Business Review & Trading Update

13 February 2012

Merchant House Group plc

Business Review & Trading Update

Merchant House Group plc ("MHG" or the "Group") is pleased to announce the following business review and trading update.

BUSINESS REVIEW

The Board's strategy since late 2008 has been to exploit the volatility and uncertainty in the financial industry to build a financial services group that combines two core divisions:

·; Investment Products: based on the business units of investment management, structured products and trading infrastructure businesses; and

·; Distribution: through its IFA, wealth management and corporate advisory businesses.

Core to the strategy is to build the business units and to drive significant cross-selling opportunities and new client introductions between the business units and divisions.

The business units are structured within specific Group companies due to regulatory requirements and operating efficiencies.

Investment Products

The objective of the Investment Products division is to develop innovative financial products and investment solutions that can be marketed both generally and/or through the Group's Distribution division.

Investment Management

The business model for investment management is to provide fund platforms and funds to larger institutions, Merchant Capital ("Merchant"), a subsidiary of MHG, being appointed investment manager, and sharing fees. Using the resultant infrastructures Merchant seeks to complement the business through launching its own funds and retaining full fees. The first initiative was Merchant Funds plc, a Dublin domiciled UCITS platform launched in 2010. Management and performance fees tend to be 2% of funds under management and 20% of annual uplift in funds valuation respectively and the standard fee agreement tends to result in Merchant retaining either 25 to 50 basis points or a share in the revenue (usually a minimum of 25%). For non-UCITS funds, Merchant typically seeks to retain 50% of the total net fees. The Group has already begun launching its own self-managed funds.

Structured Products

The business offers plans backed by large financial institutions, marketed under the "Merchant" brand. Primarily, customers are the IFA industry but Merchant also tailors plans for third-party institutional clients. Merchant aims to retain initial fees of between 1% to 3% per plan, depending on the client and the uniqueness of the structure. Merchant's products aim to be at the high quality end of the market, backed by strong counterparties.

Trading Infrastructure

Merchant Trading LLP ("MT"), a subsidiary of MHG, uses its experience in designing high-volume trading infrastructure solutions to attract professional trading teams. MT aims to participate in the profits and to retain a minority interest in any resulting independent investment business. The profit participation is usually in the region of 10% and the minority interest typically between 5% and 10% depending on the scale of the business. This business model is designed to take a small participation in a range of large proprietary or investment management businesses.

Distribution

The objective of the Distribution division is to build profitable financial services businesses in their own right and provide distribution channels for the Group's Investment Products division. Products are only distributed on merit and this division is a source of new product ideas for clients.

Merchant House Financial Services Limited ("MHFS")

MHFS pays advisers commission based on gross commissions earned by advisers and pays its TenetConnect for the regulatory and administrative network that it provides. MHFS retains the net commission to cover its own costs and to contribute to profits. This moves the business to a more variable cost structure. As the IFA industry moves towards compliance with the Retail Distribution Review ("RDR"), the strategy for 2012 is to scale the business by expanding the number of advisers and increasing the proportion of commission derived from recurring revenues. This should provide the Group with a platform to build a profitable recurring revenue business that can also be a distribution channel for its range of financial products.

Merchant Wealth

Originally the stockbroking capability of the Group, it is expected that this will be relaunched under a new management team with the aim of establishing a private client wealth management service. Based on stockbroking activities it is supplemented by the Group's corporate advisory, fx and asset management capabilities. The combination will mean that Merchant Wealth will be able to offer a full service to private and corporate clients.

Corporate Finance

The traditional business of the Group, this business is being refocused on providing corporate advisory services to companies with an existing connection with the Group (usually through the investment management business). The strategy is to team up with an equity exchange and earn corporate advisory fees and incentives in tandem with investment from one of Merchant's investment funds or companies.

TRADING UPDATE

Investment Products

Investment Management

UCITS

Whilst financial market conditions in the second half of 2011 led to a slowdown in the launch of funds, Merchant announced on 13 January 2012 the launch of the Merchant Astor Long/Short UCITS Fund and has a new UCITS fund in advanced stages of approval with the Central Bank of Ireland (the Regulator).

Assets under management as at:

31 December 2010: $47 million (3 funds)

31 December 2011: $60 million (4 funds )

7 February 2012: $62 million (5 funds )

Non-UCITS

Merchant is currently preparing an application to launch a range of non-UCITS funds in Malta as part of a deal with a European based institution. Merchant has also announced the launch of Merchant Gemini Turnaround Fund IC that is in the process of raising assets and forms the first sub-fund of an ICC umbrella established in Jersey. A second fund under the ICC is being negotiated.

Structured products

The structured products business currently manages funded plans totalling in excess of £300 million. Merchant has entered into distribution agreements which have led to a significant increase in sales to the UK retail sector in the second half of 2011. In early 2012, the primary market measure of the average quality of plans, issued by FVC, saw Merchant rise to 6th on the list, the highest position for an independent plan provider.

2010 Plan sales: £12 million (10 plans)

2011 Plan sales: £24 million (29 plans)

Trading Infrastructure

Whilst the arrangement with the first business that MT assisted had a sunset clause, it has since turned into a successful fx trading businesses. Merchant is negotiating the launch of a new fx trading team clearing through a major global bank and is expected to announce the expansion of its binary options platform, in which Merchant is expected to have a significant minority stake.

Distribution

MHFS

It took much of 2011 to complete the restructuring of this business and revenues only reached expected trading levels in the second half of the year. MHFS now has over 100 advisers operating from 5 regional offices as well as, in some cases, their own office premises. MHFS is expecting to announce a fully RDR compliant offering and is establishing a service for corporate clients. MHFS revenues in 2011 are estimated to be £5 million.

Merchant wealth

This business initiative has begun in 2012. The reason that the Group is launching this initiative now is that it can be developed on the existing infrastructure and because there is turmoil in the industry currently, releasing high quality teams that can be attracted at relatively low cost.

Corporate Finance

The original business has been wound down and the activity is currently being refocused. The business is in discussion with a range of potential new clients.

The Board anticipates that the preliminary results for the Group will be published in early May.

Christopher Day, CEO of Merchant House Group plc, said:

"It is pleasing to see that the businesses in the Group are experiencing and projecting growth, particularly as in some cases one business unit has been the catalyst and/or support to another; this is exactly what the group strategy envisaged. The Board remains cautiously optimistic about the future."

For further information:

Merchant House Group plc +44 (0) 20 7332 2200

Christopher Day, CEO

James Holmes, Chairman

Cairn Financial Advisers LLP +44 (0) 20 7148 7900

Tony Rawlinson / Avi Robinson

Symvan Securities +44 (0) 20 7464 4260

Kealan Doyle / Nicholas Nicolaides

CityRoad Communications +44 (0) 207 248 8010

Paul Quade