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):_________
National Westminster Bank Plc
23 February 2018
Annual Report and Accounts 2017
A copy of the Annual Report and Accounts 2017 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 2017 in full unedited
text. Page references in the text refer to page numbers in the
Annual Report and Accounts 2017.
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.
Risk factors
continued
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.
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.
Risk factors
continued
●
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.
●
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).
Risk factors
continued
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’.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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 30 on the consolidated
accounts on pages 159 to 170 for details for 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 Group in Q4 2017 in relation to the Group’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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
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
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.’
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
Moreover,
market volatility and illiquidity (and the assumptions, judgements
and estimates in relation to such matters that may change over time
and may ultimately not turn out to be accurate) make it difficult
to value certain of the Group’s exposures. Valuations in
future periods reflecting, among other things, the then-prevailing
market conditions and changes in the credit ratings of certain of
the Group’s assets may result in significant changes in the
fair values of the Group’s exposures, such as credit market
exposures, and the value ultimately realised by the Group may be
materially different from the current or estimated fair value. As
part of its ongoing derivatives operations, the Group also faces
significant basis, volatility and correlation risks, the occurrence
of which are also impacted by the factors noted above.
In
addition, for accounting purposes, the Group carries some of its
issued debt, such as debt securities, at the current market price
on its balance sheet. Factors affecting the current market price
for such debt, such as the credit spreads of the Group, may result
in a change to the fair value of such debt, which is recognised in
the income statement as a profit or loss.
Risk factors
continued
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 focusses 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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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’.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
The reported results of the Group are sensitive to the accounting
policies, assumptions and estimates that underlie the preparation
of its financial statements. Its results in future periods may be
affected by changes to applicable accounting rules and
standards.
The
preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the reported
amounts of assets, liabilities, income and expenses. Due to the
inherent uncertainty in making estimates, results reported in
future periods may reflect amounts which differ from those
estimates. Estimates, judgements and assumptions take into account
historical experience and other factors, including market practice
and expectations of future events that are believed to be
reasonable under the circumstances.
The
accounting policies deemed critical to the Group’s results
and financial position, based upon materiality and significant
judgements and estimates, include 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 and 110. 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.
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, judgements and estimates to
establish fair value, which are complex and often relate to matters
that are inherently uncertain.
Resulting
changes in the fair values of the financial instruments has had and
could continue to have a material adverse effect on the
Group’s earnings, financial condition and capital
position.
The Group’s 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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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
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
●
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.
Risk factors
continued
Further
losses or a failure to meet profitability targets or reduce
risk-weighted assets in accordance with or within the timeline
contemplated by the RBS Group’s capital plan, a depletion of
its 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.
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.
Risk factors
continued
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.
●
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;
Risk factors
continued
●
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
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.
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.
Risk factors
continued
In
addition, the Group may be exposed to certain risks, including
risks arising out of ongoing liabilities and obligations, breaches
of covenants, representations and warranties, indemnity claims,
transitional services arrangements and redundancy or other
transaction-related costs, and counterparty risk in respect of
buyers of assets being sold.
The
occurrence of any of the risks described above could have a
material adverse effect on the Group’s business, results of
operations, financial condition and capital position and
consequently may have the potential to impact the competitive
position of part or all of the Group’s business.
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.
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
|
|
|
|
|
NATIONAL
WESTMINSTER BANK PLC (Registrant)
|
|
|
|
By:
|
/s/ Jan
Cargill
|
|
|
|
Name:
|
Jan
Cargill
|
|
Title:
|
Deputy
Secretary
|