Notes: (1) The tables above relate to continuing businesses only; variable compensation relating to discontinued businesses in 2014 totalled £62 million (2013 - £40 million). (2) Cash payments to all employees are limited to £2,000. (3) Excludes other performance related compensation. (4) Reported operating profit excluding Citizens Financial Group before variable compensation expense and one-off and other items. 2013 also excludes the impact of the creation of RCR.
The Royal Bank of Scotland Group Pension Fund (the “Main scheme”)
operates under UK trust law and is managed and administered on behalf of its members in accordance with the terms of the trust deed, the scheme rules and UK legislation (principally the Pension Schemes Act 1993, the Pensions Act 1995 and the Pensions Act 2004). Under UK
legislation a defined benefit pension scheme is required to meet the statutory funding objective of having sufficient and appropriate assets to cover its liabilities. Pension fund trustees are required to: prepare a statement of funding principles; obtain regular actuarial valuations and reports; put in place a recovery plan addressing any funding shortfall; and send regular summary funding statements to members of the scheme.
The Board is responsible for operating the scheme in line with its formal rules and pensions law. It has a duty to act in the best interests of all scheme members, including pensioners and those who are no longer employed by the Group, but who still have benefits in the scheme.
Similar governance principles apply to the Group’s other pension schemes, although different legislative frameworks apply to the Group’s overseas schemes.
Group’s retirement benefit obligations, was closed to new entrants in 2006. Since 2009, pensionable salary increases in the Main scheme and certain other UK and Irish schemes have been limited to 2% per annum or CPI inflation if lower. Also, with effect from 1 October 2012, the normal pension age for future benefits was increased to 65 unless members elected to make a contribution to maintain a normal pension age of 60.
Interim valuations of the Group’s schemes under IAS 19 ‘Employee Benefits’ were prepared at 31 December with the support of independent actuaries, using the following assumptions: Principal actuarial assumptions (weighted average)
Note: (1) The discount rate and the expected return on plan assets for the Main scheme as at 31 December 2013 was 4.65%.
Cash exposure of equity futures (1.3) (7.7) (8.9) (1.6) (7.7) (8.4)
Equity and bond call options 7,382 846 48 4,102 108 63 963 94 —
Equity and bond put options 7,409 1 61 4,071 11 90 963 13 31
Swaps are part of the management of the inflation and interest rate sensitivity of the Main scheme liabilities. They have been executed at prevailing market rates and within standard market bid/offer spreads. The majority of swaps are with The Royal Bank of Scotland plc and National
Collateral is required on all swap transactions with those between the banks and the Main scheme on terms that do not allow the banks to rehypothecate. The banks had delivered £2,908 million of collateral at 31
Longevity at age 60 for future pensioners currently aged 40 (years)
Present value Present value Fair value of defined Net Fair value of defined Net of plan benefit pension of plan benefit pension assets obligation deficit assets obligation deficit £m £m £m £m £m £m
Currency translation and other adjustments — — — 1 14 13
Actuarial gains and losses due to changes in demographic assumptions — 224 224 — 238 238
Actuarial gains and losses due to changes in demographic assumptions — 401 401 — 491 491
Net assets of schemes in surplus (included in Prepayments, accrued income and other assets, Note 19) (295) (214) (144)
The defined benefit obligation is attributable to the different classes of scheme members in the following proportions (Main scheme): Following the legal separation of ABN AMRO Bank N.V. on 1 April 2010, ABN AMRO’s principal pension scheme in the Netherlands was transferred to the State of the Netherlands. At 31 December 2009, this scheme had fair value of plan assets of £8.3 billion and present value of defined benefit obligations of £8.3 billion. The principal actuarial assumptions at 31 December 2009 were: discount rate 5.25%; expected return on plan assets
Experience gains/(losses) on plan liabilities 3 102 (232) (208) (858) 18 176 (207) (200) (882)
Experience gains on plan assets 4,629 986 301 935 1,830 5,171 1,097 485 842 1,941
Actual return on pension schemes assets 5,766 1,997 1,329 1,966 2,779 6,485 2,270 1,696 2,065 3,170
Actual return on pension schemes assets - % 23.8% 8.9% 6.3% 10.3% 16.7% 22.8% 8.6% 6.8% 9.1% 11.4%
In May 2014, the triennial funding valuation of The Royal Bank of Scotland Group Pension Fund was agreed which showed that the value of the liabilities exceeded the value of assets by £5.6 billion at 31 March 2013, a ratio of 82%. To eliminate this deficit, RBS will pay annual contributions of £650 million from 2014 to 2016 and £450 million (indexed in line with inflation) from 2017 to 2023. These contributions are in addition to regular annual contributions of approximately £270 million in respect of the ongoing accrual of benefits as well as contributions to meet the expenses of running the scheme.
(Decrease)/increase (Decrease)/increase in pension cost in obligation in pension cost in obligation for year at 31 December for year at 31 December £m £m £m £m £m £m £m £m £m £m £m £m 0.25% increase in the discount rate (67) (66) (66) (1,466) (1,187) (1,199) (79) (80) (80) (1,695) (1,379) (1,392)
Pension costs and liabilities are calculated on the central assumptions and under the relevant sensitivity scenarios. The sensitivity to pension costs/liabilities is the difference between these calculations.
The sensitivity analysis presented above may not be representative of the actual change in the pension cost or defined benefit obligation as it is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
Group Audit Committee and are subject to strict controls to ensure the external auditor’s independence is unaffected by the provision of other services.
Group selects the supplier best placed to meet its requirements. The Group’s auditors are permitted to tender for such work in competition with other firms where the work is permissible under audit independence rules.
Fees payable to the auditor and its associates for other services to the Group - the audit of the company’s subsidiaries 24.2 22.1
Fees payable to the auditor and its associates in respect of audits of associated pension schemes 0.4 0.5
Notes: (1) Comprises fees of £0.9 million (2013 - £0.9 million) in relation to reviews of interim financial information, £2.5 million (2013 - £2.3 million) in respect of reports to the Group’s regulators in the UK and overseas, £0.3 million (2013 - £0.3 million) in respect of internal controls assurance and £1.1 million (2013 - £0.3 million) in relation to non-statutory audit opinions. (2) Comprises fees of £0.9 million (2013 - £0.8 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances undertaken by the Group, including securitisations and £0.8 million (2013 - nil) in respect of reporting accountant services in connection with disposals by the Group.
Reduction in the carrying value of deferred tax assets (1,472) (701) (394)
Losses in year where no deferred tax asset recognised (86) (879) (511)
- gain on sale of RBS Aviation Capital — — 26
Notes: (1) In recent years the UK Government has steadily reduced the rate of UK corporation tax, with the latest enacted rates standing at 21% with effect from 1 April 2014 and 20% with effect from 1 April 2015. The closing deferred tax assets and liabilities have been calculated in accordance with the rates enacted at the balance sheet date. (2) Prior year tax adjustments include releases of tax provisions in respect of structured transactions and adjustments to reflect submitted tax computations in the UK and overseas. In addition, a prior year tax credit of £151 million has been recognised in 2014 in respect of tax losses arising in the Belfast Branch of Ulster Bank Ireland Limited reflecting UK tax law changes and European Court of Justice decisions on the surrender of tax losses.
Notes: (1) Discretionary dividends on certain non-cumulative preference shares and discretionary distributions on certain innovative securities recommenced in May 2012. (2) Between 1 January 2015 and the date of approval of these accounts, dividends amounting to US$107 million and £0.4 million have been declared in respect of equity preference shares for payment 8 Ordinary dividends
The company did not pay an ordinary dividend in 2014, 2013 or 2012.
Diluted weighted average number of ordinary shares and equivalent B shares outstanding during the year 11,447 11,311 11,107
shares and 250% of the ordinary dividend rate multiplied by the number of B shares issued, less any dividends paid on the B shares and on ordinary shares issued on their conversion. When calculating earnings per share, IFRS requires profit or loss to be allocated to participating equity instruments as if all of the profit or loss for the period had been distributed.
such that it is no longer a participating share; it is only entitled to total dividends of £1.5 billion, subject to increases after 1 January 2016.
The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown separately.
trading or loss derivatives for-sale receivables maturity Amortised cost leases liabilities 2014 £m £m £m £m £m £m £m £m £m £m
Cash and balances at central banks — — — 74,872 — 74,872
trading or loss derivatives for-sale receivables Amortised cost leases liabilities 2013 £m £m £m £m £m £m £m £m £m
Cash and balances at central banks — — — 82,659 82,659
Cash and balances at central banks — — — 79,290 79,290
Gains/(losses) on financial assets/liabilities designated as at fair value through profit or loss
(4) Comprises bonds and medium term notes of £48,476 million (2013 - £63,959 million; 2012 - £88,723 million) and certificates of deposit and other commercial paper of £1,804 million (2013 - £3,860 million; 2012 - £5,869 million).
Effect of master Net amount after the effect netting and Cash Other financial of netting arrangements
Carrying Fair (losses)/ reclassification as a result of value value releases not occurred reclassification
Notes: (1) £12 million (2013 - £113 million; 2012 - £171 million) was taken to AFS reserves. (2) £155 million would have been taken to AFS reserves if reclassification had not occurred. (3) £1 million in 2013 and 2012 would have been taken to AFS reserves if reclassification had not occurred.
IPV takes place at least monthly, at month end date, for exposures in the regulatory trading book and at least quarterly for exposures in the regulatory banking book. Monthly meetings are held between the business and the support functions to discuss the results of the IPV and pricing reserves. The IPV control includes formalised reporting and escalation of any valuation differences in breach of established thresholds. The Pricing Unit determines IPV policy, monitors adherence to that policy and performs additional independent reviews of highly subjective valuation issues.
Valuation models are subject to a review process which requires different levels of model documentation, testing and review, depending on the complexity of the model and the size of RBS's exposure. A key element of the control environment for model use is a Modelled Product Review
RBS. This committee sets the policy for model documentation, testing and review, and prioritises models with significant exposure for review by the RBS Pricing Model Risk team. Potential valuation uncertainty is a key input in determining model review priorities at these meetings. The
Financial Controller, the Chief Accountant, and other senior members within finance and risk.
CIB Risk Committee. The CIB Valuation Committee submits a quarterly paper covering the key areas that are governed by them to the CIB Risk
Market risk metrics such as value-at-risk (VaR), Incremental Risk Charge and stressed value-at-risk (SVaR) cover financial instruments in CIB and
Initial classification of a financial instrument is carried out by the Product
Unit and are also subject to senior management review. Particular attention is paid to instruments crossing from one level to another, new instrument classes or products, instruments that are generating significant profit and loss and instruments where valuation uncertainty is high.
RBS derives fair value of its instruments differently depending on whether the instrument is a non-modelled or a modelled product.
Modelled products valued using a pricing model range in complexity from comparatively vanilla products such as interest rate swaps and options
• Credit spreads - where available, these are derived from prices of credit default swaps or other credit based instruments, such as debt securities. For others, credit spreads are obtained from pricing services.
Recovery rates are primarily sourced from market data providers or inferred from observable credit spreads.
Furthermore, on an ongoing basis, RBS assesses the appropriateness of any model used. To the extent that the price determined by internal models does not represent the fair value of the instrument, for instance in highly stressed market conditions, RBS makes adjustments to the model valuation to calibrate to other available pricing sources.
Credit valuation adjustments represent an estimate of the adjustment to fair value that a market participant would make to incorporate the counterparty credit risk inherent in derivative exposures. CVA is actively managed by a credit and market risk hedging process, and therefore movements in CVA are partially offset by trading revenue on the hedges.
The majority of CVA arises on these vanilla products together with exposures to counterparties which are considered to be close to default.
The exposures arising from all other product types are modelled and assessed separately. The potential future positive exposure to each counterparty is the aggregate of the exposures arising on the underlying product types.
Expected losses are determined from market implied probabilities of default and internally assessed recovery levels. The probability of default is calculated with reference to observable credit spreads and observable recovery levels. For counterparties where observable data do not exist, the probability of default is determined from the credit spreads and recovery levels of similarly rated entities.
The correlation between exposure and counterparty risk is also incorporated within the CVA calculation where this risk is considered significant. The risk primarily arises on credit derivative trades where the default risk of the referenced entity is correlated with the counterparty risk. The risk also arises on trades with emerging market counterparties where the gross mark-to-market value of the trade, and therefore the counterparty exposure can increase based on weakening of the local currency.
calculation. In such cases where RBS holds collateral against counterparty exposures, CVA is held to the extent that residual risk remains.
Risk data are used as the primary sources of information within bid-offer calculations and are aggregated when they are more granular than market standard buckets. Bid-offer adjustments for each risk factor
As permitted by IFRS 13, netting is applied on a portfolio basis to reflect the value at which RBS believes it could exit the portfolio, rather than the sum of exit costs for each of the portfolio’s individual trades. This is applied where the asset and liability positions are managed as a portfolio for risk and reporting purposes. For example, netting is applied where long and short risk in two different maturity buckets can be closed out in a single market transaction at lower cost than two separate transactions
Product related risks such as correlation risk, attract specific bid-offer reserves. Additional reserves are provided for exotic products to ensure overall reserves match market close-out costs. These market close-out costs inherently incorporate risk decay and cross-effects (taking into account how changes in one risk factor may affect other inputs rather than treating all risk factors independently) that are unlikely to be adequately reflected in a static hedge based on vanilla instruments.
Where there is limited bid-offer information for a product, the pricing approach and risk management strategy are taken into account when assessing the reserve.
The discount rates applied to derivative cash-flows in determining fair value reflect any underlying collateral agreements. Collateralised derivatives are generally discounted at the relevant OIS rates at an individual trade level. Uncollateralised derivatives are discounted with reference to funding levels by applying a funding spread over benchmark interest rates on a portfolio basis (funding valuation adjustment).
Funding valuation adjustments represent an estimate of the adjustment to fair value that a market participant would make to incorporate funding costs and benefits that arise in relation to uncollateralised derivative exposures.
Cumulative own credit adjustment HFT DFV Total DFV Total Derivatives (3) Total
The following tables show financial instruments carried at fair value on the balance sheet by valuation hierarchy - level 1, level 2 and level 3.
Level 2 instruments included non-G10 government securities, most government agency securities, investment-grade corporate bonds, certain mortgage products, including CLOs, most bank loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most notes issued, and certain money market securities and loan commitments and most OTC derivatives.
(2) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instruments were transferred. There were no significant transfers between level 1 and level 2. (3) For an analysis of derivatives by type of contract see Capital and risk management – Balance Sheet analysis - derivatives, which includes balances relating to disposal groups.
Note: (1) Sensitivity represents the favourable and unfavourable effect on the income statement or the statement of comprehensive income due to reasonably possible changes to valuations using reasonably possible alternative inputs in RBS’s valuation techniques or models. Level 3 sensitivities are calculated at a sub-portfolio level and hence these aggregated figures do not reflect the correlation between some of the sensitivities. In particular, for some portfolios, the sensitivities may be negatively correlated where a downward movement in one asset would produce an upward movement in another, but due to the additive presentation above, this correlation cannot be shown.
The table below shows a breakdown of valuation techniques and the ranges for those unobservable inputs used in valuation models and techniques that have a material impact on the valuation of Level 3 financial instruments. The table excludes unobservable inputs where the impact on valuation is less significant. Movements in the underlying input may have a favourable or unfavourable impact on the valuation depending on the particular terms of the contract and the exposure. For example an increase in the credit spread of a bond would be favourable for the issuer and unfavourable for the note holder. Whilst RBS indicates where it considers that there are significant relationships between the inputs, these inter-relationships will be affected by macro economic factors including interest rates, foreign exchange rates or equity index levels.
(3) Recovery rate: Reflects market expectations about the return of principal for a debt instrument or other obligations after a credit event or on liquidation. Recovery rates tend to move conversely to credit spreads.
(4) Credit spreads and discount margins: Credit spreads and margins express the return required over a benchmark rate or index to compensate for the credit risk associated with a cash instrument. A higher credit spread would indicate that the underlying instrument has more credit risk associated with it. Consequently, investors require a higher yield to compensate for the higher risk. The discount rate comprises credit spread or margin plus the benchmark rate; it is used to value future cash flows.
(6) Volatility: A measure of the tendency of a price to change with time. (7) RBS does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
The Level 3 sensitivities above are calculated at a trade or low level portfolio basis. They are not calculated on an overall portfolio basis and therefore do not reflect the likely potential uncertainty on the portfolio as a whole. The figures are aggregated and do not reflect the correlated nature of some of the sensitivities. In particular, for some of the portfolios the sensitivities may be negatively correlated where a downwards movement in one asset would produce an upwards movement in another, but due to the additive presentation of the above figures this correlation cannot be displayed. The actual potential downside sensitivity of the total portfolio may be less than the non-correlated sum of the additive figures as shown in the above table.
Where markets are liquid or very liquid, little judgment is required.
The determination of an instrument’s level cannot be made at a global product level as a single product type can be in more than one level. For example, a single name corporate credit default swap could be in Level 2 or Level 3 depending on whether the reference counterparty’s obligations are liquid or illiquid.
As part of RBS’s IPV process, data are gathered at a trade level from market trading activity, trading systems, pricing services, consensus pricing providers, brokers and research material amongst other sources.
The decision to classify a modelled asset as Level 2 or 3 will be dependent upon the product/model combination, the currency, the maturity, the observability and quality of input parameters and other factors. All these must be assessed to classify the asset.
The majority of derivative instruments for example vanilla interest rate swaps, foreign exchange swaps and liquid single name credit derivatives are classified as Level 2 as they are vanilla products valued using observable inputs. The valuation uncertainty on these is considered to be low and both input and output testing may be available.
The availability and quality of independent pricing information is considered during the classification process. An assessment is made regarding the quality of the independent information. For example, where consensus prices are used for non-modelled products, a key assessment of the quality of a price is the depth of the number of prices used to provide the consensus price. If the depth of contributors falls below a set hurdle rate, the instrument is considered to be Level 3. This hurdle rate is that used in the IPV process to determine the IPV quality rating.
For some instruments with a wide number of available price sources, there may be differing quality of available information and there may be a wide range of prices from different sources. In these situations the highest quality source is used to determine the classification of the asset.
The discount rates applied to derivative cash-flows in determining fair value reflect any underlying collateral agreements. Collateralised derivative exposures are generally discounted at the relevant OIS rates whilst funding valuation adjustments are applied to uncollateralised derivative exposures. Whilst these adjustments reference certain inputs which are not based on observable market data, these inputs are not considered to have a significant effect on the valuation of the individual trades. The classification of derivatives is not determined by the observability of these adjustments, and any related sensitivity does not form part of the Level 3 sensitivities presented.
For structured notes issued the own credit adjustment is based on debt issuance spreads above average inter-bank rates at the reporting date (at a range of tenors). Whilst certain debt issuance spreads are not based on observable market data, these inputs are not considered to have a significant effect on the valuation of individual trades. Neither the classification of structured notes issued nor any related valuation sensitivities are determined by the observability of the debt issuance spreads.
Amount recorded in the Level 3 transfers Foreign in respect of
SOCI (2) In Out Issuances (3) Purchases Settlements Sales exchange At balances held at year end 1 January statement (1) and other 31 December Unrealised Realised 2014 £m £m £m £m £m £m £m £m £m £m £m £m £m
Notes: (1) Net losses on HFT instruments of £100 million (2013 - £543 million; 2012 - £1,528 million) were recorded in income from trading activities in continuing operations. Net gains on other instruments of £205 million (2013 - £11 million; 2012 - £141 million) were recorded in other operating income and interest income as appropriate in continuing operations. There were no losses (2013 - nil; 2012 - £19 million) in discontinued operations.
Total loans and advances to customers 312.1 303.5 — 2.0 301.5
These techniques involve uncertainties and require assumptions and judgments covering prepayments, credit risk and discount rates.
Changes in these assumptions would significantly affect estimated fair values. The fair values reported would not necessarily be realised in an immediate sale or settlement.
Loans and advances to banks - items in the course of collection from other banks 1.5
Total12 months 12 months 12 months 12 months 12 months 12 months £m £m £m £m £m £m £m £m £m
Held-for-trading assets of £498.2 billion (2013 - £452.1 billion; 2012 - £666.5 billion) and liabilities of £477.1 billion (2013 - £423.3 billion; 2012 - £628.2 billion) have been excluded from the following tables in view of their short-term nature.
Cash and balances at central banks 82,659 — — — — —
Loans and advances to customers 70,511 48,027 84,836 65,542 74,296 69,242
For the notes relating to this table refer to the following page.
Loans and advances to customers 73,590 57,403 93,445 65,569 76,682 87,450
Unwind of discount (recognised in interest income) (138) (109) — (247) (391) (476)
RBS manages this risk within approved limits. Residual risk positions are hedged with derivatives principally interest rate swaps. Suitable larger financial instruments are fair value hedged; the remaining exposure, where possible, is hedged by derivatives documented as cash flow hedges and qualifying for hedge accounting. The majority of RBS’s fair value hedges involve interest rate swaps hedging the interest rate risk in recognised financial assets and financial liabilities. Cash flow hedges relate to exposures to the variability in future interest payments and receipts on forecast transactions and on recognised financial assets and financial liabilities. RBS hedges its net investments in foreign operations with currency borrowings and forward foreign exchange contracts.
For cash flow hedge relationships of interest rate risk, the hedged items are actual and forecast variable interest rate cash flows arising from financial assets and financial liabilities with interest rates linked to LIBOR,
For cash flow hedging relationships, the initial and ongoing prospective effectiveness is assessed by comparing movements in the fair value of the expected highly probable forecast interest cash flows with movements in the fair value of the expected changes in cash flows from the hedging interest rate swap. Prospective effectiveness is measured on a cumulative basis i.e. over the entire life of the hedge relationship. The method of calculating hedge ineffectiveness is the hypothetical derivative method. Retrospective effectiveness is assessed by comparing the actual movements in the fair value of the cash flows and actual movements in the fair value of the hedged cash flows from the interest rate swap over the life to date of the hedging relationship.
The initial and ongoing prospective effectiveness of fair value hedge relationships is assessed on a cumulative basis by comparing movements in the fair value of the hedged item attributable to the hedged risk with changes in the fair value of the hedging interest rate swap.
Retrospective effectiveness is assessed by comparing the actual movements in the fair value of the hedged items attributable to the hedged risk with actual movements in the fair value of the hedging derivative over the life to date of the hedging relationship.
Hedge ineffectiveness recognised in other operating income in continuing operations comprised: 2014 2013 2012 £m £m £m
Gains/(losses) on the hedged items attributable to the hedged risk 809 (165) 178
Held to maturity 4,537 — — — — — 4,537 —
were realised on the sale of available-for-sale securities in continuing operations.
The following table analyses available-for-sale debt securities and the related yield (based on weighted averages) by remaining maturity and issuer.
Unquoted equity investments whose fair value cannot be reliably measured are carried at cost and classified as available-for-sale financial assets. They include capital stock (redeemable at cost) in the Federal Home Loan Bank and the Federal Reserve Bank of nil (2013 - £0.6 billion; 2012 - £0.7 billion)
Disposals and write-off of fully amortised assets (20) (608) (1,464) (2,092)
Disposals and write-off of fully amortised assets (20) (608) (1,450) (2,078)
Disposals and write-off of fully amortised assets (85) (1,978) (643) (2,706)
CGU or group of CGUs with its recoverable amount. Recoverable amount is the higher of fair value and value in use. Value in use is the present value of expected future cash flows from the CGU or group of CGUs. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants.
The recoverable amounts for all CGUs at 30 September 2014 were based on the value in use test, using management's latest five-year forecasts. The long-term growth rates have been based on respective country nominal GDP growth rates. The risk discount rates are based on observable market long-term government bond yields and average industry betas adjusted for an appropriate risk premium.
Corporate & Institutional Banking (£0.1 billion). All UK Retail, Wealth and
The analysis of goodwill by reportable segment is shown in Note 38.
Investment Freehold leasehold leasehold and other lease properties premises premises premises equipment assets Total 2014 £m £m £m £m £m £m £m
Disposals and write-off of fully depreciated assets (339) (34) (10) (79) (677) (1,485) (2,624)
Transfers to disposal groups — (6) — (9) (35) — (50)
Disposals and write-off of fully depreciated assets — (12) (1) (65) (561) (559) (1,198)
Charge for the year - continuing operations — 104 11 115 324 205 759
Net book value at 31 December 2,633 2,015 117 752 1,263 1,129 7,909
Investment Freehold leasehold leasehold and other lease properties premises premises premises equipment assets Total 2012 £m £m £m £m £m £m £m
Transfers from/(to) disposal groups — 43 6 66 (65) — 50
Net book value at 31 December 3,111 2,146 138 808 1,378 2,203 9,784
Investment property valuations principally employ present value techniques that discount expected cash flows. Expected cash flows reflect rental income, occupancy and residual market values; valuations are sensitive to changes in these factors. The fair value measurement of non-specialised properties in locations where the market for such properties is active and transparent are categorised as level 2 - 78%
The fair value of investment properties includes £235 million of depreciation since purchase (2013 - £271 million; 2012 - £186 million).
Rental income from investment properties in continuing operations was £217 million (2013 - £244 million; 2012 - £267 million). Direct operating expenses of investment properties in continuing operations were £81
(a) Loss/(profit) from discontinued operations, net of tax 2014 2013 2012 £m £m £m
Profit from other discontinued operations, net of tax 41 148 (172)
Other discontinued operations reflect the results of Direct Line Insurance Group plc (DLG) presented as a discontinued operation until 12 March 2013 and as an associate thereafter and the results of RFS Holdings attributable to the State of the Netherlands and Santander following the legal separation of ABN AMRO Bank N.V. on 1 April 2010. The profit from discontinued operations includes a gain of £82 million (2013 - £37 million gain; 2012 - £112 million loss) attributable to non-controlling interests.
(c) Assets and liabilities of disposal groups 2014 Citizens Other Total 2013 2012 £m £m £m £m £m
Assets acquired exclusively with a view to disposal — — — 163 175
DLG is included in disposal groups at 31 December 2013 and 2012. In addition, disposal groups at 31 December 2013 include the Chicago area retail branches, small business operations and select middle market relationships in the Chicago market which form part of CFG. No adjustment was required to the carrying value of these assets and liabilities on reclassification.
Transfer from accruals and other liabilities — — 52 — — — — 10 62
Currency translation and other movements — — (7) (2) 2 4 107 (7) 97
The principal assumptions underlying the Group’s provision in respect of PPI sales are: assessment of the total number of complaints that the Group will receive; the proportion of these that will result in redress; and the average cost of such redress. The number of complaints has been estimated from an analysis of the Group’s portfolio of PPI policies sold by vintage and by product. Estimates of the percentage of policyholders that will lodge complaints (the take up rate) and of the number of these that will be upheld (the uphold rate) have been established based on recent experience, guidance in FSA policy statements and the expected rate of responses from proactive customer contact. The average redress assumption is based on recent experience and FSA calculation rules. The table below shows the sensitivity of the provision to changes in the principal assumptions (all other assumptions remaining the same).
Single premium book past business review take up rate 49% 52% +/-5 +/-56
Interest that will be payable on successful complaints has been included in the provision as has the estimated cost to the Group of administering the redress process. The Group expects the majority of the cash outflows associated with the remaining provision to have occurred by Q2 2016. There are uncertainties as to the eventual cost of redress which will depend on actual complaint volumes, take up and uphold rates and average redress costs.
Background information in relation to PPI claims is given in Note 32.
The cumulative charge for IRHP is £1.4 billion, of which £1.1 billion relates to redress and £0.3 billion to administrative expenses.
The principal assumptions underlying the Group’s provision are: • the proportion of relevant customers with interest rate caps that will ask to be included in the review
• the type of consequential loss claims that will be received
Background information in relation to Interest Rate Hedging Products claims is given in Note 32.
(4) On 6 February 2013, the Group reached agreement with the FSA, the US Department of Justice and the Commodity Futures Trading Commission in relation to the setting of LIBOR and other trading rates, including financial penalties of £381 million. In December 2013, the Group agreed to pay settlement penalties of approximately €260 million and €131 million to resolve investigations by the European Commission into Yen LIBOR
(6) Arising out of its normal business operations, the Group is party to legal proceedings in the United Kingdom, the United States and other jurisdictions. An additional charge of £2,050 million was recorded in 2013 as a result of greater levels of certainty on expected outcomes, primarily in respect of mortgage-backed securities and securities-related litigation following third party settlements and regulatory decisions. Detailed descriptions of the Group’s legal proceedings and discussion of the associated uncertainties are given in Note 32.
(7) The property provisions principally comprise provisions for onerous lease contracts. Provision is made for future rentals payable in respect of vacant leasehold property and for any shortfall where leased property is sub-let at a rental lower than the lease rentals payable by the Group.
UK tax losses carried forward - The Royal Bank of Scotland plc 489 1,693 2,654 - UK branch of RBS N.V. — — 322 - RBS Management Services (UK) Ltd — — 30
Under UK tax rules, tax losses do not expire and can be carried forward indefinitely. In his 2014 Autumn Statement, the UK Chancellor of the
tax losses will therefore arise, assuming that these proposals are enacted by Parliament in 2015. International Accounting Standards require the recoverability of DTAs to be considered by reference to legislation in force at the balance sheet reporting date.
Impairment charges have reduced and Ulster Bank Ireland returned to profitability during 2014. Based on the Group’s strategic plan, the losses on which a deferred tax asset has been recognised will be utilised against future taxable profits of the company by the end of 2021.
Deferred tax assets of £5,738 million (2013 - £4,942 million; 2012 - £3,827 million) have not been recognised in respect of tax losses and other temporary differences carried forward of £26,742 million (2013 - £28,099 million; 2012 - £20,432 million) in jurisdictions where doubt exists over the availability of future taxable profits. Of these losses and other temporary differences, £4,378 million expire within five years and £5,311 million thereafter. The balance of tax losses and other temporary differences carried forward has no time limit.
2014 - final redemption £m £m £m £m £m £m £m
Currently 2014 2015 2016-2018 2019-2023 Thereafter Perpetual Total 2013 - call date £m £m £m £m £m £m £m £m 2012 - final redemption £m £m £m £m £m £m £m
Currently 2013 2014 2015-2017 2018-2022 Thereafter Perpetual Total 2012 - call date £m £m £m £m £m £m £m £m
US$1,000 million 6.1% subordinated notes 2023 Tier 2 — 603 —
CAD420 million 10.5% subordinated notes 2022 Tier 2 — — 268
CHF124 million 9.375% subordinated notes 2022 Tier 2 — — 86
US$2,132 million 9.5% subordinated notes 2022 Tier 2 — — 1,346
AUD397 million floating rate subordinated notes Tier 2 217 — —
AUD265 million floating rate subordinated notes Tier 2 145 — —
CAD217 million floating rate subordinated notes Tier 2 94 — —
CHF34 million floating rate subordinated notes Tier 2 23 — —
€176 million floating rate undated notes Tier 2 138 — —
AUD32 million floating rate subordinated notes 2017 (partial redemption) Tier 2 17 — —
€79.75 million floating rate notes 2017 (partial redemption) Tier 2 65 — —
US$50 million floating rate subordinated notes Tier 2 — 31 —
AUD145 million floating rate subordinated notes (partial redemption) Tier 2 — — 97
US$814 million floating rate subordinated notes (partial redemption) Tier 2 — — 514 €273 million 4.5% subordinated (partial redemption) Tier 2 — — 227
CHF166 million floating subordinated notes (partial redemption) Tier 2 — — 114 €398 million floating rate subordinated notes (partial redemption) Tier 2 — — 331
AUD360 million floating rate subordinated notes (partial redemption) Tier 2 — — 241
€100 million 5.13% flip flop subordinated notes Tier 2 — 81 —
Group Group plc AMRO interests Total £m £m £m £m £m
Gains on available-for-sale financial assets, net of tax — — 23 — 23
Dividend access share of £0.01 (1) — — — — — —
Non-cumulative preference shares of £1 — — — 54 54 54
Meeting to issue up to £256 million nominal of ordinary shares other than by pre-emption to existing shareholders.
In addition, the company issued 73.9 million ordinary shares of £1 each in connection with employee share plans.
In December 2009, the company entered into an acquisition and contingent capital agreement with HM Treasury. HM Treasury agreed to acquire at 50p per share 51 billion B shares with a nominal value of £0.01 each and a dividend access share with a nominal value of £0.01; these shares were issued to HM Treasury on 22 December 2009. Net proceeds were £25.1 billion.
Certain of the Group's subordinated securities in the legal form of debt are classified as equity under IFRS.
Notes: (1) Subordinated notes issued to limited partnerships that have in turn issued partnership preferred securities to trusts that have issued trust preferred securities to investors. The trust preferred securities are redeemable only at the issuer’s option and dividends are payable at the Group’s discretion. On maturity of the subordinated notes, the partnerships are required to reinvest in eligible capital instruments issued by the Group. Prior to the implementation of IFRS 10 in 2013, the limited partnerships and the trusts were consolidated and the trust preferred securities recorded as non-controlling interests.
(3) Preferred securities in issue - US$276 million RBS Capital Trust IV, floating rate noncumulative trust preferred securities. Notice of redemption issued in January 2015.
(4) Preferred securities in issue - €166 million RBS Capital Trust C, fixed/floating rate noncumulative trust preferred securities.
(5) Preferred securities in issue - £93 million RBS Capital Trust D, fixed/floating rate noncumulative trust preferred securities.
Merger reserve - the merger reserve comprises the premium on shares issued to acquire NatWest, less goodwill amortisation charged under previous GAAP, and the premium arising on shares issued to acquire
Aonach Mor Limited, less amounts realised through subsequent share redemptions by Aonach Mor Limited. No share premium was recorded in the company financial statements through the operation of the merger relief provisions of the Companies Act.
After 1 year but within 5 years 5,963 (600) (197) 5,166 512 £m £m £m
Amounts recognised as income and expense in discontinued operations are £124 million (2013 - £134 million; 2012 - £133 million) in relation to operating leases - minimum rentals payable.
Operating leases - cars and light commercial vehicles 10 4 6 — 20
Operating leases - cars and light commercial vehicles 317 44 49 1 411
RBS provides asset finance to its customers through acting as a lessor. It purchases plant, equipment and intellectual property, renting them to customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases.
The majority of securitisations are supported through liquidity facilities or other credit enhancements. RBS arranges securitisations to facilitate client transactions and undertakes own asset securitisations to sell or to fund portfolios of financial assets. RBS also acts as an underwriter and depositor in securitisation transactions in both client and proprietary transactions.
In own-asset securitisations, the pool of assets held by the SE is either originated by RBS, or (in the case of whole loan programmes) purchased from third parties.
The table below analyses the asset categories for those own-asset securitisations where the transferred assets continue to be recorded on
Held by third Held by Held by third Held by Held by third Held by Assets parties RBS (1) Total Assets parties RBS (1) Total Assets parties RBS (1) Total £m £m £m £m £m £m £m £m £m £m £m £m
Certain loans and advances to customers have been assigned to bankruptcy remote limited liability partnerships to provide security for issues of debt securities by RBS. RBS retains all of the risks and rewards of these loans, the partnerships are consolidated, the loans retained on
RBS’s balance sheet and the related covered bonds included within debt securities in issue. At 31 December 2014, £13,401 million of mortgages provided security for debt securities in issue of £7,114 million (2013: mortgages - £16,177 million, bonds - £9,041 million; 2012: mortgages - £15,990 million, bonds - £10,139 million).
The Group enters into securities repurchase agreements and securities lending transactions under which it transfers securities in accordance with normal market practice.
Assets subject to securities repurchase agreements or security lending transactions 2014 2013 2012 £m £m £m
The Group pledges collateral with its counterparties in respect of derivative liabilities and bank and other borrowings.
Qualifying instruments issued by subsidiaries and held by third parties 7,490 — —
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December 2014. Although the Group is exposed to credit risk in the event of a customer’s failure to meet its obligations, the amounts shown do not, and are not intended to, provide any indication of the Group's expectation of future losses.
Undrawn formal standby facilities, credit lines and other commitments to lend
Guarantees - the Group gives guarantees on behalf of customers. A
- after 1 year but within 5 years 784 1,143 1,253
Group's financial statements. The Group earned fee income of £425 million (2013 - £462 million; 2012 - £476 million) from these activities.
The Financial Services Compensation Scheme (FSCS), the UK's statutory fund of last resort for customers of authorised financial services firms, 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 industry. In relation to protected deposits, each deposit-taking institution contributes towards these levies in proportion to their share of total protected deposits on 31
April to 31 March), subject to annual maxima set by the Prudential
The FSCS has borrowed from HM Treasury to fund compensation costs associated with the failure of Bradford & Bingley, Heritable Bank,
FSCS and HM Treasury have agreed that the period of these loans will reflect the expected timetable for recoveries from the estates of Bradford
& Bingley and the other failed banks. The FSCS will levy the deposittaking sector for its share of the balance of the principal outstanding for the non-Bradford & Bingley loan prior to the FSCS loan facility with HMT
The company and certain members of the Group are party to legal proceedings and the subject of investigation and other regulatory and governmental action in the United Kingdom, the European Union, the
RBS recognises a provision for a liability in relation to these matters when it is probable that an outflow of economic benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the amount of the obligation. While the outcome of the legal proceedings, investigations and regulatory and governmental matters in which RBS is involved is inherently uncertain, the directors believe that, based on the information available to them, appropriate provisions have been made in respect of legal proceedings, investigations and regulatory and governmental matters as at 31 December 2014 (see Note 22). The aggregate provisions for litigation and regulatory proceedings of £1,500 million recognised in 2014, included a provision of £720 million related to the foreign exchange related investigations, of which £320 million was taken in the last quarter of 2014. The future outflow of resources in respect of any matter may ultimately prove to be substantially greater than or less than the aggregate provision that RBS has recognised.
There are also situations where RBS may enter into a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implications of continuing to contest liability, or in order to take account of the risks inherent in defending claims or investigations even for those matters for which RBS believes it has credible defences and should prevail on the merits. The uncertainties inherent in all such matters affect the amount and timing of any potential outflows for both matters with respect to which provisions have been established and other contingent liabilities. The future outflow of resources in respect of any matter may ultimately prove to be substantially greater than or less than the aggregate provision that RBS
Other than those discussed below, no member of the Group is or has been involved in governmental, legal or regulatory proceedings (including those which are pending or threatened) that are expected to be material individually or in aggregate.
RBS and certain of its subsidiaries, together with certain current and former officers and directors were named as defendants in a purported class action filed in the United States District Court for the Southern
A consolidated amended complaint asserting claims under Sections 10 and 20 of the US Securities Exchange Act of 1934 and Sections 11, 12 and 15 of the Securities Act was filed in November 2011 on behalf of all persons who purchased or otherwise acquired the Group's American
August 2013, the Court denied the plaintiffs’ motions for reconsideration and for leave to re-plead their case. The plaintiffs appealed the dismissal of this case to the Second Circuit Court of Appeals and that appeal was heard on 19 June 2014. A decision in respect of the appeal has not yet been issued.
Justice of England and Wales by sets of current and former shareholders, against RBS (and in one of those claims, also against certain former individual officers and directors) alleging that untrue and misleading statements and/or improper omissions were made in connection with the rights issue announced by RBS on 22 April 2008 in breach of the
RBS under the Group Litigation Order. At a case management conference in December 2014 the judge ordered that trial commence in
RBS companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of claims in the United
States that relate to the securitisation and securities underwriting businesses. These cases include actions by individual purchasers of securities and purported class action suits. Together, the pending individual and class action cases involve the issuance of more than
names RBS Securities Inc. as a defendant by virtue of the fact that it was an underwriter of some of the securities at issue. Trial in this matter is scheduled to commence in March 2015 in the United States District Court for the Southern District of New York. Three other FHFA lawsuits (against
Corporate Federal Credit Union), five cases filed by the Federal Home
Loan Banks of Boston, Chicago, Seattle and San Francisco, and a case filed by the Commonwealth of Virginia on behalf of the Virginia
RBS companies are also defendants in a purported MBS class action entitled New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al; which remains pending in the United States District Court for the
February 2015), New Jersey Carpenters Vacation Fund et al. v. The
Royal Bank of Scotland plc et al. (final court approval of the settlement granted in November 2014), and Luther v. Countrywide Financial Corp. et al. and related class action cases (final court approval of the settlement granted in December 2013). In the latter matter, several members of the settlement class are appealing the court-approved settlement to the
Certain other claims on behalf of public and private institutional investors have been threatened against RBS in connection with various mortgagerelated offerings. RBS cannot predict whether any of these threatened claims will be pursued, but expects that several may. If such claims are asserted and were successful, the amounts involved may be material.
Most of the USD LIBOR-related actions in which RBS companies are defendants, including all purported class actions relating to USD LIBOR, have been transferred to a coordinated proceeding in the United States
March 2013 and 23 June 2014, the Court dismissed plaintiffs' antitrust claims and claims under RICO (Racketeer Influenced and Corrupt
Mercantile Exchange (on the theory that defendants' alleged persistent suppression of USD LIBOR caused loss to plaintiffs), and (b) certain contract and unjust enrichment claims on behalf of over-the-counter purchaser plaintiffs who transacted directly with a defendant. Over 35 other USD LIBOR-related actions involving RBS, including purported class actions on behalf of lenders and mortgage borrowers, are subject to motions to dismiss that are being litigated. Discovery has been stayed in all cases in the coordinated proceeding pending further order from the
Bank of America Corp. that plaintiffs in the class action on behalf of corporate debt purchasers do not need to wait until there is a final judgment in the coordinated proceeding before they can appeal the dismissal of their antitrust claims to the United States Court of Appeals for the Second Circuit.
New York. On 28 March 2014, the Court in the Yen action dismissed the plaintiffs’ antitrust claims, but refused to dismiss their claims under the
Beginning in September 2014, RBS plc and a number of other financial institutions were named as defendants in several purported class action complaints (now consolidated into one complaint) alleging manipulation of USD ISDAFIX rates, to the detriment of persons who entered into transactions that referenced those rates. The complaints were filed in the
Certain members of the Group, as well as a number of other financial institutions, are defendants in a consolidated antitrust class action pending in the United States District Court for the Southern District of
Certain members of the Group, as well as a number of other financial institutions, are defendants in a consolidated antitrust class action on behalf of U.S. based plaintiffs that is pending in the United States District
N.V.) in the New York bankruptcy court. The trustee seeks to recover
allegedly ‘knew or should have known of Madoff’s possible fraud’. The
RBS Securities Inc. and certain other RBS companies, as well as several other financial institutions, are defendants in an adversary proceeding filed in the U.S. bankruptcy court in Maryland by the trustee for TMST,
States District Court for the Eastern District of New York) granted summary judgment in favour of NatWest on the issue of scienter, but on 22 September 2014, that summary judgment ruling was vacated by the
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 U.S. Antiterrorism 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. The defendants will move to dismiss the complaint.
RBS is co-operating fully with the investigations and reviews described below.
LIBOR. RBS agreed to pay penalties of £87.5 million, US$325 million and
Securities Japan Limited entered a plea of guilty to one count of wire fraud relating to Yen LIBOR and on 6 January 2014, the US District Court for the District of Connecticut entered a final judgment in relation to the conviction of RBS Securities Japan Limited pursuant to the plea agreement.
In February 2014, RBS paid settlement penalties of approximately €260 million and €131 million to resolve investigations by the European
appoint an independent compliance expert to review and report on RBS’s implementation of such remedial measures. The remediation measures include ensuring appropriate records retention, training, communications surveillance and trading reviews are in place. As part of the Enforceable
On 21 October 2014, the EC announced its findings that RBS and one other financial institution had participated in a bilateral cartel aimed at influencing the Swiss franc LIBOR benchmark interest rate between
and received full immunity from fines for revealing the existence of the cartel to the EC and co-operating closely with the EC’s ongoing investigation. Also on 21 October 2014, the EC announced its findings that RBS and three other financial institutions had participated in a related cartel on bid-ask spreads of Swiss franc interest rate derivatives in the European Economic Area (EEA). Again, RBS received full immunity from fines for revealing the existence of the cartel to the EC and co-operating closely with the EC’s ongoing investigation.
Commission (CFTC) in relation to investigations into failings in the bank’s
(CIB) segment. RBS plc agreed to pay penalties of £217 million to the
FCA and $290 million to the CFTC to resolve the investigations. Payment of the fines was made on 19 November 2014.
As previously disclosed, RBS remains in discussions with other governmental and regulatory authorities on similar issues relating to failings in the Bank’s Foreign Exchange business within its CIB segment, including settlement discussions regarding the criminal investigation being conducted by the DOJ and certain other financial regulatory authorities. The timing and amounts of any further settlements and related litigation risks and consequences remain uncertain and could be material.
On 21 July 2014, the Serious Fraud Office announced that it was launching a criminal investigation into allegations of fraudulent conduct in the foreign exchange market, apparently involving multiple financial institutions.
In June 2012, RBS was affected by a technology incident, as a result of which the processing of certain customer accounts and payments were subject to considerable delay. RBS agreed to reimburse customers for any loss suffered as a result of the incident and RBS made a provision of
In April 2013, the FCA announced that it had commenced an enforcement investigation into the incident. This was a joint investigation conducted by the FCA together with the UK Prudential Regulation
Separately the Central Bank of Ireland initiated an investigation and issued enforcement proceedings against Ulster Bank Ireland Limited
RBS and other UK banks had agreed to a redress exercise and past business review in relation to the sale of interest rate hedging products to some small and medium sized businesses who were classified as retail clients or private customers under FSA rules. In January 2013, the FSA
UK banks to adhere in conducting the review and redress exercise. This exercise is being scrutinised by an independent reviewer, who is reviewing and approving all redress outcomes, and the FCA is overseeing this. RBS has reached agreement with the independent reviewer in relation to redress outcomes for in scope customers. RBS
and the independent reviewer are now focussing on customer responses to review outcomes, securing acceptance of offers and assessing ancillary issues such as consequential loss claims. The FCA has announced that the review and redress exercise will be closed to new entrants on 31 March 2015.
RBS has made provisions in relation to the above redress exercises totalling £1.4 billion to date for these matters, including £0.2 billion in 2014, of which £1 billion had been utilised at 31 December 2014.
Subsequent to the FSA announcing the results of its mystery shopping review, the FCA has required RBS to carry out a past business review and customer contact exercise on a sample of historic customers that received investment advice on certain lump sum products through the UK
segment of RBS, which includes RBS plc and NatWest, during the period from March 2012 until December 2012. This review is being conducted under section 166 of the Financial Services and Markets Act, under which a skilled person has been appointed to carry out the exercise. Redress is currently being offered to certain customers in this sample group. In addition, RBS has agreed with the FCA that it will 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. A pilot customer communications exercise to certain cohorts of customers was undertaken between November 2014 and January 2015 with a further communication exercise to the remaining cohorts due to be completed by
In August 2013, the FCA announced that Card Protection Plan Limited and 13 banks and credit card issuers, including RBS, had agreed to a compensation scheme in relation to the sale of card and/or identity protection insurance to certain retail customers. The closing date before which any claims under the compensation scheme must have been submitted has now passed and only exceptional cases will be dealt with prior to a final closure date for the scheme of 28 February 2015. RBS has made appropriate provision based on its estimate of ultimate exposure.
Chance to conduct an independent review of the principal allegation made in the Tomlinson Report: RBS’s Global Restructuring Group 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 concluded that there was no evidence to support the principal allegation.
A separate independent review of the principal allegation, led by Mason
Hayes & Curran, Solicitors, was conducted in the Republic of Ireland. The report was published in December 2014 and found no evidence to support the principal allegation.
On 11 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.
MIF rates for debit and credit consumer cards. The draft regulation also sets out other proposals for reform including to the Honour All Cards Rule so merchants will be required to accept all cards with the same level of
Visa and MasterCard consumer and commercial credit and debit card transactions. On 4 November 2014, the successor body to the OFT, the
Whilst not currently proceeding, the CMA’s investigations do formally remain open and CMA has noted that, if the EC regulation on interchange fees did not address its concerns, it would then look again at continuing with its investigations.
Since 2011, RBS has been implementing a policy statement agreed with the FCA for the handling of complaints about the mis-selling of Payment
January 2013. The OFT acknowledged some specific improvements in the market since its last review but concluded that further changes were required to tackle ongoing concerns, including a lack of switching, the ability of consumers to compare products and the complexity of overdraft charges. The OFT decided not to refer the market to the CC but said that it expected to return to the question of a referral to the CC in 2015, or earlier. The OFT also announced that it would be carrying out behavioural economic research on the way consumers make decisions and engage with retail banking service, and would study the operation of payment systems as well as the SME banking market.
On 11 March 2014, the successor body to the OFT and CC, the CMA, announced that in addition to its pending SME review (see below), it would be undertaking an update of the OFT’s 2013 PCA review. On 18
July 2014 the CMA published its preliminary findings in respect of both the PCA and SME market studies. The CMA provisionally decided to make a market investigation reference (MIR) for both the PCA and SME
market studies. The provisional decision on both PCAs and SMEs was then subject to a consultation period until 17 September 2014. Following this period of consultation, on 6 November 2014, the CMA made its final decision to proceed with a MIR. The MIR will be a wide-ranging 18-24 month Phase 2 inquiry but at this stage it is not possible to estimate potential impacts on RBS.
Following a consultation on the scope of the market study, the OFT
published an update paper on 27 September 2013 setting out its proposed scope. On 11 March 2014, the OFT set out some competition concerns on SME banking and also announced that its successor body, the CMA, would continue the review. As discussed above, the CMA has decided to make a MIR for the SME market study in addition to the PCA
On 9 July 2014, the FCA launched a review of competition in the wholesale sector to identify any areas which may merit further investigation through an in-depth market study.
Following this consultation period, the FCA published its feedback statement on 19 February 2015. The FCA now intends to undertake a market study into investment and corporate banking (to launch in Spring 2015) and potentially into asset management (to launch late 2015 if undertaken).
Group of the Financial Fraud Enforcement Task Force relating to, among other things, issuance, underwriting and trading in mortgage-backed securities, collateralised debt obligations (CDOs), and synthetic products.
In connection with these inquiries, Group companies have received requests for information and subpoenas seeking information about, among other things, the structuring of CDOs, financing to loan originators, purchase of whole loans, sponsorship and underwriting of securitisations, due diligence, representations and warranties, communications with ratings agencies, disclosure to investors, document deficiencies, trading activities and practices and repurchase requests.
In November 2013, RBS announced that it had settled with the US
Pursuant to the settlement, RBS Securities Inc., without admitting or denying the SEC's allegations, consented to the entry of a final judgment ordering certain relief, including an injunction and the payment of approximately US$153 million in disgorgement, penalties, and interest.
Court for the District of Connecticut. RBS co-operated fully with the SEC
In 2007, the New York State Attorney General issued subpoenas to a wide array of participants in the securitisation and securities industry, focusing on the information underwriters obtained from the independent firms hired to perform due diligence on mortgages. RBS completed its production of documents requested by the New York State Attorney
RBS’s CIB business in North America has been a purchaser of nonagency US residential mortgages in the secondary market, and an issuer and underwriter of non-agency residential mortgage-backed securities
In issuing RMBS, CIB generally assigned certain representations and warranties regarding the characteristics of the underlying loans made by the originator of the residential mortgages; however, in some circumstances, CIB made such representations and warranties itself.
The activities of Citizens' two US bank subsidiaries - Citizens Bank, N.A.
In addition, Citizens Bank, N.A. agreed to take certain remedial actions to improve its compliance risk management systems and to create a comprehensive action plan designed to achieve compliance with the relevant Consent Order. Restitution plans have been prepared and submitted for approval, and Citizens Bank, N.A. has submitted for approval and is in the process of implementing its action plan for compliance with the Consent Order, as well as updated policies, procedures and programmes related to its compliance risk management systems.
In addition to the above, the bank subsidiaries could face further formal administrative enforcement actions from their federal supervisory agencies, including the assessment of civil monetary penalties and restitution, relating to issues identified by Citizens arising from other consumer products and related practices and policies, and they could face potential civil litigation.
In July 2011, RBS agreed with the Board of Governors of the Federal
Desist Order (Governance Order) to address deficiencies related to governance, risk management and compliance systems and controls in
• a Bank Secrecy Act/anti-money laundering compliance programme for the RBS plc and RBS N.V. branches in the U.S. (the U.S.
• a customer due diligence programme designed to reasonably ensure the identification and timely, accurate, and complete reporting by the U.S. Branches of all known or suspected violations of law or suspicious transactions to law enforcement and supervisory authorities, as required by applicable suspicious activity reporting laws and regulations, and
The Governance Order (which is publicly available) identified specific items to be addressed, considered, and included in each proposed plan or programme. RBS also agreed in the Governance Order to adopt and implement the plans and programmes after approval by the regulators, to fully comply with the plans and programmes thereafter, and to submit to the regulators periodic written progress reports regarding compliance with the Governance Order. RBS has created, submitted, and adopted plans and/or programmes to address each of the areas identified above. In connection with RBS’s efforts to implement these plans and programmes, it has, among other things, made investments in technology, hired and trained additional personnel, and revised compliance, risk management, and other policies and procedures for RBS’s U.S. operations. RBS
continues to test the effectiveness of the remediation efforts undertaken by RBS to ensure they are sustainable and meet regulators' expectations.
Furthermore, RBS continues to work closely with the regulators in its efforts to fulfil its obligations under the Governance Order, which will remain in effect until terminated by the regulators.
RBS may be subject to formal and informal supervisory actions and may be required by its US banking supervisors to take further actions and implement additional remedial measures with respect to these and additional matters. RBS's activities in the United States may be subject to significant limitations and/or conditions.
Bank of Scotland plc’s historical compliance with US economic sanction regulations outside the US. As part of the settlement, RBS and The
Order with the Fed (US Dollar Processing Order), which remains in effect until terminated by the Fed. The US Dollar Processing Order (which is publicly available) indicated, among other things, that RBS and The
Royal Bank of Scotland plc lacked adequate risk management and legal review policies and procedures to ensure that activities conducted outside the United States 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 of the
In August 2013, the DOJ announced a programme for Swiss banks (the
Programme), to settle the long-running dispute between the US tax authorities and Switzerland regarding the role of Swiss banks in concealing the assets of US tax payers in offshore accounts. The
Programme provides Swiss banks with an opportunity to obtain resolution, through non-prosecution agreements or non-target letters, concerning their status in connection with the DOJ’s investigations.
Coutts & Co Ltd, a member of the Group incorporated in Switzerland, notified the DOJ that it intended to participate in the Programme based on the possibility that some of its clients may not have declared their assets in compliance with US tax laws. The Programme required a detailed review of all US related accounts. The results of Coutts & Co
Programme. Coutts expects to reach resolution with the DOJ in 2015, under the terms of the Programme. Provision has been made for the estimated liability arising from this programme/review.
German prosecutor investigation into Coutts & Co Ltd A prosecuting authority in Germany is undertaking an investigation into
Coutts & Co Ltd in Switzerland, and current and former employees, for alleged aiding and abetting of tax evasion by certain Coutts & Co Ltd clients. Coutts & Co Ltd is cooperating with the authority.
Coutts & Co, a member of the Group incorporated in England and Wales, decided to undertake a past business review into the suitability of investment advice provided to its clients. This review is ongoing. Coutts &
Co is in the process of contacting clients and redress is being offered in appropriate cases. Provision has been made for the estimated liability arising from this programme/review.
Profit on sale of property, plant and equipment (137) (44) (20)
Decrease in loans and advances to banks and customers 11,245 49,314 30,719
Ordinary shares issued in respect of employee share schemes 234 174 437
Other adjustments including foreign exchange — — — 214 (1,057) (1,381)
Note: (1) Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £11,508 million (2013 - £10,342 million; 2012 - £12,784 million).
Certain members of the Group are required by law or regulation to maintain balances with the central banks in the jurisdictions in which they operate.
The directors manage the Group 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).
UK Personal & Business Banking offers a comprehensive range of banking products and related financial services to the UK personal and small business markets. It serves customers through a number of channels including: the RBS and NatWest network of branches and
ATMs in the United Kingdom, telephony, online and mobile. Small businesses include accounts having less than £2 million annual turnover and no currency transactions.
Republic of Ireland. It provides a comprehensive range of financial services through both its Retail Banking division, which provides loan and deposit products through a network of branches and direct channels, and its Corporate Banking division, which provides services to businesses and corporate customers.
Commercial Banking provides banking, finance and risk management services to the commercial, mid-corporate and corporate sector in the
Private Banking provides banking and wealth management services in the UK through Coutts & Co and Adam & Company, offshore through
Corporate & Institutional Banking serves corporate and institutional clients primarily in the UK and Western Europe, as well as those US and
Asian multinationals with substantial trade and investment links in the region. Products include debt financing, risk management and trade services, focusing on core product capabilities that are of most relevance to clients.
No business lines were moved to RCR so comparative data has not been restated.
In addition, during 2014 RBS also made changes to the method of allocating costs relating to Services and Functions and the basis of allocation of RBS Treasury costs. For further information on these changes, see page 126.
Gain on redemption of own debt — 175 175 — — — 175
Write down of goodwill — — — (18) — — (18)
Asset Protection Scheme — — — — — — (44) — (44)
Assets Liabilities assets Assets Liabilities assets Assets Liabilities assets £m £m £m £m £m £m £m £m £m *Restated
38 Segmental analysis continued Segmental analysis of assets and liabilities included in disposal groups: Assets Liabilities Assets Liabilities Assets Liabilities £m £m £m £m £m £m
Transfer to disposal groups — — — — — (540) (540)
Currency translation and other adjustments — — 2 18 (87) — (67)
Currency translation and other adjustments — — (9) — 221 — 212
Of which total assets held for sale 11,638 291 1,001 1,083 14,013
Of which total liabilities held for sale 8,405 129 871 765 10,170
Net assets attributable to equity owners and non-controlling interests 64,336 17,583 (13,835) 2,364 70,448
Cost to acquire property, plant and equipment and intangible assets 1,953 325 186 69 2,533
No directors accrued benefits under defined benefit schemes during 2014 and 2013. No directors are accruing benefits under a money purchase
(a) At 31 December 2014, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in the
Group, as defined in UK legislation, were £654,534 in respect of loans to six persons who were directors of the company at any time during the financial period.
(b) For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the company and members of the Executive
On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of The Royal Bank of Scotland Group plc.
The Group enters into transactions with many of these bodies on an arm’s length basis. The principal transactions during 2014, 2013 and 2012 included: Bank of England facilities and the issue of debt guaranteed by the UK Government discussed below and the Asset
April 2009 was underwritten by HM Treasury and, in December 2009, B
shares were issued to HM Treasury and a contingent capital agreement concluded with HM Treasury (see Note 27). Other transactions include the payment of: taxes principally UK corporation tax (page 373) and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy (page 363) and FSCS
The Group may participate in a number of schemes operated by the Bank of England in the normal course of business.
The Group participated in the National Loan Guarantee Scheme (NLGS), providing loans and facilities to eligible customers at a discount of one percent. It did not issue any guaranteed debt under the scheme and consequently, it was not committed to providing a particular volume of reduced rate facilities. At 31 December 2014, the Group had no amounts outstanding under the scheme (2013 - nil; 2012 - £898 million). The
Group had no amounts outstanding under the scheme (2013 - nil; 2012 -
Net cash flows from operating activities before tax (2,991) (2,679) (926)
Effects of exchange rate changes on cash and cash equivalents (3) 14 (50)
Cash and cash equivalents at 31 December 15 1,105 1,345 997
The accounts are prepared on a going concern basis (see the Report of the directors, page 99) and in accordance with International Financial Reporting
as adopted by the European Union (EU) (together IFRS). The company's financial statements are prepared in accordance with IFRS as issued by the
IASB and are presented in accordance with the Companies Act 2006.
Profit/(loss) and total comprehensive income for the year 1,128 964 (684)
The following table shows the company's financial assets and liabilities in accordance with the categories of financial instruments in IAS 39.
Loans and advances to banks (1) - loans and receivables 24,490 24,574 24,066
Loans and advances to customers (1) - loans and receivables 299 153 1,266
Total 12 months 12 months 12 months 12 months 12 months 12 months £m £m £m £m £m £m £m £m £m
The following table shows by contractual maturity, the undiscounted cash flows payable up to a period of 20 years from the balance sheet date, including future payments of interest.
2014 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years £m £m £m £m £m £m
*Held for fair value hedging purposes 173 11 104 37 291 —
The above information is provided in relation to the principal related undertakings only as permitted by Section 410(2) of the Companies Act 2006. Full information on all related undertakings is included in the Annual Return delivered to the Registrar of Companies for Scotland.
9 Accruals, deferred income and other liabilities 2014 2013 2012 £m £m £m £m £m £m
Increase in loans and advances to banks and customers (4,641) (225) (4,737)
13 Interest received and paid £m £m £m 14 Analysis of changes in financing during the year
Share capital sub-division and consolidation — — (8,933) — — —
Other adjustments including foreign exchange movements — — — (3,877) (1,095) (219)
Profit/(loss) before insurance net claims and impairment losses 1,291 (729) (1,042) 6,218 7,957
Derivatives, settlement balances and short positions 377,337 318,861 467,802 572,499 478,076
Share price per ordinary share at year end - £ 3.94 3.38 3.25 2.02 3.91
Market capitalisation at year end - £bn 45.2 38.2 36.3 22.3 42.8
Return on average total assets (2) (0.3%) (0.7%) (0.4%) (0.1%) (0.1%)
The following table analyses gross loans and advances to customers by remaining maturity, geographical area (location of office) and type of customer.
Loans and advances to customers - net 378,238 440,722 500,135 515,606 555,260
RBS provides credit facilities at variable rates to its corporate and retail customers. Variable rate credit extended to RBS’s corporate and commercial customers includes bullet and instalment loans, finance lease agreements and overdrafts; interest is generally charged at a margin over a benchmark rate such as LIBOR or base rate. Interest on variable rate retail loans may also be based on LIBOR or base rate; other variable rate retail lending is charged at variable interest rates set by RBS such as its mortgage standard variable rate in the UK.
Notes: (1) Includes £10 million release relating to loans and advances to banks (2013 - £15 million release; 2012 - £23 million charge; 2011 - nil; 2010 - £13 million release). (2) Excludes reverse repos.
Closing provisions for impairment as a % of total REIL 65% 64% 52% 49% 47%
REIL as a % of gross lending to customers excluding reverse repos 7.6% 9.5% 9.1% 8.6% 7.4%
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 2014 include £7,052 million (2013 - £7,687 million; 2012 - £6,009 million) of loans subject to forbearance granted during the year.
Within but within but within Over 3 months 6 months 12 months 12 months Total £m £m £m £m £m
The table below summarises other contractual cash obligations by payment date.
PRA, an operationally independent subsidiary of the Bank of England, is responsible for promoting the safety and soundness of systemically important financial institutions in the UK. The FCA's overall objective is to ensure financial markets function well. This is supported by its operational objectives of: securing an appropriate degree of protection for consumers; protecting and enhancing the integrity of the UK financial system; and promoting effective competition in the interests of consumers.
As at 31 December 2014, 16 companies in RBS, spanning a range of financial services sectors (banking, insurance and investment business), were authorised to conduct financial activities in the UK. The UK
authorised banks in RBS Group include The Royal Bank of Scotland plc,
Ireland is provided by Ulster Bank Ireland Limited, which is supervised by the Central Bank of Ireland and the European Central Bank under the
RBS is subject to extensive regulations that impose obligations on financial institutions to maintain appropriate policies, procedures and controls to ensure compliance with the rules and regulations to which they are subject.
(the “Federal Reserve”). Among other things, the Group's direct and indirect activities and investments in the United States are limited to those that are 'financial in nature' or 'incidental' or 'complementary' to a financial activity, as determined by the Federal Reserve. The Group is also required to obtain the prior approval of the Federal Reserve before acquiring directly or indirectly, the ownership or control of more than 5%
of any class of the voting shares of any US bank or holding company.
The Group is in the process of selling down its holding in Citizens
Financial Group, but currently retains a sufficient ownership stake as to come under the regulatory arrangements described below.
Comptroller of the Currency, which is charged with the regulation and supervision of nationally chartered banks. Citizens Bank, NA owns
Citizens Securities, Inc., a US registered broker dealer subject to regulation and supervision by the US Securities and Exchange
The Group's primary US broker dealer, RBS Securities Inc. (RBSSI), formerly known as Greenwich Capital Markets, Inc., is also subject to regulation and supervision mainly by the SEC and FINRA with respect to its securities activities. The futures activities of RBSSI are subject to regulation and oversight mainly by the US Commodity Futures Trading
Chicago Mercantile Exchange Group (CME). RBSSI is also supervised by the Federal Reserve Bank of Boston.
The Royal Bank of Scotland plc is a provisionally registered swap dealer; it too is subject to oversight by the CFTC and the NFA.
Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Vermont. A substantial majority of the UK branches are owned by the
Royal Bank, NatWest and their subsidiaries or are held under leases with unexpired terms of over 50 years. RBS's principal properties include its headquarters at Gogarburn, Edinburgh, its principal offices in London at 135 and 280 Bishopsgate and the Drummond House administration centre located at South Gyle, Edinburgh.
In December 2008, The Solicitor for the Affairs of Her Majesty's Treasury
(HM Treasury) acquired 22,854 million ordinary shares of 25p each representing 57.9% of the company's issued ordinary share capital.
In December 2009, HM Treasury acquired 51 billion B shares in the company representing the entire issued B share capital. As a result of the ordinary share sub-division and consolidation which took place in June 2012, HM Treasury’s holding in the company’s ordinary shares became 3,964 million ordinary shares of £1 each. At 31 December 2014, HM
Acquisitions were subject to the satisfaction of various conditions, including the company having obtained the approval of its shareholders in relation to the Acquisitions.
Contingent Subscription of the Contingent B shares in the Acquisition and
Contingent Capital Agreement. For a period of five years from 22
Contingent B shares in no fewer than two tranches of £6 billion and £2 billion (or such smaller amounts as the company and HM Treasury may agree). Any unused portion of the £8 billion could have been subscribed in one or more further tranches.
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.
The company agreed to a number of undertakings, including with respect to: (i) restrictions on the payment of dividends or other distributions on, and the redemption of, certain securities; (ii) expectations regarding the repurchase of the B shares by the company; (iii) negotiating in good faith to maintain the status of the B shares and Dividend Access Share as
Core Tier 1 capital; and (iv) restrictions in relation to the company's share premium account.
HM Treasury has agreed to waive its statutory pre-emption rights arising out of the B shares and the Dividend Access Share in respect of any future issue of equity securities by the company other than B shares and has agreed to vote its B shares and the Dividend Access Share, as applicable, in favour of each special resolution to disapply its preemption rights under the B shares and/or the Dividend Access Share then held by HM Treasury every time they arise in respect of any such future issue. The pre-emption rights arising out of the B shares and the
HM Treasury has agreed that it shall not be entitled to exercise its option to convert B shares into ordinary shares to the extent that it holds more than 75 per cent of the ordinary shares of the company or to the extent that the exercise of such option would result in it holding more than 75 per cent of the ordinary shares of the company.
shares and the Dividend Access Share, together with any other votes which HM Treasury is entitled to cast in respect of any ordinary shares held by or on behalf of HM Treasury, would exceed 75 per cent of the total votes eligible to be cast on a resolution proposed at a general meeting of the company.
The Dividend Access Share (“DAS”) was created in 2009 (see B Share
Acquisition and Contingent Capital Agreement above). On 9 April 2014, the Company entered into the DAS Retirement Agreement (“DRA”) with
January 2021, on any part of the balance that has not been paid before 1
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
The State Aid Commitment Deeds also provide for RBS's undertakings in respect of State Aid to be modified in certain limited circumstances.
Sale of RBS England & Wales and NatWest Scotland branch based business
Partners, in relation to its RBS England & Wales and NatWest Scotland branch based business. Following completion of the operational and legal separation of the business into a standalone bank to be branded Williams
Royal Bank on 21 October 2013, which will be exchangeable for a significant minority interest in Williams & Glyn at the time of the IPO. The bond will convert into Williams & Glyn shares at the IPO price, subject to a minimum ownership level which will be linked to the tangible book value of Williams & Glyn prior to the IPO, and in any case no more than a stake of 49%. To the extent the maximum ownership level is reached, the bond will be partially redeemed in cash such that investors will receive a total value of £600 million of cash and shares at the IPO price. At the IPO, subject to RBS’s consent, investors will have the option to acquire up to 10% additionally at the IPO price, subject to their pro forma ownership being no more than 49% in aggregate. RBS provided a £270 million secured financing package to the investor consortium in relation to the investment.
Financial Group, Inc. (CFG) immediately prior to the completion of the
IPO of CFG. The SSA governs the relationship between the parties during the divestment of the company’s shareholding in CFG. The SSA
will remain in place until the date on which the company ceases to own at least 4.99% of CFG’s issued and outstanding common stock or, if earlier, the date on which the company receives written notice from the Federal
The SSA includes mutual indemnities for breach of the SSA, losses arising from the indemnifying party’s business and, in the case of CFG, losses arising from material inaccuracies in CFG’s filings with governmental authorities and securities exchanges (excluding any liabilities arising out of information provided by the company for inclusion therein, with respect to which the company has agreed to indemnify
On 7 November 2014, in order to comply with an amendment to the UK
Treasury nor any of its associates will take any action that would have the effect of preventing the company from complying with its obligations under the Listing Rules; and (iii) neither HM Treasury nor any of its associates will propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules.
In the first quarter of 2015, the Group announced its intention to restructure its corporate and institutional banking (“CIB”) business to focus on UK corporate and financial institutions with a targeted presence in selected western European customer segments. The future CIB model will: • focus on the Group’s leading positions in UK rates, debt capital markets and foreign exchange; • retain two trading hubs in the US and Singapore to support the main
Reform) Act 2013 (the “Banking Reform Act 2013”), including its ringfencing requirements (the “ring-fence”). See also ‘Implementation of the ring-fence in the UK which will begin in 2015 will result in material structural changes to the Group’s business. These changes could have a material adverse effect on the Group’. There can be no assurance that the Group will be able to successfully implement this restructuring programme together with other changes required of the Group in the time frames contemplated or at all, and, as a result, the Group may not be able to meet its capital targets.
The Group’s ability to dispose of businesses and certain portfolios, including the further disposal of its remaining stake in CFG and potential disposals associated with the restructuring of its CIB business, and the price achieved for such disposals will be dependent on prevailing economic and market conditions, which remain volatile. As a result there is no assurance that the Group will be able to sell or run down (as applicable) the businesses it is now planning to sell or exit or asset portfolios it is seeking to sell either on favourable economic terms to the
The occurrence of any of the risks described above could negatively affect the Group’s ability to implement its strategic plan and achieve its capital targets and could have a material adverse effect on the Group’s business, reputation, results of operations, financial condition and cash flows. There can also be no assurance that if the Group is able to execute its new strategic plan that the new strategy will ultimately be successful or beneficial to the Group.
Implementation of the ring-fence in the UK which will begin in 2015 will result in material structural changes to the Group’s business. These changes could have a material adverse effect on the Group
May 2015, requiring compliance as soon as practicable thereafter and setting a final deadline for full implementation by 2019. In June 2014, HM
Parliament in July 2014, setting out the detail of the ring-fencing regime, specifying which entities will be “ring-fenced banks” and the activities and services that ring-fenced banks can, and cannot, conduct which came into force on 1 January 2015. In October 2014, the PRA published its first consultation paper (CP19/14) on the PRA's ring-fencing rules, focusing on legal structure, governance and continuity of services and facilities.
The PRA requested that all firms expected to be affected by ring-fencing, including the Group, submit a preliminary plan of their anticipated legal and operating structures to their supervisors by 6 January 2015, which the Group has done. The PRA will carry out further consultations during 2015 with the Group and other affected UK banks and is expected publish its final rules and supervisory statements during 2016.
Although final rules and supervisory statements will not be available until later in 2015 and early 2016, based on the proposals put forward by the
• The Group intends to establish a ring-fence bank (“RFB”) for its banking services while the non-ring-fence group (“NRFB”) will hold the Group’s remaining CIB activities, the operations of RBS
• As part of the establishment of the RFB, it will be necessary for the
RFB to operate independently from the NRFB and an entirely new corporate governance structure will need to be put in place by the
The Group will also need to evaluate, among other things, the tax exposure of each of the RFB and NRFB, as well as the impact of the ring-fence on intra-group funding and the credit ratings and external funding arrangements of each of these entities. As this structure has never been tested, the Group cannot provide any assurances regarding its ability to successfully implement such a structure.
• In order to comply with the ring-fence requirements, from 2026 it will not be possible for the RFB and the NRFB to participate in the same pension plan. As a result, it will be necessary for either the RFB or
Implementation of the ring-fence proposals in the UK will result in major changes to the Group’s corporate structure, to the delivery of its business activities conducted in the UK and other jurisdictions where the Group will operate, as well as changes to the Group’s business model. The steps required to implement the ring-fence of its retail and certain other core banking activities in the UK from other activities of the Group as well as restructuring other operations within the Group in order to comply with the new rules and regulations are extraordinarily complex and will take an extended period of time to put into place. Implementation will be costly and there can be no assurance that the ring-fence of the RFB and the
NRFB will be completed on time to meet the regulatory deadline in 2019.
In the third quarter of 2013 and in 2014, the Group revised its strategic plan by implementing its new divisional and functional structure and embarked on a major investment program to upgrade the Group’s operations and IT infrastructure (the “2013/2014 Strategic Plan”). The 2013/2014 Strategic Plan built on the core business restructuring implemented by the Group after the financial crisis which initially focused on reducing the size of the Group’s balance sheet, disposing of the
“higher risk and capital intensive assets” in RCR and strengthening the
Each aspect of the implementation of the Transformation Plan carries material risks. See also ‘Implementation by the Group of the various initiatives and programmes which form part of the Group’s
Transformation Plan, will be a viable, competitive, customer focused and profitable bank. For a further description of the risks associated with the various initiatives comprised in the Transformation Plan, see ‘The
Group’s ability to achieve its capital targets will depend on the success of the Group's plans to further reduce the size of its business through the restructuring of its corporate and institutional banking business and make further divestments of certain of its portfolios and businesses including its remaining stake in Citizens Financial Group’, ‘Implementation of the ringfence in the UK which will begin in 2015 will result in material structural changes to the Group’s business. These changes could have a material adverse effect on the Group’, ‘The Group is currently implementing a number of significant investment and rationalisation initiatives as part of the Group’s IT and operational investment programme. Should such investment and rationalisation initiatives fail to achieve the expected results, it could have a material adverse impact on the Group’s operations and its ability to retain or grow its customer business’. Failure of the Transformation Plan to result in a viable, competitive, customer focused and profitable bank would have a material adverse effect on the
The Group is currently implementing a number of significant investment and rationalisation initiatives as part of the Group’s IT and operational investment programme. Should such investment and rationalisation initiatives fail to achieve the expected results, it could have a material adverse impact on the Group’s operations and its ability to retain or grow its customer business
The intent of the 2013/2014 Strategic Plan and of the restructuring of the
The Group started implementing an investment programme of £750 million in 2013 expected to run through 2015 to materially upgrade its IT
systems following a number of system failures in the past couple of years. This investment in the Group’s IT capability is intended to address the material increase in customer use of online and mobile technology for banking over the past few years as well as provide the capability to continue to grow such services in the future. 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.
If the Group is unable to offer competitive, attractive and innovative products that are also profitable, it could lose market share, incur losses on some or all of its activities and lose opportunities for growth. In addition to upgrading its current IT infrastructure, the Group is also undertaking a major project to rationalise its legacy IT infrastructure, aiming to lower costs and improve resilience. With the implementation of the ring-fence regulatory regime there will be further need to manage the
Group’s control, including normal levels of market fluctuation, this level of revenue may not be achieved in the timescale envisaged or at any time.
and FCA in connection with the ring-fence regime. Material differences between the rules ultimately adopted and the assumptions made in the plan proposed to implement the ring-fence could make it impossible to execute the ring-fence as currently envisaged. The Transformation Plan is also intended to improve the
franchise. Due to material uncertainties, factors beyond the Group’s control, and the increased operational risk described above, there can be no guarantee that such improvements will be achieved in the timescale envisaged or at any time or that it will not result in further regulatory scrutiny.
The Group is involved in ongoing class action litigation, investigations into foreign exchange trading and rate setting activities, continuing LIBOR
related litigation and investigations, securitisation and securities related litigation, and anti-money laundering, sanctions, mis-selling and compliance related investigations, in addition to a number of other matters. In November 2014, the Group announced that it had reached a settlement with the FCA in the United Kingdom and with the Commodity
The Group may be required to make new or increase existing provisions in relation to legal proceedings, investigations and governmental and regulatory matters. In Q3 2014, the Group booked a provision of £400 million relating to penalties incurred in connection with the investigations and reviews relating to foreign exchange trading settled with the FCA and the CFTC and during 2014 the Group booked additional provisions of £650 million for Payment Protection Insurance (resulting in total provisions made for this matter of £3.7 billion, of which £2.9 billion had been utilised at 31 December 2014). The provision for interest rate hedging products redress and administration costs was also increased by £185 million in 2014, with total provisions relating to this matter totalling £1.4 billion, of which £1.0 billion had been utilised at 31 December 2014.
Ahead of the upcoming UK election in May 2015, there is uncertainty around how the policies of the elected government may impact the
Group, including a possible referendum on the UK's membership of the
The Group may be unable to attract or retain senior management
Implementation of the Group’s strategy and its future success depends on its ability to attract, retain and remunerate highly skilled and qualified personnel, including senior management (which include 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). Following the implementation in the UK of provisions of CRD IV relating to compensation in the financial sector and taking into account the views of
UKFI, the Group is restricted from paying variable remuneration to individuals for a particular year in an amount higher than the level of his or her fixed remuneration which may place the Group at a competitive disadvantage.
The Group’s directors as well as members of its executive committee and certain other senior managers and employees will also be subject to the new responsibility regime introduced under the Banking Reform Act 2013 which will impose greater responsibility on such individuals. The new rules include (i) a senior managers’ regime which will require such senior managers to be pre-approved either by the PRA or FCA whilst the new rules themselves also introduce a “presumption of responsibility” for those approved as such - where contraventions of a relevant regulatory requirement occur, the accountable senior manager will be presumed guilty of misconduct unless he or she shows to the satisfaction of the relevant regulator that he or she took all reasonable steps to prevent the contravention occurring (or continuing), (ii) a certification regime which will require the Group to assess the fitness and propriety of certain of its employees (other than senior managers), who are considered to pose a risk of significant harm to the Group or its customers and (iii) a conduct rules regime (which as currently proposed would apply regulatory prescribed conduct rules to most employees of the Group with a UK
PRA and the FCA and there remains uncertainty as to the final scope of the new rules and any transitional arrangements. Final rules are expected to enter into force in late 2015 (and early 2016 for the new certification regime). The new regulatory regime may contribute to reduce the pool of candidates for key management and non-executive roles, including nonexecutive directors with the right skills, knowledge and experience, or increase the number of departures of existing employees, given concerns over the reverse burden of proof as well as the allocation of responsibilities introduced by the new rules.
In addition, certain of the Group’s employees in the UK, continental
Europe and other jurisdictions in which the Group operates are represented by employee representative bodies, including trade unions.
Engagement with its employees and such bodies is important to the
Group and a breakdown of these relationships could adversely affect the
Group has complex and geographically diverse operations and operational risk and losses can result from internal and external fraud, errors by employees or third parties, failure to document transactions properly or to obtain proper authorisations, failure to comply with applicable regulatory requirements and conduct of business rules
Operational risks will be heightened as a result of the Group’s implementation of its Transformation Plan as described in more detail under ‘Implementation by the Group of the various initiatives and programmes which form part of the Group’s Transformation Plan subjects the Group to increased and material execution risk’. Although the Group has implemented risk controls and loss mitigation actions and significant resources and planning have been devoted to plans to mitigate operational risk associated with the Group’s activities as well as the implementation of the Group’s Transformation Plan, it is not possible to be certain that such actions have been or will be effective in controlling each of the operational risks faced by the Group. Ineffective management of operational risks, including the material operational risks that will arise in implementing the Transformation Plan, could have a material adverse effect on the Group’s business, financial condition and results of operations.
The competitive landscape for banks and other financial institutions in the
UK, the US and throughout the rest of Europe is changing rapidly. Recent regulatory and legal changes are likely to result in new market participants and changed competitive dynamics in certain key areas, such as in retail banking in the UK. The UK retail banking sector has been subjected to intense scrutiny by the UK competition authorities and by other bodies in recent years, including market reviews conducted by the Competition & Markets Authority (CMA) and its predecessor the
Accounts (PCAs), the ICB, whose final report was published in 2012 and the Parliamentary Commission on Banking Standards whose report was published in 2013. These reviews raised significant concerns about the effectiveness of competition in the banking sector.
In 2014, the CMA published two market studies about SME banking and
PCAs. On the basis of its findings and following consultation, the CMA
banking and PCAs. An MIR can be made only if the CMA has reasonable grounds for suspecting that any feature, or combination of features, of a market in the UK for goods or services prevents, restricts or distorts competition. Such investigations typically last between 15-24 months and the CMA currently expects to publish provisional findings in September 2015. While it is too early to assess the potential impact on the Group of these reviews and investigations, the competitive landscape in which the
The wholesale banking sector has also been the subject of recent scrutiny. In 2014, the FCA launched a review of competition in the wholesale sector (primarily relating to competition in wholesale securities and investment markets and related activities such as corporate banking)
The competitive landscape in the UK is also likely to be affected by the
(including the Group) have submitted plans for their legal and operational structures to implement the new ring-fence regime to the PRA. The implementation of such plans may result in the consolidation of newly separated businesses or assets of certain financial institutions with those of other parties to realise new synergies or protect their competitive position. This consolidation, in combination with the introduction of new entrants into the markets in which the Group operates which is being actively encouraged by the UK Government is likely to increase competitive pressures on the Group.
In addition, certain competitors may have more efficient operations, including better IT systems allowing them to implement innovative technologies for delivering services to their customers, and may have access to lower cost funding and/or be able to attract deposits on more favourable terms than the Group. Furthermore, the Group’s competitors may be better able to attract and retain clients and key employees, which may negatively impact the Group’s relative performance and future prospects. In addition, recent and future disposals and restructurings by the Group in the context of its Transformation Plan as well as constraints imposed on the Group’s compensation structure and its ability to compensate its employees at the same level as its competitors may also have an impact on its ability to compete effectively.
These and other changes to competition could have a material adverse effect on the Group’s business, margins, profitability, financial condition and prospects.
The Group’s businesses and performance can be negatively affected by actual or perceived global economic and financial market conditions and other global risks although the Group will be increasingly impacted by developments in the UK as its operations become gradually more focused on the UK
On completion of the Group’s Transformation Programme its business focus will be preponderantly in the UK. However, the Group’s businesses and many of its customers are, and will be, affected by global economic conditions, perceptions of those conditions and future economic prospects. The outlook for the global economy over the near to mediumterm is increasingly uncertain due to a number of factors including geopolitical risks, concerns around global growth and deflation. Risks to growth and stability stem mainly from continued imbalances in many countries in Europe and elsewhere, slowing growth in emerging markets and China and the potential consequences of continued sanctions and depressed oil prices on the Russian economy. Further instability may result from uncertainty as to how economies and counterparties will be affected, directly or indirectly, by lower oil prices and other commodity prices as well as to the impact of monetary policy measures adopted by the ECB, the US Federal Reserve and the Swiss Central Bank. There remains considerable uncertainty about when the Bank of England and the Federal Reserve will begin to raise policy interest rates. The Group’s businesses and performance are also affected by financial market conditions. Although capital and credit markets around the world have been relatively stable since 2012, financial markets, in particular equity markets, experienced higher volatility in the last quarter of 2014 which has continued into 2015. This volatility is attributable to many of the factors noted above.
The challenging operating environment for the Group’s businesses, created by uncertain economic and market conditions is characterised by: • reduced activity levels, additional write-downs and impairment charges and lower profitability, which either alone or in combination with regulatory changes or the activities of other market participants may restrict the ability of the Group to access capital, funding and liquidity; • prolonged periods of low interest rates resulting from ongoing central bank measures to foster economic growth which constrain, through margin compression and low returns on assets, the interest income earned by the Group; and
As the Group refocuses on its operations in the UK as a result of its
UK economy remains. The euro could be abandoned as a currency by one or more countries, or in an extreme scenario, the abandonment of the euro could result in the dissolution of the European Economic and
EMU and the resulting redenomination of financial instruments from the euro to a different currency, are impossible to predict fully. However, if any such events were to occur they would likely: • result in significant market dislocation; • heighten counterparty risk; • result in downgrades of credit ratings for European borrowers, giving rise to increases in credit spreads and decreases in security values; • disrupt and adversely affect the economic activity of the UK and other European markets; and
• adversely affect the management of market risk and in particular asset and liability management due, in part, to redenomination of financial assets and liabilities and the potential for mismatches.
The Group is subject to a variety of risks as a result of implementing the
State aid and approved changes to RBS’s restructuring plan in its State
Aid Amendment Decision of 9 April 2014. RBSG also entered into a
Glyn business and the divestment of the rest of the Group’s interest in
September 2013. The Group is required, pursuant to the terms of the
State Aid Amendment Decision, to dispose of its remaining interest in
CFG by the end of 2016 (with a possible 12 month extension) and must divest its interest in Williams & Glyn by way of an initial public offering by the end of 2016 with the disposal of the remainder of its interest by the end of 2017. Under the terms of the State Aid Amendment Decision, a divestiture trustee may be empowered to conduct these disposals, with the mandate to complete the disposal at no minimum price, if the Group fails to complete such required disposals within agreed or renegotiated time frames, which may result in the Group achieving less than the full value of its investment due to then prevailing market conditions.
Aid Amendment Decision, including the required divestments, it might constitute a misuse of aid which could have a material adverse impact on the Group.
Authority and potentially other exchanges where its securities are currently listed and traded. HM Treasury (or the UKFI on its behalf) may sell all or a part of its holding of ordinary shares at any time. Any offers or sale of a substantial number of ordinary shares or securities convertible or exchangeable into ordinary shares by or on behalf of HM Treasury, or an expectation that it may undertake such an offer or sale, could negatively affect prevailing market prices for securities issued by the
Treasury’s rights as majority shareholder could give rise to conflict 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.
The Group’s business performance could be adversely affected if its capital is not managed effectively or as a result of changes to capital adequacy requirements
Effective management of the Group’s capital is critical to its ability to operate its businesses, and to pursue its strategy of returning to standalone strength. The Group is required by regulators in the UK, the
EU, the US and other jurisdictions in which it undertakes regulated activities to maintain adequate capital resources. Adequate capital also gives the Group financial flexibility in the face of continuing turbulence and uncertainty in the global economy and specifically in its core UK, US
and European markets. From 2016, in accordance with the provisions of the Capital Requirements Regulation (“CRR”), a minimum level of capital adequacy will be required to meet new regulatory capital requirements allowing the Group to make certain discretionary payments relating to
The Basel Committee on Banking Supervision’s package of reforms to the regulatory capital framework (“Basel III”) raised the quantity and quality of capital required to be held by a financial institution with an emphasis on Common Equity Tier 1 (CET1) capital and introduces an additional requirement for both a capital conservation buffer and a countercyclical buffer to be met with CET1 capital. Global systemically important banks (GSIBs) will be subject to an additional CET1 capital requirement, depending on a bank’s systemic importance. The Group has been identified by the Financial Stability Board (FSB) as a GSIB. The
In addition, regulatory proposals relating to domestically systemically important banks (DSIBs) continue to be progressed and could impact the level of CET1 that is required to be held by the Group. The EBA
In addition the Financial Policy Committee (“FPC”) of the Bank of
Basel III has been implemented in the EU with a new Directive and
Under CRD IV, the Group is required, on a consolidated basis, to hold a minimum amount of regulatory capital of 8% of risk weighted assets of which at least 4.5% must be CET1 capital and at least 6% must be tier 1 capital (together, the “Pillar 1 requirements”). In addition, national supervisory authorities may add extra capital requirements to cover risks they believe are not covered or insufficiently covered by the Pillar 1 requirements (the “Pillar 2A guidance”). The PRA requires that Pillar 2A
risks should be met with at least 56% CET1 capital, no more than 44%
additional tier 1 capital and at most 25% tier 2 capital. CRD IV also introduces five new capital buffers that are in addition to the Pillar 1 and
Some or all of these buffers may be applicable to the Group as determined by the PRA.
The PRA published a consultation in January 2015 suggesting certain changes to its Pillar 2A framework which will introduce new methodologies for determining Pillar 2A capital as well as the PRA’s approach to operating the Pillar 2A buffer.
Under Article 141 (Restrictions on distribution) of the CRD IV Directive, member states of the EU must require that institutions that fail to meet the “combined buffer requirement” will be subject to restricted
“discretionary payments” (which are defined broadly by CRD IV as payments relating to CET1 (dividends), variable remuneration and payments on additional tier 1 instruments). The restrictions will be scaled according to the extent of the breach of the “combined buffer requirement” and calculated as a percentage of the profits of the institution since the last distribution of profits or “discretionary payment”.
“MDA”) in each relevant period. As an example, the scaling is such that in the bottom quartile of the “combined buffer requirement”, no
In October 2014 the FPC published its recommendation on the overall leverage ratio framework for the UK banking system. The FPC
explicitly ruled out a breach of the leverage ratio resulting in an automatic constraint to capital distributions via the “maximum distributable amount”, preferring to leave this linked to risk weighted assets for the purposes of simplicity.
TLAC requirements may differ. As the implementation of capital and loss absorption requirements under BRRD in the UK is subject to adoption of secondary legislation and subject to PRA supervisory discretion in places, and the implementation and scope of TLAC remains subject to significant uncertainty, the Group is currently unable to predict the impact such rules would have on its overall capital and loss absorption requirements or its ability to comply with applicable capital or loss absorbency requirements or to make certain discretionary distributions.
European Union, the UK, the US and in other jurisdictions in which the
If the Group is unable to raise the requisite amount of Tier 1 and Tier 2 capital, or loss absorbing debt securities it may be required to reduce further the amount of its risk weighted assets or total assets and engage in the disposal of core and other non-core businesses, which may not occur on a timely basis or achieve prices which would otherwise be attractive to the Group.
Any change that limits the Group’s ability to implement its capital plan, to access funding sources or to manage effectively its balance sheet and capital resources (including, for example, reductions in profits and retained earnings as a result of write-downs or otherwise, increases in risk-weighted assets, regulatory changes, actions by regulators, delays in the disposal of certain key assets or the inability to syndicate loans as a result of market conditions, a growth in unfunded pension exposures or otherwise) could have a material adverse effect on its business, financial condition and regulatory capital position.
Government is more likely in the future to make greater use of its resolution tools that allow burden sharing with debt holders. In 2014 credit ratings of RBSG, the Royal Bank and other Group members were downgraded in connection with the Group’s creation of RCR, coupled with concerns about execution risks, litigation risk and the potential for conduct related fines. RBSG’s long-term and short-term credit ratings were further downgraded by two notches in 2015 by Standard & Poor’s
Rating Services (“S&P”) to reflect S&P’s view that extraordinary government support would now be unlikely in the case of UK nonoperating bank holding companies and is likely to become less predictable for bank operating companies in the UK under the newly enacted legislation implementing the bail-in provisions of the BRRD.
Any further reductions in the long-term or short-term credit ratings of
RBSG or one of its principal subsidiaries (particularly the Royal Bank)
Any downgrade in the UK Government’s credit ratings could adversely affect the credit ratings of Group companies and may have the effects noted above. Credit ratings of RBSG, the Royal Bank, The Royal Bank of Scotland N.V. (RBS N.V.) and Ulster Bank Limited are also important to the Group when competing in certain markets, such as over-thecounter derivatives. As a result, any further reductions in RBSG’s longterm or short-term credit ratings or those of its principal subsidiaries could adversely affect the Group’s access to liquidity and its competitive position, increase its funding costs and have a material adverse impact on the Group’s earnings, cash flow and financial condition.
The Group’s ability to meet its obligations including its funding commitments depends on the Group’s ability to access sources of liquidity and funding
Management of the Group’s liquidity and funding focuses, among other things, on maintaining a resilient funding strategy for its assets in line with the Group’s wider strategic plan. Although conditions have improved, there have been recent periods where corporate and financial institution counterparties have reduced their credit exposures to banks and other financial institutions, limiting the availability of these sources of funding.
The Group relies on customer deposits to meet a considerable portion of its funding and it has targeted maintaining a loan to deposit ratio of around 100%. The level of deposits may fluctuate due to factors outside the Group’s control, such as a loss of confidence, increasing competitive pressures for retail customer deposits or the repatriation of deposits by foreign wholesale or central bank 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.
The Group’s businesses are subject to substantial regulation and oversight. Significant regulatory developments and increased scrutiny by the Group’s key regulators has had and is likely to continue to increase compliance risks and could have a material adverse effect on how the
Group conducts its business and on its results of operations and financial condition
The Group is subject to extensive financial services laws, regulations, corporate governance requirements, administrative actions and policies in each jurisdiction in which it operates. Many of these have changed recently and are subject to further material changes. Among others, the adoption of rules relating to ring-fencing, prohibitions on proprietary trading, the entry into force of CRD IV and the BRRD and certain other measures in the UK, the EU and the US has considerably affected the regulatory landscape in which the Group operates and will operate in the future. Increasing regulatory focus in certain areas and ongoing and possible future changes in the financial services regulatory landscape
which will begin in 2015 will result in material structural changes to the
Group’s business. These changes could have a material adverse effect on the Group’. Such changes may also result in an increased number of regulatory investigations and proceedings and have increased the risks relating to the Group’s ability to comply with the applicable body of rules and regulations in the manner and within the timeframes required.
Any of these developments (including failures to comply with new rules and regulations) could have an impact on how the Group conducts its business, its authorisations and licences, the products and services it offers, its reputation, the value of its assets, and could have a material adverse effect on its business, funding costs and its results of operations and financial condition. See ‘Implementation by the Group of the various initiatives and programmes which form part of the Group’s
(ring-fencing); • restrictions on proprietary trading and similar activities within a commercial bank and/or a group which contains a commercial bank; • the implementation of additional or conflicting capital, loss absorption or liquidity requirements, including those mandated under
• the regulation or endorsement of credit ratings used in the EU
In the EU, the UK and the US regulators have or are in the process of implementing resolution regimes to ensure the timely and orderly resolution of financial institutions and limit the systemic risks resulting from the failure of global and complex financial groups. In the EU and the
As a result of its status as a GSIB and in accordance with the PRA’s resolution and recovery schemes then in place in the UK, the Group was required to meet certain resolution planning requirements by the end of 2012 and 2013. The Group’s US businesses and CFG made their required submissions to the Federal Reserve and the FDIC by their 1 July 2014 due dates. The US supervisory agencies subsequently announced that, beginning in 2015, banks would be required to submit their annual resolution plans by 31 December of each year instead of by 1 July.
In addition to the preventive measures set out above, the UK resolution authority now has available a wide range of powers to deal with failing financial institutions. As a result of the implementation of BRRD in the UK
Among the changes introduced by the Banking Reform Act 2013, the
Banking Act 2009 was amended to insert a bail-in option as part of the powers available to the UK resolution authority. The bail-in option was introduced as an additional power available to the Bank of England to enable it to recapitalise a failed institution by allocating losses to its shareholders and unsecured creditors in a manner that seeks to respect the hierarchy of claims in liquidation. The BRRD also includes a “bail-in”
tool, which gives the relevant supervisory authorities the power to write down or write off claims (including debt securities issued by the Group and its subsidiaries) of certain unsecured creditors of a failing institution and/or to convert certain debt claims to equity or to other securities of the failing institution or to alter the terms of an existing liability. The UK
Government amended the provisions of the Banking Act 2009, as amended by the Banking Reform Act 2013, to ensure the consistency of these provisions with the bail-in provisions under the BRRD which came into effect on 1 January 2015, subject to certain transition provisions effective for debt instruments as of 19 February 2015 and with the exception of provisions relating to MREL and Article 55 of the BRRD
which relates to liabilities within the scope of the bail-in powers but governed by the law of a third country. Such bail-in mechanism, pursuant to which losses would be imposed on shareholders and, as appropriate, creditors (including senior creditors) of the Group (through write-down or conversion into equity of liabilities including debt securities) would be used to recapitalise and restore the Group to solvency. The bail-in regime adopted under the BRRD (and implemented in the UK) also provides that shareholders and creditors should not be left worse off as a result of the exercise of the stabilisation powers than they would have been had the bank not been resolved, but instead placed into insolvency. The exercise of the bail-in option will be determined by the resolution authority which will have discretion to determine whether the Group has reached a point of non-viability. Because of this inherent uncertainty, it will be difficult to predict when, if at all, the exercise of the bail-in power may occur.
The methods for implementation of any resolution and recovery scheme remain the subject of debate, particularly with respect to banking group companies and for GSIBs with complex cross border activities. Such debate includes whether the bail-in tool may be exercised through a single point of entry at the holding company or at various levels of the corporate structure of a GSIB.
The Group’s operations are highly dependent on its IT systems and is increasingly exposed to cyber security threats
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. In June 2012, computer system failures prevented NatWest, RBS and Ulster Bank customers from accessing accounts in both the UK and Ireland. Ongoing issues relating to the failure continued for several months, requiring the Group to set aside a provision for compensation to customers who suffered losses as a result of the system failure. In addition, in November 2014, the Group reached a settlement with the FCA and the PRA in relation to this incident and agreed a penalty of £42 million with the FCA and £14 million with the
Group’s IT systems are due to the complexity of the Group’s IT
investment programme which involves execution risks and may not be successful. See ‘The Group is currently implementing a number of significant investment and rationalisation initiatives as part of the Group’s
IT and operational investment programme. Should such investment and rationalisation initiatives fail to achieve the expected results, it could have a material adverse impact on the Group’s operations and its ability to retain or grow its customer business’.
In addition, the Group is subject to cyber-security threats which have targeted financial institutions as well as governments and other institutions and have increased in the recent years. Failure to protect the
Although the Group has been implementing remedial actions to improve its resilience to the increasing intensity and sophistication of cyberattacks, the Group expects to be the target of continued attacks in the future and there can be no assurance that the Group will be able to prevent all threats.
Reputational risk, meaning the risk of brand damage and/or financial loss due to a failure to meet stakeholders’ expectations of the Group’s conduct and performance, is inherent in the Group’s business.
Group’s Capital Resolution Group (“CRG”) as of 1 January 2014. In connection with the establishment of CRG, the Group indicated its aspiration to remove the vast majority, if not all of the assets comprising
RCR within three years which resulted in increased impairments of £4.5 billion which were recognised in Q4 2013. The value of the assets in
RCR, excluding derivatives, was £14.9 billion at 31December 2014 following significant reductions during 2014. Although the Group to date has successfully reduced the size of the RCR portfolio, the remaining assets in RCR may be difficult to sell and could be subject to further write downs or, when sold, realised losses. The CRG also includes the Group’s stake in the Williams & Glyn business as well as its remaining stake in
CFG. In addition, as part of the restructuring of the Group’s CIB business, the Group will be exiting or disposing of substantial parts of that business.
The Group’s interest in these businesses may be difficult to sell due to unfavourable market conditions for such assets or businesses. See also
The Group may be required to make further contributions to its pension schemes if the value of pension fund assets is not sufficient to cover potential obligations and to satisfy ring-fencing requirements
The Group maintains a number of defined benefit pension schemes for certain former and current employees. Pension risk is the risk that the assets of the Group’s various defined benefit pension schemes do not fully match the timing and amount of the schemes’ liabilities which are long-term in nature, and as a result of which, the Group is required or chooses to make additional contributions to the schemes. Pension scheme liabilities vary with changes to long-term interest rates, inflation, pensionable salaries and the longevity of scheme members as well as changes in applicable legislation. The funded schemes hold assets to meet projected liabilities to the scheme members. Risk arises from the schemes because the value of the asset portfolios, together with any additional future contributions to the schemes, may be less than expected and because there may be greater than expected increases in the estimated value of the schemes’ liabilities.
Group’s existing defined benefit pension schemes as ring-fenced banks may not be liable for debts to pension schemes that might arise as a result of the failure of another entity of the ring-fenced bank’s group, which could affect assessments of the Group’s schemes deficits. The draft Financial Services and Markets Act 2000 (Banking Reform
The Group has exposure to many different industries and counterparties, and risks arising from actual or perceived changes in credit quality and the recoverability of monies due from borrowers and counterparties are inherent in a wide range of the Group’s businesses. In particular, the
Europe (principally Germany, The Netherlands, Ireland and France) (at 31 December 2014 credit risk assets (excluding personal finance) in the
UK were £180.8 billion, in North America £81.8 billion and in Western
Europe (excluding the UK) £76.3 billion); and within certain business sectors, namely personal finance, financial institutions, commercial real estate, shipping and the oil and gas sector (at 31 December 2014 personal finance lending amounted to £180.8 billion, lending to financial institutions was £91.5 billion, commercial real estate lending was £43.3 billion, lending to the oil and gas sector was £10.7 billion and lending against ocean going vessels was £10.4 billion). As the Group implements its new strategy and withdraws from many geographic markets and materially scales down its activities in the United States, the Group’s relative exposure to the UK will increase significantly as its business becomes more concentrated in the UK.
However, a further deterioration in economic and market conditions or changes to legal or regulatory landscapes could worsen borrower and counterparty credit quality and also impact the Group’s ability to enforce contractual security rights. In addition, the Group’s credit risk is exacerbated when the collateral it holds cannot be realised or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure that is due to the Group, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those experienced in recent years. This has been particularly the case with respect to large parts of the Group’s commercial real estate portfolio. Any such losses could have an adverse effect on the Group’s results of operations and financial condition.
Mechanism (SRM) will apply the substantive rules of bank recovery and resolution set out in the BRRD. Current expectations are that the SRM
will apply from 1 January 2016, subject to certain provisions which came into effect from 1 January 2015 relating to the cooperation between national resolution authorities and the financial stability board. The effectiveness of these and other actions proposed and implemented at both the EU and national level to address systemic stresses in the
The performance and volatility of financial markets affects bond and equity prices, has caused, and may in the future cause, changes in the value of the Group’s investment and trading portfolios. Financial markets experienced significant volatility towards the end of 2014 and this trend has continued in early 2015, resulting in further short term changes in the valuation of certain of the Group’s assets. In addition, during the last quarter of 2014, oil prices fell significantly against their historical levels and other commodity prices also decreased. The Group is exposed to oil prices though its exposure to counterparties in the energy sector and oil producing countries. Further or sustained decreases in oil prices could negatively impact counterparties and the value of the Group’s trading portfolios. As part of its on-going derivatives operations, the Group also faces significant basis, volatility and correlation risks, the occurrence of which are also impacted by the factors noted above.
The Group has credit exposure arising from over-the-counter derivative contracts, mainly credit default swaps (CDSs), and other credit derivatives, each of which are carried at fair value. The fair value of these
CDSs, as well as the Group’s exposure to the risk of default by the underlying counterparties, depends on the valuation and the perceived credit risk of the instrument against which protection has been bought.
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 FSMA and is the UK’s statutory fund of last resort for customers of authorised financial services firms. The FSCS can pay compensation to customers if a firm is unable, or likely to be unable, to pay claims against it and may be required to make payments either in connection with the exercise of a stabilisation power or in exercise of the bank insolvency procedures under the Banking Act 2009.
In addition, the BRRD requires Member States to establish financing arrangements for the purpose of ensuring the effective application by national resolution authorities of the resolution tools and powers, which will require national resolution funds to raise “ex ante” contributions on banks and investment firms in proportion to their liabilities and risk profiles as well as “ex post” funding contributions. Following the adoption of the European delegated regulation on “ex-ante” contributions, the UK
government confirmed that it would implement the “ex post” funding requirements through the UK bank levy of the Finance Act 2011.
To the extent that other jurisdictions where the Group operates have introduced or plan to introduce similar compensation, contributory or reimbursement schemes (such as in the US with the Federal Deposit
Insurance Corporation), 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 relies on valuation, capital and stress test models to conduct its business and anticipate capital and funding requirements. Failure of these models to provide accurate results or accurately reflect changes in the micro and macro economic environment in which the Group operates could have a material adverse effect on the Group’s business, capital and results
Any significant write-down of goodwill could have a material adverse effect on the Group’s results of operations.
In accordance with IFRS, the Group has recognised deferred tax assets on losses available to relieve future profits from tax only to the extent that 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 changes in tax legislation
494 Financial calendar 494 Shareholder enquiries 495 Analyses of ordinary shareholders 496 Trading market 498 Dividend history 499 Taxation for US Holders 502 Exchange controls 502 Memorandum and Articles of Association 502 Incorporation and registration 503 Forward-looking statements 504 Abbreviations and acronyms 505 Glossary of terms 512 EDTF recommendations 516 Important addresses 516 Principal offices
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December 2014: Date of issue Series of ADS Number of ADSs/non-cumulative preference shares in issue
Depository Receipt (ADR) and is listed on the New York Stock Exchange, a subsidiary of NYSE Euronext (NYSE).
The ADRs evidencing the ADSs above were issued pursuant to Deposit
Agreements, among the company, The Bank of New York, as depository, and all holders from time-to-time of ADRs issued thereunder. Currently, there is no non-United States trading market for any of the noncumulative dollar preference shares. All of the non-cumulative dollar preference shares are held by the depository, as custodian, in bearer form.
In August 2001, the company issued US$1.2 billion perpetual regulatory tier one securities (PROs) which are listed on the NYSE.
representing one ordinary share changed to one ADS representing 20 ordinary shares.
Notes: (1) Prices as reported on the NYSE or NASDAQ. (2) Price quoted as a % of US$1,000 nominal. (3) Prices as reported in the Daily Official List of the London Stock Exchange. Following the sub-division and one-for-ten consolidation of ordinary shares in June 2012, prices prior to that date were restated accordingly. (4) Prices as reported on the NYSE composite tape. Following the sub-division and one-for-ten consolidation of ordinary shares in June 2012, the ratio of one ADS representing 20 ordinary shares was adjusted to one ADS representing two ordinary shares.
On 25 February 2015, the closing price of the ordinary shares on the London Stock Exchange was £4.033 equivalent to $6.251 per ordinary share translated at the Noon Buying Rate of $1.5499 per £1.00, and the closing price of the ordinary ADSs on the NYSE was $12.43.
resumed payments on its hybrid capital instruments. Future coupons and dividends on hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.
The following discussion summarises certain US federal and UK tax consequences of the ownership and disposition of ordinary shares, ADSs representing ordinary shares (ordinary ADSs), ADSs representing noncumulative dollar preference shares (preference ADSs) or PROs by a beneficial owner that is a citizen or resident of the United States or that otherwise will be subject to US federal income tax on a net income basis in respect of the ordinary shares, ordinary ADSs, preference ADSs or
The statements and practices set forth below regarding US and UK tax laws, including the US/UK double taxation convention relating to income and capital gains which entered into force on 31 March 2003 (the
“Treaty”) and the US/UK double taxation convention relating to estate and gift taxes (the “Estate Taxation Treaty”), are based on those laws and practices as in force and as applied in practice on the date of this report.
This summary is not exhaustive of all possible tax considerations and holders are advised to satisfy themselves as to the overall tax consequences, including specifically the consequences under US federal, state, local and other laws, and possible changes in taxation law, of the acquisition, ownership and disposition of ordinary shares, ordinary ADSs, preference ADSs or PROs by consulting their own tax advisers.
The following discussion assumes that the company was not for the taxable year ended 31 December 2014, and will not become in the foreseeable future, a passive foreign investment company - see ‘Passive
Subject to applicable limitations that vary depending upon a US Holder's particular circumstances and the discussion above regarding concerns expressed by the US Treasury, dividends paid to certain non-corporate
The amount of any dividend paid in pounds sterling to be included in income by a US Holder will be the US dollar amount calculated by reference to the relevant exchange rate in effect on the date of such receipt regardless of whether the payment is in fact converted into US
dollars. If the dividend is converted into US dollars on the date of receipt, the US Holder generally should not be required to recognise foreign currency gain or loss in respect of the dividend income. If the amount of such dividend is converted into US dollars after the date of receipt, the
Subject to the discussion of the Estate Tax Treaty in the following paragraph, ordinary shares, ordinary ADSs or preference ADSs beneficially owned by an individual may be subject to UK inheritance tax
(including a transfer at less than market value) by such individual.
States for purposes of the Estate Tax Treaty and who is not a national of the UK, will not be subject to UK inheritance tax on the individual's death or on a lifetime transfer of such share or ADS, except in certain cases where the share or ADS (i) is comprised in a settlement (unless, at the time of the settlement, the settlor was domiciled in the United States and was not a national of the UK); (ii) is part of the business property of a UK
The Estate Tax Treaty generally provides a credit against US federal estate or gift tax liability for the amount of any tax paid in the UK in a case where the ordinary share, ordinary ADS or preference ADS is subject to both UK inheritance tax and US federal estate or gift tax.
Payments of interest on a PRO (including any UK withholding tax, as to which see below) will constitute foreign source dividend income for US
federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as determined under
Holders as dividends. Payments will not be eligible for the dividendsreceived deduction generally allowed to corporate US holders. A US
Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at these favourable rates.
A US Holder will, upon the sale, exchange or redemption of a PRO, generally recognise capital gain or loss for US federal income tax purposes (assuming that in the case of a redemption, such US Holder does not own, and is not deemed to own, any ordinary shares or ordinary
UK withholding tax purposes. The PROs are not expected to fall within the exemption from withholding tax provided for in the Taxation of
However, the PROs constitute ‘quoted eurobonds’ within the meaning of section 987 of the Income Tax Act 2007 and therefore payments of interest will not be subject to withholding or deduction for or on account of
Holders may be able to recover the tax deducted under the Treaty.
HM Revenue & Customs may communicate this information to the tax authorities of other jurisdictions.
Holder carries on a trade (which for this purpose includes a profession or a vocation) in the UK through a branch or agency and the PROs are, or have been, held or acquired for the purposes of that trade, carried on through such branch or agency.
Inheritance tax is not generally chargeable on gifts to individuals made more than seven years before the death of the donor. However, exemption from, or a reduction of, any such UK tax liability may be available under the Estate Tax Treaty (see below). US Holders should consult their professional advisers in relation to such potential liability.
fixed base of an individual used for the performance of independent personal services.
The Estate Tax Treaty generally provides a credit against US federal estate or gift tax liability for the amount of any tax paid in the UK in a case where the PRO is subject to both UK inheritance tax and US federal estate or gift tax.
(i) at least 75% of its gross income is 'passive income' or (ii) at least 50%
of the average quarterly value of its assets is attributable to assets that produce passive income or are held for the production of passive income.
The company does not believe that it was a PFIC for its 2014 taxable year. Although interest income is generally passive income, a special rule allows banks to treat their banking business income as non-passive. To qualify for this rule, a bank must satisfy certain requirements regarding its licensing and activities. The company's possible status as a PFIC is determined annually, however, and may be subject to change if the company fails to qualify under this special rule for any year in which a US
PROs. If the company were to be treated as a PFIC for any taxable year during which a US Holder owns ordinary shares, ordinary ADSs, preference ADSs or PROs, US Holders would generally be subject to adverse US federal income tax consequences and certain reporting obligations. Holders should consult their own tax advisers as to the potential application of the PFIC rules to the ownership and disposition of the company's ordinary shares, ordinary ADSs, preference ADSs or
Payments on, and proceeds from the sale of, ordinary shares, ordinary
Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a US Holder will be allowed as a credit against the US Holder’s US federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
There are no restrictions under the Articles of Association of the company or under UK law, as currently in effect, which limit the right of non-UK
resident owners to hold or, when entitled to vote, freely to vote the company's securities.
Companies of Scotland. The Articles of Association were last amended on 30 May 2012. Copies can be obtained from Companies House in the
Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation
‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on these expressions.
In particular, this document includes forward-looking statements relating, but not limited to: The Royal Bank of Scotland Group’s (RBS)
Transformation Plan (which includes RBS’s 2013/2014 strategic plan relating to the implementation of its new divisional and functional structure and the continuation of its balance sheet reduction programme including its proposed divestments of Williams & Glyn and CFG, RBS’s information technology and operational investment plan, the proposed restructuring of RBS’s CIB business and the restructuring of the Group as a result of the implementation of the regulatory ring-fencing regime), as well as restructuring, capital and strategic plans, divestments, capitalisation, portfolios, net interest margin, capital and leverage ratios, liquidity, risk-weighted assets (RWAs), RWA equivalents (RWAe), Pillar 2A, Maximum Distributable Amount (MDA), total loss absorbing capital
RBS arising out of the origination or sale of mortgages or mortgagebacked securities in the US; RBS’s future financial performance; the level and extent of future impairments and write-downs; and RBS’s exposure to political risks, credit rating risk and to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. These statements are based on current plans, estimates, targets and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forwardlooking statements. For example, certain market risk disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.
Other factors that could adversely affect our results and the accuracy of forward looking statements in this document include the risk factors and other uncertainties discussed in Appendix 5 to this document. These include the significant risks for the Group presented by the execution of the Transformation Plan; RBS’s ability to successfully implement the various initiatives that are comprised in the Transformation Plan, particularly the balance sheet reduction programme including the divestment of Williams & Glyn and its remaining stake in CFG, the proposed restructuring of its CIB business and the significant restructuring undertaken by the Group as a result of the implementation of the ring fence; whether RBS will emerge from implementing the
Transformation Plan as a viable, competitive, customer focussed and profitable bank; RBS’ ability to achieve its capital targets which depend on RBS’ success in reducing the size of its business; the cost and complexity of the implementation of the ring-fence and the extent to which it will have a material adverse effect on RBS; the risk of failure to realise the benefit of RBS’s substantial investments in its information technology and operational infrastructure and systems, the significant changes, complexity and costs relating to the implementation of the
The forward-looking statements contained in this document speak only as of the date of this announcement, and RBS does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.
Basel III - in December 2010, the Basel Committee on Banking
Supervision issued final rules: ‘Basel III: A global regulatory framework for more resilient banks and banking systems’ and ‘Basel III: International framework for liquidity risk measurement, standards and monitoring’.
BIPRU - the prudential sourcebook for banks, building societies and investment firms. The part of the Financial Conduct Authority (FCA)
or both. The credit exposure underlying synthetic CDOs derives from credit default swaps. The CDOs issued by an individual vehicle are usually divided in different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are borne first by the equity securities, next by the junior securities, and finally by the senior securities; junior tranches offer higher coupons
Commercial paper (CP) - unsecured obligations issued by a corporate or a bank directly or secured obligations (asset-backed CP), often issued through a commercial paper conduit, to fund working capital. Maturities typically range from two to 270 days. However, the depth and reliability of some CP markets means that issuers can repeatedly roll over CP
Authority’s technical standards are still to be finalised through adoption by the European Commission and implemented within the UK.
Credit derivative product company (CDPC) - a structured entity that sells credit protection under credit default swaps or certain approved forms of insurance policies. Sometimes they can also buy credit protection.
Currency swap - an arrangement in which two parties exchange specific principal amounts of different currencies at inception and subsequently interest payments on the principal amounts. Often, one party will pay a fixed rate of interest, while the other will pay a floating rate (though there are also fixed-fixed and floating-floating arrangements). At the maturity of the swap, the principal amounts are usually re-exchanged.
Group. They include commercial paper, certificates of deposit, bonds and medium-term notes.
Deposits by banks - money deposited with the Group by banks and recorded as liabilities. They include money-market deposits, securities sold under repurchase agreements, federal funds purchased and other short term deposits. Deposits received from customers are recorded as customer accounts.
Economic capital - an internal measure of the capital required by the
(or group of financial assets or liabilities) and of allocating the interest income or interest expense over the expected life of the asset or liability.
Encumbrance usually impacts the transferability of the asset and can restrict its free use until the encumbrance is removed.
Sweden, Switzerland, the United Kingdom and the United States) that have agreed to participate in the International Monetary Fund’s (IMF’s)
Impaired loans - all loans for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans.
Impairment losses - (a) for impaired financial assets measured at amortised cost, impairment losses - the difference between carrying value and the present value of estimated future cash flows discounted at the asset's original effective interest rate - are recognised in profit or loss and the carrying amount of the financial asset reduced by establishing a provision (allowance) (b) for impaired available-for-sale financial assets, the cumulative loss that had been recognised directly in equity is removed from equity and recognised in profit or loss as an impairment loss.
Investment grade - generally represents a risk profile similar to a rating of
(unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
Liquidity and funding risk - the risk that the Group is unable to meet its financial liabilities when they fall due.
Maximum distributable amount (MDA) - a restriction on distributions which may be made by a bank which does not meet the combined buffer requirements as set out in the PRA Supervisory Statement SS6/14
Pillar 2 - Pillar 2 is intended to ensure that firms have adequate capital to support all the relevant risks in their business and is divided into capital held against risks not captured or not fully captured by the Pillar 1 regulations (Pillar 2A) and risks to which a firm may become exposed over a forward-looking planning horizon (Pillar 2B). Capital held under
PRA will set a PRA buffer only if it judges that the CRD IV buffers are inadequate for a particular firm given its vulnerability in a stress scenario, or where the PRA has identified risk management and governance failings, which the CRD IV buffers are not intended to address.
to 100%. In other jurisdictions, RMBS are classified as sub-prime if the mortgage portfolio comprises loans with one or more high risk characteristics such as: unreliable or poor payment histories; high loanto -value ratios; high debt-to-income ratio; the loan is not secured on the borrower's primary residence; or a history of delinquencies or late payments on the loan.
Securitisation - a process by which assets or cash flows are transformed into transferable securities. The underlying assets or cash flows are transferred by the originator or an intermediary, typically an investment bank, to a structured entity which issues securities to investors. Asset securitisations involve issuing debt securities (asset-backed securities)
that are backed by the cash flows of income-generating assets (ranging from credit card receivables to residential mortgage loans).
Settlement balances - payables and receivables that result from purchases and sales of financial instruments recognised on trade date.
Stressed value-at-risk (SVaR) - a VaR measure using historical data from a one year period of stressed market conditions. For the purposes of calculating regulatory SVaR, a time horizon of ten trading days is assumed at a confidence level of 99%. See also Value-at-risk below.
Tier 2 capital - qualifying subordinated debt and other Tier 2 securities in issue, eligible collective impairment allowances, unrealised available-forsale equity gains and revaluation reserves less certain regulatory deductions.
Total loss absorbing capacity (TLAC) - an FSB proposal 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. These proposals are intended to facilitate an orderly resolution that minimises any impact on financial stability, ensures the continuity of critical functions, and avoids exposing taxpayers to loss.
The Enhanced Disclosure Taskforce (EDTF), established by the Financial Stability Board, published its report ‘Enhancing the Risk Disclosures of Banks’
RBS implemented the majority of the EDTF recommendations in its 2012 Annual Report and Accounts and Pillar 3 Report, and the remainder in its 2013 reports. All EDTF recommendations are also reflected in the 2014 reports.
The table below sets out the EDTF recommendations and the related locations in the 2014 Annual Report and Accounts and Pillar 3 Report.
3 Top and emerging risks. 37,174-175 4 Key future regulatory ratios. 2,11,171-172,196-197,
Risk governance and risk management strategies/business model 5 Summarise risk management organisation, processes and key functions. 64-68,176-179,185,186, 188,192,194,197-203, 6 Risk culture and risk appetite. 64-68,180-183,186,189, 192,194,196,202,217,233, 303,324,331,333 7 Key risks arising from business models and activities. 12-13,170-173 8 Stress testing. 196-197,199-203,218-220, 310-314,322,332
Funding 19 Encumbered assets. 228-230,423 20 Contractual maturity of assets, liabilities and off-balance sheet commitments. 223-227,393-395, 21 Funding strategy including key sources. 172,217-218, 221-225,
27 Policies for impaired loans and forbearance. 243-245,258-259, 353-354,359 28 Flow statements for impaired loans and allowance for loan losses. 288-296 29 Counterparty credit risk that arises from derivatives transactions. 257,285-287 �