TIDMNWG
RNS Number : 2353Q
NatWest Group plc
17 February 2023
NatWest Group plc 17 February 2023
NatWest Markets N.V. 2022 ARA
NatWest Markets N.V. today announces the publication of its 2022
Annual Report and Accounts. This company is a wholly-owned
subsidiary of NatWest Markets Plc. The 2022 Annual Report and
Accounts for NatWest Markets N.V. is available on NatWest Group
plc's website at
https://investors.natwestgroup.com/reports-archive
For further information, please contact
Investor Relations
Investor.relations@natwest.com
+44 207 672 1758
Media Relations
+44 131 523 4205(UK)
+31 20 464 1150 (NL)
17 February 2023
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 2022 in full unedited
text. Page references in the text refer to page numbers in the
Annual Report and Accounts 2022.
Principal Risks and Uncertainties
Set out below are certain risk factors that could adversely
affect NWM N.V. Group's future results, its financial condition
and/or prospects and cause them to be materially different from
what is forecast or expected, and directly or indirectly impact the
value of its securities. 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 of all potential risks and uncertainties facing NWM N.V.
Group.
Economic and political risk
NWM N.V. Group, its customers and its counterparties face
continued economic and political risks and uncertainties in the UK,
European and global markets, including as a result of high
inflation and rising interest rates, supply chain disruption and
the Russian invasion of Ukraine.
The value of NWM N.V. Group's own and other securities 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 N.V. Group's own and other securities,
particularly during periods of market displacement. This could
cause a decline in the value of NWM N.V. Group's financial
instruments. This may adversely affect NWM N.V. Group's results of
operations in future periods, or inaccurate carrying values for
certain securities. Similarly, NWM N.V. Group trades a considerable
amount of own and other securities (including derivatives) and
volatile market conditions could result in a significant decline in
NWM N.V. 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
conditions, hedging and other risk management strategies may not be
as effective at mitigating 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 N.V. Group's counterparty risk. NWM N.V.
Group's risk management and monitoring processes seek to quantify
and mitigate NWM N.V. Group's exposure to extreme market moves.
However, market events have historically been difficult to predict
and NWM N.V. Group, its customers and its counterparties could
realise significant losses if extreme market events were to
occur.
NWM N.V. Group is affected by global economic and market
conditions. Uncertain and volatile economic conditions can create a
challenging operating environment for financial services companies
such as NWM N.V. Group. The outlook for the global economy remains
uncertain including due to: falling economic activity, high
inflation, rising interest rates, elevated energy and food prices,
supply chain disruption, changes to monetary and fiscal policy, and
the impact of armed conflict (including the Russian invasion of
Ukraine).
These conditions, including the cost-of-living crisis, could be
worsened by a number of factors including: instability in the
global financial system, market volatility and change, fluctuations
in the value of the pound sterling and euro, new or extended
economic sanctions, the COVID-19 pandemic, economic volatility in
emerging markets, volatility in commodity prices or concerns
regarding sovereign debt or sovereign credit ratings. Economic
conditions may also be affected by the changing demographics in the
markets that NWM N.V. Group serves, increasing social and other
inequalities, or rapid changes to the economic environment due to
the adoption of technology, automation, and artificial
intelligence, or due to climate change, environmental degradation,
biodiversity loss and/or other sustainability risks. Any of the
above developments could adversely affect NWM N.V. Group directly
(for example, as a result of credit losses) or indirectly (for
example, by impacting global economic growth and financial markets
and NWM N.V. Group's clients and their banking needs).
NWM N.V. Group is also 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. Unfavourable
political, military or diplomatic events, increasing geopolitical
tensions leading to armed conflict, protectionist policies or trade
barriers, secession movements or the exit of other member states
from the EU, tax changes, new and widespread public health crises
(including any epidemics or pandemics), state and privately
sponsored cyber and terrorist acts or threats, and the responses to
each of the above economic, political or other scenarios by various
governments and markets, may adversely affect the business and
performance of NWM N.V. Group, including as a result of the
indirect impact on regional or global trade and/or NWM N.V. Group's
customers and counterparties.
The COVID-19 pandemic prompted many changes that may prove to be
permanent shifts in customer behaviour and economic activity, such
as changes in spending patterns and significantly more people
working in a more flexible manner. These changes may affect asset
prices, the economic environment, and NatWest Group's customers'
and counterparties' financial performance and needs. In response
the COVID-19 pandemic, central banks, governments, regulators, and
legislatures in the UK and elsewhere have offered unprecedented
levels of support and various schemes to assist businesses and
individuals, many of which have since been curtailed or withdrawn.
However, risks remain as to whether these loans will be repaid.
The UK experienced significant political uncertainty in 2022,
which may persist into the foreseeable future. This could lead to a
loss of confidence in the UK, which could in turn, negatively
impact companies operating in the UK. NatWest Group also faces
political uncertainty in Scotland as a result of a possible second
Scottish independence referendum. Independence may adversely affect
NatWest Group both in relation to entities incorporated in Scotland
and in other jurisdictions. Any changes to Scotland's relationship
with the UK or the EU would adversely affect the environment in
which NatWest Group and its subsidiaries operate and may require
further changes to NatWest Group (including NWM Group's and NWM
Group N.V.'s structure), independently or in conjunction with other
mandatory or strategic structural and organisational changes, any
of which could adversely affect NWM N.V. Group.
Any of the above may have a negative effect on NWM N.V.
Group.
Continuing uncertainty regarding the effects and extent of the
UK's post Brexit divergence from EU laws and regulation, and NWM
N.V.'s post Brexit EU operating model may continue to adversely
affect NWM Plc (NWM N.V.'s parent company) and its operating
environment and NatWest Group plc (NWM N.V.'s ultimate parent
company) and may have an indirect effect on NWM N.V. Group.
The UK ceased to be a member of the EU and the European Economic
Area ('EEA') on 31 January 2020 ('Brexit') and the 2020 EU-UK Trade
and Cooperation Agreement ('TCA') ended the transition period on 31
December 2020. The TCA was 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 ('MoU'), which remains unsigned.
Certain aspects of the services provided by NatWest Group are
therefore subject to obtaining local licences or are subject to
individual equivalence decisions (temporary or otherwise) by
relevant regulators. The EU's equivalence regime does not cover
most lending and deposit taking, and determinations in respect of
non-EU countries have not, to date, covered the provision of most
financial investment services. In addition, equivalence
determinations do not guarantee permanent access rights and can be
withdrawn with short notice. In late 2021 the European Commission
proposed legislation that would require non-EU firms to establish a
branch or subsidiary in the EU before providing 'banking services'
in the EU. If these proposals become law all 'banking services'
will be licensable activities in each EU member state and member
states will not be permitted to offer bilateral permissions to
financial institutions outside the EU allowing them to provide
'banking services' in the EU. Uncertainty remains as to whether
'banking services' will also include investment products.
Furthermore, failure to extend existing equivalence determinations,
exemptions and derogations in relation to regulations such as
margin and clearing regulations or capital regulations, may
adversely affect customer engagement and/or may adversely affect
the operating model and business operations of NWM N.V. Group.
NatWest Group continues to evaluate its post Brexit EU operating
model, making adaptations as necessary. NatWest Group also
continues to assess where NatWest Group companies can obtain
bilateral regulatory permissions to facilitate intragroup
transactions and/or to permit business to continue from its UK
entities, transferring what cannot be continued to be rendered from
the UK to an EEA subsidiary or branch, where permitted or
commercially reasonable to do so. Where these 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 conduct
EEA business through an EEA licensed subsidiary or branch. Certain
permissions are required in order to maintain the ability to clear
euro payments. Other permissions, including the ability to have two
intermediate EU parent undertakings, may need to be obtained, and
structural changes may need to be made to allow NWM N.V. Group to
continue to serve EEA customers from both the ring-fenced and
non-ring-fenced banking entities. Any failure to obtain such
permissions or make such structural changes, in a timely manner, or
at all, could adversely affect NWM N.V. Group and the customers
that it serves. As described in 'NWM Group (including NWM N.V.
Group) has been in a period of significant structural and other
change, including as a result of NatWest Group's purpose-led
strategy and NatWest Group's recent creation of its C&I
business segment (of which NWM Group forms part ) and may continue
to be subject to significant structural and other change ', NWM
Group expects that NatWest Group's Western European corporate
portfolio (principally consisting of term funding and revolving
credit facilities) ('Transfer Business') may be: (i) transferred
from the ring-fenced subgroup of NatWest Group to NWM Group, and/or
(ii) transferred to the ring-fenced subgroup of NatWest Group from
NWM Group, subject to regulatory and customer requirements.
Furthermore, transferring business to an EEA based subsidiary is a
complex exercise and involves legal, regulatory and execution
risks, and could result in a loss of business and/or customers or
higher than anticipated costs. The changes to NatWest Group's and
NWM Group's operating model have been costly and failure to receive
the requested regulatory permissions and/or further changes to
their business operations, product offering and customer engagement
could result in further costs and/or regulatory sanction. Any of
the above could, in turn, negatively impact NWM N.V. Group.
The long-term effects of Brexit and the uncertainty regarding
NatWest Group's EU operating model may adversely affect NWM Group
and NWM N.V. Group's business. These may be exacerbated by wider UK
and global macro-economic trends and events which may significantly
impact NWM N.V. Group and its customers and counterparties who are
themselves dependent on trading with the EU or personnel from the
EU. The long-term effects of Brexit may also be exacerbated by
wider UK and global macro-economic trends and events.
Uncertainties remain as to the extent to which EU/EEA laws will
diverge from UK law. For example, bank regulation in the UK may
diverge from European bank regulation if the Financial Services and
Markets Bill ('FSM') is enacted into law. The UK government has
also proposed legislation to introduce automatic 'sunset' clauses
for retained EU law by the end of 2023 (the Retained EU Law
(Revocation and Reform) Bill 2022), which if enacted could
potentially cause market disruption and require additional
resources to manage the legal and regulatory consequences. NWM N.V.
Group may not be able to respond to these changes effectively, in a
timely manner, or at all. The actions taken by regulators in
response to any new or revised bank regulation and other rules
affecting financial services, may adversely affect NWM Group,
including its business, non-UK operations, group structure,
compliance costs, intragroup arrangements and capital requirements.
The legal and political uncertainty, and any actions taken as a
result of this uncertainty, as well as the approach taken by
regulators and new or amended rules, could have a significant
adverse impact on NWM N.V. Group's businesses, non-UK operations
and/or legal entity structure, including NWM N.V. Group, including
attendant operating, compliance and restructuring costs, level of
impairments, capital requirements, changes to intragroup
arrangements, increased complexity of the regulatory environment
and tax implications and as a result may adversely affect the
profitability, competitive position, business model and product
offering of NWM Group and NWM N.V. Group.
Significant uncertainties remain 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, whether the proposed EEA licenced subsidiary is
granted a banking licence, whether banking services will be
harmonised across the EEA and, therefore, what the respective legal
and regulatory arrangements will be, under which NWM Group and its
subsidiaries (including NWM N.V. Group) will operate. This
divergence could lead to further market fragmentation. These risks
and uncertainties may require costly changes to NWM N.V. Group's EU
operating model. The legal and political uncertainty, and any
actions taken as a result of this uncertainty, as well as the
approach taken by regulators and new or amended rules, could have a
significant adverse impact on NWM Group's businesses, non-UK
operations and/or legal entity structure, including NWM N.V. Group,
including attendant operating and compliance costs, level of
impairments, capital requirements, changes to intragroup
arrangements, increased complexity of the regulatory environment
and tax implications and as a result may adversely affect the
profitability, competitive position, business model and product
offering of NWM Group and NWM N.V. Group.
Changes in interest rates have affected and will continue to
affect NWM N.V. Group's business and results.
NWM N.V. Group's performance is affected by changes in interest
rates. Benchmark overnight interest rates increased in 2022 and are
expected to continue to rise in the short-term accompanied by
quantitative tightening. However, forward rates at 31 December 2022
suggested interest rates may fall again in the medium-term, albeit
not to the low levels experienced during the COVID-19 pandemic.
Stable interest rates support predictable income flow and less
volatility in asset and liability valuations, although persistently
low and negative interest rates, such as those experienced during
the COVID-19 pandemic, are generally expected to be less favourable
for banks. For NWM N.V. Group, persistently low interest rates may
reduce the yield on its equity structural hedge, for example.
Volatility in interest rates may also result in unexpected
outcomes both for interest income and asset and liability
valuations which may adversely affect NWM N.V. Group. For example,
unexpected movements in spreads between key benchmark rates such as
sovereign and swap rates in turn affect liquidity portfolio
valuations. Finally, sharp unexpected rises in rates may also have
negative impacts on some asset and derivative valuations, for
example. Any of the above may adversely affect NWM N.V. Group's
future results, financial condition and/or prospects.
Movements in interest rates also influence and reflect the
macro-economic situation more broadly, affecting factors such as
business and consumer confidence, property prices, default rates on
loans and other indicators that may indirectly affect NWM N.V.
Group and may adversely affect its future results, financial
condition and/or prospects.
HM Treasury (or UKGI on its behalf) could exercise a significant
degree of influence over NatWest Group and NWM N.V. Group is
ultimately controlled by NatWest Group.
In November 2019, NWM Plc acquired RBS Holdings N.V. ('RBSH'),
NWM N.V.'s immediate parent, from RFS Holdings B.V. ('RFSH'). All
entities are wholly owned by NatWest Group plc. As such, NatWest
Group plc is the ultimate parent company of NWM N.V.
In its March 2021 Budget, the UK Government announced its
intention 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 2026. NatWest Group plc has (i)
carried out directed buybacks of NatWest Group plc shares from UK
Government Investments Limited ('UKGI') in March 2021 and in March
2022, (ii) carried out sales of NatWest Group plc shares by UK
Government Investments Limited (' UKGI) by accelerated bookbuild in
May 2021, and (iii) made purchases under NatWest Group plc's
directed and on-market buyback programmes announced in July 2021
and in March 2022. As at 17 January 2023, the UK Government held
44.98% of the ordinary share capital with voting rights of NatWest
Group plc. NatWest Group may participate in similar directed or
on-market buybacks in the near-and medium-term future. The precise
timing and extent of further UKGI's sell-downs is uncertain, which
could result in a prolonged period of price volatility for NatWest
Group plc's ordinary shares and other securities.
HM Treasury has indicated that it intends to respect the
commercial decisions of NatWest Group and that NatWest Group
entities (including NWM N.V. Group) will continue to have their own
independent board of directors and management team determining
their own strategy. However, for as long as HM Treasury remains
NatWest Group plc's largest single shareholder, HM Treasury and
UKGI (as manager of HM Treasury's shareholding) could exercise a
significant degree of influence over NatWest Group (including NWM
N.V. Group) including: the election of directors and appointment of
senior management, NatWest Group's (including NWM N.V. Group's)
capital strategy, dividend policy, remuneration policy or the
conduct of NatWest Group's (including NWM N.V. Group's) operations.
HM Treasury or UKGI's approach depends on government policy, which
could change. The manner in which HM Treasury or UKGI exercises HM
Treasury's rights as NatWest Group plc's largest single shareholder
could give rise to conflicts between the interests of HM Treasury
and the interests of other shareholders, including as a result of a
change in government policy, which may in turn adversely affect
NatWest Group (including NWM N.V. Group). The exertion of such
influence over NatWest Group could in turn adversely affect the
governance or business strategy of NWM N.V. Group.
In addition, as a wholly owned subsidiary of NWM Plc (and
ultimately NatWest Group plc), NWM plc and NatWest Group plc
directly and indirectly control NWM N.V. Group's corporate policies
and strategic direction. The interests of NatWest Group plc as an
equity holder of NWM N.V. Group and as its ultimate parent and the
interests of the C&I business segment may differ from the
interests of NWM N.V. Group or of potential investors in NWM N.V.
Group's securities.
Strategic risk
NWM Group (including NWM N.V Group) has been in a period of
significant structural and other change, including as a result of
NatWest Group's purpose-led strategy and NatWest Group's recent
creation of its C&I business segment (of which NWM Group forms
part) and may continue to be subject to significant structural and
other change.
In February 2020, NatWest Group announced its strategy to focus
on becoming a purpose-led business designed to champion potential,
and to help individuals, families and businesses to thrive. As part
of NatWest Group's strategy, NWM Group's own strategy has evolved
to focus on serving NatWest Group's corporate and institutional
customer base, first via the 'NWM Refocusing' programme (which
required simplification of its operating model and technological
platform as well as reducing its cost base and capital
requirements) and then via the creation of NatWest Group's C&I
business segment (which combined NatWest Group's Commercial,
NatWest Markets and RBS International businesses). NatWest Group
plc has been reporting its results under the C&I operating
segment structure since the quarter ended 30 March 2022, although
NWM Plc continues to also report on a standalone legal entity
basis. The C&I business segment is intended to allow closer
operational and strategic alignment to support NatWest Group
growth, with increased levels of services being provided between
NatWest Group entities, with the potential increased risk of breach
of the UK ring-fencing regime without effective or enhanced
conflicts of interest policies. As a result of further focusing on
NatWest Group's core C&I customers, NWM Group's prospects have
become further dependent on the success and strategy of NatWest
Group.
NWM Group's ability to serve its customers may be diminished by
its changing business strategy and customer reactions to the
changing nature of NWM Group's business model may be more adverse
than expected. Previously anticipated revenue and profitability
levels may not be achieved (including in relation to: income from
the Rates business, the ability to support customer transactions
whilst meeting NWM Group capital targets, and changes to the
availability of risk capital, in the timescales envisaged, or at
all. An adverse macro-economic environment, political and
regulatory uncertainty, market volatility and change and/or strong
market competition may require NWM Group to adjust aspects of its
strategy or the timeframe for its implementation. It is anticipated
that NWM Plc will continue to generate operating losses in the
short term and as a result its capital levels may decline.
NWM Group's strategy requires it to meet cost-reduction targets.
A significant proportion of the cost savings are dependent on
simplification of the IT systems and therefore may not be realised
if IT capabilities are not delivered in line with assumptions. In
addition, the scale of changes that have been concurrently
implemented require the implementation and application of robust
governance and controls frameworks and robust IT systems. There is
a risk that NWM Group (including NWM N.V. Group) may not be
successful in maintaining such governance and control frameworks
and IT systems.
As part of NWM Group's strategy, NWM Group has set a number of
financial, capital and operational targets and expectations, which
are expected to require further reductions to its wider cost base.
The financial, operational and capital targets and expectations
envisaged by NWM's strategy may not be met or maintained in the
timeframes expected or at all. In addition, targets and
expectations for NWM Group 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.
In addition, to improve efficiencies and best serve customers
following Brexit, NWM Group expects that certain assets,
liabilities, transactions and activities of NatWest Group's
Transfer Business may be: (i) transferred from the ring-fenced
subgroup of NatWest Group to NWM Group, and/or (ii) transferred to
the ring-fenced subgroup of NatWest Group from NWM Group, subject
to regulatory and customer requirements. The timing, success and
quantum of any of these transfers remain uncertain as is the impact
of these transactions on its go-forward results of operations. As a
result, NatWest Group's (including NWM N.V. Group's) future
results, financial condition and/or prospects may be adversely
affected.
NWM Group has implemented a shared services model and entered
into revenue share agreements with some entities within NatWest
Group's ring-fenced sub-group (including NatWest Bank Plc and The
Royal Bank of Scotland Plc). NWM Group therefore relies directly or
indirectly on NatWest Group entities to provide services to itself
and its clients. This reliance has recently increased as a result
of NWM Group joining NatWest Group's C&I business segment. A
failure of NWM Group to receive these services may result in
operational risk. See, 'Operational risks (including reliance on
third party suppliers and outsourcing of certain activities) are
inherent in NWM Group's businesses'. In addition, any change to the
cost and/or scope of services provided by NatWest Group may impact
NWM Group's (including NWM N.V. Group's) competitive position and
its ability to meet its other targets.
NWM's strategy entails legal, execution, operational and
regulatory (including compliance with the UK ring fencing regime),
conflicts, IT system, culture, people, conduct, business and
financial risks to NWM Group (including NWM N.V. Group). As a
result, NWM Group may not be able to successfully implement some or
all aspects of its strategy or may not meet any or all of the
related strategic targets or expectations. Each of the risks
identified above, individually or collectively, could adversely
affect NWM Group's (including NWM N.V. Group's) products and
services offering or office locations, competitive position,
ability to meet targets and commitments, reputation with customers
or business model and may result in higher-than-expected costs, all
of which could adversely affect NWM Group (including NWM N.V.
Group) and its ability to deliver its strategy. There is a risk
that the intended benefits of NatWest Group's and NWM Group's
strategies may not be realised in the timelines or in the manner
currently contemplated, or at all. Various aspects of NWM Group's
strategy may not be successful, may not be completed as planned, or
at all, or could be phased or could progress in a manner other than
currently expected. This could lead to additional management
actions by NWM Group (or NWM N.V. Group), regulatory action or
reduced liquidity and/or funding opportunities. Any of the above
may lead to NWM Group (and NWM N.V. Group) not being viable,
competitive or profitable.
Financial resilience risk
NWM N.V. is NatWest Group's banking and trading entity located
in the Netherlands. NWM N.V. has repurposed its banking licence,
and NWM N.V. Group may be subject to further changes.
As part of NatWest Group's strategy, NWM N.V. is NatWest Group's
banking and trading entity located in the Netherlands, serves EEA
customers, and became a NWM Plc subsidiary in November 2019. The
banking licence of NWM N.V. was repurposed for which purpose a
declaration of non-objection (DNO) was received from the DNB.
Approval from the DNB is required for material changes to NWM
N.V.'s operating model. In addition, although the head office for
NWM N.V. is located in Amsterdam, NWM N.V. Group also operates
branches in France, Germany, Ireland, Italy, Sweden and Spain
(although the branch in Spain closed in mid-2022). As a subsidiary
of NWM Plc (and ultimately NatWest Group plc), NWM N.V. utilises a
number of NWM Group and NatWest Group systems, policies and
frameworks (via a shared services model) including in relation to:
technology (including innovation) and network infrastructure,
marketing, risk frameworks, financial accounting systems,
reporting, on-boarding processes, model development and validation,
certain administrative and legal services and governance. In
addition, the products that NWM N.V. offers are based on those
offered by NWM Plc. See also, 'Operational risks (including
reliance on third party suppliers and
outsourcing of certain activities) are inherent in NWM N.V.
Group's businesses'. As such, any changes made to systems,
policies, frameworks or products of NatWest Group or NWM Group may
have a corresponding adverse effect on NWM N.V.
A number of other factors described above are outside the
control of NWM N.V., and should changes be made, there may be an
adverse effect NWM N.V.'s profitability.
NWM Group, including NWM N.V. Group, may not meet the targets it
communicates, generate returns or implement its strategy
effectively.
NWM N.V. Group is subject to transfer pricing arrangements with
NWM Plc (NWM N.V.'s parent company). Arm's length transfer pricing
legislation in both the Netherlands and UK requires that, for
transactions between related parties, each entity is rewarded on
the same basis as two independent parties negotiating a contract
covering the same activities. The transfer pricing arrangements
between NWM N.V. and NWM Plc require approval by both
counterparties and are subject to audit and/or assessment by Dutch
and UK tax authorities. A portion of NWM N.V. Group's income
derives from transfer pricing income received from NatWest Group
entities. Should the level of such income change as a result of
regulatory intervention or otherwise, this may have a material and
adverse effect on NWM N.V. Group's profitability.
As part of NatWest Group's strategy, NWM N.V. Group has set a
number of financial, capital and operational targets including in
respect of: balance sheet and cost-reduction measures, CET1 ratio
targets (for NWM Plc and NWM N.V.), MREL targets, leverage ratio
targets (for NWM Plc and NWM N.V.), targets in relation to local
regulation, funding plans and requirements, employee engagement,
diversity and inclusion as well as ESG (including climate and
sustainable funding and financing targets and customer satisfaction
targets.
NWM N.V. Group's ability to meet its targets, including its CET1
ratio target, and make discretionary capital distributions and to
successfully fulfil its strategy is subject to various internal and
external factors and risks. These include but are not limited to:
global macro-economic, political, market and regulatory
uncertainties, operational risks and risks relating to NWM N.V.
Group's business model and strategy (including risks associated
with climate, ESG and other sustainability-related issues). See
also, ' NWM Group (including NWM N.V. Group) has been in a period
of significant structural and other change, including as a result
of NatWest Group's purpose-led strategy and NatWest Group's recent
creation of its C&I business segment (of which NWM Group forms
part ) and may continue to be subject to significant structural and
other change '.
A number of factors, including macro-economic factors, 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 RWA and the receipt and
payment of dividends. NWM N.V. 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 N.V. Group's ability to meet its planned cost reductions in
annual costs may vary considerably from year to year. Furthermore,
the focus on maintaining balance sheet and cost-reduction targets
may result in limited investment in other areas which could affect
NWM N.V. 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 adversely affect
NWM N.V. Group's business and its ability to achieve its targets
and execute its strategy.
NWM N.V. Group's strategy may not be successfully executed, it
may not meet its targets and expectations, and it may not be a
viable, competitive or profitable banking business.
NWM N.V. may not meet the prudential regulatory requirements for
capital and liquidity.
NWM N.V. Group is required by the DNB to maintain adequate
financial resources. Adequate capital provides NWM N.V. Group with
financial flexibility in the face of turbulence and uncertainty in
the global economy and specifically in its core European
operations.
NWM Plc's and NWM N.V.'s target CET1 ratios are based on
regulatory requirements, internal modelling and risk appetite
(including under stress). As at 31 December 2022, NWM N.V. Group's
CET1 ratio (on a consolidated basis) was 21%. NWM N.V.'s current
capital strategy is based on the management of RWAs and other
capital management initiatives.
Other factors that could influence NWM N.V.'s CET1 ratios
include:
- a depletion of NWM N.V.'s capital resources through reduced
profits (which would in turn impact retained earnings) and may
result from revenue attrition or increased liabilities, sustained
periods of low 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 N.V.'s RWAs, stemming from
exceeding target RWA levels, the NWM Refocusing, regulatory
adjustments (for example, from additional market risk back testing
exceptions), foreign exchange movements or a failure in internal
controls or procedures to accurately measure and report RWAs. An
increase in RWAs would lead to a reduction in the CET1 ratio;
- changes in prudential regulatory requirements including the
Total Capital Requirement for NWM N.V. (as regulated by the 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.
See also, ' NWM Group (including NWM N.V. Group) has been in a
period of significant structural and other change, including as a
result of NatWest Group's purpose-led strategy and NatWest Group's
recent creation of its C&I business segment (of which NWM Group
forms part ) and may continue to be subject to significant
structural and other change. '
Management actions taken under a stress scenario may affect,
among other things, NWM N.V. 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 N.V.
Group's securities. See also, '- NWM N.V. may not manage its
capital, liquidity or funding effectively which could trigger the
execution of certain management actions or recovery options', and
'- NatWest Group (including NWM N.V.) may become subject to the
application of statutory stabilisation or resolution powers which
may result in, among other actions, the write-down or conversion of
certain Eligible Liabilities (including NWM N.V.'s Eligible
Liabilities).'
NWM N.V. Group may not be able to adequately access sources of
liquidity and funding.
NWM N.V. 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 2022, NWM N.V. Group held EUR1,196
million in deposits from banks and customers. The level of deposits
and wholesale funding may fluctuate due to factors outside NWM N.V.
Group's control. These factors include: loss of clients, loss of
investor confidence (including in individual NWM N.V. Group
entities or the European banking sector or the banking sector as a
whole), changes in interest rates, government support, 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 N.V. Group has significant exposure to counterparty
and borrower risk'.
An inability to grow, roll-over, or any material decrease in,
NWM N.V. 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
N.V. Group's ability to satisfy its liquidity needs.
NWM N.V. 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 N.V. 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 N.V. Group
balance sheet, then unsecured funding from other sources would be
required to replace such financing. There is a risk that NWM N.V.
Group would be unable to replace such financing on acceptable terms
or at all, which could adversely affect its liquidity position and
may adversely affect NWM N.V. Group. 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 N.V. 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 N.V.
Group.
Current European, UK and global macro-economic and political
uncertainties and any significant market volatility and change
could affect NWM N.V. 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. As a result, NWM N.V. Group and its subsidiaries
could be required to adapt their funding plans or change their
operations. This could exacerbate funding and liquidity risk, which
could have a negative effect on NWM N.V. Group.
As at 31 December 2022, NWM N.V. Group reported a liquidity
coverage ratio of 230% on a solo basis. If its liquidity position
were to come under stress and if NWM N.V. 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 N.V. 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 N.V.
Group may need to liquidate assets to meet its liabilities,
including disposals of assets not previously identified for
disposal to reduce its funding or payment 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
N.V. Group's funding plans or its operations. In a time of reduced
liquidity or market stress, NWM N.V. Group may be unable to sell
some of its assets or may need to sell assets at depressed prices,
which in either case may adversely affect NWM N.V. Group's future
results, financial condition and/or prospects.
NWM N.V. Group independently manages liquidity risk on a
stand-alone basis, including through holding its own liquidity
portfolio. It has restricted access to liquidity or funding from
other NatWest Group entities. As a result, NWM N.V.'s liquidity
position could be adversely affected, which may also require assets
to be liquidated or may result in higher funding costs which may
adversely affect NWM N.V. Group's margins and profitability. NWM
N.V.'s management of its own liquidity portfolio and the structure
of capital support are subject to operational and execution risk,
as NWM N.V. is required to meet its own liquidity and capital
requirements.
Continuing market volatility described in the paragraphs above
may have a negative effect on NWM N.V. Group's access to liquidity
and funding, which could mean that NWM N.V. Group is required to
adapt its funding plan or change its operations and could adversely
affect NWM N.V. Group.
NWM N.V. Group is reliant on access to the capital markets to
meet its funding requirements. The inability to do so may adversely
affect NWM N.V. Group.
NWM N.V. Group is reliant on frequent access to the capital
markets for funding, at a cost that can be passed through to its
customers. This access entails execution risk, regulatory risk,
risk of reduced commercial activity, risk of loss of market
confidence in NWM N.V. Group if it cannot finance its activities
and risk of a ratings downgrade, which could be impeded by a number
of internal or external factors, including, those summarised in
'NWM N.V. Group, its customers and its counterparties face
continued economic and political risks and uncertainty in the UK,
European and global markets, including as a result of high
inflation and rising interest rates, supply chain disruption and
the Russian invasion of Ukraine,' and 'Continuing uncertainty
regarding the effects and extent of the UK's post Brexit divergence
from EU laws and regulation, and NWM N.V.'s post Brexit EU
operating model may continue to adversely affect NWM Plc (NWM
N.V.'s parent company) and its operating environment and NatWest
Group plc (NWM N.V.'s ultimate parent company) and may have an
indirect effect on NWM N.V. Group'.
In addition, NWM N.V. receives capital and funding from NatWest
Group plc and NWM N.V. is therefore reliant on the willingness of
NatWest Group plc to fund its internal capital targets. NWM N.V.
Group has set target levels for different tiers of capital as
percentages of its RWAs. The level of capital and funding required
for NWM N.V. to meet its internal targets is therefore a function
of the level of RWAs and its leverage exposure in NWM N.V. and this
may vary over time.
Any inability of NWM N.V. Group to adequately access the capital
markets, to manage its balance sheet in line with assumptions in
its funding plans, may adversely affect NWM N.V. Group, such that
NWM N.V. Group may not constitute a viable banking business and/or
NWM N.V. may fail to meet its regulatory capital requirements (at
present, NWM N.V. does not yet have its own MREL).
NWM N.V. may not manage its 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 Netherlands, NatWest N.V. Group
must maintain a recovery plan acceptable to its regulator, such
that a breach of NWM N.V.'s applicable capital or leverage,
liquidity or funding requirements would trigger consideration of
NWM N.V.'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 N.V. 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 N.V.'s capital and leverage requirements.
NatWest Group may also address a shortage of capital in NWM N.V.
by providing parental support to NWM N.V., subject to evidence that
the conditions set out in Article 23 of the BRRD, as implemented
into Dutch law article 3:301 and 3:305 of the FMSA have been met.
NatWest Group's and/or NWM N.V.'s regulator may also request that
NWM N.V. Group carry out additional capital management actions. The
Bank of England has identified single point-of-entry at NatWest
Group plc, as the preferred resolution strategy for NatWest Group.
However, under certain conditions set forth in the BRRD, as
implemented by the FMSA, the Dutch resolution authority, the DNB,
also has the power to execute the 'bail-in' of certain securities
of NWM N.V. without further action at NatWest Group level.
Any capital management actions taken under a stress scenario
may, in turn affect factors including: NWM N.V. 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
N.V. Group's securities. See also, '- NatWest Group (including NWM
N.V.) may become subject to the application of statutory
stabilisation or resolution powers which may result in, for
example, the write-down or conversion of certain Eligible
Liabilities (including NWM N.V.'s Eligible Liabilities)'. In
addition, if NWM N.V.'s liquidity position was to be adversely
affected, this may require assets to be liquidated or may result in
higher funding costs, which may adversely affect NWM N.V. 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 N.V. ) or any of their respective debt securities could
adversely affect the availability of funding for NWM N.V. Group,
reduce NWM N.V. Group's liquidity position and increase the cost of
funding.
Rating agencies regularly review NatWest Group plc, NWM Plc, NWM
N.V. and other NatWest Group entity credit ratings and outlooks. In
September, Moody's upgraded the credit rating of NWM Plc from A2
(positive outlook) to A1 (stable outlook). NWM N.V. Group entity
credit ratings and outlooks, could be negatively affected (directly
or indirectly) by a number of factors that can change over time,
including: credit rating agencies' assessment of NWM N.V. 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 and regions in which NWM N.V. Group operates; the
implementation of structural reform; the legal and regulatory
frameworks applicable to NWM N.V. 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 N.V. Group's
key markets (including rising interest rates and higher inflation,
supply chain disruptions and the outcome of any further Scottish
independence referendum); any reduction of the UK's sovereign
credit rating (currently on negative outlook by Moody's, S&P
and Fitch) 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. See also 'A reduction in the ESG ratings of NatWest
Group or NWM Group (including NWM N.V. Group) could have a negative
impact on NatWest Group's or NWM Group (including NWM N.V. Group)'s
reputation and on investors' risk appetite and customers'
willingness to deal with NatWest Group, NWM Group or NWM N.V.
Group.'
Any reductions in the credit ratings of NatWest Group plc, NWM
Plc, NWM N.V. or of certain other NatWest Group entities,
including, in particular, downgrades below investment grade, or a
deterioration in the capital markets' perception of NWM N.V.
Group's financial resilience could significantly affect NWM N.V.
Group's access to capital markets, reduce the size of its deposit
base and trigger additional collateral or other requirements in its
funding arrangements or the need to amend such arrangements, which
could adversely affect NWM N.V. Group's (and, in particular, NWM
N.V.'s) cost of funding and its access to capital markets which
could limit the range of counterparties willing to enter into
transactions with NWM N.V. Group (and, in particular, with NWM
N.V.). This may in turn adversely affect NWM N.V. Group's
competitive position and threaten its prospects in the short to
medium-term.
NWM N.V. Group operates in markets that are highly competitive,
with increasing competitive pressures and technology
disruption.
The markets within which NWM N.V. Group operates are highly
competitive, and NWM N.V. Group expects such competition to
continue and intensify in response to various changes . These
include: evolving customer behaviour, technological changes
(including digital currencies and other instruments, stablecoins,
and the growth of digital banking, such as from fintech entrants),
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,
automation, the cloud, blockchain, cryptocurrencies and quantum
computing may also rapidly facilitate industry transformation.
Increasingly, many of the products and services offered by NWM
N.V. Group are, and will become, more technology intensive,
including through digitalisation, automation and the use of
artificial intelligence. NWM N.V. Group's ability to develop or
acquire such services (which also comply with applicable and
evolving regulations) has become increasingly important to
retaining and growing NWM N.V. Group's client businesses across its
geographical footprint. There can be no certainty that NWM N.V.
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 N.V. Group to continue to maintain or grow such
services in the future.
Certain of NWM N.V. 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 more advanced 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 N.V. Group. As mentioned above, NWM N.V. operates a
shared services model in relation to technology and innovation.
Although NWM N.V. 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 N.V. Group's focus on its cost
savings targets. This may limit additional investment in areas such
as financial innovation and could affect NWM N.V. Group's offering
of innovative products or technologies for delivering products or
services to clients and its competitive position. NWM Group and NWM
N.V. 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. Furthermore, the development of innovative
products depends on NWM Group and NWM N.V. Group's ability to
produce underlying high-quality data, failing which its ability to
offer innovative products may be compromised.
If NWM N.V. 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 initiatives and lose
opportunities for growth. In this context, NWM N.V. Group is
investing in the automation of certain solutions and interactions
within its customer-facing businesses, including through automation
and artificial intelligence. Such initiatives may result in
operational, reputational and conduct risks if the technology used
is defective, inadequate or is not fully integrated into NWM N.V.
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 N.V. Group.
In addition, NatWest Group's purpose-led strategy, as well as
employee remuneration constraints may also have an impact on NWM
N.V. Group's ability to compete effectively and intensified
competition from incumbents, challengers and new entrants could
affect NWM N.V. Group's ability to maintain 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 N.V.
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. Any of the above may adversely affect NWM N.V.
Group's future results, financial condition and/or prospects.
NWM N.V. 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. 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 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, all of which may adversely affect NatWest
Group's (and NWM N.V. Group's) future results, financial condition
and/or prospects.
NWM N.V. Group has significant exposure to counterparty and
borrower risk.
NWM N.V., a subsidiary of NWM Plc, 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 N.V. Group's businesses. These risks may be
concentrated for those businesses for which client income is
heavily weighted towards a specific geographic region, industry or
client base.
Furthermore, these risks are likely to increase due to the
expected transfer of NatWest Group's Transfer Business: (i) from
the ring-fenced subgroup of NatWest Group to NWM Group, and/or (ii)
to the ring-fenced subgroup of NatWest Group from NWM Group. See
'NWM Group (including NWM N.V. Group) has been in a period of
significant structural and other change, including as a result of
NatWest Group's purpose-led strategy and NatWest Group's recent
creation of its C&I business segment (of which NWM Group forms
part ) and may continue to be subject to significant structural and
other change '.
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 N.V. 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 N.V. Group's clients and credit
exposures, which may, in turn, adversely affect NWM N.V. Group's
profitability.
The credit quality of NWM N.V. Group's borrowers and other
counterparties may be affected by the recent global macro-economic
and political uncertainties and a further deterioration in
prevailing economic and market conditions (including a resurgence
of the COVID-19 pandemic or other new health crises) and by changes
in the legal and regulatory landscape in countries where NWM N.V.
Group is exposed to credit risk (including the extent of the UK's
post-Brexit divergence from EU laws and regulation). Any further
deterioration in these conditions or changes to legal or regulatory
landscapes could worsen borrower and counterparty credit quality or
impact the enforcement of contractual rights over security,
increasing credit risk.
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
interdependent as a result of credit, trading, clearing and other
relationships. Any perceived lack of creditworthiness of a
counterparty or borrower may lead to market-wide liquidity problems
and losses for NWM N.V. 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 N.V.
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 N.V. Group interacts on a daily basis. See also, '- NWM N.V.
Group is reliant on access to the capital markets to meet its
funding requirements. The inability to do so may adversely affect
NWM N.V. Group'. As a result, adverse changes in borrower and
counterparty credit risk may cause accelerated impairment charges
under IFRS 9, increased repurchase demands, higher costs,
additional write-downs and losses for NWM N.V. Group and an
inability to engage in routine funding transactions.
NWM N.V. 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 judgment 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 N.V. 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 2022
may not prove to be adequate resulting in incremental ECL
provisions for NWM N.V. Group.
NWM N.V. 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 N.V. Group's
exposure to the financial industry, it also has exposure to shadow
banking entities (i.e., entities which carry out activities of a
similar nature to banks but not regulated like banks). NWM N.V.
Group is required 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 N.V. 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 NWM N.V. Group's future
results, financial condition and/or prospects.
NWM N.V. 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 N.V. Group's business, strategy and
capital requirements, NWM N.V. Group relies on analytical and other
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).
Uncertainties relating to the COVID-19 pandemic have made reliance
on analytical models and 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. In
addition, NWM N.V. Group utilises models for valuations, credit
approvals, calculation of loan impairment charges on an IFRS 9
basis, financial reporting and for financial crime (criminal
activities in the form of money laundering, terrorist financing,
bribery and corruption, tax evasion and sanctions as well as fraud
risk management (collectively, 'financial crime')). NWM N.V.
Group's models, and the parameters and assumptions on which they
are based, are periodically reviewed.
As models analyse scenarios based on assumed inputs and a
conceptual approach, model outputs therefore remain uncertain.
Failure of models (including due to errors in model design) or new
data inputs (including non-representative data sets), for example,
to accurately reflect changes in the micro and macro-economic
environment in which NWM N.V. Group operates (for example to
account for high inflation), to capture risks and exposures at the
subsidiary level, and to update for changes to NWM N.V. Group's
current business model or operations, or for findings of
deficiencies by NatWest Group (and in particular, NWM Group's) or
NWM N.V. Group's regulators (including as part of NatWest Group's
mandated stress testing) may render some business lines uneconomic,
result in increased capital requirements, may require management
action or may subject NWM N.V. Group to regulatory sanction. NWM
N.V. 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 N.V. 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). Further, accounting policy and financial statement
reporting requirements are likely to increasingly require
management to adjust existing judgments, estimates and assumptions
for the effects of climate-related, sustainability and other
matters that are inherently uncertain and for which there is little
historical experience which may affect the comparability of NWM
N.V. Group's future financial results with its historical results.
Actual results may differ due to the inherent uncertainty in making
climate-related and sustainability estimates, judgments and
assumptions.
Accounting policies deemed critical to NWM N.V. Group's results
and financial position, based upon materiality and significant
judgments and estimates, involve a high degree of uncertainty and
may have a material impact on its results. For 2022, these include
loan impairments, fair value, deferred tax and conduct and
litigation provisions. These are set out in the section 'Critical
accounting policies and key sources of estimation uncertainty'.
Changes in accounting standards may materially impact NWM N.V.
Group's financial results.
NWM N.V. Group prepares its consolidated financial statements in
accordance with IFRS as issued by the International Accounting
Standards Board. Changes in accounting standards or guidance by
accounting bodies or in the timing of their implementation, whether
immediate or foreseeable, could result in NWM N.V. Group having to
recognise additional liabilities on its balance sheet, or in
further write-downs or impairments to its assets and may also
adversely affect the future results, financial condition and/or
prospects of NWM N.V. Group.
NWM N.V. Group's trading assets amounted to EUR4,440 million as
at 31 December 2022. 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
N.V. 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 N.V. Group's
internal valuation models require NWM N.V. 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 N.V. Group to
recognise fair value losses which may adversely affect NWM N.V.
Group's income generation and financial position.
From time to time, the International Accounting Standards Board
may issue new accounting standards or interpretations that could
materially impact how NWM N.V. Group calculates, reports and
discloses its financial results and financial condition, and which
may affect NWM N.V. Group capital ratios, including the CET1 ratio.
New accounting standards and interpretations that have been issued
by the International Accounting Standards Board but which have not
yet been adopted by NWM N.V. Group are discussed in 'Future
accounting developments'.
NatWest Group (including NWM N.V.) may become subject to the
application of statutory stabilisation or resolution powers which
may result in, for example, the write-down or conversion of certain
Eligible Liabilities (including NWM N.V.'s Eligible
Liabilities).
The BRRD establishes a common approach within the EU for the
recovery and resolution of banks. In the UK and the Netherlands,
the BRRD has been implemented via national legislation which grants
powers to a national resolution authority (the 'NRA'). The UK
implementation of the BRRD remains in force now that the Brexit
transition has ended. In Europe (which for the avoidance of doubt
excludes the UK) the BRRD is also (partly) implemented by a
directly binding regulation which established a Single Resolution
Mechanism ('SRM') and a single EU Resolution Board ('SRB') with
powers which exceed the powers of the EU NRAs.
United Kingdom - NatWest Group plc and its UK affiliates
HM Treasury, the Bank of England and the Prudential Regulation
Authority ('PRA') and FCA (together, the 'UK 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; 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 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 issued by
NatWest Group (including NWM Group), which may depend on factors
outside of NWM Group's control. Moreover, the Banking Act
provisions remain largely untested in practice, particularly in
respect of resolutions of large financial institutions and
groups.
The Netherlands - NWM N.V.
The special resolution regime measures set out in the BRRD were
implemented into Dutch law in 2015. The BRRD, and the SRM, provide
that the DNB and the SRB are the resolution authorities responsible
for a resolution in relation to NWM N.V. (the 'N.V. Authorities',
and together with the UK Authorities, the 'Authorities') with broad
powers to implement resolution measures with respect to banks
incorporated in the Netherlands which meet the conditions for
resolution, which may include (without limitation) measures
analogous to the Resolution Stabilisation Tools (options set out at
points (i) to (iv) above under the Banking Act). These powers and
tools are designed to be used prior to the point at which any
insolvency proceedings with respect to NWM N.V. could have been
initiated.
In addition to the resolution powers of the N.V. Authorities
described above, the Dutch Minister of Finance may, with immediate
effect, take measures or expropriate assets and liabilities of,
claims against or securities issued by or with the consent of NWM
N.V., if in the Minister of Finance's opinion, the stability of the
financial systems is in serious and immediate danger as a result of
the situation in which the firm finds itself (the 'Minister of
Finance Powers').
There remains uncertainty regarding the ultimate nature and
scope of these powers, and any exercise of the resolution regime
powers by the N.V. Authorities or the Minister of Finance Powers
may adversely affect holders of NWM N.V.'s Eligible Liabilities
that fall within the scope of such powers.
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 future results,
financial condition and/or prospects of NWM N.V. Group.
NatWest Group is subject to Bank of England and PRA oversight in
respect of resolution, and NWM N.V. Group could be adversely
affected should the Bank of England in the future deem NatWest
Group's preparations to be inadequate.
NatWest Group is subject to regulatory oversight by the Bank of
England and the PRA, 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 was submitted to the PRA on 30
September 2021 and, in June 2022 the Bank of England's assessment
of NatWest Group's preparations did not identify any shortcomings,
deficiencies or substantive impediments but did highlight two areas
as requiring further enhancements. NatWest Group could be adversely
affected should future Bank of England assessments deem NatWest
Group's preparations to be inadequate.
NatWest Group has dedicated significant resources towards the
preparation of NatWest Group for a potential resolution scenario.
If any future Bank of England assessment identifies a significant
gap in NatWest Group's ability to achieve the resolvability
outcomes, or reveals that NatWest Group is not adequately prepared
to be resolved, or did not have adequate plans in place to meet
resolvability requirements, 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 have an impact on NatWest Group (and NWM N.V. Group)
as, depending on the Bank of England's assessment, potential action
may include, but is not limited to, resulting in restrictions on
maximum individual and aggregate exposures, a requirement to
dispose of specified assets, a requirement to change legal or
operational structure, a requirement to cease carrying out certain
activities and/or maintaining a specified amount of MREL. This may
also impact NatWest Group's (and NWM N.V. Group's) strategic plans
and may adversely affect NWM N.V. Group's financial condition or
may result in reputational damage and/or loss of investor
confidence. Additionally, DNB and SRB may exercise similar powers
if the recovery and resolution plans of NWM N.V. Group are not
satisfactory.
Climate and sustainability-related risks
NWM N.V. Group and its customers, suppliers and counterparties
face significant climate and sustainability-related risks, which
may adversely affect NWM N.V. Group.
Climate-related risks represent a source of systemic risk in the
global financial system. The financial impacts of climate-related
risks are expected to be widespread, exacerbating already existing
financial vulnerabilities and may disrupt the proper functioning of
financial markets and institutions, including NWM N.V. Group.
Financial and non-financial risks from climate change and
sustainability related risks can arise through physical and
transition risks. In addition, physical and transition risks can
trigger further losses, stemming directly or indirectly from legal
claims, litigation and conduct liability (referred to as 'liability
risk'). See also, 'NWM N.V. Group may be subject to potential
climate, environmental, human rights and other
sustainability-related litigation, enforcement proceedings,
investigations and conduct risk'.
There are significant uncertainties as to the location, extent
and timing of the manifestation of the physical risks of climate
change, such as more severe and frequent extreme weather events
(storms, flooding, subsidence, heat waves, droughts and wildfires),
rising sea levels, nature and biodiversity loss, declining food
yields, destruction of critical infrastructure, supply chain
disruption and resource scarcity. Damage to NWM N.V. Group
customers', suppliers' and counterparties' properties and
operations could disrupt business, impair asset values and
negatively impact the creditworthiness of customers leading to
increased default rates, delinquencies, write-offs and impairment
charges in NWM N.V. Group's portfolios. In addition, NWM N.V. Group
premises and operations, or those of its critical outsourced
functions may experience damage or disruption leading to increased
costs and adversely affect NWM N.V. Group's reputation, future
results, financial condition and/or prospects.
In October 2021, the UK Government published its Net Zero
Strategy which sets out how the UK will deliver on its commitment
to reach net-zero emissions by 2050 (defined as the point at which
greenhouse gas emissions from sources are equal to removals by
sinks as set out in Article 4 of the 2015 Paris Agreement). An
independent review of the government's approach to delivering its
net zero target to ensure it is pro-business and pro-growth was
published in January 2023. The timing, content and implementation
of the specific policies and proposals remain uncertain and are
subject to continuous changes and developments. The transition to a
net-zero economy across all sectors of the economy and markets in
which NWM N.V. Group operates will be required to meet the goals of
the UN Framework Convention on Climate Change (1994), the 2015
Paris Agreement, the UK's Net Zero Strategy, the Dutch Government's
commitment to cutting The Netherlands' carbon emissions with 95% by
2050, compared to 1990 levels, and the European Green Deal
initiatives, the EU Action Plan on Sustainable Finance and the
European Climate Pact. The impacts of the extensive social,
commercial, technological, policy and regulatory changes required
to achieve transition remain uncertain but are expected to be
significant, subject to continuous changes and developments and may
be disruptive across the global economy and markets, especially if
these changes do not occur in an orderly or timely manner or are
not effective in reducing emissions sufficiently. Some sectors such
as property, energy (including the oil and gas industry), mobility
( including land transport, aviation, and shipping industries and
the related manufacturing and infrastructure industry ) and food
(including the agriculture industry) are expected to be
particularly impacted. The timing and pace of the transition to a
net-zero economy is also uncertain, will depend on many factors and
uncertainties and may be near term, gradual and orderly or delayed,
rapid and disorderly, or a combination of these. There is also
growing attention on the need for a 'just transition' and 'energy
justice' - in recognition that the transition to net zero should
not disproportionally affect the most disadvantaged members of
society.
In addition, NWM N.V. Group and its customers, suppliers and
counterparties may face economic, financial and non-financial risks
arising from broader sustainability issues such as: (i) risks
relating to degradation of the environment, such as air, water and
land pollution, water stress, nature and biodiversity loss and
deforestation which may include for instance loss and/or decline of
the state of nature (including the state of biodiversity) ; (ii)
social matter-related risks (including violent conflicts,
geopolitical implications, impacts on indigenous people, migration,
human rights, diversity, equality and inclusion, the living wage,
fair taxation and value chains); and (iii) governance-related risks
(including board diversity, ethics, executive compensation and
management structure).
Financial institutions, including NWM N.V. Group, are directly
and indirectly exposed to multiple types of environmental risks
(including nature and biodiversity-related risks) through their
activities, including through the risk of default by clients. In
addition to safeguards and interventions that focus on reducing
negative impacts on the environment (including nature and
biodiversity), there is also a growing need to implement solutions
that focus on increasing positive impacts on environment (including
nature and biodiversity) through nature-based solutions. In 2021,
NatWest Group (including NWM N.V. Group) classified 'Biodiversity
and Nature Loss' as an emerging risk for NatWest Group (including
NWM N.V. Group) within its Risk Management Framework.
The Taskforce on Nature-Related Financial Disclosures (TNFD) is
a global, market-led initiative with the mission to develop and
deliver a risk management and disclosure framework for
organisations to report and act on evolving nature-related risks
and opportunities, with the ultimate aim of supporting a shift in
global financial flows away from nature-negative outcomes and
toward nature-positive outcomes. NatWest Group (including NWM N.V.
Group) is a member of the Informal Working Group 2020 of TNFD and
is a Forum Member since 2021.
Measuring the environmental related financial impacts (including
impacts on nature and biodiversity related financial impacts) as a
result of funding and financing activities as well as reporting on
these i s an evolving and complex area for the financial services
industry w hich requires collaborative approaches with partners,
stakeholders, peers and public sector bodies to help measure and
mitigate the negative impacts of the activities which NatWest Group
(including NWM N.V. Group) finances on the environment (including
nature and biodiversity), as well as supporting the growing sector
of nature-based solutions and habitat restoration and biodiversity
markets. NatWest Group (including NWM N.V. Group) is in the early
stages of developing its approach to assess, manage and mitigate
environmental risks and by using emerging industry guidance such as
the TNFD beta framework, NatWest Group (including NWM N.V. Group)
is seeking to further its understanding of how NatWest Group's
(including NWM N.V. Group's) business activities impact nature, the
dependencies NWM N.V. Group and its customers have on nature, and
the risks and opportunities nature can generate.
There is also increased scrutiny from NWM N.V. Group's
employees, investors, customers, counterparties (including its
suppliers), communities, regulators and other stakeholders
regarding how businesses address social issues, including tackling
inequality, working conditions, workplace health, safety and
wellbeing, diversity and inclusion, data protection and management,
workforce management, human rights and supply chain management
which may impact NWM N.V. Group's employees, suppliers, customers,
and their business activities or the communities in which they
operate.
- These climate and sustainability-related risks may:
- adversely affect economic activity, asset pricing and
valuations of financial instruments and, in turn, the wider
financial system;
- impact economic activities directly (for example through lower
corporate profitability or the devaluation of assets) or indirectly
(for example through macro-financial changes);
- also affect the viability or resilience of business models
over the medium to longer term, particularly those business models
most vulnerable to climate and sustainability-related risks;
- trigger further losses stemming directly or indirectly from
legal claims (liability risks) and reputational damage as a result
of the public, customers, counterparties, suppliers and/or
investors associating NWM N.V. Group or its customers with adverse
climate and sustainability-related issues;
- intersect with and add further complexity and challenge to
contributing to achieving NatWest Group's purpose-led strategy
including climate ambitions and targets;
- be drivers of several different risk categories simultaneously
and may exacerbate existing risks, including credit risk,
operational risk ( including business continuity), market risk
(both traded and non-traded), liquidity and funding risk (for
example, net cash outflows or depletion of liquidity buffers),
pension risk and conduct risk; and
- if combined, may have a greater adverse effect on NWM N.V.
Group's reputation, future results, financial condition and/or
prospects.
If NWM N.V. Group fails in a timely manner to identify and
address climate and sustainability-related risks and opportunities
and changing regulatory and market expectations, or to
appropriately identify, measure, manage and mitigate climate and
sustainability-related physical, transition and liability risks and
opportunities that NWM N.V. Group, its customers, counterparties
and suppliers face, this may adversely affect NWM N.V. Group's
reputation, future results, financial condition and/or
prospects.
NatWest Group's climate change related strategy, ambitions,
targets and transition plan entail significant execution and
reputational risk and are unlikely to be achieved without
significant and timely government policy, technology and customer
behavioural changes .
In February 2020, NatWest Group announced its ambition to become
a leading bank in the UK helping to address the climate challenge.
As part of the implementation of its climate ambitions, at NatWest
Group's Annual General Meeting in April 2022, ordinary shareholders
passed an advisory 'Say on Climate' resolution endorsing NatWest
Group's previously announced strategy to address climate change,
including its ambitions to at least halve the climate impact of its
financing activity by 2030, achieve alignment with the 2015 Paris
Agreement and reach net zero by 2050 across its financed emissions,
assets under management and operational value chain.
Furthermore, as part of its efforts to support the transition to
a net-zero economy, NatWest Group has announced its plans to (i)
stop lending and underwriting to companies with more than 15% of
activities related to thermal and lignite coal, unless they had a
Credible Transition Plan in line with the 2015 Paris Agreement in
place by end of 2021; phase out of thermal and lignite coal for UK
and non-UK customers who have UK coal production, coal-fired
generation and coal-related infrastructure by 1 October 2024, with
a full global phase out by 1 January 2030; (ii) to stop lending and
underwriting to major oil and gas producers unless they had a
Credible Transition Plan aligned with the 2015 Paris Agreement in
place by the end of 2021; (iii) from February 2023 stop providing
reserve based lending specifically for the purpose of financing oil
and gas exploration, extraction and production for new customers,
and, after the 31 December 2025 not to renew, refinance or extend
existing reserve- based lending specifically for the purpose of
financing oil and gas exploration, extraction and production; and
(iv) stop providing reserve-based lending and borrowing base
financing to upstream Oil and Gas companies specifically for the
purpose of financing upstream assets located in Arctic or Antarctic
Waters.
In December 2022, NatWest Group published its science-based
targets validated by Science Based Target Initiative (SBTi) for its
own operational footprint and for 79% of its loans and investments
(debt securities and equity shares) on its 2019 balance sheet, at
sector level.
NatWest Group has also announced and in the future it may also
announce other climate ambitions and targets which support its
overarching strategy to address climate change.
Making the changes necessary to contribute to achieving NatWest
Group's strategy on addressing climate change, including achieving
NatWest Group's climate ambitions and targets and executing its
transition plan may adversely affect NWM N.V. Group's business and
operations and will require reductions to its financed emissions
and to its exposure to customers that do not align with a
transition to net zero or do not have a credible transition plan in
place. Increases in lending and financing activities may wholly or
partially offset some or all these reductions, which may increase
the extent of changes and reductions necessary. It is anticipated
that achieving these reductions, together with the active
management of climate and sustainability-related risks and other
regulatory, policy and market changes, is likely to necessitate
material and accelerated changes to NWM N.V. Group's business,
operating model, its existing exposures and the products and
services NWM N.V. Group provides to its customers (potentially on
accelerated timescales) which may adversely affect NWM N.V. Group's
ability to achieve its financial targets and generate sustainable
returns.
NatWest Group (including NWM N.V. Group) also needs to ensure
that its strategy and business model adapt to changing national and
international standards, industry and scientific practices,
regulatory requirements and market expectations regarding climate
change, which remain under continuous development and are subject
to different interpretations. There can be no assurance that these
standards, practices, requirements and expectations will not be
interpreted differently than what was the understanding of NatWest
Group (including NWM N.V. Group) when defining its climate-related
ambitions and targets or change in a manner that substantially
increases the cost or effort for NatWest Group (including NWM N.V.
Group) to achieve such ambitions and targets. In addition, NatWest
Group's ambitions and targets may prove to be considerably more
difficult or even impossible to achieve under such changing
circumstances. This may be exacerbated if NatWest Group (including
NWM N.V. Group) chooses or is required to accelerate its
climate-related ambitions or targets as a result of (among other
things) UK or international regulatory developments or stakeholder
expectations.
NWM N.V. Group's ability to contribute to achieving NatWest
Group's strategy to address climate change, including achieving its
climate ambitions and targets, will depend to a large extent on
many factors and uncertainties beyond NatWest Group's (including
NWM N.V. Group's) control. These include the extent and pace of
climate change, including the timing and manifestation of physical
and transition risks, the macro-economic environment, the timely
implementation and integration of adequate government policies, the
effectiveness of actions of governments, legislators, regulators,
businesses, investors, customers and other stakeholders to mitigate
the impact of climate and sustainability-related risks, changes in
customer behaviour and demand, changes in the available technology
for mitigation, the roll-out of low carbon infrastructure and the
availability of accurate, verifiable, reliable, consistent and
comparable data. See also, 'There are significant challenges in
accessing reliable, verifiable and comparable climate and other
sustainability-related data due to availability, quality and other
limitations, which contribute to the substantial uncertainties in
accurately modelling and reporting on climate and sustainability
information, as well as making appropriate important internal
decisions'.
These external factors and other uncertainties will make it
challenging for NatWest Group to meet its climate ambitions and
targets and for NWM N.V. Group to contribute to them and there is a
significant risk that all or some of these will not be
achieved.
Any delay or failure by NWM N.V. Group to contribute to setting,
making progress against or meeting NatWest Group's climate-related
ambitions and targets may adversely affect NWM N.V. Group, its
reputation, future results, financial condition and/or prospects
and may increase the climate and sustainability-related risks NWM
N.V. Group faces.
There are significant limitations related to accessing reliable,
verifiable and comparable climate and other sustainability-related
data, including as a result of lack of standardisation, consistency
and completeness which, alongside other factors, contribute to
substantial uncertainties in accurately modelling and reporting on
climate and sustainability information, as well as making
appropriate important internal decisions.
Meaningful reporting of climate and sustainability-related risks
and opportunities and their potential impacts and related metrics
depends on access to accurate, reliable, consistent and comparable
climate and sustainability-related data from counterparties or
customers. Data may not be generally available or, if available,
may not be accurate, verifiable, auditable, reliable, consistent,
or comparable. Any failure of NWM N.V. Group to incorporate climate
and/or sustainability-related factors into its counterparty and
customer data sourcing and accompanying analytics, or to collect or
develop accurate, verifiable, auditable, reliable, consistent and
comparable counterparty and customer data, may adversely affect NWM
N.V. Group's ability to prepare meaningful reporting of climate and
sustainability-related risks and opportunities, and it may
adversely affect NWM N.V. Group's regulatory compliance,
reputation, business and its competitive position.
In the absence of other sources, reporting of financed emissions
by financial institutions, including NWM N.V. Group, is necessarily
based on aggregated information developed by third parties that may
be prepared in an inconsistent way using different methodologies,
interpretations, or assumptions. NWM N.V. Group's climate and
sustainability-related disclosures use a greater number and level
of assumptions and estimates than many of its financial
disclosures. These assumptions and estimates are highly likely to
change over time, and, when coupled with the longer timeframes used
in these climate and sustainability-related disclosures, make any
assessment of materiality inherently uncertain.
In particular, in the absence of actual emissions monitoring and
measurement, emissions estimates are based on industry and other
assumptions that may not be accurate for a given counterparty or
customer. There may also be data gaps that are filled using proxy
data, such as sectoral averages, again developed in different ways.
As a result, NWM N.V. Group's climate and sustainability-related
disclosures may be amended, updated or restated in the future as
the quality and completeness of NWM N.V. Group's data and
methodologies continue to improve. These data quality challenges,
gaps and limitations could have a material impact on NWM N.V.
Group's ability to make effective business decisions about climate
risks and opportunities, including risk management decisions, to
comply with disclosure requirements and to monitor and report
progress in meeting ambitions and targets.
Significant risks, uncertainties and variables are inherent in
the assessment, measurement and mitigation of climate-related
risks. These include data quality gaps and limitations mentioned
above, as well as the pace at which climate science, greenhouse gas
accounting standards and various emissions reduction solutions
develop. In addition, there is significant uncertainty about how
climate change and the transition to a net-zero economy will unfold
over the coming years and decades and how and when climate-related
risks will manifest. These timeframes are considerably longer than
NWM N.V. Group's historical strategic, financial, resilience and
investment planning horizons.
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 and/or quality of historical testing capabilities, 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
which involves a number of risks and uncertainties, for
example:
- climate scenarios are not predictions of what is likely to
happen or what NatWest Group would like to happen, rather they
explore the possible implications of different judgments and
assumptions by considering a series of scenarios;
- climate scenarios do not provide a comprehensive description of all possible future outcomes;
- lack of specialist expertise in banks such that NWM N.V. Group
needs to rely on third party advice, modelling, and data which is
also subject to many limitations and uncertainties;
- immaturity of modelling of and data on 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;
- the assumptions will be continually evolving with more
data/information which may affect the baselines for comparability
across reporting periods and impact internal and external
verification processes; and
- the pace of the development of the methodologies across
different sectors may be different and therefore it may be
challenging to report on the whole balance sheet with regard to
emissions.
Accordingly, these risks and uncertainties coupled with
significantly longer timeframes make the outputs of climate-related
risk modelling, including emission reduction targets and pathways,
inherently more uncertain than outputs modelled for traditional
financial planning cycles based on historical financial
information. Furthermore, there is a lack of scientific, industry
and regulatory consensus regarding the appropriate metrics,
methodologies, modelling and standardised reporting to enable the
assessment of the location, acuteness, and severity of
environmental risks (including nature and biodiversity-related
risks) and the monitoring and mitigation of these risks in the
economy and financial system.
Capabilities within NWM N.V. Group to appropriately assess,
model, report and manage climate and sustainability-related risks
and impacts and the suitability of the assumptions required to
model and manage climate and sustainability-related risks
appropriately are developing. The development of NWM N.V. Group's
capabilities to assess, model, report and manage the impacts of
climate change and broader environmental risk (including nature and
biodiversity-related risks) is in its early stages. Even when those
capabilities are developed, the high level of uncertainty regarding
any assumptions modelled, the highly subjective nature of risk
measurement and mitigation techniques, incorrect or inadequate
assumptions and judgments and data quality gaps and limitations may
lead to inadequate risk management information and frameworks, or
ineffective business adaptation or mitigation strategies, which may
adversely affect NWM N.V. Group's regulatory compliance,
reputation, future results, financial condition and/or
prospects.
A failure to implement effective climate change resilient
governance, procedures, systems and controls in compliance with
legal and regulatory expectations to manage climate and
sustainability-related risks and opportunities could adversely
affect NWM N.V. Group's ability to manage those risks.
The prudential regulation of climate-related risks is an
important driver in how NWM N.V. Group develops its risk appetite
for financing activities or engaging with counterparties.
Legislative and regulatory authorities are publishing expectations
as to how banks should prudently manage and transparently disclose
climate-related and environmental risks under prudential rules.
European Union and the Netherlands
NWM N.V. Group is subject to regulatory developments in the EU
and The Netherlands. In this regard, legislative and regulatory
authorities in the EU and The Netherlands are publishing
expectations as to how financial institutions should prudently
manage and transparently disclose climate-related and environmental
risks under prudential rules.
In November 2020, the European Central Bank ('ECB') published
its 'Guide on climate-related and environmental risks' ('ECB
Guide') which laid down the ECB's expectations for each supervised
entity in relation to climate-related and environmental risks. All
banks under the ECB's supervision will need to meet all supervisory
expectations on climate and environmental risks outlined in the ECB
Guide, including full integration in the Internal Capital Adequacy
Assessment Process and stress testing, by the end of 2024. In June
2021, the European Banking Authority ('EBA') published its Report
on Environmental, Social and Governance risk management and
supervision and in December 2021 the DNB published a paper titled
'Towards a sustainable balance' which aligns with the ECB
publication of November 2021 on 'The state of climate and
environmental risk management in the banking sector'. Both
documents highlight the prudential view and expectations towards
financial institutions regarding managing of climate, environmental
and social risks as part of their strategy, governance, risk
management and reporting practices and are driving the supervisory
dialogue. In 2022, the ECB launched the thematic review, which
involved conducting deep dives into institutions' climate-related
and environmental risk strategies, as well as their governance and
risks management frameworks and processes. In November 2022, the
ECB published the results of its 'Good practices for
climate-related and environmental risk management' which shares
observations and good practices illustrating the different ways
that significant institutions can align their practices with the
supervisory expectations set out in the ECB Guide.
In April 2020, the DNB published its 'Good Practices on
Integration of Climate Risks for Banks' document in which it sets
out the supervisory expectation that banks (including NWM N.V.)
should incorporate climate-related risks into their governance and
risk management arrangements in line with the principle of
proportionality. In order to achieve this, the DNB provides several
non-binding 'good practices' that banks could adhere to,
including:
- incorporating an organisation-wide strategic approach toward
climate-related risks, along with the integration of
climate-related considerations in policy framework;
- embedding the identification, assessment, mitigation and
monitoring of climate change related risks in banks' risk
management framework; and
- disclosing the carbon footprint of lending and investment portfolio in the annual report.
In October 2022, the DNB published a consultation to improve and
increase its guidance on integration and management of climate
risk. In addition, the DNB has confirmed that it will perform more
stress tests to assess the impact of climate change on the
financial sector. On 8 July 2022, the ECB published the results of
its supervisory stress test which show that banks do not yet
sufficiently incorporate climate risk into their stress-testing
frameworks and internal models, despite some progress, and banks
must urgently step up efforts to measure and manage climate risk,
closing the current data gaps and adopting good practices that are
already present in the sector according to the ECB.
In June 2020, the Dutch Authority for the Financial Markets in
the Netherlands (Stichting Autoriteit Financiële Markten ('AFM'))
published its position paper on sustainability. In this position
paper the AFM describes what it expects from market parties when it
comes to sustainability and how the AFM will be supervising this.
The AFM confirms, amongst others, that:
- a sustainable economy and society is a supervisory priority of
the AFM and is increasingly becoming an integral part of its
supervision strategy; and
- it expects market participants to integrate sustainability
aspects in a responsible and careful manner in their financial
products and services.
In order to ensure that the same high level of supervisory
standards is applied consistently among the institutions that DNB
supervise, to raise awareness of climate-related and environmental
risks, and to better prepare Less Significant Institutions (LSIs) -
such as NWM N.V. - for the future, DNB stated its intention to use
the ECB Guide as a basis for its supervisory engagements with LSIs
from 2021 in a proportionate manner. On 2 February 2021, the DNB
requested the Dutch financial institutions to do a self-assessment
on climate-related, environmental and social risks, indicating that
these risks will feature in prudential supervision with increasing
prominence going forward. The results of the ECB stress test
published on 8 July 2022 further increased the focus on these
risks.
In addition, NWM N.V. Group and its branches will continue to
be, or will potentially be, subject to an increasing array of
EU/EEA climate and sustainability-related legal and regulatory
requirements, such as the EU Taxonomy, the ECB Guide, the EU
Corporate Sustainability Reporting Directive, the EU Corporate
Sustainability Due Diligence Directive, the EU Green Bond Standard,
the EBA's Pillar 3 disclosures on ESG risks and other legal and
regulatory requirements.
The UK
In April 2019, the PRA published a supervisory statement ('SS
3/19') with particular focus on the management of financial risks
from climate change with respect to governance, risk management,
scenario analysis and disclosures. In response to the PRA's SS
3/19, following the submission of initial plans in October 2019, on
8 October 2020 NatWest Group provided the PRA with an update to its
original plan, noting that the COVID-19 pandemic had disrupted some
elements of its original plan and, as a result, the updated plan
would require additional operating cycles reaching into 2022 and
beyond to prove embedding. Throughout 2022, NatWest Group provided
the PRA with updates on how it had addressed the commitments made
in its October 2020 plan, noting the delivery of a first
generation, largely qualitative in nature, approach to the
supervisory requirements. In 2022, the PRA has also started
actively supervising firms against their supervisory expectations,
and it issued another 'Dear CEO letter' providing a summary of
capabilities, which the PRA would expect firms to be able to
demonstrate, setting out thematic observations on firms' levels of
embeddedness, and providing examples of effective practices
identified.
In June 2021, the Bank of England launched its 2021 Biennial
Exploratory Scenario ('2021 CBES') 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 three climate scenarios. NatWest Group delivered its
first 2021 CBES submission to the PRA in October 2021 and its
submission to the second phase of the 2021 CBES exercise in the
first quarter of 2022. In May 2022, the PRA published the results
of the 2021 CBES which has shown that UK banks, including NatWest
Group (including NWM N.V. Group), need to do more to understand and
manage their exposure to climate risks and that the lack of
available data on corporates' current emissions and future
transition plans is a collective issue affecting all participating
firms. In July 2022, the participating banks in the 2021 CBES
exercise were invited to discuss methodologies and challenges with
regards to climate risk scenario analysis.
In October 2022, the Bank of England and the PRA held a
conference to facilitate discussion on the complex issues
associated with adjusting the capital framework to take account of
climate-related financial risks with the aim of providing more
guidance on its approach to climate and capital by the end of 2022.
The Bank of England does not think capital frameworks should be
used to address the causes of climate change. However, as set out
in the PRA's Climate Change Adaptation Report 2021 , and, as with
any other risk, it does think the capital framework could be a
useful tool within the broader regulatory frameworks to ensure that
PRA-regulated firms are resilient to climate risks.
Any failure of NatWest Group (including NWM N.V. Group) to fully
and timely embed climate related risks into its risk management
practices and framework to appropriately identify, measure, manage
and mitigate the various climate- related physical and transition
risks and apply the appropriate product governance in line with
applicable legal and regulatory requirements and expectations, may
adversely affect NWM N.V. Group's regulatory compliance, prudential
capital requirements, liquidity position, reputation, future
results, financial condition and/or prospects.
Climate and sustainability-related disclosures are a rapidly
evolving area and increasingly expose NWM N.V. Group to risk in the
face of legal and regulatory expectations, regulatory enforcement
and class action risk. NatWest Group and its subsidiaries
(including NWM N.V. Group) currently are, and in the future will,
be subject to increasing entity-wide climate-related and other
non-financial disclosure requirements.
In the UK, as from February 2022, NatWest Group (the ultimate
parent company of NWM N.V. Group) is required to provide enhanced
climate-related disclosures consistent with the Task Force on
Climate Related Financial Disclosures ('TCFD') recommendations to
comply with the FCA Policy Statement on the Listing Rules (PS
20/17) that require commercial companies with a UK premium listing
- such as NatWest Group to make climate-related disclosures,
consistent with TCFD, on a 'comply or explain' basis.
By its Policy Statement 'Enhancing climate-related disclosures
by standard listed companies' (PS 21/23), the FCA has confirmed its
final policy position set forth in PS 20/17, extended the scope of
issuers that are subject to the new Listing Rules and added
guidance provisions on transition plan disclosure (for issuers in
scope of both the PS 20/17 and the new PS 21/23 rules). NWM N.V.
Group is currently not in scope of the FCA Policy Statement (PS
20/17) or Policy Statement (PS21/23) and therefore, it is not
required to publish climate-related disclosures consistent with the
TCFD at the company level. As required by the FCA Policy Statement
(PS 20/17) and Policy Statement (PS 21/23), NatWest Group publishes
climate-related disclosures that it believes are consistent with
the TCFD for the consolidated group, including NWM N.V. Group.
In addition, as of 5 April 2022, NatWest Group is also required
to prepare mandatory climate-related financial disclosures pursuant
to The Companies (Strategic Report) (Climate-related Financial
Disclosure) Regulations 2022.
Furthermore, in October 2022, the FCA published a Consultation
Paper on 'Sustainability Disclosure Requirements (SDR) and
investment labels' (CP 22/20) which proposes that the FCA will
require all regulated firms to ensure that from June 2023 the
naming and marketing of financial products and services in the UK
is clear, fair and not misleading, and consistent with the
sustainability profile of the products or services, i.e.
proportionate and not exaggerated.
Misrepresenting or over-emphasising the extent to which an
investment, strategy or other type of product takes into account
environmentally friendly, sustainable or ethical features and
concerns, using misleading labels and language in relation to such
products and/or omitting material information about NWM N.V.
Group's contribution to the climate crisis (including its direct or
indirect contribution to greenhouse gas emissions), or other
sustainability related issues could potentially result in
complaints, regulatory intervention, claims and/or litigation and
reputational damage.
Any failure of NWM N.V. Group to implement robust and effective
climate and sustainability-related disclosure governance and to
embed appropriate product governance policies, procedures and
controls to make accurate public statements and claims about how
environmentally friendly, sustainable or ethical NWM N.V. Group's
products and services are and to apply these in line with
applicable legal and regulatory requirements and expectations, may
adversely affect NWM N.V. Group's regulatory compliance and
reputation and could give rise to litigation.
Increasing levels of climate, environmental, human rights and
other sustainability-related laws, regulation and oversight which
are constantly evolving may adversely affect NWM N.V. Group.
There are an increasing number of EU, UK, Dutch and other
regulatory and legislative initiatives to address issues around
climate change (including promoting the transition to a net-zero
economy), environment (including nature and biodiversity), human
rights and other sustainability-related risks and opportunities.
The DNB and the AFM are also increasingly focused on climate change
and sustainability and have announced good practices and
supervisory expectations relating to these topics. As a result, an
increasing number of laws, regulations and legislative actions,
including proposals, guidance, policy and regulatory initiatives
many of which have been introduced or amended recently and are
subject to further changes, is likely to affect the financial
sector and the wider economy.
Many of these initiatives are focused on developing standardised
definitions and criteria for green and sustainable criteria of
assets and liabilities, integrating climate change and
sustainability into decision-making and customers' access to green
and sustainable financial products and services which may have a
significant impact on the services provided by NWM N.V. Group and
its subsidiaries, and its associated credit, market and financial
risk profile. They could also impact NWM N.V. Group's recognition
of its climate and sustainable funding and financing activity and
may adversely affect NWM N.V. Group's ability to achieve its
strategy and climate and sustainable funding and financing
ambitions.
There is a growing divergence between UK, EU/EEA, Dutch and US
climate and sustainability-related legal and regulatory
requirements which may result in NWM N.V. Group becoming subject to
legal and regulatory expectations different from the ones
applicable to NatWest Group (including NWM Group) and/or any of its
subsidiaries and/or NWM N.V. Group not meeting regulatory
requirements, investors' expectations and may increase the cost of
doing business (including increased operating costs) and
contentious regulatory and litigation risk.
NatWest Group (including NWM N.V. Group) is also participating
in various voluntary carbon reporting and other standard setting
initiatives for disclosing climate and sustainability-related
information, many of which have differing objectives and
methodologies and are at different stages of development in terms
of how they apply to financial institutions.
Compliance with these developing and evolving climate and
sustainability-related legal and regulatory requirements is likely
to require NWM N.V. Group to implement significant changes to its
business models, products and other governance, internal controls
over financial reporting, disclosure controls and procedures,
modelling capability and risk management systems, which may
increase the cost of doing business, and entail additional change
risk and increased compliance, regulatory sanctions and litigation
(including settlements) costs .
Failure to implement and comply with these legal and regulatory
requirements or emerging best practice expectations may have a
material adverse effect on NWM N.V. Group's regulatory compliance
and may result in regulatory sanctions, reputational damage and
investor disapproval each of which may adversely affect NWM N.V.
Group's future results, financial condition and/or prospects.
NWM N.V. Group may be subject to potential climate,
environmental, human rights and other sustainability-related
litigation, enforcement proceedings, investigations and conduct
risk.
Due to increasing new climate and sustainability-related
jurisprudence, laws and regulations in the UK, European and other
jurisdictions, growing demand from investors and customers for
environmentally sustainable products and services, and regulatory
scrutiny, financial institutions, including NWM N.V. Group, may
through their business activities face increasing litigation,
conduct, enforcement and contract liability risks related to
climate change, environmental degradation, human rights violations
and other social, governance and sustainability-related issues.
These risks may arise, for example, from claims pertaining to:
(i) failure to meet obligations, targets or commitments relating
to, or to disclose accurately, or provide updates on material
climate and/or sustainability-related risks, or otherwise provide
fair, balanced and appropriate disclosure to investors, customers,
counterparties and other stakeholders; (ii) conduct, mis-selling
and customer protection claims, including claims which may relate
to alleged insufficient product understanding, unsuitable product
offering and /or reliance upon information provided by NWM N.V.
Group or claims alleging unfair pricing of climate-related
products, for example in relation to products where limited
liquidity or reliable market data exists for benchmarking purposes
or which may be impacted by future climate policy uncertainty or
other factors; (iii) marketing that portrays products, securities,
activities or policies as having positive climate, environmental or
sustainable outcomes to an extent that may not be the case, or may
not adequately be qualified and/or omits material information about
NWM N.V. Group's contribution to the climate crisis and/or its
direct / indirect contribution to greenhouse gas emissions or other
sustainability-related issues; (iv) damages claims under various
tort theories, including common law public nuisance claims, or
negligent mismanagement of physical and/or transition risks; (v)
alleged violations of officers', directors' and other fiduciaries'
duties, for example by financing various carbon-intensive,
environmentally harmful or otherwise highly exposed assets,
companies, and industries; (vi) changes in the understanding of
what constitutes positive climate, environmental or sustainable
outcomes as a result of developing climate science, leading to
discrepancy between current product offerings and investor and/or
market and/or broader stakeholder expectations; (vii) any
weaknesses or failures in specific systems or processes associated
particularly with climate, environmental or sustainability linked
products, and/or human rights due diligence, including any failure
in the timely implementation, onboarding and/or updating of such
systems or processes; or (viii) counterparties, collaborators,
customers to whom NatWest Group (including NWM N.V. Group) provides
services and third parties in NWM N.V. Group's value chain who act,
or fail to act, or undertake due diligence, or apply appropriate
risk management and product governance in a manner that may
adversely affect NatWest Group's (including NWM N.V. Group)
reputation or sustainability credentials.
Furthermore, there is a risk that shareholders, campaign groups,
customers and special interest groups could seek to take legal
action against NWM N.V. Group for financing or contributing to
climate change, environmental degradation and human rights
violations and for not supporting the principles of 'just
transition' (i.e. maximising the social benefits of the transition,
mitigating the social risks of the transition, empowering those
affected by the change, anticipating future shifts to address
issues up front and mobilising investments from the public and
private sectors).
There is a risk that as environmental and climate science
develop and societal understanding of these issues increases and
deepens, courts, regulators and enforcement authorities may apply
the then current understandings of environmental, climate and
broader sustainability-related matters retrospectively when
assessing claims about historical conduct or dealings of financial
institutions, including NWM N.V. Group. See also, 'NWM N.V. Group
and NWM Plc are exposed to the risk of 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
N.V. Group'.
These potential litigation, conduct, enforcement and contract
liability risks may have a material adverse effect on NatWest
Group's ability to achieve its strategy, including its climate
ambition, and may adversely affect NWM N.V. Group's reputation,
future results, financial condition and/or prospects.
A reduction in the ESG ratings of NatWest Group or NWM Group
(including NWM N.V. Group) could have a negative impact on NatWest
Group's or NWM Group's (including NWM N.V. Group's) reputation and
on investors' risk appetite and customers' willingness to deal with
NatWest Group, NWM Group or NWM N.V. Group.
ESG ratings from agencies and data providers which rate how
NatWest Group or NWM Group (including NWM N.V. Group) manage
environmental, social and governance risks are increasingly
influencing investment decisions pertaining to NatWest Group's, NWM
Group's and/or NWM N.V. Group's and/or their subsidiaries'
securities or being used as a basis to label financial products and
services as environmentally friendly or sustainable. ESG ratings
are (i) unsolicited; (ii) subject to the assessment and
interpretation by the ESG rating agencies; (iii) provided without
warranty; (iv) not a sponsorship, endorsement, or promotion of
NatWest Group (including NWM N.V. Group) by the relevant rating
agency; and (v) may depend on many factors some of which are beyond
NatWest Group's and NWM N.V. Group's control (e.g. any change in
rating methodology). In addition, NWM N.V. Group offers and sells
products and services to customers and counterparties based
exclusively or largely on a rating by an unregulated ESG rating
agency. ESG rating agencies, at this stage, are not subject to any
specific regulatory or other regime or oversight (although there
are proposals by regulators in different jurisdictions to regulate
rating agencies and data providers). Regulators have expressed
concern that harm may arise from potential conflicts of interest
within ESG rating and review or opinion providers and there is a
lack of transparency in methodologies and data points, which
renders ratings and reviews incomparable between agencies or
providers. There is currently no market consensus on what precise
attributes are required for a particular asset to be classified as
'ESG'. Any reduction in the ESG ratings of NatWest Group (including
NWM N.V. Group), or a regulatory sanction or enforcement action
involving an ESG rating agency used by a NWM N.V. Group entity,
could have a negative impact on NWM N.V. Group's reputation, could
influence investors' risk appetite for NWM N.V. Group's and/or its
subsidiaries' securities, particularly ESG securities, could
increase the cost of issuing securities for NWM N.V. Group and/or
its subsidiaries and could affect a customer's willingness to deal
with NWM N.V. Group.
Operational and IT resilience risk
Operational risks (including reliance on third party suppliers
and outsourcing of certain activities) are inherent in NWM N.V.
Group's businesses.
Operational risk is the risk of loss or disruption resulting
from inadequate or failed internal processes, procedures, people or
systems, or from external events, including legal and regulatory
risks. NWM N.V. Group operates in a number of countries, offering a
diverse range of products and services supported directly or
indirectly by third party suppliers. As a result, operational risks
or losses can arise from a number of internal or external factors
(including, for example, payment errors or financial crime and
fraud), for which there is continued scrutiny by third parties on
NWM Group's compliance with financial crime requirements; see 'NWM
N.V. Group and NWM Plc are exposed to the risk of 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 N.V. Group'). These risks are also present
when NWM N.V. Group relies on NatWest Group, NWM Group, critical
service providers (suppliers) or vendors to provide services to it
or its clients, as is increasingly the case as NWM N.V. Group
outsources certain activities, including with respect to the
implementation of new technologies, innovation and responding to
regulatory and market changes. Furthermore, NWM N.V. is subject to
the EBA guidelines on outsourcing arrangements. If the systems and
services provided by NatWest Group, NWM Group or any third party do
not comply with such EBA requirements, there is a risk of increase
in operational and compliance costs, which may negatively affect
NWM N.V. Group's business continuity and reputation.
Operational risks continue to be heightened as a result of the
implementation of NatWest Group's purpose-led strategy, and the
organisational and operational changes involved, including NatWest
Group's phased withdrawal from RoI, NatWest Group's current
cost-controlling measures, the NWM Refocusing, the creation of the
C&I business segment of which NWM forms part, the progression
towards working as One Bank across NatWest Group to serve customers
and conditions affecting the financial services industry generally
(including macro-economic and other geo-political developments) as
well as 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 N.V. Group will evolve to best serve its customers. Any of the
above may exacerbate operational risks including NWM N.V. Group's
ability to maintain effective internal controls and governance
frameworks.
In recent years, NWM Group (including NWM N.V. 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. In addition, NWM N.V.
Group has materially increased its dependence on NWM Plc for
numerous critical services similar to those outlined above and for
certain sales activities, which due to their complexities could
potentially trigger regulatory, tax, reputational, financial crime
and conduct risks. A failure by NatWest Bank Plc or NWM Plc to
adequately supply these services may expose NWM N.V. Group to
critical business failure risk, increased costs and other
liabilities. These and any increases in the cost of these services
may adversely affect NWM N.V. Group's future results, financial
condition and/or prospects.
The effective management of operational risks is critical to
meeting customer service expectations and retaining and attracting
client business. Although NWM N.V. 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
N.V. Group. Ineffective management of such risks may adversely
affect NWM N.V. Group's future results, financial condition and/or
prospects.
NWM N.V. Group is subject to increasingly sophisticated and
frequent cyberattacks.
NWM N.V. Group experiences a constant threat from cyberattacks
across the entire NatWest Group (including NWM N.V. Group) and
against NatWest Group and NWM N.V. Group's supply chain,
reinforcing the importance of due diligence of close working
relationship with, the third parties on which NWM N.V. Group
relies. NWM N.V. 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
N.V. Group is required to continue to invest in additional
capability designed to defend against emerging threats. In 2022,
NWM N.V. Group and its supply chain were subjected to a small
number of Distributed Denial of Service ('DDOS') and ransomware
attacks, which are a pervasive and significant threat to the
financial services industry. The focus is to manage the impact of
the attacks and sustain availability of services for NWM N.V.
Group's customers. NWM N.V. 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 N.V. Group's IT systems or NWM N.V.'s third
party providers. NWM N.V. Group has information and cyber security
controls in place to seek to minimise the impacts of any such
attacks, 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 the potential negative impact of any such
attacks from occurring. See also, '- 'NWM N.V. Group's operations
are highly dependent on its complex IT systems, and any IT failure
could adversely affect NWM N.V. Group'.
Any failure in NWM Group's (and therefore NWM N.V. Group's) or
third-party providers cybersecurity policies, procedures or
controls, may result in significant financial losses, major
business disruption, inability to deliver customer services, or
loss of data or systems 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 N.V. Group's ability to retain and
attract clients. Regulators in the UK, US, Europe and Asia continue
to recognise cybersecurity as an important 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 reporting or notification of them, as
appropriate. Cyberattacks on NWM N.V. Group's counterparties may
also damage NWM N.V. Group's operations.
Additionally, third parties may also fraudulently attempt to
induce employees, customers, third party providers or other users
who have access to NWM N.V. Group's systems to disclose sensitive
information in order to gain access to NWM N.V. Group's data or
systems or that of NWM N.V. 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 N.V. Group's
employees or third parties, including third party providers, or may
result from technological failure. Any of the above may have an
adverse effect on NWM N.V. Group's reputation, future results,
financial condition and/or prospects.
NWM N.V. Group expects greater regulatory engagement,
supervision and enforcement to continue at a high level in relation
to its overall resilience to withstand IT and IT-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 may adversely affect NWM
N.V. Group's future results, financial condition and/or prospects.
Due to NWM N.V. Group's reliance on technology and the increasing
sophistication, frequency and impact of cyberattacks, such attacks
may adversely affect NWM N.V. Group.
In accordance with the Data Protection Act 2018 and the European
Union Withdrawal Act 2018, the Data Protection, Privacy and
Electronic Communications (Amendments Etc.) (EU Exit) Regulations
2019, as amended by the Data Protection, Privacy and Electronic
Communications (Amendments Etc.) (EU Exit) Regulations 2020 ('UK
Data Protection Framework'), NWM N.V. Group is required to ensure
it implements timely appropriate and effective organisational and
technological safeguards against unauthorised or unlawful access to
the data of NWM N.V. Group, its clients and its employees. In order
to meet this requirement, NWM N.V. 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 N.V. Group interacts. A failure to
monitor and manage data in accordance with the UK Data Protection
Framework, the EU GDPR and EBA requirements of the applicable
legislation may result in financial losses, regulatory fines and
investigations and associated reputational damage. In addition,
whilst NWM N.V. Group takes measures to prevent, detect and
minimize attacks, NWM N.V. Group's systems, and those third-party
providers, are subject to frequent cyberattacks.
NWM N.V. Group operations and strategy are highly dependent on
the accuracy and effective use of data.
NWM N.V. Group relies on the effective use of accurate data to
support, monitor, evaluate, manage and enhance its operations and
deliver its strategy. Investment is being made in data tools and
analytics, including raising awareness around data ethics usage and
privacy across NWM N.V. Group. The availability and accessibility
of current, complete, detailed, accurate and, wherever possible,
machine-readable customer segment and sub-sector data, together
with appropriate governance and accountability for data, is fast
becoming a critical strategic asset, which is subject to increased
regulatory focus. Failure to have or be able to access that data or
the ineffective use or governance of that data could result in a
failure to manage and report important risks and opportunities or
satisfy customers' expectations including the inability to deliver
products and services. This could also result in a failure to
deliver NWM N.V. Group's strategy and could place NWM N.V. 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 N.V. Group's strategy. These data weaknesses and limitations,
or the unethical or inappropriate use of data, and/or
non-compliance with data protection laws could give rise to,
conduct and litigation risks and may increase the risk of
operational challenges, losses, reputational damage or other
adverse consequences due to inappropriate models, systems,
processes, decisions or other actions. Any of the above may lead to
key business processes being negatively impacted by inappropriately
managed data, which could lead to material financial, customer and
regulatory impacts.
NWM N.V. Group relies on attracting, retaining, developing and
remunerating diverse senior management and skilled personnel (such
as market trading specialists), and is required to maintain good
employee relations.
NWM N.V. Group's success depends on its ability to attract,
retain, through creating an inclusive environment, and develop and
remunerate highly skilled and qualified diverse personnel,
including senior management, directors, market trading specialists
and key employees, especially for technology and data focused
roles, in a highly competitive market, in an era of strategic
change and under internal cost efficiency pressures.
The inability to compensate employees competitively and/or any
reduction of compensation, the perception that NWM Group may not be
a viable or competitive business, 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), negative economic developments or other factors,
may adversely affect NWM N.V. Group's ability to hire, retain and
engage well qualified employees, especially at a senior level,
which could adversely affect NWM N.V. Group's future results,
financial condition and/or prospects.
This increases the cost of hiring, training and retaining
diverse skilled personnel. In addition, certain economic, market
and regulatory conditions and political developments 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. Moreover, a failure to foster a diverse and inclusive
workforce may adversely affect NWM Group's employee engagement and
the formulation and execution of its strategy and could also have a
negative effect on its reputation with customers, investors and
regulators.
Some of NWM N.V. Group's employees are represented by employee
representative bodies, including a works council. Engagement with
its employees and such bodies is important to NWM N.V. Group in
maintaining good employee relations. Any breakdown of these
relationships may adversely affect NWM N.V. Group.
NWM N.V. Group's operations are highly dependent on its complex
IT systems, and any IT failure could adversely affect NWM N.V.
Group.
NWM N.V. 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 N.V.
Group's) transactional and payment systems, financial crime, fraud
systems and 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 N.V. Group's operations.
Individually or collectively, any critical system failure,
material loss of service availability or material breach of data
security could cause significant damage to (i) important business
services across NWM N.V. Group and (ii) NWM N.V. Group's ability to
provide services to its clients, which could result in reputational
damage, significant compensation costs and regulatory sanctions
(including fines resulting from regulatory investigations) or a
breach of applicable regulations and could affect NWM N.V. Group's
regulatory approvals, competitive position, business and brands,
which could undermine its ability to attract and retain customers.
NWM N.V. Group outsources certain functions as it innovates and
offers new digital solutions to its clients to meet the demand for
online and mobile banking. Outsourcing, alongside hybrid working
patterns of NWM N.V. Group employees heighten the above risks.
NWM N.V. Group uses IT systems that enable remote working
interface with third-party systems, and NWM N.V. 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.
In 2022, NWM N.V. 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,
including NWM N.V. 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,
may adversely affect NWM Group's operations, its reputation and
ability to retain or grow its client business or adversely affect
its competitive position, thereby negatively impacting NWM N.V.
Group. See also, '- NWM Group (including NWM N.V. Group) has been
in a period of significant structural and other change, including
as a result of NatWest Group's purpose-led strategy and NatWest
Group's recent creation of its C&I business segment (of which
NWM Group forms part ) and may continue to be subject to
significant structural and other change '.
A failure in NWM N.V. Group's risk management framework could
adversely affect NWM N.V. Group, including its ability to achieve
its strategic objectives.
Risk management is an integral part of all of NWM N.V. Group's
activities and integral to the delivery of its long-term strategy.
NatWest Group's Enterprise-Wide Risk Management Framework sets out
NWM Group's (including NWM N.V. Group) approach for managing risk
within NWM N.V. Group including in relation to risk governance and
risk appetite. A failure to adhere to this framework, or any
material weaknesses or deficiencies in the framework's controls and
procedures, may adversely affect NWM N.V. Group's financial
condition and strategic delivery including in relation to operating
within agreed risk appetite statements and accurate reporting on
risk exposures.
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, manual processes
and controls, inaccurate data, inadequate IT systems, unidentified
conflicts or misaligned incentives, lack of accountability control
and governance, incomplete risk monitoring (including trade
surveillance) and failures of systems to properly process all
relevant data, risks related to unanticipated behaviour or
performance in algorithmic trading and management or insufficient
challenges or assurance processes or a failure to timely complete
risk remediation projects. Failure to manage risks effectively, or
within regulatory expectations, could adversely affect NWM N.V.
Group's reputation or its relationship with its regulators,
clients, shareholders or other stakeholders.
In addition, financial crime risk management is dependent on the
use and effectiveness of financial crime assessment, systems and
controls. Weak or ineffective financial crime processes and
controls may risk NatWest Group inadvertently facilitating
financial crime which may result in regulatory investigation,
sanction, litigation, fines and reputational damage. Financial
crime continues to evolve, whether through fraud, scams,
cyber-attacks or other criminal activity. NatWest Group (and NWM
N.V. Group) has made and continues to make significant, multi-year
investments to strengthen and improve its overall financial crime
control framework with prevention systems and capabilities. As part
of its ongoing programme of investment, there is current and future
investment planned to further strengthen financial crime controls
over the coming years, including investment in new technologies and
capabilities to further enhance customer due diligence, transaction
monitoring, sanctions and anti-bribery and corruption systems. A
number of NWM N.V. Group's
financial crime controls are operated by NatWest Group on behalf
of NWM N.V. Group.
NWM N.V. 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 N.V.
Group's regulatory obligations, client needs or do not reflect NWM
N.V. 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 N.V. Group's businesses are also exposed to risks from
employee misconduct including non-compliance with policies and
regulations, negligence or fraud (including financial crimes and
fraud), any of which could result in regulatory fines or sanctions
and serious reputational or financial harm to NWM N.V. Group.
Remote working arrangements for NWM N.V. Group employees continues
to place heavy reliance on the IT systems that enable remote
working and may place additional pressure on NWM N.V. Group's
ability to maintain effective internal controls and governance
frameworks. Remote working arrangements are also subject to
regulatory scrutiny to ensure adequate recording, surveillance and
supervision of regulated activities and compliance with regulatory
requirements and expectations, including requirements to: meet
threshold conditions for regulated activities; ensure the ability
to oversee functions (including any outsourced functions); ensure
no detriment is caused to customers; and ensure no increased risk
of financial crime.
NWM N.V. Group has been 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 risk
management, including the ongoing development of a NatWest Group
risk management strategy in line with regulatory expectations .
However, such efforts may not insulate NWM N.V. Group from future
instances of misconduct and no assurance can be given that NWM N.V.
Group's strategy and control framework will be effective. See also,
'- NWM Group (including NWM N.V. Group) has been in a period of
significant structural and other change, including as a result of
NatWest Group's purpose-led strategy and NatWest Group's recent
creation of its C&I business segment (of which NWM Group forms
part ) and may continue to be subject to significant structural and
other change '. Any failure in NWM N.V. Group's risk management
framework may adversely affect NWM N.V. 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.
There is also the risk that the risk management frameworks, as
developed by NatWest Group and NWM Group, may not be properly
adapted for NMW N.V.'s specific circumstances. Ahead of a
regulatory audit a self-identified governance shortfall has been
identified related to regulatory reporting process management.
Furthermore, NWM N.V. has policies and controls in place to prevent
and detect financial crime and has invested in technology and
capability to enhance financial crime controls. Although NWM N.V.
head office is located in Amsterdam (where NWM N.V. risk management
function is based), it also operates branches in France, Germany,
Ireland, Italy, Sweden and Spain (although the branch in Spain was
closed in mid-2022). Should such risk policies and controls be
inadequate to combat financial crime, particularly in NWM N.V.,
branches (where there is less direct supervision) there could be an
adverse impact on NWM N.V. One branch location, Germany, is
currently under audit of their regulator (Bafin), the outcome of
this audit is difficult to predict but may result in findings,
impacting the current governance and outsourcing structure of NWM
N.V. Group.
NWM N.V. Group's operations are subject to inherent reputational
risk.
Reputational risk relates to stakeholder and public perceptions
of NWM N.V. Group arising from an actual or perceived failure to
meet stakeholder or the public's expectations, including with
respect to NatWest Group's purpose-led strategy and related
targets, NWM Group's strategy, the creation of the C&I business
segment, the progression towards working as One Bank across the
NatWest Group to serve customers, or due to any events, behaviour,
action or inaction by NWM N.V. Group, its employees or those with
whom NWM N.V. Group is associated. See also, 'NWM N.V. Group's
businesses are subject to substantial regulation and oversight,
which are constantly evolving and may adversely affect NWM N.V.
Group.' This includes harm to its brand, which may be detrimental
to NWM N.V. 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, or there is
perceived to be, a material lapse in standards of integrity,
compliance, customer or operating efficiency and may adversely
affect NWM N.V. Group's ability to attract and retain clients. In
particular, NWM N.V. Group's ability to attract and retain clients
may be adversely affected by factors including: negative public
opinion resulting from the actual or perceived manner in which NWM
N.V. 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 N.V.
Group's financial performance, IT systems failures or cyberattacks,
data breaches, financial crime and fraud, 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 timeframes and with minimal costs, may also
significantly increase and accelerate the impact of damaging
information and allegations.
Although NWM N.V. Group has implemented a Reputational Risk
Policy to monitor the identification, assessment and management of
customers and clients, transactions, products and issues, which
represent a reputational risk, NWM N.V. Group cannot be certain
that it will be successful in avoiding damage to its business from
reputational risk.
Legal, regulatory and conduct risk
NWM N.V. Group's businesses are subject to substantial
regulation and oversight, which are constantly evolving and may
adversely affect NWM N.V. Group.
NWM N.V. Group is subject to extensive laws, regulations,
guidelines, corporate governance practice and disclosure
requirements, administrative actions and policies in each
jurisdiction in which it operates, which represents ongoing
compliance and conduct risks. 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 as a result of Brexit. NWM Group (NWM N.V.
Group's parent) expects government and regulatory intervention in
the financial services industry to remain high for the foreseeable
future.
In particular, NWM N.V. Group is subject to (i) direct
prudential supervision by the DNB and indirect prudential
supervision of the ECB; (ii) direct market conduct supervision by
the AFM and indirect market conduct supervision by the European
Securities and Markets Authority (ESMA); and (iii) supervision by
the DNB, as home state supervisor, in respect of NWM N.V. Group's
branch offices in France, Germany, Ireland, Italy, Sweden and Spain
(although the branch in Spain was closed in mid-2022), and to
supervision by local regulators in these jurisdictions, as host
state supervisors, in respect of certain regulatory aspects of NWM
N.V. Group's branch offices' operations that are subject to host
state supervision (e.g. anti-money laundering laws). NWM N.V. Group
expects government and regulatory intervention in the financial
services industry to remain high for the foreseeable future.
Prudential regulatory requirements:
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. 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
Netherlands, 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 protection 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, competition and disputes regimes, anti-money
laundering, anti-corruption, anti-bribery, anti-tax evasion,
payment systems, sanctions and anti-terrorism laws and regulations.
This has resulted in NWM N.V. Group facing greater regulation and
scrutiny in the Netherlands and the other countries in which it
operates.
In addition, there is significant oversight by competition
authorities of the jurisdictions in which NWM N.V. Group operates.
The competitive landscape for banks and other financial
institutions in Europe, the UK 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 and other markets. Recent
regulatory changes, proposed (such as US proposals to increase
regulation around cybersecurity) or future developments and
heightened levels of public and regulatory scrutiny in Europe, the
UK, Asia 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.
Regulatory requirements:
Recent regulatory changes, proposed or future developments and
heightened levels of public and regulatory scrutiny in the EU 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 offering and business models. For
example, NWM N.V. 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 N.V. Group be found to be non-compliant with these
regulatory requirements.
The ECB may replace the DNB as the regulator of NWM N.V. due to
the growing size of NWM N.V. If the ECB does become the regulator
of NWM N.V. (and therefore NWM N.V. becomes a 'significant
institution' as defined by the ECB), or if NWM N.V. becomes a
'large institution' (as defined under EU law instruments), then it
would be subject to additional or different regulatory and/ or
prudential requirements and disclosure requirements. Should NWM
N.V. not meet certain supervisory criteria, remedial action or
changes to the business may be required. Any such actions or
changes may harm the reputation of NWM Group N.V. and may also
require additional resources and funds which may need to be
diverted from other parts of the business which may, in turn,
adversely affect NWM N.V. Group.
Such changes may also result in an increased number of
regulatory investigations and proceedings and have increased the
risks relating to NWM N.V. Group's ability to comply with the
applicable body of rules and regulations in the manner and within
the timeframes required.
Other areas in which, and examples of where, governmental
policies, regulatory and accounting changes and increased public
and regulatory scrutiny may adversely affect (some of which could
be material) on NWM N.V. Group include, but are not limited to, the
following:
- 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 N.V.
Group operates;
- rules relating to foreign ownership, expropriation,
nationalisation and confiscation of assets;
- new or increased regulations relating to customer data
protection as well as IT controls and resilience, such as the
proposed UK Data Protection and Digital Information Bill and in
India, the Digital Personal Data Protection Bill;
- the introduction of, and changes to, taxes, levies or fees
applicable to NWM N.V. Group's operations, which may require
increased payments of tax, such as the Dutch Withholding Tax Act
2021 (Wet bronbelasting 2021), the imposition of a financial
transaction tax, introduction of global minimum tax rules, changes
in the scope and administration of the Dutch Bank Levy
(bankenbelasting), 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 may reduce the
value of deferred tax for certain years; and
- the potential introduction by the Bank of England of a Central
Bank Digital Currency which could result in deposit outflows,
higher funding costs, and/or other implications for banks including
NatWest Group (including impact on NWM N.V. Group).
These and other recent regulatory changes, proposed or future
developments and heightened levels of public and regulatory
scrutiny in the UK, the Netherlands, 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
N.V. Group's authorisations and licences, the products and services
that NWM N.V. Group may offer, its reputation and the value of its
assets, NWM N.V. Group's operations or legal entity structure, and
the manner in which NWM N.V. Group conducts its business. Material
consequences could arise should NWM N.V. 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 N.V. Group's ability to comply with the applicable
body of rules and regulations in the manner and within the
timeframes required.
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 N.V. Group to comply with such
laws, rules and regulations, may adversely affect NWM N.V. 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 N.V. Group's ability to engage in effective
business, capital and risk management planning.
NWM N.V. Group and NWM Plc are exposed to the risk of 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 N.V. Group.
NWM N.V. Group's operations are diverse and complex and it
operates in legal and regulatory environments that expose it to
potentially significant civil actions (including those following on
from regulatory sanction), as well as criminal, regulatory and
governmental proceedings. NWM N.V. Group and NWM Plc have resolved
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 N.V. Group and/or NWM Plc are currently, have recently been
and will likely be involved in a number of significant legal and
regulatory actions, including investigations, proceedings and
ongoing reviews (both formal and informal) by governmental law
enforcement and other agencies and litigation proceedings,
including in relation to 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
issues. There is also an increasing risk of new class action claims
being brought against NWM Group in the Competition Appeal Tribunal
for breaches of competition law. Legal and regulatory actions are
subject to many uncertainties, and their outcomes, including the
timing, amount of fines, damages 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 N.V. Group's
expectation for resolution may change and substantial additional
provisions and costs may be recognised in respect of any
matter.
The resolution of significant investigations include NWM Plc's
December 2021 spoofing-related guilty plea in the United States,
which involves a three-year period of probation, an independent
corporate monitor, and commitments to compliance programme reviews
and improvements and reporting obligations. 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' at Note 23 to the
consolidated accounts.
The 2021 guilty plea, other recently resolved matters or adverse
outcomes or resolution of current or future legal or regulatory
actions, could increase the risk of greater regulatory and
third-party scrutiny and could have material collateral
consequences for NWM Group's (including NWM N.V. Group's) business
and result in restrictions or limitations on NWM Group's (including
NWM N.V. Group's) operations.
These may include the effective or actual disqualification from
carrying on certain regulated activities and consequences resulting
from the need to reapply for various important licences or obtain
waivers to conduct certain existing activities of NWM N.V. Group,
particularly but not solely in the US, which may take a significant
period of time and the results and implications of which are
uncertain. Disqualification from carrying on any activities,
whether automatically as a result of the resolution of a particular
matter or as a result of the failure to obtain such licences or
waivers could adversely affect NWM N.V. Group's business, in
particular in the US. This in turn and/or any fines, settlement
payments or penalties may adversely affect NWM N.V. Group's
reputation, future results, financial condition and/or prospects.
Similar consequences could result from legal or regulatory actions
relating to other parts of NatWest Group.
Failure to comply with undertakings made by NWM N.V. Group to
its regulators, or the conditions of probation resulting from the
spoofing-related guilty plea may result in additional measures or
penalties being taken against NWM N.V. Group. In addition, any
failure to administer conduct redress processes adequately, or to
handle individual complaints fairly or appropriately, could result
in further claims as well as the imposition of additional measures
or limitations on NWM N.V. Group's operations, additional
supervision by NWM N.V. Group's regulators, and loss of investor
confidence.
NWM N.V. Group may not effectively manage the transition of
LIBOR and other IBOR rates to replacement risk-free rates.
UK, Dutch and other European and international regulators are
driving the transition from the use of interbank offer rates
('IBORs'), to replacement rates generally referred to as 'risk-free
rates' ('RFRs').
As of 31 December 2021, LIBOR, as currently determined, has
ceased for all tenors of GBP, JPY, CHF, EUR, and for the 1 week and
2-month tenors for USD. The remaining USD LIBOR tenors, as
currently determined, are due to cease after 30 June 2023. The FCA
has used its powers under the UK Benchmarks Regulation ('UK BMR')
to require, for a limited period of time after 31 December 2021,
the ongoing publication of the 1-, 3-, and 6-month GBP and JPY
LIBOR tenors using a changed methodology (i.e., 'Art23A LIBOR' on a
synthetic basis). The UK has passed the Critical Benchmarks
(References and Administrators' Liability) Act 2021 ('Critical
Benchmarks Act') which establishes a framework that allows the
ongoing use of Art23A LIBOR under certain circumstances where
contracts have not pro-actively transitioned onto the replacement
rates. These concessions provided under UK BMR and the Critical
Benchmarks Act are temporary. The FCA confirmed that Art23A will no
longer be available from: (i) the end of 2022 for JPY, (ii) March
2023 for 1- and 6-month GBP LIBOR and (iii) March 2024 for 3-month
GBP LIBOR. The transition away from these temporary concessions may
expose NatWest Group, its customers and the financial services
industry more widely to various risks, including: (i) the FCA
further restricting use of Art23A LIBOR resulting in proactive
transition of contracts; and (ii) mis-matches between positions in
cleared derivatives and the exposures they are hedging where those
exposures are permitted to make use of Art23A LIBOR. Although the
formal cessation date for the remaining USD LIBOR tenors (as
currently determined) is not until the end of June 2023, US and UK
regulators have clarified that this is only to support the rundown
of existing USD LIBOR exposures. No new contracts should reference
these USD LIBOR tenors after 31 December 2021, other than in a very
limited range of circumstances. NatWest Group will continue to have
ongoing exposure to the remaining USD LIBOR tenors until cessation
in June 2023.
Natwest Group has held significant exposures to various IBORs
and has actively sought to transition away from these during 2021
and 2022, in accordance with regulatory expectations and
milestones. Transition measures have included the pro-active
development of new products using the replacement rates,
restructuring existing LIBOR exposures to reference these
replacement rates and embedding RFR transition language into
relevant contracts. Central Counterparty Clearing houses (CCPs)
conducted mass conversion exercises in December 2021 covering GBP,
JPY, CHF and EUR LIBOR, transitioning derivatives to the relevant
RFR, conversion exercises for USD are scheduled for May 2023, NWG
entities, along with many of their major counterparties, have
adhered to the ISDA IBOR fall-backs protocol which establishes a
contractual process to transition from IBORs to RFRs for bilateral
derivative products.
These transition efforts have involved extensive engagement with
customers, industry working groups and regulators, to seek to
deliver transition in a transparent and economically appropriate
manner. These changes coincide with the recognition that market
liquidity is lower than it has been and whilst it will be dependent
on various factors including: 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 pro-actively changed which could, depending on any
over-arching legislative transition frameworks, potentially result
in fundamentally different economic outcomes than originally
intended. The uncertainties around the manner of transition to
RFRs, and the ongoing broader acceptance and use of RFRs across the
market, expose NWM N.V. Group, its clients and the financial
services industry more widely to risks.
Examples of these risks include: (i) legal (including
litigation) risks relating to documentation for new and the
majority of existing transactions (including, changes, lack of
changes, unclear contractual provisions, and disputes in respect of
these); (ii) financial risks from any changes in valuation of
financial instruments linked to relevant IBORs, including cost of
funds and relevant risk management related financial models; (iii)
changes to benchmark rates could impact pricing, interest rate or
settlement mechanisms for certain instruments; (iv) operational
risks linked to the adaptation of IT systems, trade reporting
infrastructure and operational processes, as well as ensuring
compliance with restrictions on new USD LIBOR usage after December
2021; (v) conduct risks arising from communication of the potential
impact on customers, engagement with customers during and after the
transition period, or non-acceptance by customers of replacement
rates; and (vi) different legislative provisions in different
jurisdictions, for example, unlike certain US states and the EU,
the UK has not provided a clear and robust safe harbour to protect
against litigation and potential liability arising out of the
switch to 'synthetic LIBOR'.
Notwithstanding all efforts to date, until the transition away
from LIBOR onto replacement rates has been fully completed, and
there is greater experience of how RFRs are adopted across
different products and customer groups, there is some uncertainty
as to the impact of the transition, or the potential costs of
implementing any relevant remedial action, including in the event
that the transition is not completed in a timely manner, or at all.
The implementation of any replacement RFRs may be impossible or
impracticable under the existing terms of certain financial
instruments and may have an adverse effect on their value, or
return and therefore on NWM N.V. Group's future results.
LEI: X3CZP3CK64YBHON1LE12 - NatWest Markets N.V.
2138005O9XJIJN4JPN90 - NatWest Group plc
RR3QWICWWIPCS8A4S074 - NatWest Markets Plc
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