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PCF’s financial control failings exposed

The fast growing specialist bank has failed to properly report its exposure to wholly owned subsidiary Azule, prompting a wide range of initiatives to improve its financial controls and reporting processes.
  • Appointment of interim chief executive, new chief finance officer, chief risk officer and General Counsel.
  • Independent review has identified failings of financial controls and reporting processes.
  • Forecasts for 2020 financial year unchanged before additional audit fees.
  • Ongoing investigation and remediation costs will impact cost base for 2021 financial year.
  • Shares to remain suspended until remediation plan in place and auditors satisfied.

Aim-traded specialist bank PCF (PCF:24p) suspended its shares in mid-May and shortly after long serving chief executive Scott Maybury resigned, replaced on an interim basis by chief operating officer Garry Stran. Today’s update from the company sheds light on what exactly has been going on.

The major issue concerns management’s failure to properly report PCF’s exposure (between December 2018 and June 2019) arising from the funding provided by PCF Bank to its wholly owned subsidiary Azule to the Prudential Regulatory Authority (PRA). Had the company reported correctly, PCF Bank’s regulatory Large Exposure Limits would have been breached.

The Independent Review also identified several deficiencies and failures in PCF Bank's financial control and reporting function, including members of the finance team, under instruction, manually adjusting certain accounting entries for both financial and regulatory reporting purposes which appear to have been a deliberate effort to facilitate specific results or compliance with rules regarding Large Exposure limits.

Based on the findings of the Independent Review, the board believes that these matters may be driven by “possible collusion by some members of the finance team, under resourcing, an inadequate level of skill and experience, technological limitations and a poor culture resulting in a lack or reluctance to challenge its leadership”.

Importantly, no monies have inappropriately left the group as consequence of these failings, and the new board confirm that PCF continues to trade as normal, Covid-19 related payment deferrals continue to fall and the performance of the loan book is in line with market expectations. Although pre-tax profit for the 2020 financial year is expected to be in line with the £3.15m revised guidance given in the March 2021 trading update, clearly PCF is incurring additional audit fees relating to the financial reporting period. Also, the ongoing investigation and remediation actions will impact the cost base in the 2021 financial year.

The main initiatives being implemented include:

  • Restructuring of the Senior Leadership Team led by interim chief executive Garry Stran and recently appointed new chief finance officer Caroline Richardson, including the appointment of a new and experienced Chief Risk Officer and a General Counsel.
  • Recruitment of additional colleagues across PCF who have the skills and experience required for a listed bank.
  • Commissioning of an independent forensic review of PCF’s accounting records.
  • Transformation of the finance processes, controls, organisational and governance structures and team culture to increase the focus on transparency, challenge and compliance with all accounting, governance, regulatory and legal standards of conduct.
  • Commission an independent report on PCF’s financial position and prospects procedures. 

PCF’s shares will remain suspended pending the publication of the 2020 annual results and until all relevant actions have been addressed, and PCF’s auditors are satisfied with them. The board of directors have also reassured shareholders that they will authorise actions to recover remuneration-related payments and invoke their legal rights to recover any other consequential losses suffered as result of these matters.

Clearly, with the shares suspended, shareholders have no choice but to sit tight and await a further update. It’s frustrating, but the important point is that actions has been taken to address the issues raised by the Independent Review, there is no suggestion that profits were overstated, PCF’s loan portfolio is performing in line with expectations, loan originations and PCF’s capital position are being prudently managed, and deposit taking activity has been unaffected. PCF remains well funded, too. Hold.

Simon Thompson's 2020 Bargain Shares Portfolio Performance
Company nameTIDMMarketOpening offer price 07.02.20 Bid price 28.06.21 DividendsPercentage change (%)
XaarXARMain 42p195p0.0p364.3%
Metal Tiger (see note two)MTRAim11.8p26.5p0.0p124.6%
CreightonsCRLMain44p82p0.65p87.8%
Cenkos SecuritiesCNKSAim56p79p2.0p44.6%
NorthamberNARAim54.9p64p0.6p17.7%
Brand ArchitektsBARAim 160p180p0.0p12.5%
Anglo Eastern PlantationsAEPMain570p572p0.4p0.4%
CIP Merchant CapitalCIPAim57p57p0.0p0.0%
Chenavari Capital Solutions (see note one)CCSLMain61.4p35p0.0p-1.0%
PCF (suspended)PCFAim33.3p23p0.4p-29.7%
Average      62.1%
FTSE All-Share Total Return index7,7967,956 2.1%
FTSE Small-Cap Total Return index9,27411,813 27.4%
FTSE AIM All-Share Total Return index1,0991,442 31.2%

Note 1. Chenavari Capital Solutions made a compulsory capital redemption of 34.73 per cent of the share capital at 85.72p a share in March 2020, and subsequent compulsory capital redemption of 21.9 per cent of the share capital at 72.93p a share in July 2020. The total return takes into account the capital redemptions.

Note 2. Metal Tiger shares consolidated on the basis of one share for every 10 shares previously held on 1 July 2020.

Source: London Stock Exchange.

 

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