ANNUAL REPORT AND FINANCIAL STATEMENTS 2011 | 107


36. Financial risk management continued The Directors give careful consideration to the appropriate funding structure for financing all acquisitions, which historically have included both equity and debt funded transactions. During 2010 some 24.8 million new shares were placed in the market to partially fund the TRC acquisition and some 6.1 million of new shares were issued in respect of the Commutation arrangements.


Dividends are only declared by the Board after due consideration of a number of key items, including the financial results and the outlook of the financial position of the Company and of the Group. The dividend policy seeks to achieve a targeted dividend cover of 1.5 times underlying earnings per share. The Board declared a total dividend of 3.0 pence per share for 2011.


The overall objective of shareholder liquidity risk management is to ensure that there is sufficient liquidity over short and medium time horizons to meet the needs of the business. This includes liquidity to cover, among other things, capital expenditure, servicing debt and equity capital as well as working capital to fund the Group’s day-to-day operational requirements. The Board indicated that it will seek to reduce net debt over the medium-term, with a target of zero net debt to be achieved by the end of 2014. While the Board consider this target to be achievable, the Directors recognise that a number of risks exist which could prevent this target from being achieved.


Working capital Working capital is monitored on a daily basis to ensure that settlement terms of all forthcoming liabilities can be met. This activity includes timely collection of debtors and monitoring of cash on deposit, having regard to regulatory capital requirements, as outlined below. The Group’s Finance function includes a Treasury team which manages the cash flow requirements of the Group while seeking to maximise the amount of cash on deposit.


At 31 December 2011 the Group had a £20m revolving credit facility and bank overdraft facilities available to it which provided some protection against any short-term cash-flow deficiencies. The revolving credit facility expired on 29 February 2012. The undrawn committed facilities available at the reporting date are shown in note 22 as are details of the Group’s interest-bearing loans and borrowings.


The Group has some £150m of Guaranteed Fixed-Rate Loan Notes which mature in December 2016 together with some £125m of Fixed/Floating Rate Subordinated Notes in issue. The earliest repayment date for these Subordinated Notes is 2016, but this can be extended at the option of the Group to 2026. In addition, the Group has the option to defer interest payments on this subordinated debt, but if it elects to do so then no dividend can be paid to Ordinary Shareholders until the cumulative amount of any unpaid interest due on the subordinated debt is settled in full. No such interest payments have been deferred.


The Board Reserved List prohibits the use of derivatives including futures, options and forward contracts, in respect of the Group’s net assets, without prior Board approval, recognising the general principle of seeking to minimise capital loss.


Regulatory capital requirements The Group is required to maintain a minimum level of capital in accordance with the Capital Requirements Directive (CRD) prescribed in the UK by the Financial Services Authority (FSA).


In 2006, the Group obtained from the FSA a waiver from meeting any minimum capital requirements under the consolidated supervision rules of the CRD. This waiver took effect from 1 January 2007 and was due to expire at the end of 2011. However, in April 2011 the FSA approved F&C’s application to renew the waiver, which now expires in April 2016.


At 31 December 2011, there were 15 regulated companies in the Group, of which 11 are registered in the United Kingdom and are subject to regulation by the FSA. This includes F&C MPF which, being a regulated insurance firm, as opposed to an investment firm, is not part of the consolidation Group for regulatory capital reporting purposes. Overseas regulated companies, registered in the Republic of Ireland, The Netherlands, Portugal and Hong Kong are subject to regulatory capital requirements set out by their respective local regulatory authority, as embedded within the legislation of those jurisdictions.


Regulations set out the measurement of Capital Resources and Capital Resources Requirements (CRR) to determine the regulatory capital surplus or deficit. This CRR is referred to as the Pillar 1 capital requirements under the CRD.


For the UK-regulated investment firms, the CRR is the higher of: •the sum of the ‘credit risk capital requirement’ and the ‘market risk capital requirement’; and • the ‘fixed overhead requirement’.


Credit risk represents the risk of a party being unable to meet its obligations to a firm and is calculated using risk weighted percentages applied to the various exposure amounts. The market risk for F&C represents the risk of loss from fluctuations in exchange rates and is calculated as a percentage of the total of the long or short positions, denominated in foreign currencies, whichever is the greater. The fixed overhead requirement is calculated as a quarter of a firm’s relevant fixed annual expenditure in the previous year’s audited Financial Statements.


The regulated companies are required to submit financial returns to the FSA, or the local regulatory authority for overseas companies, setting out the calculation of the regulatory capital surplus (or deficit). The Group’s regulated companies are required to submit financial returns monthly, quarterly or semi-annually, and the Group must submit a consolidated return semi-annually.


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