Litigation, investigations and reviews continued In addition, two complaints containing similar allegations of collusion were filed in United States District Court for the Southern District of New York on behalf of TeraExchange and Javelin, who allege that they would have successfully established exchange-like trading of interest rate swaps if the defendant dealers had not unlawfully conspired to prevent that from happening through boycotts and other means, in violation of the U.S. antitrust laws. In June 2016, all of these matters were transferred to the United States District Court for the Southern District of New York for coordinated or consolidated pretrial proceedings.
In July 2017, the Court overseeing the above matters dismissed all claims against RBS companies relating to the 2008 - 2012 time period, but declined to dismiss certain antitrust and unjust enrichment claims covering the 2013 - 2016 time period. Discovery is ongoing.
On 8 June 2017, TeraExchange filed another complaint against RBS and others in the United States District Court for the Southern District of New York, this time relating to credit default swaps instead of interest rate swaps. TeraExchange alleges it would have established exchange-like trading of credit default swap if the defendant dealers had not engaged in an unlawful antitrust conspiracy. RBS has filed a motion to dismiss the complaint in this matter.
Thornburg adversary proceeding RBS Securities Inc. and certain other RBS companies, as well as several other financial institutions, are defendants in an adversary proceeding filed in the US bankruptcy court in Maryland by the trustee for TMST, Inc. (formerly known as Thornburg Mortgage, Inc.). The trustee seeks recovery of transfers made under certain restructuring agreements as, among other things, avoidable fraudulent and preferential conveyances and transfers. In September 2014, the Court largely denied the defendants' motion to dismiss this matter and, as a result, discovery is ongoing.
Interest rate hedging products litigation RBS is dealing with a large number of active litigation claims in relation to the sale of interest rate hedging products (IRHPs). In general claimants allege that the relevant interest rate hedging products were mis-sold to them, with some also alleging RBS made misrepresentations in relation to LIBOR. Claims have been brought by customers who were considered under the UK Financial Conduct Authority (FCA) redress programme, as well as customers who were outside of the scope of that programme, which was closed to new entrants on 31 March 2015. RBS encouraged those customers that were eligible to seek redress under the FCA redress programme to participate in that programme. RBS remains exposed to potential claims from customers who were either ineligible to be considered for redress or who are dissatisfied with their redress offers.
Property Alliance Group (PAG) v The Royal Bank of Scotland plc was the leading case before the English High Court involving both IRHP mis-selling and LIBOR misconduct allegations. The amount claimed was £34.8 million and the trial ended in October 2016. In December 2016 the Court dismissed all of PAG’s claims. PAG appealed that decision, and the appeal hearing closed on 8 February 2018. The judgment is awaited. The decision (subject to the appeal by PAG) may have significance to other similar LIBOR-related cases currently pending in the English courts, some of which involve substantial amounts.
Litigation, investigations and reviews continued Tax dispute HMRC issued a tax assessment in 2012 against RBS for approximately £86 million regarding a value-added-tax (‘VAT’) matter in relation to the trading of European Union Allowances (‘EUAs’) by an RBS joint venture subsidiary in 2009. RBS has commenced legal proceedings before the First-tier Tribunal (Tax), a specialist tax tribunal, challenging the assessment (the ‘Tax Dispute’). In the event that the assessment is upheld, interest and costs would be payable, and a penalty of up to 100 per cent of the VAT held to have been legitimately denied by HMRC could also be levied. Separately, RBS is a named defendant in proceedings before the High Court brought in 2015 by ten companies (all in liquidation) (the ‘Liquidated Companies’) and their respective liquidators (together, ‘the Claimants’). The Liquidated Companies previously traded in EUAs in 2009 and are alleged to be defaulting traders within (or otherwise connected to) the EUA supply chains forming the subject of the Tax Dispute. The Claimants are claiming approximately £80 million plus interest and costs by alleging that RBS dishonestly assisted the directors of the Liquidated Companies in the breach of their statutory duties and/or knowingly participated in the carrying on of the business of the Liquidated Companies with intent to defraud creditors. The trial in that matter is currently scheduled to start in June 2018.
Weiss v. National Westminster Bank Plc (NatWest) NatWest is defending a lawsuit filed by a number of US nationals (or their estates, survivors, or heirs) who were victims of terrorist attacks in Israel. The plaintiffs allege that NatWest is liable for damages arising from those attacks pursuant to the US AntiTerrorism Act because NatWest previously maintained bank accounts and transferred funds for the Palestine Relief & Development Fund, an organisation which plaintiffs allege solicited funds for Hamas, the alleged perpetrator of the attacks.
The attacks were allegedly perpetrated by Hezbollah and certain Iraqi terror cells allegedly funded by the Islamic Republic of Iran. According to the plaintiffs’ allegations, RBS N.V. and the other defendants are liable for damages arising from the attacks because they allegedly conspired with Iran and certain Iranian banks to assist Iran in transferring money to Hezbollah and the Iraqi terror cells, in violation of the US Anti-Terrorism Act, by agreeing to engage in ‘stripping’ of transactions initiated by the Iranian banks so that the Iranian nexus to the transactions would not be detected. Since commencing this matter, the plaintiffs have amended the complaint twice. The second amended complaint is subject to a motion to dismiss that defendants filed in September 2016.
Litigation, investigations and reviews continued Investigations and reviews RBS’s businesses and financial condition can be affected by the actions 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.
The NatWest Markets segment in particular has been providing information regarding a variety of matters, including, for example, the setting of benchmark rates and related derivatives trading, conduct in the foreign exchange market, and various issues relating to the issuance, underwriting, and sales and trading of fixed-income securities, including structured products and government securities.
As at 31 December 2017, the total aggregate of provisions in relation to certain of the RMBS investigations and RMBS litigation matters (set out under ‘Litigation’ on page 314) was £3.2 billion (US$4.4 billion).
RBS continues to cooperate with the DOJ and with certain state attorneys general in their investigations of RMBS matters.
The duration, timing for resolution and outcome of these investigations and RMBS litigation matters remain uncertain, including in respect of whether settlements for all or any of such matters may be reached. Further substantial provisions and costs may be recognised and, depending on the final outcome, other adverse consequences may occur as described above and in the Risk Factor relating to legal, regulatory and governmental actions and investigations set out on page 372.
In December 2017, RBS Financial Products Inc. agreed to pay US$125 million to settle the RMBS investigation of the California Attorney General. Payment has been made from a previously established provision. Ongoing investigations into the same or similar issues by certain other state attorneys general are at various stages. RBS is in advanced discussions with the New York Attorney General to resolve its investigation, although there is no certainty that any settlement will be reached.
On 26 October 2017, the United States Attorney for the District of Connecticut (USAO) announced that it had entered into a NonProsecution Agreement (NPA) with RBS Securities Inc. in connection with alleged misrepresentations to counterparties relating to secondary trading in various forms of asset-backed securities. The NPA, which recognises RBS Securities Inc.’s timely self-reporting and cooperation, required RBS Securities Inc. to pay a penalty of US$35 million, reimburse customers at least US$9.1 million, and continue to cooperate with the investigation.
These amounts were covered by provisions existing at the time of settlement. As part of the NPA, the USAO has agreed not to file criminal charges against RBS Securities Inc. relating to certain conduct and information described in the NPA if RBS Securities Inc. complies with the NPA during its one-year term. In March and December 2015, two former RBS Securities Inc. traders entered guilty pleas in the United States District Court for the District of Connecticut, each to one count of conspiracy to commit securities fraud while employed at RBS Securities Inc.
Litigation, investigations and reviews continued LIBOR and other trading rates From February 2013 to December 2016, RBS entered into settlements with various governmental authorities in relation to investigations into submissions, communications and procedures around the setting of LIBOR and other interest rates and interest rate trading, which, among other things, required RBS to pay significant penalties. As part of these resolutions, RBS made certain undertakings regarding benchmark interest rates, including the undertakings contained in its February 2013 resolution with the Commodity Futures Trading Commission (CFTC).
RBS continues to co-operate with investigations and requests for information by various other governmental and regulatory authorities, including in the UK, US and APAC.
On 3 February 2017, it was announced that RBS and the CFTC entered into a civil settlement resolving the CFTC’s investigation of ISDAFIX and related trading activities. As part of the settlement, RBS has paid a penalty of US$85 million and agreed to certain undertakings.
Foreign exchange related investigations In November 2014, RBS plc reached a settlement with the FCA and the CFTC in relation to investigations into failings in RBSG’s FX businesses within its NatWest Markets segment. RBS plc agreed to pay penalties of £217 million to the FCA and US$290 million to the CFTC to resolve the investigations. The fines were paid in November 2014.
As part of its plea agreement with the DOJ, RBS plc pled guilty in the United States District Court for the District of Connecticut to a one-count information charging an antitrust conspiracy. RBS plc admitted that it knowingly, through one of its euro/US dollar currency traders, joined and participated in a conspiracy to eliminate competition in the purchase and sale of the euro/US dollar currency pair exchanged in the FX spot market.
RBS plc and RBS Securities Inc. have also entered into a cease and desist order with the Federal Reserve relating to FX and other designated market activities (the FX Order). In the FX Order, which is publicly available and will remain in effect until terminated by the Federal Reserve, RBS plc and RBS Securities Inc. agreed to take certain remedial actions with respect to FX activities and certain other designated market activities, including the creation of an enhanced written internal controls and compliance program, an improved compliance risk management program, and an enhanced internal audit program. RBS plc and RBS Securities Inc. are obligated to implement and comply with these programs as approved by the Federal Reserve, and are also required to conduct, on an annual basis, a review of applicable compliance policies and procedures and a riskfocused sampling of key controls.
Separately, in November 2013, RBS instructed the law firm Clifford Chance to conduct an independent review of the principal allegation made in the Tomlinson Report: RBS was alleged to be culpable of systematic and institutional behaviour in artificially distressing otherwise viable businesses and, through that, putting businesses into insolvency. Clifford Chance published its report on 17 April 2014 and, while it made certain recommendations to enhance customer experience and transparency of pricing, it concluded that there was no evidence to support the principal allegation.
In November 2016, the FCA published an update on its review. 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. They were developed with the involvement of the FCA, which agreed that they were appropriate steps for RBS to take.
RBS estimates the costs associated with the complaints review process and the automatic refund of complex fees to be approximately £400 million, which was recognised as a provision in 2016. This includes operational costs together with the cost of refunded complex fees and the additional estimated redress costs arising from the complaints process. Of the £400 million provision, £150 million had been utilised by 31 December 2017.
Interest rate hedging products (IRHP) redress programme From 2013, RBS and other banks undertook a redress exercise and past business review in relation to the sale of interest rate hedging products to some small and medium sized businesses classified as retail clients or private customers under FSA rules. This exercise was scrutinised by an independent reviewer, KPMG (appointed as a Skilled Person under section 166 of the Financial Services and Markets Act), and overseen by the FCA.
The court decided in favour of KPMG, finding that (1) KPMG is not a body amenable to judicial review in respect of its role as Skilled Person in this matter; and (2) that there was no unfairness by the other bank in the procedure adopted.
The majority of the claims that name RBS as an interested party have been discontinued but there are still several cases which remain stayed pending the outcome of the appeal in the other bank’s case. If the appeal court finds that a section 166appointed Skilled Person is susceptible to judicial review, these remaining claims against RBS may then proceed to full hearing to assess the fairness of KPMG’s role in the redress programme in those particular cases. If deemed unfair, this could have a consequential impact on the reasonableness of the methodology applied to reviewed and settled IRHP files generally. As there remains some uncertainty, it is not practicable reliably to estimate the impact of this matter, if any, on RBS which may be material.
Investment advice review In February 2013, the FSA announced the results of a mystery shopping review it undertook into the investment advice offered by banks and building societies to retail clients. As a result of that review the FSA announced that firms involved were cooperative and agreed to take immediate action. RBS was one of the firms involved.
The action required included a review of the training provided to advisers, considering whether changes were necessary to both advice processes and controls for new business, and undertaking a past business review to identify any historic poor advice (and where breaches of regulatory requirements are identified, to put this right for customers).
In addition, RBS agreed with the FCA that it would carry out a remediation exercise, for a specific customer segment who were sold a particular structured product, in response to concerns raised by the FCA with regard to (a) the target market for the product and (b) how the product may have been described to customers by certain advisers. Redress has been paid to certain customers who took out the structured product.
RBS provisions in relation to investment advice total £201 million to date for these matters, of which £102 million had been utilised as at 31 December 2017.
FCA investigation into RBS plc’s compliance with the Money Laundering Regulations 2007 On 21 July 2017, the FCA notified RBS that it was undertaking an investigation into RBS plc’s compliance with the Money Laundering Regulations 2007 in relation to certain customers. Following amendment to the scope of the investigation, there are currently three areas under review: (1) compliance with Money Laundering Regulations in respect of Money Service Business customers; (2) compliance with the Terrorism Act 2000 in relation to sanctions screening; and (3) the Suspicious Transactions regime in relation to the events surrounding a particular customer. The investigations in all three areas are assessing both criminal and civil culpability. RBS is cooperating with the investigations.
Multilateral interchange fees In September 2014, the Court of Justice upheld earlier decisions by the EU Commission and the General Court that MasterCard’s multilateral interchange fee (MIF) arrangements for cross border payment card transactions with MasterCard and Maestro branded consumer credit and debit cards in the EEA are in breach of competition law.
Payment Protection Insurance (PPI) Since 2011, RBS has been implementing the FCA’s policy statement for the handling of complaints about the mis-selling of PPI (Policy Statement 10/12).
On 2 February 2017 the CMA published the Retail Banking Market Investigation Order 2017 (the ‘Order’), which is the primary legal framework setting out the obligations for the implementation of the majority of remedies, including an implementation deadline for each.
At this stage there remains uncertainty around the financial impact of the remedies once implemented, and so it is not practicable to estimate the potential impact on RBS, which may be material.
Some uncertainty remains around the financial impact of the remedies once implemented and so it is not practicable reliably to estimate the potential impact on RBS. However, at this stage, this impact is not expected to be material.
FCA Strategic Review of Retail Banking Models On 11 May 2017 the FCA announced a two phase strategic review of retail banking models. The FCA will use 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.
Litigation, investigations and reviews continued Governance and risk management consent order In July 2011, RBS agreed with the Board of Governors of the Federal Reserve System, the New York State Banking Department, the Connecticut Department of Banking, and the Illinois Department of Financial and Professional Regulation to enter into a consent Cease and Desist Order (Governance Order) (which is publicly available) to address deficiencies related to governance, risk management and compliance systems and controls in the US branches of RBS plc and RBS N.V. branches (the US Branches).
● a plan designed to enhance the US Branches’ compliance with Office of Foreign Assets Control (OFAC) requirements.
US dollar processing consent order In December 2013 RBS and RBS plc agreed a settlement with the Federal Reserve, the New York State Department of Financial Services (DFS), and the Office of Foreign Assets Control (OFAC) with respect to RBS plc’s historical compliance with US economic sanction regulations outside the US. As part of the settlement, RBS and RBS plc entered into a consent Cease and Desist Order with the Federal Reserve (US Dollar Processing Order), which remains in effect until terminated by the Federal Reserve. The US Dollar Processing Order (which is publicly available) indicated, among other things, that RBS and RBS plc lacked adequate risk management and legal review policies and procedures to ensure that activities conducted outside the US comply with applicable OFAC regulations.
RBS agreed to create an OFAC compliance programme to ensure compliance with OFAC regulations by RBS’s global business lines outside the US, and to adopt, implement, and comply with the programme. Prior to and in connection with the US Dollar Processing Order, RBS has made investments in technology, hired and trained personnel, and revised compliance, risk management, and other policies and procedures.
Pursuant to the US Dollar Processing Order, the authorities requested a second annual review to be conducted by an independent consultant. The second review was conducted by the independent consultant and reports were submitted to the authorities in September 2016. In line with the first review, and following examination of a significant number of sanctions alerts, the independent consultant did not identify any reportable issues. The authorities have requested a third annual review to be conducted and independent consultant reports are expected to be issued during Q1 2018. In addition, pursuant to requirements of the US Dollar Processing Order, RBS has provided the required written submissions, including quarterly updates, in a timely manner, and RBS continues to participate in a constructive dialogue with the authorities.
Litigation, investigations and reviews continued US/Swiss tax programme In August 2013, the DOJ announced a programme for Swiss banks (the Programme) which provides Swiss banks with an opportunity to obtain resolution, through non-prosecution agreements or non-target letters, of the DOJ’s investigations of the role that Swiss banks played in concealing the assets of US tax payers in offshore accounts (US related accounts). In December 2013, Coutts & Co Ltd., a member of the Group incorporated in Switzerland, notified the DOJ that it intended to participate in the Programme.
In addition, Coutts & Co Ltd is cooperating with investigations and enquiries from authorities in other jurisdictions in relation to the same subject matter. In this context, the Monetary Authority of Singapore (MAS)’s supervisory examination of Coutts & Co Ltd’s Singapore branch revealed breaches of anti-money laundering requirements. MAS imposed on Coutts & Co Ltd financial penalties amounting to SGD 2.4 million in December 2016.
The outcomes of other proceedings, investigations and enquiries are uncertain but may include financial consequences and/or regulatory sanctions.
As part of an internal review of the wider retail and commercial loan portfolios extending from the tracker mortgage examination programme, UBI DAC identified further legacy business issues. A programme is ongoing to identify and remediate impacted customers and a charge of €101 million (£89 million) has been recognised in 2017 based on expected remediation and project costs in relation to these items.
32 Net cash flow from operating activities 2017 2016 2015 £m £m £m
Profit on sale of property, plant and equipment (75) (18) (91)
Decrease/(increase) in loans and advances to banks and customers 2,466 (12,960) 58,766
Net outflow of cash in respect of acquisitions (131) (87) (59)
Net inflow/(outflow) of cash in respect of disposals 317 (328) 1,053
Share capital, share premium, Subordinated liabilities paid-in equity and merger reserve
Net cash (outflow)/inflow from financing (414) 2,236 2,169 (5,747) (3,606) (3,047)
Note: (1) Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £6,883 million (2016 - £6,661 million; 2015 - £11,031 million).
37 Segmental analysis (a) Reportable segments The directors manage RBS primarily by class of business and present the segmental analysis on that basis. This includes the review of net interest income for each class of business - interest receivable and payable for all reportable segments is therefore presented net. Segments charge market prices for services rendered between each other; funding charges between segments are determined by RBS Treasury, having regard to commercial demands. The segment performance measure is operating profit/(loss).
Business transfers On 1 October 2017 the following changes were made to RBS’s businesses, which impacts its financial reporting but where comparatives have not been re-presented:  Shipping and other activities, which were formerly in Capital Resolution, were transferred from the NatWest Markets reportable segment to the Commercial Banking reportable segment.
RBS International (RBSI) serves retail, commercial, corporate and financial institution customers in Jersey, Guernsey, Isle of Man and Gibraltar and financial institution customers in Luxembourg and London.
UK Personal & Business Banking 5,130 1,347 6,477 (3,829) — (235) 2,413 Ulster Bank RoI 421 183 604 (676) — (60) (132)
2016* UK Personal & Business Banking 4,945 1,182 6,127 (4,278) 2 (125) 1,726 Ulster Bank RoI 409 167 576 (669) — 113 20 2015* UK Personal & Business Banking 4,810 1,223 6,033 (4,564) — (8) 1,461 Ulster Bank RoI 365 185 550 (429) — 141 262 * Re-presented to reflect the segmental reorganisation.
RBS International 309 119 428 313 156 469 275 177 452 NatWest Markets 1,408 809 2,217 1,708 1,539 3,247 3,097 2,913 6,010 Central items & other 2,147 (1,185) 962 1,862 (1,988) (126) 1,655 (3,389) (1,734)
Segmental analysis of goodwill is as follows, there was no movements in goodwill in 2016 or 2017: UK Personal & Business Commercial RBS Banking Banking International Total £m £m £m £m
2017 UK USA Europe RoW Total £m £m £m £m £m
Of which total assets held for sale 182 10 3 — 195
Cost to acquire property, plant and equipment and intangible assets 1,479 1 11 10 1,501
Of which total assets held for sale — 13 — — 13
Of which total assets held for sale — 15 1,251 2,220 3,486
40 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 Financial 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. During 2015, all of the B shares held by the UK Government were converted into ordinary shares of £1 each (see Note 25).
The Group enters into transactions with many of these bodies on an arm’s length basis. Transactions include the payment of: taxes principally UK corporation tax (see Note 6) and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy (see Note 3) and FSCS levies (see Note 31) together with banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships.
Bank of England facilities The Group may participate in a number of schemes operated by the Bank of England in the normal course of business.
Associates Transactions with associates have given rise to the following: £m £m
Statement of changes in equity for the year ended 31 December 2017 2017 2016 2015 £m £m £m
Called-up share capital At 1 January 11,823 11,625 6,877 Ordinary shares issued 142 198 159 Conversion of B shares (1) — — 4,590 Preference shares redeemed (2) — — (1)
Share premium account At 1 January 25,693 25,425 25,052 Ordinary shares issued 235 268 373 Capital reduction (5) (25,789) — — Redemption of debt preference shares (2) 748 — —
Cash flow hedging reserve At 1 January 186 32 — Amount recognised in equity (157) 243 44 Amount transferred from equity to earnings (47) (54) (4)
Cash flow statement for the year ended 31 December 2017 £m £m £m
Critical accounting policies and sources of estimation uncertainty The reported results of the company are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. The judgements and assumptions involved in the company’s accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are those involved in assessing the impairment, if any, in its investments in subsidiaries. At each reporting date, the company assesses whether there is any indication that its investment in a subsidiary is impaired. If any such indication exists, the company undertakes an impairment test by comparing the carrying value of the investment in the subsidiary with its estimated recoverable amount. The recoverable amount of an investment in a subsidiary is the higher of its fair value less cost to sell and its value in use. Impairment testing inherently involves a number of judgments: the choice of appropriate discount and growth rates; and the estimation of fair value.
Other net interest income, non-interest income and operating expenses (9) (915) 14
Write-back/(write-down) of investments in subsidiaries (see Note 7) 562 (6,106) (2,827)
Investment in Group undertakings 47,559 44,608 Loans and advances to banks (1) - loans and receivables 14,503 28,867 Loans and advances to customers (1) - loans and receivables 10,480 97 Debt securities - loans and receivables 104 398 Derivatives (1) - held-for-trading 27 12 - hedging 136 361 163 373 Prepayments, accrued income and other assets - non-financial assets 53 70 72,862 74,413
Liabilities Deposits by banks (2) - amortised cost — 944 Debt securities in issue - amortised cost 9,122 6,745 - designated as at fair value through profit or loss 80 87 9,202 6,832 Derivatives (2) - held-for-trading 71 67 - hedging 213 193 284 260
Provisions, accruals and other liabilities - non-financial liabilities 438 992 Subordinated liabilities - amortised cost 7,977 10,668 17,901 19,696 Owners’ equity 54,961 54,717
4 Financial instruments - fair value The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.
Loans and advances due from subsidiaries (1) 25.0 25.4 28.9 29.7
2017 2016 Less than More than Total Less than More than Total 12 months 12 months 12 months 12 months £m £m £m £m £m £m
For further information on the timing of cash flows to settle financial liabilities, refer to Note 10 on the consolidated accounts.
In 2017 additions principally relate to the acquisition of the Royal Bank of Scotland International (Holdings) Limited from The Royal Bank of Scotland plc (RBS plc). The write-back in 2017 relates to the partial reversal of the company’s investment in RFS Holdings B.V..
The key assumptions applied in assessing the carrying value of the company’s investment in RBS plc are terminal growth rate of underlying business, the pre-tax discount rate, income and costs of future periods. The underlying sensitivities in connection to the Group’s reportable segments are disclosed in Note 15 on the consolidated accounts. The following sensitivities reduce the available headroom of £0.8 billion (2016: £2.9 billion) and result in a deficit indicating potential impairment.
US$350 million 4.70% dated notes 2018 (1) Ineligible 265 290 US$2250 million 6.13% dated notes 2022 (1) Tier 2 1,665 1,826 US$750 million 6.80% dated notes 2042 (callable quarterly) (1,2) Ineligible — 609 US$650 million 6.425% dated notes 2043 (callable January 2034) (1,2) Ineligible 479 525 £400 million 5.65% dated notes 2047 (callable June 2017) (2) Ineligible — 413 US$2000 million 6.00% dated notes 2023 Tier 2 1,470 1,612 US$1000 million 6.10% dated notes 2023 Tier 2 737 811 €1,000 million 3.63% dated notes 2024 (callable March 2019) Tier 2 907 875 US$2250 million 5.13% dated notes 2024 Tier 2 1,690 1,869
Note: (1) The company can satisfy interest payment obligations by issuing sufficient ordinary shares to appointed Trustees to enable them, on selling these shares, to settle the interest payment.
Note: (1) Further details of the contractual terms of the preference shares are given in Note 25 on the consolidated accounts.
Operating profit/(loss) before tax 1,471 (5,416) (1,805) Interest on subordinated liabilities 497 509 486 Increase/(decrease) in income accruals — 10 (140) Profit on disposal of investments in subsidiaries (47) — — (Write-back)/write-down of investment in subsidiaries (562) 6,106 2,827 Gain on redemption of investment in Group undertakings — (298) — Other provisions charged net of releases 25 — — Elimination of foreign exchange differences (713) 1,506 265 Other provisions utilised (773) — — (Gain)/loss on redemption of own debt (239) — — Other non-cash items 562 1,237 282
Notes: (1) Due from subsidiaries. (2) Due to subsidiaries 11 Interest received and paid £m £m £m
Issue of Additional Tier 1 capital notes — 2,040 2,007 — — —
Other adjustments including foreign exchange 196 — — (1,026) 1,727 403 13 Analysis of cash and cash equivalents £m £m £m
Net cash (outflow)/inflow (950) (1,811) 1,901 *Comprises loans and advances to banks 14 Directors’ and key management remuneration Directors’ remuneration is disclosed in Note 38 on the consolidated accounts. The directors had no other reportable related party transactions or balances with the company.
Adam & Company Group PLC BF FC 25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Caledonian Sleepers Rail Leasing Ltd BF FC 1 Princes Street, London, EC2R 8PB, England
Care Homes Holdings Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
Coutts & Company BF FC 440 Strand, London, WC2R 0QS, England
Coutts Finance Company BF FC 440 Strand, London, WC2R 0QS, England
Digi Ventures Ltd OTH FC 250 Bishopsgate, London, EC2M 4AA, England
Distant Planet Productions Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Helena Productions Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
KUC Properties Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Land Options (West) Ltd INV DE 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Leckhampton Finance Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Business Finance Ltd BF FC 280 Bishopsgate, London, EC2M 4RB, England
Lombard Corporate Finance (10) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Corporate Finance (11) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Corporate Finance (13) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Corporate Finance (14) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Corporate Finance (15) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Corporate Finance (7) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Corporate Finance (December 1) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Corporate Finance (December 3) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Corporate Finance (June 2) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Discount Ltd BF FC 280 Bishopsgate, London, EC2M 4RB, England
Lombard Finance Ltd BF FC 280 Bishopsgate, London, EC2M 4RB, England
Lombard Lease Finance Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Leasing Company Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Lessors Ltd BF FC 280 Bishopsgate, London, EC2M 4RB, England
Lombard North Central PLC BF FC 280 Bishopsgate, London, EC2M 4RB, England
Lombard Property Facilities Ltd BF FC 1 Princes Street, London, EC2R 8PB, England
Lombard Technology Services Ltd BF FC 280 Bishopsgate, London, EC2M 4RB, England
National Westminster Home Loans Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
NatWest Corporate Investments BF DE 250 Bishopsgate, London, EC2M 4AA, England
NatWest Holdings Ltd INV FC 280 Bishopsgate, London, EC2M 4RB, England
NatWest Machinery Leasing Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
NatWest Property Investments Ltd INV FC 250 Bishopsgate, London, EC2M 4AA, England
NatWest Ventures Investments Ltd BF DE 250 Bishopsgate, London, EC2M 4AA, England
Nevis Derivatives No. 3 LLP BF FC 35 Great St Helen's, London, EC3A 6AP, England
Northern Isles Ferries Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
P of A Productions Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Patalex II Productions Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Patalex III Productions Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Patalex Productions Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Patalex V Productions Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Premier Place Finance Ltd INV FC 250 Bishopsgate, London, EC2M 4RB, England
R.B. Capital Leasing Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
R.B. Leasing (December) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
R.B. Leasing (September) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
R.B.S. Special Investments Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RB Investments 2 Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RB Investments 3 Ltd OTH FC 250 Bishopsgate, London, EC2M 4AA, England
RBS AA Holdings (UK) Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RBS Asset Finance Europe Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
RBS Asset Management (ACD) Ltd BF FC 440 Strand, London, WC2R 0QS, England
RBS Asset Management Holdings BF FC 440 Strand, London, WC2R 0QS, England
RBS Equities Holdings (UK) Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RBS HG (UK) Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RBS Investments Holdings (UK) Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RBS Invoice Finance Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RBS Property Ventures Investments Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBSSAF (11) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
RBSSAF (12) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
RBSSAF (7) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
RBSSAF (8) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
RoboScot Ventures Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Royal Bank of Scotland (Industrial Leasing) Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Sandford Leasing Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Springwell Street Developments (No 1) Ltd INV FC 280 Bishopsgate, London, EC2M 4RB, England
Style Financial Services Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Total Capital Finance Ltd BF DE 1 Princes Street, London, EC2R 8PB, England
Ulster Bank Pension Trustees Ltd TR FC 11-16 Donegall Square East, Belfast, BT1 5UB, Northern Ireland
Walton Lake Developments Ltd INV DE 1 Princes Street, London, EC2R 8PB, England
West Register (Land) Ltd INV FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
West Register (Project Developments) Ltd INV FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
West Register (Realisations) Ltd INV DE 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Winchcombe Finance Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Australia RBS Group (Australia) Pty Ltd BF FC Level 22, 88 Phillip Street, Sydney, NSW, 2000
Bermuda KEB Investors, L.P. BF FC Clarendon House, Two Church Street, Suite 104, Reid Street, Hamilton, HM 11
Action Corporate Services Ltd BF FC Hudson Trust Company Limited, Third Floor, Geneva Place, Road Town, Tortola, VG1110
Minster Corporate Services Ltd BF FC Hudson Trust Company Limited, Third Floor, Geneva Place, Road Town, Tortola, VG1110
Coutts & Co (Cayman) Ltd BF FC Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75 Fort Street, George Town, Grand Cayman, KY1-1108
BF FC Maples Corporate Services Limited, P.O. Box 309, 121 South Church Street, George Town, Grand Cayman, KY1-1104
Redshield Holdings Ltd BF FC Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75 Fort Street, George Town, Grand Cayman, KY1-1108
BF FC c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40
Denmark Kastrup V & L Building K/S BF FC c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40
Finland Artul Kiinteistöt Oy BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Forssa Liikekiinteistöt Oy BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Kiinteistö Oy Pennalan Johtotie 2 BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Espoon Entresse II BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Espoon Niittysillantie 5 BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Helsingin Mechelininkatu 1 BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Helsingin Osmontie 34 BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Helsingin Panuntie 6 BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Iisalmen Kihlavirta BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Jämsän Keskushovi BF FC Södra esplanaden, 12 c/o Nordisk Renting Oy, FI-00130, Helsinki
Finland Koy Kokkolan Kaarlenportti Fab BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Lohjan Huonekalutalo BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Millennium BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Nummelan Portti BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Nuolialan päiväkoti BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Raision Kihlakulma BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Vapaalan Service-Center BF DE c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Gibraltar RBS (Gibraltar) Ltd CI FC 1 Corral Road, JE4 8ND
BF FC 3rd Floor, Dixcart House, Sir William Place, St Peter Port, GY1 1GX (5)
Guernsey Alsecure US PCC Ltd BF DE 3rd Floor, Dixcart House, Sir William Place, St Peter Port, GY1 1GX (5)
BF FC PO Box 230, Heritage Hall, Le Marchant Street, St Peter Port, GY1 4JH
Guernsey Morar ICC Insurance Ltd BF DE PO Box 384, The Albany, South Esplanade, St Peter Port, GY1 4NF
Hong Kong RBS Asia Futures Ltd BF FC 7/F, Lincoln House, Taikoo Place, 979 King's Road, Quarry Bay
BF FC 7/F, Lincoln House, Taikoo Place, 979 King's Road, Quarry Bay
Hong Kong RBS Securities Japan Ltd BF FC Level 54, Hopewell Centre, 183 Queen's Road East
SC FC DLF Cyber City, Tower C, DLF Phase III, Haryana, 122 002
Isle of Man Isle of Man Bank Ltd BF FC 2 Athol Street, Douglas, IM99 1AN
Isle of Man Lombard Manx Leasing Ltd BF FC Royal Bank House, 2 Victoria Street, Douglas, IM1 2LN
Italy Fondo Sallustio BF DE Via Vittorio Alfieri 1, Conegliano, 31015
Jersey C.J. Fiduciaries Ltd BF FC Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
BF FC Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
Mauritius RBS Asia (Mauritius) Ltd BF FC 10th Floor, Raffles Tower, 19 Cybercity, Ebene, M20
Netherlands AA Merchant Banking B.V. BF PC Gustav Mahlerlaan 350, Amsterdam, 1082 ME (5)
Netherlands RBS Asia Holdings B.V. BF FC Gustav Mahlerlaan 350, Amsterdam, 1082 ME (5)
Netherlands RBS Hollandsche N.V. CI FC Gustav Mahlerlaan 350, Amsterdam, 1082 ME (5)
BF FC c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161, Oslo
BF FC Wisniowy Business Park, ul 1-go Sierpnia 8a, Warsaw 02-134
RoI Hume Street Nominees Ltd BF FC Ulster Bank Group Centre, George's Quay, Dublin 2
RoI Norgay Property Ltd BF FC Ulster Bank Group Centre, George's Quay, Dublin 2
BF FC Guild House, Guild Street, IFSC, D01 K2C5, Dublin 1
RoI RBS Investments (Ireland) Ltd BF FC Ulster Bank Group Centre, George's Quay, Dublin 2 (5)
Sweden Airside Properties AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Arkivborgen KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Backsmedjan KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Bilfastighet i Täby AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Braheberget KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Fastighets AB Kabisten 1 BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Fastighets AB Xalam BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Forskningshöjden KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden IR IndustriRenting AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden KB Eurohill BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden LerumsKrysset KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Limstagården KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Mons AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Svenskt Fastighetskapital AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Tingsbrogården KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Switzerland Alcover A.G. BF FC Baarerstrasse 98, 6302 Zug, CH-6300 (5)
Switzerland Coutts & Co Ltd BF FC Lerchenstrasse 18, Zurich, CH 8022
USA Candlelight Acquisition LLC BF FC 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
BF PC 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
BF FC 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
USA RBS Americas Property Corp. SC FC 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
USA RBS Commercial Funding Inc. BF FC 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
USA RBS Equity Corporation BF FC 340 Madison Avenue, New York, 10173
USA RBS Financial Products Inc. BF FC 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
USA RBS Securities Inc. BF FC 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
The following table details active related undertakings incorporated in the UK where the Group ownership is less than 100%.
Aspire Oil Services Ltd BF EAA FC 27 Union Plaza 6th Floor, 1 Union Wynd, Aberdeen, AB10 1DQ, Scotland
Ballymore (London Arena) Ltd BF IA DE 45 St John's House, 5 South Parade, Summertown, Oxford, Oxfordshire, OX2 7JL, England
CFN Packaging Group Ltd BF IA DE 25 27-29 Lumley Avenue, Skegness, Lincolnshire, PE25 2AT, England
Isobel Mezzanine Borrower Ltd BF FC FC 75 40 Berkeley Square, London, W1J 5AL, England
Jaguar Cars Finance Ltd BF FC FC 50 280 Bishopsgate, London, EC2M 4RB, England
JCB Finance (Leasing) Ltd BF FC FC 75 The Mill, High Street, Rocester, ST14 5JW, England
Land Options (East) Ltd BF EAJV FC 50 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Landpower Leasing Ltd BF FC FC 75 The Mill, High Street, Rocester, ST14 5JW, England
Lyalvale Property Ltd INV IA FC 31 Lyalvale Express Ltd, Express Estate, Fisherwick, Nr Whittington, Lichfield, WS13 8XA, England
Pollokshields Developments Ltd INV IA DE 49 Abercorn House, 79 Renfrew Road, Paisley, Renfrewshire, PA3 4DA, Scotland
Wealdland Ltd OTH EAA FC 29 10 Norwich Street, London, EC4A 1BD, England
The following table details active related undertakings incorporated outside the UK where the Group ownership is less than 100%.
Lunar Funding VIII Ltd BF FC FC 0 Boundary Hall, Cricket Square, 171 Elgin Avenue, George Town, Grand Cayman, KY1-
Cyprus Pharos Estates Ltd OTH EAA DE 49 24 Demostheni Severi, 1st Floor, Nicosia, 1080
Guernsey MSE Holdings Ltd INV IA FC 37 c/o Gentoo Fund Services Ltd, Mill Court, La Charrotiere, St Peter Port, GY1 3GG
Jersey Spring Allies Jersey Ltd BF IA FC 49 Whiteley Chambers, Don Street, St Helier, JE4 9WG
Netherlands Herge Holding B.V. BF IA FC 63 Verlengde Poolseweg 16, 4818 CL, Breda (9)
Netherlands RFS Holdings B.V. BF FC FC 98 Herikerbergweg 238, Luna Arena, 1101 CM, Amsterdam Zuidoost
Saudi Arabia Alawwal Bank CI EAA FC 40 Al-Dhabab Street, Riyadh, 11431
BF FC DE 0 114 West 47th Street, New York, 10036
The following table details active related undertakings which are 100% owned by the Group but are not consolidated for accounting purposes (8).
BF NC FC PO Box 6, 23-25 Broad Street, St Helier, JE4 8ND
BF NC FC PO Box 236, First Island House, Peter Street, St Helier, JE4 8SG
USA RBSG Capital Corporation BF NC FC 2711 Centerville, Road Suite 400, Wilmington, Delaware, DE 19808
FC FC 100 Level 9, Menara Maxis, Kuala Lumpur City Centre, Kuala Lumpur, 50088
FC FC 0 Riverside One, Sir John Rogersons Quay, Dublin 2
RoI First Active Holdings Ltd FC FC 100 Ulster Bank Group Centre, George's Quay, Dublin 2
RoI First Active Treasury Ltd FC FC 100 Ulster Bank Group Centre, George's Quay, Dublin 2
FC FC 98 Ulster Bank Group Centre, George's Quay, Dublin 2 (5)
RoI Ulster Bank Group Treasury Ltd FC FC 100 Ulster Bank Group Centre, George's Quay, Dublin 2
RoI Utras Unlimited Company FC FC 98 Ulster Bank Group Centre, George's Quay, Dublin 2 (5)
RoI Zrko Ltd FC DE 67 70 Sir John Rogerson's Quay, Dublin 2
UK Arran Cards Funding plc FC FC 0 35 Great St Helen's, London, EC3A 6AP, England
UK CNW Group Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK Dixon Motors Developments Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK Emperor Holdings Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
FC FC 0 Wilmington Trust SP Services (London) Ltd, Third Floor, 1 Kings Arms Yard, London, EC2R 7AF, England
FC DE 0 Wilmington Trust SP Services (London) Ltd, Third Floor, 1 Kings Arms Yard, London, EC2R 7AF, England
UK Greenock Funding No 5 Plc FC DE 0 35 Great St Helen's, London, EC3A 6AP, England
UK Lombard Venture Finance Ltd FC FC 100 280 Bishopsgate, London, EC2M 4RB, England
UK Mons (UK) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK NatWest Finance Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK NatWest Nominees Ltd FC DE 100 1 Princes Street, London, EC2R 8PB, England
UK Nevis Derivatives No. 2 LLP FC FC 100 35 Great St Helen's, London, EC3A 6AP, England
UK Nevis Derivatives No.1 LLP FC FC 100 35 Great St Helen's, London, EC3A 6AP, England
UK Pulley's Nominees Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBDC Investments Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK RBEF Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK RBS Argonaut Ltd FC PC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK RBS Corporate Finance Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS Equities (UK) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS Health Trustee (UK) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS Overseas (UK) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS Sempra Products Ltd FC FC 51 Suite 1, 3rd Floor 11-12 St James's Square, London, SW1Y 4LB, England
UK RoboScot DevCap Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK RoboScot (64) Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK Royal Bank Ventures Ltd FC DE 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK RoyScot Ltd FC FC 100 280 Bishopsgate, London, EC2M 4RB, England
UK Thrapston Triangle Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
FC DE 100 11-16 Donegall Square East, Belfast, BT1 5UB, Northern Ireland
Denmark Nordisk Renting A/S FC FC 100 c/o Adv Jan-Erik Svensson, HC Andersens Boulevard 12, Kopenhaum V, 1553
FC FC 100 c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Nordisk Renting HB FC FC 100 c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
UK Buchanan Holdings Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK FIT Nominee 2 Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK FIT Nominee Ltd FC PC 100 250 Bishopsgate, London, EC2M 4AA, England
UK Lombard Bank FC FC 100 Lee House, Baird Road, Enfield, Middlesex, EN1 1SJ, England
UK Marigold Nominees Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK National Westminster Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK NatWest Aerospace Trust Company Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK NatWest Security Trustee Company Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK Nextlinks Ltd FC FC 100 250 Bishopsgate, London, EC2M 4RB, England
UK RBOS Trustees Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS Investment Executive Ltd NC DE 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK RBS Secretarial Services Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK RoyScot Leasing Ltd FC FC 100 280 Bishopsgate, London, EC2M 4RB, England
BF IA PC 50 FRP Advisory LLP, Apex 3, 95 Haymarket Terrace, Edinburgh, EH12 5HD, Scotland
(2) Activity: BF - Banking and Financial institution CI - Credit institution INV - Investment (shares or property) holding company SC - Service company TR - Trustee OTH – Other
(3) Regulatory Accounting treatment: DE - Deconsolidated (for non financial or insurance undertakings) FC - Full consolidation PC - Pro-rata consolidation (based on percentage equity held by RBSG)
National Westminster Bank Plc Finland, France, Germany, Italy, Jersey, Netherlands, Norway, Spain, Sweden
The Royal Bank of Scotland International Ltd Gibraltar, Guernsey, Isle of Man, Luxembourg, UK
Financial summary The geographic analysis, including the average balance sheet and interest rates, changes in net interest income and average interest rates, yields, spreads and margins in this report have generally been compiled on the basis of location of office - UK and overseas - unless indicated otherwise. ‘UK’ in this context includes transactions conducted through the offices in the UK which service international banking transactions.
Analysis of loans and advances to customers The following table analyses gross loans and advances to customers by remaining maturity, geographical area (location of office) and type of customer.
After 1 year Within but within After 2017 1 year 5 years 5 years Total 2016 2015 2014 2013 £m £m £m £m £m £m £m £m
Loans and advances to customers - gross 112,804 94,101 146,828 353,733 356,405 341,010 395,698 465,875
Yields, spreads and margins of the banking business 2017 2016 2015
Gross yield on interest-earning assets of the banking business (1) 2.57 2.80 2.88
The Royal Bank of Scotland plc base rate (average) 0.29 0.40 0.50
Average balance sheet and related interest 2017 2016 Average Average balance Interest Rate balance Interest Rate
Customer accounts: demand deposits - UK 140,514 96 0.07 146,340 390 0.27
Customer accounts: other time deposits - UK 8,703 159 1.83 8,984 149 1.66
Analysis of change in net interest income - volume and rate analysis Volume and rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are allocated pro rata to volume and rate movements. 2017 over 2016 2016 over 2015 Increase/(decrease) due to changes in: Increase/(decrease) due to changes in: Average Average Net Average Average Net volume rate change volume rate change £m £m £m £m £m £m
Average loans and advances to customers - gross 366,959 373,644 387,956 472,545 509,937
As a % of average loans and advances to customers during the year Total customer provisions charged/(released) to income statement 0.1% 0.1% (0.2%) (0.3%) 1.6%
Closing Total Closing Total Closing Total Closing Total Closing Total provision loans provision loans provision loans provision loans provision loans
Service industries and business activities 769 15.0 1,131 16.2 993 16.4 1,510 14.4 2,192 12.6
Finance leases and instalment credit 80 3.6 69 3.7 69 3.6 82 3.1 136 2.5
Analysis of write-offs The following table analyses amounts written-off by geographical area and type of UK customer.
Analysis of recoveries The following table analyses recoveries of amounts written-off by geographical area and type of UK customer.
Risk elements in lending Risk elements in lending (REIL) comprises of impaired loans and accruing loans past due 90 days or more as to principal or interest.
REIL as a % of gross lending to customers excluding reverse repos 2.7% 3.1% 3.9% 7.6% 9.5%
Notes: (1) The write-off of impaired loans affects closing provisions for impairment as a % of total REIL (the coverage ratio). The coverage ratio reduces if the loan written-off carries a higher than average provision and increases if the loan written-off carries a lower than average provision. (2) Impaired loans at 31 December 2017 include £1,324 million (2016 - £2,496 million; 2015 - £2,300 million) of loans subject to forbearance granted during the year.
Cross border exposures Cross border exposures are loans and advances including finance leases and instalment credit receivables and other monetary assets, such as debt securities, including non-local currency claims of overseas offices on local residents. RBS monitors the geographical breakdown of these exposures based on the country of domicile of the borrower or guarantor of ultimate risk. Cross border exposures exclude exposures to local residents in local currencies.
On 16 December 2013, the company announced that, having received approval from the PRA, it had terminated the £8 billion Contingent Subscription. RBS 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.
Revised State Aid Commitment Deed As a result of the State Aid granted to the company, it was required to work with HM Treasury to submit a State Aid restructuring plan to the European Commission (EC), which was then approved by the EC under the State Aid rules on 14 December 2009. The company agreed a series of measures which supplemented the measures in the company's strategic plan.
The Alternative Remedies Package is focused on the following two remedies to promote competition in the market for banking services to small and medium-sized enterprises (“SMEs”): (i) a £425 million fund that will grant funding for eligible bodies in the UK banking and financial technology sectors to develop and improve their capability to compete with RBS in the provision of banking services to SMEs and develop and improve the financial products and services available to SMEs (the “Capability and Innovation Fund”); and (ii) a £275 million scheme which will provide funding to eligible bodies to help them incentivise SME banking customers within the business previously known as Williams & Glyn to switch their business current accounts and loans to the eligible bodies (the “Incentivised Switching Scheme”). RBS has also agreed to set aside up to a further £75 million in funding to cover certain costs customers may incur as a result of switching under the Incentivised Switching Scheme. In addition, under the terms of the Alternative Remedies Package, should the uptake within the Incentivised Switching Scheme not be sufficient, RBS may be required to make a further contribution, capped at £50 million. An independent body (the “Independent Body”) is being established to facilitate and oversee the delivery of the Alternative Remedies Package, including the distribution of the funds from the Capability and Innovation Fund and the implementation of the Incentivised Switching Scheme.
The Group is subject to a number of legal, regulatory and governmental actions and investigations. Unfavourable outcomes in such actions and investigations could have a material adverse effect on the Group’s operations, operating results, reputation, financial position and future prospects The Group’s operations remain diverse and complex and it operates in legal and regulatory environments that expose it to potentially significant legal and regulatory actions, including litigation claims and proceedings and civil and criminal regulatory and governmental investigations, and other regulatory risk. 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 a number of legal and regulatory actions in the US, the UK, Europe and other jurisdictions.
The legal and regulatory actions specifically referred to below are, in the Group’s view, the most significant legal and regulatory actions to which the Group is currently exposed. However, the Group is also subject to a number of additional claims, proceedings and investigations, the adverse resolution of which may also have a material adverse impact on the Group and which include ongoing reviews, investigations and proceedings (both formal and informal) by governmental law enforcement and other agencies and litigation proceedings (including class action litigation), relating to, among other matters, the offering of securities, including residential mortgage-backed securities (RMBS), conduct in the foreign exchange market, the setting of benchmark rates such as LIBOR and related derivatives trading, the issuance, underwriting, and sales and trading of fixed-income securities (including government securities), product mis-selling, customer mistreatment, anti-money laundering, sanctions, antitrust and various other compliance issues. See ‘Litigation, investigations and reviews’ of Note 31 on the consolidated accounts on pages 313 to 325 for details for these matters. The Group continues to cooperate with governmental and regulatory authorities in relation to ongoing informal and formal inquiries or investigations regarding these and other matters. Legal and regulatory actions are subject to many uncertainties, and their outcomes, including the timing, amount of fines or settlements or the form of any settlements, which may be material, are often difficult to predict, particularly in the early stages of a case or investigation. It is expected that the Group will continue to have a material exposure to legal and regulatory actions relating to legacy issues in the medium term.
RMBS In the US, ongoing matters include certain matters relating to legacy RMBS activities including investigations by the US Department of Justice (DOJ) and several state attorneys general and various civil claims. A further provision of $650 million (£492 million) was recorded by the Group in Q4 2017 in relation to RBS’s various RMBS investigations and litigation matters, taking the total charge for the year to $971 million (£714 million). The total aggregate provision at 31 December 2017 was $4.4 billion (£3.2 billion).
The duration and outcome of the DOJ’s investigations and other RMBS matters remain uncertain, including in respect of whether settlements for all or any such matters may be reached and any timing thereof. Further substantial provisions and costs may be recognised.
Risk factors continued Adverse outcomes or resolution of current or future legal or regulatory actions could result in restrictions or limitations on the Group’s operations, adversely impact the implementation of Group’s current transformation programme as well as its capital position and its ability to meet regulatory capital adequacy requirements. The remediation programmes or commitments which the Group has agreed to in connection with past settlements or investigations, could require significant financial costs and personnel investment for the Group and may result in changes in its operations or product offerings, and failure to comply with undertakings made by the Group to its regulators may result in additional measures or penalties being taken against the Group.
Due to changes in the macro-economic and political and regulatory environment in which it operates, in particular as a result of the UK’s exit from the EU (Brexit), the Group has been required to reconsider certain aspects of its current restructuring and transformation programme. In anticipation of Brexit the Group has announced that it will be re-purposing its Dutch subsidiary, The Royal Bank of Scotland N.V. (‘RBS N.V.’) for the NatWest Market franchise’s European business and further structural changes to Group’s Western European operations may also be required, including in response to proposed changes to the European prudential regulatory framework for banks and investment banks. These proposals may result in additional prudential or structural requirements being imposed on financial institutions based outside the EU wishing to provide financial services within the EU and may apply to the Group once the UK has formally exited the EU. The ability of the RBS Group to successfully re-purpose and utilise RBS N.V. as the platform for the NatWest Market franchise’s European business following Brexit is subject to numerous uncertainties, including those relating to Brexit negotiations. See ‘The Group is subject to political risks, including economic, regulatory and political uncertainty arising from the referendum on the UK’s membership of the European Union which could adversely impact the Group’s business, results of operations, financial condition and prospects.’
Risk factors continued The Group’s transformation programme and structural reform agenda comprise a large number of concurrent actions and initiatives, any of which could fail to be implemented due to operational or execution issues. Implementation of such actions and initiatives is expected to result in significant costs, which could be materially higher than currently contemplated, including due to material uncertainties and factors outside of the Group’s control. Furthermore it requires the implementation and application of robust governance and controls frameworks and there is no guarantee that the Group will be successful in doing so. The planning and execution of the various restructuring and transformation activities is disruptive and will continue to divert management resources from the conduct of the Group’s operations and development of its business. Any additional restructuring or transformation of the Group’s activities would increase these risks and could result in further material restructuring or transformation costs, jeopardise the delivery and implementation of a number of other significant change projects, impact the Group’s product offering or business model or adversely impact the Group’s ability to deliver its strategy and meet its targets and guidance, each of which could have a material adverse impact on the Group’s results of operations, financial condition and prospects.
The Group’s ability to meet its cost:income ratio target and the planned reductions in its annual underlying costs (excluding restructuring and conduct-related charges) may also be impacted. In 2017, the Group’s costs on an unadjusted basis take into account restructuring costs of £1,565 million, including costs relating Williams & Glyn and property exit costs of £221 million and £293 million, respectively, as well as litigation and conduct costs of £1,285 million. Such costs may vary considerably from year to year and may impact the Group’s ability to maintain its 2020 cost reduction targets, and the focus on meeting cost reduction targets may result in limited investment in other areas which could affect the Group’s long-term product offering or competitive position.
More generally, the targets and expectations which accompany the Group’s transformation programme are based on management plans, projections and models and are subject to a number of key assumptions and judgments any of which may prove to be inaccurate. Among others, the targets and expectations set as part of the Group’s transformation programme assume that the Group will be successful in implementing its business model and strategy, in executing its transformation programme and reducing the complexity of its business and infrastructure at the same time that it will be implementing significant structural changes to comply with the regulatory environment and that it will implement and maintain a robust control environment and effective culture, including with respect to risk management.
Implementation of the ring-fencing regime in the UK which began in 2015 and must be completed before 1 January 2019 will result in material structural changes to the Group’s business. The steps required to implement the UK ringfencing regime are complex and entail significant costs and operational, legal and execution risks, which risks may be exacerbated by the Group’s other ongoing restructuring efforts. The requirement for large UK banks taking deposits to ‘ringfence ’ retail banking operations was introduced under the UK Financial Services (Banking Reform) Act 2013 (the ‘Banking Reform Act 2013’) and adopted through secondary legislation (the ‘UK ring-fencing regime’). These reforms form part of a broader range of structural reforms of the banking industry seeking to improve the resilience and resolvability of banks and which range from structural reforms (including ring-fencing) to the implementation of a new recovery and resolution framework (which in the UK will incorporate elements of the ring-fencing regime). See ‘The Group and its subsidiaries are subject to an evolving framework on recovery and resolution, the impact of which remains uncertain, and which may result in additional compliance challenges and costs.’
As part of this restructuring, the majority of existing personal, private, business and commercial customers of RBS plc is expected to be transferred to the RFB during the second quarter of 2018, specifically to Adam & Company PLC (to be renamed The Royal Bank of Scotland plc). Certain assets and liabilities (including the covered bond programme, certain hedging positions and parts of the liquid asset portfolio) will also be transferred to National Westminster Bank Plc. At the same time, RBS plc (which will sit outside the RFB) will be renamed NatWest Markets Plc to bring its legal name in line with the rebranding of the NatWest Markets franchise which was initiated in December 2016, and will continue to operate the NatWest Markets franchise as a direct subsidiary of RBSG. The transfer, as described above, will be effected principally by utilising a legal scheme entitled a ‘Ring-Fencing Transfer Scheme’ under Part VII of the Financial Services and Markets Act 2000. The implementation of such a scheme is subject to, amongst other considerations, regulatory approval and the sanction of the Court of Session in Scotland, Edinburgh (the ‘Court’). A hearing to seek the Court’s approval of the scheme is expected to be held on 22 March 2018.
The approval of the scheme by the Prudential Regulation Authority (‘PRA’) is expected to be confirmed shortly before that hearing date. If the scheme is duly approved by the Court at the hearing expected to be held on 22 March 2018, it is expected that the scheme will be implemented with effect from 30 April 2018 or any later date which the Group may agree with the PRA and the Financial Conduct Authority (‘FCA’). It remains possible that the court process described above may result in amendments being required to be made to the Group’s current plan and that this may result in delays in the implementation of the UK ring-fencing compliant structure, additional costs and/or changes to the Group’s business.
In addition, during the second half of 2018, it is proposed that NatWest Holdings Limited, being the parent of the future ringfenced sub-group (which together with other entities is intended to include National Westminster Bank Plc, Adam & Company PLC (to be renamed The Royal Bank of Scotland plc) and Ulster Bank Ireland DAC), will become a direct subsidiary of RBSG. This is expected to occur through a capital reduction of The Royal Bank of Scotland plc (to be renamed NatWest Markets Plc), which will be satisfied by the transfer of the shares in NatWest Holdings Limited currently held by of The Royal Bank of Scotland plc to RBSG, which will occur via a further and separate court process, which is subject to the relevant Court and regulatory approvals. It is possible that the court process described above may result in amendments being required to be made to the Group’s current plan and that this may result in delays in the implementation of the UK ring-fencing compliant structure, additional costs and/or changes to the Group’s business.
During the course of 2018, it is proposed that the Group will seek to implement a second, smaller ring-fencing transfer scheme as part of its strategy to implement its future ring-fencing compliant structure, which is proposed to transfer certain assets from National Westminster Bank Plc to The Royal Bank of Scotland plc (by then renamed to NatWest Markets Plc). Such a scheme would be subject to the same reviews and approvals as described above in connection with the first scheme.
The Group’s final ring-fenced legal structure and the actions being taken to achieve it, remain subject to, amongst other factors, additional regulatory, board and other approvals. In particular, transfers of assets and liabilities by way of a RingFencing Transfer Scheme, as described above, must be reviewed and reported on by an Independent Skilled Person appointed by the Group with the prior approval of the PRA (having consulted with the FCA). The reports of the Skilled Person are made public and form part of the court process described above.
Risk factors continued Those risks include the following:  As a result of ring-fencing, certain customers will be moved to the RFB and certain customers will be required to deal with both the RFB and other Group entities outside the RFB to obtain the full range of products and services or to take any affirmative steps in connection with the reorganisation. The Group is unable to predict how some customers may react to these and other required changes.
 The implementation of the UK ring-fencing regime will significantly impact the management of the Group’s treasury operations, including internal and external funding arrangements. The changes required may adversely impact the assessment made by credit rating agencies, creditors and other stakeholders of the credit strength of the different entities on a standalone basis and may heighten the cost of capital and funding for the Group and its subsidiaries. The ability of bank entities outside the RFB to meet funding and capital prudential requirements may be dependent on obtaining an adequate credit rating. Once the UK ringfencing regime is implemented, reliance on intragroup exemptions in relation to large exposures and liquidity will not be possible between the RFB and other Group entities and may result in risk-weighted assets inflation.
 From 2026 it will not be possible for the Group entities outside the RFB to participate in the same defined benefit pension scheme as RFB entities or their wholly-owned subsidiaries. As a result, it will be necessary to restructure the Group’s defined benefit pension scheme (including The Royal Bank of Scotland Group Pension Fund (‘Main scheme’)). This restructuring will be such that either the RFB or other Group outside the RFB leave the current scheme. The costs of separation may be material and may trigger certain legal and regulatory obligations including possibly increased contributions. Such restructuring may also result in additional or increased cash contributions in the event the pension trustees determine that the employer covenant has been weakened as a result of such separation. See ‘The Group is subject to pension risks and will be required to make additional contributions as a result of the restructuring of its pension schemes in relation to the implementation of the UK ring-fencing regime. In addition, the Group expects to make additional contributions to cover pension funding deficits if there are degraded economic conditions or if there is any devaluation in the asset portfolio held by the pension trustee.’
 In addition, the proposed transfers may have tax costs, or may impact the tax attributes of the RFB or other Group entities outside the RFB and the ability to transfer tax losses.
Risk factors continued The completion of ring-fencing will substantially reconfigure the way RBSG holds its businesses and the legal entities within the Group. There is no certainty that the Group will be able to complete the legal restructuring and migration of customers’ assets and liabilities by the 1 January 2019 deadline or in accordance with future rules and the consequences of noncompliance are currently uncertain.
The Group’s operations are highly dependent on its IT systems. A failure of the Group’s IT systems, including as a result of the lack of or untimely investments, could adversely affect its operations, competitive position and investor and customer confidence and expose the Group to regulatory sanctions. The Group’s operations are dependent on the ability to process a very large number of transactions efficiently and accurately while complying with applicable laws and regulations where it does business. 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.
The Group’s regulators in the UK, continue to actively monitor progress being made by banks in the UK to modernise, manage and secure their IT infrastructure and environment, in order to prevent future failures affecting customers. Any critical system failure, any prolonged loss of service availability or any material breach of data security could cause serious damage to the Group’s ability to provide service to its customers, which could result in significant compensation costs or fines resulting from regulatory investigations and could breach regulations under which the Group operates.
In addition, recent or future regulatory changes, such as the EU General Data Protection Regulation and the CMA’s Open Banking standard, increase the risks relating to the Group’s ability to comply with rules that impact its IT infrastructure. Any non-compliance with such regulations could result in regulatory proceedings or the imposition of fines or penalties and consequently could have a material adverse effect on the Group’s business, reputation, financial condition and future prospects.
The Group has made, and will continue to make, considerable investments in its IT systems and technology to further simplify, upgrade and improve its capabilities to make them more costeffective and improve controls, procedures, strengthen cyber security defences, enhance the digital services provided to its bank customers and improve its competitive position, which is also designed to reduce the potential for system failures which adversely affect its relationship with its customers and reputation, which may lead to regulatory investigations and redress. However, the Group’s current focus on cost-saving measures, as part of its transformation programme, may impact the resources available to implement further improvements to the Group IT infrastructure and technology or limit the resources available for investments in technological developments and/or innovation. Should such investment and rationalisation initiatives fail to achieve the expected results, or prove to be insufficient, it could have a material adverse impact on the Group’s operations, its ability to retain or grow its customer business or its competitive position and could negatively impact the Group’s financial position.
Risk factors continued The Group takes appropriate measures to prevent, detect and minimise attacks that could disrupt the delivery of critical business processes to its customers. Because financial institutions such as the Group operate with complex legacy infrastructure, they may be even more susceptible to attack due to the increased number of potential entry points and weaknesses. In addition, the increasing sophistication of cyber criminals may increase the risk of a security breach of the Group’s systems and as security threats continue to evolve the Group’s may be required to invest additional resources to modify the security of its systems, which could have a material adverse effect on the Group’s results of operations.
The Bank of England, the FCA and HM Treasury in the UK and regulators in the US and in Europe continue to recognise cybersecurity as a systemic risk to the financial sector and have highlighted the need for financial institutions to improve resilience to cyberattacks and provide timely notification of them, as appropriate. The Group expects greater regulatory engagement, supervision and enforcement on cybersecurity in the future. The Group continues to participate in initiatives led by the Bank of England and other regulators designed to share best practice and to test how major firms respond to significant cyberattacks. The outputs of this collaboration along with other regulatory and industry-led initiatives are continually incorporated into the Group’s on-going IT priorities and improvement measures. However, the Group continues to expect to be targeted regularly in the future but there can be no certainty that the Group will not be materially impacted by a future attack.
Any failure in the Group’s cybersecurity policies, procedures or controls, could lead to the Group suffering financial losses, reputational damage, a loss of customers, additional costs (including costs of notification of consumers, credit monitoring or card reissuance), regulatory investigations or sanctions being imposed and could have a material adverse effect on the Group’s results of operations, financial condition or future prospects.
The Group faces additional political uncertainty as to how the Scottish parliamentary process may impact the negotiations relating to Brexit. RBSG, RBS plc and one of the future post ringfencing principal operating companies, Adam & Company PLC, are all headquartered and incorporated in Scotland. Any changes to Scotland’s relationship with the UK or the EU (as an indirect result of Brexit or other developments) would impact the environment in which the Group and its subsidiaries operate, and may require further changes to be made to the Group’s structure, independently or in conjunction with other mandatory or strategic structural and organisational changes and as a result could adversely impact the Group.
The Group is currently subject to increased political risks as a result of the UK Government’s majority ownership stake in the Group. The UK Government in its November 2017 Autumn Budget indicated its intention to recommence the process for the privatisation of RBSG before the end of 2018-2019, although there can be no certainty as to the commencement of any selldowns or the timing or extent thereof. (See ‘HM Treasury (or UKFI on its behalf) may be able to exercise a significant degree of influence over the Group and any further offer or sale of its interests may affect the price of securities issued by the Group.’) 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. In its 2017 manifesto, for example, the Labour Party announced its intention to launch a consultation on breaking up the Group to create new local public banks.
If agreement is not reached with the pension trustee, alternative options less favourable to the Group may need to be developed to meet the requirements of the pension regulations. The costs associated with the restructuring of the Group’s existing defined benefit pension schemes could be material and could result in higher levels of additional contributions than those described above and currently agreed with the pension trustee which could have a material adverse effect on the Group’s results of operations, financial position and prospects.
Risk factors continued Risk arises from the schemes because the value of the asset portfolios may be less than expected, or may have reduced in value relative to the pension liabilities it supports, and because there may be greater than expected increases in the estimated value of the schemes’ liabilities and additional future contributions to the schemes may be required. Pension regulations may also change in a manner adverse to the Group.
Pension risk and changes to the Group’s funding of its pension schemes may have a significant impact on the Group’s regulatory capital position or its capital plan. The Group’s capital position is influenced by pension risk in several respects: Pillar 1 capital is impacted by the requirement that net pension assets are deducted from capital and that actuarial gains/losses impact reserves and, by extension, CET1 capital; Pillar 2A requirements result in the Group being required to carry a capital add-on to absorb stress on the pension fund; and finally, the risk of additional contributions to the Group’s pension fund and investment risk associated with the pension fund is taken into account in the Group’s capital plan and include additions to its capital management buffer to cater for certain pension related stress scenarios.
Risk factors continued The Group’s business and results of operations may be adversely affected by increasing competitive pressures and technology disruption in the markets in which it operates. The markets for UK financial services, and the other markets within which the Group operates, are very competitive, and management expects such competition to continue or intensify in response to customer behaviour, technological changes (including the growth of digital banking), competitor behaviour, new entrants to the market (including non-traditional financial services providers such as large retail or technology conglomerates), new lending models (such as peer-to-peer lending), industry trends resulting in increased disaggregation or unbundling of financial services or conversely the reintermediation of traditional banking services, and the impact of regulatory actions and other factors. In particular, developments in the financial sector resulting from new banking, lending and payment solutions offered by rapidly evolving incumbents, challengers and new entrants, in particular with respect to payment services and products, and the introduction of disruptive technology may impede the Group’s ability to grow or retain its market share and impact its revenues and profitability, particularly in its key UK retail banking segment.
These trends may be catalysed by various regulatory and competition policy interventions, particularly as a result of the Open Banking initiative and other remedies imposed by the Competition and Markets Authority (CMA) which are designed to further promote competition within retail banking.
Increasingly many of the products and services offered by the Group are, and will become, technology intensive and the Group’s ability to develop such services 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 investment in its IT capability intended to address the material increase in customer use of online and mobile technology for banking 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 have more efficient operations, including better IT systems allowing them to implement innovative technologies for delivering services to their customers. Furthermore, the Group’s competitors may be better able to attract and retain customers and key employees and may have access to lower cost funding and/or be able to attract deposits on more favourable terms than the Group. Although the Group invests in new technologies and participates in industry and research led initiatives aimed at developing new technologies, such investments may be insufficient, especially given the Group’s focus on its cost savings targets, which may limit additional investment in areas such as financial innovation and therefore could affect the Group’s offering of innovative products and its competitive position. 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.
In addition, recent and future disposals and restructurings by the Group relating to the implementation of non-customer facing elements of its transformation programme and the UK ringfencing regime, or required by the Group’s regulators, as well as constraints imposed on the Group’s ability to compensate its employees at the same level as its competitors, may also have an impact on its ability to compete effectively.
Operational risks are inherent in the Group’s businesses and these risks are heightened as the Group implements its transformation programme, including significant cost reductions, the UK ring-fencing regime and implementation of the Alternative Remedies Package against the backdrop of legal and regulatory changes. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events, including legal risks. The Group has complex and diverse operations and operational risks or losses can result from a number of internal or external factors, including:  internal and external fraud and theft from the Group, including cybercrime;  compromise of the confidentiality, integrity, or availability of the Group’s data, systems and services;  failure to identify or maintain the Group’s key data within the limits of the Group’s agreed risk appetite;  failure to provide adequate data, or the inability to correctly interpret poor quality data;  failure of the Group’s technology services due to loss of data, systems or data centre failure as a result of the Group’s actions or those actions outside the Group’s control, or failure by third parties to restore services;  failure to appropriately or accurately manage the Group’s operations, transactions or security;  incorrect specification of models used by the Group or implementing or using such models incorrectly;  failure to effectively design, execute or deliver the Group’s transformation programme;
The Group’s target capital ratio is based on its expected regulatory requirements and internal modelling, including stress scenarios. However, the Group’s ability to achieve such targets depends on a number of factors, including the implementation of its transformation programme and any of the factors described below.
The Group’s current capital strategy is based on the expected accumulation of additional capital through the accrual of profits over time and/or through the planned reduction of its riskweighted assets through disposals, natural attrition and other capital management initiatives.
Risk factors continued If the Group is determined to have a shortage of capital, including as a result of any of the circumstances described above, the Group may suffer a loss of confidence in the market with the result that access to liquidity and funding may become constrained or more expensive or may result in the Group being subject to regulatory interventions and sanctions. The Group’s regulators may also request that the Group carry out certain capital management actions or, in an extreme scenario, this may also trigger the implementation of its recovery plans. Such actions may, in turn, affect, among other things, the Group’s product offering, ability to operate its businesses, comply with its regulatory obligations, pursue its transformation programme and current strategies, resume dividend payments on its ordinary shares, maintain discretionary payments on capital instruments and pursue strategic opportunities, affecting the underlying profitability of the Group and future growth potential.
The Group’s funding may also be impacted at the Group entity level as a result of ongoing restructuring efforts and strategy planning, including in response to implementation of the UK ringfencing regime, planning around Brexit and the implementation of the Alternative Remedies Package, amongst others. For example, where the Group’s funding strategy depends on intragroup funding arrangements between Group entities, as a result of the implementation of the UK ring-fencing regime, such arrangements will be limited and may no longer be permitted if they are provided between RFB and entities outside the RFB and, as a result, the cost of funding may increase for certain Group entities, which will be required to manage their own funding and liquidity strategy.
As a result of these and other restructuring changes that could result in the Group’s need to manage funding and liquidity at an individual entity level, the Group may be required to maintain higher levels of funding and liquidity than would otherwise be the case.
The Group relies on retail and wholesale deposits to meet a considerable portion of its funding. 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 repatriation of deposits by foreign wholesale depositors, which could result in a significant outflow of deposits within a short period of time.
An inability to grow, or any material decrease in, the Group’s deposits could, particularly if accompanied by one of the other factors described above, have a material adverse impact on the Group’s ability to satisfy its liquidity needs. Increases in the cost of retail deposit funding may impact the Group’s margins and profitability.
The NSFR would be expressed as a percentage and set at a minimum level of 100%, which indicates that an institution holds sufficient stable funding to meet its funding needs during a oneyear period under both normal and stressed conditions. If an institution’s NSFR were to fall below the 100% level, the institution would be required to take the measures laid down in the CRD IV Regulation for a timely restoration to the minimum level. Competent authorities would assess the reasons for noncompliance with the NSFR requirement before deciding on any potential supervisory measures. These proposals are currently being considered and negotiated among the European Commission, the European Parliament and the European Council and, in light of Brexit, there is considerable uncertainty as to the extent to which such rules will apply to the Group.
If the Group is unable to raise funds through deposits or in the capital markets on acceptable terms or at all, its liquidity position could be adversely affected and it might be unable to meet deposit withdrawals on demand or at their contractual maturity, to repay borrowings as they mature, to meet its obligations under committed financing facilities, to comply with regulatory funding requirements, to undertake certain capital and/or debt management activities, or to fund new loans, investments and businesses. The Group may need to liquidate unencumbered assets to meet its liabilities, including disposals of assets not previously identified for disposal to reduce its funding commitments. In a time of reduced liquidity, the Group may be unable to sell some of its assets, or may need to sell assets at depressed prices, which in either case could have a material adverse effect on the Group’s financial condition and results of operations.
Failure by the Group to comply with regulatory capital, funding, liquidity and leverage requirements may result in intervention by its regulators and loss of investor confidence, and may have a material adverse effect on its results of operations, financial condition and reputation and may result in distribution restrictions and adversely impact existing shareholders. The Group is subject to extensive regulatory supervision in relation to the levels and quality of capital it is required to hold in connection with its business, including as a result of the transposition of the Basel Committee on Banking Supervision’s regulatory capital framework (Basel III) in Europe by a Directive and Regulation (collectively known as CRD IV).
In addition, the Group is currently identified as a global systemically important bank (G-SIB) by FSB and is therefore subject to more intensive oversight and supervision by its regulators as well as additional capital requirements, although the Group belongs to the last ‘bucket’ of the FSB G-SIB list and is therefore subject to the lowest level of additional loss-absorbing capacity requirements.
The G-SIB Buffer is currently set at 1.0% for the Group (from 1 January 2017), and is being phased in over the period to 1 January 2019. The systemic risk buffer will be applicable from 1 January 2019. The Bank of England’s Financial Policy Committee (the FPC) was responsible for setting the framework for the systemic risk buffer and the PRA adopted in December 2016 a final statement of policy implementing the FPC’s framework. In early 2019, the PRA is expected to determine which institutions the systemic risk buffer should apply to, and if so, how large the buffer should be up to a maximum of 3% of a firm’s risk-weighted assets. The systemic risk buffer will apply to ring-fenced entities only and not all entities within a banking group. The systemic risk buffer is part of the UK framework for identifying and setting higher capital buffers for domestic systemically important banks (D-SIBs), which are groups that, upon distress or failure, could have an important impact on their domestic financial systems.
The PRA has also introduced a firm-specific the PRA buffer, which is a forward-looking requirement set annually and based on various factors including firm-specific stress test results and is to be met with CET1 capital (in addition to any CET1 capital used to meet any Pillar 1 or Pillar 2A requirements). Where appropriate, the PRA may require an increase in an institution’s PRA buffer to reflect additional capital required to be held to mitigate the risk of additional losses that could be incurred as a result of risk management and governance weaknesses, including with respect to the effectiveness of the internal stress testing framework and control environment. UK banks are required to meet the higher of the combined buffer requirement or PRA buffer requirement. The FPC and PRA have expressed concerns around potential systemic risk associated with recent increases in UK consumer lending and the impact of consumer credit losses on banks’ resilience in a stress scenario, which the PRA has indicated that it will consider when setting capital buffers for individual banks.
Most of the capital requirements which apply or will apply to the Group will need to be met in whole or in part with CET1 capital. CET1 capital broadly comprises retained earnings and equity instruments, including ordinary shares. As a result, the Group’s ability meet applicable CET1 capital requirements is dependent on organic generation of CET1 through sustained profitability and/or the Group’s ability to issue ordinary shares, and there is no guarantee that the Group may be able to generate CET1 capital through either of these alternatives.
The revised Basel III standards will take effect from 1 January 2022 and will be phased in over five years. Although the revised Basel III standards must be implemented through legislation in the EU and UK, and precise estimates of their impact would be premature at this time, the revised standards may result in higher levels of risk-weighted assets and therefore higher levels of capital, and in particular CET1 capital, required to be held by the Group, under Pillar 1 requirements. Such requirements would be separate from any further capital overlays required to be held as part of the PRA’s determination of the Group’s Pillar 2A or PRA buffer requirements with respect to such exposures.
This may also result in write-down or the conversion into equity of certain regulatory capital instruments issued by the Group or the issue of additional equity by the Group, each of which could result in the dilution of the Group’s existing shareholders. A breach of the Group’s applicable capital or leverage requirements may also trigger the application of the Group’s recovery plan to remediate a deficient capital position.
Failure by the Group to comply with its capital requirements or to maintain sufficient distributable reserves may result in the application of restrictions on its ability to make discretionary distributions, including the payment of dividends to its ordinary shareholders and coupons on certain capital instruments. In accordance with the provisions of CRD IV, a minimum level of capital adequacy is required to be met by the Group in order for it to be entitled to make certain discretionary payments.
The Group may be required to recognise further impairments in the future if the outlook for its subsidiaries were to worsen. Whilst this level of distributable profits does not impact upon RBSG’s ability to pay coupons on existing securities, the Group implemented a capital reorganisation in 2017 in order to increase RBSG’s distributable reserves by approximately £30 billion, providing greater flexibility for potential future distributions and preference share redemptions (if any).
Failure by the Group to meet the combined buffer requirement or retain sufficient distributable reserves or distributable items as a result of reduced profitability or losses, or changes in regulation or taxes adversely impacting distributable reserves or distributable items, may therefore result in limitations on the Group’s ability to make discretionary distributions which may negatively impact the Group’s shareholders, holders of additional Tier 1 instruments, staff receiving variable compensation (such as bonuses) and other stakeholders and impact its market valuation and investors’ and analysts’ perception of its financial soundness.
Risk factors continued The Alternative Remedies Package replaced the existing requirement to divest the business previously described as Williams & Glyn by 31 December 2017. The Alternative Remedies Package focuses on the following two remedies to promote competition in the market for banking services to small and medium-sized enterprises (‘SMEs’) in the UK: (i) a £425 million capability and innovation fund that will grant funding to a range of eligible competitors in the UK banking and financial technology sectors; and (ii) a £275 million incentivised switching scheme which will provide funding for eligible bodies to help them incentivise SME customers of the business previously described as Williams & Glyn to switch their primary accounts and loans from the Group paid in the form of ‘dowries’ to business current accounts at the receiving bank. The Group has also agreed to set aside up to a further £75 million in funding to cover certain costs customers may incur as a result of switching under the incentivised switching scheme. In addition, under the terms of the Alternative Remedies Package, should the uptake within the incentivised switching scheme not be sufficient, RBSG may be required to make a further contribution, capped at £50 million.
As a direct consequence of the incentivised switching scheme, 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 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 also 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 result in reputational and financial exposure for the Group and impact customer service quality for RBS’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 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 or customer confidence, any of which could have a material adverse impact on the Group. Delays in execution may also impact the Group’s ability to carry out its transformation programme, including the implementation of cost saving initiatives and mandatory regulatory requirements. Such risks will increase in line with any delays.
Risk factors continued The Bank of England is responsible for setting the MREL requirements for each UK bank, building society and certain investment firms in consultation with the PRA and the FCA, and such requirement will be set depending on the resolution strategy of the financial institution. In its final rules, the Bank of England has set out a staggered compliance timeline for UK banks, including with respect to those requirements applicable to G-SIBs (including the Group).
Under the revised timeline, G-SIBs will be expected to (i) meet the minimum requirements set out in the FSB’s TLAC term sheet from 1 January 2019 (i.e. the higher of 16% of risk-weighted assets or 6% of leverage exposures), and (ii) meet the full MREL requirements to be phased in from 1 January 2020, with the full requirements applicable from 2 January 2022 (i.e. for G-SIBs two times Pillar 1 plus Pillar 2A or the higher of two times the applicable leverage ratio requirement or 6.75% of leverage exposures). MREL requirements are expected to be set on consolidated, sub-consolidated and individual bases, and are in addition to regulatory capital requirements (so that there can be no double counting of instruments qualifying for capital requirements).
For institutions, including the Group, for which bail-in is the required resolution strategy and which are structured to permit single point of entry resolution due to their size and systemic importance, the Bank of England has indicated that in order to qualify as MREL, eligible liabilities must be issued by the resolution entity (i.e. the holding company for the Group) and be structurally subordinated to operating and excluded liabilities (which include insured deposits, short-term debt, derivatives, structured notes and tax liabilities). Under the single point of entry (SPE) resolution model that applies to the Group, losses that crystallise in the operating companies are passed up the chain to RBSG through the write down of the holding company’s investments in the equity and debt of its operating companies. The probability of the external MREL investors being bailed-in will depend on the Group’s overall going-concern capital resources, the extent of any losses in the operating companies, and the extent to which those losses are passed up to the investing entity (recognising that some operating company liabilities, including obligations to pension schemes, are protected from bail-in).
In this way, MREL resources will be ‘structurally subordinated’ to senior liabilities of operating companies, allowing losses from operating companies to be transferred to the holding company and - if necessary - for resolution to occur at the holding company level, without placing the operating companies into a resolution process.
The Bank of England proposes to set internal MREL requirements above capital requirements for each ‘material subsidiary’ of a banking group. The Bank of England will formally determine which entities within the group represent material subsidiaries, with reference to indicative criteria including such subsidiary’s contribution to the Group’s risk-weighted assets and operating income. It will also set the internal MREL requirement, calibrated to be between 75% and 90% of the external MREL requirement that would otherwise apply to a material subsidiary were it a resolution entity in its own right. Such requirements must be met with internal MREL resources which are subordinated to the operating liabilities of the material subsidiary issuing them and must be capable of being written down or converted to equity via a contractual trigger. These liabilities, issued to other group entities (typically the issuing entity’s immediate parent), must be priced on an arm’s-length basis. The impact of these requirements on the Group, the cost of servicing these liabilities and the implications for the Group’s funding plans cannot be assessed with certainty until the Bank of England’s proposed internal MREL policy is finalised and final rules are published.
Risk factors continued The Group’s businesses and performance can be negatively affected by actual or perceived economic conditions in the UK and globally and other global risks, including risks arising out of geopolitical events, and political developments and the Group will be increasingly impacted by developments in the UK as its operations become increasingly concentrated in the UK. Actual or perceived difficult global economic conditions can create challenging economic and market conditions and a difficult operating environment for the Group’s businesses and its customers and counterparties.
The outlook for the global economy over the medium-term remains uncertain due to a number of factors including: political instability, an extended period of low inflation and low interest rates, although monetary policy has begun the process of normalisation in some countries. The normalisation of monetary policy in the USA may affect some emerging market economies which may raise their domestic interest rates in order to avoid capital outflows, with negative effects on growth and trade. Such conditions could be worsened by a number of factors including political uncertainty or macro-economic deterioration in the Eurozone or the US, increased instability in the global financial system and concerns relating to further financial shocks or contagion, volatility in the value of the pound sterling, new or extended economic sanctions, volatility in commodity prices or concerns regarding sovereign debt. In particular, concerns relating to emerging markets, including lower economic growth or recession, concerns relating to the Chinese economy and financial markets, reduced global trade in emerging market economies to which the Group is exposed or increased financing needs as existing debt matures, may give rise to further instability and financial market volatility.
Any of the above developments could impact the Group directly by resulting in credit losses and indirectly by further impacting global economic growth and financial markets.
Provisions held on loans in default have decreased in recent years due to asset sales and the portfolio run-down in Ulster Bank Ireland DAC and the NatWest Markets franchise’s legacy portfolios. If the risk profile of these loans were to increase, including as a result of a degradation of economic or market conditions, this could result in an increase in the cost of risk and the Group may be required to make additional provisions, which in turn would reduce earnings and impact the Group’s profitability.
In addition, as the Group continues to implement its strategy and further reduces its scale and global footprint, the Group’s relative exposure to the UK and certain sectors and asset classes in the UK will continue to increase as its business becomes more concentrated in the UK as a result of the reduction in the number of jurisdictions outside of the UK in which it operates. The level of UK household indebtedness remains high and the ability of some households to service their debts could be challenged by a period of higher unemployment. Highly indebted households are particularly vulnerable to shocks, such as falls in incomes or increases in interest rates, which threaten their ability to service their debts.
Risk factors continued The senior unsecured long-term and short-term credit ratings of RBSG and RBS plc are investment grade by Moody’s, S&P and Fitch. The outlook for RBSG is currently stable for S&P, Fitch and Moody’s and the outlook for RBS plc is currently stable for S&P and Fitch and under review for downgrade for Moody’s. This outlook is consistent with previous statements made by Moody’s that the implementation of the ring-fencing regime is likely to lead to downgrades in the ratings of RBS plc.
Rating agencies regularly review the RBSG and Group entity credit ratings and their ratings of long-term debt are based on a number of factors, including the Group’s financial strength as well as factors not within the Group’s control, such as political developments and conditions affecting the financial services industry generally.
In particular, the rating agencies may further review the RBSG and Group entity ratings as a result of the implementation of the UK ring-fencing regime, pension and litigation/regulatory investigation risk, including potential fines relating to investigations relating to legacy conduct issues, and other macroeconomic and political developments, including in light of the outcome of the negotiations relating to the form and timing of the UK’s exit from the EU.
Any reductions in the long-term or short-term credit ratings of RBSG or of certain of its subsidiaries (particularly RBS plc), including downgrades below investment grade, could adversely affect the Group’s issuance capacity in the financial markets, increase its funding and borrowing costs, require the Group to replace funding lost due to the downgrade, which may include the loss of customer deposits and may limit the Group’s access to capital and money markets and trigger additional collateral or other requirements in derivatives contracts and other secured funding arrangements or the need to amend such arrangements, limit the range of counterparties willing to enter into transactions with the Group and its subsidiaries and adversely affect its competitive position, all of which could have a material adverse impact on the Group’s earnings, cash flow and financial condition.
As discussed above, the success of the implementation of the UK ring-fencing regime and the restructuring of the Group’s NatWest Markets franchise, is in part dependent upon the relevant banking entities obtaining a sustainable credit rating and being able to satisfy their funding needs.
A failure to obtain such a rating, or any subsequent downgrades may threaten the ability of the NatWest Markets franchise or other entities outside of the RFB to satisfy their funding needs and to meet prudential capital requirements. At 31 December 2017, a simultaneous one-notch long-term and associated shortterm downgrade in the credit ratings of RBSG and RBS plc by the three main ratings agencies would have required the Group to post estimated additional collateral of £1.4 billion, without taking account of mitigating action by management. Individual credit ratings of RBSG, RBS plc, RBS N.V., RBS International, RBS Securities Inc., National Westminster Bank Plc, Ulster Bank Ltd, Ulster Bank Ireland DAC and Adam & Company PLC are also important to the Group when competing in certain markets such as corporate deposits and over-the-counter derivatives.
Risk factors continued Continued low interest rates have significantly affected and will continue to affect the Group’s business and results of operations. A continued period of low interest rates, and yield curves and spreads may affect net interest income, the effect of which may be heightened during periods of liquidity stress. Interest rate and foreign exchange risks, discussed below, are significant for the Group. Monetary policy has been highly 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 very pronounced fiscal tightening and balance sheet repair. In the UK, the Bank of England lowered interest rates to 0.25% in August 2016 and raised them to 0.5% in November 2017.
However, there remains considerable uncertainty as to whether or when the Bank of England and other central banks will further increase interest rates. While the ECB has been conducting a quantitative easing programme since January 2015 designed to improve confidence in the Eurozone and encourage more private bank lending, there remains considerable uncertainty as to whether such measures have been or will be sufficient or successful and the extension of this programme until the end of September 2018 (or beyond) may put additional pressure on margins. Continued sustained low or negative interest rates or any divergences in monetary policy approach between the Bank of England and other major central banks could put further pressure on the Group’s interest margins and adversely affect the Group’s profitability and prospects.
A continued period of low interest rates and yield curves and spreads may affect the interest rate margin realised between lending and borrowing costs, the effect of which may be heightened during periods of liquidity stress.
Conversely while increases in interest rates may support Group income, sharp increases in interest rates could lead to generally weaker than expected growth, or even contracting GDP, reduced business confidence, higher levels of unemployment or underemployment, adverse changes to levels of inflation, potentially higher interest rates and falling property prices in the markets in which the Group operates. In turn, this could cause stress in the loan portfolio of the Group, particularly in relation to non-investment grade lending or real estate loans and consequently to an increase in delinquency rates and default rates among customers, leading to the possibility of the Group incurring higher impairment charges. Similar risks result from the exceptionally low levels of inflation in developed economies, which in Europe particularly could deteriorate into sustained deflation if policy measures prove ineffective. Reduced monetary stimulus and the actions and commercial soundness of other financial institutions have the potential to impact market liquidity.
The Group’s earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions. The Group’s businesses and performance are affected by financial market conditions. The performance and volatility of financial markets affect bond and equity prices and have caused, and may in the future cause, changes in the value of the Group’s investment and trading portfolios.
Financial markets have recently experienced and may in the near term experience significant volatility, including as a result of concerns about Brexit, political and financial developments in the US and in Europe, including as a result of general elections, geopolitical developments and developments relating to trade agreements volatility and instability in the Chinese and global stock markets, expectations relating to or actions taken by central banks with respect to monetary policy, and weakening fundamentals of the Chinese economy, resulting in further shortterm changes in the valuation of certain of the Group’s assets. Uncertainty about potential fines for past misconduct and concerns about the longer-term viability of business models have also weighed heavily on the valuations of some financial institutions in Europe and in the UK, including the Group.
Any further deterioration in economic and financial market conditions or weak economic growth could require the Group to recognise further significant write-downs and realise increased impairment charges or goodwill impairments, all of which may have a material adverse effect on its financial condition, results of operations and capital ratios. As part of its transformation programme, the Group is executing the run-down or disposal of a number of businesses, assets and portfolios.
Valuations in future periods reflecting, among other things, the then-prevailing market conditions and changes in the credit ratings of certain of the Group’s assets may result in significant changes in the fair values of the Group’s exposures, such as credit market exposures, and the value ultimately realised by the Group may be materially different from the current or estimated fair value. As part of its ongoing derivatives operations, the Group also faces significant basis, volatility and correlation risks, the occurrence of which are also impacted by the factors noted above.
Such risks are currently exacerbated by Brexit and the unprecedented degree of uncertainty as to the respective legal and regulatory frameworks in which the Group and its subsidiaries will operate when the UK is no longer a member of the EU. For example, current proposed changes to the European prudential regulatory framework for banks and investment banks may result in additional prudential or structural requirements being imposed on financial institutions based outside the EU wishing to provide financial services within the EU (which may apply to the Group once the UK has formally exited the EU). 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.’. In addition, the Group and its counterparties may no longer be able to rely on the European passporting framework for financial services and could be required to apply for authorisation in multiple European jurisdictions, the costs, timing and viability of which is uncertain.
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:  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 (and taking into account the Group’s new legal structure following the implementation of the UK ring-fencing regime), including amendments to the rules relating to the calculation of riskweighted assets and reliance on internal models and credit ratings as well as rules affecting the eligibility of deferred tax assets;  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, BRRD, MREL or by the FSB’s recommendations on TLAC;  new or amended regulations or taxes that reduce profits attributable to shareholders which may diminish, or restrict, the accumulation of the distributable reserves or distributable items necessary to make distributions or coupon payments or limit the circumstances in which such distributions may be made or the extent thereof;  the monetary, fiscal, interest rate and other policies of central banks and other governmental or regulatory bodies;  further investigations, proceedings or fines either against the Group in isolation or together with other large financial institutions with respect to market conduct wrongdoing;  the imposition of government-imposed requirements and/or related fines and sanctions with respect to lending to the UK SME market and larger commercial and corporate entities;  increased regulatory scrutiny with respect to mortgage lending, including through the implementation of the FCA’s UK mortgages market study and other initiatives led by the Bank of England or European regulators;  concerns expressed by the FPC and PRA around potential systemic risk associated with recent increases in UK consumer lending and the impact of consumer credit losses on banks’ resilience in a stress scenario, which the PRA has indicated that it will consider when setting capital buffers for individual banks;  additional rules and regulatory initiatives and review relating to customer protection, including the FCA’s Treating Customers Fairly regime and increased focus by regulators on how institutions conduct business, particularly with regard to the delivery of fair outcomes for customers and orderly/transparent markets;  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 and regulations relating to, and enforcement of, anticorruption, anti-bribery, anti-money laundering, antiterrorism, sanctions, anti-tax evasion or other similar regimes;  investigations into facilitation of tax evasion or avoidance or the creation of new civil or criminal offences relating thereto;  rules relating to foreign ownership, expropriation, nationalisation and confiscation of assets;
Risk factors continued  changes to financial reporting standards (including accounting standards or guidance) and guidance or the timing of their implementation;  changes to risk aggregation and reporting standards;  changes to corporate governance requirements, senior manager responsibility, corporate structures and conduct of business rules;  competition reviews and investigations relating to the retail banking sector in the UK, including with respect to SME banking and PCAs;  financial market infrastructure reforms establishing new rules applying to investment services, short selling, market abuse, derivatives markets and investment funds, including the European Market Infrastructure Regulation and the Markets in Financial Instruments Directive and Regulation in the EU and the Dodd Frank Wall Street Reform Consumer Protection Act of 2010 in the US;  increased regulatory scrutiny with respect to UK payment systems by the Payments Systems Regulator and the FCA, including in relation to banks’ policies and procedures for handling push payment scams;  increased attention to 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, including the EU General Data Protection Regulation (‘GDPR’);  restrictions on proprietary trading and similar activities within a commercial bank and/or a group;  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, 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;  the regulation or endorsement of credit ratings used in the EU (whether issued by agencies in European member states or in other countries, such as the US);  the Markets in Financial Instruments Directive (‘MiFID’) regulating the provision of ‘investment services and activities’ in relation to a range of customer-related areas and the revised directive (‘MiFID II’) and new regulation (Markets in Financial Instruments Regulation or ‘MiFIR’) replacing and changing MiFID to include expanded supervisory powers that include the ability to ban specific products, services and practices;  the European Commission’s proposal to impose a requirement for any bank established outside the EU, which has an asset base of a certain size and has two or more institutions within the EU, to establish a single intermediate parent undertaking (‘IPU’) in the European Union, under which all EU entities within that group would operate; and
Failure of these models to accurately reflect changes in the environment in which the Group operates or to be updated in line with the Group’s business model or operations, or the failure to properly input any such changes could have an adverse impact on the modelled results or could fail to accurately capture the Group’s risk exposure or the risk profile of the Group’s financial instruments or result in the Group being required to hold additional capital as a function of the PRA buffer. For example, as the Group implements its transformation programme, including the restructuring and funding of its NatWest Markets franchise and the implementation of the UK ring-fencing regime, any impacted models would need to be correctly identified and adapted in line with the implementation process. The Group also uses valuation models that rely on market data inputs. If incorrect market data is input into a valuation model, it may result in incorrect valuations or valuations different to those which were predicted and used by the Group in its forecasts or decision making. Internal stress test models may also rely on different, less severe, assumptions or take into account different data points than those defined by the Group’s regulators.
Some of the analytical models used by the Group are predictive in nature. In addition, a number of internal models used by Group subsidiaries are designed, managed and analysed by the Group and may not appropriately capture the risks and exposures at subsidiary level. Some of the Group’s internal models are subject to periodic review by its regulators and, if found deficient, the Group may be required to make changes to such models or may be precluded from using any such models, which could result in an additional capital requirement which could have a material impact on the Group’s capital position.
Under the 2017 Bank of England stress tests, which were based on the balance sheet of the Group for the year ended 31 December 2016, the Group’s capital position before the impact of strategic management actions that the PRA judged could realistically be taken in the stress scenario remained below its CET1 capital hurdle rate and above its Tier 1 leverage hurdle rate. After the impact of strategic management actions the Group’s capital position would have remained above its CET1 capital hurdle rate, but the PRA judged that RBS did not meet its systemic reference point in this scenario. Given the steps RBS had already taken to strengthen its capital position during 2017, the PRA did not require the Group to submit a revised capital plan.
The Group’s operations entail inherent reputational risk, i.e., the risk of brand damage and/or financial loss due to a failure to meet stakeholders’ expectations of the Group’s conduct, performance and business profile. Brand damage can be detrimental to the business of the Group in a number of ways, including its ability to build or sustain business relationships with customers, low staff morale, regulatory censure or reduced access to, or an increase in the cost of, funding. In particular, negative public opinion resulting from the actual or perceived manner in which the Group conducts or modifies its business activities and operations, including as a result of the transformation programme or other restructuring efforts, speculative or inaccurate media coverage, the Group’s financial performance, ongoing investigations and proceedings and the settlement of any such investigations and proceedings, IT failures or cyber-attacks resulting in the loss or publication of confidential customer data or other sensitive information, the level of direct and indirect government support, or the actual or perceived strength or practices in the banking and financial industry may adversely affect the Group’s ability to keep and attract customers and, in particular, corporate and retail depositors.
Modern technologies, in particular online social networks and other broadcast tools which facilitate communication with large audiences in short time frames and with minimal costs, may also significantly enhance and accelerate the impact of damaging information and allegations.
The accounting policies deemed critical to the Group’s results and financial position, based upon materiality and significant judgements and estimates, include goodwill, provisions for liabilities, deferred tax, loan impairment provisions, fair value of financial instruments, which are discussed in detail in ‘Critical accounting policies and key sources of estimation uncertainty’ on pages 259 to 261. IFRS Standards and Interpretations that have been issued by the International Accounting Standards Board (the IASB) but which have not yet been adopted by the Group are discussed in ‘Accounting developments’ on pages 261 to 263.
Risk factors continued Changes in accounting standards or guidance by accounting bodies or in the timing of their implementation, whether mandatory or as a result of recommended disclosure relating to the future implementation of such standards 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.
Risk management is also strongly related to the use and effectiveness of internal stress tests and models. See ‘The Group relies on valuation, capital and stress test models to conduct its business, assess its risk exposure and anticipate capital and funding requirements. Failure of these models to provide accurate results or accurately reflect changes in the micro-and macroeconomic environment in which the Group operates or findings of deficiencies by the Group’s regulators resulting in increased regulatory capital requirements could have a material adverse effect on the Group’s business, capital and results.’
Risk factors continued A failure by the Group to embed a strong risk culture across the organisation could adversely affect the Group’s ability to achieve its strategic objective. In response to weaknesses identified in previous years, the Group is currently seeking to embed a strong risk culture within the Group based on a robust risk appetite and governance framework. A key component of this approach is the three lines of defence model designed to identify, manage and mitigate risk across all levels of the organisation. This framework has been implemented and improvements continue and will continue to be made to clarify and improve the three lines of defence and internal risk responsibilities and resources, including in response to feedback from regulators. Notwithstanding the Group’s efforts, changing an organisation’s risk culture requires significant time, investment and leadership, and such efforts may not insulate the Group from future instances of misconduct. A failure by any of these three lines to carry out their responsibilities or to effectively embed this culture could have a material adverse effect on the Group through an inability to achieve its strategic objectives for its customers, employees and wider stakeholders.
As a result of the commercial and regulatory environment in which it operates, the Group may be unable to attract or retain senior management (including members of the board) and other skilled personnel of the appropriate qualification and competence. The Group may also suffer if it does not maintain good employee relations. The Group’s current and future success depend on its ability to attract, retain and remunerate highly skilled and qualified personnel, including senior management (which includes directors and other key employees), in a highly competitive labour market. This cannot be guaranteed, 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 place the Group at a competitive disadvantage. In addition, the market for skilled personnel is increasingly competitive, thereby raising the cost of hiring, training and retaining skilled personnel.
The Group’s evolving strategy has led to the departure of a large number of experienced and capable employees. The restructuring relating to the ongoing implementation of the Group’s transformation programme and related cost-reduction targets may cause experienced staff members to leave and prospective staff members not to join the Group. The lack of continuity of senior management and the loss of important personnel coordinating certain or several aspects of the Group’s restructuring could have an adverse impact on its implementation.
The failure to attract or retain a sufficient number of appropriately skilled personnel to manage the complex restructuring required to implement the Group’s strategy could prevent the Group from successfully maintaining its current standards of operation, implementing its strategy and meeting regulatory commitments. This could have a material adverse effect on the Group’s business, financial condition and results of operations.
HM Treasury (or UKFI on its behalf) may be able to exercise a significant degree of influence over the Group and any further offer or sale of its interests may affect the price of securities issued by the Group. On 6 August 2015, the UK Government made its first sale of RBSG ordinary shares since its original investment in 2009 and sold approximately 5.4% of its stake in RBSG. Following this initial sale, the UK Government exercised its conversion rights under the B Shares on 14 October 2015 which resulted in HM Treasury holding 72.88% of the ordinary share capital of RBSG.
Risk factors continued In addition, UKFI manages HM Treasury’s shareholder relationship with the Group 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 UKFI’s position as manager of this shareholding) means that HM Treasury or UKFI might be able to 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. The manner in which HM Treasury or UKFI 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. The Board has a duty to promote the success of the Group for the benefit of its members as a whole.
These reviews raised significant concerns about the effectiveness of competition in the retail banking sector. The CMA’s Retail Banking Market Investigation report sets out measures primarily intended to make it easier for consumers and businesses to compare PCA and SME bank products, increase the transparency of price comparison between banks and amend PCA overdraft charging. The CMA is working with HM Treasury and other regulators to implement these remedies which are likely to impose additional compliance requirements on the Group and could, in aggregate, adversely impact the Group’s competitive position, product offering and revenues.
The Group and its subsidiaries are subject to an evolving framework on recovery and resolution, the impact of which remains uncertain, and which may result in additional compliance challenges and costs. In the EU, the UK and the US, regulators have implemented or are in the process of implementing recovery and resolution regimes designed to prevent the failure of financial institutions and resolution tools to ensure the timely and orderly resolution of financial institutions without use of public funds.
Implementation of certain provisions of the BRRD remains subject to secondary rulemaking as well as a review by the European Parliament and the European Commission of certain topics mandated by the BRRD. In November 2016, as a result of this review, the European Commission published a package of proposals seeking to introduce certain amendments to CRD IV and the BRRD. These proposals are now subject to further discussions and negotiations among the European institutions and it is not possible to anticipate their final content. Further amendments to the BRRD or the implementing rules in the EU or the UK may also be necessary to ensure continued consistency with the FSB recommendations on key attributes of national resolution regimes and resolution planning for G-SIBs, including with respect to TLAC and MREL requirements.
The BRRD requires national resolution funds to raise ‘ex ante’ contributions on banks and investment firms in proportion to their liabilities and risk profiles and allow them to raise additional ‘ex post’ funding contributions in the event the ex-ante contributions do not cover the losses, costs or other expenses incurred by use of the resolution fund. Although receipts from the UK bank levy are currently being used to meet the ex-ante and ex post funding requirements, the Group may be required to make additional contributions in the future. In addition, Group entities in countries subject to the European banking union are required to pay supervisory fees towards the funding of the SSM as well as contributions to the single resolution fund.
The recovery and resolution regime implementing the BRRD in the UK places compliance and reporting obligations on the Group. These compliance and reporting obligations may result in increased costs, including as a result of the Group’s mandatory participation in resolution funds, and heightened compliance risks and the Group may not be in a position to comply with all such requirements within the prescribed deadlines or at all. In addition to the costs associated with the issuance of MREL-eligible debt securities and compliance with internal MREL requirements, further changes may be required for the Group to enhance its resolvability, in particular due to regulatory requirements relating to operational continuity and valuations capabilities in resolution.
The application of such rules to the Group requires the Group to restructure certain of its activities relating to the provision of services from one legal entity to another within the Group, may limit the Group’s ability to outsource certain functions and will result in increased costs resulting from the requirement to ensure the financial and operational resilience and independent governance of such critical services.
In August 2017, the Bank of England published a consultation paper setting out its preliminary views on the valuation capabilities that firms should have in place prior to resolution. The Bank of England has not yet published a final statement of policy in this area.
In addition, compliance by the Group with this recovery and resolution framework has required and is expected to continue to require significant work and engagement with the Group’s regulators, including in order for the Group to continue to submit to the PRA an annual recovery plan assessed as meeting regulatory requirements and to be assessed as resolvable by the Bank of England. The outcome of this regulatory dialogue may impact the Group’s operations or structure or otherwise result in increased costs, including as a result of the Bank of England’s power under section 3A of the Banking Act to direct institutions to address impediments to resolvability.
The Group may become subject to the application of stabilisation or resolution powers in certain significant stress situations, which may result in various actions being taken in relation to the Group and any securities of the Group, including the write-off, write-down or conversion of the Group’s securities. The Banking Act 2009, as amended to implement the BRRD (‘Banking Act’) confers substantial powers on relevant UK authorities designed to enable them to take a range of actions in relation to UK banks or investment firms and certain of their affiliates in the event a bank or investment firm in the same group is considered to be failing or likely to fail. Under the Banking Act, wide powers are granted to the Bank of England (as the relevant resolution authority), as appropriate as part of a special resolution regime (the ‘SRR’). These powers enable the Bank of England to implement resolution measures with respect to a UK bank or investment firm and certain of its affiliates (including, for example, RBSG) (each a ‘relevant entity’) in circumstances in which the relevant UK resolution authorities are satisfied that the resolution conditions are met. Under the applicable regulatory framework and pursuant to guidance issued by the Bank of England, governmental financial support, if any is provided, would only be used as a last resort measure where a serious threat to financial stability cannot be avoided by other measures (such as the stabilisation options described below, including the UK bail-in power) and subject to the limitations set out in the Banking Act.
In the event that the Bank of England seeks to exercise its powers in relation to a UK banking group company (such as RBSG), the relevant UK resolution authority has to be satisfied that (A) the conditions set out in (i) to (iv) above are met in respect of a UK bank or investment firm in the same banking group (or, in respect of an EEA or third country credit institution or investment firm in the same banking group, the relevant EEA or third country resolution authority is satisfied that the conditions for resolution applicable in its jurisdiction are met) and (B) certain criteria are met, such as the exercise of the powers in relation to such UK banking group company being necessary having regard to public interest considerations. The use of different stabilisation powers is also subject to further ‘specific conditions’ that vary according to the relevant stabilisation power being used. Although the SRR sets out the pre-conditions for determining whether an institution is failing or likely to fail, it is uncertain how the relevant UK resolution authority would assess such conditions in any particular pre-insolvency scenario affecting RBSG and/or other members of the Group and in deciding whether to exercise a resolution power. There has been no application of the SRR powers in the UK to a large financial institution, such as RBSG, to date, which could provide an indication of the relevant UK resolution authority’s approach to the exercise of the resolution powers, and even if such examples existed, they may not be indicative of how such powers would be applied to RBSG. Therefore, holders of shares and other securities issued by the Group may not be able to anticipate a potential exercise of any such powers.
In addition, the Bank of England may use the bail-in tool to, among other things, replace or substitute the issuer as obligor in respect of debt instruments, modify the terms of debt instruments (including altering the maturity (if any) and/or the amount of interest payable and/or imposing a temporary suspension on payments) and discontinue the listing and admission to trading of financial instruments. The exercise of the bail-in tool will be determined by the Bank of England which will have discretion to determine whether the institution has reached a point of nonviability or whether the conditions for resolution are met, by application of the relevant provisions of the Banking Act, and involves decisions being taken by the PRA and the Bank of England, in consultation with the FCA and HM Treasury. As a result, it will be difficult to predict when, if at all, the exercise of the bail-in power may occur.
If these powers were to be exercised (or there is an increased risk of exercise) in respect of the Group or any entity within the Group, such exercise could result in a material adverse effect on the rights or interests of shareholders which would likely be extinguished or very heavily diluted.
Risk factors continued Holders of debt securities (which may include holders of senior unsecured debt), may see the conversion of part (or all) of their claims into equity or written down in part or written off entirely. In accordance with the rules of the Special Resolution Regime, the losses imposed on holders of equity and debt instruments through the exercise of bail-in powers would be subject to the ‘no creditor worse off’ safeguard, which requires losses (net of any compensation received) not to exceed those which would be realised in an insolvency counterfactual.
Although the above represents the risks associated with the UK bail-in power currently in force in the UK and applicable to the Group’s securities, changes to the scope of, or conditions for the exercise of the UK bail-in power may be introduced as a result of further political or regulatory developments. For example, the application of these powers to internally-issued MREL instruments, issued by one group entity and held solely by its parent entity, is currently being consulted on by the Bank of England. In addition, further political, legal or strategic developments may lead to structural changes to the Group, including at the holding company level. Notwithstanding any such changes, the Group expects that its securities would remain subject to the exercise of a form of bail-in power, either pursuant to the provisions of the Banking Act, the BRRD or otherwise.
In the UK and in other jurisdictions, the Group is responsible for contributing to compensation schemes in respect of banks and other authorised financial services firms that are unable to meet their obligations to customers. In the UK, the Financial Services Compensation Scheme (FSCS) was established under the Financial Services and Markets Act 2000 and is the UK’s statutory fund of last resort for customers of authorised financial services firms. The FSCS pays compensation if a firm is unable to meet its obligations.
To the extent that other jurisdictions where the Group operates have introduced or plan to introduce similar compensation, contributory or reimbursement schemes, the Group may make further provisions and may incur additional costs and liabilities, which may have an adverse impact on its financial condition and results of operations.
The Group intends to execute the run-down and/or the sale of certain portfolios and assets. Failure by the Group to do so on commercially favourable terms could have a material adverse effect on the Group’s operations, operating results, financial position and reputation. The Group’s ability to execute the run-down and/or sale of certain portfolios and assets and the price achieved for such disposals will be dependent on prevailing economic and market conditions.
In addition, the Group may be exposed to certain risks, including risks arising out of ongoing liabilities and obligations, breaches of covenants, representations and warranties, indemnity claims, transitional services arrangements and redundancy or other transaction-related costs, and counterparty risk in respect of buyers of assets being sold.
The Group’s results could be adversely affected in the event of goodwill impairment. The Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Acquired goodwill is recognised initially at cost and subsequently at cost less any accumulated impairment losses. As required by IFRS Standards, the Group tests goodwill for impairment annually, or more frequently when events or circumstances indicate that it might be impaired.
At 31 December 2017, the Group carried goodwill of £5.6 billion on its balance sheet. The value in use and fair value of the Group’s cash-generating units are affected by market conditions and the performance of the economies in which the Group operates.
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 Standards, the Group has recognised deferred tax assets on losses available to relieve future profits from tax only to the extent it is probable that they will be recovered. The deferred tax assets are quantified on the basis of current tax legislation and accounting standards and are subject to change in respect of the future rates of tax or the rules for computing taxable profits and offsetting allowable losses.
Failure to generate sufficient future taxable profits or further changes in tax legislation (including rates of tax) or accounting standards may reduce the recoverable amount of the recognised deferred tax assets. Changes to the treatment of deferred tax assets may impact the Group’s capital, for example by reducing further the Group’s ability to recognise deferred tax assets. The implementation of the rules relating to the UK ring-fencing regime and the resulting restructuring of the Group may further restrict the Group’s ability to recognise tax deferred tax assets in respect of brought forward losses.
Approach to the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD) recommendations In 2016, the Financial Stability Board (FSB) launched an industryled initiative, the Task Force on Climate-related Financial Disclosure, to review how to best manage the threat climate change presents to the stability of the global financial system. The mandate was to develop recommendations for voluntary, consistent climate-related risk to provide information to stakeholders. The Task Force considered the physical, liability and transition risks associated with climate change.
At a franchise level, climate-related opportunities in relation to supporting customers through the low carbon transition are managed and assessed through the business and products approvals processes, with strategy and co-ordination undertaken by the cross-bank Sustainable Energy Forum (SEF). This forum brings together senior leaders from across RBS who support customers from SMEs to multinationals to achieve their sustainable energy ambitions.
The impact of climate-related issues on the risk profile of RBS’s customers may also be considered as part of the periodic sector reviews and deep dives carried out to monitor and assess different types of risk across the portfolios. Further climate scenario analysis will be undertaken in 2018.
RBS has had a policy in place for ESE risks since 2011. The policy includes sectors sensitive to climate-related risk, such as Forestry, Fisheries and Agriculture, and prohibits lending activity to some industry types proven to have a material adverse environmental impact.
Metrics and Targets RBS uses a range of metrics and targets to assess our climate related risks and opportunities. These include: climate impacts from our operations (refer to page 30 of the Strategic Report); exposure to high carbon sectors and lending to support sustainable energy sectors. For further information refer to the Sustainable Banking pages on rbs.com.
Shareholder enquiries Shareholdings in the company may be checked by visiting the Shareholder centre section of our website, www.rbs.com and clicking the Managing your shareholding tab. You will need the shareholder reference number printed on your share certificate or tax voucher to gain access to this information.
Should you wish to donate your shares to charity in this way you should 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
Report a scam If you suspect that you have been approached by fraudsters, or have any concerns about a potential scam, report this to the FCA by contacting their Consumer Helpline on 0800 111 6768 or by using their reporting form which can be found at www.fca.org.uk/consumers/report-scam-unauthorised-firm
In addition, there are other risks and uncertainties that could adversely affect our results, ability to implement our strategy, cause us to fail to meet our targets or the accuracy of forward-looking statements in this document. These include operational risks that are inherent to RBS’s business and will increase as a result of RBS’s significant restructuring and transformation initiatives being concurrently implemented; the potential negative impact on RBS’s business of global economic and financial market conditions and other global risks, including risks arising out of geopolitical events and political developments; the impact of a prolonged period of low interest rates or unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices, equity prices; basis, volatility and correlation risks; the extent of future write-downs and impairment charges caused by depressed asset valuations; deteriorations in borrower and counterparty credit quality; heightened regulatory and governmental scrutiny (including by competition authorities) and the increasingly regulated environment in which RBS operates as well as divergences in regulatory requirements in the jurisdictions in which RBS operates; the risks relating to RBS’s IT systems or a failure to protect itself and its customers against cyber threats, reputational risks; risks relating to increased pension liabilities and the impact of pension risk on RBS’s capital position, including on any requisite management buffer; risks relating to the failure to embed and maintain a robust conduct and risk culture across the organisation or if its risk management framework is ineffective; RBS’s ability to attract and retain qualified personnel; limitations on, or additional requirements imposed on, RBS’s activities as a result of HM Treasury’s investment in RBS; the value and effectiveness of any credit protection purchased by RBS; risks relating to the reliance on valuation, capital and stress test models and any inaccuracies resulting therefrom or failure to accurately reflect changes in the micro and macroeconomic environment in which RBS operates, risks relating to changes in applicable accounting policies or rules which may impact the preparation of RBS’s financial statements or adversely impact its capital position; the impact of the recovery and resolution framework and other prudential rules to which RBS is subject; the application of stabilisation or resolution powers in significant stress situations; contribution to relevant compensation schemes; the execution of the run-down and/or sale of certain portfolios and assets; the recoverability of deferred tax assets by the Group; and the success of RBS in managing the risks involved in the foregoing.
ABCP Asset-backed commercial paper ABS Asset-backed securities AFS Available-for-sale ALCo Asset and Liability Management Committee AQ Asset quality AT1 Additional Tier 1 BBA British Bankers’ Association BCBS Basel Committee on Banking Supervision BoE Bank of England BRC Board Risk Committee C&RA Conduct & Regulatory Affairs CCF Credit conversion factor CDO Collateralised debt obligation CDs Certificates of deposit CDS Credit default swap CEC Control Environment Certification CET1 Common equity tier 1 CLO Collateralised loan obligation CMBS Commercial mortgage-backed securities COREP CRR Common Reporting CPB Commercial & Private Banking CRD Capital Requirements Directive CRE Commercial real estate CRR Capital requirements regulation CVA Credit valuation adjustment DFV Designated as at fair value through profit or loss DVA Debit valuation adjustment EAD Exposure at default EBA European Banking Authority EC European Commission ECB European Central Bank ECL Expected credit losses EMEA Europe, the Middle East and Africa ERF Executive Risk Forum ESE Environment, Social and Ethical EU European Union FCA Financial Conduct Authority FI Financial institution FINREP FSA Financial Services Authority FSB Financial Stability Board FSCS Financial Services Compensation Scheme FTSE Financial Times Stock Exchange FVA Funding Valuation Adjustment FVTPL Fair value through profit or loss GDP Gross domestic product GSIB Global systemically important bank HFT Held-for-trading HMT HM Treasury HTM Held-to-maturity IAS International Accounting Standards IASB International Accounting Standards Board ICAAP Internal Capital Adequacy Assessment
In the Report and Accounts, unless specified otherwise, the terms ‘company’ and ‘RBSG’ mean The Royal Bank of Scotland Group plc; ‘RBS’, ‘RBS Group’ and the ‘Group’ mean the company and its subsidiaries; ‘the Royal Bank’ and ‘RBS plc’ mean The Royal Bank of Scotland plc; and ‘NatWest’ means National Westminster Bank Plc. The company publishes its financial statements in pounds sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions and thousands of millions of pounds sterling, respectively, and references to ‘pence’ represent pence in the United Kingdom (‘UK’). Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of dollars, respectively, and references to ‘cents’ represent cents in the US. The abbreviation ‘€’ represents the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively.
Assets under management - assets managed by RBS on behalf of clients.
Counterparty credit risk - the risk that a counterparty defaults before the maturity of a derivative or sale and repurchase contract. In contrast to non-counterparty credit risk, the exposure to counterparty credit risk varies by reference to a market factor (e.g. interest rate, exchange rate, asset price).
Credit enhancements - techniques that improve the credit standing of financial obligations; generally those issued by a structured entity in a securitisation. External credit enhancements include financial guarantees and letters of credit from third party providers. Internal enhancements include excess spread - the difference between the interest rate received on the underlying portfolio and the coupon on the issued securities; and overcollateralisation – at inception, the value of the underlying portfolio is greater than the securities issued.
Debt securities in issue - unsubordinated debt securities issued by RBS. They include commercial paper, certificates of deposit, bonds and medium-term notes.
Defined contribution plan/scheme - pension or other postretirement benefit plan where the employer's obligation is limited to its contributions to the fund.
Eurozone - the 19 European Union countries that have adopted the euro: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
Expected credit loss (ECL, an IFRS 9 accounting measure) – generally is the weighted average of credit losses; for collectively assessed portfolios it is the product of the exposure, probability of default at the reporting date and the lifetime loss given default. At initial recognition of a financial asset, an allowance is made for the 12 month expected credit loss, using the probability of default in the first 12 months only. On a significant increase in credit risk, the expected credit loss is increased to the lifetime probability of default. ECL is applied to exposures to all financial assets and contractual facilities whose performance is not recognised at fair value in the income statement.
Financial Services Compensation Scheme (FSCS) - the UK's statutory fund of last resort for customers of authorised financial services firms. It pays compensation if a firm is unable to meet its obligations. The FSCS funds compensation for customers by raising management expenses levies and compensation levies on the financial services industry.
Futures contract - a contract which provides for the future delivery (or acceptance of delivery) of some type of financial instrument or commodity under terms established at the outset. Futures differ from forward contracts in that they are standardised and traded on recognised exchanges and rarely result in actual delivery; most contracts are closed out prior to maturity by acquisition of an offsetting position.
Government Sponsored Enterprises (GSEs) - a group of financial services corporations created by the US Congress. Their function is to improve the efficiency of capital markets and to overcome statutory and other market imperfections which otherwise prevent funds from moving easily from suppliers of funds to areas of high loan demand. They include the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. Gross yield - the interest rate earned on average interest-earning assets i.e. interest income divided by average interest-earning assets.
L-SREP - An annual Liquidity Supervisory Review and Evaluation Process with the PRA, that involves a comprehensive review of the RBS ILAAP, liquidity policies and risk management framework.
Monoline insurers (monolines) - entities that specialise in providing credit protection against the notional and interest cash flows due to the holders of debt instruments in the event of default. This protection is typically in the form of derivatives such as credit default swaps.
Net interest income - the difference between interest receivable on financial assets classified as loans and receivables or available-for-sale and interest payable on financial liabilities carried at amortised cost.
Non-performing loans - loans classified as Risk elements in lending and potential problem loans. They have a 100% probability of default and have been assigned an AQ10 internal credit grade.
Past due - a financial asset such as a loan is past due when the counterparty has failed to make a payment when contractually due.
Regulatory capital - the amount of capital that RBS holds, determined in accordance with rules established by the PRA for the consolidated Group and by local regulators for individual Group companies.
Risk appetite - an expression of the maximum level of risk that RBS is prepared to accept to deliver its business objectives.
Risk asset ratio - total regulatory capital as a percentage of riskweighted assets.
Risk-weighted assets (RWAs) - assets adjusted for their associated risks using weightings established in accordance with the CRD IV as implemented by the PRA. Certain assets are not weighted but deducted from capital.
Tier 1 capital - a component of regulatory capital, comprising Common Equity Tier 1 and Additional Tier 1. Additional Tier 1 capital includes eligible non-common equity capital securities and any related share premium. Under Basel III, Tier 1 capital comprises Core Tier 1 capital plus other Tier 1 securities in issue, less certain regulatory deductions.
Total loss absorbing capacity (TLAC) - a Financial Stability Board requirement for global systemically important banks to have a sufficient amount of specific types of liabilities which can be used to absorb losses and recapitalise a bank in resolution. The implementation of the TLAC requirements is being discussed within local regulators.
US Federal Agencies - are independent bodies established by the US Government for specific purposes such as the management of natural resources, financial oversight or national security. A number of agencies, including, the Government National Mortgage Association, issue or guarantee publicly traded debt securities.
Letter from the Chairman of the Board Risk Committee 73 Report of the Board Risk Committee 74
Business review 127 Consolidated 250 Discontinued operations 298 Notes on the consolidated accounts 326 Parent company 336 Parent company notes 342
Consolidated balance sheet 246 Consolidated cash flow statement 250 Consolidated income statement 244 Consolidated statement of changes in equity 247 Consolidated statement of comprehensive income 245 Notes on the consolidated accounts 264
Compliance report 106 Governance at a glance 48 Risk governance 152 The Board and its committees 51
Capital and risk management 204 Notes on the consolidated accounts 292
Biographies 51 Interests in shares 97 Notes on consolidated accounts 331 Notice and termination provisions 88 Remuneration 86 Remuneration policy 85 Report of the directors 109
Headcount 266 Notes on the consolidated accounts 266 Report of the directors 111 Variable compensation 268
Accounting policies 255 Critical accounting policies 261 Notes on the consolidated accounts 276 Parent company notes 338
Goodwill Critical accounting policies 259 Notes on the consolidated accounts 295
Balance sheet 334 Cash flow statement 336 Income statement 338 Statement of changes in equity 335 Statement of comprehensive income 338 Notes 337
The Royal Bank of Scotland Group plc PO Box 1000, Gogarburn, Edinburgh EH12 1HQ Telephone: +44 (0)131 626 0000
Ulster Bank Limited 11-16 Donegall Square East, Belfast BT1 5UB, Northern Ireland