Our business model
The Group's principal business is The Share Centre Limited, predominantly trading through its website. The Share Centre provides services to personal investors on a self-select basis - i.e. personal investors make their own investment decisions. There are four main account types personal investors can choose from:
Simple, easy-to-use dealing accounts capable of holding a full range of equities, funds, Exchange Traded Funds (‘ETFs’), bonds and investment trusts.
Individual Savings Account (ISA)
The same simple and easy-to-use functionality but within the tax efficient savings wrapper of an ISA.
Self Invested Personal Pension (SIPP)
Offered in conjunction with our preferred pensions administrator Curtis Banks, the SIPP offers a tax efficient route through which to save in order to provide a pension in retirement.
Child Trust Fund (CTF) / Junior ISA
The Share Centre is a major CTF and Junior ISA provider. The Government ended its contributions to CTFs, although family and friends can still contribute. It then introduced the Junior ISA which can be opened by parents and guardians on an unfunded self-select basis.
Source: Annual Report 2018
There are three specific and distinct revenue streams:
The Share Centre charges a commission for trades executed on behalf of its customers and the customers of its partners. This is collected as the trade is settled. The key determinants for dealing commission revenues are the volume of transactions and the average commission per trade. These variables include automated trades (e.g. automatic reinvestment of dividend income) as well as customer initiated trades and reduced commission rates for certain trades (e.g. regular investing). The volume of transactions is largely driven by the number of customers, the level of engagement with those customers and overall investor sentiment with the market.
The relationship with our customer is at the core of The Share Centre’s activities. The value of that is crystallised through the charging of an account administration fee. The principal variables driving account fees are the number of accounts and the tariff for each account, which is largely a flat fixed rate monthly charge. In addition to account fees, the Company charges a number of other fees including those for some of its other business streams (e.g. management fees for its Funds of Funds).
A key principle of the Group’s business model with regard to fees, is that we do not vary our fees according to the investment type held by the customer – i.e. we do not charge different custody charges for equities, funds etc. We levy a single simple fixed account administration charge leaving the investor free to choose and change their investments without then being concerned about the impact such decisions will have on the fees they have to pay.
Customer accounts are not intended as cash accounts. However, with a large and diverse customer base, at any one time there is inevitably a sizeable amount of cash in aggregate across those accounts. The security of customer’s assets is paramount, but having found suitable places to deposit the funds that are also permitted from a regulatory perspective. The Share Centre earns interest income on that cash. The key variables for this revenue stream are therefore the value of customer cash held and the interest rate earned.
The Group has a balanced business model, with a large proportion of revenues derived from fees and interest as opposed to dealing commission. For example, in 2018, 48% (2017: 44%) of the Group’s revenues were fees and interest. The change from 2017 partly reflects the increase in fees as a result of the take on of new accounts particularly from Beaufort Securities, changing our offline tariff in July 2018 and the base rate rises in November 2017 and August 2018 that benefited our interest income.
The cost base of the Group is driven by The Share Centre. Approximately half of the Group’s costs are related to the staff employed: in particular salaries and related costs, as well as profit share – with every member of staff receiving a bonus directly linked to the profits of the business.
Of the remaining cost, the Group invests heavily in marketing activity. This accounted for 8% of total costs in 2018 (2017: 10%). This is principally spent on raising the Group’s profile, increasing brand awareness of The Share Centre, engaging with existing and potential customers and generating new customer accounts. IT costs in terms of licenses and maintenance now account for 5% of total costs.
Finally, the Group spends money on rent, rates and similar operational costs, as well as incurring irrecoverable value-added tax (‘VAT’) given that not all the Group’s revenues attract VAT.
We believe the Group’s business model is scalable. No core functionality is outsourced. This means the Group has effectively built ‘the engine’ and the principal challenge is attracting increased levels of activity to pass through that engine. As a result, the increase in costs when taking on new accounts and new activity is not commensurate with the increase in revenues that those accounts generate. As a result of this scalability, the Group believes it could see margins expand in future as the customer base and revenues grow. This expansion in margin may be further accelerated by any increase in interest rates to the extent that those increases are passed on by banks to depositors such as The Share Centre Limited.
Should activity or interest rates fall though, as the Group has a relatively fixed overhead base, any reduction in revenue will impact profitability.
The balance sheet of the Group is straightforward. The majority of shareholder funds are held in cash and investments. The principal investments of value are shares in the LSE, Euroclear and Professional Partners Administration Limited (‘PPAL’). The LSE shares are liquid and should be readily realisable, while recent third party acquisitions of shareholding in Euroclear demonstrate its strong shareholder value. The Group also recognises intangible assets in respect of systems development for its technology programme and for the purchase of customer accounts from third parties.
Working capital is limited as debtor and creditor balances mainly comprise open positions with the market and customers. When The Share Centre enters into a trade on behalf of a customer, acting as the customer’s matched principal, a debtor and creditor balance exist until such time as the trade settles – one side being the open trade amount due to or from the market, and the opposite side being the amount due from or to the customer. Customers’ assets are segregated from the assets of the business and do not appear on the Group’s balance sheet.
The Group was founded on the basis that democratic capitalism works best where there is a considerable overlap between consumers, employees and shareholders. To this end we encourage employee participation in our shares through the Company’s Share Incentive Plan (‘SIP’) and we offer our customers a valuable shareholder perk.
Customers who own 500 shares or more in Share plc enjoy a 30% discount off their online dealing commission. This is a significant reduction in transaction costs alongside an investment in the business. This shareholder perk encourages our customers to own a part of our business and enables them to share in our success.
The Group complies with all the FCA’s relevant rules and regulations. A strong compliance culture is maintained throughout the organisation and all staff receive regular training on matters such as Anti-Money Laundering, Bribery and Fraud. The Group also engages actively with the FCA on issues, where the FCA is seeking consultation with the industry. Client assets, their safeguarding and protection, rightly continue to be a high priority area for the FCA. The Group takes its responsibilities in this regard very seriously and it was particularly pleasing again that the statement which received the highest level of agreement in the annual staff survey across all our staff was that “the Group treats the safety of customer assets and the security of their data as paramount.”