Our risk management strategy supports our ability to respond to the changing needs of our stakeholders and dynamics of the markets in which we operate. The purpose of our Risk Management strategy is to identify risk which could impact the delivery of our strategic objectives and mitigate these to an acceptable level.
There is a formal governance structure underpinning our approach to risk management. Key roles and responsibilities within the structure are as follows:
Has overall responsibility for risk management; and defines risk appetite.
Reviews risk appetite; monitors risk exposure; and sets objectives and monitors the activities of group Internal Audit.
Executes strategic objectives; manages business performance reviews risk reporting; and takes necessary actions to reduce risk to an acceptable level.
Monitors risk management approach across the group; supports the audit committee in evaluating risk exposure; and liaises with risk owners to monitor approach to new risks arising across the group.
Implements risk management at operational level; identifies, analyses, manages and reports on risk; and supports internal audit.
Identification of risks
The Board and the Group's management have responsibility for identifying the major business risks facing the Group and for developing systems to mitigate and manage those risks. The control of key risks is reviewed by the Board and the Regional Executive Teams at their monthly meetings.
The Group risk register comprises risks identified and owned at the business unit level by the Regional Executive Teams. These are given a risk score and incorporated into the Plc risk register where the Group Wide impact and effectiveness of any mitigation is assessed by internal audit. These risks are subsequently aligned with the principal risk register and are categorised as strategic, financial or operational risks.
The Board oversees the ongoing process for identifying, evaluating and managing the significant risks faced by the Group and that it has been in place for the year under review and up to the date of approval of this annual report and accords with corporate governance guidance and therefore the Board has performed a robust assessment of the principal risks facing the Group.
The Board maintains a focus on effective risk management which cascades all the way through the organisation. The culture of the organisation ensures that all activities from day-to-day operations to high level strategic decisions are performed in line with this approach.
The Board's assessment of our principal risks is based on the perceived impact on our ability to deliver our strategic objectives and likelihood of occurrence.
The governance of risk is undertaken in the context of the Group's overall risk appetite. The Group considers risk appetite to ensure adequate resources are allocated to the correct risks. During the year the Audit and Risk Committee reviewed the Group's updated Group risk register, which subdivides the Group's six principal risks into 20 specific risks. The results were as follows:
|Risk appetite||Number of specific risks|
Recognising that all businesses entail elements of risk, the Board maintains a policy of continuous identification and review of risks which represent an existential threat to the business or may cause future Group results to differ materially from expected results. The table below is an overview of the principal risks faced by the Group, with corresponding controls and mitigating factors. The specified risks are not intended to represent an exhaustive list of all potential risks and uncertainties. The risk factors outlined below should be considered in conjunction with the Group's system for managing risk, described above and in the Corporate Governance Report
Evaluation is defined as Management's assessment of whether the risk factor has:
IncreasedDecreasedStayed the same since the prior year.
Principal risks and uncertainties
1 Economic environment
The demand for our products and services could be affected by a downturn in economic activity in the countries in which the Group operates. Economic activity in the territories in which we operate could be adversely impacted by the UK decision to leave the EU or the ongoing uncertainty created by the current political situation in Spain.
The economic environment is pervasive across our business model as changes in the environment will impact our resources, offering and activities. However, demand for our flexible products could also be higher in periods of uncertainty.
The high level of operational gearing in our business model means that changes in demand can lead to higher levels of variability in profits.
An adverse change in macroeconomic conditions could also increase the risk of customer failure and therefore incidences of bad debts.
Flexibility is ingrained in the Group's business model and allows any vehicles returned to be placed with different customers. Alternatively, the Group can generate cash and reduce debt by reducing purchases and increasing vehicle disposals.
The Group is not materially exposed to a single customer sector and no individual customer contributes more than 5% of total revenue generated.
The Group's current hedging arrangements protect it from material foreign exchange risks.
The impact of the UK's decision to leave the EU is still uncertain as is the current Spanish political situation; however, there have been no material impacts on the Group to date.
2 Market risk
The markets in which the Group operates are fragmented with low barriers to entry meaning that price competition is high.
There is a risk that the Group fails to attract and retain customers based on pricing. This could either be because of uncompetitive pricing or failing to successfully communicate the inherent value of our offering.
There is also a risk that demand for our existing products could materially diminish due to other structural changes in the market.
Competition influences how we create value for our customers and investors, either by enhancing our service offering or investing in pricing.
If our pricing is perceived to be higher than our competition for the same level of service, then we will lose market share or be forced to reduce prices to remain competitive. Without any adjustment to the cost base, this will result in lower returns.
Core pricing is based upon target levels of return with discount authority levels allowing flexibility to ensure that we remain competitive on pricing.
Investment has been made in pricing in the year in order to generate demand. Focus around margins will continue into the subsequent year to ensure that returns are not eroded in the long term.
Investment has continued in marketing to ensure that the value proposition underpinning pricing is well communicated and received.
3 Vehicle holding costs
The profitability of the Group is dependent upon minimising vehicle holding costs, which are affected by the pricing levels of new vehicles purchased and the disposal value of vehicles sold.
Vehicle holding costs directly impact our key resources and activities.
An increase in holding costs, if not recovered through hire rate increases or other operational efficiencies, would adversely affect profitability, shareholder returns and cash generation.
Pricing is negotiated with manufacturers on an annual basis in advance of purchases being made. The number and mix of suppliers and model variants is managed in order to optimise buying terms. The holding period of vehicles is continuously reviewed to ensure that disposals are made at the optimal time in a vehicle's life cycle thereby ensuring we recycle capital in the most efficient way.
Whilst the Group is exposed to fluctuations in the used vehicle market, we seek to optimise the sales route for each vehicle. Should the market experience a short term decline in residual values, we can age our existing fleet until the market improves.
4 Legal compliance and the employee environment
Non-compliance with regulations, inadequate maintenance of our vehicles and a working environment where individuals do not receive appropriate training and support could harm relationships with stakeholders.
Failure to attract, develop and retain individuals with the appropriate skills will inhibit the successful delivery of our strategy.
Material non-compliance with regulations would affect our relationships with customers and suppliers.
Our relationship with employees is a key resource which enables the effective delivery of our key activities.
Failure to comply with laws and regulations would put the reputation of the business at risk, both in terms of attracting fines and penalties and maintaining good customer and supplier relationships.
Failure to invest in our workforce and high levels of staff turnover will impact upon customer service and delivery of the Group's strategic objectives.
Compliance with laws and regulations is ultimately the responsibility of the Board. Management of compliance is appropriately delegated to the relevant business unit leaders. Group Internal Audit monitors and reports any non-compliance to the Board.
Salaries are benchmarked against the market and a range of incentives are provided to attract and retain staff. Personal development plans and tailored training are conducted for all employees. Succession plans are in place for senior positions.
Regular communication and engagement with everyone across the business is vital to our success.
5 IT systems
IT systems are integral to the operations of the Group. Failure to appropriately invest in the Group's systems and in the security and continuity of those systems could result in a loss of commercial agility, loss or theft of sensitive data and an inability to effectively carry out the business activities of the Group.
Systems underpin our competitive advantage by enabling us to effectively deliver the business model.
Failure of existing systems or a lack of investment in new systems could inhibit the commercial agility of the business and the efficient continuity of our operations. Failure of existing systems or a lack of investment in new systems could inhibit the commercial agility of the business and the efficient continuity of our operations.
Incorrectly handling sensitive data or unsuccessfully defending against malicious cyber-attacks would cause significant reputational harm and negatively impact relationships with all stakeholders.
The UK business is currently undertaking a material systems change and has implemented an appropriate governance structure to ensure that the project is successfully delivered.
The Group has an appropriate business continuity plan in the event of disruption arising from an IT systems failure.
The appropriate level of investment is made into ensuring that sensitive data is securely held and is adequately protected from cyber-attacks or other breaches.
6 Access to capital
The Group operates a capital intensive business model and requires sufficient access to capital in order to maintain and grow the fleet.
As such, an inefficient capital cycle or failure to access credit represents a significant risk to the delivery of strategy and continuation of the business.
Capital is one of our key resources and therefore impacts how efficiently we fund the business and subsequently deliver value for our stakeholders.
Failure to maintain or extend access to credit facilities could impact on the Group's ability to deliver its strategic objectives or continue as a going concern.
The Group's main facilities mature in 2021 and 2022 and the Group believes that these facilities provide adequate resources for present requirements.
The Group reports against covenants on a semi-annual basis and continually monitors cash flow forecasts to ensure ongoing covenant compliance and headroom against facilities. The impact of access to capital on the viability of the Group is considered in the viability statement