FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For
February 14, 2020
Commission
File Number: 001-10306
The
Royal Bank of Scotland Group plc
RBS,
Gogarburn, PO Box 1000
Edinburgh
EH12 1HQ
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form
20-F X Form 40-F
___
Indicate
by check mark if the registrant is submitting the Form 6-K in paper
as permitted by Regulation S-T Rule
101(b)(1):_________
Indicate
by check mark if the registrant is submitting the Form 6-K in paper
as permitted by Regulation S-T Rule
101(b)(7):_________
Indicate
by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities
Exchange Act of 1934.
Yes ___
No X
If
"Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-
________
The following information was issued as Company announcements
in London, England and is furnished pursuant to General Instruction
B to the General Instructions to Form
6-K:
The Royal Bank of Scotland Group plc 14 February
2020
Annual Report and Accounts 2019
Pillar 3 Report 2019
A copy of the Annual Report and Accounts
2019 for The Royal
Bank of
Scotland Group plc (RBS) has been submitted to the National Storage
Mechanism and will shortly be available for inspection
at: http://www.morningstar.co.uk/uk/NSM
This document is available on our website
at www.investors.rbs.com/reports-archive
A printed version will be mailed to shareholders who have opted for
a hard copy ahead of the Annual General Meeting for which formal
Notice will be given in due course.
We have also published the 2019 Pillar 3 report, available on our
website. For further information, please contact:-
RBS Media Relations
+44 (0) 131 523 4205
Investors Alexander Holcroft
Investor Relations
+44 (0) 207 672 1982
Information on risk factors and related party
transactions
For the purpose of compliance with the Disclosure Guidance and
Transparency Rules, this announcement also contains risk factors
and details of related party transactions extracted from the Annual
Report and Accounts 2019 in full unedited text. Page references in
the text refer to page numbers in the Annual Report and Accounts
2019.
Principal Risks and Uncertainties
Set out below are certain risk factors that could adversely affect
the RBS Group's future results, its financial condition and
prospects and cause them to be materially different from what is
forecast or expected and directly or indirectly impact the value of
its securities in issue. These risk factors are broadly categorised
and should be read in conjunction with other sections of this
annual report, including the forward looking statements section,
the strategic report and the capital and risk management section,
and should not be regarded as a complete and comprehensive
statement of all potential risks and uncertainties facing the RBS
Group.
Strategic risk
The RBS Group has announced a new Purpose-led Strategy which will
entail a period of transformation and require an internal cultural
shift across the RBS Group. It carries significant execution and
operational risks and it may not achieve its stated aims and
targeted outcomes.
On 14 February 2020 the RBS Group announced a new strategy, focused
on becoming a Purpose-led business, designed to champion potential
and to help individuals, families and businesses to thrive. This
strategy is intended to reflect the rapidly shifting
environment and backdrop of unprecedented disruption in society
driven by technology and changing customer expectations. The
strategy has three areas of focus - climate change, enterprise and
learning - where RBS Group believes it can have the greatest
positive impact. Together, these strategic initiatives are referred
to as the RBS Group's 'Purpose-led Strategy'. As a Purpose-led
Strategy, it is intended to balance the interests and changing
needs of all RBS Group stakeholders and to focus on building
relationships that create mutual value across customers' lives. It
will require an internal cultural shift across the RBS Group as to
how performance is perceived and how the RBS Group conducts its
business. The changes required are substantial and will take many
years to fully embed and may not result in the expected outcome
within the timeline and in the manner currently
contemplated.
To deliver against this purpose and deliver sustainable returns,
the RBS Group intends to: focus on the lifecycles of its customers
using insights about customers to evolve product and service
offerings; re-engineer and simplify the RBS Group by updating
operational and technological capabilities and strengthening
governance and control frameworks to reduce costs and improve
customer journeys; focus on innovation and partnership to drive
change and achieve growth in new product areas and customer
segments; and have a sharper focus on capital allocation and
deploying it more effectively for customers, in particular by
re-focusing its NatWest Markets franchise ('NWM
franchise').
As part of its new Purpose-led Strategy, the RBS Group has set a
number of financial, capital and operational targets and
expectations, both for the short term and throughout the
implementation period. Over the medium to long term, the RBS Group
intends to achieve a 9-11% return on tangible equity and a CET1
ratio of 13-14%, with a sustained pay-out ratio of around 40% of
attributable profit. In addition to making significant reductions
in RWAs, achieving these targets will require further significant
reductions to the RBS Group's cost base, with c. £250 million
of reductions targeted in 2020. Realising these cost reductions
will result in material strategic costs, which may be more than
currently expected. The continued focus on meeting cost
reduction targets may also mean limited investment in other areas
which could affect the RBS Group's long-term prospects, product
offering or competitive position and its ability to meet its other
targets, including those related to customer satisfaction and its
capacity to respond to climate change in line with its ambition.
RBS Group's commitment to align its lending and financing to the
objectives of the Paris Agreement, drive significant reductions in
its climate impact and develop sustainable finance products could
materially affect the RBS Group's business and operations. See also
'The RBS Group's new Purpose-led Strategy includes one area of
focus on climate change which entails significant execution risk
and is likely to require material changes to the business model of
the RBS Group over the next ten years'. This impact, and any of the
other factors above, could jeopardise the RBS Group's ability to
achieve its associated financial targets and generate sustainable
returns.
The implementation of the new Purpose-led Strategy is highly
complex and will take many years to fully embed. The RBS Group may
not be able to successfully implement all aspects of this strategy
or reach any or all of the related targets or expectations in the
time frames contemplated or at all. In addition, the RBS Group's
ability to serve its target customers, scale certain ventures,
deliver growth in new markets and restructure the NWM franchise may
be impacted or lower than expected and previously anticipated
revenue, profitability and cost reduction levels may not be
achieved in the timescale envisaged or at any time. In particular,
the Purpose-led Strategy entails a group-wide strategic cultural
shift which involves a large number of concurrent and
interdependent actions and initiatives, including a re-focussing of
the NWM franchise, any of which could fail to be implemented in the
manner and to the extent currently contemplated, due to
operational, legal, execution or other issues. In addition, the
successful implementation of the Purpose-led Strategy in part
depends on initiatives and growth in ventures that are new to the
RBS Group or to the market and therefore there is a risk that some
or all such initiatives will not succeed, or may be limited in
scope or scale, including due to its current ownership
structure.
The scale and scope of the intended changes present material
business, operational, IT system, internal culture, conduct and
people risks to the RBS Group as the planning and implementation of
the transformation programme are resource-intensive and disruptive,
and will divert management resources. In addition, the changes
being concurrently implemented will require the implementation and
application of robust governance and controls frameworks, in
particular with respect to any strategic partnerships and
acquisitions, and further consolidation of IT systems and there is
no guarantee that the RBS Group will be successful in doing so. The
implementation of the Purpose-led Strategy could result in
materially higher costs than currently contemplated, (including due
to material uncertainties and factors outside of the RBS Group's
control) or could be phased in a manner other than currently
expected. These risks will be present throughout the period of
implementation which is expected to last during the medium term,
and in some cases, materially beyond.
Changes in the economic, political and regulatory environment in
which the RBS Group operates or regulatory uncertainty and changes,
strong market competition and industry disruption or economic
volatility, including as a result of the continued uncertainty
surrounding the terms of the UK's exit from the EU, or changes in
the scale and timing of policy responses on climate change, may
require the RBS Group to adjust aspects of its Purpose-led Strategy
or the timeframe for its implementation. In particular, because
some initiatives depend on achieving growth in new ventures and
markets for the RBS Group, the Purpose-led Strategy is vulnerable
to an economic downturn. Furthermore, any new strategy requires
ongoing confidence from customers and the wider market, without
which customer activity and related income levels may fall or the
RBS Group's reputation may be adversely affected.
Each of these risks, and others identified in these Risk Factors,
individually or collectively could jeopardise the implementation
and delivery of the Purpose-led Strategy, result in higher than
expected restructuring costs, impact the RBS Group's products and
services offering, reputation with customers or business model and
adversely impact the RBS Group's ability to deliver its strategy
and meet its targets and guidance, each of which could in turn have
a material adverse impact on the RBS Group's results of operations,
financial condition and prospects.
Over the next three years, the RBS Group intends to re-focus its
NatWest Markets franchise to the RBS Group's corporate and
institutional customer offering and realise significant reductions
in risk weighted assets, cost base and complexity. This entails
significant commercial, operational and execution risks and the
intended benefits for RBS Group may not be realised within the
timeline and in the manner currently contemplated.
As part of the new Purpose-led Strategy announced on 14 February
2020, the RBS Group intends to implement a more strategically
congruent and economically
sustainable model for its NWM franchise. Over the medium term, it
intends to re-focus the NWM franchise on principally serving the
RBS Group's corporate and institutional customer base. This will
require NWM Group to simplify its operating model and technology
platform, as well as reduce its cost base and capital requirements.
A focus of the NWM franchise realignment is the intended reduction
in its level of RWAs, to reduce it to c. 10% of the RBS Group's
RWAs in the medium term. This is intended to be achieved by exiting
certain exposures and optimising inefficient capital across the NWM
Group, especially in relation to its Rates products. It is
anticipated that the re-focusing of the NWM franchise is expected
to be capital ratio accretive in year one and over the course of
the transition plan period.
The realignment of the NatWest Markets franchise entails
significant execution risks and is based on management plans,
projections and models and are subject to certain material
assumptions and judgments which may prove to be incorrect such that
the go-forward strategy is re-assessed for example: if revenues
reduce relatively faster than costs; material execution issues
arise or market distress occurs; if RWAs take longer to exit or are
more costly to reduce than anticipated; or if the key franchise
legal entities, NWM Plc and NWM N.V., have difficulties accessing
the funding market on acceptable terms or at all.
Implementing these changes to the NWM franchise entails significant
commercial and operational and risks. These include risks around
how it is perceived by its customers and stakeholders and the
ability for NWM to retain employees required to deliver the
transition and whom are key for its go-forward strategic
priorities. Revenues and costs may be negatively impacted
(revenues, for example, may decrease significantly more quickly
than associated costs) and the implementation may be more difficult
or expensive than expected, including as a result of the UK's exit
from the EU and regulatory requirements. The orderly run-down of
certain of its portfolios and the reduction of its risk-weighted
assets may be accompanied by the recognition of disposal losses
which may be higher than anticipated, including due to a degraded
economic environment, and may not lead to a concurrent and
proportionate reduction in required capital. The NWM Plc and NWM
N.V. boards support the strategy and the associated plans and
budgets, but successful implementation of the strategy within the
NWM franchise will need their continued support, as well as that of
the NWM .N.V. boards and NWM management.
The RBS Group's new Purpose-led Strategy includes one area of focus
on climate change which entails significant execution risk and is
likely to require material changes to the business model of the RBS
Group over the next ten years.
The RBS Group's new strategy on climate change, together with its
commitments under the UN Principles on Responsible Banking to align
its strategy to the 2015 Paris Agreement, will require
significant resource to develop the capacity and methodology to
understand, and measure the climate impact of the emissions from
its financing activity. There is currently no standard approach or
methodology to measure such emissions and provide a scenario-based
model for alignment to the 2015 Paris Agreement ('Paris
Alignment'). The RBS Group must identify its approach to this on a
short time scale to meet its target of setting and publishing
sector-specific targets by 2021 and its goal of setting
comprehensive climate impact scenario-based reduction targets and
plans for Paris Alignment by 2022, and be able to adequately define
and benchmark its current climate impact to demonstrate its
progress against its ambition to reduce this by half over the next
10 years. Any delay to establishing such targets and developing its
plan for Paris Alignment may entail reputational and market risk,
and increase the risks the RBS Group faces as a result of climate
change.
It is expected that the targets and measures that the RBS Group
will need to adopt in line with its new strategy on climate change
will require significant reductions to the RBS
Group's financed emissions to be realised which, together
with the impact of embedding climate into its risk framework and
other regulatory, policy and market changes, is likely to
necessitate far reaching changes to the RBS Group's business model
and existing exposures, and potentially on timescales outside of
risk appetite. Whilst the risks presented by climate change are
unprecedented in magnitude and scale, how the RBS Group implements
its strategy to respond to climate change may also have a
material adverse effect on the RBS Group's business growth, its
competitiveness, and profitability over the short, medium and long
term. Once established, there is no certainty that the RBS Group
will be able to meet its climate change targets and ambitions or
that seeking to do so will not have an adverse impact on the RBS
Group, including its competition position. See also 'The RBS Group
expects to face significant risks in connection with climate change
and the transition to a low carbon economy, which may adversely
impact the RBS Group'.
Operational and IT resilience risk
The RBS Group is subject to increasingly sophisticated and frequent
cyberattacks.
The RBS Group is experiencing an increase in cyberattacks across
both the entire RBS Group and against the RBS Group's supply chain,
re-enforcing the importance of due diligence and close working with
the third parties on which the RBS Group relies. The RBS 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, the RBS Group is required to
continue to invest in additional capability designed to defend
against the emerging threats. In 2019, the RBS Group was subjected
to a small number of Distributed Denial of Service ('DDOS')
attacks, which are a pervasive and significant threat to the global
financial services industry. The focus is to mitigate the impact of
the attacks and sustain availability of services for RBS Group's
customers. The RBS Group continues to invest significant
resources in the development and evolution of cyber security
controls that are designed to minimise the potential effect of such
attacks.
Hostile attempts are made by third parties to gain access to and
introduce malware (including ransomware) into the RBS Group's IT
systems, and to exploit vulnerabilities. The RBS Group has
information and cyber security controls in place, which are subject
to review on a continuing basis but given the nature of the threat,
there can be no assurance that such measures will prevent all
attacks in the future. See also, 'The RBS Group's operations
are highly dependent on its complex IT systems, and any IT failure
could adversely affect the RBS Group'.
Any failure in the RBS Group's cybersecurity policies, procedures
or controls, may result in significant financial losses, major
business disruption, inability to deliver customer services, or
loss of data or other sensitive information (including as a result
of an outage) and may cause associated reputational
damage. Any of these factors could increase costs (including
costs relating to notification of, or compensation for customers,
credit monitoring or card reissuance), result in regulatory
investigations or sanctions being imposed or may affect the RBS
Group's ability to retain and attract customers. Regulators in
the UK, US, Europe and Asia continue to recognise cybersecurity as
an increasing systemic risk to the financial sector and have
highlighted the need for financial institutions to improve their
monitoring and control of, and resilience (particularly of critical
services) to cyberattacks, and to provide timely notification of
them, as appropriate.
Additionally, third parties may also fraudulently attempt to induce
employees, customers, third party providers or other users who have
access to the RBS Group's systems to disclose sensitive information
in order to gain access to the RBS Group's data or that of the RBS
Group's customers or employees. Cyber security 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 the RBS Group's employees or third parties, including third
party providers, or may result from accidental technological
failure.
The RBS Group expects greater regulatory engagement, supervision
and enforcement in relation to its overall resilience to withstand
IT and related disruption, either through a cyberattack or some
other disruptive event. Such increased regulatory engagement,
supervision and enforcement is uncertain in relation to scope,
consequence and pace of change, which could negatively impact the
RBS Group. Due to the RBS Group's reliance on technology and the
increasing sophistication, frequency and impact of cyberattacks, it
is likely that such attacks could have a material adverse impact on
the RBS Group.
In accordance with the EU General Data Protection Regulation
('GDPR'), the RBS Group is required to ensure it implements timely,
appropriate and effective organisational and technological
safeguards against unauthorised or unlawful access to the data of
the RBS Group, its customers and its employees. In order to meet
this requirement, the RBS Group relies on the effectiveness of its
internal policies, controls and procedures to protect the
confidentiality, integrity and availability of information held on
its IT systems, networks and devices as well as with third parties
with whom the RBS Group interacts. A failure to monitor and manage
data in accordance with the GDPR requirements of the applicable
legislation may result in financial losses, regulatory fines and
investigations and associated reputational damage. In addition,
whilst the RBS Group takes measures to prevent, detect and minimise
attacks, the RBS Group's systems, and those of third party
providers, are subject to frequent cyberattacks.
The RBS Group operations and strategy are highly dependent on the
effective use and accuracy of data.
The RBS Group relies on the effective use of accurate data to
support and improve its operations and deliver its strategy.
Failure to produce underlying high quality data and/or the
ineffective use of such data could result in a failure to satisfy
its customers' expectations including by delivering innovative
products and services. This could place RBS Group at a competitive
disadvantage, inhibit its efforts to reduce costs and improve its
systems, controls and processes, and result in a failure to deliver
the RBS Group's strategy. The use of unethical or inappropriate
data and/or non-compliance with customer data and privacy
protection could give rise to conduct and litigation risks and
could also increase the risk of an operational event or losses or
other adverse consequences due to inappropriate models, systems,
processes, decisions or other actions.
Operational risks are inherent in the RBS Group's
businesses.
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, procedures, people or systems, or from
external events, including legal risks. The RBS Group operates in
many countries, offering a diverse range of products and services
supported by 62,900 employees as at 31 December 2019; it
therefore has complex and diverse operations. As a result,
operational risks or losses can arise from a number of internal or
external factors (including financial crime). These risks are also
present when the RBS Group relies on third-party suppliers or
vendors to provide services to it or its customers, as is
increasingly the case as the RBS Group outsources certain
functions, including with respect to the implementation of new
technologies, innovation and responding to regulatory and market
changes.
Operational risks continue to be heightened as a result of the
implementation of the RBS Group's Purpose-led Strategy, including
the refocusing of its NatWest Markets franchise, the RBS Group's
current cost-reduction measures and conditions affecting the
financial services industry generally (including Brexit and other
geo-political developments) as well as the legal and regulatory
uncertainty resulting therefrom. This may place significant
pressure on the RBS Group's ability to maintain effective internal
controls and governance frameworks. The effective management of
operational risks is critical to meeting customer service
expectations and retaining and attracting customer business.
Although the RBS 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 the RBS
Group. Ineffective management of such risks could
adversely affect the RBS Group. See also, 'The RBS Group has
announced a new Purpose-led Strategy which will entail a period of
transformation and require an internal cultural shift across the
RBS Group. It carries significant execution and operational risks
and it may not achieve its stated aims and targeted
outcomes'.
The RBS Group's operations are highly dependent on its complex IT
systems, and any IT failure could adversely affect the RBS
Group.
The RBS Group's operations are highly dependent on the ability to
process a very large number of transactions efficiently and
accurately while complying with applicable laws and regulations.
The proper functioning of the RBS Group's payment systems,
financial crime and sanctions controls, risk management, credit
analysis and reporting, accounting, customer service and other IT
systems, as well as the communication networks between its branches
and main data processing centres, is critical to the RBS Group's
operations.
Individually or collectively, any critical system failure, material
loss of service availability or material breach of data security
could cause serious damage to the RBS Group's ability to provide
services to its customers, which could result in reputational
damage, significant compensation costs or regulatory sanctions
(including fines resulting from regulatory investigations) or a
breach of applicable regulations. In particular, such issues could
cause long-term damage to the RBS Group's reputation and could
affect its regulatory approvals, competitive position, business and
brands, which could undermine its ability to attract and retain
customers. This risk is heightened as the RBS Group outsources
certain functions and continues to innovate and offer new digital
solutions to its customers as a result of the trend towards online
and mobile banking.
In 2019, the RBS Group continued to make considerable investments
to further simplify, upgrade and improve its IT and technology
capabilities (including migration of certain services to cloud
platforms). The RBS Group 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.
Should such investment and rationalisation initiatives fail to
achieve the expected results or prove to be insufficient due to
cost-challenges or otherwise, this could negatively affect the RBS
Group's operations, its reputation and ability to retain or grow
its customer business or adversely impact its competitive position,
thereby negatively impacting the RBS Group's financial
position.
The RBS Group relies on attracting, retaining and developing senior
management and skilled personnel, and is required to maintain good
employee relations.
The RBS Group's current and future success depends on its ability
to attract, retain and develop highly skilled and qualified
personnel, including senior management, directors and key
employees, in a highly competitive labour market and under internal
cost reduction pressures. This entails risk, particularly in light
of the implementation of the RBS Group's Purpose-led Strategy and
refocusing of its NatWest Markets franchise, heightened regulatory
oversight of banks and the increasing scrutiny of, and (in some
cases) restrictions placed upon, employee compensation
arrangements, in particular those of banks in receipt of government
support such as the RBS Group, all of which may have an adverse
effect on the RBS Group's ability to hire, retain and engage
well-qualified employees. The market for skilled personnel is
increasingly competitive, especially for technology-focussed roles,
thereby raising the cost of hiring, training and retaining skilled
personnel. In addition, certain economic, market and regulatory
conditions and political developments (including Brexit) may reduce
the pool of candidates for key management and non-executive roles,
including non-executive directors with the right skills, knowledge
and experience, or increase the number of departures of existing
employees.
Many of the RBS Group's employees in the UK, the Republic of
Ireland ('ROI') and continental Europe are represented by employee
representative bodies, including trade unions. Engagement with its
employees and such bodies is important to the RBS Group in
maintaining good employee relations. Any failure to do so could
impact the RBS Group's ability to operate its business
effectively.
A failure in the RBS Group's risk management framework could
adversely affect the RBS Group, including its ability to achieve
its strategic objectives.
Risk management is an integral part of all of the RBS Group's
activities and includes the definition and monitoring of the RBS
Group's risk appetite and reporting on the RBS Group's risk
exposure and the potential impact thereof on the RBS Group's
financial condition. Financial risk management is highly dependent
on the use and effectiveness of internal stress tests and models
and ineffective risk management may arise from a wide variety of
factors, including lack of transparency or incomplete risk
reporting, unidentified conflicts or misaligned incentives, lack of
accountability control and governance, lack of consistency in risk
monitoring and management or insufficient challenges or assurance
processes. Failure to manage risks effectively could adversely
impact the RBS Group's reputation or its relationship with its
regulators, customers, shareholders or other
stakeholders.
The RBS Group's operations are inherently exposed to conduct risks.
These include business decisions, actions or reward mechanisms that
are not responsive to or aligned with the RBS Group's regulatory
obligations, customers' needs or do not reflect the RBS Group's
customer-focussed strategy, ineffective product management,
unethical or inappropriate use of data, implementation
and utilisation of new technologies, outsourcing of
customer service and product delivery, the possibility
of mis-selling of financial products and mishandling of
customer complaints. Some of these risks have materialised in the
past and ineffective management and oversight of conduct risks may
lead to further remediation and regulatory intervention or
enforcement. The RBS Group's businesses are also exposed to risks
from employee misconduct including non-compliance with policies and
regulations, negligence or fraud (including financial crimes), any
of which could result in regulatory fines or sanctions and serious
reputational or financial harm to the RBS Group.
The RBS Group has been seeking to embed a strong risk culture
across the organisation and has implemented policies and allocated
new resources across all levels of the organisation to manage and
mitigate conduct risk and expects to continue to invest in its risk
management framework. However, such efforts may not insulate the
RBS Group from future instances of misconduct and no assurance can
be given that the RBS Group's strategy and control framework will
be effective. Any failure in the RBS Group's risk management
framework could negatively affect the RBS Group and its financial
condition through reputational and financial harm and may result in
the inability to achieve its strategic objectives for its
customers, employees and wider stakeholders.
The RBS Group's operations are subject to inherent reputational
risk.
Reputational risk relates to stakeholder and public perceptions of
the RBS Group arising from an actual or perceived failure to meet
stakeholder expectations, including with respect to the RBS Group's
Purpose-led Strategy and related targets, due to any events,
behaviour, action or inaction by the RBS Group, its employees or
those with whom the RBS Group is associated. This includes brand
damage, which may be detrimental to the RBS Group's business,
including its ability to build or sustain business relationships
with customers, and may cause low employee morale, regulatory
censure or reduced access to, or an increase in the cost of,
funding. Reputational risk may arise whenever there is a material
lapse in standards of integrity, compliance, customer or operating
efficiency and may adversely affect the RBS Group's ability to
attract and retain customers. In particular, the RBS Group's
ability to attract and retain customers (and, in particular,
corporate and retail depositors) may be adversely affected by,
amongst others: negative public opinion resulting from the actual
or perceived manner in which the RBS Group conducts or modifies its
business activities and operations, media coverage (whether
accurate or otherwise), employee misconduct, the RBS Group's
financial performance, IT systems failures or cyberattacks, data
breaches, financial crime, the level of direct and indirect
government support, or the actual or perceived practices in the
banking and financial industry in general, or a wide variety of
other factors. See also, 'The RBS Group has announced a new
Purpose-led Strategy which will entail a period of transformation
and require an internal cultural shift across the RBS Group. It
carries significant execution and operational risks and it may not
achieve its stated aims and targeted outcomes'.
Modern technologies, in particular online social networks and other
broadcast tools which facilitate communication with large audiences
in short time frames and with minimal costs, may also significantly
increase and accelerate the impact of damaging information and
allegations.
Although the RBS Group has implemented a Reputational Risk Policy
to improve the identification, assessment and management of
customers, transactions, products and issues which represent a
reputational risk, the RBS Group cannot be certain that it will be
successful in avoiding damage to its business from reputational
risk.
Economic and political risk
Prevailing uncertainty regarding the terms of the UK's withdrawal
from the European Union has adversely affected and will continue to
affect the RBS Group.
Following the EU Referendum in June 2016, and pursuant to the exit
process triggered under Article 50 of the Treaty on European Union
in March 2017 and the ratification of the withdrawal agreement by
the UK government and the EU (through the Council of Ministers),
the UK ceased to be a member of the EU and the European Economic
Area ('EEA') on 31 January 2020 ('Brexit') and entered a transition
period, currently due to expire on 31 December 2020. During this
transition period, the UK retains the benefits of membership of the
EU's internal market and the customs union, but loses its
representation in the EU's institutions and its role in EU
decision-making.
The UK and EU are currently seeking to determine the terms of their
future relationship by the end of the transition period, and the
resulting economic, trading and legal relationships with both the
EU and other counterparties currently remain unclear and subject to
significant uncertainty. If the UK and EU do not agree a new
comprehensive trade agreement by the end of the transition period
and the transition period is not extended, then, subject to
separate agreements being made with third countries, the UK would
be expected to operate on basic World Trade Organization terms, the
outcome of which for RBS Group would be similar in certain respects
to a 'no-deal' Brexit, and which may result in, amongst others,
loss of access to the EU single market for goods and services, the
imposition of import duties and controls on trade between the UK
and the EU and related trade disruption.
The direct and indirect effects of the UK's exit from the EU and
the EEA are expected to affect many aspects of the RBS Group's
business and operating environment, including as described
elsewhere in these risk factors, and may be material and/or cause a
near-term impact on impairments. See also, 'The RBS Group faces
increased political and economic risks and uncertainty in the UK
and global markets'. As a result of such anticipated effects, the
RBS Group has engaged in significant and costly Brexit planning and
contingency planning and expects to continue to do so. The direct
and indirect effects of the UK's exit from the EU and the EEA may
also impede the RBS Group's ability to deliver its Purpose-led
Strategy and refocusing of its NatWest Markets franchise. See also,
'The RBS Group has announced a new Purpose-led Strategy which will
entail a period of transformation and require an internal cultural
shift across the RBS Group. It carries significant execution and
operational risks and it may not achieve its stated aims and
targeted outcomes' and 'Over the next three years, the RBS Group
intends to re-focus its NatWest Markets franchise to the RBS
Group's CIB customer offering and realise significant reductions in
risk weighted assets, cost base and complexity. This entails
significant commercial, operational and execution risks and the
intended benefits for RBS Group may not be realised within the
timeline and in the manner currently contemplated'.
The longer term effects of Brexit on the RBS Group's operating
environment depend significantly on the terms of the ongoing
relationship between the UK and EU and are difficult to predict.
They are subject to wider global macro-economic trends and events,
but may significantly impact the RBS Group and its customers and
counterparties who are themselves dependent on trading with the EU
or personnel from the EU. They may result in, or be exacerbated by,
periodic financial volatility and slower economic growth, in the UK
in particular, but also in the ROI, the rest of Europe and
potentially the global economy.
Significant uncertainty exists as to the respective legal and
regulatory arrangements under which the RBS Group and its
subsidiaries will operate once the transition period has ended. The
legal and political uncertainty and any actions taken as a result
of this uncertainty, as well as new or amended rules, could have a
significant impact on the RBS Group's non-UK operations and/or
legal entity structure, including attendant restructuring costs,
level of impairments, capital requirements, regulatory environment
and tax implications and as a result may adversely impact the RBS
Group's profitability, competitive position,, business model and
product offering.
The RBS Group has obtained the requisite regulatory permissions
(including third country licence branch approvals and access to
TARGET2 clearing and settlement mechanisms) it currently considers
are required for continuity of business as a result of the UK's
departure from the EU. These are required in order to maintain the
ability to clear euro payments and to serve non-UK EEA customers if
there is a loss of access to the European Single Market. These
changes to the RBS Group's operating model have been costly and may
require further changes to its business operations, product
offering and customer engagement. The regulatory permissions from
the Dutch and German authorities are conditional in nature and will
require on-going compliance with certain conditions, including
maintaining minimum capital level and deposit balances as well as a
defined local physical presence going forward; such conditions may
be subject to change in the future. Maintaining these permissions
and the RBS Group's access to the euro payment infrastructure will
be fundamental to its business going forward and further changes to
the RBS Group's business operations may be required.
The RBS Group faces increased political and economic risks and
uncertainty in the UK and global markets.
In the UK, significant economic and political uncertainty continues
to surround the terms of Brexit and now also the future
relationship between the UK and the EU. See also, 'Prevailing
uncertainty regarding the terms of the UK's withdrawal from the
European Union has adversely affected and will continue to affect
the RBS Group'.
The RBS Group faces additional political uncertainty as to how the
Scottish parliamentary process (including, as a result of any
further Scottish independence referendum or the next Scottish
Parliament elections in May 2021) may adversely impact the RBS
Group. RBSG plc and a number of other RBS Group entities (including
NWM Plc) are headquartered and/or incorporated in Scotland. Any
changes to Scotland's relationship with the UK or the EU (as an
indirect result of Brexit or other developments) would impact the
environment in which the RBS Group and its subsidiaries operate,
and may require further changes to the RBS Group's structure,
independently or in conjunction with other mandatory or strategic
structural and organisational changes which could adversely impact
the RBS Group.
Actual or perceived difficult global economic conditions can create
challenging economic and market conditions and a difficult
operating environment for the RBS Group's businesses and its
customers and counterparties, thereby affecting its financial
performance.
The outlook for the global economy over the medium-term remains
uncertain due to a number of factors including: trade barriers
and the increased possibility of trade wars, widespread
political instability, an extended period of low inflation and low
interest rates, and global regional variations in the impact and
responses to these factors. Such conditions could be worsened by a
number of factors including political uncertainty or macro-economic
deterioration in the Eurozone, China or the US, the conflicts or
tensions the Middle East or Asia, increased instability in the
global financial system and concerns relating to further financial
shocks or contagion (for example, due to economic concerns in
emerging markets), market volatility or fluctuations in the value
of the pound sterling, new or extended economic sanctions,
volatility in commodity prices or concerns regarding sovereign
debt. This may be compounded by the ageing demographics of the
populations in the markets that the RBS Group serves, or rapid
change to the economic environment due to the adoption of
technology and artificial intelligence. Any of the above
developments could adversely impact the RBS Group
directly (for example, as a result of credit losses) or indirectly
(for example, by impacting global economic growth and financial
markets and the RBS Group's customers and their banking
needs).
In addition, the RBS Group is exposed to risks arising out of
geopolitical events or political developments, such as trade
barriers, exchange controls, sanctions and other measures taken by
sovereign governments that may hinder economic or financial
activity levels. Furthermore, unfavourable political, military or
diplomatic events, including secession movements or the exit of
other member states from the EU, armed conflict, pandemics and
widespread public health crises (including the recent coronavirus
outbreak, the impact of which will depend on future developments,
which are highly uncertain and cannot be predicted), state and
privately sponsored cyber and terrorist acts or threats, and the
responses to them by governments and markets, could negatively
affect the business and performance of the RBS Group, including as
a result of the indirect effect on regional or global trade and/or
the RBS Group's customers.
The value of the RBS Group's financial instruments may be
materially affected by market risk, including as a result of market
fluctuations. Market volatility, illiquid market conditions and
disruptions in the credit markets may make it extremely difficult
to value certain of the RBS Group's financial instruments,
particularly during periods of market displacement which could
cause a decline in the value of the RBS Group's financial
instruments, which may have an adverse effect on the RBS Group's
results of operations in future periods, or inaccurate carrying
values for certain financial instruments.
In addition, financial markets are susceptible to severe events
evidenced by rapid depreciation in asset values, which may be
accompanied by a reduction in asset liquidity. Under these
conditions, hedging and other risk management strategies may not be
as effective at mitigating trading losses as they would be under
more normal market conditions. Moreover, under these conditions,
market participants are particularly exposed to trading strategies
employed by many market participants simultaneously and on a large
scale, increasing the RBS Group's counterparty risk. The RBS
Group's risk management and monitoring processes seek to quantify
and mitigate the RBS Group's exposure to more extreme market moves.
However, severe market events have historically been difficult to
predict and the RBS Group could realise significant losses if
extreme market events were to occur.
The RBS Group expects to face significant risks in connection with
climate change and the transition to a low carbon economy which may
adversely impact the RBS Group.
The risks associated with climate change are subject to rapidly
increasing prudential and regulatory, political and societal focus,
both in the UK and internationally. Embedding climate risk into the
RBS Group's risk framework, and adapting the RBS Group's operations
and business strategy to address the physical risks of climate
change and the risk associated with a transition to a low carbon
economy in line with its Purpose-led Strategy and ambition to
reduce the climate impact of its financing activities and evolving
regulatory requirements and market expectations is expected to have
a significant impact on the RBS Group.
Multilateral agreements, in particular the 2015 Paris Agreement,
and subsequent UK and Scottish Government commitments to
achieving net zero carbon emissions by 2050 and 2045, respectively,
will require widespread levels of adjustment across all sectors of
the UK economy and markets in which the RBS Group operates. Some
sectors such as property, energy, infrastructure (including
transport) and agriculture are expected to be particularly
impacted. The nature and timing of the far-reaching commercial,
technological, policy and regulatory changes that this transition
will entail remain uncertain. The UK Government and UK regulators,
including the PRA, the RBSG plc's UK prudential regulator, have
indicated it is a priority issue. The impact of such regulatory,
policy, commercial and technological changes is expected to be
highly significant and may be disruptive, especially if such
changes do not occur in an orderly or timely manner or are not
effective in reducing emissions sufficiently.
Furthermore, the nature and timing of the manifestation of the
physical risks of climate change (which include more extreme
specific weather events such as flooding and heat waves and longer
term shifts in climate) are also uncertain, and their impact on the
economy is predicted to be more acute if carbon emissions are not
reduced on a timely basis or to the requisite extent. Recent data
indicates that global carbon emissions are continuing to increase.
The potential impact on the economy includes, but is not limited
to, lower GDP growth, significant changes in asset prices and
profitability of industries, higher unemployment and the prevailing
level of interest rates. See also, 'The RBS Group's new Purpose-led
Strategy includes one area of focus on climate change which entails
significant execution risk and is likely to require
material changes to the business model of the RBS Group over
the next ten years', 'The RBS Group's businesses are subject to
substantial regulation and oversight, which are constantly evolving
and may adversely affect the RBS Group' and 'Any reduction in
the credit rating assigned to RBSG plc, any of its subsidiaries or
any of their respective debt securities could adversely affect the
availability of funding for the RBS Group, reduce the RBS Group's
liquidity position and increase the cost of funding'.
If the RBS Group does not adequately embed climate risk into its
risk framework to appropriately measure, manage and disclose the
various financial, transition and physical risks it faces
associated with climate change, or fails to implement its new
strategy on climate change and adapt its business model to the
changing regulatory requirements and market expectations on a
timely basis, it may have a material and adverse impact
on the RBS Group's level of business growth, its competitiveness,
profitability, prudential capital requirements, ESG ratings, credit
ratings, cost of funding, reputation, results of operation and
financial condition.
HM Treasury (or UKGI on its behalf) could exercise a significant
degree of influence over the RBS Group and further offers or sales
of the RBS Group's shares held by HM Treasury may affect the price
of securities issued by the RBS Group.
In its November 2018 Autumn Budget, the UK Government announced its
intention to continue the process of privatisation of RBSG plc and
to carry out a programme of sales of RBSG plc ordinary shares with
the objective of selling all of its remaining shares in RBSG plc by
2023-2024. On 6 February 2019, RBSG plc obtained shareholder
approval to participate in certain directed share buyback
activities. As at 31 December 2019, the UK Government
held 62.1% of the issued ordinary share capital of RBSG plc.
There can be no certainty as to the continuation of the sell-down
process or the timing or extent of such sell-downs which could
result in a prolonged period of increased price volatility on the
RBS Group's ordinary shares.
Any offers or sale, or expectations relating to the timing thereof,
of a substantial number of ordinary shares by HM Treasury, or any
associated directed buyback activity by the RBS Group, could affect
the prevailing market price for the outstanding ordinary shares of
RBSG plc.
In addition, UK Government Investments Limited ('UKGI')
manages HM Treasury's shareholder relationship with RBSG plc and,
although HM Treasury has indicated that it intends to respect the
commercial decisions of the RBS Group and that the RBS Group will
continue to have its own independent board of directors and
management team determining its own strategy, its position as a
majority shareholder (and UKGI's position as manager of this
shareholding) means that HM Treasury or UKGI could exercise a
significant degree of influence over, among other things, the
election of directors and appointment of senior management, the RBS
Group's capital strategy, dividend policy, remuneration policy or
the conduct of the RBS Group's operations, and HM Treasury or
UKGI's approach depends on government policy, which could change,
including as a result of a general election. The manner in which HM
Treasury or UKGI exercises HM Treasury's rights as majority
shareholder could give rise to conflicts between the interests of
HM Treasury and the interests of other shareholders, including as a
result of a change in government policy.
Changes in interest rates have significantly affected and will
continue to affect the RBS Group's business and
results.
Interest rate risk is significant for the RBS Group, as monetary
policy has been accommodative in recent years, including as a
result of certain policies implemented by the Bank of England and
HM Treasury such as the Term Funding Scheme, which have helped to
support demand at a time of pronounced fiscal tightening and
balance sheet repair. However, there remains considerable
uncertainty as to the direction of interest rates and pace of
change (as set by the Bank of England and other major central
banks) as well as the general UK political climate. Further
decreases in interest rates and/or continued sustained low or
negative interest rates could put pressure on the RBS Group's
interest margins and adversely affect the RBS Group's profitability
and prospects. In addition, a continued period of low interest
rates and flat yield curves has affected and may continue to affect
the RBS Group's interest rate margin realised between lending and
borrowing costs.
Conversely, while increases in interest rates may support RBS Group
income, sharp increases in interest rates could lead to generally
weaker than expected growth, or even contracting GDP, reduced
business confidence, higher levels of unemployment or
underemployment, adverse changes to levels of inflation, and
falling property prices in the markets in which the RBS Group
operates.
Changes in foreign currency exchange rates may affect the RBS
Group's results and financial position.
Although the RBS Group is now principally a UK and ROI-focussed
banking group, it is subject to foreign exchange risk from capital
deployed in the RBS Group's foreign subsidiaries, branches and
joint arrangements, and non-trading foreign exchange risk,
including customer transactions and profits and losses that are in
a currency other than the functional currency of the transaction
entity. The RBS Group also relies on issuing securities in foreign
currencies that assist in meeting the RBS Group's minimum
requirements for own funds and eligible liabilities ('MREL'). The
RBS Group maintains policies and procedures designed to manage the
impact of exposures to fluctuations in currency rates.
Nevertheless, changes in currency rates, particularly in the
sterling-US dollar and euro-sterling rates, can adversely affect
the value of assets, liabilities (including the total amount of
regulatory capital and MREL eligible instruments), income, RWAs,
capital base and expenses and the reported earnings of the RBS
Group's UK and non-UK subsidiaries and may affect the RBS Group's
reported consolidated financial condition or its income from
foreign exchange dealing and may also require incremental MREL
eligible instruments to be issued.
Decisions of major central banks (including by the Bank of England,
the European Central Bank and the US Federal Reserve) and
political or market events (including Brexit and the general
UK political climate), which are outside of the RBS Group's
control, may lead to sharp and sudden variations in foreign
exchange rates.
Financial resilience risk
The RBS Group may not meet targets and be in a position to continue
to make discretionary capital distributions (including dividends to
shareholders).
As part of the RBS Group's strategy, the RBS Group has become a
principally UK and ROI-focussed banking group and as part of its
Purpose-led Strategy has set a number of financial, capital and
operational targets for the RBS Group including in respect of: CET1
ratio targets, return on tangible equity ('ROTE'), leverage ratio
targets, funding plans and requirements, reductions in RWAs and the
timing thereof, employee engagement, diversity and inclusion as
well as environmental, social and customer satisfaction targets and
discretionary capital distributions (including dividends to
shareholders). See also, 'The RBS Group has announced a new
Purpose-led Strategy which will entail a period of transformation
and require an internal cultural shift across the RBS Group. It
carries significant execution and operational risks and it may not
achieve its stated aims and targeted outcomes'.
The RBS Group's ability to meet its targets and to successfully
meet its strategy is subject to various internal and external
factors and risks. These include, but are not limited to, market,
regulatory, macroeconomic and political uncertainties, operational
risks and risks relating to the RBS Group's business model and
strategy (including risks associated with ESG and climate issues)
and litigation, governmental actions, investigations and regulatory
matters.
A number of factors may impact the RBS Group's ability to maintain
its CET1 ratio target of 13-14% (over the medium to long term) and
make discretionary capital distributions. See also, 'The RBS Group
may not meet the prudential regulatory requirements for capital and
MREL, or manage its capital effectively, which could trigger the
execution of certain management actions or recovery
options'.
The RBS Group's ability to meet its planned reductions in its
annual underlying costs may vary considerably from year to year.
Furthermore, the focus on meeting cost reduction targets may result
in limited investment in other areas which could affect the RBS
Group's long-term product offering or competitive position and its
ability to meet its other targets, including those related to
customer satisfaction.
There is no certainty that the RBS Group's Purpose-led Strategy
will be successfully executed, that the RBS Group will meet its
targets and expectations or be in a position to continue to
distribute capital, or that the RBS Group will be a viable,
competitive or profitable banking business.
The RBS Group operates in markets that are highly competitive, with
increasing competitive pressures and technology
disruption.
The markets for UK financial services, and the other markets within
which the RBS Group operates, are highly competitive. The RBS Group
expects such competition to continue or intensify in response to
evolving customer behaviour, technological changes (including the
growth of digital banking, including from fintech entrants),
competitor behaviour, new entrants to the market (including
non-traditional financial services providers such as large retail
or technology conglomerates, who may have competitive advantages in
scale, technology and customer engagement), competitive
foreign-exchange offerings, industry trends resulting in increased
disaggregation or unbundling of financial services or conversely
the re-intermediation of traditional banking services, and the
impact of regulatory actions and other factors. In particular,
developments in the financial sector resulting from new banking,
lending and payment solutions offered by rapidly evolving
incumbents, challengers and new entrants, notably with respect to
payment services and products, and the introduction of disruptive
technology may impede the RBS Group's ability to grow or retain its
market share and impact its revenues and profitability,
particularly in its key UK retail banking segment. Moreover,
innovations such as biometrics, artificial intelligence, the cloud,
blockchain, and quantum computing may rapidly facilitate industry
transformation. These trends may be catalysed by various regulatory
and competition policy interventions, particularly as a result of
the UK initiative on Open Banking and other remedies imposed by the
Competition and Markets Authority (CMA) which are designed to
further promote competition within retail banking, as well as the
competition-enhancing measures under the RBS Group's Alternative
Remedies Package see also, 'The cost of implementing the
Alternative Remedies Package could be more onerous than
anticipated'.
Increasingly many of the products and services offered by the RBS
Group are, and will become, technology intensive, for example
Bό, Mettle, Esme, FreeAgent, Tyl, APtimise and Path, some of
the RBS Group's recent fintech ventures. The RBS Group's ability to
develop digital solutions that comply with related regulatory
changes has become increasingly important to retaining and growing
the RBS Group's customer business in the UK. There can be no
certainty that the RBS Group's innovation strategy (which includes
investment in its IT capability intended to address the material
increase in customer use of online and mobile technology for
banking as well as selective acquisitions, which carry associated
risks) will be successful or that it will allow the RBS Group to
continue to grow such services in the future. Certain of the RBS
Group's current or future competitors may be more successful in
implementing innovative technologies for delivering products or
services to their customers. The RBS Group may also fail to
identify future opportunities or derive benefits from disruptive
technologies in the context of rapid technological innovation,
changing customer behaviour and growing regulatory demands,
including the UK initiative on Open Banking (PSD2) and Open Finance
(for which the FCA announced a call for input in December 2019),
resulting in increased competition from both traditional banking
businesses as well as new providers of financial services,
including technology companies with strong brand recognition, that
may be able to develop financial services at a lower cost
base.
Furthermore, the RBS Group's competitors may be better able to
attract and retain customers and key employees and may have access
to lower cost funding and/or be able to attract deposits on more
favourable terms than the RBS Group. Although the RBS Group invests
in new technologies and participates in industry and research led
initiatives aimed at developing new technologies, such investments
may be insufficient or ineffective, especially given the RBS
Group's focus on its cost savings targets. This may limit
additional investment in areas such as financial innovation and
therefore could affect the RBS Group's offering of innovative
products or technologies for delivering products or services to
customers and its competitive position. Furthermore, the
development of innovative products depends on the RBS Group's
ability to produce underlying high quality data, failing which its
ability to offer innovative products may be
compromised.
If the RBS Group is unable to offer competitive, attractive and
innovative products that are also profitable, it will lose market
share, incur losses on some or all of its activities and lose
opportunities for growth. In this context, the RBS Group is
investing in the automation of certain solutions and interactions
within its customer-facing businesses, including through artificial
intelligence. Such initiatives may result in operational,
reputational and conduct risks if the technology used is defective,
or is not fully integrated into the RBS Group's current solutions
or does not deliver expected cost savings. The investment in
automated processes will likely also result in increased short-term
costs for the RBS Group.
In addition, recent and future disposals and restructurings by the
RBS Group, the implementation of its Purpose-led Strategy,
including the refocusing of its NatWest Markets franchise and
delivery on its climate ambition, cost-reduction measures, as well
as employee remuneration constraints, may also have an impact on
its ability to compete effectively and intensified competition from
incumbents, challengers and new entrants in the RBS Group's core
markets could affect the RBS Group's ability to maintain
satisfactory returns. See also, 'The RBS Group has announced a new
Purpose-led Strategy which will entail a period of transformation
and require an internal cultural shift across the RBS Group. It
carries significant execution and operational risks and it may not
achieve its stated aims and targeted outcomes'. Moreover, activist
investors have increasingly become engaged and interventionist in
recent years, which may pose a threat to the RBS Group's strategic
initiatives. Furthermore, continued consolidation in certain
sectors of the financial services industry could result in the RBS
Group's remaining competitors gaining greater capital and other
resources, including the ability to offer a broader range of
products and services and geographic diversity, or the emergence of
new competitors.
The RBS Group has significant exposure to counterparty and borrower
risk.
The RBS Group has exposure to many different industries, customers
and counterparties, and risks arising from actual or perceived
changes in credit quality and the recoverability of monies due from
borrowers and other counterparties are inherent in a wide range of
the RBS Group's businesses. The RBS Group is exposed to credit risk
if a customer, borrower or counterparty defaults, or under IFRS 9,
suffers a sufficiently significant deterioration of credit quality
such that, under SICR ('significant increases in credit risk')
rules, it moves to Stage 2 for impairment calculation purposes. The
RBS Group's lending strategy and associated processes may fail to
identify or anticipate weaknesses or risks in a particular sector,
market or borrower, or fail to adequately value physical or
financial collateral. This may result in increased default rates or
a higher loss given default for loans, which may, in turn, impact
the RBS Group's profitability. See also, 'Capital and risk
management - Credit Risk'.
The credit quality of the RBS Group's borrowers and other
counterparties is impacted by prevailing economic and market
conditions and by the legal and regulatory landscape in the UK and
any deterioration in such conditions or changes to legal or
regulatory landscapes could worsen borrower and counterparty credit
quality and consequently impact the RBS Group's ability to enforce
contractual security rights. See also, 'The RBS Group faces
increased political and economic risks and uncertainty in the UK
and global markets'. In particular, developments relating to
Brexit, or the consequences thereof, may adversely impact credit
quality in the UK and the resulting negative economic outlook could
drive an increased level of credit impairments reflecting the more
forward-looking nature of IFRS 9. See also, 'Prevailing uncertainty
regarding the terms of the UK's withdrawal from the European Union
has adversely affected and will continue to affect the RBS
Group'.
Within the UK, the level of household indebtedness remains high
although the pace of consumer credit growth has slowed during 2019.
The ability of such households to service their debts could be
challenged by a period of high unemployment or increased interest
rates. In particular, the RBS Group may be affected by volatility
in property prices (including as a result of Brexit and the general
UK political climate) given that the RBS Group's mortgage loan and
wholesale property portfolios as at 31 December 2019, amounted to
£210.3 billion, representing 61.9% of the RBS Group's total
customer loan exposure. If property prices were to weaken this
could lead to higher impairment charges, particularly if default
rates also increase. In addition, the RBS Group's credit risk may
be exacerbated if the collateral that it holds cannot be realised
as a result of market conditions or regulatory intervention or if
it is liquidated at prices not sufficient to recover the full
amount of the loan or derivative exposure that is due to the RBS
Group. This is most likely to occur during periods of illiquidity
or depressed asset valuations.
Concerns about, or a default by, a financial institution could lead
to significant liquidity problems and losses or defaults by other
financial institutions, since the commercial and financial
soundness of many financial institutions is closely related and
inter-dependent as a result of credit, trading, clearing and other
relationships. Any perceived lack of creditworthiness of a
counterparty may lead to market-wide liquidity problems and losses
for the RBS Group. This systemic risk may also adversely affect
financial intermediaries, such as clearing agencies, clearing
houses, banks, securities firms and exchanges with which the RBS
Group interacts on a daily basis. See also, 'The RBS Group may not
be able to adequately access sources of liquidity and
funding'.
As a result, borrower and counterparty credit quality may cause
accelerated impairment charges under IFRS 9, increased repurchase
demands, higher costs, additional write-downs and losses for the
RBS Group and an inability to engage in routine funding
transactions.
The RBS Group is exposed to the financial institutions industry,
including sovereign debt securities, banks, financial
intermediation providers (including providing facilities to
financial sponsors and funds, backed by assets or investor
commitments) and securitised products (typically senior lending to
special purpose vehicles backed by pools of financial assets). Due
to the RBS Group's exposure to the financial industry, it also has
exposure to shadow banking entities (ie, entities which carry out
banking activities outside a regulated framework). Recently, there
has been increasing regulatory focus on shadow banking. In
particular, the European Banking Authority Guidelines
(EBA/GL/2015/20) require the RBS Group to identify and monitor its
exposure to shadow banking entities, implement and maintain an
internal framework for the identification, management, control and
mitigation of the risks associated with exposure to shadow banking
entities, and ensure effective reporting and governance in respect
such exposure. If the RBS Group is unable to properly identify and
monitor its shadow banking exposure, maintain an adequate
framework, or ensure effective reporting and governance in respect
of shadow banking exposure, this may adversely affect the financial
condition and prospects of the RBS Group.
The RBS Group may not meet the prudential regulatory requirements
for capital and MREL, or manage its capital effectively, which
could trigger the execution of certain management actions or
recovery options.
The RBS Group is required by regulators in the UK, the EU and other
jurisdictions in which it undertakes regulated activities to
maintain adequate financial resources. Adequate capital also gives
the RBS Group financial flexibility in the face of turbulence and
uncertainty in the global economy and specifically in its core UK
and European markets, as well as permitting the RBS Group to make
discretionary capital distributions (including dividends to
shareholders).
As at 31 December 2019, the RBS Group's CET1 ratio was 16.2% and
the RBS Group currently targets to maintain its CET1 ratio at 13
-14% over the medium to long term. The RBS Group's target capital
ratio is based on a combination of its expected regulatory
requirements and internal modelling, including stress scenarios and
management's and/or the PRA's views on appropriate buffers above
minimum operating levels.
The RBS Group's current capital strategy is based on the expected
accumulation of additional capital through the accrual of profits
over time, planned capital actions (including issuances,
redemptions, and discretionary capital distributions), RWA growth
in the form of regulatory uplifts and lending growth and other
capital management initiatives which focus on improving capital
efficiency.
A number of factors may impact the RBS Group's ability to maintain
its current CET1 ratio target and achieve its capital strategy.
These include, amongst other things:
●
a
depletion of its capital resources through increased costs or
liabilities, reduced profits or losses (including as a result of
extreme one-off incidents such as cyberattack, fraud or conduct
issues) or, sustained periods of low or lower interest rates,
reduced asset values resulting in write-downs, impairments, changes
in accounting policy, accounting charges or foreign exchange
movements;
●
a
failure to reduce RWAs in accordance within the timeline
contemplated by the RBS Group's capital plan;
●
an
increase in the quantum of RWAs in excess of that expected,
including due to regulatory changes;
●
changes
in prudential regulatory requirements including the RBS Group's
Total Capital Requirement set by the PRA, including Pillar 2
requirements and regulatory buffers (including the increased 2%
countercyclical capital buffer for UK banks with effect from 16
December 2020), as well as any applicable scalars; and reduced
dividends from the RBS Group's subsidiaries because of changes in
their financial performance and/or the extent to which local
capital requirements exceed RBS Group's target ratio;
and
●
limitations
on the use of double leverage, i.e. RBSG plc's use of borrowed
money to invest in the equity of its subsidiaries, as a result of
the Bank of England's and/or the RBS Group's evolving views on
distribution of capital within groups.
A shortage of capital could in turn affect the RBS Group's capital
ratio, and/or ability to make capital distributions.
In accordance with the provisions of CRD IV, a minimum level of
capital adequacy is required to be met by RBS Group in order for it
to be entitled to make certain discretionary payments, and
institutions which fail to meet the combined buffer requirement are
subject to restricted discretionary payments. The resulting
restrictions are scaled according to the extent of the breach of
the combined buffer requirement and calculated as a percentage of
the profits of the institution since the last distribution of
profits or discretionary payment which gives rise to a maximum
distributable amount (MDA) (if any) that the financial institution
can distribute through discretionary payments. In the event of a
breach of the combined buffer requirement, the RBS Group will be
required to calculate its MDA, and as a consequence it may be
necessary for the RBS Group to reduce or cease discretionary
payments (including payments of dividends to shareholders) to the
extent of the breach.
In addition to regulatory capital, RBSG plc is required to maintain
a set quantum of MREL set as a percentage of its RWAs. MREL
comprises loss-absorbing senior funding and regulatory capital
instruments. The Bank of England has identified single
point-of-entry as the preferred resolution strategy for the RBS
Group. As a result, RBSG plc is the only RBS Group entity that can
externally issue securities that count towards the RBS Group's MREL
requirements, the proceeds of which can then be downstreamed to
meet the internal MREL issuance requirements of its operating
entities and intermediate holding companies as
required.
If the RBS Group is unable to raise the requisite amount of
regulatory capital or MREL, downstream the proceeds of MREL to
subsidiaries, as required, in the form of internal MREL, or to
otherwise meet its regulatory capital, MREL and leverage
requirements, it may be exposed to increased regulatory supervision
or sanctions, loss of investor confidence and constrained or more
expensive funding and be unable to make dividend payments on its
ordinary shares or maintain discretionary payments on capital
instruments.
If, under a stress scenario, the level of capital or MREL falls
outside of risk appetite, there are a range of recovery management
actions (focused on risk reduction and mitigation) that the RBS
Group could take to manage its capital levels, which may not be
sufficient to restore adequate capital levels. Under the EU Bank
Recovery and Resolution Directive ('BRRD'), as
implemented in the UK, the RBSG Group must maintain a recovery plan
acceptable to its regulator, such that a breach of the RBS Group's
applicable capital or leverage requirements may trigger the
application of the RBS Group's recovery plan to remediate a
deficient capital position. The RBS Group's regulator may request
that the RBS Group carry out certain capital management actions or,
if the RBS Group's CET1 ratio falls below 7%, certain regulatory
capital instruments issued by the RBS Group will be written-down or
converted into equity and there may be an issue of additional
equity by the RBS Group, which could result in the dilution of the
RBS Group's existing shareholders. The success of such issuances
will also be dependent on favourable market conditions and the RBS
Group may not be able to raise the amount of capital required on
acceptable terms or at all. Separately, the RBS Group may address a
shortage of capital by taking action to reduce leverage exposure
and/or RWAs via asset or business disposals. Such actions may, in
turn, affect, among other things, the RBS Group's product offering,
credit ratings, ability to operate its businesses, pursue its
current strategies and pursue strategic opportunities, any of which
may affect the underlying profitability of the RBS Group and future
growth potential. See also, 'The RBS Group may become subject to
the application of UK statutory stabilisation or resolution powers
which may result in, among other actions, the cancellation,
transfer or dilution of ordinary shares, or the write-down or
conversion of certain of the RBS Group's securities'.
The RBS Group is subject to Bank of England oversight in respect of
resolution, and the RBS Group could be adversely affected should
the Bank of England deem the RBS Group's preparations to be
inadequate.
The RBS Group is subject to regulatory oversight by the Bank of
England, and is required (under the PRA rulebook) to carry out an
assessment of its preparations for resolution, submit a report of
the assessment to the PRA, and disclose a summary of this report.
The initial report is due to be submitted to the PRA on 2 October
2020 and the Bank of England's assessment of RBS Group's
preparations is scheduled to be released on 11 June
2021.
The RBS Group has dedicated significant resources towards the
preparation of the RBS Group for a potential resolution scenario.
However, if the assessment reveals that the RBS Group is not
adequately prepared to be resolved, or does not have adequate plans
in place to meet resolvability requirements by 1 January 2022, the
RBS Group may be required to take action to enhance its
preparations to be resolvable, resulting in additional cost and the
dedication of additional resources. Such actions may adversely
affect the RBS Group, resulting in restrictions on maximum
individual and aggregate exposures, a requirement to dispose of
specified assets, a requirement to cease carrying out certain
activities and/or maintaining a specified amount of MREL. This may
also result in reputational damage and/or loss of investor
confidence.
The RBS Group may not be able to adequately access sources of
liquidity and funding.
The RBS Group is required to access sources of liquidity and
funding through retail and wholesale deposits, as well as through
the debt capital markets. As at 31 December 2019, the RBS Group
held £389.7 billion in deposits. The level of deposits may
fluctuate due to factors outside the RBS Group's control, such as a
loss of confidence (including in individual RBS Group entities),
increasing competitive pressures for retail customer deposits or
the reduction or cessation of deposits by foreign wholesale
depositors, which could result in a significant outflow of deposits
within a short period of time. An inability to grow, or any
material decrease in, the RBS Group's deposits could, particularly
if accompanied by one of the other factors described above,
materially affect the RBS Group's ability to satisfy its liquidity
or funding needs.
As at 31 December 2019, the RBS Group's liquidity coverage ratio
was 152%. If its liquidity position were to come under stress, and
if the RBS Group were unable to raise funds through deposits or in
the debt capital markets on acceptable terms or at all, its
liquidity position could be adversely affected and it might be
unable to meet deposit withdrawals on demand or at their
contractual maturity, to repay borrowings as they mature, to meet
its obligations under committed financing facilities, to comply
with regulatory funding requirements, to undertake certain capital
and/or debt management activities, or to fund new loans,
investments and businesses. The RBS Group may need to liquidate
unencumbered assets to meet its liabilities, including disposals of
assets not previously identified for disposal to reduce its funding
commitments. In a time of reduced liquidity, the RBS Group may be
unable to sell some of its assets, or may need to sell assets at
depressed prices, which in either case could negatively affect the
RBS Group's results.
Any reduction in the credit rating assigned to RBSG plc, any of its
subsidiaries or any of their respective debt securities could
adversely affect the availability of funding for the RBS Group,
reduce the RBS Group's liquidity position and increase the cost of
funding.
Rating agencies regularly review RBSG plc and other RBS Group
entity credit ratings, which could be negatively affected by a
number of factors that can change over time, including the credit
rating agency's assessment of the RBS Group's strategy and
management's capability; its financial condition including in
respect of profitability, asset quality, capital, funding and
liquidity; the level of political support for the industries in
which the RBS Group operates; the implementation of structural
reform; the legal and regulatory frameworks applicable to the RBS
Group's legal structure; business activities and the rights of its
creditors; changes in rating methodologies; changes in the relative
size of the loss-absorbing buffers protecting bondholders and
depositors; the competitive environment, political and economic
conditions in the RBS Group's key markets (including the impact of
Brexit and any further Scottish independence referendum); any
reduction of the UK's sovereign credit rating and market
uncertainty. See also, 'The RBS Group has announced a new
Purpose-led Strategy which will entail a period of transformation
and require an internal cultural shift across the RBS Group. It
carries significant execution and operational risks and it may not
achieve its stated aims and targeted outcomes'.
In addition, credit ratings agencies are increasingly taking into
account environmental, social and governance ("ESG") factors,
including climate risk, as part of the credit ratings analysis, as
are investors in their investment decisions.
Any reductions in the credit ratings of RBSG plc or of certain
other RBS Group entities, including, in particular, downgrades
below investment grade, or a deterioration in the capital markets'
perception of the RBS Group's financial resilience could
significantly affect the RBS Group's access to money markets,
reduce the size of its deposit base and trigger additional
collateral or other requirements in derivatives contracts and other
secured funding arrangements or the need to amend such
arrangements, which could adversely affect the RBS Group's (and, in
particular, RBSG plc's) cost of funding and its access to capital
markets and could limit the range of counterparties willing to
enter into transactions with the RBS Group (and, in particular,
RBSG plc). This could in turn adversely impact its competitive
position and threaten the prospects of the RBS Group in the short
to medium-term.
The RBS Group may be adversely affected if it fails to meet the
requirements of regulatory stress tests.
The RBS Group is subject to annual stress tests by its regulator in
the UK and is also subject to stress tests by European regulators
with respect to RBSG plc, NWM N.V. and Ulster Bank Ireland DAC.
Stress tests are designed to assess the resilience of banks to
potential adverse economic or financial developments and ensure
that they have robust, forward-looking capital planning processes
that account for the risks associated with their business profile.
If the stress tests reveal that a bank's existing regulatory
capital buffers are not sufficient to absorb the impact of the
stress, then it is possible that the bank will need to take action
to strengthen its capital position.
Failure by the RBS Group to meet the quantitative and qualitative
requirements of the stress tests as set forth by its UK regulator
or those elsewhere may result in: the RBS Group's regulators
requiring the RBS Group to generate additional capital,
reputational damage, increased supervision and/or regulatory
sanctions, restrictions on capital distributions and loss of
investor confidence.
The RBS Group could incur losses or be required to maintain higher
levels of capital as a result of limitations or failure of various
models.
Given the complexity of the RBS Group's business, strategy and
capital requirements, the RBS Group relies on analytical models for
a wide range of purposes, including to manage its business, assess
the value of its assets and its risk exposure, as well as to
anticipate capital and funding requirements (including to
facilitate the RBS Group's mandated stress testing). In addition,
the RBS Group utilises models for valuations, credit approvals,
calculation of loan impairment charges on an IFRS 9 basis,
financial reporting and for financial crime and fraud risk
management. The RBS Group's models, and the parameters and
assumptions on which they are based, are periodically reviewed and
updated to maximise their accuracy.
Such models are inherently designed to be predictive in nature.
Failure of these models, including due to errors in model design or
inputs, to accurately reflect changes in the micro and
macroeconomic environment in which the RBS Group operates, to
capture risks and exposures at the subsidiary level, to be updated
in line with the RBS Group's current business model or operations,
or findings of deficiencies by the RBS Group's regulators
(including as part of the RBS Group's mandated stress testing) may
result in increased capital requirements or require management
action. The RBS Group may also face adverse consequences as a
result of actions based on models that are poorly developed,
implemented or used, models that are based on inaccurate or
compromised data or as a result of the modelled outcome being
misunderstood, or by such information being used for purposes for
which it was not designed.
The RBS Group's financial statements are sensitive to the
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. Due to the inherent uncertainty in making estimates
(particularly those involving the use of complex models), future
results may differ from those estimates. Estimates, judgments,
assumptions and models take into account historical experience and
other factors, including market practice and expectations of future
events that are believed to be reasonable under the
circumstances.
The accounting policies deemed critical to the RBS Group's results
and financial position, based upon materiality and significant
judgments and estimates, which include loan impairment provisions,
are set out in 'Critical accounting policies and key sources of
estimation uncertainty' on page 212. New accounting standards and
interpretations that have been issued by the International
Accounting Standards Board but which have not yet been adopted by
the RBS Group are discussed in 'Accounting developments' on page
212.
Changes in accounting standards may materially impact the RBS
Group's financial results.
Changes in accounting standards or guidance by accounting bodies or
in the timing of their implementation, whether immediate or
foreseeable, could result in the RBS Group having to recognise
additional liabilities on its balance sheet, or in further
write-downs or impairments to its assets and could also
significantly impact the financial results, condition and prospects
of the RBS Group.
The valuation of financial instruments, including derivatives,
measured at fair value can be subjective, in particular where
models are used which include unobservable inputs. Generally, to
establish the fair value of these instruments, the RBS Group relies
on quoted market prices or, where the market for a financial
instrument is not sufficiently credible, internal valuation models
that utilise observable market data. In certain circumstances, the
data for individual financial instruments or classes of financial
instruments utilised by such valuation models may not be available
or may become unavailable due to prevailing market conditions. In
such circumstances, the RBS Group's internal valuation models
require the RBS Group to make assumptions, judgments and estimates
to establish fair value, which are complex and often relate to
matters that are inherently uncertain.
With effect form 1 January 2019, the RBS Group adopted IFRS 16
Leases, as disclosed in the Accounting Policies. This increased
Other assets by £1.3 billion and Other liabilities by
£1.7 billion. While adoption of this standard has had no
effect on the RBS Group's cash flows, it has impacted financial
ratios, which may influence investors' perception of the financial
condition of the RBS Group.
The value or effectiveness of any credit protection that the RBS
Group has purchased depends on the value of the underlying assets
and the financial condition of the insurers and
counterparties.
The RBS Group has some remaining credit exposure arising from
over-the-counter derivative contracts, mainly credit default swaps
(CDSs), and other credit derivatives, each of which are carried at
fair value. The fair value of these CDSs, as well as the RBS
Group's exposure to the risk of default by the underlying
counterparties, depends on the valuation and the perceived credit
risk of the instrument against which protection has been bought.
Many market counterparties have been adversely affected by their
exposure to residential mortgage-linked and corporate credit
products, whether synthetic or otherwise, and their actual and
perceived creditworthiness may deteriorate rapidly. If the
financial condition of these counterparties or their actual or
perceived creditworthiness deteriorates, the RBS Group may record
further credit valuation adjustments on the credit protection
bought from these counterparties under the CDSs. The RBS Group also
recognises any fluctuations in the fair value of other credit
derivatives. Any such adjustments or fair value changes may have a
negative impact on the RBS Group's results.
The RBS Group's results could be adversely affected if an event
triggers the recognition of a goodwill impairment.
The RBS Group capitalises goodwill, which is calculated as the
excess of the cost of an acquisition over the net fair value of the
identifiable assets, liabilities and contingent liabilities
acquired. Acquired goodwill is recognised at cost less any
accumulated impairment losses. As required by IFRS, the RBS Group
tests goodwill for impairment at least annually, or more frequently
when events or circumstances indicate that it might be
impaired.
An impairment test compares the recoverable amount (the higher of
the value in use and fair value less cost to sell) of an individual
cash generating unit with its carrying value. At 31 December 2019,
the RBS Group carried goodwill of £5.6 billion on its
balance sheet. The value in use and fair value of the RBS Group's
cash-generating units are affected by market conditions and the
economies in which the RBS Group operates.
Where the RBS Group is required to recognise a goodwill impairment,
it is recorded in the RBS Group's income statement, but it has no
effect on the RBS Group's regulatory capital position.
The RBS Group may become subject to the application of UK statutory
stabilisation or resolution powers which may result in, among other
actions, the cancellation, transfer or dilution of ordinary shares,
or the write-down or conversion of certain other of the RBS Group's
securities.
The Banking Act 2009, as amended ('Banking Act'), implemented the
BRRD in the UK and created a special resolution regime ('SRR').
Under the SRR, HM Treasury, the Bank of England and the PRA and FCA
(together 'Authorities') are granted substantial powers to resolve
and stabilise UK-incorporated financial institutions. Five
stabilisation options exist under the current SRR: (i) transfer of
all of the business of a relevant entity or the shares of the
relevant entity to a private sector purchaser; (ii) transfer of all
or part of the business of the relevant entity to a 'bridge bank'
wholly-owned by the Bank of England; (iii) transfer of part of the
assets, rights or liabilities of the relevant entity to one or more
asset management vehicles for management of the transferor's
assets, rights or liabilities; (iv) the write-down, conversion,
transfer, modification, or suspension of the relevant entity's
equity, capital instruments and liabilities; and (v) temporary
public ownership of the relevant entity. These tools may be applied
to RBSG plc as the parent company or an affiliate where certain
conditions are met (such as, whether the firm is failing or likely
to fail, or whether it is reasonably likely that action will be
taken (outside of resolution) that will result in the firm no
longer failing or being likely to fail). Moreover, the SRR provides
for modified insolvency and administration procedures for relevant
entities, and confers ancillary powers on the Authorities,
including the power to modify or override certain contractual
arrangements in certain circumstances. The Authorities are also
empowered by order to amend the law for the purpose of enabling the
powers under the SRR to be used effectively. Such orders may
promulgate provisions with retrospective
applicability.
Under the Banking Act, the Authorities are generally required to
have regard to specified objectives in exercising the powers
provided for by the Banking Act. One of the objectives (which is
required to be balanced as appropriate with the other specified
objectives) refers to the protection and enhancement of the
stability of the financial system of the UK. Moreover, the 'no
creditor worse off' safeguard contained in the Banking Act may not
apply in relation to an application of the separate write-down and
conversion power relating to capital instruments under the Banking
Act, in circumstances where a stabilisation power is not also used;
holders of debt instruments which are subject to the power may,
however, have ordinary shares transferred to or issued to them by
way of compensation.
Uncertainty exists as to how the Authorities may exercise the
powers granted to them under the Banking Act including the
determination of actions undertaken in relation to the ordinary
shares and other securities of the RBS Group and may depend on
factors outside of the RBS Group's control. Moreover, the relevant
provisions of the Banking Act remain untested in
practice.
If the RBS Group is at or is approaching the point of non-viability
such that regulatory intervention is required, any exercise of the
resolution regime powers by the Authorities may adversely affect
holders of RBSG plc's ordinary shares or other RBS Group securities
that fall within the scope of the resolution regime powers. This
may result in various actions being undertaken in relation to the
RBS Group and any securities of the RBS Group, including
cancellation, transfer, dilution, write-down or conversion (as
applicable). There may also be a corresponding adverse effect on
the market price of such securities.
Legal, regulatory and conduct risk
The RBS Group's businesses are subject to substantial regulation
and oversight, which are constantly evolving and may adversely
affect the RBS Group.
The RBS Group is subject to extensive laws, regulations, corporate
governance practice and disclosure requirements, administrative
actions and policies in each jurisdiction in which it operates.
Many of these have been introduced or amended recently and are
subject to further material changes, which may increase compliance
and conduct risks. The RBS Group expects government and regulatory
intervention in the financial services industry to remain high for
the foreseeable future.
In recent years, regulators and governments have focussed on
reforming the prudential regulation of the financial services
industry and the manner in which the business of financial services
is conducted. Amongst others, measures have included: enhanced
capital, liquidity and funding requirements, implementation of the
UK ring-fencing regime, implementation and strengthening of the
recovery and resolution framework applicable to financial
institutions in the UK, the EU and the US, financial industry
reforms (including in respect of MiFID II), enhanced data privacy
and IT resilience requirements, enhanced regulations in respect of
the provision of 'investment services and activities', and
increased regulatory focus in certain areas, including conduct,
consumer protection regimes, anti-money laundering, anti-bribery,
anti-tax evasion, payment systems, sanctions and anti-terrorism
laws and regulations. This has resulted in the RBS Group facing
greater regulation and scrutiny in the UK, the US and other
countries in which it operates.
Recent regulatory changes, proposed or future developments and
heightened levels of public and regulatory scrutiny in the UK, the
EU and the US have resulted in increased capital, funding and
liquidity requirements, changes in the competitive landscape,
changes in other regulatory requirements and increased operating
costs, and have impacted, and will continue to impact, product
offerings and business models. In particular, the RBS Group is
required to continue to comply with regulatory requirements in
respect of the implementation of the UK ring-fencing regime and to
ensure operational continuity in resolution; the steps required to
ensure such compliance entail significant costs, and also impose
significant operational, legal and execution risk. Serious
consequences could arise should the RBS Group be found to be
non-compliant with such regulatory requirements. Such changes may
also result in an increased number of regulatory investigations and
proceedings and have increased the risks relating to the RBS
Group's ability to comply with the applicable body of rules and
regulations in the manner and within the time frames
required.
Any of these developments (including any failure to comply with new
rules and regulations) could have a significant impact on the RBS
Group's authorisations and licences, the products and services that
the RBS Group may offer, its reputation and the value of its
assets, the RBS Group's operations or legal entity structure, and
the manner in which the RBS Group conducts its business. Areas in
which, and examples of where, governmental policies, regulatory and
accounting changes and increased public and regulatory scrutiny
could have an adverse impact (some of which could be material) on
the RBS Group include, but are not limited to, those set out above
as well as the following:
●
general
changes in government, central bank, regulatory or competition
policy, or changes in regulatory regimes that may influence
investor decisions in the markets in which the RBS Group
operates;
●
amendments
to the framework or requirements relating to the quality and
quantity of regulatory capital to be held by the RBS Group as well
as liquidity and leverage requirements, either on a solo,
consolidated or subgroup level;
●
changes
to the design and implementation of national or supranational
mandated recovery, resolution or insolvency regimes or the
implementation of additional or conflicting loss-absorption
requirements, including those mandated under UK rules, the BRRD or
MREL;
●
additional
rules and regulatory initiatives and review relating to customer
protection and resolution of disputes and complaints, including
increased focus by regulators (including the Financial Ombudsman
Service) on how institutions conduct business, particularly with
regard to the delivery of fair outcomes for customers and
orderly/transparent markets;
●
rules
and regulations relating to, and enforcement of, anti-corruption,
anti-bribery, anti-money laundering, anti-terrorism, sanctions,
anti-tax evasion or other similar regimes;
●
the
imposition of additional restrictions on the RBS Group's ability to
compensate its senior management and other employees and increased
responsibility and liability rules applicable to senior and key
employees;
●
rules
relating to foreign ownership, expropriation, nationalisation and
confiscation of assets;
●
changes
to corporate governance practice and disclosure requirements,
senior manager responsibility, corporate structures and conduct of
business rules;
●
financial
market infrastructure reforms establishing new rules applying to
investment services, short selling, market abuse, derivatives
markets and investment funds;
●
increased
attention to the protection and resilience of, and competition and
innovation in, UK payment systems and retail banking developments
relating to the UK initiative on Open Banking, Open Finance and the
European directive on payment services;
●
new
or increased regulations relating to customer data and privacy
protection as well as IT controls and resilience, including the
GDPR;
●
the
introduction of, and changes to, taxes, levies or fees applicable
to the RBS Group's operations, such as the imposition of a
financial transaction tax, changes in tax rates, changes in the
scope and administration of the Bank Levy, increases in the bank
corporation tax surcharge in the UK, restrictions on the tax
deductibility of interest payments or further restrictions imposed
on the treatment of carry-forward tax losses that reduce the value
of deferred tax assets and require increased payments of
tax;
●
laws
and regulations in respect of climate change and sustainable
finance (including ESG) considerations; and
●
other
requirements or policies affecting the RBS Group and its
profitability or product offering, including through the imposition
of increased compliance obligations or obligations which may lead
to restrictions on business growth, product offerings, or
pricing.
To support the UK's goal of Net Zero by 2050, the UK and Scottish
governments and UK and international regulators, such as the PRA
and European Commission, are actively seeking to develop new and
existing regulations directly and indirectly focussed on climate
change and the associated financial risks. Regulatory and policy
developments, such as the minimum energy efficient requirements for
residential and commercial real estate, may have a significant
impact on the markets in which the RBS Group operates, especially
mortgage lending, and its associated credit, market and financial
risk profile.
In a Joint Declaration on Climate Change published in July 2019,
the PRA, FCA, Financial Reporting Council and The Pensions
Regulator set out their commitment to working collaboratively to
address the risks of climate change. In October 2019, the RBS Group
submitted its initial plan to meet the PRA's supervisory
expectations in its supervisory statement (SS 3/19) which sets
forth an expectation that regulated entities adopt a Board-level
strategic approach to managing and mitigating the financial risks
of climate change and embed the management of them into their
governance frameworks, subject to existing prudential regulatory
supervisory tools (including stress testing and individual and
systemic capital requirements). In addition, The Bank of England
announced in December 2019 that it will use the 2021 biennial
exploratory scenario (BES) to stress banks on certain climate
scenarios to test the resilience of the current business models of
the largest banks, insurers and the financial system to the
physical and transition risks from climate change. The prudential
regulation of climate risk will be an important driver in how the
RBS Group otherwise decides how it allocates capital and further
develop its risk appetite for financing certain types of activity
or engaging with counterparties that do not align to a transition
to a net zero economy.
The FCA have also announced that climate change and green finance
will be priorities with a focus on disclosure, integrating climate
change into decision-making and consumers' access to green
financial services. The RBS Group also recognises various
legislative actions and proposals by, among others, the European
Commission's Action Plan on Sustainable Finance which include a
taxonomy on sustainable finance. Many of these legislative and
regulatory initiatives, and especially the EU taxonomy, are focused
on developing standardised definitions for the green and
sustainable criteria of assets and liabilities, which could change
over time and impact the RBS Group's recognition of its climate
financing activity and lead to reputational and conduct risk on its
own sustainable financing activity.
Changes in laws, rules or regulations, or in their interpretation
or enforcement, or the implementation of new laws, rules or
regulations, including contradictory or conflicting laws, rules or
regulations by key regulators or policymakers in different
jurisdictions, or failure by the RBS Group to comply with such
laws, rules and regulations, may adversely affect the RBS Group's
business, financial condition and results. In addition, uncertainty
and insufficient international regulatory coordination as enhanced
supervisory standards are developed and implemented may adversely
affect the RBS Group's ability to engage in effective business,
capital and risk management planning.
The RBS Group is subject to a number of legal, regulatory and
governmental actions and investigations as well as associated
remedial undertakings, the outcomes of which are inherently
difficult to predict, and which could have an adverse effect on the
RBS Group.
The RBS Group's operations are diverse and complex and it operates
in legal and regulatory environments that expose it to potentially
significant legal proceedings, and civil and criminal regulatory
and governmental actions. The RBS Group has settled a number of
legal and regulatory actions over the past several years but
continues to be, and may in the future be, involved in such actions
in the US, the UK, Europe and other jurisdictions.
The legal and regulatory actions specifically referred to below
are, in the RBS Group's view, the most significant legal and
regulatory actions to which the RBS Group is currently exposed.
However, the RBS Group is also subject to a number of ongoing
reviews, investigations and proceedings (both formal and informal)
by governmental law enforcement and other agencies and litigation
proceedings, relating to, among other matters, the offering of
securities, conduct in the foreign exchange market, the setting of
benchmark rates such as LIBOR and related derivatives trading, the
issuance, underwriting, and sales and trading of fixed-income
securities (including government securities), product mis-selling,
customer mistreatment, anti-money laundering, antitrust and various
other compliance issues. Legal and regulatory actions are subject
to many uncertainties, and their outcomes, including the timing,
amount of fines or settlements or the form of any settlements,
which may be material and in excess of any related provisions, are
often difficult to predict, particularly in the early stages of a
case or investigation, and the RBS Group's expectation for
resolution may change.
In particular, the RBS Group has for a number of years been
involved in conduct-related reviews and redress projects, including
a review of certain historical customer connections in its former
Global Restructuring RBS Group (GRG), management of claims arising
from historical sales of payment protection insurance, and a review
of tracker mortgage products in the Republic of Ireland. In
relation to the GRG review, the RBS Group established a complaints
process in November 2016, overseen by an independent third party.
The complaints process is now closed to new complaints, although
the RBS Group continues to handle certain complaints that were made
before the deadline for new complaints passed. In addition, the RBS
Group continues to handle claims in relation to historical sales of
payment protection insurance and took an additional provision of
£900 million in third quarter of 2019, reflecting greater than
predicted complaints volumes in the lead up to the 29 August 2019
deadline for making new PPI complaints.
In the ROI, Ulster Bank Ireland DAC remains engaged in a review of
the treatment of customers who have been sold mortgages with a
tracker interest rate or with a tracker interest rate entitlement.
A redress and compensation exercise has now concluded although an
appeals process is currently anticipated to run until at least the
end of 2020. See also, 'Litigation, investigations and reviews' of
Note 26 on the consolidated accounts for details of these
matters. The RBS Group has dedicated resources in place to manage
claims and complaints relating to the above and other
conduct-related matters. Provisions taken in respect of such
matters include the costs involved in administering the various
complaints processes. Any failure to administer such processes
adequately, or to handle individual complaints fairly or
appropriately, could result in further claims as well as the
imposition of additional measures or limitations on the RBS Group's
operations, additional supervision by the RBS Group's regulators,
and loss of investor confidence.
RBS Group companies are currently responding to a criminal
investigation by the United States Attorney for the District of
Connecticut (USAO) and the United States Department of Justice
(DoJ), concerning securities trading in 2018 by certain former
traders of NWM Plc ,involving alleged spoofing. The trading
activity occurred during the term of the non prosecution agreement
(NPA) that NWMSI entered into with the USAO in October 2017 in
connection with alleged misrepresentations to counterparties
relating to secondary trading in various forms of asset-backed
securities. Under the NPA, non-prosecution was conditioned on NWMSI
and affiliated companies not engaging in conduct during the NPA
that the USAO determines was a felony under federal or state law or
a violation of the antifraud provisions of the United States
securities law. See also, 'Litigation, investigations and reviews'
of Note 26 to the consolidated accounts for details of these
matters.
The duration and outcome of the criminal investigation into alleged
spoofing, which may
include the extension, modification, or deemed violation of the
NPA, remain uncertain. No settlement may be reached and further
substantial additional provisions and costs may be recognised. Any
finding of criminal liability by US authorities as to NWM Plc,
NWMSI, or an affiliate (including as a result of pleading guilty),
as to either the alleged spoofing or the conduct underlying the
NPA, could have material collateral consequences for RBS Group's
business. These may include consequences resulting from the need to
reapply for various important licenses or obtain waivers to conduct
certain existing activities of the RBS Group, particularly but not
solely in the US, which may take a significant period of time and
theresults of which are uncertain. Failure to obtain such licenses
or waivers could adversely impact the RBS Group's business, in
particular in the US, including if it results in the RBS Group
being precluded from carrying out certain activities.
Adverse outcomes or resolution of current or future legal or
regulatory actions, including conduct-related reviews or redress
projects, could result in restrictions or limitations on the RBS
Group's operations, and could adversely impact the RBS Group's
capital position or its ability to meet regulatory capital adequacy
requirements. Failure to comply with undertakings made by the RBS
Group to its regulators may result in additional measures or
penalties being taken against the RBS Group.
The RBS Group may not effectively manage the transition of LIBOR
and other IBOR rates to alternative risk free rates.
UK and international regulators are driving a transition from the
use of interbank offer rates (IBORs), including LIBOR, to
alternative risk free rates (RFRs). In the UK, the FCA has asserted
that they will not compel LIBOR submissions beyond 2021, thereby
jeopardising its continued availability, and have strongly urged
market participants to transition to RFRs, as has the CFTC and
other regulators in the US. The RBS Group has a significant
exposure to IBORs, and continues to
reference it in certain products, primarily its derivatives, commercial lending and
legacy securities. Although the RBS Group is actively engaged with
customers and industry working groups to manage the risks relating
to such exposure, and is exploring ways to utilise RFRs to the
extent possible, the legal mechanisms to effect transition cannot
be confirmed, and the impact cannot be determined nor any
associated costs accounted for, until such time that RFRs are
utilised exclusively, and there is market acceptance on the form of
alternative RFRs for different products, and certain IBOR
obligations may not be able to be changed. The transition and
uncertainties around the timing and manner of transition to RFRs
represent a number of risks for the RBS Group, its customers and
the financial services industry more
widely. Following an analysis
of the RBS Group's IBOR-linked financial products and instruments,
the RBS Group has identified the following risks: legal risks (as changes will be required to
documentation for new and the majority
of existing transactions);
financial risks (which may arise from any changes in valuation of
financial instruments linked to benchmarks rates and may impact the
RBS Group's cost of funds and its risk management related financial
models); pricing risks (such as changes to benchmark rates could
impact pricing mechanisms on certain instruments); operational
risks (due to the requirement to adapt IT systems, trade reporting
infrastructure and operational processes); and conduct risks (which
include communication regarding the potential impact on customers,
and engagement with customers during the transition
period).
It is therefore currently difficult to determine to what extent the
changes will affect the RBS Group, or the costs of implementing any
relevant remedial action. Uncertainty as to the nature and extent
of such potential changes, alternative reference rates or other
reforms including the potential continuation of the publication of
LIBOR may adversely affect financial instruments using LIBOR as
benchmarks. The implementation of any alternative RFRs may be
impossible or impracticable under the existing terms of such
financial instruments and could have an adverse effect on the value
of, return on and trading market for certain financial instruments
and on the RBS Group's profitability. There is also the risk of an
adverse effect to reported performance arising from the transition
rules established by accounting bodies, as certain rules (as
proposed by the IASB) are still to be finalised.
The RBS Group operates in markets that are subject to intense
scrutiny by the competition authorities.
There is significant oversight by competition authorities of the
markets which the RBS Group operates in. The competitive landscape
for banks and other financial institutions in the UK, the rest of
Europe 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, such as in
retail and SME banking in the UK where the introduction of new
entrants is being actively encouraged by the UK
Government.
The UK retail banking sector has been subjected to intense scrutiny
by the UK competition authorities and by other bodies, including
the FCA and the Financial Ombudsman Service, in recent years,
including with a number of reviews/inquiries being carried out,
including market reviews conducted by the CMA and its predecessor
the Office of Fair Trading regarding SME banking and personal
banking products and services, the Independent Commission on
Banking and the Parliamentary Commission on Banking
Standards.
These reviews raised significant concerns about the effectiveness
of competition in the retail banking sector. The CMA's Retail
Banking Market Order 2017 imposes remedies primarily intended to
make it easier for consumers and businesses to compare personal
current account ('PCA') and SME bank products, increase the
transparency of price comparison between banks and amend PCA
overdraft charging. These remedies impose additional compliance
requirements on the RBS Group and could, in aggregate, adversely
impact the RBS Group's competitive position, product offering and
revenues.
Adverse findings resulting from current or future competition
investigations may result in the imposition of reforms or remedies
which may impact the competitive landscape in which the RBS Group
operates or result in restrictions on mergers and consolidations
within the financial sector.
The cost of implementing the Alternative Remedies Package could be
more onerous than anticipated.
In connection with the implementation of the Alternative Remedies
Package (regarding the business previously described as Williams
& Glyn), an independent body ('Independent Body') has been
established to administer the Alternative Remedies Package. The
implementation of the Alternative Remedies Package has involved
costs for the RBS Group, including but not limited to the funding
commitments of £425 million for the Capability and Innovation
Fund and £350 million for the incentivised switching scheme,
both being administered by the Independent Body. Implementation of
the Alternative Remedies Package may involve additional costs for
the RBS Group and may also divert resources from the RBS Group's
operations and jeopardise the delivery and implementation of other
significant plans and initiatives. In addition, under the terms of
the Alternative Remedies Package, the Independent Body may require
the RBS Group to modify certain aspects of the RBS Group's
execution of the incentivised switching scheme, which could
increase the cost of implementation. Furthermore, should the uptake
within the incentivised switching scheme not be sufficient, the
Independent Body has the ability to extend the duration of the
scheme by up to twelve months, impose penalties of up to £50
million, and can compel the RBS Group to extend the customer base
to which the scheme applies which may result in prolonged periods
of disruption to a wider portion of the RBS Group's
business.
As a direct consequence of the incentivised switching scheme (which
comprises part of the Alternative Remedies Package), the RBS Group
will lose existing customers and deposits, which in turn will have
adverse impacts on the RBS Group's business and associated revenues
and margins.
Furthermore, the capability and innovation fund (which also
comprises part of the Alternative Remedies Package) is intended to
benefit eligible competitors and negatively impact the RBS Group's
competitive position. To support the incentivised switching
initiative, upon request by an eligible bank, the RBS Group has
agreed to grant those customers which have switched to eligible
banks under the incentivised switching scheme access to its branch
network for cash and cheque
handling services, which may impact customer service quality for
the RBS Group's own customers with consequent competitive,
financial and reputational implications. The implementation of the
incentivised switching scheme is also dependent on the engagement
of the eligible banks with the incentivised switching scheme and
the application of the eligible banks to and approval by the
Independent Body. The incentivised transfer of SME customers to
third party banks places reliance on those third parties to achieve
satisfactory customer outcomes which could give rise to
reputational damage to the RBS Group if these are not
forthcoming.
A failure to comply with the terms of the Alternative Remedies
Package could result in the imposition of additional measures or
limitations on the RBS Group's operations, additional supervision
by the RBS Group's regulators, and loss of investor
confidence.
Changes in tax legislation or failure to generate future taxable
profits may impact the recoverability of certain deferred tax
assets recognised by the RBS Group.
In accordance with IFRS (as adopted by the European Union),
the RBS Group has recognised deferred tax assets on losses
available to relieve future profits from tax only to the extent it
is probable that they will be recovered. The deferred tax assets
are quantified on the basis of current tax legislation and
accounting standards and are subject to change in respect of the
future rates of tax or the rules for computing taxable profits and
offsetting allowable losses.
Failure to generate sufficient future taxable profits or further
changes in tax legislation (including with respect to rates of tax)
or accounting standards may reduce the recoverable amount of the
recognised tax loss deferred tax assets, amounting to £1
billion as at 31 December 2019. Changes to the treatment of certain
deferred tax assets may impact the RBS Group's capital position. In
addition, the RBS Group's interpretation or application of relevant
tax laws may differ from those of the relevant tax authorities and
provisions are made for potential tax liabilities that may arise on
the basis of the amounts expected to be paid to tax authorities.
The amounts ultimately paid may differ materially from the amounts
provided depending on the ultimate resolution of such
matters.
Legal Entity Identifier: 2138005O9XJIJN4JPN90
Date: 14
February 2020
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THE
ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
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By: /s/
Jan Cargill
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Name:
Jan Cargill
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Title:
Deputy Secretary
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