Strategic report Governance Financial statements Other information SECTION 5: OTHER NOTES NOTES TO THE GROUP FINANCIAL STATEMENTS OTHER CONTINUED 5.7 Financial instruments contents continued Fair value hierarchy Nature and extent of risks arising from financial instruments The table below sets out the classifications of each class of financial asset and liability and their Financial risk management fair values. The main risks arising from financial instruments are market risk (including interest rate risk, foreign exchange risk and price risk), liquidity risk and credit risk. Each of these risks is discussed in detail below. Level 2 Directly The Group monitors financial risks on a consolidated basis. Hargreaves Lansdown’s financial risk Level 1 observable Level 3 management is based upon sound economic objectives and good corporate practice. No hedging Quoted prices market inputs Inputs not based transactions have taken place during the years presented. The Group has designed a framework to for similar other than on observable instruments Level 1 inputs market data Total manage the risks of its business and to ensure that the Directors have in place risk management £m £m £m £m practices appropriate to a listed company. The management of risk within the Group is governed by At 30 June 2021 the Board. Financial assets at fair value through profit or loss 0.9 – – 0.9 Market risk 0.9 – – 0.9 • Interest rate risk Interest rate risk is the risk that the Group will sustain losses from adverse movements in rates At 30 June 2020 associated with interest bearing assets and liabilities. There is an exposure to interest rates on banking Financial assets at fair value through profit deposits held in the ordinary course of business. At 30 June 2021, the value of financial instruments or loss 0.5 – – 0.5 on the Group Statement of Financial Position exposed to interest rate risk was £505.3 million (2020: Trading derivatives: £465.9 million) comprising cash, cash equivalents and term deposits. Foreign exchange Assets – 0.1 – 0.1 Foreign exchange Liabilities – (0.1) – (0.1) This exposure is continually monitored to ensure that the Group is maximising its interest earning 0.5 – – 0.5 potential within accepted liquidity and credit constraints. The Group has no external borrowings and as such is not exposed to interest rate or refinancing risk on borrowings. Cash at bank, including There were no transfers between Level 1 and Level 2 assets during the year (2020: £nil). The fair value restricted cash, earns interest at floating rates based on daily bank deposit rates. Term deposits are of financial instruments traded in active markets is based on quoted market prices at the end of the also made for varying periods of between one day and 13 months, depending on the immediate cash reporting period. requirements of the Group, and earn interest at the respective fixed term deposit rates. Instruments included in Level 1 comprise primarily equity investments and fund units entered into Given that a source of revenue is based on the value of client cash under administration, the Group has on a counterparty basis. As such there is no recurring valuation of financial instruments between an indirect exposure to interest rate risk on cash balances held for clients, the balance of which was reporting periods. £12,864 million at 30 June 2021 (2020: £13,760 million). These amounts are not included in the Group The fair value of financial instruments not traded in an active market (for example, over the counter statement of financial position. derivatives) is determined by using valuation techniques. These valuation techniques maximise the Impact of change in interest rates on interest on client money and finance income in the Consolidated use of observable market data where it is available and rely as little as possible on entity specific Income Statement. estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. The valuation techniques employed in the valuation of over the counter derivatives 2021 2020 £m £m relied on market forward rates as quoted at the end of the year used as inputs into an appropriate Interest on client money +50bps (0.5%) 2.4 28.0 pricing model. Interest on client money -50bps (0.5%) (0.2) (28.0) Finance income +50bps (0.5%) – 2.3 Finance income -50bps (-0.5%) – (2.3) 167 Hargreaves Lansdown Report and Financial Statements 2021