Two other FX-related class actions remain pending. First, there is a class action on behalf of ‘consumers and end-user businesses,’ which is proceeding in the discovery phase following the SDNY’s denial of the defendants’ motions to dismiss in March 2018. Second, there is a class action on behalf of ‘indirect purchasers’ of FX instruments (which plaintiffs define as persons who transacted FX instruments with retail foreign exchange dealers that transacted directly with defendant banks). That case is also proceeding in discovery following the SDNY’s denial of defendants’ motion to dismiss on 25 October 2018.
US Treasury securities antitrust litigation NatWest Markets Securities Inc. is a defendant in a consolidated antitrust class action pending in the SDNY on behalf of persons who transacted in US Treasury securities or derivatives based on such instruments, including futures and options. The plaintiffs allege that defendants rigged the US Treasury securities auction bidding process to deflate prices at which they bought such securities and colluded to increase the prices at which they sold such securities to plaintiffs. The defendants’ motion to dismiss this matter remains pending.
Madoff NatWest Markets N.V. (NWM N.V.) is a defendant in two actions filed by Irving Picard, as trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC, in bankruptcy court in New York. In both cases, the trustee alleges that certain transfers received by NatWest Markets N.V. amounted to fraudulent conveyances that should be clawed back for the benefit of the Madoff estate.
Separately, NatWest Markets Plc is defending claims filed in France by five French local authorities relating to structured interest rate swaps. The plaintiffs allege, among other things, that the swaps are void for being illegal transactions, that they were mis-sold, and that information / advisory duties were breached. One of the claims is now at an end following the Court of Appeal’s dismissal of the claim, and is not being appealed to the Supreme Court. Three of the claims were also dismissed but are subject to appeal to the Supreme Court. The fifth claim remains to be heard before the lower courts.
In October 2017, the trial court dismissed claims against NatWest Plc with respect to two of the 18 terrorist attacks at issue. On 14 March 2018, the trial court granted a request by NatWest Plc for leave to file a renewed summary judgment motion in respect of the remaining claims, which has now been filed. No trial date has been set.
NatWest Markets N.V. and certain other financial institutions, are defendants in several actions pending in the United States District Courts for the Eastern and Southern Districts of New York, filed by a number of US nationals (or their estates, survivors, or heirs), most of whom are or were US military personnel, who were killed or injured in attacks in Iraq between 2003 and 2011. NatWest Markets Plc is also a defendant in some of these cases.
Investigations and reviews RBS’s businesses and financial condition can be affected by the actions
27 Memorandum items continued Litigation, investigations and reviews of various governmental and regulatory authorities in the UK, the US, the EU and elsewhere. RBS has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities, including in the UK, the US, the EU and elsewhere, on an ongoing and regular basis, and in response to informal and formal inquiries or investigations, regarding operational, systems and control evaluations and issues including those related to compliance with applicable laws and regulations, including consumer protection, business conduct, competition/anti-trust, anti-bribery, anti-money laundering and sanctions regimes.
In October 2017, NatWest Markets Securities Inc. entered into a nonprosecution agreement (NPA) with the United States Attorney for the District of Connecticut (USAO) in connection with alleged misrepresentations to counterparties relating to secondary trading in various forms of asset-backed securities. As part of the NPA, the USAO agreed not to file criminal charges relating to certain conduct and information described in the NPA if NatWest Markets Securities Inc. complies with the terms of the NPA. In October 2018, NatWest Markets Securities Inc. agreed to a six-month extension of the NPA while the USAO reviews the circumstances of an unrelated matter reported during the course of the NPA.
The Skilled Person delivered its final report to the FCA during September 2016, and the FCA published an update in November 2016. In response, RBS announced redress steps for SME customers in the UK and the Republic of Ireland that were in GRG between 2008 and 2013. These steps were (i) an automatic refund of certain complex fees; and (ii) a new complaints process, 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.
27 Memorandum items continued Litigation, investigations and reviews The FCA published a summary of the Skilled Person’s report in November 2017. The UK House of Commons Treasury Select Committee, seeking to rely on Parliamentary powers, published the full version of the Skilled Person’s report on 20 February 2018. On 31 July 2018, the FCA confirmed that it had concluded its investigation and that it does not intend to take disciplinary or prohibitory action against any person in relation to these matters. It has subsequently indicated that it will shortly publish a final summary of its investigative work.
FCA investigation into RBS’s compliance with the Money Laundering Regulations 2007 On 21 July 2017, the FCA notified RBS that it was undertaking an investigation into RBS’s compliance with the Money Laundering Regulations 2007 in relation to certain customers. Following amendment to the scope of the investigation, there are currently two areas under review: (1) compliance with Money Laundering Regulations in respect of Money Service Business customers; and (2) the Suspicious Transactions regime in relation to the events surrounding particular customers. The investigations in both areas are assessing both criminal and civil culpability. RBS is cooperating with the investigations, including responding to several information requests from the FCA.
Systematic Anti-Money Laundering Programme assessment In December 2018, the FCA commenced a Systematic Anti-Money Laundering Programme assessment of RBS. RBS is responding to requests for information from the FCA.
FCA strategic review of retail banking models On 11 May 2017 the FCA announced a strategic review of retail banking models. The FCA used the review to understand how these models operate, including how ‘free if in credit’ banking is paid for and the impact of changes such as increased use of digital channels and reduced branch usage.
Regulator requests concerning certain historic Russian transactions Media coverage in 2017 highlighted an alleged money laundering scheme involving Russian entities between 2010 and 2014. Allegedly certain European banks, including RBS and 16 other UK based financial institutions, and certain US banks, were involved in processing certain transactions associated with this scheme. RBS has responded to requests for information from the FCA, PRA and regulators in other jurisdictions.
Review and investigation of treatment of tracker mortgage customers in Ulster Bank Ireland DAC In December 2015, the Central Bank of Ireland (CBI) announced that it had written to a number of lenders requiring them to put in place a robust plan and framework to review the treatment of customers who have been sold mortgages with a tracker interest rate or with a tracker interest rate entitlement. The CBI stated that the intended purpose of the review was to identify any cases where customers’ contractual rights under the terms of their mortgage agreements were not fully honoured, or where lenders did not fully comply with various regulatory requirements and standards regarding disclosure and transparency for customers. The CBI has required Ulster Bank Ireland DAC (UBI DAC), a member of the Group incorporated in the Republic of Ireland, to participate in this review and UBI DAC is co-operating with the CBI in this regard. UBI DAC submitted its phase 2 report to the CBI in March 2017, identifying impacted customers. The redress and compensation phase (phase 3) commenced in Q4 2017 and is ongoing.
Fair value given for businesses acquired (1) (113) (131) (87) Additional investment in associates (9) — —
Net outflow of cash in respect of acquisitions (122) (131) (87)
Net inflow/(outflow) of cash in respect of disposals — 317 (328)
Dividends received from associates 5 (1) 9 Cash expenditure on intangible assets (364) (384) (480)
Transfer to retained earnings — (25,789) — Ordinary shares issued in respect of employee share schemes 80 71 166 Redemption of debt preference shares — 748 — Other adjustments including foreign exchange — 196 — 71 (950) 3,178
Cash and cash equivalents 108,811 122,605 98,570 Note: (1) Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £7,302 million (2017 - £6,883 million; 2016 - £6,661 million).
Bank of England £0.9bn £0.6bn £0.5bn De Nederlandsche Bank €0.1bn €0.1bn €0.4bn 31 Directors' and key management remuneration 2018 2017
Non Executive Directors 2,001 1,747 Chairman and executive directors -emoluments 4,657 5,299 6,658 7,046 Amounts receivable under long-term incentive plans and share option plans — 1,225
No directors accrued benefits under defined benefit schemes or money purchase schemes during 2018 and 2017. The executive directors may participate in the company's long-term incentive plans, executive share option and sharesave schemes and details of their interests in the company's shares arising from their participation are given in the Directors' remuneration report. Details of the remuneration received by each director are also given in the Directors' remuneration report.
33 Adoption of IFRS 9 The Group’s accounting policies have significantly changed on the adoption of IFRS 9 ‘Financial Instruments’ with effect from 1 January 2018. Prior years are re-presented but there has been no restatement of prior year data.
Loans to customers of £2.1 billion were reclassified from loans and receivables under IAS 39 to fair value through profit or loss under IFRS 9. As a result, their carrying value increased by £583 million.
The impact on the Group’s balance sheet at 1 January 2018 and the key movements in relation to the impact on classification and measurement, expected credit losses and tax are as follow: Changes to presentation IFRS 9 impact
Liabilities Deposits by banks 46,898 (16,502) (30,396) — Bank deposits — 30,396 30,396 — — — 30,396 Customer accounts 398,036 (36,720) (361,316) — Customer deposits — 361,316 361,316 — — — 361,316 Debt securities in issue 30,559 (233) (30,326) — Settlement balances 2,844 — — 2,844 — — — 2,844 Trading liabilities 81,982 — 81,982 — — — 81,982 Short positions 28,527 (28,527) — — Derivatives 154,506 — — 154,506 — — — 154,506 Other financial liabilities — 30,326 30,326 — — — 30,326 Subordinated liabilities 12,722 — — 12,722 — — — 12,722 Other liabilities 14,871 — — 14,871 — 85 41 14,997
Classification & measurement 561 - Mandatory fair value through profit or loss assets - adjustments following business model reviews (SPPI) (1) 579 - Equity shares held at cost under IAS 39 - fair value adjustments through FVOCI reserve 48 - Additional write-down of amortised cost assets (66)
Note: (1) Includes £583 million credit in relation to loans to customers and £4 million debit in relation to debt securities.
34 Related parties UK Government On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of The Royal Bank of Scotland Group plc. The UK Government's shareholding is managed by UK Government Investments Limited, a company wholly owned by the UK Government. As a result, the UK Government and UK Government controlled bodies became related parties of the Group.
Members of the Group that are UK authorised institutions are required to maintain non-interest bearing (cash ratio) deposits with the Bank of England amounting to 0.296% of their average eligible liabilities in excess of £600 million. They also have access to Bank of England reserve accounts: sterling current accounts that earn interest at the Bank of England Rate.
35 Post balance sheet events On 6 February 2019, a General Meeting of shareholders authorised the directors to agree buy-backs by the company of ordinary shares from HM Treasury. The authority is subject to renewal at the company's forthcoming Annual General Meeting.
Other than this there have been no other significant events between 31 December 2018 and the date of approval of these accounts which would require a change to or additional disclosure in the accounts.
Liabilities Amounts due to subsidiaries - amortised cost 596 113 Amounts due to subsidiaries - other 39 51 Derivatives with subsidiaries - designated hedges 5 310 213 - economic hedges 135 71 Other financial liabilities - debt securities in issue - amortised cost 16,817 9,122 - designated as at fair value through profit or loss 4 80 Subordinated liabilities 7 7,941 7,864 Other liabilities 119 387
Owners’ equity includes a total comprehensive profit for the year, dealt with in the accounts of the parent company, of £2,487 million (2017 - £1,118 million profit; 2016 - £5,255 million loss).
As permitted by section 408(3) of the Companies Act 2006, the primary financial statements of the company do not include an income statement or a statement of comprehensive income.
Statement of changes in equity for the year ended 31 December 2018 2018 2017 2016 £m £m £m
At 1 January 11,965 11,823 11,625 Ordinary shares issued 84 142 198
Capital redemption reserve At 1 January — 4,542 4,542 Capital reduction (4) — (4,542) —
Notes: (1) Details of the company’s share capital are set out in Note 22 of the consolidated accounts. (2) AT1 capital notes totalling £2.0 billion issued in August 2016.
(6) Relates to foreign exchange hedges. Amounts transferred to earnings are recognised in net interest income. (7) The closing balance of the cash flow hedging reserve relates to continuing operations.
(9) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed.
The accompanying notes on pages 242 to 252 form an integral part of these financial statements
Sale and maturity of securities — 264 794 Investment in subsidiaries (9,481) (2,461) — Disposal of subsidiaries and associates — 119 1,744
Issue of ordinary shares 144 306 300 Issue of other equity instruments: Additional Tier 1 capital notes — — 2,040 Redemption of other equity instruments (2,805) (627) (1,160) Redemption of debt preference shares — (748) — Redemption of subordinated liabilities (267) (1,665) (425) Service cost of other equity instruments (798) (583) (1,688) Interest on subordinated liabilities (443) (514) (512)
1 Presentation of accounts The accounts are prepared on a going concern basis (refer to the Report of the directors, page 85) and in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union (together IFRS). The company's financial statements are prepared in accordance with IFRS as issued by the IASB and are presented in accordance with the Companies Act 2006.
Accounting developments International Financial Reporting Standards A number of IFRSs and amendments to IFRS were in issue at 31 December 2018. None are expected to have an impact on the Company from 1 January 2019 or later.
IFRS 9 Transition In July 2014, the IASB published IFRS 9 ‘Financial Instruments’ with an effective date of 1 January 2018. IFRS 9 replaced the previous financial instruments standard IAS 39, setting out new accounting requirements in a number of areas.
The principle features of IFRS 9 are disclosed in the RBS accounting policies
The 1 January 2018, post tax increase in equity was £0.2 billion. There has been no restatement of accounts prior to 2018.
Notes: (1) Fair value hierarchy: level 2 - £5.0 billion (2017 - £11.3 billion) and level 3 - £7.0 billion (2017 - £14.1 billion). (2) Fair value hierarchy level 2. (3) Fair value hierarchy level 3.
4 Financial instruments - maturity analysis Remaining maturity The following table shows the residual maturity of financial instruments based on contractual date of maturity. 2018 2017
Total maturing assets 755 2,089 2,035 16,502 7,650 2,470 Derivatives held for hedging 38 27 192 40 20 —
Derivatives held for designated hedging purposes are as follows: Notional Assets Liabilities Assets Liabilities £bn £m £m £m £m
At 1 January 47,559 44,608 Additional investments in Group undertakings 9,574 — Additions 33,807 2,461 Disposals (33,900) (72) (Impairment)/Write back of investments (293) 562
At 31 December 2018, NatWest Holdings Limited is the largest direct subsidiary investment and the amount by which its recoverable amount (based on its value in use) exceeded its carrying value was £2.2 billion.
National Westminster Bank Plc (1,3) Banking Great Britain 100% The Royal Bank of Scotland plc (3) Banking Great Britain 100% Coutts & Company (2, 3) Private banking Great Britain 100% Ulster Bank Ireland Designated Activity Company (3) Banking Republic of Ireland 100% Ulster Bank Limited (3) Banking Northern Ireland 100% NatWest Markets Plc Banking Great Britain 100% NatWest Markets Securities Inc. (4) Broker dealer US 100% The Royal Bank of Scotland International Limited (5) Financial Institution Jersey 100%
Redemptions in the period are disclosed in Note 19 in the consolidated accounts.
treatment £m £m £0.5 million 11% and £0.4 million 5.5% cumulative preference shares of £1 (not callable) Ineligible 1 1 1 1 Note: (1) Further details of the contractual terms of the preference shares are given in Note 22 on the consolidated accounts.
Issue of ordinary shares 144 306 300 — — — Issue of Additional Tier 1 capital notes — — 2,040 — — — Redemption of paid-in equity — (627) — — — — Redemption of subordinated liabilities — — — (267) (1,665) (425)
Entity name Activity Regulatory treatment Notes Entity name Activity Regulatory treatment Notes 280 Bishopsgate Finance Ltd INV FC (19) NatWest Capital Finance Ltd BF FC (3) Adam & Company Investment Management Ltd BF FC (18) NatWest Corporate Investments BF DE (19)
Care Homes 1 Ltd BF FC (19) NatWest Invoice Finance Ltd OTH FC (19)
Care Homes 2 Ltd BF FC (19) NatWest Markets Plc CI FC (27)
Care Homes 3 Ltd BF FC (19) NatWest Markets Secretarial Services Ltd SC FC (19)
Care Homes Holdings Ltd BF FC (19) NatWest Markets Secured Funding LLP BF FC (26)
Coutts Finance Company BF FC (33) NatWest Ventures Investments Ltd BF DE (19)
Distant Planet Productions Ltd BF FC (94) Patalex II Productions Ltd BF FC (94)
Euro Sales Finance Ltd BF FC (19) Patalex IV Productions Ltd BF FC (94)
G L Trains Ltd BF FC (3) Pittville Leasing Ltd BF FC (94)
Helena Productions Ltd BF FC (94) Price Productions Ltd BF FC (94)
ITB1 Ltd BF FC (16) Priority Sites Investments Ltd BF DE (19)
ITB2 Ltd BF FC (16) Priority Sites Ltd INV DE (19)
Land Options (West) Ltd INV DE (16) R.B. Capital Leasing Ltd BF FC (94)
Leckhampton Finance Ltd BF FC (94) R.B. Equipment Leasing Ltd BF FC (94)
Lombard Business Finance Ltd BF FC (24) R.B. Leasing (December) Ltd BF FC (94)
Lombard Corporate Finance (13) Ltd BF FC (94) R.B.S. Special Investments Ltd BF FC (19)
Lombard Corporate Finance (15) Ltd BF FC (94) RBDC Administrator Ltd SC FC (16)
Lombard Corporate Finance (December 1) Ltd BF FC (94) RBS Asset Finance Europe Ltd BF FC (94) Lombard Corporate Finance (December 3) Ltd BF FC (94) RBS Asset Management (ACD) Ltd BF FC (33)
Lombard Corporate Finance (June 2) Ltd BF FC (94) RBS Asset Management Holdings BF FC (33)
Lombard Discount Ltd BF FC (24) RBS Asset Management Ltd BF FC (19)
Lombard Industrial Leasing Ltd BF FC (94) RBS Equities Holdings (UK) Ltd BF FC (19)
Lombard Initial Leasing Ltd BF FC (24) RBS HG (UK) Ltd BF FC (19)
Lombard Lease Finance Ltd BF FC (94) RBS Investment Ltd BF FC (16)
Lombard Leasing Contracts Ltd BF FC (3) RBS Management Services (UK) Ltd SC FC (19)
Lombard Maritime Ltd BF FC (24) RBS Property Developments Ltd INV FC (27)
Lombard North Central Leasing Ltd BF FC (24) RBS Property Ventures Investments Ltd BF FC (16)
Lombard Property Facilities Ltd BF FC (3) RBSG Collective Investments Holdings Ltd BF FC (16)
Nanny McPhee Productions Ltd BF FC (94) RBSM Capital Ltd BF FC (16)
RBSSAF (7) Ltd BF FC (94) The Royal Bank of Scotland Group Independent Financial Services Ltd BF FC (16)
RBSSAF (8) Ltd BF FC (94) The Royal Bank of Scotland Invoice Discounting Ltd BF FC (19)
RoboScot Equity Ltd BF FC (16) The Royal Bank of Scotland plc CI FC (27)
Royal Bank Ventures Investments Ltd BF FC (16) Voyager Leasing Ltd BF FC (94)
Royal Scot Leasing Ltd BF FC (16) Walton Lake Developments Ltd INV DE (3)
RoyScot Financial Services Ltd BF FC (19) West Register (Hotels Number 1) Ltd INV DE (16)
RoyScot Trust plc BF FC (24) West Register (Hotels Number 3) Ltd INV DE (16)
SIG 1 Holdings Ltd BF FC (16) West Register Hotels (Holdings) Ltd BF FC (16)
The following table details active related undertakings incorporated outside the UK which are 100% owned by the Group and fully consolidated for accounting purposes
Alcover A.G. BF DE (95) IR Fastighets AB BF FC (45)
Alsecure Life Insurance PCC Ltd BF DE (28) IR IndustriRenting AB BF FC (45)
Alsecure US PCC Ltd BF DE (28) Isle of Man Bank Ltd BF FC (12)
Bil Fastigheter i Sverige AB BF FC (45) KB IR Gamlestaden BF FC (45)
Brödmagasinet KB BF FC (45) Keep SPV Ltd BF DE (74)
Candlelight Acquisition LLC BF FC (21) Koy Espoon Entresse II BF FC (47)
Coutts & Co (Cayman) Ltd BF FC (60) Koy Espoon Niittysillantie 5 BF FC (47)
Förvaltningsbolaget Predio 3 KB BF FC (45) Koy Kouvolan Oikeus ja Poliisitalo BF FC (47)
Fab Ekenäs Formanshagen 4 BF FC (47) Koy Lohjan Huonekalutalo BF FC (47)
Fastighets AB Kabisten 1 BF FC (45) Koy Päiväläisentie 1-6 BF FC (47)
Fastighets Aktiebolaget Sambiblioteket BF FC (45) Koy Raision Kihlakulma BF FC (47)
Fastighetsbolaget Holma I Höör AB BF FC (45) Koy Ravattulan Kauppakeskus BF FC (47)
Financial Asset Securities Corp. BF PC (21) Koy Tapiolan Louhi BF FC (47)
Forssa Liikekiinteistöt Oy BF FC (47) Lombard Finance (CI) Ltd BF FC (89)
Lombard Ireland Ltd BF FC (97) RBS European Investments SARL BF FC (34)
NatWest Innovation Services Inc. OTH FC (56) RBS Investments (Ireland) Ltd BF FC (97) NatWest Markets Group Holdings Corporation BF FC (21) RBS Netherlands Holdings B.V. BF FC (67)
NatWest Markets N.V. CI FC (67) RBS Nominees (Australia) Pty Ltd BF FC (77)
NatWest Markets Securities Inc. INV FC (21) RBS Nominees (Hong Kong) Ltd BF FC (78)
Nordisk Renting AB BF FC (45) RBS Nominees (Netherlands) B.V. BF FC (67)
Nordisk Renting AS BF FC (46) RBS Polish Financial Advisory Services sp. z o.o. BF FC (101)
Nordisk Renting Kapital AB BF FC (45) RBS Services (Switzerland) Ltd SC FC (75)
Nordisk Specialinvest AB BF FC (45) RBS WCS Holding Company BF FC (55)
R.B. Leasing BDA One Ltd BF FC (14) SFK Kommunfastigheter AB BF FC (45)
Random Properties Acquisition Corp. III INV DE (21) Sjöklockan KB BF FC (45)
RBS AA Holdings (Netherlands) B.V. BF FC (67) Strand European Holdings AB BF FC (45)
RBS Asia (Mauritius) Ltd BF FC (5) The RBS Group Ireland Retirement Savings Trustee Ltd TR DE (97)
RBS Asia Financial Services Ltd BF FC (78) The Royal Bank of Scotland Asia Merchant Bank (Singapore) Ltd BF FC (82)
RBS Asia Holdings B.V. BF FC (67) The Royal Bank of Scotland International Ltd CI FC (89)
RBS Asset Management (Dublin) Ltd BF FC (66) Tygverkstaden 1 KB BF DE (45)
RBS Commercial Funding Inc. BF FC (21) Ulster Bank Dublin Trust Company Unlimited Company TR DE (97)
RBS Employment (Guernsey) Ltd SC FC (2) Ulster Bank Ireland Designated Activity Company CI FC (97)
RBS Equity Corporation BF FC (25) Ulster Bank Pension Trustees (RI) Ltd TR DE (97)
The following table details related undertakings which are 100% owned by the Group ownership but are not consolidated for accounting purposes
Entity name Activity Regulatory treatment Notes Entity name Activity Regulatory treatment Notes
RBS Capital Trust II BF DE (4) RBSG Capital Corporation BF DE (22) RBS International Employees' Pension Trustees Ltd BF DE (57) West Granite Homes Inc. INV DE (39)
The following table details related undertakings incorporated outside the UK where the Group ownership is less than 100%.
Alawwal Bank CI EAA PC 40 (38) Nightingale CRE 2018-1 Ltd BF FC FC 0 (32)
Celtic Residential Irish Mortgage Securitisation No 14 DAC BF FC DE 0 (35) Optimus KB BF FC PC 51 (45)
Celtic Residential Irish Mortgage Securitisation No 15 DAC BF FC DE 0 (35)
Thames Asset Global Securitization No.1 Inc. BF FC DE 0 (7)
The following table details related undertakings that are not active (actively being dissolved).
Celtic Residential Irish Mortgage Securitisation No 10 plc FC DE 0 (35)
Celtic Residential Irish Mortgage Securitisation No 12 DAC FC DE 0 (35)
Aspire Oil Services Ltd EAA DE 27 (98) CNW Group Ltd FC FC 100 (19)
Greenwich NatWest Ltd FC FC 100 (19) RBS Life Holdings Ltd FC FC 100 (16)
Heartlands (Central) Ltd FC DE 100 (16) RBS Sempra Products Ltd FC DE 51 (92)
RBS Special Opportunities General Partner (England) Ltd FC FC 100 (19)
RBS Special Opportunities General Partner (Scotland) II Ltd FC FC 100 (16)
RBS Special Opportunities General Partner (Scotland) Ltd FC FC 100 (16)
Maja Finance S.R.L. FC DE 98 (100) RBS Specialised Property Investments Ltd FC DE 100 (19)
Mons (UK) Ltd FC FC 100 (19) RBSG Holdings N.V. FC FC 100 (73)
NatWest Finance Ltd FC DE 100 (19) RoboScot Ventures Ltd FC FC 100 (16)
NatWest Nominees Ltd FC DE 100 (3) Royal Bank Development Capital Ltd FC DE 100 (3)
Qulpic Ltd FC DE 67 (36) The Royal Bank of Scotland Finance (Ireland) FC FC 100 (17)
RB Investments 2 Ltd FC FC 100 (19) UB SIG (ROI) Ltd FC DE 100 (97)
RBDC Investments Ltd FC FC 100 (16) Ulster Bank Group Treasury Ltd FC FC 100 (97)
RBOS Trustees Ltd FC FC 100 (19) Ulster Bank Wealth Unlimited Company FC FC 100 (97)
RBS Argonaut Ltd FC PC 100 (16) Utras Unlimited Company FC FC 98 (97)
RBS CIF Trustee Ltd FC FC 100 (3) Walter Property Ltd FC FC 100 (97) RBS Corporate Finance Ltd FC FC 100 (19) West Register (Land) Ltd FC DE 100 (16)
Dunfly Trustee Ltd FC FC 100 (3) N.C. Head Office Nominees Ltd FC FC 100 (16)
FIT Nominee Ltd FC PC 100 (19) National Westminster Ltd FC FC 100 (3)
Freehold Managers (Nominees) Ltd FC FC 100 (19) NatWest FIS Nominees Ltd FC FC 100 (3)
Nordisk Renting HB FC FC 100 (45) RBSSAF (4) Ltd FC FC 100 (94) Project & Export Finance (Nominees) Ltd FC DE 100 (3) Sixty Seven Nominees Ltd FC FC 100 (3)
R.B. Leasing (March) Ltd FC FC 100 (94) Strand Nominees Ltd FC FC 100 (33) R.B.S. Property (Greenock) Ltd FC DE 100 (16) Syndicate Nominees Ltd FC FC 100 (3)
RBS Pension Trustee Ltd NC DE 100 (3) Williams & Glyn's Bank Ltd FC FC 100 (3) RBS Retirement Savings Trustee Ltd FC FC 100 (3)
Ireland and India NatWest Markets Securities Japan Ltd (Tokyo branch) Japan Ulster Bank Ireland DAC United Kingdom The Royal Bank of Scotland International Ltd
Notes: Registered addresses (UK unless stated otherwise) Country of incorporation (1) 1 Corral Road, GX11 1AA Gibraltar (2) 1 Le Marchant Street, St. Peter Port, GY1 1LF Guernsey (3) 1 Princes Street, London, EC2R 8BP, England UK (4) 100, Suite 102, White Clay Center, Newark, New Castle County, Delaware, DE 19711 USA (5) 10th Floor, Standard Chartered Tower, 19 Cybercity, Ebene, 72201 Mauritius (6) 11-16 Donegall Square East, Belfast, BT1 5UB, Northern Ireland UK (7) 114 West 47th Street, New York, 10036 USA (8) 1209 Orange Street, Wilmington, Delaware, DE 19801 USA (9) 13-15 York Buildings, London, WC2N 6JU, England UK (10) 140 Staniforth Road, Darnall, Sheffield, South Yorkshire, S9 3HF, England UK (11) 16 Library Place, St. Helier, JE4 8ND Jersey (12) 2 Athol Street, Douglas, IM99 1AN Isle of Man (13) 2 Donegall Square West, Belfast, BT2 7GP, Northern Ireland UK (14) 22 Victoria Street, Hamilton, HM12 Bermuda (15) 24 Demostheni Severi, 1st Floor, Nicosia, 1080 Cyprus (16) 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland UK (17) 24/26 City Quay, Dublin 2 RoI (18) 25 St Andrew Square, Edinburgh, EH2 1AF, Scotland UK (19) 250 Bishopsgate, London, EC2M 4AA, England UK (20) 251 Little Falls Drive, Wilmington, Delaware, DE 19808 USA (21) 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808 USA
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.
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.
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.
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 nonexecutive 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.
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 noncompliance 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.
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.
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’.
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.
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.
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.
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 selldown 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.
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.
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.
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.
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’.
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.
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.
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.
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
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.
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.
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.
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 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.
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 cashgenerating 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.
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 writedown or conversion of certain of the Group’s securities. There would also be a corresponding adverse effect on the market price of such securities.
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.
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, antibribery, anti-money laundering, antiterrorism, 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.
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 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.
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.
The company and its subsidiaries are party to various contracts in the ordinary course of business. Material contracts include the following: B Share Acquisition and Contingent Capital Agreement On 26 November 2009, the company and HM Treasury entered into the Acquisition and Contingent Capital Agreement pursuant to which HM Treasury subscribed for the initial B shares and the Dividend Access Share (the Acquisitions) and agreed the terms of HM Treasury's contingent subscription (the Contingent Subscription) for an additional £8 billion in aggregate in the form of further B shares (the Contingent B shares), to be issued on the same terms as the initial B shares. The Acquisitions were subject to the satisfaction of various conditions, including the company having obtained the approval of its shareholders in relation to the Acquisitions.
On 16 December 2013, the company announced that, having received approval from the PRA, it had terminated the £8 billion Contingent Subscription. The company was able to cancel the Contingent Subscription as a result of the actions announced in the second half of 2013 to further strengthen its capital position.
Trust Deed In the context of the Framework and State Aid Deed, the company entered into a Trust Deed with the Independent Body on 25 April 2018, to set up a trust to administer the funds committed by the company under the Framework and State Aid Deed for the Alternative Remedies Package.
Annual General Meeting 25 April 2019 RBS Conference Centre RBS Gogarburn Edinburgh, EH12 1HQ
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ShareGift The company is aware that shareholders who hold a small number of shares may be retaining these shares because dealing costs make it uneconomical to dispose of them. ShareGift, the charity share donation scheme, is a free service operated by The Orr Mackintosh Foundation (registered charity 1052686) to enable shareholders to donate shares to charity.
Should you wish to donate your shares to charity please contact ShareGift for further information: ShareGift, The Orr Mackintosh Foundation 4th Floor Rear, 67/68 Jermyn Street, London SW1Y 6NY Telephone: +44 (0)20 7930 3737 Website: www.sharegift.org
Scammers will request money upfront, as a bond or other form of security, but victims are often left out of pocket, sometimes losing their savings or even their family home. Even seasoned investors have been caught out by scams.
Corporate Governance and Regulatory Affairs The Royal Bank of Scotland Group plc PO Box 1000 Gogarburn Edinburgh EH12 1HQ Telephone: +44 (0)131 556 8555
Investor Relations 280 Bishopsgate London EC2M 4AA Telephone: +44 (0)207 672 1758 Facsimile: +44 (0)207 672 1801 Email: investor.relations@rbs.com
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.
Important factors that could affect the actual outcome of the forwardlooking statements We caution you that a large number of important factors could adversely affect our results or our ability to implement our strategy, cause us to fail to meet our targets, predictions, expectations and other anticipated outcomes or affect the accuracy of forward-looking statements we describe in this document, including in the risk factors and other uncertainties set out in the Group’s 2018 Annual Report and Accounts and other risk factors and uncertainties discussed in this document. These include the significant risks for the Group presented by: operational and IT resilience risk (including in respect of: the Group being subject to cyberattacks; operational risks inherent in the Group’s business; the Group’s operations being highly dependent on its IT systems; the Group relying on attracting, retaining and developing senior management and skilled personnel and maintaining good employee relations; the Group’s risk management framework; and reputational risk), economic and political risk (including in respect of: the uncertainties surrounding the UK’s withdrawal from the European Union; increased political and economic risks and uncertainty in the UK and global markets; climate change and the transition to a low carbon economy; HM Treasury’s ownership of RBSG and the possibility that it may exert a significant degree of influence over the Group; continued low interest rates and changes in foreign currency exchange rates), financial resilience risk (including in respect of: the Group’s ability to meet targets and make discretionary capital distributions to shareholders; the highly competitive markets in which the Group operates; deterioration in borrower and counterparty credit quality; the ability of the Group to meet prudential regulatory requirements for capital and MREL, or to manage its capital effectively; the ability of the Group to access adequate sources of liquidity and funding; changes in the credit ratings of RBSG, any of its subsidiaries or any of its respective debt securities; the Group’s ability to meet requirements of regulatory stress tests; possible losses or the requirement to maintain higher levels of capital as a result of limitations or failure of various models; sensitivity of the Group’s financial statements to underlying accounting policies, judgements, assumptions and estimates; changes in applicable accounting policies or rules; the value or effectiveness of any credit protection purchased by the Group; the level and extent of future impairments and write-downs, including with respect to goodwill; and the application of UK statutory stabilisation or resolution powers) and legal, regulatory and conduct risk (including in respect of: the Group’s businesses being subject to substantial regulation and oversight; legal, regulatory and governmental actions and investigations; the replacement of LIBOR, EURIBOR and other benchmark rates; heightened regulatory and governmental scrutiny (including by competition authorities); implementation of the Alternative Remedies Package and the costs related thereto; and changes in tax legislation).
The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicit of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.