Blueprint
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 15, 2019
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
15 February 2019
Annual Report and Accounts 2018
Pillar 3 Report 2018
A copy of the Annual Report and Accounts 2018 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.rbs.com/results.
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 2018 Pillar 3 report, available on our
website. For further information, please contact:-
RBS Media Relations
+44 (0) 131 523 4205
Investors Matt Waymark
Investor Relations
+44 (0) 207 672 1758
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 2018 in full unedited text. Page references in
the text refer to page numbers in the Annual Report and Accounts
2018.
Principal Risks and Uncertainties
Set out below are certain risk factors that could adversely affect
the Group's future results, its financial condition and prospects
and cause them to be materially different from what is forecast or
expected and either directly or indirectly impact the value of its
securities in issue. These risk factors are broadly categorised and
should be read in conjunction with the forward looking statements
section, strategic report and the capital and risk management
section of this annual report, and should not be regarded as a
complete and comprehensive statement of all potential risks and
uncertainties facing the Group.
Operational and IT resilience risk
The Group is subject to increasingly sophisticated and frequent
cyberattacks.
The Group is experiencing continued cyberattacks across the entire
Group, with an emerging trend of attacks against the Group's supply
chain, re-enforcing the importance of due diligence and close
working with the third parties on which the Group relies. The Group
is reliant on technology, which is vulnerable to attacks, with
cyberattacks increasing in terms of frequency, sophistication,
impact and severity. As cyberattacks evolve and become more
sophisticated, the Group will be required to invest additional
resources to upgrade the security of its systems. In 2018, the
Group was subjected to a small but increasing number of Distributed
Denial of Service ('DDOS') attacks, which are a pervasive and
significant threat to the global financial services industry.
The Group fully mitigated the impact of these attacks whilst
sustaining full availability of services for its customers. Hostile
attempts are made by third parties to gain access to and introduce
malware (including ransomware) into the Group's IT systems, and to
exploit vulnerabilities. The Group has information security
controls in place, which are subject to review on a continuing
basis, but there can be no assurance that such measures will
prevent all DDOS attacks or other cyberattacks in the future.
See also, 'The Group's operations are highly dependent on its
IT systems'.
Any failure in the 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 Group's ability to
retain and attract customers. Regulators in the UK, US and
Europe 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, parties may also fraudulently attempt to induce
employees, customers, third party providers or other users who have
access to the Group's systems to disclose sensitive information in
order to gain access to the Group's data or that of the Group's
customers or employees. Cybersecurity and information security
events can derive from human error, fraud or malice on the part of
the Group's employees or third parties, including third party
providers, or may result from accidental technological
failure.
In accordance with the EU General Data Protection Regulation
('GDPR'), the Group is required to ensure it timely implements
appropriate and effective organisational and technological
safeguards against unauthorised or unlawful access to the data of
the Group, its customers and its employees. In order to meet this
requirement, the 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
Group interacts and a failure to
monitor and manage data in accordance with the GDPR requirements
may result in financial losses, regulatory fines and investigations
and associated reputational damage. In addition, whilst the Group
takes appropriate measures to prevent, detect and minimise attacks,
the Group's systems, and those of third party providers, are
subject to frequent cyberattacks.
The 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. However, due to the Group's reliance on
technology and the increasing sophistication, frequency and impact
of cyberattacks, it is likely that such attacks could have a
material impact on the Group.
Operational risks are inherent in the 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 Group operates in
many countries, offering a diverse range of products and services
supported by 65,400 employees; it therefore has complex and diverse
operations. As a result, operational risks or losses can arise from
a number of internal or external factors. These risks are
also present when the Group relies on outside suppliers or vendors
to provide services to it or its customers, as is increasingly the
case as the Group implements new technologies, innovates and
responds to regulatory and market changes.
Operational risks continue to be heightened as a result of the
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 Group's ability to maintain effective
internal controls and governance frameworks. In particular, new
governance frameworks have recently been put into place throughout
the Group for certain Group entities, due to the implementation of
the UK ring-fencing regime and the resulting legal entity
structure. The effective management of operational risks is
critical to meeting customer service expectations and retaining and
attracting customer business. Although the Group has implemented
risk controls and loss mitigation actions, and significant
resources and planning have been devoted to mitigate operational
risk, there is uncertainty as to whether such actions will be
effective in controlling each of the operational risks faced by the
Group.
The Group's operations are highly dependent on its IT
systems.
The 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 Group's payment systems, financial
and sanctions controls, risk management, credit analysis and
reporting, accounting, customer service and other IT systems, as
well as the communication networks between its branches and main
data processing centres, are critical to the Group's
operations.
Individually or collectively, any critical system failure,
prolonged loss of service availability or material breach of data
security could cause serious damage to the Group's ability to
provide services to its customers, which could result in
significant compensation costs or regulatory sanctions (including
fines resulting from regulatory investigations) or a breach of
applicable regulations. In particular, failures or breaches
resulting in the loss or publication of confidential customer data
could cause long-term damage to the 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 Group continues to
innovate and offer new digital solutions to its customers as a
result of the trend towards online and mobile
banking.
In 2018, the Group upgraded its IT systems and technology and
expects to continue to make considerable investments to further
simplify, upgrade and improve its IT and technology capabilities
(including migration to the Cloud) to make them more
cost-effective, improve controls and procedures, strengthen
cyber security, enhance digital services provided to its bank
customers and improve its competitive position. 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 Group's operations,
its reputation and ability to retain or grow its customer business
or adversely impact its competitive position, thereby negatively
impacting the Group's financial position.
The Group relies on attracting, retaining and developing senior
management and skilled personnel, and is required to maintain good
employee relations.
The 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 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 Group, which may have an adverse effect on the
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 Group's employees in the UK, Republic of Ireland and
continental Europe are represented by employee representative
bodies, including trade unions. Engagement with its employees and
such bodies is important to the Group in maintaining good employee
relations. Any failure to do so could impact the Group's ability to
operate its business effectively.
A failure in the Group's risk management framework could adversely
affect the Group, including its ability to achieve its strategic
objectives.
Risk management is an integral part of all of the Group's
activities and includes the definition and monitoring of the
Group's risk appetite and reporting on the Group's risk exposure
and the potential impact thereof on the 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 Group's reputation or its relationship with
its customers, shareholders or other stakeholders.
The Group's operations are inherently exposed to conduct risks.
These include business decisions, actions or incentives that are
not responsive to or aligned with the Group's customers' needs or
do not reflect the Group's customer-focussed strategy, ineffective
product management, unethical or inappropriate use of data,
outsourcing of customer service and product delivery, the
possibility of alleged 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 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
Group.
The Group is seeking to embed a strong risk culture across the
organisation and has implemented policies and allocated new
resources across all levels of the organisation to manage and
mitigate conduct risk and expects to continue to invest in its risk
management framework. However, such efforts may not insulate the
Group from future instances of misconduct and no assurance can be
given that the Group's strategy and control framework will be
effective. Any failure in the Group's risk management framework
could negatively affect the 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 Group's operations are subject to inherent reputational
risk.
Reputational risk relates to stakeholder and public perceptions of
the Group arising from an actual or perceived failure to meet
stakeholder expectations due to any events, behaviour, action or
inaction by the Group, its employees or those with whom the Group
is associated. This includes brand damage, which may be
detrimental to the 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 Group's ability attract and retain customers. In
particular, the 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 Group
conducts or modifies its business activities and operations, media
coverage (whether accurate or otherwise), employee misconduct, the
Group's financial performance, IT failures or cyberattacks, 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.
Modern technologies, in particular online social networks and other
broadcast tools which facilitate communication with large audiences
in short time frames and with minimal costs, may also significantly
enhance and accelerate the impact of damaging information and
allegations.
Although the 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 Group cannot be certain that it will be successful in
avoiding damage to its business from reputational
risk.
Economic and political risk
Uncertainties surrounding the UK's withdrawal from the European
Union may adversely affect the 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, the UK is scheduled to leave the EU on 29
March 2019. The terms of a Brexit withdrawal agreement negotiated
by the UK Government were decisively voted against by Parliament on
15 January 2019. The UK Government and Parliament are currently
actively engaged in seeking to determine the terms of this
departure, including any 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.
As it currently stands, EU membership and all associated treaties
will cease to apply at 23:00 on 29 March 2019, unless some form of
transitional arrangement encompassing those associated treaties is
agreed or there is unanimous agreement amongst the UK, other EU
member states and the European Commission to extend the negotiation
period.
The direct and indirect effects of the UK's exit from the EU and
the European Economic Area ('EEA') are expected to affect many
aspects of the 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 Group faces increased political and economic risks and
uncertainty in the UK and global markets'.
The longer term effects of Brexit on the Group's operating
environment are difficult to predict, and are subject to wider
global macro-economic trends and events, but may significantly
impact the Group and its customers and counterparties who are
themselves dependent on trading with the EU or personnel from the
EU and may result in, or be exacerbated by, periodic financial
volatility and slower economic growth, in the UK in particular, but
also in Republic of Ireland, Europe and potentially the global
economy.
Significant uncertainty exists as to the respective legal and
regulatory arrangements under which the Group and its subsidiaries
will operate when the UK is no longer a member of the EU. See 'The
Group is in the process of seeking requisite permissions to
implement its plans for continuity of business impacted by the UK's
departure from the EU'. 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 Group's
operations 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 Group's profitability, competitive position,
viability, business model and product offering.
The Group is seeking the requisite permissions to implement its
plans for continuity of business impacted by the UK's departure
from the EU.
The Group is implementing plans designed to continue its ability to
clear euro payments and minimise the impact on the Group's ability
to serve non-UK EEA customers in the event that there is an
immediate loss of access to the European Single Market on 29 March
2019 (or any alternative date) with no alternative arrangement for
continuation of such activities under current rules (also known as
'Hard Brexit').
To ensure continued ability to clear Euro denominated payments, the
Group is finalising a third-country licence for the Frankfurt
branch National Westminster Bank Plc (NWB) with the German
regulator. In addition, the Group is working to satisfy the
conditions of the Deutsche Bundesbank (DBB) for access to TARGET2
clearing and settlement mechanisms. Satisfying these DBB
conditions, which include a country legal opinion, and accessing
SEPA, Euro 1 and TARGET2 will allow the Group (through NWB
Frankfurt branch) to continue to clear cross-border payments in
euros. The capacity to process these euro payments is a
fundamental requirement for the daily operations and customers of
all Group franchises, including Ulster Bank. The value of such
payments is typically in excess of €50 billion in any one day
with more than 300,000 transactions. This capacity is also
critical for management of the Group's euro-denominated central
bank cash balances of around €23 billion. NatWest Markets Plc
('NWM Plc') will use the NWB Frankfurt branch to clear its euro
payments and has also applied for a third country license to
maintain liquidity management and product settlement
arrangements.
A draft license has recently been issued for NWB Frankfurt branch
which the Group intends to finalise imminently. Once in place, the
third country licence branch approvals would each become effective
when the UK leaves the EU and the current passporting arrangements
cease to apply. The Group expects to have received the
requisite third country licenses and access to SEPA, Euro 1 and
TARGET2 ahead of the UK's departure from the EU. However,
given the quantum of affected payments and lack of short-term
contingency arrangements, in the event that such euro clearing
capabilities were not in place in time for a Hard Brexit or as
required in the future, it could have a material impacton the Group
and its customers.
Additionally, to continue serving most of the Group's EEA
customers, the Group has repurposed the banking licence of its
Dutch subsidiary, NatWest Markets N.V. ('NWM NV'). As
announced on 6 December 2018, the Group has requested court
permission for a FSMA transfer scheme to replicate the master trade
documentation for NWM Plc's non-UK EEA customers and transfer
certain existing transactions from NWM Plc to NWM NV. Other
transactions are expected to be transferred to NWM NV during 2019
(for example certain transactions with Corporate and Sovereign
customers and larger EEA customers from NWM Plc, and certain
Western European corporate business from National Westminster Bank
Plc). The volume and pace of business transfers to NWM NV will
depend on the terms and circumstances of the UK's exit from the EU,
as well as the specific contractual terms of the affected
products.
These changes to the Group's operating model are costly and require
further changes to its business operations 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 Group's access to the
euro payment infrastructure will be fundamental to its business
going forward and further changes to the Group's business
operations may be required.
The Group faces increased political and economic risks and
uncertainty in the UK and global markets.
In the UK, significant economic and political uncertainty surrounds
the terms of and timing of Brexit. (See also, 'Uncertainties
surrounding the UK's withdrawal from the European Union may
adversely affect the Group'.) In addition, were there to be a
change of UK Government as a result of a general election, the
Group may face new risks as a result of a change in government
policy, including more direct intervention by the UK Government in
financial markets, the regulation and ownership of public companies
and the extent to which the government exercises its rights as a
shareholder of the Group. This could affect, in particular,
the structure, strategy and operations of the Group and may
negatively impact the Group's operational performance and financial
results.
The Group faces additional political uncertainty as to how the
Scottish parliamentary process (including, as a result of any
second Scottish independence referendum) may impact the Group. RBSG
and a number of other Group entities (including NWM Plc) are
headquartered and incorporated in Scotland. Any changes to
Scotland's relationship with the UK or the EU (as an indirect
result of Brexit or other developments) would impact the
environment in which the Group and its subsidiaries operate, and
may require further changes to the Group's structure, independently
or in conjunction with other mandatory or strategic structural and
organisational changes which could adversely impact the
Group.
Actual or perceived difficult global economic conditions can create
challenging economic and market conditions and a difficult
operating environment for the Group's businesses and its customers
and counterparties, 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, 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 Group serves, or rapid
change to the economic environment due to the adoption of
technology and artificial intelligence. Any of the above
developments could impact the Group directly (for example, as a
result of credit losses) or indirectly (for example, by impacting
global economic growth and financial markets and the Group's
customers and their banking needs).
In addition, the Group is exposed to risks arising out of
geopolitical events or political developments, such as trade
barriers, exchange controls, sanctions and other measures taken by
sovereign governments that 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, 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 Group.
The value of the 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 Group's financial instruments, particularly
during periods of market displacement which could cause a decline
in the value of the Group's financial instruments, which may have
an adverse effect on the 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 Group's counterparty risk. The Group's risk
management and monitoring processes seek to quantify and mitigate
the Group's exposure to more extreme market moves. However, severe
market events have historically been difficult to predict and the
Group could realise significant losses if extreme market events
were to occur.
The Group expects to face significant risks in connection with
climate change and the transition to a low carbon
economy.
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
Group's risk framework in line with expected regulatory
expectations, and adapting the Group's operation and business
strategy to address both the risks of climate change and the
transition to a low carbon economy are likely to have a significant
impact on the Group.
Multilateral and UK Government undertakings to limit increases in
carbon emissions in the near and medium term will require
widespread levels of adjustment across all sectors of the economy,
with some sectors such as property, energy, infrastructure
(including transport) and agriculture likely to be particularly
impacted. The nature and timing of the far-reaching commercial,
technological and regulatory changes that this transition will
entail are currently uncertain but the impact of such changes 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. 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.
UK and international regulators that are actively seeking to
develop new and existing regulations directly and indirectly
focussed on climate change and the associated financial risks. Such
new regulations are being developed in parallel with an increasing
market focus on the risks associated with climate change. In
October 2018, the Group's prudential regulator, the PRA, published
a draft supervisory standard 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). Climate risk is also subject to various legislative
actions and proposals by, among others, the European Commission's
Sustainable Finance initiative that focuses on incorporating
climate risk into its financial policy frameworks, including
proposals (e.g., through amendments to MiFID II) for institutional
investors (including pension funds) to consider and disclose
climate risk criteria as part of their investment decision, and
also proposals to consider changes to RWA methodologies.
Furthermore, 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.
If the Group does not adequately embed climate risk into its risk
framework to appropriately measure, manage and disclose the various
financial and physical risks it faces associated with climate
change, or fails to adapt its strategy and business model to the
changing regulatory requirements and market expectations on a
timely basis, it may have a material and adverse impact on the
Group's level of business growth, its competitiveness,
profitability, prudential capital requirements, credit ratings,
cost of funding, results of operation and financial
condition.
HM Treasury (or UKGI on its behalf) could exercise a significant
degree of influence over the Group and further offers or sales of
the Group's shares held by HM Treasury may affect the price of
securities issued by the Group.
In its November 2018 Autumn Budget, the UK Government announced its
intention to continue the process of privatisation of RBSG and to
carry out a programme of sales of RBSG ordinary shares with the
objective of selling all of its remaining shares in RBSG by
2023-2024. On 5 June 2018, the UK Government (via HM Treasury
and UK Government Investments Limited ('UKGI')) disposed of
approximately 7.7% of its stake in RBSG. As at 31 December
2018, the UK Government held 62.3% of the issued ordinary share
capital of RBSG. 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 period of prolonged period
of increased price volatility on the Group's ordinary shares. On 6
February 2019, the Group obtained shareholder approval to
participate in certain directed share buyback
activities.
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 Group, could affect the
prevailing market price for the outstanding ordinary shares of RBSG
..
In addition, UKGI manages HM Treasury's shareholder relationship
with RBSG and, although HM Treasury has indicated that it intends
to respect the commercial decisions of the Group and that the 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
Group's capital strategy, dividend policy, remuneration policy or
the conduct of the Group's operations, and HM Treasury'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.
Continued low interest rates have significantly affected and will
continue to affect the Group's business and results.
Interest rate risk is significant for the 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. Continued
sustained low or negative interest rates could put pressure on the
Group's interest margins and adversely affect the 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 Group's interest rate margin realised between lending
and borrowing costs.
Conversely, while increases in interest rates may support 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 Group
operates.
Changes in foreign currency exchange rates may affect the Group's
results and financial position.
Although the Group is now principally a UK and ROI-focussed banking
group, it is subject to foreign exchange risk from capital deployed
in the Group's foreign subsidiaries, branches and joint
arrangements, and non-trading foreign exchange risk, including
customer transactions and profits and losses that are in a currency
other than the functional currency of the transaction entity. The
Group also relies on issuing securities in foreign currencies that
assist in meeting the Group's minimum requirements for own funds
and eligible liabilities ('MREL'). The 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 MREL eligible instruments), income,
RWAs, capital base and expenses and the reported earnings of the
Group's UK and non-UK subsidiaries and may affect the 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 ECB and the US Federal Reserve) and political or market events
(including Brexit), which are outside of the Group's control, may
lead to sharp and sudden variations in foreign exchange
rates.
Financial resilience risk
The Group may not meet its targets and be in a position to make
discretionary capital distributions to its
shareholders.
As part of the Group's strategy, the Group has become a principally
UK and ROI-focussed banking group and has set a number of
financial, capital and operational targets for the Group including
in respect of: cost:income ratios, cost reductions, CET1 ratio
targets, 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 to shareholders.
The 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 Group's business model and strategy
(including emerging risks associated with ESG issues) and
litigation, governmental actions, investigations and regulatory
matters.
A number of factors may impact the Group's ability to maintain its
current CET1 ratio target at circa 14% (over the medium term) and
make discretionary capital distributions to shareholders, see also,
'The Group may not meet the prudential regulatory requirements for
capital and MREL, or manage its capital effectively, which could
trigger certain management actions or recovery
options'.
The Group's ability to meet its cost:income ratio target and the
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 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 Group's strategy will be
successfully executed, that the Group will meet its targets and
expectations or be in a position to distribute capital to its
shareholders, or that the Group will be a viable, competitive or
profitable banking business.
The 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 Group operates, are highly competitive, and the Group
expects such competition to continue or intensify in response to
customer behaviour, technological changes (including the growth of
digital banking), competitor behaviour, new entrants to the market
(including non-traditional financial services providers such as
large retail or technology conglomerates), 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 Group's ability to grow or
retain its market share and impact its revenues and profitability,
particularly in its key UK retail banking segment. These trends may
be catalysed by various regulatory and competition policy
interventions, particularly as a result of the 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 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 Group
are, and will become, technology intensive, for example Bό,
Mettle, Esme, FreeAgent, APtimise and Path, some of the Group's
recent fintech ventures. The Group's ability to develop
digital solutions that comply with related regulatory changes has
become increasingly important to retaining and growing the Group's
customer business in the UK. There can be no certainty that
the Group's 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 Group to continue to grow such
services in the future. Certain of the Group's current or future
competitors may be more successful in implementing innovative
technologies for delivering products or services to their
customers. The Group may also fail to identify future opportunities
or derive benefits from disruptive technologies in the context of
rapid technological innovation, changing customer behaviour and
growing regulatory demands, including the UK initiative on Open
Banking (PSD2), resulting in increased competition from both
traditional banking businesses as well as new providers of
financial services, including technology companies with strong
brand recognition, that may be able to develop financial services
at a lower cost base.
Furthermore, the Group's competitors may be better able to attract
and retain customers and key employees and may have access to lower
cost funding and/or be able to attract deposits on more favourable
terms than the Group. Although the Group invests in new
technologies and participates in industry and research led
initiatives aimed at developing new technologies, such investments
may be insufficient or ineffective, especially given the Group's
focus on its cost savings targets, which may limit additional
investment in areas such as financial innovation and therefore
could affect the Group's offering of innovative products or
technologies for delivering products or services to customers and
its competitive position. Furthermore, the development of
innovative products depends on the Group's ability to produce
underlying high quality data, failing which its ability to offer
innovative products may be compromised.
If the Group is unable to offer competitive, attractive and
innovative products that are also profitable, it will lose market
share, incur losses on some or all of its activities and lose
opportunities for growth. In this context, the 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 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 Group.
In addition, recent and future disposals and restructurings by the
Group, cost-cutting 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 Group's core markets could
affect the Group's ability to maintain satisfactory returns.
Furthermore, continued consolidation in certain sectors of the
financial services industry could result in the 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 Group has significant exposure to counterparty and borrower
risk.
The Group has exposure to many different industries, customers and
counterparties, and risks arising from actual or perceived changes
in credit quality and the recoverability of monies due from
borrowers and other counterparties are inherent in a wide range of
the Group's businesses. The 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
under SICR ('significant increases in credit risk') rules such that
it moves to Stage 2 for impairment calculation purposes. The
Group's lending strategy and associated processes may fail to
identify or anticipate weaknesses or risks in a particular sector,
market or borrower category, or fail to adequately value physical
or financial collateral, which may result in an increase in default
rates for loans, which may, in turn, impact the Group's
profitability. See also, 'Capital and risk management - Credit
Risk'.
The credit quality of the 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 Group's ability to enforce
contractual security rights. See also, 'The 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.
Within the UK, the level of household indebtedness remains high
although the pace of credit growth has slowed during 2018.
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 Group may be affected by volatility
in property prices both in the residential and commercial sectors
(including as a result of Brexit) given that the Group's mortgage
loan portfolio as at 31 December 2018, amounted to
£165.1 billion, representing 52% of the Group's total customer
loan exposure. If property prices were to weaken this could lead to
higher impairment charges, particularly if default rates
consequently increase. In addition, the 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 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 among these financial institutions. Any perceived
lack of creditworthiness of a counterparty may lead to market-wide
liquidity problems and losses for the Group. This systemic risk may
also adversely affect financial intermediaries, such as clearing
agencies, clearing houses, banks, securities firms and exchanges
with which the Group interacts on a daily basis. See also, 'The
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
Group and an inability to engage in routine funding
transactions.
The Group may not meet the prudential regulatory requirements for
capital and MREL, or manage its capital effectively, which could
trigger certain management actions or recovery
options.
The 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 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 Group to make
discretionary capital distributions to shareholders.
As at 31 December 2018, the Group's CET1 ratio was 16.2% and the
Group currently targets to maintain its CET1 ratio at circa 14%
over the medium term. The 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 Group's current capital strategy is based on: the expected
accumulation of additional capital through the accrual of profits
over time; the planned reduction of its RWAs through disposals and
natural attrition; capital management initiatives which focus on
improving capital efficiency through improved data and releasing
excess capital trapped in Group subsidiaries; and discretionary
capital distributions.
A number of factors may impact the 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 cyber, 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 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 Group's Total Capital Requirement set by
the PRA, including Pillar 2 requirements and regulatory buffers, as
well as any applicable scalars; and
● double leverage and reduced
upstreaming of dividends from the Group's subsidiaries as a result
of the Bank of England's and/or the Group's evolving views on
distribution of capital within groups and the financial performance
and condition of the Group's subsidiaries.
A shortage of capital could in turn affect the Group's capital
ratio, and/or ability to make capital distributions.
In addition to regulatory capital, RBSG 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 Group. As a result,
RBSG is the only Group entity that can externally issue securities
that count towards the 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. The inability of the Group to reduce its
RWAs in line with assumptions in its funding plans could result in
failure to meet its MREL requirements.
If the 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 (focussed on risk reduction and mitigation) that the 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 Framework ('BRRD'), as implemented
in the UK, a breach of the Group's applicable capital or leverage
requirements may trigger the application of the Group's recovery
plan to remediate a deficient capital position. The Group's
regulator may request that the Group carry out certain capital
management actions or, if the Group's CET1 ratio falls below 7%,
certain regulatory capital instruments issued by the Group will be
written-down or converted into equity and there may be an issue of
additional equity by the Group, which could result in the dilution
of the Group's existing shareholders. The success of such issuances
will also be dependent on favourable market conditions and the
Group may not be able to raise the amount of capital required on
acceptable terms or at all. Separately, the 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 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 Group and future
growth potential. See also, 'The Group may become subject to the
application of UK statutory stabilisation or resolution powers
which may result in, among other actions, the write-down or
conversion of certain of the Group's securities, including its
ordinary shares.'
The Group may not be able to adequately access sources of liquidity
and funding.
The 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 2018, the Group held
£384 billion in deposits. The level of deposits may fluctuate
due to factors outside the Group's control, such as a loss of
confidence (including in individual 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. See also, 'The Group has significant exposure to
counterparty and borrower risk'. An inability to grow, or any
material decrease in, the Group's deposits could, particularly if
accompanied by one of the other factors described above, materially
affect the Group's ability to satisfy its liquidity
needs.
As at 31 December 2018, the Group's liquidity coverage ratio was
158%. If its liquidity position were to come under stress, and if
the Group is 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
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 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 Group's
results.
Any reduction in the credit rating assigned to RBSG, any of its
subsidiaries or any of its respective debt securities could
adversely affect the availability of funding for the Group, reduce
the Group's liquidity position and increase the cost of
funding.
Rating agencies regularly review the RBSG and Group entity credit
ratings, which could be negatively affected by a number of factors,
including political and regulatory developments, changes in rating
methodologies, changes in the relative size of the loss-absorbing
buffers protecting bondholders and depositors, a challenging
macroeconomic environment, the impact of Brexit, a potential second
Scottish independence referendum, further reductions of the UK's
sovereign credit rating, market uncertainty and the inability of
the Group to produce sustained profits.
Any reductions in the credit ratings of RBSG or of certain Group
entities (for example, NWM Plc), including in particular downgrades
below investment grade, may affect the 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 Group's cost of funding, its
access to capital markets and its capital instruments and could
limit the range of counterparties willing to enter into
transactions with the Group and therefore also adversely impact its
competitive position.
The Group may be adversely affected if it fails to meet the
requirements of regulatory stress tests.
The 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, 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 Group to meet the quantitative and qualitative
requirements of the stress tests carried out by its regulators in
the UK and elsewhere may result in the Group's regulators requiring
the Group to generate additional capital, reputational damage,
increased supervision and/or regulatory sanctions, restrictions on
capital distributions and loss of investor confidence.
The 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 Group's business, strategy and capital
requirements, the 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
Group's mandated stress testing). In addition, the 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 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 Group operates, to
capture risks and exposures at the subsidiary level, to be updated
in line with the Group's current business model or operations, or
findings of deficiencies by the Group's regulators (including as
part of the Group's mandated stress testing) may result in
increased capital requirements or require management action.
The Group may also face adverse consequences as a result of actions
by management 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 Group's financial statements are sensitive to the underlying
accounting policies, judgements, estimates and
assumptions.
The preparation of financial statements requires management to make
judgements, 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, judgements,
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 Group's results and
financial position, based upon materiality and significant
judgements and estimates, which include loan impairment provisions,
are set out in 'Critical accounting policies and key sources of
estimation uncertainty' on page 186. New accounting standards and
interpretations that have been issued by the International
Accounting Standards Board but which have not yet been adopted by
the Group are discussed in 'Accounting developments' on page
186.
Changes in accounting standards may materially impact the 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 Group having to recognise
additional liabilities on its balance sheet, or in further
write-downs or impairments and could also significantly impact the
financial results, condition and prospects of the
Group.
In January 2018, a new accounting standard for financial
instruments (IFRS 9) became effective, which introduced impairment
based on expected credit losses, rather than the incurred loss
model previously applied under IAS 39. The Group expects IFRS 9 to
create earnings and capital volatility, and the Group took a
£101 million impairment charge at 30 September 2018,
reflecting the more uncertain economic outlook.
The valuation of financial instruments, including derivatives,
measured at fair value can be subjective, in particular where
models are used which include unobservable inputs. Generally, to
establish the fair value of these instruments, the Group relies on
quoted market prices or, where the market for a financial
instrument is not sufficiently 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 Group's internal valuation models require
the Group to make assumptions, judgements and estimates to
establish fair value, which are complex and often relate to matters
that are inherently uncertain.
The Group will adopt IFRS 16 Leases with effect from 1 January 2019
as disclosed in the Accounting Policies. This is expected to
increase Other assets by £1.3 billion and Other liabilities by
£1.9 billion. While adoption of this standard has no effect on
the Group's cash flows, it will impact financial ratios which may
influence investors' perception of the financial condition of the
Group.
The value or effectiveness of any credit protection that the Group
has purchased depends on the value of the underlying assets and the
financial condition of the insurers and
counterparties.
The 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
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 Group may record
further credit valuation adjustments on the credit protection
bought from these counterparties under the CDSs. The 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 Group's results.
The Group's results could be adversely affected if an event
triggers the recognition of a goodwill impairment.
The 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 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
2018, the Group carried goodwill of £5.6 billion on its
balance sheet. The value in use and fair value of the Group's
cash-generating units are affected by market conditions and the
economies in which the Group operates.
Where the Group is required to recognise a goodwill impairment, it
is recorded in the Group's income statement, but it has no effect
on the Group's regulatory capital position.
The Group may become subject to the application of UK statutory
stabilisation or resolution powers which may result in, among other
actions, the write-down or conversion of certain of the Group's
securities, including its ordinary shares.
The Banking Act 2009, as amended ('Banking Act'), implements the
BRRD in the UK and creates 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 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. In addition,
the determination that ordinary shares, securities and other
obligations issued by the Group may be subject to write-down,
conversion or 'bail-in' (as applicable) is unpredictable and may
depend on factors outside of the Group's control. Moreover,
the relevant provisions of the Banking Act remain untested in
practice. However, if the 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's ordinary shares
or other Group securities that fall within the scope of 'bail-in'
powers. This may result in various actions being undertaken
in relation to the Group and any securities of the Group, including
the write-down or conversion of certain of the Group's
securities. There would also be a corresponding adverse
effect on the market price of such securities.
Legal, regulatory and conduct risk
The Group's businesses are subject to substantial regulation and
oversight, which are constantly evolving and may adversely affect
the Group.
The 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 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. Among 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 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,
Europe and the US have resulted in increased capital, funding and
liquidity requirements, changes in the competitive landscape,
changes in other regulatory requirements and increased operating
costs, and have impacted, and will continue to impact, product
offerings and business models.
In particular, the Group is required 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 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 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
Group's authorisations and licenses, the products and services that
the Group may offer, its reputation and the value of its assets,
the Group's operations or legal entity structure, and the manner in
which the 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 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 Group operates;
● amendments to the framework or
requirements relating to the quality and quantity of regulatory
capital to be held by the 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, MREL or by the Financial
Stability Board's ('FSB') recommendations on total loss-absorbing
capacity ('TLAC');
● 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 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 developments relating to the UK initiative on
Open Banking and the European directive on payment
services;
● new or increased regulations
relating to customer data and privacy protection as well as IT
controls and resilience, including the GDPR;
● the introduction of, and changes
to, taxes, levies or fees applicable to the 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 Group and its profitability or product offering,
including through the imposition of increased compliance
obligations or obligations which may lead to restrictions on
business growth, product offerings, or pricing.
Changes in laws, rules or regulations, or in their interpretation
or enforcement, or the implementation of new laws, rules or
regulations, including contradictory or conflicting laws, rules or
regulations by key regulators or policymakers in different
jurisdictions, or failure by the Group to comply with such laws,
rules and regulations, may adversely affect the Group's business
and results. In addition, uncertainty and insufficient
international regulatory coordination as enhanced supervisory
standards are developed and implemented may adversely affect the
Group's ability to engage in effective business, capital and risk
management planning.
The Group is subject to a number of legal, regulatory and
governmental actions and investigations including conduct-related
reviews and redress projects, the outcomes of which are inherently
difficult to predict, and which could have an adverse effect on the
Group.
The 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 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 Group's view, the most significant legal and regulatory
actions to which the Group is currently exposed. However, the
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 Group's expectation for resolution
may change.
In particular, the Group has for a number of years been involved in
conduct-related reviews and redress projects, including a review of
certain historic customer connections in its former Global
Restructuring Group (GRG), management of claims arising from
historic sales of payment protection insurance, and a review of
tracker mortgage products in the Republic of Ireland. In relation
to the GRG review, the Group established a complaints process in
November 2016, overseen by an independent third party. The
complaints process closed on 22 October 2018 for new complaints in
the UK and, with the exception of a small cohort of potential
complainants for whom there is an extended deadline, on 31 December
2018 for new complaints in the Republic of Ireland. An additional
provision of £50 million was taken in Q4 2018, reflecting
greater than predicted complaints volumes in the week leading up to
the closure of the complaints process. In addition, the Group
continues to handle claims in relation to historic sales of payment
protection insurance and took additional provisions of £200
million in Q3 2018, reflecting increased complaint volumes as the
complaint deadline of 31 August 2019 approaches. In the Republic of
Ireland, UBI 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 is ongoing in respect of this matter.
See also, 'Litigation, investigations and reviews' of Note 27 on
the consolidated accounts for details of these matters. The 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 Group's operations, additional supervision by the Group's
regulators, and loss of investor confidence.
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
Group's operations, and could adversely impact the Group's capital
position or its ability to meet regulatory capital adequacy
requirements. Failure to comply with undertakings made by the Group
to its regulators may result in additional measures or penalties
being taken against the Group.
The Group 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 (IBOR's), 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
United States. The Group has significant exposure to IBORs
primarily on its derivatives, commercial lending and legacy
securities. Until there is market acceptance on the form of
alternative RFRs for different products, the legal mechanisms to
effect transition cannot be confirmed, and the impact cannot be
determined nor any associated costs accounted for. The transition
and uncertainties around the timing and manner of transition to
RFRs represent a number of risks for the Group, its customers and
the financial services industry more widely. These include
risks related to: legal risks (as changes may be required to
documentation for new or existing transactions); financial risks
(which may arise from any changes in valuation of financial
instruments linked to benchmarks rates and may impact the 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 potential requirement to adapt IT systems, trade reporting
infrastructure and operational processes); and conduct risks (which
may relate to 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 Group, or the costs of implementing any
relevant remedial action. Uncertainty as to the nature of such
potential changes, alternative reference rates or other reforms and
as to the continuation of LIBOR or EURIBOR may adversely affect
financial instruments using LIBOR or EURIBOR 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 such financial
instruments
The 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 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 Group and could, in aggregate, adversely impact
the Group's competitive position, product offering and
revenues.
Adverse findings resulting from current or future competition
investigations may result in the imposition of reforms or remedies
which may impact the competitive landscape in which the 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 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 Group and may also divert resources from the Group's operations
and jeopardise the delivery and implementation of other significant
plans and initiatives. In addition, under the terms of the
Alternative Remedies Package, the Independent Body may require the
Group to modify certain aspects of the 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 Group to extend the customer base to which the scheme
applies which may result in prolonged periods of disruption to a
wider portion of the Group's business.
As a direct consequence of the incentivised switching scheme (which
comprises part of the Alternative Remedies Package), the Group will
lose existing customers and deposits, which in turn will have
adverse impacts on the Group's business and associated revenues and
margins. Furthermore, the capability and innovation fund (which
also comprises part of the Alternative Remedies Package) is
intended to benefit eligible competitors and negatively impact the
Group's competitive position. To support the incentivised switching
initiative, upon request by an eligible bank, the 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 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 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 Group's operations, additional supervision by
the 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 Group.
In accordance with IFRS, the Group has recognised deferred tax
assets on losses available to relieve future profits from tax only
to the extent it is probable that they will be recovered. The
deferred tax assets are quantified on the basis of current tax
legislation and accounting standards and are subject to change in
respect of the future rates of tax or the rules for computing
taxable profits and offsetting allowable losses.
Failure to generate sufficient future taxable profits or further
changes in tax legislation (including with respect to rates of tax)
or accounting standards may reduce the recoverable amount of the
recognised tax loss deferred tax assets, amounting to £1.0
billion as at 31 December 2018. Changes to the treatment of certain
deferred tax assets may impact the Group's capital position. In
addition, the 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: 15
February 2019
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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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