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 23, 2018
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 Form
40-F ____
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 Plc Results
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Page
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Presentation
of information
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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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10
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Balance
sheet
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11
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Statement
of changes in equity
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12
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Cash
flow
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14
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Notes
on the accounts
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15
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Additional
information
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39
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Forward
looking statements
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73
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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, 'NatWest
Holdings' or 'the holding company' means NatWest Holdings Limited,
'the Royal Bank', 'RBS plc' or 'the intermediate 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.
Segment reporting
The
Group continues to deliver on its plan to build a strong, simple
and fair bank for both customers and shareholders. To support this,
and in preparation for the UK ring-fencing regime the previously
reported operating segments were realigned in Q4 2017 and a
number of business transfers completed. For full details see Note
11.
Reportable operating segments
Following
the Q4 2017 changes detailed, the reportable operating segments are
as below. For full business descriptions, see Note 11.
● UK Personal & Business Banking (UK
PBB)
● Commercial Banking
● Private Banking
● Central items & other
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 the RBS Group's intention to
place the majority of the UK and Western European banking business
in ring-fenced banking entities under an intermediate holding
company. NatWest Markets Plc (NatWest Markets) will be a separate
non ring-fenced bank and The Royal Bank of Scotland International
(Holdings) Limited (RBSI Holdings) will also be placed outside the
ring-fence, both as direct subsidiaries of RBSG.
On 1
January 2017, the RBS Group made a number of key changes to the
legal hierarchy of its subsidiaries to support the move towards a
ring-fenced structure. As part of continuing preparation to deliver
a fully compliant ring-fencing structure by 1 January 2019, it
plans to undertake a further series of actions.
Disposal groups and discontinued operations
NatWest Group Holdings Corp.
NatWest
Group Holdings Corp (NWGH) which wholly owns RBS Securities Inc
(RBSSI) is due to be transferred to RBS plc (which is due to be
renamed NatWest Markets plc in 2018) by 1 January 2019 in
preparation for ring-fencing. NWGH is a direct subsidiary of
NatWest. NWGH is classified as a disposal group at 31 December
2017 and its assets and liabilities presented in aggregate in
accordance with IFRS 5. NWGH was mainly reported in the former
NatWest Markets and Capital Resolution operating segments, which
are no longer reportable operating segments but presented as a
discontinued operation and comparatives have been re-presented
accordingly.
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 under ICB. 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.
Financial review
2017 Highlights and key developments
2017 compared with 2016
The
Group reported a profit attributable to ordinary shareholders of
£2,065 million compared with an attributable loss of £867
million in 2016, mainly driven by higher income of £8,147
million compared with £6,039 million in 2016 and lower loss
from discontinued operations of £635 million compared with
£1,683 million in 2016.
Litigation
and conduct costs were £140 million and included a charge in
relation to PPI of £104 million (2016 - £362 million) and
a release in relation to customer redress of £12 million (2016
- £247 million charge).
Restructuring
costs increased by £148 million to £218 million, compared
with £70 million in 2016, largely due to international private
banking pension costs and the reduction of the property
portfolio.
The RBS
Group has received £19 billion of funding under the Bank of
England's Term Funding Scheme (£5 billion drawn in 2016,
£14 billion in 2017) as at 31 December 2017. The participation
of the scheme is split between NatWest (£17 billion) and RBS
plc (£2 billion).
Customer segment performance
UK Personal & Business Banking (UK PBB)
UK PBB
operating profit increased to £1,819 million compared with
£1,449 million in 2016, primarily reflecting higher total
income and lower operating expenses, partially offset by an
increase in impairment losses.
Net-interest
income increased by £204 million to £3,721 million,
compared with £3,517 million in 2016. The increase principally
reflects strong mortgage loan growth and savings re-pricing
benefits. Non-interest income decreased by £45 million, to
£774 million, principally reflecting net losses from the sale
of investments offset by a gain of £84 million from the sale
of credit card debt. Net fees and commissions remained stable,
decreasing slightly by £6 million to £802
million.
Operating
expenses decreased by £292 million to £2,490
million (2016 -
£2,782 million). This was largely due to lower litigation and
conduct costs, primarily in relation to PPI provisions of £104
million compared with a provision of £362 million in 2016,
partly offset by an increase in restructuring costs.
Impairment
losses were £186 million compared with £105 million in
2016, and reflect continued benign credit conditions. The increases
principally reflect lower recoveries, partly as a result of debt
sales undertaken. Defaults remain at low levels across all
portfolios compared with historical trends, albeit slightly higher
than in 2016.
Gross
loans and advances to customers increased by £11.2 billion to
£124.5 billion (2016 - £113.3 billion), £10.6
billion of which was driven by continued mortgage loan growth.
Customer deposits increased by £10.0 billion to £135.6
billion (2016 - 125.6 billion) reflecting strong personal current
account and business deposit growth.
Commercial Banking
Commercial
Banking operating profit increased to £1,238 million compared
with £623 million in 2016, primarily reflecting an increase in
income and lower operating expenses partially offset by higher
impairment losses.
Net-interest
income increased by £404 million to £1,566 million
compared with £1,162 million in 2016 and non-interest income
increased by £381 million to £831 million, compared with
£450 million in 2016. These increases were primarily due to
the legal entity transfers completed on 1 January 2017 in
preparation for ring-fencing which included Lombard North Central
plc, £305 million, and NatWest Invoice Finance, £84
million. The non-interest income impact of these transfers was
£355 million.
Operating
expenses decreased by £87 million to £888 million,
compared with £975 million in 2016. The decrease was
principally due to the non-repeat of litigation and conduct costs,
which in 2016 included a £223 million provision in respect of
the FCA review of the Group's treatment of SMEs, partly offset by
an increase in restructuring costs and the transfer in of legal
entities in preparation for ring-fencing.
Gross
loans and advances to customers increased by £14.1 billion to
£55.8 billion, compared with £41.7 billion in 2016.
Increase is principally due to ring-fencing legal entity moves,
£14.6 billion.
Private Banking
Private
Banking operating profit increased by £37 million, to
£177 million compared with £140 million in
2016.
Total
income was broadly flat when compared to 2016, decreasing by
£1 million to £570 million.
Operating
expenses decreased by £44 million to £388 million
compared to £432 million in 2016, primarily reflecting a
reduction in central allocated costs, offset by a £56 million
increase in conduct and litigation and restructuring costs (2016 -
£5 million).
Financial review
Financial review
Profit for the year
Profit
attributable to shareholders was £2,065 million compared with
a loss of £867 million in 2016. Operating profit before tax
was £3,516 million compared with £1,499 million in 2016.
The improvement reflected an increase in income partly offset by an
increase in impairment losses.
Loss
from discontinued operations of £635 million compared with
£1,683 million in 2016 and includes the results of NWGH which
was classified as a discontinued operation at 31 December 2017 and
UBIH which was sold to NatWest Holdings on 1 January
2017.
Net interest income
Net
interest income increased by £709 million, 15%, to £5,481
million compared with £4,772 million in 2016. This was
principally driven by increases in UK PBB, £204 million,
reflecting deposit re-pricing and strong mortgage loan growth and
in Commercial Banking, £404 million; £389 million of the
increase in Commercial Banking was due to the transfer in of legal
entities in preparation for ring- fencing.
Non-interest income
Non-interest
income increased by £1,399 million to £2,666 million,
compared with £1,267 million in 2016. Within this, net fees
and commissions increased by £109 million to £1,555
million, compared with £1,446 million in 2016, of which
£129 million relates to the transfer in of legal entities as
part the Group preparing for ring-fencing. Income from trading
activities increased by £450 million to £25 million (2016
- £425 million loss), primarily reflecting foreign exchange
and IFRS volatility.
Other
operating income increased by £840 million to £1,086
million, compared with £246 million in 2016 and included: a
gain on the sale of securities of £440 million (2016 -
£25 million) primarily in relation to NatWest's equity holding
in RBSI ( £444 million), accounted for available-for-sale
equity; profit on strategic disposals of £285 million (2016 -
£189 million) including a £63 million gain on the sale of
Vocalink and £84 million realised on the sale of credit card
debt in UK PBB; and operating lease and other rental income of
£248 million (2016 - £15 million) of which £178
million in related to income due to the transfer in of legal
entities in preparation for ring-fencing. Other operating income in
2016 comprised principally of gains in relation to strategic
disposals.
Operating
expenses decreased by £95 million to £4,320 million
compared with £4,415 million in 2016 and included £254
million of costs in relation to the Invoice Finance and Lombard
businesses transferred in. Litigation and conduct costs in relation
to PPI and customer redress were £517 million lower at
£92 million in 2017, compared with £609 million in
2016. Restructuring costs increased by £148 million to
£218 million, compared with £70 million in 2016, largely
due to international private banking pension costs and the
reduction of the property portfolio.
Impairment losses
Net
impairment losses were £311 million compared with £125
million in 2016, primarily reflecting an increase of £81
million in UK PBB and £105 million in Commercial Banking. The
increase in UK PBB was principally due to reduced recoveries,
partly as a result of debt sales. The increase in Commercial
Banking primarily reflects the legal entity transfers in
preparation for ring-fencing together with new provisions on a
small number of counterparties.
Discontinued operations
Loss
from discontinued operations was £635 million compared with
£1,683 million in 2016 and includes the results of NWGH which
was classified as a discontinued operation at 31 December 2017 and
UBIH which was sold to NatWest Holdings on 1 January 2017. The
decrease primarily reflects the reduced litigation and conduct
costs in relation to the Group's underwriting of residential
mortgage-backed securities (RMBS) of £600 million in 2017
(2016 - £1,710 million).
2016 Highlights and key developments
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 in 2016 included £362 million in
relation to PPI provisions and £247 million in relation to
customer re-dress. Restructuring costs were £70 million
compared to £677 million in 2015.
Customer segment performance
UK Personal & Business Banking (UK PBB)
UK PBB
operating profit increased to £1,449 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.
Financial review
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
profit before tax was £1,499 million compared with £711
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.
Loss
from discontinued operations of £1,683 million compared with
£1,544 million in 2015 and includes the results of NWGH which
was classified as a discontinued operation at 31December 2017 and
UBIH which was transferred to RBSG on 1 January 2017.
Net interest income
Net
interest income increased by £233 million, 5%, to £4,772
million compared with £4,539 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.
Non-interest income
Non-interest
income increased by £180 million, 17%, to £1,267 million
compared with £1,087 million in 2015. Within this, loss from
trading activities was £425 million (2015 - £73 million)
primarily reflecting foreign exchange movements and IFRS volatility
losses.
Other
operating income increased by £513 million to £246
million compared with a loss of £267 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 £98 million in 2015.
Net
fees and commissions increased to £1,446 million compared with
£1,427 million, primarily reflecting improved business
activity.
Operating expenses
Operating
expenses decreased by £554 million, 11%, to £4,415
million compared with £4,969 million in 2015.
Litigation
and conduct costs in 2016 included £362 million in relation to
PPI provisions and £270 million in relation to customer
re-dress.
Restructuring
costs decreased by £607 million, 90%, to £70 million,
compared with £677 million in 2015. The 2015 costs included a
£277 million impairment in the value of US
premises.
Staff
costs decreased by £287 million, 29%, to £713 million
reflecting cost savings initiatives.
Impairment losses
Net
impairment losses were £125 million compared with impairment
releases of £54 million in 2015. Net impairment losses
principally in UK PBB (£105 million) and in Commercial Banking
(£14 million), reflected reduced provision
releases.
Discontinued operations
Loss
from discontinued operations was £1,683 million compared with
£1,544 million in 2015 and includes the results of NWGH which
was classified as a discontinued operation at 31 December 2017 and
UBIH 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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Capital
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31 December
|
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31 December
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2017
|
|
2016
|
£m
|
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£m
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CET1
|
13,301
|
|
10,393
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Tier 1
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13,301
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10,393
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Total
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17,536
|
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15,016
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|
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|
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RWAs
|
|
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Credit risk
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|
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|
- non-counterparty
|
48,575
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|
56,066
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- counterparty
|
266
|
|
473
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Market risk
|
136
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|
676
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Operational risk
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7,724
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7,209
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Total RWAs
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56,701
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64,424
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Risk asset ratios
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%
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%
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CET1
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23.5
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16.1
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Tier 1
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23.5
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16.1
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Total
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30.9
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23.3
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Leverage
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Tier 1 capital (£m)
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13,301
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10,393
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Exposure (£m)
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213,474
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169,586
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Leverage ratio (%)
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6.2
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6.1
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Key points
●
The CET1 ratio
increased from 16.1% to 23.5%, mainly due to the reduction in
significant investments following ring-fencing related transfers.
UBI DAC was transferred to NatWest Holdings Limited with effect
from 1 January 2017.
●
RWAs decreased by
£7.7 billion, mainly as a result of phasing-in of CRR
end-point rules relating to significant
investments.
●
The leverage ratio on a PRA
transitional basis improved from 6.1% to 6.2%. Whilst the exposure
has increased due to higher central bank balances and mortgage
growth, the impact of ring-fencing related transfers on CET1
capital has offset this.
Financial review
Commentary on consolidated balance sheet
2017 compared with 2016
Total assets increased by £24.4 billion, 8%, to £340.8
billion and reflect increases in cash and balances at banks and
increases in loans and advances to customers, partially offset by
the transfer of UBIH to NatWest Holdings on 1 January
2017.
Cash and balances at central banks increased by £33.2 billion
to £35.8 billion, compared with £2.6 billion in 2016. The
increase reflects funds previously placed with RBS plc now being
placed directly with the Bank of England under the Term Funding
Scheme and the move of certain treasury activities to the Group in
preparation for ring-fencing.
Loans and advances to banks decreased by £17.3 billion, 18%,
to £79.8 billion. 2017 included the impact of £10.4
billion (2016 - £2.4 billion) being transferred to disposal
groups. Amounts due from intermediate holding company and fellow
subsidiaries decreased by £16.8 billion, 18% to £77.9
billion and bank placings decreased by £0.5 billion, 22%, to
£1.9 billion.
Loans and advances to customers increased by £14.8 billion,
8%, to £191.9 billion compared with £177.1 billion in
2016. Within this, amounts due from fellow subsidiaries were down
£3.2 billion to nil. Customer lending was up by £18.0
billion, 10%, to £191.9 billion, primarily reflecting a
£11.2 billion increase in UK PBB mainly in relation to
mortgages and in Commercial, £14.1 billion primarily due to
the legal entity transfers in preparation for ring-fencing, partly
offset by £8.8 billion being transferred to assets of disposal
groups.
Debt securities and equity shares decreased by £2.9 billion,
64%, to £1.7 billion. 2017 reflected the transfer of £4.1
billion to assets of disposal groups.
Movements in the fair value of derivative assets, down £1.6
billion, 41%, to £2.3 billion, and derivative liabilities down
£1.5 billion, 32%, to £3.2 billion mainly related to
decreases in amounts due from the holding company and fellow
subsidiaries.
Assets of disposal groups decreased by £0.5 billion, 2%, to
£24.5 billion and liabilities of disposal groups increased
from £19.3 billion, 23%, to £23.8 billion. The balances
relate to NWGH at 31 December 2017 and to UBIH at 31 December 2016.
UBIH was sold to RBSG on 1 January 2017.
Deposits by banks increased by £33.8 billion to £53.8
billion with amounts due to the holding company and fellow
subsidiaries, up by £18.5 billion to £33.3 billion. Other
bank deposits of £20.5 billion increased by £15.3
billion, mainly in relation to the draw down of funds under the
Bank of England Term Funding Scheme, 2017 included the impact of
£3.2 billion (2016 - £1.3 billion) transferred to
liabilities of disposal groups.
Customer accounts decreased by £0.6 billion to £233.4
billion. 2017 included the impact of £14.0 billion (2016 -
£16.1 billion) transferred to disposal groups offset by an
increase in UK PBB of £10.0 billion reflecting strong
personal current account and business deposit growth.
Subordinated liabilities decreased by £1.5 billion, 21%, to
£5.8 billion, primarily as a result of redemptions of Ulster
Bank Limited subordinate liabilities as part of on-going capital
management.
Owner's equity increased by £0.7 billion, 5%, to £16.3
billion primarily driven by the £2.1 billion attributable
profit for the year partly offset by £0.8 billion in relation
to currency translation.
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 2017.
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
|
Ross
McEwan
|
Ewen
Stevenson
|
Chairman
|
Chief
Executive
|
Chief
Financial Officer
|
22
February 2018
Board of directors
Chairman
|
Executive directors
|
Non-executive directors
|
Howard
Davies
|
Ross
McEwan
Ewen
Stevenson
|
Frank
Dangeard
Alison
Davis
Morten
Friis
Robert
Gillespie
Penny
Hughes
Yasmin
Jetha
Brendan
Nelson
Baroness
Noakes
Mike
Rogers
Mike
Seligman
Dr Lena
Wilson
|
Consolidated income statement for the year ended 31 December
2017
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
£m
|
£m
|
£m
|
Interest receivable
|
|
6,271
|
5,784
|
5,792
|
Interest payable
|
|
(790)
|
(1,012)
|
(1,253)
|
Net interest income
|
|
5,481
|
4,772
|
4,539
|
Fees and commissions receivable
|
|
2,054
|
1,890
|
1,900
|
Fees and commissions payable
|
|
(499)
|
(444)
|
(473)
|
Income from trading activities
|
|
25
|
(425)
|
(73)
|
Other operating income
|
|
1,086
|
246
|
(267)
|
Non-interest income
|
|
2,666
|
1,267
|
1,087
|
Total income
|
|
8,147
|
6,039
|
5,626
|
Staff costs
|
|
(844)
|
(713)
|
(1,000)
|
Premises and equipment
|
|
(273)
|
(233)
|
(442)
|
Other administrative expenses
|
|
(2,921)
|
(3,326)
|
(3,306)
|
Depreciation and amortisation
|
|
(282)
|
(127)
|
(136)
|
Write down of goodwill and other intangible assets
|
|
-
|
(16)
|
(85)
|
Operating expenses
|
|
(4,320)
|
(4,415)
|
(4,969)
|
Profit before impairment (losses)/releases
|
|
3,827
|
1,624
|
657
|
Impairment (losses)/releases
|
|
(311)
|
(125)
|
54
|
Operating profit before tax
|
|
3,516
|
1,499
|
711
|
Tax charge
|
|
(812)
|
(683)
|
(373)
|
Profit from continuing operations
|
|
2,704
|
816
|
338
|
Loss from discontinued operations net of tax
|
|
(635)
|
(1,683)
|
(1,544)
|
Profit/(loss) for the year
|
|
2,069
|
(867)
|
(1,206)
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
Non-controlling interests
|
|
4
|
-
|
(1)
|
Ordinary shareholders
|
|
2,065
|
(867)
|
(1,205)
|
|
|
2,069
|
(867)
|
(1,206)
|
Consolidated statement of comprehensive income for the year ended
31 December 2017
|
|
2017
|
2016
|
2015
|
|
|
|
|
£m
|
£m
|
£m
|
|
|
Profit/(loss) for the year
|
|
2,069
|
(867)
|
(1,206)
|
|
|
Items that do not qualify for reclassification
|
|
|
|
|
|
|
Loss on remeasurement of retirement benefit schemes
|
|
(22)
|
(1,030)
|
(167)
|
|
|
Tax
|
|
8
|
320
|
328
|
|
|
|
|
(14)
|
(710)
|
161
|
|
|
Items that do qualify for reclassification
|
|
|
|
|
|
|
Available-for-sale financial assets
|
|
(312)
|
284
|
(11)
|
|
|
Cash flow hedges
|
|
-
|
2
|
2
|
|
|
Currency translation
|
|
(805)
|
862
|
(326)
|
|
|
Tax
|
|
5
|
20
|
3
|
|
|
|
|
(1,112)
|
1,168
|
(332)
|
|
|
Other comprehensive (loss)/income after tax
|
|
(1,126)
|
458
|
(171)
|
|
|
Total comprehensive income/(loss) for the year
|
|
943
|
(409)
|
(1,377)
|
|
|
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
|
|
Non-controlling interests
|
|
4
|
73
|
(24)
|
|
|
Ordinary shareholders
|
|
939
|
(482)
|
(1,353)
|
|
|
|
|
943
|
(409)
|
(1,377)
|
|
|
|
|
|
|
|
|
|
Note:
(1)
A loss of £635
million (2016 - loss £1,683 million; 2015 - loss £1,544
million) from discontinued operations was attributable to ordinary
shareholders.
Balance sheet as at 31 December 2017
|
|
Group
|
|
Bank
|
|
|
2017
|
2016
|
|
2017
|
2016
|
|
|
£m
|
£m
|
|
£m
|
£m
|
Assets
|
|
|
|
|
|
|
Cash and balances at central banks
|
|
35,799
|
2,567
|
|
34,763
|
1,198
|
Amounts due from intermediate holding company and
subsidiaries
|
|
77,926
|
94,686
|
|
54,153
|
63,427
|
Other loans and advances to banks
|
|
1,919
|
2,466
|
|
1,635
|
1,176
|
Loans and advances to banks
|
|
79,845
|
97,152
|
|
55,788
|
64,603
|
Amounts due from subsidiaries
|
|
-
|
3,223
|
|
58
|
65
|
Other loans and advances to customers
|
|
191,889
|
173,842
|
|
160,621
|
150,082
|
Loans and advances to customers
|
|
191,889
|
177,065
|
|
160,679
|
150,147
|
Debt securities subject to repurchase agreements
|
|
-
|
2,900
|
|
-
|
-
|
Other debt securities
|
|
1,612
|
1,563
|
|
1,059
|
-
|
Debt securities
|
|
1,612
|
4,463
|
|
1,059
|
-
|
Equity shares
|
|
43
|
87
|
|
7
|
11
|
Investments in Group undertakings
|
|
-
|
-
|
|
2,546
|
6,931
|
Settlement balances
|
|
3
|
1,693
|
|
-
|
119
|
Amounts due from intermediate holding company and
subsidiaries
|
|
1,709
|
2,929
|
|
1,697
|
2,167
|
Other derivatives
|
|
606
|
975
|
|
580
|
915
|
Derivatives
|
|
2,315
|
3,904
|
|
2,277
|
3,082
|
Intangible assets
|
|
522
|
484
|
|
490
|
477
|
Property, plant and equipment
|
|
2,580
|
2,160
|
|
692
|
787
|
Deferred tax
|
|
1,079
|
1,391
|
|
1,060
|
1,365
|
Prepayments, accrued income and other assets
|
|
630
|
534
|
|
315
|
201
|
Assets of disposal groups
|
|
24,526
|
24,976
|
|
41
|
-
|
Total assets
|
|
340,843
|
316,476
|
|
259,717
|
228,921
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Amounts due to intermediate holding company and
subsidiaries
|
|
33,303
|
14,845
|
|
11,937
|
5,773
|
Other deposits by banks
|
|
20,544
|
5,200
|
|
20,528
|
3,435
|
Deposits by banks
|
|
53,847
|
20,045
|
|
32,465
|
9,208
|
Amounts due to subsidiaries
|
|
6,774
|
4,859
|
|
6,956
|
4,829
|
Other customer accounts
|
|
226,598
|
229,080
|
|
194,194
|
187,661
|
Customer accounts
|
|
233,372
|
233,939
|
|
201,150
|
192,490
|
Debt securities in issue
|
|
396
|
301
|
|
-
|
-
|
Settlement balances
|
|
4
|
1,753
|
|
-
|
86
|
Short positions
|
|
-
|
4,591
|
|
-
|
-
|
Amounts due to intermediate holding company and
subsidiaries
|
|
2,966
|
4,294
|
|
2,908
|
3,604
|
Other derivatives
|
|
212
|
360
|
|
209
|
334
|
Derivatives
|
|
3,178
|
4,654
|
|
3,117
|
3,938
|
Provisions for liabilities and charges
|
|
1,398
|
6,659
|
|
1,192
|
1,533
|
Accruals and other liabilities
|
|
2,646
|
1,897
|
|
783
|
467
|
Retirement benefit liabilities
|
|
31
|
29
|
|
15
|
12
|
Amounts due to holding company
|
|
4,515
|
5,806
|
|
4,409
|
4,409
|
Other subordinated liabilities
|
|
1,240
|
1,489
|
|
1,231
|
1,481
|
Subordinated liabilities
|
|
5,755
|
7,295
|
|
5,640
|
5,890
|
Liabilities of disposal groups
|
|
23,849
|
19,313
|
|
-
|
-
|
Total liabilities
|
|
324,476
|
300,476
|
|
244,362
|
213,624
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
81
|
420
|
|
-
|
-
|
Owners' equity
|
|
16,286
|
15,580
|
|
15,355
|
15,297
|
Total equity
|
|
16,367
|
16,000
|
|
15,355
|
15,297
|
Total liabilities and equity
|
|
340,843
|
316,476
|
|
259,717
|
228,921
|
Statement of changes in equity for the year ended 31 December
2017
|
Group
|
|
Bank
|
|
2017
|
2016
|
2015
|
|
2017
|
2016
|
2015
|
£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
|
307
|
18
|
29
|
|
1
|
-
|
-
|
Unrealised gains/(losses)
|
128
|
303
|
(5)
|
|
-
|
1
|
-
|
Realised gains
|
(440)
|
(19)
|
(6)
|
|
-
|
-
|
-
|
Tax
|
-
|
5
|
-
|
|
-
|
-
|
-
|
At 31 December
|
(5)
|
307
|
18
|
|
1
|
1
|
-
|
|
|
|
|
|
|
|
|
Cash flow hedging reserve
|
|
|
|
|
|
|
|
At 1 January
|
-
|
(1)
|
(3)
|
|
-
|
(1)
|
(3)
|
Amount recognised in equity
|
-
|
-
|
-
|
|
(55)
|
-
|
-
|
Amount transferred from equity to earnings
|
-
|
2
|
2
|
|
55
|
2
|
2
|
Tax
|
-
|
(1)
|
-
|
|
-
|
(1)
|
-
|
At 31 December
|
-
|
-
|
(1)
|
|
-
|
-
|
(1)
|
|
|
|
|
|
|
|
|
Foreign exchange reserve
|
|
|
|
|
|
|
|
At 1 January
|
1,626
|
821
|
1,121
|
|
(10)
|
(10)
|
(10)
|
Retranslation of net assets
|
(35)
|
994
|
(283)
|
|
-
|
-
|
-
|
Foreign currency losses on hedges of net assets
|
(77)
|
(54)
|
(20)
|
|
-
|
-
|
-
|
Tax
|
5
|
16
|
3
|
|
-
|
-
|
-
|
Recycled to profit or loss on disposal of businesses
|
(693)
|
(151)
|
-
|
|
-
|
-
|
-
|
At 31 December
|
826
|
1,626
|
821
|
|
(10)
|
(10)
|
(10)
|
|
|
|
|
|
|
|
|
Capital redemption reserve
|
|
|
|
|
|
|
|
At 1 January
|
647
|
647
|
647
|
|
647
|
647
|
647
|
Redemption of preference shares classified as debt
|
149
|
-
|
-
|
|
149
|
-
|
-
|
At 31 December
|
796
|
647
|
647
|
|
796
|
647
|
647
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
At 1 January
|
9,097
|
9,433
|
9,677
|
|
10,756
|
6,743
|
7,384
|
Profit/(loss) attributable to ordinary shareholders
|
|
|
|
|
|
|
|
- continuing operations
|
2,700
|
816
|
339
|
|
26
|
3,466
|
(1,422)
|
- discontinued operations
|
(635)
|
(1,683)
|
(1,544)
|
|
-
|
-
|
-
|
Capital contribution
|
51
|
1,300
|
800
|
|
51
|
1,300
|
800
|
Redemption of debt preference shares
|
(157)
|
-
|
-
|
|
(157)
|
-
|
-
|
Loss on remeasurement of the retirement benefit
schemes
|
|
|
|
|
|
|
|
- gross
|
(22)
|
(1,030)
|
(167)
|
|
(19)
|
(1,058)
|
(348)
|
- tax
|
8
|
320
|
328
|
|
8
|
305
|
329
|
Loss on transfer of fellow subsidiary (1)
|
(276)
|
(59)
|
-
|
|
-
|
-
|
-
|
At 31 December
|
10,766
|
9,097
|
9,433
|
|
10,665
|
10,756
|
6,743
|
|
|
|
|
|
|
|
|
Owners' equity at 31 December
|
16,286
|
15,580
|
14,821
|
|
15,355
|
15,297
|
11,282
|
|
|
|
|
|
|
|
|
Statement of changes in equity for the year ended 31 December
2017
|
Group
|
|
Bank
|
|
2017
|
2016
|
2015
|
|
2017
|
2016
|
2015
|
£m
|
£m
|
£m
|
|
£m
|
£m
|
£m
|
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
|
|
|
|
|
|
At 1 January
|
420
|
346
|
394
|
|
-
|
-
|
-
|
Currency translation adjustments and other movements
|
-
|
73
|
(23)
|
|
-
|
-
|
-
|
Profit/(loss) attributable to non-controlling
interests
|
|
|
|
|
|
|
|
- continuing operations
|
4
|
-
|
(1)
|
|
-
|
-
|
-
|
Dividends paid
|
(5)
|
-
|
-
|
|
-
|
-
|
-
|
Acquisition of business
|
8
|
-
|
-
|
|
-
|
-
|
-
|
Equity withdrawn and disposals (2)
|
(346)
|
1
|
(24)
|
|
-
|
-
|
-
|
At 31 December
|
81
|
420
|
346
|
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
Total equity at 31 December
|
16,367
|
16,000
|
15,167
|
|
15,355
|
15,297
|
11,282
|
|
|
|
|
|
|
|
|
Total equity is attributable to:
|
|
|
|
|
|
|
|
Non-controlling interests
|
81
|
420
|
346
|
|
-
|
-
|
-
|
Ordinary shareholders
|
16,286
|
15,580
|
14,821
|
|
15,355
|
15,297
|
11,282
|
|
16,367
|
16,000
|
15,167
|
|
15,355
|
15,297
|
11,282
|
|
|
|
|
|
|
|
|
Notes:
(1)
Loss in 2017 relates to the legal entity transfer of Lombard North
Central Plc in preparation for ring-fencing.
(2)
Ulster Bank (Ireland) Holdings Unlimited Company (UBIH) was sold to
NatWest Holdings Limited (Natwest Holdings) on 1 January 2017 in
preparation for ring-fencing under ICB.
Cash flow statement for the year ended 31 December
2017
|
|
Group
|
|
Bank
|
|
|
2017
|
2016
|
2015
|
|
2017
|
2016
|
2015
|
£m
|
£m
|
£m
|
|
£m
|
£m
|
£m
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Operating profit/(loss) before tax from continuing
operations
|
|
3,516
|
1,499
|
711
|
|
665
|
4,060
|
(1,105)
|
Loss before tax from discontinued operations
|
|
(642)
|
(1,663)
|
(1,625)
|
|
-
|
-
|
-
|
Adjustments for non-cash items and other
|
|
|
|
|
|
|
|
|
adjustments included within income statement
|
|
(3,855)
|
(3,548)
|
(4,993)
|
|
7,766
|
(697)
|
2,304
|
Cash contribution to defined benefit pension schemes
|
|
(157)
|
(4,473)
|
(807)
|
|
(127)
|
(4,349)
|
(724)
|
Changes in operating assets and liabilities
|
|
16,791
|
(1,227)
|
8,772
|
|
18,013
|
(5,704)
|
(548)
|
Income taxes (paid)/received
|
|
(190)
|
(77)
|
169
|
|
(35)
|
(131)
|
62
|
Net cash flows from operating activities
|
|
15,463
|
(9,489)
|
2,227
|
|
26,282
|
(6,821)
|
(11)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Sale and maturity of securities
|
|
469
|
1,179
|
2,226
|
|
3
|
-
|
782
|
Purchase of securities
|
|
(1,567)
|
(1,246)
|
(1,417)
|
|
(1,064)
|
-
|
-
|
Sale of property, plant and equipment
|
|
319
|
64
|
413
|
|
81
|
17
|
15
|
Purchase of property, plant and equipment
|
|
(283)
|
(88)
|
(207)
|
|
(65)
|
(61)
|
(165)
|
Net investment in business interests and intangible
assets
|
|
5,543
|
(1,247)
|
(2,716)
|
|
(3,622)
|
(307)
|
(715)
|
Net cash flows from investing activities
|
|
4,481
|
(1,338)
|
(1,701)
|
|
(4,667)
|
(351)
|
(83)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Issue of subordinated liabilities
|
|
507
|
-
|
-
|
|
-
|
-
|
-
|
Capital contribution
|
|
51
|
1,300
|
800
|
|
51
|
1,300
|
800
|
Redemption of non-controlling interests
|
|
(346)
|
-
|
-
|
|
-
|
-
|
-
|
Redemption of subordinated liabilities
|
|
(936)
|
-
|
(387)
|
|
-
|
-
|
(387)
|
Redemption of preference shares
|
|
(178)
|
-
|
-
|
|
(178)
|
-
|
-
|
Dividends paid
|
|
(5)
|
-
|
-
|
|
-
|
-
|
-
|
Interest on subordinated liabilities
|
|
(222)
|
(245)
|
(262)
|
|
(57)
|
(237)
|
(255)
|
Net cash flows from financing activities
|
|
(1,129)
|
1,055
|
151
|
|
(184)
|
1,063
|
158
|
Effects of exchange rate changes on cash and cash
equivalents
|
|
(639)
|
2,993
|
115
|
|
(138)
|
1,073
|
(55)
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
18,176
|
(6,779)
|
792
|
|
21,293
|
(5,036)
|
9
|
Cash and cash equivalents at 1 January
|
|
79,764
|
86,543
|
85,751
|
|
61,151
|
66,187
|
66,178
|
Cash and cash equivalents at 31 December
|
|
97,940
|
79,764
|
86,543
|
|
82,444
|
61,151
|
66,187
|
|
|
|
|
|
|
|
|
|
Notes on the accounts
1 Basis of Preparation
The
Group's consolidated financial statements should be read in
conjunction with the 2017 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
2017 have been prepared on a going concern basis.
2 Businesses within disposal groups.
NatWest Group Holdings Corp.
NatWest
Group Holdings Corp (NWGH) which wholly owns RBS Securities Inc
(RBSSI) is due to be transferred to RBS plc (which is due to be
renamed NatWest Markets plc in 2018) by 1 January 2019 in
preparation for ring-fencing. NWGH is a direct subsidiary of
NatWest. NWGH is classified as a disposal group at 31 December
2017 and its assets and liabilities presented in aggregate in
accordance with IFRS 5. NWGH was mainly reported in the former
NatWest Markets and Capital Resolution operating segments, which
are no longer reportable operating segments but presented as a
discontinued operation and comparatives have been re-presented
accordingly.
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 101 to
109 of the 2017 Annual Report and Accounts. Amendments to IFRS
effective for 2017 have not had a material effect on the 2017
results.
Critical accounting policies and key sources of estimation
uncertainty
The
judgments 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 judgments are
described on pages 109 to 111 of the 2017 Annual Report and
Accounts.
Notes on the accounts
4 Operating expenses
|
Group
|
|
2017
|
2016
|
2015
|
|
£m
|
£m
|
£m
|
Wages, salaries and other staff costs
|
647
|
582
|
750
|
Social security costs
|
52
|
53
|
50
|
Pension costs
|
|
|
|
- defined benefit schemes
|
131
|
60
|
239
|
- gains on curtailments or settlements
|
-
|
-
|
(57)
|
- defined contribution schemes
|
14
|
18
|
18
|
Staff costs
|
844
|
713
|
1,000
|
|
|
|
|
Premises and equipment
|
273
|
233
|
442
|
Other administrative expenses (1)
|
2,921
|
3,326
|
3,306
|
|
|
|
|
Property, plant and equipment, depreciation and write
down
|
213
|
79
|
75
|
Intangible assets amortisation
|
69
|
48
|
61
|
Depreciation and amortisation
|
282
|
127
|
136
|
Write down of goodwill and other intangible assets
|
-
|
16
|
85
|
|
4,320
|
4,415
|
4,969
|
|
|
|
|
|
|
|
|
Restructuring costs relating to continuing operations included in
operating expenses comprise:
|
|
|
|
2017
|
2016
|
2015
|
|
£m
|
£m
|
£m
|
Staff costs
|
83
|
44
|
81
|
Premises and depreciation
|
104
|
(3)
|
523
|
Other (2)
|
31
|
29
|
112
|
|
218
|
70
|
716
|
Notes:
(1)
Includes litigation and conduct costs. Further details are provided
in Note 9.
(2)
Includes other administration expenses and write down of intangible
assets.
5 Pensions
As at
31 December 2017, the Main Scheme had an unrecognised surplus
reflected by a ratio of assets to liabilities of c.120% under IAS
19 valuation principles. The surplus is unrecognised because
the trustee's power to enhance member benefits could consume that
surplus meaning that RBS does not control its ability to realise an
asset. The existence of the asset, albeit unrecognised, limits
RBS's exposure to changes in actuarial assumptions and investment
performance. See Note 4 on the 2017 Annual Report and Accounts for
further details.
Notes on the accounts
6 Tax
|
|
|
2017
|
2016
|
2015
|
|
£m
|
£m
|
£m
|
Current tax
|
|
|
|
Charge for the year
|
(781)
|
(639)
|
(98)
|
Over/(under) provision in respect of prior years
|
19
|
(60)
|
(13)
|
|
(762)
|
(699)
|
(111)
|
Deferred tax
|
|
|
|
(Charge)/credit for the year
|
(12)
|
35
|
(287)
|
Reduction in the carrying value of deferred tax assets
|
-
|
(17)
|
-
|
(Under)/over provision in respect of prior years
|
(38)
|
(2)
|
25
|
Tax charge for the year
|
(812)
|
(683)
|
(373)
|
The
actual tax charge differs from the expected tax charge computed by
applying the standard rate of UK corporation tax of 19.25% (2016 -
20.00%; 2015 - 20.25%) as follows:
|
2017
|
2016
|
2015
|
|
£m
|
£m
|
£m
|
Expected tax charge
|
(677)
|
(300)
|
(144)
|
Losses and temporary differences in year where no deferred tax
asset recognised
|
(2)
|
(1)
|
(51)
|
Foreign profits taxed at other rates
|
(2)
|
1
|
(3)
|
UK tax rate change impact (1)
|
-
|
(27)
|
(51)
|
Non-deductible goodwill impairment
|
-
|
-
|
(25)
|
Items not allowed for tax
|
|
|
|
- losses on disposal and write-downs
|
(77)
|
(14)
|
(1)
|
- UK bank levy
|
-
|
-
|
(3)
|
- regulatory and legal actions
|
(29)
|
(119)
|
(106)
|
- other disallowable items
|
(31)
|
(45)
|
(45)
|
Non-taxable items
|
228
|
65
|
39
|
Taxable foreign exchange movements
|
3
|
(6)
|
4
|
Losses brought forward and utilised
|
3
|
5
|
1
|
Reduction in carrying value of deferred tax asset in respect
of
|
|
|
|
- UK losses
|
-
|
(17)
|
-
|
Banking surcharge
|
(209)
|
(163)
|
-
|
Adjustments in respect of prior years (2)
|
(19)
|
(62)
|
12
|
Actual tax charge
|
(812)
|
(683)
|
(373)
|
Notes:
(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 2017 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.
(2)
Prior year tax adjustments incorporate refinements to tax
computations made on submission and agreement with the tax
authorities. Current taxation balances include provisions in
respect of uncertain tax positions, in particular in relation to
restructuring and other costs where the taxation treatment remains
subject to agreement with the relevant tax
authorities.
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
|
|
2016
|
assessed
|
assessed
|
2017
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
At 1 January
|
249
|
1,127
|
187
|
1,563
|
5,335
|
Transfers to disposal groups
|
-
|
-
|
-
|
-
|
(1,200)
|
Transfers from fellow subsidiaries
|
37
|
49
|
14
|
100
|
-
|
Currency translation and other adjustments
|
(3)
|
3
|
-
|
-
|
368
|
Amounts written-off
|
(100)
|
(477)
|
-
|
(577)
|
(2,946)
|
Recoveries of amounts previously written-off
|
7
|
66
|
-
|
73
|
61
|
Charge/(release) to income statement
|
|
|
|
|
|
- from continuing operations
|
99
|
203
|
9
|
311
|
125
|
- from discontinued operations
|
-
|
-
|
-
|
-
|
(106)
|
Unwind of discount (recognised in interest income)
|
|
|
|
|
|
- from continuing operations
|
(4)
|
(27)
|
-
|
(31)
|
(37)
|
- from discontinued operations
|
-
|
-
|
-
|
-
|
(37)
|
At 31 December
|
285
|
944
|
210
|
1,439
|
1,563
|
|
Bank
|
|
Individually
|
Collectively
|
Latent
|
|
2016
|
assessed
|
assessed
|
2017
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
At 1 January
|
201
|
1,004
|
167
|
1,372
|
1,692
|
Currency translation and other adjustments
|
(2)
|
4
|
-
|
2
|
2
|
Amounts written-off
|
(77)
|
(431)
|
-
|
(508)
|
(468)
|
Recoveries of amounts previously written-off
|
4
|
63
|
-
|
67
|
26
|
Charge/(release) to income statement
|
59
|
187
|
9
|
255
|
155
|
Unwind of discount (recognised in interest income)
|
(3)
|
(26)
|
-
|
(29)
|
(35)
|
At 31 December
|
182
|
801
|
176
|
1,159
|
1,372
|
|
Group
|
|
Impairment charge/(release) to the income statement
|
2017
|
2016
|
2015
|
|
£m
|
£m
|
£m
|
|
Loans and advances to customers
|
311
|
125
|
(54)
|
|
Charge/(release) to the income statement for continuing
operations
|
311
|
125
|
(54)
|
|
|
|
|
|
|
There was no release to the income statement in relation to
discontinued operations (2016 - £106 million: 2015 - £675
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, NatWest Group Holdings Corp
(NWGH), which is a direct subsidiary of NatWest and which wholly
owns RBS Securities Inc (RBSSI), is due to be transferred to RBSG
by 1 January 2019 in preparation for ring-fencing. Accordingly,
NWGH is classified as a disposal group at 31 December 2017 and
presented as a discontinued operation, with comparative income statement and
related notes re-presented.
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 was classified as a disposal group at 31 December
2016 and presented as a discontinued operation.
(a) Profit from discontinued operations, net of tax
|
|
|
|
|
2017
|
2016
|
2015
|
|
£m
|
£m
|
£m
|
NWGH
|
|
|
|
Interest income
|
-
|
-
|
1
|
Interest expense
|
(17)
|
(4)
|
(7)
|
Net interest income
|
(17)
|
(4)
|
(6)
|
Other income
|
99
|
146
|
412
|
Total income
|
82
|
142
|
406
|
Operating expenses
|
(724)
|
(1,859)
|
(2,868)
|
Loss before impairment losses
|
(642)
|
(1,717)
|
(2,462)
|
Impairment losses
|
-
|
(6)
|
(2)
|
Operating loss before tax
|
(642)
|
(1,723)
|
(2,464)
|
Tax credit/(charge)
|
7
|
(23)
|
84
|
Loss from NWGH discontinued operations, net of tax
|
(635)
|
(1,746)
|
(2,380)
|
|
|
|
|
|
|
|
|
UBIH
|
|
|
|
Interest income
|
-
|
482
|
487
|
Interest expense
|
-
|
(72)
|
(124)
|
Net interest income
|
-
|
410
|
363
|
Other income
|
-
|
122
|
141
|
Total income
|
-
|
532
|
504
|
Operating expenses
|
-
|
(584)
|
(341)
|
(Loss)/profit before impairment losses
|
-
|
(52)
|
163
|
Impairment losses
|
-
|
112
|
676
|
Operating profit before tax
|
-
|
60
|
839
|
Tax credit/(charge)
|
-
|
3
|
(3)
|
Profit from UBIH discontinued operations, net of tax
|
-
|
63
|
836
|
(b) Operating cash flows attributable to discontinued
operations
|
|
|
|
|
2017
|
2016
|
2015
|
|
£m
|
£m
|
£m
|
Net cash flows from operating activities
|
(795)
|
2,560
|
(2,724)
|
Net cash flows from investing activities
|
4
|
178
|
211
|
Net cash flows from financing activities
|
502
|
(1,802)
|
(5)
|
Net increase in cash and cash equivalents
|
(361)
|
1,675
|
(2,463)
|
Notes on the accounts
(c) Assets and liabilities of disposal groups
|
|
|
|
|
|
|
|
2017
|
2016
|
|
|
|
£m
|
£m
|
Assets of disposal groups
|
|
|
|
|
Cash and balances at central banks
|
|
|
-
|
249
|
Loans and advances to banks
|
|
|
10,381
|
2,418
|
Loans and advances to customers
|
|
|
8,838
|
18,922
|
Debt securities and equity shares
|
|
|
4,062
|
2,953
|
Derivatives
|
|
|
3
|
94
|
Property, plant and equipment
|
|
|
168
|
67
|
Settlement balances
|
|
|
1,011
|
-
|
Other assets
|
|
|
63
|
273
|
|
|
|
24,526
|
24,976
|
|
|
|
|
|
Liabilities of disposal groups
|
|
|
|
|
Deposits by banks
|
|
|
3,168
|
1,309
|
Customer accounts
|
|
|
13,976
|
16,113
|
Derivatives
|
|
|
2
|
126
|
Debt securities in issue
|
|
|
-
|
1,179
|
Subordinated liabilities
|
|
|
804
|
76
|
Settlement balances
|
|
|
1,532
|
-
|
Short positions
|
|
|
2,436
|
-
|
Provisions for liabilities and charges
|
|
|
1,722
|
202
|
Other liabilities
|
|
|
209
|
308
|
|
|
|
23,849
|
19,313
|
At 31
December 2017, disposal groups comprise the third party net assets
of NWHG due to be distributed to RBSG before 1 January 2019; costs
to distribute are expected to be immaterial. At 31 December 2016,
disposal groups comprise the third party net assets of UBIH and the
Group's interest in RBS International.
Debt
securities and equity shares are carried at fair value and are
primarily classed as Level 1in the fair value
hierarchy.
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 2017
|
753
|
562
|
4,966
|
86
|
292
|
6,659
|
Transfer to disposal groups
|
-
|
-
|
(1,683)
|
(12)
|
(27)
|
(1,722)
|
Acquisition of business
|
-
|
55
|
-
|
4
|
13
|
72
|
Currency translation and other movements
|
-
|
-
|
(386)
|
(14)
|
27
|
(373)
|
Charge to income statement
|
|
|
|
|
|
|
- from continuing operations
|
107
|
31
|
-
|
50
|
276
|
464
|
- from discontinued operations
|
-
|
-
|
600
|
-
|
8
|
608
|
Releases to income statement
|
|
|
|
|
|
|
- from continuing operations
|
(3)
|
(43)
|
-
|
(2)
|
(78)
|
(126)
|
- from discontinued operations
|
-
|
-
|
(50)
|
-
|
-
|
(50)
|
Provisions utilised
|
(225)
|
(219)
|
(3,447)
|
(47)
|
(196)
|
(4,134)
|
At 31 December 2017
|
632
|
386
|
-
|
65
|
315
|
1,398
|
|
|
|
|
|
|
|
Bank
|
|
|
|
|
|
|
Payment
|
Other
|
Litigation
|
|
Total
|
|
protection
|
customer
|
and other
|
Property
|
|
insurance
|
redress
|
regulatory
|
and other
|
Provisions for liabilities and charges
|
£m
|
£m
|
£m
|
£m
|
£m
|
At 1 January 2017
|
744
|
538
|
-
|
251
|
1,533
|
Acquisition of business
|
-
|
-
|
-
|
1
|
1
|
Currency translation and other movements
|
-
|
-
|
(1)
|
(1)
|
(2)
|
Charge to income statement
|
107
|
33
|
5
|
209
|
354
|
Releases to income statement
|
(6)
|
(47)
|
-
|
(66)
|
(119)
|
Provisions utilised
|
(223)
|
(198)
|
(2)
|
(152)
|
(575)
|
At 31 December 2017
|
622
|
326
|
2
|
242
|
1,192
|
|
|
|
|
|
|
|
|
|
|
|
|
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
2017. 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
|
|
2017
|
2016
|
|
2017
|
2016
|
|
£m
|
£m
|
|
£m
|
£m
|
Contingent liabilities and commitments
|
|
|
|
|
|
Guarantees and assets pledged as collateral security
|
674
|
869
|
|
562
|
648
|
Other contingent liabilities
|
871
|
1,222
|
|
823
|
966
|
Standby facilities, credit lines and other commitments
|
53,416
|
55,363
|
|
47,095
|
48,325
|
|
54,961
|
57,454
|
|
48,480
|
49,939
|
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 2017 (refer to Note 9).
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 the Risk Factor relating to legal,
regulatory and governmental actions and investigations set out on
page 44.
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 RBSG (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. These and other similar threatened claims were
consolidated by the Court via a Group Litigation Order. Since then,
further High Court claims have been issued against RBS under the
Group Litigation Order. Prior to the 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
Litigation, investigations and reviews continued
In
December 2016 the RBS Group concluded full and final settlements
with four of the five shareholder groups representing 78 per cent
of the claims by value. Further full and final settlements, without
any admission of liability were reached and the RBS Group has now
concluded the action with over 98 per cent of the
claimants.
The
aggregate settlement figure available to claimants is £900
million, for which a previously established provision is in place,
and is subject to validation of claims.
The
Court directed that any claimant choosing not to enter the
settlement should, by 28 July 2017, issue an application to restore
the proceedings. No such application was made.
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.
In
general, plaintiffs in these actions claim that certain disclosures
made in connection with the relevant offerings of RMBS 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 Securities Inc.
remains a defendant in a lawsuit relating to RMBS issued by Nomura
Holding America Inc. (Nomura) and subsidiaries, filed by 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). In 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, 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 contained materially misleading statements
about the mortgage loans that backed the securitisations. Nomura
and the RBS Group appealed. On 28 September 2017, the court's
judgment against Nomura and RBS Securities Inc. was affirmed by the
United States Court of Appeals for the Second Circuit.
RBS
Securities Inc. estimates that its net exposure under the court's
judgment is approximately US$318 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 estimated net
exposure in this matter is covered by an existing provision. The
judgment is stayed pending defendants' request for review by the
United States Supreme Court, though post-judgment interest on the
judgment amount will accrue while that request and any further
review 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.
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 settled this matter for US$55.3 million, which has been paid
into escrow pending court approval of the
settlement.
In
addition to the above, the remaining RMBS lawsuits against RBS
Group companies consist of cases filed by the Federal Home Loan
Banks of Boston and Seattle and the Federal Deposit Insurance
Corporation that together involve the issuance of less than US$1
billion of RMBS issued primarily from 2005 to 2007.
As at
31 December 2017, 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
27) was £1.7 billion (US$2.3 billion) which has been
transferred to disposal groups. 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.
The RBS
Group continues to caution that, in connection with RMBS litigation
matters and RMBS investigations taken as a whole, further
substantial provisions and costs may be recognised and, depending
on the final outcomes, other adverse consequences may
occur.
London Interbank Offered Rate (LIBOR) and other rates
litigation
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.
Notes on the accounts
Litigation, investigations and reviews continued
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 in 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 has been 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.
On 10
July 2017, the US Federal Deposit Insurance Corporation (FDIC), on
behalf of 39 failed US banks, served a claim in the High
Court of Justice of England and Wales against the RBS Group, other
LIBOR panel banks and the British Bankers' Association, alleging
collusion with respect to the setting of USD LIBOR. The action
alleges that the defendants breached English and
European competition law as well as asserting common law
claims of fraud under US law. The FDIC previously asserted
many of the same US law USD LIBOR-related claims against the RBS
Group and others in a lawsuit pending in the United States District
Court for the Southern District of New York, though most of the
claims in that case have been dismissed as a result of a series of
rulings by that court. The RBS Group's defence to the High Court
claim was filed on 24 November 2017.
Certain
members of the Group have also been named as defendants in two
class actions relating to JPY LIBOR and Euroyen TIBOR, both pending
before the same judge in the United States District Court for the
Southern District of New York. In the first case, relating to
Euroyen TIBOR futures contracts, the court dismissed plaintiffs'
antitrust claims in March 2014, but declined to dismiss their
claims under the Commodity Exchange Act for price manipulation,
which are proceeding in the discovery phase.
In the
second case, relating to other derivatives allegedly tied to JPY
LIBOR and Euroyen TIBOR, the court dismissed the case on 10 March
2017 on the ground that the plaintiffs lack standing. Plaintiffs
have commenced an appeal of that decision.
Certain
members of the Group have also been named as defendants in class
actions relating to (i) Euribor, (ii) Swiss Franc LIBOR (iii) Pound
sterling LIBOR, (iv) the Singapore Interbank Offered Rate and
Singapore Swap Offer Rate, and (v) 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.
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.
On 18
August 2017, the court in the action relating to the Singapore
Interbank Offered Rate and Singapore Swap Offer Rate dismissed all
claims against the RBS Group for lack of personal jurisdiction;
however, the court allowed the plaintiffs to replead their
complaint, and defendants' renewed motion to dismiss the amended
complaint is pending. On 25 September 2017, the court in the action
relating to Swiss Franc LIBOR dismissed all claims against all
defendants on various grounds; however, the court held that it has
personal jurisdiction over RBS and allowed the plaintiffs to
replead their complaint, and defendants' renewed motion to dismiss
the amended complaint is pending. The other matters described in
this paragraph (relating to Pound Sterling LIBOR and the Australian
Bank Bill Swap Reference Rate) are subject to motions to dismiss
that are currently pending.
Details
of UK litigation claims in relation to the sale of interest rate
hedging products (IRHPs) involving LIBOR-related allegations are
set out under "Interest rate hedging products litigation" on page
26. Details of LIBOR investigations involving the RBS Group are set
out under ''Investigations and reviews'' on page 28.
Notes on the accounts
Litigation, investigations and reviews continued
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 in 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 in December 2015, the RBS Group paid the total
settlement amount (US$255 million) into escrow pending final court
approval of the settlement.
On 24
March 2017, the court dismissed a second FX-related antitrust class
action, holding that the alleged class of "consumers and end-user
businesses" lacked standing to pursue antitrust claims. The
plaintiffs in that case have since filed an amended complaint. The
defendants made a renewed motion to dismiss the complaint but the
court denied that motion on 3 August 2017. As a result, the
discovery phase has commenced. The RBS Group and the other
defendants are seeking reconsideration of the court's decision
regarding standing or, in the alternative, permission to take an
immediate appeal to the United States Court of Appeals for the
Second Circuit.
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 in September 2016
on the ground that the plaintiffs failed to plead that the
defendants had ERISA-based fiduciary duties to the plaintiffs. The
plaintiffs' appeal of this dismissal remains pending.
Beginning
in September 2016, several additional class action complaints were
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 plaintiffs define "indirect purchasers" as
persons who were indirectly affected by FX instruments that others
entered into directly with defendant banks or on exchanges. The
consolidated amended complaint for these matters alleges 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 plaintiffs have asserted claims
under federal and state antitrust laws. The RBS Group and the other
defendants have filed a motion to dismiss, which remains
pending.
On 12
July 2017, Alpari (US) LLC (Alpari) filed a class action complaint
against RBS Group companies in the United States District Court for
the Southern District of New York. The complaint alleges that the
RBS Group breached contracts with Alpari and other counterparties
by rejecting FX orders placed over electronic trading platforms
through the application of a function referred to as "Last Look",
and that the rejected orders were later filled at prices less
favourable to putative class members.
The
complaint contains claims for breach of contract and unjust
enrichment. The RBS Group has filed a motion to compel arbitration
of Alpari's claims or, in the alternative, to dismiss those claims
for improper venue.
In
September 2015, certain members of the Group, as well as a number
of other financial institutions, were named as defendants in two
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,
alleging that the defendants violated the Canadian Competition Act
by conspiring to manipulate the prices of currency
trades.
The RBS
Group settled the matters for approximately CAD 13 million. The
settlement amount has been paid and the settlement has received
final 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.
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
consolidated amended complaint for these matters, pending in the
United States District Court for the Southern District of New York,
alleges that RBS Securities Inc. and the other 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 complaint asserts claims under the US antitrust
laws on behalf of persons who transacted in US Treasury securities
or derivatives based on such instruments, including futures and
options. The defendants anticipate filing a motion to dismiss the
operative complaint in this matter.
Notes on the accounts
Litigation, investigations and reviews continued
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. In 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.
In July
2017, the Court overseeing the above matters dismissed all claims
against RBS Group companies relating to the
2008 -
2012 time period, but declined to dismiss certain antitrust and
unjust enrichment claims covering the 2013 - 2016 time period.
Discovery is ongoing.
On 8
June 2017, TeraExchange filed another complaint against the RBS
Group and others in the United States District Court for the
Southern District of New York, this time relating to credit default
swaps instead of interest rate swaps. TeraExchange alleges it would
have established exchange-like trading of credit default swap if
the defendant dealers had not engaged in an unlawful antitrust
conspiracy. The RBS Group has filed a motion to dismiss the
complaint in this matter.
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. In 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 £34.8 million and the trial ended in October 2016. In
December 2016 the Court dismissed all of PAG's claims. PAG appealed
that decision, and the appeal hearing closed on 8 February 2018.
The judgment is awaited. The decision (subject to the 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 London Bridge Holdings Ltd and others v RBS plc remains
stayed pending the outcome of the PAG appeal. The sum claimed in
that case is £446.7 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. 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
RBS, on the basis that the bank does not owe a legal duty of care
to customers in carrying out the FCA review. An appeal of that
decision was dismissed in July 2017 and permission to further
appeal was refused by the UK Supreme Court in December
2017.
Notes on the accounts
Litigation, investigations and reviews continued
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"). In the event that the
assessment is upheld, interest and costs would be payable, and a
penalty of up to 100 per cent of the VAT held to have been
legitimately denied by HMRC could also be levied. 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
£80 million plus interest and costs by alleging that RBS
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 trial in that matter is currently
scheduled to start in June 2018.
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.
In
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 in 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. In 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. On 5 October 2017, the
United States District Court for the Eastern District of New York
dismissed claims against NatWest with respect to two terrorist
attacks, but denied NatWest's summary judgment motion with respect
to claims arising from 16 other attacks. No trial date has been
set.
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 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.
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
several state attorneys general, including those mentioned below,
relating to, among other things, issuance, underwriting and trading
in RMBS and other mortgage-backed securities and collateralised
debt obligations (CDOs).
These
ongoing matters include, among others, active 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.
Notes on the accounts
Litigation, investigations and reviews continued
As at
31 December 2017, the Group's total aggregate of provisions in
relation to certain of the RMBS investigations and RMBS litigation
matters (set out under "Litigation" on page 23) was £1.7
billion (US$2.3 billion). The provision at 31 December 2017 has
been transferred to disposal groups.
The RBS
Group continues to cooperate with the DOJ in its investigations of
RMBS matters and with certain state attorneys general in their
investigations. The duration, timing for resolution 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 may occur as described above and in the Risk
Factor relating to legal, regulatory and governmental actions and
investigations set out on page 44.
In
December 2017, RBS Financial Products Inc. agreed to pay US$125
million to settle the RMBS investigation of the California Attorney
General. Payment has been made from a previously established
provision. Ongoing investigations into the same or similar issues
by certain other state attorneys general are at various stages. RBS
is in advanced discussions with the New York Attorney General to
resolve its investigation, although there is no certainty that any
settlement will be reached.
On 26
October 2017, the United States Attorney for the District of
Connecticut (USAO) announced that it had entered into a
Non-Prosecution Agreement (NPA) with RBS Securities Inc. in
connection with alleged misrepresentations to counterparties
relating to secondary trading in various forms of asset-backed
securities. The NPA, which recognises RBS Securities Inc.'s timely
self-reporting and cooperation, required RBS Securities Inc. to pay
a penalty of US$35 million, reimburse customers at least US$9.1
million, and continue to cooperate with the investigation of RMBS
Matters. These amounts were covered by provisions existing at the
time of settlement. As part of the NPA, the USAO has agreed
not to file criminal charges against RBS Securities Inc.
relating to certain conduct and information described in the NPA if
RBS Securities Inc. complies with the NPA during its one-year
term. In March and December 2015, two former RBS Securities
Inc. 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 RBS
Securities Inc..
US mortgages - loan repurchase matters
The RBS
Group'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
From
February 2013 to December 2016, the RBS Group entered into
settlements with various governmental authorities in relation to
investigations into submissions, communications and procedures
around the setting of LIBOR and other interest rates and interest
rate trading, which, among other things, required the RBS Group to
pay significant penalties. As part of these resolutions, the RBS
Group made certain undertakings regarding benchmark interest rates,
including the undertakings contained in its February 2013
resolution with the Commodity Futures Trading Commission
(CFTC).
The RBS
Group continues to co-operate with investigations and requests for
information by various other governmental and regulatory
authorities, including in the UK, US and APAC.
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 RBSG'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 in
November 2014.
In 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.
Notes on the accounts
Litigation, investigations and reviews continued
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.
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 appointed an independent Skilled Person under section 166
of the Financial Services and Markets Act to review the allegations
in the Tomlinson Report. 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.
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.
In
November 2016, the FCA published an update on its review. In
response, the RBS Group announced redress steps for SME customers
in the UK and the Republic of Ireland that were in GRG between 2008
and 2013. These steps were (i) an automatic refund of certain
complex fees; and (ii) a new complaints process, overseen by an
Independent Third Party. They were developed with the involvement
of the FCA, which agreed that they were appropriate steps for the
RBS Group to take.
The
Group estimates the costs associated with the complaints review
process and the automatic refund of complex fees to be
approximately £223 million, which was 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 complaints process. Of the £223
million provision, £78 million had been utilised by 31
December 2017.
On 23
October 2017, the FCA published an interim report incorporating a
summary of the Skilled Person's report which
stated
that, further to the general investigation announced in November
2016, the FCA had decided to carry out a more focused
investigation. The FCA published its final summary of the Skilled
Person's report on 28 November 2017. The UK House of Commons
Treasury Select Committee, seeking to rely on Parliamentary powers,
published the full version of the Skilled Person's report on 20
February 2018.
Notes on the accounts
Litigation, investigations and reviews continued
Interest rate hedging products (IRHP) redress
programme
From
2013, the RBS Group and other banks undertook 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 Group
provisions in relation to the above redress exercises total
£1.0 billion for these matters, virtually all of which had
been utilised at 31 December 2017.
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 in 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 been granted
permission to appeal that decision, and the appeal hearing is
expected to take place on 23 and 24 May 2018. 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 the appeal in the other bank's case. If 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 were 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 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 1 April 2015. The project regarding
review/remediation of sales between 1 January 2011 and 1 April 2015
was due to finish at the end of 2017 but this deadline is being
extended with completion anticipated by the end of Q1 2018. This is
to allow completion of outstanding remediation activity that was
impacted by customer responses, and to receive information from
third party providers, in addition to concluding small cohorts of
work that were postponed until the additional scope was
agreed.
In
addition, discussions are ongoing with FCA with regard to extending
the scope of the review/remediation exercise to include the period
from 1 January 2010 to 31 December 2010, with a formal decision
expected during Q1 2018. It is not currently anticipated that any
extension of scope will require an additional provision to be
taken.
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 provisions in relation to investment advice total £105
million to date for these matters, of which £71 million had
been utilised as at 31 December 2017.
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.
The FCA
conducted a thematic review of packaged bank accounts across the UK
from October 2014 to April 2016, the results of which were
published in October 2016. The RBS Group continues to take
into consideration and, where relevant, address the findings from
this review.
Notes on the accounts
Litigation, investigations and reviews continued
FCA investigation into the RBS Group plc's compliance with the
Money Laundering Regulations 2007
On 21
July 2017, the FCA notified the RBS Group that it was undertaking
an investigation into RBS plc's compliance with the Money
Laundering Regulations 2007 in relation to certain customers.
Following amendment to the scope of the investigation, there are
currently three areas under review: (1) compliance with Money
Laundering Regulations in respect of Money Service Business
customers; (2) compliance with the Terrorism Act 2000 in relation
to sanctions screening; and (3) the Suspicious Transactions
regime in relation to the events surrounding a particular customer.
The investigations in all three areas are assessing both criminal
and civil culpability. The RBS Group is cooperating with the
investigations.
Multilateral interchange fees
In
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.
Separately,
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. On 3 August
2017, the EC announced it had also sent Visa a Supplementary
Statement of Objections. The EC investigations are
ongoing.
In 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.
In 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 the FCA's policy
statement for the handling of complaints about the mis-selling of
PPI (Policy Statement 10/12).
In
August 2017, the FCA's new rules and guidance on PPI complaints
handling (Policy Statement 17/3) came into force. The Policy
Statement introduced new so called 'Plevin' rules, under which
customers may be eligible for redress if the bank earned a high
level of commission from the sale of PPI, but did not disclose this
detail at the point of sale. The Policy Statement also introduced a
two year PPI deadline, due to expire in August 2019, before which
new PPI complaints must be made. The RBS Group is implementing the
Policy Statement.
The
Group has made provisions totalling £3.0 billion to date for
PPI claims, including an additional provision of £107 million
in 2017. Of the £3.0 billion cumulative provision, £2.4
billion had been utilised by 31 December 2017.
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 personal current account (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 set out remedies to address these concerns. These
included 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 (the "Order"), 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).
On 19
December 2017 the CMA published directions for the RBS Group and
four other banks, which set out revised
implementation
dates for the delivery of certain obligations relating to open
banking under the Order.
On 29
January 2018 the CMA published separate directions for RBS, which
set out revised implementation dates for the delivery of certain
obligations requiring PCA overdraft alerts to be sent to customers
under the Order.
At this
stage there remains uncertainty around the financial impact of the
remedies once implemented, and so it is not practicable to estimate
the potential impact on the RBS Group, which may be
material.
Notes on the accounts
Litigation, investigations and reviews continued
FCA Investment and Corporate Banking Market Study
In February 2015, the FCA launched a market study into investment
and corporate banking. In October 2016 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. The prohibition on restrictive contractual
clauses took effect from 3 January 2018.
Some uncertainty remains around the financial impact of the
remedies once implemented and so it is not practicable reliably to
estimate the potential impact on the RBS Group. However, at this
stage, this impact is not expected to be material.
FCA Asset Management Market Study
In November 2015, the FCA announced that a market study would be
undertaken into asset management. In 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. On 28 June 2017, the FCA published the final report
which was broadly in line with the interim report and sets out an
extensive package of remedies which include providing further
protection to investors and driving competitive pressure on asset
managers.
Some uncertainty remains around the financial impact of the
remedies once implemented and so it is not practicable reliably to
estimate the potential impact on the RBS Group. However, at this
stage, this impact is not expected to be material.
FCA Mortgages Market Study
In
December 2016, the FCA launched a market study into the provision
of mortgages. The FCA is expected to publish an interim report in
Spring 2018 with the final report expected in Q4 2018.
At this
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.
FCA Strategic Review of Retail Banking Models
On 11
May 2017 the FCA announced a two phase strategic review of retail
banking models. The FCA will use the review to understand how these
models operate, including how 'free if in credit' banking is paid
for and the impact of changes such as increased use of digital
channels and reduced branch usage.
Phase 1
will allow the FCA to enhance its understanding of existing models
and how these impact competition and conduct. Phase 2 will evaluate
the impacts of economic, technological, social and regulatory
factors on these models. A project update is expected in Q2 2018
outlining the FCA's preliminary conclusions from Phase
1.
At this
early stage, as there is considerable uncertainty around the
outcome of this review, it is not practicable reliably to estimate
the aggregate impact, if any, on the RBS Group, which in due course
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.
|
Notes on the accounts
Litigation, investigations and reviews continued
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.
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 in 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 in
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. The
authorities have requested a third annual review to be conducted
and independent consultant reports are expected to be issued during
Q1 2018.
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 RBS 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. In 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 offences in connection
with US related accounts.
Notes on the accounts
Litigation, investigations and reviews continued
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 RBS 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. FINMA
is currently investigating three individuals in connection with
1MDB.
In
addition, Coutts & Co Ltd is 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.
Regulator requests concerning certain historic Russian
transactions
Media
coverage in 2017 highlighted an alleged money laundering scheme
involving Russian entities between 2010 and 2014. Allegedly certain
European banks, including the RBS Group and 16 other UK based
financial institutions, and certain US banks, were involved in
processing certain transactions associated with this scheme. The
RBS Group has responded to requests for information from the FCA,
PRA and regulators in other jurisdictions.
Notes on the accounts
11 Segmental analysis
(a) Reportable segments
Segmental reorganisation and business transfers
The
Group continues to deliver on its plan to build a strong, simple
and fair bank for both customers and shareholders. To support this,
and in preparation for the UK ring-fencing regime the previously
reported operating segments were realigned in Q4 2017 and a
number of business transfers completed.
Segmental reorganisation
The
previously reported operating segments are now realigned and
comparatives have been re-presented as follows:
● The former Capital Resolution reported operating
segment has been integrated into the NatWest Markets reportable
segment, with the exception of the costs in relation to the retail
mortgage backed securities (RMBS) claims, which have been
transferred to the Central items & other reportable
segment.
● NatWest Markets (including the former Capital
Resolution business), which is predominately RBS Securities Inc
(RBSSI), and is wholly owned by NatWest Group Holdings Corp (NWGH),
is due to be transferred to RBS plc by 1 January 2019. It is
therefore no longer a reportable segment and presented as a
discontinued operation.
Business transfers
On 1
October 2017 the following changes were made to the Group's
businesses, which impacts its financial reporting but where
comparatives have not been re-presented:
● Certain UK PBB and Commercial Banking businesses,
which are prohibited from being within the ring-fence but are
designed to serve UK PBB and Commercial Banking customers, have
move out of those segments to Central items &
other;
● Shipping & Other activities has been
transferred from NatWest Markets to Commercial Banking;
and
● The UK PBB Collective Investment Funds business
has been transferred to Private Banking.
Disposal groups and discontinued operations
NatWest Group Holdings Corp
NatWest
Group Holdings Corp (NWGH) which wholly owns RBS Securities Inc
(RBSSI) is due to be transferred to RBSG by 1 January 2019 in
preparation for ring-fencing. NWGH is a direct subsidiary of
NatWest. NWGH is classified as a disposal group at 31 December
2017 and its assets and liabilities presented in aggregate in
accordance with IFRS 5. NWGH, which was mainly reported in the
former NatWest Markets and Capital Resolution operating segments,
are no longer a reportable operating segments but presented as a
discontinued operation and comparatives have been re-presented
accordingly.
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 was a direct
subsidiary of RBS plc and was classified as a disposal group at 31
December 2016 and its assets and liabilities presented in aggregate
in accordance with IFRS 5. UBIH is presented as a discontinued
operation in relevant periods.
Reportable operating segments
Following
the changes detailed the reportable operating segments are as
follows:
Personal & Business Banking (PBB) comprises one
reportable
segment:
UK Personal & Business Banking (UK PBB). 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.
Central items & other includes corporate functions, such as RBS
treasury, finance, risk management, compliance, legal,
communications and human resources. Central functions manages RBS
capital resources and RBS-wide regulatory projects and provides
services to the reportable segments. Balances in relation to legacy
litigation issues, the NWHG, UBIH and international private banking
business are included in Central items in the relevant
periods.
Notes on the accounts
11 Segmental analysis continued
2017
|
|
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
|
3,721
|
774
|
4,495
|
(2,490)
|
-
|
(186)
|
1,819
|
Commercial Banking
|
1,566
|
831
|
2,397
|
(888)
|
(152)
|
(119)
|
1,238
|
Private Banking
|
386
|
184
|
570
|
(388)
|
-
|
(5)
|
177
|
Commercial & Private Banking
|
1,952
|
1,015
|
2,967
|
(1,276)
|
(152)
|
(124)
|
1,415
|
Central items & other
|
(192)
|
877
|
685
|
(272)
|
(130)
|
(1)
|
282
|
Total
|
5,481
|
2,666
|
8,147
|
(4,038)
|
(282)
|
(311)
|
3,516
|
2016*
|
|
|
|
|
|
|
|
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
|
Central items & other
|
(287)
|
(193)
|
(480)
|
(99)
|
(127)
|
(7)
|
(713)
|
Total
|
4,772
|
1,267
|
6,039
|
(4,288)
|
(127)
|
(125)
|
1,499
|
|
|
|
|
|
|
|
|
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
|
Central items & other
|
(337)
|
(240)
|
(577)
|
(735)
|
(136)
|
89
|
(1,359)
|
Total
|
4,539
|
1,087
|
5,626
|
(4,833)
|
(136)
|
54
|
711
|
|
|
|
|
|
|
|
|
* Re-presented to reflect the segmental
reorganisation.
Notes on the accounts
11 Segmental analysis continued
|
2017
|
|
2016*
|
|
2015*
|
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
|
5,291
|
-
|
5,291
|
|
5,214
|
(4)
|
5,210
|
|
4,949
|
(15)
|
4,934
|
Commercial Banking
|
2,313
|
24
|
2,337
|
|
1,474
|
16
|
1,490
|
|
1,393
|
12
|
1,405
|
Private Banking
|
647
|
20
|
667
|
|
660
|
30
|
690
|
|
676
|
42
|
718
|
Commercial & Private Banking
|
2,960
|
44
|
3,004
|
|
2,134
|
46
|
2,180
|
|
2,069
|
54
|
2,123
|
Central items & other
|
1,185
|
(44)
|
1,141
|
|
147
|
(42)
|
105
|
|
334
|
(39)
|
295
|
Total
|
9,436
|
-
|
9,436
|
|
7,495
|
-
|
7,495
|
|
7,352
|
-
|
7,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016*
|
|
2015*
|
|
|
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
|
4,493
|
2
|
4,495
|
|
4,332
|
4
|
4,336
|
|
4,063
|
36
|
4,099
|
Commercial Banking
|
2,455
|
(58)
|
2,397
|
|
1,699
|
(87)
|
1,612
|
|
1,613
|
(86)
|
1,527
|
Private Banking
|
573
|
(3)
|
570
|
|
572
|
(1)
|
571
|
|
582
|
(5)
|
577
|
Commercial & Private Banking
|
3,028
|
(61)
|
2,967
|
|
2,271
|
(88)
|
2,183
|
|
2,195
|
(91)
|
2,104
|
Central items & other
|
626
|
59
|
685
|
|
(564)
|
84
|
(480)
|
|
(632)
|
55
|
(577)
|
Total
|
8,147
|
-
|
8,147
|
|
6,039
|
-
|
6,039
|
|
5,626
|
-
|
5,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016*
|
|
2015*
|
|
|
|
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
|
133,688
|
140,505
|
-
|
|
120,903
|
132,152
|
-
|
|
108,008
|
126,362
|
-
|
Commercial Banking
|
59,870
|
87,787
|
208
|
|
43,815
|
73,378
|
3
|
|
40,472
|
65,075
|
-
|
Private Banking
|
29,244
|
28,115
|
-
|
|
28,228
|
27,180
|
-
|
|
25,304
|
24,309
|
-
|
Commercial & Private Banking
|
89,114
|
115,902
|
208
|
|
72,043
|
100,558
|
3
|
|
65,776
|
89,384
|
-
|
Central items & other
|
118,041
|
68,069
|
92
|
|
123,530
|
67,766
|
91
|
|
128,646
|
71,517
|
272
|
Total
|
340,843
|
324,476
|
300
|
|
316,476
|
300,476
|
94
|
|
302,430
|
287,263
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
* Re-presented to reflect the segmental
reorganisation.
|
|
|
|
|
|
|
|
|
|
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) 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 subsidiaries of the
RBS Group.
|
|
|
|
2017
|
2016
|
2015
|
|
£m
|
£m
|
£m
|
Income
|
|
|
|
Interest receivable
|
363
|
491
|
646
|
Interest payable
|
(396)
|
(427)
|
(531)
|
Fees and commissions receivable
|
11
|
24
|
76
|
Fees and commissions payable
|
(2)
|
(1)
|
(62)
|
Other administrative expenses
|
(2,358)
|
(2,288)
|
(2,222)
|
|
(2,382)
|
(2,201)
|
(2,093)
|
Discontinued operations
|
|
|
|
Net expenses
|
(29)
|
(8)
|
(19)
|
Other administrative expenses
|
-
|
(81)
|
(27)
|
|
(29)
|
(89)
|
(46)
|
13 Date of approval
The
annual results for the year ended 31 December 2017 were approved by
the board of directors on 22 February 2018.
14 Post balance sheet events
There
have been no other significant events between 31 December 2017 and
the date of approval of these accounts which would require a change
to or an additional disclosure in the accounts.
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 operating subsidiary of The Royal
Bank of Scotland Group plc ('RBSG' and, together with its
subsidiaries, the 'RBS Group'). Accordingly, in addition to the
risks to which the Group and its business are or will be exposed, a
number of the risk factors described below which relate to RBSG,
the RBS Group and The Royal Bank of Scotland plc ('RBS plc') will
also be applicable to the Bank and the Group and the occurrence of
any such risks could have a material adverse effect on the Group's
business, reputation, results of operations, financial condition,
cash flows or future 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.
The
Group's asset, liability and business profile will change
significantly following the implementation of ring-fencing and
accordingly certain of the following risks will be more or less
significant to the Group, or otherwise apply to the Group
differently, as a result thereof.
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's
business, including with respect to the perimeter of the Group's
activities and the assets, liabilities and businesses that it
holds. The steps required to implement the UK ring-fencing regime
are complex and entail significant costs and operational, legal and
execution risks, which risks may be exacerbated by the RBS Group's
other ongoing restructuring efforts.
The
requirement for large UK banks taking deposits 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 'RBSG and its subsidiaries,
including the Bank, are subject to an evolving framework on
recovery and resolution, the impact of which remains uncertain, and
which may result in additional compliance challenges and
costs.'
By the
end of 2018, the RBS Group intends to have placed the majority of
its UK and Western European banking business in ring-fenced banking
entities organised as a sub-group (the 'RFB') under an intermediate
holding company named NatWest Holdings Limited, which will
ultimately be a direct subsidiary of RBSG and will own 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 RBS plc (to be renamed
NatWest Markets Plc). RBS plc (to be renamed NatWest Markets Plc)
and the RBS International businesses will sit outside the
RFB.
As part
of this restructuring, the majority of existing personal, private,
business and commercial customers of RBS plc are expected to be
transferred to the RFB during the second quarter of 2018,
specifically to Adam & Company PLC, which will be renamed The
Royal Bank of Scotland plc). Certain assets and liabilities
(including the covered bond programme, certain hedging positions
and parts of the liquid asset portfolio) will also be transferred
to the Bank. 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.
The
transfer, as described above, will be effected principally by
utilising a legal scheme entitled a 'Ring-Fencing Transfer Scheme'
under Part VII of the Financial Services and Markets Act 2000. The
implementation of such a scheme is subject to, amongst other
considerations, regulatory approval and the sanction of the Court
of Session in Scotland, Edinburgh (the 'Court'). A hearing to seek
the Court's approval of the scheme is expected to be held on 22
March 2018. The approval of the scheme by the Prudential Regulation
Authority ('PRA') is expected to be confirmed shortly before that
hearing date. If the scheme is duly approved by the Court at the
hearing expected to be held on 22 March 2018, it is expected that
the scheme will be implemented with effect from 30 April 2018 or
any later date which the RBS Group may agree with the PRA and the
Financial Conduct Authority ('FCA'). It remains possible that the court
process described above may result in amendments being required to
be made to the RBS Group's current plan and that this may result in
delays in the implementation of the UK ring-fencing compliant
structure, additional costs and/or changes to the RBS Group's and
the Group's business.
In
addition, during the second half of 2018, it is proposed that
NatWest Holdings Limited, being the parent of the future
ring-fenced sub-group (which together with other entities is
intended to include the Bank, Adam & Company PLC (to be renamed
The Royal Bank of Scotland plc) and Ulster Bank Ireland DAC), will
become a direct subsidiary of RBSG. This is expected to occur
through a capital reduction of The Royal Bank of Scotland plc,
which will be satisfied by the transfer of the shares in NatWest
Holdings Limited currently held by The Royal Bank of Scotland plc
to RBSG, which will occur via a further and separate court process,
which is subject to the relevant Court and regulatory approvals.
It is possible that the
court process described above may result in amendments being
required to be made to the RBS Group's current plan and that this
may result in delays in the implementation of the UK ring-fencing
compliant structure, additional costs and/or changes to the RBS
Group's and the Group's business.
During the course of 2018, it is proposed that the RBS Group will
seek to implement a second, smaller ring-fencing transfer scheme as
part of its strategy to implement its future ring-fencing compliant
structure which is proposed to transfer certain assets from the
Bank to RBS plc (by then renamed to NatWest Markets Plc). Such a
scheme would be subject to the same reviews and approvals as
described above in connection with the first scheme.
Risk factors continued
As a result of the implementation of the changes described above,
there will be a material impact on how the Group conducts its
business and will require a significant legal and organisational
restructuring of the RBS Group and the Group and the transfer of
large numbers of assets, liabilities, obligations, customers and
employees between legal entities and the realignment of employees
within the RBS Group. As the Bank will be one of the principal
operating entities within the RFB, certain assets, liabilities and
businesses from RBS Group entities outside the RFB will be
transferred to the Bank, including RBS plc's covered bonds
business. In addition, and as discussed below, certain activities
currently undertaken by the Group will be transferred out of the
Group into RBS Group entities outside the RFB.
The RBS Group's final ring-fenced legal structure and the actions
being taken to achieve it, remain subject to, amongst other
factors, additional regulatory, board and other approvals. In
particular, transfers of assets and liabilities by way of a
Ring-Fencing Transfer Scheme, as described above, must be reviewed
and reported on by an Independent Skilled Person appointed by the
RBS Group with the prior approval of the PRA (having consulted with
the FCA). The reports of the Skilled Person are made public and
form part of the court process described
above.
The implementation of these changes involves a number of risks
related to both the revised RBS Group and the Group structures and
also the process of transition to such new structures. Those risks
include the following:
● As a result of
ring-fencing, certain customers will be moved to the RFB and
certain customers will be required to deal with both the RFB and
other RBS Group entities outside the RFB in order to obtain the
full range of products and services or to take any affirmative
steps in connection with the reorganisation. The Group is unable to
predict how some customers may react to these and other required
changes.
● As a result of the
ring-fencing, certain assets, liabilities and businesses from RBS
Group entities outside the RFB will be transferred to the Bank,
including RBS plc's covered bonds. Also as a result of the
ring-fencing, subject to certain exceptions, the Group will no
longer be able to undertake certain activities. This will require
the transfer of certain of the Group's activities to other RBS
Group entities outside the RFB, which will alter the scope of the
Group's activities. Such adjustment to the Group's activities and
any related loss of customers may have a material adverse effect on
the Group's business, financial condition and results of
operations.
● As part of the
establishment of a ring-fence compliant structure, the Bank will
need to operate independently from other RBS Group entities outside
the RFB and as a result, amendments will need to be made to the
Group's existing corporate governance structure to ensure the RFB
is independent from the other RBS Group entities outside the RFB.
This new structure, which will also require the approval of the
PRA, may result in divergences between the various governance
bodies within the RBS Group and create operational
challenges.
● Due to the movement of
assets, liabilities and businesses from the Bank to other RBS Group
entities outside the RFB and vice versa, the RBS Group's capital
structure may experience corresponding changes that could result in
a reduction of available capital for funding day to day operations.
Any replacement or new funding may not be available on commercial
terms acceptable to the Group or at all. See 'The ability of the
RBS Group and the Group to meet their obligations, including
funding commitments, depends on their ability to access sources of
liquidity and funding. If the Group (or any other RBS Group entity)
is unable to raise funds through deposits and/or in the capital
markets, its liquidity position could be adversely affected which
may require unencumbered assets to be liquidated or it may result
in higher funding costs which may impact the Group's margins and
profitability.'
● 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 the Bank on a
standalone basis and may heighten the cost of capital and funding
for the RBS Group and its subsidiaries (including the Group). The
ability of the Bank to meet funding and capital prudential
requirements may be dependent on obtaining adequate credit ratings.
The Group currently receives capital and funding support from RBS
Group entities, including some which will ultimately sit outside
the RFB and which may no longer, or only to a limited extent,
provide capital and funding support to the Group once a ring-fence
compliant structure is established. 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.
● The Group currently
receives the majority of services from entities within the RBS
Group and has access to the infrastructure of different entities
within 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 RBS Group will need
to revise its operations infrastructure so as to comply with the
shared services, independence and resolvability requirements set
out in the UK ring-fencing legislation and 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 the 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 duplicates certain infrastructure that following
the implementation are run from outside the RFB or rely on third
party providers for the provision of such services or
infrastructure.
Risk factors continued
● Once the UK
ring-fencing regime is implemented, reliance on intragroup
exemptions in relation to large exposures and liquidity will not be
possible between the RFB (of which the Group will be part) and
other RBS Group entities outside the RFB and may result in
risk-weighted assets inflation for the Bank and/or the RBS Group.
Intragroup distributions (including payments of dividends) between
RFB and other RBS Group entities (with the exception of
distributions to RBSG) will also be prohibited.
● From 2026 it will not
be possible for the Group or other RFB entities to participate in
the same defined benefit pension scheme as entities outside the RFB
or their wholly-owned subsidiaries. As a result, it will be
necessary to restructure the RBS Group's defined benefit pension
schemes (including The Royal Bank of Scotland Group Pension Fund
(the 'Main scheme') in which the Bank currently participates). This
restructuring will be such that either the RFB or the entities
outside 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. 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.
See 'The Group is subject to pension risks and will be required to
make additional contributions 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 expects to make
additional contributions to cover pension funding deficits as a
result of degraded economic conditions and any devaluation in the
asset portfolio held by the pension trustee.'
● 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, certain transfers will be
made at fair value which may result in a profit or loss being
recognised by 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.
● In addition, the
proposed transfers may have tax costs, or may impact the tax
attributes of the Bank.
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 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 other ongoing
restructuring efforts (many of which impact or will impact the
Group).
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 exit ('Brexit') from the European
Union ('EU') , as well as
further political developments or changes to the RBS Group's
current strategy, may require the RBS Group to further restructure
its operations (including certain of its operations in the UK and
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).
The completion of ring-fencing will substantially reconfigure the
way RBSG holds its businesses and the legal entities within the RBS
Group. There is no certainty that the RBS Group and the Group will
be able to complete the legal restructuring and migration of
customers' assets and liabilities 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 RBS Group's and/or 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 RBS Group (including the Group) has been, and will remain, in a
period of major business transformation and structural change
through to at least 2019 as it implements its own transformation
programme and seeks to comply with UK ring-fencing and recovery and
resolution requirements as well as the Alternative Remedies
Package. Additional structural changes to the RBS Group's
operations will also be required as a result of Brexit. These
various transformation and restructuring activities are required to
occur concurrently, which carries significant execution and
operational risks, and the RBS Group may not be a viable,
competitive and profitable bank 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 and Commercial & Private
Banking and the further restructuring of the NatWest Markets
franchise, to focus mainly on UK and Western European corporate and
financial institutions.
Part of
the focus of this transformation programme is to downsize and
simplify the RBS Group and the Group, reduce underlying costs and
strengthen its overall capital position. The transformation
programme also aims to improve customer experience and employee
engagement, update the RBS Group's and the Group's operational and
technological capabilities, strengthen governance and control
frameworks and better position the RBS Group and the Group to
operate in compliance with the UK ring-fencing regime by 1 January
2019. Together, these initiatives are referred to as the RBS
Group's 'transformation programme'.
Risk factors continued
This
transformation programme, including the restructuring of the
NatWest Markets franchise, is being completed at the same time as
the RBS Group is going through a period of very significant
structural reform to implement the requirements of the UK
ring-fencing regime and the requirements of the bank recovery and
resolution framework. Alongside changes to help make the RBS Group
resolvable (specifically, regulatory requirements to ensure
operational continuity in resolution), ring-fencing also requires
significant changes in how services are delivered between legal
entities within the RBS Group. It is complex and entails
significant costs and operational, legal and execution risks. See
'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's
business, including with respect to the perimeter of the Group's
activities and the assets, liabilities and businesses that it
holds. The steps required to implement the UK ring-fencing regime
are complex and entail significant costs and operational, legal and
execution risks, which risks may be exacerbated by the RBS Group's
other ongoing restructuring efforts.' The RBS Group is concurrently
seeking to implement the alternative remedies package announced on
26 July 2017 regarding the business previously described as
Williams & Glyn ('Alternative Remedies Package'). See 'The cost
of implementing the Alternative Remedies Package regarding the
business previously described as Williams & Glyn could be more
onerous than anticipated and any failure to comply with the terms
of the Alternative Remedies Package could result in the imposition
of additional measures or limitations on the RBS Group's and the
Group's operations.'
Due to
changes in the macro-economic and political and regulatory
environment in which it operates, in particular as a result of
Brexit, the RBS Group has been required to reconsider certain
aspects of its current restructuring and transformation programme.
In anticipation of Brexit the RBS Group has announced that it will
be re-purposing the RBS Group's Dutch subsidiary, The Royal Bank of
Scotland N.V. ('RBS N.V.') for the NatWest Markets franchise's
European business and further structural changes to RBS Group's
Western European operations may also be required, including in
response to proposed changes to the European prudential regulatory
framework for banks and investment banks.
These
proposals 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 and may
apply to the RBS Group once the UK has formally exited the EU. The
ability of the RBS Group to successfully re-purpose and utilise RBS
N.V. as the platform for the NatWest Markets franchise's European
business following Brexit is subject to numerous uncertainties,
including those relating to Brexit negotiations.
See
'The Group is subject to political risks, including economic,
regulatory and political uncertainty arising from the referendum on
the UK's membership of the European Union, which could adversely
impact the Group's business, results of operations, financial
condition and prospects.' One proposal made by the European
Commission ('EC') would impose a requirement for any bank
established outside the EU, which has an asset base within the EU
exceeding a certain size and has two or more institutions within
the EU, to establish a single intermediate parent undertaking
('IPU') in the European Union under which all EU entities within
that group will operate. The RBS Group is currently taking steps to
plan for how these proposals, if adopted as currently proposed, may
impact the RBS Group and its current plans to implement the UK
ring-fencing regime (which will come into force on 1 January 2019
ahead of any IPU being required). The impact of these proposals
could be material given the expectation that banking entities both
inside the ring-fence and outside of it would continue to carry out
operations in the EU. This could result in organisational
complexity, could require material additional capital requirements
and could have adverse tax implications.
The
scale and scope of the changes currently being implemented present
material operational, people and financial risks to the RBS Group.
The RBS Group's transformation programme and structural reform
agenda comprise a large number of concurrent actions and
initiatives, any of which could fail to be implemented due to
operational or execution issues. Implementation of such actions and
initiatives 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. Furthermore it requires the implementation and application
of robust governance and controls frameworks and there is no
guarantee that the RBS Group will be successful in doing so. The
planning and execution of the various restructuring and
transformation activities is disruptive 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. Any
additional restructuring or transformation of the RBS Group's
activities would increase these risks and could result in further
material restructuring and transformation costs, jeopardise the
delivery and implementation of a number of other significant change
projects, impact the RBS Group's and the Group's product offering
or business model or adversely impact the RBS Group's or 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 or the Group's results of operations, financial
condition and prospects.
There
can be no certainty that the RBS Group will be able to successfully
complete its transformation programme and programmes for mandatory
structural reform, nor that the restructured RBS Group will be a
viable, competitive or profitable banking business.
Risk factors continued
The Group is subject to political risks, including economic,
regulatory and political uncertainty arising from the referendum on
the UK's membership of the European Union, which could adversely
impact the Group's business, results of operations, financial
condition and prospects.
In a referendum held in the UK on 23 June 2016 (the 'EU
Referendum'), a majority voted for the UK to leave the EU. On 29
March 2017 the UK Government triggered the exit process
contemplated under Article 50 of the Treaty on European Union. This
provides for a maximum two year period of negotiation to determine
the terms of Brexit and set the framework for the UK's new
relationship with the EU. After this period its EU membership and
all associated treaties will cease to apply, unless some form of
transitional agreement encompassing those associated treaties is
agreed or there is unanimous agreement by the European Council with
the UK to extend the negotiation period defined under Article 50.
There
is no certainty that negotiations relating to the terms of the UK's
relationship with the EU will be completed within the two-year
period designated by Article 50. Such negotiations may well extend
beyond 29 March 2019, into any transitional period, the terms and
duration of which are currently uncertain. Furthermore, the
government has introduced the European Union (Withdrawal) Bill (the
'Withdrawal Bill') to the UK parliament, which aims to repeal the
European Communities Act of 1972 and to transpose EU law relevant
to the UK into national law upon the UK's exit from the EU.
However, the precise terms of the Withdrawal Bill, if enacted by
the UK parliament, are uncertain and it remains unclear how the
Withdrawal Bill will impact the legal and regulatory landscape in
the UK after it becomes effective. In addition, it is possible
(although of low likelihood) that a disorderly termination of the
Article 50 process could occur, resulting in the UK leaving the EU
before 29 March 2019. The consequences of such an early termination
of the Article 50 process are uncertain and adverse impacts could
crystallise rapidly should this occur.
This
prevailing uncertainty relates to the timing of Brexit, as well as
to 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. The timing of, and process for,
such negotiations and the resulting terms of the UK's future
economic, trading and legal relationships with both the EU and
other counterparties could impact the RBS Group's and the Group's
financial condition, results of operations and prospects. The
direct and indirect effects of Brexit are expected to affect many
aspects of the RBS Group's and the Group's business and operating
environment, including as described elsewhere in these risk
factors, and may be material.
The
longer term effects of Brexit 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 may
significantly impact the RBS Group and the Group and their
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, Europe and
potentially the global economy.
Until
the bilateral and multilateral trading and economic relationships
between the UK, the EU, members of the World Trade Organisation and
other key trading partners are agreed, implemented and settled, the
longer-term effects of this uncertainty are likely to endure and
their severity increase in the absence of such
agreements.
There
is related uncertainty as to the respective legal and regulatory
arrangements under which the RBS Group and its subsidiaries
(including the Group) will operate when the UK is no longer a
member of the EU. The RBS Group and its counterparties may no
longer be able to rely on the EU passporting framework for
financial services and could be required to apply for authorisation
in multiple jurisdictions in the EU.
The
cost and timing of that authorisation process is uncertain. The RBS
Group has already announced plans to re-purpose its Dutch banking
subsidiary, RBS N.V., to conduct the NatWest Markets franchise's
European business and further changes to the RBS Group's business
operations may be required. The RBS Group is also monitoring
proposed amendments to the prudential framework for non-EU banks
operating within in the EU. These and any other restructuring or
commercial actions as well as new or amended rules, could have a
significant impact on the RBS Group's operations and/or legal
entity structure, including attendant restructuring costs, capital
requirements and tax implications and as a result adversely impact
the RBS Group's and the Group's profitability, business model and
product offering. These impacts would potentially be greater in the
event of a disorderly termination of the Article 50 process and
early Brexit. See 'The RBS Group (including the Group) has been,
and will remain, in a period of major business transformation and
structural change through to at least 2019 as it implements its own
transformation programme and seeks to comply with UK ring-fencing
and recovery and resolution requirements as well as the Alternative
Remedies Package. Additional structural changes to the RBS Group's
operations will also be required as a result of Brexit. These
various transformation and restructuring activities are required to
occur concurrently, which carries significant execution and
operational risks, and the RBS Group may not be a viable,
competitive and profitable bank as a result.'
The RBS
Group and the Group face additional political uncertainty as to how
the Scottish parliamentary process may impact the negotiations
relating to Brexit.
Risk factors continued
RBSG is
headquartered and incorporated in Scotland. Any changes to
Scotland's relationship with the UK or the EU (as an indirect
result of Brexit or other developments) would impact the
environment in which the RBS Group and its subsidiaries (including
the Group) operate, and may require further changes to be made to
the RBS Group's or the Group's structure, independently or in
conjunction with other mandatory or strategic structural and
organisational changes and as a result could adversely impact the
RBS Group and the Group. The Group is currently subject to
increased political risks as a result of the UK Government's
majority ownership stake in RBSG.
The UK
Government in its November 2017 Autumn Budget indicated its
intention to recommence the process for the privatisation of RBSG
before the end of 2018-2019, although there can be no certainty as
to the commencement of any sell-downs or the timing or extent
thereof. See 'HM Treasury (or UKFI on its behalf) may be able to
exercise a significant degree of influence over the RBS Group,
including indirectly on the Group, and any further offer or sale of
its interests may affect the price of securities issued by the RBS
Group.' Were there to be a change of UK government as a result of a
general election, the Group may face new risks as a result of a
change in government policy. In its 2017 manifesto, for example,
the Labour Party announced its intention to launch a consultation
on breaking up the RBS Group to create new local public banks, a
move that could impact the Group.
In
addition to the political risks described above, the RBS Group and
the Group remain exposed to risks arising out of geopolitical
events, such as the imposition of trade barriers, the
implementation of exchange controls and other measures taken by
sovereign governments that can hinder economic or financial
activity levels. Furthermore, unfavourable domestic or
international political, military or diplomatic events, armed
conflict, pandemics and terrorist acts and threats, and the
response to them by the UK and other governments could also
adversely affect levels of economic activity and have an adverse
effect upon the RBS Group's and the Group's business, financial
condition and results of operations.
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 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
they operate in legal and regulatory environments that expose them
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 the RBS Group and the Group
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, including the Group, are currently
exposed.
However,
the RBS Group, including 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 government
securities), product mis-selling, customer mistreatment, anti-money
laundering, sanctions, antitrust and various other compliance
issues. See 'Litigation, investigations and reviews' of note 10 for
details of these matters. The RBS Group and the Group continue to
cooperate with governmental and regulatory authorities in relation
to ongoing informal and formal inquiries or investigations
regarding these and other matters. 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 RBS Group, including the Group will continue to
have a material exposure to legal and regulatory actions relating
to legacy issues in the medium term.
RMBS
In the
US, ongoing matters include certain matters relating to legacy RMBS
activities including investigations by the U.S. Department of
Justice (DOJ) and several state attorneys general and various civil
claims. A further provision of $333 million (£258 million) was
recorded by the RBS Group in Q4 2017 in relation to RBS's various
RMBS investigations and litigation matters, taking the charge for
the year to $774 million (£600 million). The aggregate
provision at 31 December 2017 was $2.3 billion (£1.7 billion).
The provision at 31 December 2017 has been transferred to disposal
groups.
The
duration and outcome of the DOJ's investigations and other RMBS
matters remain uncertain, including in respect of whether
settlements for all or any such matters may be reached and any
timing thereof. Further substantial provisions and costs may be
recognised.
Risk factors continued
Global Restructuring Group
As
announced on 8 November 2016, the RBS Group has taken steps,
including automatic refunds of certain complex fees and a
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 complaints review process and the
automatic refund of complex fees was developed with the involvement
of the Financial Conduct Authority (FCA). The RBS Group booked a
provision of £400 million in Q4 2016, based on its estimates
of the costs associated with the complaints review process and the
automatic refund of complex fees for SME customers in GRG. On 23
October 2017, the FCA published an interim report incorporating a
summary of the Skilled Person's report which stated that, further
to the general investigation announced in November 2016, the FCA
had decided to carry out a more focused
investigation.
The FCA
published its final summary of the Skilled Person's report on 28
November 2017. The UK House of Commons Treasury Select
Committee, seeking to rely on Parliamentary powers, published the
full version of the Skilled Person's report on 20 February 2018.
The FCA investigation is ongoing and fines or additional redress
commitments may be accepted by or imposed upon the RBS Group as a
result of this or any subsequent investigation or enquiry,
notwithstanding the steps the RBS Group has already
taken.
Payment protection insurance
To
date, the Group has booked provisions of £3.0 billion with
respect to payment protection insurance (PPI), including an
additional provision of £107 million in 2017. Of the £3.0
billion cumulative provision, £2.4 billion had been utilised
by 31 December 2017. In August 2017, the FCA's new rules and
guidance on PPI complaints handling (Policy Statement (17/3)) came
into force.. The Policy Statement introduced new so called 'Plevin'
rules, under which customers may be eligible for redress if the
bank earned a high level of commission from the sale of PPI, but
did not disclose this detail at the point of sale. The Policy
Statement also introduced a two year PPI deadline, due to expire in
August 2019, before which new PPI complaints must be made. The RBS
Group is implementing the Policy Statement. The number of claims
received and the cost of the redress of such claims may materially
exceed the RBS Group's estimates and may entail additional material
provisions and reputational harm.
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 RBS Group and 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 the
RBS Group's current transformation programme as well as the Group's
capital position and its ability to meet regulatory capital
adequacy requirements. The remediation programmes or commitments
which the RBS Group and the Group have 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.
The Group's ability to meet the targets and expectations which
accompany the RBS Group's transformation programme, including with
respect to its cost reduction programme and its return to
profitability and the timing thereof, are subject to various
internal and external risks and are based on a number of key
assumptions and judgments any of which may prove to be
inaccurate.
As part
of the RBS Group's transformation programme, a number of financial,
capital, operational and diversity targets and expectations have
been set by management for the RBS Group and the Group, both for
the short term and throughout the transformation and 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 growth 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, including remediation costs, expectations relating to
restructuring or transformation costs and charges as well as
impairment charges, disposal losses, 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.
Risk factors continued
The
successful implementation of the RBS Group's transformation
programme and the RBS Group's and the 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,
governmental actions and investigations 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 and funding of the NatWest Markets franchise, the
implementation of the UK ring-fencing regime and compliance with
the RBS Group's Alternative Remedies Package obligations. A number
of factors may also impact the RBS Group's ability to maintain its
current CET1 ratio target at 13% throughout the restructuring
period, including conduct related costs, pension or legacy charges,
accounting impairments, including as a result of the implementation
of the IASB's new accounting standard for financial instruments
('IFRS 9'), 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.
The RBS
Group's and the Group's ability to meet cost:income ratio targets
and the planned reductions in annual underlying costs (excluding
restructuring and conduct-related charges) 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.
More
generally, the targets and expectations 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 and expectations 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, in executing the transformation programme and reducing
the complexity of their businesses 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 robust control environments and effective
cultures, including with respect to risk management.
In
addition, the plans to deliver a UK ring-fencing compliant
structure across franchises and functions may impact the RBS
Group's concurrent transformation programme which could result in
delays to the transformation programme portfolio deliveries at the
Group level which in turn could result in the Group receiving
delayed benefits therefrom. See 'The RBS Group (including the
Group) has been, and will remain, in a period of major business
transformation and structural change through to at least 2019 as it
implements its own transformation programme and seeks to comply
with UK ring-fencing and recovery and resolution requirements as
well as the Alternative Remedies Package. Additional structural
changes to the RBS Group's operations will also be required as a
result of Brexit. These various transformation and restructuring
activities are required to occur concurrently, which carries
significant execution and operational risks, and the RBS Group may
not be a viable, competitive and profitable bank as a
result.'
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 or the Group will meet its targets and
expectations during the restructuring period or that the
restructured RBS Group (including the Group) will be a viable,
competitive or profitable banking business.
Operational risks are inherent in the Group's businesses and these
risks are heightened as the RBS Group implements its transformation
programme, including significant cost reductions, the UK
ring-fencing regime and implementation of the Alternative Remedies
Package 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 Group has complex and diverse operations
and operational risks or losses can result from a number of
internal or external factors, including:
● internal and external fraud and theft from the
RBS Group or the Group, including cybercrime;
● compromise of the confidentiality, integrity, or
availability of the RBS Group's or the Group's data, systems and
services;
● failure to identify or maintain the RBS Group's
or the Group's key data within the limits of their agreed risk
appetite;
● failure to provide adequate data, or the
inability to correctly interpret poor quality
data;
● failure of the RBS Group's or the Group's
technology services due to loss of data, systems or data centre
failure as a result of the Group's actions or actions outside the
Group's control, or failure by third parties to restore
services;
● failure to appropriately or accurately manage the
RBS Group's or the Group's operations, transactions or
security;
● incorrect specification of models used by the RBS
Group or the Group or implementing or using such models
incorrectly;
● failure to effectively execute or deliver the
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.
Risk factors continued
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, in particular the implementation of the RBS Group's
transformation programme, its cost-reduction programme, the
implementation of the UK ring-fencing regime and implementation of
the Alternative Remedies Package. Individually, these initiatives
carry significant execution and delivery risk and such risks are
heightened as their implementation is often highly correlated and
dependent on the successful implementation of interdependent
initiatives.
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
such risks could have a material adverse effect on the Group's
business, financial condition and results of
operations.
The Group's operations are highly dependent on its and the RBS
Group's IT systems. A failure of its or the RBS 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 RBS Group or 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 in part due to their complexity, which is attributable
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.
Within a complex IT estate, the risk of disruption due to
end-of-life hardware and software may create challenges in
recovering from system breakdowns. In 2017, the Group made progress
to remediate or replace out of date systems, reducing the overall
risk of disruption. However, some risk remains, and will require
continued focus and investment on an on-going basis to limit any IT
failures which may adversely affect the RBS Group's or the Group's
relationship with their customers and their reputation, and which
may also lead to regulatory investigations and
redress.
The RBS
Group's and the Group's regulators in the UK, continue to actively
monitor progress being made by banks in the UK to modernise, manage
and secure their IT infrastructure and environment, 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 RBS
Group's or the Group's ability to provide service to their
customers, which could result in significant compensation costs or
fines resulting from regulatory investigations and could breach
regulations under which the RBS Group and the Group
operate.
In
particular, failures or breaches resulting in the loss or
publication of confidential customer data could cause long-term
damage to the RBS Group's and/or the Group's reputation, business
and brands, which could undermine its ability to attract and keep
customers.
The RBS
Group is currently implementing a number of complex change
initiatives, including its transformation programme, the UK
ring-fencing regime and the restructuring of the NatWest Markets
franchise. 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 or loss or publication of
confidential customer data and in turn could cause long-term damage
to the RBS Group's and the Group's reputation, brands, results of
operations and financial position. In addition, recent or future
regulatory changes, such as the EU General Data Protection
Regulation and the Competition and Marketing Authority's (CMA's)
Open Banking standard, increase the risks relating to the RBS
Group's and the Group's ability to comply with rules that impact
its IT infrastructure. Any non-compliance with such regulations
could result in regulatory proceedings or the imposition of fines
or penalties and consequently could have a material adverse effect
on the RBS Group's and the Group's business, reputation, financial
condition and future prospects.
The RBS
Group has made, and will continue to make, considerable investments
in its (including the Group's) IT systems and technology to further
simplify, upgrade and improve its capabilities to make them more
cost-effective and improve controls, 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, which is designed to reduce the potential for system
failures which adversely affect their relationship with their
customers and reputation, which 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 the Group's IT infrastructure
and technology or limit the resources available for investments in
technological developments and/or innovation. 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.
Risk factors continued
The RBS Group and the Group are exposed to cyberattacks and a
failure to prevent or defend against such attacks and provide, as
appropriate, notification of them, 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 regular cybersecurity attacks
and related threats, which have targeted financial institutions,
corporates, governments and other institutions across all
industries. The RBS Group and the Group are increasingly reliant on
technology which is vulnerable to attacks and these attacks
continue to increase in frequency, sophistication and severity and
could have a material adverse effect on the Group's operations,
customers and reputation. The RBS Group and the Group rely on the
effectiveness of their internal policies, controls, procedures and
capabilities to protect the confidentiality, integrity and
availability of information held on their computer systems,
networks and devices, and also on the computer systems, networks
and devices of third parties with whom the RBS Group and the Group
interact. In connection with the implementation of the UK
ring-fencing regime, certain systems, networks or devices may be
migrated from RBS plc to the Bank, which may cause disruption or
impact the effectiveness of such systems, networks or
devices.
The RBS
Group and the Group take appropriate measures to prevent, detect
and minimise attacks that could disrupt the delivery of critical
business processes to their customers. Because financial
institutions such as the Group operate with complex legacy
infrastructure, they may be even more susceptible to attack due to
the increased number of potential entry points and
weaknesses.
In
addition, the increasing sophistication of cyber criminals may
increase the risk of a security breach of the RBS Group' and the
Group's systems and as security threats continue to evolve the RBS
Group and the Group may be required to invest additional resources
to modify the security of their systems, which could have a
material adverse effect on the RBS Group's and the Group's results
of operations.
Failure
to protect the RBS Group's and the Group's operations from
cyberattacks or to continuously review and update current processes
and controls in response to new or existing 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 and staff.
The RBS Group's and the Group's systems, and those of third parties
suppliers, are often subject to cyberattacks which have to date
been immaterial to the RBS Group's and the Group's operations. In
2017, the RBS Group experienced 11 distributed denial of service
(DDOS) attacks against customer-facing websites, one of which
caused minimal customer impacts for a short period of time. This
represents a decrease from 26 attacks against the RBS Group in
2016, but a recent surge of activity in the fourth quarter of 2017
points towards an increasing trend of such attacks into 2018. The
Group's DDOS mitigation controls have recently been strengthened
and will continue to be strengthened further in 2018. However,
there can be no assurance that those and the RBS Group's and the
Group's other strategies to defend against cyberattacks, including
future DDOS attacks, will be successful and avoid the potential
adverse effects of cyberattacks on the RBS Group or the
Group.
The
Bank of England, the FCA and HM Treasury in the UK and regulators
in the US and in Europe continue to recognise cybersecurity as a
systemic risk to the financial sector and have highlighted the need
for financial institutions to improve resilience to cyberattacks
and provide timely notification of them, as appropriate. The RBS
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 share best practice and to
test how major firms respond to significant cyberattacks. The
outputs of this collaboration along with other regulatory and
industry-led initiatives are continually incorporated into the RBS
Group's and the Group's on-going IT priorities and improvement
measures. However, the Group continues to expect that it and the
RBS Group will be targeted regularly in the future but there can be
no certainty that the RBS Group or the Group will not be materially
impacted by a future attack.
Any
failure in the RBS Group's or the Group's cybersecurity policies,
procedures or controls, could lead to the Group suffering financial
losses, reputational damage, a loss of customers, additional costs
(including costs of notification of consumers, credit monitoring or
card reissuance) regulatory investigations or sanctions being
imposed and could have a material adverse effect on the Group's
results of operations, financial condition or future
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.
.
Risk factors continued
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 various regulatory and competition policy
interventions, particularly as a result of the Open Banking
initiative and other remedies imposed by the CMA which are designed
to further promote competition within retail banking.
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.
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 given the RBS
Group's focus on its cost savings targets, which may limit
additional investment in areas such as financial innovation and
therefore could affect the Group's offering of innovative products
and its competitive position.
The
Group may also fail to identify future opportunities or derive
benefits from disruptive technologies in the context of rapid
technological innovation, changing customer behaviour and growing
regulatory demands, including the UK initiative on Open Banking
(PSD2), resulting in increased competition from both traditional
banking businesses as well as new providers of financial services,
including technology companies with strong brand recognition, that
may be able to develop financial services at a lower cost base. 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.
For
example, companies in the financial services industry are
increasingly using artificial intelligence and/or automated
processes to enhance their output and performance. As part of this
broader trend, the RBS Group is in the early stages of automating
certain of its solutions and interactions within its
customer-facing businesses. Such developments may result in
unintended consequences or conduct risk for the RBS Group and the
Group if such new processes, including the algorithms used, are not
carefully tested and integrated into the RBS Group and the Group's
current solutions. In addition to such reputational risks, the
development of automated solutions will require investment in
technology and will likely result in increased costs for the RBS
Group and the Group.
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 Group is subject to pension risks and will be required to make
additional contributions 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 expects to make
additional contributions to cover pension funding deficits as a
result of degraded economic conditions and any devaluation in the
asset portfolio held by the pension trustee.
RBS plc
and its subsidiaries maintain a number of defined benefit pension
schemes for certain former and current employees. The UK
ring-fencing regime will require significant changes to the
structure of the RBS Group's existing defined benefit pension
schemes because, from 2026 it will not be possible for the Group or
any other entities inside the RFB to participate in the same
defined benefit pension scheme as entities outside the RFB or their
wholly-owned subsidiaries. As a result, RFB cannot 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
scheme to implement the UK ring-fencing regime could also affect
assessments of the RBS Group's pension scheme deficits or result in
the pension scheme trustees considering that the employer covenant
has been weakened and result in further additional material
contributions being required.
The RBS
Group is developing a strategy to meet these requirements. This
will require the agreement of the pension scheme trustee. The RBS
Group's intention is for the Main scheme to be supported by the
Bank. 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.
Risk factors continued
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 also 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
chooses 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, or may have reduced in
value relative to the pension liabilities it supports, 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. Pension regulations may also change in
a manner adverse to the RBS Group and RBS plc.
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.
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 schemes 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 the
first quarter of 2016.
The
next triennial period valuation will take place in the fourth
quarter of 2018 and the Main scheme pension trustee 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 the first quarter of 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.
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 regulatory capital position or the RBS Group's capital
plan.
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 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 and investment risk associated with the pension fund
is taken into account in the RBS Group's capital plan and include
additions to the RBS Group's capital management buffer to cater for
certain pension related stress scenarios.
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 RBS
Group believes that the accelerated payment to the RBS Group's Main
scheme pension fund made in the first quarter of 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 prevailing Pillar 2A add-on.
However, subsequent contributions required in connection with the
2018 triennial valuation, or otherwise, may adversely impact the
RBS Group's and the Group's capital position.
As the
RBS Group is unable to recognise any accounting surplus due to
constraints under IFRIC14, any contributions made which increase
the accounting surplus, or contributions committed to which would
increase the accounting surplus when paid, would have a
corresponding negative impact on the RBS Group's capital
position.
Risk factors continued
As a
result, if any of these assumptions prove inaccurate, or if the
Group does not hold adequate capital in its management buffer to
cover market risk in the pension fund in a stressed scenario, 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 (including the Bank), 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 RBS Group to manage its pension obligations
resulting in an adverse impact on the RBS Group's CET1
capital.
The Group's businesses and performance can be negatively affected
by actual or perceived economic conditions in the UK and globally
and other global risks, including risks arising out of geopolitical
events and political developments 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 can 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 Brexit are
difficult to predict and are 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.
See
'The Group is subject to political risks, including economic,
regulatory and political uncertainty arising from the referendum on
the UK's membership of the European Union, which could adversely
impact the Group's business, results of operations, financial
condition and prospects.' and 'The RBS Group (including the Group)
has been, and will remain, in a period of major business
transformation and structural change through to at least 2019 as it
implements its own transformation programme and seeks to comply
with UK ring-fencing and recovery and resolution requirements as
well as the Alternative Remedies Package. Additional structural
changes to the RBS Group's operations will also be required as a
result of Brexit. These various transformation and restructuring
activities are required to occur concurrently, which carries
significant execution and operational risks, and the RBS Group may
not be a viable, competitive and profitable bank as a
result.'
The
outlook for the global economy over the medium-term remains
uncertain due to a number of factors including: political
instability, an extended period of low inflation and low interest
rates, although monetary policy has begun the process of
normalisation in some countries. The normalisation of monetary
policy in the USA may affect some emerging market economies which
may raise their domestic interest rates in order to avoid capital
outflows, with negative effects on growth and trade. 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, volatility in the value 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 to which the
Group is exposed 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 will be required to make
additional contributions 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 expects to make
additional contributions to cover pension funding deficits as a
result of degraded economic conditions and any devaluation in the
asset portfolio held by the pension trustee.'
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,
including secession movements or the exit of other Member States
from the EU, armed conflict, pandemics, state and privately
sponsored cyber and terrorist acts or 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.
Risk factors continued
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 to certain
individual customers and other counterparties in weaker business
sectors and geographic markets and also has concentrated country
exposure in the UK.
At 31
December 2017, current exposure in the UK was £193.2 billion
and in and in the rest of the world was £0.2 billion. Within
certain business sectors, namely personal and property at 31
December 2017, personal lending amounted to £128.7 billion and
lending exposure to property was £17.5 billion.
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.
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.
However,
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, developments
relating to Brexit may adversely impact credit quality in the
UK.
In
addition, as the RBS Group continues to implement its strategy and
further reduces its scale and global footprint, the Group's
relative exposure to the UK and to certain sectors and asset
classes in the UK will continue to increase as its business becomes
more concentrated in the UK as a result of the reduction in the
number of jurisdictions outside of the UK in which it operates. 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 has improved against 2016
but may be short-lived given continued political uncertainty and
progress of negotiations relating to the form and timing of Brexit.
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, the continued house price weakness, 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, inflation or increased unemployment, could also lead to
higher impairments on loans held by the Group being
recognised.
The
Group also remains exposed to certain counterparties operating in
certain industries which have been under pressure in recent years,
and any further deterioration in the outlook the credit quality of
these counterparties may require the Group to make additional
provisions, which in turn would reduce earnings and impact the
Group's profitability.
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.
Risk factors continued
Any
such deteriorations 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 RBS Group and/or 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.
Continued low interest rates have significantly affected and will
continue to affect the Group's business and results of operations.
A continued period of low interest rates, and yield curves and
spreads may affect net interest income, the effect of which may be
heightened during periods of liquidity stress.
Interest
rate and foreign exchange risks, discussed below, are significant
for the Group. 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 Term Funding
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 raised them to 0.5% in November 2017. However, there
remains considerable uncertainty as to whether or when the Bank of
England and other central banks will further 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 until the end of September 2018 (or beyond) may put
additional pressure on margins. 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 the Group's 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 levels 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.
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 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 Brexit, 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
Chinese and global stock markets, expectations relating to or
actions taken by central banks with respect to monetary policy, and
weakening fundamentals of the Chinese economy, resulting in further
short-term changes in the valuation of certain of the Group's
assets. 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 RBS 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.
Risk factors continued
Moreover,
market volatility and illiquidity (and the assumptions, judgments
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 cost of implementing the Alternative Remedies Package regarding
the business previously described as Williams & Glyn could be
more onerous than anticipated and any failure to comply with the
terms of the Alternative Remedies Package could result in the
imposition of additional measures or limitations on the RBS Group's
and the Group's operations.
On 18 September 2017, the RBS Group received confirmation that the
Alternative Remedies Package had been formally approved by the
European Commission ('EC') in the form proposed.
The Alternative Remedies Package replaced the existing requirement
to divest the business previously described as Williams & Glyn
by 31 December 2017. The Alternative Remedies Package focuses on
the following two remedies to promote competition in the market for
banking services to small and medium-sized enterprises ('SMEs') in
the UK: (i) a £425 million capability and innovation fund that
will grant funding to a range of eligible competitors in the UK
banking and financial technology sectors; and (ii) a £275
million incentivised switching scheme which will provide funding
for eligible bodies to help them incentivise SME customers of the
business previously described as Williams & Glyn to switch
their primary accounts and loans from the RBS Group, paid in the
form of 'dowries' to business current accounts at the receiving
bank. The RBS Group has also agreed to set aside up to a further
£75 million in funding to cover certain costs customers may
incur as a result of switching under the incentivised switching
scheme. In addition, under the terms of the Alternative Remedies
Package, should the uptake within the incentivised switching scheme
not be sufficient, RBSG may be required to make a further
contribution, capped at £50 million.
An independent body ('Independent Body') is in the process of being
established to administer the Alternative Remedies Package.
However, the implementation of the Alternative Remedies Package,
also entails additional costs, including but not limited to the
funding commitments and financial incentives envisaged to be
provided under the plan.
Implementation of the Alternative Remedies Package could also
divert resources from the RBS Group's and the Group's operations
and jeopardise the delivery and implementation of other significant
plans and initiatives. In addition, under the terms of the
Alternative Remedies Package, the Independent Body can require the
RBS Group to modify certain aspects of the RBS Group's execution of
the incentivised switching scheme, which could increase the cost of
implementation. Furthermore, should the uptake within the
incentivised switching scheme not be sufficient, the Independent
Body can extend the duration of the scheme by up to twelve months
and can compel the RBS Group to extend the customer base to which
the scheme applies which may result in prolonged periods of
disruption to a wider portion of the Group's business.
As a direct consequence of the incentivised switching scheme, the
Group will lose existing customers and deposits, which in turn will
have adverse impacts on the Group's business and associated
revenues and margins. Furthermore, the capability and innovation
fund is intended to benefit eligible competitors and negatively
impact the Group's competitive position. To support the
incentivised switching initiative, upon request by an eligible
bank, the RBS Group has also agreed to grant those customers which
have switched to eligible banks under the incentivised switching
scheme access to its branch network for cash and cheque handling
services, which may result in reputational and financial exposure
for the Group and impact customer service quality for the Group's
own customers with consequent competitive, financial and
reputational implications. The implementation of the
incentivised switching scheme is also dependent on the engagement
of the eligible banks with the incentivised switching scheme and
the application of the eligible banks to and approval by the
Independent Body. The
incentivised transfer of SME customers to third party banks places
reliance on those third parties to achieve satisfactory customer
outcomes which could give rise to reputational damage if these are
not forthcoming.
A failure to comply with the terms of the Alternative Remedies
Package could result in the imposition of additional measures or
limitations on the RBS Group's and the Group's operations,
additional supervision by the RBS Group's regulators, and loss of
investor or customer confidence, any of which could have a material
adverse impact on the RBS Group and the Group. 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 mandatory regulatory requirements. Such
risks will increase in line with any delays.
Risk factors continued
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 EU Bank Recovery and Resolution Directive (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 Financial Stability Board ('FSB') published a
final term sheet setting out its total loss- absorbing capacity
('TLAC') standards for global systemically important banks
('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. These include
internal MREL requirements, in respect of which the FSB published
guiding principles in July 2017.
The
Bank of England published a consultation paper in October 2017 but
has not yet published a final statement of policy on its approach
to setting internal MREL. The Bank of England has also stated that
it expects to set out policy proposals for MREL cross-holdings and
disclosure requirements once there is greater clarity as to the
timing and final content of related EU proposals.
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). 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).
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). Under the single point of
entry (SPE) resolution model that applies to the RBS Group, losses
that crystallise in the operating companies are passed up the chain
to RBSG through the write down of the holding company's investments
in the equity and debt of its operating companies. The probability
of the external MREL investors being bailed-in will depend on the
RBS Group's overall going-concern capital resources, the extent of
any losses in the operating companies, and the extent to which
those losses are passed up to the investing entity (recognising
that some operating company liabilities, including obligations to
pension schemes, are protected from bail-in).
The
final 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 to material
operating subsidiaries (as identified using criteria set in the
Bank of England's final rules on internal MREL) in the form of
capital or another form of subordinated claim.
Risk factors continued
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 requires that 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.
The purpose of internal MREL requirements is to provide for
loss-absorbing capacity to be appropriately distributed within a
banking group and to provide the mechanism by which losses can be
transferred from operating companies to the resolution entity. The
Bank of England proposes to set internal MREL requirements above
capital requirements for each 'material subsidiary' of a banking
group. The Bank of England will formally determine which
entities within the group represent material subsidiaries, with
reference to indicative criteria including such subsidiary's
contribution to the RBS Group's risk-weighted assets and operating
income. It will also set the internal MREL requirement,
calibrated to be between 75% and 90% of the external MREL
requirement that would otherwise apply to a material subsidiary
were it a resolution entity in its own right. Such requirements
must be met with internal MREL resources which are subordinated to
the operating liabilities of the material subsidiary issuing them
and must be capable of being written down or converted to equity
via a contractual trigger. These liabilities, issued to other group
entities (typically the issuing entity's immediate parent), must be
priced on an arm's-length basis. The impact of these requirements
on the RBS Group and the Group, the cost of servicing these
liabilities and the implications for the RBS Group's and the
Group's funding plans, in particular if the Bank is determined to
represent a 'material subsidiary' of the RBS Group, cannot be
assessed with certainty until the Bank of England's proposed
internal MREL policy is finalised and final rules are
published.
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 and other instruments compliant
with the rules, which may be costly, whilst certain existing Tier 1
and Tier 2 securities and other senior, unsecured instruments
issued by the RBS Group will cease to count towards the RBS Group's
loss-absorbing capacity 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 see an
increased risk of a breach of the RBS Group's combined buffer
requirement triggering the restrictions relating to the MDA
described above.
There
remain some areas of uncertainty regarding the implementation of
outstanding regulatory requirements 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.
Failure by the RBS Group or the Group to comply with regulatory
capital, funding, liquidity 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 and may result in
distribution restrictions and adversely impact existing
shareholders.
The RBS
Group and, where applicable RBS Group entities, including the Bank
on a standalone basis, are subject to extensive regulatory
supervision in relation to the levels and quality of capital it is
required to hold in connection with its business, 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 G-SIB by the
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 capacity requirements.
Each
business within the RBS Group is subject to performance metrics
which factor in underlying regulatory capital requirements 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 1.0%, with binding effect from 28 November 2018 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'.
Risk factors continued
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. 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 RFB
expects that it may be subject to the systemic risk
buffer.
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 has
been set by the PRA at an equivalent of 4.0% 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 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. The FPC and
PRA have expressed concerns around potential systemic risk
associated with recent increases in UK consumer lending and the
impact of consumer credit losses on banks' resilience in a stress
scenario, which the PRA has indicated that it will consider when
setting capital buffers for individual banks.
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.
These include a minimum leverage requirement of 3.25% which applies
to major UK banks, as recalibrated in October 2017 in accordance
with the FPC's recommendation to the PRA.
In
addition, the UK leverage ratio framework provides for: (i) 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 0.75% from 1 January 2018) and (ii) 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
sustained 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
and the Bank'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 and the Bank. 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 and the Bank'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 and the
Bank.
On 7
December 2017, the Basel Committee on Banking Supervision published
revised standards intended to finalise the Basel III post-crisis
regulatory reforms.
Risk factors continued
The
revised standards include the following elements: (i) a revised
standardised approach for credit risk, which will improve the
robustness and risk sensitivity of the existing approach; (ii)
revisions to the internal ratings-based approach for credit risk,
where the use of the most advanced internally modelled approaches
for low-default portfolios will be limited; (iii) revisions to the
credit valuation adjustment (CVA) framework, including the removal
of the internally modelled approach and the introduction of a
revised standardised approach; (iv) a revised standardised approach
for operational risk, which will replace the existing standardised
approaches and the advanced measurement approaches; (v) revisions
to the measurement of the leverage ratio and a leverage ratio
buffer for G-SIBs, which will take the form of a Tier 1 capital
buffer set at 50% of a G-SIB's risk-weighted capital buffer; and
(vi) an aggregate output floor, which will ensure that banks'
risk-weighted assets ('RWAs') generated by internal models are no
lower than 72.5% of RWAs as calculated by the Basel III framework's
standardised approaches.
The
revised Basel III standards will take effect from 1 January 2022
and will be phased in over five years. Although the revised Basel
III standards must be implemented through legislation in the EU and
UK, and precise estimates of their impact would be premature at
this time, the revised standards 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. 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. In the UK, the
PRA also set revised expectations to the calculation of
risk-weighted capital requirements in relation to residential
mortgage portfolios which firms are expected to meet by the end of
2020. To this effect, firms should also submit amended models for
regulatory approval.
Although
the above provides an overview of the capital and leverage
requirements currently applicable to the RBS Group and the Bank,
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 theBRRD. 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 Bank).
This uncertainty is compounded by Brexit which may result in
further changes to the prudential and regulatory framework
applicable to the RBS Group and the Bank.
If the
RBS Group is unable to raise the requisite amount of regulatory
capital (including loss absorbing capital in the form of MREL), or
if the RBS Group or the Bank otherwise fail to meet regulatory
capital and leverage requirements, they may be exposed to increased
regulatory supervision or sanctions, loss of investor confidence,
and 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.
This
may also result in write-down or the conversion into equity of
certain regulatory capital instruments issued by the RBS Group or
the issue of additional equity by the RBS Group, each of which
could result in the dilution of the RBS Group's existing
shareholders. A breach of the RBS Group's or the Bank'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 ability of the RBS Group and the Group to meet their
obligations, including funding commitments, depends on their
ability to access sources of liquidity and funding. If the Group
(or any other RBS Group entity) is unable to raise funds through
deposits and/or in the capital markets, its liquidity position
could be adversely affected which may require unencumbered assets
to be liquidated or it may result in higher funding costs which may
impact the Group's margins and profitability.
Liquidity
risk is the risk that the 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.
The
implementation of the UK ring-fencing regime may impact the Group's
funding strategy which is currently 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. Because the Group,
including the Bank, will have to access the debt capital markets as
a new standalone entity following the implementation of the UK
ring-fencing regime its funding plan entails increased execution
risk. In addition, the transitioning of the Group to a standalone
entity will necessitate investors to establish new investment
limits and credit lines to reflect the impact of the ring-fencing
regime and the standalone nature of the Group and such limits and
credit lines may be smaller than those applicable to the Group
before ring-fencing.
Risk factors continued
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
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.
Rules
currently proposed by the FSB and in the EU in relation to the
implementation of requirements for TLAC and MREL may also limit the
ability of certain large financial institutions to hold debt
instruments issued by other large financial institutions. 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
and the 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.
In
addition, the RBS Group is subject to certain regulatory
requirements with respect to liquidity coverage, including a
liquidity coverage ratio set by the PRA in the UK. This requirement
was phased in at 90% for the RBS Group from 1 January 2017 and
increased to 100% in January 2018 (as required by the Capital
Requirements Regulation). 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 and/or decrease 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 the CRD IV Regulation
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 Brexit, there is
considerable uncertainty as to the extent to which such rules will
apply to the RBS Group.
If the
RBS Group or the Group are unable to raise funds through deposits
or in the capital markets on acceptable terms or at all, the
liquidity position of the RBS Group or the Group could be adversely
affected and they might be unable to meet deposit withdrawals on
demand or at their contractual maturity, to repay borrowings as
they mature, to meet their obligations under committed financing
facilities, to comply with regulatory funding requirements, to
undertake certain capital and/or debt management activities or to
fund new loans, investments and businesses.
The RBS
Group or the Group may need to liquidate unencumbered assets to
meet their liabilities, including disposals of assets not
previously identified for disposal to reduce their funding
commitments. In a time of reduced liquidity, the RBS Group or the
Group may be unable to sell some of their 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's borrowing costs, its access to the debt capital
markets and its sources of liquidity
depend significantly on its and the RBS Group's credit ratings and,
to a lesser extent, on the UK sovereign
ratings.
The
credit ratings of RBSG, the Bank, RBS plc and other RBS Group
entities directly affect the cost of funding and capital
instruments issued by those entities, as well as secondary market
liquidity in those instruments. The implementation of ring-fencing
is expected to change the funding strategy of the RBS Group and the
Group as a result of the RFB, including the Bank, and the entities
outside of the RFB raising debt capital directly. A number of UK
and other European financial institutions, including RBSG, RBS plc
and other RBS Group entities, 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.
Risk factors continued
The
senior unsecured long-term and short-term credit ratings of RBSG,
RBS plc and the Bank are investment grade by Moody's, S&P and
Fitch. The outlook for RBSG is currently stable for S&P, Fitch
and Moody's, the outlook for RBS plc is currently stable for
S&P and Fitch and under review for downgrade for Moody's and
the outlook for the Bank is currently under review for upgrade for
Moody's, positive for S&P and watch positive for Fitch. Current
outlooks for RBS plc and for the Bank are consistent with previous
statements made by rating agencies that the implementation of the
ring-fencing regime is likely to lead to rating differentials
between RBS plc and the Bank.
Rating
agencies regularly review the RBS Group entity credit ratings,
including those of RBSG, the Bank and RBS plc and their ratings of
long-term debt are based on a number of factors, including the RBS
Group's financial strength as well as factors not within the
Group's control, such as political developments and conditions
affecting the financial services industry generally.
In
particular, the rating agencies may further review the RBSG, the
Bank and other RBS Group entity ratings as a result of the
implementation of the UK ring-fencing regime, 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 form and timing
of the UK's exit from the EU.
A
challenging macroeconomic environment, a delayed return to
satisfactory profitability and greater market uncertainty could
negatively impact the RBS Group's (and in particular, the Bank's)
credit ratings and potentially lead to ratings downgrades which
could adversely impact the RBS Group's (and in particular, the
Bank's) ability to fund, and the cost of that funding, if any. As a
result, the Bank's ability to access capital markets on acceptable
terms and hence their ability to raise the amount of capital and
funding required to meet its and the RBS Group's regulatory
requirements and targets, including those relating to
loss-absorbing instruments to be issued by the RBS Group, could be
affected. See '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's business, including with respect to the perimeter of the
Group's activities and the assets, liabilities and businesses that
it holds. The steps required to implement the UK ring-fencing
regime are complex and entail significant costs and operational,
legal and execution risks, which risks may be exacerbated by the
RBS Group's other ongoing restructuring efforts.'
Any
reductions in the long-term or short-term credit ratings of RBSG
or, in particular, the Bank, including downgrades below investment
grade, could adversely affect the Group's issuance capacity in the
financial markets increase the funding and borrowing costs of 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 and
clients 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 Group's earnings,
cash flow and financial condition.
As
discussed above, the success of the implementation of the UK
ring-fencing regime and the establishment of the RFB, is in part
dependent upon the RFB or its material subsidiaries (including the
Bank) obtaining a sustainable credit rating and being able to
satisfy their funding needs. A failure to obtain such a rating, or
any subsequent downgrades to current ratings may threaten the
ability of the RFB (including the Bank) to operate on a standalone
basis, in particular to satisfy its funding needs and to meet
prudential capital requirements.
The
major credit rating agencies downgraded and changed their outlook
to negative on the UK's sovereign credit rating in June 2016 and
September 2017 following the UK's decision to leave the EU. Any
further downgrade in the UK Government's credit ratings could
adversely affect the credit ratings of RBS Group entities,
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, the Bank, RBS
plc and other RBS Group entities.
The Group's businesses are exposed to the effect of movements in
currency rates, which could have a material adverse effect on the
results of operations, financial condition or prospects of the
Group.
The Group's foreign exchange exposure arises from structural
foreign exchange risk, including capital deployed in the Group's
foreign subsidiaries, branches and joint arrangements, and
non-trading foreign exchange risk, including customer transactions
and profits and losses that are in a currency other than the
functional currency of the transacting entity. The Group maintains
policies and procedures to ensure the impact of exposures to
fluctuations in currency rates are minimised. Nevertheless, changes
in currency rates, particularly in the sterling-US dollar and
euro-sterling 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 or its
income from foreign exchange dealing.
Risk factors continued
Changes in foreign exchange rates may result from the decisions of
the Bank of England, ECB, the US Federal Reserve and from political
or global market events outside the Group's control and lead to
sharp and sudden variations in foreign exchange rates, such as
those seen in the sterling/US dollar exchange rates since the
occurrence of the EU Referendum. Throughout 2017, ongoing UK
negotiations to exit the EU, have, amongst other factors, resulted
in continued volatility in the sterling exchange rate relative to
other major currencies. Continued or increasing volatility in
currency rates can materially affect the Group's results of
operations, financial condition or prospects.
The RBS Group relies on valuation, capital and stress test models
to conduct its business, assess its 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 operates
or findings of deficiencies by the RBS Group's regulators resulting
in increased regulatory capital requirements could have a material
adverse effect on the RBS Group's business, capital and
results.
Given
the complexity of the RBS Group's business, strategy and capital
requirements, the RBS 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.
The RBS
Group's 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 RBS Group operates or to be updated in line with the
changes in the RBS 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 RBS Group's risk exposure or the risk profile of the RBS
Group's financial instruments or result in the RBS Group being
required to hold additional capital as a function of the PRA
buffer. For example, as the RBS Group implements its transformation
programme, including the restructuring and funding of its NatWest
Markets franchise, the implementation of the UK ring-fencing
regime, any impacted models would need to be correctly identified
and adapted in line with the implementation process. The RBS 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 RBS 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 RBS Group's
regulators.
Some of
the analytical models used by the RBS Group are predictive in
nature. In addition, a number of internal models used by the Group
are designed, managed and analysed by the RBS Group and may not
appropriately capture the risks and exposures relating to the
Group's portfolios. Some of the RBS Group's internal models are
subject to periodic review by its regulators and, if found
deficient, the RBS Group may be required to make changes to such
models or may be precluded from using any such models, which could
result in an additional capital requirement which could have a
material impact on the RBS Group's capital position.
The RBS
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 RBS
Group's business, financial condition and results of operations,
minimum capital requirements and reputation.
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/or 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 N.V. and Ulster Bank Ireland DAC. 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.
Risk factors continued
Under
the 2017 Bank of England stress tests, which were based on the
balance sheet of the RBS Group for the year ended 31 December 2016,
the RBS Group's capital position before the impact of strategic
management actions that the PRA judged could realistically be taken
in the stress scenario remained below its CET1 capital hurdle rate
and above its Tier 1 leverage hurdle rate. After the impact of
strategic management actions the RBS Group's capital position would
have remained above its CET1 capital hurdle rate, but the PRA
judged that RBSG did not meet its systemic reference point in this
scenario. Given the steps the RBSG had already taken to strengthen
its capital position during 2017, the PRA did not require the RBS
Group to submit a revised capital plan.
Failure
by the RBS 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 RBS Group's regulators requiring the RBS 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 prospects.
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
judgments, 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, judgments 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
judgments and estimates, include goodwill, 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 109 to 111 of the 2017 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 111 and 112 of the 2017 Annual
Report and Accounts.
Changes
in accounting standards or guidance by 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 IFRS 9 effective for annual periods
beginning on or after 1 January 2018. It introduced 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. The inclusion of loss allowances
with respect to all financial assets that are not recorded at fair
value tend to result in an increase in overall impairment balances
when compared with the previous basis of measurement under IAS 39.
The Group expects IFRS 9 to increase earnings and capital
volatility in 2018 and beyond.
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, judgments 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 operations entail inherent reputational risk, i.e., 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.
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 other member of the RBS
Group conducts or modifies its business activities and operations,
including as a result of the transformation programme or other
restructuring efforts, speculative or inaccurate media coverage,
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.
Risk factors continued
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.
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 may be adversely impacted if its or the RBS Group's 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 of uncertainty and risks as described throughout
these risk factors.
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 RBS Group's
and/or the Group's reputation or their 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 relies on
valuation, capital and stress test models to conduct its business,
assess its 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 operates or findings of
deficiencies by the RBS Group's regulators resulting in increased
regulatory capital requirements could have a material adverse
effect on the RBS Group's business, capital and
results.'
A failure by the Group to embed a strong risk culture across the
organisation could adversely affect the ability of the RBS Group
and the Group to achieve their 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 RBS Group's efforts, changing
an organisation's risk culture requires significant time,
investment and leadership, and such efforts may not insulate the
RBS Group or 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 RBS Group and/or the Group through
an inability to achieve their strategic objectives for their
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 current and 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.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 were applied to
the wider employee population from 7 March 2017, with the exception
of some transitional provisions.
Risk factors continued
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 as part of
the implementation of the UK ring-fencing regime, 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 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, including
the Group. The lack of continuity of senior management and the loss
of important personnel coordinating certain or several aspects of
the RBS Group's restructuring (including those which impact the
Group) 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 RBS Group's and the
Group's strategies could prevent the Group from successfully
maintaining its current standards of operation, 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.
The Group's business performance and
financial position could be adversely affected if it or the RBS
Group's capital is not managed effectively or if it or the RBS
Group is unable to meet their prudential regulatory requirements or
if it is deemed prudent to increase the amount of any management
buffer that they require. 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, pursue the
RBS Group's transformation programme and current strategies, resume
dividend payments on RBSG ordinary shares, maintain discretionary
payments and pursue its strategic
opportunities.
The RBS
Group and the Bank (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 their core UK
and European markets.
The RBS
Group currently targets a CET1 ratio at or above 13% throughout the
period until completion of its restructuring. On a PRA transitional
loaded basis, the RBS Group and the Bank's CET1 ratio were 15.9%
and 23.5%, respectively at 31 December 2017, compared with 13.4%
and 16.1%, respectively at 31 December 2016.
The RBS
Group's target capital ratio for the RBS Group and the RBS Group
entities, including the Bank, is based on its expected regulatory
requirements and internal modelling, including stress scenarios.
However, the ability of the RBS Group or the Bank 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 Bank's capital
ratio, could arise from:
●
a depletion of the RBS
Group's or the Bank'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, impairments
or accounting charges;
●
reduced upstreaming of
dividends from the RBS Group's subsidiaries as a result of the Bank
of England's approach to setting MREL within groups, requiring
sub-groups, such as the Group, to hold internal MREL resources
sufficient to match both their own individual MREL as well as the
internal MREL of the subsidiaries constituting the
sub-group;
●
an increase in the amount of capital
that is required to meet the Bank'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 Bank, 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;
or
Risk factors continued
●
the implementation of
the RBS Group's transformation programme, including in response to
implementation of the UK ring-fencing regime, means certain
intragroup funding arrangements will be limited and may no longer
be permitted and the RBS Group entities, including the Bank, may
need to increasingly manage funding and liquidity at an individual
RBS Group entity level, which could result in the RBS Group and the
Bank being required to maintain higher levels of capital in order
to meet their regulatory requirements than would otherwise be the
case, as may be the case if the Bank of England were to identify
impediments to the RBS Group's resolvability resulting from new
funding and liquidity management strategies. In addition,
once the
UK ring-fencing regime is implemented, reliance on intragroup
exemptions in relation to the limits of risk-weighted assets and
large exposures will not be possible between the RFB (including the
Bank) and other RBS Group entities outside the RFB and may result
in risk-weighted assets inflation.
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 Bank 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.
The RBS
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, natural attrition and other capital
management initiatives.
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 or
the Bank's 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 they need to hold
(including as a result of the reasons described above), would
adversely impact the RBS Group's or the Bank's ability to meet
their capital targets or requirements and achieve their capital
strategy during the restructuring period.
If the
RBS Group or the Bank are determined to have a shortage of capital,
including 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 or the
Bank being subject to regulatory interventions and sanctions. The
RBS Group's regulators may also request that the RBS Group carry
out certain capital management actions which may impact the Bank
or, in an extreme scenario, this may also trigger the
implementation of the RBS Group recovery plans. Such actions may,
in turn, affect, among other things, the RBS Group's and/or the
Group's product offering, ability to operate their businesses,
comply with their regulatory obligations, pursue the RBS Group's
transformation programme and current strategies, resume dividend
payments on RBSG ordinary shares, maintain discretionary payments
on capital instruments and pursue strategic opportunities,
affecting the underlying profitability of the RBS Group and 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 the Group.
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
recovery 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, severe restrictions 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, anti-tax evasion,
payment systems, and antiterrorism laws and regulations, have
resulted in the Group facing greater regulation and scrutiny in the
UK and 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.
Risk factors continued
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 Brexit 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
'The RBS Group (including the Group) has been, and will remain, in
a period of major business transformation and structural change
through to at least 2019 as it implements its own transformation
programme and seeks to comply with UK ring-fencing and recovery and
resolution requirements as well as the Alternative Remedies
Package. Additional structural changes to the RBS Group's
operations will also be required as a result of Brexit. These
various transformation and restructuring activities are required to
occur concurrently, which carries significant execution and
operational risks, and the RBS Group may not be a viable,
competitive and profitable bank as a result.' In addition, the RBS
Group and its counterparties may no longer be able to rely on the
European passporting framework for financial services and could be
required to apply for authorisation in multiple European
jurisdictions, the costs, timing and viability of which is
uncertain.
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 licenses, 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 UK rules, BRRD, 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 RBS Group or 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 FCA's
UK mortgages market study and other initiatives led by the Bank of
England or European regulators;
● concerns expressed by the FPC and PRA around
potential systemic risk associated with recent increases in UK
consumer lending and the impact of consumer credit losses on banks'
resilience in a stress scenario, which the PRA has indicated that
it will consider when setting capital buffers for individual
banks;
● 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.
Risk factors continued
● 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;
● rules and regulations relating to, and
enforcement of, anti-corruption, anti-bribery, anti-money
laundering, anti-terrorism, sanctions, anti-tax evasion or other
similar regimes;
● investigations into facilitation of tax evasion
or avoidance or the creation of new civil or criminal offences
relating thereto;
● 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 regulatory scrutiny with respect to UK
payment systems by the Payments Systems Regulator and the FCA,
including in relation to banks' policies and procedures for
handling push payment scams;
● increased attention to competition and innovation
in UK payment systems 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 ('GDPR');
● 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;
● 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);
● the Markets in Financial Instruments Directive
('MiFID') regulating the provision of 'investment services and
activities' in relation to a range of customer-related areas and
the revised directive ('MiFID II') and new regulation (Markets in
Financial Instruments Regulation or 'MiFIR') replacing and changing
MiFID to include expanded supervisory powers that include the
ability to ban specific products, services and
practices;
● the European Commission's proposal to impose a
requirement for any bank established outside the EU, which has an
asset base of a certain size and has two or more institutions
within the EU, to establish an IPU in the European Union, under
which all EU entities within that group would operate;
and
● other requirements or policies affecting the
Group and its 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 RBS
Group or 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.
HM Treasury (or UKFI on its behalf) may be able to exercise a
significant degree of influence over the RBS Group, including
indirectly on the Group, and any further offer or sale of its
interests may affect the price of securities issued by the RBS
Group.
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, held
70.5% of the issued ordinary share capital of the RBS Group as of
31 December 2017. The UK Government in its November 2017 Autumn
Budget indicated its intention to recommence the process for the
privatisation of the RBS Group before the end of 2018-2019 and to
carry out over the forecast period a programme of sales of RBSG
ordinary shares expected to sell down approximately two thirds of
HM Treasury's current shareholding in the RBS Group, although there
can be no certainty as to the commencement of any sell-downs or the
timing or extent thereof.
Risk factors continued
Any
offers or sale, or expectations relating to the timing thereof, of
a substantial number of ordinary shares by HM Treasury, could
negatively affect prevailing market prices for the outstanding
ordinary shares of RBSG and other securities issued by the RBS
Group and lead to a period of increased price volatility for the
RBS Group's securities.
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 entities (including the Bank) will continue to
have their own independent board of directors and management team
determining their own strategies, 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, the RBS
Group's capital strategy, dividend policy, remuneration policy or
the conduct of any RBS Group entities, 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 operates in markets that are subject to intense scrutiny
by the competition authorities and its business and results of
operations could be materially affected by competition decisions
and other regulatory interventions.
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 banking products and services, the Independent Commission
on Banking and the Parliamentary Commission on Banking
Standards.
These
reviews raised significant concerns about the effectiveness of
competition in the retail 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 Group operates could have a material adverse effect on
the Group's business, margins, profitability, financial condition
and prospects.
RBSG and its subsidiaries, including the Bank, are subject to an
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 without use of public funds. 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 capacity.
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.
Risk factors continued
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 or the UK may also be necessary to
ensure continued consistency with the FSB recommendations on key
attributes of national resolution regimes and resolution planning
for G-SIBs, including with respect to TLAC and MREL
requirements.
In
light of these potential developments as well as the impact of
Brexit, 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 N.V. and Ulster Bank
Ireland DAC 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, although it remains clear that the Bank of England,
as UK resolution authority, would be responsible for resolution of
the RBS Group overall (consistent with the RBS Group's single point
of entry bail-in resolution strategy, as determined by the Bank of
England)
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. In addition, RBS Group
entities in countries subject to the European banking union are
required to pay supervisory fees towards the funding of the SSM as
well as contributions to the single resolution fund.
The
recovery and resolution regime implementing the BRRD in the UK
places compliance and reporting obligations on the RBS Group,
including the Group, which may result in increased costs, including
as a result of the RBS Group's 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 to the costs
associated with the issuance of MREL-eligible debt securities and
compliance with internal MREL requirements, further changes may be
required for the RBS Group to enhance its resolvability, in
particular due to regulatory requirements relating to operational
continuity and valuations capabilities in resolution.
In July
2016, 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 requires the RBS Group
to restructure certain of its activities relating to the provision
of services from one legal entity to another within the RBS Group,
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
August 2017, the Bank of England published a consultation paper
setting out its preliminary views on the valuation capabilities
that firms should have in place prior to resolution. The Bank of
England has not yet published a final statement of policy in this
area. Achieving compliance with the expectations set out in
any such statement of policy, once finalised, may require changes
to the RBS Group's existing valuation processes and/or the
development of additional capabilities, infrastructure and
processes. The RBS Group may incur costs in complying with such
obligations, which costs may increase if the Bank of England
determined that the RBS Group's valuation capabilities constitute
an impediment to resolution and subsequently exercised its
statutory power to direct the RBS Group to take measures to address
such impediment.
In
addition, compliance by the RBS Group with this 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 continue to
submit to the PRA an annual recovery plan assessed as meeting
regulatory requirements and to be assessed as resolvable by the
Bank of England. The outcome of this regulatory dialogue may impact
the operations or structure of the RBS Group or the Group, or
otherwise result in increased costs, including as a result of the
Bank of England's power under section 3A of the Banking Act to
direct institutions to address impediments to
resolvability.
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 RBS Group, including 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 adequately reflect the RBS Group's
customers' needs, ineffective management and monitoring of products
and their distribution, actions taken that may not conform to the
RBS Group's customer-centric focus, 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 product, 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.
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 (including financial crimes), any of
which could result in regulatory fines or 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, including, for example, in
connection with the foreign exchange and LIBOR investigations, the
Group may not succeed in protecting itself from such conduct in the
future. It is not always possible to timely detect or deter
employee misconduct and the precautions the Group takes to detect
and prevent this activity may not always be effective.
The RBS
Group and the Group have implemented a number of policies and
allocated new resources in order to help mitigate against these
risks. The RBS Group and the Group have also prioritised
initiatives to reinforce good conduct in their engagement with the
markets in which they operate, together with the development of
preventative and detective controls in order to positively
influence behaviour.
The RBS
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 and financial crime issues will not have an
adverse effect on the Group's results of operations, financial
condition or prospects.
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 (the '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 Bank of England (as the relevant resolution
authority), as appropriate as part of a special resolution regime
(the 'SRR').
These
powers enable the Bank of England 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
authorities are 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 Bank of
England under the SRR, where a resolution has been triggered. In
addition, the Bank of England may commence special administration
or liquidation procedures specifically applicable to banks. Where
stabilisation options are used which rely on the use of public
funds, such funds 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 Bank of England, 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 Bank of England 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.
Risk factors continued
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 relevant UK resolution
authority 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.
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 Bank of England
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 1
January 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 certain
conditions under the Banking Act, for example if the institution
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.
The
Bank of England may exercise the power to write down or convert
capital instruments without any further exercise of resolution
tools, as may be the case where the write-down or conversion of
capital instruments is sufficient to restore an institution to
viability.
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 RBS Group entities, as well as increased
difficulties for RBSG or other RBS Group entities 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) in respect of the RBS Group or any entity within the RBS
Group (including the Bank), 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), may 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
(net of any compensation received) not to exceed those which would
be realised in an insolvency counterfactual.
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.
For
example, the application of these powers to internally-issued MREL
instruments, issued by one group entity and held solely by its
parent entity, is currently being consulted on by the Bank of
England. 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.
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.
To the
extent that other jurisdictions where the RBS Group operates have
introduced or plan to introduce similar compensation, contributory
or reimbursement schemes, the RBS Group and the Group may make
further provisions and may incur additional costs and liabilities,
which may have an adverse impact on the Group's financial condition
and results of operations.
The Group intends to execute the run-down and/or the sale of
certain portfolios and assets. 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 execute the run-down and/or sale of certain
portfolios and assets and the price achieved for such disposals
will be dependent on prevailing economic and market
conditions.
As a
result, there is no assurance that the Group will be able to sell
or run down these 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 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 portfolios or assets being sold between the announcement of
the disposal and its completion, which period may span many
months.
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.
Changes in tax legislation or failure to generate future taxable
profits 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.
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. 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.
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 franchise; 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 and other uncertainties set out in
the Group's 2017 Annual Report and other risk factors and
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 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 Brexit and from the outcome of general
elections in the UK and changes in government policies; 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 restructuring and transformation
programme, particularly the proposed further restructuring of the
NatWest Markets franchise, 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 dependence of the
Group's operations on its and RBS Group's IT systems; 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, funding, liquidity 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.
Forward looking statements
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 and transformation 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, including risks arising out of geopolitical
events and political developments; 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 (including by
competition authorities) 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, including on any
requisite management buffer; 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
application of stabilisation or resolution powers in significant
stress situations; contribution to relevant compensation
schemes; the execution of the run-down and/or sale of certain
portfolios and assets; 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:
23 February 2018
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NATIONAL
WESTMINSTER BANK PLC (Registrant)
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By:
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/s/ Jan
Cargill
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Name:
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Jan
Cargill
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Title:
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Deputy
Secretary
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