Blueprint
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For February
24, 2017
Commission
File Number: 001-09266
National
Westminster Bank PLC
135
Bishopsgate
London
EC2M 3UR
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form
20-F X
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Form
40-F ____
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Indicate
by check mark if the registrant is submitting the Form 6-K in paper
as permitted by Regulation S-T Rule 101(b)(1):_________
Indicate by check
mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):_________
NatWest Reports
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Page
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Description
of business
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2
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Financial
Review
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3
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Statement
of directors’ responsibilities
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8
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Consolidated
income statement
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9
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Consolidated
statement of comprehensive income
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9
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Consolidated
balance sheet
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10
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Consolidates
statement of changes in equity
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11
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Consolidated
cash flow
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12
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Notes
on the accounts
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13
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Additional
information
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42
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Forward
looking statements
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75
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Presentation of information
In this
document, and unless specified otherwise, the term
‘Bank’ or ‘NatWest’ means National
Westminster Bank Plc, the ‘Group’ or ‘NatWest
Group’ means the Bank and its subsidiaries, ‘the Royal
Bank’, ‘RBS plc’ or ‘the holding
company’ means The Royal Bank of Scotland plc,
‘RBSG’ or ‘the ultimate holding company’
means The Royal Bank of Scotland Group plc and ‘RBS
Group’ means the ultimate holding company and its
subsidiaries.
The
Group 2016 Annual Report and Accounts are available at
www.rbs.com/results
Business structure
The RBS
Group continues to deliver on its plan to build a strong, simple
and fair bank for both customers and shareholders.
On 5
December 2016 the Corporate & Institutional Banking (CIB)
business was re-branded as NatWest Markets (NWM) in readiness for
our future ring-fenced structure: this included the renaming of the
reportable operating segment as NatWest Markets. NatWest Markets
will continue to offer financing, rates and currencies products to
its customers.
During
2016 the Group’s activities are organised on a franchise
basis as follows:
UK Personal & Business Banking (UK PBB) serves
individuals and mass affluent customers in the UK together with
small businesses (generally up to £2 million turnover). UK PBB
includes Ulster Bank customers in Northern Ireland.
Commercial & Private Banking (CPB) comprises two
reportable segments: Commercial Banking and Private Banking.
Commercial Banking serves commercial and corporate customers in the
UK and Western Europe. Private Banking serves UK connected high net
worth individuals.
NatWest Markets (NWM), formerly Corporate and Institutional
Banking (CIB), consists primarily of the operations of RBS
Securities Inc (RBSSI). RBSSI is a U.S. registered broker-dealer
principally engaged in the purchase, sale and financing of
securities with institutional entities and government sponsored
entities.
Capital Resolution was established to execute the sale
or wind down of most of the global footprint. Non-strategic
markets, portfolio and banking assets identified are being sold or
wound down.
Central items & other includes corporate functions, such
as RBS treasury, finance, risk management, compliance, legal,
communications and human resources. Central functions manage the
Group’s capital resources and Group-wide regulatory projects
and provides services to the reportable segments.
Ulster Bank (Ireland) Holdings Unlimited Company
Ulster
Bank (Ireland) Holdings Unlimited Company (UBIH) was sold to
NatWest Holdings Limited (NatWest Holdings) on 1 January 2017 in
preparation for ring-fencing. NatWest Holdings is a direct
subsidiary of RBS plc. UBIH is classified as a disposal group
at 31 December 2016 and its assets and liabilities presented in
aggregate in accordance with IFRS 5. UBIH, which was mainly
reported in the Ulster Bank RoI operating segment, is no longer a
reportable operating segment but presented as a discontinued
operation and comparatives have been re-presented accordingly. UBIH
wholly owns Ulster Bank Ireland Designated Activity Company (UBI
DAC) which is regulated by the Central Bank of
Ireland.
RBS Group ring-fencing
The UK
ring-fencing legislation requiring the separation of essential
banking services from investment banking services will take effect
from 1 January 2019.
To
comply with these requirements it is RBS Group’s intention to
place the majority of the UK and Western European banking business
in ring-fenced banking entities under a new intermediate holding
company (NatWest Holdings). NatWest Markets (formerly Corporate and
Institutional Banking) will be a separate non ring-fenced bank, and
The Royal Bank of Scotland International (Holdings) Limited (RBSI
Holdings) will be outside the ring-fence, both as direct
subsidiaries of RBSG.
The
final ring-fenced legal structure and the actions to be taken to
achieve it, remain subject to, amongst other factors, additional
regulatory, Board and other approvals as well as employee
information and consultation procedures. All such actions and their
respective timings may be subject to change, or additional actions
may be required, including as a result of external and internal
factors including further regulatory, corporate or other
developments.
On 1
January 2017 RBS Group made a number of key changes to the legal
entity structure as detailed below to support the move towards a
ring-fenced structure. There are also plans to make further changes
prior to 1 January 2019.
NatWest Holdings
An
intermediate holding company, NatWest Holdings, was introduced as a
direct subsidiary of RBS plc. This is an interim structure as
NatWest Holdings is expected to become a direct subsidiary of RBSG
in mid 2018.
The
Bank and Adam & Company Group PLC (Adam & Co) transferred
from being direct subsidiaries of RBS plc, and UBIH transferred
from being a direct subsidiary of Ulster Bank Limited, to become
direct subsidiaries of NatWest Holdings.
Financial review
RBS International
RBSI
Holdings transferred from being an indirect subsidiary of RBS plc
to become a direct subsidiary of RBSG. The intention is for RBS
International’s operating companies to remain as subsidiaries
of RBSI Holdings.
The
Bank bought Lombard North Central PLC and RBS Invoice Finance
(Holdings) Limited from RBS plc and some smaller companies from
other members of the RBS Group.
2016 compared with 2015
The
Group reported a loss attributable to ordinary shareholders of
£867 million compared with £1,205 million in
2015.
Litigation
and conduct costs of £2,258 million included a provision of
£1,710 million in relation to the Group’s issuance and
underwriting of residential mortgage-backed securities (RMBS) and
PPI provisions of £362 million.
Restructuring
costs decreased by £635 million to £81 million, compared
with £716 million in 2015.
The
NatWest Plc CET1 ratio increased from 11.6% to 16.1% primarily
reflecting the £1.3 billion capital injection from RBS plc and
profit in the year, partially offset by the adverse impact of the
£4.2 billion accelerated pension payment to the Main scheme in
March 2016 and the annual phasing in of the CRR end-point rules
relating to significant investments.
Customer segment performance
UK Personal & Business Banking (UK PBB)
UK PBB
operating profit increased to £1,499 million compared with
£1,179 million in 2015, primarily reflecting lower operating
expenses and an increase in income.
Net-interest
income increased by £151 million principally reflecting strong
mortgage loan growth and active deposit re-pricing. Non-interest
income increased by £86 million, reflecting an increase in net
fees and commissions of £99 million to £807 million (2015
- £709 million).
Operating
expenses decreased by £118 million to £2,782 million
(2015 - £2,900 million). This was largely due to lower
litigation and conduct costs which in 2016 included a provision of
£362 million in relation to PPI, together with lower staff
costs.
Impairment
losses were £105 million compared with £20 million in
2015 with increases principally reflecting reduced portfolio
provision releases.
Gross
loans and advances to customers grew by £14.0 billion to
£113.3 billion principally driven by continued mortgage
growth. Customer deposits increased by £6.8 billion to
£125.6 billion primarily driven by growth in
deposits.
Commercial Banking
Commercial
Banking operating profit decreased to £623 million compared
with £832 million in 2015, driven by higher expenses, partly
offset by an increase in income.
Net-interest
income increased by £37 million to £1,162 million
compared with £1,125 million in 2015 driven by higher asset
and deposit volumes. Non-interest income increased by £48
million to £450 million.
Operating
expenses increased by £283 million to £975 million,
compared with £692 million in 2015, and included a £223
million provision in respect of the FCA review of the Group’s
treatment of SMEs.
Gross
loans and advances to customers increased by £1.7 billion to
£41.7 billion compared with £40.0 billion in 2015,
primarily reflecting increased borrowing across a number of
sectors.
Financial review
Operating loss before tax
Operating
loss before tax was £224 million compared with a loss of
£1,753 million in 2015. The improvement reflected an increase
in income and lower operating expenses, partly offset by an
increase in impairment losses compared with impairment releases in
2015. Loss attributable to shareholders was £867 million
compared with £1,205 million in 2015. Profit from discontinued
operations of £63 million compared with £836 million in
2015 and includes the results of UBIH which was classified as a
discontinued operation at 31 December 2016.
Net interest income
Net
interest income increased by £235 million, 5%, to £4,768
million compared with £4,533 million in 2015. This was
principally driven by increases in UK PBB, £151 million,
reflecting deposit re-pricing and strong loan growth and in
Commercial Banking, £37 million, due to higher asset
volumes.
Financial review
Non-interest income
Non-interest
income decreased by £86 million, 6%, to £1,413 million
compared with £1,499 million in 2015. Within this, loss from
trading activities was £338 million (2015 - £51 million)
primarily reflecting foreign exchange movements and IFRS volatility
losses.
Other
operating income increased by £234 million to £253
million compared with £19 million in 2015. The increase
comprised of a profit on strategic disposals of £189 million,
compared with a loss of £84 million in 2015, and a gain on
disposal of loans and receivables of £5 million, compared with
a loss of £84 million in 2015.
Net
fees and commissions decreased to £1,498 million compared with
£1,531 million, primarily reflecting the sale of the
international private banking business and reduced activity in
NatWest Markets.
Operating expenses
Operating
expenses decreased by £1,563 million to £6,274 million
compared with £7,837 million in 2015.
Litigation
and conduct costs were £2,258 million compared with
£2,825 million in 2015, and includes a £1,710 million
provision in relation to the Group’s RMBS, PPI provisions of
£362 million and a £223 million provision in respect of
the FCA review of the Group’s treatment of SMEs.
Restructuring
costs decreased by £635 million to £81 million, compared
with £716 million in 2015. 2015 costs included a £277
million impairment in the value of US premises.
Operating
expenses excluding litigation and conduct costs and restructuring
costs declined by £361 million, 8%, to £3,935 million
compared with £4,296 million in 2015. Staff costs decreased by
£358 million, 29%, to £878 million reflecting reductions
in Capital Resolution and cost savings initiatives.
Impairment losses
Net
impairment losses were £131 million compared with impairment
releases of £52 million in 2015. Net impairment losses
principally in UK PBB (£105 million) and in Commercial Banking
(£14 million), reflected reduced provision
releases.
Discontinued operations
Profit
from discontinued operations was £63 million compared with
£836 million in 2015 and includes the results of UBIH which
was classified as a discontinued operation in at 31 December
2016.
Financial review
2015 compared with 2014
Operating (loss)/profit before tax
Operating
loss before tax was £1,753 million compared with a profit of
£902 million in 2014. This decrease reflects higher charges
for litigation and conduct costs of £2,825 million compared
with £1,026 million in 2014, net impairment releases of
£52 million compared with net impairment losses of £128
million in 2014 and a significant decrease in other non-interest
income; this was partially offset by an increase in net interest
income. Profit from discontinued operations was £836 million
compared with £1,829 million and includes the results of
Ulster Bank (Ireland) Holdings which was classified as a
discontinued operation at 31 December 2016.
Net interest income
Net
interest income increased by £386 million, 9% to £4,533
million compared with £4,147 million in 2014. The increase was
principally due to improvements in UK PBB reflecting improvements
in deposit margins and growth in the mortgage book.
Non-interest income
Non-interest
income decreased by £936 million, 38% to £1,499 million,
compared with £2,435 million in 2014, primarily due to a
significant decrease in other operating income of £654 million
to £19 million primarily reflecting losses on strategic
disposals and a reduction in dividend income. Loss from trading
activities decreased by £34 million to £51 million
principally from the reduced scale of activity in NatWest Markets.
Net fees and commissions decreased by £316 million to
£1,531 million reflecting reduced activity in NatWest Markets,
reductions in Private Banking and lower card interchange fees in UK
PBB.
Operating expenses
Operating
expenses increased by £2,285 million, or 41%, to £7,837
million from £5,552 million in 2014. Operating expenses
excluding restructuring costs and litigation and conduct costs
declined by £166 million, or 4%, to £4,296 million (2014
- £4,492 million) mainly reflecting the benefits of cost
savings initiatives.
Litigation
and conduct costs were £2,825 million compared with
£1,026 million in 2014, primarily relating to mortgage-backed
securities litigation. Other charges in 2015 include: provisions in
relation to PPI costs of £359 million and Interest Rate
Hedging Products redress of £85 million and other litigation
and conduct provisions of £268 million.
Restructuring
costs increased by £682 million to £716 million, compared
with £34 million in 2014, primarily reflecting property and
software write-downs in NatWest Markets.
Impairment releases/(losses)
Net
impairment releases were £52 million in 2015 compared with a
loss of £128 million in 2014. Net impairment releases were
principally in Capital Resolution with disposal activity
continuing.
Discontinued operations
Profit
from discontinued operations was £836 million compared with
£1,829 million and includes the results of Ulster Bank
(Ireland) Holdings which was classified as a discontinued operation
at 31 December 2016.
Financial review
Capital and leverage ratios
Capital
resources, RWAs and leverage based on the relevant local regulatory
capital transitional arrangements for the significant legal
entities within the Group are set out below.
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31 December 2016
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31 December 2015
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Risk asset ratios
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NatWest Plc
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UBI DAC
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NatWest Plc
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UBI DAC
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CET1(%)
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16.1
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29.0
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11.6
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29.6
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Tier 1(%)
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16.1
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29.0
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11.6
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29.6
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Total (%)
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23.3
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31.9
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19.7
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32.1
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Capital
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CET 1(£bn)
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10.4
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5.2
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7.2
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5.7
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Tier 1(£bn)
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10.4
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5.2
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7.2
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5.7
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Total (£bn)
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15.0
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5.7
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12.1
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6.2
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Risk weighted assets
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Credit risk
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- non-counterparty (£bn)
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56.0
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16.3
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54.4
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17.8
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- counterparty (£bn)
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0.5
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0.5
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0.4
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0.3
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Market risk (£bn)
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0.7
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—
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0.6
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—
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Operational risk (£bn)
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7.2
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1.2
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6.4
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1.1
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64.4
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18.0
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61.8
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19.2
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Leverage
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Leverage exposure (£bn)
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169.6
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27.3
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153.1
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23.7
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Tier 1 capital (£bn)
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10.4
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5.2
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7.2
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5.7
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Leverage ratio (%)
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6.1
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19.1
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4.7
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24.0
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Notes:
(1)
UBI DAC refers to
Ulster Bank Ireland DAC.
(2)
Refer to page 27 of
the 2016 Annual Report and Accounts.
NatWest Plc
The
CET1 ratio increased from 11.6% to 16.1% primarily reflecting the
£1.3 billion capital injection from RBS plc and profit in the
year, partially offset by the adverse impacts of the £4.2
billion accelerated pension payment to the Main Scheme in March
2016 and the annual phasing in of the CRR end-point rules relating
to significant investments.
RWAs
increased by £2.6 billion primarily due to lending growth and
the annual recalculation of operational risk.
The
leverage ratio on a PRA transitional basis increased to 6.1% as a
result of increased Tier 1 capital, offset by growth in mortgage
lending.
UBI DAC
The CBI
transitional CET1 ratio decreased from 29.6% to 29.0%.
RWAs
decreased from €26.2 billion to €21.0 billion as a
result of decreased lending, disposals and model
changes.
When
translated into sterling RWAs decreased by £1.2
billion.
The
leverage ratio on a CBI transitional basis decreased to 19.1% from
24.0%, reflecting higher leverage exposure, primarily due to
currency movements.
Financial review
Commentary on consolidated balance sheet
2016 compared with 2015
Total assets increased by £14.0 billion, 5%, to £316.5
billion and reflected loan growth in UK PBB, partly offset by
disposal and run-down in Capital Resolution.
Loans and advances to banks decreased by £6.1 billion, 6%, to
£97.2 billion and included the impact of £2.4 billion
being transferred to assets of disposal groups (2015 - £0.7
billion). Within this, other bank placings decreased by £1.4
billion, 36%, to £2.5 billion and amounts due from the holding
company and fellow subsidiaries decreased by £4.7 billion, 5%,
to £94.7 billion.
Loans and advances to customers remained stable at £177.1
billion compared with £176.8 billion in 2015. Within this,
amounts due from fellow subsidiaries were up £2.7 billion to
£3.2 billion. Customer lending decreased by £2.4 billion,
1%, to £173.8 billion, primarily reflecting the impact of
£18.9 billion (2015 - £1.6 billion) being transferred to
assets of disposal groups, loan disposals in Capital Resolution of
£1.5 billion, partly offset by a £14.0 billion increase
in UK PBB mainly in relation to mortgages
Debt securities and equity shares decreased by £3.4 billion,
43%, to £4.6 billion primarily reflecting the transfer of
£3.0 billion (2015 - £0.4 billion) to assets of disposal
groups and reductions in held-for-trading government and financial
institution securities.
Movements in the fair value of derivative assets, up £1.3
billion, 49%, to £3.9 billion, and derivative liabilities up
£2.0 billion, 74%, to £4.7 billion reflecting Capital
Resolution run-down.
The increase in assets and liabilities of disposal groups from
£3.3 billion to £25.0 billion and from £2.7 billion
to £19.3 billion respectively, reflects the transfer of UBIH
to disposal groups at 31 December 2016.
Deposits by banks decreased by £4.5 billion, 18%, to
£20.0 billion with amounts due to the holding company and
fellow subsidiaries, down £2.8 billion, 16%, to £14.8
billion, a decrease in other bank deposits of £1.8 billion,
26%, to £5.2 billion and the impact of £1.3 billion
transferred to liabilities of disposal groups.
Customer accounts increased £2.3 billion, 1%, to £233.9
billion and included the impact of £16.1 billion (2015 -
£2.6 billion) transferred to disposal groups. Within this,
amounts due to fellow subsidiaries decreased by £2.9 billion,
37%, to £4.9 billion. Other customer deposits were up
£5.2 billion, 2%, at £229.1 billion, with the increase
mainly in UKPBB and Commercial Banking.
Subordinated liabilities increased by £0.3 billion, 4% to
£7.3 billion, primarily as a result of the net increase in
exchange rate of £0.3 billion.
Owner’s equity decreased by £0.8 billion, 5%, to
£15.6 billion primarily driven by the £0.9 billion
attributable loss for the year.
Statement of directors’ responsibilities
The
responsibility statement below has been prepared in connection with
the Group's full Annual Report and Accounts for the year ended 31
December 2016.
The
directors confirm that to the best of their knowledge:
●
the financial
statements, prepared in accordance with International Financial
Reporting Standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the company
and the undertakings included in the consolidation taken as a
whole; and
●
the Strategic
Report and Directors’ report (incorporating the Financial
review) includes a fair review of the development and performance
of the business and the position of the company and the
undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and
uncertainties that they face.
By
order of the Board
Howard
Davies
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Ross
McEwan
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Ewen
Stevenson
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Chairman
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Chief
Executive
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Chief
Financial Officer
|
23
February 2017
Board of directors
Chairman
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Executive directors
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Non-executive directors
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Howard
Davies
|
Ross
McEwan
Ewen
Stevenson
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Sandy
Crombie
Frank
Dangeard
Alison
Davis
Morten
Friis
Robert
Gillespie
Penny
Hughes
Brendan
Nelson
Baroness
Noakes
Mike
Rogers
|
Consolidated income statement for the year ended 31 December
2016
|
|
2016
|
2015
|
2014
|
£m
|
£m
|
£m
|
Interest receivable
|
|
5,784
|
5,793
|
5,894
|
Interest payable
|
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(1,016)
|
(1,260)
|
(1,747)
|
Net interest income
|
|
4,768
|
4,533
|
4,147
|
Fees and commissions receivable
|
|
1,938
|
2,040
|
2,339
|
Fees and commissions payable
|
|
(440)
|
(509)
|
(492)
|
Income from trading activities
|
|
(338)
|
(51)
|
(85)
|
Other operating income
|
|
253
|
19
|
673
|
Non-interest income
|
|
1,413
|
1,499
|
2,435
|
Total income
|
|
6,181
|
6,032
|
6,582
|
Staff costs
|
|
(878)
|
(1,236)
|
(1,453)
|
Premises and equipment
|
|
(273)
|
(505)
|
(242)
|
Other administrative expenses
|
|
(4,978)
|
(5,545)
|
(3,642)
|
Depreciation and amortisation
|
|
(129)
|
(444)
|
(215)
|
Write down of goodwill and other intangible assets
|
|
(16)
|
(107)
|
—
|
Operating expenses
|
|
(6,274)
|
(7,837)
|
(5,552)
|
(Loss)/profit before impairment (losses)/releases
|
|
(93)
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(1,805)
|
1,030
|
Impairment (losses)/releases
|
|
(131)
|
52
|
(128)
|
Operating (loss)/profit before tax
|
|
(224)
|
(1,753)
|
902
|
Tax charge
|
|
(706)
|
(289)
|
(998)
|
Loss from continuing operations
|
|
(930)
|
(2,042)
|
(96)
|
Profit from discontinued operations net of tax
|
|
63
|
836
|
1,829
|
(Loss)/profit for the year
|
|
(867)
|
(1,206)
|
1,733
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
Non-controlling interests
|
|
—
|
(1)
|
—
|
Ordinary shareholders
|
|
(867)
|
(1,205)
|
1,733
|
|
|
(867)
|
(1,206)
|
1,733
|
|
2016
|
2015
|
2014
|
Statement of comprehensive income
|
£m
|
£m
|
£m
|
(Loss)/profit for the year
|
(867)
|
(1,206)
|
1,733
|
Items that do not qualify for reclassification
|
|
|
|
Loss on remeasurement of retirement benefit schemes
|
(1,030)
|
(167)
|
(1,567)
|
Tax
|
320
|
328
|
247
|
|
(710)
|
161
|
(1,320)
|
Items that do qualify for reclassification
|
|
|
|
Available-for-sale financial assets
|
284
|
(11)
|
(38)
|
Cash flow hedges
|
2
|
2
|
3
|
Currency translation
|
862
|
(326)
|
160
|
Tax
|
20
|
3
|
12
|
|
1,168
|
(332)
|
137
|
Other comprehensive profit/(loss) after tax
|
458
|
(171)
|
(1,183)
|
Total comprehensive (loss)/income for the year
|
(409)
|
(1,377)
|
550
|
|
|
|
|
Attributable to:
|
|
|
|
Non-controlling interests
|
73
|
(24)
|
(34)
|
Ordinary shareholders
|
(482)
|
(1,353)
|
584
|
|
(409)
|
(1,377)
|
550
|
|
|
|
|
Balance sheet as at 31 December 2016
|
|
Group
|
|
Bank
|
|
|
2016
|
2015
|
|
2016
|
2015
|
|
|
£m
|
£m
|
|
£m
|
£m
|
Assets
|
|
|
|
|
|
|
Cash and balances at central banks
|
|
2,567
|
1,690
|
|
1,198
|
819
|
Amounts due from holding company and subsidiaries
|
|
94,686
|
99,403
|
|
63,427
|
72,227
|
Other loans and advances to banks
|
|
2,466
|
3,875
|
|
1,176
|
1,022
|
Loans and advances to banks
|
|
97,152
|
103,278
|
|
64,603
|
73,249
|
Amounts due from subsidiaries
|
|
3,223
|
569
|
|
65
|
132
|
Other loans and advances to customers
|
|
173,842
|
176,263
|
|
150,082
|
134,251
|
Loans and advances to customers
|
|
177,065
|
176,832
|
|
150,147
|
134,383
|
Debt securities subject to repurchase agreements
|
|
2,900
|
3,740
|
|
—
|
—
|
Other debt securities
|
|
1,563
|
3,464
|
|
—
|
—
|
Debt securities
|
|
4,463
|
7,204
|
|
—
|
—
|
Equity shares
|
|
87
|
717
|
|
11
|
4
|
Investments in Group undertakings
|
|
—
|
—
|
|
6,931
|
6,554
|
Settlement balances
|
|
1,693
|
2,138
|
|
119
|
47
|
Amounts due from holding company and subsidiaries
|
|
2,929
|
1,724
|
|
2,167
|
1,326
|
Other derivatives
|
|
975
|
889
|
|
915
|
760
|
Derivatives
|
|
3,904
|
2,613
|
|
3,082
|
2,086
|
Intangible assets
|
|
484
|
517
|
|
477
|
498
|
Property, plant and equipment
|
|
2,160
|
1,031
|
|
787
|
811
|
Deferred tax
|
|
1,391
|
1,802
|
|
1,365
|
1,546
|
Prepayments, accrued income and other assets
|
|
534
|
1,297
|
|
201
|
395
|
Assets of disposal groups
|
|
24,976
|
3,311
|
|
—
|
—
|
Total assets
|
|
316,476
|
302,430
|
|
228,921
|
220,392
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Amounts due to holding company and subsidiaries
|
|
14,845
|
17,609
|
|
5,773
|
8,210
|
Other deposits by banks
|
|
5,200
|
6,982
|
|
3,435
|
2,726
|
Deposits by banks
|
|
20,045
|
24,591
|
|
9,208
|
10,936
|
Amounts due to subsidiaries
|
|
4,859
|
7,752
|
|
4,829
|
8,718
|
Other customer accounts
|
|
229,080
|
223,909
|
|
187,661
|
176,421
|
Customer accounts
|
|
233,939
|
231,661
|
|
192,490
|
185,139
|
Debt securities in issue
|
|
301
|
1,473
|
|
—
|
—
|
Settlement balances
|
|
1,753
|
2,461
|
|
86
|
53
|
Short positions
|
|
4,591
|
3,577
|
|
—
|
—
|
Amounts due to holding company and subsidiaries
|
|
4,294
|
2,291
|
|
3,604
|
1,993
|
Other derivatives
|
|
360
|
379
|
|
334
|
302
|
Derivatives
|
|
4,654
|
2,670
|
|
3,938
|
2,295
|
Provisions for liabilities and charges
|
|
6,659
|
5,329
|
|
1,533
|
1,325
|
Accruals and other liabilities
|
|
1,897
|
2,214
|
|
467
|
379
|
Retirement benefit liabilities
|
|
29
|
3,547
|
|
12
|
3,242
|
Amounts due to holding company
|
|
5,806
|
5,621
|
|
4,409
|
4,413
|
Other subordinated liabilities
|
|
1,489
|
1,395
|
|
1,481
|
1,328
|
Subordinated liabilities
|
|
7,295
|
7,016
|
|
5,890
|
5,741
|
Liabilities of disposal groups
|
|
19,313
|
2,724
|
|
—
|
—
|
Total liabilities
|
|
300,476
|
287,263
|
|
213,624
|
209,110
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
420
|
346
|
|
—
|
—
|
Owners’ equity
|
|
15,580
|
14,821
|
|
15,297
|
11,282
|
Total equity
|
|
16,000
|
15,167
|
|
15,297
|
11,282
|
Total liabilities and equity
|
|
316,476
|
302,430
|
|
228,921
|
220,392
|
Statement of changes in equity for the year ended 31 December
2016
|
Group
|
|
Bank
|
|
2016
|
2015
|
2014
|
|
2016
|
2015
|
2014
|
£m
|
£m
|
£m
|
|
£m
|
£m
|
£m
|
Called-up share capital
|
|
|
|
|
|
|
|
At 1 January and 31 December
|
1,678
|
1,678
|
1,678
|
|
1,678
|
1,678
|
1,678
|
|
|
|
|
|
|
|
|
Share premium
|
|
|
|
|
|
|
|
At 1 January and 31 December
|
2,225
|
2,225
|
2,225
|
|
2,225
|
2,225
|
2,225
|
|
|
|
|
|
|
|
|
Available-for-sale reserve
|
|
|
|
|
|
|
|
At 1 January
|
18
|
29
|
55
|
|
—
|
—
|
6
|
Unrealised gains/(losses)
|
303
|
(5)
|
(29)
|
|
1
|
—
|
—
|
Realised gains
|
(19)
|
(6)
|
(9)
|
|
—
|
—
|
(7)
|
Tax
|
5
|
—
|
12
|
|
—
|
—
|
1
|
At 31 December
|
307
|
18
|
29
|
|
1
|
—
|
—
|
|
|
|
|
|
|
|
|
Cash flow hedging reserve
|
|
|
|
|
|
|
|
At 1 January
|
(1)
|
(3)
|
(6)
|
|
(1)
|
(3)
|
(6)
|
Amount recognised in equity
|
—
|
—
|
—
|
|
—
|
—
|
—
|
Amount transferred from equity to earnings
|
2
|
2
|
3
|
|
2
|
2
|
3
|
Tax
|
(1)
|
—
|
—
|
|
(1)
|
—
|
—
|
At 31 December
|
—
|
(1)
|
(3)
|
|
—
|
(1)
|
(3)
|
|
|
|
|
|
|
|
|
Foreign exchange reserve
|
|
|
|
|
|
|
|
At 1 January
|
821
|
1,121
|
927
|
|
(10)
|
(10)
|
(10)
|
Retranslation of net assets
|
994
|
(283)
|
231
|
|
—
|
—
|
—
|
Foreign currency losses on hedges of net assets
|
(54)
|
(20)
|
(37)
|
|
—
|
—
|
—
|
Tax
|
16
|
3
|
—
|
|
—
|
—
|
—
|
Recycled to profit or loss on disposal businesses
|
(151)
|
—
|
—
|
|
—
|
—
|
—
|
At 31 December
|
1,626
|
821
|
1,121
|
|
(10)
|
(10)
|
(10)
|
|
|
|
|
|
|
|
|
Capital redemption reserve
|
|
|
|
|
|
|
|
At 1 January and 31 December
|
647
|
647
|
647
|
|
647
|
647
|
647
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
At 1 January
|
9,433
|
9,677
|
7,262
|
|
6,743
|
7,384
|
3,990
|
(Loss)/profit attributable to ordinary shareholders
|
|
|
|
|
|
|
|
- continuing operations
|
(930)
|
(2,041)
|
(96)
|
|
3,466
|
(1,422)
|
2,416
|
- discontinued operations
|
63
|
836
|
1,829
|
|
—
|
—
|
—
|
Ordinary dividends paid
|
—
|
—
|
(175)
|
|
—
|
—
|
(175)
|
Capital contribution
|
1,300
|
800
|
2,177
|
|
1,300
|
800
|
2,177
|
Loss on remeasurement of retirement benefit schemes
|
|
|
|
|
|
|
|
- gross
|
(1,030)
|
(167)
|
(1,567)
|
|
(1,058)
|
(348)
|
(1,265)
|
- tax
|
320
|
328
|
247
|
|
305
|
329
|
241
|
Loss on transfer of fellow subsidiary
|
(59)
|
—
|
—
|
|
—
|
—
|
—
|
At 31 December
|
9,097
|
9,433
|
9,677
|
|
10,756
|
6,743
|
7,384
|
|
|
|
|
|
|
|
|
Owners' equity at 31 December
|
15,580
|
14,821
|
15,374
|
|
15,297
|
11,282
|
11,921
|
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
|
|
|
|
|
|
At 1 January
|
346
|
394
|
1,278
|
|
—
|
—
|
—
|
Currency translation adjustments and other movements
|
73
|
(23)
|
(34)
|
|
—
|
—
|
—
|
Loss attributable to non-controlling interests
|
—
|
(1)
|
—
|
|
—
|
—
|
—
|
Equity withdrawn and disposals
|
1
|
(24)
|
(850)
|
|
—
|
—
|
—
|
At 31 December
|
420
|
346
|
394
|
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
Total equity at 31 December
|
16,000
|
15,167
|
15,768
|
|
15,297
|
11,282
|
11,921
|
|
|
|
|
|
|
|
|
Total equity is attributable to:
|
|
|
|
|
|
|
|
Non-controlling interests
|
420
|
346
|
394
|
|
—
|
—
|
—
|
Ordinary shareholders
|
15,580
|
14,821
|
15,374
|
|
15,297
|
11,282
|
11,921
|
|
16,000
|
15,167
|
15,768
|
|
15,297
|
11,282
|
11,921
|
|
|
|
|
|
|
|
|
Cash flow statement for the year ended 31 December
2016
|
|
Group
|
|
Bank
|
|
|
2016
|
2015
|
2014
|
|
2016
|
2015
|
2014
|
£m
|
£m
|
£m
|
|
£m
|
£m
|
£m
|
Cash flows operating activities
|
|
|
|
|
|
|
|
|
Operating (loss)/profit before tax from continuing
operations
|
|
(224)
|
(1,753)
|
902
|
|
4,060
|
(1,105)
|
2,541
|
Profit before tax from discontinued operations
|
|
60
|
839
|
1,675
|
|
—
|
—
|
—
|
Adjustments for non-cash items and other
|
|
|
|
|
|
|
|
|
Adjustments included within income statement
|
|
(3,548)
|
(4,993)
|
(4,163)
|
|
(697)
|
2,304
|
(1,800)
|
Cash contribution to defined benefit pension schemes
|
|
(4,473)
|
(807)
|
(804)
|
|
(4,349)
|
(724)
|
(712)
|
Changes in operating assets and liabilities
|
|
(1,227)
|
8,772
|
(13,713)
|
|
(5,704)
|
(548)
|
(5,737)
|
Income taxes (paid)/received
|
|
(77)
|
169
|
25
|
|
(131)
|
62
|
(128)
|
Net cash flows from operating activities
|
|
(9,489)
|
2,227
|
(16,078)
|
|
(6,821)
|
(11)
|
(5,836)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Sale and maturity of securities
|
|
1,179
|
2,226
|
709
|
|
—
|
782
|
471
|
Purchase of securities
|
|
(1,246)
|
(1,417)
|
(2,070)
|
|
—
|
—
|
—
|
Sale of property, plant and equipment
|
|
64
|
413
|
287
|
|
17
|
15
|
49
|
Purchase of property, plant and equipment
|
|
(88)
|
(207)
|
(187)
|
|
(61)
|
(165)
|
(66)
|
Net investment in business interests and intangible
assets
|
|
(1,247)
|
(2,716)
|
(8)
|
|
(307)
|
(715)
|
17
|
Net cash flows from investing activities
|
|
(1,338)
|
(1,701)
|
(1,269)
|
|
(351)
|
(83)
|
471
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Capital contribution
|
|
1,300
|
800
|
1,500
|
|
1,300
|
800
|
1,500
|
Redemption of subordinated liabilities
|
|
—
|
(387)
|
(60)
|
|
—
|
(387)
|
—
|
Dividends paid
|
|
—
|
—
|
(175)
|
|
—
|
—
|
(175)
|
Interest on subordinated liabilities
|
|
(245)
|
(262)
|
(270)
|
|
(237)
|
(255)
|
(250)
|
Net cash flows from financing activities
|
|
1,055
|
151
|
995
|
|
1,063
|
158
|
1,075
|
Effects of exchange rate changes on cash and cash
equivalents
|
|
2,993
|
115
|
221
|
|
1,073
|
(55)
|
(108)
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase in cash and cash equivalents
|
|
(6,779)
|
792
|
(16,131)
|
|
(5,036)
|
9
|
(4,398)
|
Cash and cash equivalents at 1 January
|
|
86,543
|
85,751
|
101,882
|
|
66,187
|
66,178
|
70,576
|
Cash and cash equivalents at 31 December
|
|
79,764
|
86,543
|
85,751
|
|
61,151
|
66,187
|
66,178
|
|
|
|
|
|
|
|
|
|
Notes on the accounts
1 Basis of Preparation
The
Group’s consolidated financial statements should be read in
conjunction with the 2016 Annual Report and Accounts which were
prepared in accordance with International Financial Reporting
Standards issued by the International Accounting Standards Board
(IASB) and interpretations issued by the IFRS Interpretations
Committee of the IASB as adopted by the European Union (EU)
(together IFRS).
Going concern
Having
reviewed the Group’s forecasts, projections and other
relevant evidence, the directors have a reasonable expectation that
the Group will continue in operational existence for the
foreseeable future. Accordingly, the results for the year ended 31
December 2016 have been prepared on a going concern
basis.
2 Ulster Bank (Ireland) Holdings unlimited company
Ulster
Bank (Ireland) Holdings unlimited company (UBIH) was classified as
a disposal group at 31 December 2016 and the international private
banking business was classified as a disposal group at 31 December
2015. UBIH, which was mainly reported in the Ulster Bank RoI
operating segment, is no longer a reportable operating segment but
presented as a discontinued operation and comparatives have been
re-presented accordingly.
3 Accounting Policies
Principle accounting policies
The
Group’s principle accounting policies are set out on pages
102 to 110 of the 2016 Annual Report and Accounts. Amendments to
IFRS effective for 2016 have not had a material effect on the Group
results.
Critical accounting policies and key sources of estimation
uncertainty
The
judgements and assumptions that are considered to be the most
important to the portrayal of the Group’s financial
conditions are those relating to pensions, goodwill, provisions for
liabilities, deferred tax, loan impairment provision and fair value
of financial instruments. These critical accounting policies and
judgements are described on pages 110 to 112 of the 2016 Annual
Reports and Accounts.
Notes on the accounts
4 Operating expenses
|
Group
|
|
2016
|
2015
|
2014
|
|
£m
|
£m
|
£m
|
Wages, salaries and other staff costs
|
732
|
968
|
1,129
|
Social security costs
|
62
|
61
|
76
|
Pension costs
|
|
|
|
- defined benefit schemes
|
60
|
239
|
219
|
- gains on curtailments or settlements
|
—
|
(57)
|
—
|
- defined contribution schemes
|
24
|
25
|
29
|
Staff costs
|
878
|
1,236
|
1,453
|
|
|
|
|
Premises and equipment
|
273
|
505
|
242
|
Other administrative expenses (1)
|
4,978
|
5,545
|
3,642
|
|
|
|
|
Property, plant and equipment, depreciation and write
down
|
81
|
377
|
102
|
Intangible assets amortisation
|
48
|
67
|
113
|
Depreciation and amortisation
|
129
|
444
|
215
|
Write down of intangible assets
|
16
|
107
|
—
|
|
6,274
|
7,837
|
5,552
|
|
|
|
|
|
|
|
|
Restructuring costs relating to continuing operations included in
operating expenses comprise:
|
|
|
|
2016
|
2015
|
2014
|
|
£m
|
£m
|
£m
|
Staff costs
|
55
|
81
|
17
|
Premises and depreciation
|
(3)
|
523
|
13
|
Other (2)
|
29
|
112
|
4
|
|
81
|
716
|
34
|
Notes:
(1)
Includes litigation
and conduct costs. Further details are provided in Note 21 of the
2016 Annual Report and Accounts.
(2)
Includes
other administration expenses and write down of intangible
assets.
Notes on the accounts
5 Pensions
The
Group sponsors a number of pension schemes in the UK and overseas,
including the Main Section of The Royal Bank of Scotland Group
Pension Fund (the “Main scheme”) which operates under
UK trust law and is managed and administered on behalf of its
members in accordance with the terms of the trust deed, the scheme
rules and UK legislation (principally the Pension Schemes Act 1993,
the Pensions Act 1995 and the Pensions Act 2004). Under UK
legislation a defined benefit pension scheme is required to meet
the statutory funding objective of having sufficient and
appropriate assets to cover its liabilities. Pension fund trustees
are required to: prepare a statement of funding principles; obtain
regular actuarial valuations and reports; put in place a recovery
plan addressing any funding shortfall; and send regular summary
funding statements to members of the scheme.
The
Main scheme corporate trustee is RBS Pension Trustee Limited (the
Trustee), a wholly owned subsidiary of National Westminster Bank
Plc. The Trustee is the legal owner of the Main scheme assets which
are held separately from the assets of the Group. The Board of the
Trustee comprises four trustee directors nominated by members
selected from eligible active staff and pensioner members who apply
and six appointed by the Group. The Board is responsible for
operating the scheme in line with its formal rules and pensions
law. It has a duty to act in the best interests of all scheme
members, including pensioners and those who are no longer employed
by the Group, but who still have benefits in the scheme. Similar
governance principles apply to the Group’s other pension
schemes, although different legislative frameworks apply to the
Group’s overseas schemes.
Various
changes have been made to the Group’s defined benefit pension
schemes to manage pension costs and risks. The Group announced in
October 2016 that, following an extensive consultation process
that, it would be increasing employee contributions in its UK
defined benefit pension schemes by 2% of salary.
The
Group’s defined benefit schemes generally provide a pension
of one-sixtieth of final pensionable salary for each year of
service prior to retirement up to a maximum of 40 years. Employees
making additional contributions can secure additional
benefits.
Since
October 2006, new UK entrants may join The Royal Bank of Scotland
Retirement Savings Plan, a defined contribution pension
scheme.
The
Group also provides post-retirement benefits other than pensions,
principally through subscriptions to private healthcare schemes in
the UK and unfunded post-retirement benefit plans. Provision for
the costs of these benefits is charged to the income statement over
the average remaining future service lives of eligible employees.
The amounts are not material.
Interim
valuations of the Group’s schemes under IAS 19
‘Employee Benefits’ were prepared at 31 December with
the support of independent actuaries, using the following
assumptions:
Notes on the accounts
|
Group
|
|
Bank
|
Changes in value of net pension liability
|
|
Present value
|
Asset
|
Net
|
|
|
Present value
|
Asset
|
Net
|
Fair value
|
of defined
|
ceiling/
|
pension
|
Fair value
|
of defined
|
ceiling/
|
pension
|
of plan
|
benefit
|
minimum
|
liability/
|
of plan
|
benefit
|
minimum
|
liability/
|
assets
|
obligation
|
funding (1)
|
(surplus)
|
assets
|
obligation
|
funding (1)
|
(surplus)
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
At 1 January 2015
|
32,132
|
34,261
|
1,854
|
3,983
|
|
30,077
|
31,776
|
1,739
|
3,438
|
Currency translation and other adjustments
|
(13)
|
(58)
|
|
(45)
|
|
|
|
|
|
Income statement
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
1,134
|
1,220
|
64
|
150
|
|
1,118
|
1,157
|
64
|
103
|
Current service cost
|
|
297
|
|
297
|
|
|
244
|
|
244
|
Less direct contributions from other scheme
members
|
|
(199)
|
|
(199)
|
|
|
(195)
|
|
(195)
|
Past service cost
|
|
40
|
|
40
|
|
|
28
|
|
28
|
Gains on curtailments or settlement
|
|
(57)
|
|
(57)
|
|
|
—
|
|
—
|
|
1,134
|
1,301
|
64
|
231
|
|
1,118
|
1,234
|
64
|
180
|
Statement of comprehensive income
|
|
|
|
|
|
|
|
|
|
Return on plan assets above recognised interest
income
|
(427)
|
|
|
427
|
|
(415)
|
|
|
415
|
Experience gains and losses
|
|
(276)
|
|
(276)
|
|
|
(233)
|
|
(233)
|
Effect of changes in actuarial financial
assumptions
|
|
(1,246)
|
|
(1,246)
|
|
|
(1,124)
|
|
(1,124)
|
Effect of changes in actuarial demographic
assumptions
|
|
60
|
|
60
|
|
|
112
|
|
112
|
Asset ceiling/minimum funding adjustments
|
|
|
1,202
|
1,202
|
|
|
|
1,178
|
1,178
|
|
(427)
|
(1,462)
|
1,202
|
167
|
|
(415)
|
(1,245)
|
1,178
|
348
|
|
|
|
|
|
|
|
|
|
|
Contributions by employer
|
807
|
—
|
|
(807)
|
|
724
|
—
|
|
(724)
|
Contributions by plan participants and other
|
|
|
|
|
|
|
|
|
|
scheme members
|
201
|
201
|
|
—
|
|
195
|
195
|
|
—
|
Benefits paid
|
(1,050)
|
(1,050)
|
|
—
|
|
(996)
|
(996)
|
|
—
|
Transfer to disposal groups
|
(299)
|
(297)
|
|
2
|
|
—
|
—
|
|
—
|
At 1 January 2016
|
32,485
|
32,896
|
3,120
|
3,531
|
|
30,703
|
30,964
|
2,981
|
3,242
|
Currency translation and other adjustments
|
422
|
469
|
|
47
|
|
|
|
|
|
Income statement
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
1,374
|
1,249
|
122
|
(3)
|
|
1,310
|
1,184
|
116
|
(10)
|
Current service cost
|
|
243
|
|
243
|
|
|
199
|
|
199
|
Less direct contributions from other scheme
members
|
|
(171)
|
|
(171)
|
|
|
(171)
|
|
(171)
|
Past service cost
|
|
28
|
|
28
|
|
|
28
|
|
28
|
|
1,374
|
1,349
|
122
|
97
|
|
1,310
|
1,240
|
116
|
46
|
Statement of comprehensive income
|
|
|
|
|
|
|
|
|
|
Return on plan assets above recognised interest
income
|
8,824
|
|
|
(8,824)
|
|
8,562
|
|
|
(8,562)
|
Experience gains and losses
|
|
(766)
|
|
(766)
|
|
|
(658)
|
|
(658)
|
Effect of changes in actuarial financial
assumptions
|
|
9,019
|
|
9,019
|
|
|
8,804
|
|
8,804
|
Effect of changes in actuarial demographic
assumptions
|
|
(472)
|
|
(472)
|
|
|
(402)
|
|
(402)
|
Asset ceiling/minimum funding adjustments
|
|
|
2,073
|
2,073
|
|
|
|
1,876
|
1,876
|
|
8,824
|
7,781
|
2,073
|
1,030
|
|
8,562
|
7,744
|
1,876
|
1,058
|
|
|
|
|
|
|
|
|
|
|
Contributions by employer
|
4,473
|
|
|
(4,473)
|
|
4,349
|
|
|
(4,349)
|
Contributions by plan participants and other
|
|
|
|
|
|
|
|
|
|
scheme members
|
174
|
174
|
|
—
|
|
169
|
169
|
|
—
|
Liabilities extinguished upon settlement
|
—
|
(20)
|
|
(20)
|
|
—
|
—
|
|
—
|
Benefits paid
|
(1,374)
|
(1,374)
|
|
—
|
|
(1,269)
|
(1,269)
|
|
—
|
Transfer to/from fellow subsidiaries
|
93
|
104
|
—
|
11
|
|
—
|
—
|
—
|
—
|
Transfer to disposal groups
|
(1,160)
|
(1,369)
|
—
|
(209)
|
|
—
|
—
|
—
|
—
|
At 31 December 2016
|
45,311
|
40,010
|
5,315
|
14
|
|
43,824
|
38,848
|
4,973
|
(3)
|
Note:
(1)
In recognising the
net surplus or deficit of a pension scheme, the funded status of
each scheme is adjusted to reflect any minimum funding requirement
imposed on the sponsor and any ceiling on the amount that the
sponsor has a right to recover from a scheme.
Notes on the accounts
|
Main scheme
|
Analysis of net pension deficit
|
2016
|
2015
|
£m
|
£m
|
Fund assets at fair value
|
43,824
|
30,703
|
Present value of fund liabilities
|
38,851
|
30,966
|
Funded status
|
4,973
|
263
|
Asset ceiling/minimum funding
|
(4,973)
|
2,981
|
Retirement benefit liability
|
—
|
3,244
|
Minimum funding requirement
|
—
|
3,657
|
Asset ceiling
|
—
|
(413)
|
|
—
|
3,244
|
|
Group
|
|
Bank
|
Net pension deficit comprises
|
2016
|
2015
|
|
2016
|
2015
|
£m
|
£m
|
|
£m
|
£m
|
Net assets surplus of schemes in surplus (included in
Prepayments,
|
|
|
|
|
|
accrued income and other assets
|
(15)
|
(16)
|
|
(15)
|
—
|
Net liabilities of schemes in deficit
|
29
|
3,547
|
|
12
|
3,242
|
|
14
|
3,531
|
|
(3)
|
3,242
|
The income statement charge comprises:
|
|
|
|
|
2016
|
2015
|
2014
|
£m
|
£m
|
£m
|
Continuing operations
|
60
|
182
|
219
|
Discontinued operations
|
37
|
49
|
23
|
|
97
|
231
|
242
|
|
|
|
|
The
defined benefit obligation is attributable to the different classes
of scheme members in the following proportions (Main
scheme).
Triennial funding valuation
In
January 2016, the Group accelerated the settlement of the future
contributions agreed with the Trustee as part of the 31 March 2013
triennial valuation of the Main scheme. This amounted to £4.2
billion. At the same time it entered into a Memorandum of
Understanding with the Trustee that included advancing the date of
the 31 March 2016 triennial funding valuation to 31 December 2015.
Consequently, the next triennial valuation does not need to be
agreed until 31 March 2020.
In June
2016, the triennial funding valuation of the Main scheme as at 31
December 2015 was agreed. Using the actuarial assumptions set out
in the table below (which are different to the assumptions used to
calculate the IAS 19 defined benefit obligation) the pension
liabilities calculated at 31 December 2015 totalled £37
billion and the deficit was £5.8 billion, subsequently reduced
by the £4.2 billion cash payment in March 2016. Investment
returns over the next 10 year period are forecast to absorb the
£1.6 billion balance of the deficit. The average cost of the
future service of current members has increased from 27% to 35% of
basic salary before contributions from those members; it includes
the expenses of running the scheme.
The
Trustee of the Main scheme is responsible for setting the actuarial
assumptions used in the triennial funding valuation having taken
advice from the Scheme Actuary. These represent the Trustee’s
prudent estimate of the future experience of the Main scheme taking
into account the covenant provided by the Group and the investment
strategy of the scheme. They are agreed with the Group and
documented in the Statement of Funding Principles.
The key
assumption methodology used in the 31 December 2015 valuation is
set out below. As at that date the funding level disclosed on the
assumptions below was 84%. This is before any allowance for the
£4.2 billion contribution made in March 2016.
Principal actuarial assumptions for 2015 and 2013 triennial
valuations
Discount
rate
|
Fixed
interest swap yield curve plus 1.5% per annum at all
durations
|
Inflation
assumption
|
Retail
price index (RPI) swap yield curve
|
|
Rate of
increase in pensions in payment
|
(RPI
floor 0%, cap 5%): Limited price indexation (LPI) (0,5) swap yield
curve
|
|
Post
retirement mortality assumptions:
|
|
2015
|
2013
|
Longevity
at age 60 for current pensioners (years)
|
Male
Female
|
28.4
30.2
|
28.8
30.8
|
Longevity
at age 60 for future pensioners currently aged 40
(years)
|
Male
Female
|
29.9
32.4
|
30.7
32.9
|
Notes on the accounts
6 Tax
|
Group
|
|
2016
|
2015
|
2014
|
|
£m
|
£m
|
£m
|
Current tax
|
|
|
|
(Charge)/credit for the year
|
(646)
|
(47)
|
39
|
(Under)/over provision in respect of prior years
|
(76)
|
20
|
(64)
|
|
(722)
|
(27)
|
(25)
|
Deferred tax
|
|
|
|
Credit/(charge) for the year
|
35
|
(287)
|
(276)
|
Reduction in the carrying value of deferred tax assets
|
(17)
|
—
|
(775)
|
(Under)/over provision in respect of prior years
|
(2)
|
25
|
78
|
Tax (charge)/credit for the year
|
(706)
|
(289)
|
(998)
|
The
actual tax (charge)/credit differs from the expected tax
(charge)/credit computed by applying the standard rate of UK
corporation tax of 20% (2015 - 20.25%; 2014 – 21.50%) as
follows:
|
2016
|
2015
|
2014
|
|
£m
|
£m
|
£m
|
Expected tax credit/(charge)
|
45
|
355
|
(194)
|
Losses and temporary differences in year where no deferred tax
asset recognised
|
(696)
|
(933)
|
(4)
|
Foreign profits taxed at other rates
|
344
|
431
|
(29)
|
UK tax rate change impact (1)
|
(27)
|
(51)
|
—
|
Non-deductible goodwill impairment
|
—
|
(25)
|
—
|
Items not allowed for tax
|
|
|
|
- losses on disposal and write-downs
|
(14)
|
(1)
|
(4)
|
- UK bank levy
|
—
|
(3)
|
—
|
- regulatory and legal actions
|
(119)
|
(106)
|
(4)
|
- other disallowable items
|
(45)
|
(45)
|
(72)
|
Non-taxable items
|
65
|
39
|
65
|
Taxable foreign exchange movements
|
(6)
|
4
|
2
|
Losses brought forward and utilised
|
5
|
1
|
3
|
Reduction in carrying value of deferred tax asset in respect
of:
|
|
|
|
- UK losses
|
(17)
|
—
|
—
|
- US losses and temporary differences
|
—
|
—
|
(775)
|
Banking surcharge
|
(163)
|
—
|
—
|
Adjustments in respect of prior years
|
(78)
|
45
|
14
|
Actual tax charge
|
(706)
|
(289)
|
(998)
|
Note:
(1)
In
recent years, the UK government has steadily reduced the rate of UK
corporation tax, with the latest enacted rates standing at 20% with
effect from 1 April 2015, 19% from 1 April 2017, and 17% from 1
April 2020. The Finance (No 2) Act 2015 restricts the rate at which
tax losses are given credit in future periods to the main rate of
UK corporation tax, excluding the Banking Surcharge 8% rate
introduced by this Act. Deferred tax assets and liabilities at 31
December 2016 take into account the reduced rates in respect of tax
losses and non-banking temporary differences and where appropriate,
the banking surcharge inclusive rate in respect of other banking
temporary differences.
Notes on the accounts
7 Financial assets - impairments
|
|
|
|
|
|
The following table shows the movement in the provision for
impairment losses on loans and advances.
|
|
|
|
|
|
|
|
Group
|
|
Individually
|
Collectively
|
Latent
|
|
2015
|
assessed
|
assessed
|
2016
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
At 1 January
|
1,667
|
3,235
|
433
|
5,335
|
13,908
|
Transfers to disposal groups
|
(69)
|
(1,054)
|
(77)
|
(1,200)
|
(20)
|
Currency translation and other adjustments
|
116
|
221
|
31
|
368
|
(542)
|
Transfers from fellow subsidiaries
|
—
|
—
|
—
|
—
|
10
|
Amounts written-off
|
(1,519)
|
(1,427)
|
—
|
(2,946)
|
(7,276)
|
Recoveries of amounts previously written-off
|
33
|
28
|
—
|
61
|
82
|
Charge/(release) to income statement
|
|
|
|
|
|
- from continuing operations
|
36
|
92
|
3
|
131
|
(54)
|
- from discontinued operations
|
(8)
|
99
|
(203)
|
(112)
|
(677)
|
Unwind of discount (recognised in interest income)
|
|
|
|
|
|
- from continuing operations
|
(6)
|
(31)
|
—
|
(37)
|
(50)
|
- from discontinued operations
|
(1)
|
(36)
|
—
|
(37)
|
(46)
|
At 31 December
|
249
|
1,127
|
187
|
1,563
|
5,335
|
|
Bank
|
|
Individually
|
Collectively
|
Latent
|
|
2015
|
assessed
|
assessed
|
2016
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
At 1 January
|
229
|
1,307
|
156
|
1,692
|
2,530
|
Currency translation and other adjustments
|
(5)
|
7
|
—
|
2
|
—
|
Amounts written-off
|
(63)
|
(405)
|
—
|
(468)
|
(813)
|
Recoveries of amounts previously written-off
|
6
|
20
|
—
|
26
|
34
|
Charge/(release) to income statement
|
39
|
105
|
11
|
155
|
(12)
|
Unwind of discount (recognised in interest income)
|
(5)
|
(30)
|
—
|
(35)
|
(47)
|
At 31 December
|
201
|
1,004
|
167
|
1,372
|
1,692
|
|
Group
|
Impairment charge/(release) to the income statement
|
2016
|
2015
|
2014
|
£m
|
£m
|
£m
|
Loans and advances to customers
|
131
|
(54)
|
130
|
|
131
|
(54)
|
130
|
|
|
|
|
Debt securities
|
—
|
2
|
(2)
|
Charge/(release) to the income statement for continuing
operations
|
131
|
(52)
|
128
|
|
|
|
|
|
|
|
|
The release to the income statement in relation to discontinued
operations was £112 million (2015 - £677 million: 2014 -
£1,377 million)
|
|
Notes on the accounts
8 Discontinued operations and assets and liabilities of disposal
groups
As part
of implementing the legislation following the recommendations of
the Independent Commission on Banking, on 1 January 2017 Ulster
Bank (Ireland) Holdings Unlimited Company (UBIH) was sold to
NatWest Holdings. NatWest Holdings is a subsidiary of RBS plc, the
immediate parent company of the Group. Accordingly, UBIH has been
classified as a disposal group at 31 December 2016 and presented as
a discontinued operation, with comparative income statement and
related notes re-presented.
(a) Profit from discontinued operations, net of tax
|
|
|
|
|
2016
|
2015
|
2014
|
|
£m
|
£m
|
£m
|
UBIH
|
|
|
|
Interest income
|
482
|
487
|
605
|
Interest expense
|
(72)
|
(124)
|
(175)
|
Net interest income
|
410
|
363
|
430
|
Other income
|
122
|
141
|
265
|
Total income
|
532
|
504
|
695
|
Operating expenses
|
(584)
|
(341)
|
(397)
|
(Loss)/profit before impairment losses
|
(52)
|
163
|
298
|
Impairment losses
|
112
|
676
|
1,377
|
Operating profit before tax
|
60
|
839
|
1,675
|
Tax credit/(charge)
|
3
|
(3)
|
154
|
Profit from UBIH discontinued operations, net of tax
|
63
|
836
|
1,829
|
(b) Operating cash flows attributable to discontinued
operations
|
|
|
|
|
2016
|
2015
|
2014
|
|
£m
|
£m
|
£m
|
Net cash flows from operating activities
|
2,144
|
(152)
|
2,177
|
Net cash flows from investing activities
|
167
|
198
|
(2,116)
|
Net cash flows from financing activities
|
(1,802)
|
(5)
|
(69)
|
Net increase/(decrease) in cash and cash equivalents
|
1,121
|
25
|
(27)
|
(c) Assets and liabilities of disposal groups
|
|
|
|
|
|
|
|
2016
|
2015
|
|
|
|
£m
|
£m
|
Assets of disposal groups
|
|
|
|
|
Cash and balances at central banks
|
|
|
249
|
440
|
Loans and advances to banks
|
|
|
2,418
|
674
|
Loans and advances to customers
|
|
|
18,922
|
1,638
|
Debt securities and equity shares
|
|
|
2,953
|
442
|
Derivatives
|
|
|
94
|
25
|
Property, plant and equipment
|
|
|
67
|
15
|
Other assets
|
|
|
273
|
77
|
|
|
|
24,976
|
3,311
|
|
|
|
|
|
Liabilities of disposal groups
|
|
|
|
|
Deposits by banks
|
|
|
1,309
|
32
|
Customer accounts
|
|
|
16,113
|
2,591
|
Derivatives
|
|
|
126
|
27
|
Debt securities in issue
|
|
|
1,179
|
—
|
Subordinated liabilities
|
|
|
76
|
—
|
Other liabilities
|
|
|
510
|
74
|
|
|
|
19,313
|
2,724
|
At 31
December 2016, disposal groups comprise the third party net assets
of UBIH and the Group’s interest in RBS International.
The aggregate consideration receivable in respect of these
assets is £4.4 billion. Taking into account related foreign
exchange movements, the Group does not expect to report a material
gain or loss on completion of these sales.
At 31
December 2015, the net assets of disposal groups comprise
international private banking measured at the agreed sale price to
Union Bancaire Privèe less costs to sell (fair value hierarchy
level 3).
Notes on the accounts
9 Provisions for liabilities and charges
|
|
|
|
|
|
|
|
Group
|
|
|
|
|
|
Provisions for liabilities and charges
|
Payment
|
Other
|
Residential
|
Litigation and
|
|
Total
|
protection
|
customer
|
mortgage backed
|
other
|
Property
|
insurance
|
redress
|
securities
|
regulatory
|
and other
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
At 1 January 2016
|
599
|
584
|
3,772
|
55
|
319
|
5,329
|
Transfer to disposal groups
|
—
|
(169)
|
—
|
(12)
|
(21)
|
(202)
|
Transfer from accruals and other liabilities
|
—
|
2
|
17
|
12
|
15
|
46
|
Transfer
|
34
|
(21)
|
—
|
—
|
(13)
|
—
|
Currency translation and other movements
|
—
|
9
|
686
|
13
|
24
|
732
|
Charge to income statement
|
|
|
|
|
|
|
- from continuing operations
|
362
|
270
|
1,710
|
77
|
209
|
2,628
|
- from discontinued operations
|
—
|
177
|
—
|
4
|
9
|
190
|
Releases to income statement
|
|
|
|
|
|
|
- from continuing operations
|
—
|
(23)
|
(91)
|
(47)
|
(115)
|
(276)
|
- from discontinued operations
|
—
|
(11)
|
—
|
—
|
(16)
|
(27)
|
Provisions utilised
|
(242)
|
(256)
|
(1,128)
|
(16)
|
(119)
|
(1,761)
|
At 31 December 2016
|
753
|
562
|
4,966
|
86
|
292
|
6,659
|
|
|
|
|
|
|
|
Bank
|
|
|
|
|
|
Provisions for liabilities and charges
|
Payment
|
Other
|
Litigation
|
|
Total
|
protection
|
customer
|
and other
|
Property
|
insurance
|
redress)
|
regulatory
|
and other
|
£m
|
£m
|
£m
|
£m
|
£m
|
At 1 January 2016
|
587
|
489
|
6
|
243
|
1,325
|
Transfers
|
34
|
(21)
|
—
|
(13)
|
—
|
Currency translation and other movements
|
—
|
—
|
—
|
15
|
15
|
Charge to income statement
|
|
|
|
|
|
- from continuing operations
|
362
|
259
|
4
|
188
|
813
|
Releases to income statement
|
—
|
(19)
|
(3)
|
(110)
|
(132)
|
Provisions utilised
|
(239)
|
(170)
|
(7)
|
(72)
|
(488)
|
At 31 December 2016
|
744
|
538
|
—
|
251
|
1,533
|
Notes on the accounts
10 Memorandum items
Contingent liabilities and commitments
The
amounts shown in the table below are intended only to provide an
indication of the volume of business outstanding at 31 December
2016. Although the Group is exposed to credit risk in the event of
non-performance of the obligations undertaken by customers, the
amounts shown do not, and are not intended to, provide any
indication of the Group’s expectation of future
losses.
|
Group
|
|
Bank
|
|
2016
|
2015
|
|
2016
|
2015
|
|
£m
|
£m
|
|
£m
|
£m
|
Contingent liabilities and commitments
|
|
|
|
|
|
Guarantees and assets pledged as collateral security
|
869
|
1,050
|
|
648
|
594
|
Other contingent liabilities
|
1,222
|
1,230
|
|
966
|
1,008
|
Standby facilities, credit lines and other commitments
|
55,363
|
49,608
|
|
48,325
|
43,616
|
|
57,454
|
51,888
|
|
49,939
|
45,218
|
Note:
(1)
In the normal
course of business, the Bank guarantees specified third party
liabilities of certain subsidiaries; it also gives undertakings
that individual subsidiaries will fulfil their obligations to third
parties under contractual or other arrangements.
Additional
contingent liabilities arise in the normal course of the
Group’s business. It is not anticipated that any material
loss will arise from these transactions.
Notes on the accounts
10 Memorandum items continued
Litigation, investigations and reviews
NatWest
Group and certain members of the RBS Group are party to legal
proceedings and the subject of investigation and other regulatory
and governmental action (“Matters”) in the United
Kingdom (UK), the United States (US), the European Union (EU) and
other jurisdictions.
The RBS
Group recognises a provision for a liability in relation to these
Matters when it is probable that an outflow of economic benefits
will be required to settle an obligation resulting from past
events, and a reliable estimate can be made of the amount of the
obligation. While the outcome of these Matters is inherently
uncertain, the directors believe that, based on the information
available to them, appropriate provisions have been made in respect
of the Matters as at 31 December 2016 (see Note 21 of the 2016
Annual Reports and Accounts).
In many
proceedings and investigations, it is not possible to determine
whether any loss is probable or to estimate reliably the amount of
any loss, either as a direct consequence of the relevant
proceedings and investigations or as a result of adverse impacts or
restrictions on the RBS Group’s reputation, businesses and
operations. Numerous legal and factual issues may need to be
resolved, including through potentially lengthy discovery and
document production exercises and determination of important
factual matters, and by addressing novel or unsettled legal
questions relevant to the proceedings in question, before a
liability can reasonably be estimated for any claim. The RBS Group
cannot predict if, how, or when such claims will be resolved or
what the eventual settlement, damages, fine, penalty or other
relief, if any, may be, particularly for claims that are at an
early stage in their development or where claimants seek
substantial or indeterminate damages.
In
respect of certain matters described below, we have established a
provision and in certain of those matters, we have indicated that
we have established a provision. The RBS Group generally does not
disclose information about the establishment or existence of a
provision for a particular matter where disclosure of the
information can be expected to prejudice seriously the RBS
Group’s position in the matter.
There
are situations where the RBS Group may pursue an approach that in
some instances leads to a settlement agreement. This may occur in
order to avoid the expense, management distraction or reputational
implications of continuing to contest liability, or in order to
take account of the risks inherent in defending claims or
investigations even for those matters for which the RBS Group
believes it has credible defences and should prevail on the merits.
The uncertainties inherent in all such matters affect the amount
and timing of any potential outflows for both matters with respect
to which provisions have been established and other contingent
liabilities.
The
Group may not be directly involved in all of the following
litigation, investigations and reviews but due to the potential
implications to the RBS Group of such litigation, investigations
and reviews, if a final outcome is adverse to the RBS Group it may
also have an adverse effect on the Group.
The
future outflow of resources in respect of any matter may ultimately
prove to be substantially greater than or less than the aggregate
provision that the RBS Group has recognised. Where (and as far as)
liability cannot be reasonably estimated, no provision has been
recognised.
Other
than those discussed below, no member of the Group is or has been
involved in governmental, legal or regulatory proceedings
(including those which are pending or threatened) that are expected
to be material, individually or in aggregate. The RBS Group expects
that in future periods additional provisions, settlement amounts,
and customer redress payments will be necessary, in amounts that
are expected to be substantial in some instances.
For a
discussion of certain risks associated with the Group’s
litigation, investigations and reviews, see “Risk
Factors” on pages 42 to 74.
Litigation
UK 2008 rights issue shareholder litigation
Between
March and July 2013, claims were issued in the High Court of
Justice of England and Wales by sets of current and former
shareholders, against RBS Group (and in one of those claims, also
against certain former individual officers and directors) alleging
that untrue and misleading statements and/or improper omissions, in
breach of the Financial Services and Markets Act 2000, were made in
connection with the rights issue announced by the RBS Group on 22
April 2008. In July 2013 these and other similar threatened claims
were consolidated by the Court via a Group Litigation Order. The
RBS Group’s defence to the claims was filed on 13 December
2013. Since then, further High Court claims have been issued
against the RBS Group under the Group Litigation Order which is now
closed to further claimants. Prior to the partial settlement
described below, the aggregate value of the shares subscribed for
at 200 pence per share by all of the then claimant shareholders was
approximately £4 billion.
Notes on the accounts
10 Memorandum items continued
In
December 2016 the RBS Group concluded full and final settlements
with four of the five shareholder groups representing 78% of the
claims by value. The maximum settlement figure of £800 million
is covered by existing RBS Group provisions and that total figure
assumes that agreement is reached with all groups, is split
proportionally between each, and is subject to validation of
claims.
Should
the remaining group’s claim not be settled, the RBS Group
will continue to defend it. Damages have not yet been quantified.
The court timetable provides that a trial of the preliminary issue
of whether the rights issue prospectus contained untrue and
misleading statements and/or improper omissions will commence in
May 2017. In the event that the court makes such a finding, further
trial(s) will be required to consider whether any such statements
and/or omissions caused loss and, if so, the quantum of that
loss.
Residential mortgage-backed securities (RMBS) litigation in the
US
RBS
Group companies have been named as defendants in their various
roles as issuer, depositor and/or underwriter in a number of claims
in the US that relate to the securitisation and securities
underwriting businesses. These cases include actions by individual
purchasers of securities and a purported class action suit.
Together, the pending individual and class action cases (including
those claims specifically described in this note) involve the
issuance of approximately US$36.5 billion of RMBS issued primarily
from 2005 to 2007.
In
general, plaintiffs in these actions claim that certain disclosures
made in connection with the relevant offerings contained materially
false or misleading statements and/or omissions regarding the
underwriting standards pursuant to which the mortgage loans
underlying the securities were issued.
RBS
Group companies remain as defendants in more than 10 lawsuits
brought by or on behalf of purchasers of RMBS, including the
purported class action identified below.
In the
event of an adverse judgment in any of these cases, the amount of
the RBS Group’s liability will depend on numerous factors
that are relevant to the calculation of damages, which may include
the recognised loss of principal value in the securities at the
time of judgment (write-downs); the value of the remaining unpaid
principal balance of the securities at the time the case began, at
the time of judgment (if the plaintiff still owns the securities at
the time of judgment), or at the time when the plaintiff disposed
of the securities (if plaintiff sold the securities); and a
calculation of pre and post judgment interest that the plaintiff
could be awarded, which could be a material amount.
In
September 2011, the US Federal Housing Finance Agency (FHFA) as
conservator for the Federal National Mortgage Association (Fannie
Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)
filed RMBS-related lawsuits against the RBS Group and a number of
other financial institutions, all of which, except for the two
cases described below, have since settled for amounts that were
publicly disclosed.
The
primary FHFA lawsuit against the RBS Group remains pending in the
United States District Court for the District of Connecticut, and
it relates to approximately US$32 billion of RMBS for which RBS
Group entities acted as sponsor/depositor and/or lead underwriter
or co-lead underwriter. Of the US$32 billion, approximately US$7.6
billion was outstanding at 31 December 2016 with cumulative write
downs to date on the securities of approximately US$1.1 billion
(being the recognised loss of principal value suffered by security
holders). In September 2013, the Court denied the defendants’
motion to dismiss FHFA’s amended complaint in this case. The
matter continues in the discovery phase.
The
other remaining FHFA lawsuit that involves the RBS Group relates to
RMBS issued by Nomura Holding America Inc. (Nomura) and
subsidiaries, and is the subject of an appeal. On 11 May 2015,
following a trial, the United States District Court for the
Southern District of New York issued a written decision in favour
of FHFA on its claims against Nomura and RBS Securities Inc.,
finding, as relevant to the RBS Group, that the offering documents
for four Nomura-issued RMBS for which RBS Securities Inc. served as
an underwriter, relating to US$1.4 billion in original principal
balance, contained materially misleading statements about the
mortgage loans that backed the securitisations, in violation of the
Securities Act and Virginia securities law.
RBS
Securities Inc. estimates that its net exposure under the
Court’s judgment is approximately US$383 million, which
consists of the difference between the amount of the judgment
against RBS Securities Inc. (US$636 million) and the estimated
market value of the four RMBS that FHFA would return to RBS
Securities Inc. pursuant to the judgment, plus the costs and
attorney’s fees that will be due to FHFA if the judgment is
upheld.
The
Court has stayed the judgment pending the result of the appeal that
the defendants are taking to the United States Court of Appeals for
the Second Circuit, though post-judgment interest on the judgment
amount will accrue while the appeal is pending. RBS Securities Inc.
intends to pursue a contractual claim for indemnification against
Nomura with respect to any losses it suffers as a result of this
matter.
Notes on the accounts
10 Memorandum items continued
Other
remaining RMBS lawsuits against RBS Group companies include cases
filed by the Federal Home Loan Banks of Boston and Seattle and the
Federal Deposit Insurance Corporation.
RBS
Group companies are also defendants in a purported RMBS class
action entitled New Jersey Carpenters Health Fund v. Novastar
Mortgage Inc. et al., which remains pending in the United States
District Court for the Southern District of New York. The RBS Group
has reached an agreement in principle to settle this matter,
subject to documentation and court approval. The amount of the
settlement is covered by an existing provision.
As at
31 December 2016, the Group’s total aggregate of provisions
in relation to certain of the RMBS litigation matters (described
immediately above) and RMBS and other securitised products
investigations (set out under “Investigations and
reviews” on page 169 of the 2016 Annual Report and Accounts),
including an additional provision of £1.7 billion ($2.2
billion) in 2016, is £5 billion ($6.1 billion). The duration
and outcome of these investigations and litigation matters remain
uncertain, including in respect of whether settlements for all or
any of such matters may be reached.
Further
substantial provisions and costs may be recognised and, depending
on the final outcome, other adverse consequences may
occur.
In many
of the securitisation and securities related cases in the US, the
RBS Group has or will have contractual claims to indemnification
from the issuers of the securities (where an RBS Group company is
underwriter) and/or the underlying mortgage originator (where an
RBS Group company is issuer). The amount and extent of any recovery
on an indemnification claim, however, is uncertain and subject to a
number of factors, including the ongoing creditworthiness of the
indemnifying party, a number of whom are or may be
insolvent.
London Interbank Offered Rate (LIBOR)
Certain
members of the Group have been named as defendants in a number of
class actions and individual claims filed in the US with respect to
the setting of LIBOR and certain other benchmark interest rates.
The complaints are substantially similar and allege that certain
members of the Group and other panel banks individually and
collectively violated various federal laws, including the US
commodities and antitrust laws, and state statutory and common law,
as well as contracts, by manipulating LIBOR and prices of
LIBOR-based derivatives in various markets through various
means.
Most of
the USD LIBOR-related actions in which RBS Group companies are
defendants, including all purported class actions relating to USD
LIBOR, were transferred to a coordinated proceeding in the United
States District Court for the Southern District of New
York.
In the
coordinated proceeding, consolidated class action complaints were
filed on behalf of (1) exchange-based purchaser plaintiffs, (2)
over-the-counter purchaser plaintiffs, and (3) corporate debt
purchaser plaintiffs. Over 35 other USD LIBOR-related actions
naming the RBS Group as a defendant, including purported class
actions on behalf of lenders and mortgage borrowers, were also made
part of the coordinated proceeding.
In a
series of orders issued in 2013 and 2014, the district court
overseeing the coordinated USD proceeding dismissed class
plaintiffs' antitrust claims and claims under RICO (Racketeer
Influenced and Corrupt Organizations Act), but declined to dismiss
(a) certain Commodity Exchange Act claims on behalf of persons who
transacted in Eurodollar futures contracts and options on futures
contracts on the Chicago Mercantile Exchange (on the theory that
defendants' alleged persistent suppression of USD LIBOR caused loss
to plaintiffs), and (b) certain contract and unjust enrichment
claims on behalf of over-the-counter purchaser plaintiffs who
transacted directly with a defendant.
On 23
May 2016, the district court’s dismissal of plaintiffs’
antitrust claims was vacated by the United States Court of Appeals
for the Second Circuit, which held that plaintiffs have adequately
pled antitrust injury and an antitrust conspiracy, but remanded to
the lower court for further consideration on the question of
whether plaintiffs possess the requisite antitrust standing to
proceed with antitrust claims.
In a
decision issued on 20 December 2016, the district court held that
it lacks personal jurisdiction over the RBS Group with respect to
certain claims asserted in the coordinated proceeding. Following
that decision, the RBS Group is dismissed from each of the USD
LIBOR-related class actions in the coordinated proceeding, subject
to appeal, although certain non-class cases on behalf of particular
plaintiffs remain pending.
Notes on the accounts
10 Memorandum items continued
Certain
members of the Group have also been named as defendants in class
actions relating to (i) JPY LIBOR and Euroyen TIBOR (one case
relating to Euroyen TIBOR futures contracts and one relating to
other derivatives allegedly linked to JPY LIBOR and Euroyen TIBOR),
(ii) Euribor, (iii) Swiss Franc LIBOR (iv) Pound sterling LIBOR,
and (v) the Singapore Interbank Offered Rate and Singapore Swap
Offer Rate, and (vi) the Australian Bank Bill Swap Reference Rate,
all of which are pending before other judges in the United States
District Court for the Southern District of New York. Each of these
matters is subject to motions to dismiss that will be made or are
currently pending, with the exceptions that on 28 March 2014, the
Court in the action relating to Euroyen TIBOR futures contracts
dismissed the plaintiffs’ antitrust claims, but declined to
dismiss their claims under the Commodity Exchange Act for price
manipulation and on 21 February 2017, the court in the action
relating to Euribor dismissed all claims alleged against the RBS
Group for lack of personal jurisdiction.
Details
of LIBOR investigations involving the RBS Group are set out under
‘‘Investigations and reviews’’ on page
30.
ISDAFIX antitrust litigation
Beginning
in September 2014, The Royal Bank of Scotland plc (RBS plc) and a
number of other financial institutions were named as defendants in
several purported class action complaints (subsequently
consolidated into one complaint) in the United States District
Court for the Southern District of New York alleging manipulation
of USD ISDAFIX rates In 2015, RBS plc reached an agreement to
settle this matter for US$50 million, and that settlement received
preliminary approval from the Court on 11 May 2016. The settlement
amount has been paid into escrow pending the final court approval
of the settlement.
FX antitrust litigation
In
2015, Group companies settled a consolidated antitrust class action
(the “consolidated action”), pending in the United
States District Court for the Southern District of New York,
asserting claims on behalf of persons who entered into (a)
over-the-counter foreign exchange (FX) spot transactions, forwards,
swaps, futures, options or other FX transactions the trading or
settlement of which is related in any way to FX rates, or (b)
exchange-traded FX instruments. Following the Court’s
preliminary approval of the settlement on 15 December 2015, the RBS
Group paid the total settlement amount (US$255 million) into escrow
pending final court approval of the settlement. On 8 June 2016, the
Court denied a motion by the settling defendants to enjoin a second
FX-related antitrust class action pending in the same court from
proceeding, holding that the alleged class of “consumers and
end-user businesses” in that action is not included within
the classes at issue in the consolidated action.
The RBS
Group has made a motion to dismiss the claims in this
“consumer” action, and that motion remains
pending.
A third
FX-related class action, asserting Employee Retirement Income
Security Act claims on behalf of employee benefit plans that
engaged in FX transactions, including claims based on alleged
non-collusive FX-related conduct, was dismissed on 20 September
2016 on the ground that the plaintiffs failed to plead that the
defendants had ERISA-based fiduciary duties to the plaintiffs.
Plaintiffs have commenced an appeal of this dismissal.
On 26 September 2016, a class action complaint was filed in the
United States District Court for the Southern District of New York
asserting claims on behalf of “indirect purchasers” of
FX instruments. The complaint defines “indirect
purchasers” as persons who were indirectly affected by FX
instruments that others entered into directly with defendant banks
or on exchanges.
It is alleged that certain RBS Group companies and other defendant
banks caused damages to the “indirect purchasers” by
conspiring to restrain trade in the FX spot market. The complaint
seeks damages and other relief under federal, California, and New
York antitrust laws. The RBS Group and the other defendants have
made a motion to dismiss this matter.
In
September 2015, certain members of the Group, as well as a number
of other financial institutions, were named as defendants in two
purported class actions filed in Ontario and Quebec on behalf of
persons in Canada who entered into foreign exchange transactions or
who invested in funds that entered into foreign exchange
transactions. The plaintiffs allege that the defendants violated
the Canadian Competition Act by conspiring to manipulate the prices
of currency trades.
In
January 2017, the RBS Group reached an agreement in principle to
settle these matters for approximately CAD 13 million, subject to
settlement documentation and court approval.
Certain
other foreign exchange transaction related claims have been or may
be threatened against the RBS Group in other jurisdictions. The RBS
Group cannot predict whether any of these claims will be pursued,
but expects that several may.
Notes on the accounts
10 Memorandum items continued
US Treasury securities antitrust litigation
Beginning
in July 2015, numerous class action antitrust complaints were filed
in US federal courts against a number of primary dealers of US
Treasury securities, including RBS Securities Inc. The complaints
allege that the defendants rigged the US Treasury securities
auction bidding process to deflate prices at which they bought such
securities and colluded to increase the prices at which they sold
such securities to plaintiffs. The complaints assert claims under
the US antitrust laws and the Commodity Exchange Act on behalf of
persons who transacted in US Treasury securities or derivatives
based on such instruments, including futures and options. On 8
December 2015, all pending matters were transferred to the United
States District Court for the Southern District of New York for
coordinated or consolidated pre-trial proceedings. The RBS Group
anticipates making a motion to dismiss these claims.
Interest rate swaps antitrust litigation
Beginning
in November 2015, RBS plc and other members of the Group, as well
as a number of other interest rate swap dealers, were named as
defendants in a number of class action antitrust complaints filed
in the United States District Court for the Southern District of
New York and the United States District Court for the Northern
District of Illinois. The complaints, filed on behalf of persons
who entered into interest rate swaps with the defendants, allege
that the defendants violated the US antitrust laws by restraining
competition in the market for interest rate swaps through various
means and thereby caused inflated bid-ask spreads for interest rate
swaps, to the alleged detriment of the plaintiff
class.
In
addition, two complaints containing similar allegations of
collusion were filed in United States District Court for the
Southern District of New York on behalf of TeraExchange and
Javelin, who allege that they would have successfully established
exchange-like trading of interest rate swaps if the defendant
dealers had not unlawfully conspired to prevent that from happening
through boycotts and other means, in violation of the U.S.
antitrust laws. On 2 June 2016, all of these matters were
transferred to the United States District Court for the Southern
District of New York for coordinated or consolidated pretrial
proceedings.
The RBS
Group has made a motion to dismiss the operative complaints in
these matters.
Thornburg adversary proceeding
RBS
Securities Inc. and certain other RBS Group companies, as well as
several other financial institutions, are defendants in an
adversary proceeding filed in the US bankruptcy court in Maryland
by the trustee for TMST, Inc. (formerly known as Thornburg
Mortgage, Inc.). The trustee seeks recovery of transfers made under
certain restructuring agreements as, among other things, avoidable
fraudulent and preferential conveyances and transfers. On 25
September 2014, the Court largely denied the defendants' motion to
dismiss this matter and, as a result, discovery is
ongoing.
Interest rate hedging products litigation
The RBS
Group is dealing with a large number of active litigation claims in
relation to the sale of interest rate hedging products (IRHPs). In
general claimants allege that the relevant interest rate hedging
products were mis-sold to them, with some also alleging the RBS
Group made misrepresentations in relation to LIBOR. Claims have
been brought by customers who were considered under the UK
Financial Conduct Authority (FCA) redress programme, as well as
customers who were outside of the scope of that programme, which
was closed to new entrants on 31 March 2015. The RBS Group
encouraged those customers that were eligible to seek redress under
the FCA redress programme to participate in that programme. The RBS
Group remains exposed to potential claims from customers who were
either ineligible to be considered for redress or who are
dissatisfied with their redress offers.
Property
Alliance Group (PAG) v The Royal Bank of Scotland plc was the
leading case before the English High Court involving both IRHP
mis-selling and LIBOR misconduct allegations. The amount claimed
was approximately £33 million and the trial ended in October
2016. On 21 December 2016 the Court dismissed all of PAG’s
claims. The decision (subject to any appeal by PAG) may have
significance to other similar LIBOR-related cases currently pending
in the English courts, some of which involve substantial amounts.
The case of Wall v RBS plc, which concerns similar allegations to
those in PAG, is currently scheduled to go to trial October 2017.
The sum claimed is between £400 million and £700
million.
In
addition to claims alleging that IRHPs were mis-sold, the RBS Group
has received a number of claims involving allegations that it
breached a legal duty of care in its conduct of the FCA redress
programme.
Notes on the accounts
10 Memorandum items continued
These
claims have been brought by customers who are dissatisfied with
redress offers made to them through the FCA redress programme. The
claims followed a preliminary decision against another UK bank. The
RBS Group has since been successful in opposing an application by a
customer to amend its pleadings to include similar claims against
the RBS Group, on the basis that the bank does not owe a legal duty
of care to customers in carrying out the FCA review. The customer
has been granted leave to appeal by the Court of Appeal, and the
appeal is scheduled for May 2017.
Tax dispute
HMRC
issued a tax assessment in 2012 against the RBS Group for
approximately £86 million regarding a value-added-tax
(“VAT”) matter in relation to the trading of European
Union Allowances (“EUAs”) by an RBS Group joint venture
subsidiary in 2009. The RBS Group has commenced legal proceedings
before the First-tier Tribunal (Tax), a specialist tax tribunal,
challenging the assessment (the “Tax Dispute”).
Separately, the RBS Group is a named defendant in proceedings
before the High Court brought in 2015 by ten companies (all in
liquidation) (the “Liquidated Companies”) and their
respective liquidators (together, “the Claimants”). The
Liquidated Companies previously traded in EUAs in 2009 and are
alleged to be defaulting traders within (or otherwise connected to)
the EUA supply chains forming the subject of the Tax Dispute. The
Claimants are claiming approximately £72.5 million by alleging
that the RBS Group dishonestly assisted the directors of the
Liquidated Companies in the breach of their statutory duties and/or
knowingly participated in the carrying on of the business of the
Liquidated Companies with intent to defraud creditors. The RBS
Group strongly denies these allegations.
Weiss v. National Westminster Bank Plc (NatWest)
NatWest
is defending a lawsuit filed by a number of US nationals (or their
estates, survivors, or heirs) who were victims of terrorist attacks
in Israel. The plaintiffs allege that NatWest is liable for damages
arising from those attacks pursuant to the US Anti-terrorism Act
because NatWest previously maintained bank accounts and transferred
funds for the Palestine Relief & Development Fund, an
organisation which plaintiffs allege solicited funds for Hamas, the
alleged perpetrator of the attacks. On 28 March 2013, the trial
court (the United States District Court for the Eastern District of
New York) granted summary judgment in favour of NatWest on the
issue of scienter, but on 22 September 2014, that summary judgment
ruling was vacated by the United States Court of Appeals for the
Second Circuit.
The
appeals court returned the case to the trial court for
consideration of NatWest's other asserted grounds for summary
judgment and, if necessary, for trial. On 31 March 2016, the trial
court denied a motion by NatWest to dismiss the case in which
NatWest had argued that the court lacked personal jurisdiction over
NatWest. NatWest has since asserted other grounds for summary
judgment that the trial court has not previously ruled
upon.
Investigations and reviews
The RBS
Group’s businesses and financial condition can be affected by
the actions of various governmental and regulatory authorities in
the UK, the US, the EU and elsewhere. The RBS Group has engaged,
and will continue to engage, in discussions with relevant
governmental and regulatory authorities, including in the UK, the
US, the EU and elsewhere, on an ongoing and regular basis, and in
response to informal and formal inquiries or investigations,
regarding operational, systems and control evaluations and issues
including those related to compliance with applicable laws and
regulations, including consumer protection, business conduct,
competition/anti-trust, anti-bribery, anti-money laundering and
sanctions regimes. The NatWest Markets (formerly CIB) segment in
particular has been providing information regarding a variety of
matters, including, for example, the setting of benchmark rates and
related derivatives trading, conduct in the foreign exchange
market, and various issues relating to the issuance, underwriting,
and sales and trading of fixed-income securities, including
structured products and government securities.
Any
matters discussed or identified during such discussions and
inquiries may result in, among other things, further inquiry or
investigation, other action being taken by governmental and
regulatory authorities, increased costs being incurred by the RBS
Group, remediation of systems and controls, public or private
censure, restriction of the RBS Group’s business activities
and/or fines. Any of the events or circumstances mentioned in this
paragraph or below could have a material adverse effect on the RBS
Group, its business, authorisations and licences, reputation,
results of operations or the price of securities issued by
it.
The RBS
Group is co-operating fully with the investigations and reviews
described below.
Notes on the accounts
10 Memorandum items continued
RMBS and other securitised products investigations
In the
US, the RBS Group is involved in reviews, investigations and
proceedings (both formal and informal) by federal and state
governmental law enforcement and other agencies and self-regulatory
organisations, including the US Department of Justice (DOJ) and
various other members of the Residential Mortgage-Backed Securities
Working Group (RMBS Working Group) of the Financial Fraud
Enforcement Task Force (including several state attorneys general,
including those mentioned below), relating to, among other things,
issuance, underwriting and trading in RMBS and other
mortgage-backed securities, collateralised debt obligations (CDOs),
collateralised loan obligations (CLOs) and synthetic
products.
In
connection with these inquiries, Group companies have received
requests for information and subpoenas seeking information about,
among other things, the structuring of CDOs, financing to loan
originators, purchase of whole loans, sponsorship and underwriting
of securitisations, due diligence, representations and warranties,
communications with ratings agencies, disclosure to investors,
document deficiencies, trading activities and practices and
repurchase requests.
These
ongoing matters include, among others, active civil and criminal
investigations by the DOJ, relating primarily to due diligence on
and disclosure related to loans purchased for, or otherwise
included in, securitisations and related disclosures.
In June
2016, RBS Securities Inc. (RBSSI), a U.S. broker-dealer, reached an
agreement in principle to resolve investigations by the office of
the Attorney General of Connecticut on behalf of the Connecticut
Department of Banking, concerning RBSSI’s underwriting and
issuance of RMBS and the potential consequences to RBSSI of RBS
plc’s May 2015 FX-related guilty plea. The agreement became
final on 3 October 2016 through the publication by the Department
of Banking of two agreed consent orders without RBSSI admitting or
denying the Department of Banking’s allegations. As required
by the RMBS consent order, in addition to making certain
undertakings, RBSSI has paid US$120 million to the State of
Connecticut to resolve the investigation.
The
amount was covered by a provision that had previously been
established. Pursuant to the FX consent order, RBSSI agreed, among
other things, to certify to the Department of Banking its
compliance with various obligations undertaken in connection with
RBS plc's FX-related guilty plea and FX-related resolutions with
the Commodity Futures Trading Commission and Board of Governors of
the Federal Reserve System.
In
2007, the New York State Attorney General issued subpoenas to a
wide array of participants in the securitisation and securities
industry, focusing on the information underwriters obtained from
the independent firms hired to perform due diligence on mortgages.
The RBS Group completed its production of documents requested by
the New York State Attorney General in 2008, principally producing
documents related to loans that were pooled into one securitisation
transaction.
In May
2011, the New York State Attorney General requested additional
information about the RBS Group’s mortgage securitisation
business and, following the formation of the RMBS Working Group,
has focused on the same or similar issues as the other state and
federal RMBS Working Group investigations described above. The
investigation is ongoing.
As at
31 December 2016, the Group’s total aggregate of provisions
in relation to certain of the RMBS and other securitised products
investigations (described immediately above) and RMBS litigation
matters (set out under “Litigation” on page 24,
including an additional provision of £1.7 billion ($2.2
billion) in 2016, is £5 billion ($6.1 billion). RBS continues
to cooperate with the DOJ in its civil and criminal investigations
of RMBS matters. The duration and outcome of these investigations
and RMBS litigation matters remain uncertain, including in respect
of whether settlements for all or any of such matters may be
reached. Further substantial provisions and costs may be recognised
and, depending on the final outcome, other adverse consequences as
described above may occur.
RBSSI
has also been responding to an ongoing criminal investigation by
the United States Attorney for the District of Connecticut relating
to alleged misrepresentations in the trading of various forms of
asset-backed securities, including RMBS, commercial mortgage-backed
securities, CDOs, and CLOs. In March and December 2015, two former
RBSSI traders entered guilty pleas in the United States District
Court for the District of Connecticut, each to one count of
conspiracy to commit securities fraud while employed at RBSSI.
RBSSI is in advanced discussions to resolve the
matter.
Notes on the accounts
10 Memorandum items continued
US mortgages - loan repurchase matters
RBS’s
NatWest Markets business in North America was a purchaser of
non-agency residential mortgages in the secondary market, and an
issuer and underwriter of non-agency RMBS.
In
issuing RMBS, NatWest Markets in some circumstances made
representations and warranties regarding the characteristics of the
underlying loans. As a result, NatWest Markets may be, or may have
been, contractually required to repurchase such loans or indemnify
certain parties against losses for certain breaches of such
representations and warranties. Depending on the extent to which
such loan repurchase related claims are pursued against and not
rebutted by NatWest Markets on timeliness or other grounds, the
aggregate potential impact on the RBS Group, if any, may be
material.
LIBOR and other trading rates
In
February 2013, the RBS Group announced settlements with the
Financial Services Authority (FSA) in the UK, the United States
Commodity Futures Trading Commission (CFTC) and the DOJ in relation
to investigations into submissions, communications and procedures
around the setting of LIBOR. The RBS Group agreed to pay penalties
of £87.5 million, US$325 million and US$150 million to these
authorities respectively to resolve the investigations and also
agreed to certain undertakings in its settlement with the CFTC. As
part of the agreement with the DOJ, RBS plc entered into a Deferred
Prosecution Agreement (DPA) in relation to one count of wire fraud
relating to Swiss Franc LIBOR and one count for an antitrust
violation relating to Yen LIBOR. The DPA expired in April 2015 and
is of no further effect.
In
April 2013, RBS Securities Japan Limited entered a plea of guilty
to one count of wire fraud relating to Yen LIBOR and in January
2014, the US District Court for the District of Connecticut entered
a final judgment in relation to the conviction of RBS Securities
Japan Limited pursuant to the plea agreement.
In
February 2014, the RBS Group paid settlement penalties of
approximately €260 million and €131 million to resolve
investigations by the European Commission (EC) into Yen LIBOR
competition infringements and EURIBOR competition infringements
respectively. This matter is now concluded.
In July
2014, the RBS Group entered into an Enforceable Undertaking with
the Australian Securities and Investments Commission (ASIC) in
relation to potential misconduct involving the Australian Bank Bill
Swap Rate. The RBS Group made various undertakings and agreed to
make a voluntary contribution of A$1.6 million to fund independent
financial literacy projects in Australia.
In
October 2014, the EC announced its findings that (1) the RBS
Group and one other financial institution had participated in a
bilateral cartel aimed at influencing the Swiss Franc LIBOR
benchmark interest rate between March 2008 and July 2009; and (2)
the RBS Group and three other financial institutions had
participated in a related cartel on bid-ask spreads of Swiss Franc
interest rate derivatives in the European Economic Area (EEA). The
RBS Group received full immunity from fines.
In
December 2016 the Swiss ComCo announced the closure of four
separate investigations into the RBS Group and certain other banks
relating to interest rate derivatives and LIBOR. The RBS Group
received full immunity for fines relating to the Swiss franc LIBOR
benchmark investigation. The RBS Group has agreed to pay a total of
CHF17.06m in fines to settle the other investigations.
The RBS
Group is co-operating with
investigations and requests for information by various other
governmental and regulatory authorities, including in the UK, US
and Asia, into its submissions, communications and procedures
relating to a number of trading rates, including LIBOR and other
interest rate settings, and non-deliverable
forwards.
On 3
February 2017, it was announced that the RBS Group and the CFTC
entered into a civil settlement resolving the CFTC’s investigation of ISDAFIX and
related trading activities. As part of the settlement, the RBS
Group has paid a penalty of US$85 million and agreed to certain
undertakings.
Foreign exchange related investigations
In
November 2014, RBS plc reached a settlement with the FCA and the
CFTC in relation to investigations into failings in the RBS
Group’s FX businesses within its NatWest Markets segment. RBS
plc agreed to pay penalties of £217 million to the FCA and
US$290 million to the CFTC to resolve the investigations. The fines
were paid on 19 November 2014.
Notes on the accounts
10 Memorandum items continued
On 20
May 2015, RBS plc announced that it had reached settlements with
the DOJ and the Board of Governors of the Federal Reserve System
(Federal Reserve) in relation to investigations into its FX
business within its NatWest Markets segment. RBS plc paid a penalty
of US$274 million to the Federal Reserve and agreed to pay a
penalty of US$395 million to the DOJ to resolve the
investigations.
As part
of its plea agreement with the DOJ, RBS plc pled guilty in the
United States District Court for the District of Connecticut to a
one-count information charging an antitrust conspiracy. RBS plc
admitted that it knowingly, through one of its euro/US dollar
currency traders, joined and participated in a conspiracy to
eliminate competition in the purchase and sale of the euro/US
dollar currency pair exchanged in the FX spot market.
The
charged conspiracy occurred between as early as December 2007 to at
least April 2010. On 5 January 2017, the United States District
Court for the District of Connecticut imposed a sentence on RBS plc
consisting of the US$395 million criminal fine previously agreed
with the DOJ and a term of probation, which among other things,
prohibits RBS plc from committing another crime in violation of US
law or engaging in the FX trading practices that form the basis for
the charged crime and requires RBS plc to implement a compliance
program designed to prevent and detect the unlawful conduct at
issue and to strengthen its compliance and internal controls as
required by other regulators (including the FCA and the
CFTC).
A
violation of the terms of probation could lead to the imposition of
additional penalties. Subsequent to the sentencing, RBS plc paid
the criminal fine, which had been covered by an existing
provision.
RBS plc
and RBS Securities Inc. have also entered into a cease and desist
order with the Federal Reserve relating to FX and other designated
market activities (the FX Order). In the FX Order, which is
publicly available and will remain in effect until terminated by
the Federal Reserve, RBS plc and RBS Securities Inc. agreed to take
certain remedial actions with respect to FX activities and certain
other designated market activities, including the creation of an
enhanced written internal controls and compliance program, an
improved compliance risk management program, and an enhanced
internal audit program. RBS plc and RBS Securities Inc. are
obligated to implement and comply with these programs as approved
by the Federal Reserve, and are also required to conduct, on an
annual basis, a review of applicable compliance policies and
procedures and a risk-focused sampling of key
controls.
The RBS
Group is co-operating with investigations and responding to
inquiries from other governmental and regulatory (including
competition) authorities on similar issues relating to failings in
its FX business within its NatWest Markets segment. The timing and
amount of financial penalties with respect to any further
settlements and related litigation risks and collateral
consequences remain uncertain and may well be
material.
On 21
July 2014, the Serious Fraud Office in the UK (SFO) announced that
it was launching a criminal investigation into allegations of
fraudulent conduct in the foreign exchange market, apparently
involving multiple financial institutions. On 15 March 2016, the
SFO announced that it was closing its investigation, having
concluded that, based on the information and material obtained,
there was insufficient evidence for a realistic prospect of
conviction.
Interest rate hedging products (IRHP) redress
programme
Since
2013, the RBS Group and other banks have been undertaking a redress
exercise and past business review in relation to the sale of
interest rate hedging products to some small and medium sized
businesses classified as retail clients or private customers under
FSA rules. This exercise was scrutinised by an independent
reviewer, KPMG (appointed as a Skilled Person under section 166 of
the Financial Services and Markets Act), and overseen by the FCA.
The RBS Group has reached agreement with KPMG in relation to
redress determinations for all in scope customers, as well as the majority of the
consequential loss claims received.
The
Group’s provisions in relation to the above redress exercises
total £1 billion to date for these matters, of which £0.9
billion had been utilised at 31 December 2016.
Judicial Review of Skilled Person’s role in IRHP
review
The RBS
Group has been named as an interested party in a number of claims
for judicial review of KPMG’s decisions as Skilled Person in
the RBS Group’s previously disclosed IRHP redress programme.
This follows a similar claim from a customer of another UK bank,
also against KPMG.
All of
these claims were stayed pending the outcome of the other
bank’s case. The trial in that case was heard on 25 January
2016. The court decided in favour of KPMG, finding that (1) KPMG is
not a body amenable to judicial review in respect of its role as
Skilled Person in this matter; and (2) that there was no unfairness
by the other bank in the procedure adopted. The claimant has sought
permission to appeal the decision.
Notes on the accounts
10 Memorandum items continued
The
majority of the claims that name the RBS Group as an interested
party have been discontinued but there are still several cases
which remain stayed pending the outcome of any appeal in the other
bank’s case. If permission to appeal is granted and the
appeal court finds that a section 166-appointed Skilled Person is
susceptible to judicial review, these remaining claims against the
RBS Group may then proceed to full hearing to assess the fairness
of KPMG’s role in the redress programme in those particular
cases. If deemed unfair, this could have a consequential impact on
the reasonableness of the methodology applied to reviewed and
settled IRHP files generally.
As
there remains some uncertainty, it is not practicable reliably to
estimate the impact of this matter, if any, on the RBS Group which
may be material.
Investment advice review
In
February 2013, the FSA announced the results of a mystery shopping
review it undertook into the investment advice offered by banks and
building societies to retail clients. As a result of that review
the FSA announced that firms involved were cooperative and agreed
to take immediate action. The RBS Group was one of the firms
involved.
The
action required included a review of the training provided to
advisers, considering whether changes are necessary to both advice
processes and controls for new business, and undertaking a past
business review to identify any historic poor advice (and where
breaches of regulatory requirements are identified, to put this
right for customers).
Subsequent
to the FSA announcing the results of its mystery shopping review,
the FCA has required the RBS Group to carry out a past business
review and customer contact exercise on a sample of historic
customers that received investment advice on certain lump sum
products through the UK Financial Planning channel of the UK
Personal & Business Banking (UK PBB) segment of the RBS Group,
which includes RBS plc and NatWest, during the period from March
2012 until December 2012.
This
review was conducted under section 166 of the Financial Services
and Markets Act, under which a Skilled Person was appointed to
carry out the exercise. Redress has been paid to certain customers
in this sample group. Following discussions with the FCA after
issue of the draft section 166 report, the RBS Group agreed with
the FCA that it would carry out a wider review/remediation exercise
relating to certain investment, insurance and pension sales from 1
January 2011 to present.
The RBS
Group started writing to the relevant customers during 2016 and
redress payments have also commenced. The project is due to finish
in Q4 2017. In addition, the RBS Group agreed with the FCA that it
would carry out a remediation exercise, for a specific customer
segment who were sold a particular structured product, in response
to concerns raised by the FCA with regard to (a) the target market
for the product and (b) how the product may have been described to
customers by certain advisers. Redress has been paid to certain
customers who took out the structured product.
The
Group’s provisions in relation to investment advice total
£105 million to date for these matters, of which £39
million had been utilised at 31 December 2016.
Packaged accounts
As a
result of an uplift in packaged current account complaints, the RBS
Group proactively put in place dedicated resources in 2013 to
investigate and resolve complaints on an individual basis. The
Group has made gross provisions totalling £229 million to date
for this matter.
FCA review of the RBS Group’s treatment of SMEs
In
November 2013, a report by Lawrence Tomlinson, entrepreneur in
residence at the UK Government’s Department for Business
Innovation and Skills, was published (“Tomlinson
Report”). The Tomlinson Report was critical of the RBS
Group’s treatment of SMEs.
The
Tomlinson Report was passed to the PRA and FCA. Shortly thereafter,
the FCA announced that an independent Skilled Person would be
appointed under section 166 of the Financial Services and Markets
Act to review the allegations in the Tomlinson Report. On 17
January 2014, a Skilled Person was appointed. The Skilled
Person’s review was focused on the RBS Group’s UK small
and medium sized business customers with credit exposures of up to
£20 million whose relationship was managed within the RBS
Group’s Global Restructuring Group or within similar units
within the RBS Group’s Corporate Banking Division that were
focused on customers in financial difficulties. In the period 2008
to 2013 the RBS Group was one of the leading providers of credit to
the UK SME sector.
Notes on the accounts
10 Memorandum items continued
Separately,
in November 2013, the RBS Group instructed the law firm Clifford
Chance to conduct an independent review of the principal allegation
made in the Tomlinson Report: the RBS Group was alleged to be
culpable of systematic and institutional behaviour in artificially
distressing otherwise viable businesses and, through that, putting
businesses into insolvency. Clifford Chance published its report on
17 April 2014 and, while it made certain recommendations to enhance
customer experience and transparency of pricing, it concluded that
there was no evidence to support the principal
allegation.
A
separate independent review of the principal allegation, led by
Mason Hayes & Curran, Solicitors, was conducted in the Republic
of Ireland. The report was published in December 2014 and found no
evidence to support the principal allegation.
The
Skilled Person review focused on the allegations made in the
Tomlinson Report and certain observations made by Sir Andrew Large
in his 2013 Independent Lending Review, and was broader in scope
than the reviews undertaken by Clifford Chance and Mason, Hayes
& Curran which are referred to above. The Skilled Person
delivered the draft findings from its review to the FCA in March
2016. The RBS Group was then given the opportunity to consider and
respond to those draft findings before the Skilled Person delivered
its final report to the FCA during September 2016.
On 8
November 2016, the FCA published an update on its review. In
response, the RBS Group announced steps that will impact SME
customers in the UK and the Republic of Ireland that were in GRG
between 2008 and 2013. These steps are (i) an automatic refund of
certain complex fees; and (ii) a new complaints process, overseen
by an Independent Third Party.
These
steps have been developed with the involvement of the FCA which
agreed that they are appropriate for the RBS Group to
take.
The
Group estimates the costs associated with the new complaints review
process and the automatic refund of complex fees to be
approximately £223 million, which has been recognised as a
provision in 2016. This includes operational costs together with
the cost of refunded complex fees and the additional estimated
redress costs arising from the new complaints process.
The FCA
has announced that its review will continue. The RBS Group
continues to cooperate fully with the review.
Multilateral interchange fees
On 11
September 2014, the Court of Justice upheld earlier decisions by
the EU Commission and the General Court that MasterCard’s
multilateral interchange fee (MIF) arrangements for cross border
payment card transactions with MasterCard and Maestro branded
consumer credit and debit cards in the EEA are in breach of
competition law.
In
April 2013, the EC announced it was opening a new investigation
into interchange fees payable in respect of payments made in the
EEA by MasterCard cardholders from non-EEA countries. The
EC’s case is ongoing.
On 8
June 2015, a regulation on interchange fees for card payments
entered into force. The regulation requires the capping of both
cross-border and domestic MIF rates for debit and credit consumer
cards. The regulation also sets out other reforms including to the
Honour All Cards Rule which require merchants to accept all cards
with the same level of MIF but not cards with different MIF
levels.
On 6 May 2015, the Competition & Markets Authority (CMA),
announced that it had closed the investigations into domestic
interchange fees on the grounds of administrative
priorities.
Whilst
there are no recent developments on the above to report, there
remains uncertainty around the outcomes of the ongoing EC
investigation, and the impact of the regulation, and they may have
a material adverse effect on the structure and operation of four
party card payment schemes in general and, therefore, on the RBS
Group’s business in this sector.
Payment Protection Insurance (PPI)
Since
2011, the RBS Group has been implementing a policy statement agreed
with the FCA for the handling of complaints about the mis-selling
of PPI. The RBS Group is also monitoring developments following the
UK Supreme Court’s decision in the case of Plevin v Paragon
Personal Finance Ltd in November 2014. That decision was that the
sale of a single premium PPI policy could create an ‘unfair
relationship’ under s.140A of the Consumer Credit Act 1974
(the ‘Consumer Credit Act’) because the premium
contained a particularly high level of undisclosed
commission.
The
Financial Ombudsman Service (FOS) has confirmed on its website that
unfair relationship provisions in the Consumer Credit Act and the
Plevin judgment are ’potentially relevant
considerations’ in some of the PPI complaints referred to
FOS.
Notes on the accounts
10 Memorandum items continued
On 26
November 2015, the FCA issued Consultation Paper 15/39, in which it
set out proposed rules and guidance for how firms should handle PPI
complaints fairly in light of the Plevin decision and how the FOS
should consider relevant PPI complaints. The Consultation Paper
also contained proposals for the introduction in 2018 on a date to
be confirmed of a deadline for submission of PPI complaints. The
RBS Group submitted its response to the Consultation Paper on 26
February 2016.
The
proposals in the Consultation Paper included an FCA-led
communications campaign to raise awareness of the deadline and to
prompt those who intend to complain to act ahead of the
deadline.
Following
feedback received on its Consultation Paper, on 2 August 2016, the
FCA issued a further Consultation Paper (CP 16/20) on certain
aspects of the proposed rules and guidance. As a result of this
second Consultation Paper, it was expected that the complaint
deadline would be end of June 2019 rather than 2018 as proposed in
the initial Consultation Paper. The BBA and the RBS Group submitted
responses to the Consultation Paper on 11 October
2016.
Following
feedback received on its second Consultation Paper (CP16/20), on 9
December 2016, the FCA issued a statement explaining that it is
carefully considering the issues raised and will make a further
announcement before 31 March 2017. In light of this statement, the
RBS Group expects that the implementation of the complaint deadline
will be pushed back from end of June 2019 to 1 October or 31
December 2019. The introduction of new Plevin rules and guidance
will also be delayed.
If the
proposals contained in these Consultation Papers are agreed and
implemented, the RBS Group would expect higher claims volumes,
persisting longer than previously modelled, and additional
compensation payments in relation to PPI claims made as a result of
the Plevin judgment. If the end of June 2019 deadline is
implemented by the FCA, complaints made after that time would lose
the right to be assessed by firms or by the Financial Ombudsman
Service, bringing an end to new PPI cases on 1 October or 31
December 2019.
The
Group has made provisions totalling £2.9 billion to date for
PPI claims, including an additional provision of £362 million
in 2016, in response to the anticipated further delay in guidance.
Of the £2.9 billion cumulative provision, £2 billion in
redress and £0.2 billion administrative expenses had been
utilised by 31 December 2016.
UK retail banking
In
November 2014, the CMA announced its decision to proceed with a
market investigation reference (MIR) into retail banking, which
would cover PCA and SME banking. On 9 August 2016, the CMA
published its final report. The CMA concluded that there are a
number of competition concerns in the provision of PCAs, business
current accounts and SME lending, particularly around low levels of
customers searching and switching, resulting in banks not being put
under enough competitive pressure, and new products and new banks
not attracting customers quickly enough. The final report sets out
remedies to address these concerns. These include remedies making
it easier for customers to compare products, ensure customers
benefit from technological advantages around open banking, improve
the current account switching service and provide PCA overdraft
customers with greater control over their charges along with
additional measures targeted at SME customers.
On 2
February 2017 the CMA published the Retail Banking Market
Investigation Order 2017 which is the primary legal framework
setting out the obligations for the implementation of the majority
of remedies, including an implementation deadline for each. Other
remedies are to be delivered via undertakings signed by Bacs and
recommendations to be taken forward by other regulators (including
the FCA).
At this
stage there remains uncertainty around the financial impact of the
remedies once implemented and it is not practicable to estimate the
potential impact on the RBS Group, which may be
material.
FCA Wholesale Sector Competition Review
In February 2015, the FCA launched a market study into
investment and corporate banking. On 18 October 2016 by publication
by the FCA published its final report. It found that whilst many clients feel well served by primary capital market
services there were some areas where improvements could be made to
encourage competition, particularly for smaller clients. It set out
a package of remedies, including prohibiting the use of
restrictive contractual clauses and ending league table
misrepresentation by asking league table providers to review their
recognition criteria.
In
November 2015, the FCA also announced that a market study would be
undertaken into asset management. On 18 November 2016, the FCA
published the interim report which indicated that price competition
is weak and expressed concerns around the lack of transparency on
the objectives, and appropriate benchmarks, for reporting fund
performance. The FCA has proposed a number of remedies. The
deadline for responses to the interim report was 20 February 2017
and the FCA expects to publish the final report in Q2
2017.
Notes on the accounts
10 Memorandum items continued
FCA Mortgages Market Study
In
December 2016, the FCA launched a market study into the provision
of mortgages. The FCA has announced that it intends to publish an
interim report in summer 2017 with the final report expected in
Quarter 1 2018.
At this
very early stage, as there is considerable uncertainty around the
outcome of this market study, it is not practicable reliably to
estimate the aggregate impact, if any, on the RBS Group which may
be material.
Governance and risk management consent order
In July
2011, the RBS Group agreed with the Board of Governors of the
Federal Reserve System, the New York State Banking Department, the
Connecticut Department of Banking, and the Illinois Department of
Financial and Professional Regulation to enter into a consent Cease
and Desist Order (Governance Order) (which is publicly available)
to address deficiencies related to governance, risk management and
compliance systems and controls in the US branches of RBS plc and
RBS N.V. branches (the US Branches).
In
the Governance Order, the RBS Group agreed to create the following
written plans or programmes:
Key points
●
|
a plan
to strengthen board and senior management oversight of the
corporate governance, management, risk management, and operations
of the RBS Group’s US operations on an enterprise-wide and
business line basis;
|
●
|
an
enterprise-wide risk management programme for the RBS Group’s
US operations;
|
●
|
a plan
to oversee compliance by the RBS Group’s US operations with
all applicable US laws, rules, regulations, and supervisory
guidance;
|
●
|
a Bank
Secrecy Act/anti-money laundering compliance programme for the US
Branches on a consolidated basis;
|
●
|
a plan
to improve the US Branches’ compliance with all applicable
provisions of the Bank Secrecy Act and its rules and regulations as
well as the requirements of Regulation K of the Federal
Reserve;
|
●
|
a
customer due diligence programme designed to ensure reasonably the
identification and timely, accurate, and complete reporting by the
US Branches of all known or suspected violations of law or
suspicious transactions to law enforcement and supervisory
authorities, as required by applicable suspicious activity
reporting laws and regulations; and
|
●
|
a plan
designed to enhance the US Branches’ compliance with Office
of Foreign Assets Control (OFAC) requirements.
|
The
Governance Order identified specific items to be addressed,
considered, and included in each proposed plan or programme. The
RBS Group also agreed in the Governance Order to adopt and
implement the plans and programmes after approval by the
regulators, to comply fully with the plans and programmes
thereafter, and to submit to the regulators periodic written
progress reports regarding compliance with the Governance
Order.
The RBS
Group has created, submitted, and adopted plans and/or programmes
to address each of the areas identified above. In connection with
the RBS Group’s efforts to implement these plans and
programmes, it has, among other things, made investments in
technology, hired and trained additional personnel, and revised
compliance, risk management, and other policies and procedures for
the RBS Group’s US operations.
The RBS
Group continues to test the effectiveness of the remediation
efforts it has undertaken to ensure they are sustainable and meet
regulators' expectations. Furthermore, the RBS Group continues to
work closely with the regulators in its efforts to fulfil its
obligations under the Governance Order, which will remain in effect
until terminated by the regulators.
The RBS
Group may be subject to formal and informal supervisory actions and
may be required by its US banking supervisors to take further
actions and implement additional remedial measures with respect to
these and additional matters. The RBS Group’s activities in
the US may be subject to significant limitations and/or
conditions.
US dollar processing consent order
In December 2013 the RBS Group
and RBS plc agreed a settlement with the Federal Reserve, the New
York State Department of Financial Services (DFS), and the Office
of Foreign Assets Control (OFAC) with respect to RBS plc’s
historical compliance with US economic sanction regulations outside
the US. As part of the settlement, the RBS Group and RBS plc entered into a consent Cease and
Desist Order with the Federal Reserve (US Dollar Processing Order),
which remains in effect until terminated by the Federal Reserve.
The US Dollar Processing Order (which is publicly available)
indicated, among other things, that the RBS Group and RBS plc
lacked adequate risk management and legal review policies and
procedures to ensure that activities conducted outside the US
comply with applicable OFAC regulations.
Notes on the accounts
10 Memorandum items continued
The RBS
Group agreed to create an OFAC
compliance programme to ensure compliance with OFAC regulations by
the RBS Group’s global
business lines outside the US, and to adopt, implement, and comply
with the programme. Prior to and in connection with the US Dollar
Processing Order, the RBS Group has made investments in technology,
hired and trained personnel, and revised compliance, risk
management, and other policies and procedures.
Under
the US Dollar Processing Order (as
part of the OFAC compliance programme) the RBS Group was required
to appoint an independent consultant to conduct an annual review of
OFAC compliance policies and procedures and their implementation
and an appropriate risk-focused sampling of US dollar payments. The
RBS Group appointed the independent consultant and their reports
were submitted to the authorities on 14 June 2015. The independent
consultant review examined a significant number of sanctions alerts
and no reportable issues were identified.
Pursuant to the US Dollar Processing Order, the authorities
requested a second annual review to be conducted by an independent
consultant. The second review was conducted by the independent
consultant and reports were submitted to the authorities on 30
September 2016. In line with the first review, and following
examination of a significant number of sanctions alerts, the
independent consultant did not identify any reportable issues. In
addition, pursuant to requirements of the US Dollar Processing
Order, the RBS Group has provided the required written submissions,
including quarterly updates, in a timely manner, and the RBS Group
continues to participate in a constructive dialogue with the
authorities.
US/Swiss tax programme
In
August 2013, the DOJ announced a programme for Swiss banks (the
Programme) which provides Swiss banks with an opportunity to obtain
resolution, through non-prosecution agreements or non-target
letters, of the DOJ’s investigations of the role that Swiss
banks played in concealing the assets of US tax payers in offshore
accounts (US related accounts). In December 2013, Coutts &
Co Ltd., a member of the Group incorporated in Switzerland,
notified the DOJ that it intended to participate in the
Programme.
As
required by the Programme, Coutts & Co Ltd. subsequently
conducted a review of its US related accounts and presented the
results of the review to the DOJ. On 23 December 2015, Coutts &
Co Ltd. entered into a non-prosecution agreement (the NPA) in which
Coutts & Co Ltd. paid a US$78.5 million penalty and
acknowledged responsibility for certain conduct set forth in a
statement of facts accompanying the agreement. Under the NPA, which
has a term of four years, Coutts & Co Ltd. is required, among
other things, to provide certain information, cooperate with
DOJ’s investigations, and commit no U.S. federal offences. If
Coutts & Co Ltd. abides by the NPA, the DOJ will not prosecute
it for certain tax-related and monetary transaction offenses in
connection with US related accounts.
Enforcement proceedings and investigations in relation to Coutts
& Co Ltd
The Swiss Financial Market Supervisory Authority (FINMA) has been
taking enforcement proceedings against Coutts & Co Ltd, a
member of the RBS Group incorporated in Switzerland, with regard to
certain client accounts held with Coutts & Co Ltd relating to
allegations in connection with the Malaysian sovereign wealth fund
1MDB.
On 2 February 2017, FINMA announced that Coutts & Co Ltd had
breached money laundering regulations by failing to carry out
adequate background checks into business relationships and
transactions associated with 1MDB. FINMA accordingly required
Coutts & Co Ltd to disgorge profits of CHF 6.5
million.
Coutts & Co Ltd is also cooperating with investigations and
enquiries from authorities in other jurisdictions in relation to
the same subject matter. In this context, the Monetary Authority of
Singapore (MAS)’s supervisory examination of Coutts & Co
Ltd’s Singapore branch revealed breaches of anti-money
laundering requirements. MAS imposed on Coutts & Co Ltd
financial penalties amounting to SGD 2.4 million in December 2016.
The outcomes of other proceedings, investigations and enquiries are
uncertain but may include financial consequences and/or regulatory
sanctions.
Review of suitability of advice provided by Coutts &
Co
In 2013
the FCA conducted a thematic review of the advice processes across
the UK wealth management industry. As a result of this review,
Coutts & Co undertook a past business review into the
suitability of investment advice provided to its clients. This
review has concluded, as Coutts & Co has contacted affected
clients and offered redress in appropriate cases. The majority of
these redress payments have now been paid, having been met by the
RBS Group’s existing provision.
Notes on the accounts
10 Memorandum items continued
Regulator requests concerning Mossack Fonseca
In
common with other banks, the RBS Group received a letter from the
FCA in April 2016 requesting information about any relationship the
RBS Group has with the Panama-based law firm Mossack Fonseca or any
individuals named in recent media coverage in connection with the
same. The RBS Group responded to the FCA setting out details of the
limited services provided to Mossack Fonseca and its
clients.
Review and investigation of treatment of tracker mortgage customers
in Ulster Bank Ireland DAC (formerly Ulster Bank Ireland
Limited)
On 22
December 2015, the Central Bank of Ireland (CBI) announced that it
had written to a number of lenders requiring them to put in place a
robust plan and framework to review the treatment of customers who
have been sold mortgages with a tracker interest rate or with a
tracker interest rate entitlement.
The CBI
stated that the intended purpose of the review was to identify any
cases where customers’ contractual rights under the terms of
their mortgage agreements were not fully honoured, or where lenders
did not fully comply with various regulatory requirements and
standards regarding disclosure and transparency for customers. The
CBI has required Ulster Bank Ireland DAC (UBI DAC), a member of the
RBS Group, incorporated in the Republic of Ireland, to participate
in this review and UBI DAC is co-operating with the CBI in this
regard. The RBS Group has made a lifetime provision totalling EUR
211 million for this matter.
Separately,
on 15 April 2016, the CBI notified UBI DAC that it was also
commencing an investigation under its Administrative Sanctions
Procedure into suspected breaches of the Consumer Protection Code
2006 during the period 4 August 2006 to 30 June 2008 in relation to
certain customers who switched from tracker mortgages to fixed rate
mortgages.
Notes on the accounts
11 Segmental analysis
(a) Reportable segments
The
Group continues to deliver on its plan to build a strong, simple
and fair bank for both customers and shareholders. On 5 December
2016 the Corporate & Institutional Banking (CIB) business was
re-branded as NatWest Markets (NWM) in readiness for our future
ring-fenced structure; this included the renaming of the reportable
operating segment as NatWest Markets. NatWest Markets will continue
to offer financing, rates and currencies products to its customers.
Reported operating segments are as follows:
Organisational structure
The
Group continues to deliver on its plan to build a strong, simple
and fair bank for both customers and shareholders. The reportable
operating segments are as follows:
UK Personal & Business Banking (UK PBB) serves individuals and mass affluent
customers in the UK together with small businesses (generally up to
£2 million turnover). UK PBB includes Ulster Bank customers in
Northern Ireland.
Commercial & Private Banking (CPB) comprises two reportable segments,
Commercial Banking and Private Banking. Commercial Banking serves
commercial and mid-corporate customers in the UK and Western
Europe. Private Banking serves UK connected high net worth
individuals.
NatWest Markets (NWM), formerly Corporate and Institutional
Banking (CIB), consists primarily of the operations of RBS
Securities Inc (RBSSI). RBSSI is a U.S. registered broker-dealer
principally engaged in the purchase, sale and financing of
securities with institutional entities and government sponsored
entities.
Capital Resolution was established to execute the sale
or wind down of most of the global footprint. Non-strategic
markets, portfolio and banking assets identified are being sold or
wound down.
Central items & other comprises corporate functions,
such as RBS Treasury, Finance, Risk Management, Compliance, Legal,
Communications and Human
Resources. Central functions manages the Group capital resources
and Group-wide regulatory projects and provides services to the reportable segments. Balances
relating to UBIH the international private banking business are
also included.
Ulster Bank (Ireland) Holdings
Ulster
Bank (Ireland) Holdings Unlimited Company (UBIH) was sold to
NatWest Holdings Limited on 1 January 2017 in preparation for
ring-fencing. NatWest Holding Limited is a direct subsidiary of RBS
plc. UBIH is classified as a disposal group at 31 December
2016 and its assets and liabilities presented in aggregate in
accordance with IFRS 5. UBIH, which was mainly reported in the
Ulster Bank RoI operating segment, is no longer a reportable
operating segment but presented as a discontinued operation and
comparatives have been re-presented accordingly. UBIH wholly owns
Ulster Bank Ireland Designated Activity Company (UBI DAC) which is
regulated by the Central Bank of Ireland.
Notes on the accounts
2016
|
Group
|
Net
|
Non-
|
|
|
Depreciation
|
Impairment
|
|
interest
|
interest
|
Total
|
Operating
|
and
|
(losses)/
|
Operating
|
income
|
income
|
income
|
expenses
|
amortisation
|
releases
|
profit/(loss)
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
UK Personal & Business Banking
|
3,517
|
819
|
4,336
|
(2,782)
|
—
|
(105)
|
1,449
|
Commercial Banking
|
1,162
|
450
|
1,612
|
(975)
|
—
|
(14)
|
623
|
Private Banking
|
380
|
191
|
571
|
(432)
|
—
|
1
|
140
|
Commercial & Private Banking
|
1,542
|
641
|
2,183
|
(1,407)
|
—
|
(13)
|
763
|
NatWest Markets
|
3
|
21
|
24
|
(115)
|
—
|
—
|
(91)
|
Capital Resolution
|
2
|
42
|
44
|
(1,723)
|
(10)
|
(12)
|
(1,701)
|
Central items & other
|
(296)
|
(110)
|
(406)
|
(118)
|
(119)
|
(1)
|
(644)
|
Total
|
4,768
|
1,413
|
6,181
|
(6,145)
|
(129)
|
(131)
|
(224)
|
2015
|
|
|
|
|
|
|
|
UK Personal & Business Banking
|
3,366
|
733
|
4,099
|
(2,900)
|
—
|
(20)
|
1,179
|
Commercial Banking
|
1,125
|
402
|
1,527
|
(692)
|
—
|
(3)
|
832
|
Private Banking
|
385
|
192
|
577
|
(506)
|
—
|
(12)
|
59
|
Commercial & Private Banking
|
1,510
|
594
|
2,104
|
(1,198)
|
—
|
(15)
|
891
|
NatWest Markets
|
(25)
|
33
|
8
|
(168)
|
—
|
—
|
(160)
|
Capital Resolution
|
14
|
(190)
|
(176)
|
(2,355)
|
—
|
87
|
(2,444)
|
Central items & other
|
(332)
|
329
|
(3)
|
(772)
|
(444)
|
—
|
(1,219)
|
Total
|
4,533
|
1,499
|
6,032
|
(7,393)
|
(444)
|
52
|
(1,753)
|
2014
|
|
|
|
|
|
|
|
UK Personal & Business Banking
|
3,254
|
908
|
4,162
|
(3,070)
|
—
|
(164)
|
928
|
Commercial Banking
|
1,073
|
454
|
1,527
|
(560)
|
—
|
(43)
|
924
|
Private Banking
|
423
|
221
|
644
|
(412)
|
—
|
5
|
237
|
Commercial & Private Banking
|
1,496
|
675
|
2,171
|
(972)
|
—
|
(38)
|
1,161
|
NatWest Markets
|
3
|
53
|
56
|
(266)
|
—
|
—
|
(210)
|
Capital Resolution
|
19
|
522
|
541
|
(382)
|
(3)
|
74
|
230
|
Central items & other
|
(625)
|
277
|
(348)
|
(647)
|
(212)
|
—
|
(1,207)
|
Total
|
4,147
|
2,435
|
6,582
|
(5,337)
|
(215)
|
(128)
|
902
|
|
2016
|
|
2015
|
|
2014
|
Total revenue
|
|
Inter
|
|
|
|
Inter
|
|
|
|
Inter
|
|
External
|
segment
|
Total
|
External
|
segment
|
Total
|
External
|
segment
|
Total
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
UK Personal & Business Banking
|
5,214
|
(4)
|
5,210
|
|
4,949
|
(15)
|
4,934
|
|
4,947
|
(26)
|
4,921
|
Commercial Banking
|
1,474
|
16
|
1,490
|
|
1,393
|
12
|
1,405
|
|
1,467
|
13
|
1,480
|
Private Banking
|
660
|
30
|
690
|
|
676
|
42
|
718
|
|
768
|
48
|
816
|
Commercial & Private Banking
|
2,134
|
46
|
2,180
|
|
2,069
|
54
|
2,123
|
|
2,235
|
61
|
2,296
|
NatWest Markets
|
20
|
—
|
20
|
|
61
|
—
|
61
|
|
54
|
2
|
56
|
Capital Resolution
|
59
|
2
|
61
|
|
19
|
72
|
91
|
|
983
|
122
|
1,105
|
Central items & other
|
210
|
(44)
|
166
|
|
703
|
(111)
|
592
|
|
602
|
(159)
|
443
|
Total
|
7,637
|
—
|
7,637
|
|
7,801
|
—
|
7,801
|
|
8,821
|
—
|
8,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes on the accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Inter
|
|
|
|
Inter
|
|
|
|
Inter
|
|
|
External
|
segment
|
Total
|
External
|
segment
|
Total
|
External
|
segment
|
Total
|
Total income
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
UK Personal & Business Banking
|
4,332
|
4
|
4,336
|
|
4,063
|
36
|
4,099
|
|
4,086
|
76
|
4,162
|
Commercial Banking
|
1,699
|
(87)
|
1,612
|
|
1,613
|
(86)
|
1,527
|
|
1,611
|
(84)
|
1,527
|
Private Banking
|
572
|
(1)
|
571
|
|
582
|
(5)
|
577
|
|
656
|
(12)
|
644
|
Commercial & Private Banking
|
2,271
|
(88)
|
2,183
|
|
2,195
|
(91)
|
2,104
|
|
2,267
|
(96)
|
2,171
|
NatWest Markets
|
24
|
—
|
24
|
|
8
|
—
|
8
|
|
54
|
2
|
56
|
Capital Resolution
|
46
|
(2)
|
44
|
|
(114)
|
(62)
|
(176)
|
|
669
|
(128)
|
541
|
Central items & other
|
(492)
|
86
|
(406)
|
|
(120)
|
117
|
3
|
|
(494)
|
146
|
(348)
|
Total
|
6,181
|
—
|
6,181
|
|
6,032
|
—
|
6,032
|
|
6,582
|
—
|
6,582
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
Cost to acquire
|
|
|
|
Cost to acquire
|
|
|
|
Cost to acquire
|
|
|
|
fixed assets
|
|
|
fixed assets
|
|
|
fixed assets
|
|
|
|
and intangible
|
|
|
and intangible
|
|
|
and intangible
|
Assets
|
Liabilities
|
assets
|
Assets
|
Liabilities
|
assets
|
Assets
|
Liabilities
|
assets
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
UK Personal & Business Banking
|
120,903
|
132,152
|
—
|
|
108,008
|
126,362
|
—
|
|
97,925
|
123,357
|
—
|
Commercial Banking
|
43,815
|
73,378
|
3
|
|
40,472
|
65,075
|
—
|
|
39,557
|
61,745
|
—
|
Private Banking
|
28,228
|
27,180
|
—
|
|
25,304
|
24,309
|
—
|
|
26,903
|
22,913
|
5
|
Commercial & Private Banking
|
72,043
|
100,558
|
3
|
|
65,776
|
89,384
|
—
|
|
66,460
|
84,658
|
5
|
NatWest Markets
|
29,029
|
25,767
|
—
|
|
26,238
|
22,862
|
10
|
|
20,048
|
14,822
|
2
|
Capital Resolution
|
3,007
|
7,489
|
—
|
|
4,012
|
7,545
|
—
|
|
80,405
|
19,805
|
107
|
Central items & other
|
91,494
|
34,510
|
91
|
|
98,396
|
41,110
|
262
|
|
44,362
|
50,790
|
128
|
Total
|
316,476
|
300,476
|
94
|
|
302,430
|
287,263
|
272
|
|
309,200
|
293,432
|
242
|
Notes on the accounts
12 Related parties
UK Government
On 1
December 2008, the UK Government through HM Treasury became the
ultimate controlling party of The Royal Bank of Scotland Group plc.
The UK Government's shareholding is managed by UK Financial
Investments Limited, a company wholly owned by the UK Government.
As a result, the UK Government and UK Government controlled bodies
became related parties of the Group. During 2015, all of the B
shares held by the UK Government were converted into ordinary
shares of £1 each.
The
Group enters into transactions with many of these bodies on an
arm’s length basis. Transactions include the payment of:
taxes principally UK corporation tax (see Note 6 of the Annual
Report and Accounts) and value added tax; national insurance
contributions; local authority rates; and regulatory fees and
levies; together with banking transactions such as loans and
deposits undertaken in the normal course of banker-customer
relationships.
Bank of England facilities
The
Group may participate in a number of schemes operated by the Bank
of England in the normal course of business.
Members
of the Group that are UK authorised institutions are required to
maintain non-interest bearing (cash ratio) deposits with the Bank
of England amounting to 0.18% of their average eligible liabilities
in excess of £600 million. They also have access to Bank of
England reserve accounts: sterling current accounts that earn
interest at the Bank of England Rate.
Other related parties
(a)
In their roles as
providers of finance, Group companies provide development and other
types of capital support to businesses. These investments are made
in the normal course of business and on arm's length terms. In some
instances, the investment may extend to ownership or control over
20% or more of the voting rights of the investee company. However,
these investments are not considered to give rise to transactions
of a materiality requiring disclosure under IAS 24.
(b)
The Group recharges
The Royal Bank of Scotland Group Pension Fund with the cost of
administration services incurred by it. The amounts involved are
not material to the Group.
(c)
In accordance with
IAS 24, transactions or balances between Group entities that have
been eliminated on consolidation are not reported.
(d)
The captions in the
primary financial statements of the parent company include amounts
attributable to subsidiaries. These amounts have been disclosed in
aggregate in the relevant notes to the financial
statements.
The
table below discloses items included in income and operating
expenses on transactions between the Group and fellow subsidiaries
of the RBS Group.
|
2016
|
2015
|
2014
|
|
£m
|
£m
|
£m
|
Continuing operations
|
|
|
|
Interest receivable
|
491
|
646
|
739
|
Interest payable
|
(427)
|
(531)
|
(728)
|
Fees and commissions receivable
|
24
|
76
|
80
|
Fees and commissions payable
|
(1)
|
(62)
|
(57)
|
Other administrative expenses
|
(2,288)
|
(2,222)
|
(2,072)
|
Continuing operations
|
(2,201)
|
(2,093)
|
(2,038)
|
|
|
|
|
Discontinued operations
|
|
|
|
Net expenses
|
(8)
|
(19)
|
(4)
|
Other administrative expenses
|
(81)
|
(27)
|
(50)
|
|
(89)
|
(46)
|
(54)
|
13 Date of approval
The
annual results for the year ended 31 December 2016 were approved by
the board of directors on 23 February 2017.
14 Post balance sheet events
To
support the introduction of a ring-fencing from 1 January 2019, on
1 January 2017 NatWest Holdings Limited, a direct subsidiary of RBS
plc, acquired National Westminster Bank Plc from RBS plc and Ulster
Bank (Ireland) Holdings Unlimited Company from Ulster Bank
Limited.
Additional information
Risk factors
Set out
below are certain risk factors that could adversely affect the
Group's future results, its financial condition and prospects and
cause them to be materially different from what is expected. The
Group is (and following the implementation of the UK ring-fencing
regime will remain) a principal subsidiary of RBSG and,
accordingly, risk factors which relate to RBSG and RBS plc will
also directly or indirectly impact the Group’s financial
position, results of operations, reputation or prospects. The
factors discussed below and elsewhere in this report should not be
regarded as a complete and comprehensive statement of all potential
risks and uncertainties facing the Group.
Implementation of the ring-fencing regime in the UK which began in
2015 and must be completed before 1 January 2019 will result in
material structural changes to the RBS Group and the Group
including with respect to the perimeter of the Group’s
activities and the assets that it holds. These changes will have a
material adverse effect on the Group.
The
requirement to “ring-fence” retail banking operations
was introduced under the UK Financial Services (Banking Reform) Act
2013 (the Banking Reform Act 2013) and adopted through secondary
legislation (the UK ring-fencing regime). These reforms form part
of a broader range of structural reforms of the banking industry
seeking to improve the resilience and resolvability of banks and
which range from structural reforms (including ring-fencing) to the
implementation of a new recovery and resolution framework (which in
the UK will incorporate elements of the ring-fencing regime). See
“The RBS Group and its subsidiaries, including the Group, are
subject to a new and evolving framework on recovery and resolution,
the impact of which remains uncertain, and which may result in
additional compliance challenges and costs”.
On 30
September 2016, the RBS Group announced plans for its future
ring-fencing compliant structure. By the end of 2018, the RBS Group
intends to place the majority of its UK and Western European
banking business in ring-fenced banking entities organised as a
sub-group (RFB) under an intermediate holding company named NatWest
Holdings Limited which will be a direct subsidiary of RBSG and will
ultimately assume ownership of the Bank, Adam & Company PLC (to
be renamed The Royal Bank of Scotland plc) and Ulster Bank Ireland
DAC (Ulster Bank). As a result, the Bank will no longer be a
subsidiary of the current The Royal Bank of Scotland plc (RBS plc)
entity. In addition, a number of existing legal entities will be
transferred to the Group, while other current subsidiaries of the
Group may be transferred to other RBS Group entities, including
those outside the ring-fence. The activities of the NatWest Markets
(NWM) franchise (formerly known as the Corporate and Institutional
Banking business) and the RBS Group’s RBS International
business will be placed outside the ring-fence in other banking
subsidiaries of RBSG.
As part
of this restructuring, in mid-2018, the majority of existing
personal, private, business and commercial customers of RBS plc
will be transferred to the RFB, specifically to Adam & Company
PLC, which (on the same day) will be renamed The Royal Bank of
Scotland plc, and to the Bank and/or other Group
entities.
At the
same time, RBS plc (which will sit outside the RFB) will be renamed
NatWest Markets Plc to bring its legal name in line with the
rebranding of the NatWest Markets franchise which was initiated in
December 2016, and will continue to operate the NatWest Markets
franchise as a direct subsidiary of RBSG.
As a
result of the changes described above, the establishment of the RFB
sub-group will have a material impact on how the Group conducts its
business and requires a significant legal and organisational
restructuring of the RBS Group and the Group, as the Bank will be
one of the principal banking entities within the RFB, and the
transfer of large numbers of assets, liabilities and customers
between legal entities (within the RBS Group) and the realignment
of employees which started in early 2017. The RBS Group’s
final ring-fenced legal structure and the actions taken to achieve
it, remain subject to, amongst other factors, additional
regulatory, board and other approvals as well as employee
representative information and consultation procedures. In
particular, transfers of assets and liabilities through a
ring-fencing transfer scheme are now subject to review by an
Independent Skilled Person designated by the PRA in advance of
commencing the formal court process in late 2017 prior to such
transfers and migrations taking place in 2018, which may result in
amendments being required to be made to the RBS Group’s
current plan and in delays in the implementation of the UK
ring-fencing regime, additional costs and/or changes to the RBS
Group’s and/or the Group’s business.
The
implementation of these changes involves a number of risks related
to both the revised RBS Group and Group structures and also the
process of transition to such new structures. Those risks include
the following:
●
The Group is unable
to predict how some customers may react to the required changes,
including if certain of its customers would be required as a result
to deal with both the Group and the other RBS Group entities
outside the RFB to obtain the full range of products and services
or to take any affirmative steps in connection with the
reorganisation.
●
As part of the
establishment of the RFB, the RFB, including Group entities, will
need to operate independently from other RBS Group entities outside
the RFB and as a result, amendments may need to be made to the
Group’s existing corporate governance structure to ensure its
independence. This new structure may result in divergences between
the various governance bodies within the RBS Group and create
operational challenges. In addition, the Group may experience
difficulties in attracting qualified candidates to occupy these new
positions and the new governance structure may result in an
associated increase in overhead and compliance costs. In addition,
remuneration policies will be required to be designed at Group
level.
●
As a result of the
ring-fence, subject to certain exceptions, the Group will no longer
be able to undertake certain activities, including investment and
wholesale banking and activities such as dealing in investments and
dealing in commodities will, subject to limited exemptions, be
prohibited, which will require the transfer of certain of the
Group’s activities to other RBS Group entities outside the
RFB, leading to a loss of revenue and assets, and limitations on
the Group’s ability to grow.
Additional information
Risk factors continued
●
In addition, the
Group will no longer be allowed to have exposure to certain
financial institutions or to operate branches or subsidiaries
outside the European Economic Area. The RBS Group is still
considering whether a number of its current activities will be
conducted within or outside of the RFB, which may impact the
Group’s operations. Such changes will limit the scope of the
Group’s activities and may have a material adverse effect on
the Group’s business, financial condition and results of
operations.
●
The Group currently
receives a large majority of services from entities within the RBS
Group and has access to the infrastructure of the RBS Group which
the Group is currently reliant upon in order to operate its
business. In order to comply with the requirements of the UK
ring-fencing regime, the RFB, of which the Group will form part,
will need to make significant changes to its operations
infrastructure so as to comply with the shared services,
independence and resolvability requirements set out in the UK
ring-fencing rules, including in areas such as information
technology (IT) infrastructure, human resources and critical
service providers. Complying with these requirements may involve
significant associated execution risks and increased costs.
Arrangements currently in place between RFB, including Group
entities, and other RBS Group entities outside the RFB will need to
be reviewed in light of these requirements and the requirement that
all such transactions take place on an arm’s-length basis,
which may result in increased operational costs for the Bank if it
has to rely on third party providers for the provision of such
services or set up its own infrastructure.
●
The implementation
of the UK ring-fencing regime will significantly impact the
management of the RBS Group’s treasury operations, including
internal and external funding arrangements. The changes required
may adversely impact the assessment made by credit rating agencies,
creditors and other stakeholders of the credit strength of some of
the RFB entities (including the Bank) or other RBS Group entities
outside the RFB on a standalone basis and the ability of the RFB
(of which the Group will be part) to meet funding and capital
prudential requirements will be dependent on obtaining adequate
credit ratings. The Group currently receives capital and funding
support from the RBS Group including RBS Group entities which will
ultimately be outside the RFB. Restrictions or changes imposed on
the ability of the RBS Group to provide intra-group funding,
capital or other support directly or indirectly to the Group or to
receive such support from the RBS Group, may result in funding or
capital pressures and liquidity stress for the Group.
●
Reliance on
intragroup exemptions in relation to the calculation of
risk-weighted assets and large exposures may not be possible
between the RFB and other RBS Group entities outside the RFB and
may result in risk-weighted assets inflation.
●
Intragroup
distributions (including payments of dividends) between RFB and
other RBS Group entities (with the exception of the RBS Group
parent company) will also be prohibited.
●
From 2026 it will
not be possible for the RFB and other RBS Group entities that are
not RFB entities or wholly owned subsidiaries of the RFB to
participate in the same defined benefit pension plan. As a result,
it will be necessary to restructure the Group’s defined
benefit pension schemes (including The Royal Bank of Scotland Group
Pension Fund, the RBS Group’s main defined benefit pension
scheme (the “Main scheme”) in which the Bank currently
participates), such that either the Group or other RBS Group
entities that are not wholly owned subsidiaries of the RFB leave
the current scheme. The costs of separation may be material and may
trigger certain legal and regulatory obligations, including
possibly increased contributions or may require certain RBS Group
entities (including the Bank) to assume additional pension
liabilities in relation to employees previously employed by other
RBS Group entities. Such restructuring may also result in
additional or increased cash contributions in the event the pension
trustees determine that the employer covenant has been weakened as
a result of such separation.
●
The restructuring
and planned transfers may also result in accounting consequences
for the Bank. Although a number of transfers will be made at book
value between fully owned RBS Group entities and will therefore not
have an accounting impact, certain transfers will be made at fair
value which may result in a profit or loss being recognised by RBS
Group entities, including the Bank. In addition, transfers of
assets that have related hedging arrangements may result in adverse
operational, financial or accounting consequences if the transfer
is not consistent with the unaffected continuation of such hedging
arrangements.
●
The steps required
to implement the UK ring-fencing regime within the RBS Group
(including with respect to the Group) to comply with the relevant
rules and regulations are extraordinarily complex and require an
extended period of time to plan, execute and implement and entail
significant costs and operational, legal and execution risks, which
risks may be exacerbated by the RBS Group’s and the
Group’s other ongoing restructuring efforts. External or
internal factors, including new and developing legal requirements
relating to the regulatory framework for the banking industry and
the evolving regulatory and economic landscape resulting from the
UK’s planned exit from the EU, as well as further political
developments or changes to the RBS Group’s current strategy
or means of compliance with its EU State Aid Commitments, may
require the RBS Group to further restructure its operations
(including its operations in Western Europe) and may in turn
require further changes to be made to the RBS Group’s
ring-fencing plans including the planned structure of the RBS Group
post implementation).
Additional information
Risk factors continued
●
See also
“Changes to the prudential regulatory framework for banks and
investment banks within the EU may require additional structural
changes to the RBS Group’s operations which may affect
current restructuring plans and have a material adverse effect on
the Group.” There is no certainty that the RBS Group and the
Group will be able to complete the legal restructuring and
migration of customers by the 1 January 2019 deadline or in
accordance with future rules and the consequences of non-compliance
are currently uncertain. Conducting the Group’s operations in
accordance with the new rules may result in additional costs
(transitional and recurring) following implementation and impact
the Group’s profitability. As a result, the implementation of
the UK ring-fencing regime could have a material adverse effect on
the Group’s reputation, results of operations, financial
condition and prospects.
The Group is subject to political risks, including economic,
regulatory and political uncertainty arising from the outcome of
the referendum on the UK’s membership of the European Union
(EU Referendum) which could adversely impact the Group’s
business, results of operations, financial condition and
prospects.
In a
referendum held on 23 June 2016, a majority voted for the UK to
leave the European Union (EU). There is now prevailing uncertainty
relating to the timing of the UK’s exit from the EU, as well
as the negotiation and form of the UK’s relationships with
the EU, with other multilateral organisations and with individual
countries at the time of exit and beyond.
Once
the exit process is triggered by the UK government, Article 50 of
the Treaty on the EU stipulates that a maximum two year period of
negotiation will begin to determine the new terms of the UK’s
exit from the EU and set the framework for the UK’s new
relationship with the EU, after which period its membership of the
EU and all associated treaties will cease to apply, unless some
form of transitional arrangement encompassing those associated
treaties is agreed or there is unanimous agreement amongst EU
member states and the European Commission to extend the negotiation
period. The direct and indirect effects of the UK’s decision
to leave the EU are expected to affect many aspects of the RBS
Group’s and the Group’s business, including as
described elsewhere in these risk factors, and may be material.
During the period in which the UK is negotiating its exit from the
EU, the RBS Group and the Group may face an increasingly uncertain
operating environment.
The
longer term effects of the EU Referendum on the RBS Group’s
and the Group’s operating environment are difficult to
predict, and subject to wider global macro-economic trends and
events, but are likely to significantly impact the Group and its
customers and counterparties who are themselves dependent on
trading with the EU or personnel from the EU and may result in
periodic financial volatility and slower economic growth, in the UK
in particular, but also in Republic of Ireland (ROI), Europe and
potentially the global economy.
These
longer term effects may endure until the bilateral and multilateral
trading and economic relationship between the UK, the EU, members
of the World Trade Organisation and other key trading partners are
agreed, implemented and settled.
There
is related uncertainty as to the respective legal and regulatory
arrangements under which the RBS Group and the Group will operate
when the UK is no longer a member of the EU.
This
uncertainty and any actions taken as a result of this uncertainty,
as well as new or amended rules, could have a significant impact on
the RBS Group’s and the Group’s operations or legal
entity structure, including attendant restructuring costs, capital
requirements and tax implications and as a result adversely impact
the Group’s profitability, business model and product
offering. See also “Changes to the prudential regulatory
framework for banks and investment banks within the EU may require
additional structural changes to the RBS Group’s operations
which may affect current restructuring plans and have a material
adverse effect on the Group.”
The
outcome of the EU Referendum has created constitutional and
political uncertainty as to how the Scottish parliamentary process
may impact the negotiations relating to the UK’s exit from
the EU.
As RBSG
and The Royal Bank of Scotland plc (RBS plc), its principal
operating subsidiary, are both headquartered and incorporated in
Scotland, any changes to Scotland’s relationship with the UK
or the EU may further impact the environment in which the RBS Group
and its subsidiaries operate including as it may require changes to
be made to the RBS Group’s structure, independently or in
conjunction with other mandatory or strategic structural and
organisational changes and as a result could adversely impact the
Group.
Changes to the prudential regulatory framework for banks and
investment banks within the EU may require additional structural
changes to the RBS Group’s operations which may affect
current restructuring plans and have a material adverse effect on
the Group.
The
exit from the European Union by the UK following the EU Referendum
may result in one or more structural and reorganisation changes
being implemented within the RBS Group, in addition to those
currently planned for. Current proposed changes to the European
prudential regulatory framework for banks and investment banks may
result in additional prudential or structural requirements being
imposed on financial institutions based outside the EU wishing to
provide financial services within the EU which may apply to the RBS
Group once the UK has formally exited the EU.
Additional information
Risk factors continued
One of
the proposals would impose a requirement for any third country
banks with two or more institutions within the EU to establish a
single intermediate parent undertaking in the European Union. These
are currently draft proposals which, if adopted, are not expected
to come into force until after the implementation deadline for the
UK ring fencing regime (1 January 2019). The RBS Group is currently
assessing how these proposals, if adopted, may impact the RBS Group
and its current restructuring plans to implement the UK
ring-fencing regime. If implemented, the impact of these proposals
could be material given the expectation that both the RFB and the
non-ring fenced group would continue to carry out operations in the
EU.
If
adopted, these proposals would require further additional
restructuring of the RBS Group’s operations and legal
structure, in addition to the changes already planned to be
implemented for the purposes of compliance with the UK ring-fencing
regime and any other changes required to be implemented as a result
of other regulatory, political or strategic developments and could
result in material additional capital requirements and have adverse
tax implications.
Planning and
implementation of any additional restructuring of the RBS
Group’s activities may also divert management and personnel
resources from the effective conduct of the RBS Group’s
operations, result in further material restructuring costs,
jeopardise the delivery and implementation of a number of other
significant change projects resulting from mandatory regulatory
developments or as part of its transformation programme, impact the
Group’s product offering or business model or adversely
impact the RBS Group’s and the Group’s ability to
deliver its strategy and meet its targets and guidance, each of
which could have a material adverse impact on the RBS Group’s
and the Group’s results of operations, financial condition
and prospects.
The Group’s businesses and performance can be negatively
affected by the performance of the UK economy as well as actual or
perceived economic and financial market conditions in the UK and
globally and other global risks and the Group will be increasingly
impacted by developments in the UK as its operations become
increasingly concentrated in the UK.
Actual
or perceived difficult global economic conditions create
challenging economic and market conditions and a difficult
operating environment for the Group’s businesses and its
customers and counterparties.
The
Group’s primary business focus is the UK and the ROI and, as
part of its revised strategy, the RBS Group has been refocusing its
business in the UK, the ROI and Western Europe. Accordingly the
Group and the RBS Group are materially exposed to the economic
conditions of the British economy as well as the
Eurozone.
In
particular, the longer term effects of the EU Referendum are
difficult to predict, and subject to wider global macro-economic
trends, but may include periods of financial market volatility and
slower economic growth, in the UK in particular, but also in the
ROI, Europe and the global economy, at least in the short to medium
term.
The
outlook for the global economy over the medium-term remains
uncertain due to a number of factors including: political
instability, continued slowdown of global growth, an extended
period of low inflation and low interest rates and delays in
normalising monetary policy. Such conditions could be worsened by a
number of factors including political uncertainty or macro-economic
deterioration in the Eurozone or the US, increased instability in
the global financial system and concerns relating to further
financial shocks or contagion, a further weakening of the pound
sterling, new or extended economic sanctions, volatility in
commodity prices or concerns regarding sovereign debt.
In
particular, concerns relating to emerging markets, including lower
economic growth or recession, concerns relating to the Chinese
economy and financial markets, reduced global trade in emerging
market economies or increased financing needs as existing debt
matures, may give rise to further instability and financial market
volatility. Any of the above developments could impact the Group
directly by resulting in credit losses and indirectly by further
impacting global economic growth and financial
markets.
Developments
relating to current economic conditions, including those discussed
above, could have a material adverse effect on the Group’s
business, financial condition, results of operations and prospects.
Any such developments may also adversely impact the financial
position of the Group’s pension schemes which may result in
the Group being required to make additional contributions. See
“The Group is subject to pension risks and may be required to
make additional contributions to cover pension funding deficits as
a result of degraded economic conditions or as a result of the
restructuring of its pension schemes in relation to the
implementation of the UK ring-fencing regime.”
In
addition, the Group is exposed to risks arising out of geopolitical
events or political developments, such as trade barriers, exchange
controls, sanctions and other measures taken by sovereign
governments that can hinder economic or financial activity levels.
Furthermore, unfavourable political, military or diplomatic events,
armed conflict, pandemics and terrorist acts and threats, and the
responses to them by governments, could also adversely affect
economic activity and have an adverse effect upon the Group’s
business, financial condition and results of
operations.
Additional information
Risk factors continued
Changes in interest rates or foreign exchange rates have
significantly affected and will continue to affect the
Group’s business and results of operations.
Some of
the most significant market risks that the Group faces are interest
rate and foreign exchange risks. Monetary policy has been highly
accommodative in recent years, including as a result of certain
policies implemented by the Bank of England and HM Treasury such as
the ‘Funding for Lending’ scheme, which have helped to
support demand at a time of very pronounced fiscal tightening and
balance sheet repair. In the UK, the Bank of England lowered
interest rates to 0.25% in August 2016 and there remains
considerable uncertainty as to whether or when the Bank of England
and other central banks will increase interest rates. While the ECB
has been conducting a quantitative easing programme since January
2015 designed to improve confidence in the Eurozone and encourage
more private bank lending, there remains considerable uncertainty
as to whether such measures have been or will be sufficient or
successful and the extension of this programme during 2017 may put
additional pressure on margins.
Further
decreases in interest rates by the Bank of England or other central
banks, continued sustained low or negative interest rates or any
divergences in monetary policy approach between the Bank of England
and other major central banks, could put further pressure on the
Group’s interest margins and adversely affect the
Group’s profitability and prospects. A continued period of
low interest rates and yield curves and spreads may affect the
interest rate margin realised between lending and borrowing costs,
the effect of which may be heightened during periods of liquidity
stress.
Conversely while
increases in interest rates may support Group income, sharp
increases in interest rates could lead to generally weaker than
expected growth, or even contracting GDP, reduced business
confidence, higher levels of unemployment or underemployment,
adverse changes to levels of inflation, potentially higher interest
rates and falling property prices in the markets in which the Group
operates.
In
turn, this could cause stress in the loan portfolio of the Group,
particularly in relation to non-investment grade lending or real
estate loans and consequently to an increase in delinquency rates
and default rates among customers, leading to the possibility of
the Group incurring higher impairment charges. Similar risks result
from the exceptionally low level of inflation in developed
economies, which in Europe particularly could deteriorate into
sustained deflation if policy measures prove ineffective. Reduced
monetary stimulus and the actions and commercial soundness of other
financial institutions have the potential to impact market
liquidity.
Changes
in currency rates, particularly in the sterling-euro exchange rates
and sterling-US dollar exchange rates, affect the value of assets,
liabilities, income and expenses denominated in foreign currencies
and the reported earnings of the Bank’s non-UK subsidiaries
and may affect the Group’s reported consolidated financial
condition. Such changes may result from the decisions of the Bank
of England, ECB or of the US Federal Reserve or from political
events and lead to sharp and sudden variations in foreign exchange
rates, such as those seen in the GBP/USD exchange rates during the
second half of 2016 following the EU Referendum.
The financial performance of the Group has been, and may continue
to be, materially affected by customer and counterparty credit
quality and deterioration in credit quality could arise due to
prevailing economic and market conditions and legal and regulatory
developments.
The
Group has exposure to many different industries, customers and
counterparties, and risks arising from actual or perceived changes
in credit quality and the recoverability of monies due from
borrowers and other counterparties are inherent in a wide range of
the Group’s businesses. In particular, the Group has
significant exposure, directly and through its subsidiaries, to
certain individual customers and other counterparties in weaker
business sectors and geographic markets and also has concentrated
country exposure in the UK, Ireland, other Western European
countries and the rest of the world.
At 31
December 2016, current exposure in the UK was £159.6 billion,
in ROI was £21.6 billion and in the rest of the world was
£8.4 billion. Within certain business sectors, namely personal
and property at 31 December 2016, personal lending amounted to
£131.3 billion and lending exposure to property was £17.2
billion.
Provisions held on
loans in default have decreased in recent years due to asset sales
and the portfolio run-down in Ulster Bank (Ireland) Holdings
Limited and Capital Resolution. If the risk profile of these loans
were to increase, including as a result of a degradation of
economic or market conditions, this could result in an increase in
the cost of risk and the Group may be required to make additional
provisions, which in turn would reduce earnings and impact the
Group’s profitability. The Group’s lending strategy or
processes may also fail to identify or anticipate weaknesses or
risks in a particular sector, market or borrower category, which
may result in an increase in default rates, which may, in turn,
impact the Group’s profitability.
Any
adverse impact on the credit quality of the Group’s customers
and other counterparties, coupled with a decline in collateral
values, could lead to a reduction in recoverability and value of
the Group’s assets and higher levels of impairment
allowances, which could have an adverse effect on the Group’s
operations, financial position or prospects.
Additional information
Risk factors continued
The
credit quality of the Group’s borrowers and its other
counterparties is impacted by prevailing economic and market
conditions and by the legal and regulatory landscape in their
respective markets. Credit quality has improved in certain of the
Group’s core markets, in particular the UK and Ireland, as
these economies have improved. Notwithstanding the above, asset
quality remains weak across certain portfolios and the Group or its
subsidiaries may inaccurately assess the levels of provisions
required to mitigate such risks.
A
further deterioration in economic and market conditions or changes
to legal or regulatory landscapes could worsen borrower and
counterparty credit quality and also impact the Group’s
ability to enforce contractual security rights. In particular, the
UK’s decision to leave the EU may adversely impact credit
quality in the UK.
In
addition, as the RBS Group implements its strategy and withdraws
from many geographic markets and continues to materially scale down
its international activities, the Group’s relative exposure
to the UK and to certain sectors and asset classes in the UK will
increase as its business becomes more concentrated in the UK. The
level of UK household indebtedness remains high and the ability of
some households to service their debts could be challenged by a
period of higher unemployment. Highly indebted households are
particularly vulnerable to shocks, such as falls in incomes or
increases in interest rates, which threaten their ability to
service their debts.
In
particular, in the UK, the Group is at risk from downturns in the
UK economy and volatility in property prices in both the
residential and commercial sectors. With UK home loans representing
the most significant portion of the Group’s total loans and
advances to the retail sector, the Group has a large exposure to
adverse developments in the UK residential property sector. In the
UK commercial real estate market, activity slowed during the second
half of 2016 following the EU Referendum.
There
is a risk of further adjustment given the reliance of the UK
commercial real estate market in recent years on inflows of foreign
capital and, in some segments, stretched property valuations. As a
result, a fall in house prices, particularly in London and the
South East of the UK, would be likely to lead to higher impairment
and negative capital impact as loss given default rate increases.
In addition, reduced affordability of residential and commercial
property in the UK, for example, as a result of higher interest
rates or increased unemployment, could also lead to higher
impairments on loans held by the Group.
In
addition, the Group’s credit risk is exacerbated when the
collateral it holds cannot be realised as a result of market
conditions or regulatory intervention or is liquidated at prices
not sufficient to recover the full amount of the loan or derivative
exposure that is due to the Group, which is most likely to occur
during periods of illiquidity and depressed asset valuations, such
as those experienced in recent years.
This
has particularly been the case with respect to large parts of the
Group’s commercial real estate portfolio. Any such
deterioration in the Group’s recoveries on defaulting loans
could have an adverse effect on the Group’s results of
operations and financial condition.
Concerns about, or
a default by, one financial institution could lead to significant
liquidity problems and losses or defaults by other financial
institutions, as the commercial and financial soundness of many
financial institutions may be closely related as a result of
credit, trading, clearing and other relationships. Even the
perceived lack of creditworthiness of, or questions about, a
counterparty may lead to market-wide liquidity problems and losses
for, or defaults by, the Group.
This
systemic risk may also adversely affect financial intermediaries,
such as clearing agencies, clearing houses, banks, securities firms
and exchanges with which the Group interacts on a daily
basis.
The
effectiveness of recent prudential reforms designed to contain
systemic risk in the EU and the UK is yet to be tested.
Counterparty risk within the financial system or failures of the
Group’s financial counterparties could have a material
adverse effect on the Group’s access to liquidity or could
result in losses which could have a material adverse effect on the
Group’s financial condition, results of operations and
prospects.
The
trends and risks affecting borrower and counterparty credit quality
have caused, and in the future may cause, the Group to experience
further and accelerated impairment charges, increased repurchase
demands, higher costs, additional write- downs and losses for the
Group and an inability to engage in routine funding
transactions.
The Group’s earnings and financial condition have been, and
its future earnings and financial condition may continue to be,
materially affected by depressed asset valuations resulting from
poor market conditions.
The
Group’s businesses and performance are also affected by
financial market conditions.
The
performance and volatility of financial markets affect bond and
equity prices and have caused, and may in the future cause, changes
in the value of the Group’s investment and trading
portfolios. Financial markets have recently experienced and may in
the near term experience significant volatility, including as a
result of concerns about the outcome of the EU Referendum,
political and financial developments in the US and in Europe,
including as a result of general elections, geopolitical
developments and developments relating to trade agreements,
volatility and instability in the global stock markets and
expectations relating to or actions taken by central banks with
respect to monetary policy, resulting in further short-term changes
in the valuation of certain of the Group’s
assets.
Additional information
Risk factors continued
Uncertainty about
potential fines for past misconduct and concerns about the
longer-term viability of business models have also weighed heavily
on the valuations of some financial institutions in Europe and in
the UK, including the RBS Group.
Any
further deterioration in economic and financial market conditions
or weak economic growth could require the Group to recognise
further significant write-downs and realise increased impairment
charges, all of which may have a material adverse effect on its
financial condition, results of operations and capital
ratios.
As part
of its transformation programme, the RBS Group is executing the
run-down or disposal of a number of businesses, assets and
portfolios. In addition, the RBS Group’s interest in the
remainder of the businesses and portfolios within the exiting
business may be difficult to sell due to unfavourable market
conditions for such assets or businesses.
Moreover, market
volatility and illiquidity (and the assumptions, judgements and
estimates in relation to such matters that may change over time and
may ultimately not turn out to be accurate) make it difficult to
value certain of the Group’s exposures. Valuations in future
periods reflecting, among other things, the then-prevailing market
conditions and changes in the credit ratings of certain of the
Group’s assets may result in significant changes in the fair
values of the Group’s exposures, such as credit market
exposures, and the value ultimately realised by the Group may be
materially different from the current or estimated fair
value.
As part
of its ongoing derivatives operations, the Group also faces
significant basis, volatility and correlation risks, the occurrence
of which are also impacted by the factors noted above.
In
addition, for accounting purposes, the Group carries some of its
issued debt, such as debt securities, at the current market price
on its balance sheet. Factors affecting the current market price
for such debt, such as the credit spreads of the Group, may result
in a change to the fair value of such debt, which is recognised in
the income statement as a profit or loss.
The RBS Group is in the process of seeking to satisfy its
commitments arising as a result of the receipt of State Aid in
December 2008. The process to amend the RBS Group’s State Aid
obligations in respect of Williams & Glyn may not ultimately
amend such obligations or the revised obligations may be more
onerous than those currently being discussed. The diversion of RBS
Group resources required to meeting the RBS Group’s
obligations in respect of Williams & Glyn, associated costs or
delays in meeting, or a failure to meet, the deadline for
compliance, could have a material adverse effect on the
Group’s operations, operating results, financial position and
reputation.
State
Aid approval was received from the European Commission in
connection with the financial assistance provided to the RBS Group
by the UK Government in 2008. In connection with the receipt of
such financial assistance, and as a condition for State Aid
approval, the RBS Group entered into a state aid commitment deed
with HM Treasury (as amended from time to time, the “State
Aid Commitment Deed”) which set out conditions upon which
such State Aid approval was granted including the requirement for
the RBS Group to divest its RBS branches in England and Wales,
NatWest branches in Scotland, Direct SME banking and certain
mid-corporate customers (Williams & Glyn) by the end of
2017.
In
light of its obligations under the State Aid Commitment Deed, the
RBS Group actively sought to fully divest Williams & Glyn and
engaged in discussions with a number of interested parties
concerning a transaction related to substantially all of the
Williams & Glyn business. However, as none of these proposals
could deliver full divestment by 31 December 2017, the RBS Group
announced on 28 April 2016 that there was a significant risk that
the previously planned separation and divestment of Williams &
Glyn would not be achieved by the 31 December 2017 deadline. On 5
August 2016, the RBS Group announced that the Board had determined
that it would not be prudent to continue with the plan for
separating and divesting Williams & Glyn and announced that
various alternative divestment structures were being actively
explored.
The RBS
Group subsequently announced on 17 February 2017 that the
Commissioner responsible for EU competition policy planned to
propose to the European Commission to open proceedings to develop
an alternative plan for the RBS Group to meet its remaining State
Aid obligations in regards to Williams & Glyn. If adopted, it
is intended that this alternative plan would replace the existing
requirement to achieve separation and divestment of Williams &
Glyn by 31 December 2017 and the current conditions set out in the
State Aid Commitment Deed would be amended
accordingly.
Under
the current form of the alternative plan, the RBS Group will
deliver a package of measures to promote competition in the market
for banking services to small and medium enterprises (SMEs) in the
UK.
Additional information
Risk factors continued
This
package will include: (i) an SME banking capability fund,
administered by an independent body, which eligible challenger
banks could access to increase their SME business banking
capabilities; (ii) funding for eligible challenger banks to help
them incentivise UK SME customers to switch their accounts from the
RBS Group to eligible challenger banks by paying in the form of
“dowries”; (iii) the RBS Group granting business
customers of eligible challenger banks access to its branch network
for cash and cheque handling, to support the incentivised switching
programme; and (iv) the funding of an independent financial
services innovation fund to invest in and help support the growth
of existing businesses providing or developing innovative financial
services or products for UK SMEs. In connection with this package
of alternative measures, the RBS Group has taken a £750
million provision in 2016.
However, actual
costs associated with the implementation of such
measures may be
materially higher as a result of unforeseen complexities and
factors outside of the RBS Group’s control.
Discussions will
continue between the RBS Group, HM Treasury and the European
Commission to further develop the design of this package of
alternative measures and the duration of them. The timing of the
approval for this or any package of alternative measures is
uncertain and there is no guarantee that the European Commission
will ultimately agree to this or any package of alternative
measures in replacement of the original terms of the State Aid
Commitment Deed in relation to Williams & Glyn. In addition,
the final scope and content of the package of alternative measures
will be subject to further market testing by HM Treasury and a
consultation exercise by the European Commission, either of which
may result in amendments to the scope of and costs associated with
this package as a result of which the final terms of a package of
alternative measures may be more onerous than the scope of the plan
set out above.
Implementation of
the package, or if required as a result of the above process a more
onerous package, and any associated business restructuring could
divert resources from the RBS Group’s operations and
jeopardise the delivery and implementation of other significant
plans and initiatives. The incentivised transfer of SME customers
to third parties places reliance on those third parties to achieve
satisfactory customer outcomes which could give rise to
reputational damage if these are not forthcoming.
Execution of the
alternative measures package plan entails significant costs,
including the funding commitments and financial incentives
envisaged to be provided under the plan. In addition, the final
terms of the agreement entered into among the RBS Group, HM
Treasury and the European Commission may include sanctions or
additional financial incentives designed to ensure that the RBS
Group delivers its commitments.
The RBS
Group will also need to assess the timing and manner in which to
reintegrate the remaining Williams & Glyn business into the RBS
Group which is expected to result in additional restructuring
charges and may adversely impact the RBS Group’s existing
restructuring plans, including in respect of the implementation of
the UK ring-fencing regime.
As a
direct consequence of the incentivised switching component of the
package of alternative measures described above, the RBS Group will
lose existing customers and deposits and associated revenues and
margins. Furthermore, the SME banking capability fund and financial
services innovation fund envisaged by the alternative plan is
intended to benefit challenger banks and negatively impact the RBS
Group’s competitive position. To support this incentivised
switching initiative, the RBS Group will also have to agree to
grant business customers of eligible challenger banks access to its
branch network for cash and cheque handling, which may result in
reputational and financial exposure for the RBS Group and impact
customer service quality for the RBS Group’s own customers
with consequent competitive, financial and reputational
implications.
If the
RBS Group fails to come to an agreement with HM Treasury and the
European Commission in respect of the proposed package of
alternative measures, and a determination is made that the RBS
Group remains required to divest Williams & Glyn, there is no
guarantee that the RBS Group will be able to identify or recommence
discussions with interested buyers for Williams & Glyn at that
time or that it will be able to agree a divestment on commercially
beneficial, and there is no certainty that any such discussions
would lead to a viable transaction. In addition, the RBS Group
would be required to conduct further restructuring in order to
divest the Williams & Glyn business, at the same time that it
is implementing significant restructuring changes in connection
with the implementation of the UK ring-fencing regime and other
restructuring changes which may be required as a result of the UK
terminating its membership of the European Union, which entails
material execution risks and costs, as well as diverting RBS Group
and management resources.
In
addition, if no alternative to the RBS Group’s current State
Aid Commitment Deed obligations becomes effective, the RBS Group
would be unable to meet the principal obligation in the State Aid
Commitment Deed to divest Williams & Glyn by 31 December 2017,
which could entail material sanctions (including the appointment of
a divestiture trustee, with the mandate to complete the divestment
at no minimum price).
A
failure to comply with the terms of the revised State Aid
Commitment Deed, once agreed, could result in the imposition of
additional measures or limitations on the RBS Group’s
operations, additional supervision by the RBS Group’s
regulators, and loss of investor confidence, any of which could
have a material adverse impact on the RBS Group.
Additional information
Risk factors continued
Delays
in execution may also impact the RBS Group’s ability to carry
out its transformation programme, including the implementation of
cost saving initiatives and implement mandatory regulatory
requirements, including the UK ring-fencing regime. Such risks will
increase in line with any additional delays.
The RBS Group and the Group are subject to a number of legal,
regulatory and governmental actions and investigations.
Unfavourable outcomes in such actions and investigations could have
a material adverse effect on the RBS Group’s operations,
operating results, reputation, financial position and future
prospects.
The RBS
Group’s and the Group’s operations remain diverse and
complex and it operates in legal and regulatory environments that
expose it to potentially significant legal and regulatory actions,
including litigation claims and proceedings and civil and criminal
regulatory and governmental investigations, and other regulatory
risk. The RBS Group and the Group have settled a number of legal
and regulatory actions over the past several years but continue to
be, and may in the future be, involved in a number of legal and
regulatory actions in the US, the UK, Europe and other
jurisdictions.
The
legal and regulatory actions specifically referred to below are, in
the RBS Group’s view, the most significant legal and
regulatory actions to which the RBS Group is currently
exposed.
However,
RBS Group and the Group are also subject to a number of additional
claims, proceedings and investigations, the adverse resolution of
which may also have a material adverse impact on the Group and
which include ongoing reviews, investigations and proceedings (both
formal and informal) by governmental law enforcement and other
agencies and litigation proceedings (including class action
litigation), relating to, among other matters, the offering of
securities, including residential mortgage-backed securities
(RMBS), conduct in the foreign exchange market, the setting of
benchmark rates such as LIBOR and related derivatives trading, the
issuance, underwriting, and sales and trading of fixed-income
securities (including structured products and government
securities), product mis-selling, customer mistreatment, anti-money
laundering, sanctions, and various other compliance issues. See
pages 23 to 37 for details for these matters. The RBS Group and the
Group continue to cooperate with governmental and regulatory
authorities in relation to ongoing regulatory actions. Legal and
regulatory actions are subject to many uncertainties, and their
outcomes, including the timing, amount of fines or settlements or
the form of any settlements, which may be material, are often
difficult to predict, particularly in the early stages of a case or
investigation.
It is
expected that the Group will continue to have a material exposure
to legal and regulatory actions relating to legacy issues in the
medium term.
In the
US, ongoing matters include various civil claims relating to legacy
retail mortgage-backed securities (RMBS) activities, the most
material of which are those of the Federal Housing Finance Agency
(FHFA), and investigations by the civil and criminal divisions of
the U.S. Department of Justice (DOJ) and various other members of
the RMBS Working Group of the Financial Fraud Enforcement Task
Force (including several state attorneys general). On 26 January
2017, the Group announced that it was taking a further £1.3bn
($1.6bn) provision in the Q4 2016 in relation to these litigation
and investigation matters including in relation to the RBS
Group’s issuance and underwriting of RMBS as well as other
RMBS litigation matters.
The
duration and outcome of the DOJ’s civil and criminal
investigations remain uncertain. No settlement may be reached with
the DOJ and further substantial additional provisions and costs may
be recognised. Any finding of criminal liability by US authorities
(including as a result of guilty pleas) could have material
collateral consequences for the Group’s
operations.
These
may include consequences resulting from the need to reapply for
various important licences or obtain waivers to conduct certain
existing activities of the Group, particularly but not solely in
the US, which may take a significant period of the time and the
results of which are uncertain.
Failure
to obtain such licenses or waivers could adversely impact the
Group’s business, in particular the NatWest Markets business
in the US, including if it results in the Group being precluded
from carrying out certain activities. A further provision of
£1.3 billion ($1.6 billion) was recorded by the Group in Q4
2016 in relation to the Group’s various RMBS investigations
and litigation matters, taking the total of such provisions to
£5.0 billion ($6.1 billion) at 31 December 2016.
The RBS
Group is also facing litigation in the UK in connection with its
2008 shareholder rights issue. In December 2016, the RBS Group
concluded full and final settlements with four of the five
shareholder groups representing 78% of the claims by value. As
announced in December, although the RBS Group has determined a
settlement figure of up to £800 million for the resolution of
these matters (including the settlement referred to above), which
amount is covered by existing provisions.
This
figure assumes that agreement is also reached with the remaining
claimant group, is split proportionally and is subject to
validation of claims. Following the settlements described above, a
number of claims remain outstanding with the final shareholder
group and the RBS Group may not manage to reach a settlement
agreement with the remaining claimants, and as a result remains
exposed to continuing litigation. Trial is scheduled to commence in
March 2017.
Additional information
Risk factors continued
In
addition, the Group is undertaking various remediation programmes
in response to past conduct issues. As announced on 8 November
2016, the Group is also taking steps, including automatic refunds
of certain complex fees and a new complaints process, overseen by
an independent third party for small and medium entity (SME)
customers in the UK and the Republic of Ireland that were in its
Global Restructuring Group (GRG) between 2008 and 2013. This new
complaints review process and the automatic refund of complex fees
was developed with the involvement of the Financial Conduct
Authority (FCA). The FCA’s review into these activities is
continuing and fines or additional redress commitments may be
accepted by or imposed upon the Group, notwithstanding the steps
the Group has already taken. The Group booked a provision of
£400 million in Q4 2016, based on its estimates of the costs
associated with the new complaints review process and the automatic
refund of complex fees for SME customers in GRG.
In
2016, the Group booked additional provisions of £362 million
with respect to payment protection insurance (PPI), resulting in
total provisions made for such matters of £753 million), of
which £242 million had been utilised by 31 December 2016 and
additional future provisions and costs are possible until such time
as the FCA’s consultation on the deadline for PPI is
concluded.
Settlements,
resolutions and outcomes in relation to ongoing legal or regulatory
actions may result in material financial fines or penalties,
non-monetary penalties, restrictions upon or revocation of
regulatory permissions and licences and other collateral
consequences and may prejudice both contractual and legal rights
otherwise available to the Group. The costs of resolving these
legal and regulatory actions could individually or in aggregate
prove to be substantial and monetary penalties and other outcomes
could be materially in excess of provisions, if any, made by the
Group.
New
provisions or increases in existing provisions relating to existing
or future legal or regulatory actions may be substantial and may
have a material adverse effect on the Group’s financial
condition and results of operations as well as its reputation. The
outcome of on-going claims against the Group may give rise to
additional legal claims being asserted against the Group. Adverse
outcomes or resolution of current or future legal or regulatory
actions could result in restrictions or limitations on the
Group’s operations, adversely impact the implementation of
Group’s current transformation programme as well as its
capital position and its ability to meet regulatory capital
adequacy requirements.
The
remediation programmes or commitments which the Group has agreed to
in connection with past settlements or investigations, could
require significant financial costs and personnel investment for
the Group and may result in changes in its operations or product
offerings, and failure to comply with undertakings made by the
Group to its regulators may result in additional measures or
penalties being taken against the Group.
Operational risks are inherent in the Group’s businesses and
these risks are heightened as a result of key strategic and
regulatory initiatives being implemented by the RBS Group and the
Group and against the backdrop of legal and regulatory
changes.
Operational risk is
the risk of loss resulting from inadequate or failed internal
processes, people or systems, or from external events, including
legal risks. The RBS Group and the Group have complex and diverse
operations and operational risk and losses can result from a number
of internal or external factors, including:
●
internal and
external fraud and theft from the RBS Group and the
Group,
●
compromise of the
confidentiality, integrity, or availability of the RBS Group and
the Group’s data, systems and services;
●
failure to identify
or maintain the Group’s key data within the limits of the RBS
Group’s agreed risk appetite;
●
failure of the RBS
Group or the Group’s technology services due to loss of data,
systems or data centre failure or failure by third parties to
restore services;
●
failure to
appropriately or accurately manage the RBS Group or the
Group’s operations, transactions or security;
●
incorrect
specification of models used by the RBS Group or the Group,
implementing or using such models incorrectly;
●
failure to
effectively execute or deliver the RBS Group’s transformation
programme;
●
failure to attract,
retain or engage staff;
●
insufficient
resources to deliver change and business-as-usual
activity;
●
decreasing employee
engagement or failure by the RBS Group or the Group to embed new
ways of working and values; or
●
incomplete,
inaccurate or untimely statutory, regulatory or management
reporting.
Operational risks
for the Group are and will continue to be heightened as a result of
the number of initiatives being concurrently implemented by the
Group, including the implementation of the RBS Group’s
transformation programme, its cost-reduction programme, the
implementation of the UK ring-fencing regime and the divestment of
Williams & Glyn. Individually, these initiatives carry
significant execution and delivery risk and such risks are
heightened as their implementation is generally highly correlated
and dependent on the successful implementation of interdependent
initiatives.
Additional information
Risk factors continued
These
initiatives are being delivered against the backdrop of ongoing
cost challenges and increasing legal and regulatory uncertainty and
will put significant pressure on the Group’s ability to
maintain effective internal controls and governance frameworks.
Although the Group has implemented risk controls and loss
mitigation actions and significant resources and planning have been
devoted to mitigate operational risk, it is not possible to be
certain that such actions have been or will be effective in
controlling each of the operational risks faced by the Group.
Ineffective management of operational risks could have a material
adverse effect on the Group’s business, financial condition
and results of operations.
The RBS Group and the Group are exposed to cyberattacks and a
failure to prevent or defend against such attacks could have a
material adverse effect on the Group’s operations, results of
operations or reputation.
The RBS
Group and the Group are subject to cybersecurity attacks which have
regularly targeted financial institutions and corporates as well as
governments and other institutions and have materially increased in
frequency, sophistication and severity in recent years. The RBS
Group and the Group rely on the effectiveness of their internal
policies and associated procedures, IT infrastructure and
capabilities to protect the confidentiality, integrity and
availability of information held on their computer systems,
networks and mobile devices, and on the computer systems, networks
and mobile devices of third parties on whom the RBS Group and the
Group rely.
The RBS
Group and the Group take measures to protect themselves from
attacks designed to prevent the delivery of critical business
processes to its customers. Despite these preventative measures,
the RBS Group’s and the Group’s computer systems,
software, networks and mobile devices, and those of third parties
on whom the RBs Group and the Group rely, are vulnerable to
cyberattacks, sabotage, unauthorised access, computer viruses,
worms or other malicious code, and other events that have a
security impact. Financial institutions, such as the Group, with
complex legacy infrastructure may be even more susceptible to
attack due to the increased number of potential entry points and
weaknesses.
Failure
to protect the RBS Group’s and the Group’s operations
from cyberattacks or to continuously review and update current
processes in response to new threats could result in the loss of
customer data or other sensitive information as well as instances
of denial of service for the Group’s customers. Although the
Group experienced attempted distributed denial of service (DDoS)
attacks in 2016, none of these attacks was successful. During 2015,
the Group experienced a number of DDoS attacks, one of which had a
temporary impact on some of the Bank’s web services, as well
as a smaller number of malware attacks.
The
Bank of England, the FCA and HM Treasury in the UK and regulators,
in the US and in Europe have identified cybersecurity as a systemic
risk to the financial sector and highlighted the need for financial
institutions to improve resilience to cyberattacks and the Group
expects greater regulatory engagement, supervision and enforcement
on cybersecurity in the future. The RBS Group and the Group
continue to participate in initiatives led by the Bank of England
and other regulators designed to test how major firms respond to
significant cyberattacks. The outputs of this exercise and other
regulatory and industry-led initiatives are being incorporated into
the on-going IT priorities and improvement measures of the RBS
Group and the Group.
However, the Group
expects that it and the RBS Group will be the target of continued
attacks in the future and there can be no certainty that the Group
will be able to effectively mitigate the impact of such
attacks.
Any
failure in the RBS Group’s or the Group’s cybersecurity
policies, procedures or capabilities, or cyber-related crime, could
lead to the Group suffering reputational damage and a loss of
customers, regulatory investigations or sanctions being imposed and
could have a material adverse effect on the Group’s results
of operations, financial condition or prospects.
The Group’s business and results of operations may be
adversely affected by increasing competitive pressures and
technology disruption in the markets in which it
operates.
The
markets for UK financial services, and the other markets within
which the Group operates, are very competitive, and management
expects such competition to continue or intensify in response to
customer behaviour, technological changes (including the growth of
digital banking), competitor behaviour, new entrants to the market
(including non-traditional financial services providers such as
large retail or technology conglomerates), new lending models (such
as peer-to-peer lending), industry trends resulting in increased
disaggregation or unbundling of financial services or conversely
the re-intermediation of traditional banking services, and the
impact of regulatory actions and other factors.
In
particular, developments in the financial sector resulting from new
banking, lending and payment solutions offered by rapidly evolving
incumbents, challengers and new entrants, in particular with
respect to payment services and products, and the introduction of
disruptive technology may impede the Group’s ability to grow
or retain its market share and impact its revenues and
profitability, particularly in its key UK retail banking segment.
These trends may be catalysed by regulatory and competition policy
implemented by the UK government, particularly as a result of the
Open Banking initiative and remedies imposed by the Competition and
Markets Authority (CMA) designed to support the objectives of this
initiative.
Increasingly many
of the products and services offered by the Group are, and will
become, technology intensive and the Group’s ability to
develop such services has become increasingly important to
retaining and growing the Group’s customer business in the
UK.
Additional information
Risk factors continued
There
can be no certainty that the Group’s investment in its IT
capability intended to address the material increase in customer
use of online and mobile technology for banking will be successful
or that it will allow the Group to continue to grow such services
in the future. Certain of the Group’s current or future
competitors may have more efficient operations, including better IT
systems allowing them to implement innovative technologies for
delivering services to their customers.
Furthermore, the
Group’s competitors may be better able to attract and retain
customers and key employees and may have access to lower cost
funding and/or be able to attract deposits on more favourable terms
than the Group.
Although the Group
invests in new technologies and participates in industry and
research led initiatives aimed at developing new technologies, such
investments may be insufficient, especially against a backdrop of
cost savings targets for the Group, or the Group may fail to
identify future opportunities or derive benefits from disruptive
technologies. If the Group is unable to offer competitive,
attractive and innovative products that are also profitable, it
will lose market share, incur losses on some or all of its
activities and lose opportunities for growth.
In
addition, recent and future disposals and restructurings relating
to the implementation of non-customer facing elements of the RBS
Group’s transformation programme and the UK ring-fencing
regime, or required by the Group’s regulators, as well as
constraints imposed on the Group’s ability to compensate its
employees at the same level as its competitors, may also have an
impact on its ability to compete effectively. Intensified
competition from incumbents, challengers and new entrants in the
Group’s core markets could lead to greater pressure on the
Group to maintain returns and may lead to unsustainable growth
decisions.
These
and other changes in the Group’s competitive environment
could have a material adverse effect on the Group’s business,
margins, profitability, financial condition and
prospects.
The RBS Group and the Group operate in markets that are subject to
intense scrutiny by the competition authorities and their
businesses and results of operations could be materially affected
by competition rulings and other government measures.
The
competitive landscape for banks and other financial institutions in
the UK and the rest of Europe is changing rapidly. Recent
regulatory and legal changes have and may continue to result in new
market participants and changed competitive dynamics in certain key
areas, such as in retail and SME banking in the UK where the
introduction of new entrants is being actively encouraged by the UK
Government. The competitive landscape in the UK is also likely to
be affected by the UK Government’s implementation of the UK
ring-fencing regime and other customer protection measures
introduced by the Banking Reform Act 2013.
The
implementation of these reforms may result in the consolidation of
newly separated businesses or assets of certain financial
institutions with those of other parties to realise new synergies
or protect their competitive position and is likely to increase
competitive pressures on the Group.
The UK
retail banking sector has been subjected to intense scrutiny by the
UK competition authorities and by other bodies, including the FCA,
in recent years, including with a number of reviews/inquiries being
carried out, including market reviews conducted by the CMA and its
predecessor the Office of Fair Trading regarding SME banking and
Personal Current Accounts (PCAs), the Independent Commission on
Banking and the Parliamentary Commission on Banking
Standards.
These
reviews raised significant concerns about the effectiveness of
competition in the banking sector. The CMA’s Retail Banking
Market Investigation report sets out measures primarily intended to
make it easier for consumers and businesses to compare PCA and SME
bank products, increase the transparency of price comparison
between banks and amend PCA overdraft charging.
The CMA
is working with HM Treasury and other regulators to implement these
remedies which are likely to impose additional compliance
requirements on the RBS Group and the Group and could, in
aggregate, adversely impact the Group’s competitive position,
product offering and revenues.
Adverse
findings resulting from current or future competition
investigations may result in the imposition of reforms or remedies
which may impact the competitive landscape in which the RBS Group
and the Group operate or result in restrictions on mergers and
consolidations within the UK financial sector. The impact of any
such developments in the UK will become more significant as the
Group’s business becomes increasingly concentrated in the UK
retail sector. These and other changes to the competitive framework
in which the RBS Group and the Group operate could have a material
adverse effect on the Group’s business, margins,
profitability, financial condition and prospects.
Additional information
Risk factors continued
The RBS Group and the Group rely on valuation, capital and stress
test models to conduct their business, assess their risk exposure
and anticipate capital and funding requirements. Failure of these
models to provide accurate results or accurately reflect changes in
the micro-and macroeconomic environment in which the RBS Group and
the Group operate or findings of deficiencies by the Group’s
regulators resulting in increased regulatory capital requirements
could have a material adverse effect on the Group’s business,
capital and results.
Given
the complexity of the RBS Group and the Group’s business,
strategy and capital requirements, the Group relies on analytical
models to manage its business, assess the value of its assets and
its risk exposure and anticipate capital and funding requirements,
including with stress testing.
Valuation, capital
and stress test models and the parameters and assumptions on which
they are based, need to be periodically reviewed and updated to
maximise their accuracy.
Failure
of these models to accurately reflect changes in the environment in
which the Group operates, or to be updated in line with changes in
the RBS Group’s or the Group’s business model or
operations, or the failure to properly input any such changes could
have an adverse impact on the modelled results or could fail to
accurately capture the Group’s risk exposure, the risk
profile of the Group’s financial instruments or result in the
Group being required to hold additional capital as a function of
the PRA buffer. The Group also uses valuation models that rely on
market data inputs.
If
incorrect market data is input into a valuation model, it may
result in incorrect valuations or valuations different to those
which were predicted and used by the Group in its forecasts or
decision making. Internal stress test models may also rely on
different, less severe, assumptions or take into account different
data points than those defined by the Group’s
regulators.
Some of
the analytical models used by the Group are predictive in nature.
In addition, a number of the internal models used by the Group are
designed, managed and analysed by the RBS Group and may
inappropriately capture the risks and exposures relating to the
Group’s portfolios.
Some of
the Group’s internal models are subject to periodic review by
its regulators and, if found deficient, the Group may be required
to make changes to such models or may be precluded from using any
such models, which would result in an additional capital
requirement that could have a material impact on the Group’s
capital position.
The
Group could face adverse consequences as a result of decisions
which may lead to actions by management based on models that are
poorly developed, implemented or used, or as a result of the
modelled outcome being misunderstood or such information being used
for purposes for which it was not designed. Risks arising from the
use of models could have a material adverse effect on the
Group’s business, financial condition and/or results of
operations, minimum capital requirements and
reputation.
The reported results of the Group are sensitive to the accounting
policies, assumptions and estimates that underlie the preparation
of its financial statements. Its results in future periods may be
affected by changes to applicable accounting rules and
standards.
The
preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the reported
amounts of assets, liabilities, income and expenses. Due to the
inherent uncertainty in making estimates, results reported in
future periods may reflect amounts which differ from those
estimates.
Estimates,
judgements and assumptions take into account historical experience
and other factors, including market practice and expectations of
future events that are believed to be reasonable under the
circumstances.
The
accounting policies deemed critical to the Group’s results
and financial position, based upon materiality and significant
judgements and estimates, include provisions for liabilities,
deferred tax, loan impairment provisions, fair value of financial
instruments, which are discussed in detail in “Critical
accounting policies and key sources of estimation
uncertainty” on pages 110 to 112 of the 2016 Annual Report
and Accounts. IFRS Standards and Interpretations that have been
issued by the International Accounting Standards Board (the IASB)
but which have not yet been adopted by the Group are discussed in
“Accounting developments” on pages 112 to 116 of the
Annual Report and Accounts.
Changes
in accounting standards or guidance by internal accounting bodies
or in the timing of their implementation, whether mandatory or as a
result of recommended disclosure relating to the future
implementation of such standards could result in the Group having
to recognise additional liabilities on its balance sheet, or in
further write-downs or impairments and could also significantly
impact the financial results, condition and prospects of the
Group.
In July
2014, the IASB published a new accounting standard for financial
instruments (IFRS 9) effective for annual periods beginning on or
after 1 January 2018. It introduces a new framework for the
recognition and measurement of credit impairment, based on expected
credit losses, rather than the incurred loss model currently
applied under IAS 39.
Additional information
Risk factors continued
The
inclusion of loss allowances with respect to all financial assets
that are not recorded at fair value will tend to result in an
increase in overall impairment balances when compared with the
existing basis of measurement under IAS 39. As a result of ongoing
regulatory consultations, there is currently uncertainty as to the
impact of the implementation of this standard on the RBS
Group’s and the Group’s CET1 capital (and therefore
CET1 ratio), although it is expected that this will result in
increased earnings and capital volatility for the RBS Group and the
Group.
The
valuation of financial instruments, including derivatives, measured
at fair value can be subjective, in particular where models are
used which include unobservable inputs.
Generally, to
establish the fair value of these instruments, the Group relies on
quoted market prices or, where the market for a financial
instrument is not sufficiently active, internal valuation models
that utilise observable market data. In certain circumstances, the
data for individual financial instruments or classes of financial
instruments utilised by such valuation models may not be available
or may become unavailable due to prevailing market
conditions.
In such
circumstances, the Group’s internal valuation models require
the Group to make assumptions, judgements and estimates to
establish fair value, which are complex and often relate to matters
that are inherently uncertain. Resulting changes in the fair values
of the financial instruments has had and could continue to have a
material adverse effect on the Group’s earnings, financial
condition and capital position.
The Group’s business performance and financial position could
be adversely affected if its or the RBS Group’s capital is
not managed effectively or if it or the RBS Group are unable to
meet their capital targets.
Effective
management of the RBS Group’s and the Group’s capital
is critical to their ability to operate their businesses, comply
with regulatory obligations and pursue the RBS Group’s
strategy of returning to standalone strength, resume dividend
payments on its ordinary shares and maintain discretionary
payments.
The RBS
Group and the Group (on a standalone basis) are required by
regulators in the UK, the EU and other jurisdictions in which they
undertake regulated activities to maintain adequate capital
resources. Adequate capital also gives the RBS Group and the Group
financial flexibility in the face of continuing turbulence and
uncertainty in the global economy and specifically in its core UK
and European markets.
The RBS
Group currently targets a CET1 ratio at or above 13% throughout the
period until completion of the implementation of its restructuring.
On a fully loaded basis, the RBS Group’s and the
Group’s CET1 ratio were 13.4% and 16.1%, respectively, at 31
December 2016, compared with 15.5% and 11.6%, respectively, at 31
December 2015.
The RBS
Group’s target capital ratio for the RBS Group and the RBS
Group entities, including the Group and the Bank, is based on its
expected regulatory requirements and internal modelling, including
stress scenarios. However, the ability of the RBS Group or the
Group to achieve such targets depends on a number of factors,
including the implementation of the RBS Group’s
transformation programme and any of the factors described
below.
A
shortage of capital, which could in turn affect the Group’s
capital ratio, could arise from:
●
a depletion of the
RBS Group’s or the Group’s capital resources through
increased costs or liabilities (including pension, conduct and
litigation costs), reduced profits or increased losses (which would
in turn impact retained earnings), sustained periods of low or
lower interest rates, reduced asset values resulting in write-downs
or impairments or accounting charges;
●
an increase in the
amount of capital that is required to meet the Group’s
regulatory requirements, including as a result of changes to the
actual level of risk faced by the RBS Group, factors influencing
the RBS Group’s regulator’s determination of the
firm-specific Pillar 2B buffer applicable to the RBS Group (PRA
buffer), changes in the minimum levels of capital or liquidity
required by legislation or by the regulatory authorities or the
calibration of capital or leverage buffers applicable to the RBS
Group or the Group, including countercyclical buffers, increases in
risk-weighted assets or in the risk weighting of existing asset
classes or an increase in the RBS Group’s view of any
management buffer it needs, taking account of, for example, the
capital levels or capital targets of the RBS Group’s peer
banks and criteria set by the credit rating agencies.
In
addition, the RBS Group’s capital requirements, determined
either as a result of regulatory requirements, including in light
of the implementation of the UK ring-fencing regime and the
establishment of the RFB (of which the Group will form part) or
management targets, may impact the level of capital required to be
held by the Group and as part of its capital management strategy,
the RBS Group may decide to impose higher capital levels to be held
by the Bank or the Group.
The RBS
Group’s and the Group’s current capital strategy is
based on the expected accumulation of additional capital through
the accrual of profits over time and/or through the planned
reduction of its risk-weighted assets through disposals or natural
attrition, the execution of which is subject to operational and
market risks.
Additional information
Risk factors continued
Further
losses or a failure to meet profitability targets or reduce
risk-weighted assets in accordance with or within the timeline
contemplated by the RBS Group’s capital plan, a depletion of
its capital resources, earnings and capital volatility resulting
from the implementation of IFRS 9 as of 1 January 2018, or an
increase in the amount of capital it needs to hold (including as a
result of the reasons described above), would adversely impact the
Group’s ability to meet its capital targets or requirements
and achieve its capital strategy during the restructuring
period.
If the
RBS Group or the Group are determined to have a shortage of capital
as a result of any of the circumstances described above, the RBS
Group may suffer a loss of confidence in the market with the result
that access to liquidity and funding may become constrained or more
expensive or may result in the RBS Group being subject to
regulatory interventions and sanctions.
The RBS
Group’s regulators may also request that the RBS Group carry
out certain capital reconstruction management actions which may
impact the Group or, in an extreme scenario, this may also trigger
the implementation of the RBS Group’s recovery
plans.
Such
actions, in turn, may affect the RBS Group’s product
offering, capacity to pay future dividends and make other
distributions (including discretionary coupons on capital
instruments) or adversely impact the RBS Group’s or the
Group’s ability to pursue strategic opportunities, affecting
the underlying profitability of the Group and future growth
potential.
If, in
response to such shortage, certain regulatory capital instruments
are converted into equity or the RBS Group raises additional
capital through the issuance of share capital or regulatory capital
instruments, existing RBSG shareholders may experience a dilution
of their holdings. The success of such issuances will also be
dependent on favourable market conditions and the RBS Group may not
be able to raise the amount of capital required or on satisfactory
terms.
Separately, the RBS
Group may address a shortage of capital by taking action to reduce
leverage and/or risk-weighted assets, by modifying the RBS
Group’s legal entity structure or by asset or business
disposals. Such actions may affect the underlying profitability of
the RBS Group and/or the Group.
Failure by the RBS Group or the Group to comply with regulatory
capital and leverage requirements may result in intervention by
their regulators and loss of investor confidence, and may have a
material adverse effect on the Group’s results of operations,
financial condition and reputation.
The RBS
Group and, where applicable RBS Group entities, including the
Group, are subject to extensive regulatory supervision in relation
to the levels and quality of capital they must hold, including as a
result of the transposition of the Basel Committee on Banking
Supervision’s regulatory capital framework (Basel III) in
Europe by a Directive and Regulation (collectively known as
“CRD IV”).
In
addition, the RBS Group is currently identified as a global
systemically important bank (G-SIB) by the Financial Stability
Board (FSB) and is therefore subject to more intensive oversight
and supervision by its regulators as well as additional capital
requirements, although the RBS Group belongs to the last
“bucket” of the FSB G-SIB list and is therefore subject
to the lowest level of additional loss-absorbing capital
requirements. As the RBS Group reduces its global footprint and its
balance sheet, the FSB may, at its discretion, determine that the
RBS Group is no longer a G-SIB.
Each
business within the RBS Group is subject to performance metrics
which factor in underlying regulatory capital requirements set
Individual Capital Guidance for the RBS Group and the Bank to
ensure that business capital targets and generation are aligned to
the RBS Group’s overall risk appetite.
Under
CRD IV, the RBS Group is required, on a consolidated basis, to hold
at all times a minimum amount of regulatory capital calculated as a
percentage of risk-weighted assets (Pillar 1
requirement).
CRD IV
also introduced a number of new capital buffers that are in
addition to the Pillar 1 and Pillar 2A requirements (as described
below) that must be met with CET1 capital.
The
combination of the capital conservation buffer (which, subject to
transitional provisions, will be set at 2.5% from 2019), the
countercyclical capital buffer (of up to 2.5% which is currently
set at 0% by the FPC for UK banks) and the higher of (depending on
the institution) the systemic risk buffer, the global systemically
important institutions buffer (G-SIB Buffer) and the other
systemically important institutions buffer, is referred to as the
“combined buffer requirement”. These rules entered into
force on 1 May 2014 for the countercyclical capital buffer and on 1
January 2016 for the capital conservation buffer and the G-SIB
Buffer. The G-SIB Buffer is currently set at 1.0% for the RBS Group
(from 1 January 2017) and is being phased in over the period to 1
January 2019. The systemic risk buffer will be applicable from 1
January 2019. The Bank of England’s Financial Policy
Committee (the “FPC”) was responsible for setting the
framework for the systemic risk buffer and the PRA adopted in
December 2016 a final statement of policy implementing the
FPC’s framework.
In
early 2019, the PRA is expected to determine which institutions the
systemic risk buffer should apply to, and if so, how large the
buffer should be up to a maximum of 3% of a firm’s
risk-weighted assets. The systemic risk buffer will apply to
ring-fenced entities only and not all entities within a banking
group.
Additional information
Risk factors continued
The
systemic risk buffer is part of the UK framework for identifying
and setting higher capital buffers for domestic systemically
important banks, which are groups that, upon distress or failure,
could have an important impact on their domestic financial
systems.
The
Group expects that it may be subject to the systemic risk buffer.
This follows on the 2012 framework recommendations by the FSB that
national authorities should identify D-SIBs and take measures to
reduce the probability and impact of the distress or failure of
D-SIBs.
In
addition, national supervisory authorities may add extra capital
requirements (the “Pillar 2A requirements”) to cover
risks that they believe are not covered or insufficiently covered
by Pillar 1 requirements.
The RBS
Group’s current Pillar 2A requirement set by the PRA is set
at an equivalent of 3.8% of risk-weighted assets. The PRA has also
introduced a firm specific PRA buffer which is a forward-looking
requirement set annually and based on various factors including
firm-specific stress test results and credible recovery and
resolution planning and is to be met with CET1 capital (in addition
to any CET1 capital used to meet any Pillar 1 or Pillar 2A
requirements).
Where
appropriate, the PRA may require an increase in an
institution’s PRA buffer to reflect additional capital
required to be held to mitigate the risk of additional losses that
could be incurred as a result of risk management and governance
weaknesses, including with respect to the effectiveness of the
internal stress testing framework and control environment. UK banks
are required to meet the higher of the combined buffer requirement
or PRA buffer requirement.
In
addition to capital requirements and buffers, the regulatory
framework adopted under CRD IV, as transposed in the UK, sets out
minimum leverage ratio requirements for financial institutions,
namely: (i) a minimum leverage requirement of 3% which applies to
major UK banks, (ii) an additional leverage ratio to be met by
G-SIBs and ring-fenced institutions to be calibrated at 35% of the
relevant firm’s capital G-SIB Buffer or systemic risk buffer
and which is being phased in from 2016 (currently set at 0.175%
from 1 January 2017) and (iii) a countercyclical leverage ratio
buffer for all firms subject to the minimum leverage ratio
requirements which is calibrated at 35% of a firm’s
countercyclical capital buffer.
Further
changes may be made to the current leverage ratio framework as a
result of future regulatory reforms, including FSB proposals and
proposed amendments to the CRD IV proposed by the European
Commission in November 2016.
Most of
the capital requirements which apply or will apply to the RBS Group
or to the Group (directly or indirectly as a result of RBS Group
internal capital management) will need to be met in whole or in
part with CET1 capital. CET1 capital broadly comprises retained
earnings and equity instruments, including ordinary shares. As a
result, the RBS Group’s ability meet applicable CET1 capital
requirements is dependent on organic generation of CET1 through
profitability and/or the RBS Group’s ability to issue
ordinary shares, and there is no guarantee that the RBS Group may
be able to generate CET1 capital through either of these
alternatives.
The
amount of regulatory capital required to meet the RBS Group’s
regulatory capital requirements (and any additional management
buffer), is determined by reference to the amount of risk-weighted
assets held by the RBS Group.
The
models and methodologies used to calculate applicable
risk-weightings are a combination of individual models, subject to
regulatory permissions, and more standardised approaches. The rules
are applicable to the calculation of the RBS Group’s
risk-weighted assets are subject to regulatory changes which may
impact the levels of regulatory capital required to be met by the
RBS Group.
The
Basel Committee and other agencies remain focused on changes that
will increase, or recalibrate, measures of risk-weighted assets as
the key measure of the different categories of risk in the
denominator of the risk-based capital ratio. While they are at
different stages of maturity, a number of initiatives across risk
types and business lines are in progress that are expected to
impact the calculation of risk-weighted assets. The Basel Committee
is currently consulting on new rules relating to the risk weighting
of real estate exposures and other changes to risk-weighting
calculations, including proposals to introduce floors for the
calculation of risk-weighted assets, which could directly affect
the calculation of capital ratios. However, given recent delays,
the timing and outcome of the consultation is now increasingly
uncertain. In the UK, the PRA is also considering ways of reducing
the sensitivity of UK mortgage risk weights to economic conditions.
The Basel Committee is also consulting on a revised standardised
measurement approach for operational risk.
Certain
EU officials have raised concerns in relation to the new proposed
rules and there is therefore uncertainty as to the way in which the
FSB’s proposals would be implemented in the EU. The new
approach for operational risk would replace the three existing
standardised approaches for calculating operational risk, as well
as the internal model-based approach.
The
proposed new methodology combines a financial statement-based
measure of operational risk, with an individual firm’s past
operational losses.
While
the quantum of impact of these reforms remains uncertain owing to
lack of clarity of the proposed changes and the timing of their
introduction, the implementation of such initiatives may result in
higher levels of risk-weighted assets and therefore higher levels
of capital, and in particular CET1 capital, required to be held by
the RBS Group or the Group under Pillar 1
requirements.
Additional information
Risk factors continued
Such
requirements would be separate from any further capital overlays
required to be held as part of the PRA’s determination of the
RBS Group’s Pillar 2A or PRA buffer requirements with respect
to such exposures.
Although the above
provides an overview of the capital and leverage requirements
currently applicable to the RBS Group and the Group, such
requirements are subject to ongoing amendments and revisions,
including as a result of final rules and recommendations adopted by
the FSB or by European or UK regulators.
In
particular, on 23 November 2016, the European Commission published
a comprehensive package of reforms including proposed amendments to
CRD IV and the EU Bank Recovery and Resolution Directive (the
“BRRD”). Although such proposals are currently being
considered and discussed among the European Commission, the
European Parliament and the European Council and their final form
and the timetable for their implementation are not known, such
amendments may result in increased or more stringent requirements
applying to the RBS Group or its subsidiaries (including the
Group).
This
uncertainty is compounded by the UK’s decision to leave the
EU following the outcome of the EU Referendum which may result in
further changes to the prudential and regulatory framework
applicable to the RBS Group and the Group.
If the
RBS Group is unable to raise the requisite amount of regulatory
capital (including loss absorbing capital), or if the RBS Group or
the Group otherwise fail to meet regulatory capital and leverage
requirements, they may be exposed to increased regulatory
supervision or sanctions, loss of investor or customer confidence,
restrictions on distributions or they may be required to reduce
further the amount of their risk-weighted assets or total assets
and engage in the disposal of core and other non-core businesses,
including businesses within the Group, which may not occur on a
timely basis or achieve prices which would otherwise be attractive
to the RBS Group or the Group. A breach of the RBS Group’s
applicable capital or leverage requirements may also trigger the
application of the RBS Group’s recovery plan to remediate a
deficient capital position. Any of these developments, including
the failure by the RBS Group to meet its regulatory capital and
leverage requirements, may have a material adverse impact on the
Group’s capital position, operations, reputation or
prospects.
The RBS Group is subject to stress tests mandated by its regulators
in the UK and in Europe which may result in additional capital
requirements or management actions which, in turn, may impact the
RBS Group’s and the Group’s financial condition,
results of operations and investor confidence or result in
restrictions on distributions.
The RBS
Group is subject to annual stress tests by its regulator in the UK
and also subject to stress tests by the European regulators with
respect to RBSG, RBS NV and Ulster Bank. Stress tests provide an
estimate of the amount of capital banks might deplete in a
hypothetical stress scenario. In addition, if the stress tests
reveal that a bank’s existing regulatory capital buffers are
not sufficient to absorb the impact of the stress, it is possible
that it will need to take action to strengthen its capital
position.
There
is a strong expectation that the PRA would require a bank to take
action if, at any point during the stress, a bank were projected to
breach any of its minimum CET1 capital or leverage ratio
requirements. However, if a bank is projected to fail to meet its
systemic buffers, it will still be expected to strengthen its
capital position over time but the supervisory response is expected
to be less intensive than if it were projected to breach its
minimum capital requirements.
The PRA
will also use the annual stress test results to inform its
determination of whether individual banks’ current capital
positions are adequate or need strengthening.
For
some banks, their individual stress-test results might imply that
the capital conservation buffer and countercyclical rates set for
all banks is not consistent with the impact of the stress on them.
In that case, the PRA can increase regulatory capital buffers for
individual banks by adjusting their PRA buffers.
Under
the 2016 Bank of England stress tests, which were based on the
balance sheet of the RBS Group for the year ended 31 December 2015,
the RBS Group did not meet its CET1 capital or Tier 1 leverage
hurdle rates before additional tier 1 conversion. After additional
tier 1 conversion, it did not meet its CET1 systemic reference
point or Tier 1 leverage ratio hurdle rate. In light of the stress
test results the RBS Group agreed a revised capital plan with the
PRA to improve its stress resilience in light of the various
challenges and uncertainties facing both the RBS Group and the
wider economy highlighted by the concurrent stress testing
process.
As part
of this revised capital plan, the RBS Group intends to execute an
array of capital management actions to supplement organic capital
generation from its core franchises and further improve its stress
resilience, including: further decreasing the cost base of the RBS
Group; further reductions in risk-weighted assets across the RBS
Group; further run-down and sale of other non-core loan portfolios
in relation to the personal and commercial franchises; and the
management of undrawn facilities in 2017. Additional management
actions may be required by the PRA until the RBS Group’s
balance sheet is sufficiently resilient to meet the
regulator’s stressed scenarios.
Additional information
Risk factors continued
In
addition, such actions may have an adverse impact on the Group as
they may result in the divestment of assets, portfolios or
businesses currently within the Group and the resulting loss in
revenue could adversely impact the Group’s financial
condition, results of operations and future prospects.
Consistent with the
approach set out in the 2015, the 2017 Bank of England stress test
will, for the first time, test the resilience of the system, and
individual banks within it, against two stress
scenarios.
In
addition to the annual cyclical scenario, there will be an
additional ‘exploratory’ scenario that will be tested
for the first time in 2017. This will allow the Bank of England to
assess the resilience of the system, and the individual banks
within it, to a wider range of potential threats, including weak
global supply growth, persistently low interest rates, and a
continuation of declines in both world trade relative to GDP and
cross-border banking activity.
If the
RBS Group were to fail under either of these scenarios, it may be
required to take further action to strengthen its capital position,
including further actions which may adversely impact the
Group.
In
addition, the introduction of IFRS 9, effective for annual periods
beginning on or after 1 January 2018, is expected to result in
capital volatility for the Group, which in turn could have an
impact on the Group’s ability to meet its required CET1 ratio
in a stress test scenario.
Failure
by the Group to meet the thresholds set as part of the stress tests
carried out by its regulators in the UK and elsewhere may result in
the Group’s regulators requiring the Group to generate
additional capital, increased supervision and/or regulatory
sanctions, restrictions on capital distributions and loss of
investor confidence, which may impact the Group’s financial
condition, results of operations and future prospects.
As a result of extensive reforms being implemented relating to the
resolution of financial institutions within the UK, the EU and
globally, material additional requirements will arise to ensure
that financial institutions maintain sufficient loss-absorbing
capacity. Such changes to the funding and regulatory capital
framework may require the RBS Group to meet higher capital levels
than anticipated within the RBS Group’s strategic plans and
affect the RBS Group’s and the Group’s funding
costs.
In
addition to the prudential requirements applicable under CRD IV,
the BRRD introduces, among other things, a requirement for banks to
maintain at all times a sufficient aggregate amount of own funds
and “eligible liabilities” (that is, liabilities that
can absorb loss and assist in recapitalising a firm in accordance
with a predetermined resolution strategy), known as the minimum
requirements for own funds and eligible liabilities (MREL),
designed to ensure that the resolution of a financial institution
may be carried out, without public funds being exposed to the risk
of loss and in a way which ensures the continuity of critical
economic functions, maintains financial stability and protects
depositors.
In
November 2015, the FSB published a final term sheet setting out its
total loss-absorbing capacity (TLAC) standards for G-SIBs. The EBA
was mandated to assess the implementation of MREL in the EU and the
consistency of MREL with the final TLAC standards and published an
interim report setting out the conclusions of its review in July
2016 and its final report in December 2016.
On the
basis of the EBA’s work and its own assessment of CRD IV and
the BRRD, the European Commission published in November 2016 a
comprehensive set of proposals, seeking to make certain amendments
to the existing MREL framework. In particular, the proposals make a
number of amendments to the MREL requirements under the BRRD, in
part in order to transpose the FSB’s final TLAC term
sheet.
The UK
government is required to transpose the BRRD's provisions relating
to MREL into law through further secondary legislation. In November
2016, the Bank of England published its final rules setting out its
approach to setting MREL for UK banks.
These
final rules (which were adopted on the basis of the current MREL
framework in force in the EU) do not take into account the European
Commission’s most recent proposals with respect to MREL and
differ in a number of respects. In addition, rules relating to a
number of specific issues under the framework remain to be
implemented, following the publication of further rules by the FSB,
in particular rules on internal MREL requirements, cross holdings
and disclosure requirements are outstanding.
The
Bank of England is responsible for setting the MREL requirements
for each UK bank, building society and certain investment firms in
consultation with the PRA and the FCA, and such requirement will be
set depending on the resolution strategy of the financial
institution. In its final rules, the Bank of England has set out a
staggered compliance timeline for UK banks, including with respect
to those requirements applicable to G-SIBs (including the RBS
Group).
Under
the revised timeline, G-SIBs will be expected to (i) meet the
minimum requirements set out in the FSB’s TLAC term sheet
from 1 January 2019 (i.e. the higher of 16% of risk-weighted assets
or 6% of leverage exposures), and (ii) meet the full MREL
requirements to be phased in from 1 January 2020, with the full
requirements applicable from 2 January 2022 (i.e. for G-SIBs two
times Pillar 1 plus Pillar 2A or the higher of two times the
applicable leverage ratio requirement or 6.75% of leverage
exposures).
Additional information
Risk factors continued
MREL
requirements are expected to be set on consolidated,
sub-consolidated and individual bases, and are in addition to
regulatory capital requirements(so that there can be no double
counting of instruments qualifying for capital
requirements).
In
terms of applying MREL requirements to individual banking group
entities (such as the Bank), the Bank of England will set
individual MRELs for all institutions within a banking group and
may also set individual MRELs for entities that are important from
a resolution perspective on an entity-specific basis. As a result,
the RFB holding entity and the Bank on a solo basis may be required
to meet specific MREL requirements set by the
regulator.
Such
requirements will be required to be met with internal MREL
resources which are subordinated to the operating liabilities of
the entity issuing them and must be capable of being written down
or converted to equity. The Bank of England has indicated that it
expects to align the scope of MREL with the scope of capital
requirements, unless there are compelling reasons to deviate from
this and that it will, on an entity-by-entity basis, consider
whether individual entities within a group could feasibly enter
insolvency upon the resolution of the group as a whole. Where this
is the case those entities may be set an individual MREL equal to
their regulatory minimum capital requirements although the Bank of
England may adjust the internal MREL set for an individual entity
having regard to the consolidated MREL set for the resolution
group.
For
institutions, including the RBS Group, for which bail-in is the
required resolution strategy and which are structured to permit
single point of entry resolution due to their size and systemic
importance, the Bank of England has indicated that in order to
qualify as MREL, eligible liabilities must be issued by the
resolution entity (i.e. the holding company for the RBS Group) and
be structurally subordinated to operating and excluded liabilities
(which include insured deposits, short-term debt, derivatives,
structured notes and tax liabilities).
The
final PRA rules set out a number of liabilities which cannot
qualify as MREL and are therefore “excluded
liabilities”. As a result, senior unsecured issuances by RBSG
will need to be subordinated to the excluded liabilities described
above. The proceeds from such issuances will be transferred
downstream to material operating subsidiaries in the form of
capital or another form of subordinated claim.
In this way,
MREL resources will be “structurally subordinated” to
senior liabilities of operating companies, allowing losses from
operating companies to be transferred to the holding company and
– if necessary – for resolution to occur at the holding
company level, without placing the operating companies into a
resolution process.
The
TLAC standard includes an exemption from this requirement if the
total amount of excluded liabilities on RBSG’s balance sheet
does not exceed 5% of its external TLAC (i.e. the eligible
liabilities RBSG has issued to investors which meet the TLAC
requirements) and the Bank of England has adopted this criterion in
its final rules. If the RBS Group were to fail to comply with this
“clean balance sheet” requirement, it could disqualify
otherwise eligible liabilities from counting towards MREL and
result in the RBS Group breaching its MREL
requirements.
Compliance with
these and other future changes to capital adequacy and
loss-absorbency requirements in the EU and the UK by the relevant
deadline will require the RBS Group to restructure its balance
sheet and issue additional capital compliant with the rules, which
may be costly whilst certain existing Tier 1 and Tier 2 securities
and other senior instruments issued by the RBS Group will cease to
count towards the RBS Group’s loss-absorbing capital for the
purposes of meeting MREL/TLAC requirements. The RBS Group’s
resolution authority can impose an MREL requirement over and above
the regulatory minima and potentially higher than the RBS
Group’s peers, if it has concerns regarding the resolvability
of the RBS Group.
As a
result, the RBS Group may be required to issue additional
loss-absorbing instruments in the form of CET1 capital or
subordinated or senior unsecured debt instruments and may result in
an increased risk of a breach of the RBS Group’s combined
buffer requirement.
There
remain some areas of uncertainty as to how these rules will be
implemented in the UK, the EU and globally and the final
requirements to which the RBS Group will be subject, and the RBS
Group may therefore need to revise its capital plan accordingly.
The European Commission’s recent proposals also include a
proposal seeking to harmonise the priority ranking of unsecured
debt instruments under national insolvency proceedings to
facilitate the implementation of MREL across Europe. This rule is
currently subject to consideration and negotiation by the European
institutions but, to the extent it were to apply to the RBS Group,
it could impact the ranking of current or future senior unsecured
creditors of the RBS Group.
The Group’s borrowing costs and its sources of liquidity
depend significantly on its and the RBS Group’s credit
ratings and, to a lesser extent, on the rating of the UK
Government.
The
credit ratings of the Bank, its principal subsidiaries, as well as
those of RBSG, RBS plc and other RBS Group companies directly
affect the cost of funding and capital instruments issued by the
RBS Group, as well as secondary market liquidity in those
instruments. A number of UK and other European financial
institutions, including RBSG, RBS plc and other RBS Group
companies, have been downgraded multiple times in recent years in
connection with rating methodology changes and credit rating
agencies’ revised outlook relating to regulatory
developments, macroeconomic trends and a financial
institution’s capital position and financial
prospects.
The
senior unsecured long-term and short-term credit ratings of RBSG
are below investment grade by Moody’s, and investment grade
by S&P and Fitch. The senior unsecured long-term and short-term
credit ratings of RBS plc are investment grade by Moody’s,
S&P and Fitch. The outlook for RBSG and RBS plc by
Moody’s is currently positive and is stable for S&P and
Fitch.
Additional information
Risk factors continued
Rating
agencies regularly review the RBS Group entity credit ratings,
including those of RBSG and the Bank, or of certain of RBSG’s
subsidiaries and their ratings of long-term debt are based on a
number of factors, including the Group’s financial strength
as well as factors not within the Group’s control, including
political developments and conditions affecting the financial
services industry generally.
In
particular, the rating agencies may further review the RBSG, Bank
and other Group entity ratings as a result of the implementation of
the UK ring-fencing regime and related reorganisation, pension and
litigation/regulatory investigation risk, including potential fines
relating to investigations relating to legacy conduct issues, and
other macroeconomic and political developments, including in light
of the outcome of the negotiations relating to the shape and timing
of the UK’s exit from the EU.
A
challenging macroeconomic environment, reduced profitability and
greater market uncertainty could negatively impact the
Group’s performance and potentially lead to credit ratings
downgrades which could adversely impact the Group’s funding
or borrowing costs. The ability of the RBS Group or the Group to
access capital markets on acceptable terms and hence their
respective ability to raise the amount of capital and funding
required to meet regulatory requirements and targets, including
those relating to loss-absorbing instruments to be issued by the
RBS Group, could be affected.
Any
further reductions in the long-term or short-term credit ratings of
the Bank or RBSG or of certain of RBSG’s or the Bank’s
subsidiaries, including further downgrades below investment grade,
could increase the funding and borrowing costs or the Group,
require the Group to replace funding lost due to the downgrade,
which may include the loss of customer deposits and may limit the
Group’s access to capital and money markets and trigger
additional collateral or other requirements in derivatives
contracts and other secured funding arrangements or the need to
amend such arrangements, limit the range of counterparties willing
to enter into transactions with the Group or its subsidiaries and
adversely affect its competitive position, all of which could have
a material adverse impact on the earnings, cash flow and financial
condition of the Group. As discussed above, the success of the
implementation of the UK ring-fencing regime and the establishment
of the RFB is in part dependent up the RFB or its material
subsidiaries (including the Bank) obtaining a sustainable credit
rating.
A
failure to obtain such a rating, or any subsequent downgrades to
current ratings may threaten the ability of the RFB or the Bank to
operate on a standalone basis, in particular with respect to its
ability to meet prudential capital requirements.
The
major credit rating agencies downgraded and changed their outlook
to negative on the UK’s sovereign credit rating following the
result of the EU Referendum in June 2016. Any further downgrade in
the UK Government’s credit ratings could adversely affect the
credit ratings of RBS Group companies, including the Bank and may
result in the effects noted above. Further political developments,
including in relation to the UK’s exit from the EU or the
outcome of any further Scottish referendum could negatively impact
the credit ratings of the UK Government and result in a downgrade
of the credit ratings of RBSG and Group entities.
The Group’s ability to
meet its obligations including its funding commitments depends on
the Group’s ability to access sources of liquidity and
funding.
Liquidity risk is
the risk that a bank will be unable to meet its obligations,
including funding commitments, as they fall due. This risk is
inherent in banking operations and can be heightened by a number of
factors, including an over-reliance on a particular source of
wholesale funding (including, for example, short-term and overnight
funding), changes in credit ratings or market-wide phenomena such
as market dislocation and major disasters.
Credit
markets worldwide, including interbank markets, have experienced
severe reductions in liquidity and term funding during prolonged
periods in recent years.
In
2016, although the RBS Group’s and the Group’s overall
liquidity position remained strong, credit markets experienced
elevated volatility and certain European banks, in particular in
the peripheral countries of Spain, Portugal, Greece and Italy,
remained reliant on the ECB as one of their principal sources of
liquidity.
The
Group relies on retail and wholesale deposits to meet a
considerable portion of its funding. The level of deposits may
fluctuate due to factors outside the Group’s control, such as
a loss of confidence (including in other RBS Group entities),
increasing competitive pressures for retail customer deposits or
the repatriation of deposits by foreign wholesale depositors, which
could result in a significant outflow of deposits within a short
period of time. An inability to grow, or any material decrease in,
the Group’s deposits could, particularly if accompanied by
one of the other factors described above, have a material adverse
impact on the Group’s ability to satisfy its liquidity needs.
Increases in the cost of retail deposit funding may impact the
Group’s margins and profitability.
The
implementation of the UK ring-fencing regime may impact the
Group’s funding strategy which is managed centrally by the
RBS Group insofar as the Group also depends on intragroup funding
arrangements entered into with other RBS Group entities. As a
result of the implementation of the UK ring-fencing regime, such
arrangements will be limited and may no longer be permitted if they
are provided to the Group by an RBS Group entity outside the RFB
and as a result the cost of funding may increase for certain Group
entities, including the Bank, which will be required to manage
their own funding and liquidity strategy.
Additional information
Risk factors continued
The RBS
Group is using the Bank of England’s term funding scheme
which was introduced in August 2016, in order to reduce the funding
costs for the RBS Group. Such funding has a short maturity profile
and hence the RBS Group will diversify its sources of
funding.
The
market view of bank credit risk has changed radically as a result
of the financial crisis and banks perceived by the market to be
riskier have had to issue debt at significantly higher costs.
Although conditions have improved, there have been recent periods
where corporate and financial institution counterparties have
reduced their credit exposures to banks and other financial
institutions, limiting the availability of these sources of
funding. The ability of the Bank of England to resolve the RBS
Group in an orderly manner may also increase investors’
perception of risk and hence affect the availability and cost of
funding for the RBS Group.
Any
uncertainty relating to the credit risk of financial institutions
may lead to reductions in levels of interbank lending or may
restrict the Group’s access to traditional sources of funding
or increase the costs or collateral requirements for accessing such
funding.
The RBS
Group and the Group have, at times, been required to rely on
shorter-term and overnight funding with a consequent reduction in
overall liquidity, and to increase recourse to liquidity schemes
provided by central banks. Such schemes require assets to be
pledged as collateral. Changes in asset values or eligibility
criteria can reduce available assets and consequently available
liquidity, particularly during periods of stress when access to the
schemes may be needed most.
In
addition, the RBS Group are subject to certain regulatory
requirements with respect to liquidity coverage, including a
liquidity coverage ratio set by the PRA in the UK. This requirement
is currently being phased in and is set at 90% for the RBS Group
from 1 January 2017 to increase 100% in January 2018 (as required
by the CRR). The PRA may also impose additional liquidity
requirements on the RBS Group to reflect risks not captured in the
leverage coverage ratio by way of Pillar 2 add-ons, which may
increase from time to time and require the RBS Group to obtain
additional funding or diversify its sources of funding. Current
proposals by the FSB and the European Commission also seek to
introduce certain liquidity requirements for financial
institutions, including the introduction of a net stable funding
ratio (NSFR). Under the European Commission November 2016
proposals, the NSFR would be calculated as the ratio of an
institution's available stable funding relative to the required
stable funding it needs over a one-year horizon.
The
NSFR would be expressed as a percentage and set at a minimum level
of 100%, which indicates that an institution holds sufficient
stable funding to meet its funding needs during a one-year period
under both normal and stressed conditions. If an
institution’s NSFR were to fall below the 100% level, the
institution would be required to take the measures laid down in CRD
IV for a timely restoration to the minimum level. Competent
authorities would assess the reasons for non-compliance with the
NSFR requirement before deciding on any potential supervisory
measures. These proposals are currently being considered and
negotiated among the European Commission, the European Parliament
and the European Council and, in light of the UK’s decision
to leave the EU, there is uncertainty as to the extent to which
such rules will apply to the RBS Group due to the expectation that
the NSFR requirements will be published during the UK’s
negotiation of its exit from the EU.
If the
Group is unable to raise funds through deposits or in the capital
markets, its liquidity position could be adversely affected and it
might be unable to meet deposit withdrawals on demand or at their
contractual maturity, to repay borrowings as they mature, to meet
its obligations under committed financing facilities, to comply
with regulatory funding requirements or to fund new loans,
investments and businesses.
The
Group may need to liquidate unencumbered assets to meet its
liabilities, including disposals of assets not previously
identified for disposal to reduce its funding commitments. In a
time of reduced liquidity, the Group may be unable to sell some of
its assets, or may need to sell assets at depressed prices, which
in either case could have a material adverse effect on the
Group’s financial condition and results of
operations.
The Group is subject to pension risks and may be required to make
additional contributions to cover pension funding deficits as a
result of degraded economic conditions or as a result of the
restructuring of its pension schemes in relation to the
implementation of the UK ring-fencing regime.
RBS plc
and its subsidiaries maintain a number of defined benefit pension
schemes for certain former and current employees. Pension risk
includes the risk that the assets of the RBS Group’s various
defined benefit pension schemes do not fully match the timing and
amount of the schemes’ liabilities, as a result of which the
RBS Group and/or RBS plc and subsidiaries are required or choose to
make additional contributions to address deficits that may emerge.
Risk arises from the schemes because the value of the asset
portfolios may be less than expected and because there may be
greater than expected increases in the estimated value of the
schemes’ liabilities and additional future contributions to
the schemes may be required.
The
value of pension scheme liabilities varies with changes to
long-term interest rates (including prolonged periods of low
interest rates as is currently the case), inflation, monetary
policy, pensionable salaries and the longevity of scheme members,
as well as changes in applicable legislation. In particular, as
life expectancies increase, so too will the pension scheme
liabilities; the impact on the pension scheme liabilities due to a
one year increase in longevity would have been expected to be
£1.5 billion as at 31 December 2016.
Additional information
Risk factors continued
Given
economic and financial market difficulties and volatility, the low
interest rate environment and the risk that such conditions may
occur again over the near and medium term, some of the RBS
Group’s pension funds have experienced increased pension
deficits.
The
last triennial valuation of the Main Scheme had an effective date
of 31 December 2015. This valuation was concluded with the
acceleration of the nominal value of all committed contributions in
respect of past service (£4.2 billion), which was paid in Q1
2016.
The
next triennial period valuation will take place in Q4 2018 and the
Main Scheme pension trustee has agreed that it would not seek a new
valuation prior to that date, except where a material change
arises.
The
2018 triennial valuation is expected to result in a significant
increase in the regular annual contributions in respect of the
ongoing accrual of benefits.
Notwithstanding the
2016 accelerated payment and any additional contributions that may
be required beforehand as a result of a material change, the RBS
Group expects to have to agree to additional contributions over and
above the existing committed past service contributions as a result
of the next triennial valuation.
Under
current legislation, such agreement would need to be reached no
later than Q1 2020. The cost of such additional contributions could
be material and any additional contributions that are committed to
the Main Scheme following new actuarial valuations would trigger
the recognition of a significant additional liability on the
Bank’s balance sheet and/or an increase in any pension
surplus derecognised, which in turn could have a material adverse
effect on the Group’s results of operations, financial
position and prospects.
In
addition, the UK ring-fencing regime will require significant
changes to the structure of the RBS Group’s existing defined
benefit pension schemes as RFB entities may not be liable for debts
to pension schemes that might arise as a result of the failure of
an entity that is not an RFB or wholly owned subsidiary thereof
after 1 January 2026. The restructuring of the RBS Group and its
defined benefit pension plans to implement the UK ring-fencing
regime could affect assessments of the RBS Group’s schemes
deficits, or result in the pension scheme trustees considering that
the employer covenant has been weakened, and result in additional
contributions being required.
The RBS
Group is developing a strategy to meet these requirements, which
has been discussed with the PRA and is likely to require the
agreement of the pension scheme trustee. Discussions with the
pension scheme trustee are ongoing and will be influenced by the
RBS Group’s overall ring-fence strategy and its pension
funding and investment strategies.
If
agreement is not reached with the pension trustee, alternative
options less favourable to the RBS Group or the Group may need to
be developed to meet the requirements of the pension regulations.
The costs associated with the restructuring of the RBS
Group’s existing defined benefit pension schemes could be
material and could result in higher levels of additional
contributions than those described above and currently agreed with
the pension trustee which could have a material adverse effect on
the Group’s results of operations, financial position and
prospects.
Pension risk and changes to the RBS Group’s funding of its
pension schemes may have a significant impact on the RBS
Group’s and/or the Group’s capital
position.
The RBS
Group’s capital position is influenced by pension risk in
several respects: Pillar 1 capital is impacted by the requirement
that net pension assets are to be deducted from capital and that
actuarial gains/losses impact reserves and, by extension, CET1
capital; Pillar 2A requirements result in the RBS Group being
required to carry a capital add-on to absorb stress on the pension
fund and finally the risk of additional contributions to the RBS
Group’s pension fund is taken into account in the RBS
Group’s capital framework plan.
Changes
to the RBS Group’s capital position or capital requirements
relating to pension risks, are then reflected in the capital which
the Group is required to hold, in line with the RBS Group’s
capital strategy which requires Group entities, including the
Group, to maintain adequate capital at all times. In addition, an
increase in the pension risk to which the Group is exposed may
result in increased regulatory capital requirements applicable to
the Group.
The
Group believes that the accelerated payment to the Main Scheme
pension fund made in Q1 2016 improved the RBS Group’s and the
Group’s capital planning and resilience through the period to
2019 and provided the Main Scheme pension trustee with more
flexibility over its investment strategy. This payment has resulted
in a reduction in the prevailing Pillar2A add-on. However,
subsequent contributions required in connection with the 2018
triennial valuation may adversely impact the RBS Group’s and
the Group’s capital position.
The RBS
Group’s expectations as to the impact on its capital position
of this payment in the near and medium term and of the accounting
impact under its revised accounting policy are based on a number of
assumptions and estimates, including with respect to the beneficial
impact on its Pillar 2A requirements and confirmation of such
impact by the PRA and the timing thereof, any of which may prove to
be inaccurate (including with respect to the calculation of the
CET1 ratio impact on future periods), including as a result of
factors outside of the RBS Group’s control (which include the
PRA’s approval).
Additional information
Risk factors continued
As a
result, if any of these assumptions proves inaccurate, the RBS
Group’s capital position may significantly deteriorate and
fall below the minimum capital requirements applicable to the RBS
Group or RBS Group entities and in turn result in increased
regulatory supervision or sanctions, restrictions on discretionary
distributions or loss of investor confidence, which could
individually or in aggregate have a material adverse effect on the
RBS Group’s and the Group’s results of operations,
financial prospects or reputation. The impact of the Group’s
pension obligations on its results and operations are also
dependent on the regulatory environment in which it
operates.
There
is a risk that changes in prudential regulation, pension regulation
and accounting standards, or a lack of coordination between such
sets of rules, may make it more challenging for the Group to manage
its pension obligations resulting in an adverse impact on the
Group’s CET1 capital.
The RBS Group has been, and will remain, in a period of major
restructuring through to 2019, which carries significant execution
and operational risks including the risk of not meeting stated
management targets, and the RBS Group (including the Group) may not
be a viable, competitive, customer-focused and profitable banking
group as a result.
Since
early 2015, the RBS Group has been implementing a major
restructuring and transformation programme, articulated around a
strategy focused on the growth of its strategic operations in UK
Personal & Business Banking (PBB) and Commercial & Private
Banking (CPB) and the further restructuring of the NatWest Markets
franchise to focus mainly on UK and Western European corporate and
financial institutions. As part of this programme, the RBS Group
also continues to run-down certain of its operations, businesses
and portfolios in order to reduce risk-weighted assets as well as
the scope and complexity of its activities, including through the
run-down of the higher risk and capital intensive assets in RBS
Capital Resolution. Throughout 2016, the RBS Group stepped up the
run-down of the higher risk and capital intensive assets in RBS
Capital Resolution, reducing risk-weighted assets by £14.2
billion.
Part of
the focus of this transformation programme is to downsize and
simplify the RBS Group and the Group, reduce underlying costs,
strengthen its overall capital position, improve customer
experience and employee engagement, update operational and
technological capabilities, strengthen governance and control
frameworks and better position the RBS Group and the Group for the
implementation of the UK ring-fencing regime by 1 January 2019.
Together, these initiatives are referred to as the RBS
Group’s “transformation programme”.
As part
of its transformation programme, a number of financial, capital,
operational and diversity targets, expectations and trends have
been set by management for the RBS Group and the Group, both for
the short term and throughout the restructuring period. These
include (but are not limited to) expectations relating to the RBS
Group’s and the Group’s return to profitability and the
timing thereof, one-off costs incurred in connection with material
litigation and conduct matters and the timing thereof, expected
grown rates in income, customer loans and advances and volumes and
underlying drivers and trends, cost:income ratio targets,
expectations with respect to reductions in operating costs and
charges as well as impairment charges, disposal losses relating to
Capital Resolution, CET1 ratio targets and expectations regarding
funding plans and requirements expectations with respect to
reductions in risk-weighted assets and the timing thereof,
expectations with respect to employees engagement and diversity
targets.
The
successful implementation of the RBS Group’s transformation
programme and the RBS Group’s ability to meet associated
targets and expectations, are subject to various internal and
external factors and risks, including those described in this risk
factor, the other risk factors included in this section and the
disclosure included in the rest of this document. These include but
are not limited to, market, regulatory, economic and political
uncertainties, developments relating to litigation and regulatory
matters, operational risks, risks relating to the RBS Group’s
and the Group’s business models and strategies and delays or
difficulties in implementing its transformation programme,
including the restructuring of the NatWest Markets franchise, the
implementation of the UK ring-fencing regime and compliance with
the RBS Group’s State Aid obligations. A number of factors
may impact the RBS Group’s ability to maintain its CET1 ratio
target at or over 13% throughout the restructuring period,
including conduct related costs, pension or legacy charges,
accounting impairments or limited organic capital generation
through profits.
In
addition, the run-down of risk-weighted assets may be accompanied
by the recognition of disposal losses which may be higher than
anticipated, including due to a degraded economic environment.
Further regulatory changes may also result in risk-weighted assets
inflation in the medium term.
For a
further discussion of the risks associated with meeting the RBS
Group’s capital targets, see “The Group’s
business performance and financial position could be adversely
affected if its or the RBS Group’s capital is not managed
effectively or if it or the RBS Group are unable to meet their
capital targets.” The RBS Group’s and the Group’s
ability to meet cost:income ratio targets and the planned
reductions in their annual underlying costs (excluding
restructuring and conduct-related charges and remediation costs)
may also be impacted, and the focus on meeting cost reduction
targets may result in limited investment in other areas which could
affect the RBS Group’s or the Group’s long-term product
offering or competitive position.
Additional information
Risk factors continued
Due to
the changed nature of the RBS Group’s and the Group’s
business model, the RBS Group’s and the Group’s
expectations with respect to its return to profitability and the
timing thereof may not be achieved in the timescale envisaged or at
any time. An adverse macroeconomic environment, including sustained
low interest rates, political and regulatory uncertainty, increased
market competition and/or heightened litigation costs may also pose
significant headwinds to the profitability of the RBS Group and the
Group. In addition there can be no certainty that the new business
model defined for the NatWest Markets franchise will result in a
sustainable or profitable business.
More
generally, the targets, expectations and trends which accompany the
RBS Group’s transformation programme are based on management
plans, projections and models and are subject to a number of key
assumptions and judgments any of which may prove to be
inaccurate.
Among
others, the targets, expectations and trends set as part of the RBS
Group’s transformation programme assume that the RBS Group
and the Group will be successful in implementing their business
models and strategies, executing the RBS Group transformation
programme and reducing the complexity of their business and
infrastructure at the same time that they will be implementing
significant structural changes to comply with the regulatory
environment and that they will implement and maintain a robust
control environment and effective culture, including with respect
to risk management.
The RBS
Group may not be able to successfully implement any part of its
transformation programme or reach any of its related targets or
expectations in the time frames contemplated or at all. The RBS
Group’s transformation programme comprises a large number of
concurrent actions and initiatives, any of which could fail to be
implemented due to operational or execution issues. Implementation
of the RBS Group’s transformation programme is expected to
result in significant costs, which could be materially higher than
currently contemplated, including due to material uncertainties and
factors outside of the RBS Group’s control.
In
addition, certain aspects of this transformation programme directly
impact the Group’s business and product offering as it has
resulted in the divestment of a number of its assets and portfolios
as well as a reduction in available funding for the
Group.
Implementing the
RBS Group’s current transformation programme, including the
restructuring of the NatWest Markets franchise, requires further
material changes to be implemented within the RBS Group over the
medium term, concurrent with the implementation of significant
structural changes to comply with the UK ring-fencing regime and
resulting from the RBS Group’s seeking to comply with its
State Aid obligations. This restructuring period will be
disruptive, will increase operational and people risks for the RBS
Group and the Group and will continue to divert management
resources from the conduct of the RBS Group’s and the
Group’s operations and development of their business. The
scale of changes being concurrently implemented has and will
continue to require the implementation and application of robust
governance and controls frameworks. And there is no guarantee that
the RBS Group or the Group will be successful in doing
so.
Due to
changes in the micro and macro-economic and political and
regulatory environment in which it operates, in particular as a
result of the consequences of the EU Referendum, the RBS Group may
also be required to reconsider certain aspects of its current
restructuring programme, or the timeframe for its
implementation.
In
particular, there may be a need to further restructure the RBS
Group’s Western European operations, including for example,
as a result of potential changes in the prudential regulatory
framework for banks and investment banks within the EU or if the
RBS Group is no longer able to rely on the passporting framework
for financial services applicable in the EU. Any such additional
restructuring will be likely to increase operational and people
risks for the RBS Group and the Group.
Due to
the changed nature of the RBS Group’s business model,
previously anticipated levels of revenue and profitability may not
be achieved in the timescale envisaged or at any time. An adverse
macroeconomic environment, including sustained low interest rates,
political and regulatory uncertainty, market competition for
margins and/or heightened litigation costs may also pose
significant headwinds to the profitability of the RBS Group and the
Group.
As a
result, there can be no certainty that the implementation of the
RBS Group’s transformation programme will prove to be a
successful strategy, that the RBS Group will meet its targets and
expectations during the restructuring period or that the
restructured RBS Group will be a viable, competitive,
customer-focused or profitable bank.
Additional information
Risk factors continued
The Group’s businesses are subject to substantial regulation
and oversight. Significant regulatory developments and increased
scrutiny by the Group’s key regulators has had and is likely
to continue to increase compliance and conduct risks and could have
a material adverse effect on how the Group conducts its business
and on its results of operations and financial
condition.
The
Group is subject to extensive laws, regulations, corporate
governance requirements, administrative actions and policies in
each jurisdiction in which it operates. Many of these have been
introduced or amended recently and are subject to further material
changes. Among others, the implementation and strengthening of the
prudential and resolution framework applicable to financial
institutions in the UK, the EU and the US, and future amendments to
such rules, are considerably affecting the regulatory landscape in
which the Group operates and will operate in the future, including
as a result of the adoption of rules relating to the UK
ring-fencing regime, prohibitions on proprietary trading, CRD IV
and the BRRD and certain other measures. Increased regulatory focus
in certain areas, including conduct, consumer protection regimes,
anti-money laundering, payment systems, and antiterrorism laws and
regulations, have resulted in the Group facing greater regulation
and scrutiny in the UK and the other countries in which it
operates.
Recent
regulatory changes, proposed or future developments and heightened
levels of public and regulatory scrutiny in the UK, Europe and the
US have resulted in increased capital, funding and liquidity
requirements, changes in the competitive landscape, changes in
other regulatory requirements and increased operating costs, and
have impacted, and will continue to impact, product offerings and
business models. Such changes may also result in an increased
number of regulatory investigations and proceedings and have
increased the risks relating to the Group’s ability to comply
with the applicable body of rules and regulations in the manner and
within the time frames required.
Such
risks are currently exacerbated by the outcome of the EU Referendum
and the UK’s decision to leave the EU and the unprecedented
degree of uncertainty as to the respective legal and regulatory
frameworks in which the RBS Group and the Group will operate when
the UK is no longer a member of the EU. For example, current
proposed changes to the European prudential regulatory framework
for banks and investment banks may result in additional prudential
or structural requirements being imposed on financial institutions
based outside the EU wishing to provide financial services within
the EU (which may apply to the Group once the UK has formally
exited the EU). See “Changes to the prudential regulatory
framework for banks and investment banks within the EU may require
additional structural changes to the RBS Group’s operations
which may affect current restructuring plans and have a material
adverse effect Group”.
Any of
these developments (including failures to comply with new rules and
regulations) could have a significant impact on how the Group
conducts its business, its authorisations and licences, the
products and services it offers, its reputation and the value of
its assets, the Group’s operations or legal entity structure,
including attendant restructuring costs and consequently have a
material adverse effect on its business, funding costs, results of
operations, financial condition and future prospects.
Areas
in which, and examples of where, governmental policies, regulatory
and accounting changes and increased public and regulatory scrutiny
could have an adverse impact (some of which could be material) on
the Group include, but are not limited to, those set out above as
well as the following:
●
amendments to the
framework or requirements relating to the quality and quantity of
regulatory capital as well as liquidity and leverage requirements
to be met by the RBS Group or the Group, either on a solo,
consolidated or subgroup level (and taking into account the new
legal structure of the RBS Group and the Group following the
implementation of the UK ring-fencing regime), including amendments
to the rules relating to the calculation of risk-weighted assets
and reliance on internal models and credit ratings as well as rules
affecting the eligibility of deferred tax assets;
●
the design and
implementation of national or supranational mandated recovery,
resolution or insolvency regimes or the implementation of
additional or conflicting loss-absorption requirements, including
those mandated under MREL or by the FSB’s recommendations on
TLAC;
●
new or amended
regulations or taxes that reduce profits attributable to
shareholders which may diminish, or restrict, the accumulation of
the distributable reserves or distributable items necessary to make
distributions or coupon payments or limit the circumstances in
which such distributions may be made or the extent
thereof;
●
the monetary,
fiscal, interest rate and other policies of central banks and other
governmental or regulatory bodies;
●
further
investigations, proceedings or fines either against the Group in
isolation or together with other large financial institutions with
respect to market conduct wrongdoing;
●
the imposition of
government-imposed requirements and/or related fines and sanctions
with respect to lending to the UK SME market and larger commercial
and corporate entities;
●
increased
regulatory scrutiny with respect to mortgage lending, including
through the implementation of the UK mortgage market review and
other initiatives led by the Bank of England or European
regulators;
●
additional rules
and regulatory initiatives and review relating to customer
protection, including the FCA’s Treating Customers Fairly
regime and increased focus by regulators on how institutions
conduct business, particularly with regard to the delivery of fair
outcomes for customers and orderly/transparent
markets;
●
the imposition of
additional restrictions on the Group’s ability to compensate
its senior management and other employees and increased
responsibility and liability rules applicable to senior and key
employees;
Additional information
Risk factors continued
●
regulations
relating to, and enforcement of, anti-bribery, anti- money
laundering, anti-terrorism or other similar sanctions
regimes;
●
rules relating to
foreign ownership, expropriation, nationalisation and confiscation
of assets;
●
changes to
financial reporting standards (including accounting standards or
guidance) and guidance or the timing of their
implementation;
●
changes to risk
aggregation and reporting standards;
●
changes to
corporate governance requirements, senior manager responsibility,
corporate structures and conduct of business rules;
●
competition reviews
and investigations relating to the retail banking sector in the UK,
including with respect to SME banking and PCAs;
●
financial market
infrastructure reforms establishing new rules applying to
investment services, short selling, market abuse, derivatives
markets and investment funds, including the European Market
Infrastructure Regulation and the Markets in Financial Instruments
Directive and Regulation in the EU and the Dodd Frank Wall Street
Reform Consumer Protection Act of 2010 in the US;
●
increased attention
to competition and innovation in UK payment systems following the
establishment of the new Payments Systems Regulator and
developments relating to the UK initiative on Open Banking and the
European directive on payment services;
●
new or increased
regulations relating to customer data and privacy protection,
including the EU General Data Protection Regulation; restrictions
on proprietary trading and similar activities within a commercial
bank and/or a group;
●
the introduction
of, and changes to, taxes, levies or fees applicable to the RBS
Group’s or the Group’s operations, such as the
imposition of a financial transaction tax, changes in tax rates,
increases in the bank corporation tax surcharge in the UK,
restrictions on the tax deductibility of interest payments or
further restrictions imposed on the treatment of carry-forward tax
losses that reduce the value of deferred tax assets and require
increased payments of tax;investigations into facilitation of tax
evasion or avoidance or the creation of new civil or criminal
offences relating thereto;
●
the regulation or
endorsement of credit ratings used in the EU (whether issued by
agencies in European member states or in other countries, such as
the US); and
●
other requirements
or policies affecting the Group’s profitability or product
offering, including through the imposition of increased compliance
obligations or obligations which may lead to restrictions on
business growth, product offerings, or pricing.
Changes
in laws, rules or regulations, or in their interpretation or
enforcement, or the implementation of new laws, rules or
regulations, including contradictory laws, rules or regulations by
key regulators in different jurisdictions, or failure by the Group
to comply with such laws, rules and regulations, may have a
material adverse effect on the Group’s business, financial
condition and results of operations. In addition, uncertainty and
lack of international regulatory coordination as enhanced
supervisory standards are developed and implemented may adversely
affect the Group’s ability to engage in effective business,
capital and risk management planning.
The Group’s operations are highly dependent on its and the
RBS Group’s IT systems. A failure of the RBS Group’s or
the Group’s IT systems, including as a result of the lack of
or untimely investments, could adversely affect its operations,
competitive position and investor and customer confidence and
expose the Group to regulatory sanctions.
The RBS
Group’s and the Group’s operations are dependent on the
ability to process a very large number of transactions efficiently
and accurately while complying with applicable laws and regulations
where it does business. The proper functioning of the RBS
Group’s and the Group’s payment systems, financial and
sanctions controls, risk management, credit analysis and reporting,
accounting, customer service and other IT systems, as well as the
communication networks between its branches and main data
processing centres, are critical to the RBS Group’s and the
Group’s operations.
The
vulnerabilities of the RBS Group’s and the Group’s IT
systems are due to their complexity, attributable in part to
overlapping multiple dated systems that result from the RBS
Group’s historical acquisitions and insufficient investment
prior to 2013 to keep the IT applications and infrastructure
up-to-date.
A
complex IT estate containing end-of-life hardware and software
creates challenges in recovering from system breakdowns. IT
failures adversely affect the Group’s relationship with its
customers and reputation and have led, and may in the future, lead
to regulatory investigations and redress.
The
Group experienced a limited number of IT failures in 2016 affecting
customers, although improvements introduced since 2012 allowed the
Group to contain the impact of such failures.
The RBS
Group’s and the Group’s regulators in the UK are
actively surveying progress made by banks in the UK to modernise,
manage and secure their IT infrastructures, in order to prevent
future failures affecting customers. Any critical system failure,
any prolonged loss of service availability or any material breach
of data security could cause serious damage to the Group’s
ability to service its customers, could result in significant
compensation costs or fines resulting from regulatory
investigations and could breach regulations under which the Group
operates. In particular, failures or breaches resulting in the loss
or publication of confidential customer data could cause long-term
damage to the Group’s reputation, business and brands, which
could undermine its ability to attract and keep
customers.
Additional information
Risk factors continued
The RBS
Group is currently implementing a number of complex initiatives,
including its transformation programme, the UK ring-fencing regime
and the restructuring of the NatWest Markets franchise, all which
put additional strains on the RBS Group’s and Group’s
existing IT systems. A failure to safely and timely implement one
or several of these initiatives could lead to disruptions of the
RBS Group’s or the Group’s IT infrastructure and in
turn cause long-term damage to the Group’s reputation,
brands, results of operations and financial position.
The RBS
Group has mad, and will continue to make, considerable investments
in its IT systems to further simplify and upgrade its (including
the Group’s) IT systems and capabilities to make them more
cost-effective and improve controls and procedures, strengthen
cyber security defences, enhance the digital services provided to
bank customers and improve the RBS Group’s and the
Group’s competitive position and address system failures
which adversely affect their relationship with their customers and
reputation and may lead to regulatory investigations and
redress.
However, the RBS
Group’s current focus on cost-saving measures as part of its
transformation programme may impact the resources available to
implement further improvements to the RBS Group’s and/or the
Group’s IT infrastructure or limit the resources available
for investments in technological developments and innovations.
Should such investment and rationalisation initiatives fail to
achieve the expected results, or prove to be insufficient, it could
have a material adverse impact on the Group’s operations, its
ability to retain or grow its customer business or its competitive
position and could negatively impact the Group’s financial
position
The Group’s operations entail inherent reputational
risk.
Reputational risk, meaning the risk of brand damage and/or
financial loss due to a failure to meet stakeholders’
expectations of the Group’s conduct, performance and business
profile, is inherent in the Group’s business. Stakeholders
include customers, investors, rating agencies, employees,
suppliers, governments, politicians, regulators, special interest
groups, consumer groups, media and the general public.
Brand
damage can be detrimental to the business of the Group in a number
of ways, including its ability to build or sustain business
relationships with customers, low staff morale, regulatory censure
or reduced access to, or an increase in the cost of, funding. In
particular, negative public opinion resulting from the actual or
perceived manner in which the Group or any member of the RBS Group
conducts its business activities and operations, including as a
result of speculative or inaccurate media coverage, the
Group’s financial performance, ongoing investigations and
proceedings and the settlement of any such investigations and
proceedings, IT failures or cyber-attacks resulting in the loss or
publication of confidential customer data or other sensitive
information, the level of direct and indirect government support,
or the actual or perceived strength or practices in the banking and
financial industry may adversely affect the Group’s ability
to keep and attract customers and, in particular, corporate and
retail depositors.
Modern
technologies, in particular online social networks and other
broadcast tools which facilitate communication with large audiences
in short time frames and with minimal costs, may also significantly
enhance and accelerate the impact of damaging information and
allegations.
Reputational risks
may also be increased as a result of the restructuring of the RBS
Group to implement its transformation programme and the UK
ring-fencing regime, which could, in turn, have an adverse effect
on the Group.
Although the RBS
Group has implemented a Reputational Risk Policy across
customer-facing businesses (including those of the Group) to
improve the identification, assessment and management of customers,
transactions, products and issues which represent a reputational
risk, the Group cannot ensure that it will be successful in
avoiding damage to its business from reputational risk, which could
result in a material adverse effect on the Group’s business,
financial condition, results of operations and
prospects.
The Group is exposed to conduct risk which may adversely impact the
Group or its employees and may result in conduct having a
detrimental impact on the Group’s customers or
counterparties.
In
recent years, the Group has sought to refocus its culture on
serving the needs of its customers and continues to redesign many
of its systems and processes to promote this focus and
strategy.
However, the Group
is exposed to various forms of conduct risk in its operations.
These include business and strategic planning that does not
consider customers’ needs, ineffective management and
monitoring of products and their distribution, a culture that is
not customer-centric, outsourcing of customer service and product
delivery via third parties that do not have appropriate levels of
control, oversight and culture, the possibility of alleged
mis-selling of financial products or the mishandling of complaints
related to the sale of such products, or poor governance of
incentives and rewards.
Some of
these risks have materialised in the past and ineffective
management and oversight of conduct issues may result in customers
being poorly or unfairly treated and may in the future lead to
further remediation and regulatory
intervention/enforcement.
of
uncertainty and risks as described throughout these risk
factors.
Additional information
Risk factors continued
The
Group’s businesses are also exposed to risks from employee
misconduct including non-compliance with policies and regulatory
rules, negligence or fraud, any of which could result in regulatory
sanctions and serious reputational or financial harm to the RBS
Group and the Group. In recent years, a number of multinational
financial institutions, including entities within the RBS Group,
have suffered material losses due to the actions of employees and
the Group may not succeed in protecting itself from such conduct in
the future.
It is
not always possible to deter employee misconduct and the
precautions the Group takes to prevent and detect this activity may
not always be effective.
The
Group has implemented a number of policies and allocated new
resources in order to help mitigate against these risks. The Group
has also prioritised initiatives to reinforce good conduct in its
engagement with the markets in which it operates, together with the
development of preventative and detective controls in order to
positively influence behaviour. The Group’s transformation
programme is also intended to improve the Group’s control
environment. Nonetheless, no assurance can be given that the
Group’s strategy and control framework will be effective and
that conduct issues will not have an adverse effect on the
Group’s results of operations, financial condition or
prospects.
The RBS Group and Group may be adversely impacted if their risk
management is not effective and there may be significant challenges
in maintaining the effectiveness of the Group’s risk
management framework as a result of the number of strategic and
restructuring initiatives being carried out by the RBS Group
simultaneously.
The
management of risk is an integral part of all of the Group’s
activities. Risk management includes the definition and monitoring
of the RBS Group’s risk appetite and reporting of the RBS
Group’s and the Group’s exposure to uncertainty and the
consequent adverse effect on profitability or financial condition
arising from different sources Ineffective risk management may
arise from a wide variety of events and behaviours, including lack
of transparency or incomplete risk reporting, unidentified
conflicts or misaligned incentives, lack of accountability control
and governance, lack of consistency in risk monitoring and
management or insufficient challenges or assurance
processes.
Failure
to manage risks effectively could adversely impact the
Group’s reputation or its relationship with its customers,
shareholders or other stakeholders, which in turn could have a
significant effect on the Group’s business prospects,
financial condition and/or results of operations. Risk management
is also strongly related to the use and effectiveness of internal
stress tests and models. See “The RBS Group and the Group
rely on valuation, capital and stress test models to conduct their
business, assess their risk exposure and anticipate capital and
funding requirements. Failure of these models to provide accurate
results or accurately reflect changes in the micro-and
macroeconomic environment in which the RBS Group and the Group
operate or findings of deficiencies by the Group’s regulators
resulting in increased regulatory capital requirements could have a
material adverse effect on the Group’s business, capital and
results.”
A failure by the Group to embed a strong risk culture across the
organisation could adversely affect the Group’s ability to
achieve its strategic objectives.
In
response to weaknesses identified in previous years, the RBS Group
is currently seeking to embed a strong risk culture within the RBS
Group (including the Group) based on a robust risk appetite and
governance framework. A key component of this approach is the three
lines of defence model designed to identify, manage and mitigate
risk across all levels of the organisation.
This
framework has been implemented and improvements continue and will
continue to be made to clarify and improve the three lines of
defence and internal risk responsibilities and resources, including
in response to feedback from regulators. Notwithstanding the
Group’s efforts, changing an organisation’s risk
culture requires significant time, investment and leadership, and
such efforts may not insulate the Group from future instances of
misconduct.
A
failure by any of these three lines to carry out their
responsibilities or to effectively embed this culture could have a
material adverse effect on the Group through an inability to
achieve its strategic objectives for its customers, employees and
wider stakeholders.
As a
result of the commercial and regulatory environment in which it
operates, the Group may be unable to attract or retain senior
management (including members of the board) and other skilled
personnel of the appropriate qualification and competence. The
Group may also suffer if it does not maintain good employee
relations.
The
Group’s future success depend on its ability to attract,
retain and remunerate highly skilled and qualified personnel,
including senior management (which includes directors and other key
employees), in a highly competitive labour market. This cannot be
guaranteed, particularly in light of heightened regulatory
oversight of banks and the increasing scrutiny of, and (in some
cases) restrictions placed upon, employee compensation
arrangements, in particular those of banks in receipt of Government
support (such as the RBS Group), which may place the Group at a
competitive disadvantage. In addition, the market for skilled
personnel is increasingly competitive, thereby raising the cost of
hiring, training and retaining skilled personnel.
Additional information
Risk factors continued
Certain
of the Group’s directors as well as members of its executive
committee and certain other senior managers and employees are also
subject to the new responsibility regime introduced under the
Banking Reform Act 2013 which introduces clearer accountability
rules for those within the new regime. The senior managers’
regime and certification regime took effect on 7 March 2016, whilst
the conduct rules will apply to the wider employee population from
7 March 2017 onwards, with the exception of some transitional
provisions.
The new
regulatory regime may contribute to reduce the pool of candidates
for key management and non-executive roles, including non-executive
directors with the right skills, knowledge and experience, or
increase the number of departures of existing employees, given
concerns over the allocation of responsibilities introduced by the
new rules.
In
addition, in order to ensure the independence of the RFB, the RBS
Group will be required to recruit new independent directors and
senior members of management to sit on the boards of directors and
board committees of the RFB and other RBS Group entities outside
the RFB, and there may be a limited pool of competent candidates
from which such appointments can be made.
The RBS
Group’s evolving strategy has led to the departure of a large
number of experienced and capable employees, including Group
employees. The restructuring relating to the ongoing implementation
of the RBS’s Group’s transformation programme and
related cost reduction targets may cause experienced staff members
to leave and prospective staff members not to join the RBS Group.
The lack of continuity of senior management and the loss of
important personnel could have an adverse impact on the
Group’s business and future success.
The
failure to attract or retain a sufficient number of appropriately
skilled personnel to manage the complex restructuring required to
implement the UK ring-fencing regime and the Group’s strategy
could prevent the Group from successfully implementing its strategy
and meeting regulatory commitments. This could have a material
adverse effect on the Group’s business, financial condition
and results of operations.
In
addition, many of the Group’s employees in the UK and other
jurisdictions in which the Group operates are represented by
employee representative bodies, including trade unions. Engagement
with its employees and such bodies is important to the Group and a
breakdown of these relationships could adversely affect the
Group’s business, reputation and results.
HM Treasury (or UKFI on its behalf) may be able to exercise a
significant degree of influence over the RBS Group, including the
Group, and any further offer or sale of its interests may affect
the price of its securities.
On 6
August 2015, the UK Government made its first sale of RBSG ordinary
shares since its original investment in 2009 and sold approximately
5.4% of its stake in RBSG. Following this initial sale, the UK
Government exercised its conversion rights under the B Shares on 14
October 2015 which resulted in HM Treasury holding 72.88% of the
ordinary share capital of RBSG, and which entity owns all of the
Bank’s share capital.
The UK
Government, through HM Treasury, currently holds 71.3% of the
issued ordinary share capital of the RBS Group. The UK Government
has indicated its intention to continue to sell down its
shareholding in the RBS Group.
In
addition, UKFI manages HM Treasury’s shareholder relationship
with the RBS Group and, although HM Treasury has indicated that it
intends to respect the commercial decisions of the RBS Group and
that the RBS Group companies (including the Bank) will continue to
have their own independent board of directors and management team
determining their own strategy, its position as a majority
shareholder (and UKFI’s position as manager of this
shareholding) means that HM Treasury or UKFI might be able to
exercise a significant degree of influence over, among other
things, the election of directors and appointment of senior
management, remuneration policy or the conduct of any RBS Group
company, including the Bank.
The
manner in which HM Treasury or UKFI exercises HM Treasury’s
rights as majority shareholder could give rise to conflicts between
the interests of HM Treasury and the interests of other
shareholders. The Board of RBSG has a duty to promote the success
of the RBS Group for the benefit of its members as a
whole.
The Group is committed to executing the run-down and sale of
certain businesses, portfolios and assets forming part of the
businesses and activities being exited by the Group. Failure by the
Group to do so on commercially favourable terms could have a
material adverse effect on the Group’s operations, operating
results, financial position and reputation.
The
Group’s ability to dispose of the remaining businesses,
portfolios and assets forming part of the businesses and activities
being exited by the Group and the price achieved for such disposals
will be dependent on prevailing economic and market conditions,
which remain volatile. As a result, there is no assurance that the
Group will be able to sell, exit or run down these businesses,
portfolios or assets either on favourable economic terms to the
Group or at all or that it may do so within the intended
timetable.
Material tax or
other contingent liabilities could arise on the disposal or
run-down of assets or businesses and there is no assurance that any
conditions precedent agreed will be satisfied, or consents and
approvals required will be obtained in a timely manner or at all.
The Group may be exposed to deteriorations in the businesses,
portfolios or assets being sold between the announcement of the
disposal and its completion, which period may span many
months.
Additional information
Risk factors continued
In
addition, the Group may be exposed to certain risks, including
risks arising out of ongoing liabilities and obligations, breaches
of covenants, representations and warranties, indemnity claims,
transitional services arrangements and redundancy or other
transaction-related costs, and counterparty risk in respect of
buyers of assets being sold.
The
occurrence of any of the risks described above could have a
material adverse effect on the Group’s business, results of
operations, financial condition and capital position and
consequently may have the potential to impact the competitive
position of part or all of the Group’s business.
The RBS Group and its subsidiaries, including the Group, are
subject to a new and evolving framework on recovery and resolution,
the impact of which remains uncertain, and which may result in
additional compliance challenges and costs.
In the
EU, the UK and the US, regulators have implemented or are in the
process of implementing recovery and resolution regimes designed to
prevent the failure of financial institutions and resolution tools
to ensure the timely and orderly resolution of financial
institutions. These initiatives have been complemented by a broader
set of initiatives to improve the resilience of financial
institutions and reduce systemic risk, including the UK
ring-fencing regime, the introduction of certain prudential
requirements and powers under CRD IV, and certain other measures
introduced under the BRRD, including the requirements relating to
loss absorbing capital. The BRRD which was implemented in the UK
from January 2015, provides a framework for the recovery and
resolution of credit institutions and investment firms, their
subsidiaries and certain holding companies in the EU, and the tools
and powers introduced under the BRRD include preparatory and
preventive measures, early supervisory intervention powers and
resolution tools.
Implementation of
certain provisions of the BRRD remains subject to secondary
rulemaking as well as a review by the European Parliament and the
European Commission of certain topics mandated by the BRRD. In
November 2016, as a result of this review, the European Commission
published a package of proposals seeking to introduce certain
amendments to CRD IV and the BRRD as well as a new proposal seeking
to harmonize creditor hierarchy. These proposals are now subject to
further discussions and negotiations among the European
institutions and it is not possible to anticipate their final
content. Further amendments to the BRRD or the implementing rules
in the EU may also be necessary to ensure continued consistency
with the FSB recommendations on resolution regimes and resolution
planning for G-SIBs, including with respect to TLAC
requirements.
In
light of these potential developments as well as the impact of the
UK’s decision to leave the EU following the result of the EU
Referendum, there remains uncertainty as to the rules which may
apply to the RBS Group going forward. In addition, banks
headquartered in countries which are members of the Eurozone are
now subject to the European banking union framework.
In
November 2014, the ECB assumed direct supervisory responsibility
for RBS NV and Ulster Bank under the Single Supervisory Mechanism
(SSM). As a result of the above, there remains uncertainty as to
how the relevant resolution regimes in force in the UK, the
Eurozone and other jurisdictions, would interact in the event of a
resolution of the RBS Group.
The
BRRD requires national resolution funds to raise “ex
ante” contributions on banks and investment firms in
proportion to their liabilities and risk profiles and allow them to
raise additional “ex post” funding contributions in the
event the ex-ante contributions do not cover the losses, costs or
other expenses incurred by use of the resolution fund. Although
receipts from the UK bank levy are currently being used to meet the
ex-ante and ex post funding requirements, the RBS Group may be
required to make additional contributions in the
future.
The new
recovery and resolution regime implementing the BRRD in the UK
replaces the previous regime and has imposed and is expected to
impose in the near-to medium-term future, additional compliance and
reporting obligations on the RBS Group, including the Group, which
may result in increased costs, including as a result of mandatory
participation in resolution funds, and heightened compliance risks
and the RBS Group may not be in a position to comply with all such
requirements within the prescribed deadlines or at
all.
In
addition, the PRA has adopted a new framework requiring financial
institutions to ensure the continuity of critical shared services
(provided by entities within the group or external providers) to
facilitate recovery action, orderly resolution and post-resolution
restructuring, which will apply from 1 January 2019.
The
application of such rules to the RBS Group may require the RBS
Group to restructure certain of its activities or reorganise the
legal structure of its operations, may limit the RBS Group’s
ability to outsource certain functions and/or may result in
increased costs resulting from the requirement to ensure the
financial and operational resilience and independent governance of
such critical services. Any such developments could have a material
adverse effect on the Group.
In
addition, compliance by the RBS Group with this new recovery and
resolution framework has required and is expected to continue to
require significant work and engagement with the RBS Group’s
regulators, including in order for the RBS Group to submit to the
PRA credible recovery and resolution plans, the outcome of which
may impact the operations or structure of the RBS Group or the
Group.
Such
rules will need to be implemented consistently with the UK
ring-fencing regime.
Additional information
Risk factors continued
The RBS Group may become subject to the application of
stabilisation or resolution powers in certain significant stress
situations, which may result in various actions being taken in
relation to the RBS Group and any securities of the RBS Group,
including the Group, including the write-off, write- down or
conversion of securities issued by the RBS Group or the
Group.
The
Banking Act 2009, as amended to implement the BRRD (Banking Act)
confers substantial powers on relevant UK authorities designed to
enable them to take a range of actions in relation to UK banks or
investment firms and certain of their affiliates in the event a
bank or investment firm in the same group is considered to be
failing or likely to fail.
Under
the Banking Act, wide powers are granted to the relevant resolution
authorities, as appropriate as part of a special resolution regime
(the “SRR”).
These
powers enable the relevant UK resolution authority to implement
resolution measures with respect to a UK bank or investment firm
and certain of its affiliates (including, for example, RBSG) (each
a “relevant entity”) in circumstances in which the
relevant UK resolution authority is satisfied that the resolution
conditions are met.
Under
the applicable regulatory framework and pursuant to guidance issued
by the Bank of England, governmental financial support, if any is
provided, would only be used as a last resort measure where a
serious threat to financial stability cannot be avoided by other
measures (such as the stabilisation options described below,
including the UK bail-in power) and subject to the limitations set
out in the Banking Act.
Several
stabilisation options and tools are available to the relevant UK
resolution authority under the SRR, where a resolution has been
triggered. In addition, the UK resolution authority may commence
special administration or liquidation procedures specifically
applicable to banks.
Where
stabilisation options are used which rely on the use of public
funds, the option can only be used once there has been a
contribution to loss absorption and recapitalisation of at least 8%
of the total liabilities of the institution under
resolution.
The
Bank of England has indicated that among these options, the UK
bail-in tool (as described further below) would apply in the event
a resolution of the RBS Group were triggered.
Further, the
Banking Act grants broad powers to the UK resolution authority, the
application of which may adversely affect contractual arrangements
and which include the ability to (i) modify or cancel contractual
arrangements to which an entity in resolution is party, in certain
circumstances; (ii) suspend or override the enforcement provisions
or termination rights that might be invoked by counterparties
facing an entity in resolution, as a result of the exercise of the
resolution powers; and (iii) disapply or modify laws in the UK
(with possible retrospective effect) to enable the powers under the
Banking Act to be used effectively.
The
stabilisation options are intended to be applied prior to the point
at which any insolvency proceedings with respect to the relevant
entity would otherwise have been initiated. Accordingly, the
stabilisation options may be exercised if the relevant UK
resolution authority: (i) is satisfied that a UK bank or investment
firm is failing, or is likely to fail; (ii) determines that it is
not reasonably likely that (ignoring the stabilisation powers)
action will be taken by or in respect of a UK bank or investment
firm that will result in condition (i) above ceasing to be met;
(iii) considers the exercise of the stabilisation powers to be
necessary, having regard to certain public interest considerations
(such as the stability of the UK financial system, public
confidence in the UK banking system and the protection of
depositors, being some of the special resolution objectives) and
(iv) considers that the special resolution objectives would not be
met to the same extent by the winding-up of the UK bank or
investment firm.
In the
event that the relevant UK resolution authority seeks to exercise
its powers in relation to a UK banking group company (such as
RBSG), the relevant UK resolution authority has to be satisfied
that (A) the conditions set out in (i) to (iv) above are met in
respect of a UK bank or investment firm in the same banking group
(or, in respect of an EEA or third country credit institution or
investment firm in the same banking group, the relevant EEA or
third country resolution authority is satisfied that the conditions
for resolution applicable in its jurisdiction are met) and (B)
certain criteria are met, such as the exercise of the powers in
relation to such UK banking group company being necessary having
regard to public interest considerations.
The use
of different stabilisation powers is also subject to further
“specific conditions” that vary according to the
relevant stabilisation power being used. Although the SRR sets out
the pre-conditions for determining whether an institution is
failing or likely to fail, it is uncertain how the Bank of England
would assess such conditions in any particular pre-insolvency
scenario affecting RBSG and/or other members of the RBS Group
(including the Bank) and in deciding whether to exercise a
resolution power. Further regulatory developments, including
proposals by the FSB on cross-border recognition of resolution
actions, could also influence the conditions for the exercise of
the stabilisation powers.
Additional information
Risk factors continued
There
has been no application of the SRR powers in the UK to a large
financial institution, such as RBSG, to date, which could provide
an indication of the relevant UK resolution authority’s
approach to the exercise of the resolution powers, and even if such
examples existed, they may not be indicative of how such powers
would be applied to RBSG. Therefore, holders of shares and other
securities issued by RBS Group entities may not be able to
anticipate a potential exercise of any such powers.
The UK
bail-in tool is one of the powers available to the UK resolution
authority under the SRR and was introduced under the Banking Reform
Act 2013. The UK government amended the provisions of the Banking
Act to ensure the consistency of these provisions with the bail-in
provisions under the BRRD, which amendments came into effect on
January 1, 2015.
The UK
bail-in tool includes both a power to write-down or convert capital
instruments and triggered at the point of non-viability of a
financial institution and a bail-in tool applicable to eligible
liabilities (including senior unsecured debt securities issued by
the RBS Group) and available in resolution.
The
capital instruments write-down and conversion power may be
exercised independently of, or in combination with, the exercise of
a resolution tool, and it allows resolution authorities to cancel
all or a portion of the principal amount of capital instruments
and/or convert such capital instruments into common equity Tier 1
instruments when an institution is no longer viable.
The
point of non-viability for such purposes is the point at which the
Bank of England or the PRA determines that the institution meets
the conditions for entry into the Special Resolution Regime as
defined under the Banking Act or will no longer be viable unless
the relevant capital instruments are written down or extraordinary
public support is provided, and without such support the
appropriate authority determines that the institution would no
longer be viable.
Where
the conditions for resolution exist and it is determined that a
stabilisation power may be exercised, the Bank of England may use
the bail-in tool (in combination with other resolution tools under
the Banking Act) to, among other things, cancel or reduce all or a
portion of the principal amount of, or interest on, certain
unsecured liabilities of a failing financial institution and/or
convert certain debt claims into another security, including
ordinary shares of the surviving entity.
In
addition, the Bank of England may use the bail-in tool to, among
other things, replace or substitute the issuer as obligor in
respect of debt instruments, modify the terms of debt instruments
(including altering the maturity (if any) and/or the amount of
interest payable and/or imposing a temporary suspension on
payments) and discontinue the listing and admission to trading of
financial instruments.
The
exercise of the bail-in tool will be determined by the Bank of
England which will have discretion to determine whether the
institution has reached a point of non-viability or whether the
conditions for resolution are met, by application of the relevant
provisions of the Banking Act, and involves decisions being taken
by the PRA and the Bank of England, in consultation with the FCA
and HM Treasury. As a result, it will be difficult to predict when,
if at all, the exercise of the bail-in power may
occur.
The
potential impact of these powers and their prospective use may
include increased volatility in the market price of shares and
other securities issued by the RBS Group and the Group (including
the Bank’s American depositary shares), as well as increased
difficulties for RBS Group in issuing securities in the capital
markets and increased costs of raising such funds.
If
these powers were to be exercised (or there is an increased risk of
exercise), such exercise could result in a material adverse effect
on the rights or interests of RBSG shareholders which would likely
be extinguished or very heavily diluted.
Holders
of debt securities (which may include holders of RBSG senior
unsecured debt), would see the conversion of part (or all) of their
claims into equity or written down in part or written off entirely.
In accordance with the rules of the Special Resolution Regime, the
losses imposed on holders of equity and debt instruments through
the exercise of bail-in powers would be subject to the “no
creditor worse off” safeguard, which requires losses not to
exceed those which would be realised in insolvency.
Although the above
represents the risks associated with the UK bail-in power currently
in force in the UK and applicable to the RBS Group, changes to the
scope of, or conditions for the exercise of the UK bail-in power
may be introduced as a result of further political or regulatory
developments. In addition, further political, legal or strategic
developments may lead to structural changes to the RBS Group,
including at the holding company level. Notwithstanding any such
changes, the RBS Group expects that its securities would remain
subject to the exercise of a form of bail-in power, either pursuant
to the provisions of the Banking Act, the BRRD or
otherwise.
adverse
impact on its financial condition and results of
operations.
Additional information
Risk factors continued
In the UK and in other jurisdictions, the RBS Group and the Group
are responsible for contributing to compensation schemes in respect
of banks and other authorised financial services firms that are
unable to meet their obligations to customers.
In the
UK, the Financial Services Compensation Scheme (FSCS) was
established under the Financial Services and Markets Act 2000 and
is the UK’s statutory fund of last resort for customers of
authorised financial services firms.
The
FSCS pays compensation if a firm is unable to meet its obligations.
The FSCS funds compensation for customers by raising levies on the
industry, including the RBS Group and the Group. In relation to
protected deposits, each deposit-taking institution contributes
towards these levies in proportion to their share of total
protected deposits.
In the
event that the FSCS needs to raise additional and unexpected
funding, is required to raise funds more frequently or
significantly increases the levies to be paid by authorised firms,
the associated costs to the RBS Group or the Group may have an
adverse impact on their results of operations and financial
condition. For example, the deposit protection limit increased by
£10,000 to £85,000 effective from 30 January 2017, which
will result in an increase to the Group’s FSCS
levies.
To the
extent that other jurisdictions where the Group operates have
introduced or plan to introduce similar compensation, contributory
or reimbursement schemes, the Group may make further provisions and
may incur additional costs and liabilities, which may have
an
Recent and anticipated changes
in the tax legislation in the UK are likely to result in increased
tax payments by the Group and may impact the recoverability of
certain deferred tax assets recognised by the
Group.
In
accordance with IFRS Standards, the Group has recognised deferred
tax assets on losses available to relieve future profits from tax
only to the extent it is probable that they will be recovered. The
deferred tax assets are quantified on the basis of current tax
legislation and accounting standards and are subject to change in
respect of the future rates of tax or the rules for computing
taxable profits and offsetting allowable losses.
In the
UK, legislation has been introduced over the past few years which
seeks to impose restrictions on the use of certain brought forward
tax losses of banking companies. This has impacted and will
continue to impact the extent to which the Group is able to
recognise deferred tax assets. Failure to generate sufficient
future taxable profits or further changes in tax legislation
(including rates of tax) or accounting standards may reduce the
recoverable amount of the recognised deferred tax assets. Further
changes to the treatment of deferred tax assets may impact the
Group’s capital, for example by reducing further the
Group’s ability to recognise deferred tax assets. The
implementation of the rules relating to the UK ring-fencing regime
and the resulting restructuring of the Group may further restrict
the Group’s ability to recognise tax deferred tax assets in
respect of brought forward losses.
Forward-looking statements
Cautionary statement regarding forward-looking
statements
Certain
sections in this document contain ‘forward-looking
statements’ as that term is defined in the United States
Private Securities Litigation Reform Act of 1995, such as
statements that include the words ‘expect’,
‘estimate’, ‘project’,
‘anticipate’, ‘commit’,
‘believe’, ‘should’, ‘intend’,
‘plan’, ‘could’, ‘probability’,
‘risk’, ‘Value-at-Risk (VaR)’,
‘target’, ‘goal’, ‘objective’,
‘may’, ‘endeavour’, ‘outlook’,
‘optimistic’, ‘prospects’ and similar
expressions or variations on these expressions.
In
particular, this document includes forward-looking statements
relating, but not limited to: future profitability and performance,
including financial performance targets such as return on tangible
equity; cost savings and targets, including cost:income ratios;
litigation and government and regulatory investigations, including
the timing and financial and other impacts thereof; structural
reform and the implementation of the UK ring-fencing regime; the
implementation of RBSG’s transformation programme, including
the further restructuring of the NatWest Markets business; the
satisfaction of RBSG’s residual EU State Aid obligations; the
continuation of RBSG’s and the Group’s balance sheet
reduction programme, including the reduction of risk-weighted
assets (RWAs) and the timing thereof; capital and strategic plans
and targets; capital, liquidity and leverage ratios and
requirements, including CET1 Ratio, RWA equivalents (RWAe), Pillar
2 and other regulatory buffer requirements, minimum requirement for
own funds and eligible liabilities, and other funding plans;
funding and credit risk profile; capitalisation; portfolios; net
interest margin; customer loan and income growth; the level and
extent of future impairments and write-downs, including with
respect to goodwill; restructuring and remediation costs and
charges; future pension contributions; and RBSG’s and the
Group’s exposure to political risks, operational risk,
conduct risk, cyber and IT risk and credit rating risk and to
various types of market risks, including as interest rate risk,
foreign exchange rate risk and commodity and equity price risk;
customer experience including our Net Promotor Score (NPS);
employee engagement and gender balance in leadership
positions.
Limitations inherent to forward-looking statements
These
statements are based on current plans, estimates, targets and
projections, and are subject to significant inherent risks,
uncertainties and other factors, both external and relating to the
RBS Group and the Group’s strategy or operations, which may
result in the Group being unable to achieve the current targets,
predictions, expectations and other anticipated outcomes expressed
or implied by such forward-looking statements. In addition certain
of these disclosures are dependent on choices relying on key model
characteristics and assumptions and are subject to various
limitations, including assumptions and estimates made by
management. By their nature, certain of these disclosures are only
estimates and, as a result, actual future gains and losses could
differ materially from those that have been estimated. Accordingly,
undue reliance should not be placed on these statements.
Forward-looking statements speak only as of the date we make them
and we expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the RBS Group’s or
the Group’s expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is
based.
Important factors that could affect the actual outcome of the
forward-looking statements
We
caution you that a large number of important factors could
adversely affect our results or our ability to implement our
strategy, cause us to fail to meet our targets, predictions,
expectations and other anticipated outcomes or affect the accuracy
of forward-looking statements we describe in this document
including in the risk factors set out in the Group’s 2016
Annual Report and other uncertainties discussed in this
document.
These
include the significant risks for RBSG and the Group presented by
the outcomes of the legal, regulatory and governmental actions and
investigations that RBSG is or may be subject to (including active
civil and criminal investigations) and any resulting material
adverse effect on RBSG of unfavourable outcomes and the timing
thereof (including where resolved by settlement); economic,
regulatory and political risks, including as may result from the
uncertainty arising from the EU Referendum; RBSG’s ability to
satisfy its residual EU State Aid obligations and the timing
thereof; RBSG’s ability to successfully implement the
significant and complex restructuring required to be undertaken in
order to implement the UK ring fencing regime and related
costs;
RBSG’s
ability to successfully implement the various initiatives that are
comprised in its transformation programme, particularly the
proposed further restructuring of the NatWest Markets business, the
balance sheet reduction programme and its significant cost-saving
initiatives and whether RBSG and the Group will be a viable,
competitive, customer focused and profitable bank especially after
its restructuring and the implementation of the UK ring-fencing
regime; the exposure of RBSG and the Group to cyber-attacks and
their ability to defend against such attacks; RBSG’s and the
Group’s ability to achieve their capital and leverage
requirements or targets which will depend in part on RBSG and the
Group’s success in reducing the size of their business and
future profitability as well as developments which may impact its
CET1 capital including additional litigation or conduct costs,
additional pension contributions, further impairments or accounting
changes; ineffective management of capital or changes to regulatory
requirements relating to capital adequacy and liquidity or failure
to pass mandatory stress tests; RBSG’s and the Group’s
ability to access sufficient sources of capital, liquidity and
funding when required; changes in the credit ratings of RBSG, the
Bank or the UK government; declining revenues resulting from lower
customer retention and revenue generation in light of RBSG’s
and the Group’s strategic refocus on the UK; as well as
increasing competition from new incumbents and disruptive
technologies.
In
addition, there are other risks and uncertainties that could
adversely affect our results, ability to implement our strategy,
cause us to fail to meet our targets or the accuracy of
forward-looking statements in this document. These include
operational risks that are inherent to the Group’s business
and will increase as a result of RBSG’s and the Group’s
significant restructuring initiatives being concurrently
implemented; the potential negative impact on RBSG’s and the
Group’s business of global economic and financial market
conditions and other global risks; the impact of a prolonged period
of low interest rates or unanticipated turbulence in interest
rates, yield curves, foreign currency exchange rates, credit
spreads, bond prices, commodity prices, equity prices; basis,
volatility and correlation risks; the extent of future write-downs
and impairment charges caused by depressed asset valuations;
deteriorations in borrower and counterparty credit quality;
heightened regulatory and governmental scrutiny and the
increasingly regulated environment in which RBSG and the Group
operate as well as divergences in regulatory requirements in the
jurisdictions in which RBSG and the Group operate; the risks
relating to RBSG’s or the Group’s IT systems or a
failure to protect themselves and their customers against cyber
threats, reputational risks; risks relating to increased pension
liabilities and the impact of pension risk on RBSG’s and the
Group’s capital positions; risks relating to the failure to
embed and maintain a robust conduct and risk culture across the
organisation or if their risk management framework is ineffective;
the Group’s ability to attract and retain qualified
personnel; limitations on, or additional requirements imposed on,
the Group’s activities as a result of HM Treasury’s
investment in RBSG; the value and effectiveness of any credit
protection purchased by the Group; risks relating to the reliance
on valuation, capital and stress test models and any inaccuracies
resulting therefrom or failure to accurately reflect changes in the
micro and macroeconomic environment in which the Group operates,
risks relating to changes in applicable accounting policies or
rules which may impact the preparation of RBSG’s and the
Group’s financial statements or adversely impact their
capital positions; the impact of the recovery and resolution
framework and other prudential rules to which RBSG and the Group
are subject; the recoverability of deferred tax assets by the
Group; and the success of RBSG and the Group in managing the risks
involved in the foregoing.
The
forward-looking statements contained in this document speak only as
at the date hereof, and RBSG and the Group do not assume or
undertake any obligation or responsibility to update any
forward-looking statement to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated
events.
The
information, statements and opinions contained in this document do
not constitute a public offer under any applicable legislation or
an offer to sell or solicit of any offer to buy any securities or
financial instruments or any advice or recommendation with respect
to such securities or other financial instruments.
Legal
Entity Identifier: 213800IBT39XQ9C4CP71
Signatures
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: 24 February
2017
|
NATIONAL
WESTMINSTER BANK PLC (Registrant)
|
|
Name:
Title:
|
Jan
Cargill
Deputy
Secretary
|