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 15, 2019
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 ____
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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):_________
National Westminster Bank Plc 15 February 2019
Annual Report and Accounts 2018
A copy of the Annual Report and Accounts 2018 for National
Westminster Bank Plc has been submitted to the National
Storage Mechanism and will shortly be available for inspection
at http://www.morningstar.co.uk/uk/NSM. The
document will be available on The Royal Bank of Scotland Group
plc's website at www.rbs.com/reports
For further information, please contact:- RBS Media
Relations
+44 (0) 131 523 4205
Investor relations Matt Waymark Investor Relations
+44 (0) 207 672 1758
For the purpose of compliance with the Disclosure Guidance and
Transparency Rules, this announcement also contains risk factors
extracted from the Annual Report and Accounts 2018 in full unedited
text. Page references in the text refer to page numbers in the
Annual Report and Accounts 2018.
Risk factors
Principal Risks and Uncertainties
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 forecast or
expected and either directly or indirectly impact the value of its
securities in issue.
These risk factors are broadly categorised and should be read in
conjunction with the forward looking statements section, the
strategic report and the capital and risk management section of
this annual report and should not be regarded as a complete and
comprehensive statement of all potential risks and uncertainties
facing the Group.
Operational and IT resilience risk
The Group is subject to increasingly sophisticated and frequent
cyberattacks.
The Group is experiencing continued cyberattacks across the entire
Group, with an emerging trend of attacks against the Group's supply
chain, re-enforcing the importance of due diligence and close
working with the third parties on which the Group relies. The Group
is reliant on technology, which is vulnerable to attacks, with
cyberattacks increasing in terms of frequency, sophistication,
impact and severity. As cyberattacks evolve and become more
sophisticated, the Group will be required to invest additional
resources to upgrade the security of its systems. In 2018, the
Group was subjected to a small but increasing number of Distributed
Denial of Service ('DDOS') attacks, which are a pervasive and
significant threat to the global financial services industry.
The Group fully mitigated the impact of these attacks whilst
sustaining full availability of services for its customers. Hostile
attempts are made by third parties to gain access to and introduce
malware (including ransomware) into the Group's IT systems, and to
exploit vulnerabilities. The Group has information security
controls in place, which are subject to review on a continuing
basis, but there can be no assurance that such measures will
prevent all DDOS attacks or other cyberattacks in the future.
See also, 'The Group's operations are highly dependent on its
IT systems'.
Any failure in the Group's cybersecurity policies, procedures or
controls, may result in significant financial losses, major
business disruption, inability to deliver customer services, or
loss of data or other sensitive information (including as a result
of an outage) and may cause associated reputational damage. Any of
these factors could increase costs (including costs relating to
notification of, or compensation for customers, credit monitoring
or card reissuance), result in regulatory investigations or
sanctions being imposed, or may affect the Group's ability to
retain and attract customers. Regulators in the UK, US and Europe
continue to recognise cybersecurity as an increasing systemic risk
to the financial sector and have highlighted the need for financial
institutions to improve their monitoring and control of, and
resilience (particularly of critical services) to cyberattacks, and
to provide timely notification of them, as
appropriate.
Additionally, parties may also fraudulently attempt to induce
employees, customers, third party providers or other users who have
access to the Group's systems to disclose sensitive information in
order to gain access to the Group's data or that of the Group's
customers or employees. Cybersecurity and information security
events can derive from human error, fraud or malice on the part of
the Group's employees or third parties, including third party
providers, or may result from accidental technological
failure.
In accordance with the EU General Data Protection Regulation
('GDPR'), the Group is required to ensure it timely implements
appropriate and effective organisational and technological
safeguards against unauthorised or unlawful access to the data of
the Group, its customers and its employees. In order to meet this
requirement, the Group relies on the effectiveness of its internal
policies, controls and procedures to protect the confidentiality,
integrity and availability of information held on its IT systems,
networks and devices as well as with third parties with whom the
Group interacts and a failure to monitor and manage data in
accordance with the GDPR requirements may result in financial
losses, regulatory fines and investigations and associated
reputational damage. In addition, whilst the Group takes
appropriate measures to prevent, detect and minimise attacks, the
Group's systems, and those of third party providers, are subject to
frequent cyberattacks.
The Group expects greater regulatory engagement, supervision and
enforcement in relation to its overall resilience to withstand IT
systems and related disruption, either through a cyberattack or
some other disruptive event. However, due to the Group's reliance
on technology and the increasing sophistication, frequency and
impact of cyberattacks, it is likely that such attacks could have a
material impact on the Group.
Operational risks are inherent in the Group's
businesses.
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, procedures, people or systems, or from
external events, including legal risks. As at 31 December 2018, the
Group offered a diverse range of products and services supported by
55,400 employees; it therefore has complex and diverse operations.
As a result, operational risks or losses can arise from a number of
internal or external factors. These risks are also present when the
Group relies on outside suppliers or vendors to provide services to
it or its customers, as is increasingly the case as the Group
implements new technologies, innovates and responds to regulatory
and market changes.
Operational risks continue to be heightened as a result of the RBS
Group's current cost-reduction measures and conditions affecting
the financial services industry generally (including Brexit and
other geo-political developments) as well as the legal and
regulatory uncertainty resulting therefrom. This may place
significant pressure on the Group's ability to maintain effective
internal controls and governance frameworks. In particular, new
governance frameworks have recently been put into place throughout
the RBS Group for certain RBS Group entities (including the Group)
and certain stand-alone market-facing capabilities have been
established for the Group and Group entities, due to the
implementation of the UK ring-fencing regime and the resulting
legal entity structure. See also, 'The Group, including the Bank,
is required to comply with regulatory requirements in respect of
the implementation of the UK ring-fencing regime'. The Group is
also dependent on the RBS Group for certain shared critical
services. The effective management of operational risks is critical
to meeting customer service expectations and retaining and
attracting customer business.
Although the Group has implemented risk controls and loss
mitigation actions, and significant resources and planning have
been devoted to mitigate operational risk, there is uncertainty as
to whether such actions will be effective in controlling each of
the operational risks faced by the Group.
The Group's operations are highly dependent on its IT
systems.
The Group's operations are highly dependent on the ability to
process a very large number of transactions efficiently and
accurately while complying with applicable laws and regulations.
The proper functioning of 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 their branches and main
data processing centres, are critical to the Group's
operations.
Individually or collectively, any critical system failure,
prolonged loss of service availability or material breach of data
security could cause serious damage to the Group's ability to
provide services to its customers, which could result in
significant compensation costs or regulatory sanctions (including
fines resulting from regulatory investigations), or a breach of
applicable regulations. In particular, failures or breaches
resulting in the loss or publication of confidential customer data
could cause long-term damage to the Group's reputation and could
affect its regulatory approvals, competitive position, business and
brands, which could undermine its ability to attract and retain
customers. This risk is heightened as the Group continues to
innovate and offer new digital solutions to its customers as a
result of the trend towards online and mobile banking.
In 2018, the Group upgraded its IT systems and technology and
expects to continue to make considerable investments to further
simplify, upgrade and improve its IT and technology capabilities
(including migration to the Cloud) to make them more
cost-effective, improve controls and procedures, strengthen cyber
security, enhance digital services provided to its customers and
improve its competitive position. Should such investment and
rationalisation initiatives fail to achieve the expected results or
prove to be insufficient due to cost challenges or otherwise, this
could negatively affect the Group's operations, its reputation and
ability to retain or grow its customer business or adversely impact
its competitive position, thereby negatively impacting the Group's
financial position.
The Group, including the Bank, is required to comply with
regulatory requirements in respect of the implementation of the UK
ring-fencing regime.
The UK ring-fencing regime came into force on 1 January 2019. As
part of the transition to become compliant with the UK ring-fencing
regime, the Bank has established stand-alone market-facing
capabilities for derivatives, foreign exchange and fixed income, in
order to manage funding and market risk in the Group. The Bank is
now a direct member of GBP and EUR payment systems and a direct
member of the London Clearing House and the Continuous Linked
Settlement. The Group's ongoing compliance with the UK ring-fencing
regime may entail significant costs, and may also impose
significant operational, legal and execution risk in the Group's
day-to-day activities.
In addition, the implementation of the UK ring-fencing regime may
impact the Group's treasury operations, including internal and
external funding arrangements and the Group's funding strategy as
certain Group entities, including the Bank, will be required to
access the debt capital markets as new stand-alone entities which
may entail increased execution risk for the Group's funding plan
and may increase the cost of funding for certain Group entities,
including the Bank.
The Group relies on attracting, retaining and developing senior
management and skilled personnel, and is required to maintain good
employee relations.
The Group's current and future success depends on its ability to
attract, retain and develop highly skilled and qualified personnel,
including senior management, directors and key employees, in a
highly competitive labour market and under internal cost reduction
pressures. This entails risk, 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 have an adverse effect on
the Group's ability to hire, retain and engage well-qualified
employees. The market for skilled personnel is increasingly
competitive, especially for technology-focussed roles, thereby
raising the cost of hiring, training and retaining skilled
personnel. In addition, certain economic, market and regulatory
conditions and political developments (including Brexit) may 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.
Many of the Group's employees in the UK, Republic of Ireland and
continental Europe are represented by employee representative
bodies, including trade unions. Engagement with its employees and
such bodies is important to the Group in maintaining good employee
relations. Any failure to do so could impact the Group's ability to
operate its business effectively.
A failure in the Group's risk management framework could adversely
affect the Group, including its ability to achieve its strategic
objectives.
Risk management is an integral part of all of the Group's
activities and includes the definition and monitoring of the
Group's risk appetite and reporting on its risk exposure and the
potential impact thereof on its financial condition. Financial risk
management is highly dependent on the use and effectiveness of
internal stress tests and models and ineffective risk management
may arise from a wide variety of factors, including lack of
transparency or incomplete risk reporting, unidentified conflicts
or misaligned incentives, lack of accountability control and
governance, lack of consistency in risk monitoring and management
or insufficient challenges or assurance processes. Failure to
manage risks effectively could adversely impact the Group's
reputation or its relationship with its customers, shareholders or
other stakeholders.
The Group's operations are inherently exposed to conduct risks.
These include business decisions, actions or incentives that are
not responsive to or aligned with the Group's customers' needs or
do not reflect the Group's customer-focussed strategy, ineffective
product management, unethical or inappropriate use of data,
outsourcing of customer service and product delivery, the
possibility of alleged mis-selling of financial products and
mishandling of customer complaints. Some of these risks have
materialised in the past and ineffective management and oversight
of conduct risks may lead to further remediation and regulatory
intervention or enforcement. The Group's businesses are also
exposed to risks from employee misconduct including non-compliance
with policies and regulations, negligence or fraud (including
financial crimes), any of which could result in regulatory fines or
sanctions and serious reputational or financial harm to the
Group.
The Group is seeking to embed a strong risk culture across the
organisation and has implemented policies and allocated new
resources across all levels of the organisation to manage and
mitigate conduct risk and expects to continue to invest in its risk
management framework. However, such efforts may not insulate the
Group from future instances of misconduct and no assurance can be
given that the Group's strategy and control framework will be
effective. Any failure in the Group's risk management framework
could negatively affect the Group and its financial condition
through reputational and financial harm and may result in the
inability to achieve its strategic objectives for their customers,
employees and wider stakeholders.
The Group's operations are subject to inherent reputational
risk.
Reputational risk relates to stakeholder and public perceptions of
the Group arising from an actual or perceived failure to meet
stakeholder expectations due to any events, behaviour, action or
inaction by the Group, its employees or those with whom the Group
is associated. This includes brand damage, which may be detrimental
to the Group's business, including its ability to build or sustain
business relationships with customers, and may cause low employee
morale, regulatory censure or reduced access to, or an increase in
the cost of, funding. Reputational risk may arise whenever there is
a material lapse in standards of integrity, compliance, customer or
operating efficiency and may adversely affect the Group's ability
attract and retain customers. In particular, the Group's ability to
attract and retain customers (and, in particular, corporate and
retail depositors) may be adversely affected by, amongst others:
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, media
coverage (whether accurate or otherwise), employee misconduct, the
Group's financial performance, IT systems failures or cyberattacks,
the level of direct and indirect government support, or the actual
or perceived practices in the banking and financial industry in
general, or a wide variety of other factors.
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 Group has implemented a Reputational Risk Policy to
improve the identification, assessment and management of customers,
transactions, products and issues which represent a reputational
risk, the Group cannot be certain that it will be successful in
avoiding damage to its business from reputational
risk.
Economic and political risk
Uncertainties surrounding the UK's withdrawal from the European
Union may adversely affect the Group.
Following the EU Referendum in June 2016, and pursuant to the exit
process triggered under Article 50 of the Treaty on European Union
in March 2017, the UK is scheduled to leave the EU on 29 March
2019. The terms of a Brexit withdrawal agreement negotiated by the
UK Government were decisively voted against by Parliament on 15
January 2019. The UK Government and Parliament are currently
actively engaged in seeking to determine the terms of this
departure, including any transition period, and the resulting
economic, trading and legal relationships with both the EU and
other counterparties currently remain unclear and subject to
significant uncertainty.
As it currently stands, EU membership and all associated treaties
will cease to apply at 23:00 on 29 March 2019, unless some form of
transitional arrangement encompassing those associated treaties is
agreed or there is unanimous agreement amongst the UK, other EU
member states and the European Commission to extend the negotiation
period.
The direct and indirect effects of the UK's exit from the EU and
the European Economic Area ('EEA') are expected to affect many
aspects of the Group's business and operating environment,
including as described elsewhere in these risk factors, and may be
material and/or cause a near-term impact on impairments. See also
'The Group faces increased political and economic risks and
uncertainty in the UK and global markets'.
The longer term effects of Brexit on the RBS Group's operating
environment are difficult to predict, and are subject to wider
global macro-economic trends and events, but may significantly
impact the Group and its customers and counterparties who are
themselves dependent on trading with the EU or personnel from the
EU and may result in, or be exacerbated by, periodic financial
volatility and slower economic growth, in the UK in particular, but
also in Republic of Ireland, Europe and potentially the global
economy.
Significant uncertainty exists as to the respective legal and
regulatory arrangements under which the Group and its subsidiaries
will operate when the UK is no longer a member of the EU (see 'The
RBS Group is in the process of seeking requisite permissions to
implement its plans for continuity of business impacted by the UK's
departure from the EU'. The legal and political uncertainty and any
actions taken as a result of this uncertainty, as well as new or
amended rules, could have a significant impact on the Group's
operations or legal entity structure, including attendant
restructuring costs, level of impairments, capital requirements,
regulatory environment and tax implications and as a result may
adversely impact the Group's profitability, competitive position,
viability, business model and product offering.
The RBS Group is seeking the requisite permissions to implement its
plans for continuity of business impacted by the UK's departure
from the EU.
The RBS Group is implementing plans designed to continue its
ability to clear euro payments and minimise the impact on the
Group's ability to serve non-UK EEA customers in the event that
there is an immediate loss of access to the European Single Market
on 29 March 2019 (or any alternative date) with no alternative
arrangement for continuation of such activities under current rules
(also known as 'Hard Brexit').
To ensure continued ability to clear Euro denominated payments, the
RBS Group is finalising a third-country licence for the Frankfurt
branch of the Bank. In addition, the RBS Group is working to
satisfy the conditions of the Deutsche Bundesbank (DBB) for access
to TARGET2 clearing and settlement mechanisms. Satisfying these DBB
conditions, which include a country legal opinion, and accessing
SEPA, Euro 1 and TARGET2 will allow the RBS Group (through the
Bank's Frankfurt branch) to continue to clear cross-border payments
in euros. The capacity to process these euro payments is a
fundamental requirement for the daily operations and customers of
all Group franchises, including PBB and CPB. The value of such
payments is typically in excess of €50 billion in any one day
with more than 300,000 transactions. This capacity is also
critical for management of the RBS Group's euro-denominated central
bank cash balances of around €23 billion. NatWest Markets Plc
('NWM Plc') will use the Bank's Frankfurt branch to clear its euro
payments and has also applied for a third country license to
maintain liquidity management and product settlement
arrangements.
A draft license has recently been issued for NWB Frankfurt branch
which the Group intends to finalise imminently. Once in place, the
third country licence branch approvals would each become effective
when the UK leaves the EU and the current passporting arrangements
cease to apply. The RBS Group expects to have received the
requisite third country licenses and access to SEPA, Euro 1 and
TARGET2 ahead of the UK's departure from the EU. However, given the
quantum of affected payments and lack of short term contingency
arrangements, in the event that such euro clearing capabilities
were not in place in time for a Hard Brexit or as required in the
future, it could have a material impact on the RBS Group and the
Group and its customers.
Additionally, to continue serving most of the RBS Group's EEA
customers, the RBS Group has repurposed the banking licence of its
Dutch subsidiary, NatWest Markets N.V. ('NWM NV'). As
announced on 6 December 2018, the RBS Group has requested court
permission for a FSMA transfer scheme to replicate the master trade
documentation for NWM Plc's non-UK EEA customers and to transfer
certain existing transactions from NWM Plc to NWM NV. Other
transactions are expected to be transferred to NWM NV during 2019
(for example, certain transactions with Corporate and Sovereign
customers and larger EEA customers from NWM Plc, and certain
Western European corporate business from National Westminster Bank
Plc). The volume and pace of business transfers to NWM NV will
depend on the terms and circumstances of the UK's exit from the EU,
as well as the specific contractual terms of the affected
products.
These changes to the Group's operating model are costly and require
further changes to its business operations and customer engagement.
The regulatory permissions from the Dutch and German authorities
will be conditional in nature and will require on-going compliance
with certain conditions including maintaining minimum capital level
and deposit balances as well as a defined local physical presence
going forward, and may be subject to change in the future.
Maintaining these permissions and the RBS Group's access to the
euro payment infrastructure will be fundamental to its business
going forward and further changes to the Group's business
operations may be required.
The Group faces increased political and economic risks and
uncertainty in the UK and global markets.
In the UK, significant economic and political uncertainty surrounds
the terms of and timing of Brexit. (See also, 'Uncertainties
surrounding the UK's withdrawal from the European Union may
adversely affect the Group'). In addition, 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, including more direct intervention by the UK government in
financial markets, the regulation and ownership of public companies
and the extent to which the government exercises its rights as a
shareholder of the RBS Group. This could affect, in particular, the
structure, strategy and operations of the RBS Group (including the
Group) and may negatively impact the Group's operational
performance and financial results.
The Group faces additional political uncertainty as to how the
Scottish parliamentary process (including, as a result of any
second Scottish independence referendum) may impact the Group. RBSG
and a number of other RBS Group entities are 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 operate, and may require further changes to
the RBS Group's (including the Group's structure), independently or
in conjunction with other mandatory or strategic structural and
organisational changes which could adversely impact the
Group.
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, thereby affecting its financial
performance.
The outlook for the global economy over the medium-term remains
uncertain due to a number of factors including: trade barriers and
the increased possibility of trade wars, widespread political
instability, an extended period of low inflation and low interest
rates, and global regional variations in the impact and responses
to these factors. Such conditions could be worsened by a number of
factors including political uncertainty or macro-economic
deterioration in the Eurozone, China or the US, increased
instability in the global financial system and concerns relating to
further financial shocks or contagion (for example, due to economic
concerns in emerging markets), market volatility or fluctuations in
the value of the pound sterling, new or extended economic
sanctions, volatility in commodity prices or concerns regarding
sovereign debt. This may be compounded by the ageing demographics
of the populations in the markets that the Group serves, or rapid
change to the economic environment due to the adoption
of technology and artificial intelligence. Any of the above
developments could impact the Group directly (for example, as a
result of credit losses) or indirectly (for example, by impacting
global economic growth and financial markets and the Group's
customers and their banking needs).
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 may 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 and
widespread public health crises, state and privately sponsored
cyber and terrorist acts or threats, and the responses to them by
governments and markets, could negatively affect the business and
performance of the Group.
Continued low interest rates have significantly affected and will
continue to affect the Group's business and results.
Interest rate risk is significant for the Group, as monetary policy
has been 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 pronounced fiscal tightening and balance sheet
repair. However, there remains considerable uncertainty as to the
direction of interest rates and pace of change, as set by the Bank
of England. Continued sustained low or negative interest rates
could put pressure on the Group's interest margins and adversely
affect the Group's profitability and prospects. In addition, a
continued period of low interest rates and flat yield curves has
affected and may continue to affect the Group's interest rate
margin realised between lending and borrowing costs.
Conversely, while increases in interest rates may support Group
income, sharp increases in interest rates could lead to generally
weaker than expected growth, or even contracting GDP, reduced
business confidence, higher levels of unemployment or
underemployment, adverse changes to levels of inflation, and
falling property prices in the markets in which the Group
operates.
The Group expects to face significant risks in connection with
climate change and the transition to a low carbon
economy
The risks associated with climate change are subject to rapidly
increasing prudential and regulatory, political and societal focus,
both in the UK and internationally. Embedding climate risk into the
Group's risk framework in line with expected regulatory
expectations, and adapting the Group's operation and business
strategy to address both the risks of climate change and the
transition to a low carbon economy are likely to have a significant
impact on the Group.
Multilateral and UK Government undertakings to limit increases in
carbon emissions in the near and medium term will require
widespread levels of adjustment across all sectors of the economy,
with some sectors such as property, energy, infrastructure
(including transport) and agriculture likely to be particularly
impacted. The nature and timing of the far-reaching commercial,
technological and regulatory changes that this transition will
entail are currently uncertain but the impact of such changes may
be disruptive, especially if such changes do not occur in an
orderly or timely manner or are not effective in reducing emissions
sufficiently. Furthermore, the nature and timing of the
manifestation of the physical risks of climate change (which
include more extreme specific weather events such as flooding and
heat waves and longer term shifts in climate) are also uncertain,
and their impact on the economy is predicted to be more acute if
carbon emissions are not reduced on a timely basis or to the
requisite extent. The potential impact on the economy includes, but
is not limited to, lower GDP growth, significant changes in asset
prices and profitability of industries, higher unemployment and the
prevailing level of interest rates.
UK and international regulators are actively seeking to develop new
and existing regulations that are directly and indirectly focussed
on climate change and the associated financial risks. Such new
regulations are being developed in parallel with an increasing
market focus on the risks associated with climate change. In
October 2018, the Group's prudential regulator, the PRA, published
a draft supervisory standard which sets forth an expectation that
regulated entities adopt a Board-level strategic approach to
managing and mitigating the financial risks of climate change and
embed the management of them into their governance frameworks,
subject to existing prudential regulatory supervisory tools
(including stress testing and individual and systemic capital
requirements). Climate risk is also subject to various legislative
actions and proposals by, among others, the European Commission's
Sustainable Finance initiative that focuses on incorporating
climate risk into its financial policy frameworks, including
proposals (e.g. through amendments to MiFID II) for institutional
investors (including pension funds) to consider and disclose
climate risk criteria as part of their investment decision, and
also proposals to consider changes to RWA methodologies.
Furthermore, credit ratings agencies are increasingly taking into
account environmental, social and governance ('ESG') factors,
including climate risk, as part of the credit ratings analysis, as
are investors in their investment decisions.
If the Group does not adequately embed climate risk into its risk
framework to appropriately measure, manage and disclose the various
financial and physical risks it faces associated with climate
change, or fails to adapt its strategy and business model to the
changing regulatory requirements and market expectations on a
timely basis, it may have a material and adverse impact on the
Group's level of business growth, its competitiveness,
profitability, prudential capital requirements, credit ratings,
cost of funding, results of operation and financial
condition.
Changes in foreign currency exchange rates may affect the Group's
results and financial position.
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 transaction entity. The Group is
required to issue instruments in foreign currencies that assist in
meeting the Group's minimum requirements for own funds and eligible
liabilities ('MREL'). The Group maintains policies and procedures
designed to manage the impact of exposures to fluctuations in
currency rates. Nevertheless, changes in currency rates,
particularly in the sterling-US dollar and euro-sterling exchange
rates, can adversely affect the value of assets, liabilities
(including the total amount of MREL eligible instruments), income,
RWAs, capital base and expenses and the reported earnings of the
Bank's UK and non-UK subsidiaries and may affect the Group's
reported consolidated financial condition.
Decisions of major central banks (including by the Bank of England,
the ECB and the US Federal Reserve) and political or market events
(including Brexit), which are outside of the Group's control, may
lead to sharp and sudden variations in foreign exchange
rates.
HM Treasury (or UKGI on its behalf) could exercise a significant
degree of influence over the RBS Group.
In its November 2018 Autumn Budget, the UK Government announced its
intention to continue the process of privatisation of RBSG and to
carry out a programme of sales of RBSG ordinary shares with the
objective of selling all of its remaining shares in RBSG by
2023-2024. On 5 June 2018, the UK Government (via HM Treasury and
UK Government Investments Limited ('UKGI')) disposed of
approximately 7.7% of its stake in RBSG. As at 31 December 2018,
the UK Government held 62.3% of the issued ordinary share capital
of RBSG. There can be no certainty as to the continuation of the
sell-down process or the timing or extent of such
sell-downs.
UKGI manages HM Treasury's shareholder relationship with RBSG 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 Group) will continue to have their own
independent board of directors and management team determining
their own strategy, its position as a majority shareholder (and
UKGI's position as manager of this shareholding) means that HM
Treasury or UKGI could exercise a significant degree of influence
over, among other things, the election of directors and appointment
of senior management, the RBS Group's (including the Group's)
capital strategy, dividend policy, remuneration policy or the
conduct of the RBS Group's (including the Group's) operations, and
HM Treasury's approach depends on government policy, which could
change, including as a result of a general election. The exertion
of such influence over RBS Group could in turn have an adverse
effect on the governance or business strategy of the
Group.
Financial resilience risk
The Group may not meet targets nor generate sustainable
returns.
As part of the RBS Group's strategy, the Group has principally
become a UK-focussed domestic banking group and is included in a
number of financial, capital and operational targets for the RBS
Group including in respect of: cost:income ratios, cost reductions
leverage ratio targets, funding plans and requirements, reductions
in RWAs and the timing thereof, employee engagement, diversity and
inclusion as well as environmental, social and customer
satisfaction targets.
The Group's ability to meet the RBS Group and the Group's
respective targets and to successfully meet its strategy are
subject to various internal and external factors and risks. These
include, but are not limited to, market, regulatory, economic and
political factors, developments relating to litigation,
governmental actions, investigations and regulatory matters, and
operational risks and risks relating to the Group's business model
and strategy (including emerging risks associated with
environmental, social and governance issues). A number of factors
may impact the Bank's ability to maintain its current CET1 ratio,
including impairments, limited organic capital generation or
unanticipated increases in RWAs. In addition, the run-down of RWAs
may be accompanied by the recognition of disposal losses which may
be higher than anticipated.
The Group's ability to meet its respective cost:income ratio
targets and the planned reductions in its annual underlying costs
may vary considerably from year to year. Furthermore, the focus on
meeting cost reduction targets may result in limited investment in
other areas which could affect the Group's long-term product
offering or competitive position and its ability to meet its other
targets, including those related to customer
satisfaction.
There is no certainty that the RBS Group's strategy will be
successfully executed, that the Group will meet its targets and
expectations, or that the Group will be a viable, competitive or
profitable banking business.
The Group has significant exposure to counterparty and borrower
risk.
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. The Group is exposed to credit risk if a
customer, borrower or counterparty defaults, or under IFRS 9,
suffers a sufficiently significant deterioration of credit quality
under SICR ('significant increases in credit risk') rules such that
it moves to Stage 2 for impairment calculation purposes. The
Group's lending strategy and associated processes may fail to
identify or anticipate weaknesses or risks in a particular sector,
market or borrower category, or fail to adequately value physical
or financial collateral, which may result in an increase in default
rates for loans, which may, in turn, impact the Group's
profitability. See 'Capital and risk management - Credit
Risk'.
The credit quality of the Group's borrowers and other
counterparties is impacted by prevailing economic and market
conditions and by the legal and regulatory landscape in the UK and
any deterioration in such conditions or changes to legal or
regulatory landscapes could worsen borrower and counterparty credit
quality and consequently impact the Group's ability to enforce
contractual security rights. See also, 'The Group faces increased
political and economic risks and uncertainty in the UK and global
markets'. In particular, developments relating to Brexit or the
consequences thereof, may adversely impact credit quality in the
UK, and the resulting negative economic outlook could drive an
increased level of credit impairments reflecting the more
forward-looking nature of IFRS 9.
Within the UK, the level of household indebtedness remains high
although the pace of credit growth has slowed during 2018. The
ability of such households to service their debts could be
challenged by a period of high unemployment or increased interest
rates. In particular, the Group may be affected by volatility in
property prices both in the residential and commercial sectors
(including as a result of Brexit) given that the Group's mortgage
loan portfolio as at 31 December 2018, amounted to £124
billion, representing 59% of the Group's customer loan exposure. If
property prices were to weaken this could lead to higher impairment
charges, particularly if default rates consequently increase. In
addition, the Group's credit risk may be exacerbated if the
collateral that it holds cannot be realised as a result of market
conditions or regulatory intervention or if it is liquidated at
prices not sufficient to recover the full amount of the loan or
derivative exposure that is due to the Group. This is most likely
to occur during periods of illiquidity or depressed asset
valuations.
Concerns about, or a default by, a financial institution could lead
to significant liquidity problems and losses or defaults by other
financial institutions, since the commercial and financial
soundness of many financial institutions is closely related and
inter-dependent as a result of credit, trading, clearing and other
relationships among these financial institutions. Any perceived
lack of creditworthiness of a counterparty may lead to market-wide
liquidity problems and losses for 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. See also, 'The
Group may not be able to adequately access sources of liquidity and
funding'.
As a result, borrower and counterparty credit quality may cause
accelerated impairment charges under IFRS 9, increased repurchase
demands, higher costs, additional write-downs and losses for the
Group and an inability to engage in routine funding
transactions.
The Group operates in markets that are highly competitive, with
increasing competitive pressures and technology
disruption.
The market for UK financial services is highly competitive, and the
Group 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), industry trends
resulting in increased disaggregation or unbundling of financial
services or conversely the re-intermediation of traditional banking
services, and the impact of regulatory actions and other factors.
In particular, developments in the financial sector resulting from
new banking, lending and payment solutions offered by rapidly
evolving incumbents, challengers and new entrants, notably 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 UK initiative on
Open Banking and other remedies imposed by the Competition and
Markets Authority ('CMA') which are designed to further promote
competition within retail banking, as well as the
competition-enhancing measures under the RBS Group's Alternative
Remedies Package. See also, 'The cost of implementing the
Alternative Remedies Package could be more onerous than
anticipated'.
Increasingly many of the products and services offered by the Group
are, and will become, technology intensive for example Bό,
Mettle, Esme, FreeAgent, APtimise and Path, some of the Group's
recent fintech ventures. The Group's ability to develop digital
solutions that comply with related regulatory changes 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 innovation strategy (which includes investment in its IT
capability intended to address the material increase in customer
use of online and mobile technology for banking as well as
selective acquisitions, which carry associated risks) 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 be more successful in implementing innovative
technologies for delivering products or services to their
customers. 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.
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 or ineffective, especially given the 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 or
technologies for delivering products or services to customers and
its competitive position. Furthermore, the development of
innovative products depends on the Group's ability to produce
underlying high quality data, failing which its ability to offer
innovative products may be compromised.
If the Group is unable to offer competitive, attractive and
innovative products that are also profitable, it will lose market
share, incur losses on some or all of its activities and lose
opportunities for growth. In this context, the Group is investing
in the automation of certain solutions and interactions within its
customer-facing businesses, including through artificial
intelligence. Such initiatives may result in operational,
reputational and conduct risks if the technology used is defective,
or is not fully integrated into the Group's current solutions or
does not deliver expected cost savings. The investment in automated
processes will likely also result in increased short-term costs for
the Group.
In addition, recent and future disposals and restructurings by the
Group, cost-cutting measures, as well as employee remuneration
constraints, may also have an impact on the Group's ability to
compete effectively and intensified competition from incumbents,
challengers and new entrants in the Group's core markets could
affect the Group's ability to maintain satisfactory returns.
Furthermore, continued consolidation in certain sectors of the
financial services industry could result in the Group's remaining
competitors gaining greater capital and other resources, including
the ability to offer a broader range of products and services and
geographic diversity, or the emergence of new
competitors.
The Group may not meet the prudential regulatory requirements for
capital or manage its capital effectively, which could trigger
certain management actions or recovery options.
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 financial
resources. Adequate capital also gives the RBS Group (including the
Group) financial flexibility in the face of turbulence and
uncertainty in the global economy and specifically in their core UK
and European markets.
As at 31 December 2018, the Bank's CET1 ratio was 17.4%. The RBS
Group currently targets to maintain its CET1 ratio at circa 14% in
the medium term. The RBS Group's target capital ratio is based on a
combination of its expected regulatory requirements and internal
modelling, including stress scenarios and management's and/or the
PRA's views on appropriate buffers above minimum operating
levels.
The RBS Group's current capital strategy for the Bank is based on:
the expected accumulation of additional capital through the accrual
of profits over time; the planned reduction of its RWAs through
disposals and natural attrition; and other capital management
initiatives which focus on improving capital efficiency through
improved data and upstreaming of dividends from the Bank to
RBSG.
A number of factors may impact the Group's ability to maintain its
current CET1 ratio target and achieve its capital strategy. These
include, amongst other things:
● a depletion of its capital
resources through increased costs or liabilities, reduced profits
or losses (including as a result of extreme one-off incidents such
as cyber, fraud or conduct issues) or, sustained periods of low or
lower interest rates, reduced asset values resulting in
write-downs, impairments, changes in accounting policy, accounting
charges or foreign exchange movements;
● a failure to reduce RWAs in
accordance
● within the timeline contemplated
by the RBS Group's capital plan;
● an increase in the quantum of
RWAs in excess of that expected, including due to regulatory
changes; and
● changes in prudential regulatory
requirements including the Bank's Total Capital Requirement set by
the PRA, including Pillar 2 requirements and regulatory buffers, as
well as any applicable scalars.
In addition to regulatory capital, the Bank is required to maintain
a set quantum of internal MREL set as a percentage of its RWAs,
which comprises loss-absorbing senior funding and regulatory
capital instruments internally issued up to RBSG. The Bank of
England has identified single point-of-entry as the preferred
resolution strategy for RBS Group. As a result, RBSG is the only
RBS Group entity that is able to externally issue securities that
count towards the RBS Group's MREL requirements, the proceeds of
which can then be downstreamed to meet the internal MREL issuance
requirements of its operating entities, including the Bank, as
required. The inability of the Group to reduce its RWAs in
line with assumptions in its funding plans could result in an
increase of its internal MREL requirements.
If, under a stress scenario, the level of capital or MREL falls
outside of risk appetite, there are a range of recovery management
actions (focussed on risk reduction and mitigation) that the Group
could take to manage its capital levels, which may not be
sufficient to restore adequate capital levels. Under the EU Bank
Recovery and Resolution Framework ('BRRD'), as implemented in the
UK, a breach of the Group's applicable capital or leverage
requirements may trigger the application of the RBS Group's
recovery plan to remediate a deficient capital position. The RBS
Group's regulator may
request that the Group carry out certain capital management actions
or, if the RBS Group's CET1 ratio falls below 7%, certain
regulatory capital instruments issued by the RBS Group will be
written-down or converted into equity and there may be an issue of
additional equity by the RBS Group, which could result in the
dilution of the RBS Group's existing shareholders. 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 acceptable terms or at all. Separately, the
RBS Group may address a shortage of capital by taking action to
reduce leverage exposure and/or RWAs via asset or business
disposals. Such actions may, in turn, affect, among other things,
the Group's product offering, credit ratings, ability to operate
its businesses, pursue its current strategies and pursue strategic
opportunities, any of which may affect the underlying profitability
of the Group and future growth potential. See
also, 'The RBS Group (including the Group) may
become subject to the application of UK statutory stabilisation or
resolution powers which may result in, among other actions, the
write-down or conversion of the Group's Eligible
Liabilities'.
The Group may not be able to adequately access sources of liquidity
and funding.
The Group is required to access sources of liquidity and funding
through retail and wholesale deposits, as well as through the debt
capital markets. As at 31 December 2018, the Group held £255
billion in deposits and 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 reduction or
cessation of deposits by foreign wholesale depositors, which could
result in a significant outflow of deposits within a short period
of time. See also, 'The Group has significant exposure to
counterparty and borrower risk'. 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, materially
affect the Group's ability to satisfy its liquidity
needs.
If the Group's liquidity position were to come under stress, and if
the Group is unable to raise funds through deposits or in the debt
capital markets on acceptable terms or at all, its liquidity
position could be adversely affected and it might be unable to meet
deposit withdrawals on demand or at their contractual maturity, to
repay borrowings as they mature, to meet its obligations under
committed financing facilities, to comply with regulatory funding
requirements, to undertake certain capital and/or debt management
activities, or to fund new loans, investments and businesses. The
Group may need to liquidate unencumbered assets to meet its
liabilities, including disposals of assets not previously
identified for disposal to reduce its funding commitments. In a
time of reduced liquidity, the Group may be unable to sell some of
its assets, or may need to sell assets
at depressed prices, which in either case could negatively affect
the Group's results.
The Group is reliant on the RBS Group for capital and funding
support, and is substantially reliant on RBSG's ability to issue
sufficient amounts of external MREL securities and downstream the
proceeds to the Group.
The Group receives capital and funding support from RBS Group. The
Group will be required to issue instruments that are compliant with
MREL as set forth by the Bank of England. As RBSG is the only
entity that is able to issue securities that count towards the
Group's MREL requirements, the Group's ability to meet its internal
MREL requirements is substantially reliant on RBSG's ability to
issue sufficient amounts of external MREL securities and downstream
the proceeds to the Group. If RBSG is unable to issue adequate
levels of MREL securities such that it is unable to downstream
sufficient amounts to the Group, this could lead to a failure of
the Group to meet its own individual internal MREL requirements as
well as the internal MREL requirements of subsidiaries within the
Group. See also, 'The Group may not meet the prudential regulatory
requirements for capital or manage its capital effectively, which
could trigger certain management actions or recovery
options'.
Any reduction in the credit rating assigned to RBSG, any of its
subsidiaries (including the Bank or other Group subsidiaries) or
any of their respective debt securities could adversely affect the
availability of funding for the Group, reduce its liquidity
position and increase the cost of funding.
Rating agencies regularly review the RBS Group entity credit
ratings, including those of RBSG, the Bank and NWM Plc, which could
be negatively affected by a number of factors, including political
and regulatory developments, changes in rating methodologies,
changes in the relative size of the loss-absorbing buffers
protecting bondholders and depositors, a challenging macroeconomic
environment, the impact of Brexit, a potential second Scottish
independence referendum, further reductions of the UK's sovereign
credit rating, market uncertainty and the inability of the Group to
produce sustained profits.
Any reductions in the long-term or short-term credit ratings of
RBSG or the Bank, including in particular downgrades below
investment grade, may affect the Group's access to money markets,
reduce the size of its deposit base and trigger additional
collateral or other requirements in derivatives contracts and other
secured funding arrangements or the need to amend such
arrangements, which could adversely affect the Group's cost of
funding, its access to capital markets and could limit the range of
counterparties willing to enter into transactions with the Group
and therefore also adversely impact its competitive
position.
The Group may be adversely affected if the RBS Group fails to meet
the requirements of regulatory stress tests.
The RBS Group is subject to annual stress tests by its regulator in
the UK and is also subject to stress tests by European regulators
with respect to RBSG, NWM NV and Ulster Bank Ireland DAC. Stress
tests are designed to assess the resilience of banks to potential
adverse economic or financial developments and ensure that they
have robust, forward-looking capital planning processes that
account for the risks associated with their business profile. If
the stress tests reveal that a bank's existing regulatory capital
buffers are not sufficient to absorb the impact of the stress, then
it is possible that the bank will need to take action to strengthen
its capital position.
Failure by the RBS Group to meet the quantitative and qualitative
requirements 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,
reputational damage, increased supervision and/or regulatory
sanctions, restrictions on capital distributions and loss of
investor confidence.
The Group could incur losses or be required to maintain higher
levels of capital as a result of limitations or failure of various
models.
Given the complexity of the Group's business, strategy and capital
requirements, the Group relies on analytical models for a wide
range of purposes, including to manage its business, assess the
value of its assets and its risk exposure, as well as to anticipate
capital and funding requirements (including to facilitate the RBS
Group's mandated stress testing). In addition, the Group utilises
models for valuation, credit approvals, calculation of loan
impairment charges on an IFRS 9 basis, financial reporting and for
financial crime and fraud risk management. The Group's models, and
the parameters and assumptions on which they are based, are
periodically reviewed and updated to maximise their
accuracy.
Such models are inherently designed to be predictive in nature.
Failure of these models, including due to errors in model design or
inputs, to accurately reflect changes in the micro and
macroeconomic environment in which the Group operates, to capture
risks and exposures at the subsidiary level, to be updated in line
with the RBS Group's or the Group's current business model or
operations, or findings of deficiencies by the RBS Group's (and in
particular, the Group's) regulators (including as part of the RBS
Group's mandated stress testing) may result in increased capital
requirements or require management action. The Group may also face
adverse consequences as a result of actions by management based on
models that are poorly developed, implemented or used, models that
are based on inaccurate or compromised data or as a result of the
modelled outcome being misunderstood, or by such information being
used for purposes for which it was not designed.
The Group's financial statements are sensitive to the underlying
accounting policies, judgements, estimates and
assumptions.
The preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the reported
amounts of assets, liabilities, income, expenses, exposures and
RWAs. Due to the inherent uncertainty in making estimates
(particularly those involving the use of complex models), future
results may differ from those estimates. Estimates, judgements,
assumptions and models take into account historical experience and
other factors, including market practice and expectations of future
events that are believed to be reasonable under the
circumstances.
The accounting policies deemed critical to the Group's results and
financial position, based upon materiality and significant
judgements and estimates, which include loan impairment provisions,
are set out in 'Critical accounting policies and key sources of
estimation uncertainty' on page 81. New accounting standards and
interpretations that have been issued by the International
Accounting Standards Board but which have not yet been adopted by
the Group are discussed in 'Accounting developments' on page
81.
Changes in accounting standards may materially impact the Group's
financial results.
Changes in accounting standards or guidance by accounting bodies or
in the timing of their implementation, whether immediate or
foreseeable, 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 January 2018, a new accounting standard for financial
instruments (IFRS 9) became effective, which introduced impairment
based on expected credit losses, rather than the incurred loss
model previously applied under IAS 39. The Group expects IFRS 9 to
create earnings and capital volatility and the Group took a
£60 million impairment charge at 31 December 2018, reflecting
the more uncertain economic outlook.
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 credible, internal valuation models
that utilise observable market data. In certain circumstances, the
data for individual financial instruments or classes of financial
instruments utilised by such valuation models may not be available
or may become unavailable due to prevailing market conditions. In
such circumstances, the Group's internal valuation models require
the Group to make assumptions, judgements and estimates to
establish fair value, which are complex and often relate to matters
that are inherently uncertain.
The Group will adopt IFRS 16 Leases with effect from 1 January 2019
as disclosed in the Accounting policies. This is expected to
increase Other assets by £0.9 billion and Other liabilities by
£1.5 billion. While adoption of this standard has no effect on
the Group's cash flows, it will impact financial ratios which may
influence investors' perception of the financial condition of the
Group.
The RBS Group (including the Group) may become subject to the
application of UK
statutory stabilisation or resolution powers which may result in,
among other actions, the write-down or conversion of the Group's
Eligible Liabilities.
The Banking Act 2009, as amended ('Banking Act'), implements the
BRRD in the UK and creates a special resolution regime ('SRR').
Under the SRR, HM Treasury, the Bank of England and the PRA and FCA
(together 'Authorities') are granted substantial powers to resolve
and stabilise UK-incorporated financial institutions. Five
stabilisation options exist under the current SRR: (i) transfer of
all of the business of a relevant entity or the shares of the
relevant entity to a private sector purchaser; (ii) transfer of all
or part of the business of the relevant entity to a 'bridge bank'
wholly-owned by the Bank of England; (iii) transfer of part of the
assets, rights or liabilities of the relevant entity to one or more
asset management vehicles for management of the transferor's
assets, rights or liabilities; (iv) the write-down, conversion,
transfer, modification, or suspension of the relevant entity's
equity, capital instruments and liabilities ('Eligible
Liabilities'); and (v) temporary public ownership of the relevant
entity. These tools may be applied to RBSG as the parent
company or to the Group, as an affiliate, where certain conditions
are met (such as, whether the firm is failing or likely to fail, or
whether it is reasonably likely that action will be taken (outside
of resolution) that will result in the firm no longer failing or
being likely to fail). Moreover, the SRR provides for modified
insolvency and administration procedures for relevant entities, and
confers ancillary powers on the Authorities, including the power to
modify or override certain contractual arrangements in certain
circumstances. The Authorities are also empowered by order to amend
the law for the purpose of enabling the powers under the SRR to be
used effectively. Such orders may promulgate provisions with
retrospective applicability.
Under the Banking Act, the Authorities are generally required to
have regard to specified objectives in exercising the powers
provided for by the Banking Act. One of the objectives (which is
required to be balanced as appropriate with the other specified
objectives) refers to the protection and enhancement of the
stability of the financial system of the UK. Moreover, the 'no
creditor worse off' safeguard contained in the Banking Act may not
apply in relation to an application of the separate write-down and
conversion power relating to capital instruments under the Banking
Act, in circumstances where a stabilisation power is not also used;
holders of debt instruments which are subject to the power may,
however, have ordinary shares transferred to or issued to them by
way of compensation.
Uncertainty exists as to how the Authorities may exercise the
powers granted to them under the Banking Act. In addition, the
determination that ordinary shares, securities and other
obligations issued by RBS Group (including the Group) may be
subject to write-down, conversion or 'bail-in' (as applicable) is
unpredictable and may depend on factors outside of the Group's
control. Moreover, the relevant provisions of the Banking Act
remain untested in practice. However, if the Group (or any other
RBS Group entity) is at or is approaching the point of
non-viability such that regulatory intervention is required, any
exercise of the resolution regime powers by the Authorities may
adversely affect holders of the Group's securities that fall within
the scope of 'bail-in' powers. This may result in various actions
being undertaken in relation to the Group and any securities of the
Group, including the write-down of certain of the Group's Eligible
Liabilities which would adversely affect the financial results,
condition and prospects of the Group.
Legal, regulatory and conduct risk
The Group's businesses are subject to substantial regulation and
oversight, which are constantly evolving and may adversely affect
the Group.
The Group is subject to extensive laws, regulations, corporate
governance practice and disclosure 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, which may increase compliance
and conduct risks. The Group expects government and regulatory
intervention in the financial services industry to remain high for
the foreseeable future.
In recent years, regulators and governments have focussed on
reforming the prudential regulation of the financial services
industry and the manner in which the business of financial services
is conducted. Among others, measures have included: enhanced
capital, liquidity and funding requirements, implementation of the
UK ring-fencing regime, implementation and strengthening of the
recovery and resolution framework applicable to financial
institutions in the UK, the EU and the US, financial industry
reforms (including in respect of MiFID II), enhanced data privacy
and IT resilience requirements, enhanced regulations in respect of
the provision of 'investment services and activities', and
increased regulatory focus in certain areas, including conduct,
consumer protection regimes, anti-money laundering, anti-bribery,
anti-tax evasion, payment systems, sanctions and anti-terrorism
laws and regulations. This has 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. In particular, the Group is required
to comply with regulatory requirements in respect of the
implementation of the UK ring-fencing regime (See also, 'The Group,
including the Bank, is required to comply with regulatory
requirements in respect of the implementation of the UK
ring-fencing regime') and to ensure operational continuity in
resolution; the steps required to ensure such compliance entail
significant costs, and also impose significant operational, legal
and execution risk. Serious consequences could arise should the
Group be found to be non-compliant with such regulatory
requirements. 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.
Any of these developments (including any failure to comply with new
rules and regulations) could have a significant impact on the
Group's authorisations and licenses, the products and services that
the Group may offer, its reputation and the value of its assets,
the Group's operations or legal entity structure, and the manner in
which the Group conducts its business. 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:
● general changes in government,
central bank, regulatory or competition policy, or changes in
regulatory regimes that may influence investor decisions in the
markets in which the Group operates;
● amendments to the framework or
requirements relating to the quality and quantity of regulatory
capital to be held by the Group as well as liquidity and leverage
requirements, either on a solo, consolidated or subgroup
level;
● changes to 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, the BRRD, MREL or by the Financial
Stability Board's ('FSB') recommendations on total loss-absorbing
capacity ('TLAC');
● additional rules and regulatory
initiatives and review relating to customer protection and
resolution of disputes and complaints, including increased focus by
regulators (including the Financial Ombudsman Service) on how
institutions conduct business, particularly with regard to the
delivery of fair outcomes for customers and orderly/transparent
markets;
● 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;
● 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 relating to foreign
ownership, expropriation, nationalisation and confiscation of
assets;
● changes to corporate governance
practice and disclosure requirements, senior manager
responsibility, corporate structures and conduct of business
rules;
● financial market infrastructure
reforms establishing new rules applying to investment services,
short selling, market abuse, derivatives markets and investment
funds;
● increased attention to the
protection and resilience of, and 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 as well as IT
controls and resilience, including the GDPR;
● the introduction of, and changes
to, taxes, levies or fees applicable to the Group's operations,
such as the imposition of a financial transaction tax, changes in
tax rates, changes in the scope and administration of the Bank
Levy, 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;
● laws and regulations in respect
of climate change and sustainable finance (including ESG)
considerations; 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 or conflicting laws, rules or
regulations by key regulators or policymakers in different
jurisdictions, or failure by the Group to comply with such laws,
rules and regulations, may adversely affect the Group's business
and results. In addition, uncertainty and insufficient
international
regulatory coordination as enhanced supervisory standards are
developed and implemented may adversely affect the Group's ability
to engage in effective business, capital and risk management
planning.
The Group is subject to a number of legal, regulatory and
governmental actions and investigations including conduct-related
reviews and redress projects, the outcomes of which are inherently
difficult to predict, and which could have an
adverse effect on the Group.
The Group's operations are diverse and complex and it operates in
legal and regulatory environments that expose it to potentially
significant legal proceedings, and civil and criminal regulatory
and governmental actions. The Group has settled a number of legal
and regulatory actions over the past several years but continues to
be, and may in the future be, involved in such actions in the UK,
the US and other jurisdictions.
The legal and regulatory actions specifically referred to below
are, in the Group's view, the most significant legal and regulatory
actions to which the Group is currently exposed. However, the Group
is also subject to a number of ongoing reviews, investigations and
litigation proceedings relating to, among
other matters, the setting of benchmark rates such as LIBOR and
related derivatives trading, product mis-selling, customer
mistreatment, anti-money laundering, antitrust and various other
compliance issues. 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 and in excess of any related provisions, are often
difficult to predict, particularly in the early stages of a case or
investigation, and the Group's expectations for resolution may
change.
In particular, the Group has for a number of years been involved in
conduct-related reviews and redress projects, including a review of
certain historic customer connections in its former Global
Restructuring Group (GRG), management of claims arising from
historic sales of payment protection insurance. In relation to the
GRG review, the Group established a complaints process in November
2016, overseen by an independent third party. The complaints
process closed on 22 October 2018 for new complaints in the UK and,
with the exception of a small cohort of potential complainants for
whom there is an extended deadline, on 31 December 2018 for new
complaints in the Republic of Ireland. An additional provision
of £50 million was taken in Q4 2018, reflecting greater than
predicted complaints volumes in the week leading up to the closure
of the complaints process. In addition, the Group continues to
handle claims in relation to historic sales of payment protection
insurance and took additional provisions of £125 million in Q3
2018, reflecting increased complaint volumes as the complaint
deadline of 31 August 2019 approaches. See 'Litigation,
investigations and reviews' of Note 29 on the consolidated
for details of these matters. The Group has dedicated resources in
place to manage claims and complaints relating to the above and
other conduct-related matters. Provisions taken in respect of such
matters include the costs involved in administering the various
complaints processes. Any failure to administer such processes
adequately, or to handle individual complaints fairly or
appropriately, could result in further claims as well as the
imposition of additional measures or limitations on the Group's
operations, additional supervision by the Group's regulators, and
loss of investor confidence.
Adverse outcomes or resolution of current or future legal or
regulatory actions, including conduct-related reviews or redress
projects, could result in restrictions or limitations on the
Group's operations, and could adversely impact the Group's capital
position or its ability to meet regulatory capital adequacy
requirements. 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 may not effectively manage the transition of LIBOR and
other IBOR rates to alternative risk free rates.
UK and international regulators are driving a transition from the
use of interbank offer rates (IBOR's), including LIBOR, to
alternative risk free rates (RFRs). In the UK, the FCA has asserted
that they will not compel LIBOR submissions beyond 2021, thereby
jeopardising its continued availability, and have strongly urged
market participants to transition to RFRs, as the CFTC and other
regulators in the United States. The Group has significant exposure
to IBORs primarily on its commercial lending and legacy securities.
Until there is market acceptance on the form of alternative RFRs
for different products, the legal mechanisms to effect transition
cannot be confirmed, and the impact cannot be determined nor any
associated costs accounted for. The transition and uncertainties
around the timing and manner of transition to RFRs represent a
number of risks for the Group, its customers and the financial
services industry more widely. These include risks related to:
legal risks (as changes may be required to documentation for new or
existing transactions); financial risks (which may arise from any
changes in valuation of financial instruments linked to benchmarks
rates and may impact the Group's cost of funds and its risk
management related financial models); pricing risks (such as
changes to benchmark rates could impact pricing mechanisms on
certain instruments); operational risks (due to the potential
requirement to adapt IT systems, trade reporting infrastructure and
operational processes); and conduct risks (which may relate to
communication regarding the potential impact on customers, and
engagement with customers during the transition
period).
It is therefore currently difficult to determine to what extent the
changes will affect the Group, or the costs of implementing any
relevant remedial action. Uncertainty as to the nature of such
potential changes, alternative reference rates or other reforms and
as to the continuation of LIBOR or EURIBOR may adversely affect
financial instruments using LIBOR or EURIBOR as benchmarks. The
implementation of any alternative RFRs may be impossible or
impracticable under the existing terms of such financial
instruments and could have an adverse effect on the value of,
return on and trading market for such financial
instruments.
The Group operates in markets that are subject to intense scrutiny
by the competition authorities.
There is significant oversight by competition authorities of the
markets which the Group operates in. The competitive landscape for
banks and other financial institutions in the UK and the rest of
Europe is rapidly changing. 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 UK retail banking sector has been subjected to intense scrutiny
by the UK competition authorities and by other bodies, including
the FCA and the Financial Ombudsman Service, 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 Order 2017 imposes remedies primarily intended to
make it easier for consumers and businesses to compare personal
current account ('PCA') and SME bank products, increase the
transparency of price comparison between banks and amend PCA
overdraft charging. These remedies 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 Group
operates or result in restrictions on mergers and consolidations
within the financial sector.
The cost of implementing the Alternative Remedies Package could be
more onerous than anticipated.
In connection with the implementation of the Alternative Remedies
Package (regarding the business previously described as Williams
& Glyn), an independent body ('Independent Body') has been
established to administer the Alternative Remedies Package. The
implementation of the Alternative Remedies Package has involved
costs for the Group, including but not limited to the funding
commitments of £425 million for the Capability and Innovation
Fund and £350 million for the incentivised switching scheme,
both being administered by the Independent Body. Implementation of
the Alternative Remedies Package may involve additional costs for
the Group and may also divert resources from 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 may require the
Group to modify certain aspects of the 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 has the ability to extend the duration of the scheme by up to
twelve months, impose penalties of up to £50 million, 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 (which
comprises part of the Alternative Remedies Package), 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 (which
also comprises part of the Alternative Remedies Package) 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
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
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 to the Group 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 Group's operations, additional supervision by
the Group's regulators, and loss of investor
confidence.
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, 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 with respect to rates of tax)
or accounting standards may reduce the recoverable amount of the
recognised tax loss deferred tax assets, amounting to £1.4
billion as at 31 December 2018. Changes to the treatment of certain
deferred tax assets may impact the Group's capital position. In
addition, the Group's interpretation or application of relevant tax
laws may differ from those of the relevant tax authorities and
provisions are made for potential tax liabilities that may arise on
the basis of the amounts expected to be paid to tax authorities.
The amounts ultimately paid may differ materially from the amounts
provided depending on the ultimate resolution of such
matters.
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:
15 February 2019
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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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