Our strategy 19 Our structure 20 Our brands 22 Building a more sustainable bank 24
Business review 41 Personal & Business Banking 42 Commercial & Private Banking 46 NatWest Markets 50 Capital Resolution 53
Governance 57 Business review 123 Capital and risk management 163 Financial statements 277 Additional information 416 Risk factors 432 Shareholder information 464 Abbreviations and acronyms 469 Glossary of terms 470 Index 476 Important addresses 480
Across our Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and NatWest Markets (NWM) franchises, RBS reported a £163 million, or 4%, increase in adjusted operating profits to £4,249 million for 2016, and an adjusted return on equity of 11.1%, compared with 11.2% in 2015.
In 2016 RBS delivered against all of its operating financial targets; PBB and CPB had combined income growth of 2%, adjusting for transfers, underpinned by 10% net lending growth, expenses have been reduced by around £1 billion for the third year in succession as the bank continues to focus on digital channels and on simplification of its processes, and Capital Resolution RWAs have reduced by a further £14.5 billion, or 30%, to £34.5 billion, with 80% of RWAs now relating to PBB, CPB and NatWest Markets compared with 72% at the end of 2015. RBS is committed to achieving its sub 50% cost:income ratio and 12% return on tangible equity targets by 2020.
(2) Operating profit before tax excluding own credit adjustments, (loss)/gain on redemption of own debt, strategic disposals, restructuring costs, litigation and conduct costs and write down of goodwill.
(5) Based on end-point Capital Requirements Regulation (CRR) Tier 1 capital and leverage exposure under the CRR Delegated Act.
Employee engagement score £1.32bn Total tax paid to the UK Government (8)
2016 was another difficult year for RBS shareholders, even though there is good progress to report on our strategy to rebuild a strong bank focused primarily on retail and commercial customers in the UK and Ireland.
This lower interest rate environment puts further pressure on banks to control their costs.
Our prime focus through this uncertain period has been, and will continue to be, to provide high quality banking services to our customers and to help them to understand the implications of change for their businesses and their families.
UK banks are also now heavily engaged in preparations for the implementation of ring-fencing, as required by the legislation implementing the recommendation of the Independent Commission on
Strategy Set against that backdrop our strategy remains consistent. The aim is to make RBS a simpler bank focused on doing fewer things, built around a low risk UK and Irish retail and commercial bank and markets business; a safer bank with a long-term target of a CET1 ratio of at least 13%; and a customerfocused bank that is easier to do business with. Our aspiration remains to be the best UK bank for customer service, trust and advocacy by 2020. We will retain a smaller markets business, which complements our strong domestic franchises. The Board are confident that this is the right path to follow and that the bank will deliver good returns for shareholders when its legacy problems have been resolved.
Conduct, litigation and legacy issues As I have said, during the year we made good progress in dealing with a number of legacy issues that have been clouding our performance and shareholder investment case.
In January 2016, the Board took the decision to make an accelerated £4.2 billion payment to our main pension scheme. Taking this action reduced the scheme deficit considerably and helped provide certainty on our capital management of the pension scheme for both members and regulators. The next valuation is scheduled for 2018.
We also resolved a number of litigation cases relating to foreign exchange and interest rate fixing allegations. These settlements were costly reminders of past behaviours that have no place in the industry or the bank we are building.
Another legacy problem on the way to resolution is the shareholder litigation related to the 2008 rights issue. We announced in December that we made an offer to affected shareholders to resolve that litigation and four out of five groups involved have already accepted it.
Remuneration While RBS continues to report losses it is vital that the bank remains disciplined in its approach to remuneration. On the other hand, we need to fairly reward our colleagues who work with customers from day to day and who bear no responsibility for the decisions which led to those losses, and it is important for the long-term value of shareholders’ investment in the company that we attract and retain well-qualified and motivated people. We believe the decisions we have made this year, on the bonus pool (which has been further reduced) and on the proposed new long-term incentive scheme, strike that balance appropriately. They are more fully explained in the 2016 Remuneration report.
Supporting our communities We refreshed our main customer facing brands during the year, with a new advertising campaign, emphasising their contribution to the communities in which they operate. In England our principal brand is NatWest, in Ireland it is Ulster Bank, and of course in Scotland it is The Royal Bank of Scotland, which has been providing banking services to the country since 1727. We also have a vital role to play in these communities that goes beyond traditional banking activity. Our support of small businesses continues to strengthen through our partnership with Entrepreneurial Spark. In 2016 we opened a further six accelerator hubs. These accelerator hubs, which are based in our buildings, provide startups with free office space, mentoring and access to our networks. Over 7,000 entrepreneurs will be supported in this way over five years, helping to grow the economy and create thousands of jobs.
Our financial education programme, MoneySense, continues to deliver vital skills to young people that will help them be more financially aware in later life. This year we have helped over 300,000 young people in the UK.
In 2016 we also celebrated our 40th anniversary of supporting The Prince’s Trust. To mark this milestone, we raised over £470,000 in just five days, with 566 colleagues cycling across the country in fundraising efforts.
This year, we have taken the first step towards combining our 2016 Sustainability and Strategic reports, bringing together in one place our financial and non financial performance to demonstrate how we are building a more sustainable bank to deliver long term value to all our stakeholders.
Our service level and product improvements are already delivering benefits for both customers and the core bank. In 2017 our focus will turn to going even further on reducing costs and faster on digital transformation in order to deliver a more simple, safe and customer-focused bank.
In 2016 RBS made an attributable loss of £7.0 billion, mostly reflecting charges for outstanding litigation and conduct, and costs associated with restructuring of the bank. The financial impact of these issues is a difficult but necessary step in working through the bank’s legacy issues. These costs are a stark reminder of what happens to a bank when things go wrong and you lose focus on the customer, as this bank did before the financial crisis. The more progress we have made on clearing these past issues, enables us to sharpen our focus on the core bank.
The past is not completely behind us, with our dealings on Residential Mortgage Backed Securities (RMBS) and Williams & Glyn, our residual European Commission State Aid obligations, two significant issues that we still need to resolve. The recent proposal by HM Treasury on an alternative way to increase competition to allow us to meet our State Aid commitments would deliver an outcome more quickly, and with more certainty than undertaking a complex sale. We have been able to provide for both of these in our accounts, though there may still be substantial additional provisions on RMBS.
The bank we are today We are now in a much better position to focus on our long term aspiration – to transform the bank into the number one for customer service, trust, and advocacy. While the signs of this transformation have at times been masked by our wider organisational changes, the core bank has already evolved materially since 2014. Our decision to refocus on the UK has seen our balance sheet shrink by £229 billon since the start of our plan. This is net of the continued growth in our Personal and Business Banking and Commercial and Private Banking franchises. We are seeing the benefits of our service-led strategy in the financial performance of the core bank, generating £4.2 billion in adjusted pre-tax operating profit for the year, an average of £1 billion per quarter for the last eight quarters and 4% up on 2015.
With £30 billion of gross new mortgage lending in UK PBB, we helped 320,000 customers with their mortgage in 2016, growing our market share for the fourth consecutive year without leading on price or risk.
Digital innovation means customers are doing more of their transactions online. We interact with our customers over 20 times more through digital channels than physical ones. 35% of all new products were taken out digitally in UK PBB, and this is rising steadily. A fifth of our customers now solely use mobile and digital to interact with us. As customers change the way they bank with us, we must change the way we serve them. This means continuing to simplify for our customers, and accelerating our deployment of digital and mobile capabilities. The role of the branch is fast moving to an advice and service centre, away from transactions. While the branch will still be a core part of our offering to customers, inevitably some branches will have to close.
We’re working to blur the line between traditional and digital banking channels. We are investing in a video sales and service proposition that will connect customers, no matter where they are, to the right specialist.
This shift isn’t only in personal banking. We are aiming to service 95% of our commercial customers’ needs through mobile and online by 2020, up from nearly 80% today, by introducing a new digital banking service that will greatly improve experience. We’re also responding to customer preferences for more innovative lending platforms and products.
We are investing heavily in technology in our NatWest Markets business.
In 2016, we improved on our position in a number of rankings, including achieving our highest ever score in the Dow Jones Sustainability Index.
We are committed to running the bank as a more sustainable and responsible business, serving today’s customers in a way that also helps future generations, generating long term value for all of our stakeholders and society. In 2016, we improved on our position in a number of rankings, including achieving our highest ever score in the Dow Jones Sustainability Index. We continued with our commitment to manage our impacts on climate change and support our customers to move towards the transition to a low-carbon economy. We continue to support financial education and our goal is to help a further one million more young people understand all about money by the end of 2018.
Our commitment to sustainability is also evident in our annual results, where we have replaced our annual Sustainability Report with a more integrated approach. You will see a number of new elements in the Strategic Report that explain the key influences on our operating environment, and some of the impact we have had over the past year. This is an important step towards fully integrated reporting over the coming years.
This has also been another tough year for our colleagues. I am grateful for their determination in serving our millions of customers every day, despite many negative headlines. Our colleagues are the face of the bank for our customers, and their engagement is critical to our success. One of our five key targets in 2017 is to improve employee engagement.
We no longer have global aspirations and we need to go further still on our operating costs. We expect to take out an additional £750 million of operating costs in 2017 through our focus on simplification and digital transformation. A simpler bank is a more profitable bank and a bank that delivers a better customer experience. Where we can make it easy for our customers, the more business they will do with us and the more sustainable our earnings will become.
This is a bank that has been on a remarkable journey. We still have further to go. But the next three years will not be the same as the past three. Legacy issues will take up a decreasing amount of our time and focus. Our customers, our cost base and the measures we plan to implement to return the bank to sustainable headline profits will be where we focus our efforts. Assuming we can conclude our issues on RMBS this year and resolve our residual State Id obligations, we aim to have RBS back into profit in 2018 representing a significant step towards being able to start repaying UK taxpayers for their support.
� The 2016 operating loss of £4,082 million compared with an operating loss of £2,703 million in 2015. The adjusted operating profit of £3,674 million was £731 million, or 17%, lower than 2015.
� Excluding expenses associated with Williams & Glyn (1), write-down of intangible assets and the VAT recovery in Q2, adjusted operating expenses have reduced by £985 million, or 11%, compared with 2015, exceeding our target of £800 million. RBS has reduced adjusted operating expenses by over £3 billion in the last three years.
� Tangible net asset value (TNAV) per share decreased by 56p to 296p compared with 2015 principally reflecting the attributable loss for the year.
� Across our three customer facing franchises, PBB, CPB and NatWest Markets, adjusted operating profit of £4,249 million, was £163 million, or 4% higher than 2015.
� UK PBB adjusted operating profit of £2,202 million was £33 million, or 2%, higher than 2015 as increased income and reduced costs were partially offset by increased impairments. Total income increased by £90 million, or 2%, to £5,290 million compared with 2015 as the benefit of increased lending more than offset reduced margins, down 17 basis points to 3.01%, and lower fee income, reflecting reduced credit card interchange fees and increased cash back payments following the launch of the Reward account. Net loans and advances increased by 10% to £132.1 billion in 2016 principally driven by mortgage growth.
� Capital Resolution adjusted operating loss of £1,432 million compared with a loss of £412 million in 2015 and included disposal losses and impairments of £825 million, of which £683 million related to the shipping portfolio. RWAs reduced by £14.5 billion in 2016 to £34.5 billion.
£2 billion AT1 issuance £2 billion equivalent AT1 issued in Q3 2016
Customer experience Narrow the gap to No.1 in NPS in every primary UK brand
Year on year Commercial Banking have narrowed the gap. NatWest Personal, Ulster Business & Commercial in Northern Ireland and Ulster Business Direct in Republic of Ireland, have seen improvements in NPS.
Down 3 points to be 6 points adverse to GFS norm
Notes: (1) Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK. During the period presented Williams & Glyn has not operated as a separate legal entity.
(3) Private Banking serves high net worth individuals through Coutts and Adam & Company.
(4) IFRS volatility arises from the changes to fair value of hedges of loans which do not qualify for hedge accounting under IFRS.
� RWAs reduced by £14.4 billion, or 6%, during 2016 to £228.2 billion driven by £14.5 billion of disposals and run-off in Capital Resolution and a £3.9 billion reduction associated with the removal of Citizens operational risk RWAs, partially offset by an increase associated with the weakening of sterling and lending growth across our core franchises.
� On 10 August 2016 RBS announced that it had successfully completed the pricing of $2.65 billion 8.625% AT1 capital notes, with £4.0 billion equivalent issued since August 2015. (1.8% of Q4 2016 RWAs)
RBS has successfully addressed a number of the remaining legacy issues and continues to de-risk its balance sheet
� During Q1 2016 RBS made the final dividend payment in respect of the DAS, £1,193 million, an action that was taken to normalise the ownership structure of the Bank.
The next triennial valuation is due to occur at the end of 2018 with agreement on any additional contributions by the end of March 2020. As at 31 December 2016, the Main scheme had an unrecognised surplus reflected by a ratio of assets to liabilities of c.115% under IAS 19 valuation principles.
� On 11 April 2016, RBS completed the successful transfer of the Coutts International businesses in Asia and the Middle East to Union Bancaire Privée, the final milestone in the sale of our International Private Bank. During 2016 we also completed the sale of our Russia and Kazakhstan subsidiaries.
� In line with the progress to de-risk the balance sheet, exposures to the shipping and oil and gas sectors continued to reduce during 2016, with potential exposures declining by 29% to £5.2 billion and by 22% to £5.3 billion respectively. As at the end of 2016, our total exposure to the coal mining, oil and gas and power generation sectors represented 1.4% of our total lending.
RBS is progressing with its plan to build a strong, simple, fair bank for customers and shareholders.
� The Reward account continued to show positive momentum and now has 1,149,000 fee-paying customers compared with 202,000 at 31 December 2015. We have seen positive evidence of increased levels of engagement, with overall current account attrition levels falling by 7% in the year. This is particularly evident across our Private and Premium customer, with attrition 12% lower. We continue to embed the product across our population of valuable main bank customers.
� RBS continued to make better use of our digital channels to make it simpler to serve our customers and easier for them to do business with us. We now have 4.2 million customers regularly using our mobile app in the UK, 19% higher than the end of 2015, and around 60% of our personal customers used a digital channel within the last 90 days. In 2016, we more than doubled the number of customers who purchased a product through our mobile channel compared with 2015. NatWest customers can now apply for personal loans, credit cards and overdrafts via the mobile app, facilitating approximately 8% of total applications. Our new business banking ‘Online Account Opening’ service now allows start up business customers to submit an application online in just ten minutes and get a sort code and account number in under an hour.
� RBS became the first UK Bank to be accredited by the Royal National Institute for Blind People for having an accessible mobile app for blind and partially sighted customers. In addition, we launched a new service for British Sign Language (BSL) customers, making it possible to instantly chat with an advisor through a BSL interpreter.
� Delivered leadership training to almost 16,000 leaders through a comprehensive ‘Determined to Lead’ programme.
� RBS has attained silver status in the Business Disability Forum’s Disability Standard, scoring 88% in its assessment of accessibility and inclusion in the workplace.
Building the number one bank for customer service, trust and advocacy in the UK
� RBS has agreed that HMT will now seek formal amendment to RBS’s State Aid commitments to pave the way for the Commissioner to propose to open proceedings, as described above. In addition to the Commission’s proceedings, HMT will carry out a market testing exercise in parallel. The opening of the Commission’s proceedings does not prejudge the outcome of the investigation.
� Net impairment charges should remain meaningfully below normalised levels in 2017. However, we expect the level of net impairment charges to be driven by a combination of increased gross charges and a materially reduced benefit from releases. Recent UK economic performance has been better than previous forecasts leading to improved expectations for the 2017 economic outlook. However, the medium term outlook remains less certain, and together with the increased volatility expected with the introduction of IFRS 9, quantification of future credit losses is more challenging beyond 2017 at this point. We continue to remain mindful of potential downside risks including from single name / sector driven events and lower releases of provisions.
� We continue to expect that cumulative Capital Resolution disposal losses will total approximately £2.0 billion since the beginning of 2015, with £1,192 million of losses incurred to date (2016; £825 million, 2015; £367 million) with most of the balance expected to be incurred during 2017. Excluding RBS’s stake in Alawwal Bank (previously
�We plan to reduce adjusted operating expenses in the order of £2 billion in the next four years with around two thirds of this from the core bank.
�We continue to monitor the ongoing discussions around the potential further tightening of regulatory capital rules and recognise that this could result in RWA inflation in the medium term.
�In view of the significant risks and uncertainties in the external economic, political and regulatory environment including uncertainties around the resolution of RMBS, the timing of returning excess capital to shareholders through dividends or buybacks remains uncertain.
(3) Cost saving target and progress 2017 calculated using operating expenses excluding restructuring costs, litigation and conduct costs, write down of goodwill and the 2016 VAT recovery.
Notes: (1) Based on RBS future business profile business and excludes Capital Resolution. (2) The targets, expectations and trends discussed in this section represent management’s current expectations and are subject to change, including as a result of the factors described in this document and in the “Risk Factors” on pages 432 to 463 of the 2016 Annual Report and Accounts. These statements constitute forward looking statements, please see Forward Looking Statements on pages 465 and 466 of the 2016 Annual Report and Accounts.
Our plan focuses on delivering excellent customer service through all of our brands.
Notes: (1) Cost saving target and progress calculated using operating expenses excluding restructuring costs, litigation and conduct costs, write down of goodwill and the 2016 VAT recovery.
Our franchises share operational and control functions, deriving economies of scale and diversification benefits. Our brands are personalised and each reflects a particular targeted customer segment.
Personal and Business Banking (PBB) With a branch network and mobile, telephone and online banking propositions, PBB services our retail banking, mass affluent and small business customers in both the UK and Republic of Ireland.
Commercial and Private Banking (CPB) CPB serves our commercial and our high net worth customers in the UK and Western Europe.
Our structure We have three customer franchises, and each is underpinned by a range of distinct brands, which are the route through which we engage with our customers.
Teams define and deliver the customer proposition, and are accountable for end-to-end customer processes and products. The teams partner with functions and services to develop cost-effective propositions that meet customer needs.
Operations are centralised to provide cost-efficient and consistently strong customer service, through simple processes and economies of scale.
Our brands Our brands are our main connection with customers. Each takes a clear and differentiated position that will help us strengthen our relationships with our customers, stand out in the market, and build the value of our brands.
Focusing on our core markets in the UK and Western Europe, NatWest Markets provides financing and risk management to our UK and Western Europe corporate customers and global financial institutions.
Flying high Sarah-Jane Anthony saw her first falconry display aged seven and was hooked. Twenty years later, she decided to follow her dream and start her own business. Now she runs her own award-winning falconry centre in Essex.
By delivering the best possible service for customers to meet their needs, we aim to achieve a return for our shareholders. At the same time, we recognise our responsibility towards the society we serve and operate in. It is only by supporting our customers and communities to succeed that we will be become a more sustainable bank.
Our key resources and relationships RBS provides financial services to individuals and businesses, primarily in the UK and Ireland. We rely on financial, human, intellectual, social, infrastructure and natural capital to do so. We leverage these forms of capital through our expertise, technology and customer focus across our different brands. This helps to improve customer service quality, personalised through our brands. We also seek to create sustainable value for our shareholders and other stakeholders, including customers, employees, and civil society.
We continue to provide multiple physical channels for serving customers, including access to a network of c.12,500 Post Office and An Post branches (3) and 41 mobile banking vans alongside our existing network of 1,425 branches and 4,646 ATMs.
Our activities generate outcomes across all parts of the economy: Keeping money safe and accessible for our depositors, including preventing 498,000 cases of attempted fraud amounting to £303 million in the UK.(5)
Enabling individuals and businesses to make payments effectively and efficiently, including more than doubling the number of products sold through our mobile channel compared with 2015.
Providing working capital and lending to help businesses meet their goals, including £30.5 billion (7) in lending to small and medium-sized enterprises across England, Scotland and Wales, and c. £1.0 billion in lending to infrastructure projects.
Supporting entrepreneurs to start up in business, including 1,736 businesses (9) helped through Entrepreneurial Spark powered by NatWest.
Royal Bank of Scotland plc and Ulster Bank Ireland DAC. (3) Comprises c.11, 500 Post Office branches in the UK and c.1000
(7) SME lending balances in over 9960 postcode sectors across England, Scotland & Wales.
(8) Data is compiled by Project North East (PNE) on and is based on the total spend allocated by each Regional Board.
Thinking long term We know we succeed only when our customers and communities succeed.
This wind farm projected to power approximately 450,000 homes (around three times the number of homes in the Moray and Highland region). It was one of the first eight UK projects to be awarded an Investment Contract under the Contract for Difference feed in tariff. It will contribute £680m in the construction phase to the economy through supply chain opportunities and employment. It is estimated to have an on-going £400-525 million impact on the economy over the windfarm’s 25 year operational life.
An integrated approach was delivered by RBS through close collaboration between teams highlighting the breadth, strength and market leadership of the RBS franchise and ensuring a successful outcome for our customer.
Our Colleagues Engaging our colleagues is critical to delivering on our strategy and ambition as a bank. Being better for our colleagues means we are better for our customers, and this makes us a better bank.
Our most recent survey, in which almost 63,000 colleagues took part, showed that we are changing the culture of RBS for the better. We remain above the Global Financial Services Norm for wellbeing, our inclusion scores continue to improve and there is a strong sense that managers act consistently with Our Values. However, the choices we’ve had to make as we move RBS forward have taken a toll on our colleagues. The scaling down of RBS and the impact of dealing with some difficult legacy issues have contributed to a decline in the improvements in engagement, pride and leadership that we saw in 2015.
We encourage colleagues to tell us what they think via the annual colleague survey and our regular comments boards. When colleagues wish to report concerns relating to wrong doing or misconduct they can raise concerns via Speak Up, the bank’s whistleblowing service. In 2016 213 cases were raised compared to 142 in 2015.
Learning We continue to embed ‘Determined to lead’ (Dtl), our core leadership programme across the bank. Dtl provides consistent tools to lead and engage our colleagues and is transforming the way we operate. In 2016 almost 16,000 leaders participated in the programme.
We work closely with the Chartered Banker Institute (CBI) and Chartered Banker Professional Standards Board (CB:PSB) to professionalise our colleagues. In 2016 we achieved an Excel rating in the CB:PSB Foundation Standard review , one of only two CB:PSB member firms to have secured ‘Earned Autonomy’.
We also offer a wide range of learning opportunities which can be mandatory, role specific or related to personal development. Our mandatory learning is focused on keeping our customers, our colleagues and the bank safe.
� As at 31 December 2016, our permanent headcount was 79,099. 48% were male and 52% female.
� We continue to focus on building an ethnically diverse RBS. Our plan focuses on positive action and includes reciprocal mentoring, targeted development workshops and leadership programmes and ensuring we have a Black, Asian and Minority Ethnic (BAME) focus on recruitment, talent identification and promotion.
� Our LGBT agenda continues to deliver a better experience for our LGBT colleagues and customers. We have processes in place to support updating gender and title on customers’ banking records and to support colleagues undergoing gender transition. And, we continue to support our 16,000-strong colleague networks.
There were 716 senior managers (in accordance with the definition contained within the relevant Companies Act legislation), which comprises our executive population and individuals who are directors of our subsidiaries. The RBS Board of directors has twelve members, consisting of nine male and three female directors.
Our Customers RBS remains committed to achieving its target of being the number one bank for customer service, trust and advocacy by 2020.
Net Promoter Score (NPS) Customers are asked how likely they would be to recommend their bank to a friend or colleague, and respond based on a 0-10 scale with 10 indicating ‘extremely likely’ and 0 indicating ‘not at all likely’. Customers scoring 0 to 6 are termed detractors and customers scoring 9 to 10 are termed promoters. NPS is established by subtracting the proportion of detractors from the proportion of promoters.
Ireland. In Great Britain, we have also narrowed the gap to number one in Commercial Banking. We do, however, acknowledge that there is still work to do, with four brands missing their year end targets.
Business & Commercial Ulster Bank (Northern Ireland) (4) -19 0 0 -4
Notes: (1) Source: GfK FRS 6 month rolling data. Latest base sizes: NatWest (England & Wales) (3313) Royal Bank of Scotland (Scotland) (527). Based on the question: “How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?“
(3) Source: Charterhouse Research Business Banking Survey (GB), based on interviews with businesses with an annual turnover up to £2 million. Quarterly rolling data. Latest base sizes: NatWest England & Wales (1258), RBS Scotland (422). Weighted by region and turnover to be representative of businesses in England & Wales/Scotland, 4 quarter rolling data.
(4) Source: Charterhouse Research Business Banking Survey (NI), based on interviews with businesses with an annual turnover up to £1 billion. Latest base size: Ulster (399) Weighted by turnover and industry sector to be representative of businesses in Northern Ireland, 4 quarter rolling data.
(5) Source: PWC ROI Business Banking Tracker 2016 (annual study only). Latest sample size: Ulster Bank (218) In 2017 we will be switching the source of advocacy measurement for Ulster Bank Business in RoI to Red C. Red C is a recognised research agency that will provide more frequent reporting of NPS, as well as additional diagnostic customer feedback to help us improve the customer experience.
(7) Source: Populus. Latest quarter’s data. Measured as a net of those that trust RBS/NatWest to do the right thing, less those that do not. Latest base sizes: NatWest, England & Wales (871), RBS Scotland (226).
at Q4 2016. Trust in RBS in Scotland has fallen year on year (from 14% in Q4 2015 to 13% in Q4 2016) and has fallen behind its target for 2016. This is primarily due to ongoing reputational and legacy issues that the bank continues to work to resolve.
Our ability to serve customers and create value for the long term is heavily influenced by the environment in which we operate. We have assessed the importance of these influences both in terms of their relevance to our stakeholders (including customers, investors, UK government, employees and civil society) and their potential commercial impact on us. We have categorised them accordingly, shown in the diagram below. This provides additional context for our performance and future strategy. Each influence is briefly described on the following pages, with links provided to the relevant parts of the Strategic Report for more detail.
Security and privacy Public understanding of companies’ use of personal information is low and many do not trust companies to handle data responsibly. At the same time, protecting data from cyber and malicious attacks is also a vital part of providing a safe and secure banking service.
Ethics, culture and integrity Professional integrity is a key governance consideration in the banking sector. Services provided must satisfy the highest professional standards, avoid conflicts of interest, bias, or negligence, and ensure that all stakeholders, including employees, contractors and business partners, are treated fairly and respectfully.
UK housing Demand for housing in some parts of the UK outstrips supply, reducing affordability and harming family disposable incomes. Quality of housing stock is also below standard in some areas. Mortgage providers play a key role in the housing market.
Technological innovation and disruption The banking sector is changing rapidly, with the creation of new technologies, new market entrants and high potential for disruption. There is also a broad regulatory plan to deliver an “Open Banking” environment which will help to improve customers’ overall banking experience. This, along with the ever increasing reliance of technology, will present a risk to traditional banking business models and impact society.
Banking regulation Banks operate in an environment where regulatory change is frequent and increasingly complex.
Skills and capabilities of staff Financial services companies face competition for skilled employees, in particular with specific skillsets (e.g. IT). As the industry transforms to more digital banking, the need for such skills may become more acute.
Employee engagement and inclusion Employee engagement and satisfaction is highly correlated with overall performance. A key part of this is the inclusion agenda and the need to foster corporate cultures that value diversity, teamwork, quality leadership and training.
Operational competence Banks need to proactively identify and manage risks and efficiencies in their operations and facilities. Delivering appropriate digital infrastructure is important to ensure a ‘technically-able’ bank that supports its long-term future. Providing this requires investment and resources, at a time when banks must stay cost-competitive, and manage potential future pensions liabilities.
Conduct Banks remain focused on putting in place measures to prevent conduct failings. At the same time, historic conduct failings, such as RMBS, continue to have major financial and reputational impacts.
Support for enterprise A healthy economy needs a pipeline of new and growing businesses to spur innovation and growth. ‘Entrepreneurs, start-ups and small businesses require particular support in terms of financing and building market share.
Social inequality and poverty Poverty and inequality are associated with many societal problems and can contribute to challenges in accessing financial products and services, resulting in reduced Financial Inclusion.
Pay differentials Shareholders, employees and the general public have shown increasing concerns about the inequality in pay in large companies between senior executives and the general workforce.
Financial capability Enabling customers to manage money well day to day and plan for the future, increases their resilience, and their ability to manage the financial impact of major life events. This in turn helps customers avoid falling into financial difficulty and can improve their well being.
Boundary summary All entitites and facilities either owned or under operational control
Scope 2 Market-based CO2e emissions (tonnes) ***** 512,958 418,918 377,779 165,553 -68% -60%
Scope 3 CO2e Emissions from business travel (tonnes) **** 140,97 106,117 96,256 91,406 -35% -14%
Our direct environmental footprint RBS is committed to reducing the environmental impact of serving our customers. We outperformed our 2020 targets of 20% carbon, 5% water and 50% paper reduction during 2016 and we will increase our ambition in these areas during 2017. Our decrease in total carbon emissions is largely attributable to a 15% per full time equivalents reduction in energy consumption since 2014. We are containing growth in Data Centre energy consumption through legacy IT decommissions and energy reduction initiatives. The rationalisation of property space and investment in building management systems in 384 branches and 17 offices are examples of a number of projects delivering energy reductions. We buy renewable electricity in the UK, reflected in our market-based CO2e emissions figure. Scope 3 business travel emissions are being driven down by a reduction in long haul flights, a focus on associated cost and improved virtual collaboration tools.
We collaborate with colleagues and suppliers to improve performance in all areas. Our Innovation Gateway crowdsourcing community is a partnership with corporates and universities, now sourcing new solutions from 1,300 SMEs. We’ve tested 34 of these new products in our facilities since 2014 with notable success in reducing water usage. We engage colleagues via bank wide ‘Determined to Make a Difference’ campaigns. In 2016, 1,200 colleagues logged over 2500 activities to reduce our environmental impact, via our green reward app JUMP.
A main focus during 2016 has been to meet our new obligations under the Modern Slavery Act 2015 (MSA), which aims to protect victims, bring perpetrators to justice and provide more effective tools for law enforcement. We welcome the MSA and its aim to eradicate forced labour and human trafficking.
Our ESE Risk Policy applies to our customers, and is kept under review. Alongside our sector specific risk appetite positions we have outlined ESE risk concerns for customers operating outside of these sectors. Our policy identifies human rights risks and due diligence is carried out on clients when human rights risks are identified. We expect our customers to share our commitment to respecting human rights within their operations.
Independent assurance The Royal Bank of Scotland Group plc appointed Ernst & Young LLP to provide limited independent assurance over selected sustainability content within the Strategic Report (“the Report”), as at and for the period ended 31 December 2016. The assurance engagement was planned and performed in accordance with the International Standard for Assurance Engagements (ISAE) 3000 Revised, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information.
These procedures were designed to conclude on: � The consistency of selected narrative claims on sustainability with underlying performance information, and; � The accuracy and completeness of the sustainability performance indicators listed below: - Value (£) of attempted fraud prevented in UK
- Number of cases raised via Speak Up, the bank’s whistleblowing service - Total gender balance in top 3 senior layers - Customer Trust score - % personal customers who are digitally active - Total scope 1 and 2 location based CO2e emissions and Scope 3 emissions from business travel - Number of Foundation accounts opened - Lending to small and medium sized enterprises (SMEs) across England, Scotland and Wales
Key economic indicators The UK economy grew by 2.1% in 2016, down from 2.2% in 2015 and close to its long-run average.
Summary The main development in 2016 was the fall in the value of sterling, which finished the year down 15%, 10% of that happening after the EU referendum. That quickly fed through to higher import costs, with producers’ input prices rising by 16%, squeezing firms’ margins. The Bank of England expects consumer price inflation to reach around 2.75% in 2017 and 2018, above the target set by Parliament. However, the Bank of England has not raised interest rates to moderate inflation. Rather, in August it cut Bank Rate to 0.25%. That reflected its concern that leaving the European Union would lead growth to slow and inflation to undershoot the target. In addition, the Bank of England tends to disregard inflation caused by a currency change unless it feeds through to wages.
The Republic of Ireland continued to grow at around 4%, with domestic demand contributing more, and exports less to growth than in recent years. Unemployment continued to fall, ending the year at 7.2%. House price inflation accelerated to 9% from 4.6% in 2015.
Eurozone area growth slowed slightly to 1.7% from 1.8%. Unemployment remained close to 10%. With inflation still close to zero, the European Central Bank reduced interest rates and expanded its quantitative easing programme.
While the year opened with considerable market volatility, which reflected concerns about the outlook for China, growth there was 6.7%, reflecting actions by the authorities to boost activity. That had beneficial spillover effects among some of China’s trading partners.
Despite continued growth and low unemployment in the UK, markets continue to expect interest rates to remain low. At the year’s end, the first rise in Bank Rate was expected around mid-2019. While that partly reflects the Bank of England’s response to the EU referendum result, more important are structural factors; slower global growth, higher levels of desired saving and lower levels of desired investment, which have been pushing down real interest rates for some time and which are likely to persist.
Our Risk appetite is set in line with the overall strategy and approved by the board while the risk management framework identifies and manages current and emerging risks that could materially affect the delivery of the RBS strategy.
In particular, there has been a focus on enhancing our risk appetite framework and communicating and embedding it across the bank. For each of our material risks, significant emphasis has been placed on reviewing current measures along with associated limits and triggers and also the way our risk profile compared to risk appetite is reported across RBS. Risk culture has continued to be at the forefront of our work as RBS moves towards the achievement of its strategic objectives. To that end, the ambition is to make risk management simply part of the way colleagues across RBS work and think. In support of this, during 2016 the RBS-wide action plan focused on assessment, identifying and taking actions to build clarity, develop capability and motivate staff.
In market risk, sustained effort has been necessary to anticipate and respond to major developments in the wider environment. Managing this has required close collaboration between our first and second lines of defence but, in turn, has demonstrated RBS’s continued commitment to its wholesale banking proposition.
RWAs continued to decline (6%), ending the year at £228 billion (from £243 billion in 2015). The decline was driven by continued run down in Capital Resolution, where RWAs fell by £14.5 billion during the year, offset in part by an increase in RWAs in the core franchises.
The Common Equity Tier 1 (CET1) ratio decreased by 210 basis points to 13.4% in 2016, reflecting lower CET1 capital partially offset by a reduction in RWAs. Litigation and conduct charges of £5.9 billion in 2016 contributed to a significant reduction in the CET1 capital. Management actions to normalise the ownership structure and improve the long-term resilience of RBS also contributed to the reduction. These actions included the final Dividend Access Share payment of £1.2 billion and the impact of the accelerated pension payment of £4.2 billion. Tier 1 capital benefitted from the successful issuance of £2 billion of Additional Tier 1 (AT1) capital notes.
The leverage ratio fell by 50bps to 5.1% during 2016. This reflected the fall in the CET1 position, partly offset by the successful issuance of an additional £2 billion equivalent of AT1 instruments as planned at the beginning of the year. The Bank of England leverage ratio benefited from an additional 50bps uplift following the FPC’s guidance on 4 August that allowed banks, under certain conditions, to exclude central bank reserves from the leverage exposure measure. RBS also issued £4.2 billion of MRELeligible senior debt as part of the issuance plan to meet its steady-state bail-in requirements by 2022.
In the Bank of England 2016 stress test, RBS did not meet its common equity Tier 1 (CET1) capital or Tier 1 leverage hurdle rates before additional Tier 1 (AT1) conversion under the hypothetical adverse scenario. After AT1 conversion, it did not meet its CET1 systemic reference point or Tier 1 leverage ratio hurdle rate. Based on RBS’s own assessment of its resilience identified during the stress-testing process, RBS has already updated its capital plan to incorporate further capital strengthening actions and this revised plan has been accepted by the PRA Board. The PRA will continue to monitor RBS’s progress against its revised capital plan.
RBS maintained a robust liquidity and funding risk profile in 2016. Its loan-todeposit -ratio was 91% at 31 December 2016, compared with 89% in 2015. The latest Internal Liquidity Adequacy Assessment Process (ILAAP) showed that RBS is in a strong position to withstand liquidity stress scenarios. It suggested that RBS’s liquidity portfolio was large enough to cover more than 139% of the expected outflows in the worst of three severe scenarios.
Risk overview Effective risk management plays a central role in the successful development and execution of our strategy.
Top and emerging risks RBS employs a continuous process for identifying and managing its top and emerging risks. These are defined as scenarios that could have a significant negative impact on RBS’s ability to operate or meet its strategic objectives. A number of scenarios attracted particular attention in 2016.
Macro-economic and political risks: RBS remains vulnerable to changes and uncertainty in the external economic and political environment, which have intensified in the past year. To mitigate these risks, RBS has taken actions in 2016 with its capital, liquidity and leverage positions. A number of higher-risk portfolios have been exited or reduced. Stress testing and scenario planning is used extensively to inform strategic planning and risk mitigation relating to a range of macro-economic and political risks. Scenarios identified as having a potentially material negative impact on RBS include: the impact of the UK’s exit from the EU; a second Scottish independence referendum; a UK recession including significant falls in house prices; global financial market volatility linked to advanced economy interest rate increases or decreases; a protracted period of low interest rates in the UK; vulnerabilities in emerging market economies resulting in contagion in RBS’s core markets; a eurozone crisis; and major geopolitical instability.
Risks to income, costs and business models arising from regulatory requirements: RBS is exposed to the risk of further increases in regulatory capital requirements as well as risks related to new regulations that could affect its business models, such as Open Banking. RBS considers and incorporates the implications of proposed or potential regulatory activities in its strategic and financial plans.
Operational and execution risks Increased losses arising from a failure to execute major projects successfully: The successful execution of major projects, including the transformation plan, the restructuring of NatWest Markets, meeting the final European Commission State Aid requirements relating to Williams & Glyn compliance with structural reform requirements including the statutory ring-fencing requirements implemented as a result of the Independent Commission on Banking; delivering a robust control environment and the embedding of a strong and pervasive, customer centred organisational and risk culture, are essential to meet RBS’s strategic objectives. These projects cover organisational structure, business strategy, information technology systems, operational processes and product offerings. RBS is working to implement change in line with its project plans while assessing the risks to implementation and is taking steps to mitigate those risks where possible.
Failure of information technology systems: RBS’s information technology systems may be subject to failure. As such systems are complex, recovering from failure is challenging. To mitigate these risks, a major investment programme has significantly improved the resilience of the systems and further progress is expected. Back-up system sustainability has improved, and a ‘mirror bank’ system, to provide basic services, if needed, has been created.
Full risk factors are discussed on pages 432 to 463 of the 2016 Annual Report and Accounts.
Making sense of money MoneySense is our flagship financial education programme for young people aged between 5 and 18. It aims to help young people towards a better financial future. Since we started providing financial education in schools over 22 years ago, we’ve helped an estimated 4.5 million young people understand all about money. By the end of 2018, we’ll have helped a further one million young people.
Our programme is used to deliver lessons in primary and secondary schools in the UK and Ireland, thanks to the support of registered teachers and our dedicated volunteer network of over 2,800 employees.
RBS is structured around becoming number one for service, trust and advocacy as we meet the ambitions and needs of our retail, business, commercial and corporate customers. Organised under three customerfacing franchises, our core businesses are centred around the UK and Ireland markets with a focused international capability.
� Credit conditions remained benign, with a net impairment release of £30 million in 2016 compared with £148 million in 2015.
Upwardly mobile Whether it’s logging in with your fingerprint, paying your contacts through your phone, cancelling a direct debit or amending standing orders, we’ve been working hard to make our apps even more convenient for customers, by making them easier to use and giving them increased functionality. In fact, over a third of all personal product sales are now completed digitally.
� Our new business banking ‘Online Account Opening’ service now allows start up business customers to submit an application online in just ten minutes and get a sort code and account number in under an hour. RBS was awarded a Moneyfacts 5 star rating for Business Banking accounts.
� Our customers, the bank and our entire industry faced a bigger threat from fraud, scams and cyber attacks in 2016. In response, we trained our staff to spot phishing e-mails and we ran security awareness seminars and events for around 12,800 customers, staff and industry partners.
Committed to service In 2015, Chief Executive, Ross McEwan, signed the Armed Forces Covenant, pledging that no customers or colleagues would be disadvantaged because of their involvement with the military.
This year, the bank’s support of these customers and colleagues was rewarded, when we were awarded the Gold Award by the Ministry of Defence Employer Recognition scheme.
Commercial & Private Banking Commercial & Private Banking (CPB) serves commercial and corporate customers, operating principally through the NatWest, Royal Bank of Scotland and Lombard brands, and high net worth individuals, through Coutts and Adam & Company. RBS International (RBSI) continues to focus on supporting retail, commercial, corporate and financial institution customers in Jersey, Guernsey, Isle of Man, Gibraltar and Luxembourg. CPB aims to support the UK and Western European economies through its provision of credit and banking services to help businesses grow.
� Impairment losses of £213 million increased £131 million compared with 2015 largely reflecting a single name charge taken in respect of the oil and gas portfolio.
The shipping news The Port of Dover is Europe’s busiest ferry port. It’s a vital international gateway for the movement of passengers and trade, handling up to £119 billion of UK trade each year.
� Commercial Banking reported the largest (and only significant) year on year improvement in NPS amongst major UK banks.
The project is the largest of its kind in the UK, and represents a major step towards a government target to replace traditional meters in all homes by 2020.
The increase was driven by Rates and Currencies, reflecting sustained customer activity throughout the year and favourable market conditions following the EU referendum and subsequent central bank actions.
� The NatWest Markets brand was introduced on 5 December 2016. The new brand is an important step towards our ambition to become No.1 for customers.
� NatWest Markets started a multi-year transformation in February 2015 and real progress is being made towards building a technology-led business with ongoing investment to improve efficiency and reduce costs while sustaining a well-controlled end-toend model.
� The business’s progress against its transformation plan is already being recognised externally: - No.1 for Gilts by Market Share EMEA FIs (Source: Greenwich Associates, European Fixed Income 2016 – Government Bonds)
- Best for putting corporate client’s interest before the bank’s (Source: Global Capital Bond Awards 2016)
� Total income included disposal losses of £572 million, £205 million higher than in 2015.
� Operating expenses reduced by £696 million to £4,255 million reflecting a £775 million reduction in adjusted operating expenses and a £1,229 million reduction in restructuring costs, partially offset by a £1,308 million increase in litigation and conduct costs. Adjusted operating expenses decreased by £775 million, or 50%, to £764 million, principally reflecting a 1,000 reduction in headcount.
� A net impairment loss of £253 million compared with a net impairment release of £725 million in 2015 and principally comprised charges relating to a number of shipping assets (£424 million).
Board Risk Committee Provides oversight and advice to the Board on current and potential future risk exposures of RBS and future risk strategy. It reviews RBS’s compliance with approved risk appetite and oversees the operation of the RBS Policy Framework and submissions to regulators.
Sustainable Banking Committee Provides support to the Board in overseeing actions being taken by management to run a sustainable long term business, with specific focus on culture, people, customer, brand and environmental social and ethical issues.
UK Corporate Governance Code Throughout the year ended 31 December 2016, RBS has complied with all of the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated April 2016 except in relation to provision (D.2.2) that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. RBS considers that this is a matter which should rightly be reserved for the Board.
Our Board The Board has twelve directors comprising the Chairman, two executive directors and nine independent non-executive directors, one of whom is the Senior Independent Director. Biographies for each director can be found on pages 58 to 61. Mike Rogers was appointed to the Board on 26 January 2016 and Frank Dangeard was appointed to the Board on 16 May 2016.
An internal evaluation of the effectiveness of the Board and its committees was conducted in 2016, led by the Chief Governance Officer and Board Counsel.
The bank’s business and strategic plans provide long term direction and are reviewed on, at least, an annual basis, including multi-year forecasts showing the expected financial position throughout the planning horizon. The base case plan indicates that the bank has sufficient capital and liquidity resources over the three year assessment period.
Lawyer Sharon Amesu joined our Manchester hub in February 2016. “There was a real buzz and an immediate sense that I could be part of something quite special and significant” she says. “It’s been instrumental in helping me grow my mentoring business and also a fantastically creative space to get to know, and network with, other aspirational and passionate people.”
Across 12 accelerators throughout the UK, we have supported 1,736 companies with an aggregate turnover of more than £176 million. We’ve helped secure more than £151 million worth of investment for entrepreneurs in the Entrepreneurial Spark programme, and they in turn have created 3,152 jobs. More than 80% of the participating companies are still operating.
School of Economics and Political Science from 2003 until May 2011. He is also Professor of
Chair of the International Advisory Council of the China Securities Regulatory
Experience: Sandy spent his entire full-time career with Standard Life plc, retiring as Group
Chief Executive. An actuary, he has served his profession in a variety of roles and has also served as a director of the Association of British
World City of Literature Trust and vice-Chairman of the Royal Conservatoire of Scotland.
Corporation, Xoom, Diamond foods and chair of the board (and as Non-executive director) of
Non-executive director, and member of the audit committee of Fiserv Inc
President, Financial Institutions. In 1997, he was appointed as Senior Vice President, Group Risk
Waterhouse (now PricewaterhouseCoopers) where he qualified as a chartered accountant. He then moved into banking joining SG Warburg, specialising in corporate finance, and was appointed as Co-Head and Managing Director of its US investment banking business in 1989.
Experience: Previously a non-executive director and Chairman of the corporate compliance and responsibility committee of Wm Morrison
Group plc. Also chair of the nominations and member of the audit, risk and remuneration committees
Experience: Brendan was global Chairman, financial services for KPMG. He previously held senior leadership roles within KPMG including as a member of the KPMG UK board from 1999 to 2006 and as vice-Chairman from 2006 until his retirement in 2010. He was Chairman of the Audit
President of the Institute of Chartered Accountants in England and Wales. She was appointed to the
Secretary and Head of Group Secretariat in 2007, and prior to that held various legal, secretariat and risk roles including Head of External Risk (Retail),
The Board is supported by the Executive Committee comprising the executive directors and other senior executives. Details of the composition of the Executive Committee and biographies of its members can be found at rbs.com>about us>board and governance>ceo and board>executive committee.
As mentioned in my Chairman’s Statement on page 6, the Board has considered a number of key strategic, financial, regulatory and litigation matters during 2016.
review of the treatment of SME customers, shareholder litigation and RMBS litigation. The divestment of Williams & Glyn; the implications of the EU Referendum result; and the
The Board has twelve directors comprising the Chairman, two executive directors and nine independent non-executive directors, one of whom is the Senior Independent Director.
Biographies for each director and details of which Board committees they are members of can be found on pages 58 to 61. The Board considers that the Chairman was independent on appointment and that all non-executive directors are independent for the purposes of the Code.
As mentioned above a number of board members have been designated as “Senior Managers” under the PRA and FCA’s
Chief Executive and there is a clear division of responsibilities with the Chairman leading the Board and the Chief Executive managing RBS business day to day.
Committee consider succession planning for Board appointments; • manage the business of the Board and set the agenda, style and tone of Board discussions to promote effective decisionmaking and constructive debate; • facilitate the effective contribution and encourage active engagement by all members of the Board; • in conjunction with the Chief Executive and Chief
Board; • drive and deliver performance against financial plans, acting in accordance with authority delegated by the Board; • consult regularly with the Chairman and Board on matters which may have a material impact on RBS; • act as champion of the culture and values of RBS, creating an environment where employees are engaged and committed to good customer outcomes; • lead, manage and develop RBS’s senior leadership team, ensuring professional capability is developed and that succession coverage meets the needs of RBS; • ensure RBS has effective frameworks and structures to identify, assess and mitigate risks; and
In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. Please see page 54 of the Strategic Report for more details. The terms of reference are available on rbs.com.
customers continued to meet during 2016, to oversee and provide advice to the Board in relation to the review, the external independent review of Global Restructuring Group (GRG)
Chief Governance Officer and Board Counsel Aileen Taylor is the Chief Governance Officer and Board Counsel and the Company Secretary. As of 1 January 2017, she also leads the bank’s Regulatory Affairs function as part of an extended remit.
• the provision of professional support to the Board and its committees and leading on implementation of recommendations from the annual Board evaluation.
RBS has procedures in place to ensure that the Board’s management of conflicts of interest and its powers for authorising certain conflicts are operating effectively. On appointment, each director is provided with RBS’s guidelines for referring conflicts of interest to the Board. Each director is required to notify the Board of any actual or potential situational or transactional conflicts of interest and to update the Board with any changes to the facts and circumstances surrounding such conflicts.
In 2016, nine Board meetings were scheduled and individual attendance by directors at these meetings is shown in the table below.
During 2016 the Board also visited the Ulster Bank business in the Republic of Ireland, spending time on the business, risks and challenges. The directors met with key customers, politicians and senior industry and business representatives.
Executive Committee members attend part of each Board meeting to provide an update on the performance of each of the franchises and risk, operational and conduct issues. Other relevant senior executives attend Board meetings to present reports to the Board as appropriate. This provides the Board with an opportunity to engage directly with management on key issues and supports the Board’s succession planning activity.
Board, which is co-ordinated by the Chief Governance Officer and Board Counsel. This includes visits to RBS’s major businesses and functions and meetings with directors and senior management. Meetings with external auditors, counsel and stakeholders are also arranged as appropriate. An illustrative list of the meetings arranged during a new director’s induction programme is set out below: Chairman
In accordance with the Code, an external evaluation of the Board takes place every three years. An internal evaluation takes place in the intervening years.
Key strengths identified included the following: • The Chairman provides strong leadership to the Board and has settled into the role well.
• The Board’s committees operated effectively within their terms of reference throughout the year, providing valuable support to the Board.
The Sustainable Banking Committee has played a key role in customer and culture issues, however the directors would welcome greater Board focus on these priorities.
Recommendations arising out of the 2016 evaluation have been carefully considered by the Board. An action plan has been agreed for 2017 and key actions include: • Ensuring board & committee composition and succession plans are kept under regular review, to be led by the Group
• Refreshing Board and committee paper templates and guidance, to ensure consistency across the Board and committees in relation to paper length and content.
Relations with investors The Chairman is responsible for ensuring effective communication with shareholders. The company communicates with shareholders through the Annual Report and Accounts and by providing information in advance of the Annual General
Meeting. Individual shareholders can raise matters relating to their shareholdings and the business of RBS at any time throughout the year by letter, telephone or email via rbs.com/ir.
Government’s investments in financial institutions, to discuss the strategy and financial performance of the business. The Chief Executive and Chief Financial Officer also undertake an extensive annual programme of meetings with the company’s largest institutional shareholders; • the Chairman independently meets with RBS’s largest institutional shareholders annually to hear their feedback on management, strategy, business performance and corporate governance. Additionally, the Chairman, Senior Independent
Director and chairmen of the Board committees met with the governance representatives of a number of institutional shareholders during the year; • the Senior Independent Director is available if any shareholder has concerns that they feel are not being addressed through the normal channels; and
The Investor Relations programme also includes communications aimed specifically at its fixed income (debt) investors. The Chief
The Group Nominations and Governance Committee was constituted in January 2016 and assumed the responsibilities of the previous Group Nominations Committee to review the structure, size and composition of the Board, and membership and chairmanship of Board Committees. In addition, the
Board directors and therefore made succession planning a priority in 2016.
In addition to recruitment, the Committee assumed oversight of the process to reach agreement with the PRA in respect of a governance model that adheres to ring-fencing legislation. Ringfencing also gives rise to a requirement to recruit additional nonexecutive directors to the boards of our material regulated subsidiaries, which the Committee has also been overseeing.
The Group Nominations and Governance Committee is comprised of the Chairman of the Board and four independent non-executive directors, which is consistent with the findings of last year’s recommendation. The Committee holds at least four scheduled meetings per year and also meets on an ad hoc basis as required. In 2016, there were four Group Nominations and
As previously advised, JCA Group has been engaged to support the search for new non-executive directors. The search and nominations process has been streamlined, including by establishment of this Committee. The Committee has also considered (by reference to peer institutions) the significant time commitment required of the Group’s non-executive directors and how this might be reduced to make the position accessible to a larger pool of candidates. JCA group does not provide search services to any other part of RBS.
December 2016 with a remit to provide an external lens to RBS’s innovation and technology agenda including consideration of driving a resilient, simple and efficient technology environment.
In addition to appointments to the Board (and subsidiary appointments being required to specifically comply with ringfencing legislation), the Committee has also overseen the process for the appointment of a new chairman for Ulster Bank
Group Nominations and Governance Committee operated effectively. However, certain recommendations for action were recognised including the need to: regularly engage with the external search firm to provide clarity and guidance on RBS’s recruitment requirements; and rebalance the agenda of the
Committee to ensure greater focus on strategic issues, including director performance and board and senior management succession.
operated effectively during 2016, as was confirmed by the annual evaluation process, details of which are also set out below.
The implications of the EU referendum and subsequent developments in the macro economic environment were an important area of focus for RBS in the second half of 2016. The
GAC received reports on the implications for the credit environment which it has considered in the context of RBS’s disclosures and financial reports. This will remain an area of ongoing focus into 2017.
The Market Abuse Regulation took effect in July 2016. The GAC
reviewed and discussed the implications for RBS’s disclosures and the processes RBS has implemented to ensure compliance with these regulations.
In relation to the Annual Report and Accounts, the GAC carefully considered the viability report and the ‘fair, balanced and understandable’ statement, including the processes which support them. The directors are required to make these statements in line with the UK Corporate Governance Code.
A priority for the GAC during 2016 was to oversee a change of the external auditors. Ernst &Young (EY) assumed the role of
On behalf of the GAC, I would like to thank the outgoing external auditors, Deloitte LLP, for their hard work over many years and for their professionalism in ensuring an orderly and smooth handover to EY.
The external auditors have attended each meeting of the GAC in 2016 and have provided the GAC with quarterly reports and ad hoc updates on specific topics as required. I am pleased to confirm that the 2016 evaluation of the external auditor found that
“The first priority of the Group Audit Committee is to ensure the integrity and quality of RBS’s financial statements”
Moving into 2017 the GAC will continue its focus on RBS’s accounting and financial reporting. The GAC will continue to consider developments in accounting policy and regulations impacting RBS, including IFRS 9 in particular. The impact of developments in the macro economic environment on the credit portfolio and financial results will also remain a priority, as will the
Accounting issues and disclosures relating to legacy litigation and conduct issues are also expected to be an important area of attention during 2017 as had been demonstrated by the provision
Committee. Brendan Nelson and Sandy Crombie are also members of the Group Nominations and Governance Committee.
The members of GAC are selected with a view to the expertise and experience of the GAC as a whole and with proper regard for the key issues and challenges facing RBS.
Securities Exchange Act of 1934 (the “Exchange Act”) and related guidance. The Board has further determined that Brendan
Exchange, and that they have competence in accounting and auditing as required under the Disclosure Guidance and
Management executives. Other executives, subject matter experts and external advisers were also invited to attend, as required, to present and advise on reports commissioned by the
The GAC held seven scheduled meetings during 2016, four of which were held immediately prior to the submission of the quarterly financial statements to the Board. The GAC also convened three ad hoc meetings to consider: • the trading statement issued in January 2016; • documentation relating to disclosures in the 2015 Annual
• disclosure issues relating to the H1 2016 results, including the developments on Payment Protection Insurance.
Allocation of Group Audit Committee agenda time during 2016 was as follows: Financial affairs of the group 39%
Following an externally facilitated evaluation in 2015, the evaluation of the GAC’s performance in 2016 was conducted internally. The evaluation process involved the completion of questionnaires by both GAC members and members of management and follow up interviews to discuss the findings. The Board and the GAC have considered and discussed the outcomes of this evaluation. Overall the review concluded that the GAC continued to operate effectively. A number of recommendations for improvement were made which were approved by the GAC and the Board; progress against these will be tracked in 2017.
The Group Audit Committee focused on a number of salient judgements and reporting issues in the preparation of the financial results throughout 2016, including the quarterly, half year and full year results and the Annual Report and Accounts. In particular, the Committee considered, discussed and, where appropriate, challenged: • provision and disclosure for ongoing regulatory and litigation actions including: Payment Protection Insurance claims, RMBS investigations and litigation, UK shareholder actions, the FCA’s investigation into RBS’s former
Global Restructuring Group, the Central Bank of Ireland’s review of Irish tracker mortgages and investigations into alleged foreign exchange rate manipulation. During 2016 RBS has recognised £5.9 billion of litigation and conduct provisions; • the adequacy of loan impairment provisions, focusing in particular on judgements and methodology applied to provisions. The Committee was satisfied that the overall loan impairment provisions and underlying assumptions and methodologies were reasonable and applied consistently; • valuation methodologies and assumptions for financial instruments carried at fair value including RBS’s credit market exposures and own liabilities assessed at fair value; • judgements made by management in relation to the carrying value of intangible assets. In particular, in light of changes to economic forecasts, the GAC considered whether any adjustments were required to the carrying value of goodwill and of RBS’s investment in subsidiaries within the stand-alone parent company accounts; in its Q3 2016 results RBSG reduced the carrying value of its investment in subsidiaries by £6.0 billion to £44.7 billion in light of the deterioration in the economic outlook. The GAC also challenged the processes and the models used to asses the value of these assets; • judgements made by management in assessing the recoverability of deferred tax assets, in light of continued execution of the RBS’s strategy and changes to the UK corporate tax system. A £300 million impairment of deferred tax assets was recognised in RBS’s Q3 2016 results; • management’s assessment of the adequacy of internal controls over financial reporting, and identified deficiencies. Remediation of identified weaknesses in relation to privileged access controls for certain IT
applications and in relation to legal entity recharge accounting for the allocation of ATM fees was monitored and tracked by the GAC during 2016; • the quality and transparency of financial and risk disclosures; • the viability statement in the 2016 report and accounts. The GAC considered the process to support the assessment of principal risks; assessed the company’s prospects in the light of its current position and the identified principal risks; selected the time period to be covered by the statement; and reviewed the disclosure on behalf of the Board; • the going concern basis of accounting including consideration of evidence of RBS’s capital, liquidity and funding position. The GAC supported the directors’ going concern conclusion. Further information is set out on page 119; and
• the comprehensive review process which supports the GAC and the Board in reaching the conclusion that the disclosures in the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provided the information necessary for shareholders to assess the company’s position and performance, business model and strategy. The review process included: central co-ordination of the annual report and accounts by the Director of Finance with guidance on requirements being provided to individual contributors; review of the annual report and accounts by the Executive Disclosure Committee prior to consideration by the
The GAC considered the effectiveness of RBS’s internal control system, including any significant failings or weaknesses. The Williams & Glyn divestment programme and the NatWest Markets control environment were both identified as weaknesses, these have both been closely monitored and reviewed by the Board Risk
The GAC considered the outputs of bi-annual self-assessments of the robustness of the internal control environment for RBS’s customer-facing businesses, and its support and control functions. This informs the control environment disclosure in the annual report and accounts.
The GAC reviewed work undertaken on the bank’s integrated risk assessment approach which is designed to provide a single approach to the assessment of risk mind sets and behaviours and risk capabilities, leading to a more effective and simplified approach to the assessment of risk culture, the three lines of defence and performance assessments.
Taxation The GAC reviewed RBS’s tax position, including a deep dive on Tax in October 2016 which covered; the structure of the Tax team, Tax Risk within the Risk Management Framework, material tax risks and disputes, UK Corporate tax compliance, deferred tax assets, VAT risks and challenges, external tax developments and the key projects on which the tax team are engaged.
The GAC considered RBS’s compliance with the requirements of the Sarbanes-Oxley Act of 2002, and was satisfied in this respect. RBS had no Material Weaknesses as at 31 December 2016, however Significant
Deficiencies were identified relating to legal entity recharge arrangements and action is being taken by
The GAC considered the impact of the Market Abuse Regulation which took effect in July 2016. The GAC noted the main changes to disclosure requirements and the processes implemented by RBS to address these. This included the establishment of a sub-committee of the executive disclosure committee to consider potential instances of inside information, including whether there are any grounds for delaying disclosure under the Market
Audit’s opinion in relation to RBS’s Risk & Control Environment and its Risk & Control Awareness. Internal Audit are now using the new simplified bank-wide risk and control rating metrics, which came into effect on 1 January 2016. The new metrics align the way RBS assesses its risks and controls across the first, second and third lines of defence. The GAC received updates on management’s response to Internal Audit’s findings and challenged management as to progress on remediating such findings.
The GAC considered and approved Internal Audit’s plan for 2017, which is focused on the highest risks faced by
Internal Auditors International Standards, were approved by the GAC and the GAC confirmed the independence of
During two visits to Internal Audit in 2016, the GAC received updates on a variety of issues impacting the internal audit function, including; resourcing, bench strength, risk mindset and behaviours, strategic priorities, use of data analytics and internal quality assurance.
The Chief Audit Executive continued to report to the Chairman of the GAC, with a secondary reporting line to the
Chief Executive for administrative purposes. The GAC assessed the annual performance (including risk performance) of the Chief Audit Executive.
The annual review of effectiveness of Internal Audit was undertaken internally in 2016. Under the evaluation process feedback on Internal Audit was provided by GAC members and attendees (including the external auditors), chairmen of subsidiary audit committees, key members of business risk committees and other key members of management. The evaluation concluded that Internal Audit had operated effectively during the year.
Certain recommendations were made to aid continuous improvement within the function; these will be implemented during 2017 and progress will be tracked by the GAC.
The GAC received a report on the status of RBS’s relationships with its key regulators, the status of regulatory reviews, including any reviews at risk of potential enforcement action in 2016, and key upstream risk developments. The GAC Chairman also attended continuous assessment meetings with the PRA and FCA, meetings with the Bank of England and other audit committee chairmen and trilateral meetings with the PRA and external auditor.
The GAC supervised the transition of the external auditor from Deloitte to EY during 2016 with EY assuming the role of external auditor for RBS at the end of March 2016. The Board will recommend the appointment of EY as external auditor to shareholders for approval at the Annual General Meeting.
The GAC received updates in relation to the external auditor’s 2016 plan and approved the 2016 audit fees including the fee for the 2016 interim results. The GAC was authorised by shareholders at the Annual General
The GAC conducted an internal evaluation to assess the independence and objectivity of the external auditor during 2016. This review included an evaluation of the effectiveness of the audit process and sought the views of the GAC members, attendees and other key members of management. Regard was had to the external auditor’s mindset and culture, skills, character and knowledge, quality control and judgement. The evaluation concluded that the external auditor was operating effectively. A number of recommendations for continuous improvement were identified which the external auditor has agreed to take forward during 2017. Following the evaluation the
GAC recommended that the Board seek the reappointment of EY as external auditor at the next annual general meeting.
CASS Opinions At the GAC’s request the external auditor presented the results of its assurance procedures on compliance with the FCA’s Client Asset Rules for RBS’s regulated legal entities for the year ended 31 December 2015. The GAC
also considered the CASS Audit plan for 2017, the findings of which will be reported to the GAC once the audit is complete.
The GAC considered the ‘dry run’ report to the PRA by the external auditor for the 2015 year end. The report responded to specific questions posed by the PRA. This report was produced in preparation for implementation of auditor reporting for the largest UK banks which is required for 2016 year ends, in line with the proposals set out in PRA consultation paper CP8/15.
In accordance with the policy, all audit services and permitted non-audit services are approved in advance.
Under the policy certain services are classed as Audit-Related Services and these may be approved by the
Director of Finance, on behalf of the GAC, up to a limit of £100,000 each financial quarter. Engagements for
Audit-Related Services in excess of this quarterly limit require the approval of the GAC Chairman. All Audit-
Finance and by Supply Chain Services. All such ad hoc approvals of non-audit services are ratified by the GAC
During 2016, the current and previous external auditors were approved to undertake the significant engagements set out below whilst in the role of external auditor: • Deloitte were engaged to prepare an audit opinion, required by the PRA confirming the level of asset run down in RBS Capital Resolution, taking into accounting outstanding liabilities/indemnities to any disposed asset; details of any residual assets and how these will be managed following the closure of RBS Capital
Resolution; and details of any ongoing obligations RBS will have to any disposed assets; • Deloitte’s role as Reporting Accountant for Williams & Glyn was extended, to permit them to prepare a financial ‘fact pack’ to support the trade sale marketing of Williams & Glyn; • Deloitte were engaged to support Williams & Glyn with validation, review, quality assurance and documentation activities in relation to Williams and Glyn’s capital stress plan; • Deloitte were engaged to support the first phase of a Central Bank of Ireland mandated investigation into tracker mortgages in Ulster Bank RoI. This first phase comprised the development and submission of a detailed plan for conducting the investigation and ensuring that appropriate governance was in place; • EY were engaged to review historical and prospective financial information for certain parts of the business; • EY were engaged to provide an assurance opinion for an information request from the European
Commission in connections with its competition investigation into pre-2012 FX currency trading; and
GAC or on its behalf by the Director of Finance (depending on the value of the engagement. Since Deloitte have been removed from independence requirements with these safeguards in place they have been engaged as follows: • to provide additional quality assurance over management’s assessment of the adequacy of SOX 404 control design and management’s testing of the effective operation of SOX 404 controls; • as the skilled person to support the Bank’s ring-fencing programme; • in relation to the remediation of the tracker mortgage book in Ulster Bank; • to provide resource support to help technology teams to implement and embed a new Technology delivery framework and; • to support the second phase of the Central Bank of Ireland mandated investigation into tracker mortgages in
The Committee had a challenging programme of risk issues to consider in 2016 and the report that follows provides details of the topics reviewed and debated by the Committee during the year. The Committee reviewed and provided oversight of the risk profile of the bank relative to the bank’s strategy and risk appetite against the backdrop of an economic environment which is challenging for the bank and which was made more uncertain following the outcome of the EU referendum.
The Committee continued to devote considerable attention to the demanding bank-wide transformation programme in 2016. In particular, it considered execution and delivery risk on behalf of the Board and monitored the amount of change risk faced by the business. We focused on the impact of transformation plans on the bank’s control environment and on the control transformation workstream which is a key part of the overall programme. End to end risk and control assessments for material processes were carried out during 2016 and in 2017 we will be overseeing the improvement actions which are needed. The broader cost and control objectives of the transformation programme will continue to be a key priority in 2017 and future years.
Delivery of the Williams & Glyn separation programme remained a significant area of focus of the Committee in the first half of the year. In light of the delivery challenges, the Board decided to change its strategic direction and the committee subsequently focused on the wind-down of the programme.
As the year progressed, increasing agenda time was devoted to the implementation of the bank’s ring-fencing programme as the programme moved from the design phase into the execution phase. The Committee reviewed the revised baseline plan before submission to the regulator and oversaw the development of an integrated assurance programme for the project involving Risk,
RBS as a whole is on a journey towards a robust, well-managed control environment and the Committee reviews the control ratings of significant business areas twice a year. Challenges are greatest within the bank’s NatWest Markets (formerly CIB)
franchise and we reviewed management’s plans to strengthen substantively its control environment and address known weaknesses. We will oversee the effective delivery of those plans, relying in particular on more detailed challenge in the second line of defence.
The bank’s risk appetite framework provides a structured approach to risk taking and the committee reviewed proposed enhancements to the framework prior to Board approval. We have extended our detailed examination beyond the suite of strategic risks to all material risk categories via a series of in depth reviews of the individual risk appetite statements and related metrics. These sessions enabled essential preparatory work to be undertaken prior to transitioning to a Board approval framework for these material risks in 2017. We will continue to supervise closely the maturing risk appetite framework, including remediation where breaches of material risk appetite are identified, in the year ahead.
The bank conducted a number of stress tests in 2016 including the European Banking Authority and Bank of England stress tests in addition to its own internal stress tests. The Committee played a vital role in reviewing the scenarios and assumptions deployed and in ensuring that the outputs of the tests were subjected to a high degree of scrutiny and challenge. The Committee also oversaw enhancements to the bank’s stress testing capability and this will remain a priority in 2017.
Other material areas of Committee focus during the year have included: • conduct risk and the oversight of on-going regulatory investigations and remediation; • the capital and liquidity position of RBS and related regulatory submissions; • cyber security including the outcome of RBS’s participation in a cyber testing initiative led by the Bank of England
(CBEST); • risk culture, the three lines of defence model and risk performance assessments, now being combined into an integrated risk assessment process; and
The bank has made significant advances this year towards its goal of becoming a stronger, simpler and fairer bank. However, while progress has been made, more work is required before the bank will be operating fully within risk appetite and the Committee will keep this under review in 2017. In the coming year the
resilience and assessing the impact of external factors on the bank’s risk profile.
I would like to conclude by welcoming Frank Dangeard to the
Committee and by thanking my fellow Committee members for their continued support and diligence throughout the year. I
would also like to extend my gratitude to Robert Gillespie, who stood down as a member in August, for his valuable contribution.
“RBS as a whole is on a journey towards a robust, well managed control environment”
Brendan Nelson is chairman of the Group Audit Committee of which Baroness Noakes and Morten Friis are also members.
Executive, and the lead partner of the External Auditor. External advice is sought by the BRC, where appropriate.
Meetings and visits Nine scheduled meetings and six ad hoc meetings were held in 2016. The ad hoc meetings were required to consider: the results of various phases of internal and external stress tests; the Ring-
Fencing Revised Baseline Plan; and the draft budgets and related stress test outputs.
The review included a small number of general recommendations which are relevant for both the Board and its senior committees.
The outcomes of the evaluation have been reported to the Board and the BRC will track progress on its 2017 priorities during the year.
Committee and the RBS Chief Financial Officer. It provides oversight of the risk management framework of RBS’s combined US operations, including the review and approval of US risk management policies and material submissions to US regulators.
• Requested focus sessions on the controls transformation workstream, in particular the prioritisation and completion of the Risk and Control Assessments planned in 2016. A report was received from
Internal Audit on the robustness of the assessments and the BRC will oversee management’s plans to enhance processes and to remediate control weaknesses identified through completion of the exercise.
• Received updates on the wind-down of the separation programme after the decision of the Board not to proceed with this method of divestment and considered the impact of the decision upon people, costs, records management and security. Reviewed the impact of the change in strategic direction upon other key deliverables.
• Considered the key risks of the implementation of the ring-fencing programme as it moved from the design phase into execution in H2 2016, including reviewing the revised baseline plan and endorsing its submission to the PRA.
• Oversaw the development of an integrated assurance programme involving Risk, Internal Audit and external third party assurance.
• Discussed the change risk profile of RBS and the prioritisation and impact of mandatory change programmes and considered the agreed risk appetite statement and measures used to assess change risk across RBS. Suggested refinements to the processes for assessing change risk and the acceptable volume of change.
• Reviewed the client pricing process against regulatory requirements to ensure that the pricing of liabilities and assets takes into account RBS’s business model and risk strategy. The BRC noted that additional testing would be undertaken and enhancements made to the process. An annual review will be undertaken in future years.
• Reviewed risk appetite for strategic risks (earnings volatility, RBS-wide and functions, funding and equity investors) and subject to suggested refinements, recommended this to the Board for approval.
• Reviewed the cascade of RBS-wide risk appetite to franchises and functions and the alignment between strategic and material risk appetite statements.
• During the year, the BRC considered the underlying assumptions and scenario selection for the external Bank of England stress test, including Internal Audit’s opinion, making recommendations to the Board as appropriate.
• Provided challenge and scrutiny to the results of the three phases of the 2016 EBA stress test and the results of the 2016 Bank of England stress test.
• Reviewed the results of the reverse stress test and made recommendations to the Board in this regard.
• Oversaw enhancements to RBS’s stress testing capability, in particular the remediation actions taken in response to the PRA review of stress testing capability.
• Oversaw the development of a new model risk framework designed to deliver improvements in the management of model risk. This included reviewing progress in remediating areas of identified weaknesses such as model validation and the restructure of model risk management team.
• The BRC reviewed the output of the pilot of the revised approach within certain functions and franchises and Risk.
RDAR • Monitored progress towards full compliance with the Basel Principles on Effective Risk Data Aggregation and Reporting (RDAR). Received a report from Internal Audit on material compliance with RDAR
principles and oversaw communications with the PRA in this regard. The BRC will continue to ensure that areas requiring additional improvement are remediated in 2017 alongside plans to achieve full compliance.
Risk Assurance • Received quarterly reports on issues highlighted by reviews conducted in each of the three franchises by
• Received bi-annual reports on the Control Environment of the franchises and functions and sought management’s assurance that appropriate measures were in place to ensure that the businesses could continue to operate safely, where control weaknesses had been identified.
• Reviewed and challenged management plans to remediate and strengthen the conduct and control environment across the NatWest Markets franchise. Received reports on specific remediation issues and control issues including, Trade and Transaction Reporting; Collateral Management Algorithmic Trading and Intra-Day Risk; IMA waiver and capital implications; and surveillance measures and potential enhancements.
• Reviewed management’s transformation plans for the business, including how these would impact remediation, mandatory change and the control environment.
• Approved a revised governance for large credit exposure decisions, designed to enhance the level of
The BRC also reviewed reports in relation to: • the potential risks posed by end of life software; • simplification of the RBS Policy Framework. The BRC requested that greater analysis of the volume of exceptions to policy be undertaken; and
• data quality. Following review of progress against a detailed plan, the BRC was pleased to note significant progress in this area.
• In Q2 2016 the BRC reviewed the draft Internal Capital Adequacy Assessment process (ICAAP) along with an Internal Audit review and recommended the document to the Board for approval subject to certain enhancements.
• Oversaw the first part of a two year remediation process in designed to deliver a recovery plan in line with industry best practice.
• Examined and commented upon the draft 2016 recovery plan and resolution pack and recommended them to the Board for approval. Approved the final version of the recovery plan under delegated authority from the Board.
Capital Management • Reviewed the progress of the capital management capability enhancement programme.
Financial Crime • Discussed the Group Money Laundering Reporting Officer’s (MLRO) Annual Report 2015 and recommended it to the Board.
Other conduct risks The BRC also reviewed reports in relation to: • the European Markets Infrastructure and Markets in Financial Instruments regulations; • progress to meet the requirements of the European Deposit Guarantee Scheme; • RBS’s and NatWest’s compliance with the FCA client assets rules (CASS) and recommended the reports to the Board for approval; • the New Product Risk Assessment (NPRA) process; • complaints performance improvement; and
• Oversaw the performance and the independence of the Risk and Compliance functions, through undertaking bi-annual visits to Risk and Conduct & Regulatory Affairs during which the BRC considered people and succession planning, budget and the resource capability of both functions. Received quarterly dashboards of key management information covering headcount, comparisons to budget, high performing staff turnover and outputs of staff surveys.
Continued to provide oversight over the risk dimension of performance and remuneration arrangements, working closely with the Group Performance and Remuneration Committee. The Report of the Group
Affairs Officer; • an assessment of the risk/conduct performance of members and attendees of RBS’s Executive
Committee, with recommendations made to the Group Performance and Remuneration Committee as appropriate to inform its decision on pay and awards; • an assessment of the risk/conduct performance of the RBS and its businesses, with recommendations made to the Group Performance and Remuneration Committee to inform its decision on adjustments to the annual bonus pools; • performance conditions for the RBS’s Long Term Incentive Plans and assessment of proposed vesting levels to ensure risk management/conduct performance is fairly reflected in vesting outcomes; and
• the proposed Executive Director Future Remuneration Policy as detailed on pages 94 to 99 from a risk and control perspective.
issues. Engagement with management continues to be good and we have listened, learnt and acted on challenges and ideas from stakeholders we have spoken to throughout the year.
Our ambition to be number one for customer service, trust and advocacy in each of our chosen business areas remains unchanged. Delivering this ambition depends on our ability to demonstrate beyond question that we are a responsible company, that has learnt from the past, doing business in a sustainable way.
The efforts to build a responsible and sustainable business are being recognised through independent and external measures.
The SBC has also seen tangible evidence of good customer outcomes. RBS is the largest lender to small and medium sized business in the UK and gross lending to our Personal and
Business Banking customers is up 29% year on year. Building financial capability remains a focus for RBS with financial health checks available to Personal and Business Banking customers.
18 year-olds, also continues to grow. Raising awareness of the importance of financial education was supported by a NatWest national advertising campaign last year, along with a new commitment to reach another one million young people with
The repositioning of our primary customer brands was a significant moment for RBS. The SBC played a role in overseeing and challenging the brand strategy which plays an important role in building a customer focused bank which our people can be proud of and our customers trust.
YES Check and made changes to the way we do some of the fundamentals of banking. The SBC will continue to operate at a strategic level to support management on its journey to reaching our ambition to becoming a more sustainable and truly customer focused bank.
Executive, Chairman, senior representatives from the customerfacing franchises as well as Human Resources, Sustainability,
In addition to ongoing engagement which takes place across our business each day, the Committee has run a proactive engagement programme since 2011 to which we invite external stakeholders to meet with, and challenge, the most senior decision makers in RBS.
could do more. These discussions help shape future policies, influence strategic priorities and inform decision making across
In 2016 we held four such stakeholder engagement sessions covering the following topics: • how to serve and support scale-up, high growth customers beyond start up stage; • defining the vision of sustainable banking for RBS and taking a bolder, more integrated approach to delivering it; • financial capability and the key concerns and challenges faced by Irish consumers in relation to their personal finances; and
As part of its programme of stakeholder engagement, members of the SBC undertook a visit to Personal and Business Banking which provided valuable insight to the SBC. There are plans for more frontline customer engagement in 2017.
The Sustainable Banking Committee comprises four independent non-executive directors. The Chairman and members of the SBC, together with their attendance at meetings, are shown below.
Performance evaluation The annual review of the effectiveness of the Board and its senior
Committees, including the Sustainable Banking Committee, was conducted internally in 2016. The Committee has considered and discussed the outcomes of this evaluation and accepts the findings. Overall the review concluded that the Sustainable
issues. The stakeholder engagement sessions are regarded as a valuable opportunity to learn how well RBS is aligned to external sustainability priorities. During 2017, the Committee will continue to focus on these priorities, and ensure it undertakes a proactive programme of stakeholder engagement.
• oversee customer centricity priorities and how RBS is supporting and engaging with key customer segments; • oversee progress being made to achieve the long term target of being number one for customer service, trust and advocacy in each of our chosen businesses; Brand & Communications
• receive reports on managing ESE risk; • consider RBS’s environmental footprint and how RBS is operating in its communities; and
Annual statement from the Chairman of the Group Performance and Remuneration
I am pleased to set out the Directors’ Remuneration Report for 2016. This report describes the pay decisions that we took for the last financial year and the new remuneration policy that is being proposed to shareholders for approval at the forthcoming AGM.
I know that views on executive pay are continuing to evolve. The government is consulting on areas of reform aimed at strengthening the UK’s corporate governance arrangements. A
separate industry-led Executive Remuneration Working Group has also set out areas where it is believed that improvement is needed to restore trust in current remuneration practices. RBS
It is clear many shareholders value simple remuneration structures. The Committee spent a great deal of time considering alternative constructs and how these would align to RBS’s cultural aims on pay. The proposed new policy represents a significant change and has two principal aims: to produce greater alignment with shareholders and to discourage the potential for excessive risk taking.
The design focuses on creating alignment by ensuring executives build up larger shareholdings and retain them for longer. This intent is being reinforced by a significant increase in shareholding requirements from 250% to 400% of salary for the Chief
The new policy also encourages sustainable long-term performance by having a lower maximum long-term incentive award level, but with performance assessed on factors that the executive would reasonably be expected to achieve, creating a less leveraged construct and encouraging safe and secure growth. The maximum potential long-term incentive award is being reduced by around 40% for the Chief Executive and by around 30% for the Chief Financial Officer.
Committee recognises that time pro rating is a common preference for some investors and its removal has only been included after considerable thought, and after consulting with a number of shareholders. The intention is to create high levels of shareholding that persist for a period after leaving and pro rating of awards reduces this alignment. RBS is unusual in having no annual bonus element of pay for executive directors and bonus awards would typically not be subject to pro rating. Furthermore, the policy aims broadly to maintain the expected value of pay to executive directors over their typical tenure in role.
In summary, the focus is on meaningful long-term shareholding as the mechanism for achieving alignment with shareholders. To date, the proposed remuneration policy has been well received in discussions with our largest shareholders.
UK employees have increased by 7.5% over the last three years while executive directors’ salaries have been static. Our rates of pay continue to exceed the living wage and we have removed sales incentives for front line retail staff and increased fixed pay so that they can concentrate on providing great customer service.
Some important milestones were met in 2016. RBS was able to retire the Dividend Access Share in March and this was a key part in normalising RBS’s capital structure. Good progress has also been made in resolving a number of major legacy and conduct issues although these continue to affect financial results.
The new policy is focused on the long term, aimed at attracting and keeping the right people for RBS.
As a result, shareholding requirements will be significantly increased under the new policy and performance testing of LTI awards will be based on factors that executive directors would reasonably be expected to achieve, encouraging executives to operate within risk appetite.
Combined with the removal of pro rating for good leavers, the expected value of remuneration delivered to executive directors over time is broadly maintained.
For each of the core performance areas of Finance, Risk & Operations, Customers and our People, the Committee will consider whether the executive director has over the relevant period achieved what would reasonably have been expected in the circumstances.
The pre-grant test will constitute a collective and individual view of performance over the prior year. No deduction will be made for target performance. Prior to vesting, a pre-vest test will be based on an assessment of collective performance for the year for which the award was made, knowing ‘what we know now’, and taking into account all circumstances. This is intended to carry a high degree of certainty, and to vest as long as a threshold level of sustainable performance has been delivered.
RISK & OPERATIONS e.g. deliver on key operational priorities for the year and progress on risk culture
Pre-vest performance measures based on four categories: Economic Profit, Relative TSR, Safe &
Secure Bank and Customers & People together with a risk and conduct underpin.
A 12 month retention period applies after vesting. The clawback period is extended to ten years from grant if events are under investigation at the end of the seven year period.
LTI awards held by good leavers are normally pro rated based on time served during the performance period.
Unvested LTI awards will count towards the requirement once any pre-vest performance has been assessed, three years after grant. The number of unvested shares that count will be reduced to reflect the estimated tax liability arising on vesting. Once shares are free from their respective retention periods, executive directors will be permitted to sell a maximum of 25% of such shares until the requirement is met. It is estimated that it would take a new Chief Executive five years to meet the 400%
(vesting over seven years and one year post-vesting retention period), following a year of pre-grant assessment to determine the size of the award.
LTI awards vest over years three to seven followed by 12 month retention period post vesting
Why are changes being made to the policy at this time?
Two main options were identified following the review: • Adopting an alternative LTI construct to replace the current structure, based on reduced maximum quantum but with performance assessed on factors that the executive would reasonably be expected to achieve; or
After consultation with major shareholders, the Committee believes that the alternative LTI construct provides the best fit with RBS’s ambitions as well as being strongly aligned to the creation of long-term shareholder value.
What material factors are taken into account when setting remuneration policy?
The intention is to create a remuneration policy that is specific to
RBS and its particular circumstances rather than looking to follow standard market practice. The policy aims to reinforce our values and support the delivery of RBS’s strategy. The views of shareholders are key in shaping the remuneration policy along with the need to comply with evolving regulatory requirements.
RBS-driven features: • Maximum potential LTI awards will be reduced; • Performance assessment is based on factors considered to be more within the control of management; • The policy encourages executive directors to operate within risk appetite and deliver safe and secure growth; • Shareholding requirements will be increased; • Fixed share allowances will be released over a three year rather than a five year retention period, in recognition of the impact of the extended deferral period for LTI awards; • LTI awards held by executive directors who leave in ‘good leaver’ circumstances will not be subject to time pro rating, helping to maintain expected value and increasing post employment shareholder alignment; and
Regulatory-driven features: • Pre-grant performance tests will be introduced; • The pre-grant performance test has the effect of preventing the grant of an LTI award in the year of joining; • The deferral period will be extended with awards vesting between years three to seven from the date of grant; • The retention period that applies after the vesting date will be increased from six months to twelve months; and
Subject to approval from shareholders, the new policy will be effective from the date of the AGM. The changes will be implemented in a transitional period from 2017 to 2018. The fixed share allowance for 2017 will be awarded after the AGM, to be released over a three year retention period, and the first LTI
The LTI award to be made in March 2017, for the 2016 performance year, will be the last award made under the existing remuneration policy. This award will include a longer deferral period, with 50% of the award vesting after four years and the remaining 50% vesting in years five to seven, along with an extended clawback period in line with regulatory requirements.
Further details for 2017 can be found on page 100 and a summary of the transitional arrangements is set out below.
To provide the best possible customer service, RBS is building a strong, simple and fair bank. Performance and pay management is part of that process.
• Senior leaders are subject to individual and collective performance assessment based on factors which include financial strength and customer service.
• In October 2016 we launched Service Excellence, our new customer service programme with over 34,000 employees receiving training so far.
• Professional Standards Frameworks set out the relevant knowledge, skills, and behaviours expected of RBS
• While employee engagement has been impacted during 2016 by the ongoing restructuring of the business, it remains higher than when we set out our strategic plan in
• Our clerical population in the UK and Republic of Ireland now receives only fixed pay, making pay arrangements easier to understand.
• Further information on the accountability review process under which malus and clawback can be applied is set out later in this report.
• The Committee aims to strike a fair balance between adjustments to variable pay as a targeted measure to change behaviour whilst not disproportionately penalising employees who are not directly responsible for events. • As set out below, bonuses have continued to shrink at
in 2020, unless changes are required in which case a revised policy will be submitted to shareholders for approval. The objective of the policy is to support the business strategy and promote the long-term success of RBS.
Fixed pay elements are intended to provide a level of competitive remuneration for performing the role. The intention is to have less reliance on variable pay and thus discourage excessive risk-taking.
The rates for 2017 are unchanged: • Chief Financial Officer - £800,000
Any future salary increases will be considered against peer companies and will not normally be greater than the average salary increase for RBS
A fixed allowance paid entirely in shares. Individuals receive shares that vest immediately subject to any deductions required for tax purposes and a retention period will apply. Shares will be released from the retention period in equal tranches over a three year period. The fixed share allowance will broadly be paid in arrears, currently in two instalments per year.(1) The fixed share allowance is not pensionable.
An award of shares with an annual value of up to 100% of salary at the time of award, or such higher amount which represents such value rounded up to the nearest whole share.
Benefits To provide a range of flexible and market competitive benefits that are valued and assist key individuals in carrying out their duties effectively.
Further benefits including, but not limited to, relocation costs (e.g. tax advice, shipment and storage facilities, housing and flight allowances and payment of legal fees) may be offered in line with market practice. RBS
Performance will include a range of financial and nonfinancial factors to encourage long-term value creation for shareholders.
Delivery in shares with the ability to apply malus adjustments and clawback further supports longer-term alignment with shareholders’
Awards will be subject to deferral, malus, clawback, post-vesting retention periods and any other terms as required by regulators.
A one year pre-grant performance period will apply and awards will also be subject to a pre-vest performance assessment at the end of a three year period, with vesting taking place from years three to seven after grant.
Awards are subject to malus prior to vesting and clawback post vesting. Clawback applies for seven years from the date of award, extended to ten years if events are under investigation at the end of the normal seven-year clawback period. The post-vesting retention period will be 12 months.
Employee Share Plan, as approved by shareholders at the 2014 AGM.
Awards are also subject to the regulatory requirement that limits variable pay to the level of fixed pay and can be valued in line with EBA
The vesting level of the award can vary between on the assessment of performance.
Performance will be assessed in the areas of Finance, Risk & Operations,
RBS’s strategic aims but will apply its judgement for the most part without reference to formulaic targets.
Performance will be assessed in the round. The majority of the performance variation is expected to take place under the pre-grant test, with the pre-vest assessment representing a final check that, taking all circumstances into account, overall performance has been satisfactory.
The Committee has discretion to vary the performance factors in appropriate circumstances.
Further details on the performance factors and assessment will be set out in the annual remuneration report for the relevant year.
• Remuneration for executive directors broadly follows the policy for all employees but generally with a higher element of variable pay and greater delivery in shares, held for the long term to ensure appropriate alignment with the interests of shareholders.
To ensure executive directors build and continue to hold a significant shareholding to align with the interests of shareholders.
Once the respective retention periods have passed, directors are permitted to dispose of up to 25% of the net of tax shares received until the shareholding requirement is met. Any shares purchased voluntarily will be excluded from this sale restriction.
Share Plan. LTI awards under the existing policy will normally vest over a three to seven year period subject to the achievement of relevant performance conditions, based on Economic Profit, Relative
People measures. Six month post-vesting retention periods and service requirements also apply. Further details of the value and terms of the awards can be found in the annual remuneration reports for the relevant years. Authority is also given to honour arrangements agreed for an employee prior to appointment as an executive director that may have different terms or performance conditions.
The variable pay element is approximately 40% lower for the Chief Executive and 30% lower for the Chief Financial Officer than the current policy. (5) The relatively minor difference between expected and maximum shown above is the consequence of a deliberate move to a less leveraged remuneration construct. The expected value has been calculated at 80% of maximum. The policy has a strong focus on long-term shareholding to create alignment with shareholders along with LTI awards assessed on factors that executive directors would reasonably be expected to achieve, encouraging performance within risk appetite.
Fees are paid monthly in cash. The Board retains discretion to pay fees in shares as well as cash.
Fees are reviewed regularly. Additional fees may be paid for new Board Committees provided these are not greater than fees payable for the existing Board Committees as detailed in the annual report on remuneration.
LTI awards to be exchanged for new awards; change any performance measures, targets, and to adjust such awards if major events occur (for example transaction and capital raisings); and make administrative changes to the plan rules. In addition, the Committee retains discretion to apply malus and clawback to LTI awards. When assessing performance, the Committee can also adjust the number of shares that are received under LTI awards through the application of underpins in appropriate circumstances.
The Committee also retains the discretion to make reasonable and proportionate changes to the Directors’ Remuneration Policy in order to respond to changing legal or regulatory requirements or guidelines (including but not limited to any PRA or FCA revisions to their remuneration rules and the EBA remuneration guidelines). Where proposed changes are considered to be material, the Committee will consult with RBS’s major shareholders.
Listing Rules and will need to comply with regulatory requirements. Full details will be disclosed in the next remuneration report following recruitment; and
• The maximum level of variable pay which may be granted to new executive directors will be guided by, but not limited to, arrangements for existing executive directors and in any event will not be more than one times the level of fixed pay, valued according to EBA rules. The maximum level excludes any buy-out arrangements.
Neither of the current executive directors holds a non-executive director role at any other company at this time. Details of the directorships held by other directors can be found in the biographies section of the corporate governance report.
The Committee retains oversight of the remuneration policy for all employees to ensure there is a fair and consistent approach throughout the organisation. The policy uses deferral, malus and clawback to promote effective risk management and alignment with shareholders’ interests.
Consultation on remuneration generally takes place with our social partners, including representatives from UNITE. RBS is a fully accredited Living Wage employer and we set our minimum pay (including benefit funding) above the level that is required to meet this.
Shareholders asked wide-ranging questions including how the performance tests would work and the rationale for removing pro rating for good leavers. The Committee Chairman explained how the expected value of pay would be broadly maintained over time under the new policy, provided that pro rating for good leavers did not apply, and that there were merits in assessing executive directors against factors considered to be more within their control and which they could reasonably be expected to achieve.
RBS or the executive director is required to give 12 months’ notice to the other party to terminate the executive director’s employment.
Shares will continue to be released over the applicable retention period helping to ensure that former executive directors maintain an appropriate interest in RBS shares. In all leaver circumstances, executive directors will continue to be eligible to receive a pro-rated fixed share allowance to reflect the period up to the termination date.
LTI awards made under the existing remuneration policy (approved at the 2014 AGM)
LTI awards normally lapse on leaving unless the termination is for one of a limited number of specified ‘good leaver’
Under the policy being proposed to the 2017 AGM, LTI awards made in future will not be subject to pro rating for time in good leaver circumstances, for the reasons outlined earlier in this report. Awards will also generally be made to good leavers in respect of the final year of employment.
This definition applies to all LTI awards that the executive director holds. Individuals will qualify for good leaver treatment if they leave due to ill-health, injury, disability, death, retirement, redundancy, the employing company ceasing to be a member of the Group, transfer of the employing business, or any other reason if and to the extent the Committee decides in any particular case.
Other provisions Contracts include standard clauses covering remuneration arrangements and discretionary incentive plans (as set out in this report), reimbursement of reasonable out-of-pocket expenses incurred in performance of duties, redundancy terms and sickness absence, the performance review process, the disciplinary procedure and terms for dismissal in the event of personal underperformance or breaches of RBS policies. The Committee retains the discretion to make payments (including but not limited to professional and outplacement fees) to facilitate smooth handovers, mitigate against legal claims and/or procure reasonable assistance with investigations or claims, subject to any payments being made pursuant to a settlement or release agreement.
The sections audited by the company's auditors, Ernst and Young LLP, are as indicated.
requirements. Subject to the performance conditions being met, vesting will take place between years four to seven (with 50% of any vesting in year four and 50% split over years five to seven). This will be the last LTI award under the current remuneration policy with any subsequent awards being made under the proposed new remuneration policy set out on page 94. The fixed share allowance for 2017 will be granted after the 2017 AGM and, subject to shareholder approval of the proposed policy, will be released over a three year retention period.
The CIB BOC was disbanded at the end of February 2016. However, the Board agreed that Robert Gillespie, the former CIB BOC
Chairman, should continue in an advisory role, supporting the NatWest Markets (formerly CIB) CEO and senior management team during a transitional period for the business for which he receives fees of £30,000 per annum.
(£11,801) provided to Ross McEwan. The 2015 benefits figure for Ross McEwan has been restated to include a value for travel assistance during that year. (3) The total fixed remuneration at £2,463,000 is higher than the £2,376,250 fixed remuneration in the implementation of policy section as the lower figure includes standard benefits only. (4) The 2016 value for Ross McEwan relates to an LTI award granted in 2014 that is due to vest in March 2017. The performance conditions ended on 31 December 2016 and have been assessed as set out below together with an estimate of the vesting value. The value for 2015 has been amended from the estimated value of £1,347,000 provided in the 2015 report to reflect the actual value on the vesting date in March 2016.
An assessment of performance of each relevant element was provided by internal control functions and PwC assessed relative Total
Note: (1) The Economic Profit outcome was determined according to the vesting scale where target performance of (£0.77 billion) would result in 62.5% vesting.
The Committee also received input from the BRC. In making its final judgement, the Committee considered the overall context of performance including a number of factors such as the Williams & Glyn transaction. The Committee believed such factors were already adequately reflected across the performance categories and that the overall vesting outcome above was fair and appropriate.
December 2016 and the award is due to vest in March 2017. The average share price over the last three months of the financial year has been used to estimate the vesting value.
Notes: (1) The maximum number of shares is calculated in line with the underlying award structure where each of the four performance categories could give rise to shares worth 100% of salary at grant but with the overall maximum capped at 300% of salary at grant. The percentage vesting under the Economic Profit category has been rounded from 82% to 80% when calculating the number of vested shares in order to maintain the overall weighted vesting outcome at 42%.
The table represents an early indication of potential vesting outcomes only based on the position at 31 December 2016. Subject to the assessment of performance conditions over a three year period, these LTI awards will vest in years four and five from the date of grant.
Performance conditions for LTI awards to be granted to executive directors in 2017, for the 2016 performance year
This will be the last LTI award under the current remuneration policy, with any subsequent awards being made under the new remuneration policy, subject to shareholder approval at the 2017
December 2019. Subject to the achievement of the performance conditions, shares will vest 50% four years from the date of grant with the remaining 50% vesting pro rata between years five to seven from grant. Any awards that vest will be subject to a six month retention period.
Awards granted to executive directors in March 2017 will be subject to four equally weighted performance categories, each able to vest up to 100% of base salary, subject to the maximum award that is possible under the policy and the regulatory cap.
Measure: The measure compares performance against a group of comparator banks. The TSR comparator group was updated for awards made in 2016 to more accurately reflect the business strategy with reduced focus on investment banking. No changes have been made for the awards to be granted in March 2017.
Measure: The key measures in this category are the achievement of pre-determined Common Equity Tier 1 (CET1)
Reason: These measures reward management for building a customer-focused business with engaged employees.
(NTS) will be used. Employee engagement will be measured against the Global Financial Services (GFS) norm.
Committee’s discretion taking into account changes in circumstances over the performance period, the margin by which individual targets have been missed or exceeded, and any other relevant factors.
In line with previous practice, the Economic Profit is considered to be commercially sensitive. Within the Customers category, new metrics are being developed which will target trust and advocacy, specific to customers on a segmental basis, and will be consistent with RBS’s long-term ambition. Further information on the trust and advocacy targets will be disclosed in the 2017
No remuneration payment or payment for loss of office was made to directors during 2016.
Notes: (1) The Committee also considered recommendations from the BRC and concluded it would be appropriate to apply the risk and financial performance underpin in respect of the above awards. This resulted in downward discretion being applied to reduce the final vesting outcome from 56% to 50%. (2) The maximum number of shares is calculated in line with the underlying award structure where each of the four performance categories could give rise to shares worth 100% of salary at grant but with the overall maximum capped at 300% of salary. The number has been reduced on a pro rata basis to reflect time served by Stephen Hester. The interests for Bruce Van Saun’s award were converted to shares in Citizens Financial Group, Inc. as part of the IPO of that business.
A new Group Nominations and Governance Committee was established at the end of January 2016, replacing the former Group
(4) Frank Dangeard and Mike Rogers joined the Board on 16 May 2016 and 26 January 2016 respectively.
BOC Board Oversight Committee for the RCR, NatWest Markets (formerly CIB) and GRG business areas
Notes: (1) Ross McEwan holds 259,455 shares from his 2015 and 2016 fixed share allowances that are included in the total shares beneficially owned below but these have been excluded from the shareholding requirements calculation as he will transfer these shares to charity at the end of the retention period. (2) Value of shares held is based on the share price of £2.246 as at 31 December 2016. During the year ended 31 December 2016, the share price ranged from £1.489 to £3.02.
Shares owned at 31 December 2016 (or date of cessation if earlier)
No other director had an interest in the company's ordinary shares during the year or held a non-beneficial interest in the shares of the company at 31 December 2016, at 1 January 2016 or date of appointment if later. The interests shown above include shares held by persons closely associated with the directors. As at 23 February 2017, there were no changes to the directors' interests in shares shown in the table above.
TSR for FTSE UK banks for the same period has been added for comparison. Source: Datastream
Annual bonus against maximum opportunity 0% 85% 0% 0% 0% n/a n/a n/a
LTI vesting rates against maximum opportunity 0% 0% 0% 0% 0% 72.85% 62% 56%
Notes: (1) Executive directors are not eligible for an annual bonus. Standard benefit funding for executive directors remained unchanged between 2015 and 2016. The benefits for the
2008 YE 2009 YE 2010 YE 2011 YE 2012 YE 2013 YE 2014 YE 2015 YE 2016 YE
The table below shows a comparison of remuneration expenditure against other distributions and charges.
Distributions to holders of preference shares and paid-in equity (3) 1,697 385 341%
- Irrecoverable VAT and other indirect taxes incurred by RBS (4) 697 691 0.9%
Mike Rogers was appointed as a new member of the Committee with effect from 1 January 2017.
• 2015 performance reviews and remuneration arrangements for members and attendees of the Executive Committee and high earners.
• Remuneration governance across legal entities and the impact of the Senior Managers Regime.
• 2016 half-year performance reviews for members and attendees of the Executive Committee and high earners.
On areas for development, the importance of papers containing all the relevant information was highlighted and there was still scope to further improve the articulation of how reward links to strategy. There was also a suggestion that it would be helpful for the Committee to have another member. Subsequently, the
RBS subsidiaries. There are processes in place to ensure the advice received by the Committee is independent of any support provided to management. As well as receiving advice from PwC
in 2016, the Committee took account at meetings of the views of the Chairman; Chief Executive; Chief Financial Officer; Chief HR
remuneration are charged on a time/cost basis and in 2016 amounted to £214,706 excluding VAT (2015 - £121,358). The increase in fees is a result of additional work undertaken during 2016 in developing the new directors’ remuneration policy.
During the ten year period to 31 December 2016, awards made that could require new issue shares to be used in connection with the company's employee share plans represented 5.4% of the company's issued ordinary share capital, leaving an available dilution headroom of 4.6%. The company meets its employee share plan obligations through a combination of new issue shares and market purchase shares.
Notes: (1) Remuneration earned in 2016 for eight members of the Executive Committee. (2) Disclosure includes prior year long-term incentive awards which vested during 2016. The amounts shown reflect the value of vested awards using the share price on the day the awards vested.
• Malus can be applied to reduce (if appropriate to zero) the amount of any variable pay awards prior to payment taking place.
• Clawback provisions can also be applied to recover awards that have vested.
Allowances are provided to certain employees in key roles in line with market practice and qualify as fixed remuneration for regulatory requirements. They are delivered in cash and/or shares depending on the level of the allowance and the seniority of the recipient. Shares are subject to an appropriate retention period, not less than six months.
Immediate cash awards are limited to a maximum of £2,000. Under the deferral arrangements a significant proportion of annual bonus awards for our more senior employees are deferred over a three to seven year period. Awards are subject to malus and clawback provisions. For MRTs, a minimum of 50% of any annual bonus is delivered in shares and subject to a minimum six month retention period post vesting in line with regulatory requirements.
Guaranteed awards are only used in very limited circumstances in accordance with regulatory requirements.
The amount of the award that vests may vary between 0% -100%
In accordance with UK regulatory requirements and internal dealing rules that apply to employees, the conditions attached to discretionary share-based awards prohibit the use of any personal hedging strategies to lessen the impact of a reduction in value of such awards. These conditions are explicitly acknowledged and accepted by employees when any share-based awards are granted.
The table below includes deferred remuneration awarded or paid out in 2016 in respect of prior performance years. Deferred remuneration reduced during the year relates to long-term incentives lapsed when performance conditions are not met, long-term incentives and deferred awards forfeited on leaving and malus adjustments of prior year deferred awards and longterm incentives.
Unvested at year end 42.4 195.5 4. Sign-on and severance payments
RBS does not operate ‘Sign-on awards’. Guaranteed variable remuneration may be used for new hires in compensation for awards foregone in their previous company. Three such payments totalling £442,695 are included in the tables above.
This relates to commitments made on recruitment in respect of three new employees. These awards are still subject to deferral.
Employees that earned total remuneration of over €1 million in 2016 represent just 0.1% of our employees. This number reduces to 72 employees if we exclude pension and benefit funding.
Throughout the year ended 31 December 2016, RBS has complied with all of the provisions of the UK Corporate
Governance Code issued by the Financial Reporting Council dated April 2016 (the “Code”) except in relation to provision
Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. RBS
Chairman’s remuneration. The Board believes this approach is very much in line with the spirit of the Code and no director is involved in decisions regarding his or her own remuneration. We do not anticipate any changes to our approach on this aspect of the Code. Information on how RBS has applied the main principles of the Code can be found in the Corporate governance report on pages 57 to 111. A copy of the Code can be found at www.frc.org.uk
Ongoing processes for the identification, evaluation and management of the principal risks faced by RBS operated throughout the period from 1 January 2016 to 23 February 2017, the date the directors approved the Annual Report & Accounts.
Committee. Internal Audit undertakes independent assurance activities and provides reports to the committees of Board and executive management on the quality and effectiveness of governance, risk management and internal controls to monitor, manage and mitigate risks in achieving the bank’s objectives. In addition, the Board receives risk management reports at each scheduled Board meeting. Executive management committees in each of the RBS businesses also receive regular reports on significant risks facing their business and how they are being controlled. Details of the bank’s approach to risk management are given in the Capital & Risk Management section.
RBS has made progress strengthening the control environment in recent years. However, more work is required and RBS continues on its journey of improvement, building on the established control environment, strengthening and remediating where appropriate.
Areas of particular focus during 2016 included further work to develop and enhance the risk appetite framework in support of a robust and holistic control approach. In parallel with this, progress was made in further embedding a consistent end-to-end risk and control assessment process. These activities, together with complementary work-streams aimed at developing, enhancing and embedding a strong and dynamic risk culture across each of the franchises and functions, will continue in 2017.
and overseas. Additional details of regulatory oversight are given in the Capital & Risk Management section.
Oxley Act of 2002 and assess the effectiveness of internal control over financial reporting as of 31 December 2016.
RBS has assessed the effectiveness of its internal control over financial reporting as of 31 December 2016 based on the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in the 2013 publication of ‘Internal Control - Integrated Framework'.
Based on its assessment, management has concluded that, as of 31 December 2016, RBS’s internal control over financial reporting is effective.
There was no change in RBS’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, RBS’s internal control over financial reporting.
As a foreign private issuer with American Depository Shares representing ordinary shares, preference shares and debt securities listed on the New York Stock Exchange (the “NYSE”),
provided that it follows home country practice in lieu of the NYSE
RBS is also required to provide an Annual Written Affirmation to the NYSE of its compliance with the mandatory applicable NYSE
The Group Audit Committee fully complies with the mandatory provisions of the NYSE Standards (including by reference to the rules of the Exchange Act) that relate to the composition, responsibilities and operation of audit committees. In March 2016
Audit Committee and its work during 2016 is set out in the Group
RBS has reviewed its corporate governance arrangements and is satisfied that these are consistent with the NYSE Standards, subject to the following departures: (i) NYSE Standards require the majority of the Board to be independent. The NYSE
Standards contain different tests from the Code for determining whether a director is independent. RBS follows the Code’s requirements in determining the independence of its directors and currently has 9 independent non-executive directors, one of whom is the senior independent director (ii) The NYSE
Governance Committee does not have responsibility for overseeing the evaluation of management (iv) The NYSE
Performance and Remuneration Committee has not assessed the independence of any compensation consultant, legal counsel or other adviser, in each case, in accordance with the independence tests prescribed by the NYSE Standards.
to disclose the full range of corporate governance guidelines with which it complies (vi) The NYSE Standards require listed companies to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. RBS has adopted a code of conduct which applies to all directors, officers and employees and is supplemented by a number of key policies and guidance dealing with matters including , among others, anti-bribery and corruption, anti-money laundering, sanctions, confidentiality, inside information, health, safety and environment, conflicts of interest, market conduct and management records. The Code of Conduct is available to view on RBS’s website at rbs.com.
owned by HMT of £1.2 billion was paid in March 2016, effecting the immediate retirement of the DAS which was redesignated as a single B share and subsequently cancelled.
At 31 December 2016, HMT’s holding in the company’s ordinary shares was 71.3%.
Holdings, as a direct subsidiary of RBS plc. This is an interim structure as NatWest Holdings is expected to become a direct subsidiary of RBSG in mid 2018.
Markets will continue to offer financing, rates and currencies products to its customers. During 2016 RBS’s activities were organised on a franchise basis as follows: Personal & Business Banking (PBB) comprises two reportable segments, UK Personal & Business Banking (UK PBB) and
Commercial & Private Banking (CPB) comprises three reportable segments, Commercial Banking, Private Banking and RBS
International (RBSI). Commercial Banking serves commercial and corporate customers in the UK and Western Europe. Private
Additionally non-strategic markets, portfolio and banking assets identified are being sold or wound down.
December 2015, as set out in the consolidated income statement on page 290.
The company did not pay a dividend on ordinary shares in 2014,
Board decided to partially neutralise any impact on Core Tier 1 capital of coupon and dividend payments in respect of 2015 and 2016 Group hybrid capital instruments through equity issuances of c.£300 million. Consequently, approximately £300 million was raised during 2015 and 2016 through the issue of new ordinary shares and the Board has decided a further £300 million of new equity will be issued during the course of 2017 to again partially neutralise the CET1 impact of coupon and dividend payments.
Business review on pages 124 to 162. Details of the strategy for delivering the company’s objectives can be found in the Strategic report.
RBS’s future performance and results could be materially different from expected results depending on the outcome of certain potential risks and uncertainties. Full details of these and other risk factors are set out on pages 431 to 463.
RBS’s approach to risk management, including its financial risk management objectives and policies and information on RBS’s exposure to price, credit, liquidity and cash flow risk, is discussed in the Capital and risk management section.
RBSG, RBS plc, RBS Holdings and RBS N.V., a substantial part of the business activities of RBS N.V. had been successfully transferred to RBS plc by 2014.There is continued focus on further de-risking the RBS N.V. balance sheet. Ultimately, the objective is that RBS N.V. is in a position to relinquish its banking licence in the Netherlands.
As previously disclosed, none of the proposals to acquire the business received by RBS can deliver full separation and divestment before the 31 December 2017 deadline. As RBS no longer intends to pursue divestment of Williams & Glyn by way of an Initial Public Offering, the £600 million exchangeable bond issued to a consortium of investors, led by Centerbridge and
As at 31 December 2016, RBS employed 77,900 people (full-time equivalent basis, including temporary workers) throughout the world. Details of related costs are included in Note 3 on the consolidated accounts.
Building a healthy culture that embodies Our Values is one of our core priorities.
Our Values guide the way we identify the right people to serve our customers well, and how we manage, engage and reward our colleagues. They are at the heart of both Our Standards (the bank wide behavioural framework) and Our Code (the bank wide
We know that building an engaged, healthy and inclusive workforce is crucial to achieving our ambition. Every year we ask our colleagues to share their thoughts on what it’s like to work here via our annual colleague survey (OurView). The results help us monitor levels of engagement and enable our people leaders to work with their teams to make improvements. It also helps us measure the progress we are making towards our goals.
At the start of 2016 we removed sales incentives and we gave every eligible frontline colleague in Personal & Business Banking an increase to their guaranteed pay. This approach remains popular with our colleagues and ensures that our customers can be certain that if they take a product from us, it has no financial impact on what our colleagues are paid.
For 2017, we have simplified how we pay our clerical colleagues, consolidating bonuses, making pay fairer and easier to understand.
In 2015, we launched ‘Determined to Lead’, a core management system for RBS. It is the means by which leaders put our values into practice every day and is transforming the way we operate by creating a common language, consistent operating rhythm and improving the competence of our leaders across RBS. It provides consistent tools to lead and engage our colleagues. This programme has continued in 2016 with over 16,000 leaders participating in the programme.
Professionalising our colleagues is important to us. We work closely with the Chartered Banker Institute (CBI) and Chartered
Banker Professional Standards Board (CB:PSB) to offer our colleagues professional qualifications. Over 8,000 of our colleagues completed their CBI qualification in 2016.
We are especially pleased that we achieved an Excel rating in the CB:PSB Foundation Standard review for 2015. We are one of only two CB:PSB member firms to have secured ‘Earned
Autonomy’ - meaning we are exempt from quarterly monitoring over the next 3 years. 95% of our in-scope population have achieved the Foundation Standard. This is a great reflection of the focus we continue to place on professionalising our colleagues.
We also offer a wide range of learning which can be mandatory, role specific or related to personal development. Our mandatory learning has to be completed by everyone and is focused on keeping our our customers, colleagues and RBS safe.
Wellbeing is a big part of how we create a great place to work.
In 2016, we focused on physical, mental health and social wellbeing. We participated in the Global Corporate Challenge
Programme) and launched our Mindfulness toolkit. We continued our support of Time to Change (the UK’s biggest programme to challenge mental health stigma).
There has been ongoing engagement and discussion with those bodies given the scale of change taking place across RBS.
Employee Council to discuss developments and update on the progress of our strategic plans.
During 2016, we continued to roll out unconscious bias learning to all our colleagues to create a solid platform for the wider inclusion agenda. Almost 30,000 colleagues participated in unconscious bias training in 2016 meaning we have trained around 66,000 colleagues across RBS to date.
Franchise and Function by 2020 and to be fully gender balanced
(50/50) by 2030. We have a positive action approach in place, tailored by business, according to the specific challenges they face.
RBS’s funding and liquidity profile, including changes in key metrics and the build up of liquidity reserves.
and of the company have been prepared on a going concern basis.
Under the revised UK Corporate Governance Code the directors are required to confirm that they have carried out a robust assessment of the RBS’s principal risks and make a longer term viability statement. This is set out in the Strategic Report on page
In addition, the company issued 56 million shares in connection with employee share schemes during 2016.
In October 2015, HMT converted its entire holding of 51 billion B
Companies House in the UK or can be found at rbs.com/about/board-and-governance.
On a show of hands at a general meeting of the company every holder of ordinary shares and cumulative preference shares present in person or by proxy and entitled to vote shall have one vote. On a poll, every holder of ordinary shares or cumulative preference shares present in person or by proxy and entitled to vote shall have four votes for every share held. The notices of
The rules governing the powers of directors, including in relation to issuing or buying back shares and their appointment are set out in the company’s Articles of Association. It will be proposed at the 2017 Annual General Meeting that the directors be granted authorities to allot shares under the Companies Act 2006. The company’s Articles of Association may only be amended by a special resolution at a general meeting of shareholders.
Under the rules of certain employee share plans, eligible employees are entitled to acquire shares in the company, and shares are held in trust for participants by The Royal Bank of
The names and brief biographical details of the current directors are shown on pages 58 to 61.
Mike Rogers was appointed to the Board on 26 January 2016 and Frank Dangeard was appointed on 16 May 2016.
All directors of the company are required to stand for election or re-election annually by shareholders at the Annual General
December 2016 are shown on page 105. None of the directors held an interest in the loan capital of the company or in the shares or loan capital of any of the subsidiary undertakings of the company, during the period from 1 January 2016 to 23 February
UK or EU and it is not proposed that RBS’s longstanding policy of not making contributions to any political party be changed.
EY LLP are the auditors. EY were appointed to fill the casual vacancy arising from Deloitte LLP's resignation following the signing of the 2015 accounts and the Group’s Form 20-F and appointed by shareholders at the 2016 Annual General Meeting .
A resolution to reappoint EY as the company’s auditors will be proposed at the forthcoming Annual General Meeting.
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 278 to 289.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required by Article 4 of the IAS
Markets will continue to offer financing, rates and currencies products to its customers.
treasury, finance, risk management, compliance, legal, communications and human resources. Central functions manages RBS capital resources and RBS-wide regulatory projects and provides services to the reportable segments.
as issued by the IASB which constitutes a body of generally accepted accounting principles (‘GAAP’). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP financial measures. These measure exclude certain items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. These measures include: • ‘Adjusted’ measures of financial performance, principally operating performance before: own credit adjustments; gain or loss on redemption of own debt; strategic disposals, restructuring costs, litigation and conduct costs. and write down of goodwill; • Performance, funding and credit metrics such as ‘return on tangible equity’, ‘adjusted return on tangible equity’ and related RWA equivalents incorporating the effect of capital deductions (RWAes), total assets excluding derivatives
(funded assets) and net interest margin (NIM) adjusted for items designated at fair value through profit or loss (nonstatutory NIM), cost:income ratio, loan:deposit ratio and
REIL/impairment provision ratios. These are internal metrics used to measure business performance; • Personal & Business Banking (PBB) franchise, combining the reportable segments of UK Personal & Business
Private Banking (CPB) franchise, combining the reportable segments of Commercial Banking, Private Banking and RBS
• Cost savings progress and 2016 target calculated using operating expenses excluding litigation and conduct costs, restructuring costs, write down of goodwill, the impairment of other intangible assets, the operating costs of Williams &
Allocation of central balance sheet items RBS allocates all central costs relating to Services and Functions to the business using appropriate drivers, these are reported as indirect costs in the segmental income statements. Assets (and risk-weighted assets) held centrally, mainly relating to RBS
The UK ring-fencing legislation requiring the separation of essential banking services from investment banking services will take effect from 1 January 2019.
To comply with these requirements it is RBS’s intention to place the majority of the UK and Western European banking business in ring-fenced banking entities under an intermediate holding company. NatWest Markets will be a separate non ring-fenced bank and The Royal Bank of Scotland International (Holdings)
On 1 January 2017 RBS made a number of key changes to the legal entity structure as detailed below to support the move towards a ring-fenced structure. There are also plans to make further changes prior to 1 January 2019.
Group PLC (Adam & Co) transferred from being direct subsidiaries of RBS plc, and Ulster Bank (Ireland) Holdings
Unlimited Company (UBIH) transferred from being a direct subsidiary of Ulster Bank Limited, to become direct subsidiaries of NatWest Holdings.
RBS plc to become a direct subsidiary of RBSG. The intention is for RBS International's operating companies to remain as subsidiaries of RBSI Holdings.
Notes: (1) Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals. Tax on these items was a £90 million charge in 2016 (2015 - £15 million charge; 2014 - £29 million credit). (2) Excluding restructuring costs, litigation and conduct costs and write down of goodwill. Tax on these items was £286 million in 2016 (2015 - £563 million; 2014 - £551 million). (3) Tangible equity is equity attributable to ordinary shareholders less intangible assets.
Cost of interest-bearing liabilities of the banking business (0.94) (1.11) (1.24)
Notes: (1) Negative interest on loans and advances is classed as interest payable. (2) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. (3) Gross yield is the interest earned on average interest-earning assets of the banking book. (4) Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. (5) For the purpose of net interest margin calculations, there was no increase in interest receivable (2015 - nil; 2014 - £11 million) and no increase in interest payable (2015 - £15 million; 2014 - £58 million) in respect of interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interestbearing liabilities have been adjusted where applicable.
RBS total, and represented 82% of total average interest earning assets (2015 - 72%). NIM across PBB and CPB was 2.31%, 13 basis points lower than 2015.
Ulster Bank RoI NIM increased by 5 basis points to 1.62% driven by a continued reduction in the cost of deposits and a reduced volume of low yielding liquid assets, partly offset by reduced income on free funds.
Commercial Banking NIM fell by 12 basis points to 1.76% driven by asset margin pressure in a competitive market and low rate environment.
Non-interest income was £3,882 million, a reduction of £274 million, or 7%, compared with 2015. Capital Resolution noninterest income reduced by £775 million reflecting planned asset disposal, including £572 million of disposal losses compared with £367 million in 2015, and a funding valuation adjustment of £170 million. In addition, we recognised a charge of £510 million for volatile items under IFRS compared with a £15 million gain in 2015. Partially offsetting, we reported a strategic disposal gain of £164 million, compared with a loss of £157 million in 2015, a loss on redemption of own debt of £126 million, compared with £263 million in 2015, an FX gain of £349 million following the significant weakening of sterling against the dollar and a £97 million foreign exchange reserve recycling gain.
Net fees and commissions decreased by £398 million, or 14%, compared with 2015 reflecting the planned Capital Resolution asset run-down, £168 million, a reduction in NatWest Markets, £175 million, and a £36 million reduction in UK PBB, driven by lower credit card interchange fees and increased cash back payments following the launch of the Rewards account.
Income from trading activities increased by £14 million to £820 million as a £219 million increase in NatWest Markets income has been partially offset by Capital Resolution, £133 million, and an increased charge for volatile items under IFRS.
Other operating income reduced by £219 million principally reflecting planned asset disposals in Capital Resolution.
Net fees and commissions fell by £606 million, or 17%, to £2,933 million, compared with £3,539 million, principally from the reduced scale of activity in NatWest Markets (formerly CIB), run down of Capital Resolution and lower card interchange fees in
Income from trading activities declined by £519 million, or 39%, to £806 million compared with £1,325 million, due to the reduced scale and resources in NatWest Markets and the continued planned reduction of the Capital Resolution business and the impact of disposal losses.
US dollar, sterling and euro senior debt securities, compared with a gain of £20 million in 2014.
Staff expenses 4,482 4,896 5,376 Premises and equipment 1,297 1,483 1,812 Other administrative expenses 1,619 2,124 2,120 Restructuring costs 2,106 2,931 1,154 Litigation and conduct costs 5,868 3,568 2,194
Administrative expenses 15,372 15,002 12,656 Depreciation and amortisation 705 778 927 Write down of goodwill — 498 130 Write down of other intangible assets 117 75 146
Staff costs as a percentage of total income 36% 38% 35%
PPI provisions, a £400 million provision in respect of the FCA
Adjusted operating expenses fell by £1,025 million, 10% to £9,356 million compared with £10,381 million. Excluding expenses associated with Williams & Glyn and the benefit of lower intangible asset write offs, adjusted operating expenses reduced by £983(1) million, exceeding the revised 2015 cost saving target of over £900 million.
New impairment losses/(releases) 587 (552) (1,250) Less: recoveries of amounts previously written-off (109) (175) (102)
Commercial Banking net impairment loss of £206 million was £137 million higher than 2015 principally reflecting a single name charge in respect of the oil and gas portfolio.
UK PBB reported a net impairment loss of £83 million compared with a net release of £7 million in 2015.
Ulster Bank RoI reported a net impairment release of €138 million compared with €194 million in 2015. The 2016 impairment release included a write back associated with the sale of a portfolio of loans. REIL reduced by €0.6 billion driven by the portfolio sale, partially offset by a widening of the definition of loans which are considered to be impaired.
Ulster Bank RoI partially offset by an increase in the shipping portfolio, foreign exchange movements and the implementation of a revised mortgage methodology in Ulster Bank RoI. REIL
Capital Resolution recorded net releases of £725 million, compared with £1,307 million in 2014, with disposal activity continuing. Ulster Bank RoI recorded net impairment releases of £141 million, down from £306 million in 2014, as economic conditions in Ireland continue to improve. UK PBB recorded a release of £7 million compared with a loss of £154 million, due to lower debt flows and increased releases and recoveries. Net impairment releases were also reported in NatWest Markets
Risk elements in lending (REIL) declined from £28.2 billion to £12.2 billion, with REIL as a percentage of gross loans falling from 6.8% to 3.9%. The reduction was driven by the disposal of
The strategic goal of UK PBB is to become the number one personal and business bank for customer service, trust and advocacy in the UK. As part of our culture change, the removal of frontline incentives has been matched by a reinvestment in our people, both in terms of their fixed pay and their capability, including over seven thousand frontline employees completing their Professional Banking Certificate by the end of 2016. Our values have been reinforced by the huge organisational commitment to our customer focused leadership programme,
Gross new mortgage lending of £29.8 billion was 29% higher than 2015. Across 2016, our market share of new mortgages was approximately 12%, supporting a growth in stock share to 8.8%
from 8.2% at 31 December 2015. Mortgage processing time has reduced by 40 minutes through increased automation and 42%of existing customers in 2016 re-mortgaged on-line in a matter of minutes. In addition, the introduction of electronic signatures has reduced the mortgage switching documentation process from 7 days to less than 2 days. NatWest was awarded Best Bank for
NatWest Intermediary Solutions awarded the industry leading 5 star service award.
Check, discussing the benefits of the Reward current account, and guiding them through more complex financial goals and ambitions such as buying a home.
The net impairment charge of £83 million reflects continued benign credit conditions and compared with a £7 million release in 2015, with the increase principally reflecting reduced portfolio provision releases. The default driven charge was 13% lower than 2015 with REIL 26% lower and provision coverage remaining strong at 65%.
Total income was £5,200 million, a reduction of 4% from £5,444 million. Net interest income declined 2% to £4,152 million primarily as a result of continued margin pressure in the mortgage market as customers move to lower margin fixed rate products together with higher internal funding costs. The decline was partly offset by improved deposit margins. Reflecting strong mortgage balance growth, net interest margin (NIM) declined 14 basis points from 2014 to 3.18% as the overall portfolio mix continues to be increasingly weighted toward secured lending, together with the decline in unsecured balances. The decline was slightly offset by improved deposit margins.
2015 was a strong year for the mortgage business with applications increasing 48% from £21.7 billion to £32.0 billion as gross new lending rose 29% to £23 billion. Market share of new mortgages was 10.5% versus a stock share of 8.2%. This led to gross mortgage balances growing by £9.3 billion or 10% to
Note: (1) The business transfers included: net loans and advances to customers of £0.8 billion as at 31 December 2016.
Loan impairment charge/(release) as a % of gross customer loans and advances (excluding reverse repurchase agreements) by sector
Total loans and advances to customers (gross) 23.5 25.3 26.4 20.1 18.6 20.5
Total risk elements in lending 4.1 4.7 5.6 3.5 3.5 4.4
The completion of a sale of €1.8 billion of largely underperforming loans in Q4 2016 has served to strengthen and de-risk the balance sheet, building a strong foundation for future growth.
Gross new lending of €2.5 billion increased 31% in 2016 supported by investment in the mortgage and asset and invoice finance businesses combined with a revitalisation of the Ulster
Bank brand. 2016 was a strong year for mortgage lending with gross new lending of €1.0 billion, an increase of 48% on the prior year, contributing to an increase in market share of new lending.
Further strategic investments were made to our digital platform and award winning mobile app in 2016 including product applications for loans, credit cards and overdrafts and clearer transaction detail. Our market leading ‘Get Cash’ facility is used over 2,000 times a week ensuring customers are never without access to cash. Continued developments in the mobile platform supported a 22% increase in active users of the mobile app in 2016 reflecting the growing customer preference for banking services through this channel.
Ulster Bank RoI became the first major bank in the Republic of
Operating profit decreased by €338 million to €24 million compared with 2015 primarily due to an increase in litigation and conduct costs of €229 million and a €56 million reduction in net impairment releases. Adjusted operating profit of €280 million was €85 million, or 23%, lower than prior year as a reduction in adjusted operating expenses was more than offset by the non recurrence of one-off income benefits in 2015 and lower impairment releases.
A realignment of costs within direct expenses contributed to an increase in staff costs in 2016 with an offsetting reduction in other costs. This reflects the reallocation of 660 staff from UK PBB to align with current management responsibilities following the separation of the Northern Ireland and Republic of Ireland businesses. Excluding the reallocation from UK PBB and staff supporting the tracker mortgage examination and asset disposal programmes, headcount decreased by 9% year on year.
The sale of a portfolio of loans contributed to a €0.6 billion, or 13%, reduction in risk elements in lending in 2016 to €4.1 billion.
Whilst gross new lending increased 31% in 2016, net loans and advances to customers decreased €0.6 billion, or 3%, as new lending was offset by asset disposals and repayments. The low yielding tracker mortgage portfolio declined by €1.0 billion, or 9%, to €10.8 billion at 31 December 2016 supported by repayments and asset disposals.
Loan:deposit ratio decreased 10 percentage points to 117% in 2016 supported by a €1.0 billion growth in deposits and reduced net loans following recent asset sales.
compared with prior year due to a continued improvement in deposit pricing in line with market trends, combined with nonrecurring benefits, including a gain on the sale of a buy-to-let portfolio of €17 million and the closure of a foreign exchange exposure of €33 million. These benefits were largely offset by reduced income on free funds.
Net interest margin (NIM) was 1.57%, a decrease of 35 basis points from 2014, primarily driven by reduced income on free funds and an increased drag from liquidity management requirements. NIM continues to reflect a sizeable drag from the low yielding tracker mortgage book.
Operating expenses increased by €67 million from €523 million to €590 million, reflecting an increase in pension servicing costs, totalling €30 million. Cost savings delivered through a further reduction in both employee numbers and the property footprint were somewhat offset by further investment in the business and operational infrastructure.
Gross new mortgage lending increased 53% to €0.7 billion whilst gross new lending to commercial customers increased 65% to €1.5 billion. Strong new lending volumes across the business in 2015 were offset by high levels of customer repayments and the sale of a €0.4 billion buy-to-let mortgage portfolio. Net loans and advances to customers decreased €0.6 billion to €22.7 billion.
- Private sector services (education, health, etc) 6.9 6.7 6.8 - Wholesale and retail trade repairs 8.4 7.5 6.8
Notes: (1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 11% of the monthly average of segmental RWAes, assuming 28% tax rate. (2) Excluding restructuring costs and litigation and conduct costs. (3) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
Europe business community with lending growth of £8.8 billion, 10% higher compared with 2015, across a variety of sectors and exceeding market indicators.
Our Lending Transformation Programme reached a major milestone with its latest systems upgrade, 79% of Commercial
Operating profit was £742 million compared with £1,264 million in 2015 and included a £423 million litigation and conduct charge, principally relating to a provision in respect of the FCA review of
RBS’s treatment of SMEs. Adjusted operating profit of £1,273 million was £111 million, or 8%, lower than 2015, mainly reflecting increased impairments, partially offset by increased income.
Net loans and advances of £100.1 billion increased by £8.8 billion, or 10%, compared with 2015 reflecting increased borrowing across a number of sectors.
RWAs were £78.5 billion, an increase of £6.2 billion compared with 2015 reflecting asset growth partially offset by reduced RWA
2015 compared with 2014 Comparisons with prior periods are affected by a number of internal business transfers. In line with changes to the business model, the UK and Western European corporate loan portfolios transferred to Commercial Banking on 1 May 2015 and 1 October 2015 respectively. The prior period financials were adjusted for the UK Transaction Services business transfer and do not affect comparisons. The results exclude RBS International which is reported as a separate segment for the first time.
Commercial Banking recorded an operating profit of £1,264 million, broadly in line with the prior year. Adjusted operating profit was £1,384 million, a decrease of £92 million from 2014 due to a marginal fall in income reflecting margin pressure.
Note: (1) The business transfers included impact of: total income of £218 million (2015 - £79 million; 2014 - nil); operating expenses of £109 million (2015 - £25 million; 2014 - nil); impairment losses of £50 million (2015 - £1 million releases; 2014 - nil); net loans and advances to customers of £6.2 billion (2015 - £5.0 billion; 2014 - nil); customer deposits of £0.4 billion (2015 and 2014 - nil); and RWAs of £9.3 billion (2015 - £8.4 billion; 2014 - nil).
Notes: (1) Excluding restructuring costs and litigation and conduct costs and write down of goodwill. (2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 15% of the monthly average of segmental RWAes, assuming 28% tax rate. (3) Comprises assets under management, assets under custody and investment cash. (4) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
Private Banking has been through a period of transition and is now being repositioned to focus on its UK target customer base.
Portfolio Service is first quartile compared to peers over 1 & 3 years and Coutts Multi Asset funds continue to outperform peers in Defensive, Balanced and Growth strategies.
Coutts won the best private bank in the UK for the fifth year running, best private bank for philanthropy services and best initiative of the year in client facing technology at the Global
Launched Direct to Consumer (D2C) investment proposition, enabling customers to model investment options, target returns and complete transactions themselves.
Improved mortgage processing for clients with the creation of a mortgage specialist team focused on speeding up the lending process.
An operating profit of £111 million compared with an operating loss of £470 million in 2015 which included a goodwill impairment of £498 million. Adjusted operating profit of £149 million was £36 million, or 32%, higher than 2015 reflecting increased income, lower adjusted operating expenses and lower impairments.
Total income increased by £13 million to £657 million primarily reflecting higher asset volumes. Net interest margin fell by 9 basis points to 2.66% reflecting asset margin pressures.
Net loans and advances of £12.2 billion increased by £1.0 billion compared with 2015 driven by mortgages. Assets under management of £17.0 billion were £3.1 billion higher compared with 2015 reflecting underlying growth and equity index inflation.
Net impairment losses totalled £13 million, compared with a release of £5 million, due to higher individual and latent charges.
The business is the market leader in the Isle of Man and has top three market positions in Guernsey and Jersey. It has established strong customer advocacy, with broadly no change in NPS in the past year, despite an ongoing customer remediation programme.
Total income increased by £7 million to £374 million primarily reflecting higher asset volumes. Net interest margin fell by 12 basis points to 1.36% reflecting asset margin pressures.
Customer deposits of £25.2 billion grew by £3.9 billion compared with 2015 principally reflecting the transfer of the Luxembourg branch into RBSI from Capital Resolution during Q2 2016.
Operating expenses remained stable at £160 million due to control in direct expenditure offset by a slightly higher UK bank levy charge.
Notes: (1) Excluding own credit adjustments. (2) Excluding restructuring costs and litigation and conduct costs. (3) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 15% of the monthly average of segmental RWAes, assuming 28% tax rate.
NatWest Markets provides financing and risk management solutions and is built around three product lines: Rates,
• #1 for GBP Options, GBP Inflation and GBP 2Y – 10Y IRS
• #1 for all European Issuers in the private placement market
RWAs increased by £2.1 billion compared with 2015 to £35.2 billion principally due to business movements and the impact of the weakening of sterling.
Total income declined by £404 million, or 21%, to £1,527 million in 2015. This includes £120 million relating to own credit adjustments and £98 million relating to the transfer of portfolio businesses to Commercial Banking. Excluding this, NatWest
• Financing was impacted by the strategically reduced corporate footprint especially in the US and by lower levels of EMEA investment grade issuance.
Funded assets fell by £34.4 billion to £103.3 billion as the business continues to work through re-shaping, and included £17 billion (2014 - £20 billion) relating to the transfer to Treasury of the Short Term Markets business and £5 billion from the transfer of the UK and Western European corporate loan portfolios to
RWAs reduced by £8.8 billion to £33.1 billion compared with £41.9 billion, nearing the end-state target of c.£30 billion. The reduction was primarily driven by the transfer of the UK and
Note: (1) NatWest Markets results include the following financials for businesses subsequently transferred to Commercial Banking for 2015: total income of £98 million and operating expenses of £31 million.
Notes: (1) Excluding own credit adjustments and strategic disposals. (2) Excluding restructuring costs, litigation and conduct costs and write down of goodwill. (3) Asia-Pacific portfolio. (4) European, the Middle East and Africa portfolio.
Notes: (1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (2) Asia-Pacific portfolio. (3) European, the Middle East and Africa portfolio.
Significant balance sheet reduction in GTS with almost all customers exited by the end of 2016 with focus on managing the day to day customer exit journey, helping them re-bank and providing transition advice.
RWAs decreased by £14.5 billion, or 30%, to £34.5 billion reflecting disposal activity partially offset by an increase due to the weakening of sterling. Since the end of 2014, RWAs have reduced by £60.6 billion, or 64%.
Income disposal losses were £572 million, £205 million higher than 2015, and included £259 million in respect of the shipping portfolio. In addition, a funding valuation adjustment charge of £170 million was incurred in 2016.
2015 compared with 2014 Capital Resolution RWAs reduced from £95.1 billion to £49.0 billion driven by significant reductions across a number of business areas, which primarily reflected disposals and repayments activity.
Capital Resolution made an operating loss of £3,687 million, including income related disposal losses of £367 million, restructuring costs of £1,307 million together with litigation and conduct costs of £2,105 million primarily relating to additional provisions for mortgage-backed securities litigation in the United
Capital Resolution funded assets fell £62.2 billion to £53.4 billion, primarily due to loan portfolio disposals.
Notes: (1) Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK. During the period presented W&G has not operated as a separate legal entity. (2) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and principally comprises RBS
continued to perform well despite the competitive low interest rate environment. Gross new lending for mortgages increased by £0.2 billion, or 10%, to £2.1 billion while commercial remained resilient with gross new lending of £2.6 billion.
An operating profit of £345 million compared with £431 million in 2015. Adjusted operating profit of £402 million was £57 million lower than 2015 reflecting higher adjusted operating expenses and increased impairments.
Operating expenses of £450 million increased by £63 million, or 16%, and included a £29 million increase in restructuring costs.
Adjusted operating expenses increased by £34 million, or 9%, to £393 million reflecting activity undertaken in H1 to create a standalone bank, partially offset by the benefit of the commercial business restructuring which was announced in Q4 2015.
Net loans and advances increased by £0.6 billion, or 3%, to £20.6 billion principally reflecting growth in mortgages of £0.4 billion, or 4%.
Operating profit was £431 million, compared with a profit of £467 million in 2014. The reduction was principally driven by lower non-interest income and restructuring costs attributed to
Commercial Banking, partly offset by a lower net impairment charge. Adjusted operating profit was down £8 million to £459 million.
Commercial Banking. Adjusted expenses increased 9% to £359 million as the business continued to stand up the central functions and operations areas resulting in an increase in staff costs of 8% or £15 million.
Funding and operating costs have been allocated to operating segments based on direct service usage, the requirement for market funding and other appropriate drivers where services span more than one segment.
Glyn. Treasury funding costs were a charge of £94 million, compared with a gain of £169 million in 2015, and included a £510 million charge for volatile items under IFRS, due to reductions in long term interest rates, and a £349 million foreign exchange gain, principally associated with the weakening of sterling against the US dollar. In addition, there was a £126 million loss on redemption of own debt in 2016. These were partially offset by a VAT recovery of £227 million and a £246 million gain on the sale of the stake in VISA Europe.
Consolidated balance sheet as at 31 December 2016 2016 2015 £m £m
Loans and advances to customers increased £18.1 billion, 5%, to £352.0 billion. Within this, reverse repos were up £1.4 billion, 5%, to £28.9 billion. Customer lending increased by £16.7 billion, 5%, to £323.0 billion, or £14.0 billion to £327.5 billion before impairments. This reflected increases in UK PBB reflecting growth in mortgages, Commercial Banking which recorded strong new business volumes, partially offset by run-down and disposals in Capital Resolution.
Equity shares decreased by £0.7 billion, 48%, to £0.7 billion, primarily due to the continuing risk reduction and run-down in
Increases in trading activity in NatWest Markets of £15 billion was more than offset by disposals and run-off in Capital Resolution.
Deposits by banks increased by £0.3 billion, 1%, to £38.6 billion, with increases in inter-bank deposits, up £5.3 billion, 19%, to £33.3 billion, primarily driven by increases in NatWest Markets and RBS Treasury offset by reductions in Capital Resolution.
Treasury given the lower funding requirements of a reduced balance sheet.
Net cash outflows from investing activities of £4,359 million related to the net outflows from purchase and sale of securities of £3,008 million, the purchase of property, plant and equipment of £912 million and £886 million outflows from disposals, offset by net cash inflows from the sale of property, plant and equipment of
Net cash outflows from financing activities of £5,107 million relate primarily to the redemption of subordinated liabilities of £3,606 million, redemption of equity preference shares of £1,160 million, the final payment to retire the Dividend Access Share of £1,193 million and interest paid on subordinated liabilities of £813 million.
These outflows were partly offset by the inflow from the issuance of Additional Tier 1 capital notes of £2,046 million.
The major factors contributing to the net cash outflow from operating activities of £20,387 million were the decrease of £18,260 million in operating assets and liabilities, loans and advances written-off net of recoveries of £5,073 million, other provisions utilised of £3,528 million and the loss before tax of £564 million from continuing and discontinued operations. These were partially offset by the loss on reclassification to disposal groups of £3,994 million and other provisions charged net of releases of £2,711 million.
Net cash inflows from investing activities of £6,609 million related to the net inflows from sales and maturity of securities of £7,744 million and the sale of property, plant and equipment of £1,162 million, offset by net investments in business interests and intangible assets of £1,481 million and net cash outflows from the purchase of property, plant and equipment of £816 million.
Total income - statutory 5,290 576 3,415 657 374 1,574 (362) 837 229 12,590 Own credit adjustments — (3) — — — (53) (134) — 10 (180) Loss on redemption of own debt — — — — — — — — 126 126 Strategic disposals — — — — — — 81 — (245) (164)
Additional information Return on equity (1) 16.2% 0.7% 4.1% 5.6% 13.8% (6.6%) nm nm nm (17.9%) Return on equity - adjusted (1,2) 26.8% 8.4% 8.4% 7.8% 14.2% 1.1% nm nm nm 1.6% Cost income ratio 72% 116% 72% 84% 47% 125% nm 54% nm 129% Cost income ratio - adjusted (2) 57% 80% 57% 78% 45% 87% nm 47% nm 66%
Total income - statutory 5,200 550 3,254 644 367 1,527 539 833 9 12,923 Own credit adjustments — — — — — (120) (175) — (14) (309) Loss on redemption of own debt — — — — — — — — 263 263 Strategic disposals — — — — — — 38 — 119 157
Total income - statutory 5,444 604 3,305 689 391 1,931 1,792 852 142 15,150 Own credit adjustments — — — — — 9 36 — 101 146 Gain on redemption of own debt — — — — — — — — (20) (20) Strategic disposals — — — — — — — — (191) (191)
Restructuring costs - direct 10 (8) 41 1 2 13 80 — 1,015 1,154 - indirect 101 21 67 — 5 89 105 — (388) — Litigation and conduct costs 918 (19) 112 90 — 832 162 — 99 2,194 Write down of goodwill — — — — — — 130 — — 130
Notes: (1) RBS’s CET 1 target is 13% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers of capital usage, segmental operating profit after tax and adjusted for preference dividends is divided by notional equity allocated at different rates of 11% (Commercial Banking and Ulster Bank RoI), 12% (RBS International) and 15% for all other segments, of the monthly average of segmental risk-weighted assets incorporating the effect capital deductions (RWAes). RBS Return on equity is calculated using profit for the period attributable to ordinary shareholders.
Net loans and advances to banks 17,278 13 17,291 18,361 642 19,003 Reverse repurchase agreements and stock borrowing 12,860 — 12,860 12,285 67 12,352
Net loans and advances to customers 323,023 — 323,023 306,334 1,639 307,973 Reverse repurchase agreement and stock borrowing 28,927 — 28,927 27,558 — 27,558
Customer accounts 380,968 — 380,968 370,298 2,805 373,103 Debt securities in issue 27,245 — 27,245 31,150 — 31,150 Settlement balances 3,645 — 3,645 3,390 7 3,397 Short positions 22,077 — 22,077 20,809 — 20,809 Derivatives 236,475 — 236,475 254,705 28 254,733 Provisions for liabilities and charges 12,836 — 12,836 7,366 — 7,366 Accruals and other liabilities 6,991 15 7,006 7,749 97 7,749 Retirement benefit liabilities 363 — 363 3,789 3 3,792 Deferred tax 662 — 662 882 8 890 Subordinated liabilities 19,419 — 19,419 19,847 — 19,847 Liabilities of disposal groups 15 (15) — 2,980 (2,980) —
Risk mitigation 211 Portfolio overview 214 Wholesale credit risk 218 � Problem debt management and forbearance 220 � Key credit portfolios 224 Personal credit risk 234 � Problem debt management and forbearance 234 � Personal portfolio overviews 236 � Key credit portfolios 239
A strong risk culture is essential if RBS is to achieve its ambition to build a truly customer-focused bank.
To achieve this RBS is focusing on leaders as role models and taking actions to build clarity, develop capability and motivate employees to reach the required standards of risk culture behaviours including: • Taking personal accountability and proactively managing risk; • Respecting risk management and the part that it plays in daily work; • Understanding clearly the risks associated with individual roles; • Aligning decision-making to RBS’s risk appetite; • Considering risk in all actions and decisions; • Escalating risks and issues early; • Taking action to mitigate risks; • Learning from mistakes and near-misses; • Challenging others’ attitudes, ideas and actions; and
To support a consistent tone from the top, senior management frequently communicate the importance of the required risk behaviours through various channels, linking them to the achievement of good customer outcomes.
To track progress towards RBS’s risk culture target a programme of assessment commenced in 2016.
RBS-wide remuneration policy ensures that the remuneration arrangements for all employees reflect the principles and standards prescribed by the UK Remuneration Code. For further information refer to page 87.
RBS offers a wide range of risk learning, both technical and behavioural, across the risk disciplines. This training can be mandatory, role-specific or for personal development.
These principles cover conduct-related issues as well as wider business activities. They focus on desired outcomes, with practical guidelines to align the values with commercial strategy and actions. The embedding of these principles facilitates sound decision-making and a clear focus on good customer outcomes.
A simple decision-making guide (called the “YES check”) has been included in the Code of Conduct. It is a simple, intuitive set of five questions, designed to ensure RBS values guide day-today decisions: • Does what I am doing keep our customers and RBS safe and secure?
• In five years’ time would others see this as a good way to work?
If conduct falls short of RBS’s required standards, the accountability review process is used to assess how this should be reflected in pay outcomes for those individuals concerned.
Risk appetite defines the types of risk RBS is willing to accept, within risk capacity, in order to achieve strategic objectives and business plans. It links the goals and priorities to risk management in a way that guides and empowers staff to serve customers well and achieve financial targets.
The Risk Appetite Framework bolsters effective risk management by promoting sound risk taking and ensuring emerging risk and risk taking activities are recognised, assessed, escalated and addressed in a timely manner.
Strategic risks are the foundations on which RBS ensures it remains safe and sound while implementing its strategic business objectives. They are: • Capital adequacy; • Earnings volatility; • Funding and liquidity; and
The Board sets risk appetite for strategic risks to help ensure
RBS is well placed to meet its priorities and long-term targets even under challenging economic environments.
All other risk appetites for material risks (such as credit risk, market risk and operational risk) should align to strategic risks.
The purpose of risk appetite statements is to strengthen understanding of acceptable levels of risk.
Risk appetite statements are established at an RBS-wide level for strategic risks and material risks, and at a franchise, function and legal entity level.
The annual process of establishing risk appetite statements is completed alongside the business and financial planning process to ensure risk appetite remains appropriate given the levels of risk expected over the planning horizon.
Responsible for managing and overseeing all aspects of the Group's business and operations.
Providing oversight and advice on current and potential future risk exposures, and future risk strategy, including determination of risk appetite and tolerance.
The primary forum for considering the financial strategy, risk management, balance sheet and remuneration and policy implications of RBS’s pension schemes.
Finance. Responsibilities include: • Working with the businesses and functions to develop the risk and control policies, limits and tools for the business to use in order to discharge its responsibilities.
• Providing senior executives with relevant management information and reports and escalating concerns where appropriate.
Stress testing, capital review, strategic risk, risk appetite and policy framework risk analytics, risk models
o n tr o l F ra m e w o rk
RBS’s management structure in 2016 and the main elements of each role are illustrated below.
(2) Conduct & Regulatory Affairs In 2016, Conduct & Regulatory Affairs (C&RA) was led by the Chief Conduct & Regulatory Affairs Officer, who reported directly to the Chief Executive and had an indirect reporting line to the Board Risk Committee and a right of access to the committee’s chairman. C&RA was responsible for providing oversight of conduct risk and regulatory risk at RBS, and did so by setting RBS-wide policy and standards, providing advice to each customer business, and ensuring that the mitigating controls were suitable. C&RA also provided leadership of RBS’s relationships with its regulators. The functional heads (the directors of Financial Crime, Advisory, Remediation, Compliance Services, and Regulatory Affairs) reported to the Chief Conduct & Regulatory Affairs Officer. Each was responsible, where appropriate, for the RBS-wide risk appetite and standards of their respective areas.
(3) Plans to merge parts of the C&RA function with Risk Management were announced in December 2016. The changes, designed to take advantage of synergies across the risk, conduct and regulatory agendas, were effective from 1 January 2017. Regulatory Affairs moved to Corporate Governance & Secretariat, and Remediation and Complaints moved to Services Chief Operating Office.
Risk Assurance perform quality assurance on both credit and market risk activity, review key controls and manage model risk.
Section 404 of the US Sarbanes-Oxley Act 2002. During 2016, the team’s scope extended to include testing of controls supporting risk data aggregation reporting to support compliance with Basel Committee on Banking Supervision (BCBS) 239.
The Risk Assurance Committee (RAC) ensures a consistent and fair approach to all aspects of the credit risk, market risk and control assurance review activities. The RAC also monitors and validates the ongoing programme of reviews and tracks the remediation of review actions. The credit and market risk assurance teams also attend relevant committees run by the customer franchises and other risk functions.
MRM reviews may test and challenge the logic and conceptual soundness of the methodology, or the assumptions underlying a model. Reviews may also test whether or not all appropriate risks have been sufficiently captured as well as checking the accuracy and robustness of calculations.
assesses changes since the last approval along the following dimensions, as appropriate: change in size/composition of the portfolio, market changes, model performance, model changes, status of any outstanding issues and scheduled activities including work carried over from previous reviews.
Capital consists of reserves and instruments issued that are available to the Group that have a degree of permanency and are capable of absorbing losses. A number of strict conditions set by regulators must be satisfied to be eligible to count as capital.
Capital risk is the risk that the Group has insufficient capital and other loss absorbing debt instruments to operate effectively including meeting minimum regulatory requirements, operating within Board approved risk appetite and supporting its strategic goals.
Capital management is the process by which the Group manages its capital risk and is a key focus of its risk management activities.
• The CET1 ratio decreased by 210 basis points to 13.4% in 2016, reflecting lower CET1 capital partially offset by a reduction in RWAs.
• Litigation and conduct costs of £5.9 billion in 2016 contributed to a significant reduction in the CET1 capital.
• Tier 1 capital benefitted from the successful issuance of £2 billion of Additional Tier 1 (AT1) capital notes in August 2016. Total end-point Capital Requirements Regulation
• The leverage exposure decreased by £19.2 billion to £683.3 billion at 31 December 2016. Growth in PBB and CPB
lending has been more than offset by lower undrawn commitments and derivative potential future exposures
• RBS’s PRA minimum leverage ratio requirement of 3% has been supplemented with an additional GSII leverage ratio buffer of 0.13125%, equivalent to £897 million of CET1 capital.
• RBS issued £4.2 billion of MREL-eligible senior debt, in line with the £3 - £5 billion senior debt issuance target for 2016.
MREL compliant, as part of ongoing transition to a holding company capital and term funding model, in line with regulatory requirements.
In determining whether the Group holds sufficient capital and other loss absorbing debt instruments, the Group assesses the amount and type of capital under a number of different bases: Going concern vs. gone concern view
This determination of capital sufficiency is made on the basis that there is sufficient capital to absorb losses and remain a viable going concern.
This determination of capital sufficiency is made on the basis that there is sufficient capital and other loss absorbing instruments to enable an orderly resolution in the event of failure. Gone concern would apply if the Group had been deemed to fail by the Bank of
This determination of capital sufficiency is an assessment of whether the Group has sufficient capital and other loss absorbing debt instruments to meet the requirements of prudential regulation.
Rule-making bodies may set regulation according to standards agreed at international level, such as those published by the
This determination of capital sufficiency is an assessment of whether the Group has sufficient capital and other loss absorbing debt instruments to meet risk appetite limits.
This Group’s risk appetite framework establishes quantitative and qualitative targets and limits within which the Group operates to achieve its strategic objectives.
Capital risk is one of the Group’s top strategic risk appetite constituents as it is a stand-alone risk and is both influenced by, and influences, other key risks.
The regulatory requirement for going concern capital typically takes the form of a ratio of capital compared to a defined exposure amount having to exceed a minimum percentage: Constituents of capital held