Strategic Report | Governance | Financial Statements | 67
RISK OUTLOOK
HOW THIS RISK EFFECTS JUST
JUST’S EXPOSURE TO RISK
OUTLOOK AND HOW WE MANAGE OR MITIGATE THE RISK
Just monitors and assesses regulatory developments for their potential impact on an ongoing basis. We seek to actively participate in all regulatory initiatives which may affect or provide future opportunities for the Group. Our aims are to implement any changes required effectively and deliver better outcomes for our customers and a competitive advantage for the business. We develop our strategy by giving consideration to planned political and regulatory developments and allowing for contingencies should outcomes differ from our expectations.
The matching adjustment and Solvency II reform is of key importance to Just’s business model. In September 2023, the PRA issued its first substantive consultation on the detail of its proposed changes to the matching adjustment (MA). Subject to the government’s legislative timetable and responses to the consultation, the PRA plans to publish final policy and rules on the MA during Q2 2024 with an effective date of 30 June 2024, with all other changes relating to the Solvency II review taking effect on 31 December 2024. Whilst greater clarity has now been provided, the potential impact of the changes will not be completely understood until the final details have been agreed and full details of their implementation are known in 2024. The Group has limited Funded Reinsurance and that which it has is collateralised with awareness of the recapture risks and correlated risks the PRA is concerned with in CP 24/23. The Group will evaluate the changes required as a result of the final supervisory statement and if required make changes to its approach. The FCA’s rules for a new consumer duty sets higher and clearer standards for consumer protection across financial services and require firms to put customers’ needs first. The Duty applied to new and existing products and services that are open to sale (or renewal) from 31 July 2023. Just achieved substantive compliance with the requirements in line with the timescales provided by the FCA. Work is in progress to apply the requirements to products and services in closed books by 31 July 2024, and completion of these works will form part of the required annual Board report. Following the PRA and FCA regulations on operational resilience from March 2022, Just identified its most important business services and set impact tolerances for each. These are subject to regular scenario testing and an annual self-Assessment is prepared for Board approval. Just continues to evolve its operational resilience capability through the pillars that support the delivery of business services. On 9 November 2023, the Government published a consultation seeking views on capping the maximum ground rent that residential leaseholders can be required to pay in England and Wales. The consultation set out five options including capping ground rents at a peppercorn (essentially zero). The Group invests in loans secured on residential ground rents as part of its investment portfolio, and if the consultation results in a reduction in future cash flow from ground rents, the security and/or value of the loans will be reduced, in some cases materially. For more information on the Group’s exposure to residential ground rents see page 32. Just is proactive in pursuing its sustainability responsibilities and recognises the importance of its social purpose. We have set targets for Scope 1, 2 and business travel to be carbon net zero by 2025. For emissions from our Scope 3 emissions including our investment portfolio, properties on which lifetime mortgages are secured and supply chain we have set net zero targets by 2050, with a 50% reduction in these emissions by 2030. Performance against these targets is being monitored and reported. We continue to look to improve stress and scenario testing capabilities to support the monitoring of potential climate change impact on our investment and LTMs portfolios with a particular focus on refining the quality of input data. The lifetime mortgage lending criteria will be kept under review and adjustments made as required. Under Just’s Responsible Investment Framework, the ESG risks, including climate change, are considered for liquid and illiquid assets. Risks arising from flooding, coastal erosion and subsidence are taken into account in lifetime mortgage lending decisions. The consideration of sustainability in investment decisions may restrict investment choice and the yields available; but may also create new opportunities to invest in assets that are perceived to be more sustainable.
1
POLITICAL AND REGULATORY
Changes in regulation and/or the political environment can impact the Group’s financial position and its ability to conduct business. The financial services industry continues to see a high level of regulatory activity.
TREND UNCERTAIN
STRATEGIC PRIORITIES 1. 3. 4. 5.
Our TCFD disclosures (section “sustainability strategy: TCFD disclosure framework”) explains how climate-related risks and opportunities are embedded in Just’s governance, strategy and risk management, with metrics to show the potential financial impacts on the Group. The metrics reflect the stress-testing and scenario capabilities developed to date to assess the potential impact of climate risk on the Group’s financial position. The value of properties on which lifetime mortgages are secured can be affected by: (i) transition risk – such as potential government policy changes related to the energy efficiency of residential properties; (ii) physical risks – such as increased flooding due to severe rainfall, or more widespread subsidence after extended droughts. A shortfall in property sale price against the outstanding mortgage could lead to a loss due to the no-negative equity guarantee given to customers.
2 CLIMATE AND ESG
Climate change could impact our financial position by impacting the value of residential properties in our lifetime mortgage portfolio and the yields and default risk of our investment portfolios. Just’s reputation could also be affected by missed emissions targets or inadequate actions on environmental issues or broader sustainability issues.
TREND INCREASING
STRATEGIC PRIORITIES 1. 2. 3. 4. 5.
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