NatWest Group plc 16 February
2024
NatWest Markets N.V. 2023
ARA
NatWest Markets N.V. today
announces the publication of its 2023 Annual Report and Accounts.
This company is a wholly-owned subsidiary of NatWest Markets Plc.
The 2023 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@rbs.com
+44 207 672 1758
Media Relations
+44 131 523 4205(UK)
+31 20 464 1150 (NL)
16 February 2024
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 2023 in full unedited text. Page references in the text
refer to page numbers in the Annual Report and Accounts
2023.
Principal Risks and
Uncertainties
Set out below are certain risk
factors that could have a material adverse effect on 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 risk factors in this section and
other parts of this annual report, including the top and emerging
risk section, 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 inflation and interest rates, supply chain disruption
and geopolitical developments.
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 financial markets
may make it very 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, 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, or resulting in, 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 often automatically) 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:
GDP growth, inflation and changing interest rates, changing asset
prices (including residential and commercial property), elevated
energy, supply chain disruption, and changes to monetary and fiscal
policy.
These conditions could be
exacerbated by a number of factors including: instability in the UK
or global financial systems, market volatility and change,
fluctuations in the value of the pound sterling and euro, new or
extended economic sanctions, economic volatility in the UK or
globally, volatility in commodity prices, political uncertainty or instability (for example the
upcoming European Parliament and US presidential elections, and the
UK general election to take place before February 2025),
or concerns regarding sovereign debt or sovereign
credit ratings, 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, and/or other sustainability-related risks.
See also 'Changes in interest rates will continue to
affect NWM N.V. Group's business and results''.
Any of the above developments could have a
material adverse effect on 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
that may hinder economic or financial activity levels. Political,
military or diplomatic events (for example
the Russia-Ukraine and Israel-Hamas conflicts), terrorist acts or threats, protectionist policies or trade barriers, tax changes,
widespread public health crises,
related potential adverse effects on supply
chains, and the responses to any of the above scenarios by various
governments and markets, may have a material adverse effect on the
business and performance of NWM N.V. Group, including as a result
of the direct or indirect impact on UK, regional or global trade
and/or NWM N.V. Group's customers and counterparties.
In recent years, the UK has
experienced significant political uncertainty and a general
election will take place before February 2025, which may further
change the UK political landscape. Heightened political uncertainty
could lead to a loss of confidence in the UK, which could in turn,
negatively impact the economy and companies operating in the UK.
NatWest Group also faces political uncertainty in Scotland as a
result of a possible Scottish independence referendum. Scottish
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 plc and its
subsidiaries operate and may require further changes to NatWest
Group (including NWM Group's and NWM N.V. Group'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. See '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'.
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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.
As a result of the UK's withdrawal
from the EU, certain aspects of the services provided by NatWest
Group require local licences or individual equivalence decisions
(temporary or otherwise) by relevant regulators. 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. When these proposals become law all 'banking services'
provided by NatWest Group (of which NWM N.V. Group forms part) in
the EU may be licensable activities in each EU member state in
which it provides such services and member states may not be
permitted to offer bilateral permissions to financial institutions
outside the EU allowing them to provide such 'banking services'
except in limited circumstances.
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 significantly
negatively impact the operating model and business operations of
NWM Group (of which NWM N.V. Group forms part).
NatWest Group continues to
evaluate its EU operating model, making adaptations as necessary.
Changes to NatWest Group's and NWM Group's operating model have
been, and may continue to be, costly and failure to receive
regulatory permissions and/or further changes to their business
operations, product offering, customer engagement, and regulatory
requirements could result in further costs and/or regulatory
sanction.
Transfers in relation to NatWest
Group's Western European corporate portfolio (principally
consisting of term funding and revolving credit facilities) may
also affect NWM Group of which NWM N.V. Group is a part of. See
also, 'The transfer of NatWest
Group's Western European corporate portfolio involves certain
risks.'
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 macroeconomic 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
macroeconomic 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
following the enactment of the Financial Services and Markets Act
2023 ('FSMA 2023') and the Retained EU Law
(Revocation and Reform) Act 2023.
In particular, FSMA 2023 provides for the
revocation of Retained EU Law relating to financial services
regulation but sets out that this process will likely take a number
of years and that the intention is that specific retained EU laws
will not be revoked until such time as replacement regulatory rules
are in place. Significant uncertainties
remain as to 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. 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.
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
Changes in interest rates 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 2023, although forward rates at 31 December 2023
suggested interest rates may begin to fall in 2024.
On the one hand, stable interest
rates support predictable income flow and less volatility in asset
and liability valuations, although persistently low and negative
interest rates, may adversely affect NWM
N.V. Group.
On the other hand, volatility in
interest rates may 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 may,
in turn, affect liquidity portfolio valuations. In addition,
unexpected sharp rises in rates may also have an adverse effect on
some asset and derivative valuations, for example. Furthermore,
customer and investor responses to rapid changes in interest rates
can have an adverse impact on NWM N.V. Group. For example, customers may make deposit choices that provide
them with higher returns than those then being offered by NWM N.V.
Group, and NWM N.V. Group may not respond with competitive products
as rapidly, for example following an interest rate change which may
in turn decrease NWM N.V. Group's net interest income.
Movements in interest rates also
influence and reflect the macroeconomic situation more broadly,
affecting factors such as business and consumer confidence,
property prices, default rates on loans, customer behaviour, and
other indicators that may indirectly affect NWM N.V. Group and may
adversely affect its future results, financial condition,
prospects, and/or reputation.
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.
NatWest Group plc is the ultimate
parent company of NWM N.V. In its Autumn
Statement 2023 (presented on 22 November 2023), the UK Government
confirmed its commitment to exiting its shareholding in NatWest
Group plc, subject to market conditions. It also stated that it
"intends to fully exit by 2025-26 utilising a range of disposal
methods" and "will explore options to launch a share sale to retail
investors in the next twelve months, subject to supportive market
conditions".
NatWest Group plc has most
recently: (i) carried out a directed buyback of NatWest Group plc
ordinary shares from HM Treasury in May 2023, and (ii) made
purchases under NatWest Group plc's on-market buyback programmes
announced in July 2023 and February 2024. NatWest Group plc may
participate in similar directed or on-market buybacks in the near-
and medium-term future.
As at 8 January 2024, HM Treasury held 36.94% of
the ordinary share capital with voting rights of NatWest Group
plc.
Achievement of the UK Government's
Autumn Statement 2023 objective is likely to entail it selling a
significant number of NatWest Group plc's shares. The precise
timing, method and extent of further HM Treasury's disposal of
NatWest Group plc's shares may be driven by economic as well as
other considerations and is uncertain, which could result in a
prolonged period of price volatility for NatWest Group plc's
ordinary shares and NatWest Group's (including NWM N.V. Group)
other securities.
Any offers or sales of a
substantial number of ordinary shares in NatWest Group plc by HM
Treasury (including at a discount or with other incentives), market
expectations about these offers or sales, or perceptions about the
success or failure of any offers or sales (including for example,
media or public attention on any such offering or post-offer share
price performance), and any directed, on- or off-market buyback
activity by NatWest Group plc, could affect the prevailing market
price for the outstanding ordinary shares of NatWest Group
plc, and, in the case of a directed, on-
or off-market buyback, could reduce NatWest Group plc's capital and
liquidity, which may have an adverse
effect on NWM N.V. Group.
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 UK Government Investments Limited
('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 or removal of directors, the
appointment or removal 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
largely depends on government policy and other considerations,
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.
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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 strategy and
NatWest Group's 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.
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, via the
creation of NatWest Group's C&I business segment (which
combines the previously separately reporting NatWest Group's
Commercial, NatWest Markets and RBS International businesses).
Since the quarter ending 30 March 2022, NatWest Group plc has been
reporting its results under the C&I operating segment
structure, although NWM Plc continues to also report on a
standalone legal entity basis. The C&I business segment was
created to promote closer operational and strategic alignment to
support NatWest Group growth, with more integrated services to
customers across NatWest Group entities, within and outside the
ring-fenced banks, with the potential increased risk of breach of
the UK ring-fencing regime requiring effective 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 adversely affected 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: 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 macroeconomic environment, political and
regulatory uncertainty, market volatility and change, uncertainties
regarding the senior leadership of NatWest Group, 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.
NWM Group has implemented a shared
services model and transfer pricing arrangements 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 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 for NWM N.V. Group.
See, 'Operational risks
(including reliance on third party suppliers and outsourcing of
certain activities) are inherent in NWM N.V. 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, cybersecurity,
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 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 as 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, and may have a material adverse effect on NWM N.V.
Group's future results, financial condition, prospects, and/or
reputation.
The transfer of NatWest Group's
Western European corporate portfolio involves certain
risks.
To improve efficiencies and best
serve customers following Brexit, NWM Group expects that certain
assets, liabilities, transactions and activities of NatWest Group
(including NatWest Group's Western European corporate portfolio
principally consisting of term funding and revolving credit
facilities) (the '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 results of operations.
As a result, this could have a material adverse effect on NWM
Group's (including NWM N.V. Group) future results, financial
condition, prospects, and/or reputation.
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. In addition, although the head
office for NWM N.V. is located in Amsterdam, NWM N.V. Group also
operates branches in France, Germany, Italy, and Sweden.
On 13 November 2023, the European Central Bank
('ECB') confirmed that RBS Holdings N.V. and its subsidiary NWM
N.V. were classified as a "significant supervised group". As a
result, the ECB assumed direct supervision of NWM N.V. on 1 January
2024. Direct supervision could have an adverse impact on NWM N.V.
Group's business strategy, operating model (including any
compliance cost) and prudential and regulatory
requirements.
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.
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
NWM Group, including NWM N.V.
Group, may not achieve its ambitions, targets and guidance 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 climate
strategy (including its climate and sustainable funding and
financing targets) and customer satisfaction targets.
NWM N.V. Group's ability to meet
its ambitions, targets and guidance (including its CET1 ratio
target), and make discretionary capital distributions and to
successfully fulfil its strategy is subject to various internal and
external factors, risks and uncertainties. These include but are
not limited to: global macroeconomic, 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 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 strategy and NatWest Group's
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 may impact NWM
Plc and NWM N.V.'s abilities to maintain their respective CET1
ratio targets, including impairments, the macroeconomic
environment, 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 anticipated.
NWM N.V. Group's ability to meet
its planned 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 guidance and execute its
strategy. Furthermore, NWM N.V. Group's strategy may not be
successfully executed, or it may not meet its ambitions, targets,
guidance, and expectations.
Any of the above may lead NWM N.V.
Group to not meet its ambitions, target, guidance and expectations,
to not be viable, competitive or profitable, and may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
NWM N.V. may not meet the
prudential regulatory requirements for capital.
NWM N.V. Group is required by the
ECB 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 (see the targets set forth in each respective entity's
Outlook section) are based on regulatory requirements, internal
modelling and risk appetite (including under stress). As at 31
December 2023, NWM N.V. Group's CET1 ratio (on a consolidated
basis) was 19.0%. 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, 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 (and
increase the amount of internal MREL required for NWM
N.V.);
- changes in prudential regulatory requirements including the
Total Capital Requirement for NWM N.V. (as regulated by the ECB and
De Nederlandsche Bank ('DNB')), including Pillar
2 requirements and regulatory buffers as well as
any applicable scalars;
- further developments of prudential regulation (for example,
finalisation of Basel 3 standards), which will impact various areas
including the approach to calculating
credit risk, market risk, leverage ratio, capital floors and
operational risk RWAs, as well as continued regulatory uncertainty
on the details thereto;
- further losses (including as a result of extreme one-off
incidents such as cyberattack, fraud or conduct issues) would
deplete capital resources and place downward pressure on the CET1
ratio; or
- the
timing of planned liquidation, disposal and/or capital releases of
capital including on 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 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).'
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
NWM N.V. Group may not meet the
prudential regulatory requirements for liquidity and funding or may
not be able to adequately access sources of liquidity and funding,
which could trigger the execution of certain management actions or
recovery options.
Liquidity and the ability to raise
funds continues to be a key area of focus for NWM N.V. Group and
the industry as a whole. NatWest Group and NWM N.V are required by
regulators in the UK, the EU and other jurisdictions in which they
undertake regulated activities to maintain adequate liquidity and
funding resources. To satisfy its liquidity and funding
requirements, NWM N.V. Group may therefore 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 2023, NWM N.V. Group held
€4.97 billion 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, changes in customer behaviour, loss of client and/or
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 may have an adverse
effect on 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.
Macroeconomic developments and
political uncertainty, changes in interest rates, and market
volatility could affect NWM N.V. Group's ability to access sources
of liquidity and funding on satisfactory terms, or at all. This 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 change
their funding plans and/or their operations. This could exacerbate
funding and liquidity risk, which could have a negative effect on
NWM N.V. Group.
As at 31 December 2023, NWM N.V.
Group reported a liquidity coverage ratio of 144% 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, wholesale funding
sources, or other reliable funding sources, on acceptable terms or
at all, its liquidity position would
likely 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.
If, under a stress scenario, the
level of liquidity falls outside of NWM N.V. Group's risk appetite,
there are a range of recovery management actions that NWM N.V.
Group could take to manage its liquidity levels, but any such
actions may not be sufficient to restore adequate liquidity levels.
NWM N.V. Group must maintain a recovery plan acceptable to its
regulator, such that a breach of NWM N.V. Group's applicable
liquidity requirements would trigger consideration of NWM N.V.'s
recovery plan. This in turn may prompt consideration of NatWest
Group's recovery plan to attempt to remediate a deficient liquidity
position.
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.
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 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. Market volatility
may also result in increases to leverage exposure.
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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 has funding
requirements based on its current and anticipated business
activities and 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
influenced 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 inflation and interest rates, supply chain
disruption and geopolitical
developments,' 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).
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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 Dutch Financial Markets Supervision Act ('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, DNB or the SRB,
also have 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: 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 of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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
entities' credit ratings and outlooks. NWM N.V. Group entities'
credit ratings and outlooks, could be negatively affected (directly
and indirectly) by a number of factors that can change over time,
including without limitations: 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, and risk management
practices; the level of political support for the sectors 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,
geopolitical and economic conditions in NWM N.V. Group's key
markets (including interest rates and inflation, supply chain
disruptions and the outcome of any further Scottish independence
referendum); any reduction of the UK's sovereign credit rating and
market uncertainty.
In addition, credit ratings
agencies are increasingly taking into account
sustainability-related factors, including climate, environmental,
social and governance related risk, as part of the credit ratings
analysis, as are investors in their investment decisions. 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, any downgrade
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.), on favourable terms, or
at all. This may in turn adversely affect NWM N.V. Group's
competitive position and threaten its prospects.
Any of the above may have a
material adverse effect on NWM Group's future results, financial
condition, prospects, and/or reputation.
NWM N.V. Group operates in markets
that are highly competitive, with 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 including: 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
(including non-traditional financial services providers who may
have competitive advantages in scale, technology and consumer
engagement), competitive foreign exchange offerings, industry
trends resulting in increased disaggregation or unbundling of
financial services, or conversely the reintermediation of
traditional banking services, and the impact of regulatory actions
and other factors. In particular, developments in the financial
sector resulting from new or more competitive banking and lending
products and services offered by rapidly evolving incumbents,
challengers (including shadow banks and alternative lenders, i.e.
entities which carry out activities of a similar nature to banks
without the same regulatory oversight) and new entrants
such as technology companies (which may result in a shift in customer behaviour) and the
introduction of disruptive technology, may impede NWM N.V. Group's
ability to grow or retain its market share and impact its revenues
and profitability. Moreover, innovations such as biometrics,
artificial intelligence (including generative artificial
intelligence), automation, the cloud, blockchain, cryptocurrencies
and quantum computing may 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) and their integration in NWM N.V. Group's
systems and controls has become increasingly important to retaining
and growing NWM N.V. Group's competitiveness, market share and
client businesses across its geographical footprint. There is a
risk 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 strategic partnerships with third party technology
providers will be successful or that it will allow NWM N.V. Group
to successfully offer innovative products and services in the
future.
Certain of NWM N.V. Group's
current or future competitors may be more successful in
implementing technologies than NWM N.V. Group for delivering
products or services to their clients, which may adversely affect
its competitive position. NWM N.V. Group may also fail to identify
future opportunities or fail to derive benefits from technologies
in a context of technological innovation, changing customer
behaviour and changing regulatory demands, resulting in increased
competition from traditional banking businesses as well as new
providers of financial services (including
technology conglomerates with strong brand recognition, that may be
able to develop financial services at a lower cost
base). NWM N.V. Group's competitors may
also be better able to attract and retain clients and key
employees, may have more effective 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 efficiencies. 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 in
turn affecting its competitive position. NWM Group and NWM N.V.
Group may also fail to identify future opportunities or fail to
derive benefits from technologies in a context of technological
innovation, changing customer behaviour and changing regulatory
demands. Any of the above may limit additional investment in areas
such as innovation and could affect NWM Group's offering of
innovative products or technologies for delivering products or
services to customers and its competitive position. Furthermore,
the development of innovative products depends on NWM Group and NWM
N.V. Group's ability to effectively produce, acquire, or manage
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 rolled out in a timely manner, it will lose market
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 not used appropriately, is defective, inadequate or is not fully
integrated into NWM N.V. Group's current solutions, systems, and
controls. There is a risk that such initiatives will deliver the
expected cost savings and investment in technology (including automated processes and
artificial intelligence) will likely also result in increased costs for NWM N.V.
Group.
In addition, NatWest Group's
strategy, as well as employee remuneration constraints may also
have an impact on NWM N.V. Group's ability to compete effectively.
Intensified competition from incumbents, challengers and new
entrants as well as disintermediation by large technology companies
could affect NWM Group and NWM N.V. Group's ability to provide
satisfactory returns.
Moreover, activist investors have
increasingly become engaged and interventionist in recent years,
which may pose a threat to NatWest Group's strategic
initiatives.
Furthermore, continued
consolidation or technological or other developments in the
financial services industry could result in NWM N.V. Group's
competitors gaining greater capital and other resources, including
the ability to offer a broader and more attractive or better value
range of products and services and geographic diversity, or the
emergence of new competitors.
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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
and other stress tests by its regulator in the UK and NWM N.V Group
is subject to stress testing by the ECB. 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 (or NWM
N.V. Group) to meet its quantitative and qualitative requirements
of the stress tests set forth by its UK regulators or the ECB, as
applicable, may result in: NatWest Group's (and/or NWM N.V.
Group's) regulators requiring NatWest Group (or NWM N.V. Group) to
generate additional capital, reputational damage, increased
supervision and/or regulatory sanctions and/or loss of investor
confidence.
Any of the above may have a
material adverse effect on NatWest Group's (and NWM N.V. Group's)
future results, financial condition, prospects, and/or
reputation.
NWM N.V. Group has significant
exposure to counterparty and borrower risk including credit losses,
which may have an adverse effect on NWM N.V. Group.
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 sectors, 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. See 'The
transfer of NatWest Group's Western European corporate portfolio
involves certain risks'.
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
global macroeconomic and political uncertainties and a further
deterioration in prevailing economic and market conditions. These
include factors relating to interest rates and inflation, changing
asset prices, energy prices, supply chain disruption,
changes to monetary and fiscal policy, armed
conflicts, and 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, increasing credit
risk.
NWM N.V. Group is exposed to the
financial sector, including sovereign debt securities, financial
institutions, 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). Concerns about, or a default by, a financial
institution or intermediary could lead to significant liquidity
problems and losses or defaults by other financial institutions,
since the commercial and financial soundness of many financial
institutions and intermediaries 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 regular 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', and
'NWM N.V. Group may not meet the
prudential regulatory requirements for liquidity and funding or may
not be able to adequately access sources of liquidity and funding,
which could trigger the execution of certain management actions or
recovery options'. As a result, adverse changes in borrower
and counterparty credit risk may cause additional 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 2023 may not prove to be
adequate resulting in incremental ECL provisions for NWM N.V.
Group.
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 without the same regulatory oversight). 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/or 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.
Any of the above may adversely
affect NWM N.V. Group's future results, financial condition,
prospects, and/or reputation.
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). 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 external or internal fraud (collectively,
'financial crime')). NWM N.V. Group's models, and the parameters
and assumptions on which they are based, are periodically
reviewed.
As model outputs are imperfect
representations of real-world phenomena or simplifications of
complex real-world systems and processes, and are based on a
limited set of observations, model outputs therefore remain
uncertain. NWM N.V. Group may face adverse
consequences as a result of actions or decisions based on models
that are poorly developed, incorrectly implemented, outdated or
used inappropriately. This includes models that are based on
inaccurate or non-representative data (for example, where there
have been changes in the micro or macroeconomic environment in
which NWM N.V. Group operates) or as a result of the modelled
outcome being misunderstood, or by such information being used for
purposes for which it was not designed. This could result in
findings of deficiencies by NatWest Group's (and in particular, NWM
Group's or NWM N.V. Group's) regulators (including as part of
NatWest Group's mandated stress testing) and increased capital
requirements, may render some business lines uneconomic, may
require management action or may subject NWM N.V. Group to
regulatory sanction, any of which in turn may also have an adverse
effect on NWM N.V. Group and its customers. Any of the above may
have a material adverse effect on NWM Group's future results,
financial condition, prospects, and/or reputation.
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
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 2023, these include loan impairments, fair value,
deferred tax and conduct and litigation provisions. These are set
out in the section 'Critical
accounting policies'.
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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 NWM N.V.
Group.
NWM N.V. Group's trading assets
amounted to €4,693million as at 31 December 2023. 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'.
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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
subsidiaries
HM Treasury, the Bank of England,
the Prudential Regulation Authority ('PRA') and the 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 options may be applied to
NatWest Group plc as the parent company or to NWM Group, as a
subsidiary, 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 within
NatWest Group, 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 2009, the
Authorities are generally required to have regard to specified
objectives in exercising the powers provided for by the UK 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 provides that where resolution action is
taken, the Authorities are required to ensure that no creditor is
in a worse position than if the bank had entered into normal
insolvency proceedings. Although, this safeguard may not apply in
relation to an application of the separate write-down and
conversion power relating to capital instruments under the UK
Banking Act, in circumstances where a stabilisation power is not
also used, the UK Banking Act still requires the Authorities to
respect the hierarchy on insolvency when using the write-down and
conversion power. Further, 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 UK
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 BRRD and the SRM provide the
SRB and DNB (the 'N.V. Authorities', and together with the UK
Authorities, the 'Authorities') with substantial powers to resolve
and stabilise financial institutions incorporated in the
Netherlands. The N.V. Authorities are responsible for resolution in
relation to RBS Holdings N.V. and its subsidiaries (including NWM
N.V.). As a result, the SRB assumes direct resolution
responsibility for NWM N.V. Group, while DNB participates in the
planning and execution of resolution measures in coordination with
the SRB within the SRM framework. The N.V. Authorities have broad
powers to implement resolution measures with respect to financial
institutions 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 UK 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 such that regulatory intervention is
required, there may correspondingly be a material adverse effect on
NWM N.V. Group's future results, financial condition, prospects,
and/or reputation.
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. 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.
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 does 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 to maintain a
specified amount of MREL. This may also impact NatWest Group's (and
NWM N.V. Group's) strategic plans and may lead to a loss of
investor confidence. Additionally, DNB and the SRB may exercise
similar powers if the recovery and resolution plans of NWM N.V.
Group are not satisfactory.
Any of the above have a material
adverse effect on NWM N.V. Group's future results, financial
condition, prospects, and/or reputation.
Climate and sustainability-related risks
NWM N.V. Group and its value chain
face climate-related and sustainability-related risk that may
adversely affect NWM N.V. Group.
NWM N.V. Group and its value chain
(including its investors, customers, counterparties (including its
suppliers) and employees may face financial and non-financial risks
arising from sustainability-related risks, including
climate-related risks.
Climate and sustainability-related
risks may:
- adversely affect asset pricing and valuations of NWM N.V.
Group's own and other securities and, in turn, the wider financial
system;
- adversely affect economic activities directly (for example
through lower corporate profitability or the devaluation of assets)
or indirectly (for example through macro-financial
changes);
- adversely 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 losses stemming directly or indirectly from liability
risks, and/or reputational damage, including as a result of adverse
media coverage, activists, the public, customers, counterparties
(including suppliers) and/or investors associating NWM N.V. Group
or its customers with adverse climate and sustainability-related
issues;
- adversely affect NWM N.V. Group's ability to contribute to
deliver on NatWest Group's strategy, including contributing to
achieve NatWest Group's climate ambitions and targets;
- exacerbate other risk categories to which NWM N.V. Group is
exposed, 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), reputational risk, pension risk,
regulatory compliance risk and conduct risk; and
- may
have a material adverse effect on NWM N.V. Group's reputation,
future results, financial condition and/or prospects (including
cash flows, access to finance or cost of capital over the short,
medium or long term).
Climate and sustainability matters
are becoming increasingly political and polarised. Some customers,
counterparties (including suppliers) and investors may decide not
to do business with NWM N.V. Group because, according to their own
assessment, NatWest Group's (including NWM N.V. Group) strategy,
ambitions and targets related to climate and sustainability do not
meet their expectations, whereas others may decide not to do
business with NWM N.V. Group for failing to progress to contribute
to NatWest Group's climate and sustainability-related strategy,
ambitions and targets or if they are of the view that they lack
credibility.
If NWM N.V. Group fails to
identify, assess, prioritise, monitor and react appropriately to
climate and sustainability-related risks, in a timely manner or at
all, climate and sustainability-related physical, transition and
liability risks and opportunities, changing regulatory and market
expectations and societal preferences that NWM N.V. Group, its
customers, counterparties (including suppliers) face, this may have
a material adverse effect on NWM N.V. Group's business, future
results, financial condition, prospects, reputation or the price of
its securities.
Climate-related risks may
adversely affect the global financial system, NWM N.V. Group or its
value chain.
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 and may disrupt the orderly functioning of financial
markets and have an adverse effect on financial institutions,
including NWM N.V. Group.
There are significant
uncertainties as to the location, extent and timing of the
manifestation of the physical impacts of climate change, such as
more severe and frequent extreme weather events (storms, flooding,
subsidence, heat waves, droughts and wildfires), rising average
global temperatures and sea levels, nature loss, declining food
yields, destruction of critical infrastructure, supply chain
disruption and resource scarcity. Damage to NWM N.V. Group
customers' and counterparties' (including suppliers') properties
and operations could disrupt business, result in the deterioration
of the value of collateral or insurance shortfalls, impair asset
values and negatively impact the creditworthiness of customers and
their ability and/or willingness to pay fees, afford new products
or repay their debts, leading to increased default rates,
delinquencies, write-offs and impairment charges in NWM N.V.
Group's portfolios. In addition, NWM N.V. Group's premises and
operations, or those of its critical outsourced functions may
experience damage or disruption leading to increased costs. Any of
these may have a material adverse effect on NWM N.V. Group's future
results, financial condition, prospects and/or
reputation.
To meet the goals of the 2015
Paris Agreement, the EU's and the Netherlands' climate policy and
the UK's Net Zero Strategy will require a net-zero transition
across all sectors of the economy and markets in which NWM N.V.
Group operates. The impacts of the extensive social, commercial,
technological, policy and regulatory changes required to achieve
this 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 in a timely
manner, or at all. NWM N.V. Group's business and customers in some
sectors, including but not limited to residential mortgages,
commercial real estate, agriculture (primary farming), automotive
manufacturing, aviation, shipping, land transport and logistics
(freight road, passenger rail and road), electricity generation and
oil and gas are expected to be particularly impacted. The timing
and pace of the net-zero transition 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.
Climate-related risks may
exacerbate the impact of financial and non-financial risks and they
may have a material adverse effect on NWM N.V. Group's future
results, financial condition, prospects, and/or reputation,
including as a result of financial losses caused directly or
indirectly by climate-related litigation and conduct matters
(referred to as 'liability risk'). See also, 'NWM N.V. Group may be subject to
potential climate and other sustainability-related litigation,
enforcement proceedings, investigations and conduct
risk.'
NWM N.V. Group and its value chain
may, face other sustainability-related risks that may adversely
affect NWM N.V. Group.
NWM N.V. Group and its value chain
(including its investors, customers, counterparties (including its
suppliers) and employees) may face financial and non-financial
risks arising from broader (i.e. non-climate-related)
sustainability issues. These include: (i) risks relating to nature
loss (such as the loss and/or decline of the state of nature
including but not limited to, the reduction of any aspect of
biological diversity and other forms of environmental degradation
such as air, water and land pollution, soil quality degradation and
water stress); (ii) risks related to societal (including human
rights) matters, for example, climate change and environmental
degradation negatively impacting people's standard of living and
health, geopolitical tensions and conflict endangering people's
lives and security, the displacement of communities, the violation
of indigenous people's rights, unjust working conditions and labour
rights breaches (including discrimination, lack of diversity and
inclusion, inequality, gender/ethnicity pay gap and payments under
the minimum wage), modern slavery, financial crime, data privacy
breaches and lack of support for the vulnerable; and (iii)
governance-related risks (including board diversity, ethics,
executive compensation and management structure).
NWM N.V. Group is directly and
indirectly exposed to multiple types of nature-related risks
through the breadth of its activities, products and services
offering, including through the risk of default by customers whose
businesses are exposed to nature-related risks. In 2021, NatWest
Group (including NWM N.V. Group) first classified 'Biodiversity and
Nature Loss' as an emerging risk for NatWest Group (including NWM
N.V. Group) within its Risk Management Framework. From January
2024, NatWest Group (including NWM N.V. Group) has expanded its key
risk definition from climate risk to climate and nature risk and
updated its climate risk policy to reflect emerging nature-related
risks and to capture requirements that go beyond climate
risk.
NatWest Group (including NWM N.V.
Group) supports the aims of the Task Force on Nature Related
Financial Disclosure and continues to enhance its reporting and
measurement capabilities, acknowledging challenges associated with
data availability, while continuing to review evolving disclosure
standards and framework. NatWest Group's (including NWM N.V. Group)
approach is to integrate nature its existing strategy on climate,
recognising there is still, much to do in understanding its impacts
and dependencies on nature as well as our nature-related risks and
opportunities.
There is also increased scrutiny
from NWM N.V. Group's investors, customers, counterparties
(including its suppliers), employees, communities, regulators, the
media and other stakeholders on how NWM N.V. Group addresses
societal and governance related matters, including unjust working
conditions and labour rights breaches, resilience in the workplace,
safety and wellbeing, data protection and management, workforce
management, human rights and value chain management. For example,
NatWest Group's (including NWM N.V. Group) ambition is to support
decarbonisation while promoting energy security, may lead to
continued exposure to carbon-intensive activities and sectors
regarded as posing high climate and nature-related and societal
(including human rights) risks, (such as the textiles, agriculture
and mining sectors) each of which may impact NWM N.V. Group's
employees, customers, counterparties (including suppliers) and
stakeholders and their business activities and/or the communities
in which they operate and, in turn, result in reputational risk for
NWM N.V. Group.
There is also growing expectation
of the need for 'just transition' and 'energy justice' - in
recognition that the transition to net zero should happen in a way
that is as fair and inclusive as possible to everyone concerned.
Although NatWest Group (including NWM N.V. Group) continues to
evaluate and assess how it integrates 'just transition'
considerations into its climate and sustainability strategy, a
failure (or perception of failure) by NatWest Group (including NWM
N.V. Group) to sufficiently factor these considerations into
existing products and service offerings may adversely affect.
NatWest Group, including NWM N.V. Group's reputation.
In 2023, NatWest Group (including
NWM N.V. Group) published its initial assessment of its 'salient
human rights issues'. Human rights saliency assessments are
high-level scoping exercises based on internal and external
stakeholder engagement and involve subjective materiality and other
judgements including as to severity and likelihood of human rights
impacts. Failure by NatWest Group (including NWM N.V. Group) to
identify, assess, prioritise and monitor any actual or potential
adverse human rights issues that NatWest Group (including NWM N.V.
Group) contributes to, or is directly linked to, may adversely
impact people and communities, which in turn may have a material
adverse effect on NWM N.V. Group's future results, financial
condition, prospects and/or reputation.
Sustainability-related risks may
have the potential to cause or stress other financial and
non-financial risks, including climate-related risks, and they may
have a material adverse effect on NWM N.V. Group's future results,
financial condition, prospects and/or reputation, including as a
result of financial losses caused directly or indirectly by
sustainability-related litigation and conduct matters (referred to
as 'liability risk'). See also, 'NWM N.V. Group may be subject to potential
climate and other sustainability-related litigation, enforcement
proceedings, investigations and conduct risk'.
NatWest Group's climate change
related strategy, ambitions, targets and transition plan entail
significant execution and/or reputational risks and are unlikely to
be achieved without significant and timely government policy,
technology and customer behavioural changes.
NatWest Group has an ambition to
become a leading bank in the UK, helping to address the climate
challenge. 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 strategic
direction on 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 across
its financed emissions, assets under management and operational
value chain by 2050. Further, in December 2022, NatWest Group
published its science-based targets validated by Science Based
Target Initiative for 79% of its lending book as at 31 December
2019 and 57% of debt securities and equity shares, excluding
sovereign debt securities.
NatWest Group has also announced
and in the future it may also announce other climate ambitions,
targets and initiatives which support its aim to help addressing
the climate challenge.
Making the changes necessary to
contribute to achieving NatWest Group's strategic direction on
climate change, including contributing to achieve NatWest Group's
climate ambitions and targets and contributing to execute NatWest
Group's transition plan, together with the active management of
climate and sustainability-related risks and other regulatory,
policy and market changes, is likely to necessitate material
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). NWM N.V.
Group may be required to (i) significantly reduce its financed
emissions and its exposure to customers that do not align with a
transition to net zero or do not have a credible transition plan in
place and (ii) divest or discontinue certain activities for
regulatory or legal reasons or in response to the transition to a
less carbon-dependent economy. 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.
Making the necessary changes (or
not making the necessary changes in a timely manner, or at all) may
have a material adverse effect on NWM N.V. Group's business and
operations, financial condition, prospects and competitive position
and NWM N.V. Group's ability to contribute to achieving NatWest
Group's climate and financial ambitions and targets, take advantage
of climate change-related opportunities and generate sustainable
returns.
NWM N.V. Group's ability to
contribute to achieving NatWest Group's strategy, including
contributing to achieve NatWest Group's climate ambitions and
targets, will significantly depend on many factors and
uncertainties beyond NWM N.V. Group's control. These include: (i)
the extent and pace of climate change, including the timing and
manifestation of physical and transition risks; (ii) the
macroeconomic environment; (iii) the effectiveness of actions of
governments, legislators, regulators and businesses; (iv) the
response of the wider society, investors, customers, suppliers and
other stakeholders to mitigate the impact of climate and
sustainability-related risks; (v) changes in customer behaviour and
demand; (vi) appetite for new markets, credit appetite,
concentration risk appetite, lending and underwriting
opportunities; (vii) developments in the available technology;
(viii) the roll-out of low carbon infrastructure; and (ix) the
availability of accurate, verifiable, reliable, auditable,
consistent and comparable data. These external factors and other
uncertainties will make it challenging for NWM N.V. Group to
contribute to achieving NatWest Group's climate ambitions and
targets and there is a significant risk that all or some of these
ambitions and targets will not be achieved or not achieved within
the intended timescales.
NWM N.V. Group's ability to
contribute to achieving NatWest Group's climate ambitions and
targets depends to a significant extent on the timely
implementation and integration of appropriate government policies.
The UK CCC June 2023 Progress Report to the UK Parliament states
that the rate of emissions reduction will need to significantly
increase for the UK to meet its 2030 commitments and continued
delays in policy development and implementation mean achievement is
increasingly challenging. On 20 September 2023, the UK Government
announced its revised plans on reducing emissions to reach net
zero, including (i) delaying the proposed ban on the sale of petrol
and diesel cars to 2035; (ii) not proceeding with new policies
forcing landlords to upgrade the energy efficiency of their
properties; and (iii) delaying the ban on new fossil fuel boilers
for certain households. Accordingly,
NatWest Group (including NWM N.V. Group) considers achievement of
the following ambitions increasingly challenging (i) 50% of NatWest
Group's mortgage portfolio to have an EPC rating of C or above by
2030; and (ii) to at least halve the climate impact of NatWest
Group's financing activity by 2030, against a 2019
baseline.
NatWest Group (including NWM N.V.
Group) has also stated that it plans to phase-out 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. Data challenges, particularly
the lack of granular customer information, creates challenges in
identifying customers with 'coal related infrastructure' (e.g.
transportation and storage) and other customers with 'coal- related
operations' within NatWest Group's (including NWM N.V. Group) large
and diversified customer portfolios. Therefore, there is a risk
that some customers with UK-based coal activities may not have been
identified and that NatWest Group (including NWM N.V. Group) will
not be able to identify all relevant activities to achieve these
coal phase-out plans.
Any delay or failure by NWM N.V
Group in contributing to set, make progress against or meet NatWest
Group's climate-related ambitions, targets and plans may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation and may increase
the climate and sustainability-related risks NWM N.V. Group
faces.
There are significant limitations
related to accessing accurate, reliable, verifiable, auditable,
consistent and comparable climate and other sustainability-related
data that 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, verifiable, auditable, consistent and
comparable climate and sustainability-related data from
counterparties (including suppliers) or customers. Data may not be
generally available or, if available, may not be accurate,
reliable, verifiable, auditable, consistent, or
comparable.
Any failure of NWM N.V. Group to
proportionately collect or develop accurate, reliable, verifiable,
auditable, consistent and comparable counterparty (including
supplier) and customer data, may adversely affect NWM N.V. Group's
ability to prepare meaningful reporting which is relevant,
represented in an accurate, verifiable, comparable and
understandable way of the climate and sustainability-related risks
and opportunities, which may adversely affect NWM N.V. Group's
ability to meet external disclosure obligations and its reputation,
business and its competitive position.
In the absence of other sources,
reporting of financed emissions, facilitated emissions and other
sustainability data 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, judgements and estimates
than many of its financial disclosures. These assumptions,
judgements and estimates are highly likely to change materially
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 sector and other assumptions that may not be accurate
for a given counterparty (including supplier) or customer. There
may also be data gaps that are filled using proxy data, such as
sectoral averages or use of emissions estimated by a third party,
again developed in a variety of ways and in some cases not in a
timely manner causing data to be potentially outdated at the time
when they are used.
Significant risks, uncertainties
and variables are inherent in the assessment, measurement and
mitigation of climate and sustainability-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 world's transition to
a net-zero economy will unfold over time and how and when climate
and sustainability-related risks will manifest. These timeframes
are considerably longer than NWM N.V. Group's historical and
current strategic, financial, resilience and investment planning
horizons.
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 may have a
material impact on NWM N.V. Group's ability to make effective
business decisions about climate and sustainability-related risks
and opportunities, including risk management decisions, to comply
with disclosure requirements and to monitor and report progress in
meeting ambitions, targets and pathways.
Climate-related risks are
challenging to model due to their forward-looking nature, the lack
of and/or quality of historical testing capabilities, lack of
accuracy standardisation and incompleteness of emissions and other
climate and sub-sector related data and the immature nature of risk
measurement and modelling methodologies. As a result, it is very
difficult to predict and model the impact of climate-related risks
into precise financial and economic outcomes.
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 NWM N.V. Group would like to happen, rather they
explore the possible implications of different judgements 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 NWM N.V. Group that 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 presumably evolve rapidly in the
coming years;
- the
number of variables and the 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 continue to evolve 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 financed
emissions.
The calculation method for
facilitated emissions in respect of capital markets activities is
still in the process of developing and to date there is no unified
industry approach. Therefore, measuring, monitoring and reporting
on facilitated emissions will present similar data and modelling
challenges as described above for on balance sheet financed
emissions.
Accordingly, these risks and
uncertainties coupled with significantly long timeframes make the
outputs of climate-related risk modelling, climate-related targets
(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 climate-related risks and
the monitoring and mitigation of these risks in the economy and
financial system. There is increasing industry concern
(acknowledged by the Network for Greening the Financial System)
that model scenarios, including those provided by central banks and
supervisory bodies and are too benign and may not adequately
capture: (i) the financial implications of increasing frequency and
severity of acute physical risks as global temperatures increase;
(ii) second and third order impacts such as disruptions to supply
chains and increased geo-political risks; nor (iii) possible
'tipping points' that could lead to large, irreversible changes in
the climate system (for example the melting of permafrost or the
Greenland and Antarctic ice sheets).
Capabilities within NWM N.V. Group
to appropriately assess, model, report and manage climate related
risks and impacts and the suitability of the assumptions required
to model and manage climate-related risks appropriately continue to
develop. But such development is still in its early stages. Even
when those capabilities are appropriately 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 judgements and data quality
gaps and limitations may lead to inadequate risk management
information and frameworks, or ineffective business adaptation or
mitigation strategies or regulatory non-compliance all of which may
have a material adverse effect on NWM N.V. Group's business, future
results, financial condition, prospects, reputation and the price
of its securities.
Failure to implement effective
governance, procedures, systems and controls in compliance with
legal, regulatory requirements and societal expectations to manage
climate and sustainability-related risks and opportunities could
adversely affect NWM N.V. Group.
The UK's prudential regulation of
climate-related risk management is an important driver in how
NatWest Group (including NWM N.V. Group) develops its associated
risk framework for financing activities or engaging with
counterparties (including suppliers). Legislative and regulatory
authorities are publishing expectations as to how banks should
prudently manage and transparently disclose climate and
sustainability-related risks.
European Union and the Netherlands
NWM N.V. Group is subject to
regulatory developments in the EU and the Netherlands.
In November 2020, the 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. In November 2022, the ECB published its 'Good practices for
climate-related and environmental risk management' which shared
observations and good practices illustrating the different ways
that significant institutions could align their practices with the
supervisory expectations set out in the ECB Guide.
In April 2023, the ECB published
'The importance of being transparent - A review of climate-related
and environmental risks disclosures practices and trends', in which
it assessed the state of adherence to the ECB Guide by institutions
and shared best practices. On 23 January 2024, the ECB published
the report 'Risks from misalignment of banks' financing with the EU
climate objectives' focusing on the transition risks stemming from
banks' credit portfolios.
The ECB expects institutions to
have met its supervisory expectations for climate and environmental
risks in governance, strategy and risk management (including on
capital adequacy and stress testing by the end of 2024 and has set
various intervening deadlines before the end of 2024. The ECB has
expressed its readiness to enforce the abovementioned deadline with
all the instruments at its disposal, including imposing periodic
penalty payments or bank-specific capital add-ons.
In June 2021, the European Banking
Authority ('EBA') published its 'Report on Environmental, Social
and Governance risk management and supervision' in which it
highlighted the prudential view and expectations regarding
financial institutions' management of ESG risks as part of their
strategy, governance, risk management and reporting
practices.
In January 2022, the EBA published
its final draft implementing technical standards on Pillar 3
disclosures on ESG risks which from 28 June 2022 apply to large
institutions that have securities traded on a regulated market of
an EU member state (including NWM N.V. Group) and require them to
disclose information on their exposure to ESG-related risks and the
actions they take to mitigate those risks, as well as metrics
including their Green Asset Ratio (to be disclosed for the
financial year ending 2023) and the Banking Book Taxonomy Alignment
Ratio (to be disclosed for the financial year ending 2024). On 18
January 2024, the EBA launched a public consultation open until 18
April 2024 on draft guidelines on the management of ESG risks,
which set out requirements for institutions for the identification,
measurement, management and monitoring of ESG risks, including
through plans aimed at addressing the risks arising from the
transition towards an EU climate-neutral economy.
In March 2023, DNB, the
Netherlands' central bank, published its 'Guide to managing climate
and environmental risks' which provided financial undertakings with
focal points and best practices for managing climate-related and
environmental risks, including considerations for integrated risk
management in areas such as business models, strategies,
governance, risk management and information
dissemination.
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 described what it
expected from market parties when it comes to sustainability and
how the AFM would be supervising this. The AFM confirmed, 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.
The
UK
In the UK, the Bank of England's
Supervisory Statement 3/19 on the management of climate-related
financial risks, covering governance, risk management, scenario
analysis and disclosure which sets out expectations that firms,
such as NatWest Group (including NWM N.V. Group), take a strategic
approach to managing climate-related financial risks, identifying
current risks and those that can plausibly arise in the future, and
appropriate actions to mitigate those risks. In March 2023 the Bank
of England published a report setting out its latest thinking on
climate-related risks and regulatory capital frameworks. It found
there to be uncertainty over whether banks are sufficiently
capitalised for future climate-related losses and it stated that it
will undertake further analysis to explore whether changes to the
regulatory capital frameworks may be required.
Any failure of NatWest Group
(including NWM N.V. Group) to fully and timely embed climate and
other sustainability-related risks into its risk management
practices and framework to appropriately identify, assess,
prioritise and monitor the various climate-related physical and
transition risks and other sustainability-related risks and apply
the appropriate product governance process 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 and this may have a material
adverse effect on NWM N.V. Group's business, future results,
financial condition, prospects, reputation or the price of its
securities.
Increasing levels of climate and
other sustainability-related laws, regulation and oversight may
adversely affect NWM N.V. Group.
NatWest Group as well as its
subsidiaries in the UK, EU and elsewhere are increasingly becoming
subject to more extensive climate and sustainability-related legal
and regulatory requirements.
In the UK, these include mandatory
requirements by the FCA and under the Companies Act 2006 to make
climate-related disclosures consistent with the recommendations of
the Task Force on Climate related Financial Disclosures. In
addition, in August 2023 the FCA set out its intention to consult
in 2024 on rules and guidance for listed companies to disclose in
line with the UK-endorsed ISSB standards and the Transition Plan
Taskforce Disclosure Framework published in October 2023 as a
complementary package. Further regulatory requirements may emerge
as part of the developing UK sustainability-related disclosure
requirements.
NWM N.V. Group may be subject to
EU and Dutch climate and sustainability laws and regulations, such
as the EU Taxonomy, the EU Corporate Sustainability Reporting
Directive, the EU Green Bond Standard, the proposed EU Corporate
Sustainability Due Diligence Directive and other legal, regulatory
and supervisory expectations relating to climate-related and
environmental risk management and disclosure. The ECB, AFM, and DNB
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. A
failure of NWM N.V. Group to comply with these regulations, whether
through insufficient resources, expertise, support, customer and
counterparty data challenges or otherwise may have an adverse
effect on NWM N.V. Group's reputation and the successful
contribution to the implementation of NatWest Group's
strategy.
In some jurisdictions,
particularly the United States, regulatory and enforcement activity
around climate and sustainability initiatives is becoming
increasingly politicised. This has resulted in a polarisation
between promoting more extensive climate and sustainability-related
requirements, such as the proposed SEC climate disclosure rules,
and challenging climate and sustainability-related initiatives on
the basis of allegations that they could breach applicable
laws.
Divergence between UK, EU, US ,
Dutch and other climate and sustainability-related legal and
regulatory requirements and their interpretation may increase the
cost of doing business (including increased operating costs), may
result in contentious regulatory and litigation risk, may require
changes to NWM N.V. Group's business and may restrict NWM N.V.
Group's access to the EU/EEA and US capital markets. Failure to
comply with these divergent legal and regulatory requirements which
are applicable to NWM N.V. Group may result in NWM N.V. Group and
its subsidiaries not meeting applicable regulatory requirements or
investors' expectations.
Compliance with these complex and
evolving climate and sustainability-related legal and regulatory
requirements and voluntary standards and initiatives is likely to
require NWM N.V. Group to implement significant changes to its
business models, IT systems, products, governance, internal
controls over financial reporting, disclosure controls and
procedures, modelling capability and risk management systems, which
may increase the cost of doing business, result in higher capital
requirements, and entail additional change risk and increased
compliance, regulatory sanctions, conduct and litigation (including
settlements) costs.
Failure to implement and comply
with these requirements, standards and initiatives may also result
in investigations and/or regulatory sanctions, reputational damage
and investor disapproval each of which may have a material adverse
effect on NWM N.V. Group's future results, financial condition,
prospects and/or reputation.
Increasing regulation of
"greenwashing" is likely to increase the risk of regulatory
enforcement and investigation and litigation.
Misrepresenting or
over-emphasising the extent to which an investment or other type of
product takes into account 'green', '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 investigation
and/or sanction, claims and/or litigation and reputational damage.
This risk is likely to increase as the UK and other jurisdictions
implement and enforce new anti-greenwashing regulations. For
example, the FCA's Sustainability Disclosure Requirements and
investment labels policy statement (PS 23/16) published in November
2023 includes a general anti-greenwashing rule that requires
regulated firms to ensure that sustainability claims in financial
promotions of their products and services are consistent with the
sustainability characteristics of the product or service and are
fair, clear and not misleading. The FCA has stated that it would
publish guidance as to how regulated firms should comply with its
anti-greenwashing rule including the requirements for
sustainability claims that will become effective on 31 May 2024
(currently the subject of FCA consultation paper (GC23/3)). In the
EU, the European Commission has proposed a Green Claims Directive
which will address false environmental claims and the proliferation
of environmental labels by requiring certain claims to be
substantiated with scientific evidence and independently verified.
In June 2023, the European Supervisory Authorities (the EBA, the
European Insurance and Occupational Pensions Authority and the
European Securities and Markets Authority) published their Progress
Reports on Greenwashing in the financial sector, in which they set
out a common high-level understanding of greenwashing applicable to
market participants across their respective remits (banking,
insurance and pensions and financial markets). In the Netherlands,
in October 2023 the AFM published its Guidelines on Sustainability
Claims in which it provided tools to financial institutions and
pension providers on how to make correct, clear and non-misleading
sustainability claims.
NatWest Group (including NWM N.V.
Group) plans to invest in voluntary carbon credits to mitigate
emissions beyond its own value chain whilst transitioning towards a
state of net zero emissions by 2050. NatWest Group (including NWM
N.V. Group) may also be involved in trading voluntary carbon
credits with its clients, or facilitating clients to trade these
credits. Financial market and platform regulators are increasingly
taking an interest in the voluntary carbon market and voluntary
carbon credits retired, sold or traded by financial institutions or
used by them as part of their own emissions reduction plans. NWM
N.V. Group could potentially be exposed to financial, litigation,
regulatory enforcement and reputational risk where it retires,
facilitates or is otherwise associated with voluntary carbon credit
transactions or use (including use to offset own emissions). This
includes where voluntary carbon credits are not of sufficient
quality, potential issues or risks with respect to such carbon
credits (or projects through which they are generated) are not
adequately disclosed or stated benefits are exaggerated or
misleading and/or such carbon credits are used either by NWM N.V.
Group or by a third party organisation (such as a customer) as a
substitute for achieving appropriate emissions reductions in their
own operations.
Any failure of NWM N.V. Group to
implement robust and effective climate and sustainability-related
disclosure, communications and 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/or reputation and could give rise to increased
regulatory enforcement, investigation and litigation.
NWM N.V. Group may be subject to
potential climate 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 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, nature-related degradation, human rights
violations and other social, governance and sustainability-related
issues.
These risks may arise, for
example, from claims pertaining to:
- 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
appropriate, balanced, clear, complete, correct, fair, meaningful,
understandable disclosure (which is capable of being substantiated)
to investors, customers, counterparties (including suppliers) and
other stakeholders;
- 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;
- marketing that portrays products, securities, activities or
policies as having positive climate, nature-related 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;
- damages claims under various tort theories, including common
law public nuisance claims, or negligent mismanagement of physical
and/or transition risks;
- 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;
- changes in the understanding of what constitutes positive
climate, nature-related 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;
- any
weaknesses or failures in specific systems or processes associated
particularly with climate, nature-related 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;
- counterparties, collaborators, customers to whom 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 NWM N.V. Group's reputation or sustainability
credentials; or
- NWM
N.V. Group's or its customers', counterparties' (including
suppliers') involvement in, or decision not to participate in,
certain industries or projects associated with causing or
exacerbating climate change and nature-related
degradation.
Furthermore, there is a risk that
shareholders, campaign groups, customers and activist groups could
seek to take legal action against NWM N.V. Group for financing or
contributing to climate change, nature-related degradation and
human rights violations, failure to implement or follow adequate
governance procedures 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 an increase in the number
of legal, conduct and regulatory claims, as well as an increase in
the variety of legal bases being alleged, remedies sought and
amount of damages awarded in legal, conduct and regulatory
proceedings, investigations, administrative actions and other
adversarial proceedings against financial institutions for climate
and sustainability matters. There is a risk that as climate,
nature-related and environmental science develop and societal
understanding of these issues increases and deepens, courts,
regulators and enforcement authorities may apply the then current
understandings of climate and the broader sustainability-related
matters retrospectively when assessing claims about historical
conduct or dealings of financial institutions, including NWM N.V.
Group.
There is also an increase in
enforcement and litigation focusing on challenging public and
private sector sustainability policies and initiatives intended to
address climate change and nature-related degradation. See also,
'NWM N.V. Group is 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.' In
addition, supervisors and regulators are increasing their
enforcement focus on climate and environmental matters. For
example, the ECB has stated that enforcement measures in the form
of periodic penalty payments may be imposed on banks that do not
fully align with ECB supervisory expectations of sound practices
for managing climate and environmental risks.
These potential litigation,
conduct, enforcement and contract liability risks may have a
material adverse effect on NWM N.V. Group's ability to contribute
to achieving NatWest Group's strategy, including NatWest Group's
climate ambitions and targets, and this may have a material adverse
effect on NWM N.V. Group's future results, financial condition,
prospects, and/or reputation.
A reduction in the ESG ratings of
NatWest Group (including NWM N.V. Group) or NWM N.V. Group could
have a negative impact on NatWest Group's (including NWM N.V.
Group's) or NWM N.V. Group's reputation and on investors' risk
appetite and customers' willingness to deal with NatWest Group
(including NWM N.V. Group) or NWM N.V. Group.
ESG ratings from agencies and data
providers which rate how NatWest Group (including NWM N.V. Group)
or NWM N.V. Group manages environmental, social and governance
risks are increasingly influencing investment decisions pertaining
to NatWest Group's and/or its subsidiaries' securities or being
used as a basis to label financial products and services as
environmentally friendly or sustainable. ESG ratings are often (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) or 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 and certain of its
subsidiaries offer and sell products and services to customers and
counterparties based exclusively or largely on a rating by an
unregulated ESG rating agency or data providers. 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 second party opinion providers and there is a lack of
transparency in methodologies and data points, which renders
ratings and reviews incomparable between agencies or providers. Any
material reduction in the ESG ratings of NatWest Group (including
NWM N.V. Group) or NWM N.V. Group may 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 potentially affect the pricing
of securities issued by NWM N.V. Group and/or its subsidiaries and
could affect a customer's willingness to deal with NWM N.V. Group.
A regulatory sanction or enforcement action involving an ESG rating
agency used by a NWM N.V. Group entity could also have a negative
impact on NWM N.V. Group's reputation.
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, third party processes,
procedures, people or systems. 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
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
strategy, and the organisational and operational changes involved,
including NatWest Group's phased withdrawal from RoI, NatWest
Group's current cost-controlling measures, the progression towards
working as One Bank across NatWest Group to serve customers and
conditions affecting the financial services industry generally
(including macroeconomic and other geopolitical developments) as
well as the legal and regulatory uncertainty resulting from these
conditions. It is unclear as to how the future ways of working may
further 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 place significant pressure on 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, legal, risk, regulatory compliance and reporting,
financial crime, 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.
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.
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
NWM N.V. Group is subject to
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 2023,
NatWest Group and its supply chain were subjected to a small number
of Distributed Denial of Service and ransomware attacks, which are
a pervasive threat to the financial services industry (including
NWM N.V. Group). The focus is to manage the impact of the attacks
and sustain availability of services for NWM N.V. Group's
customers. Consequently, NWM N.V. Group continues to invest
significant resources in developing and evolving of cybersecurity
controls that are designed to minimise the potential effect of such
attacks.
Third parties continue to make
hostile attempts to gain access to, introduce malware (including
ransomware) into and exploit potential vulnerabilities of NWM N.V.
Group's IT systems. NWM N.V. Group has information and
cybersecurity controls that seek to minimise the impact of any such
attacks, which are subject to review on a regular basis, but given
the nature of the threat, there can be no assurance that such
measures will prevent the potential adverse effect of any attack
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' information
and cybersecurity policies, procedures or controls, may result in
significant financial losses, major business disruption, inability
to deliver customer services, or loss of, or ability to access,
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. Furthermore, cyberattacks on NWM N.V. Group's
counterparties may also have an adverse
effect on NWM N.V. Group's
operations.
Additionally, third parties may
induce employees, customers, third party providers or other users
with access to NWM N.V. Group's systems to wrongfully disclose
sensitive information 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.
NWM N.V. Group expects greater
regulatory engagement, supervision and enforcement to continue 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. 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'), and
the EU General Data Protection Regulation ('EU GDPR'), 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.
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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, innovate its
products offering, meet its regulatory obligations, and deliver its
strategy. Investment is being made in data tools and analytics,
including raising awareness around ethical data usage (for example,
in relation to the use of artificial intelligence) 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 have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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 (including
for technology and data focused roles), in a highly competitive
market, in an era of strategic change and under internal cost
reduction pressures.
The inability to compensate
employees competitively and/or any reduction of compensation, the
perception that NWM Group (of which NWM N.V. Group forms part) 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.
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 may increase the number
of departures of existing employees. Moreover, a failure to foster
a diverse and inclusive workforce may adversely affect NWM N.V.
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 works
councils. 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.
Any of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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
system failure, loss of service availability or breach of data
security could potentially 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 and talent. 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 2023, NWM N.V. Group made
considerable investments to further simplify, upgrade and improve
its IT and technology capabilities (including migration of certain
services to cloud platforms). As part of NWM's strategy, 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 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 of the above may have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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 commence or
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. These risks are exacerbated as
NWM N.V. Group continues to innovate its product offering and
increasingly offers digital solutions to its customers.
NatWest Group (including 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,
inappropriate behaviour towards customers, customer outcomes, 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, contractor or services
provider 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.
Hybrid working arrangements for NWM N.V. Group employees 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, governance frameworks, and increase
operational risk. Hybrid 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 seeks to embed a
risk awareness 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 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 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, Italy, and Sweden. 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.
Any of the above have a material
adverse effect on NWM N.V. Group's future results, financial
condition, prospects, and/or reputation.
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 strategy
and related targets, NWM Group's strategy, 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, stakeholders and
regulators, 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 and talent, and engage with
counterparties 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.
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 identify, measure and manage
material reputational risk exposures, NWM N.V. Group cannot be
certain that it will be successful in avoiding damage to its
business from reputational risk.
Any of the above aspects of
reputational risk may have a material adverse effect on NWM N.V.
Group's future results, financial condition, prospects, and/or
reputation.
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 DNB and the ECB;
(ii) direct market conduct supervision by the AFM and indirect
market conduct supervision by the ESMA; and (iii) supervision by
DNB, as home state supervisor, in respect of NWM N.V. Group's
branch offices in France, Germany, Italy, and Sweden, 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: Regulators and governments continue to focus 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 through initiatives such as the Basel 3.1 standards
implementation (and any resulting effect
on RWAs and models), the UK ring-fencing
regime, the strengthening of the recovery and resolution framework
applicable to financial institutions in the Netherlands, the EU
proposed reform of bank crisis management and deposit insurance
framework, the UK, the EU and the US, financial industry reforms
(including in respect of MiFID II and the FSM Act 2023), LIBOR
transition, corporate governance requirements, rules relating to
the compensation of senior management and
other employees, enhanced data protection and IT resilience
requirements, financial market infrastructure reforms), enhanced
regulations in respect of the provision of 'investment services and
activities', and increased regulatory focus in certain areas,
including conduct, consumer protection (such as the FCA's Consumer Duty) in retail or other
financial markets, 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. Regulatory and
competition authorities, including the CMA, are also looking at and
focusing more on how they can support competition and innovation in
digital and other markets.
Recent regulatory changes 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 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.
On 1 January 2024 the ECB replaced
DNB as the regulator of NWM N.V. due to NWM N.V. becoming a
'significant institution' as defined by the ECB and more oversight
from the ECB is anticipated going forward. This may result in
changes to supervision and regulations applicable to NWM N.V.
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 N.V. Group 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 or appropriation 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 (No
2) and in India, the Digital Personal Data Protection Bill
2022;
- 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 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;
- 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);
- recent or proposed US regulations around cybersecurity
incidents, climate disclosures, and other climate and
sustainability-related rules;
- new
or increased regulations relating to financial crime (including the
new criminal offence of failure to prevent fraud), and
- any
regulatory requirements relating to the use of artificial
intelligence and large language models across the financial
services industry (such as the European Union Artificial
Intelligence Act).
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.
Any of the above could have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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
- 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);
- recent or proposed US regulations around cybersecurity
incidents, climate disclosures, and other climate and
sustainability-related rules;
- new
or increased regulations relating to financial crime (including the
new criminal offence of failure to prevent fraud), and
- any
regulatory requirements relating to the use of artificial
intelligence and large language models across the financial
services industry (such as the European Union Artificial
Intelligence Act).
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.
Any of the above could have a
material adverse effect on NWM N.V. Group's future results,
financial condition, prospects, and/or reputation.
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,
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. Significant ongoing
matters include the implementation of recommendations made by the
independent corporate monitor aforementioned. For additional information relating to this and other legal
and regulatory proceedings and matters to which NWM Group is
exposed, see 'Litigation
and regulatory matters' at Note 25
to the NWM Group consolidated accounts.
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.
Any of the above may have a material
adverse effect on NWM N.V. Group's future results, financial
condition, prospects, and/or reputation
LEI: X3CZP3CK64YBHON1LE12 -
NatWest Markets N.V.
2138005O9XJIJN4JPN90 - NatWest
Group plc
RR3QWICWWIPCS8A4S074 - NatWest
Markets Plc