In 2017 we continued with the run down of our non-core bank, with legacy risk weighted assets, excluding Alawwal, reducing by £12.6 billion in the year. Given its reduced scale, in December we announced the wind-up of this division, with the remainder of the assets now folded back mainly into NatWest Markets.
We are also on track to meet our ring-fencing obligations by 2019. The majority of the bank will be within the ring-fence, so I will chair the Boards of the Group and the ring-fenced bank. We are well advanced in the process of securing the legal permissions we need to transfer some of our customers to the most appropriate post ring-fenced legal entity. This will allow us to continue to serve them with little or no change to their day-to-day banking. The services they use (their local branch, sort code, account numbers and where relevant Relationship Manager) will not change as a result of the Ring-Fencing Transfer Scheme and they will not need to do anything differently.
As well as encouraging a more open culture internally, the Board has also made a considered effort to listen to the views of all shareholders. In 2017 we hosted two retail shareholder events in London and Edinburgh. Those events provided shareholders with the opportunity to share their views on our progress and our future initiatives directly with members of the Board and executive committee. Individual shareholders’ views on our plans to build a better bank are important to us.
� Reached settlement with the Federal Housing Finance Agency (FHFA) and the California State Attorney General in the US and resolved the 2008 rights issue shareholder litigation.
UK Personal & Business Banking UK PBB now includes the business previously described as Williams & Glyn. Adjusted operating profit of £3,084 million was 18.4% higher than in 2016, including a £185 million debt sale gain. Income increased by 5.7% to £6,477 million supported by a 5.9% increase in net loans and advances, which more than offset margin contraction. Adjusted operating expenses were 7.1% lower than 2016 reflecting reduced headcount and lower back-office operations costs. Adjusted return on equity increased to 30.7% in 2017 from 25.1% in 2016. There are a range of variables that could impact near to medium term returns, including RWA inflation as a result of a change in Bank of England mortgage risk weighting.
For more details refer to the Business Review on pages 130 to 148.
Artificial Intelligence (AI) is fundamentally changing how customers interact with services across a number of industries from healthcare to journalism and even manufacturing.
Creating lasting relationships with our customers, who advocate for our bank, is the key to generating sustainable value.
NatWest Markets NatWest Markets offers corporate and institutional customers global market access, providing them with financing and risk management solutions, built around rates, currencies and financing products.
Drummonds has served private banking customers for over 300 years, providing a discreet and professional service.
We incur operating expenses in providing these services, and accept risk; including credit risk, liquidity risk and currency risk.
To help our customers protect themselves against fraud and scams we have been working with various partners across the industry.
Investors Includes UK Financial Investments, retail and institutional investors. They are interested in financial and non-financial performance in the short, medium and long term.
Further progress has been made in making sure employees are paid fairly for the work they do and are supported by simple and transparent pay structures. More employees have moved to a purely fixed pay construct during the year, allowing them to concentrate on providing excellent customer service. We will continue to make further changes in 2018 which will result in over half of our employees being on a purely fixed pay construct making their pay fairer and easier to understand.
MoneySense resources are used in 66% of secondary schools across the UK and Ireland.
• A key milestone in our ring-fencing journey was achieved through the application to the Court of Session in Edinburgh to initiate a ‘Ring-Fencing Transfer Scheme’ so as to carry out a legal transfer of some of our business.
The outlook for the UK and global economy remains uncertain due to a number of factors including: the UK’s vote to leave in the EU referendum, wider political instability, an extended period of low interest rates, high debt levels and delays in normalising monetary policy.
• Our Board Sustainable Banking Committee hosted stakeholder engagement sessions and two retail shareholder events.
We’re helping to support infrastructure projects right across the UK, including airports. By giving them access to the funding they need to invest in their future and enhance the passenger experience, we’re playing our part keeping people, goods – and the economy – moving.
Key economic indicators The UK economy grew by 1.8% in 2017, down slightly from 1.9% in 2016. That was below the long-run average of more than 2%.
Throughout 2017, work continued to consolidate enhancements to the operational risk management framework. The framework plays a key role in helping RBS maintain a safe and secure environment for its customers and is central to the overall risk management strategy. There was an ongoing focus on risk and control assessment, particularly relating to the most material products, processes and services. Significant progress was made in strengthening the fraud defence framework and reducing fraud losses as a result of the successful implementation of various tactical and strategic solutions. The emphasis on understanding and managing the risks relating to RBS’s transformation agenda remained a key theme during the year.
RBS employs a continuous process for identifying and managing its top and emerging risks. These are defined as scenarios that could have a significant negative impact on RBS’s ability to operate. A number of scenarios attracted particular attention in 2017. The factors discussed below and elsewhere in this report should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties facing RBS.
Impact of cyber attacks Cyber attacks are increasing in frequency and severity across the industry. RBS has participated in industry-wide cyber attack simulations in order to help test and develop defence planning. To mitigate the risks, a number of control enhancements have been delivered as part of a bank-wide security programme. This has improved the protection of IT systems and data for both employees and customers. Further enhancements are underway and planned to ensure RBS continues to maintain an effective control environment as the cyber threats evolve.
Failure of information technology systems RBS’s information technology systems are complex. As such, recovering from failure is challenging. To mitigate these risks, a major investment programme has significantly improved the resilience of the systems and further progress is expected. System sustainability has improved as we continue to simplify and modernise our infrastructure and applications.
Operational and execution risks Increased losses may arise from a failure to execute major projects successfully. These currently include the transformation plan, the restructuring of NatWest Markets, compliance with structural reform requirements including the statutory ring-fencing requirements implemented as a result of the Independent Commission on Banking and the implementation of obligations under the policy framework for resolution (including Operational Continuity in Resolution). These support the delivery of a robust control environment and the embedding of a strong and pervasive customercentred organisational and risk culture, which are essential to meet RBS’s strategic objectives. These projects cover organisation structure, business strategy, information technology systems, operational processes and product offerings. RBS continues to work to implement change in line with its project plans while assessing the risks to implementation and is taking steps to mitigate those risks where possible.
Committee membership(s): Group Audit Committee (Chairman) Group Nominations and Governance Committee Board Risk Committee GRG Board Oversight Committee (Chairman) UBI DAC Board Oversight Committee
Experience: Mike has extensive experience in retail banking and financial services. Mike joined Barclays in 1986 where he undertook a variety of roles in the UK and overseas across business banking, wealth management and retail banking. Mike was Managing Director of Small Business, Premier Banking and UK Retail Banking and was latterly Chief Executive of Liverpool Victoria Group for 10 years.
Dr Lena Wilson, CBE Nationality: British Date of appointment: 1 January 2018
Experience: A qualified solicitor, Aileen joined RBS in 2000. She was appointed Deputy Group Secretary and Head of Group Secretariat in 2007, and prior to that held various legal, secretariat and risk roles including Head of External Risk (Retail), Head of Regulatory Risk (Retail Direct) and Head of Legal and Compliance (Direct Line Financial Services).
As mentioned in my Chairman’s Statement on page 6, during 2017 the Board has considered a number of key strategic, financial, regulatory and risk matters together with legacy issues such as Williams & Glyn; Global Restructuring Group (GRG); and various litigation matters including the 2008 shareholders’ rights issue litigation. The Board has also been able to spend time focussing on forward-looking matters, including ring-fencing preparations; innovation; technology; and culture. The establishment of the Board’s Technology and Innovation Committee will further support our focus on the Group’s future strategic direction.
Conflicts of interests RBS has procedures in place to ensure that the Board’s management of conflicts of interest and its powers for authorising certain conflicts are operating effectively. On appointment, each director is provided with RBS’s guidelines for referring conflicts of interest to the Board. Each director is required to notify the Board of any actual or potential situational or transactional conflict of interest and to update the Board with any changes to the facts and circumstances surrounding such conflicts.
At each scheduled Board meeting the directors received reports from the Chairman, Chief Executive, Chief Financial Officer, Chief Risk Officer, Chief Operating Officer, Chief Administration Officer, Franchise CEOs, General Counsel and the Board Committee Chairmen. Other relevant senior executives attend Board meetings to present reports to the Board as appropriate. This provides the Board with an opportunity to engage directly with management on key issues and supports the Board’s succession planning activity.
In October 2017, an event for subsidiary non-executive directors provided a useful opportunity for subsidiary non-executive directors to gain a broader knowledge of the Group and education on areas of interest as well as providing a deeper understanding of their roles and responsibilities within the Group. A Board reception was also held at Gogarburn in October 2017, during which directors were able to meet and spend time with RBS customers, stakeholders and other influencers.
 Retail banking  Broad financial services  Commercial & Private
Shareholders are given the opportunity to ask questions at the Annual General Meeting and any General Meetings held or can submit written questions in advance. The Senior Independent Director and the chairmen of the Board committees are available to answer questions at the Annual General Meeting.
September due to a clash with an external commitment in place prior to appointment.
The outcomes of the evaluation have been reported to the Board and the Committee will track progress during the year.
Inclusion and diversity progress, including information about the appointment process, will continue to be reported in the Group Nominations and Governance Committee’s report in the RBS Annual Report. The balance of skills, experience, independence, knowledge and diversity on the Board, and how the Board operates together as a unit is reviewed annually as part of the Board evaluation. Where appropriate, findings from the evaluation will be considered in the search, nomination and appointment process.
External audit Having completed their first year as RBS’s external auditors in 2016, Ernst & Young LLP (EY) have continued to build and embed their knowledge of the bank during 2017. EY attended each meeting of the GAC in 2017, providing quarterly audit reports and updates on various other bespoke topics. EY’s input has been invaluable in assisting the GAC’s deliberations throughout 2017 and the year-end audit period and I would like to thank them for their contributions.
The GAC conducts an annual evaluation of both the external auditor and the Internal Audit function each year. The 2017 evaluations found that EY were performing the audit of RBS effectively and that Internal Audit continued to operate effectively during the year. Further details are provided in the report below.
Reporting  The Committee provided oversight of RBS’s risk profile relative to RBS’s strategy and risk appetite through the review of key emerging and identified top risks impacting RBS’s businesses and operations as presented in the Risk & Conduct Management Quarterly Report, and supplemented by short form reports at all other meetings.
 Particular focus has been placed on areas where the control environment requires enhancement. The BRC has devolved detailed review and challenge of management plans to remediate and strengthen the conduct and control environment across the NatWest Markets franchise to Technical ERF. We received reports on those discussions and actions being taken, paying particular attention to the robustness of issue closure and downgrade; interdependencies; and sustainability.
 Undertook an annual review of the client pricing process against regulatory requirements to ensure that the pricing of liabilities and assets takes into account the bank’s business model and risk strategy.
 Considered the statement of risk appetite for operational risk together with a new suite of metrics.
 being consulted on the Modern Slavery Act statement prior to it being published for the first time last year.
People  It is pleasing that RBS is recognised for being an attractive employer and has been rated a Top Global Stonewall Employer. The Committee recognises the importance of making RBS a great place to work.
In 2017 we held four such external engagement sessions covering the following topics:  how digital tools and programmes can enhance financial capability and the opportunity for RBS to take a leadership role in this area;  housing affordability and the role RBS could play in helping to address the housing crisis;  how RBS could develop its approach and strategies to manage climate change risk; and
Summary of the executive directors’ remuneration policy approved at the 2017 AGM 85
For executive directors, performance has been assessed for the long-term incentive plan granted in 2015 following the end of the performance period. The vesting reflects improvements in the Economic Profit, CET1 ratio and people measures, with adjustments in areas where performance did not meet targets over the three year period, such as total shareholder return.
Aligned with strategic thinking and building a strong simple and fair bank
Future salary increases will not normally be greater than the average salary increase for RBS employees over the period. Other than in exceptional circumstances, the salary will not increase by more than 15% over the course of this policy.
Remuneration for the Chairman and non-executive directors Element of pay Operation Maximum potential value
We are confident that we pay our employees fairly. We keep our HR policies and processes under review to ensure we do so. Our Gender Pay Gap information has been published and can be found in the ‘our colleagues’ section of the Strategic Report.
 share ownership - opportunity in the UK and Republic of Ireland to participate in employee share plans, with Sharesave 2017 seeing a 26% increase in participation.
 support for employee-led networks which helps raise awareness and influence strategy in a number of areas.
2016 and 2017 LTI awards to executive directors – current assessment (audited) The table represents an early indication of potential vesting outcomes only based on the position at 31 December 2017. Details of the final performance assessment at the end of the three year period and any use of discretion will be disclosed in the remuneration report for the relevant year. The Committee may consider the proximity of legacy items to the executive directors when assessing the vesting level.
TSR at upper quartile of comparator group 100% Below median performance for vesting
Performance assessment framework for LTI awards granted from 2018 onwards For each of the core performance areas, the Committee will consider whether the executive director has achieved what would reasonably have been expected over the relevant period. The Committee will follow a robust process to review performance against pre-set objectives relevant to RBS’s strategic aims, but will apply its judgement without reference to formulaic targets and weightings. Performance will be assessed taking into account circumstances applying over the period. Risk & Control and Stakeholder Perception underpins will also apply under which the Committee, with input from the Board Risk Committee and Sustainable Banking Committee, can consider if there are any other factors that would lead to a downwards adjustment (for example if the achievements are not considered sustainable, or were achieved through excessive risk taking).
Key to table: Noms & Gov Group Nominations and Governance Committee
Ross McEwan 2,052,193 2,793,493 Ewen Stevenson 1,103,940 2,485,320 Howard Davies 41,000 Sandy Crombie 20,000 Frank Dangeard Alison Davis 20,000 Morten Friis 20,000 Robert Gillespie 25,000 John Hughes Penny Hughes 562 Yasmin Jetha Brendan Nelson 12,001 Baroness Noakes 41,000 Mike Rogers Mark Seligman 20,000
Notes: (1) 2013 remuneration includes Stephen Hester (SH) as Chief Executive for the period to 30 September and Ross McEwan (RM) for the period from 1 October to 31 December. (2) Figures have been amended where appropriate to reflect any restatement of prior year amounts, for example, to reflect the actual rather than estimated value of LTI vestings as part of the total remuneration figure and any revisions to the value of benefits provided. (3) The maximum opportunity is set according to the approved policy and, for LTI awards granted in 2015 and onwards, the regulatory cap.
To support a culture where good performance against a full range of measures will be rewarded. To encourage the creation of value over the long term and to align rewards with the returns to shareholders.
Personal & Business Banking Variable remuneration (cash) Deferred remuneration (bonds) Deferred remuneration (shares)
As stated at the start of this Compliance Report, in the case of RBS, the Board, rather than the Group Performance and Remuneration Committee, reserves the authority to make the final determination of the remuneration of the Chief Executive (v) The NYSE Standards require listed companies to adopt and disclose corporate governance guidelines. Throughout the year ended 31 December 2017, RBS has complied with all of the provisions of the Code (subject to the exception described above) and the Code does not require RBS to disclose the full range of corporate governance guidelines with which it complies (vi) The NYSE Standards require listed companies to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. RBS has adopted a code of conduct which is supplemented by a number of key policies and guidance dealing with matters including , among others, antibribery and corruption, anti-money laundering, sanctions, confidentiality, inside information, health, safety and environment, conflicts of interest, market conduct and management records. This code of conduct applies to all officers and employees and is fully aligned to the PRA and FCA Conduct Rules which apply to all directors. The Code of Conduct is available to view on RBS’s website at rbs.com.
The rules governing the powers of directors, including in relation to issuing or buying back shares and their appointment are set out in the company’s Articles of Association. It will be proposed at the 2018 Annual General Meeting that the directors be granted authorities to allot shares under the Companies Act 2006. The company’s Articles of Association may only be amended by a special resolution at a general meeting of shareholders.
2017 compared with 2016 The tax charge for the year ended 31 December 2017 is higher than the UK statutory tax rate reflecting the impact of the banking surcharge, non-deductible bank levy and conduct charges for which no tax relief has been recognised, a reduction in the carrying value and impact of UK tax rate changes on deferred tax balances. These factors have been offset partially by the release of tax provisions that reflect the reduction of exposures in countries where RBS is ceasing operations.
Equity shares decreased by £0.2 billion, 28.6%, to £0.5 billion, primarily due to the sale of RBS’s holding in EuroClear.
Deposits by banks increased by £8.3 billion, 21.8%, to £46.9 billion, with increases in inter-bank deposits, up £6.2 billion, 18.6%, to £39.5 billion, primarily driven by amounts received under the TFS, offset by reductions in the cash collateral held against derivatives. Repurchase agreements and stock lending (‘repos’), increased by £2.2 billion, 42.3%, to £7.4 billion, primarily driven by increased process efficiencies and increased trading activity partially offset by netting benefits in RBS Treasury and NatWest Markets.
Debt securities in issue increased by £3.4 billion, 12.5%, to £30.6 billion reflecting new covered bond issuances offset by maturities in RBS Treasury along with mark-to-market and foreign exchange movements.
Derivatives, settlement balances and short positions 185,877 262,197 278,904 377,337 318,861
Return on average total assets (2) 0.1% (0.8%) (0.2%) (0.3%) (0.7%)
The Reward proposition continued to grow with more than 1,450,000 customer accounts, 26% higher than December 2016. We repositioned the Reward account proposition from 26 June 2017, including the introduction of minimum customer criteria, supporting improved returns in the second half of 2017.
2016 compared with 2015 Operating profit was £742 million compared with £1,264 million in 2015 and included a £423 million litigation and conduct charge, principally relating to a provision in respect of the FCA review of RBS’s treatment of SMEs. Adjusted operating profit of £1,273 million was £111 million, or 8%, lower than 2015, mainly reflecting increased impairments, partially offset by increased income.
Net impairment losses increased by £137 million to £206 million primarily reflecting a single name charge taken in respect of the oil and gas portfolio.
 Best bank for FX Prime Brokerage services (Source: FX Week Best Bank Awards 2017)
Provides oversight and advice on: current and potential future risk exposures, and
Enterprise-wide risk and control framework (including stress testing and risk capital, risk appetite and framework, strategic and earnings risk, non-traded market risk and risk model build)
R is k an d c o nt ro l f ra m e w or k, r is k ap pe tit e a nd c h al le ng e, o ve rs ig ht o f r is k m an ag em en t
 Analysing the aggregate risk profile and ensuring that risks are being managed within risk appetite.
The annual process of establishing risk appetite statements is completed alongside the business and financial planning process. This ensures plans and risk appetite are appropriately aligned.
 Scenario results and management actions are reviewed and agreed by senior management through executive committees including
 Under the 2017 Bank of England stress test, CET1 ratio reached a low point of 6.4%, below the hurdle rate of 6.7%.  Post the impact of management actions and the conversion of AT1 capital, the Group’s low point CET1 ratio increased from 6.4% to 7.0%, meeting the hurdle rate but remained below the Systemic Reference Point of 7.4%.  Tier 1 leverage ratio was projected to be 3.7% under stress, above the 3.25% leverage hurdle rate. Post the impact of management actions and conversion of AT1 capital, the Tier 1 leverage ratio would have been 4.0%.  The stress was based on an end of 2016 balance sheet starting position. Since then, RBS has taken a number of actions to improve its capital position stress resilience, including the on-going run-down of Capital Resolution RWAs, the continued reduction in certain credit portfolios and the resolution of various litigation cases and regulatory investigations.
Notes: (1) The countercyclical leverage ratio buffer is set at 35% of the Group’s CCyB. As noted above this buffer may be set between 0% and 2.5% and the Financial Policy Committee
Capital base: Own funds are based on shareholders’ equity. The adjustment arising from the application of the prudent valuation requirements to all assets measured at fair value, has been included in full. Additional valuation adjustments relating to unearned credit spreads on exposures under the advanced internal ratings approach has been included in the determination of the expected loss amount deducted from CET1. Where the deductions from AT1 capital exceed AT1 capital, the excess is deducted from CET1 capital. Based on our current interpretations of the Commission Delegated Regulation issued in December 2013 on credit risk adjustments, RBS’s standardised latent provision has been reclassified to specific provision and is not included in Tier 2 capital.
Capital, liquidity and funding risk continued Loss absorbing capital (unaudited) The following table illustrates the components of estimated loss absorbing capital (LAC) in RBSG plc and operating subsidiaries and includes external issuances only. The table is prepared on a transitional basis, including the benefit of regulatory capital instruments issued from operating companies, to the extent they meet MREL criteria. For further details regarding regulatory requirements in relation to MREL, refer to page 161.
Securitisation - weighted average rate spread (bps) 1,080 — — — — — 1,080
Key points (unaudited)  RWAs decreased by £27.3 billion during the year with reductions across all risk types but primarily in noncounterparty credit risk (£17.5 billion) driven by reduced asset size and limit reductions in both NatWest Markets and Commercial Banking.
Key points  The loan:deposit ratio was 88%, down from 91% at the end of 2016 driven by deposit growth, primarily in UK PBB and RBS International.
 Underlying loan growth in UK PBB, with smaller increases in Ulster Bank RoI and Private Banking, was offset by active management of the lending book in Commercial Banking and reductions in NatWest Markets.
RBS uses one of the following three methods to quantify the provision required: individual, where the quantification method is on a case-by-case assessment of future cash flows; collective, a quantitative review of the relevant portfolio; and latent, where PD, LGD, drawn balance and emergence period are considered in the calculation.
Exposure Portfolio and asset quality as a percentage of total current exposure Wholesale (1) Wholesale (1) Banks and Banks and Personal other FIs Sovereigns (2) Other Total Personal other FIs Sovereigns (2) Other Total
 Sovereign exposure in the UK and Western Europe (predominantly Germany) increased and reflects liquidity management transactions.
Of which: Mixed (capital and interest only) 6,027 70 — 20 6,117 6,003 75 — 23 6,101
 The most significant movement in exposure during 2017 was in the AQ5-AQ8 banding where the bulk of the ship finance debt portfolio lies. The reduction in exposure was mainly as a result of asset disposals resulting from the exit strategy.
Impairment losses/(releases) Impairment provision 2017 Individual Collective Latent Total Individual Collective Latent Total £m £m £m £m £m £m £m £m
of which: commercial real estate 24,784 1,189 293 4.8 25 1.2 (76) 139
Finance leases and instalment credit 12,269 139 79 1.1 57 0.6 8 12
of which: commercial real estate 25,311 1,323 426 5.2 32 1.7 (102) 600
 Derivative notionals decreased by 27%, mainly due to trade compression cycle participation, maturities and buyouts, as well as the effect of foreign exchange. This was offset by new business.
The majority of RBS’s non-traded market risk exposure arises from retail and commercial banking activities from assets and liabilities that are not classified as held-for-trading.
Its quantitative appetite is expressed in terms of exposure limits. These limits comprise both Board risk measures (which are approved by the RBS Board on the recommendation of the Board Risk Committee) and key risk measures (which are approved by the ALCo).
Risk measurement The market risk exposures that arise as a result of RBS’s retail and commercial banking activities are measured using a combination of value-based metrics (VaR and sensitivities) and earnings-based metrics, as explained in greater detail for each of the key non-traded risk exposure types disclosed in this section.
The sensitivity of net interest income table below shows the expected impact, over the next 12 months, to an immediate upward or downward change of 25 and 100 basis points to all interest rates. All yield curves are expected to move in parallel with the exception that interest rates are assumed to floor at zero per cent or, for euro rates, at the current negative rate.
The limit framework at RBS level comprises value-at-risk (VaR) and stressed value-at-risk (SVaR). More details on these are provided on the following pages.
A risk review of trading businesses is undertaken weekly with senior risk and front office staff. This includes a review of profit and loss drivers, notable position concentrations and other positions of concern.
Key points  Traded VaR fluctuated throughout 2017, reflecting political developments, market events, customer flows and other macroeconomic factors.
Pension risk (unaudited) continued Risk mitigation The trustee has taken measures to mitigate inflation and interest rate risks, both by investing in suitable financial assets and by entering into inflation and interest rate swaps. The Main scheme also uses derivatives to manage the allocation of the portfolio to different asset classes and to manage risk within asset classes.
The next triennial valuation will have an effective date of 31 December 2018. The expectation is that this will result in additional contributions being agreed with the trustee. Under current legislation, such agreement would need to be reached no later than 31 March 2020.
RBS continued to remediate historical conduct issues, while also focusing its customer-facing businesses and support functions around the needs of its customers including the delivery of a number of regulatory change programmes. Conduct and litigation costs were £1.1 billion in 2017 compared with £5.9 billion in 2016.  The remediation of PPI continued, with the FCA confirming
Operational risk (unaudited) continued Operational risk is responsible for the design, development, delivery and continuous improvement of the operational risk management framework. The Operational Risk Policy is incorporated into the RBS Policy Framework and provides direction for the consistent identification, assessment, management, monitoring and reporting of operational risk. Through a network of oversight teams, the function seeks to ensure the integrity of the framework, and manages overall operational risk profile against risk appetite.
The process is designed to confirm that risks are effectively managed and prioritised in line with the stated risk appetite. Controls are tested at the appropriate frequency to verify that they remain fit-for-purpose and operate effectively.
Sources of risk Business risk arises as a result of RBS’s exposure to the macroenvironment, to the competitive environment, and to technological changes. In addition, internal factors such as volatility in sales volumes, and input costs, and other operational risks such as RBS’s ability to assess the business operating environment, or to execute its chosen strategy, contribute to business risk.
Where possible, assumptions were benchmarked against Pillar 3, EBA stress tests and our internally developed ranges.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:  adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or  the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or  certain disclosures of directors’ remuneration specified by law are not made; or  we have not received all the information and explanations we require for our audit
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.
Neither of these amendments has had a material effect on the Group’s financial statements.
If an asset does not generate cash flows that are independent from those of other assets or groups of assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. For the purposes of impairment testing, goodwill acquired in a business combination is allocated to each of the Group’s cash-generating units or groups of cash-generating units expected to benefit from the combination. The recoverable amount of an asset or cash-generating unit is the higher of its fair value less cost to sell and its value in use. Value in use is the present value of future cash flows from the asset or cashgenerating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cash-generating unit that have not been taken into account in estimating future cash flows. If the recoverable amount of an intangible or tangible asset is less than its carrying value, an impairment loss is recognised immediately in profit or loss and the carrying value of the asset reduced by the amount of the loss.
23. Derivatives and hedging Derivative financial instruments are initially recognised, and subsequently measured, at fair value. The Group’s approach to determining the fair value of financial instruments is set out in the section of Critical accounting policies and key sources of estimation uncertainty entitled Fair value - financial instruments; further details are given in Note 9 on the accounts.
(i) Goodwill The Group capitalises goodwill arising on the acquisition of businesses, as discussed in Accounting policy 6. The carrying value of goodwill as at 31 December 2017 was £5,558 million (2016 - £5,558 million).
Effective 1 January 2018 - IFRS 9 In July 2014, the IASB published IFRS 9 ‘Financial Instruments’ with an effective date of 1 January 2018. IFRS 9 replaces the current financial instruments standard IAS 39, setting out new accounting requirements in a number of areas.
IFRS 17 ‘Insurance contracts’ was issued in May 2017 to replace IFRS 4 and to establish a comprehensive standard for inceptors of insurance policies. The effective date is 1 January 2021.
Other operating income Operating lease and other rental income 276 287 276 Changes in the fair value of own debt designated as at fair value through profit or loss attributable to own credit risk (2) - debt securities in issue — 41 84 - subordinated liabilities — (15) (29)
Year in which income statement charge is expected to be taken for deferred variable compensation £m £m £m £m £m
Defined benefit schemes The Group sponsors a number of pension schemes in the UK and overseas, including the Main section of The Royal Bank of Scotland Group Pension Fund (the “Main scheme”) which operates under UK trust law and is managed and administered on behalf of its members in accordance with the terms of the trust deed, the scheme rules and UK legislation.
Net assets of schemes in surplus (included in Prepayments, accrued income and other assets, Note 17) 392 276
On 24 March 2016 Deloitte LLP (Deloitte) resigned as the Group’s auditors and at the Annual General Meeting on 4 May 2016 the shareholders approved the appointment of Ernst & Young LLP (EY) as the Group’s auditor for the audit of the 2016 annual accounts. EY remain the Group’s auditors for the audit of the 2017 annual accounts.
Amounts paid to the Group's auditors for statutory audit and other services are set out below: EY £m £m
Fees payable to the auditor and its associates in respect of audits of associated pension schemes — 0.1
8 Financial instruments - classification The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown within other assets and other liabilities.
Valuation hierarchy Initial classification of a financial instrument is carried out by the Product Control team following the principles in IFRS 13. They base their judgment on information gathered during the IPV process for instruments which include the sourcing of independent prices and model inputs. The quality and completeness of the information gathered in the IPV process gives an indication as to the liquidity and valuation uncertainty of an instrument.
Consensus pricing RBS uses consensus prices for the IPV of some instruments. The consensus service encompasses the equity, interest rate, currency, commodity, credit, property, fund and bond markets, providing comprehensive matrices of vanilla prices and a wide selection of exotic products. NatWest Markets contributes to consensus pricing services where there is a significant interest either from a positional point of view or to test models for future business use. Data sourced from consensus pricing services are used for a combination of control processes including direct price testing, evidence of observability and model testing. In practice this means that RBS submits prices for all material positions for which a service is available. Data from consensus services are subject to the same level of quality review as other inputs used for IPV process.
In order to determine a reliable fair value, where appropriate, management applies valuation adjustments to the pricing information gathered from the above sources. The sources of independent data are reviewed for quality and are applied in the IPV processes using a formalised input quality hierarchy. These adjustments reflect RBS's assessment of factors that market participants would consider in setting a price.
Loans and advances to banks 0.8 11.4 11.5 — 3.3 8.2
Disposals and write-off of fully amortised assets — (217) (217) — (651) (651)
Impairment testing inherently involves a number of judgmental areas: the preparation of cash flow forecasts for periods that are beyond the normal requirements of management reporting; the assessment of the discount rate appropriate to the business; estimation of the fair value of CGUs; and the valuation of the separable assets of each business whose goodwill is being reviewed.
Currency translation and other adjustments 140 91 5 73 108 25 442
Write down of property, plant and equipment — 71 — — 7 — 78 Disposals and write-off of fully depreciated assets — (137) (22) (86) (180) (250) (675)
(b) Operating cash flows attributable to discontinued operations Included within the Group’s cash flows are the following amounts attributable to discontinued operations: Net cash flows from operating activities — — (57)
$156 million 7.65% Series F non-cumulative preference shares (callable) Ineligible 120 —
US$ 2,132 million 9.50% subordinated notes March 2022 Tier 2 1,724 —
Notes: (1) The coupons on these notes are non-cumulative and payable at the company’s discretion. In the event the Group’s CET1 ratio falls below 7% any outstanding notes will be converted into ordinary shares at a fixed price. While taking the legal form of debt these notes are classified as equity under IFRS.
Income arising from sponsored entities where we hold no interest at year end was £11 million (2016 - £18 million).
On 24 March 2017, the court dismissed a second FX-related antitrust class action, holding that the alleged class of ‘consumers and end-user businesses’ lacked standing to pursue antitrust claims. The plaintiffs in that case have since filed an amended complaint. The defendants made a renewed motion to dismiss the complaint but the court denied that motion on 3 August 2017. As a result, the discovery phase has commenced. RBS and the other defendants are seeking reconsideration of the court’s decision regarding standing or, in the alternative, permission to take an immediate appeal to the United States Court of Appeals for the Second Circuit.
In addition, discussions are ongoing with FCA with regard to extending the scope of the review/remediation exercise to include the period from 1 January 2010 to 31 December 2010, with a formal decision expected during Q1 2018. It is not currently anticipated that any extension of scope will require an additional provision to be taken.
Litigation, investigations and reviews continued UK retail banking In November 2014, the CMA announced its decision to proceed with a market investigation reference (MIR) into retail banking, which would cover personal current account (PCA) and SME banking. On 9 August 2016, the CMA published its final report. The CMA concluded that there are a number of competition concerns in the provision of PCAs, business current accounts and SME lending, particularly around low levels of customers searching and switching, resulting in banks not being put under enough competitive pressure, and new products and new banks not attracting customers quickly enough. The final report set out remedies to address these concerns. These included remedies making it easier for customers to compare products, ensure customers benefit from technological advantages around open banking, improve the current account switching service and provide PCA overdraft customers with greater control over their charges along with additional measures targeted at SME customers.
FCA Asset Management Market Study In November 2015, the FCA announced that a market study would be undertaken into asset management. In November 2016, the FCA published the interim report which indicated that price competition is weak and expressed concerns around the lack of transparency on the objectives, and appropriate benchmarks, for reporting fund performance. On 28 June 2017, the FCA published the final report which was broadly in line with the interim report and sets out an extensive package of remedies which include providing further protection to investors and driving competitive pressure on asset managers.
Enforcement proceedings and investigations in relation to Coutts & Co Ltd The Swiss Financial Market Supervisory Authority (FINMA) has been taking enforcement proceedings against Coutts & Co Ltd, a member of RBS incorporated in Switzerland, with regard to certain client accounts held with Coutts & Co Ltd relating to allegations in connection with the Malaysian sovereign wealth fund 1MDB. On 2 February 2017, FINMA announced that Coutts & Co Ltd had breached money laundering regulations by failing to carry out adequate background checks into business relationships and transactions associated with 1MDB. FINMA accordingly required Coutts & Co Ltd to disgorge profits of CHF 6.5 million. FINMA is currently investigating three individuals in connection with 1MDB.
Segmental reorganisation The previously reported operating segments are now realigned and comparatives have been re-presented as follows:  The former Williams & Glyn reportable operating segment has been integrated into the UK PBB reportable segment;  The former Capital Resolution reportable operating segment has been integrated into the NatWest Markets reportable segment, with the exception of the costs in relation to the RMBS claims, which have been transferred to the Central & other items reportable segment;  The RBSI reportable operating segment is no longer presented within the CPB franchise.
 Commercial Banking whole business securitisations and relevant financial institutions (RFI) were transferred to NatWest Markets during December 2017. RFIs are prohibited from being within the ring-fence due to their nature and exposure to global financial markets. The move is in preparation for the implementation of the UK ringfencing regime.
Inter Inter Inter External segment Total External segment Total External segment Total £m £m £m £m £m £m £m £m £m
UK Personal & Business Banking 7,348 44 7,392 7,197 52 7,249 7,164 51 7,215 Ulster Bank RoI 676 (4) 672 660 1 661 640 15 655
UK Personal & Business Banking 190,636 183,410 — 181,357 173,040 — 167,959 164,830 — Ulster Bank RoI 24,564 19,853 — 24,111 19,299 — 21,264 15,837 —
(b) Geographical segments The geographical analysis in the tables below has been compiled on the basis of location of office where the transactions are recorded.
Of which total liabilities held for sale — 10 — — 10
Net assets attributable to equity owners and non-controlling interests 36,211 1,921 9,109 1,852 49,093
39 Transactions with directors and key management (a) At 31 December 2017, amounts outstanding in relation to transaction, arrangements and agreements entered into by authorised institutions in the Group, as defined in UK legislation, were £24,376 in respect of loans to six persons who were directors of the company at any time during the financial period.
Owners’ equity includes a total comprehensive profit for the year, dealt with in the accounts of the parent company, of £1,118 million (2016 - £5,255 million loss; 2015 - £1,950 million loss). Refer to Note 2 on the parent company accounts.
(3) AT1 capital notes totalling £2.0 billion issued in August 2016 (2015 - £2.0 billion). (4) Paid-in equity reclassified to liabilities as a result of the call of US$564 million and CAD321 million EMTN notes in August 2017 (redeemed in October 2017). (5) On 15 June 2017, the Court of Session approved a reduction of RBSG plc capital so that the amounts which stood to the credit of share premium account and capital redemption reserve were transferred to retained earnings.
The accounting policies that are applicable to the company are included in RBS accounting polices which are set out on pages 251 to 263 of the consolidated financial statements, except that it has no policy regarding ‘Basis of consolidation’ and that the company’s investments in its subsidiaries are stated at cost less any impairment.
The majority of the impairment charge for 2016 relates to the company’s investment in RBS plc. At 31 December 2017, the amount by which it exceeded its carrying value (based on its value in use) was £0.8 billion.
US$242 million 7.25% series H non-cumulative preference shares of US$ 0.01 (callable) Ineligible — 197
US$ 1,000 million 9.118% series 1 non-cumulative convertible preference shares of US$ 0.01 (callable, partial redemption) Ineligible — 54 £0.5 million 11% and £0.4 million 5.5% cumulative preference shares of £1 (not callable) Ineligible 1 1
Care Homes 1 Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RBS Secured Funding LLP BF FC 35 Great St Helen's, London, EC3A 6AP, England
Royal Bank Ventures Investments Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
West Register (Hotels Number 3) Ltd INV DE 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Bahamas CTB Ltd BF FC Trident Corporate Services (Bahamas) Ltd, Suite 200B, 2nd Floor, Centre of Commerce, One Bay Street, PO Box N-3944, Nassau, JE4 8ND
Finland Nordisk Renting OY BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Sweden KB IR Gamlestaden BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Nordisk Renting AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
INV DE 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
USA RBS WCS Holding Company BF FC Corporation Trust Centre, 1209 Orange St, Wilmington, Delaware, DE 19808
Higher Broughton (GP) Ltd BF EAA PC 51 Floor 3, 1 St Ann Street, Manchester, M2 7LR, England
BF IA FC 33 Boundary Hall, Cricket Square, 171 Elgin Avenue, George Town, Grand Cayman, KY1-
RoI First Active Investments No. 3 Ltd FC FC 100 Ulster Bank Group Centre, George's Quay, Dublin 2
FC DE 0 35 Great St Helen's, London, EC3A 6AP, England
UK Latam Directors Ltd NC FC 100 Quartermile Two, 2 Lister Square, Edinburgh, Midlothian, EH3 9GL, Scotland
UK AD Aggregator Platform Ltd FC FC 100 The Shards, 32 London Bridge Street, London, SE1 9SG, England
UK N.C. Head Office Nominees Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK RBS Trustees Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
(4) Accounting treatment: EAA - Equity accounting - Associate EAJV - Equity accounting - Joint Venture FC - Fully consolidated IA - Investment accounting NC - Not consolidated
Group overseas branches The company’s related undertakings have branches in the following countries.
The Royal Bank of Scotland plc Canada, Germany, Hong Kong, RoI, Jersey, Poland, Singapore, Turkey, United Arab Emirates
Finance leases and instalment credit 5,045 4,805 1,820 11,670 11,967 11,134 10,933 10,524
Loans and advances to customers - net 349,919 351,950 333,892 378,238 440,722
Notes: (1) Gross yield is the interest earned on average interest-earning assets of the banking book. (2) Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. (3) For the purpose of net interest margin calculations, there was no increase in interest receivable (2016 - nil; 2015 – nil) and no increase in interest payable
Total interest-bearing liabilities - banking business (1,2) 270,269 1,865 0.69 264,471 2,474 0.94
Notes: (1) Interest receivable and interest payable have both been decreased by £182 million (2016 – £76 million) in respect of negative interest relating to financial assets and financial liabilities that attracted negative interest. (2) There was no increase in interest receivable (2016 - nil; 2015 - nil) and no increase in interest payable (2016 - nil; 2015 - £15 million) in respect of interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have been adjusted where applicable. (3) Interest receivable includes £256 million (2016 - £290 million; 2015 - £400 million) in respect of loan fees forming part of the effective interest rate of loans and receivables. (4) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. (5) Interest receivable includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers. (6) The analysis into UK and overseas has been compiled on the basis of location of office.
Forbearance The table below shows loans granted forbearance during the year. These loans are unimpaired: either the loan was performing before and after the granting of forbearance or the loan was non-performing before but subsequently transferred to the performing book. Loans with impairment provisions subject to forbearance continue to be reported as impaired loans.
Over 2017 0-3 months 3-6 months 6-12 months 12 months Total £m £m £m £m £m
Contractual obligations to purchase goods or services 74 202 332 67 7 —
Part of the focus of this transformation programme is to downsize and simplify the Group, reduce underlying costs and strengthen its overall capital position. The transformation programme also aims to improve customer experience and employee engagement, update the Group’s operational and technological capabilities, strengthen governance and control frameworks and better position the Group to operate in compliance with the UK ring-fencing regime by 1 January 2019. Together, these initiatives are referred to as the Group’s ‘transformation programme’.
The Group’s ability to meet the targets and expectations which accompany the Group’s transformation programme, including with respect to its cost reduction programme and its return to profitability and the timing thereof, are subject to various internal and external risks and are based on a number of key assumptions and judgments any of which may prove to be inaccurate. As part of its transformation programme, a number of financial, capital, operational and diversity targets and expectations have been set by management for the Group, both for the short term and throughout the transformation and restructuring period. These include (but are not limited to) expectations relating to the Group’s return to profitability and the timing thereof, one-off costs incurred in connection with material litigation and conduct matters and the timing thereof, expected growth rates in income, customer loans and advances and volumes and underlying drivers and trends, cost:income ratio targets, expectations with respect to reductions in operating costs, including remediation costs, expectations relating to restructuring or transformation costs and charges as well as impairment charges, disposal losses, CET1 ratio targets and expectations regarding funding plans and requirements, expectations with respect to reductions in risk-weighted assets and the timing thereof, expectations with respect to employee engagement and diversity and environmental targets.
The implementation of these changes involves a number of risks related to both the revised Group structure and also the process of transition to such new structure.
These and any other restructuring or commercial actions as well as new or amended rules, could have a significant impact on the Group’s operations and/or legal entity structure, including attendant restructuring costs, capital requirements and tax implications and as a result adversely impact the Group’s profitability, business model and product offering. These impacts would potentially be greater in the event of a disorderly termination of the Article 50 process and early Brexit. See ‘The Group has been, and will remain, in a period of major business transformation and structural change through to at least 2019 as it implements its own transformation programme and seeks to comply with UK ring-fencing and recovery and resolution requirements as well as the Alternative Remedies Package. Additional structural changes to the Group’s operations will also be required as a result of Brexit. These various transformation and restructuring activities are required to occur concurrently which carries significant execution and operational risks, and the Group may not be a viable, competitive and profitable bank as a result.’
The impact of the Group’s pension obligations on its results and operations are also dependent on the regulatory environment in which it operates. There is a risk that changes in prudential regulation, pension regulation and accounting standards, or a lack of coordination between such sets of rules, may make it more challenging for the Group to manage its pension obligations resulting in an adverse impact on the Group’s CET1 capital.
A shortage of capital, which could in turn affect the Group’s capital ratio and ability to resume dividend payments, could arise from:  a depletion of the Group’s capital resources through increased costs or liabilities (including pension, conduct and litigation costs), reduced profits or increased losses (which would in turn impact retained earnings), sustained periods of low or lower interest rates, reduced asset values resulting in write-downs, impairments or accounting charges;  reduced upstreaming of dividends from the Group’s subsidiaries as a result of the Bank of England’s approach to setting the minimum requirements for own funds and eligible liabilities (‘MREL’) within groups, requiring subgroups to hold internal MREL resources sufficient to match both their own individual MREL as well as the internal MREL of the subsidiaries constituting the sub-group;  an increase in the amount of capital that is required to meet the Group’s regulatory requirements, including as a result of changes to the actual level of risk faced by the Group, factors influencing the Group’s regulator’s determination of the firm-specific Pillar 2B buffer applicable to the Group (PRA buffer), changes in the minimum levels of capital or liquidity required by legislation or by the regulatory authorities or the calibration of capital or leverage buffers applicable to the Group, including countercyclical buffers, increases in risk-weighted assets or in the risk weighting of existing asset classes, or an increase in the Group’s view of any management buffer it needs, taking account of, for example, the capital levels or capital targets of the Group’s peer banks and criteria set by the credit rating agencies;  the implementation of the Group’s transformation programme, including in response to implementation of the UK ring-fencing regime, certain intragroup funding arrangements will be limited and may no longer be permitted and the Group may need to increasingly manage funding and liquidity at an individual Group entity level, which could result in the Group being required to maintain higher levels of capital in order to meet the Group’s regulatory requirements than would otherwise be the case, as may be the case if the Bank of England were to identify impediments to the Group’s resolvability resulting from new funding and liquidity management strategies.
The amount of regulatory capital required to meet the Group’s regulatory capital requirements (and any additional management buffer), is determined by reference to the amount of risk-weighted assets held by the Group. The models and methodologies used to calculate applicable risk-weightings are a combination of individual models, subject to regulatory permissions, and more standardised approaches. The rules are applicable to the calculation of the Group’s risk-weighted assets are subject to regulatory changes which may impact the levels of regulatory capital required to be met by the Group.
RBSG’s distributable reserves and distributable items are sensitive to the accounting impact of factors including the redemption of preference shares, restructuring costs and impairment charges and the carrying value of its investments in subsidiaries which are carried at the lower of cost and their prevailing recoverable amount. Recoverable amounts depend on discounted future cash flows which can be affected by restructurings, including the restructuring required to implement the UK ring-fencing regime, or unforeseen events.
The cost of implementing the Alternative Remedies Package regarding the business previously described as Williams & Glyn could be more onerous than anticipated and any 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. On 18 September 2017, the Group received confirmation that an alternative remedies package announced on 26 July 2017 (‘Alternative Remedies Package’), regarding the business previously described as Williams & Glyn, had been formally approved by the European Commission (‘EC’) in the form proposed.
The financial performance of the Group has been, and may continue to be, materially affected by customer and counterparty credit quality and deterioration in credit quality could arise due to prevailing economic and market conditions and legal and regulatory developments. 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.
In addition, the Group’s credit risk is exacerbated when the collateral it holds cannot be realised as a result of market conditions or regulatory intervention or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure that is due to the Group, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those experienced in recent years.
The effectiveness of recent prudential reforms designed to contain systemic risk in the EU and the UK is yet to be tested. Counterparty risk within the financial system or failures of the Group’s financial counterparties could have a material adverse effect on the Group’s access to liquidity or could result in losses which could have a material adverse effect on the Group’s financial condition, results of operations and prospects.
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. Its results in future periods may be affected by changes to applicable accounting rules and standards. The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, results reported in future periods may reflect amounts which differ from those estimates. Estimates, judgements and assumptions take into account historical experience and other factors, including market practice and expectations of future events that are believed to be reasonable under the circumstances.
In July 2014, the IASB published a new accounting standard for financial instruments (IFRS 9) effective for annual periods beginning on or after 1 January 2018. It introduced a new framework for the recognition and measurement of credit impairment, based on expected credit losses, rather than the incurred loss model currently applied under IAS 39. The inclusion of loss allowances with respect to all financial assets that are not recorded at fair value tend to result in an increase in overall impairment balances when compared with the previous basis of measurement under IAS 39. The Group expects IFRS 9 to increase earnings and capital volatility in 2018 and beyond.
The Group’s transformation programme is also intended to improve the Group’s control environment. Nonetheless, no assurance can be given that the Group’s strategy and control framework will be effective and that conduct and financial crime issues will not have an adverse effect on the Group’s results of operations, financial condition or prospects.
In addition, in order to ensure the independence of the RFB as part of the Group’s implementation of the UK ring-fencing regime, the Group will be required to recruit new independent directors and senior members of management to sit on the boards of directors and board committees of the RFB and other Group entities, and there may be a limited pool of competent candidates from which such appointments can be made.
The stabilisation options are intended to be applied prior to the point at which any insolvency proceedings with respect to the relevant entity would otherwise have been initiated. Accordingly, the stabilisation options may be exercised if the relevant UK resolution authority: (i) is satisfied that a UK bank or investment firm is failing, or is likely to fail; (ii) determines that it is not reasonably likely that (ignoring the stabilisation powers) action will be taken by or in respect of a UK bank or investment firm that will result in condition (i) above ceasing to be met; (iii) considers the exercise of the stabilisation powers to be necessary, having regard to certain public interest considerations (such as the stability of the UK financial system, public confidence in the UK banking system and the protection of depositors, being some of the special resolution objectives) and (iv) considers that the special resolution objectives would not be met to the same extent by the winding-up of the UK bank or investment firm.
Strategy The RBS climate change strategy is driven by a range of external and internal drivers and encompasses all activities covering both direct and indirect impacts.
Direct impacts The strategy for managing direct climate change impacts is focused on continued efficiency of buildings, processes and associated activities such as business travel. In 2017 90% of UK and Republic of Ireland electricity usage was from renewable sources (66% globally). RBS is also investing in its property estate to reduce energy usage and waste. This is further supported by the Innovation Gateway initiative for green entrepreneurs. The property strategy has and will aim to continue to result in a material reduction in footprint which in aggregate will reduce the exposure to direct physical impacts for climate-related risks.
Page Financial calendar 405 Shareholder enquiries 405 Analyses of ordinary shareholders 406 Forward-looking statements 407 Abbreviations and acronyms 408 Glossary of terms 409 Index 416 Important addresses 419 Principal offices 419
Financial calendar Dividends Payment dates Cumulative preference shares 31 May and 31 December 2018
Limitations inherent to forward-looking statements These statements are based on current plans, estimates, targets and projections, and are subject to significant inherent risks, uncertainties and other factors, both external and relating to the Group’s strategy or operations, which may result in the Group being unable to achieve the current targets, predictions, expectations and other anticipated outcomes expressed or implied by such forward-looking statements. In addition certain of these disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations, including assumptions and estimates made by management. By their nature, certain of these disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated. Accordingly, undue reliance should not be placed on these statements. Forward-looking statements speak only as of the date we make them and we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Group’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Process IPV Independent price verification IRB Internal ratings based IRC Incremental risk charge IRHP Interest rate hedging product L-SREP Liquidity Supervisory Review and Evaluation
Defined benefit obligation - the present value of expected future payments required to settle the obligations of a defined benefit plan resulting from employee service.
Level 3 - level 3 fair value measurements use one or more unobservable inputs for the asset or liability.
Option - an option is a contract that gives the holder the right but not the obligation to buy (or sell) a specified amount of an underlying physical or financial commodity, at a specific price, at an agreed date or over an agreed period. Options can be exchange-traded or traded over-the-counter.
Pillar 1 - the part of CRD IV that sets out the process by which regulatory capital requirements should be calculated for credit, market and operational risk.
Residential mortgage backed securities (RMBS) - asset-backed securities for which the underlying asset portfolios are residential mortgages. RBS RMBS classifications, including prime, nonconforming and sub-prime, reflect the characteristics of the underlying mortgage portfolios. RMBS are classified as prime RMBS where the loans have low default risk and are made to borrowers with good credit records and reliable payment histories and there is full documentation. Non-conforming RMBS include US Alt-A RMBS, together with RMBS in jurisdictions other than the US where the underlying mortgages are not classified as either prime or sub-prime. Classification of RMBS as subprime or Alt-A is based on Fair Isaac Corporation (FICO) scores, level of documentation and loan-to-value ratios of the underlying mortgage loans. US RMBS are classified as sub-prime if the mortgage portfolio comprises loans with FICO scores between 500 and 650 with full or limited documentation. Mortgages in AltA RMBS portfolios have FICO scores of 640 to 720, limited documentation and an original LTV of 70% to 100%. In other jurisdictions, RMBS are classified as sub-prime if the mortgage portfolio comprises loans with one or more high risk characteristics such as: unreliable or poor payment histories; high loan-to-value ratios; high debt-to-income ratio; the loan is not secured on the borrower's primary residence; or a history of delinquencies or late payments on the loan.