2019

Integrated Annual Report

Committee letters

AUDIT, RISK AND COMPLIANCE COMMITTEE LETTER

Diane Radley

Activities during the 2019 financial year for the ARC committee included recommendations on and monitoring of the implementation of changes to key group functions impacting the control environment. These changes were made to enhance board and committee oversight and maintain a robust system of controls across the group.

Internal audit applies a systematic risk-based approach to evaluate, improve and provide assurance on the effectiveness of internal controls, risk management and governance processes at group and divisional level. As such, the board maintains ongoing focus on the integrity of this key function and provides specific oversight to ensure it remains sufficiently resourced over time to fulfil its mandate. The growth of the group's divisions in existing and adjacent market verticals (including into new product types), required corresponding growth in the capacity and capability of internal audit.

In 2019, Transaction Capital appointed a new group internal audit executive who will augment the required competencies of this key function. The previous head has relocated to SA Taxi to leverage their deep understanding of this division and will now serve as SA Taxi's head of internal audit. An experienced audit executive will be employed as head of internal audit at TCRS. These changes will also ensure the internal audit function remains sufficiently resourced at group and divisional level over the medium term, to provide assurance on the strategic growth initiatives described in this report.

The ARC committee also considered the tenure of Deloitte & Touche, who have been Transaction Capital's auditors for 11 years. During this time, we rotated audit partners ahead of the five-year mandatory audit partner rotation requirement. However, the ARC committee has recommended to the board that a new audit firm be appointed for the 2022 financial year. This is ahead of the mandatory audit firm rotation rule of the Independent Regulatory Board for Auditors, which takes effect from 1 April 2023.

The ARC committee provides oversight on the credit and insurance provisioning models for SA Taxi and the amortised cost model for TCRS. We assess the group and divisional risk registers quarterly and ensure that risks are correctly identified, prudently monitored and adequately mitigated, where possible, by management.

SA Taxi elected to early adopt IFRS 17 – Insurance Contracts, effective from 1 October 2017. As the new accounting standard replacing IFRS 4, IFRS 17 aligns insurance provisioning policies to IFRS 9 in that provisions are based on a forwardlooking expected loss model rather than an incurred loss model. In addition, IFRS 15 – Revenue from Contracts with Customers, was adopted this year. The ARC committee provided oversight over the process to adopt these accounting standards.

Details on the quality of earnings for the group and divisions, as well as the adoption of IFRS 17 in SA Taxi, can be found in the CFO's report.

ALCO provides regular and comprehensive feedback to the ARC committee on its rigorous monitoring and oversight of funding, liquidity, interest rate, counterparty, currency and regulatory risks. Established policies and tolerances are in place to manage these risks while maintaining agility to respond to changing economic and business conditions. The group's conservative approach to capital management continues to ensure that its balance sheet is well capitalised and liquid, and debt-free at a holding company level. As we expect TCRS's acquisition of non-performing consumer loan portfolios (NPL portfolios) in the 2020 financial year to be at least in line with that of 2019, a portion of the group's undeployed capital has been allocated towards this strategic organic growth initiative. In this regard, ALCO has provided ongoing monitoring of the capital adequacy and capital allocation models of the divisions, and focused on continued access to the debt capital markets to fund these and other organic growth opportunities.

Details on the group's capital management strategy and performance can be found in the Capital management report.

For the year ahead, the focus areas for the ARC committee include:

Diane Radley
Audit, risk and compliance committee chair

SOCIAL AND ETHICS COMMITTEE LETTER

Phumzile Langeni

During the year, the social and ethics committee focused on key initiatives to drive progress on transformation and ethical conduct across the group, along with a greater emphasis on environmental, social and governance (ESG) disclosure to stakeholders.

Transformation is high on the social and ethics committee's agenda. In October 2019, the committee held a dedicated meeting to discuss the group's plans and progress on transformation, and in particular employment equity. In addition, focused employment equity targets have been built into the succession planning processes in each division.

In light of the many publicised corporate and ethics failures, both within South Africa and internationally, the board deemed it appropriate to raise the profile of the ethics functions within the group, thereby ensuring that ethics receives the right focus required in the current environment. Under the board's direction and my guidance as chair of the social and ethics committee, the social and ethics committee considered and recommended refinements to the processes and structure of the group and divisional ethics functions to maintain the group's progressive approach to managing ethics and to adequately support the group's growth trajectory.

The group chief executive officer (CEO) and each divisional CEO are ultimately responsible for ethics, which serves as a common platform to inform the actions and decisions of every leader and employee across the group. With effect from 1 August 2019, the role of ethics executive has been incorporated into the governance portfolio of the group company secretary. Following this restructure, the ethics function will now consist of a senior executive at the group executive office, who has direct access to the group board of directors and subsidiary boards, as required. Dedicated ethics teams at each of the divisions, staffed by senior resources, will be established, thereby extending and deepening ethics structures across the group.

To accelerate the transformation objectives and embed an ethical culture within the group, transformation and ethics targets have been included as qualitative measures in the discretionary component of short-term incentive targets for key executives across the Transaction Capital group. These targets are minimum hurdles that each executive must attain in order to qualify for the full qualitative remuneration component.

As part of the ongoing governance enhancements, the board adopted an anti-bribery and corruption policy during the year, which is publicly available on the company website (at www.transactioncapital.co.za).

The social and ethics committee noted an increasing emphasis on ESG matters among shareholders and investors, and indeed all stakeholders. Transaction Capital's divisions are positioned deliberately in relation to socio-economic dynamics to deliver robust commercial returns and positive social impact in different economic conditions. This integrated annual report includes a number of key measures of our social impact and disclosure on our governance processes and policies. The group will be enhancing its ESG reporting over time and the social and ethics committee will monitor its progress in developing relevant metrics, setting targets and disclosing performance.

Although Transaction Capital has a low overall impact on the natural environment, we continue to undertake initiatives to reduce our environmental impact. These initiatives are reported to the committee on a quarterly basis.

Details on the social impact of the divisions can be found in the respective Impact sections.
Details on governance can be found in the Governance report.

For the year ahead, the focus areas for the social and ethics committee include:

Phumzile Langeni
Social and ethics committee chair

REMUNERATION COMMITTEE LETTER

Kuben Pillay

For Transaction Capital, compensation is a critical determinant of organisational performance and sustainability. This view is based on the belief that all factors that underpin enhanced performance require the highest calibre of leadership and specialist technical expertise, and that stakeholders' interests are best served by aligning strategy, business model, structure, staffing and compensation.

Although over 80% of shareholders voted in favour of the group's remuneration policy at the 2018 annual general meeting (far above the 75% required by King IV), the remuneration committee engaged extensively with shareholders as well as key investors on areas of concern. As a result of these engagements, Transaction Capital has enhanced key aspects of its remuneration policy and related disclosures to ensure it addresses all key concerns and aligns to market best practice.

Transaction Capital has included further disclosure on its executive remuneration scorecard in the remuneration report. The remuneration committee has also overseen specific enhancements to align the conditional share plan (CSP) to international best practice, with the CSP now only vesting in years three, four and five. Also, we have removed the 'retention' component of the CSP, such that the award of the CSP now relates only to defined performance hurdles being met. An additional category has been implemented to award superperformance, where selected executives (as approved by the remuneration committee on every CSP issuance) will receive an additional component of their CSP settlement value if they achieve predetermined stretch performance criteria.

The structure of our short-term incentives (STIs) has also been refined, with performance measured against defined and expanded quantitative and qualitative criteria, and a discretionary component based on individual performance.

The remuneration committee is committed to remaining at the forefront of governance developments. It is proposing the adoption of a malus and clawback policy for short-term and long-term incentive awards, which will be put to shareholders for their approval, if deemed fit, at the annual general meeting (AGM). The intention is to have a policy that would allow the business to adjust variable remuneration (both short-term and long-term incentives) awarded to participants before the vesting of an award (malus) and in the case of participants who are members of the executive committees, to recover variable pay after vesting or even payment (clawback), under appropriate circumstances. In this way the business would be able to recover value from key executives and thereby align risk and individual reward.

Further details on the revised remuneration policy, executive scorecard, STI criteria and malus and clawback policy are available in the Remuneration report.

We will continue to engage with shareholders to ensure Transaction Capital's remuneration policy supports business performance and remains aligned to the interests of its stakeholders.

Kuben Pillay
Lead independent non-executive director and remuneration committee chair

NOMINATIONS COMMITTEE LETTER

The board, through the nominations committee, assesses the composition and membership of the board and its sub-committees annually. The composition of the board reflects an appropriate combination of knowledge, skills, experience, diversity and independence, as well as knowledge of the group and its specialism in credit-orientated alternative assets.

King IV recommends that the majority of the board is comprised of non-executive directors, most of whom should be independent. The current board comprises five executive directors and seven non-executive directors, of whom five are independent.

In November 2019, the board conducted its annual assessment of directors' independence and determined that both long-standing non-executive directors, Christopher Seabrooke and Phumzile Langeni, continue to act independently.

The annual assessment process involved a self-assessment of independence by each non-executive director and an assessment of all the non-executive directors by the board collectively.

Details on the criteria for evaluating independence can be found in the Governance report.

In addition, as part of the group's ongoing alignment to the King IV principles, Kuben Pillay was appointed as lead independent non-executive director with effect from 15 July 2019. This role is primarily to support the chairman of the board by serving as a sounding board, facilitating decision-making in instances of conflicts of interest and being an avenue of communication for other directors.

The board has also constituted a standing independent committee, comprised of three independent non-executive directors – Christopher Seabrooke, Diane Radley and Kuben Pillay. This committee is empowered and mandated to make decisions where a purely independent view is required or where there may be a conflict of interest. The committee may engage group executives or external advisers as required to fulfil its mandate.

To bolster the technical skills and experience of the subsidiary boards, the group has appointed an external consultant with extensive financial services, investment, capital management, credit and organisational skills. Craig Dreyer is a permanent invitee to the SA Taxi and TCRS boards, and a member of SA Taxi's insurance advisory, credit and debt capital markets executive committees, and TCRS's investment committees (which encompasses both Transaction Capital Recoveries and TC Global Finance). Craig Dreyer will also be providing coaching and mentoring to the group and divisional CFOs.

Finally, the nominations committee continues to evaluate and enhance succession planning for group and divisional executives to ensure that Transaction Capital has sufficient executive bandwidth to support its growth over time, with a specific focus on transformation.

For the year ahead, the committee will focus on:

Christopher Seabrooke
Chairman of the board and nominations committee chair

Kuben Pillay
Lead independent non-executive director and nominations committee member