Acquisition of James Hay Holdings Limited

Transcription

1 THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended to immediately consult your stockbroker, bank manager, solicitor, accountant or other independent financial adviser (being in the case of Shareholders in Ireland, an organisation or firm authorised or exempted pursuant to the Investment Intermediaries Act 1995 (as amended) or the European Communities (Markets in Financial Instruments) Regulations (Nos. 1 to 3) 2007 and, in the case of Shareholders in the United Kingdom, an organisation or firm authorised or exempted pursuant to the Financial Services and Markets Act 2000 ( FSMA )). Davy, which is regulated in Ireland by the Financial Regulator, is acting exclusively for the Company, as sponsor and placing agent to the Company in connection with the requirements of the Irish Stock Exchange and the UK Listing Authority relating to the Acquisition and the Placing and Open Offer and for no-one else and will not be responsible to anyone other than the Company for providing the protections afforded to clients of Davy or for providing advice in relation to the Acquisition and the Placing and Open Offer or any other matters referred to in this document. Davy makes no representation, express or implied with respect to the accuracy or completeness of any information contained in this Prospectus and accepts no responsibility for, nor does it authorise the contents of this Prospectus or its issue, including without limitation, under Section 41 of the 2005 Act, or Regulation 31 of the Prospectus Regulations. Hawkpoint Partners Limited, which is regulated in the United Kingdom by the Financial Services Authority, is acting exclusively for IFG Group plc and no one else in connection with the Acquisition and, apart from the responsibilities and liabilities, if any, which may be imposed on Hawkpoint by the FSMA and the regulatory regime established thereunder, Hawkpoint accepts no responsibility whatsoever for, and makes no representation or warranty, express or implied, in relation to, the contents of this document (including, but not limited to, its accuracy, fairness, sufficiency completeness or verification) and will not be responsible to anyone other than IFG Group plc for providing the protections afforded to its customers or for giving advice in connection with the arrangements described in this document. If you have sold or otherwise transferred all of your Ordinary Shares please send any documents issued by the Company in connection with the New Ordinary Shares, if and when received, at once to the purchaser or transferee, or to the bank, stockbroker or other agent through whom the sale or transfer was effected for delivery to the purchaser or transferee. However, these documents should not be forwarded or transmitted in or into any jurisdiction in which such act would constitute a violation of the relevant laws of such jurisdiction. If you have sold or transferred only part of your holding of Ordinary Shares, you should retain these documents and consult the bank, stockbroker or other agent through whom the sale or transfer was effected. This Prospectus has been drawn up in accordance with Part 5 of the Investment Funds, Companies and Miscellaneous Provisions Act 2005 (the 2005 Act ), Part 5 of the Prospectus (Directive 2003/71/EC) Regulations 2005 (SI No. 324 of 2005) (the Prospectus Regulations ) and Commission Regulation (EC) No. 809/2004 the EU Prospectus Regulation. The Prospectus has been approved by the Financial Regulator, as competent authority under the Prospectus Directive 2003/71/EC. The Financial Regulator only approves this Prospectus as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus Directive 2003/71/EC. Such approval relates only to the New Ordinary Shares which are to be admitted to trading on the regulated market of the Irish Stock Exchange or other regulated markets for the purposes of Directive 2004/39/EC or which are to be offered to the public in any Member State of the European Economic Area. IFG Group plc has requested that the Financial Regulator provide a certificate of approval and a copy of this Prospectus to the relevant competent authority in the United Kingdom. This Prospectus has been made available to the public in accordance with Part 8 of the Prospectus Regulations by the same being made available, free of charge, in electronic form on the Company s website and in printed format for a period of 14 days from the date of publication of this Prospectus at the Company s registered office and at the registered offices of Davy and at the offices of Computershare Investor Services (Ireland) Limited, details of which are set out on pages 19 and 20 of this Prospectus. The Directors, whose names appear on page 19 of this document, and the Company, accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Company and the Directors (who have taken all reasonable care to ensure that such is the case), the information contained in this document is in accordance with the facts and contains no omission likely to affect its import. IFG Group plc (Incorporated and registered in Ireland under the Companies Acts 1908 to 1959 with registered number 21010) Prospectus Proposed Placing and Open Offer of 48,263,932 New Ordinary Shares at a price of 1.05 to raise approximately 50 million and admission of the New Ordinary Shares to the Official Lists and trading on the Irish Stock Exchange and London Stock Exchange in connection with the Proposed Sponsor and Broker Davy Acquisition of James Hay Holdings Limited Financial Adviser Hawkpoint The whole of this Prospectus should be read but your attention is drawn to the section of this Prospectus entitled Risk Factors which contains a discussion of certain risks that might affect the value of your holding in IFG and which should be considered by prospective investors in the New Ordinary Shares. The latest time and date for acceptance and payment in full in respect of your entitlement under the Open Offer is a.m. on 7 January The procedures for acceptance and payment are set out in Part XI of this Prospectus and in the Application Form which accompanies this Prospectus. Application will be made to the Irish Stock Exchange and the UK Listing Authority for the 48,263,932 New Ordinary Shares to be admitted to the Official Lists and application will be made to the Irish Stock Exchange and the London Stock Exchange for such New Ordinary Shares to be admitted to trading on their respective regulated markets for listed securities. Subject to the passing of the Resolutions at the EGM and the receipt of the approvals referred in subparagraphs (c) and (d) of section 2 of Part I of this document, such admission will become effective and dealings in respect of the New Ordinary Shares will commence on or around 20 January The New Ordinary Shares will, on Admission, rank in full for all dividends and other distributions declared, made or paid on the Ordinary Shares after Admission, save for the interim dividend which has been declared in respect of the year ending 31 December 2009, and will otherwise rank pari passu in all respects with the Ordinary Shares in issue at the date of this Prospectus. This Prospectus is not an offer of securities for sale in the United States or in any of the Excluded Territories. None of the New Ordinary Shares referred to in this Prospectus have been or will be registered under the US Securities Act of 1933, as amended (the Securities Act ), the securities laws of any state, district or jurisdiction of the United States or the securities laws of any other Excluded Territories or any other territory or jurisdiction where the posting of this Prospectus would constitute a breach of local law or regulation and, subject to certain exceptions, may not be directly or indirectly offered or sold, taken up or delivered in or into the United States or the Excluded Territories or to or by any person located in the United States or resident of the Excluded Territories. No person has been authorised to give any information or make any representations other than those contained in this Prospectus and, if given or made, such information or representations must not be relied on as having been so authorised. Neither the delivery of this Prospectus nor any subscription or sale made under it shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date of this Prospectus or that the information is correct as of any subsequent time. The contents of this document are not to be construed as legal, financial or tax advice. Each prospective investor should consult his, her or its own solicitor, independent financial adviser or tax adviser for legal, financial or tax advice. Capitalised terms have the meanings ascribed to them in the section headed Definitions.

2

3 NOTICE TO SHAREHOLDERS IN THE UNITED STATES The New Ordinary Shares have not been and will not be registered under the US Securities Act, and may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the US Securities Act and in compliance with any applicable state securities laws. Subject to certain exceptions, the New Ordinary Shares are only being offered and sold outside the United States in reliance on Regulation S under the US Securities Act and are only being offered and sold inside the United States to qualified institutional buyers within the meaning of Rule 144A under the US Securities Act. The New Ordinary Shares are not transferable except in accordance with the restrictions, and each subscriber of New Ordinary Shares will be deemed to have made certain representations, acknowledgements and agreements, described in this Prospectus including, without limitation, those set out in section 7 of Part XI. Prospective investors are hereby notified that sales of the New Ordinary Shares may be made in reliance on an exemption from the provisions of Section 5 of the US Securities Act. Terms used above have the meanings given to them by Rule 144A and Regulation S under the US Securities Act. The New Ordinary Shares have not been approved or disapproved by the US Securities and Exchange Commission, by any US state securities commission or any other US regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the Open Offer or the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offence in the United States. Any offer or sale of New Ordinary Shares in reliance on Rule 144A under the US Securities Act will be made by broker-dealers who are registered as such under the US Exchange Act of 1934, as amended (the US Exchange Act ). AVAILABLE INFORMATION FOR INVESTORS IN THE UNITED STATES For so long as any New Ordinary Shares are restricted securities within the meaning of Rule 144(a)(3) of the US Securities Act, the Company will, during any period in which it is neither subject to Section 13 or 15(d) of the US Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) of the US Exchange Act, provide, upon written request, to holders of New Ordinary Shares, any owner of any beneficial interest in New Ordinary Shares or to any prospective purchaser designated by such a holder or owner, the information required to be delivered pursuant to Rule 144A(d)(4) under the US Securities Act. Subject to certain exceptions, any reproduction or distribution of this Prospectus, in whole or in part, in the United States, and any disclosure of its contents or use of any information herein or therein in the United States for any purpose is prohibited. Each potential investor in the New Ordinary Shares, by accepting delivery of this Prospectus, agrees to the foregoing. i

4 CONTENTS Page Number Summary... 1 Risk Factors... 7 Presentation of Information Directors, Company Secretary, Registered Office, and Advisers Expected Timetable of Principal Events Capital Raising Statistics Part I: Information on the Acquisition and the Placing and Open Offer Part II: Information on IFG Part III: Information on James Hay Part IV: Operating and financial review relating to IFG Part V: Operating and financial review relating to James Hay Part VI: Historical financial information relating to IFG Part VII: Forecast financial information relating to IFG Part VIII: Historical financial information relating to James Hay Part IX: Unaudited pro-forma balance sheet of the Enlarged Group Part X: Taxation information Part XI: Terms and conditions of the Placing and Open Offer Part XII: Information concerning the New Ordinary Shares Part XIII: Additional information Part XIV: Information incorporated by reference Definitions ii

5 SUMMARY This following summary information should be read as an introduction to this Prospectus. Any decision to invest in relation to the Placing and Open Offer should be based on consideration of this Prospectus as a whole by the investor. Where a claim relating to the information contained in this Prospectus is brought before a court, the plaintiff investor might, under the national legislation of the Member States, have to bear the costs of translating this Prospectus before legal proceedings are initiated. Civil liability attaches to those persons responsible under law for the contents of this Prospectus, but only if the summary is misleading, inaccurate or inconsistent when read together with the other parts of this Prospectus. 1. INTRODUCTION On 9 December 2009, the Company announced that the Group had signed an agreement to acquire James Hay Holdings Limited, a UK incorporated company, and its subsidiary undertakings ( James Hay ) for a total consideration of 35 million (approximately 38.6 million) subject to an additional adjustable amount in respect of the net asset value of James Hay at Completion, as further described in section 2 of Part I of this document. James Hay Holdings Limited is a subsidiary of Santander Private Banking UK Limited, a member of Banco Santander S.A. Further details regarding James Hay and the terms of the Acquisition are set out in Part III and section 2 of Part I of this document, respectively. 2. BACKGROUND TO, AND REASONS FOR, THE ACQUISITION AND THE PLACING AND OPEN OFFER In order to fund the Acquisition and to maintain the Enlarged Group s financial flexibility, the Group believes that an additional equity funding is required and accordingly, IFG is proposing to raise approximately million (before expenses) by way of a Placing and Open Offer. Further details regarding the Placing and Open Offer can be found in sections 3 and 4 of Part I of this document. IFG s strategy is to develop two divisions of scale, one being financial services comprising a pension s administration business and a personal advisory business, operating in Ireland and the UK and the other being the corporate and trustee administration division. The existing business operations comprise these two divisions and a key strength for IFG within these divisions is the provision of independent and conflict-free advice in areas of investment and pensions, which IFG views as a competitive advantage as it does not provide taxation or legal advice, active asset management services or auditing services, which could be viewed as a source of conflict of interest. As a pure administrator, IFG s proposition is based on high quality administration and advice. The Directors believe that the Acquisition provides IFG with a unique opportunity to become the leading SIPP provider in the UK market, and for the Enlarged Group to offer its services to a broader market. The Directors believe there should be considerable benefits to the Group arising from the Acquisition, including an expanded client base, access to a wider base of financial intermediaries who have supported James Hay and may introduce new clients to the Group, as well as the potential for improved margins. Under a share purchase agreement dated 9 December, 2009 between Santander Private Banking UK Limited (the Vendor ) and IFG UK Holdings Limited (the Purchaser ), the Purchaser has agreed to buy the entire issued share capital of James Hay Holdings Limited on the following terms: (a) consideration of Stg 35,000,000 (approximately 38.6 million) payable in cash on Completion; and (b) an additional adjustable amount (subject to a pound for pound adjustment upwards or downwards based on whether the net asset value at Completion is greater than or less than 5.1 million) in respect of the net asset value of James Hay at Completion, as described below. Shortly before Completion the Vendor will confirm the estimated amount of the net asset adjustment referred to above. At Completion the Purchaser shall pay 35 million (approximately 38.6 million) and the estimated net asset adjustment which shall not (save as set out below) exceed 5 million even if the adjustment notified by the Vendor is in excess of 5 million. 1

6 If the Vendor notifies the Purchaser at any time prior to Completion that it expects the net asset adjustment to be in excess of 5 million as a consequence of a payment to James Hay to maintain its minimum regulatory working capital requirements, the Purchaser may agree to pay the increased net asset adjustment or choose to terminate the Acquisition Agreement. Following Completion there are no rights for any party to terminate the Acquisition Agreement. The estimated net asset adjustment amount paid at Completion will be verified through a completion accounts process which is likely to take up to three months post Completion. To the extent that the estimate is shown to be inaccurate by this process a balancing adjustment payment will be made by the Purchaser or the Vendor as the case may be. In all circumstances the 5 million cap on the net asset adjustment will apply unless the Purchaser has agreed to pay the increased net asset adjustment in the situation described above. The Acquisition is subject to the satisfaction of certain conditions which are set out in section 2 of Part I of this Prospectus. 3. DETAILS OF THE PLACING AND OPEN OFFER The Placing Davy, as placing agent for the Company, has made arrangements to place 48,263,932 New Ordinary Shares of 0.12 each with Fiordland and certain institutional investors at a price of 1.05 per New Ordinary Share. These New Ordinary Shares will be offered in the first instance to Qualifying Shareholders pursuant to the Open Offer. Any New Ordinary Shares not taken up by Qualifying Shareholders under the Open Offer will first be placed with Fiordland and thereafter with certain institutional investors procured by Davy as per the Placing and Open Offer Underwriting Agreement (see paragraph 12.1(f) of Part XIII of this document for further details). The Open Offer The Open Offer provides an opportunity for Qualifying Shareholders to subscribe for 9 New Ordinary Shares of 0.12 for every 14 Ordinary Shares held on the Record Date at the Issue Price in accordance with the terms of the Open Offer and is intended to provide Qualifying Shareholders with an opportunity to participate in the fundraising. If all of the Open Offer Shares are not applied for by existing shareholders, the residual shares will be allotted to Fiordland in the first instance such that its shareholding will be approximately 17.5 per cent. (but will not exceed 19.9 per cent. of the Enlarged Issued Ordinary Share Capital) and thereafter to other Placees procured by Davy. Each of the Directors has entered into an irrevocable undertaking not to subscribe for any of his entitlement under the Open Offer. The purpose of these undertakings is to facilitate Fiordland s investment in the Company. Further details on the Placing and Open Offer can be found in Part XI of this Prospectus. 4. CURRENT TRADING AND PROSPECTS 4.1 The IFG Group Set out below is an extract from the interim management statement for the four months ended 31 October 2009 and the year to date and its expected performance in 2009, published by IFG on 6 November 2009: Performance and outlook Performance at group level is in line with expectations and we are confident of a satisfactory outcome for the current financial year. Though economic conditions remain difficult, our two principal divisions, namely International and UK, continue to trade satisfactorily. Their resilience is testament to their business models and their robust recurring revenue streams. The proposed acquisition of James Hay will have no impact on the results of the Enlarged Group for the current financial year to the end of 2009 as the transaction will not be completed until

7 4.2 James Hay For the financial year ended 31 December 2008, James Hay generated revenues of million and operating profit of million before an exceptional charge of million for impairment of intangible assets, further details of which is set out in Part 7 of this document and note 8 to the financial information relating to James Hay set out in Part 7 of this document. In the nine month period ended 30 September 2009, based on James Hay management accounts, while non interest income, representing the administration fees generated by the business (approximately 52% of revenue in the period) is behind expectations by 6%, interest income (representing approximately 48% of revenue in the period) is behind expectations by 6.5%, overall trading conditions showed an improvement. It is expected that the business will continue to trade in line with expectations. 5. KEY FINANCIAL INFORMATION 5.1 The IFG Group The tables below set out a brief summary of historic trends in revenue and operating profit over the period. Year ended 31 December Revenue Financial Services... 66,015 87,864 81,353 Trustee & Corporate Services... 43,272 40,965 26, , , ,792 Revenue Geographical split Ireland... 29,281 47,416 45,594 UK... 37, ,838 Isle of Man & Jersey... 31,311 35,509 25,395 Cyprus... 4, Other countries... 6,332 4,710 1, , , , Operating profit Financial Services... 2,827 10,302 9,648 Trustee & Corporate Services... 8,962 7,490 5,915 Unallocated... 3,212 (450) (1,237) Operating profit... 15,001 17,342 14,326 Source: annual report and accounts of IFG for the years ended 31 December 2008, 31 December 2007 and 31 December The audited financial information relating to IFG, which has been incorporated by reference into the Prospectus, has been extracted without material adjustment from the audited results of the Group for the 12 months ended 31 December 2008, and 31 December 2007 and 31 December 2006 respectively. 3

8 The tables below set out a brief summary of historic trends in revenue and operating profit over the half year periods. Six Months ended 30 June Revenue Financial Services... 28,364 34,205 43,689 Trustee & Corporate Services... 20,665 19,999 17,850 49,029 54,204 61, Operating profit... 9,580 8,053 8,955 Source: Unaudited interim reports for the six months ended 30 June 2009, 30 June 2008 and 30 June The unaudited financial information relating to IFG, which has been incorporated by reference into the Prospectus, has been extracted without material adjustment from the unaudited results of the Group for the 6 months ended 30 June 2009, 30 June 2008 and 30 June 2007 respectively. 5.2 James Hay The following information in relation to James Hay, which has been audited for the purpose of this document, has been extracted from the Financial Information Table on James Hay in Part VIII of this document: Year ended 31 December Stg 000 Stg 000 Stg 000 Revenue... 39,552 37,254 35,588 Operating (loss) / profit... (10,209) 7,298 5,550 (Loss) / profit before income tax... (10,383) 7,374 5,515 The operating loss and loss before income tax reported in the year ended 31 December 2008 arose after charging an exceptional item of 18,705,000, representing a write off of the costs associated with a software platform. Net liabilities at 31 December, 2008 amounted to Stg 6,307,000. Cash and cash equivalents at 31 December, 2008 was Stg 30,730,000. Detailed financial information on James Hay is set out in Part VIII of this document. For a complete understanding of the Acquisition, Shareholders should read the entire document and not just the summary information produced in this section. 6. RISK FACTORS A number of factors could materially and adversely affect the Enlarged Group s business, results of operations, financial condition, prospects and/or the Company s share price. Additional risks and uncertainties not currently known to the Directors, or that the Directors currently deem immaterial, may also have an adverse effect on the Company s business, financial condition, results of operations and prospects. Further information in relation to the risk factors below are set out in the section of this Prospectus entitled Risk Factors. (A) GENERAL INDUSTRY RISK FACTORS Past performance is not a reliable indication for future performance Competition Economic and market cycles Regulations and standards 4

9 (B) COMPANY SPECIFIC RISKS Changing demand for products Dependence on product providers The Group may not be able to attract and retain customers Illegal acts committed by the financial consultants in the course of professional engagement could give rise to liability for the Group Current and future financing requirements Cost management A sustained economic downturn could result in a reduction in variable administration income and advisory/commission income Changes in applicable law and regulations could adversely affect the level and method of calculating the Group s advisory/commission income The Group s success depends on the retention of key personnel Pension liabilities Interest rate risk Foreign exchange Credit risk Liquidity risk Regulations and standards Complaints Taxation The Group is subject to technological risks that could have an adverse impact on its business Litigation (C) RISKS RELATING TO THE ACQUISITION Integration risk We are subject to counterparty risk James Hay may not perform in line with expectations Acquisition risk Pre-closing risks to James Hay Closing risks to the Acquisition (D) RISKS RELATING TO THE NEW ORDINARY SHARES The New Ordinary Shares may not be suitable as an investment for all recipients of this Prospectus The Company s share price will fluctuate Shareholders who do not acquire New Ordinary Shares in the Open Offer will experience dilution in their ownership of the Company and the Placing generally will give rise to dilution for Shareholders A disposal of Ordinary Shares by major Shareholders could adversely depress the market price of Ordinary Shares 5

10 Shareholders outside Ireland and the United Kingdom may not be able to take up New Ordinary Shares in the Open Offer or future issues of shares Shareholders may be subject to exchange rate risks The ability of Overseas Shareholders to bring actions or enforce judgments against the Company or the Directors may be limited Future issues or sales of Ordinary Shares could adversely affect the Company s share price Taxation 6

11 RISK FACTORS A number of factors affect the results of operations, financial condition and prospects of the IFG Group or James Hay (assuming that it becomes part of the Enlarged Group) and will also affect the Enlarged Group following Completion. This section describes the risk factors which are considered by the Directors to be material in relation to the IFG Group, and if the Acquisition is completed, the Enlarged Group. Additional risks and uncertainties that are not currently known to the IFG Group, or that the IFG Group currently deems immaterial, may also have a material adverse effect on the financial condition or business success of the IFG Group and, if the Acquisition is completed, on the Enlarged Group. Investors should consider carefully whether an investment in Ordinary Shares is suitable for them in light of the information in this Prospectus and their personal circumstances. The following risks should be considered carefully before making any investment decision to acquire any New Ordinary Shares. GENERAL Investors should carefully consider all of the information in this document including the risks and uncertainties described below. Those risks and uncertainties are considered by the Directors to be the material risk factors currently faced by the Group or applicable to an investment in the Company s shares. If any of the following risks actually materialise, the Group s business, financial condition, prospects and share price could be materially and adversely affected to the detriment of the Company and its Shareholders, and investors may lose all or part of their investment. The risks set out below are those which the Directors currently believe to be material to the Group. The risks set out below are not intended to be presented in any particular order of priority. (A) GENERAL INDUSTRY RISK FACTORS Past performance is not a reliable indication for future performance Historical facts, information gained from historic experience, present facts, circumstances and information, and assumptions from all or any of these are not a guide to future performance. Aims, targets, plans and intentions referred to herein are no more than that and do not imply forecasts. The past and present performance of James Hay and all present and past facts, circumstances and information, and assumptions are not a guide to or an indication of the future performance of James Hay. Accordingly the future performance of James Hay may have a detrimental affect on the revenues, costs and operating profits of IFG. Competition The Group operates in a competitive market where it competes against large banking and financial groups with large market shares and also against niche companies which specialise in certain products and/or types of customers. There can be no guarantee that the Group s competitors or new entrants will not bring superior services to the market or provide similar services to the Group at lower fees. If the Group becomes unable to maintain its competitive strengths, which are the provision of independent advice and services orientated quality administration, its market share may decrease, which could have a material adverse effect on the Group s business, results of operations and financial condition. Economic and market cycles The Group s businesses are subject to the general risks to which all companies operating in the same markets as the Group are subject. The markets in which the Group operates may be affected by numerous factors, many of which are beyond the Group s control and the exact effect of which cannot be accurately predicted. Within geographical markets, such factors include general economic and political activities, including the extent of any governmental regulation and taxation. In particular the Group could be adversely affected by the following: economic and political conditions: the markets in which specialised financial services companies such as IFG operate may be affected by the performance of the economy and political conditions 7

12 in the countries in which it is present. If global economic growth slows or general economic conditions deteriorate, it could have a material adverse effect on the Group s business and financial condition; administrative, taxation and other regulatory factors: changes in administrative, taxation or regulatory factors may have an adverse effect on the performance of the Group. Due to strict rules and regulations within the financial services sector any changes in these could have the potential to limit the activities of the Group and affect overall revenue; fluctuations in asset values and interest rates: the Group s business is primarily the administration of long term financial and investment based structures like pensions and other asset protection structures. The level of activity in these markets is dependent on various macro-economic factors which are outside IFG s control, including, but not limited to, changes in government policies, laws, interest rates, economic growth and inflation. The impact of changes in these areas on the industry generally cannot be predicted. Therefore, during periods of adverse market conditions, there is a risk that the Group s ability to generate revenues will suffer as a result of a decreased performance in the value of assets under administration and, as a result, a decrease in commissions and advisory fees earned. During these periods, many investors may also be inclined to shift their investments to products that expose them to lower risk, which generate lower commissions. Regulations and standards The Group is subject to a broad range of laws, regulations and standards in all of its operating jurisdictions, including those relating to investment advice, financial service activities, anti-money laundering and trustee laws. These regulations and standards are becoming increasingly stringent. Many of the Group s operating subsidiaries are regulated and authorised by local regulatory authorities in the jurisdictions they operate in and it is the Group s policy and practice to require that all its subsidiaries comply fully with applicable laws, regulations and standards. However, violations of such laws, regulations and standards could result in restrictions on the operations of the Group, damages, fines or other sanctions and increased costs of compliance with potential reputational damage. (B) COMPANY SPECIFIC RISKS Changing demand for products Future demand for the financial products marketed by the Group could decline, for example, due to a change in the regulatory framework in a particular country, and the investment preferences of the Group s target client group could change. If the Group is unable to adapt quickly to the changes in demand and preferences by expanding or altering its existing product range, this could have an adverse effect on the Group s business and future financial results. Dependence on product providers The UK and Ireland pension administration business and personal advisory business, through their financial advisory businesses, sell financial products that are offered by other financial services groups. The companies in this division have agreements with product providers regarding the sale of their products. If a number of these product providers were to terminate or restrict their business relationships with the division, this could have a significant adverse effect on the division s business. In order to mitigate this risk, the Group has taken steps to have alternative providers of financial products and, over time, business could be transferred to other providers if required. The Group may not be able to attract and retain customers The Group s future success depends on its ability to continue to attract and retain a loyal customer base, to provide a quality customer administration service and to offer innovative investment solutions and products that satisfy customer investment requirements. There can be no assurance that the Group will be able to continue providing quality customer administration service and innovative investment solutions, or that it will be able to maintain its 8

13 competitiveness in its current markets. Any loss of competitiveness or diminution in customer base or service may have material adverse effects on the Group s business and financial results. The Group is not dependent on any one customer or group of related customers which, if lost, would result in a significant reduction in Group revenues. No one customer or group of related customers account for 5% or more of Group revenues. Illegal acts committed by the financial consultants in the course of professional engagement could give rise to liability for the Group The Group s pensions administration business and personal advisory business in the UK and Ireland have financial advisory operations and there can be no assurance that the financial consultants providing advice in the Group s financial advisory business will not commit negligent or illegal acts in the distribution and sale of the Group s financial products and services. These companies could be involved in administrative proceedings initiated by a regulatory authority on the basis of such illegal acts, and could be subject to administrative penalties, which could have a material adverse effect on the operation of the financial advisory business and financial results of the Group s pensions administration business and personal advisory business. The initiation of legal or administrative proceedings, irrespective of the underlying merits of the claims, against a financial consultant could also have a material adverse effect on the Group s image and market reputation and on the relationship of trust between the Group and its customers. Current and future financing requirements The Group s ability to grow its businesses profitably is somewhat dependent upon its ability to generate or obtain capital at an acceptable cost. The ability to arrange financing in the future will depend in part upon prevailing capital market conditions, as well as conditions within the businesses and/or operating results. Such factors may impact on the Group s efforts to arrange additional financing on satisfactory terms. The terms of the Group s current secured banking facility may limit the Group s ability to further materially leverage its business. There may also be an increase in the cost of borrowings thereby impacting on the Company s profitability. The principal terms of the Group s secured banking facility includes financial covenants from IFG in respect of net debt and interest cover to EBITDA. Net debt is defined as the financial indebtedness of IFG less any cash and cash equivalents and less investment debt. The most material covenants are those relating to the debt ratio which requires the Group to maintain a ratio of net debt to EBITDA of not greater than 2 to 1 and a ratio of EBITDA to net interest payable not less than 6 to 1. Net interest payable charges are defined as interest payable on financial indebtedness less interest earned and interest on investment debt. Cost management The Group operates in a very competitive environment and fee increases are not always an available option. As a result, cost management can become the main mechanism to protect operating margins. If the Group fails to successfully manage its costs the financial results of operations could be materially and adversely affected. The Group s ability to reduce its costs on a timely basis during periods of declining income in order to address competitive pressures is critical to the maintenance of profit margins. If the Group is unable to adjust its cost base accordingly, profit margins could suffer. A sustained economic downturn could result in a reduction in variable administration income and advisory/commission income A portion of the Groups trustee and corporate services administration fees are variable as they are activity based. A sustained economic downturn could lead to a decrease in demand for our services or lead to a lower level of activity among our customer base. Some of the Group s financial services advisory and commission fee income can be related to the performance of the products supplied by IFG, which in turn are affected by the performance of the financial markets and national and international economic conditions. 9

14 The occurrence of a sustained economic downturn could result in a reduction of the Group s variable fee income, which could have a significant adverse effect on the Group s financial results. Changes in applicable law and regulations could adversely affect the level and method of calculating the Group s advisory/commission income The UK personal advisory business is affected by the Retail Distribution Review (RDR) where financial advisors income is moving to a fee based model rather than a commission based model by While the majority of our advisory income is already fee based these changes are altering the method of calculation and could have an adverse effect on our advisory income. Should this initiative be undertaken in Ireland the personal advisory business would have an adverse fee income exposure as the majority of advisory income would be commission based. The Group s success depends on the retention of key personnel The Group s success greatly depends on the experience of the Group s management. Management responsibility for the Group s operations and internal controls is substantially concentrated on a small number of key managers. Although it is believed that key employees could be replaced in an orderly fashion should the need arise, the loss of any of the executive team, senior management, or key personnel could lead to an adverse effect on the Group s businesses, operating results and financial condition. The Group s success is also dependent on the ability to manage the network of financial consultants, as well as the Group s ability to attract and retain qualified employees, independent contractors and financial consultants. There can be no assurance that the Group will be able to retain its key personnel, or that it would be able to find equally qualified replacements for any such key personnel. The failure to retain, or find equally qualified replacements for such key personnel could have a material adverse effect on the Group s business, operating results and financial condition. Pension liabilities The Group operates a defined benefit pension scheme for eligible employees in the Isle of Man. The scheme was closed to new entrants with effect from 1 November, The assets of the scheme are held, separately from those of the Group being invested with an insurance company. Updated actuarial valuations at 31 December, 2008, under IAS 19, value the scheme s assets at 2.65 million and liabilities at 2.74 million. Under IAS 19, the pension deficit is recognised in the Group s balance sheet. The value of this deficit is based, amongst other things, on assumptions regarding inflation, discount rates, expected return on plan assets, salary increases and future pension increases. The assumptions may differ from the actual data as a result of changes in economic and market conditions. In the event that the market value of the scheme s assets declines in relation to its assessed liabilities, the Group may be required to increase its contributions to cover any further funding shortfalls. This could have an adverse impact on the Group s operational results and cash flow. Interest rate risk The Group has a material risk in relation to the absolute level of interest rates. Interest is earned by the Group on funds under SIPP administration and thus a reduction in the level of interest rates will have a direct impact on revenue earned. A sustained period of low interest rates could impact significantly on the Group s margins in the SIPP administration business, thus reducing profits. The Group also has a risk with regard to the rate it receives on deposits relative to base rates. A general market return to greater liquidity and a reduction in the pricing of credit risk on deposits taken by institutions could impact Group profits. The Group s debt facility is priced on the basis of a margin being applied over cost of funds. Any increase in the cost of funds will increase the finance cost for the Group. This could have a significant impact on the operational results and cash flow. 10

15 Foreign exchange Foreign exchange transaction exposure exists but is limited due to the fact that trading companies in the Group tend to have the majority of their revenues in their functional currency. However, significant adverse movement in foreign currency, particularly Sterling pounds, could have an adverse affect on the Group s cash flows and operating profits. The results of IFG Group are affected by the movement in exchange rates. The consolidated financial statements are presented in Euro which is the company s functional and presentation currency. Results of subsidiary undertakings with different functional currency to the Company are translated into euro using average exchange rates during the year. As noted in the Group s 2008 annual report, there was a 16% decrease in the value of sterling which affected 80% of the Group s earnings. Forward rate contracts are used in order to mitigate the impact of exchange rate movements on the Group s income statement when it is considered economically viable to do so. Credit risk The Group has a credit policy in place and monitors credit risk on an ongoing basis. Credit risk is managed at both the Group level and the subsidiary level. It arises from exposures in respect of cash and short-term deposits with banks as well as credit exposures to customers. Credit risk is managed by limiting the aggregate amount and duration of exposure to counterparties. These judgments are made after taking into account the counterparty s credit rating and by regular monitoring of these ratings. Customers who wish to avail of credit terms with the Group are subject to credit evaluations prior to credit being advanced and are subject to continued monitoring at operating company level. The Group does not hold collateral in respect of amounts receivable from customers. Liquidity risk The Group maintains a long-term committed facility that is managed to ensure it has sufficient available funds for operations and planned expansions. The principal liquidity risks faced by the Group relates to the maturity profile of debt obligations. The Group s finance function ensures that sufficient resources are available to meet such liabilities as they fall due through a combination of liquid investments, cash and cash equivalents, cash flows and undrawn committed bank facilities. Flexibility in funding sources is achieved through a variety of means including (i) maintaining cash and cash equivalents with a range of highly-rated counterparties; (ii) limiting the maturity of such balances; (iii) borrowing the bulk of the Group s debt requirements under committed bank lines; and (iv) having surplus committed lines of credit. Regulations and standards The Group is subject to a broad range of laws, regulations and standards in all of its operating jurisdictions, including those relating to investment advice, financial service activities, anti-money laundering and trustee laws. These regulations and standards are becoming increasingly stringent. Many of the Group s operating subsidiaries are regulated and authorised by local regulatory authorities in the jurisdictions they operate in and it is the Group s policy and practice to require that all its subsidiaries comply fully with applicable laws, regulations and standards. Operating subsidiaries employ local compliance officers and the local board is responsible for ensuring that all local and international law and regulations are complied with at all times. However, violations of such laws, regulations and standards could occur and could result in restrictions on the activities of the operating subsidiaries. Damages, fines or other sanctions could be imposed along with increased costs of compliance. Any fines or sanctions could have potential reputational risks to the Group. Complaints The Group s UK business which has historically been involved in the arrangement of endowment policies to support mortgages and investment related financial products, in common with other independent financial advisers, the Group has been the subject of complaints from customers who have allegedly suffered losses as a result of misselling. The Group has initiated remedial actions in respect of this past business by discontinuing sale of these products. The Group also provided for the costs associated with such claims. 11

16 There can however be no certainty about the future potential claims relating to products currently sold despite the introduction of a rigorous compliance environment and regular case reviews. It is possible that business currently being written could lead to future complaints and the Group could incur future costs associated with such complaints. Taxation Revenue law and/or practice in the jurisdictions in which IFG operate may change with consequent adverse effects on the Group. The Group operates in jurisdictions that impose varying levels of taxation which currently range from 0% to 28%. Any increase in the rates imposed in those jurisdictions with significant levels of taxable profits will have an impact on cash flows. Tax grouping is currently employed to manage the tax affairs of the Group in as efficient a manner as possible. Any change in the applicable laws that could restrict the ability to group profits and losses in the relevant jurisdictions could have an impact on the amount of tax that the Group is obliged to pay. The Group is subject to technological risks that could have an adverse impact on its business The Group s operations are dependent on the efficiency of the various Group s information technology systems. The information technology systems are subject to the typical risks of companies in the industry, such as service interruption, viruses, errors, omissions, delays and non-compliance with the required security and control procedures. While industry standard information, security management systems, policies, procedures and techniques (including business continuity planning, vulnerability testing, internal and external system audits) are adopted there can be no assurance that these risks will not occur, and that they will not have a material adverse effect on the Group s business, operations and financial condition. The Group manages such risks through the use of maintenance agreements, software development contracts, disaster recovery procedures and in-house review processes through internal control and risks processes. Litigation The Group operates in businesses where there is a risk of litigation. In particular the Group s pensions administration business and personal advisory business is more exposed to the risk of litigation due to the nature of the provision of financial advice and administration. To date the UK division has been subject to some direct litigation by a small number of clients. The nature of these claims has been related to the provision of advice, mis-selling and mal administration. These cases are typically processed through the Financial Ombudsman Service, court or similar process. There can however be no certainty about future potential claims relating to products currently sold despite a rigorous compliance environment and regular case reviews being in place. It is possible that business currently being written could lead to future complaints and the Group could incur future costs associated with such complaints. There can be no way of knowing the potential impact of any future litigation on the performance of the Group. (C) RISKS RELATING TO THE ACQUISITION Integration risk Post Completion, it is not intended to integrate the two SIPP businesses, James Hay and IPS. The existing business of James Hay will be managed under the James Hay name by IFG s UK division as a separate unit using James Hays technology, structures and operation. All new business will be written under the James Hay name and brand and will be serviced through IPS s more efficient and technologically superior infrastructure in Bristol. The Group may, however, encounter difficulties separating the James Hay business from the Abbey/ Santander Group and integrating James Hay into the Enlarged Group. The key risks include the relocation of the technology infrastructure and interfaces out of the Abbey Group UK data centre into our UK data centre, the capture of the additional distribution channel across to the Enlarged Group and the maintenance of banking, share dealing and nominee services provided by Abbey National plc to the acquired client base. 12