GOVERNANCE
FINANCIAL STATEMENTS
strategic report
RISK OUTLOOK
HOW THIS RISK AFFECTS JUST
JUST’S EXPOSURE TO THE RISK
OUTLOOK AND HOW WE MANAGE OR MITIGATE THE RISK
Just monitors and assesses regulatory developments 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.
HM Treasury continues to review the future regulatory framework for financial services, which includes the Solvency II review. Both reviews could impact the amount of capital our businesses are required to hold. Matching Adjustment and Risk Margin reform is of key importance to Just’s business model. The HM Treasury response in November 2022 set out the Government’s final reform package for Solvency UK, including: • a reduction in the Risk Margin; • an enhancement in the Fundamental Spread risk sensitivity although its underlying design will be unchanged; and • a broadening of eligibility requirements for the Matching Adjustment, the inclusion of assets with ‘highly predictable’ cash flows, and other changes including increased flexibility in the associated processes. The potential impact of the changes will not be fully understood until the details of their implementation are known. The FCA’s rules for a new Consumer Duty (PS22/9 published July 2022) will set higher and clearer standards for consumer protection across financial services and require firms to put customers’ needs first. Firms need to apply the Duty to new and existing products and services that are open to sale (or renewal) from 31 July 2023, and from 31 July 2024 to apply the Duty to products and services in closed books. Work is now progressing to implement within the timeframes the plans approved by the Just Boards in October 2022. New PRA and FCA regulations on operational resilience took effect in March 2022. The Regulators expect firms to be operationally resilient to ensure customers are not at a financial disadvantage or be placed at risk of financial harm. Firms must identify its most important business services and set impact tolerances for each, with regular scenario testing and an annual Self-Assessment for Board approval. The change in insurance accounting standard to IFRS 17 due to be implemented in 2023 will produce a different profit recognition profile to which market participants will take time to adjust. We published an investor presentation in February 2023 to brief investors on the changes resulting from IFRS 17 ahead of full implementation. Just is proactive in pursuing its sustainability responsibilities and recognises the importance of its social purpose. We have set sustainability targets for our operations to be carbon net zero by 2025 and for emissions from our investment portfolio, properties on which lifetime mortgages are secured and supply chain to be net zero by 2050, with a 50% reduction in these emissions by 2030. Performance against these targets is being monitored and reported. We will continue to develop stress 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. Under Just’s Responsible Investment Framework, the environmental credentials of bonds and illiquid investments are considered when new premium income is invested. 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; it 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.
STRATEGIC PRIORITIES 1, 3, 4, 5
TREND UNCERTAIN
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 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. The lifetime mortgage lending policy will be kept under review in light of climate risk and adjustments made as required. For corporate bond and illiquid investment portfolios, the impact of climate risk on assets or business models may affect the ability of corporate bond issuers and commercial borrowers to service their liabilities. Yields available from corporate bonds may also be affected by any litigation or reputational risks associated with the issuers’ environmental policies or adherence to emissions targets.
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.
STRATEGIC PRIORITIES 1, 2, 3, 4, 5
TREND INCREASING
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