In respect of certain matters described below, we have established a provision and in certain of those matters, we have indicated that we have established a provision. RBS generally does not disclose information about the establishment or existence of a provision for a particular matter where disclosure of the information can be expected to prejudice seriously RBS’s position in the matter.
There are situations where RBS may pursue an approach that in some instances leads to a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implications of continuing to contest liability, or in order to take account of the risks inherent in defending claims or investigations even for those matters for which RBS believes it has credible defences and should prevail on the merits. The uncertainties inherent in all such matters affect the amount and timing of any potential outflows for both matters with respect to which provisions have been established and other contingent liabilities.
In December 2016 RBS concluded full and final settlements with four of the five shareholder groups representing 78 per cent of the claims by value. Further full and final settlements, without any admission of liability, were reached and RBS has now concluded the action with over 98 per cent of the claimants.
The aggregate settlement figure available to claimants is £900 million, for which a previously established provision is in place, and is subject to validation of claims.
Most of the USD LIBOR-related actions in which RBS companies are defendants, including all purported class actions relating to USD LIBOR, were transferred to a coordinated proceeding in the United States District Court for the Southern District of New York.
In a decision issued in December 2016, the district court held that it lacks personal jurisdiction over RBS with respect to certain claims asserted in the coordinated proceeding. Following that decision, RBS has been dismissed from each of the USD LIBORrelated class actions in the coordinated proceeding, subject to appeal, although certain non-class cases on behalf of particular plaintiffs remain pending.
The action alleges that the defendants breached English and European competition law as well as asserting common law claims of fraud under US law. The FDIC previously asserted many of the same US law USD LIBOR-related claims against RBS and others in a lawsuit pending in the United States District Court for the Southern District of New York, though most of the claims in that case have been dismissed as a result of a series of rulings by that court. RBS’s defence to the High Court claim was filed on 24 November 2017.
Certain members of the Group have also been named as defendants in two class actions relating to JPY LIBOR and Euroyen TIBOR, both pending before the same judge in the United States District Court for the Southern District of New York. In the first case, relating to Euroyen TIBOR futures contracts, the court dismissed plaintiffs’ antitrust claims in March 2014, but declined to dismiss their claims under the Commodity Exchange Act for price manipulation, which are proceeding in the discovery phase. In the second case, relating to other derivatives allegedly tied to JPY LIBOR and Euroyen TIBOR, the court dismissed the case on 10 March 2017 on the ground that the plaintiffs lack standing. Plaintiffs have commenced an appeal of that decision.
Certain members of the Group have also been named as defendants in class actions relating to (i) Euribor, (ii) Swiss Franc LIBOR (iii) Pound sterling LIBOR, (iv) the Singapore Interbank Offered Rate and Singapore Swap Offer Rate, and (v) the Australian Bank Bill Swap Reference Rate, all of which are pending before other judges in the United States District Court for the Southern District of New York. On 21 February 2017, the court in the action relating to Euribor dismissed all claims alleged against RBS for lack of personal jurisdiction. On 18 August 2017, the court in the action relating to the Singapore Interbank Offered Rate and Singapore Swap Offer Rate dismissed all claims against RBS for lack of personal jurisdiction; however, the court allowed the plaintiffs to replead their complaint, and defendants’ renewed motion to dismiss the amended complaint is pending. On 25 September 2017, the court in the action relating to Swiss Franc LIBOR dismissed all claims against all defendants on various grounds; however, the court held that it has personal jurisdiction over RBS and allowed the plaintiffs to replead their complaint, and defendants’ renewed motion to dismiss the amended complaint is pending. The other matters described in this paragraph (relating to Pound Sterling LIBOR and the Australian Bank Bill Swap Reference Rate) are subject to motions to dismiss that are currently pending.
Details of UK litigation claims in relation to the sale of interest rate hedging products (IRHPs) involving LIBOR-related allegations are set out under ‘Interest rate hedging products litigation’ on page 317. Details of LIBOR investigations involving RBS are set out under ‘‘Investigations and reviews’’ on page 320.
Litigation, investigations and reviews continued ISDAFIX antitrust litigation Beginning in September 2014, The Royal Bank of Scotland plc (RBS plc) and a number of other financial institutions were named as defendants in several purported class action complaints (subsequently consolidated into one complaint) in the United States District Court for the Southern District of New York alleging manipulation of USD ISDAFIX rates. In 2015, RBS plc reached an agreement to settle this matter for US$50 million, and that settlement received preliminary approval from the Court in May 2016. The settlement amount has been paid into escrow pending the final court approval of the settlement.
FX antitrust litigation In 2015, Group companies settled a consolidated antitrust class action (the ‘consolidated action’), pending in the United States District Court for the Southern District of New York, asserting claims on behalf of persons who entered into (a) over-the-counter foreign exchange (FX) spot transactions, forwards, swaps, futures, options or other FX transactions the trading or settlement of which is related in any way to FX rates, or (b) exchange-traded FX instruments. Following the Court’s preliminary approval of the settlement in December 2015, RBS paid the total settlement amount (US$255 million) into escrow pending final court approval of the settlement.
A third FX-related class action, asserting Employee Retirement Income Security Act claims on behalf of employee benefit plans that engaged in FX transactions, including claims based on alleged non-collusive FX-related conduct, was dismissed in September 2016 on the ground that the plaintiffs failed to plead that the defendants had ERISA-based fiduciary duties to the plaintiffs. The plaintiffs’ appeal of this dismissal remains pending.
Beginning in September 2016, several additional class action complaints were filed in the United States District Court for the Southern District of New York asserting claims on behalf of ‘indirect purchasers’ of FX instruments.
The plaintiffs define ‘indirect purchasers’ as persons who were indirectly affected by FX instruments that others entered into directly with defendant banks or on exchanges. The consolidated amended complaint for these matters alleges that certain RBS companies and other defendant banks caused damages to the ‘indirect purchasers’ by conspiring to restrain trade in the FX spot market. The plaintiffs have asserted claims under federal and state antitrust laws. RBS and the other defendants have filed a motion to dismiss, which remains pending.
Certain other foreign exchange transaction related claims have been or may be threatened against RBS in other jurisdictions. RBS cannot predict whether any of these claims will be pursued, but expects that several may.
US Treasury securities antitrust litigation Beginning in July 2015, numerous class action antitrust complaints were filed in US federal courts against a number of primary dealers of US Treasury securities, including RBS Securities Inc.. The consolidated amended complaint for these matters, pending in the United States District Court for the Southern District of New York, alleges that RBS Securities Inc. and the other defendants rigged the US Treasury securities auction bidding process to deflate prices at which they bought such securities and colluded to increase the prices at which they sold such securities to plaintiffs.
Swaps antitrust litigation Beginning in November 2015, RBS plc and other members of the Group, as well as a number of other interest rate swap dealers, were named as defendants in a number of class action antitrust complaints filed in the United States District Court for the Southern District of New York and the United States District Court for the Northern District of Illinois. The complaints, filed on behalf of persons who entered into interest rate swaps with the defendants, allege that the defendants violated the US antitrust laws by restraining competition in the market for interest rate swaps through various means and thereby caused inflated bidask spreads for interest rate swaps, to the alleged detriment of the plaintiff class.
Madoff In December 2010, Irving Picard, as trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC., filed a clawback claim against The Royal Bank of Scotland N.V. (RBS N.V.) in the New York bankruptcy court.
In the operative complaint, filed in August 2012, the trustee seeks to recover US$75.8 million in redemptions that RBS N.V. allegedly received from certain Madoff feeder funds and US$162.1 million that RBS N.V. allegedly received from its swap counterparties at a time when RBS N.V. allegedly ‘knew or should have known of Madoff’s possible fraud’. The trustee alleges that those transfers were preferences or fraudulent conveyances under the US bankruptcy code and New York law and he asserts the purported right to claw them back for the benefit of Madoff’s estate.
RBS N.V. made a motion to dismiss in this case on the ground that many of the transfers at issue were extraterritorial to the United States and therefore not subject to the fraudulent conveyance statute upon which the trustee’s claim is based, but the bankruptcy court denied that motion in November 2016. RBS N.V. sought leave to appeal, but this was denied on 3 October 2017. A further claim by the trustee against RBS N.V., for clawback of an additional US$21.8 million, was filed in October 2011. With respect to that claim, the bankruptcy court granted RBS N.V.’s motion to dismiss on extraterritorial grounds, and the trustee has commenced an appeal of that decision.
In addition to claims alleging that IRHPs were mis-sold, RBS has received a number of claims involving allegations that it breached a legal duty of care in its conduct of the FCA redress programme. These claims have been brought by customers who are dissatisfied with redress offers made to them through the FCA redress programme. The claims followed a preliminary decision against another UK bank. RBS has since been successful in opposing an application by a customer to amend its pleadings to include similar claims against RBS, on the basis that the bank does not owe a legal duty of care to customers in carrying out the FCA review. An appeal of that decision was dismissed in July 2017 and permission to further appeal was refused by the UK Supreme Court in December 2017.
In March 2013, the trial court (the United States District Court for the Eastern District of New York) granted summary judgment in favour of NatWest on the issue of scienter, but in September 2014, that summary judgment ruling was vacated by the United States Court of Appeals for the Second Circuit. The appeals court returned the case to the trial court for consideration of NatWest's other asserted grounds for summary judgment and, if necessary, for trial. In March 2016, the trial court denied a motion by NatWest to dismiss the case in which NatWest had argued that the court lacked personal jurisdiction over NatWest. NatWest has since asserted other grounds for summary judgment that the trial court has not previously ruled upon. On 5 October 2017, the United States District Court for the Eastern District of New York dismissed claims against NatWest with respect to two terrorist attacks, but denied NatWest’s summary judgment motion with respect to claims arising from 16 other attacks. No trial date has been set.
Anti-Terrorism Act litigation against RBS N.V. RBS N.V. and certain other financial institutions (HSBC, Barclays, Standard Chartered, Credit Suisse, Bank Saderat, and Commerzbank) are defendants in an action first commenced in the United States District Court for the Eastern District of New York in November 2014 by a number of US nationals (or their estates, survivors, or heirs), most of whom are or were US military personnel, who were killed or injured in more than 90 attacks in Iraq between 2004 and 2011.
In November 2016, additional plaintiffs commenced a second action in the United States District Court for the Southern District of Illinois against the same defendants (including RBS N.V.), as well as Deutsche Bank. The allegations were substantially similar to the allegations contained in the complaint described above. The plaintiffs were a number of US military personnel (or their estates, survivors, or heirs) who were killed or injured in 21 attacks in Iraq between 2006 and 2011. In April 2017, this case was transferred to the United States District Court for the Eastern District of New York. On 3 October 2017, the plaintiffs in this second case, instead of responding to defendants’ motion to dismiss, voluntarily dismissed their claims without prejudice to refiling at a later date.
On 9 November 2017, a third action was commenced by an additional group of plaintiffs in the United States District Court for the Southern District of New York, against the same defendants as the November 2016 action (including RBS N.V.), as well as RBS plc. The allegations are substantially similar to the allegations contained in the complaints described above and concern 55 attacks in Iraq between 2003 and 2011. The defendants anticipate filing a motion to dismiss the claims in this case.
RMBS and other securitised products investigations In the US, RBS is involved in reviews, investigations and proceedings (both formal and informal) by federal and state governmental law enforcement and other agencies and selfregulatory organisations, including the US Department of Justice (DOJ) and several state attorneys general, including those mentioned below, relating to, among other things, issuance, underwriting and trading in RMBS and other mortgage-backed securities and collateralised debt obligations (CDOs). These ongoing matters include, among others, active investigations by the DOJ, relating primarily to due diligence on and disclosure related to loans purchased for, or otherwise included in, securitisations and related disclosures.
US mortgages - loan repurchase matters RBS’s NatWest Markets business in North America was a purchaser of non-agency residential mortgages in the secondary market, and an issuer and underwriter of non-agency RMBS.
In May 2015, RBS plc announced that it had reached settlements with the DOJ and the Board of Governors of the Federal Reserve System (Federal Reserve) in relation to investigations into its FX business within its NatWest Markets segment. RBS plc paid a penalty of US$274 million to the Federal Reserve and agreed to pay a penalty of US$395 million to the DOJ to resolve the investigations.
The charged conspiracy occurred between as early as December 2007 to at least April 2010. On 5 January 2017, the United States District Court for the District of Connecticut imposed a sentence on RBS plc consisting of the US$395 million criminal fine previously agreed with the DOJ and a term of probation, which among other things, prohibits RBS plc from committing another crime in violation of US law or engaging in the FX trading practices that form the basis for the charged crime and requires RBS plc to implement a compliance program designed to prevent and detect the unlawful conduct at issue and to strengthen its compliance and internal controls as required by other regulators (including the FCA and the CFTC). A violation of the terms of probation could lead to the imposition of additional penalties. Subsequent to the sentencing, RBS plc paid the criminal fine, which had been covered by an existing provision.
FCA review of RBS’s treatment of SMEs In November 2013, a report by Lawrence Tomlinson, entrepreneur in residence at the UK Government’s Department for Business Innovation and Skills, was published (‘Tomlinson Report’). The Tomlinson Report was critical of RBS’s treatment of SMEs.
The Tomlinson Report was passed to the PRA and FCA. Shortly thereafter, the FCA appointed an independent Skilled Person under section 166 of the Financial Services and Markets Act to review the allegations in the Tomlinson Report. The Skilled Person’s review was focused on RBS’s UK small and medium sized business customers with credit exposures of up to £20 million whose relationship was managed within RBS’s Global Restructuring Group or within similar units within RBS’s Corporate Banking Division that were focused on customers in financial difficulties. In the period 2008 to 2013 RBS was one of the leading providers of credit to the UK SME sector.
Litigation, investigations and reviews continued A separate independent review of the principal allegation, led by Mason Hayes & Curran, Solicitors, was conducted in the Republic of Ireland. The report was published in December 2014 and found no evidence to support the principal allegation.
The Skilled Person review focused on the allegations made in the Tomlinson Report and certain observations made by Sir Andrew Large in his 2013 Independent Lending Review, and was broader in scope than the reviews undertaken by Clifford Chance and Mason, Hayes & Curran which are referred to above. The Skilled Person delivered the draft findings from its review to the FCA in March 2016. RBS was then given the opportunity to consider and respond to those draft findings before the Skilled Person delivered its final report to the FCA during September 2016.
On 23 October 2017, the FCA published an interim report incorporating a summary of the Skilled Person’s report which stated that, further to the general investigation announced in November 2016, the FCA had decided to carry out a more focused investigation. The FCA published its final summary of the Skilled Person’s report on 28 November 2017. The UK House of Commons Treasury Select Committee, seeking to rely on Parliamentary powers, published the full version of the Skilled Person’s report on 20 February 2018.
Judicial Review of Skilled Person’s role in IRHP review RBS has been named as an interested party in a number of claims for judicial review of KPMG’s decisions as Skilled Person in RBS’s previously disclosed IRHP redress programme. This follows a similar claim from a customer of another UK bank, also against KPMG.
All of these claims were stayed pending the outcome of the other bank’s case. The trial in that case was heard in January 2016.
The claimant has been granted permission to appeal that decision, and the appeal hearing is expected to take place on 23 and 24 May 2018.
Subsequent to the FSA announcing the results of its mystery shopping review, the FCA required RBS to carry out a past business review and customer contact exercise on a sample of historic customers that received investment advice on certain lump sum products through the UK Financial Planning channel of the UK Personal & Business Banking (UK PBB) segment of RBS, which includes RBS plc and NatWest, during the period from March 2012 until December 2012.
This review was conducted under section 166 of the Financial Services and Markets Act, under which a Skilled Person was appointed to carry out the exercise. Redress has been paid to certain customers in this sample group.
Litigation, investigations and reviews continued Following discussions with the FCA after issue of the draft section 166 report, RBS agreed with the FCA that it would carry out a wider review/remediation exercise relating to certain investment, insurance and pension sales from 1 January 2011 to 1 April 2015. The project regarding review/remediation of sales between 1 January 2011 and 1 April 2015 was due to finish at the end of 2017 but this deadline is being extended with completion anticipated by the end of Q1 2018. This is to allow completion of outstanding remediation activity that was impacted by customer responses, and to receive information from third party providers, in addition to concluding small cohorts of work that were postponed until the additional scope was agreed.
Packaged accounts As a result of an uplift in packaged current account complaints, RBS proactively put in place dedicated resources in 2013 to investigate and resolve complaints on an individual basis. RBS has made gross provisions totalling £409 million to date for this matter.
The FCA conducted a thematic review of packaged bank accounts across the UK from October 2014 to April 2016, the results of which were published in October 2016. RBS continues to take into consideration and, where relevant, address the findings from this review.
Separately, in April 2013, the EC announced it was opening a new investigation into interchange fees payable in respect of payments made in the EEA by MasterCard cardholders from nonEEA countries. On 3 August 2017, the EC announced it had also sent Visa a Supplementary Statement of Objections. The EC investigations are ongoing.
In June 2015, a regulation on interchange fees for card payments entered into force. The regulation requires the capping of both cross-border and domestic MIF rates for debit and credit consumer cards.
The regulation also sets out other reforms including to the Honour All Cards Rule which require merchants to accept all cards with the same level of MIF but not cards with different MIF levels.
In May 2015, the Competition & Markets Authority (CMA) announced that it had closed the investigations into domestic interchange fees on the grounds of administrative priorities.
Whilst there are no recent developments on the above to report, there remains uncertainty around the outcomes of the ongoing EC investigation, and the impact of the regulation, and they may have a material adverse effect on the structure and operation of four party card payment schemes in general and, therefore, on RBS’s business in this sector.
In August 2017, the FCA’s new rules and guidance on PPI complaints handling (Policy Statement 17/3) came into force. The Policy Statement introduced new so called ‘Plevin’ rules, under which customers may be eligible for redress if the bank earned a high level of commission from the sale of PPI, but did not disclose this detail at the point of sale. The Policy Statement also introduced a two year PPI deadline, due to expire in August 2019, before which new PPI complaints must be made. RBS is implementing the Policy Statement.
RBS has made provisions totalling £5.1 billion to date for PPI claims, including an additional provision of £175 million in 2017. Of the £5.1 billion cumulative provision, £4.1 billion had been utilised by 31 December 2017.
Other remedies are to be delivered via undertakings signed by Bacs and recommendations to be taken forward by other regulators (including the FCA).
On 19 December 2017 the CMA published directions for RBS and four other banks, which set out revised implementation dates for the delivery of certain obligations relating to open banking under the Order. On 29 January 2018 the CMA published separate directions for RBS, which set out revised implementation dates for the delivery of certain obligations requiring PCA overdraft alerts to be sent to customers under the Order.
FCA Investment and Corporate Banking Market Study In February 2015, the FCA launched a market study into investment and corporate banking. In October 2016 the FCA published its final report. It found that whilst many clients feel well served by primary capital market services there were some areas where improvements could be made to encourage competition, particularly for smaller clients. It set out a package of remedies, including prohibiting the use of restrictive contractual clauses and ending league table misrepresentation by asking league table providers to review their recognition criteria. The prohibition on restrictive contractual clauses took effect from 3 January 2018.
In December 2016, the FCA launched a market study into the provision of mortgages. The FCA is expected to publish an interim report in Spring 2018 with the final report expected in Q4 2018.
At this stage, as there is considerable uncertainty around the outcome of this market study, it is not practicable reliably to estimate the aggregate impact, if any, on RBS which may be material.
Phase 1 will allow the FCA to enhance its understanding of existing models and how these impact competition and conduct. Phase 2 will evaluate the impacts of economic, technological, social and regulatory factors on these models. A project update is expected in Q2 2018 outlining the FCA’s preliminary conclusions from Phase 1.
At this early stage, as there is considerable uncertainty around the outcome of this review, it is not practicable reliably to estimate the aggregate impact, if any, on RBS, which in due course may be material.
In the Governance Order, RBS agreed to create the following written plans or programmes: Key points ● a plan to strengthen board and senior management oversight of the corporate governance, management, risk management, and operations of RBS’s US operations on an enterprise-wide and business line basis; ● an enterprise-wide risk management programme for RBS’s US operations; ● a plan to oversee compliance by RBS’s US operations with all applicable US laws, rules, regulations, and supervisory guidance; ● a Bank Secrecy Act/anti-money laundering compliance programme for the US Branches on a consolidated basis; ● a plan to improve the US Branches’ compliance with all applicable provisions of the Bank Secrecy Act and its rules and regulations as well as the requirements of Regulation K of the Federal Reserve; ● a customer due diligence programme designed to ensure reasonably the identification and timely, accurate, and complete reporting by the US Branches of all known or suspected violations of law or suspicious transactions to law enforcement and supervisory authorities, as required by applicable suspicious activity reporting laws and regulations; and
The Governance Order identified specific items to be addressed, considered, and included in each proposed plan or programme. RBS also agreed in the Governance Order to adopt and implement the plans and programmes after approval by the regulators, to comply fully with the plans and programmes thereafter, and to submit to the regulators periodic written progress reports regarding compliance with the Governance Order.
RBS has created, submitted, and adopted plans and/or programmes to address each of the areas identified above. In connection with RBS’s efforts to implement these plans and programmes, it has, among other things, made investments in technology, hired and trained additional personnel, and revised compliance, risk management, and other policies and procedures for RBS’s US operations. RBS continues to test the effectiveness of the remediation efforts it has undertaken to ensure they are sustainable and meet regulators' expectations.
RBS may be subject to formal and informal supervisory actions and may be required by its US banking supervisors to take further actions and implement additional remedial measures with respect to these and additional matters. RBS’s activities in the US may be subject to significant limitations and/or conditions.
Under the US Dollar Processing Order (as part of the OFAC compliance programme) RBS was required to appoint an independent consultant to conduct an annual review of OFAC compliance policies and procedures and their implementation and an appropriate risk-focused sampling of US dollar payments. RBS appointed the independent consultant and their reports were submitted to the authorities in June 2015. The independent consultant review examined a significant number of sanctions alerts and no reportable issues were identified.
Review and investigation of treatment of tracker mortgage customers in Ulster Bank Ireland DAC (formerly Ulster Bank Ireland Limited) In December 2015, the Central Bank of Ireland (CBI) announced that it had written to a number of lenders requiring them to put in place a robust plan and framework to review the treatment of customers who have been sold mortgages with a tracker interest rate or with a tracker interest rate entitlement. The CBI stated that the intended purpose of the review was to identify any cases where customers’ contractual rights under the terms of their mortgage agreements were not fully honoured, or where lenders did not fully comply with various regulatory requirements and standards regarding disclosure and transparency for customers. The CBI has required Ulster Bank Ireland DAC (UBI DAC), a member of RBS, incorporated in the Republic of Ireland, to participate in this review and UBI DAC is co-operating with the CBI in this regard. UBI DAC submitted its phase 2 report to the CBI on 31 March 2017, identifying impacted customers. The redress and compensation phase (phase 3) commenced in Q4 2017.
RBS has made provisions totalling €298 million (£248 million) to date for this matter, including an additional provision of €87 million (£76 million) in 2017. Of the €298 million (£248 million) cumulative provision, €75 million (£64 million) had been utilised by 31 December 2017.
Write down of goodwill and other intangible assets 29 159 1,332
Net cash inflow/(outflow) from operating activities 38,741 (3,650) 918 33 Analysis of the net investment in business interests and intangible assets 2017 2016 2015
Note: (1) Includes cash proceeds of £1,628 million in 2015 relating to the disposal of the controlling interest in Citizens.
Ordinary shares issued in respect of employee share schemes 71 166 225
Other adjustments including foreign exchange 196 — — (950) 3,178 (11)
Segmental reorganisation and business transfers RBS continues to deliver on its plan to build a strong, simple and fair bank for both customers and shareholders. To support this, and in preparation for the UK ring-fencing regime, the previously reported operating segments were realigned in Q4 2017 and a number of business transfers completed.
 UK PBB Collective Investment Funds (CIFL) business was transferred to the Private Banking reportable segment in order to better serve customers.
Reportable operating segments Following the changes detailed the reportable operating segments are as follows: Personal & Business Banking (PBB) comprises two reportable segments: UK Personal & Business Banking (UK PBB) and Ulster Bank RoI. UK PBB serves individuals and mass affluent customers in the UK together with small businesses (generally up to £2 million turnover). UK PBB includes Ulster Bank customers in Northern Ireland. Ulster Bank RoI serves individuals and businesses in the Republic of Ireland (RoI).
NatWest Markets offers corporate and institutional customers global market access, providing them with trading, risk management and financing solutions through its trading and sales operations in London, Singapore and Stamford and sales offices in Dublin, Hong Kong and Tokyo.
Central items & other includes corporate functions, such as RBS 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. Balances in relation to legacy litigation issues and the international private banking business are included in Central items in the relevant periods.
RBS International 281 108 389 239 135 374 200 167 367 NatWest Markets 1,077 (27) 1,050 1,296 (84) 1,212 2,190 (124) 2,066 Central items & other 256 195 451 15 214 229 (178) 187 9
RBS International 25,867 29,077 12 23,420 25,280 — 23,130 21,398 — NatWest Markets 277,886 248,553 4 372,496 340,471 6 416,748 380,059 29 Central items & other 49,268 75,877 1,275 28,241 60,048 1,098 35,739 61,261 1,227 *Re-presented to reflect the segmental reorganisation
Of which total liabilities held for sale — 15 — — 15
Of which total liabilities held for sale — 16 418 2,546 2,980
Amounts receivable under long-term incentive plans and share option plans 1,225 993
No directors accrued benefits under defined benefit schemes or money purchase schemes during 2017 and 2016.
Compensation of key management The aggregate remuneration of directors and other members of key management during the year was as follows: Short-term benefits 19,019 20,350
(b) For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the company and members of the Executive Committee. The captions in the Group's primary financial statements include the following amounts attributable, in aggregate, to key management: Loans and advances to customers 3,942 4,127 Customer accounts 23,619 17,045
Members of the Group that are UK authorised institutions are required to maintain non-interest bearing (cash ratio) deposits with the Bank of England amounting to 0.18% of their average eligible liabilities in excess of £600 million. They also have access to Bank of England reserve accounts: sterling current accounts that earn interest at the Bank of England Rate.
(b) RBS recharges The Royal Bank of Scotland Group Pension Fund with the cost of administration services incurred by it. The amounts involved are not material to the Group.
(c) In accordance with IAS 24, transactions or balances between RBS entities that have been eliminated on consolidation are not reported.
The accounts were approved by the Board of directors on 22 February 2018 and signed on its behalf by: Howard Davies Chairman
Paid-in equity At 1 January 4,478 2,438 431 Additional Tier 1 capital notes (3) — 2,040 2,007 Redeemed/reclassified (4) (431) — —
Merger reserve At 1 January — — 2,341 Transfer on impairment of investment in RBS plc — — (2,341)
Capital redemption reserve At 1 January 4,542 4,542 9,131 Conversion of B shares (1) — — (4,590) Capital reduction (5) (4,542) — — Preference shares redeemed (2) — — 1
Retained earnings At 1 January 7,995 16,252 17,483 Profit/(loss) attributable to ordinary shareholders and other equity owners 1,284 (5,409) (1,982) Equity preference dividends paid (234) (260) (297) Dividend access share dividend — (1,193) — Paid-in equity dividends paid, net of tax (390) (235) (79) Capital reduction (5) 30,331 — — Redemption of debt preference shares (2) (748) — — Redemption of equity preference shares (2) — (1,160) (1,214) Transfer on impairment of investment in RBS plc — — 2,341 Reclassification of paid-in equity (196) — —
Notes: (1) In October 2015, all B shares were converted into ordinary shares of £1 each. (2) During 2017, non-cumulative US dollar preference shares recorded as debt were redeemed at their original issue price of US$1.1 billion. The nominal value of £0.3 million has been credited to the capital redemption reserve; share premium increased by £0.7 billion in respect of the premium received on issue, with a corresponding decrease in retained earnings. During 2016, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.5 billion (2015 - $1.9 billion).The nominal value of £0.3 million (2015 - £1.0 million) was transferred from share capital to capital redemption reserve and ordinary owners equity was reduced by £0.4 billion (2015 - £0.2 billion) in respect of the movement in exchange rates since issue.
The accompanying notes on pages 337 to 356 form an integral part of these financial statements.
Effects of exchange rate changes on cash and cash equivalents (14) 122 9
1 Presentation of accounts The accounts are prepared on a going concern basis (refer to the Report of the directors, page 112) and in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union (together IFRS). The company's financial statements are prepared in accordance with IFRS as issued by the IASB and are presented in accordance with the Companies Act 2006.
Accounting developments International Financial Reporting Standards A number of IFRSs and amendments to IFRS were in issue at 31 December 2017 that would affect the Company from 1 January 2018 or later.
In summary, on 1 January 2018, the estimated post tax increase in equity is not more than £0.2 billion. There will be no restatement of accounts prior to 2018.
2 Profit dealt with in the accounts of the company As permitted by section 408(3) of the Companies Act 2006, the primary financial statements of the company do not include an income statement or a statement of comprehensive income. Condensed information is set out below.
The company did not pay an ordinary dividend in 2017, 2016 or 2015.
3 Financial instruments - classification The following table shows the company's financial assets and liabilities in accordance with the categories of financial instruments in IAS 39.
Notes: (1) Fair value hierarchy: level 2 - £11.3 billion (2016 - £26.9 billion) and level 3 - £14.1 billion (2016 - £2.8 billion). (2) Fair value hierarchy level 2. (3) Fair value hierarchy level 3.
Financial liabilities: contractual maturity The following table shows undiscounted cash flows payable up to 20 years from the balance sheet date, including future interest payments.
2017 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years £m £m £m £m £m £m
6 Debt securities Debt securities comprise the partial repurchase of preferred securities issued by the trusts referred to in Note 26 on the consolidated accounts.
7 Investments in Group undertakings Investments in Group undertakings are carried at cost less impairment. Movements during the year were as follows: 2017 2016 £m £m
£bn £bn 1% adverse movement Discount Rate (4.8) (3.4) 1% adverse movement Terminal Growth Rate (1.4) — 5% adverse movement in Costs (0.8) 1.2 5% adverse movement in Income (1.8) 0.4
The principal subsidiary undertakings of the company are shown below. Their capital consists of ordinary and preference shares which are unlisted with the exception of certain preference shares issued by NatWest.
The Royal Bank of Scotland plc and RFS Holdings B.V. are directly owned by the company, and all other subsidiary undertakings are owned either by the company, or directly, or indirectly through intermediate holding companies. All of these subsidiaries are included in RBS's consolidated financial statements and have an accounting reference date of 31 December.
The Royal Bank of Scotland plc Banking Great Britain 100% National Westminster Bank Plc (1) Banking Great Britain 100% Coutts & Company (2) Private banking Great Britain 100% RBS Securities Inc. Broker dealer US 100% Ulster Bank Limited Banking Northern Ireland 100% Ulster Bank Ireland Designated Activity Company Banking Republic of Ireland 100% The Royal Bank of Scotland International Limited Financial Institution Jersey 100%
Notes: (1) The company does not hold any of the preference shares in issue. (2) Coutts & Company is incorporated with unlimited liability. Its registered office is 440 Strand, London WC2R 0QS.
Dated loan capital 7,213 8,830 Undated loan capital 763 836 Preference shares 1 1,002
Notes: (1) On-lent to The Royal Bank of Scotland plc on a subordinated basis. (2) The call is on the underlying security in the partnership, rather than the internal issued debt.
US$762 million 7.648% notes (callable September 2031) (1) Ineligible 571 625
US$150 million 8.00% notes (callable October 2093) Tier 2 113 124
US$156 million 7.65% series F non-cumulative preference shares of US$ 0.01 (callable) Ineligible — 127
US$751 million 5.75% series L non-cumulative preference shares of US$ 0.01 (callable) Ineligible — 609 £200 million 7.387% series 1 non-cumulative convertible £0.01 preference shares (callable, partial redemption) Ineligible — 14
9 Share capital Details of the company’s share capital are set out in Note 25 on the consolidated accounts.
(Decrease)/increase in deposits by banks and customers (2) (944) 37 (295) Increase/(decrease) in debt securities in issue 2,370 1,772 (2,461) Increase/(decrease) in other liabilities 61 36 (202) Increase/(decrease) in derivative liabilities (2) 24 195 35
Net cash (outflow)/inflow from financing (321) 2,340 2,314 (1,665) (425) (1,745)
Ordinary shares issued in respect of employee share schemes 71 166 225 — — —
Redemption of equity preference shares — — (1) — — —
Transfer on impairment of investment in RBS plc — — (2,341) — — —
Redemption of debt preference shares 748 — — — — —
15 Related undertakings RBS legal entities and activities at 31 December 2017 In accordance with the Companies Act 2006, the company’s related undertakings and the accounting treatment for each are listed below. All undertakings are wholly-owned by the company or subsidiaries of the company and are consolidated by reason of contractual control (Section 1162(2) CA 2006), unless otherwise indicated. Group interest refers to ordinary shares of equal values and voting rights unless further analysis is provided in the notes. Activities are classified in accordance with Annex I to the Capital Requirements Directive (“CRD IV”) and the definitions in Article 4 of the Capital Requirements Regulation. All other requirements of the Capital Requirements (country-by-country) Reporting Regulations 2013 will be published on the RBS Group’s website.
Acc (3) Address Notes 280 Bishopsgate Finance Ltd INV FC 250 Bishopsgate, London, EC2M 4RB, England
Adam & Company Investment Management Ltd BF FC 25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Adam & Company PLC CI FC 25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Care Homes 2 Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
Care Homes 3 Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
Churchill Management Ltd BF FC 1 Princes Street, London, EC2R 8PB, England
Desertlands Entertainment Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Esme Loans Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
Euro Sales Finance Plc BF FC 250 Bishopsgate, London, EC2M 4AA, England
G L Trains Ltd BF FC 1 Princes Street, London, EC2R 8PB, England
Heartlands (Central) Ltd BF DE 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
KUC (Public Houses) Ltd BF DE 1 Princes Street, London, EC2R 8PB, England
Lombard & Ulster Ltd BF FC 11-16 Donegall Square East, Belfast, BT1 5HD, Northern Ireland
Lombard Business Leasing Ltd BF FC 280 Bishopsgate, London, EC2M 4RB, England
Lombard Charterhire Ltd BF FC 280 Bishopsgate, London, EC2M 4RB, England
Lombard Corporate Finance (6) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Industrial Leasing Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Lombard Initial Leasing Ltd BF FC 280 Bishopsgate, London, EC2M 4RB, England
Lombard Leasing Contracts Ltd BF FC 1 Princes Street, London, EC2R 8PB, England
Lombard Maritime Ltd BF FC 280 Bishopsgate, London, EC2M 4RB, England
Lombard North Central Leasing Ltd BF FC 280 Bishopsgate, London, EC2M 4RB, England
Nanny McPhee Productions Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
National Westminster Bank Plc CI FC 135 Bishopsgate, London, EC2M 4AA, England
National Westminster Properties No. 1 Ltd SC FC 250 Bishopsgate, London, EC2M 4AA, England
NatWest Capital Finance Ltd BF FC 1 Princes Street, London, EC2R 8PB, England
Patalex IV Productions Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Pittville Leasing Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Premier Audit Company Ltd BF DE 250 Bishopsgate, London, EC2M 4AA, England
Price Productions Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Priority Sites Investments Ltd BF DE 250 Bishopsgate, London, EC2M 4AA, England
Priority Sites Ltd INV FC 250 Bishopsgate, London, EC2M 4AA, England
Property Venture Partners Ltd INV FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
R.B. Equipment Leasing Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
R.B. Leasing (April) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
R.B. Leasing (March) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
R.B. Quadrangle Leasing Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
RBDC Administrator Ltd SC FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBOS (UK) Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RBS Asset Management Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RBS Collective Investment Funds Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBS Invoice Finance (Holdings) Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RBS Management Services (UK) Ltd SC FC 250 Bishopsgate, London, EC2M 4AA, England
RBS Mezzanine Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBS SME Investments Ltd BF FC 1 Princes Street, London, EC2R 8PB, England
RBSG Collective Investments Holdings Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBSG International Holdings Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBSM Capital Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBSSAF (2) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
RBSSAF (25) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
RBSSAF (4) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
RBSSAF (6) Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
RoboScot Equity Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Royal Bank Leasing Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Royal Scot Leasing Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RoyScot Financial Services Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
RoyScot Trust plc BF FC 280 Bishopsgate, London, EC2M 4RB, England
SIG 1 Holdings Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
SIG Number 2 Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
The One Account Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
The Royal Bank of Scotland plc CI FC 36 St Andrew Square, Edinburgh, EH2 2YB, Scotland
Theobald Film Productions LLP BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Ulster Bank Commercial Services (NI) Ltd BF FC 11-16 Donegall Square East, Belfast, BT1 5UB, Northern Ireland
Ulster Bank Ltd CI FC 11-16 Donegall Square East, Belfast, BT1 5UB, Northern Ireland
Voyager Leasing Ltd BF FC The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
West Register (Hotels Number 1) Ltd INV DE 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
West Register (Property Investments) Ltd BF DE 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
West Register Hotels (Holdings) Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
15 Related undertakings continued The following table details active related undertakings incorporated outside the UK which are 100% owned by the Group and fully consolidated for accounting purposes.
Country (1) Entity name Activity (2) Reg Acc (3) Address Notes
Bermuda R.B. Leasing BDA One Ltd BF FC 22 Victoria Street, Hamilton, HM12
Brazil RBS Assessoria Ltda SC FC Rua Boa Vista, Sao Paulo, SP 01014-907
Redlion Investments Ltd OTH FC Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75 Fort Street, George Town, Grand Cayman, KY1-1108
Royhaven Secretaries Ltd BF FC Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75 Fort Street, George Town, Grand Cayman, KY1-1108
Denmark Airside Properties Denmark AS BF FC c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40
Denmark Kastrup Commuter K/S BF FC c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40
Denmark Kastrup Hangar 5 K/S BF FC c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40
Finland Fab Ekenäs Formanshagen 4 BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Helsingin Panuntie 11 BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Peltolantie 27 BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Ravattulan Kauppakeskus BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Finland Koy Tapiolan Louhi BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
SC FC 1 Le Marchant Street, St. Peter Port, GY1 1LF
BF FC 414, Empire Complex (South Wing), Senapati Bapat Marg, Lower Parel, Mumbai, 400 013
Isle of Man Lombard Manx Ltd BF FC Royal Bank House, 2 Victoria Street, Douglas, IM1 2LN
Jersey Keep SPV Ltd BF DE La Motte Chambers, St. Helier, JE1 1BJ (5)
Jersey Lombard Finance (CI) Ltd BF FC Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
CI FC Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
Netherlands FI Equity Partners B.V. BF FC Gustav Mahlerlaan 350, Amsterdam, 1082 ME (5)
BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland, UK
Netherlands RBS Holdings N.V. BF FC Gustav Mahlerlaan 350, Amsterdam, 1082 ME (5)
Norway BD Lagerhus AS BF FC c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161, Oslo
Norway Hatros 1 AS BF FC c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161, Oslo
Norway Nordisk Renting AS BF FC c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161, Oslo
Norway Ringdalveien 20 AS BF FC c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161, Oslo
Poland RBS Bank (Polska) S.A. CI FC Wisniowy Business Park, ul 1-go Sierpnia 8a, Warsaw 02-134
RoI Easycash (Ireland) Ltd BF FC Ulster Bank Group Centre, George's Quay, Dublin 2
RoI First Active Ltd BF FC Ulster Bank Group Centre, George's Quay, Dublin 2
RoI Lombard Ireland Ltd BF FC Ulster Bank Group Centre, George's Quay, Dublin 2
RoI RBS Nominees (Ireland) Ltd BF FC Ulster Bank Group Centre, George's Quay, Dublin 2 (5)
RoI Walter Property Ltd BF FC Ulster Bank Group Centre, George's Quay, Dublin 2
Sweden Bil Fastigheter i Sverige AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Eurohill 4 KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Fastighets AB Stockmakaren BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Gredelinen KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Grinnhagen KB BF PC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Horrsta 4:38 KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden IR Fastighets AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden KB Lagermannen BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden KB Likriktaren BF DE c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Läkten 1 KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Mjälgen KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Mons Investment AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Nordisk Specialinvest AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Pyrrhula 6,7 AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden SFK Kommunfastigheter AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Sjöklockan KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Skinnarängen KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Solbänken KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Strand European Holdings AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Svenskt Energikapital AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Tygverkstaden 1 KB BF DE c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
INV PC 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
USA RBS Acceptance Inc. CI FC 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
USA RBS Holdings USA Inc. BF FC 2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
BGF Group Ltd BF EAA PC 24 13-15 York Buildings, London, WC2N 6JU, England
Cloud Electronics Holdings Ltd BF IA PC 20 140 Staniforth Road, Darnall, Sheffield, South Yorkshire, S9 3HF, England
GWNW City Developments Ltd BF EAJV FC 50 Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR, England
Hamsard 3120 Ltd BF IA FC 40 Sycamore Road, Eastwood Trading Estate, Rotherham, South Yorkshire, S65 1EN, England
Higher Broughton Partnership LP BF EAA FC 51 Cornwall Buildings, 45-51 Newhall Street, Birmingham, West Midlands, B3 3QR, England
Isobel AssetCo Ltd BF FC FC 75 40 Berkeley Square, London, W1J 5AL, England
Isobel EquityCo Ltd BF FC FC 75 40 Berkeley Square, London, W1J 5AL, England
Isobel HoldCo Ltd BF FC FC 75 40 Berkeley Square, London, W1J 5AL, England
Isobel Intermediate HoldCo Ltd BF FC DE 75 40 Berkeley Square, London, W1J 5AL, England
Isobel Loan Capital Ltd BF FC FC 75 40 Berkeley Square, London, W1J 5AL, England
JCB Finance Ltd BF FC FC 75 The Mill, High Street, Rocester, ST14 5JW, England
London Rail Leasing Ltd BF EAJV PC 50 99 Queen Victoria Street, London, EC4V 4EH, England
Prestige Walker Ltd OTH IA FC 30 Terminal House, Station Approach, Shepperton, Middlesex, TW17 8AS, England
RBS Covered Bonds LLP BF FC DE 73 1 Princes Street, London, EC2R 8BP, England
RBS Secured Funding (LM) Ltd BF FC FC 20 c/o SFM Corporate Services Ltd, 35 Great St Helens, London, EC3A 6AP, England
RBS Sempra Commodities LLP BF FC FC 51 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Uniconn Ltd OTH IA FC 30 Howe Moss Drive, Kirkhill Industrial Estate, Dyce, Aberdeen, AB21 0GL, Scotland
China Galaxy Futures Company Ltd BF EAA FC 17 Floor 9th, SOHO Century Plaza, 1501 Century Avenue, Pudong New Area, Shanghai
Italy Eris Finance S.R.L. BF IA FC 45 Via Vittorio Alfieri 1, Conegliano, 31015
Italy Maja Finance S.R.L. BF FC DE 0 Via Vittorio Alfieri 1, Conegliano, 31015
BF EAJV FC 50 De entree 99 -197, 1101HE, Amsterdam Zuidoost
OTH IA FC 20 c/o Denis Crowley & Co, Chartered Accountants, Unit 6 Riverside Grove, Riverstick, Cork
BF FC FC 51 c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Optimus KB BF FC PC 51 c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Stora Kvarnen KB BF FC FC 51 c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
USA Sempra Energy Trading LLC BF FC DE 51 251 Little Falls Drive, Wilmington, Delaware, DE 19808
USA RBS Capital LP B BF NC DE 1209 Orange Street, Wilmington, Delaware, DE 19801 (12)
USA RBS Capital LP II BF NC DE 1209 Orange Street, Wilmington, Delaware, DE 19801 (12)
USA RBS Capital Trust B BF NC DE 100, Suite 102, White Clay Center, Newark, New Castle County, Delaware, DE 19711
USA RBS Capital Trust II BF NC DE 100, Suite 102, White Clay Center, Newark, New Castle County, Delaware, DE 19711
USA West Granite Homes Inc. INV NC FC Bellevue Parkway, Suite 210, Wilmington, Delaware, DE 19809
FC FC 100 Maples Corporate Services Limited, P.O. Box 309, 121 South Church Street, George Town, Grand Cayman, KY1-1104
EAJV FC 50 Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
Jersey Mulcaster Street Nominees Ltd FC FC 100 Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
Netherlands Exfin Capital B.V. FC FC 0 Amsteldijk 166, Amsterdam, 1082 MD
RBSG Holdings N.V. FC FC 100 Kaya Flambayan 9, Curacao, Netherlands Antilles
RoI Marnin Ltd NC DE 98 Ulster Bank Group Centre, George's Quay, Dublin 2
RoI RBS Trustees (Ireland) Ltd FC FC 98 First Floor, 10/11 Exchange Place, International Financial Services Centre, Dublin 1
RoI UB SIG (ROI) Ltd FC DE 100 Ulster Bank Group Centre, George's Quay, Dublin 2
FC FC 100 Ulster Bank Group Centre, George's Quay, Dublin 2
RoI West Register (RoI) Property Ltd FC DE 100 Ulster Bank Group Centre, George's Quay, Dublin 2
UK Attlee Personal Loans Plc FC FC 0 35 Great St Helen's, London, EC3A 6AP, England
FC FC 0 35 Great St Helen's, London, EC3A 6AP, England
UK Cala Campus Ltd EAJV DE 50 Ledingham Chalmers, Johnstone House, 52-54 Rose Street, Aberdeen, AB10 1HA, Scotland
UK Greenwich NatWest Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK KUC Holdings Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK NatWest (HMHP) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK Northants Developments Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK Property Ventures (B&M) Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK Raingrove Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS Development (UK) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS Equity Products (UK) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS Finance (UK) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS Group Investments (UK) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS GTS Services Ltd FC FC 98 250 Bishopsgate, London, EC2M 4AA, England (5)
UK RBS Investments (UK) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS Lease Finance (UK) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS Life Holdings Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK STAR 1 Special Partner Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK The National Bank Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
FC DE 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Isle of Man Coutts & Co (Manx) Ltd FC FC 100 23/25 Broad Street, St Helier, JE4 8ND, Jersey For notes for this table refer to page 356
Hong Kong Atlas Nominees Ltd FC DE 100 7/F, Lincoln House, Taikoo Place, 979 King's Road, Quarry Bay
Jersey RBS Cards Securitisation Funding Ltd FC DE 100 Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
UK Adam & Company (Nominees) Ltd FC FC 100 25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK Blydenstein Nominees Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK British Overseas Bank Nominees Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK Dunfly Trustee Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK Freehold Managers (Nominees) Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK Glyns Nominees Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK HPUT A Ltd FC FC 100 250 Bishopsgate, London, EC2M 4RB, England
UK HPUT B Ltd FC FC 100 250 Bishopsgate, London, EC2M 4RB, England
UK JCB Finance Pension Ltd FC FC 88 11-16 Donegall Square East, Belfast, BT1 5UB, Northern Ireland
UK NatWest FIS Nominees Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK NatWest Invoice Finance Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK NatWest PEP Nominees Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK R.B.S. Property (Greenock) Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK RB Investments 5 Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBOS Nominees Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK RBS CIF Trustee Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK RBS Pension Trustee Ltd NC FC 100 1 Princes Street, London, EC2R 8PB, England
UK Sixty Seven Nominees Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK Strand Nominees Ltd FC FC 100 440 Strand, London, WC2R 0QS, England
UK Syndicate Nominees Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK TDS Nominee Company Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK The Royal Bank of Scotland (1727) Ltd FC FC 100 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
UK W.G.T.C.Nominees Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
UK Williams & Glyn Ltd FC FC 100 250 Bishopsgate, London, EC2M 4AA, England
Notes: (1) Country: UK – United Kingdom USA – United States of America RoI – Republic of Ireland
(5) Wholly-owned subsidiary of RFS Holdings B.V. which is 98% owned by the Group. (6) The Group is interested in 25% of the voting rights (7) The Group is interested in none of the voting rights (8) Related undertaking consolidated because the Group controls the company by virtue of contractual agreements (9) By contractual agreement the Group holds 50% of the voting rights. (10) Related undertaking not consolidated as it is not controlled by the Group. (11) Related undertaking owned for the benefit of Group pension schemes. (12) Related undertaking for the benefit of trust preferred security holders.
Service industries and business activities 19,965 20,047 9,120 49,132 53,018 51,257 50,621 52,253
(4) Net interest margin is net interest income of the banking business as a percentage of interest-earning assets (IEA) of the banking business. (5) For the purpose of calculating gross yields and interest spread, interest receivable and interest payable have both been decreased by £182 million (2016 - £76 million) in respect of negative interest relating to financial assets and financial liabilities that attracted negative interest. (6) The analysis into UK and overseas has been compiled on the basis of location of office.
Loans and advances to banks - UK 51,150 257 0.50 27,986 159 0.57
Total interest-earning assets - banking business (1,2,3,5) 422,337 10,852 2.57 399,598 11,182 2.80
Customer accounts: savings deposits - UK 65,506 358 0.55 62,097 425 0.68
Internal funding of trading business - UK (18,739) 8 (0.04) (15,302) (4) 0.03
Loan impairment provisions For details of the factors considered in determining the amount of provisions, refer to the accounting policy on page 254 and ‘Critical accounting policies and key sources of estimation uncertainty’ on page 260. The following table shows the movements in loan impairment provisions.
Customer losses/(releases) to income statement as a % of gross loans and advances to customers (2)
Amounts written-off (net of recoveries) - customers 0.3% 1.0% 2.3% 1.1% 0.8%
Notes: (1) Includes nil relating to loans and advances to banks (2016 - nil; 2015 - £4 million release; 2014 - £10 million release; 2013 - £15 million release). (2) Excludes reverse repos.
Note: (1) Includes nil written-off in respect of loans and advances to banks (2016 - nil; 2015 - £33 million; 2014 - £8 million).
Impaired loans are all loans (including loans subject to forbearance) for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans.
Accruing loans past due 90 days or more comprises loans past due 90 days where no impairment loss is expected.
Closing provisions for impairment as a % of total REIL 43% 43% 59% 65% 64%
Notes: (1) Wholesale loans subject to forbearance include only those arrangements above thresholds set individually by the segments, ranging from nil to £3 million. (2) For 2017, wholesale loans subject to forbearance were £1,206 million (2016 - £1,807 million; 2015 - £2,258 million) and secured retail loans subject to forbearance were £274 million (2016 - £450 million; 2015 - £1,502 million). Unsecured retail loans subject to forbearance amounting to £31 million (2016 - £37 million; 2015 - £96 million) are not included.
Short Net of short Government Banks Other Total positions positions £m £m £m £m £m £m
Certificates of deposit and other time deposits The following table shows certificates of deposit and other time deposits over $100,000 or equivalent by remaining maturity.
Short-term borrowings Short-term borrowings comprise repurchase agreements, borrowings from financial institutions, commercial paper and certificates of deposit. Derivative collateral received from financial institutions is excluded from the table, as are certain long-term borrowings.
At the year end During the year Weighted Weighted average Maximum Average average Balance interest rate balance balance interest rate 2017 £bn % £bn £bn %
Note: (1) Excludes derivative cash collateral of £23 billion at 31 December 2017 (2016 - £32 billion; 2015 - £30 billion); and 2017 average of £26 billion (2016 - 34 billion; 2015 - £36 billion).
Undrawn formal facilities, credit lines and other commitments to lend were £121,229 million (2016 - £134,324 million; 2015 - £132,198 million). While RBS has given commitments to provide these funds, some facilities may be subject to certain conditions being met by the counterparty. RBS does not expect all facilities to be drawn, and some may lapse before drawdown.
Material contracts The company and its subsidiaries are party to various contracts in the ordinary course of business. Material contracts include the following: B Share Acquisition and Contingent Capital Agreement On 26 November 2009, the company and HM Treasury entered into the Acquisition and Contingent Capital Agreement pursuant to which HM Treasury subscribed for the initial B shares and the Dividend Access Share (the Acquisitions) and agreed the terms of HM Treasury's contingent subscription (the Contingent Subscription) for an additional £8 billion in aggregate in the form of further B shares (the Contingent B shares), to be issued on the same terms as the initial B shares. The Acquisitions were subject to the satisfaction of various conditions, including the company having obtained the approval of its shareholders in relation to the Acquisitions.
For as long as it is a substantial shareholder of the company (within the meaning of the UKLA’s Listing Rules), HM Treasury has undertaken not to vote on related party transaction resolutions at general meetings and to direct that its affiliates do not so vote.
The Revised State Aid Commitment Deed provides that RBS will comply or procure compliance with certain measures and behavioural commitments. RBS agreed to do all acts and take all measures to ensure HM Treasury's compliance with its obligations under any EC decision approving State Aid to RBS, including under the Alternative Remedies Package.
The Revised State Aid Commitment Deed also provides that if the EC adopts a decision that the UK Government must recover any State Aid (a "Repayment Decision") and the recovery order of the Repayment Decision has not been annulled or suspended by the General Court or the European Court of Justice, then RBS must repay HM Treasury any aid ordered to be recovered under the Repayment Decision.
The Revised State Aid Commitment Deed also provides for RBS's undertakings in respect of State Aid to be modified in certain limited circumstances. However, HM Treasury has undertaken that it will not, without the consent of RBS, agree modifications to RBS's undertakings with respect to State Aid which are significantly more onerous to RBS than those granted in order to obtain the State Aid approval. Further details are provided in the Risk Factors.
In the context of the Alternative Remedies Package, RBS has also agreed to enter into separate indemnification arrangements with each of the Independent Body and HM Treasury, up to an amount of £320 million collectively to cover liabilities that may be incurred in implementing the Alternative Remedies Package.
State Aid Costs Reimbursement Deed Under the 2009 State Aid Costs Reimbursement Deed, RBS has agreed to reimburse HM Treasury for fees, costs and expenses associated with the State Aid and State Aid approval.
HMT and UKFI Relationship Deed On 7 November 2014, in order to comply with an amendment to the UK Listing Rules, the company entered into a Relationship Deed with HM Treasury and UK Financial Investments Limited in relation to the company’s obligations under the UK Listing Rules to put in place an agreement with any controlling shareholder (as defined for these purposes in the Listing Rules). The Relationship Deed covers the three independence provisions mandated by the Listing Rules: (i) that contracts between the company and HM Treasury (or any of its subsidiaries) will be arm's length and normal commercial arrangements, (ii) that neither HM Treasury nor any of its associates will take any action that would have the effect of preventing the company from complying with its obligations under the Listing Rules; and (iii) neither HM Treasury nor any of its associates will propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules.
Risk factors Set out below are certain risk factors that could adversely affect the Group’s future results, its financial condition and prospects and cause them to be materially different from what is expected. The factors discussed below and elsewhere in this report should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties facing the Group.
Global Restructuring Group As announced on 8 November 2016, the Group has taken steps, including automatic refunds of certain complex fees and a complaints process, overseen by an independent third party for small and medium entity (SME) customers in the UK and the Republic of Ireland that were in its Global Restructuring Group (GRG) between 2008 and 2013. This complaints review process and the automatic refund of complex fees was developed with the involvement of the Financial Conduct Authority (FCA). The Group booked a provision of £400 million in Q4 2016, based on its estimates of the costs associated with the complaints review process and the automatic refund of complex fees for SME customers in GRG. On 23 October 2017, the FCA published an interim report incorporating a summary of the Skilled Person’s report which stated that, further to the general investigation announced in November 2016, the FCA had decided to carry out a more focused investigation. The FCA published its final summary of the Skilled Person’s report on 28 November 2017. The UK House of Commons Treasury Select Committee, seeking to rely on Parliamentary powers, published the full version of the Skilled Person’s report on 20 February 2018. The FCA investigation is ongoing and fines or additional redress commitments may be accepted by or imposed upon the Group as a result of this or any subsequent investigation or enquiry, notwithstanding the steps the Group has already taken.
Payment protection insurance To date, the Group has booked provisions totaling £5.1 billion with respect to payment protection insurance (PPI), including an additional provision of £175 million in 2017. Of the £5.1 billion cumulative provision, £4.0 billion had been utilised by 31 December 2017. In August 2017, the FCA’s new rules and guidance on PPI complaints handling (Policy Statement (17/3)) came into force. The Policy Statement introduced new so called ‘Plevin’ rules, under which customers may be eligible for redress if the bank earned a high level of commission from the sale of PPI, but did not disclose this detail at the point of sale. The Policy Statement also introduced a two year PPI deadline, due to expire in August 2019, before which new PPI complaints must be made. RBS is implementing the Policy Statement. The number of claims received and the cost of the redress of such claims may materially exceed the Group’s estimates and may entail additional material provisions and reputational harm.
Settlements, resolutions and outcomes in relation to ongoing legal or regulatory actions may result in material financial fines or penalties, non-monetary penalties, restrictions upon or revocation of regulatory permissions and licences and other collateral consequences and may prejudice both contractual and legal rights otherwise available to the Group. The costs of resolving these legal and regulatory actions could individually or in aggregate prove to be substantial and monetary penalties and other outcomes could be materially in excess of provisions, if any, made by the Group. New provisions or increases in existing provisions relating to existing or future legal or regulatory actions may be substantial and may have a material adverse effect on the Group’s financial condition and results of operations as well as its reputation. The outcome of on-going claims against the Group may give rise to additional legal claims being asserted against the Group.
The Group has been, and will remain, in a period of major business transformation and structural change through to at least 2019 as it implements its own transformation programme and seeks to comply with UK ring-fencing and recovery and resolution requirements as well as the Alternative Remedies Package. Additional structural changes to the Group’s operations will also be required as a result of Brexit. These various transformation and restructuring activities are required to occur concurrently, which carries significant execution and operational risks, and the Group may not be a viable, competitive and profitable bank as a result. Since early 2015, the Group has been implementing a major restructuring and transformation programme, articulated around a strategy focused on the growth of its strategic operations in Personal & Business Banking (PBB) and Commercial & Private Banking (CPB) and the further restructuring of the NatWest Markets franchise, to focus mainly on UK and Western European corporate and financial institutions.
This transformation programme including the restructuring of its NatWest Markets franchise, is being completed at the same time as the Group is going through a period of very significant structural reform to implement the requirements of the UK ringfencing regime and the requirements of the bank recovery and resolution framework. Alongside changes to help make the Group resolvable (specifically, regulatory requirements to ensure operational continuity in resolution), ring-fencing also requires significant changes in how services are delivered between legal entities within the Group. It is complex and entails significant costs and operational, legal and execution risks.
See ‘Implementation of the ring-fencing regime in the UK which began in 2015 and must be completed before 1 January 2019 will result in material structural changes to the Group’s business. The steps required to implement the UK ring-fencing regime are complex and entail significant costs and operational, legal and execution risks, which risks may be exacerbated by the Group’s other ongoing restructuring efforts.’ The Group is concurrently seeking to implement the Alternative Remedies Package. See ‘The cost of implementing the Alternative Remedies Package regarding the business previously described as Williams & Glyn could be more onerous than anticipated and any failure to comply with the terms of the Alternative Remedies Package could result in the imposition of additional measures or limitations on the Group’s operations.’
One proposal made by the European Commission would impose a requirement for any bank established outside the EU which has an asset base within the EU exceeding a certain size and has two or more institutions within the EU, to establish a single intermediate parent undertaking (‘IPU’) in the European Union, under which all EU entities within that group will operate. The Group is currently taking steps to plan for how these proposals, if adopted as currently proposed, may impact the Group and its current plans to implement the UK ring-fencing regime (which will come into force on 1 January 2019 ahead of any IPU being required). The impact of these proposals could be material given the expectation that banking entities both inside the ring-fence and outside of it would continue to carry out operations in the EU. This could result in organisational complexity, could require material additional capital requirements and could have adverse tax implications.
The scale and scope of the changes currently being implemented present material operational, people and financial risks to the Group.
There can be no certainty that the Group will be able to successfully complete its transformation programme and programmes for mandatory structural reform nor that the restructured Group will be a viable, competitive or profitable banking business.
The successful implementation of the Group’s transformation programme and the Group’s ability to meet associated targets and expectations, are subject to various internal and external factors and risks, including those described in this risk factor, the other risk factors included in this section and the disclosure included in the rest of this document.
These include, but are not limited to, market, regulatory, economic and political uncertainties, developments relating to litigation, governmental actions and investigations and regulatory matters, operational risks, risks relating to the Group’s business model and strategy and delays or difficulties in implementing its transformation programme, including the restructuring and funding of its NatWest Markets franchise, the implementation of the UK ring-fencing regime, and compliance with the Group’s Alternative Remedies Package obligations. A number of factors may impact the Group’s ability to maintain its current CET1 ratio target at 13% throughout the restructuring period, including conduct related costs, pension or legacy charges, accounting impairments, including as a result of the implementation of IFRS 9, or limited organic capital generation through profits. In addition, the run-down of risk-weighted assets may be accompanied by the recognition of disposal losses which may be higher than anticipated, including due to a degraded economic environment.
In addition, the plans to deliver a UK ring-fencing compliant structure across franchises and functions may impact the Group’s concurrent transformation programme, which could result in delays to the transformation programme portfolio deliveries which in turn could result in delayed benefits therefrom. See ‘The Group has been, and will remain, in a period of major business transformation and structural change through to at least 2019 as it implements its own transformation programme and seeks to comply with UK ring-fencing and recovery and resolution requirements as well as the Alternative Remedies Package. Additional structural changes to the Group’s operations will also be required as a result of Brexit. These various transformation and restructuring activities are required to occur concurrently, which carries significant execution and operational risks, and the Group may not be a viable, competitive and profitable bank as a result.’
Risk factors continued As a result, there can be no certainty that the implementation of the Group’s transformation programme will prove to be a successful strategy, that the Group will meet its targets and expectations during the restructuring period or that the restructured Group will be a viable, competitive or profitable banking business.
As a result of the implementation of the changes described above, there will be a material impact on how the Group conducts its business and will require a significant legal and organisational restructuring of the Group and the transfer of large numbers of assets, liabilities, obligations, customers and employees between legal entities and the realignment of employees within the Group.
 As part of the establishment of the RFB, the RFB will need to operate independently from the other Group entities outside the RFB and as a result, amendments will need to be made to the Group’s existing corporate governance structure to ensure the RFB is independent from the other Group entities outside the RFB. This new structure, which will also require the approval of the PRA, may result in divergences between the various governance bodies within the Group and create operational challenges.
 In order to comply with the requirements of the UK ringfencing regime, the Group will need to revise its operations infrastructure so as to comply with the shared services, independence and resolvability requirements set out in the UK ring-fencing legislation and rules, including in areas such as information technology (IT) infrastructure, human resources and critical service providers which may involve associated execution risk and may result in increased costs. Arrangements between the RFB and other Group entities outside the RFB will also need to be reviewed in light of these requirements and the requirement that all such transactions take place on an arm’s-length basis. Any duplication of certain infrastructure or functions between the RFB and other Group entities outside the RFB that are required to comply with the UK ring-fencing legislation and rules and dis-synergies resulting therefrom may in turn result in additional costs and/or changes to the Group’s business and operations
 The restructuring and planned transfers may also result in accounting consequences for the Group. Although a number of transfers will be made at book value between fully owned Group entities, certain transfers will be made at fair value which may result in a profit or loss being recognised by Group entities. In addition, transfers of assets that have related hedging arrangements may result in adverse operational, financial or accounting consequences if the transfer is not consistent with the unaffected continuation of such hedging arrangements.
The steps required to implement the UK ring-fencing regime within the Group to comply with the relevant rules and regulations are complex and require an extended period of time to plan, execute and implement and entail significant costs and operational, legal and execution risks, which risks may be exacerbated by the Group’s other ongoing restructuring efforts. External or internal factors including new and developing legal requirements relating to the regulatory framework for the banking industry and the evolving regulatory and economic landscape resulting from Brexit, as well as further political developments or changes to the Group’s current strategy, may require the Group to further restructure its operations (including certain operations in the UK and Western Europe) and may in turn require further changes to be made to the Group’s ring-fencing plans (including the planned structure of the Group post implementation).
Conducting the Group’s operations in accordance with the new rules may result in additional costs (transitional and recurring) following implementation and impact the Group’s profitability. As a result, the implementation of the UK ring-fencing regime could have a material adverse effect on the Group’s reputation, results of operations, financial condition and prospects.
The vulnerabilities of the Group’s IT systems are in part due to their complexity, which is attributable to overlapping multiple dated systems that result from the Group’s historical acquisitions and insufficient investment prior to 2013 to keep the IT applications and infrastructure up-to-date. Within a complex IT estate, the risk of disruption due to end-of-life hardware and software may create challenges in recovering from system breakdowns. In 2017, the Group made progress to remediate or replace out of date systems, reducing the overall risk of disruption. However, some risk remains, and will require continued focus and investment on an on-going basis to limit any IT failures which may adversely affect the Group’s relationship with its customers and its reputation, and which may also lead to regulatory investigations and redress.
The Group is exposed to cyberattacks and a failure to prevent or defend against such attacks and provide, as appropriate, notification of them, could have a material adverse effect on the Group’s operations, results of operations or reputation. The Group is subject to regular cybersecurity attacks and related threats, which have targeted financial institutions, corporates, governments and other institutions across all industries. The Group is increasingly reliant on technology which is vulnerable to attacks, and these attacks continue to increase in frequency, sophistication and severity and could have a material adverse effect on the Group’s operations, customers and reputation. The Group relies on the effectiveness of its internal policies, controls, procedures and capabilities to protect the confidentiality, integrity and availability of information held on its computer systems, networks and devices, and also on the computer systems, networks and devices of third parties with whom the Group interacts.
Failure to protect the Group’s operations from cyberattacks or to continuously review and update current processes and controls in response to new or existing threats could result in the loss of customer data or other sensitive information as well as instances of denial of service for the Group’s customers and staff. The Group’s systems, and those of third parties suppliers, are often subject to cyberattacks which have to date been immaterial to the Group’s operations. In 2017, the Group experienced 11 distributed denial of service (DDOS) attacks against customerfacing websites, one of which caused minimal customer impacts for a short period of time. This represents a decrease from 26 attacks against the Group in 2016, but a recent surge of activity in the fourth quarter of 2017 points towards an increasing trend of such attacks into 2018. The Group’s DDOS mitigation controls have recently been strengthened and will continue to be strengthened further in 2018. However, there can be no assurance that those and the Group’s other strategies to defend against cyberattacks, including future DDOS attacks, will be successful and avoid the potential adverse effects of cyberattacks on the Group.
The Group is subject to political risks, including economic, regulatory and political uncertainty arising from the referendum on the UK’s membership of the European Union which could adversely impact the Group’s business, results of operations, financial condition and prospects. In a referendum held in the UK on 23 June 2016 (the ‘EU Referendum’), a majority voted for the UK to leave the European Union (‘EU’). On 29 March 2017 the UK Government triggered the exit process contemplated under Article 50 of the Treaty on European Union. This provides for a maximum two year period of negotiation to determine the terms of Brexit and set the framework for the UK’s new relationship with the EU. After this period its EU membership and all associated treaties will cease to apply, unless some form of transitional agreement encompassing those associated treaties is agreed or there is unanimous agreement by the European Council with the UK to extend the negotiation period defined under Article 50. There is no certainty that negotiations relating to the terms of the UK’s relationship with the EU will be completed within the two-year period designated by Article 50. Such negotiations may well extend beyond 29 March 2019, into any transitional period, the terms and duration of which are currently uncertain. Furthermore, the government has introduced the European Union (Withdrawal) Bill (the ‘Withdrawal Bill’) to the UK Parliament, which aims to repeal the European Communities Act of 1972 and to transpose EU law relevant to the UK into national law upon the UK’s exit from the EU. However, the precise terms of the Withdrawal Bill, if enacted by the UK Parliament, are uncertain and it remains unclear how the Withdrawal Bill will impact the legal and regulatory landscape in the UK after it becomes effective. In addition, it is possible (although of low likelihood) that a disorderly termination of the Article 50 process could occur, resulting in the UK leaving the EU before 29 March 2019. The consequences of such an early termination of the Article 50 process are uncertain and adverse impacts could crystallise rapidly should this occur.
This prevailing uncertainty relates to the timing of Brexit, as well as to the negotiation and form of the UK’s relationships with the EU, with other multilateral organisations and with individual countries at the time of exit and beyond. The timing of, and process for, such negotiations and the resulting terms of the UK’s future economic, trading and legal relationships with both the EU and other counterparties could impact the Group’s financial condition, results of operations and prospects. The direct and indirect effects of Brexit are expected to affect many aspects of the Group’s business and operating environment, including as described elsewhere in these risk factors, and may be material.
Risk factors continued There is related uncertainty as to the respective legal and regulatory arrangements under which the Group and its subsidiaries will operate when the UK is no longer a member of the EU. The Group and its counterparties may no longer be able to rely on the EU passporting framework for financial services and could be required to apply for authorisation in multiple jurisdictions in the EU. The cost and timing of that authorisation process is uncertain. The Group has already announced plans to re-purpose its Dutch banking subsidiary, RBS N.V., to conduct the NatWest Market franchise’s European business and further changes to the Group’s business operations may be required. The Group is also monitoring proposed amendments to the prudential framework for non-EU banks operating within in the EU.
In addition to the political risks described above, the Group remains exposed to risks arising out of geopolitical events, such as the imposition of trade barriers, the implementation of exchange controls and other measures taken by sovereign governments that can hinder economic or financial activity levels. Furthermore, unfavourable domestic or international political, military or diplomatic events, armed conflict, pandemics and terrorist acts and threats, and the response to them by the UK and other governments could also adversely affect levels of economic activity and have an adverse effect upon the Group’s business, financial condition and results of operations.
The Group is subject to pension risks and will be required to make additional contributions as a result of the restructuring of its pension schemes in relation to the implementation of the UK ring-fencing regime. In addition, the Group expects to make additional contributions to cover pension funding deficits if there are degraded economic conditions or if there is any devaluation in the asset portfolio held by the pension trustee. The Group maintains a number of defined benefit pension schemes for certain former and current employees. The UK ringfencing regime will require significant changes to the structure of the Group’s existing defined benefit pension schemes because, from 2026 it will not be possible for Group entities outside the RFB to participate in the same defined benefit pension scheme as RFB entities or their wholly-owned subsidiaries. As a result, RFB cannot be liable for debts to pension schemes that might arise as a result of the failure of an entity that is not a RFB entity or wholly owned subsidiary thereof after 1 January 2026. The restructuring of the Group and its defined benefit pension scheme to implement the UK ring-fencing regime could also affect assessments of the Group’s pension scheme deficits or result in the pension scheme trustees considering that the employer covenant has been weakened and result in further additional material contributions being required.
The Group is developing a strategy to meet these requirements. This will require the agreement of the pension scheme trustee. The Group’s intention is for the Main scheme to be supported by the RFB. Discussions with the pension scheme trustee are ongoing and will be influenced by the Group’s overall ring-fence strategy and its pension funding and investment strategies.
Pension risk also includes the risk that the assets of the Group’s various defined benefit pension schemes do not fully match the timing and amount of the schemes’ liabilities, as a result of which the Group is required or chooses to make additional contributions to address deficits that may emerge.
The value of pension scheme liabilities varies with changes to long-term interest rates (including prolonged periods of low interest rates as is currently the case), inflation, monetary policy, pensionable salaries and the longevity of scheme members, as well as changes in applicable legislation.
In addition, as the Group expects to continue to materially reduce the scope of its operations as part of the implementation of its transformation programme and of the UK ring-fencing regime, pension liabilities will therefore increase relative to the size of the Group, which may impact the Group’s results of operations and capital position.
Given economic and financial market difficulties and volatility, the low interest rate environment and the risk that such conditions may occur again over the near and medium term, some of the Group’s pension schemes have experienced increased pension deficits.
The Group believes that the accelerated payment to the Group’s Main scheme pension fund made in the first quarter of 2016 improved the Group’s capital planning and resilience through the period to 2019 and provided the Main scheme pension trustee with more flexibility over its investment strategy.This payment has resulted in a reduction in prevailing Pillar 2A add-on. However, subsequent contributions required in connection with the 2018 triennial valuation, or otherwise, may adversely impact the Group’s capital position.
As the Group is unable to recognise any accounting surplus due to constraints under IFRIC14, any contributions made which increase the accounting surplus, or contributions committed to which would increase the accounting surplus when paid, would have a corresponding negative impact on the Group’s capital position.
As a result, if any of these assumptions prove inaccurate, or if the Group does not hold adequate capital in its management buffer to cover market risk in the pension fund in a stressed scenario, the Group’s capital position may significantly deteriorate and fall below the minimum capital requirements applicable to the Group or Group entities, and in turn result in increased regulatory supervision or sanctions, restrictions on discretionary distributions or loss of investor confidence, which could individually or in aggregate have a material adverse effect on the Group’s results of operations, financial prospects or reputation.
If the Group is unable to offer competitive, attractive and innovative products that are also profitable, it will lose market share, incur losses on some or all of its activities and lose opportunities for growth.
For example, companies in the financial services industry are increasingly using artificial intelligence and/or automated processes to enhance their output and performance. As part of this broader trend, the Group is in the early stages of automating certain of its solutions and interactions within its customer-facing businesses. Such developments may result in unintended consequences or conduct risk for the Group if such new processes, including the algorithms used, are not carefully tested and integrated into the Group’s current solutions. In addition to such reputational risks, the development of automated solutions will require investment in technology and will likely result in increased costs for the Group.
Intensified competition from incumbents, challengers and new entrants in the Group’s core markets could lead to greater pressure on the Group to maintain returns and may lead to unsustainable growth decisions. These and other changes in the Group’s competitive environment could have a material adverse effect on the Group’s business, margins, profitability, financial condition and prospects.
Risk factors continued  failure to attract, retain or engage staff;  insufficient resources to deliver change and business-asusual activity;  decreasing employee engagement or failure by the Group to embed new ways of working and values; or  incomplete, inaccurate or untimely statutory, regulatory or management reporting. Operational risks are and will continue to be heightened as a result of the number of initiatives being concurrently implemented by the Group, in particular the implementation of its transformation programme, including its cost-reduction programme, the implementation of the UK ring-fencing regime and implementation of the Alternative Remedies Package. Individually, these initiatives carry significant execution and delivery risk and such risks are heightened as their implementation is often highly correlated and dependent on the successful implementation of interdependent initiatives. These initiatives are being delivered against the backdrop of ongoing cost challenges and increasing legal and regulatory uncertainty and will put significant pressure on the Group’s ability to maintain effective internal controls and governance frameworks. Although the Group has implemented risk controls and loss mitigation actions and significant resources and planning have been devoted to mitigate operational risk, it is not possible to be certain that such actions have been or will be effective in controlling each of the operational risks faced by the Group. Ineffective management of such risks could have a material adverse effect on the Group’s business, financial condition and results of operations.
The Group’s business performance and financial position could be adversely affected if its capital is not managed effectively or if it is unable to meet its prudential regulatory requirements, or if it is deemed prudent to increase the amount of any management buffer that it requires. Effective management of the Group’s capital is critical to its ability to operate its businesses, comply with its regulatory obligations, pursue its transformation programme and current strategies, resume dividend payments on its ordinary shares, maintain discretionary payments and pursue its strategic opportunities. The Group is required by regulators in the UK, the EU and other jurisdictions in which it undertakes regulated activities to maintain adequate capital resources. Adequate capital also gives the Group financial flexibility in the face of continuing turbulence and uncertainty in the global economy and specifically in its core UK and European markets.
The Group currently targets a CET1 ratio at or above 13% throughout the period until completion of its restructuring. On a fully loaded basis, the Group’s CET1 ratio was 15.9% at 31 December 2017, compared with 13.4% at 31 December 2016.
If, in response to such shortage, certain regulatory capital instruments are converted into equity or the Group raises additional capital through the issuance of share capital or regulatory capital instruments, existing shareholders may experience a dilution of their holdings. The success of such issuances will also be dependent on favourable market conditions and the Group may not be able to raise the amount of capital required or on satisfactory terms. Separately, the Group may address a shortage of capital by taking action to reduce leverage and/or risk-weighted assets, by modifying the Group’s legal entity structure or by asset or business disposals. Such actions may affect the underlying profitability of the Group.
The market view of bank credit risk has changed radically as a result of the financial crisis and banks perceived by the market to be riskier have had to issue debt at significantly higher costs. Although conditions have improved, there have been recent periods where corporate and financial institution counterparties have reduced their credit exposures to banks and other financial institutions, limiting the availability of these sources of funding. Rules currently proposed by the Financial Stability Board (‘FSB’) and in the EU in relation to the implementation of total lossabsorbing capacity (‘TLAC’) and MREL may also limit the ability of certain large financial institutions to hold debt instruments issued by other large financial institutions. The ability of the Bank of England to resolve the Group in an orderly manner may also increase investors’ perception of risk and hence affect the availability and cost of funding for the Group. Any uncertainty relating to the credit risk of financial institutions may lead to reductions in levels of interbank lending or may restrict the Group’s access to traditional sources of funding or increase the costs or collateral requirements for accessing such funding.
The implementation of the UK ring-fencing regime may impact the Group’s funding strategy and the cost of funding may increase for certain Group entities which will be required to manage their own funding and liquidity strategy, in particular those entities outside the ring-fence which will no longer be able to rely on retail deposit funding.
In addition, the Group is subject to certain regulatory requirements with respect to liquidity coverage, including a liquidity coverage ratio set by the PRA in the UK. This requirement was phased in at 90% from 1 January 2017 and increased to 100% in January 2018 (as required by the Capital Requirements Regulation). The PRA may also impose additional liquidity requirements to reflect risks not captured in the leverage coverage ratio by way of Pillar 2 add-ons, which may increase and/or decrease from time to time and require the Group to obtain additional funding or diversify its sources of funding. Current proposals by the FSB and the European Commission also seek to introduce certain liquidity requirements for financial institutions, including the introduction of a net stable funding ratio (‘NSFR’).
Risk factors continued Under the European Commission November 2016 proposals, the NSFR would be calculated as the ratio of an institution’s available stable funding relative to the required stable funding it needs over a one-year horizon.
Under CRD IV, the Group is required to hold at all times a minimum amount of regulatory capital calculated as a percentage of risk-weighted assets (Pillar 1 requirement).
CRD IV also introduced a number of new capital buffers that are in addition to the Pillar 1 and Pillar 2A requirements (as described below) that must be met with CET1 capital. The combination of the capital conservation buffer (which, subject to transitional provisions, will be set at 2.5% from 2019), the countercyclical capital buffer (of up to 2.5% which is currently set at 1.0%, with binding effect from 28 November 2018 by the FPC for UK banks) and the higher of (depending on the institution) the systemic risk buffer, the global systemically important institutions buffer (G-SIB Buffer) and the other systemically important institutions buffer, is referred to as the ‘combined buffer requirement’. These rules entered into force on 1 May 2014 for the countercyclical capital buffer and on 1 January 2016 for the capital conservation buffer and the G-SIB Buffer.
In addition, national supervisory authorities may add extra capital requirements (the Pillar 2A requirements) to cover risks that they believe are not covered or insufficiently covered by Pillar 1 requirements. The Group’s current Pillar 2A requirement has been set by the PRA at an equivalent of 4.0% of risk-weighted assets.
In addition to capital requirements and buffers, the regulatory framework adopted under CRD IV, as transposed in the UK, sets out minimum leverage ratio requirements for financial institutions.
Risk factors continued These include a minimum leverage requirement of 3.25% which applies to major UK banks, as recalibrated in October 2017 in accordance with the FPC’s recommendation to the PRA. In addition, the UK leverage ratio framework provides for: (i) an additional leverage ratio to be met by G-SIBs and ring-fenced institutions to be calibrated at 35% of the relevant firm’s capital G-SIB Buffer or systemic risk buffer and which is being phased in from 2016 (currently set at 0.75% from 1 January 2018) and (ii) a countercyclical leverage ratio buffer for all firms subject to the minimum leverage ratio requirements which is calibrated at 35% of a firm’s countercyclical capital buffer. Further changes may be made to the current leverage ratio framework as a result of future regulatory reforms, including FSB proposals and proposed amendments to the CRD IV proposed by the European Commission in November 2016.
On 7 December 2017, the Basel Committee on Banking Supervision published revised standards intended to finalise the Basel III post-crisis regulatory reforms. The revised standards include the following elements: (i) a revised standardised approach for credit risk, which will improve the robustness and risk sensitivity of the existing approach; (ii) revisions to the internal ratings-based approach for credit risk, where the use of the most advanced internally modelled approaches for lowdefault portfolios will be limited; (iii) revisions to the credit valuation adjustment (CVA) framework, including the removal of the internally modelled approach and the introduction of a revised standardised approach; (iv) a revised standardised approach for operational risk, which will replace the existing standardised approaches and the advanced measurement approaches; (v) revisions to the measurement of the leverage ratio and a leverage ratio buffer for global systemically important banks (GSIBs ), which will take the form of a Tier 1 capital buffer set at 50% of a G-SIB’s risk-weighted capital buffer; and (vi) an aggregate output floor, which will ensure that banks' riskweighted assets (RWAs) generated by internal models are no lower than 72.5% of RWAs as calculated by the Basel III framework’s standardised approaches.
In the UK, the PRA also set revised expectations to the calculation of risk-weighted capital requirements in relation to residential mortgage portfolios which firms are expected to meet by the end of 2020. To this effect, firms should also submit amended models for regulatory approval.
Although the above provides an overview of the capital and leverage requirements currently applicable to the Group, such requirements are subject to ongoing amendments and revisions, including as a result of final rules and recommendations adopted by the FSB or by European or UK regulators. In particular, on 23 November 2016, the European Commission published a comprehensive package of reforms including proposed amendments to CRD IV and the EU Bank Recovery and Resolution Directive ‘BRRD’. Although such proposals are currently being considered and discussed among the European Commission, the European Parliament and the European Council and their final form and the timetable for their implementation are not known, such amendments may result in increased or more stringent requirements applying to the Group or its subsidiaries. This uncertainty is compounded by Brexit which may result in further changes to the prudential and regulatory framework applicable to the Group.
If the Group is unable to raise the requisite amount of regulatory capital (including loss absorbing capital in the form of MREL), or to otherwise meet regulatory capital and leverage requirements, it may be exposed to increased regulatory supervision or sanctions, loss of investor confidence, restrictions on distributions and it may be required to reduce further the amount of its riskweighted assets or total assets and engage in the disposal of core and other non-core businesses, which may not occur on a timely basis or achieve prices which would otherwise be attractive to the Group.
Risk factors continued Pursuant to Article 141 (Restrictions on distribution) of the CRD IV Directive, as transposed in the UK, institutions that fail to meet the ‘combined buffer requirement’ will be subject to restricted ‘discretionary payments’ (which are defined broadly by CRD IV as payments relating to CET1 instruments (dividends), variable remuneration and coupon payments on additional Tier 1 instruments). The resulting restrictions are scaled according to the extent of the breach of the ‘combined buffer requirement’ and calculated as a percentage of the profits of the institution since the last distribution of profits or ‘discretionary payment’ which gives rise to a maximum distributable amount (MDA) (if any) that the financial institution can distribute through discretionary payments.
The EBA has clarified that the CET1 capital to be taken into account for the MDA calculation should be limited to the amount not used to meet the Pillar 1 and Pillar 2 own funds requirements of the institution. In the event of a breach of the combined buffer requirement, the Group will be required to calculate its MDA, and as a consequence it may be necessary for the Group to reduce or cease discretionary payments to the extent of the breach.
The ability of the Group to meet the combined buffer requirement will be subject to the Group holding sufficient CET1 capital in excess of its minimum Pillar 1 and Pillar 2 capital requirements. In addition, the interaction of such restrictions on distributions with the capital requirements and buffers applicable to the Group remains uncertain in many respects while the relevant authorities in the EU and the UK consult on and develop their proposals and guidance on the application of the rules. In particular, the proposals published by the European Commission in November 2016 contain certain proposed amendments to Article 141, including to introduce a ‘stacking order’ in the calculation of the maximum distributable amount and establish certain priorities in the payments which could be made in the event the restrictions apply (with payments relating to additional Tier 1 instruments being required to be made before payments on CET1 instruments (dividends) or other discretionary payments). The treatment of MDA breaches under the European Commission proposals differ from the proposed consequences set out in the final PRA rules and may result in uncertainty in the application of these rules.
In addition to these rules and the requirement for PRA approval, in order to make distributions (including dividend payments) in the first place, RBSG is required to have sufficient distributable reserves available. Furthermore, coupon payments due on the additional Tier 1 instruments issued by RBSG must be cancelled in the event that RBSG has insufficient ‘distributable items’ as defined under CRD IV. Both distributable reserves and distributable items are largely impacted by the Group’s ability to generate and accumulate profits or conversely by material losses (including losses resulting from conduct related-costs, restructuring costs or impairments).
An independent body (‘Independent Body’) is in the process of being established to administer the Alternative Remedies Package. However, the implementation of the Alternative Remedies Package also entails additional costs for the Group, including but not limited to the funding commitments and financial incentives envisaged to be provided under the plan. Implementation of the Alternative Remedies Package could also divert resources from the Group’s operations and jeopardise the delivery and implementation of other significant plans and initiatives. In addition, under the terms of the Alternative Remedies Package, the Independent Body can require the Group to modify certain aspects of the Group’s execution of the incentivised switching scheme, which could increase the cost of implementation. Furthermore, should the uptake within the incentivised switching scheme not be sufficient, the Independent Body can extend the duration of the scheme by up to twelve months and can compel the Group to extend the customer base to which the scheme applies which may result in prolonged periods of disruption to a wider portion of the Group’s business.
In November 2015, the FSB published a final term sheet setting out its TLAC standards for G-SIBs. The EBA was mandated to assess the implementation of MREL in the EU and the consistency of MREL with the final TLAC standards and published an interim report setting out the conclusions of its review in July 2016 and its final report in December 2016. On the basis of the EBA’s work and its own assessment of CRD IV and the BRRD, the European Commission published in November 2016 a comprehensive set of proposals, seeking to make certain amendments to the existing MREL framework. In particular, the proposals make a number of amendments to the MREL requirements under the BRRD, in part in order to transpose the FSB’s final TLAC term sheet.
The UK government is required to transpose the BRRD’s provisions relating to MREL into law through further secondary legislation. In November 2016, the Bank of England published its final rules setting out its approach to setting MREL for UK banks. These final rules (which were adopted on the basis of the current MREL framework in force in the EU) do not take into account the European Commission’s most recent proposals with respect to MREL and differ in a number of respects. In addition, rules relating to a number of specific issues under the framework remain to be implemented. These include internal MREL requirements, in respect of which the FSB published guiding principles in July 2017. The Bank of England published a consultation paper in October 2017 but has not yet published a final statement of policy on its approach to setting internal MREL. The Bank of England has also stated that it expects to set out policy proposals for MREL cross-holdings and disclosure requirements once there is greater clarity as to the timing and final content of related EU proposals.
The final rules set out a number of liabilities which cannot qualify as MREL and are therefore ‘excluded liabilities’. As a result, senior unsecured issuances by RBSG will need to be subordinated to the excluded liabilities described above. The proceeds from such issuances will be transferred to material operating subsidiaries (as identified using criteria set in the Bank of England’s final rules on internal MREL) in the form of capital or another form of subordinated claim.
The TLAC standard requires that the total amount of excluded liabilities on RBSG’s balance sheet does not exceed 5% of its external TLAC (i.e. the eligible liabilities RBSG has issued to investors which meet the TLAC requirements) and the Bank of England has adopted this criterion in its final rules.
If the Group were to fail to comply with this ‘clean balance sheet’ requirement, it could disqualify otherwise eligible liabilities from counting towards MREL and result in the Group breaching its MREL requirements. The purpose of internal MREL requirements is to provide for loss-absorbing capacity to be appropriately distributed within a banking group and to provide the mechanism by which losses can be transferred from operating companies to the resolution entity.
Compliance with these and other future changes to capital adequacy and loss-absorbency requirements in the EU and the UK by the relevant deadline will require the Group to restructure its balance sheet and issue additional capital and other instruments compliant with the rules which may be costly whilst certain existing Tier 1 and Tier 2 securities and other senior, unsecured instruments issued by the Group will cease to count towards the Group’s loss-absorbing capacity for the purposes of meeting MREL/TLAC requirements. The Group’s resolution authority can impose an MREL requirement over and above the regulatory minima and potentially higher than the Group’s peers, if it has concerns regarding the resolvability of the Group. As a result, RBSG may be required to issue additional loss-absorbing instruments in the form of CET1 capital or subordinated or senior unsecured debt instruments or may result in an increased risk of a breach of the Group’s combined buffer requirement, triggering the restrictions relating to the MDA described above. There remain some areas of uncertainty regarding the implementation of outstanding regulatory requirements within the UK, the EU and globally, and the final requirements to which the Group will be subject, and the Group may therefore need to revise its capital plan accordingly.
As part of its revised strategy, the Group has been refocusing its business in the UK, the ROI and Western Europe and, accordingly is more exposed to the economic conditions of the British economy as well as the Eurozone. In particular, the longer term effects of Brexit are difficult to predict and are subject to wider global macro-economic trends, but may include periods of financial market volatility and slower economic growth, in the UK in particular, but also in the ROI, Europe and the global economy, at least in the short to medium term. See ‘The Group is subject to political risks, including economic, regulatory and political uncertainty arising from the referendum on the UK’s membership of the European Union which could adversely impact the Group’s business, results of operations, financial condition and prospects.’ and ‘The Group has been, and will remain, in a period of major business transformation and structural change through to at least 2019 as it implements its own transformation programme and seeks to comply with UK ring-fencing and recovery and resolution requirements as well as the Alternative Remedies Package. Additional structural changes to the Group’s operations will also be required as a result of Brexit. These various transformation and restructuring activities are required to occur concurrently, which carries significant execution and operational risks, and the Group may not be a viable, competitive and profitable bank as a result.’
In addition, the Group is exposed to risks arising out of geopolitical events or political developments, such as trade barriers, exchange controls, sanctions and other measures taken by sovereign governments that can hinder economic or financial activity levels. Furthermore, unfavourable political, military or diplomatic events, including secession movements or the exit of other Member States from the EU, armed conflict, pandemics, state and privately sponsored cyber and terrorist acts or threats, and the responses to them by governments, could also adversely affect economic activity and have an adverse effect upon the Group’s business, financial condition and results of operations.
In particular, the Group has significant exposure to certain individual customers and other counterparties in weaker business sectors and geographic markets and also has concentrated country exposure in the UK, the US and across the rest of Europe principally Germany, the Netherlands, Ireland and France.
At 31 December 2017, current exposure in the UK was £363.0 billion, in the US was £18.4 billion and in Western Europe (excluding the UK) was £60.0 billion); and within certain business sectors, namely personal and financial institutions (at 31 December 2016, personal lending amounted to £176.6 billion, and lending to banks and other financial institutions was £37.8 billion.
Risk factors continued The Group’s lending strategy or processes may also fail to identify or anticipate weaknesses or risks in a particular sector, market or borrower category, which may result in an increase in default rates, which may, in turn, impact the Group’s profitability. Any adverse impact on the credit quality of the Group’s customers and other counterparties, coupled with a decline in collateral values, could lead to a reduction in recoverability and value of the Group’s assets and higher levels of impairment allowances, which could have an adverse effect on the Group’s operations, financial position or prospects.
The credit quality of the Group’s borrowers and its other counterparties is impacted by prevailing economic and market conditions and by the legal and regulatory landscape in their respective markets.
Credit quality has improved in certain of the Group’s core markets, in particular the UK and Ireland, as these economies have improved. However, a further deterioration in economic and market conditions or changes to legal or regulatory landscapes could worsen borrower and counterparty credit quality and also impact the Group’s ability to enforce contractual security rights. In particular, developments relating to Brexit may adversely impact credit quality in the UK.
In particular, in the UK, the Group is at risk from downturns in the UK economy and volatility in property prices in both the residential and commercial sectors. With UK home loans representing the most significant portion of the Group’s total loans and advances to the retail sector, the Group has a large exposure to adverse developments in the UK residential property sector. In the UK commercial real estate market, activity has improved against 2016 but may be short-lived given continued political uncertainty and progress of negotiations relating to the form and timing of Brexit. There is a risk of further adjustment given the reliance of the UK commercial real estate market in recent years on inflows of foreign capital and, in some segments, stretched property valuations. As a result, the continued house price weakness, particularly in London and the South East of the UK, would be likely to lead to higher impairment and negative capital impact as loss given default rate increases. In addition, reduced affordability of residential and commercial property in the UK, for example, as a result of higher interest rates, inflation or increased unemployment, could also lead to higher impairments on loans held by the Group being recognised.
The Group also remains exposed to certain counterparties operating in certain industries which have been under pressure in recent years and any further deterioration in the outlook the credit quality of these counterparties may require the Group to make additional provisions, which in turn would reduce earnings and impact the Group’s profitability.
Concerns about, or a default by, one financial institution could lead to significant liquidity problems and losses or defaults by other financial institutions, as the commercial and financial soundness of many financial institutions may be closely related as a result of credit, trading, clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses for, or defaults by, the Group. This systemic risk may also adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which the Group interacts on a daily basis.
The Group’s borrowing costs, its access to the debt capital markets and its liquidity depend significantly on its credit ratings and, to a lesser extent, on the UK sovereign ratings. The credit ratings of RBSG, RBS plc and other Group members directly affect the cost of funding and capital instruments issued by the Group, as well as secondary market liquidity in those instruments. The implementation of ring-fencing is expected to change the funding strategy of the Group as a result of the RFB and the entities outside of the RFB raising debt capital directly. A number of UK and other European financial institutions, including RBSG, RBS plc and other Group entities, have been downgraded multiple times in recent years in connection with rating methodology changes and credit rating agencies’ revised outlook relating to regulatory developments, macroeconomic trends and a financial institution’s capital position and financial prospects.
A challenging macroeconomic environment, a delayed return to satisfactory profitability and greater market uncertainty could negatively impact the Group’s credit ratings and potentially lead to ratings downgrades which could adversely impact the Group’s ability and cost of funding. The Group’s ability to access capital markets on acceptable terms and hence its ability to raise the amount of capital and funding required to meet its regulatory requirements and targets, including those relating to lossabsorbing instruments to be issued by the Group, could be affected. See ‘Implementation of the ring-fencing regime in the UK which began in 2015 and must be completed before 1 January 2019 will result in material structural changes to the Group’s business. The steps required to implement the UK ringfencing regime are complex and entail significant costs and operational, legal and execution risks, which risks may be exacerbated by the Group’s other ongoing restructuring efforts.’
The major credit rating agencies downgraded and changed their outlook to negative on the UK’s sovereign credit rating in June 2016 and September 2017 following the UK’s decision to leave the EU. Any further downgrade in the UK Government’s credit ratings could adversely affect the credit ratings of Group entities and may result in the effects noted above. Further political developments, including in relation to Brexit or the outcome of any further Scottish referendum could negatively impact the credit ratings of the UK Government and result in a downgrade of the credit ratings of RBSG and Group entities.
The Group’s businesses are exposed to the effect of movements in currency rates, which could have a material adverse effect on the results of operations, financial condition or prospects of the Group. As part of its strategy, the Group has revised its focus to become a UK-focused domestic bank. However, 6.5% of its revenues are derived in foreign currencies. The Group’s foreign exchange exposure arises from structural foreign exchange risk, including capital deployed in the Group’s foreign subsidiaries, branches and joint arrangements, and non-trading foreign exchange risk, including customer transactions and profits and losses that are in a currency other than the functional currency of the transacting entity. The Group also relies on MREL issuances in foreign currency. The Group maintains policies and procedures to ensure the impact of exposures to fluctuations in currency rates are minimised. Nevertheless, changes in currency rates, particularly in the sterling-US dollar and euro-sterling exchange rates, affect the value of assets, liabilities, (including the total amount of MREL eligible instruments), income and expenses denominated in foreign currencies and the reported earnings of the Group’s non-UK subsidiaries and may affect the Group’s reported consolidated financial condition or its income from foreign exchange dealing and may also require incremental MREL to be issued.
Changes in foreign exchange rates may result from the decisions of the Bank of England, ECB, the US Federal Reserve and from political or global market events outside the Group’s control and lead to sharp and sudden variations in foreign exchange rates, such as those seen in the sterling/US dollar exchange rates since the occurrence of the EU Referendum. Throughout 2017, ongoing UK negotiations to exit the EU, amongst other factors, resulted in continued volatility in the sterling exchange rate relative to other major currencies. Continued or increasing volatility in currency rates can materially affect the Group’s results of operations, financial condition or prospects.
Moreover, market volatility and illiquidity (and the assumptions, judgements and estimates in relation to such matters that may change over time and may ultimately not turn out to be accurate) make it difficult to value certain of the Group’s exposures.
The Group’s businesses are subject to substantial regulation and oversight. Significant regulatory developments and increased scrutiny by the Group’s key regulators has had and is likely to continue to increase compliance and conduct risks and could have a material adverse effect on how the Group conducts its business and on its results of operations and financial condition. The Group is subject to extensive laws, regulations, corporate governance requirements, administrative actions and policies in each jurisdiction in which it operates. Many of these have been introduced or amended recently and are subject to further material changes.
Risk factors continued Among others, the implementation and strengthening of the prudential and recovery and resolution framework applicable to financial institutions in the UK, the EU and the US, and future amendments to such rules, are considerably affecting the regulatory landscape in which the Group operates and will operate in the future, including as a result of the adoption of rules relating to the UK ring-fencing regime, severe restrictions on proprietary trading, CRD IV and the BRRD and certain other measures. Increased regulatory focus in certain areas, including conduct, consumer protection regimes, anti-money laundering, anti-tax evasion, payment systems, and antiterrorism laws and regulations, have resulted in the Group facing greater regulation and scrutiny in the UK, the US and other countries in which it operates.
Any of these developments (including failures to comply with new rules and regulations) could have a significant impact on how the Group conducts its business, its authorisations and licenses, the products and services it offers, its reputation and the value of its assets, the Group’s operations or legal entity structure, including attendant restructuring costs and consequently have a material adverse effect on its business, funding costs, results of operations, financial condition and future prospects.
The Group relies on valuation, capital and stress test models to conduct its business, assess its risk exposure and anticipate capital and funding requirements. Failure of these models to provide accurate results or accurately reflect changes in the micro-and macroeconomic environment in which the Group operates or findings of deficiencies by the Group’s regulators resulting in increased regulatory capital requirements could have a material adverse effect on the Group’s business, capital and results. Given the complexity of the Group’s business, strategy and capital requirements, the Group relies on analytical models to manage its business, assess the value of its assets and its risk exposure and anticipate capital and funding requirements, including with stress testing. The Group’s valuation, capital and stress test models and the parameters and assumptions on which they are based, need to be periodically reviewed and updated to maximise their accuracy.
Risk factors continued The Group could face adverse consequences as a result of decisions which may lead to actions by management based on models that are poorly developed, implemented or used, or as a result of the modelled outcome being misunderstood or such information being used for purposes for which it was not designed. Risks arising from the use of models could have a material adverse effect on the Group’s business, financial condition and results of operations, minimum capital requirements and reputation.
The Group is subject to stress tests mandated by its regulators in the UK and in Europe which may result in additional capital requirements or management actions which, in turn, may impact the Group’s financial condition, results of operations and investor confidence or result in restrictions on distributions. The Group is subject to annual stress tests by its regulator in the UK and also subject to stress tests by the European regulators with respect to RBSG, RBS N.V. and Ulster Bank Ireland DAC. Stress tests provide an estimate of the amount of capital banks might deplete in a hypothetical stress scenario. In addition, if the stress tests reveal that a bank’s existing regulatory capital buffers are not sufficient to absorb the impact of the stress, it is possible that it will need to take action to strengthen its capital position. There is a strong expectation that the PRA would require a bank to take action if, at any point during the stress, a bank were projected to breach any of its minimum CET1 capital or leverage ratio requirements.
However, if a bank is projected to fail to meet its systemic buffers, it will still be expected to strengthen its capital position over time but the supervisory response is expected to be less intensive than if it were projected to breach its minimum capital requirements. The PRA will also use the annual stress test results to inform its determination of whether individual banks’ current capital positions are adequate or need strengthening. For some banks, their individual stress-test results might imply that the capital conservation buffer and countercyclical rates set for all banks is not consistent with the impact of the stress on them. In that case, the PRA can increase regulatory capital buffers for individual banks by adjusting their PRA buffers.
Although the Group has implemented a Reputational Risk Policy across customer-facing businesses to improve the identification, assessment and management of customers, transactions, products and issues which represent a reputational risk, the Group cannot ensure that it will be successful in avoiding damage to its business from reputational risk, which could result in a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group’s businesses are also exposed to risks from employee misconduct including non-compliance with policies and regulatory rules, negligence or fraud (including financial crimes), any of which could result in regulatory fines or sanctions and serious reputational or financial harm to the Group. In recent years, a number of multinational financial institutions, including the Group, have suffered material losses due to the actions of employees, including, for example, in connection with the foreign exchange and LIBOR investigations and the Group may not succeed in protecting itself from such conduct in the future. It is not always possible to timely detect or deter employee misconduct and the precautions the Group takes to detect and prevent this activity may not always be effective.
The Group may be adversely impacted if its risk management is not effective and there may be significant challenges in maintaining the effectiveness of the Group’s risk management framework as a result of the number of strategic and restructuring initiatives being carried out by the Group simultaneously. The management of risk is an integral part of all of the Group’s activities. Risk management includes the definition and monitoring of the Group’s risk appetite and reporting of the Group’s exposure to uncertainty and the consequent adverse effect on profitability or financial condition arising from different sources of uncertainty and risks as described throughout these risk factors.
Failure to manage risks effectively could adversely impact the Group’s reputation or its relationship with its customers, shareholders or other stakeholders, which in turn could have a significant effect on the Group’s business prospects, financial condition and/or results of operations.
Certain of the Group’s directors as well as members of its executive committee and certain other senior managers and employees are also subject to the new responsibility regime introduced under the Banking Reform Act 2013 which introduces clearer accountability rules for those within the new regime. The senior managers’ regime and certification regime took effect on 7 March 2016, whilst the conduct rules apply to the wider employee population from 7 March 2017, with the exception of some transitional provisions. The new regulatory regime may contribute to reduce the pool of candidates for key management and nonexecutive roles, including non-executive directors with the right skills, knowledge and experience, or increase the number of departures of existing employees, given concerns over the allocation of responsibilities and personal liability introduced by the new rules.
In addition, many of the Group’s employees in the UK, Republic of Ireland and continental Europe are represented by employee representative bodies, including trade unions. Engagement with its employees and such bodies is important to the Group and a breakdown of these relationships could adversely affect the Group’s business, reputation and results.
The UK Government, through HM Treasury, held 70.5% of the issued ordinary share capital of the Group as of 31 December 2017. The UK Government in its November 2017 Autumn Budget indicated its intention to recommence the process for the privatisation of RBSG before the end of 2018-2019 and to carry out over the forecast period a programme of sales of RBSG ordinary shares expected to sell down approximately two thirds of HM Treasury’s current shareholding in the Group, although there can be no certainty as to the commencement of any sell-downs or the timing or extent thereof.
Any offers or sale, or expectations relating to the timing thereof, of a substantial number of ordinary shares by HM Treasury, could negatively affect prevailing market prices for the outstanding ordinary shares of RBSG and other securities issued by the Group and lead to a period of increased price volatility for the Group’s securities.
The UK retail banking sector has been subjected to intense scrutiny by the UK competition authorities and by other bodies, including the FCA, in recent years, including with a number of reviews/inquiries being carried out, including market reviews conducted by the CMA and its predecessor the Office of Fair Trading regarding SME banking and personal banking products and services, the Independent Commission on Banking and the Parliamentary Commission on Banking Standards.
These initiatives have been complemented by a broader set of initiatives to improve the resilience of financial institutions and reduce systemic risk, including the UK ring-fencing regime, the introduction of certain prudential requirements and powers under CRD IV, and certain other measures introduced under the BRRD, including the requirements relating to loss absorbing capital.
The BRRD, which was implemented in the UK from January 2015, provides a framework for the recovery and resolution of credit institutions and investment firms, their subsidiaries and certain holding companies in the EU, and the tools and powers introduced under the BRRD include preparatory and preventive measures, early supervisory intervention powers and resolution tools.
In light of these potential developments as well as the impact of Brexit, there remains uncertainty as to the rules which may apply to the Group going forward. In addition, banks headquartered in countries which are members of the Eurozone are now subject to the European banking union framework.
Risk factors continued In November 2014, the ECB assumed direct supervisory responsibility for RBS N.V. and Ulster Bank Ireland DAC under the Single Supervisory Mechanism (SSM). As a result of the above, there remains uncertainty as to how the relevant resolution regimes in force in the UK, the Eurozone and other jurisdictions, would interact in the event of a resolution of the Group, although it remains clear that the Bank of England, as UK resolution authority, would be responsible for resolution of the Group overall (consistent with the Group’s single point of entry bail-in resolution strategy, as determined by the Bank of England)
In July 2016, the PRA adopted a new framework requiring financial institutions to ensure the continuity of critical shared services (provided by entities within the group or external providers) to facilitate recovery action, orderly resolution and post-resolution restructuring, which will apply from 1 January 2019.
Achieving compliance with the expectations set out in any such statement of policy, once finalised, may require changes to the Group’s existing valuation processes and/or the development of additional capabilities, infrastructure and processes. The Group may incur costs in complying with such obligations, which costs may increase if the Bank of England determined that the Group’s valuation capabilities constitute an impediment to resolution and subsequently exercised its statutory power to direct the Group to take measures to address such impediment.
Several stabilisation options and tools are available to the Bank of England under the SRR, where a resolution has been triggered. In addition, the Bank of England may commence special administration or liquidation procedures specifically applicable to banks. Where stabilisation options are used which rely on the use of public funds, such funds can only be used once there has been a contribution to loss absorption and recapitalisation of at least 8% of the total liabilities of the institution under resolution. The Bank of England has indicated that among these options, the UK bail-in tool (as described further below) would apply in the event that a resolution of the Group were triggered.
Risk factors continued Further, the Banking Act grants broad powers to the Bank of England, the application of which may adversely affect contractual arrangements and which include the ability to (i) modify or cancel contractual arrangements to which an entity in resolution is party, in certain circumstances; (ii) suspend or override the enforcement provisions or termination rights that might be invoked by counterparties facing an entity in resolution, as a result of the exercise of the resolution powers; and (iii) disapply or modify laws in the UK (with possible retrospective effect) to enable the powers under the Banking Act to be used effectively.
The UK bail-in tool is one of the powers available to the Bank of England under the SRR and was introduced under the Banking Reform Act 2013.
The UK government amended the provisions of the Banking Act to ensure the consistency of these provisions with the bail-in provisions under the BRRD, which amendments came into effect on 1 January 2015. The UK bail-in tool includes both a power to write-down or convert capital instruments and triggered at the point of non-viability of a financial institution and a bail-in tool applicable to eligible liabilities (including senior unsecured debt securities issued by the Group) and available in resolution.
The capital instruments write-down and conversion power may be exercised independently of, or in combination with, the exercise of a resolution tool, and it allows resolution authorities to cancel all or a portion of the principal amount of capital instruments and/or convert such capital instruments into common equity Tier 1 instruments when an institution is no longer viable. The point of non-viability for such purposes is the point at which the Bank of England or the PRA determines that the institution meets certain conditions under the Banking Act, for example if the institution will no longer be viable unless the relevant capital instruments are written down or extraordinary public support is provided, and without such support the appropriate authority determines that the institution would no longer be viable. The Bank of England may exercise the power to write down or convert capital instruments without any further exercise of resolution tools, as may be the case where the write-down or conversion of capital instruments is sufficient to restore an institution to viability.
Where the conditions for resolution exist and it is determined that a stabilisation power may be exercised, the Bank of England may use the bail-in tool (in combination with other resolution tools under the Banking Act) to, among other things, cancel or reduce all or a portion of the principal amount of, or interest on, certain unsecured liabilities of a failing financial institution and/or convert certain debt claims into another security, including ordinary shares of the surviving entity.
The value or effectiveness of any credit protection that the Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties. The Group has some remaining credit exposure arising from over-the-counter derivative contracts, mainly credit default swaps (CDSs), and other credit derivatives, each of which are carried at fair value.
Any such adjustments or fair value changes may have a material adverse impact on the Group’s financial condition and results of operations.
The FSCS funds compensation for customers by raising levies on the industry, including the Group. In relation to protected deposits, each deposit-taking institution contributes towards these levies in proportion to their share of total protected deposits.
In the event that the FSCS needs to raise additional and unexpected funding, is required to raise funds more frequently or significantly increases the levies to be paid by authorised firms, the associated costs to the Group may have an adverse impact on its results of operations and financial condition.
As a result, there is no assurance that the Group will be able to sell or run down these portfolios or assets either on favourable economic terms to the Group or at all or that it may do so within the intended timetable. Material tax or other contingent liabilities could arise on the disposal or run-down of assets and there is no assurance that any conditions precedent agreed will be satisfied, or consents and approvals required will be obtained in a timely manner or at all. The Group may be exposed to deteriorations in the portfolios or assets being sold between the announcement of the disposal and its completion, which period may span many months.
Risk factors continued An impairment test involves comparing the recoverable amount (the higher of the value in use and fair value less cost to sell) of an individual cash generating unit with its carrying value.
Where the Group is required to recognise a goodwill impairment, it is recorded in the Group’s income statement, but it has no effect on the Group’s regulatory capital position. Further impairments of the Group’s goodwill could have an adverse effect on the Group’s results and financial condition.
Governance The Board has oversight of climate related risks and opportunities through the Sustainable Banking Committee (SBC). SBC’s remit includes considering relevant environmental, social and ethical issues and during 2017 was engaged on environmental targets, the sustainable energy strategy and reputational risk appetite. In addition, in August 2017 SBC invited a group of external experts to attend a stakeholder engagement session on climate change risk. For further details on risk governance, see page 152.
RBS also continues to refine its business continuity plans to deal with the impact of severe weather to operations and sees the shift to digital and mobile banking as helping to improve the resilience of the business and customers’ activities during severe weather.
Indirect impacts The strategy for managing indirect climate change impacts is focused on supporting customers with the transition to a low carbon economy through the provision of financial products and services. RBS is committed to ensuring it does not miss the substantial opportunities available to finance low carbon technologies and has been recognised externally as a leader in supporting renewable energy finance. RBS expects these, and wider opportunities to continue to grow in the future.
Risk Management RBS employs a continuous process for identifying and managing emerging risks, including climate-related risks. While no climaterelated risks have been identified that would have a major impact on RBS’s strategy over a five-year horizon, the ability to manage new, emerging and unforeseen threats is a key element of the risk management framework.
RBS has significantly reduced its credit exposure to the sectors most vulnerable to climate-related regulation and market changes. At 31 December 2017, total exposure to the Power and Oil & Gas sectors had reduced to 1.2% of total lending exposures.
Non-cumulative preference shares 29 March, 29 June, 28 September and 31 December 2018
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Clone firms A ‘clone firm’ uses the name, firm registration number (FRN) and address of a firm which is FCA authorised. The scammer may claim that the genuine firm's contact details on the FCA Register (Register) are out of date and then use their own details, or copy the website of an authorised firm, making subtle changes such as the phone number. They may claim to be an overseas firm, which won’t always have full contact and website details listed on the Register.
How to protect yourself Always be wary if you’re contacted out of the blue, pressured to invest quickly, or promised returns that sound too good to be true. FCA authorised firms are unlikely to contact you unexpectedly with an offer to buy or sell shares or bonds.
Check the Register to ensure the firm contacting you is authorised and also check the FCA’s Warning List of firms to avoid.
If you have already invested in a scam, fraudsters are likely to target you again or sell your details to other criminals. The followup scam may be completely separate, or may be related to the previous scam in the form of an offer to get your money back or buy back the investment on payment of a fee.
Cautionary statement regarding forward-looking statements Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘commit’, ‘believe’, ‘should’, ‘intend’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘may’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on these expressions.
In particular, this document includes forward-looking statements relating, but not limited to: future profitability and performance, including financial performance targets such as return on tangible equity; cost savings and targets, including cost:income ratios; litigation and government and regulatory investigations, including the timing and financial and other impacts thereof; structural reform and the implementation of the UK ring-fencing regime; the implementation of RBS’s transformation programme, including the further restructuring of the NatWest Markets franchise; the satisfaction of the Group’s residual EU State Aid obligations; the continuation of RBS’s balance sheet reduction programme, including the reduction of risk-weighted assets (RWAs) and the timing thereof; capital and strategic plans and targets; capital, liquidity and leverage ratios and requirements, including CET1 Ratio, RWA equivalents (RWAe), Pillar 2 and other regulatory buffer requirements, minimum requirement for own funds and eligible liabilities, and other funding plans; funding and credit risk profile; capitalisation; portfolios; net interest margin; customer loan and income growth; the level and extent of future impairments and write-downs, including with respect to goodwill; restructuring and remediation costs and charges; future pension contributions; RBS’s exposure to political risks, operational risk, conduct risk, cyber and IT risk and credit rating risk and to various types of market risks, including as interest rate risk, foreign exchange rate risk and commodity and equity price risk; customer experience including our Net Promoter Score (NPS); employee engagement and gender balance in leadership positions.
Important factors that could affect the actual outcome of the forward-looking statements We caution you that a large number of important factors could adversely affect our results or our ability to implement our strategy, cause us to fail to meet our targets, predictions, expectations and other anticipated outcomes or affect the accuracy of forward-looking statements we describe in this document, including in the risk factors and other uncertainties set out in the Group’s 2017 Annual Report and other risk factors and uncertainties discussed in this document. These include the significant risks for RBS presented by the outcomes of the legal, regulatory and governmental actions and investigations that RBS is or may be subject to and any resulting material adverse effect on RBS of unfavourable outcomes and the timing thereof (including where resolved by settlement); economic, regulatory and political risks, including as may result from the uncertainty arising from Brexit and from the outcome of general elections in the UK and changes in government policies; RBS’s ability to satisfy its residual EU State Aid obligations and the timing thereof; RBS’s ability to successfully implement the significant and complex restructuring required to be undertaken in order to implement the UK ring-fencing regime and related costs; RBS’s ability to successfully implement the various initiatives that are comprised in its restructuring and transformation programme, particularly the proposed further restructuring of the NatWest Markets franchise, the balance sheet reduction programme and its significant cost-saving initiatives and whether RBS will be a viable, competitive, customer focused and profitable bank especially after its restructuring and the implementation of the UK ring-fencing regime; the dependence of the Group’s operations on its IT systems; the exposure of RBS to cyber-attacks and its ability to defend against such attacks; RBS’s ability to achieve its capital, funding, liquidity and leverage requirements or targets which will depend in part on RBS’s success in reducing the size of its business and future profitability as well as developments which may impact its CET1 capital including additional litigation or conduct costs, additional pension contributions, further impairments or accounting changes; ineffective management of capital or changes to regulatory requirements relating to capital adequacy and liquidity or failure to pass mandatory stress tests; RBS’s ability to access sufficient sources of capital, liquidity and funding when required; changes in the credit ratings of RBS, RBS entities or the UK government; declining revenues resulting from lower customer retention and revenue generation in light of RBS’s strategic refocus on the UK; as well as increasing competition from new incumbents and disruptive technologies.
The forward-looking statements contained in this document speak only as at the date hereof, and RBS does not assume or undertake any obligation or responsibility to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Process LAR Loans and receivables LCR Liquidity coverage ratio LGD Loss given default LIBOR London Interbank Offered Rate LTI Long term incentive awards LTV Loan-to-value MDA Maximum distributable amount MREL Minimum requirement for own funds and eligible liabilities MRM Model risk management MTNs Medium term notes NI Northern Ireland NIM Net Interest Margin NSFR Net stable funding ratio NTIRR Non-traded interest rate risk NWM NatWest Markets OCA Own credit adjustment OREC Operational Risk Executive Committee OTC Over-the-counter PBB Personal & Business Banking PD Probability of default PPI Payment Protection Insurance PPL Potential problem loans PRA Prudential Regulation Authority RBSG The Royal Bank of Scotland Group plc RCR Risk, Conduct and Restructuring REIL Risk elements in lending RFB Ring-fenced banking entities RMBS Residential mortgage-backed securities RNIV Risks not In VaR ROI Republic of Ireland RoW Rest of the World RWA Risk-weighted asset SE Structured entity SEC US Securities and Exchange Commission SME Small and medium-sized enterprise SVaR Stressed value-at-risk TLAC Total loss absorbing capacity TSR Total Shareholder Return SME Small and medium-sized enterprise UBI DAC Ulster Bank Ireland Designated Activity
Back-testing - statistical techniques that assess the performance of a model, and how that model would have performed had it been applied in the past.
Commercial paper (CP) - unsecured obligations issued by a corporate or a bank directly or secured obligations (asset-backed CP), often issued through a commercial paper conduit, to fund working capital. Maturities typically range from two to 270 days. However, the depth and reliability of some CP markets means that issuers can repeatedly roll over CP issuance and effectively achieve longer term funding. CP is issued in a wide range of denominations and can be either discounted or interest-bearing.
Commercial real estate (CRE) - freehold and leasehold properties used for business activities. Commercial real estate includes office buildings, industrial property, medical centres, hotels, retail stores, shopping centres, agricultural land and buildings, warehouses, garages etc.
CRD IV - the European Union has implemented the Basel III capital proposals through the CRR and the CRD, collectively known as CRD IV. CRD IV was implemented on 1 January 2014. The EBA’s technical standards are still to be finalised through adoption by the European Commission and implemented within the UK.
Credit risk - the risk of financial loss due to the failure of a customer, or counterparty, to meet its obligation to settle outstanding amounts.
Debit valuation adjustment (DVA) - an adjustment made in valuing OTC derivative liabilities to reflect the entity's own credit risk.
Defined benefit plan/scheme - pension or other post-retirement benefit plan other than a defined contribution plan.
Derivative - a contract or agreement whose value changes with changes in an underlying variable such as interest rates, foreign exchange rates, share prices or indices and which requires no initial investment or an initial investment that is smaller than would be required for other types of contracts with a similar response to market factors. The principal types of derivatives are: swaps, forwards, futures and options.
Economic capital - an internal measure of the capital required by RBS to support the risks to which it is exposed.
Economic profit - the difference between the return on shareholders funds and the cost of that capital. Economic profit is usually expressed as a percentage.
Encumbrance - an interest in an asset held by another party. Encumbrance usually restricts the asset’s transferability until the encumbrance is removed.
Internal Liquidity Adequacy Assessment Process (ILAAP) an ongoing exercise as part of the PRA’s regulatory framework to comply with best practice and regulatory standards for liquidity management.
Level 1 - level 1 fair value measurements are derived from quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
Leverage ratio - a measure prescribed under Basel III. It is the ratio of Tier 1 capital to total exposures. Total exposures include on-balance sheet items, off-balance sheet items and derivatives, and generally follow the accounting measure of exposure. Liquidity and funding risk - the risk that RBS is unable to meet its financial liabilities when they fall due.
Maximum distributable amount (MDA) - a restriction on distributions which may be made by a bank which does not meet the combined buffer requirements as set out in the PRA Supervisory Statement SS6/14 ‘Implementing CRD IV: capital buffers’.
Minimum requirement for own funds and eligible liabilities (MREL) – Tier 1 and Tier 2 capital plus specific loss absorbing instruments, including senior notes, that may be used to cover certain gone concern requirements in the EU.
Own credit adjustment (OCA) - the effect of the RBS’s own credit standing on the fair value of financial liabilities.
Pillar 2 - Pillar 2 is intended to ensure that firms have adequate capital to support all the relevant risks in their business and is divided into capital held against risks not captured or not fully captured by the Pillar 1 regulations (Pillar 2A) and risks to which a firm may become exposed over a forward-looking planning horizon (Pillar 2B). Capital held under Pillar 2A, in addition to the Pillar 1 requirements, is the minimum level of regulatory capital a bank should maintain at all times to cover adequately the risks to which it is or might be exposed, and to comply with the overall financial adequacy rules. Pillar 2B is a capital buffer which helps to ensure that a bank can continue to meet minimum requirements during a stressed period, and is determined by the PRA evaluating the risks to which the firm may become exposed (e.g. due to changes to the economic environment) during the supervisory review and evaluation process. All firms will be subject to a PRA buffer assessment and the PRA will set a PRA buffer only if it judges that the CRD IV buffers are inadequate for a particular firm given its vulnerability in a stress scenario, or where the PRA has identified risk management and governance failings, which the CRD IV buffers are not intended to address.
PRA Rule Book - contains provisions made by the PRA that apply to PRA authorised firms. Within ‘Banking and Investment Rules’, the Capital Requirements firms’ section applies to RBS.
Private equity - equity investments in operating companies not quoted on a public exchange. Capital for private equity investment is raised from retail or institutional investors and used to fund investment strategies such as leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital.
Reverse repurchase agreement (Reverse repo) - refer to Sale and repurchase agreements.
Settlement balances - payables and receivables that result from purchases and sales of financial instruments recognised on trade date. Asset settlement balances are amounts owed to RBS in respect of sales and liability settlement balances are amounts owed by RBS in respect of purchases.
Standstill - is an agreement, usually for a specified period of time, not to enforce the lender’s rights as a result of a customer breaching the terms and conditions of their facilities. This is a concession to the customer. A standstill is most commonly used in a complex restructuring of a company’s debts, where a group of creditors agree to delay enforcement action to give the company time to gather information and formulate a strategy with a view to establishing a formal restructuring.
Tier 2 capital - qualifying subordinated debt and other Tier 2 securities in issue, eligible collective impairment provisions less certain regulatory deductions.
Unaudited - financial information that has not been subjected to the audit procedures undertaken by RBS's auditors to enable them to express an opinion on RBS's financial statements.
Value-at-risk (VaR) - a technique that produces estimates of the potential loss in the market value of a portfolio over a specified time period at a given confidence level.
Wholesale funding - wholesale funding comprises Deposits by banks, Debt securities in issue and Subordinated liabilities.
Letter from the Chairman of the Group Audit Committee 65 Report of the Group Audit Committee 67
Presentation of information 118 Report of the directors 109 Notes on the consolidated accounts 298
Capital ratios 165 Capital resources 166 Notes on the consolidated accounts 311
Capital and risk management 201 Notes on the consolidated accounts 294 Parent company notes 340
Accounting policies 255 Business review 124 Critical accounting policies 260 Notes on the consolidated accounts 291
Accounting policies 252 Segmental analysis of goodwill 330 Notes on the consolidated accounts 295
Loans and advances to banks 276 Loans and advances to customers 276
Accounting policies 254 Additional information 363 Notes on the consolidated accounts 291, 299
Business review 130 Description of business 118 Notes on the consolidated accounts 328
Letter from the Chairman of the Sustainable Banking Committee 81 Report of the Sustainable Banking Committee 82 Building a more sustainable bank 24
Accounting policies 254 Business review 124 Critical accounting policies 260 Notes on the consolidated accounts - tax 275 Notes on the consolidated accounts - deferred tax 301
Shareholder enquiries Registrar Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Telephone: +44 (0)370 702 0135 Facsimile: +44 (0)370 703 6009 Website: wwwuk. computershare.com/investor/contactus
Ulster Bank Ireland DAC Ulster Bank Group Centre, George's Quay Dublin 2, D02 VR98 Republic of Ireland
RBS Holdings USA Inc. 600 Washington Blvd Stamford, CT 06901 USA
The Royal Bank of Scotland International Limited Royal Bank House, 71 Bath Street St Helier, Jersey, Channel Islands JE4 8PJ