TIDM83NF
RNS Number : 7040P
Natwest Markets PLC
19 February 2021
NatWest Markets Plc 19 February 2021
Annual Report and Accounts 2020
A copy of the Annual Report and Accounts 2020 for NatWest
Markets Plc has been submitted to the National Storage Mechanism
and will shortly be available for inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism . The
document will be available on NatWest Group plc's
website at https://investors.natwestgroup.com/reports-archive
For further information, please contact: Media Relations
+44 (0) 131 523 4205
Investor relations Amanda Hausler NatWest Markets Plc Investor
Relations
+44 (0) 207 085 6448
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 2020 in full unedited
text. Page references in the text refer to page numbers in the
Annual Report and Accounts 2020.
Principal Risks and Uncertainties
Set out below are certain risk factors that could adversely
affect NWM Group's future results, its financial condition and
prospects and cause them to be materially different from what is
forecast or expected, and directly or indirectly impact the value
of its securities in issue. These risk factors are broadly
categorised and should be read in conjunction with other sections
of this annual report, including the forward-looking statements
section, the strategic report and the risk and capital management
section. They should not be regarded as a complete and
comprehensive statement on its own of all potential risks and
uncertainties facing NWM Group. The current COVID-19 pandemic may
exacerbate any of the risks described below.
Risks relating to the COVID-19 pandemic
The effects of the COVID-19 pandemic on the UK, global economies
and financial markets and NWM Group's customers, as well as its
competitive environment may continue to have a material adverse
effect on NWM Group's business, results of operations and
outlook.
In March 2020, the World Health Organization declared the spread
of the COVID-19 virus a pandemic. Since then, many countries,
including the UK (NatWest Group's most significant market) have at
times imposed strict social distancing measures, restrictions on
non-essential activities and travel quarantines, in an attempt to
slow the spread and reduce the impact of the COVID-19 pandemic.
The UK economy, as well as most countries, went into recession
in 2020 as measures were introduced to reduce the spread of the
virus. UK economic output fell again in November 2020, according to
estimates from the Office for National Statistics, as many
restrictions were re-introduced towards the end of 2020 and at the
start of 2021. The COVID-19 pandemic has caused significant
reductions in levels of personal and commercial activity,
reductions in consumer spending, increased levels of corporate debt
and, for some customers, personal debt, increased unemployment and
significant market volatility in asset prices, interest rates and
foreign exchange rates. It has also caused physical disruption and
slow-down to global supply chains and working practices, all of
which have affected NWM Group's customers.
Further waves of infection may result in further restrictions in
affected countries and regions. While vaccine treatment is
currently being deployed, the pace of deployment and ultimate
effectiveness is uncertain, and vaccines may fail to achieve
immunisation that is significant within the population. Therefore,
significant uncertainties remain as to how long the COVID-19
pandemic will last. Even when restrictions are relaxed, they may be
re-imposed, sometimes at short notice if either immunisation is
insufficient or new strains of the COVID-19 virus or other diseases
develop into new epidemics or pandemics.
Significant uncertainties continue as to the extent of the
economic contraction and the path and length of time required to
achieve economic recovery.
In response to the COVID-19 pandemic, central banks,
governments, regulators and legislatures in the UK and elsewhere
have announced historic levels of support and various schemes for
impacted businesses and individuals, including forms of financial
assistance and legal and regulatory initiatives, including further
reductions in interest rates. Whether or not these measures
effectively mitigate the negative impacts of the COVID-19 pandemic
on NWM Group, some of these measures, or further measures, such as
negative interest rates, may also have a material adverse effect on
NWM Group's business and performance. It is uncertain as to how
long such financial assistance and legal and regulatory initiatives
may last, how they may evolve in the future or how consumers and
businesses may react to such initiatives. NWM Group's clients may
be negatively impacted when such support schemes are scaled back
and ultimately ended, which in turn could expose NWM Group to
increased credit and counterparty risk. In addition, the COVID-19
pandemic related uncertainties and the range of prudential
regulatory support has made reliance on analytical models, planning
and forecasting for NWM Group more complex and may result in
uncertainty impacting the risk profile of NWM Group and/or that of
the wider banking industry. The medium and long-term implications
of the COVID-19 pandemic for NWM Group customers, and the UK and
global economies and financial markets remain uncertain and may
continue to have a material adverse effect on NWM Group's business,
results of operations and outlook.
The adverse impact of the COVID-19 pandemic on the credit
quality of NWM Group's counterparties has increased NWM Group's
exposure to counterparty risk, which may adversely affect its
business, results of operations and outlook.
The effects of the COVID-19 pandemic have adversely affected the
credit quality of many of NWM Group's borrowers and other
counterparties. As a result, NWM Group experienced (and may
continue to experience) elevated exposure to credit risk and
demands on its funding from, for example, customers and borrowers
drawing down upon committed credit facilities. If borrowers or
counterparties default or suffer deterioration in credit, this
increases impairment charges, credit reserves, write-downs and
regulatory expected loss. An increase in drawings upon committed
credit facilities may also increase NWM Plc's and/or its
subsidiaries' RWAs. If the NWM Group experiences losses and a
reduction in future profitability, this is likely to affect the
recoverable value of fixed assets, including deferred taxes, which
may lead to further write-downs and, in turn, have a material
adverse effect on NWM Group's business, results of operations and
outlook.
NWM Group has applied an internal analysis of multiple economic
scenarios (MES) together with the determination of specific overlay
adjustments to inform its IFRS 9 ECL (Expected Credit Loss). The
recognition and measurement of ECL is complex and involves the use
of significant judgement and estimation. This includes the
formulation and incorporation of multiple forward-looking economic
scenarios into ECL to meet the measurement objective of IFRS 9. The
ECL provision is sensitive to the model inputs and economic
assumptions underlying the estimate. Going forward, NWM Group
anticipates observable credit deterioration of a proportion of
assets resulting in a systematic uplift in defaults, which is
mitigated by those economic assumption scenarios being reflected in
the Stage 2 ECL across portfolios, along with a combination of post
model overlays in both wholesale and retail portfolios reflecting
the uncertainty of credit outcomes. See also, ' Risk and capital
management - Credit Risk' . A credit deterioration would also lead
to RWA increases. Furthermore, the assumptions and judgments used
in the MES and ECL assessment at 31 December 2020 may not prove to
be adequate resulting in incremental ECL provisions for the NWM
Group. As government support schemes reduce, defaults are expected
to rise with more ECLs cases moving from Stage 2 to Stage 3.
Any of the above could have a material adverse effect on NWM
Group's business, results of operations and outlook.
The COVID-19 pandemic may adversely affect NWM Group's strategy
and impair its ability to meet its targets and to achieve its
strategic objectives.
In February 2020, NatWest Group outlined a Purpose-led Strategy,
which requires changes in the NWM Group's business, including
reductions in capital allocated to NWM Plc or its subsidiaries, its
cost base and complexity. As part of the NWM Refocusing, the NWM
Group has been setting a number of financial, capital and
operational targets and expectations. The sudden and profound
economic and social impact of the COVID-19 pandemic, and the
revised economic outlook challenge many of the fundamental
assumptions behind its targets, especially on impairment levels and
the impact of IFRS9, RWA reductions, loan growth and cost
reductions, such that the relevant targets and expectations may no
longer be achievable as planned and/or on the timelines projected,
or at all. For example, the COVID-19 pandemic caused significant
market volatility, which temporarily increased NWM Group's market
risk and has caused RWA inflation, which may increase in the
future.
Whilst NWM Group, as part of NatWest Group, remains committed to
its cost reduction targets, achieving the planned reductions in an
environment affected by the COVID-19 pandemic will be more
challenging and may require additional savings to be made in a
manner that may increase certain operational risks and could impact
productivity and competitiveness within NWM Group and which may
have a material adverse effect on NWM Group's business, results of
operations and outlook.
It is uncertain as to how the broader macroeconomic business
environment and societal norms may be impacted by the COVID-19
pandemic, which is already resulting in several significant wider
societal changes. For example, one of the most visible effects of
the COVID-19 pandemic has been the impact on the most vulnerable
groups of society and concerns about systemic racial biases and
social inequalities.
In addition, the COVID-19 pandemic has accelerated existing
economic trends that may radically change the way businesses are
run and people live their lives. These trends include
digitalisation, decarbonisation, automation, e-commerce and agile
working, each of which has resulted in significant market
volatility in asset prices. There is also increasing investor,
regulatory and customer scrutiny regarding how businesses address
these changes and related climate, environmental, social,
governance and other sustainability issues including workplace
health, safety and wellbeing, diversity and inclusion, data
privacy, workforce management, human rights and supply chain
management. Any failure or delay by NWM Group to adopt its business
strategy and to establish and maintain effective governance,
procedures, systems and controls in response to these changes and
to manage emerging climate, environmental, social and other
sustainability-related risks and opportunities may have a material
adverse effect on NWM Group's reputation, business, results of
operations and outlook and the value of NWM Group's securities. See
also, 'Any failure by NWM Group to implement effective and
compliant climate change resilient systems, controls and procedures
could adversely affect NWM Group's ability to manage
climate-related risks' and 'A failure to adapt NWM Group's business
strategy, governance, procedures, systems and controls to manage
emerging sustainability-related risks and opportunities may have a
material adverse effect on NWM Group's reputation, business,
results of operations and outlook'.
The COVID-19 pandemic may also result in unexpected developments
or changes in financial markets, the fiscal, tax and regulatory
frameworks and consumer customer and corporate client behaviour,
which could intensify competition in the financial services
industry. If NWM Group is not able to adapt or compete effectively,
it could experience loss of business, which in turn could adversely
affect its business, results of operations and outlook.
The COVID-19 pandemic has heightened NWM Group's operational
risks as many of its employees are working remotely which may also
adversely affect NWM Group's ability to maintain effective internal
controls.
Due to the COVID-19 pandemic, as at 31 January 2021, many of NWM
Group's employees continue to work remotely. This has increased
reliance on NWM Group's IT systems that enable remote working and
increased exposure to fraud, conduct, operational and other risks
and may place additional pressure on NWM Group's ability to
maintain effective internal controls and governance frameworks. The
IT systems that enable remote working interface with third-party
systems, and NWM Group could experience service denials or
disruptions if such systems exceed capacity or if a third-party
system fails or experiences any interruptions, all of which could
result in business and customer interruption and related
reputational damage, significant compensation costs, regulatory
sanctions and/or a breach of applicable regulations. See also, 'NWM
Group's operations are highly dependent on its complex IT systems
(including those that enable remote working) and any IT failure
could adversely affect NWM Group '.
Sustained periods of remote working may also negatively affect
workplace morale. Whilst NWM Group has taken measures seeking to
maintain the health, wellbeing and safety of its employees during
the COVID-19 pandemic, these measures may be ineffective and could
result in increased expenses and widespread illness could
negatively affect staffing within certain functions, businesses or
geographies. Certain areas of NWM Group also continue to experience
workloads that are heavier than usual as a result of increased
client requirements, or other related direct and indirect effects.
Resources have been diverted from certain ordinary course
activities, and regulatory and other change projects, including the
implementation of NWM Refocusing, which may have implications for
the execution of related deliverables and meeting regulatory and
other deadlines. Operational difficulties as a result of the
COVID-19 pandemic, which may affect NWM Group's external
stakeholders (including clients), may result in challenges in
managing daily cash and liquidity. As a result of the COVID-19
pandemic, compliance and conduct risk may also be heightened both
as a result of internal and external factors. The economic impact
of the COVID-19 pandemic may also necessitate changes in the
remuneration of NWM Group employees, in particular at a senior
level. For example, in March 2020 the PRA requested that bank
boards in response to the COVID-19 pandemic should consider taking
appropriate actions with regard to the accrual, payment and vesting
of variable remuneration. Any of the above could impair NWM Group's
ability to hire, retain and engage well-qualified employees,
especially at a senior level, which in turn may adversely impact
NWM Group's ability to serve its clients efficiently, and impact
productivity across NWM Group. This could have a material adverse
effect on NWM Group's reputation and competitive position and its
ability to grow its business.
Any of the above could have a material adverse effect on NWM
Group's business, results of operations and outlook.
The effects of the COVID-19 pandemic could affect NWM Group's
ability to access sources of liquidity and funding, which may
result in higher funding costs and failure to comply with
regulatory capital, funding and leverage requirements.
Depending on the severity and duration of market volatility
resulting from COVID-19 pandemic related uncertainties and the
impact on capital and RWAs, NWM Group may be required to adapt its
funding plan in order to satisfy its capital and funding
requirements, which may have a material adverse effect on NWM
Group. In addition, impairments or other losses as well as
increases to capital deductions may result in a decrease to NWM
Plc's capital base, and/or that of its subsidiaries. If NatWest
Group plc is unable to issue securities externally as planned as a
result of the COVID-19 pandemic, this may have a negative impact on
NWM Plc's current and forecasted MREL position, particularly if
NatWest Group plc is unable to downstream capital and/or funding to
NWM Plc. In response to the COVID-19 pandemic, there have been
relaxations on certain countercyclical buffer requirements and
stress tests, as well as the calculation of RWAs and leverage,
which may be reinstated in the future.
Furthermore, significant fluctuation in foreign currency
exchange rates may affect capital deployed in NWM Plc's foreign
subsidiaries, branches and joint arrangements, securities issued by
NWM Plc and/or its subsidiaries in foreign currencies or the
respective values of assets, liabilities, income, RWAs, capital
base, expenses and reported earnings.
In addition, increased income as a result of higher levels of
customer flow activity and balance sheet growth (as a result of
increases in corporate deposits and derivative valuations) may not
be sustained in the future. Furthermore, market volatility may
result in increases to leverage exposure.
Any downgrading to the credit ratings and/or outlooks assigned
to NatWest Group plc, NWM Plc or certain other NatWest Group
entities and their respective debt securities as a result of the
economic impact of the COVID-19 pandemic could exacerbate funding
and liquidity risk, and further changes may be possible and are
uncertain in nature, which could have a material adverse effect on
NWM Group's business, results of operations and outlook.
Strategic risk
NatWest Group is in the process of implementing its Purpose-led
Strategy, which requires changes in NWM Group's business and
strategy, and entails material execution, commercial and
operational risks for NWM Group.
In February 2020, NatWest Group announced a new strategy,
focused on becoming a Purpose-led business designed to champion
potential, and to help individuals, families and businesses to
thrive. NatWest Group aims to deliver this strategy, referred to as
its 'Purpose-led Strategy', through: (i) four strategic priorities:
'supporting customers at every stage of their lives;' 'powered by
innovation and partnerships;' 'simple to deal with'; and 'sharpened
capital allocation;' and (ii) three areas of focus: climate change,
enterprise and learning. This strategy requires changes in NWM
Group's business, including an increased focus on serving NatWest
Group's corporate and institutional customer base. NWM Group
intends to achieve this by simplifying its operating model and
technology platform, as well as reducing its cost base and capital
requirements. Together, these initiatives are referred to as the
'NWM Refocusing'. The implementation of the Purpose-led Strategy is
highly complex, and the changes required for both the Purpose-led
Strategy and the NWM Refocusing are substantial, will be
implemented over several years, and may not result in the expected
outcome within the timeline and in the manner contemplated.
As part of its Purpose-led Strategy, NatWest Group has set a
number of financial, capital and operational targets and
expectations, both for the short term and throughout the
implementation period. In addition to the NWM Refocusing, NatWest
Group will require significant reductions to its wider cost base.
In addition to requiring additional cost reductions within NWM
Group, this could affect the cost and scope of NatWest Group's
provision of services to NWM Group, which individually and
collectively may impact NWM Group's competitive position and its
ability to meet its other targets.
A part of the NWM Refocusing is the intended reduction in NWM
Plc's level of RWAs through accelerating the exit of exposures and
an optimisation of inefficient capital across NWM Group. The NWM
Refocusing entails significant commercial, operational, legal and
execution risks and is based on certain material assumptions that
may prove to be incorrect should, for example, RWAs take longer to
exit or are more costly to reduce than anticipated or not possible
to exit at all. In addition, it is anticipated that NWM Group will
generate operating losses over the course of the transition plan
period and therefore NWM Group's capital levels will also decline.
Moreover, it is anticipated that NWM Plc's capital ratios will be
maintained, as the level of RWAs is anticipated to fall more
quickly than capital levels. However, capital levels could decline
at a faster pace than expected (with a corresponding effect on the
capital ratios), should RWA exit costs or operating costs be higher
than anticipated, revenues reduce relatively faster than costs as a
result of execution issues or market conditions, or if NWM Plc
and/or NWM N.V. have difficulties accessing the funding market on
acceptable terms or at all (including if the legal entity credit
ratings are negatively impacted). Should any of the above arise,
additional management actions by NWM Group or NatWest Group may be
triggered. The implementation of the NWM Refocusing is also
expected to result in material costs for NWM Group and could be
materially higher than anticipated, including due to material
uncertainties and factors outside of NWM Group's control, or could
be phased or could progress in a manner other than currently
expected.
The NWM Refocusing is highly complex and NWM Group may not be
able to successfully implement all aspects of it or reach any or
all of the related targets or expectations within the timeframes
contemplated, or at all. More generally, the targets and
expectations that accompany the NWM Refocusing 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. The scale and scope of the intended changes present
material and increased operational, IT system, culture, conduct,
business and financial risks to NWM Group, especially during the
planning and implementation period. The NWM Refocusing may also
create increased people risk through the loss of key staff, the
recalibration of roles and loss of institutional knowledge. This,
combined with the prolonged COVID-19 pandemic, may impact NWM
Group's culture and morale. The NWM Refocusing is
resource-intensive and disruptive, and will divert management
resources, adding to the challenge for the new senior management
team of NWM Group. In addition, the scale of changes being
concurrently implemented will require the implementation and
application of robust governance and controls frameworks and robust
IT systems. There is a risk that NWM Group may not be successful in
doing so.
The focus on meeting cost reduction targets requires head-count
reductions and may also result in limited investment in other areas
which could affect NWM Group's long-term prospects, product
offering or competitive position and its ability to meet its other
targets and commitments. A significant proportion of the cost
savings are dependent on simplification of the IT systems and
therefore may not be realised in full if IT capabilities are not
delivered in line with assumptions. These risks will be present
throughout the period of refocusing and alignment, which is
expected to last for the medium term.
Each of these risks could jeopardise the delivery and
implementation of the NWM Refocusing, result in higher than
expected costs, impact NWM Group's products and services offering
or office locations, reputation with customers or business model
and adversely impact NWM Group's ability to deliver its strategy
and meet its targets and guidance, any of which could in turn have
a material adverse impact on NWM Group's business, results of
operations and outlook. The NWM Refocusing envisages a smaller
scaled business and its successful implementation is expected to
result in substantially lower revenues.
As a result, there can be no certainty that the NWM Refocusing
will be successfully executed, that NWM Group will meet targets and
expectations, or that the refocused NWM Group will be a viable,
competitive business aligned to NatWest Group's corporate and
institutional customer offering.
NWM Group may not be able to successfully implement the NWM
Refocusing and it may not achieve its targets and NWM Group may not
ultimately result in a viable, competitive business.
As part of the NWM Refocusing, NWM Group has set a number of
financial, capital and operational targets and expectations. These
include (but are not limited to) expectations relating to
reductions in RWAs and the timing thereof, and CET1 ratio.
The implementation of the NWM Refocusing is currently underway,
but is highly complex and NWM Group's ability to meet associated
targets and expectations is subject to various internal and
external factors and risks. These include, but are not limited to,
market, regulatory, economic and political uncertainties,
operational risks, insufficient cost reduction plans, risks
relating to NatWest Group's and NWM Group's business models and
strategies and delays or difficulties in implementing the NWM
Refocusing. The successful implementation of the NWM Refocusing
also depends on how the NWM Refocusing is perceived by its
customers, regulators, rating agencies, stakeholders and the wider
market, how that impacts its business, and NWM Group's ability to
retain employees required to deliver the transition and its
go-forward strategic priorities.
Revenues will be negatively impacted, and the implementation may
be more difficult or expensive than expected. Costs relating to the
NWM Refocusing may also be higher than anticipated. The orderly
run-down of certain of its portfolios and the targeted reduction of
its RWAs will be accompanied by the recognition of disposal losses,
which may be higher than anticipated, including due to future
stresses which may place NWM Plc's capital ratios under pressure.
Furthermore, regulatory pressures or changes in the economic and
political and regulatory environment in which NWM Group operates or
regulatory uncertainty or economic volatility, including (but not
limited to) as a result of the effects of the COVID-19 pandemic and
continued uncertainty surrounding the terms of the UK's future
trading arrangements with the EU or changes in the scale and timing
of policy responses on climate change, may require NWM Group to
adjust aspects of the NWM Refocusing or the timeframe for its
implementation.
NWM Group's ability to serve its customers may be diminished by
the implementation of the NWM Refocusing. In addition, customer
reactions to the changed nature of NWM Group's business model may
be more adverse than expected and previously anticipated revenue
and profitability levels may not be achieved in the timescale
envisaged or at all. An adverse macroeconomic environment,
including due to the COVID-19 pandemic, sustained low interest
rates, continued political and regulatory uncertainty and/or strong
market competition may also pose significant challenges to the
successful implementation of the NWM Refocusing and the achievement
of its targets. The prolonged period of implementation and changed
nature of NWM Group's business may also adversely affect the credit
rating assigned to NWM Plc and certain of its subsidiaries
(including NWM N.V.) or any of their respective debt securities,
which could adversely affect the availability and cost of funding
for NWM Group and negatively impact NWM Group's liquidity
position.
Should NWM Group not be able to implement or execute the NWM
Refocusing as contemplated, it may negatively impact revenues for
NWM Group, its ability to meet targets and expectations and could
lead to revisions to the NWM Refocusing strategy, including
management actions by NatWest Group. Such changes and revisions
could have an adverse effect on NWM Group and may affect its
ability to be a viable and competitive business.
Economic and political risk
NWM Group faces market risk as a result of increased political
and economic risks and uncertainty in the UK and global
markets.
NatWest Group faces political uncertainty in Scotland as a
result of a possible second Scottish independence referendum.
Independence may impact NWM Group with NatWest Group plc and other
NatWest Group entities (including NWM Plc) being incorporated
and/or headquartered 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
NatWest Group and its subsidiaries operate, and may require further
changes to NatWest Group (including NWM Group's structure),
independently or in conjunction with other mandatory or strategic
structural and organisational changes which could adversely impact
NWM Group.
The value of NWM Group's financial instruments may be materially
affected by market risk, including as a result of market
fluctuations. Market volatility, illiquid market conditions and
disruptions in the credit markets may make it extremely difficult
to value certain of NWM Group's financial instruments, particularly
during periods of market displacement. This could cause a decline
in the value of NWM Group's financial instruments. This may have an
adverse effect on NWM Group's results of operations in future
periods, or cause inaccurate carrying values for certain financial
instruments. Similarly, NWM Group trades a considerable amount of
financial instruments (including derivatives) and volatile market
conditions could result in a significant decline in NWM Group's net
trading income or result in a trading loss.
In addition, financial markets are susceptible to severe events
evidenced by rapid depreciation in asset values, which may be
accompanied by a reduction in asset liquidity. Under these extreme
conditions, hedging and other risk management strategies may not be
as effective at mitigating trading losses as they would be under
more normal market conditions. Moreover, under these conditions,
market participants are particularly exposed to trading strategies
employed by many market participants simultaneously and on a large
scale, increasing NWM Group's counterparty risk. NWM Group's risk
management and monitoring processes seek to quantify and mitigate
NWM Group's exposure to more extreme market moves. However, severe
market events have historically been difficult to predict and NWM
Group could realise significant losses if extreme market events
were to occur.
The outlook for the global economy over the medium-term remains
uncertain due to a number of factors including: the COVID-19
pandemic, resulting societal inequalities and changes, trade
barriers and the increased possibility and/or continuation of trade
wars, widespread political instability (including as a result of
populism and nationalism, which may lead to protectionist
policies), an extended period of low inflation and low (or
negative) interest rates, climate , environmental, social and other
sustainability-related risks and global regional variations in the
impact and responses to these factors. These conditions could be
worsened by a number of factors including macro-economic
deterioration, increased instability in the global financial system
and concerns relating to further financial shocks or contagion (for
example, due to economic concerns in emerging markets), market
volatility or fluctuations in the value of the pound sterling, new
or extended economic sanctions, volatility in commodity prices or
concerns regarding sovereign debt. This may be compounded by the
ageing demographics of the populations in the markets that NWM
Group serves, increasing inequalities, or rapid change to the
economic environment due to the adoption of technology and
artificial intelligence. Any of the above developments could
adversely impact NWM Group directly (for example, as a result of
credit losses) or indirectly (for example, by impacting global
economic growth and financial markets and NWM Group's clients and
their banking needs).
In addition, NWM Group is exposed to risks arising out of
geopolitical events or political developments, such as exchange
controls, and other measures taken by sovereign governments that
may hinder economic or financial activity levels. Furthermore,
unfavourable political, military or diplomatic events, including
secession movements or the exit of other member states from the EU,
armed conflict, pandemics and widespread public health crises
(including the current COVID-19 pandemic and any future epidemics
or pandemics), state and privately sponsored cyber and terrorist
acts or threats, and the responses to them by governments and
markets, could negatively affect the business and performance of
NWM Group, including as a result of the indirect effect on regional
or global trade and/or NWM Group's customers.
Continuing uncertainty regarding the effects of the UK's
withdrawal from the European Union may continue to adversely affect
NWM Group and its operating environment.
After the 2016 EU Referendum, the UK ceased to be a member of
the EU and the European Economic Area ('EEA') on 31 January 2020
('Brexit'). The 2020 EU-UK Trade and Cooperation Agreement ('TCA')
ended the transition period on 31 December 2020 and provides for
free trade between the UK and EU with zero tariffs and quotas on
all goods that comply with the appropriate rules of origin, with
minimal coverage, however, for financial services; UK-incorporated
financial services providers no longer have EU passporting rights
and there is no mutual recognition regime. Financial services may
largely be subject to individual equivalence decisions by relevant
regulators. A number of temporary equivalence decisions have been
made that cover all services offered by NWM Group. The EU's
equivalence regime does not cover most lending and deposit taking,
and determinations in respect of third countries have not, to date,
covered the provision of investment services. In addition,
equivalence determinations do not guarantee permanent access rights
and can be withdrawn with short notice. The TCA is accompanied by a
Joint Declaration on financial services, which sets out an
intention for the EU and UK to cooperate on matters of financial
regulation and to agree a Memorandum of Understanding by March
2021. There is no certainty, however, as to the form, scope and
timing of any such Memorandum of Understanding.
NatWest Group has engaged in significant and costly Brexit
planning and contingency planning. NatWest Group continues to
monitor regulatory developments, and NatWest Group continues to
seek advice on any transitional regimes being introduced by
individual EU countries. It is updating its operating model
accordingly. NatWest Group also continues to assess where NatWest
Group companies can obtain bilateral regulatory permissions to
permit business to continue from its UK entities, transferring what
cannot be continued to be rendered from the UK to an EEA
subsidiary. Where such regulatory permissions are temporary or are
withdrawn, a different approach may need to be taken or may result
in a change in operating model or some business being ceased . Not
all NatWest Group entities have applied for bilateral regulatory
permissions and instead intend to move EEA business to an EEA
licenced subsidiary. There is a risk that such EEA licences may not
be granted, and where these permissions are not obtained, further
changes to NatWest Group's operating model may be required or some
business may need to be ceased. In addition, failure to obtain
regulatory permissions in one part of NatWest Group may impact
other parts of NatWest Group adversely. Certain permissions are
required in order to maintain the ability to clear euro payments
and others will allow NatWest Group to continue to serve non-UK EEA
customers. Furthermore, transferring business to an EEA based
subsidiary is a complex exercise and involves legal, regulatory and
executional risks, and could result in a loss of business,
customers or greater than expected costs. The changes to NatWest
Group's operating model have been costly and further changes to its
business operations, product offering and customer engagement could
result in further costs. Any of the above could, in turn,
negatively impact NWM Group.
NatWest Group previously announced that it had transferred the
client relationship coverage of its Western European corporate
portfolio to NWM Group. This was accompanied by the transfer of
certain term funding and revolving credit facilities from NWB Plc
to NWM Group. In light of NatWest Group's most recent Brexit
planning and consistent with NatWest Group and NWM Group's
strategies, NWM Group currently expects that certain parts of
NatWest Group's Western European corporate portfolio may remain in
NatWest Holdings Group and not be transferred to NWM Group. In
addition, some or all of this portfolio already held in NWM Group
may be transferred back to NatWest Holdings Group. The timing and
quantum of any such transfers is uncertain and NWM Group can give
no assurance as to the full impact of such transactions on its
go-forward results of operations. As a result, NWM Group's
business, results of operations and outlook could be adversely
affected.
The effects of the UK's exit from the EU and the EEA are
expected to continue to affect many aspects of NWM Group's business
and operating environment, including as described elsewhere in
these risk factors, and may be material and/or cause a near-term
impact on impairments.
The long-term effects of Brexit on NWM Group's operating
environment are difficult to predict. They may be impacted by wider
global macro-economic trends and events, particularly COVID-19
pandemic related uncertainties, which may significantly impact NWM
Group and its customers and counterparties who are themselves
dependent on trading with the EU or personnel from the EU. They may
exacerbate the economic impacts of the COVID-19 pandemic on the UK,
the Republic of Ireland ('ROI') and the rest of EU/EEA .
Significant uncertainty remains as to the extent to which EU/EEA
laws will diverge from UK law ( including bank regulation), whether
and what equivalence determinations will be made by the various
regulators and therefore what respective legal and regulatory
arrangements will be, under which NWM Group and its subsidiaries
will operate. The legal and political uncertainty and any actions
taken as a result of this uncertainty, as well as new or amended
rules, could have a significant adverse impact on NWM Group's
businesses and non-UK operations and/or legal entity structure,
including attendant operating, compliance and restructuring costs,
level of impairments, capital requirements, regulatory environment
and tax implications and as a result may adversely impact NWM
Group's profitability, competitive position, business model and
product offering.
Changes in interest rates have affected and will continue to
affect NWM Group's business and results.
Interest rate risk exists for NWM Group. Monetary policy has
been accommodative in recent years including initiatives
implemented by the Bank of England and HM Treasury, which have
helped to support demand at a time of pronounced fiscal tightening
and balance sheet repair. However, there remains considerable
uncertainty as to the future direction of interest rates and pace
of change (as set by the Bank of England and other major central
banks) including as a result of COVID-19 pandemic and its effect on
the UK economy as well as the general UK political or economic
climate. Further decreases in interest rates and/or continued
sustained low or negative interest rates would be expected to
continue to put further pressure on NWM Group's interest income and
profitability. Zero or negative interest rates will require
investment spend to implement a strategic solution to allow a
potential pass-through of those interest rates in certain systems
to relevant customer segments.
Conversely, while increases in interest rates may support NWM
Group interest income, sharp increases in interest rates could have
macroeconomic effects that lead to adverse outcomes for the
business. For example, they could lead to generally weaker than
expected growth, or even contracting GDP, reduced business
confidence and higher levels of unemployment or underemployment,
all of which could adversely affect the business and performance of
NWM Group.
Changes in foreign currency exchange rates may affect NWM
Group's results and financial position.
Decisions of major central banks (including the Bank of England,
the European Central Bank and the US Federal Reserve) and political
or market events which are outside NWM Group's control, may lead to
sharp and sudden variations in foreign exchange rates.
As part of NatWest Group's strategy, NWM Group has become the
markets business for NatWest Group, and is engaged principally in
providing financing, risk management and trading solutions to
global customers across Europe, the USA and Asia. NWM Group
entities issue instruments in foreign currencies that assist in
meeting their respective capital and/or MREL requirements. In
addition, NWM Plc's acquisition of NWM N.V. from NatWest Group
increased NWM Group's exposure to euro movements. NWM N.V. holds a
significant loan portfolio denominated in euros (see also, 'Risk
and capital management - Credit Risk' ). In its day-to-day
operations, NWM Group maintains policies and procedures designed to
manage the impact of exposures to fluctuations in currency rates.
Nevertheless, changes in currency rates, particularly in the
sterling-US dollar and euro-sterling exchange rates, can adversely
affect the value of assets, liabilities (including the total amount
of MREL eligible instruments), foreign exchange dealing activity,
income and expenses, RWAs and hence the reported earnings and
financial condition of NWM Group.
HM Treasury (or UKGI on its behalf) could exercise a significant
degree of influence over NatWest Group and NWM Group is controlled
by NatWest Group.
In its March 2020 Budget, the UK Government announced its
intention to continue the process of privatisation of NatWest Group
plc and to carry out a programme of sales of NatWest Group plc
ordinary shares with the objective of selling all of its remaining
shares in NatWest Group plc by 2025. On 6 February 2019, NatWest
Group plc obtained shareholder authority to make off-market
purchases of its ordinary shares from HM Treasury under the terms
of a directed buyback contract. The authority provided by this
contract was renewed at NatWest Group's Annual General Meeting on
29 April 2020. As of 31 December 2020, the UK Government held 61.9%
of the issued ordinary share capital of NatWest Group plc. There
can be no certainty as to the continuation of the sell-down process
or the timing or extent of such sell-downs.
HM Treasury has indicated that it intends to respect the
commercial decisions of NatWest Group and that NatWest Group
entities (including NWM Group) will continue to have its own
independent board of directors and management team determining
their own strategy. However, HM Treasury, as majority shareholder,
and UK Government Investments Limited ( ' UKGI ' ), as manager of
HM Treasury's shareholding, could exercise a significant degree of
influence over the election of directors and appointment of senior
management, NatWest Group ' s (including NWM Group ' s) capital
strategy, dividend policy, remuneration policy or the conduct of
NatWest Group ' s operations, and other things. HM Treasury or
UKGI's approach depends on government policy, which could change,
including as a result of a general election. The exertion of such
influence over NatWest Group could in turn have an adverse effect
on the governance or business strategy of NWM Group.
In addition, NWM Plc is a wholly owned subsidiary of NatWest
Group plc, and NatWest Group plc therefore controls NWM Group's
board of directors, corporate policies and strategic direction. The
interests of NatWest Group plc as an equity holder and as NWM
Group's parent may differ from the interests of NWM Group or of
potential investors in NWM Group's securities.
Financial resilience risk
NWM Group may not meet the targets it communicates to the
market, generate returns or implement its strategy effectively.
As part of NatWest Group's Purpose-led Strategy and the NWM
Refocusing, NWM Group has set a number of internal and external
financial, capital and operational targets including in respect of:
balance sheet and cost reductions, CET1 ratio targets (for NWM Plc
and NWM N.V.), leverage ratio targets (for NWM Plc and NWM N.V.),
targets in relation to local regulation, funding plans and
requirements, management of RWAs and the timing thereof, employee
engagement, diversity and inclusion as well as environmental,
social and customer satisfaction targets.
NWM Group's ability to meet its targets and to successfully
implement its strategy is subject to various internal and external
factors and risks. These include, but are not limited to, the
impact of the COVID-19 pandemic, client and staff behaviour and
actions, market, regulatory, economic and political factors,
developments relating to litigation, governmental actions,
investigations and regulatory matters, and operational risks and
risks relating to NWM Group's business model and strategy
(including risks associated with climate, environmental, social,
governance and other sustainability-related issues) and the NWM
Refocusing. See also, 'NatWest Group is in the process of
implementing its Purpose-led Strategy, which requires changes in
NWM Group's business and strategy, and entails material execution,
commercial and operational risks for NWM Group' and 'NWM Group may
not be able to successfully implement the NWM Refocusing and it may
not achieve its targets and NWM Group may not ultimately result in
a viable, competitive business'.
A number of factors, including the economic and other effects of
the COVID-19 pandemic, may impact NWM Plc and NWM N.V.'s ability to
maintain their current CET1 ratio targets, including impairments,
the extent of organic capital generation or the reduction of RWAs.
NWM Plc may incur disposal losses as part of the process of exiting
positions to reduce RWAs. Some of these losses may be recognised
ahead of the actual disposals and the losses overall may be higher
than currently anticipated.
NWM Group's ability to meet its planned reductions in annual
costs may vary considerably from year to year. Furthermore, the
focus on meeting balance sheet and cost reduction targets may
result in limited investment in other areas which could affect NWM
Group's long-term product offering or competitive position and its
ability to meet its other targets, including those related to
customer satisfaction.
In addition, challenging trading conditions may have an adverse
impact on NWM Group's business and may adversely affect its ability
to achieve its targets and execute its strategy.
There is a risk that NWM Group's strategy may not be
successfully executed, that it will not meet its targets and
expectations, or that it will not be a viable, competitive or
profitable banking business.
NWM Group has undergone significant structural and other change,
including as a result of the UK ring-fencing regime, acquisition of
NatWest Markets N.V. and the implementation of NatWest Group's
Purpose-led strategy (including the NWM Refocusing).
Prior to the implementation of the UK ring-fencing regime, NWM
Plc was NatWest Group's principal operating subsidiary. As a result
of the implementation of the UK ring-fencing regime and the
acquisition of NWM N.V., NWM Plc is now the principal operating
company for most of NatWest Group's operations outside the
ring-fence (excluding RBS International). The implementation of the
UK ring-fencing regime had a significant impact on NWM Plc and
required it to adapt its strategy, structure and business model and
adopt processes and structures for, among other things, financial
reporting, risk management and corporate governance. Ongoing
compliance with the UK ring-fencing rules is required.
NatWest Group is currently in the process of implementing its
Purpose-led Strategy, which includes the NWM Refocusing. The
implementation of this strategy has required and is expected to
continue to require changes to the NWM Group's business and
operations in the medium and long term and entails material
execution, commercial and operational risks for NWM Group.
Additional changes to NWM Group's business and structure may be
required. See also, 'NatWest Group is in the process of
implementing its Purpose-led Strategy, which requires changes in
NWM Group's business and strategy, and entails material execution,
commercial and operational risks for NWM Group' and 'NWM Group may
not be able to successfully implement the NWM Refocusing and it may
not achieve its targets and NWM Group may not ultimately result in
a viable, competitive business'.
NWM Group has implemented a shared services model with the
ring-fenced entities for certain services, the execution of which
is subject to various internal and external factors and risks,
including the implementation of the NWM Refocusing. Moreover, NWM
Group has entered into Revenue Share Agreements with some entities
within NatWest Group's ring-fenced sub-group (including NatWest
Bank Plc, The Royal Bank of Scotland Plc and Ulster Bank Ireland
DAC) as well as a non-ring-fenced entity (RBS International). It
has also entered into certain transfer pricing arrangements, a
funded guarantee and revenue sharing agreements with NWM N.V. in
relation to certain EEA customer transfers and Western European
transfers.
Following NWM Plc's acquisition of RBS Holdings N.V. and its
wholly owned subsidiary, NatWest Markets N.V. in 2019, these
entities are now part of NWM Group, introducing additional risks,
including in respect of: foreign exchange exposure, counterparty
and borrower risk, Brexit risk (due to potential changes in
regulatory approach following Brexit), operational and business
risk.
There can be no certainty that NWM Group will be a viable,
competitive or profitable banking business.
NWM Plc and/or its regulated subsidiaries may not meet the
prudential regulatory requirements for capital.
NWM Group is required by regulators in the UK, the EU and other
jurisdictions in which it undertakes regulated activities to
maintain adequate financial resources. Adequate capital also gives
NWM Group financial flexibility in the face of turbulence and
uncertainty in the global economy and specifically in its core UK
and European operations.
NWM Plc's target CET1 ratio is based on regulatory requirements,
internal modelling and risk appetite (including under stress). NWM
N.V.'s target CET1 ratio is based on expected regulatory
requirements, internal modelling and risk appetite (including under
stress).
As at 31 December 2020, NWM Plc's solo CET1 ratio was 21.7%. NWM
Plc's current capital strategy is based on the management of RWAs
and other capital management initiatives (including the reduction
of RWAs and the periodic payment of dividends to NatWest Group plc,
NWM Plc's parent company).
Other factors that could influence NWM Plc and NWM N.V.'s CET1
ratios include, amongst other things (See also, 'NatWest Group is
in the process of implementing its Purpose-led Strategy, which
requires changes in NWM Group's business and strategy, and entails
material execution, commercial and operational risks for NWM
Group'):
-- a depletion of NWM Plc or NWM N.V.'s capital resources
through losses (which would in turn impact retained earnings) and
may result from revenue attrition or increased liabilities,
sustained periods of low or lower interest rates, reduced asset
values resulting in write-downs or reserve adjustments,
impairments, changes in accounting policy, accounting charges or
foreign exchange movements;
-- a change in the quantum of NWM Plc's or NWM N.V.'s RWAs,
stemming from exceeding target RWA levels, the continued
implementation of the NWM Refocusing, regulatory adjustments (for
example, from additional market risk backtesting exceptions) or
foreign exchange movements. An increase in RWAs would lead to a
reduction in the CET1 ratio (and increase the amount of internal
MREL required for NWM Plc);
-- changes in prudential regulatory requirements including the
Total Capital Requirement for NWM Plc (as regulated by the PRA) or
NWM N.V. (as regulated by the De Nederlandsche Bank ('DNB')),
including Pillar 2 requirements and regulatory buffers as well as
any applicable scalars;
-- further developments of prudential regulation (for example,
finalisation of Basel 3 standards), which will impact various areas
including the approach to calculating credit risk, market risk,
leverage ratio, capital floors and operational risk RWAs, as well
as continued regulatory uncertainty on the details thereto;
-- further losses (including as a result of extreme one-off
incidents such as cyberattack, fraud or conduct issues) would
deplete capital resources and place downward pressure on the CET1
ratio; or
-- the timing of planned liquidation, disposal and/or capital
releases of capital optimisation activity or legacy entities owned
by NWM Plc and NWM N.V.
NWM Plc has a Capital Support Deed in place, which facilitates
capital support amongst the participating entities in NWM
Group.
Any capital management actions taken under a stress scenario may
affect, among other things, NWM Group's product offering, its
credit ratings, its ability to operate its businesses and pursue
its current strategies and strategic opportunities, any of which
may negatively impact investor confidence and the value of NWM
Group's securities. See also, 'NWM Plc and/or its regulated
subsidiaries may not manage their capital, liquidity or funding
effectively which could trigger the execution of certain management
actions or recovery options' and 'NatWest Group (including NWM
Group) may become subject to the application of UK statutory
stabilisation or resolution powers which may result in, among other
actions, the write-down or conversion of NWM Group entities'
Eligible Liabilities'.
NWM Plc may not be able to adequately access sources of
liquidity and funding.
NWM Group is required to access sources of liquidity and funding
through deposits and wholesale funding, including debt capital
markets and trading liabilities such as repurchase agreements. As
at 31 December 2020 NWM Group held GBP4.4 billion in deposits from
banks and customers. The level of deposits and wholesale funding
may fluctuate due to factors outside NWM Group's control. These
factors include: loss of investor confidence (including in
individual NWM Group entities or the UK banking sector or the
banking sector as a whole), sustained low or negative interest
rates, increasing competitive pressures for bank funding or the
reduction or cessation of deposits and other funding by
counterparties, any of which could result in a significant outflow
of deposits or reduction in wholesale funding within a short period
of time. See also, 'NWM Group has significant exposure to
counterparty and borrower risk'.
An inability to grow, roll-over, or any material decrease in,
NWM Group's deposits, short-term wholesale funding and short-term
liability financing could, particularly if accompanied by one of
the other factors described above, materially affect NWM Group's
ability to satisfy its liquidity needs.
NWM Group engages from time to time in 'fee based borrow'
transactions whereby collateral (such as government bonds) is
borrowed from counterparties on an unsecured basis in return for a
fee. This borrowed collateral may be used by NWM Group to finance
parts of its balance sheet, either in its repo financing business,
derivatives portfolio or more generally across its balance sheet.
If such 'fee based borrow' transactions are unwound whilst used to
support the financing of parts of NWM Group balance sheet, then
unsecured funding from other sources would be required to replace
such financing. There is a risk that NWM Group would be unable to
replace such financing on acceptable terms or at all, which could
adversely affect its liquidity position and have a material adverse
effect on NWM Group's business, results of operations and outlook.
In addition, because "fee base borrow" transactions are conducted
off-balance sheet (due to the collateral being borrowed) investors
may find it more difficult to gauge NWM Group's creditworthiness,
which may be affected if these transactions were to be unwound in a
stress scenario. Any lack of or perceived lack of creditworthiness
may adversely affect NWM Group.
As at 31 December 2020, NWM Group reported a liquidity coverage
ratio of 268%. If its liquidity position were to come under stress
and if NWM Group is unable to raise funds through deposits or
wholesale funding sources on acceptable terms or at all, its
liquidity position could be adversely affected. This would mean
that NWM Group might be unable to: meet deposit withdrawals on
demand or satisfy buy back requests, repay borrowings as they
mature, meet its obligations under committed financing facilities,
comply with regulatory funding requirements, undertake certain
capital and/or debt management activities, or fund new loans,
investments and businesses. NWM Group may need to liquidate
unencumbered assets to meet its liabilities, including disposals of
assets not previously identified for disposal to reduce its funding
commitments or trigger the execution of certain management actions
or recovery options . This could also lead to higher funding costs
and/or changes to NWM Group's funding plans. In a time of reduced
liquidity or market stress, NWM Group may be unable to sell some of
its assets or may need to sell assets at depressed prices, which in
either case could negatively affect NWM Group's results.
NWM Group entities independently manage liquidity risk on a
stand-alone basis, including through holding their own liquidity
portfolios. They have restricted access to liquidity or funding
from other NatWest Group entities. NWM Group entities management of
their own liquidity portfolios and the structure of capital support
are subject to operational and execution risk, as NWM group
entities take steps to meet their own liquidity and capital
requirements.
NWM Plc and/or its regulated subsidiaries may not manage their
capital, liquidity or funding effectively which could trigger the
execution of certain management actions or recovery options.
Under the EU Bank Recovery and Resolution Directives I and II
('BRRD'), as implemented in the UK, NatWest Group must maintain a
recovery plan acceptable to its regulator, such that a breach of
NWM Plc's applicable capital or leverage, liquidity or funding
requirements would trigger consideration of NWM Plc's recovery
plan, and in turn may prompt consideration of NatWest Group's
recovery plan. If, under stressed conditions, the liquidity,
capital or leverage ratio were to decline, there are a range of
recovery management actions (focused on risk reduction and
mitigation) that NWM Plc could undertake that may or may not be
sufficient to restore adequate liquidity, capital and leverage
ratios. Additional management options relating to existing capital
issuances, asset or business disposals, capital payments and
dividends from NWM Plc to its parent, could also be undertaken to
support NWM Plc's capital and leverage requirements. NatWest Group
may also address a shortage of capital in NWM Plc by providing
parental support to NWM Plc. NatWest Group's (and NWM Plc's)
regulator may also request that NWM Group carry out additional
capital management actions. The Bank of England has identified
single point-of-entry as the preferred resolution strategy for
NatWest Group. However, under certain conditions set forth in the
BRRD, as the UK resolution authority, the Bank of England also has
the power to execute the 'bail-in' of certain securities of NWM
Group without further action at NatWest Group level.
Any capital management actions taken under a stress scenario may
affect, among other things, NWM Group's product offering, credit
ratings, ability to operate its businesses and pursue its current
strategies and strategic opportunities as well as negatively
impacting investor confidence and the value of NWM Group's
securities. See also, 'NatWest Group (including NWM Group) may
become subject to the application of UK statutory stabilisation or
resolution powers which may result in, among other actions, the
write-down or conversion of NWM Group entities' Eligible
Liabilities'. In addition, if NWM Plc or NWM N.V.'s liquidity
position were to be adversely affected, this may require
unencumbered assets to be liquidated or may result in higher
funding costs, which may adversely impact NWM Group's operating
performance.
Any reduction in the credit rating and/or outlooks assigned to
NatWest Group plc, any of its subsidiaries (including NWM Plc or
NWM Group subsidiaries) or any of their respective debt securities
could adversely affect the availability of funding for NWM Group,
reduce NWM Group's liquidity position and increase the cost of
funding.
Rating agencies regularly review NatWest Group plc, NWM Plc and
other NatWest Group entity credit ratings and outlooks, which could
be negatively affected by a number of factors that can change over
time including: the credit rating agency's assessment of NWM
Group's strategy and management's capability; its financial
condition including in respect of profitability, asset quality,
capital, funding and liquidity; the level of political support for
the industries in which NWM Group operates; the implementation of
structural reform; the legal and regulatory frameworks applicable
to NWM Group's legal structure; business activities and the rights
of its creditors; changes in rating methodologies; changes in the
relative size of the loss-absorbing buffers protecting bondholders
and depositors; the competitive environment, political and economic
conditions in NWM Group's key markets (including the impact of the
COVID-19 pandemic, Brexit and any further Scottish independence
referendum); any reduction of the UK's sovereign credit rating and
market uncertainty.
In addition, credit ratings agencies are increasingly taking
into account sustainability-related factors, including climate,
environmental, social and governance related risk, as part of the
credit ratings analysis, as are investors in their investment
decisions.
Any reductions in the credit ratings of NatWest Group plc, NWM
Plc or of certain other NatWest Group entities, including, in
particular, downgrades below investment grade, or a deterioration
in the capital markets' perception of NWM Group's financial
resilience could significantly affect NWM Group's access to money
markets, reduce the size of its deposit base and trigger additional
collateral or other requirements in derivatives contracts and other
secured funding arrangements or the need to amend such
arrangements, which could adversely affect NWM Group's (and, in
particular, NWM Plc's) cost of funding and its access to capital
markets which could limit the range of counterparties willing to
enter into transactions with NWM Group (and, in particular, with
NWM Plc). This could in turn adversely impact NWM Group's
competitive position and threaten its prospects in the short to
medium-term.
NWM Group operates in markets that are highly competitive, with
increasing competitive pressures and technology disruption.
The markets in which NWM Group operates are highly competitive,
and competition may intensify in response to the economic effects
of the COVID-19 pandemic and other changes. These include evolving
customer behaviour, technological changes, competitor behaviour,
new entrants to the market, industry trends resulting in increased
disaggregation or unbundling of financial services, the impact of
regulatory actions and other factors. Innovations such as
biometrics, artificial intelligence, the cloud, blockchain, and
quantum computing may also rapidly facilitate industry
transformation.
Increasingly many of the products and services offered by NWM
Group are, and will become, more technology intensive. NWM Group's
ability to develop such services (which also comply with applicable
and evolving regulations) has become increasingly important to
retaining and growing NWM Group's client businesses across its
geographical footprint. There can be no certainty that NWM Group's
innovation strategy (which includes investment in its IT capability
intended to improve its core infrastructure and client interface
capabilities as well as investments and partnerships with third
party technology providers) will be successful or that it will
allow NWM Group to continue to grow such services in the
future.
In addition, certain of NWM Group's current or future
competitors may be more successful in implementing innovative
technologies for delivering products or services to their clients.
These competitors may be better able to attract and retain clients
and key employees , may have better IT systems, and may have access
to lower cost funding and/or be able to attract deposits or provide
investment-banking services on more favourable terms than NWM
Group. Although NWM Group invests in new technologies and
participates in industry and research-led initiatives aimed at
developing new technologies, such investments may be insufficient
or ineffective, especially given NWM Group's focus on its cost
savings targets. This may limit additional investment in areas such
as financial innovation and could therefore affect NWM Group's
offering of innovative products or technologies for delivering
products or services to clients and its competitive position. NWM
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. The development of innovative products depends
on NWM Group's ability to produce underlying high quality data,
failing which its ability to offer innovative products may be
compromised.
If NWM Group is unable to offer competitive, attractive and
innovative products that are also profitable and timely, it will
lose share, incur losses on some or all of its activities and lose
opportunities for growth. In this context, NWM Group is investing
in the automation of certain solutions and interactions within its
customer-facing businesses, including through artificial
intelligence. Such initiatives may result in operational,
reputational and conduct risks if the technology used is defective,
or is not fully integrated into NWM Group's current solutions.
There can be no certainty that such initiatives will deliver the
expected cost savings and investment in automated processes will
likely also result in increased short-term costs for NWM Group.
In addition, the implementation of the NWM Refocusing and
NatWest Group's Purpose-led Strategy, including NatWest Group's
acquisitions, divestments, reorganisations, restructurings and
partnerships, its climate ambition, cost-reduction measures, as
well as employee remuneration constraints, may also have an impact
on NWM Group's ability to compete effectively and intensified
competition from incumbents, challengers and new entrants could
affect NWM Group's ability to provide satisfactory returns.
Moreover, activist investors have increasingly become engaged and
interventionist in recent years, which may pose a threat to NatWest
Group's strategic initiatives. Furthermore, continued consolidation
or technological or other developments in certain sectors of the
financial services industry could result in NWM Group's remaining
competitors gaining greater capital and other resources, including
the ability to offer a broader range of products and services and
geographic diversity, or the emergence of new competitors, each of
which can adversely affect NWM Group's business and results of
operations.
NWM Group is reliant on access to the capital markets to meet
its funding requirements, both directly, and indirectly through its
parent for the subscription to its internal MREL. The inability to
do so may adversely affect NWM Group.
NWM Group is reliant on frequent access to the capital markets
for funding, and on terms that are acceptable to it. Such access
entails execution risk and could be impeded by a number of internal
or external factors, including, those referred to above in 'NWM
Group faces market risk as a result of increased political and
economic risks and uncertainty in the UK and global markets',
'Continuing uncertainty regarding the effects of the UK's
withdrawal from the European Union may continue to adversely affect
NWM Group and its operating environment' and 'Any reduction in the
credit rating and/or outlooks assigned to NatWest Group plc, any of
its subsidiaries (including NWM Plc or NWM Group subsidiaries) or
any of their respective debt securities could adversely affect the
availability of funding for NWM Group, reduce NWM Group's liquidity
position and increase the cost of funding'.
In addition, NWM Plc receives capital and funding from NatWest
Group plc. NWM Plc has set target levels for different tiers of
capital and for the internal minimum requirements for own funds and
eligible liabilities ('MREL'), as percentages of its RWAs. The
level of capital and funding required for NWM Plc to meet its
internal targets is therefore a function of the level of RWAs and
its leverage exposure in NWM Plc and this may vary over time.
NWM Plc's internal MREL comprises the regulatory value of
capital instruments and loss-absorbing senior funding issued by NWM
Plc to its parent, NatWest Group plc, in all cases with a residual
maturity of at least one year. The Bank of England has identified
that the preferred resolution strategy for NatWest Group is as a
single point of entry. As a result, only NatWest Group plc is able
to issue Group MREL eligible liabilities to third-party investors,
using the proceeds to fund the internal capital and MREL targets
and/or requirements of its operating entities, including NWM Plc.
NWM Plc is therefore dependent not only on NatWest Group plc to
fund its internal capital targets, but also on NatWest Group plc's
ability to source appropriate funding. NWM Plc is also dependent on
NatWest Group plc to continue to fund NWM Plc's internal MREL
targets over time and its ability to issue and maintain sufficient
amounts of external MREL liabilities to support this. In turn, NWM
Plc is required to fund the internal capital and MREL requirements
of its subsidiaries.
Any inability of NWM Group to adequately access the capital
markets, to manage its balance sheet in line with assumptions in
its funding plans, or to issue internal capital and MREL may
adversely affect NWM Group, such that NWM Group may not constitute
a viable banking business and/or NWM Plc or NWM N.V. may fail to
meet their respective regulatory capital and/or MREL requirements
(at present, NWM N.V. does not yet have its own MREL
requirements).
NWM Group may be adversely affected if NatWest Group fails to
meet the requirements of regulatory stress tests.
NatWest Group is subject to annual stress tests by its regulator
in the UK and is also subject to stress tests by European
regulators with respect to NatWest Group plc, NWM N.V. and Ulster
Bank Ireland DAC. Stress tests are designed to assess the
resilience of banks to potential adverse economic or financial
developments and ensure that they have robust, forward-looking
capital planning processes that account for the risks associated
with their business profile. If the stress tests reveal that a
bank's existing regulatory capital buffers are not sufficient to
absorb the impact of the stress, then it is possible that NatWest
Group and/or NWM Group may need to take action to strengthen their
capital positions.
Failure by NatWest Group to meet its quantitative and
qualitative requirements of the stress tests set forth by its UK
regulators or those elsewhere may result in: NatWest Group's
regulators requiring NatWest Group to generate additional capital,
reputational damage, increased supervision and/or regulatory
sanctions and/or loss of investor confidence.
NWM Group has significant exposure to counterparty and borrower
risk.
NWM N.V., which NWM plc acquired in late 2019, has a portfolio
of loans and loan commitments to Western European corporate
customers. As a result, through the NWM N.V. business and NWM
Group's other activities, NWM 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 NWM Group's
businesses. These are particularly relevant for those businesses
for which the concentration of client income is heavily weighted
towards a specific geographic region, industry or client base.
NWM Group is also exposed to credit risk if a customer, borrower
or counterparty defaults, or under IFRS 9, suffers a sufficiently
significant deterioration of credit quality such that, under SICR
('significant increases in credit risk') rules, it moves to Stage 2
for impairment calculation purposes. Credit risk may arise from a
variety of business activities, including, but not limited to:
extending credit to clients through various lending commitments;
entering into swap or other derivative contracts under which
counterparties have obligations to make payments to NWM Group
(including un-collateralised derivatives); providing short or
long-term funding that is secured by physical or financial
collateral whose value may at times be insufficient to fully cover
the loan repayment amount; posting margin and/or collateral and
other commitments to clearing houses, clearing agencies, exchanges,
banks, securities firms and other financial counterparties; and
investing and trading in securities and loan pools, whereby the
value of these assets may fluctuate based on realised or expected
defaults on the underlying obligations or loans. See also, ' Risk
and capital management - Credit Risk' . Any negative developments
in the activities listed above may negatively impact NWM Group's
clients and credit exposures, which may, in turn, adversely impact
NWM Group's profitability.
The credit quality of NWM Group's borrowers and other
counterparties is impacted by prevailing economic and market
conditions (including those caused by the COVID-19 pandemic) and by
the legal and regulatory landscape in the UK and Europe in general,
and any deterioration in such conditions or changes to legal or
regulatory landscapes could worsen borrower and counterparty credit
quality and consequently adversely impact NWM Group's ability to
enforce contractual security rights.
Concerns about, or a default by, a financial institution could
lead to significant liquidity problems and losses or defaults by
other financial institutions, since the commercial and financial
soundness of many financial institutions is closely related and
inter-dependent as a result of credit, trading, clearing and other
relationships. Any perceived lack of creditworthiness of a
counterparty may lead to market-wide liquidity problems and losses
for NWM Group. In addition, the value of collateral may be
correlated with the probability of default by the relevant
counterparty ('wrong way risk'), which would increase NWM Group's
potential loss. This systemic risk may also adversely affect
financial intermediaries, such as clearing agencies, clearing
houses, banks, securities firms and exchanges with which NWM Group
interacts on a daily basis. See also, 'NWM Group is reliant on
access to the capital markets to meet its funding requirements,
both directly, and indirectly through its parent for the
subscription to its internal MREL. The inability to do so may
adversely affect NWM Group'.
As a result of the above, borrower and counterparty credit
quality may cause accelerated impairment charges under IFRS 9,
increased repurchase demands, higher costs, additional write-downs
and losses for NWM Group and an inability to engage in routine
funding transactions.
NWM Group is exposed to the financial industry, including
sovereign debt securities, banks, financial intermediation
providers (including providing facilities to financial sponsors and
funds, backed by assets or investor commitments) and securitised
products (typically senior lending to special purpose vehicles
backed by pools of financial assets). Due to NWM Group's exposure
to the financial industry, it also has exposure to shadow banking
entities (i.e., entities which carry out banking activities outside
a regulated framework). Recently, there has been increasing
regulatory focus on shadow banking. In particular, the European
Banking Authority Guidelines (EBA/GL/2015/20) require NWM Group to
identify and monitor its exposure to shadow banking entities,
implement and maintain an internal framework for the
identification, management, control and mitigation of the risks
associated with exposure to shadow banking entities, and ensure
effective reporting and governance in respect of such exposure. If
NWM Group is unable to properly identify and monitor its shadow
banking exposure, maintain an adequate framework, or ensure
effective reporting and governance in respect of shadow banking
exposure, this may adversely affect the business, results of
operations and outlook of NWM Group.
NWM Group could incur losses or be required to maintain higher
levels of capital as a result of limitations or failure of various
models.
Given the complexity of NWM Group's business, strategy and
capital requirements, NWM Group relies on analytical models for a
wide range of purposes, including to manage its business, assess
the value of its assets and its risk exposure, as well as to
anticipate capital and funding requirements (including to
facilitate NatWest Group's mandated stress testing). In addition,
NWM Group utilises models for valuations, credit approvals,
calculation of loan impairment charges on an IFRS 9 basis,
financial reporting and for financial crime and fraud risk
management. NWM Group's models, and the parameters and assumptions
on which they are based, are periodically reviewed and updated to
maximise their accuracy.
As models analyse scenarios based on assumed inputs and a
conceptual approach, model outputs therefore remain uncertain and
should not be relied on. Failure of models (including due to errors
in model design) or new data inputs, including to accurately
reflect changes in the micro and macroeconomic environment in which
NWM Group operates (for example to account for the impact of the
COVID-19 pandemic), to capture risks and exposures at the
subsidiary level, and to update for changes to NWM Group's current
business model or operations, or for findings of deficiencies by
NatWest Group (and in particular, NWM Group's) regulators
(including as part of NatWest Group's mandated stress testing) may
result in increased capital requirements or require management
action. NWM Group may also face adverse consequences as a result of
actions based on models that are poorly developed, implemented or
used, models that are based on inaccurate or compromised data or as
a result of the modelled outcome being misunderstood, or by such
information being used for purposes for which it was not
designed.
NWM Group's financial statements are sensitive to underlying
accounting policies, judgments, estimates and assumptions.
The preparation of financial statements requires management to
make judgments, estimates and assumptions that affect the reported
amounts of assets, liabilities, income, expenses, exposures and
RWAs. While estimates, judgments and assumptions take into account
historical experience and other factors (including market practice
and expectations of future events that are believed to be
reasonable under the circumstances), actual results may differ due
to the inherent uncertainty in making estimates, judgments and
assumptions (particularly those involving the use of complex
models).
The accounting policies deemed critical to NWM Group's results
and financial position, based upon materiality and significant
judgments and estimates, which include loan impairment provisions,
are set out in 'Critical accounting policies and key sources of
estimation uncertainty' on page 97. New accounting standards and
interpretations that have been issued by the International
Accounting Standards Board but which have not yet been adopted by
NWM Group are discussed in 'Accounting developments' on page
97.
Changes in accounting standards may materially impact NWM
Group's financial results.
Changes in accounting standards or guidance by accounting bodies
or in the timing of their implementation, whether immediate or
foreseeable, could result in NWM Group having to recognise
additional liabilities on its balance sheet, or in further
write-downs or impairments to its assets and could also
significantly impact the financial results, condition and prospects
of NWM Group.
NWM Group's trading assets amounted to GBP68.7 billion as at 31
December 2020. 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, NWM
Group relies on quoted market prices or, where the market for a
financial instrument is not sufficiently credible, internal
valuation models that utilise observable market data. In certain
circumstances, the data for individual financial instruments or
classes of financial instruments utilised by such valuation models
may not be available or may become unavailable due to prevailing
market conditions. In these circumstances, NWM Group's internal
valuation models require NWM Group to make assumptions, judgments
and estimates to establish fair value, which are complex and often
relate to matters that are inherently uncertain. Any of these
factors could require NWM Group to recognise fair value losses,
which may have an adverse effect on NWM Group's income generation
and financial position.
NatWest Group (including NWM Group) may become subject to the
application of UK statutory stabilisation or resolution powers
which may result in, among other actions, the write-down or
conversion of NWM Group entities' Eligible Liabilities.
HM Treasury, the Bank of England and the PRA and FCA (together,
the 'Authorities') are granted substantial powers to resolve and
stabilise UK-incorporated financial institutions. Five
stabilisation options exist: (i) transfer of all of the business of
a relevant entity or the shares of the relevant entity to a private
sector purchaser; (ii) transfer of all or part of the business of
the relevant entity to a 'bridge bank' wholly-owned by the Bank of
England; (iii) transfer of part of the assets, rights or
liabilities of the relevant entity to one or more asset management
vehicles for management of the transferor's assets, rights or
liabilities; (iv) the write-down, conversion, transfer,
modification, or suspension of the relevant entity's equity,
capital instruments and liabilities ('Eligible Liabilities'); and
(v) temporary public ownership of the relevant entity. These tools
may be applied to NatWest Group plc as the parent company or to NWM
Group, as an affiliate, where certain conditions are met (such as,
whether the firm is failing or likely to fail, or whether it is
reasonably likely that action will be taken (outside of resolution)
that will result in the firm no longer failing or being likely to
fail). Moreover, there are modified insolvency and administration
procedures for relevant entities, and the Authorities have the
power to modify or override certain contractual arrangements in
certain circumstances and amend the law for the purpose of enabling
their powers to be used effectively and may promulgate provisions
with retrospective applicability. Similar powers may also be
exercised with respect to NWM N.V. in the Netherlands by the
relevant Dutch regulatory authorities.
Under the UK Banking Act, the Authorities are generally required
to have regard to specified objectives in exercising the powers
provided for by the Banking Act. One of the objectives (which is
required to be balanced as appropriate with the other specified
objectives) refers to the protection and enhancement of the
stability of the financial system of the UK. Moreover, the 'no
creditor worse off' safeguard contained in the Banking Act (which
provides that creditors' losses in resolution should not exceed
those that would have been realised in an insolvency of the
relevant institution) may not apply in relation to an application
of the separate write-down and conversion power relating to capital
instruments under the Banking Act, in circumstances where a
stabilisation power is not also used; Holders of debt instruments
which are subject to the power may, however, have ordinary shares
transferred to or issued to them by way of compensation.
Uncertainty exists as to how the Authorities may exercise their
powers including the determination of actions undertaken in
relation to the ordinary shares and other securities of NatWest
Group (including NWM Group), which may depend on factors outside of
NWM Group's control. Moreover, the Banking Act provisions remain
untested in practice.
If NatWest Group is at or is approaching the point of
non-viability such that regulatory intervention is required, there
may correspondingly be an adverse effect on the business, results
of operations and outlook of NWM Group.
NatWest Group is subject to Bank of England oversight in respect
of resolution, and NatWest Group could be adversely affected should
the Bank of England deem NatWest Group's preparations to be
inadequate.
NatWest Group is subject to regulatory oversight by the Bank of
England, and is required (under the PRA rulebook) to carry out an
assessment of its preparations for resolution, submit a report of
the assessment to the PRA, and disclose a summary of this report.
The initial report is due to be submitted to the PRA on 1 October
2021 and the Bank of England's assessment of NatWest Group's
preparations is scheduled to be released on 10 June 2022. The form
and substance of the June publication is yet to be established.
NatWest Group has dedicated significant resources towards the
preparation of NatWest Group for a potential resolution scenario.
However, if the assessment reveals that NatWest Group is not
adequately prepared to be resolved, or does not have adequate plans
in place to meet resolvability requirements by 1 January 2022,
NatWest Group may be required to take action to enhance its
preparations to be resolvable, resulting in additional cost and the
dedication of additional resources. These actions may adversely
affect NatWest Group and/or NWM Group, resulting in restrictions on
maximum individual and aggregate exposures, a requirement to
dispose of specified assets, a requirement to cease carrying out
certain activities and/or maintaining a specified amount of MREL.
This may also result in reputational damage and/or loss of investor
confidence.
Climate and sustainability-related risks
NWM Group and its customers may face significant climate-related
risks, including in transitioning to a low-carbon economy, which
may adversely impact NWM Group.
Climate-related risks and uncertainties are subject to
increasing national and international prudential and regulatory,
political and societal scrutiny.
Financial and non-financial risks from climate change arise
through physical and transition risks. Furthermore, NWM Group may
face a variety of climate-related legal risks, both physical and
transition, from potential litigation and contract liability. See
also, 'NWM Group may be subject to potential climate, environmental
and other sustainability-related litigation, enforcement
proceedings, investigations and conduct risk'.
It is very difficult to predict how and when the physical risks
from climate change will manifest. They include more extreme and
frequent weather events, rising sea levels, flooding and
subsidence, heat waves and long-lasting wildfires, reductions in
biodiversity and resource scarcity. Damage to NWM customers'
properties and operations could disrupt business, impair asset
values and negatively impact creditworthiness leading to increased
default rates, delinquencies, write-offs and impairment charges in
NWM Group's portfolios. In addition, NWM Group may itself suffer
damage to premises and disruption to operations leading to
increased costs and negatively affecting business continuity.
The timing and pace of the transition to a low-carbon economy is
also uncertain and may be near term, gradual and orderly or
delayed, rapid and disorderly. The impact of the extensive
commercial, technological, policy and regulatory changes required
to achieve transition remains uncertain, but it is expected to be
significant and may be disruptive across the global economy and
markets. Some sectors within NWM Group's customer base (including
oil and gas, automotive and transport, for example) are expected to
be particularly impacted.
If NWM Group fails to timely adapt its business and operating
model to the climate-related risks and opportunities and changing
market expectations, or to appropriately identify, measure, manage
and mitigate climate change related physical and transition risks
and opportunities that NWM Group and its customers face, NWM
Group's reputation, business, results of operations and outlook may
be impacted adversely.
NatWest Group's Purpose-led Strategy includes one area of focus
on climate change that is likely to require material changes to the
business and operating model of NWM Group and entails significant
execution risk.
NatWest Group has announced its ambition to become the leading
bank on climate in the UK and ROI and set itself the challenge to
at least halve the climate impact of its financing activity by 2030
Agreement ('Climate Ambition') and to do what is necessary to
achieve alignment with the 2015 Paris Agreement.
NatWest Group's Climate Ambition may require NWM Group to
significantly reduce its own financed emissions and its exposure to
customers that do not align with a transition to a low-carbon
economy or do not have a credible transition plan. Those
reductions, together with the active management of climate-related
risks and regulatory, policy and market changes, are likely to
necessitate material and accelerated changes to NWM Group's
business and operating model. This may have a material adverse
effect on NWM Group's ability to achieve financial targets and
generate sustainable returns.
To understand and measure the climate impact of emissions
related to NWM Group's financing activities and alignment to the
2015 Paris Agreement objectives will require significant resources.
There is currently no single standard approach or methodology exist
to measure such emissions and to provide a scenario-based model for
alignment with the objectives of the 2015 Paris Agreement and the
data, methodologies and assumptions on which emissions estimates
and targets are based are also subject to change. Accordingly,
NatWest Group, including NWM Group, must continue to define and
develop its approach to setting and publishing comprehensive
sector-specific and climate impact scenario-based targets and plans
by 2022 and to benchmarking its climate impact to measure and
demonstrate progress towards its Climate Ambition by 2030 .
NWM Group's ability to contribute to achieving NatWest Group's
Climate Ambition through its own specific targets and commitments
will depend greatly on many external factors such as the
macroeconomic environment, the extent and pace of climate change,
including the timing and manifestation of physical and transition
risks and the effectiveness of actions of governments, legislators,
regulators, businesses , investors, customers and other
stakeholders to adapt and/or mitigate the impact of climate-related
risks. See also, 'NatWest Group is in the process of implementing
its Purpose-led Strategy, which requires changes in NWM Group's
business and strategy, and entails material execution, commercial
and operational risks for NWM Group'.
Any delay or failure to meet those climate-related targets and
commitments and may have a material adverse impact on NWM Group's
reputation, business, results, outlook, market and competitive
position.
Any failure by NWM Group to implement effective and compliant
climate change resilient systems , controls and procedures could
adversely affect NWM Group's ability to manage climate-related
risks.
Legislative and regulatory authorities in the UK and in the
European Union are publishing expectations as to how banks should
prudently manage and transparently disclose climate-related and
environmental risks. In November 2020, the European Central Bank
published its 'Guide on climate-related and environmental risks'
and in April 2019, the PRA published a supervisory statement
'Enhancing banks' and insurers' approaches to managing the
financial risks from climate change' (the 'SS 3/19').
In the SS 3/19 the PRA states that regulated entities must:
-- fully embed the consideration of the financial risks from
climate change in their governance arrangements;
-- incorporate the financial risks from climate change into
existing financial risk management practice;
-- use (long term) scenario analysis to inform strategy setting
and risk assessment and identification; and
-- develop an approach to disclosure on the financial risks from climate change.
The PRA requires firms to embed fully their approaches to
managing climate-related financial risks by the end of 2021.
NatWest Group provided the PRA on 8 October 2020 with an updated
delivery plan to its original plan submitted in October 2019 to
meet these requirements, stating that the COVID-19 pandemic had
disrupted delivery of some elements of NatWest Group's original
plan and as a result , some near term activities have been delayed
to 2021. This delay may increase execution risk. Further, the
updated plan advised that it will require additional operating
cycles reaching into 2022 and beyond to prove embedding.
The Bank of England will use the 2021 biennial exploratory
scenario launching in June 2021 to stress test the resilience of
the current business models of the largest banks, insurers and the
financial system to the physical and transition risks from climate
change under a number of climate scenarios (the 'Climate Biennial
Explanatory Scenario' or 'CBES'). In December 2020 the Bank of
England confirmed that the 2021 CBES will be exploratory in nature
and will not be used to set capital requirements. However, in
future, regulators may require financial institutions such as
NatWest Group (including NWM Group) to hold additional capital to
enhance their resilience against systemic and/or institution
specific vulnerabilities to climate-related risks, including
potential asset devaluation shocks.
Any failure of NWM Group to fully and timely embed the
climate-related risks into its risk management practices in line
with applicable legal and regulatory requirements and expectations
may have a material and adverse impact on NWM Group's regulatory
compliance, prudential capital requirements, liquidity position,
reputation, business, results of operations and outlook.
There are significant uncertainties inherent in accurately
modelling the impact of climate-related risks.
Significant risks, uncertainties and variables are inherent in
the assessment, measurement and mitigation of climate-related
risks. These include data quality gaps and limitations, the pace at
which climate science , greenhouse gas accounting standards and
carbon capture and other emissions reduction solutions develop. In
addition, multiple climate change scenarios dependent on a range of
variable factors could unfold over the coming two or three decades,
which timeframes are considerably longer than NWM Group's
historical strategic, financial, resilience and investment planning
horizons and which will affect how and when climate-related risks
manifest.
As a result, it is very difficult to predict and model the
impact of climate-related risks into precise financial and economic
outcomes and impacts. Climate-related risks present significant
methodological challenges due to their forward-looking nature, the
lack of historical testing capabilities, the quality, lack of
standardisation and incompleteness of emissions and other climate
and sub-sector related data and the immature nature of risk
measurement and modelling methodologies. The evaluation of
climate-related risk exposure and the development of associated
potential risk mitigation techniques largely depend on the choice
of climate scenario modelling methodology and the assumptions
made.
Risks and uncertainties of climate scenario modelling include
(but are not limited to):
-- lack of specialist expertise in banks such that NWM Group
needs to rely on third party advice, modelling, and data;
-- immaturity of modelling of and data on the impact of
climate-related risks on financial assets which will evolve rapidly
in the coming years;
-- the number of variables and forward- looking nature of
climate scenarios which makes them challenging to back test and
benchmark;
-- the significant uncertainty as to how the climate will evolve
over time, how and when governments, regulators, businesses,
investors and customers respond and how those responses impact the
economy, asset valuations, land systems, energy systems,
technology, policy and wider society.
Capabilities within NWM Group to appropriately assess, model and
manage climate-related risks are developing. Even when those
capabilities are developed, the high level of uncertainty and
subjectivity around assumptions, the highly subjective nature of
risk measurement and mitigation techniques, and data quality issues
may lead to inadequate risk management information and frameworks,
ineffective business adaptation or mitigation strategies, which may
have a material adverse impact on NWM Group's regulatory
compliance, reputation, business, results of operations and
outlook.
A failure to adapt NWM Group's business strategy, governance,
procedures, systems and controls to manage emerging
sustainability-related risks and opportunities may have a material
adverse effect on NWM Group's reputation, business, results of
operations and outlook.
Investors, customers, international organisations, regulators
and other stakeholders are increasingly focussing on
identification, management and mitigation of
'sustainability-related' risks and opportunities such as
environmental (including biodiversity and loss of natural capital);
social (such as tackling inequality, inclusion, human rights and
working conditions); and governance (such as board diversity,
ethics, executive compensation and management structure) and on
long term sustainable value creation.
In addition to climate-related risks, sustainability-related
risks may also adversely affect economic activity, asset pricing
and valuations of issuers' securities and, in turn, the wider
financial system and together with climate-related risks, may
combine to generate even greater adverse effects.
Sustainability-related risks may impact economic activities
directly or indirectly and may affect the viability or resilience
of business models over the medium to longer term. In addition,
sustainability-related risks can trigger further losses stemming
directly or indirectly from legal claims (liability risks) and
reputational damage as a result of the public, customers,
counterparties and/or investors associating the NWM Group or its
customers with adverse sustainability-related issues, as well as
exacerbate existing risks.
Failure to adapt NWM Group's business strategy and to establish
and maintain effective governance, procedures, systems and controls
to manage emerging sustainability-related risks and opportunities
may have a material adverse effect on NWM Group's reputation,
liquidity position, business, results of operations and
outlook.
Any reduction in the ESG ratings of NatWest Group (including NWM
Group) could have a negative impact on NatWest Group's (including
NWM Group) reputation and on investors' and customers risk
appetite.
Unsolicited ESG ratings from agencies and data providers that
rate how NatWest Group (including NWM Group) manages environmental,
social and governance risks are increasingly influencing investment
decisions. Changes to those ESG ratings can arise from factors
outside NatWest Group's (including NWM Group) control (e.g. change
in rating methodology). Any reduction in ESG ratings of NatWest
Group could have a negative impact on NWM Group's reputation and
influence investors' risk appetite for NWM Group's and/or its
subsidiaries' securities and affect whether customers wish to deal
with NWM Group.
Increasing levels of climate, environmental and
sustainability-related laws, regulation and oversight may adversely
affect NWM Group's business and expose NWM Group to increased costs
of compliance, regulatory sanction and reputational damage.
There are an increasing number of EU, UK and other regulatory
and legislative initiatives to address issues around climate,
environmental and sustainability risks and opportunities and to
promote the transition to a more sustainable low-carbon economy,
affecting the financial sector and the real economy. Many focus on
disclosure, developing standardised definitions for green and
sustainable criteria of assets and liabilities and integrating
climate change and sustainability into decision-making to improve
transparency and access to green and sustainable financial products
and services. This may significantly impact the services provided
by NWM Group and its associated credit, market and financial risk
profile as well as its recognition of its climate financing
activity, in turn adversely affecting NatWest Group's (including
NWM Group) achievement of its Climate Ambition.
In addition, NWM Group's EU subsidiaries will continue to be
subject to an increasing array of the EU/EEA climate and
sustainability-related legal and regulatory requirements. These
requirements may be used as the basis for UK laws and regulations
(such as the recently announced UK Green Taxonomy) or regarded by
investors and regulators as best practice standards whether or not
they apply to UK businesses. Any divergence between EU/EEA and UK
climate and sustainability-related legal and regulatory
requirements may result in NWM Group not meeting investors'
expectations, increase the cost of doing business and may restrict
access of NWM Group's UK business to the EU/EEA market.
In addition, NWM Group and its subsidiaries will be subject to
increasing entity wide climate and other non-financial disclosures
requirements with varying objectives and scopes, including the
requirement to provide climate-related disclosures consistent with
the Task Force on Climate-related Financial Disclosure ('TCFD')
recommendations. The FCA will also consult on expanding its
proposed new stock exchange listing rules for a wider scope of
listed issuers, including NWM Group, as the UK moves towards
mandatory TCFD reporting across the UK economy by 2025.
NatWest Group (including NWM Group) is also participating in
various voluntary carbon reporting and other standard setting
initiatives for disclosing climate and sustainability-related
information.
Compliance with these developing requirements is likely to
require NWM Group to implement significant changes to its business,
operations, internal controls over financial reporting, disclosure
controls, modelling capability and risk management systems, which
may increase the cost of doing business, entail additional change
risk and compliance costs.
Failure to implement and comply with these requirements or
emerging best practice expectations may have a material adverse
effect on NWM Group's regulatory compliance and may result in
regulatory sanction and reputational damage.
NWM Group may be subject to potential climate, environmental and
other sustainability-related litigation, enforcement proceedings,
investigations and conduct risk.
The increasing number of new climate and sustainability-related
laws and regulations, growing demand from investors and customers
for environmentally sustainable products and services, and
regulatory scrutiny exposes financial institutions, including NWM
Group, to increasing litigation, conduct, enforcement and contract
liability risks.
Furthermore, there is the risk that shareholders, campaign
groups, customers and other interest groups could seek to take
legal action against NWM Group for financing, underwriting or
contributing to climate change and environmental degradation.
These potential, litigation, conduct, enforcement and contract
liability risks may have a material adverse effect on NWM Group's
ability to deliver its strategy, reputation, business, results of
operations and outlook.
Operational and IT resilience risk
Operational risks (including reliance on third party suppliers
and outsourcing of certain activities) are inherent in NWM Group's
businesses.
Operational risk is the risk of loss resulting from inadequate
or failed internal processes, procedures, people or systems, or
from external events, including legal risks. It has come under
increasing regulatory focus in recent years. NWM Group operates in
many countries, offering a diverse range of products and services
supported by 2,100 employees as at 31 December 2020; it therefore
has complex and diverse operations. As a result, operational risks
or losses can arise from a number of internal or external factors
(including financial crime). These risks are also present when NWM
Group relies on third-party suppliers or vendors to provide
services to it or its clients, as is increasingly the case as NWM
Group outsources certain activities, including with respect to the
implementation of new technologies, innovation and responding to
regulatory and market changes.
Operational risks continue to be heightened as a result of the
implementation of the NWM Refocusing and NatWest Group's
Purpose-led Strategy, NWM Group's current cost-reduction measures
and conditions affecting the financial services industry generally
(including Brexit and other geo-political developments) and in
particular the legal and regulatory uncertainty resulting
therefrom. It is unclear as to how the future ways of working may
evolve, including in respect of how working practices may develop,
or how NWM Group will evolve to best serve its customers. Any of
the above may place significant pressure on NWM Group's ability to
maintain effective internal controls and governance frameworks.
As part of the NWM Refocusing, NWM Group has materially
increased its dependence on NatWest Bank Plc for numerous critical
services and operations, including without limitation, property,
finance, accounting, treasury, risk, regulatory compliance and
reporting, human resources, and certain other support and
administrative functions. A failure by NatWest Bank Plc to
adequately supply these services may expose NWM Group to critical
business failure risk, increased costs and other liabilities. These
and any increases in the cost of these services may adversely
impact NWM Group's business, results of operations and outlook.
The effective management of operational risks is critical to
meeting customer service expectations and retaining and attracting
client business. Although NWM Group has implemented risk controls
and mitigation actions, with resources and planning having been
devoted to mitigate operational risk, such measures may not be
effective in controlling each of the operational risks faced by NWM
Group. Ineffective management of such risks could adversely affect
NWM Group.
NWM Group is subject to increasingly sophisticated and frequent
cyberattacks.
NWM Group experiences a constant threat from cyberattacks across
the entire NatWest Group (including NWM Group) and against NatWest
Group and NWM Group's supply chain, reinforcing the importance of
due diligence of close working relationship with, the third parties
on which NWM Group relies. NWM Group is reliant on technology,
against which there is a constantly evolving series of attacks,
that are increasing in terms of frequency, sophistication, impact
and severity. As cyberattacks evolve and become more sophisticated,
NWM Group is required to continue to invest in additional
capability designed to defend against emerging threats. In 2020,
NWM Group was subjected to a small number of Distributed Denial of
Service ('DDOS') attacks, which are a pervasive and significant
threat to the global financial services industry. The focus is to
manage the impact of the attacks and sustain availability of
services for NWM Group's customers. NWM Group continues to invest
significant resources in the development and evolution of cyber
security controls that are designed to minimise the potential
effect of such attacks.
Hostile attempts are made by third parties to gain access to,
introduce malware (including ransomware) into and exploit
vulnerabilities of NWM Group's IT systems, and to exploit
vulnerabilities. NWM Group has information and cyber security
controls in place to minimise the impact of any attack , which are
subject to review on a continuing basis, but given the nature of
the threat, there can be no assurance that such measures will
prevent all attacks in the future. See also, 'NWM Group's
operations are highly dependent on its complex IT systems
(including those that enable remote working) and any IT failure
could adversely affect NWM Group '.
Any failure in NWM Group's cybersecurity policies, procedures or
controls, may result in significant financial losses, major
business disruption, inability to deliver customer services, or
loss of data or other sensitive information (including as a result
of an outage) and may cause associated reputational damage. Any of
these factors could increase costs (including costs relating to
notification of, or compensation for clients and credit
monitoring), result in regulatory investigations or sanctions being
imposed or may affect NWM Group's ability to retain and attract
clients. Regulators in the UK, US, Europe and Asia continue to
recognise cybersecurity as an increasing systemic risk to the
financial sector and have highlighted the need for financial
institutions to improve their monitoring and control of, and
resilience (particularly of critical services) to cyberattacks, and
to provide timely notification of them, as appropriate.
Additionally, third parties may also fraudulently attempt to
induce employees, customers, third party providers or other users
who have access to NWM Group's systems to disclose sensitive
information in order to gain access to NWM Group's data or that of
NWM Group's clients or employees. Cybersecurity and information
security events can derive from groups or factors such as: internal
or external threat actors, human error, fraud or malice on the part
of NWM Group's employees or third parties, including third party
providers, or may result from accidental technological failure.
NWM Group expects greater regulatory engagement, supervision and
enforcement to continue at a high level in relation to its overall
resilience to withstand IT and related disruption, either through a
cyberattack or some other disruptive event. Such increased
regulatory engagement, supervision and enforcement is uncertain in
relation to the scope, cost, consequence and the pace of change,
which could negatively impact NWM Group. Due to NWM Group's
reliance on technology and the increasing sophistication, frequency
and impact of cyberattacks, it is likely that such attacks could
have a material adverse impact on NWM Group.
In accordance with the EU General Data Protection Regulation
('GDPR') and European Banking Authority ('EBA') Guidelines on ICT
and Security Risk Management , NWM Group is required to ensure it
implements timely appropriate and effective organisational and
technological safeguards against unauthorised or unlawful access to
data of NWM Group, its clients and its employees. In order to meet
this requirement, NWM Group relies on the effectiveness of its
internal policies, controls and procedures to protect the
confidentiality, integrity and availability of information held on
its IT systems, networks and devices as well as with third parties
with whom NWM Group interacts. A failure to monitor and manage data
in accordance with the GDPR and EBA requirements of the applicable
legislation may result in financial losses, regulatory fines and
investigations and associated reputational damage.
NWM Group operations and strategy are highly dependent on the
accuracy and effective use of data.
NWM Group relies on the effective use of accurate data to
support, monitor, evaluate, manage and enhance its operations and
deliver its strategy. The availability of current, detailed,
accurate and, wherever possible, machine-readable customer segment
and sub-sector data is fast becoming a critical strategic asset.
Failure to have current, high-quality data and/or the ineffective
use of such data could result in a failure to manage and report
important risks and opportunities or satisfy customers'
expectations including the inability to deliver innovative products
and services. This could also result in a failure to deliver NWM
Group's strategy and could place the NWM Group at a competitive
disadvantage by increasing its costs, inhibiting its efforts to
reduce costs or its ability to improve its systems, controls and
processes which could result in a failure to deliver NWM Group's
strategy. These data limitations or t he unethical or inappropriate
use of data and/or non-compliance with customer data and privacy
protection laws could give rise to conduct and litigation risks and
may increase the risk of operational events, losses or other
adverse consequences due to inappropriate models, systems,
processes, decisions or other actions.
NWM Group relies on attracting, retaining, developing and
remunerating senior management and skilled personnel (such as
market trading specialists), and is required to maintain good
employee relations.
NWM Group's success depends on its ability to attract, retain,
develop and remunerate highly skilled and qualified personnel,
including senior management, directors, market trading specialists
and key employees, especially for technology-focused roles, in a
highly competitive market, in an era of strategic change (including
a recent change in executive management) and under internal cost
reduction pressures. NWM Group's ability to do this may be more
difficult due to the implementation of the NWM Refocusing,
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 NatWest Group. This increases the
cost of hiring, training and retaining skilled personnel. In
addition, certain economic, market and regulatory conditions and
political developments (including Brexit) may reduce the pool of
candidates for key management and non-executive roles, including
non-executive directors with the right skills, knowledge and
experience, or increase the number of departures of existing
employees. The NWM Refocusing has also reduced NWM Group's ability
to engage in succession planning for critical roles given the
recent reduction in headcount. This has placed increased risk on
employee turnover within revenue generating areas.
Any reduction of compensation as a result of the PRA's request
that bank boards consider taking further appropriate action
regarding variable compensation, or negative economic developments,
could have an adverse effect on NatWest Group's ability to hire,
retain and engage well qualified employees, especially at a senior
level , which may have a material adverse impact on the financial
position and prospects of NWM Group.
Some of NWM Group's employees are represented by employee
representative bodies, including trade unions. Engagement with its
employees and such bodies is important to NWM Group in maintaining
good employee relations. Any breakdown of these relationships could
affect NWM Group's business, reputation, results of operations and
outlook.
NWM Group's operations are highly dependent on its complex IT
systems (including those that enable remote working) and any IT
failure could adversely affect NWM Group.
NWM Group's operations are highly dependent on the ability to
process a very large number of transactions efficiently and
accurately while complying with applicable laws and regulations.
The proper functioning of NatWest Group's (including NWM Group's)
transactional and payment systems, financial crime and sanctions
controls, risk management, credit analysis and reporting,
accounting, customer service and other IT systems (some of which
are owned and operated by other entities in NatWest Group or third
parties), is critical to NWM Group's operations.
Individually or collectively, any critical system failure,
material loss of service availability or material breach of data
security could cause serious damage to NWM Group's ability to
provide services to its clients, which could result in reputational
damage, significant compensation costs or regulatory sanctions
(including fines resulting from regulatory investigations) or a
breach of applicable regulations. In particular, such issues could
cause long-term damage to NWM Group's reputation and could affect
its regulatory approvals, competitive position, business and
brands, which could undermine its ability to attract and retain
clients. This risk is heightened as most of NWM Group's employees
are working remotely as a result of the COVID-19 pandemic, as it
outsources certain functions and as it continues to innovate and
offer new digital solutions to its clients as a result of the trend
towards online and digital product offerings.
NWM Group continued to make considerable investments to further
simplify, upgrade and improve its IT and technology capabilities
(including migration of certain services to cloud platforms). As
part of the NWM Refocusing, NWM Group also continues to develop and
enhance digital services for its customers and seeks to improve its
competitive position through enhancing controls and procedures and
strengthening the resilience of services including cyber security.
Any failure of these investment and rationalisation initiatives to
achieve the expected results, due to cost challenges or otherwise,
could negatively affect NWM Group's operations, its reputation and
ability to retain or grow its client business or adversely impact
its competitive position, thereby negatively impacting NWM Group's
business, results of operations and outlook. See also, ' NatWest
Group is in the process of implementing its Purpose-led Strategy,
which requires changes in NWM Group's business and strategy, and
entails material execution, commercial and operational risks for
NWM Group'.
A failure in NWM Group's risk management framework could
adversely affect NWM Group, including its ability to achieve its
strategic objectives.
Risk management is an integral part of all of NWM Group's
activities and includes the definition and monitoring of NWM
Group's risk appetite and reporting on NWM Group's risk exposure
and the potential impact thereof on NWM Group's financial
condition. Financial risk management is highly dependent on the use
and effectiveness of internal stress tests and models and
ineffective risk management may arise from a wide variety of
factors, including lack of transparency or incomplete risk
reporting, unidentified conflicts or misaligned incentives, lack of
accountability control and governance, lack of consistency in risk
monitoring, risks related to unanticipated behaviour or performance
in algorithmic trading and management or insufficient challenges or
assurance processes. Failure to manage risks effectively could
adversely impact NWM Group's reputation or its relationship with
its regulators, clients, shareholders or other stakeholders.
NWM Group's operations are inherently exposed to conduct risks,
which include business decisions, actions or reward mechanisms that
are not responsive to or aligned with NWM Group's regulatory
obligations, client needs or do not reflect NWM Group's
customer-focused strategy, ineffective product management,
unethical or inappropriate use of data, information asymmetry,
implementation and utilisation of new technologies, outsourcing of
customer service and product delivery, the possibility of
mis-selling of financial products and mishandling of customer
complaints. Some of these risks have materialised in the past and
ineffective management and oversight of conduct risks may lead to
further remediation and regulatory intervention or enforcement. NWM
Group's businesses are also exposed to risks from employee
misconduct including non-compliance with policies and regulations,
negligence or fraud (including financial crimes), any of which
could result in regulatory fines or sanctions and serious
reputational or financial harm to NWM Group. These risks may be
exacerbated when most of NWM Group's employees work remotely as a
result of the COVID-19 pandemic, which places additional pressure
on NWM Group's ability to maintain effective internal controls and
governance frameworks.
As part of the NWM Refocusing, NWM Group is seeking to embed a
strong risk culture across the organisation and has implemented
policies and allocated new resources across all levels of the
organisation to manage and mitigate conduct risk and expects to
continue to invest in its risk management framework. However, such
efforts may not insulate NWM Group from future instances of
misconduct and no assurance can be given that NWM Group's strategy
and control framework will be effective. See also, 'NatWest Group
is in the process of implementing its Purpose-led Strategy, which
requires changes in NWM Group's business and strategy, and entails
material execution, commercial and operational risks for NWM
Group'. Any failure in NWM Group's risk management framework could
negatively affect NWM Group and its financial condition through
reputational and financial harm and may result in the inability to
achieve its strategic objectives for its clients, employees and
wider stakeholders.
NWM Group's operations are subject to inherent reputational
risk.
Reputational risk relates to stakeholder and public perceptions
of NWM Group arising from an actual or perceived failure to meet
stakeholder expectations, including with respect to the NWM
Refocusing and related targets, due to any events, behaviour,
action or inaction by NWM Group, its employees or those with whom
NWM Group is associated. This includes brand damage, which may be
detrimental to NWM Group's business, including its ability to build
or sustain business relationships with clients, and may cause low
employee morale, regulatory censure or reduced access to, or an
increase in the cost of, funding. Reputational risk may arise
whenever there is a material lapse in standards of integrity,
compliance, customer or operating efficiency and may adversely
affect NWM Group's ability to attract and retain clients. In
particular, NWM Group's ability to attract and retain clients may
be adversely affected by, amongst others: negative public opinion
resulting from the actual or perceived manner in which NWM Group or
any other member of NatWest Group conducts or modifies its business
activities and operations, media coverage (whether accurate or
otherwise), employee misconduct, NWM Group's financial performance,
IT systems failures or cyberattacks, data breaches, financial
crime, the level of direct and indirect government support for
NatWest Group plc, or the actual or perceived practices in the
banking and financial industry in general, or a wide variety of
other factors.
Modern technologies, in particular online social networks and
other broadcast tools that facilitate communication with large
audiences in short time frames and with minimal costs, may also
significantly increase and accelerate the impact of damaging
information and allegations.
Although NWM Group has implemented a Reputational Risk Policy to
improve the identification, assessment and management of customers
and clients, transactions, products and issues, which represent a
reputational risk, NWM Group cannot be certain that it will be
successful in avoiding damage to its business from reputational
risk.
Legal, regulatory and conduct risk
NWM Group's businesses are subject to substantial regulation and
oversight, which are constantly evolving and may adversely affect
NWM Group.
NWM Group is subject to extensive laws, regulations, corporate
governance practice and disclosure requirements, administrative
actions and policies in each jurisdiction in which it operates.
Many of these have been introduced or amended recently and are
subject to further material changes, which may increase compliance
and conduct risks, particularly as EU/EEA and UK laws diverge now
that the Brexit transition period has ended. NWM Group expects
government and regulatory intervention in the financial services
industry to remain high for the foreseeable future.
In recent years, regulators and governments have focused on
reforming the prudential regulation of the financial services
industry and the manner in which the business of financial services
is conducted. Amongst others, measures have included: enhanced
capital, liquidity and funding requirements, implementation of the
UK ring-fencing regime, implementation and strengthening of the
recovery and resolution framework applicable to financial
institutions in the UK, the EU and the US, financial industry
reforms (including in respect of MiFID II), corporate governance
requirements, restrictions on the compensation of senior management
and other employees, enhanced data privacy and IT resilience
requirements, financial market infrastructure reforms (including
enhanced regulations in respect of the provision of 'investment
services and activities'), enhanced regulations in respect of the
provision of 'investment services and activities', and increased
regulatory focus in certain areas, including conduct, consumer
protection and disputes regimes, anti-money laundering,
anti-corruption, anti-bribery, anti-tax evasion, payment systems,
sanctions and anti-terrorism laws and regulations.
In addition, there is significant oversight by competition
authorities of the jurisdictions in which NWM Group operates. The
competitive landscape for banks and other financial institutions in
the UK, EU/EEA and the US is rapidly changing. Recent regulatory
and legal changes have and may continue to result in new market
participants and changed competitive dynamics in certain key areas.
Competition authorities, including the CMA, are currently also
looking at and focusing more on how they can support competition
and innovation in digital markets. Recent regulatory changes,
proposed or future developments and heightened levels of public and
regulatory scrutiny in the UK, the EU 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. For example, NWM
Group is required to ensure operational continuity in resolution;
the steps required to ensure such compliance entail significant
costs, and also impose significant operational, legal and execution
risk. Material consequences could arise should NWM Group be found
to be non-compliant with these regulatory requirements. Such
changes may also result in an increased number of regulatory
investigations and proceedings and have increased the risks
relating to NWM Group's ability to comply with the applicable body
of rules and regulations in the manner and within the time frames
required.
Other 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 NWM Group include, but are not limited
to:
-- general changes in government, central bank, regulatory or
competition policy, or changes in regulatory regimes that may
influence investor decisions in the jurisdictions in which NWM
Group operates;
-- rules relating to foreign ownership, expropriation,
nationalisation and confiscation of assets;
-- new or increased regulations relating to customer data and
privacy protection as well as IT controls and resilience, including
the GDPR and the impact of the recent Court of Justice of the EU
(CJEU) decision (known as Schrems II), in which the CJEU ruled that
Privacy Shield (an EU/US data transfer mechanism) is now invalid,
leading to more onerous due diligence requirements for the Group
prior to sending personal data of its EU customers and employees to
non-EEA countries, including the UK and the US ;
-- the introduction of, and changes to, taxes, levies or fees
applicable to NWM Group's operations, such as the imposition of a
financial transaction tax, changes in the scope and administration
of the Bank Levy, 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.
These and other recent regulatory changes, proposed or future
developments and heightened levels of public and regulatory
scrutiny in the UK, the EU 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. Any of these
developments (including any failure to comply with new rules and
regulations) could also have a significant impact on NWM Group's
authorisations and licences, the products and services that NWM
Group may offer, its reputation and the value of its assets, NWM
Group's operations or legal entity structure, and the manner in
which NWM Group conducts its business. Material consequences could
arise should NWM Group be found to be non-compliant with these
regulatory requirements. Regulatory developments may also result in
an increased number of regulatory investigations and proceedings
and have increased the risks relating to NWM Group ' s ability to
comply with the applicable body of rules and regulations in the
manner and within the time frames required.
In 2019, the PRA published an industry-wide "Dear CEO" letter
which confirmed the regulator's ongoing focus on the integrity of
regulatory reporting and its intention to ask a selection of UK
banks to commission reports from Skilled Persons under section 166
of the Financial Services and Markets Act 2000 to review the
governance, controls and processes around the preparation of Common
Reporting ('COREP') regulatory returns and to provide reasonable
assurance opinions on whether the returns reviewed were properly
prepared. NatWest Group was selected to participate in this review.
The PRA delayed the start of this review in light of the COVID-19
pandemic and the Skilled Persons are now expected to complete their
work in H1 2021.
Changes in laws, rules or regulations, or in their
interpretation or enforcement, or the implementation of new laws,
rules or regulations, including contradictory or conflicting laws,
rules or regulations by key regulators or policymakers in different
jurisdictions, or failure by NWM Group to comply with such laws,
rules and regulations, may adversely affect NWM Group's business,
results of operations and outlook. In addition, uncertainty and
insufficient international regulatory coordination as enhanced
supervisory standards are developed and implemented may adversely
affect NWM Group's ability to engage in effective business, capital
and risk management planning.
NWM Group is subject to various litigation matters, regulatory
and governmental actions and investigations as well as remedial
undertakings, the outcomes of which are inherently difficult to
predict, and which could have an adverse effect on NWM Group.
NWM Group's operations are diverse and complex and it operates
in legal and regulatory environments that expose it to potentially
significant legal proceedings, and civil and criminal regulatory
and governmental actions. NWM Group has settled a number of legal
and regulatory actions over the past several years but continues to
be, and may in the future be, involved in such actions in the US,
the UK, Europe and other jurisdictions.
NWM Group is currently involved in a number of significant legal
and regulatory actions, including criminal and civil
investigations, proceedings and ongoing reviews (both formal and
informal) by governmental law enforcement and other agencies and
litigation proceedings, relating to, among other matters, the
offering of securities, 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,
antitrust, VAT recovery and various other compliance issues. Legal
and regulatory actions are subject to many uncertainties, and their
outcomes, including the timing, amount of fines or settlements or
the form of any settlements, which may be material and in excess of
any related provisions, are often difficult to predict,
particularly in the early stages of a case or investigation. NWM
Group's expectation for resolution may change and substantial
additional provisions and costs may be recognised in respect of any
matter.
NWM Group companies are currently responding to a criminal
investigation by the United States Attorney for the District of
Connecticut (USAO) and the United States Department of Justice
(DoJ) concerning trading by certain NWM Plc former traders
involving alleged spoofing, which activity occurred during the term
of a non-prosecution agreement (NPA) that NWMSI entered into in
connection with secondary trading in various forms of asset-backed
securities, under which non-prosecution was conditioned on NWMSI
and affiliated companies not engaging in conduct during the NPA
that the USAO determines was a felony under federal or state law or
a violation of the anti-fraud provisions of the United States
securities law. The duration and outcome of this criminal
investigation, which may include the extension, modification, or
deemed violation of the NPA, remain uncertain. For additional
information relating to this and other legal and regulatory
proceedings and matters to which NWM Group is currently exposed,
see ' Litigation and regulatory matters ' of Note 26 to the
consolidated accounts on pages 144 to 147 for details of these
matters.
Adverse outcomes or resolution of current or future legal or
regulatory actions (in particular, any finding of criminal
liability by US authorities (including as a result of pleading
guilty), as to the alleged spoofing or the conduct underlying the
NPA) could have material collateral consequences for NWM Group's
business and result in restrictions or limitations on NWM Group's
operations. These may include consequences resulting from the need
to reapply for various important licenses or obtain waivers to
conduct certain existing activities of NWM Group, particularly but
not solely in the US, which may take a significant period of time
and the results of which are uncertain. Failure to obtain such
licenses or waivers could adversely impact NWM Group's business, in
particular in the US, including if it results in NWM Group being
precluded from carrying out certain activities. This in turn and/or
the fines, settlement payments or penalties could adversely impact
NWM Group's capital position or its ability to meet regulatory
capital adequacy requirements.
Failure to comply with undertakings made by NWM Group to its
regulators may result in additional measures or penalties being
taken against NWM Group.
NWM Group may not effectively manage the transition of LIBOR and
other IBOR rates to alternative risk free rates.
UK and international regulators are driving the transition from
the use of interbank offer rates (IBORs), including LIBOR, to
alternative risk free rates (RFRs). Interest rate benchmark reform
is a key priority of the Financial Stability Board, and working
groups have been established in a number of jurisdictions to
support the transition. Major central banks and regulators,
including the FCA, the Bank of England, and the Federal Reserve,
have strongly urged market participants to transition to RFRs,
given the FCA have indicated that the availability of LIBOR beyond
the end of 2021 cannot be guaranteed. NWM Group has a significant
exposure to IBORs, and continues to reference it in certain
products, primarily derivatives and cash products. NWM Group has
started to phase out its use of IBOR in line with the Bank of
England transition roadmap, and has embedded appropriate fall-back
mechanisms in most new IBOR activities, either through bilateral
contract documentation, or under the ISDA fall-backs protocol. NWM,
along with many of its major counterparties, has already adhered to
the ISDA IBOR fall-backs supplement and protocol, which establishes
a clear, industry accepted, contractual process to manage the
transition from IBORs to RFRs for derivative products.
NWM Group is actively engaged with customers and industry
working groups to manage the risks relating to this exposure, and
explore ways to transition IBOR exposures to RFRs to the extent
possible. Any economic impacts will be dependent on, inter alia,
the establishment of deep and liquid RFR markets, the establishment
of clear and consistent market conventions for all replacement
products, as well as counterparties' willingness to accept, and
transition to, these conventions. Furthermore, certain IBOR
obligations may not be able to be changed thus resulting in
fundamentally different economic outcomes than originally intended.
The uncertainties around the timing and manner of transition to
RFRs expose NWM Group, its clients and the financial services
industry more widely to risk.
Examples of these risks may include: (i) legal risks relating to
documentation for new and the majority of existing transactions
(including, but not limited to, changes, lack of changes, or
unclear contractual provisions); (ii) financial risks from any
changes in valuation of financial instruments linked to impacted
IBORs that may impact NWM Group's performance, including its cost
of funds, and its risk management related financial models; (iii)
pricing, interest rate or settlement risks, such as changes to
benchmark rates could impact pricing, interest rate or settlement
mechanisms on certain instruments; (iv) operational risks due to
the requirement to adapt IT systems, trade reporting infrastructure
and operational processes; and (v) conduct and litigation risks
arising from communication regarding the potential impact on
customers, and engagement with customers during the transition
period, or non-acceptance by customers of replacement rates.
It is therefore difficult to determine to what extent the
changes will affect the NWM Group, or the costs of implementing any
relevant remedial action. Uncertainty as to the nature and extent
of such potential changes, the take up of alternative reference
rates or other reforms including the potential continuation of the
publication of LIBOR, may adversely affect financial instruments
using LIBOR as benchmarks. The implementation of any alternative
RFRs may be impossible or impracticable under the existing terms of
certain financial instruments and could have an adverse effect on
the value of, return on and trading market for, certain financial
instruments and on the NWM Group's profitability. There is also the
risk of an adverse effect to reported performance arising from the
transition rules established by accounting bodies, as the outcome
of certain rules (as approved by the IASB) are still dependent on
how the actual transition process is implemented.
Changes in tax legislation or failure to generate future taxable
profits may impact the recoverability of certain deferred tax
assets recognised by NWM Group.
In accordance with the accounting policies set out on page 94 ,
NWM Group has recognised deferred tax assets on losses available to
relieve future profits from tax only to the extent it is probable
that they will be recovered. The deferred tax assets are quantified
on the basis of current tax legislation and accounting standards
and are subject to change in respect of the future rates of tax or
the rules for computing taxable profits and offsetting allowable
losses.
Failure to generate sufficient future taxable profits or further
changes in tax legislation (including with respect to rates of tax)
or accounting standards may reduce the recoverable amount of the
recognised tax loss deferred tax assets, amounting to GBP62 million
as at 31 December 2020. Changes to the treatment of certain
deferred tax assets may impact NWM Group's capital position. In
addition, NWM Group's interpretation or application of relevant tax
laws may differ from those of the relevant tax authorities and
provisions are made for potential tax liabilities that may arise on
the basis of the amounts expected to be paid to tax authorities.
The amounts ultimately paid may differ materially from the amounts
provided depending on the ultimate resolution of such matters.
Legal Entity Identifier: RR3QWICWWIPCS8A4S074
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms
and conditions, to analyse how you engage with the information
contained in this communication, and to share such analysis on an
anonymised basis with others as part of our commercial services.
For further information about how RNS and the London Stock Exchange
use the personal data you provide us, please see our Privacy
Policy.
END
ACSDKCBBPBKKKBD
(END) Dow Jones Newswires
February 19, 2021 02:04 ET (07:04 GMT)
Natwest Mk.33 (LSE:83NF)
Historical Stock Chart
From Jun 2024 to Jul 2024
Natwest Mk.33 (LSE:83NF)
Historical Stock Chart
From Jul 2023 to Jul 2024