• Latent loss provisions are held against losses that have been incurred but have not been identified at the year end. Latent provisions are held against loans and advances across all customer segments and
RCR and calculated using models based on probabilities of default and loss given default as well as emergence periods between the impairment event occurring and an individual or collective impairment being recognised.
The most significant judgements arise on impairments recorded against loans and advances in RCR (£10,946 million) and Ulster Bank (£2,711 million) at 31 December 2014. As a result of the strategy to exit RCR
We tested the design and operating effectiveness of the key controls to determine which loans and advances are impaired and provisions against those assets. These included testing: • System-based and manual controls over the timely recognition of impaired loans and advances; • Controls over the impairment calculation models; and
We tested a sample of loans and advances to assess whether impairment events had been identified in a timely manner.
For the collective and latent impairment models used by the Group, we tested a sample of the data used in the models as well as testing the calculations within the models. We assessed whether the modelling assumptions used considered all relevant risks, and whether the additional overlays to reflect unmodelled risks, were reasonable in light of historical experience, economic climate, current operational processes and the circumstances of the customers. We also tested the extraction from underlying systems of historical data used in the models.
For individually assessed loans we selected a sample of loans and tested the estimation of the future expected cash flows from customers and where applicable, from realisation of collateral held. This work involved assessing the work performed by external experts used by the Group to value the collateral or to assess the estimates of future cash flows. In some cases we used our own industry experts, particularly in respect of commercial real estate loans, to assess the appropriateness of valuations and estimates used by the Group.
The valuation of the Group’s financial instruments was a key area of focus of our audit given the degree of complexity involved in valuing some of the financial instruments and the significance of the judgements and estimates made by the directors. As set out in Note 11 of the consolidated financial statements, financial instruments held at fair value comprised assets of £534 billion and liabilities of £497 billion. In the Group’s accounting policies, the directors have described the key sources of estimation involved in determining the valuation of financial instruments and in particular when the fair value is established using a valuation technique due to the instrument’s complexity or due to the lack of availability of market-based data.
In Note 32 of the consolidated financial statements the directors have summarised the most significant legal proceedings, investigations and other regulatory and government actions involving the Group. The recognition and measurement of provisions and the measurement and disclosure of contingent liabilities in respect of litigation, customer remediation and regulatory investigations requires significant judgement by the directors and as a result is a key area of focus in our audit. As set out in the accounting policies, judgement is needed to assess whether an obligation exists at 31 December 2014 in order to determine if: • It is likely that an economic outflow (for example, a payment) is likely; and
At 31 December 2014 the Group held provisions for liabilities and charges totalling £4,774 million, including conduct and litigation claims totalling £4,111 million. We focused our work on the most significant areas of judgement including the: • Assessment of the provisions for payment protection insurance (£799 million at 31 December 2014) and interest rate hedging product redress (£424 million at 31 December 2014); and
We assessed the legal advice and correspondence with regulators received in connection with legal proceedings, investigations and regulatory matters which the Group is party to. For the more material matters, we also met with the Group’s external legal counsel.
As the directors have described in the accounting policies, estimating future profitability requires the application of significant judgement by the directors particularly given the uncertainties that exist in the markets in which the Group operates and the changes that are expected in the foreseeable future as a result of changing regulation; for example, the ringfencing of retail banking operations. The key judgements made by the directors include estimating taxable profits, growth rates and discount rates. The sensitivity of these key judgements and their effect on the carrying value of goodwill has been set out in Note 17 of the consolidated financial statements and the bases of the deferred tax assets set out in
We have tested the design and operating effectiveness of the key controls over the preparation and review of the Group’s budgets and forecasts.
We compared the directors’ assumptions on growth rates and discount rates to industry averages, those used by peer organisations and other economic metrics, considering any reasonable alternative assumptions.
The widespread reliance on information systems within the Group means that the controls over access rights are critical. In 2014 and in previous years the Group identified a number of deficiencies in the controls over the provision of access to IT application systems and system databases which increased the risk that individuals had inappropriate access. For the IT
Where these deficiencies affected applications and databases within the scope of our audit we performed a combination of controls and substantive testing in order to determine whether we could place reliance on the completeness and accuracy of system generated information, including: • Determined whether unauthorised or inappropriate changes had been made to the affected databases and IT application systems; and
We determined materiality for the Group to be £300 million (2013 - £350 million), which was calculated as 0.5% (2013 - 0.6%) of the total equity of the
Group. This represented 11% of the Group’s loss for the year (2013 - 4% of the Group’s loss). Our materiality in both 2014 and 2013 was based on the equity of the Group given the significant volatility of the Group’s profits and losses in recent years.
We determined the scope of our audit by first considering the internal organisation of the Group and then identifying the components of the audit that have most significance to the financial statements. The significant components of our audit are consistent with the operating segments identified in the financial statements comprising UK Personal & Business Banking, Ulster Bank, Commercial Banking, Private Banking, Corporate & Institutional
Banking, Citizens Financial Group, RCR and the central functions of the Group including Finance (both in the UK and overseas), Treasury and Services.
remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns. Under the UK Listing Rules we are required to review certain elements of the
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s
Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Write down of goodwill and other intangible assets (523) (1,403) (124)
Basic and diluted earnings/(loss) from continuing operations 9 0.5p (85.0p) (58.9p)
Recycled to profit or loss on disposal of businesses (2) 36 (110) —
Recycled to profit or loss on disposal of businesses — (3) (3)
Costs relating to Citizens Financial Group initial public offering (45) — —
Movements in available-for-sale securities - recycled to profit or loss on disposal of businesses (3) — (5) —
Movements in cash flow hedging reserve - amount recognised in equity 18 — —
Notes: (1) Paid-in equity reclassified to liabilities as a result of the call of RBS Capital Trust III on 23 December 2014 (see Note 27). (2) Net of tax - £11 million charge (2013 - £35 million charge). (3) 2013 - net of tax of £1 million. (4) Includes £2,117 million relating to the initial public offering of Citizens Financial Group.
Net (investment in)/divestment of business interests and intangible assets 34 (1,481) 1,150 352
Effects of exchange rate changes on cash and cash equivalents 909 512 (3,893)
Cash and cash equivalents at 31 December 37 107,904 121,177 132,841
Instruments: Recognition and Measurement’; it has relaxed some of the standard's hedging requirements. The Group has not taken advantage of this relaxation: its financial statements are prepared in accordance with
The company is incorporated in the UK and registered in Scotland. Its accounts are presented in accordance with the Companies Act 2006.
Citizens was classified as a disposal group on 31 December 2014; its assets and liabilities at that date have been aggregated and presented in separate balance sheet captions. It has been treated as a discontinued operation and prior periods re-presented.
January 2014: ‘Offsetting Financial Assets and Financial Liabilities (Amendments to IAS
32)’ adds application guidance to IAS 32 to address inconsistencies identified in the application of the standard’s criteria for offsetting financial assets and financial liabilities.
‘Investment Entities (amendments to IFRS 10, IFRS 12 and IAS 27)’
applies to investment entities; such entities should account for their subsidiaries (other than those that provide services related to the entity’s investment activities) at fair value through profit or loss.
The implementation of these requirements has not had a material effect on the Group’s accounts.
The consolidated accounts incorporate the financial statements of the company and entities (including certain structured entities) that are controlled by the Group. The Group controls another entity (a subsidiary)
Credit and debit card fees - fees from card business include: • Interchange received: as issuer, the Group receives a fee
Lending (credit facilities) - commitment and utilisation fees are determined as a percentage of the outstanding facility. If it is unlikely that a specific lending arrangement will be entered into, such fees are taken to profit or loss over the life of the facility otherwise they are deferred and included in the effective interest rate on the loan.
• past service cost resulting from a scheme amendment or curtailment
A curtailment occurs when the Group significantly reduces the number of employees covered by a plan. A plan amendment occurs when the Group introduces, or withdraws, a defined benefit plan or changes the benefits payable under an existing defined benefit plan. Past service cost may be either positive (when benefits are introduced or changed so that the present value of the defined benefit obligation increases) or negative
During and after development, accumulated costs are reviewed for impairment against the benefits that the software is expected to generate.
Items of property, plant and equipment (except investment property - see
Depreciation is charged to profit or loss on a straight-line basis so as to write-off the depreciable amount of property, plant and equipment
If an asset does not generate cash flows that are independent from those of other assets or groups of assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. A
Investment property comprises freehold and leasehold properties that are held to earn rentals or for capital appreciation or both. Investment property is not depreciated but is stated at fair value. Fair value is based on current prices for similar properties in the same location and condition.
Lease incentives granted are recognised as an integral part of the total rental income.
Group entities record transactions in foreign currencies in their functional currency - the currency of the primary economic environment in which they operate - at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the relevant functional currency at the foreign exchange rates ruling at the balance sheet date. Foreign exchange differences arising on the settlement of foreign currency transactions and from the translation of monetary assets and liabilities are reported in income from trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign operations (see Accounting policy 23).
Translation differences arising on non-monetary items measured at fair value are recognised in profit or loss except for differences arising on available-for-sale non-monetary financial assets, for example equity shares, which are recognised in other comprehensive income unless the asset is the hedged item in a fair value hedge.
Interest receivable. Unguaranteed residual values are subject to regular review; if there is a reduction in their value, income allocation is revised and any reduction in respect of amounts accrued is recognised immediately.
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that they will be recovered. Deferred tax is not recognised on temporary differences that arise from initial recognition of an asset or a liability in a transaction (other than a business combination) that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is calculated using tax rates expected to apply in the periods when the assets will be realised or the liabilities settled, based on tax rates and laws enacted, or substantively enacted, at the balance sheet date.
On initial recognition, financial assets are classified into held-to-maturity investments; held-for-trading; designated as at fair value through profit or loss; loans and receivables; or available-for-sale financial assets. Regular way purchases of financial assets classified as loans and receivables are recognised on settlement date; all other regular way transactions in financial assets are recognised on trade date.
Reclassifications - held-for-trading and available-for-sale financial assets that meet the definition of loans and receivables (non-derivative financial assets with fixed or determinable payments that are not quoted in an active market) may be reclassified to loans and receivables if the Group has the intention and ability to hold the financial asset for the foreseeable future or until maturity. The Group typically regards the foreseeable future for this purpose as twelve months from the date of reclassification.
Fair value - the Group’s approach to determining the fair value of financial instruments measured at fair value is set out in the section of Critical accounting policies and key sources of estimation uncertainty entitled
The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets classified as held-to-maturity, as available-for-sale or as loans and receivables is impaired. A financial asset or group of financial assets is impaired and an impairment loss incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.
Where, in the course of the orderly realisation of a loan, it is exchanged for equity shares or property, the exchange is accounted for as the sale of the loan and the acquisition of equity securities or investment property.
Financial liabilities designated as at fair value through profit or loss principally comprise structured liabilities issued by the Group: designation significantly reduces the measurement inconsistency between these liabilities and the related derivatives carried at fair value.
A financial asset is derecognised when the contractual right to receive cash flows from the asset has expired or when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the
Group continue to be shown on the balance sheet and the sale proceeds recorded as a financial liability. Securities acquired in a reverse sale and repurchase transaction under which the Group is not exposed to substantially all the risks and rewards of ownership are not recognised on the balance sheet and the consideration paid is recorded as a financial asset.
Securities borrowing and lending transactions are usually secured by cash or securities advanced by the borrower. Borrowed securities are not recognised on the balance sheet or lent securities derecognised. Cash collateral given or received is treated as a loan or deposit; collateral in the form of securities is not recognised. However, where securities borrowed are transferred to third parties, a liability for the obligation to return the securities to the stock lending counterparty is recorded.
Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group currently has a legally enforceable right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financial liabilities but where it does not intend to settle the amounts net or simultaneously and therefore the assets and liabilities concerned are presented gross.
The Group classifies a financial instrument that it issues as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms and as equity if it evidences a residual interest in the assets of the Group after the deduction of liabilities. The components of a compound financial instrument issued by the Group are classified and accounted for separately as financial assets, financial liabilities or equity as appropriate.
The Group enters into three types of hedge relationship: hedges of changes in the fair value of a recognised asset or liability or unrecognised firm commitment (fair value hedges); hedges of the variability in cash flows from a recognised asset or liability or a highly probable forecast transaction (cash flow hedges); and hedges of the net investment in a foreign operation.
An associate is an entity over which the Group has significant influence.
Such awards are generally subject to vesting conditions: conditions that vary the amount of cash or shares to which an employee is entitled.
(requiring the employee to complete a specified period of service and specified performance targets to be met). Other conditions to which an award is subject are non-vesting conditions (such as a requirement to save throughout the vesting period).
If an award is modified, the original cost continues to be recognised as if there had been no modification. Where modification increases the fair value of the award, this increase is recognised as an expense over the modified vesting period. A new award of shares or share options is treated as the modification of a cancelled award if, on the date the new award is granted, the Group identifies them as replacing the cancelled award. The cancellation of an award through failure to meet non-vesting conditions triggers an immediate expense for any unrecognised element of the cost of an award.
Reporting’. The judgements and assumptions involved in the Group's accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed below.
The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.
A pension asset of £295 million and a liability of £2,579 million were recognised on the balance sheet at 31 December 2014 (2013 - asset £214 million, liability £3,210 million; 2012 - asset £144 million, liability £3,884 million).
LIBOR investigations, nil (2013 - £416 million; 2012 - £381 million) and other regulatory proceedings and litigation, £1,988 million (2013 - £2,168 million; 2012 - £368 million). Provisions are liabilities of uncertain timing or amount, and are recognised when there is a present obligation as a result of a past event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Judgement is involved in determining whether an obligation exists, and in estimating the probability, timing and amount of any outflows. Where the Group can look to another party such as an insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is recognised when, and only when, it is virtually certain that it will be received.
Payment Protection Insurance - the Group has established a provision for redress payable in respect of the mis-selling of Payment Protection
Insurance policies. The provision is management’s best estimate of the anticipated costs of redress and related administration expenses. The determination of appropriate assumptions to underpin the provision requires significant judgement by management. The principal assumptions underlying the provision together with sensitivities to changes in those assumptions are given in Note 22.
Group agreed to provide redress to customers in relation to certain interest rate hedging products sold to small and medium-sized businesses classified as retail clients under FSA rules. There remain uncertainties over the eventual cost of redress, including any consequential loss claims. Estimating the liability depends on a number of assumptions. These are discussed in Note 22.
Provisions for litigation - the Group and members of the Group are party to legal proceedings in the United Kingdom, the United States and other jurisdictions, arising out of their normal business operations. The measurement and recognition of liabilities in respect of litigation involves a high degree of management judgement. Before the existence of a present obligation as the result of a past event can be confirmed, numerous facts may need to be established, involving extensive and time-consuming discovery, and novel or unsettled legal questions addressed. Once it is determined there is an obligation, assessing the probability of economic outflows and estimating the amount of any liability can be very difficult. In many proceedings, it is not possible to determine whether any loss is probable or to estimate the amount of any loss.
Furthermore, for an individual matter, there can be a wide range of possible outcomes and often it is not practicable to quantify a range of such outcomes. The Group’s outstanding litigation is periodically assessed in consultation with external professional advisers, where appropriate, to determine the likelihood of the Group incurring a liability. A
The Group makes provision for deferred tax on temporary differences where tax recognition occurs at a different time from accounting recognition. Deferred tax assets of £1,540 million were recognised as at
The Group has recognised deferred tax assets in respect of losses, principally in the UK, and temporary differences. Deferred tax assets are recognised in respect of unused tax losses and other temporary differences to the extent that it is probable that there will be future UK
The Group's loan impairment provisions are established to recognise incurred impairment losses in its portfolio of loans classified as loans and receivables and carried at amortised cost in accordance with Accounting policy 15. A loan is impaired when there is objective evidence that events since the loan was granted have affected expected cash flows from the loan. Such objective evidence, indicative that a borrower’s financial condition has deteriorated, can include for loans that are individually assessed: the non-payment of interest or principal; debt renegotiation; probable bankruptcy or liquidation; significant reduction in the value of any security; breach of limits or covenants; and deteriorating trading performance and, for collectively assessed portfolios: the borrowers’
At 31 December 2014, loans and advances to customers classified as loans and receivables totalled £307,971 million (2013 - £364,772 million; 2012 - £397,846 million) and customer loan impairment provisions million). Customer loan impairment releases in 2014 amounted to £1,354 million (2013 - £8,120 million losses; 2012 - £5,031 million losses). The losses in 2013 include loan impairment provisions in respect of loans transferred to RBS Capital Resolution Group. These loans are expected to be exited within three years and impairment provisions in respect of these loans have been reassessed in the light of this change in recovery strategy.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. It also uses the assumptions that market participants would use when pricing the asset or liability. In determining fair value the
Group maximises the use of relevant observable inputs and minimises the use of unobservable inputs.
Credit valuation adjustments are made when valuing derivative financial assets to incorporate counterparty credit risk. Adjustments are also made when valuing financial liabilities measured at fair value to reflect the
Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data. Further details about the Group’s valuation methodologies and the sensitivity to reasonably possible alternative assumptions of the fair value of financial instruments valued using techniques where at least one significant input is unobservable are given in Note 11.
A number of IFRSs and amendments to IFRS were in issue at 31
Annual Improvements to IFRS 2010 - 2012 and 2011 - 2013 cycles were issued in December 2013 making a number of minor amendments to
There are new restrictions on the ability to account for financial assets at amortised cost and a prohibition on the bifurcation of embedded derivatives from financial assets. Accounting for financial liabilities is largely unchanged except for the treatment of changes in the fair value of liabilities designated as at fair value through profit or loss attributable to own credit risk; these are recognised in other comprehensive income.
Secondly, there are amended requirements for hedge accounting designed to align the accounting more closely to the risk management framework and remove or simplify some of the rule-based requirements of IAS 39. The basic mechanics of hedge accounting: fair value, cash flow and net investment hedges are retained. Finally, there is a new approach to credit impairment provisions moving from IAS 39’s incurred loss model to an expected loss model. An expected loss model will result in the recognition of credit impairment losses earlier than an incurred loss model. Subject to EU endorsement, IFRS 9 is applicable for periods beginning on or after 1 January 2018.
and several Interpretations. Contracts are bundled or unbundled into distinct performance obligations with revenue recognised as the obligations are met. It is effective from 1 January 2017.
issued in May 2014 amends IAS 16 ‘Property, Plant and Equipment’ and
IAS 38 ‘Intangible Assets’ requiring amortisation to be based on the consumption of an asset, introducing a rebuttable presumption that this is not achieved by an amortisation profile aligned to revenue. The effective date is 1 January 2016.
Annual Improvements to IFRS 2012 - 2014 cycle was issued in
Associates and Joint Ventures’ were issued in September 2014 to clarify the accounting for sales between an investor, its associate or joint ventures, and in December 2014 to clarify the application of the investment entity consolidation exception. The effective date of these amendments is 1 January 2016.
An amendment to IAS 1 ‘Presentation of Financial Statements’ was issued in December 2014 to clarify the application of materiality to financial statements. Its effective date is 1 January 2016.
Changes in the fair value of own debt designated as at fair value through profit or loss attributable to own credit risk (2)
(2) Measured as the change in fair value from movements in the year in the credit risk premium payable by RBS. (3) Includes income from activities other than banking.
Pension costs - defined benefit schemes (see Note 4) 462 508 514 - curtailment and settlement gains (see Note 4) — (7) (13)
Included in operating expenses are the following integration, restructuring and divestment costs. Continuing Discontinued
Staff Premises Other Depreciation operations operations Total £m £m £m £m £m £m £m
The fair value of options granted in 2014 was determined using a pricing model that included: expected volatility of shares determined at the grant date based on historical volatility over a period of up to seven years; expected option lives that equal the vesting period; no dividends on equity shares; and risk-free interest rates determined from UK gilts with terms matching the expected lives of the options.
Reconciliation of variable compensation awards to income statement charge 2014 2013 2012 £m £m £m
Less: deferral of charge for amounts awarded for current year (150) (230) (252)
Income statement charge for amounts awarded in current year 271 306 384
The Group sponsors a number of pension schemes in the UK and overseas.
RBSPT is the legal owner of the Main scheme assets which are held separately from the assets of the Group. The Board of RBSPT comprises four trustee directors nominated by members selected from eligible active staff and pensioner members who apply and six appointed by the Group.
The Main scheme, accounting for 87% (2013 - 86%; 2012 - 85%) of the
Since October 2006, new UK entrants may join The Royal Bank of
The Group also provides post-retirement benefits other than pensions, principally through subscriptions to private healthcare schemes in the UK
Expected return on plan assets (1) 3.7 4.7 4.5 3.6 4.5 4.4
Rate of increase in pensions in payment 2.8 3.1 2.8 2.7 2.9 2.6
The sterling yield curve (applied to 91% of the Group’s defined benefit obligations) is constructed by reference to yields on ‘AA’ corporate bonds from which a single discount rate is derived based on a cash flow profile similar in structure and duration to the pension obligations. Significant judgement is required when setting the criteria for bonds to be included in the population from which the yield curve is derived. The criteria include issue size, quality of pricing and the exclusion of outliers. Judgement is also required in determining the shape of the yield curve at long durations: a constant credit spread relative to gilts is assumed.
Discount rates for other currencies are derived using a variety of methodologies. In the case of US dollar defined benefit obligations, a matching portfolio of high-quality ‘AA’ corporate bonds is used for the first 30 years’ cash flows; cash flows beyond 30 years are discounted using a yield curve determined in a similar way to the UK. For euro defined benefit obligations, a similar approach to the UK has been used at 31
December 2014. However, at longer durations, rates are derived by extrapolating yields on ‘A’ and ‘AAA’ corporate bonds to derive equivalent
Equity exposure of equity futures 1.3 8.0 9.0 1.6 8.0 8.4
The assets of the Main scheme, which represent 88% of plan assets at 31 December 2014 (2013 and 2012 - 85%), are invested in a diversified portfolio of quoted and private equity, government and corporate fixed-interest and index-linked bonds, and other assets including property and hedge funds.
The Main scheme’s holdings of derivative instruments are summarised in the table below: Notional Fair value Notional Fair value Notional Fair value amounts Assets Liabilities amounts Assets Liabilities amounts Assets Liabilities £m £m £m £m £m £m £m £m £m
The investment strategy of other schemes is similar to that of the Main scheme, adjusted to take account of the nature of liabilities, risk appetite of the trustees, size of the scheme and any local regulatory constraints.
The use of derivative instruments outside the Main scheme is not material.
Westminster Bank Plc (the “banks”). At 31 December 2014, the gross notional value of the swaps was £34,163 million (2013 - £31,664 million; 2012 - £28,541 million) and had a net positive fair value of £2,433 million
Ordinary shares of the company with a fair value of £2 million (2013 and 2012 - £4 million) and other financial instruments issued by the Group with a value of £2,172 million (2013 - £416 million; 2012 - £610 million)
Return on plan assets above recognised interest income 986 — (986) 1,097 — (1,097)
Actuarial gains and losses due to changes in financial assumptions — 562 562 — 589 589
Currency translation and other adjustments — — — (60) (85) (25)
Actuarial gains and losses due to changes in financial assumptions — 3,757 3,757 — 4,806 4,806
The weighted average duration of the Main scheme’s defined benefit obligation at 31 December 2014 is 20.0 years (2013 - 18.0 years; 2012 - 19.2 years).
(weighted average) 5.25%; rate of increase in salaries 2.5%; rate of increase in pensions in payment 2.0%; and inflation assumption 2.0%.
History of defined benefit schemes 2014 2013 2012 2011 2010 2014 2013 2012 2011 2010 £m £m £m £m £m £m £m £m £m £m
Fair value of plan assets 30,077 24,272 22,441 21,111 19,110 34,359 28,488 26,370 25,086 22,816
Present value of defined benefit obligations 31,776 26,958 25,648 22,955 21,092 36,643 31,484 30,110 27,137 24,999
The table below sets out the sensitivities of the pension cost for the year and the present value of defined benefit obligations at 31 December to a change in the principal actuarial assumptions: Main scheme All schemes
0.25% additional rate of increase in 0.25% additional rate of increase in 0.25% additional rate of increase in
Longevity increase of one year 39 35 33 988 728 647 42 39 38 1,053 801 727
Amounts paid to the Group's auditors for statutory audit and other services are set out below. All audit-related and other services are approved by the
The Group Audit Committee recognise that for certain assignments the auditors are best placed to perform the work economically; for other work the
Fees payable for the audit of the Group’s annual accounts 4.0 4.0
The actual tax charge differs from the expected tax (charge)/credit computed by applying the standard rate of UK corporation tax of 21.5% (2013 - £m £m £m
Items not allowed for tax - losses on disposals and write-downs (12) (20) (49)
Non-taxable items - gain on sale of Direct Line Insurance Group 41 — —
- gain on sale of WorldPay (Global Merchant Services) — 37 —
(Reduction)/increase in carrying value of deferred tax asset in respect of: - US losses and temporary differences (775) — —
Interest on securities classified as equity, net of tax 49 49 28
Loss/(profit) from discontinued operations attributable to ordinary and B shareholders 3,527 (521) (430)
Profit/(loss) from continuing operations attributable to ordinary and B shareholders 57 (9,516) (6,485)
Equivalent B shares in issue during the year 5,100 5,100 5,100
Weighted average number of ordinary shares and equivalent B shares outstanding during the year 11,356 11,196 11,002
Effect of dilutive share options and convertible securities 91 115 105
Basic (loss)/earnings per ordinary and equivalent B share from earnings per ordinary and equivalent B share from discontinued operations was 4.6p in 2013. There was no dilutive impact in 2014 or
Prior to the DAS retirement agreement, the DAS was entitled to a dividend amounting to the greater of 7% of the aggregate issue price of B
Under the DAS retirement agreement, once RBS has paid dividends on the DAS totalling £1.5 billion, it will lose its preferential dividend rights and become a single B share. The dividends are payable at the discretion of the directors. The first DAS dividend of £320 million was paid in August 2014. Unpaid DAS dividends will be subject to an increase of 5% per annum from 1 January 2016 and an increase of 10% per annum from 1
Consequently earnings per share for periods ended after 25 June 2014 only reflect DAS dividends recognised before the end of a reporting period; this amounted to £320 million in respect of the year ended 31
December 2014. Dividends can be paid on ordinary and B shares only once the remaining £1,180 million of retirement dividend, subject to increases as above, has been paid.
Accruals, deferred income and other liabilities — — 1,801 — 11,545 13,346
trading or loss derivatives for-sale receivables Amortised cost leases liabilities 2012 £m £m £m £m £m £m £m £m £m
Notes: (1) Includes items in the course of collection from other banks of £980 million (2013 - £1,454 million; 2012 - £1,531 million). (2) Includes items in the course of transmission to other banks of £513 million (2013 - £828 million; 2012 - £521 million). (3) The carrying amount of other customer accounts designated as at fair value through profit or loss is £432 million (2013 - £412 million; 2012 - £305 million) higher than the principal amount. No amounts have been recognised in profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial, measured as the change in fair value from movements in the period in the credit risk premium payable.
The tables below present information on financial assets and liabilities that are offset in the balance sheet under IFRS or subject to enforceable master netting agreement together with financial collateral received or given.
Gross IFRS offset Balance sheet similar agreements collateral collateral and related collateral £m £m £m £m £m £m £m
RBS's control environment for the determination of the fair value of financial instruments includes formalised protocols for the review and validation of fair values independent of the businesses entering into the transactions. There are specific controls to ensure consistent pricing policies and procedures, incorporating disciplined price verification. RBS
ensures that appropriate attention is given to bespoke transactions, structured products, illiquid products and other instruments which are difficult to price.
A key element of the control environment is the independent price verification (IPV) process. Valuations are first performed by the business which entered into the transaction. Such valuations may be directly from available prices, or may be derived using a model and variable model inputs. These valuations are reviewed, and if necessary amended, by a team independent of those trading the financial instruments, in the light of available pricing evidence.
IPV differences are classified according to the quality of independent market observables into IPV quality bands linked to the fair value hierarchy principles, as laid out in IFRS 13 ‘Fair Value Measurement’.
These differences are classified into fair value levels 1, 2 and 3 (with the valuation uncertainty risk increasing as the levels rise from 1 to 3) and then further classified into high, medium, low and indicative depending on the quality of the independent data available to validate the prices.
Pricing Model Risk team within Risk Management, which is independent of the trading businesses, assesses the appropriateness of the application of the model to the product, the mathematical robustness of the model, and where appropriate, considers alternative modelling approaches.
The CIB and RCR Valuation Control Committees meet formally on a monthly basis to discuss independent pricing, reserving and valuation issues. All material methodology changes require review and ratification by these committees. The committees, which include valuation specialists representing several independent review functions, comprise Market
CIB and RCR Valuations Committees, and other relevant issues including prudential valuation. This committee covers key material and subjective valuation issues within the trading businesses and provides a ratification to the appropriateness of areas with high levels of residual valuation uncertainty. Committee members include the Chief Financial Officer, the
Committee. Additionally, the CIB Valuation Committee may escalate items to the CIB Risk Committee on a more frequent basis as appropriate.
RCR. RBS has a framework to quantify those market risks not adequately captured by standard market risk framework such as VaR and SVaR refer to pages 304 to 310 for details.
There is a process to review and control the classification of financial instruments into the three level hierarchy established by IFRS 13. Some instruments may not easily fall into a level of the fair value hierarchy and judgment may be required as to which level the instrument is classified.
Control team following the principles in IFRS 13. They base their judgment on information gathered during the IPV process for instruments which include the sourcing of independent prices and model inputs. The quality and completeness of the information gathered in the IPV process gives an indication as to the liquidity and valuation uncertainty of an instrument.
(e.g. interest rate caps and floors) through to more complex derivatives.
(e.g. to construct volatility surfaces). RBS uses a number of modelling methodologies.
Swaps rate (OIS) and other quoted interest rates in the swap, bond and futures markets.
• Commodity prices - many commodities are actively traded in spot and forward contracts and futures on exchanges in London, New
• Prepayment rates - the fair value of a financial instrument that can be prepaid by the issuer or borrower differs from that of an instrument that cannot be prepaid. In valuing prepayable instruments that are not quoted in active markets, RBS considers the value of the prepayment option.
RBS uses consensus prices for the IPV of some instruments. The consensus service encompasses the equity, interest rate, currency, commodity, credit, property, fund and bond markets, providing comprehensive matrices of vanilla prices and a wide selection of exotic products. CIB and RCR contribute to consensus pricing services where there is a significant interest either from a positional point of view or to test models for future business use. Data sourced from consensus pricing services is used for a combination of control processes including direct price testing, evidence of observability and model testing. In practice this means that RBS submits prices for all material positions for which a service is available. Data from consensus services are subject to the same level of quality review as other inputs used for IPV process.
Where unobservable inputs are used, RBS may determine a range of possible valuations derived from differing stress scenarios to determine the sensitivity associated with the valuation. When establishing the fair value of a financial instrument using a valuation technique, RBS
considers adjustments to the modelled price which market participants would make when pricing that instrument. Such adjustments include the credit quality of the counterparty and adjustments to compensate for model limitations.
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, liquidity and credit risk. The following table shows credit valuation adjustments (CVA) and other valuation reserves. CVA represents an estimate of the adjustment to fair value that a market participant would make to incorporate the risk inherent in derivative exposures.
Where a positive exposure exists to a counterparty that is considered to be close to default, the CVA is calculated by applying expected losses to the current level of exposure. Otherwise, expected losses are applied to estimated potential future positive exposures which are modelled to reflect the volatility of the market factors which drive the exposures and the correlation between those factors.
Potential future positive exposures arising from vanilla products (including interest rate and foreign exchange derivatives, as well as some inflation derivatives) are modelled using RBS's core counterparty risk systems.
Collateral held under a credit support agreement is factored into the CVA
Fair value positions are adjusted to bid (long positions) or offer (short positions) levels, by marking individual cash positions directly to bid or offer or by taking bid-offer reserves calculated on a portfolio basis for derivatives exposures. The bid-offer approach is based on current market spreads and standard market bucketing of risk.
(including delta (the degree to which the price of an instrument changes in response to a change in the price of the underlying), vega (the degree to which the price of an instrument changes in response to the volatility in the price of the underlying), correlation (the degree to which prices of different instruments move together)) are determined by aggregating similar risk exposures arising on different products. Additional basis bidoffer reserves are taken where these are charged in the market. Risk associated with non-identical underlying exposures is not netted down unless there is evidence that the cost of closing the combined risk exposure is less than the cost of closing individual exposures.
(calendar netting). This reflects the fact that to close down the portfolio, the net risk can be settled rather than each long and short trade individually.
Vanilla risk on exotic products is typically reserved as part of the overall portfolio based calculation e.g. delta and vega risk on exotic products are included within the delta and vega bid-offer calculations. Aggregation of risk arising from different models is in line with RBS’s risk management practices; the model review control process considers the appropriateness of model selection in this respect.
Funding levels are applied to estimated potential future exposures, the modelling of which is consistent with the approach used in the calculation of CVA relating to other counterparties. The counterparty contingent nature of the exposures is reflected in the calculation.
On initial recognition of financial assets and liabilities valued using valuation techniques incorporating information other than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred. Such amounts are recognised in profit or loss over the life of the transaction; when market data becomes observable; or when the transaction matures or is closed out as appropriate. At 31 December 2014, net gains of £119 million (2013 - £205 million; 2012 - £153 million) were carried forward. During the year, net gains of £53 million (2013 - £134 million; 2012 - £39 million) were deferred and £139 million (2013 - £82 million; 2012 - £47 million) were recognised in the income statement.
RBS takes into account the effect of its own credit standing when valuing financial liabilities recorded at fair value in accordance with IFRS. Own credit spread adjustments are made when valuing issued debt held at fair value, including issued structured notes, and derivatives. An own credit adjustment is applied to positions where it is believed that counterparties would consider RBS's creditworthiness when pricing trades.
The fair value of RBS's derivative financial liabilities is also adjusted to reflect RBS's own credit risk (DVA). Expected gains are applied to estimated potential future negative exposures, the modelling of which is consistent with the approach used in calculation of CVA relating to other counterparties. Expected gains are determined from market implied probabilities of default and recovery levels. FVA is considered the primary adjustment applied to derivative liabilities. The extent to which DVA and
(HFT) and designated as at fair value through profit or loss (DFV) debt securities in issue, subordinated liabilities and derivative liabilities are set out below.
(increase)/decrease in liability (1) £m £m £m £m £m £m £m
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
11 Financial instruments - valuation continued The following table analyses level 3 balances and related valuation sensitivities. 2014 2013 2012
Credit 0.4 0.6 DCF based on recoveries Recovery rates (3) 0% 100%
Notes: (1) Level 3 structured issued debt securities of £1.2 billion are not included in the table above as valuation is consistent with the valuation of the embedded derivative component. (2) Price and yield: There may be a range of price based information used to value an instrument. This may be a direct comparison of one instrument or portfolio with another or movements in a more liquid instrument may be used to indicate the movement in the value of less liquid instrument. The comparison may also be indirect in that adjustments are made to the price to reflect differences between the pricing source and the instrument being valued, for example different maturity, credit quality, seniority or expected payouts. Similarly to price, an instrument’s yield may be compared to other instruments either directly or indirectly. Prices move inversely to yields.
(5) Correlation: Measures the degree by which two prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. Correlations typically include relationships between: default probabilities of assets in a basket (a group of separate assets), exchange rates, interest rates and other financial variables.
However, when the information regarding the liquidity in a particular market is not clear, a judgment may need to be made. This can be more difficult as assessing the liquidity of a market is not always straightforward. For an equity traded on an exchange, daily volumes of trading can be seen, but for an over-the counter (OTC) derivative assessing the liquidity of the market with no central exchange is more difficult.
The breadth and depth of the IPV data allows for a rules based quality assessment to be made of market activity, liquidity and pricing uncertainty, which assists with the process of allocation to an appropriate level. Where suitable independent pricing information is not readily available, the quality assessment will result in the instrument being assessed as Level 3.
For example, a tradable quote would be considered a better source than a consensus price.
Reasonably possible alternative assumptions of unobservable inputs are determined based on a 90% confidence interval. The assessments recognise different favourable and unfavourable valuation movements where appropriate. Each unobservable input within a product is considered separately and sensitivity is reported on an additive basis.
CVA applied to derivative exposures to other counterparties and own credit adjustments applied to derivative liabilities (DVA) are calculated on a portfolio basis. Whilst the methodology used to calculate each of these adjustments references certain inputs which are not based on observable market data, these inputs are not considered to have a significant effect on the net valuation of the related portfolios. The classification of the derivative portfolios which the valuation adjustments are applied to is not determined by the observability of the valuation adjustments, and any related sensitivity does not form part of the Level 3 sensitivities presented.
(2) Consolidated statement of comprehensive income. (3) Fair value through profit or loss comprises held-for-trading predominantly and designated at fair value through profit and loss.
11 Financial instruments - valuation continued Fair value of financial instruments not carried at fair value
Items where fair value Carrying Fair value of hierarchy level approximates carrying value value Fair value Level 1 Level 2 Level 3 2014 £bn £bn £bn £bn £bn £bn
Deposits by banks - items in the course of transmission to other banks 0.5
The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Quoted market values are used where available; otherwise, fair values have been estimated based on discounted expected future cash flows and other valuation techniques.
For certain short-term financial instruments: cash and balances at central banks, items in the course of collection from other banks, settlement balances, items in the course of transmission to other banks, demand deposits and notes in circulation, fair value approximates to carrying value.
In estimating the fair value of loans and advances to banks and customers measured at amortised cost, RBS’s loans are segregated into appropriate portfolios reflecting the characteristics of the constituent loans. Two principal methods are used to estimate fair value: (a) Contractual cash flows are discounted using a market discount rate that incorporates the current spread for the borrower or where this is not observable, the spread for borrowers of a similar credit standing.
This method is used for portfolios where counterparties have external ratings: large corporate loans in Commercial Banking and institutional and corporate lending in CIB.
(b) Expected cash flows (unadjusted for credit losses) are discounted at the current offer rate for the same or similar products. This approach is adopted for lending portfolios in UK PBB, Commercial Banking
(SME loans), Ulster Bank and Private Banking in order to reflect the homogeneous nature of these portfolios.
The majority of debt securities are valued using quoted prices in active markets, or using quoted prices for similar assets in active markets.
Fair values of the rest are determined using discounted cash flow valuation techniques.
Fair values of deposits are estimated using discounted cash flow valuation techniques.
Fair values are determined using quoted prices for similar liabilities where available or by reference to valuation techniques, adjusting for own credit spreads where appropriate.
Items where fair value Carrying Fair value of hierarchy level approximates carrying value value Fair value Level 2 Level 3 2013 £bn £bn £bn £bn £bn
Deposits by banks - items in the course of transmission to other banks 0.8
Cash and balances at central banks 74,872 — 74,872 82,659 — 82,659 79,290 — 79,290
Loans and advances to banks 43,175 560 43,735 53,206 865 54,071 63,143 808 63,951
Loans and advances to customers 149,118 229,120 378,238 169,314 271,408 440,722 197,855 302,280 500,135
For example, if a structured note is automatically prepaid when an equity index exceeds a certain level, the cash outflow will be included in the less than three months period, whatever the level of the index at the year end.
The settlement date of debt securities in issue, issued by certain securitisation vehicles consolidated by RBS, depends on when cash flows are received from the securitised assets. Where these assets are prepayable, the timing of the cash outflow relating to securities assumes that each asset will be prepaid at the earliest possible date. As the repayments of assets and liabilities are linked, the repayment of assets in securitisations is shown on the earliest date that the asset can be prepaid, as this is the basis used for liabilities.
12 Financial instruments - maturity analysis continued 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years
Loans and advances to banks 15,110 975 219 46 15 —
Loans and advances to customers 56,664 37,249 64,266 56,726 64,051 71,492
Settlement balances and other liabilities 6,295 5 4 — — —
Loans and advances to banks 16,096 1,876 279 4 74 5
Settlement balances and other liabilities 7,074 4 9 4 — 1
0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years
Loans and advances to banks 15,592 1,393 272 27 20 62
Notes: (1) RBS is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. RBS expects most guarantees it provides to expire unused. (2) RBS has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by the counterparty.
RBS does not expect all facilities to be drawn, and some may lapse before drawdown.
Currency translation and other adjustments (630) (21) (16) (667) 121 (310)
Recoveries of amounts previously written-off 72 133 — 205 256 341
Notes: (1) Includes £40 million relating to loans and advances to banks (2013 - £63 million; 2012 - £114 million). (2) The table above excludes impairments relating to securities.
Loans and advances to customers (2) 25,201 16,444 8,757 37,101 23,150 13,951 38,352 19,176 19,176
Notes: (1) Impairment provisions individually assessed. (2) Impairment provisions individually assessed on balances of £17,655 million (2013 - £26,939 million; 2012 - £26,797 million).
The following table shows financial and non-financial assets, recognised on RBS's balance sheet, obtained during the year by taking possession of collateral or calling on other credit enhancements. 2014 2013 2012 £m £m £m
RBS enters into fair value hedges, cash flow hedges and hedges of net investments in foreign operations. The majority of RBS’s interest rate hedges relate to the management of RBS’s non-trading interest rate risk.
EURIBOR or the Bank of England official Bank Rate. The financial assets are customer loans and the financial liabilities are customer deposits and
December 2014, variable rate financial assets of £80 billion (2013 - £74 billion; 2012 - £61 billion) and variable rate financial liabilities of £14 billion (2013 - £10 billion; 2012 - £9 billion) were hedged in such cash flow hedge relationships.
For fair value hedge relationships of interest rate risk, the hedged items are typically large corporate fixed-rate loans, fixed rate finance leases, fixed rate medium-term notes or preference shares classified as debt. At 31 December 2014, fixed rate financial assets of £18 billion (2013 - £23 billion; 2012 - £25 billion) and fixed rate financial liabilities of £32 billion
The following table shows the notional amounts and fair values of RBS's derivatives.
Hedge ineffectivness recognised in other operating income in discontinued operations was £1 million in 2012.
Over 0-1 years 1-5 years 5-10 years 10-20 years 20 years Total 2014 £m £m £m £m £m £m
Designated as at fair value through profit or loss — — 111 2 4 — 117 —
Designated as at fair value through profit or loss — — 104 — 17 1 122 15
Designated as at fair value through profit or loss — — 123 86 610 54 873 516
Gross gains of £502 million (2013 - £1,018 million; 2012 - £1,824 million) and gross losses of £386 million (2013 - £352 million; 2012 - £901 million)
Gross gains of £20 million (2013 - £96 million; 2012 - £137 million) and gross losses of £3 million (2013 - £1 million; 2012 - £12 million) were realised on the sale of available-for-sale securities in discontinued operations.
Within 1 year After 1 but within 5 years After 5 but within 10 years After 10 years Total
Gross gains of £175 million (2013 - £76 million; 2012 - £118 million) and gross losses of £64 million (2013 - £4 million; 2012 - £2 million) were realised on the sale of available-for-sale equity shares in continuing operations. Gross gains of £71 million in 2012 were realised on the sale of available-for-sale equity shares in discontinued operations.
Dividend income from available-for-sale equity shares was £30 million (2013 - £67 million; 2012 - £37 million) in continuing operations and £22 million
(2013 - £21 million; 2012 - £22 million) in discontinued operations.
that RBS’s banking subsidiaries in the US are required to hold; and a number of individually small shareholdings in unlisted companies. Unquoted equity shares generated no material gains or losses in 2014, 2013 or 2012.
Disposals and write-off of fully amortised assets (1) (19) (1,321) (1,341)
Disposals and write-off of fully amortised assets — (11) (1,221) (1,232)
Write down of goodwill and other intangible assets - discontinued operations — — — —
Disposals and write-off of fully amortised assets (76) (1,968) (638) (2,682)
Impairment testing involves the comparison of the carrying value of a
The results of the annual impairment test for 2013 and 2012 are presented using the reportable segments for those years which differ as a result of the changes to RBS’s structure implemented in 2014.
Following the change in reportable segments in 2014, the £2.8 billion goodwill attributed to UK Corporate was allocated to Commercial Banking
US Retail & Commercial goodwill was allocated to UK Personal &
Goodwill growth rate discount rate carrying value rate growth rate pre-tax earnings
Expenditure on investment properties 13 — — — — — 13
Net book value at 31 December 1,933 1,854 110 536 845 889 6,167 2013 Cost or valuation
Change in fair value of investment properties - continuing operations (281) — — — — — (281)
Currency translation and other adjustments — 4 5 (7) (35) (4) (37)
Transfers (to)/from disposal groups (129) 101 11 95 (135) — (57)
Currency translation and other adjustments (51) 21 13 (124) (182) (53) (376)
Expenditure on investment properties 10 — — — — — 10
Currency translation and other adjustments — (9) 11 (114) (157) (21) (290)
Write down of property, plant and equipment — 9 7 1 — — 17
Disposals and write-off of fully depreciated assets — (15) (4) (16) (36) (462) (533)
Valuations were carried out by qualified surveyors who are members of the Royal Institution of Chartered Surveyors, or an equivalent overseas body; property with a fair value of £932 million (2013 - £985 million) was valued by independent valuers.
Property, plant and equipment, excluding investment properties, include £2 million (2013 - £42 million; 2012 - £35 million) assets in the course of construction.
19 Prepayments, accrued income and other assets 2014 2013 2012 £m £m £m
Pension schemes in net surplus (see Note 4) 295 214 144
In accordance with a commitment to the EC to sell Citizens Financial Group, Inc. (Citizens) by 31 December 2016, RBS disposed of 29.5% of its interest in Citizens during the second half of 2014 primarily through an initial public offering in the USA. RBS plans to cede control by the end of 2015 and therefore Citizens is classified as a disposal group and its results presented as discontinued operations, with comparatives re-presented.
Hierarchy level 2: based on the quoted price of shares in Citizens Financial Group, Inc.) by £3,994 million and the carrying value of the assets and liabilities of the disposal group has been adjusted by this amount. This loss has been attributed to the intangible assets of the disposal group.
(Loss)/profit from Citizens discontinued operations, net of tax (3,486) 410 490
Profit before insurance net claims and impairment losses 22 615 2,322
20 Discontinued operations and assets and liabilities of disposal groups continued
Included within RBS’s cash flows are the following amounts attributable to discontinued operations: £m £m £m
Cash and balances at central banks 622 — 622 2 18
Discontinued operations and other disposal groups 80,967 1,044 82,011 2,854 13,838
Discontinued operations and other disposal groups 71,268 52 71,320 3,376 10,162
Liabilities acquired exclusively with a view to disposal — — — 2 8
Citizens value value carrying value Level 2 Level 3 £bn £bn £bn £bn £bn
22 Accruals, deferred income and other liabilities 2014 2013 2012 £m £m £m
Provisions for liabilities and charges (see table below) 4,774 5,489 3,147 13,346 16,017 14,801 Note: (1) Other liabilities include £28 million (2013 - £25 million; 2012 - £24 million) in respect of share-based compensation.
Total protection hedging customer FX regulatory Property insurance (1) products (2) redress (3) investigations (5) provisions (5) and other (7)
Transfers to disposal groups — — (53) — — — (4) — (57)
(2) The Group has estimated £1,435 million for its liability in respect of the sale of Interest Rate Hedging Products based on experience, having now agreed all outcomes with the independent skilled person appointed to review all decisions. The provision includes redress that will be paid to customers, consequential loss (including interest) on customer redress, the cost to the Group of exiting the hedging positions and the cost of undertaking the review.
In 2014, the Group increased its provision by £185 million (2013 - £550 million; 2012 - £700 million), principally reflecting a marginal increase in redress experience compared to expectations and the cost of a small number of consequential loss claims over and above interest offered as part of basic redress payments. The outcomes of all cases have now been agreed with the independent skilled person appointed to review all decisions.
• movements in market rates that will impact the cost of closing out legacy hedging positions
(3) The Group has provided for other customer redress, primarily in relation to investment advice in retail and private banking (£190 million) and packaged accounts (£150 million).
competition infringements and EURIBOR competition infringements respectively. For further details see Note 32.
(5) The Group is party to certain legal proceedings and regulatory investigations and continues to co-operate with a number of regulators. All such matters are periodically reassessed with the assistance of external professional advisers, where appropriate, to determine the likelihood of the
Accelerated value of for-sale Cash losses capital Deferred IFRS financial financial flow Share carried
(Disposal)/acquisition of subsidiaries — (21) 5 — — — — — — — — — (16)
Exchequer announced proposals to restrict the use of losses carried forward by UK banks to a maximum of 50% of profits in periods from April 2015 onwards. A longer recovery period of the DTA associated with UK
The Royal Bank of Scotland plc - the deferred tax asset in respect of taxable losses brought forward at 1 January 2014 related mainly to trading losses that arose in the UK branch of RBS N.V. These were transferred following the transfer of activities of the UK Branch of RBS
N.V. to The Royal Bank of Scotland plc. The UK Branch tax losses attributable to credit market write-downs during the financial crisis were principally incurred between 2007 and 2009.
The Royal Bank of Scotland plc reported a taxable profit in 2011 and tax losses in 2012 and 2013. The taxable loss for 2012 reflected the reversal of previous own credit gains offset by core banking profitability. In 2013
UK tax losses were largely attributable to loan impairment charges arising from the RCR accelerated recovery strategy recorded in the final quarter of the period. In 2014, core profitability remained strong and a taxable profit arises. A reduction in the carrying value of deferred tax assets of £701 million was recorded in 2013. In addition, deferred tax of £150 million was not recognised in respect of excess 2013 UK taxable losses.
CIB restructuring will constrain the utilisation of carried forward tax losses in the near-term. Consequently, a further reduction in the carrying value of deferred tax assets of £850 million has been recorded in 2014. The bank expects that the recognised deferred tax asset of £489 million in respect of tax losses amounting to £2,445 million will be recovered by the end of 2019. The proposed UK tax law change referred to above, if enacted, is expected to extend the recovery period by approximately one year.
National Westminster Bank Plc - the deferred tax asset in respect of tax losses at 31 December 2014 relates to residual unrelieved trading losses that arose between 2009 and 2014. 60% of the losses that arose were relieved against taxable profits arising in other UK Group companies.
Based on the Group’s strategic plan, the bank expects that the recognised deferred tax asset of £768 million in respect of tax losses amounting to £3,838 million will be recovered by the end of 2018. The proposed UK tax law change referred to above, if enacted, is expected to extend the recovery period by approximately two years.
Ulster Bank Ireland - a deferred tax asset of £222 million has been recognised in respect of losses of £1,776 million (2013 - £592 million; 2012 - £575 million) of total tax losses of £8,599 million (2013 - £11,575 million; 2012 - £7,627 million) carried forward at 31 December 2013.
These losses arose principally as a result of significant impairment charges that arose between 2008 and 2013 reflecting the challenging economic conditions in the Republic of Ireland during that period.
Deferred tax liabilities of £186 million (2013 - £186 million; 2012 - £214 million) have not been recognised in respect of retained earnings of overseas subsidiaries and held-over gains on the incorporation of overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation. No taxation is expected to arise in the foreseeable future in respect of held-over gains. Changes to UK tax legislation largely exempts from UK tax overseas dividends received on or after 1 July 2009.
Currently 2015 2016 2017-2019 2020-2024 Thereafter Perpetual Total 2014 - call date £m £m £m £m £m £m £m £m 2013 - final redemption £m £m £m £m £m £m £m
Issuances and redemptions during the year (values as at date of transaction). Capital 2014 2013 2012 treatment £m £m £m
US$2,250 million 5.125% subordinated notes 2024 Tier 2 1,331 — —
US$2,000 million 6% subordinated notes 2023 Tier 2 — 1,193 —
US$2,250 million 6.125% subordinated notes 2022 Tier 2 — — 1,385
AUD883 million 13.125% subordinated notes 2022 Tier 2 — — 590
US$350 million 4.150% subordinated notes 2022 (1) Ineligible — — 214
€391 million floating rate undated notes Tier 1 310 — —
US$318 million floating rate undated notes Tier 1 188 — —
US$322 million floating rate subordinated notes Tier 2 177 — —
US$229 million floating rate subordinated notes Tier 2 144 — —
US$686 million floating rate subordinated notes Tier 2 431 — —
€227 million floating rate subordinated notes Tier 2 179 — —
€170 million floating rate undated notes Tier 2 133 — —
£1 million floating rate undated notes Tier 2 1 — —
US$211.9 million floating rate subordinated notes 2017 (partial redemption) Tier 2 129 — —
CAD483 million 4.25% subordinated notes (partial redemption) Tier 2 — — 308
US$428 million floating rate subordinated notes (partial redemption) Tier 2 — — 270
AUD400 million 6.5% subordinated notes (partial redemption) Tier 2 — — 267
US$1,050 million floating rate subordinated notes (partial redemption) Tier 2 — — 663
Ulster Banking Group £60 million floating rate subordinated notes Tier 2 60 — —
AUD451.8 million 6.50% subordinated notes 2018 (partial redemption) Tier 2 240 — —
AUD149.2 million 7.461% subordinated notes 2018 (partial redemption) Tier 2 79 — —
US$72.8 million 6.14% subordinated notes 2019 (partial redemption) Tier 2 45 — —
€13 million zero coupon subordinated notes Tier 2 — 11 —
€1,085 million floating rate subordinated notes (partial redemption) Tier 2 — 904 —
US$9 million 6.14% subordinated notes (partial redemption) Tier 2 — 5 —
US$936 million floating rate subordinated notes (partial redemption) Tier 2 — 566 —
RBS has now resumed payments on all discretionary non-equity capital instruments following the end of the European Commission ban in 2012 for RBSG and 2013 for RBS N.V. Future coupons and dividends on hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.
Gains on available-for-sale financial assets, net of tax 24 — 76 — 100
Allotted, called up and fully paid £m £m £m 000s 000s 000s
Non-cumulative preference shares of US$0.01 1 1 1 209,609 209,609 209,609
Non-cumulative convertible preference shares of US$0.01 — — — 65 65 65
Non-cumulative convertible preference shares of £0.01 — — — 15 15 15
The directors have the authority to issue £17.7 billion nominal of ordinary shares in connection with a conversion of B shares. At 31 December 2014 they had a remaining authority granted at the 2014 Annual General
During 2014, the company allotted and issued the following new ordinary shares of £1 each: Month Number of shares
The B shares do not generally carry voting rights at general meetings of ordinary shareholders. Following the subdivision and consolidation of ordinary shares in 2012 and subject to anti-dilution adjustments, each B
share is entitled to one tenth of the cash dividend of an ordinary share and may be converted at any time at the option of the holder into ordinary shares at the rate of ten B shares for each ordinary share.
On 25 June 2014, the company’s independent shareholders approved the ‘DAS Retirement Agreement’ between RBS and HM Treasury to provide for the future retirement of the Dividend Access Share (‘DAS’).
DAS. Under the DAS Retirement Agreement once RBS has paid dividends on the DAS totalling £1.5 billion, it will lose its preferential rights and become a single B share.
Non-cumulative preference shares entitle the holders thereof (subject to the terms of issue) to receive periodic non-cumulative cash dividends at specified fixed rates for each Series payable out of distributable profits of the company.
Class of preference share Number of Redemption Redemption shares in issue Interest rate date on or after price per share Debt/equity (1)
Under existing arrangements, no redemption or purchase of any noncumulative preference shares may be made by the company without the prior consent of the Prudential Regulation Authority.
Contingent capital reserve - in December 2009, HM Treasury agreed to subscribe for up to 16 billion B shares of £0.01 each at 50p per share subject to certain conditions including the Group's Core Tier 1 capital ratio falling below 5%. The fair value of the consideration payable by the company on entering into this agreement amounted to £1,458 million to be settled in instalments; of this £1,208 million was debited to the contingent capital reserve. The reserve and £320 million in respect of the final instalment were transferred to Retained earnings on cancellation of the contingent capital arrangements on 16 December 2013.
Own shares held - at 31 December 2014, 28 million ordinary shares of £1 each of the company (2013 - 34 million; 2012 - 51 million) were held by employee share trusts in respect of share awards and options granted to employees. During the year the employee share trusts awarded 6.5 million ordinary shares in satisfaction of the exercise of options and the vesting of share awards under the employee share plans.
The Group optimises capital efficiency by maintaining reserves in subsidiaries, including regulated entities. Certain preference shares and subordinated debt are also included within regulatory capital. The remittance of reserves to the company or the redemption of shares or subordinated capital by regulated entities may be subject to maintaining the capital resources required by the relevant regulator.
Finance lease contracts and hire purchase agreements Operating lease assets: Gross Present value Other Present future minimum amounts adjustments movements value lease rentals £m £m £m £m £m
After 1 year but within 5 years 6,014 (534) (251) 5,229 341
Within 1 but within but within After 5 year 2 years 5 years years 2014 £m £m £m £m £m
Operating leases - cars and light commercial vehicles 18 8 7 — 33
In a securitisation, assets, or interests in a pool of assets, are transferred generally to an SE which then issues liabilities to third party investors.
Debt securities in issue Debt securities in issue Debt securities in issue
conduits. A conduit is an SE that issues commercial paper and uses the proceeds to purchase or fund a pool of assets. The commercial paper is secured on the assets and is redeemed by further commercial paper issuance, repayment of assets or funding from liquidity facilities.
Commercial paper is typically short-dated, usually up to three months. At 31 December 2014 assets held by the conduits totalled £0.6 billion (2013 - £1.6 billion; 2012 - £3.6 billion). At 31 December 2014, 2013 and 2012 the conduits were funded entirely by RBS.
Asset backed Asset backed securitisation securitisation Investment vehicles - vehicles - funds sponsored not sponsored and other Total £m £m £m £m
Notes: (1) Income from interests in unconsolidated structured entities includes interest receivable, changes in fair value and other income less impairments. (2) A sponsored entity is a structured entity established by RBS where RBS provides liquidity and/or credit enhancements or provides ongoing services to the entity. RBS can act as sponsor for its own or for customers’ transactions. (3) In 2014 RBS transferred £1,756 million (2013 - £2,119 million) of assets into sponsored structured entities which are not consolidated by RBS and for which RBS held no interest at 31 December 2014. Income arising from these entities was £172 million (2013 - £192 million). (4) The 2013 interests in unconsolidated structured entities have been revised.
Group retains substantially all the risks and rewards of ownership. The fair value (and carrying value) of securities transferred under such repurchase transactions included on the balance sheet, are set out below. All of these securities could be sold or repledged by the holder.
RBS's regulatory capital resources in accordance with PRA definitions were as follows: PRA
Qualifying instruments and related share premium subject to phase out 5,820 — —
Qualifying instruments issued by subsidiaries and held by third parties 1,648 — —
Guarantees and assets pledged as collateral security 7,437 2,102 2,992 4,190 16,721 20,179 19,164
financial guarantee represents an irrevocable undertaking that the Group will meet a customer's specified obligations to a third party if the customer fails to do so. The maximum amount that the Group could be required to pay under a guarantee is its principal amount as in the table above. The
Commitments to lend - under a loan commitment the Group agrees to make funds available to a customer in the future. Loan commitments, which are usually for a specified term may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and unutilised overdraft facilities.
Contractual obligations for future expenditure not provided for in the accounts
In its capacity as trustee or other fiduciary role, the Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in the
December of the year preceding the scheme year (which runs from 1
expiring in March 2015. In addition, the FSCS levied an interim payment relating to resolution costs for Dunfermline Building Society of £100 million. The total capital element levied on the industry in the 2014/15 scheme year was £399 million (£363 million in the 2013/14 scheme year).
The Group has accrued £110 million for its share of estimated FSCS
In many proceedings, it is not possible to determine whether any loss is probable or to estimate the amount of any loss. Numerous legal and factual issues may need to be resolved, including through potentially lengthy discovery and document production exercises and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a liability can be reasonably estimated for any claim. RBS cannot predict if, how, or when such claims will be resolved or what the eventual settlement, damages, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages.
September 2012, the Court dismissed the ADR claims with prejudice. In
Between March and July 2013, claims were issued in the High Court of
Financial Services and Markets Act 2000. In July 2013 these and other similar threatened claims were consolidated by the Court via a Group
Litigation Order. RBS’s defence to the claims was filed on 13 December 2013. Since then, further High Court claims have been issued against
US$46 billion of mortgage-backed securities (MBS) issued primarily from 2005 to 2007. In general, plaintiffs in these actions claim that certain disclosures made in connection with the relevant offerings contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the securities were issued. RBS companies remain as defendants in more than 30 lawsuits brought by purchasers of MBS, including the purported class action identified below.
Among these MBS lawsuits are two cases filed in September 2011 by the
lawsuit remains pending in the United States District Court for the District of Connecticut, and it relates to approximately US$32 billion of MBS for which RBS entities acted as sponsor/depositor and/or lead underwriter or co-lead underwriter. Of these approximately US$9.5 billion were outstanding at 31 December 2014 with cumulative write downs to date of approximately US$1.09 billion (being the recognised loss of principal value suffered by security holders). In September 2013, the Court denied the defendants’ motion to dismiss FHFA’s amended complaint in this case. Discovery is ongoing and is scheduled to be substantially completed by the end of 2015.
The other remaining FHFA lawsuit that involves RBS (in which the primary defendant is Nomura Holding America Inc. and subsidiaries)
Inc. was an underwriter defendant were settled without any contribution from RBS Securities Inc. On 19 June 2014, another FHFA lawsuit in which RBS Securities Inc. was an underwriter defendant (against Ally
Financial Group) was settled by RBS Securities Inc. by payment of
Other MBS lawsuits against RBS companies include three cases filed by the National Credit Union Administration Board (on behalf of US Central
In many of the securitisation and securities related cases in the US, RBS
has or will have contractual claims to indemnification from the issuers of the securities (where an RBS company is underwriter) and/or the underlying mortgage originator (where an RBS company is issuer). The amount and extent of any recovery on an indemnification claim, however, is uncertain and subject to a number of factors, including the ongoing creditworthiness of the indemnifying party a number of whom are or may be insolvent.
Certain members of the Group have been named as defendants in a number of class actions and individual claims filed in the US with respect to the setting of LIBOR and certain other benchmark interest rates. The complaints are substantially similar and allege that certain members of the Group and other panel banks individually and collectively violated various federal laws, including the US commodities and antitrust laws, and state statutory and common law, as well as contracts, by manipulating LIBOR and prices of LIBOR-based derivatives in various markets through various means.
District Court for the Southern District of New York. In the coordinated proceeding, consolidated class action complaints were filed on behalf of
Exchange Act claims on behalf of persons who transacted in Eurodollar futures contracts and options on futures contracts on the Chicago
Certain members of the Group have also been named as defendants in class actions relating to (i) JPY LIBOR and Euroyen TIBOR (the "Yen action"), (ii) Euribor, and (iii) Swiss Franc LIBOR, all three of which are pending in the United States District Court for the Southern District of
Details of LIBOR investigations and their outcomes affecting RBS are set out under ‘Investigations and reviews’ on the next page.
United States District Court for the Southern District of New York and contain claims for unjust enrichment and violations of the U.S. antitrust laws and the Commodities Exchange Act. This matter is subject to prediscovery motions to dismiss some or all of the claims against the defendants.
U.S. antitrust laws by restraining competition in the market for credit default swaps through various means and thereby causing inflated bidask spreads for credit default swaps. On 4 September 2014, the Court largely denied the defendants' motion to dismiss this matter.
Court for the Southern District of New York. The plaintiffs in this action allege that the defendants violated the U.S. antitrust laws by conspiring to manipulate the foreign exchange market by manipulating benchmark foreign exchange rates. On 28 January 2015, the court denied the defendants’ motion to dismiss this action. On the same day, the court dismissed two similar class action complaints that had been filed on behalf of non-U.S. plaintiffs in Norway and South Korea on the principal ground that such claims are barred by the Foreign Trade Antitrust
District of New York on behalf of investors that transacted in exchangetraded foreign exchange futures contracts and/or options on foreign exchange futures contracts. The complaint contains allegations that are substantially similar to those contained in the consolidated antitrust class action, and it asserts both antitrust claims and claims under the
In December 2010, Irving Picard, as trustee for the bankruptcy estates of
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.
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. A further claim, for US$21.8 million, was filed in October 2011.This matter is subject to pre-discovery motions to dismiss the claims against RBS N.V..
The trustee seeks recovery of transfers made under certain restructuring agreements as, among other things, avoidable fraudulent and preferential conveyances and transfers. On 25 September 2014, the Court largely denied the defendants' motion to dismiss this matter and as a result, discovery has commenced.
CPDO claims have been served on RBS N.V. in England, the
Netherlands and Australia relating to the sale of a type of structured financial product known as a constant proportion debt obligation (CPDO).
RBS is dealing with a large number of active litigation claims in the UK in relation to the sale of interest rate hedging products. In general claimants allege that the relevant interest rate hedge products were mis-sold to them, with some also alleging RBS made misrepresentations in relation to LIBOR. Claims have been brought by customers who are being considered under the UK Financial Conduct Authority (FCA) redress programme, as well as customers who are outside of the scope of that programme. RBS is encouraging those customers that are eligible to seek redress under the FCA redress programme to participate in that programme. RBS remains exposed to potential claims from customers who were either ineligible to be considered for redress or who are dissatisfied with their redress offers.
NatWest is defending a lawsuit filed by a number of United States nationals (or their estates, survivors, or heirs) who were victims of terrorist attacks in Israel. The plaintiffs allege that NatWest is liable for damages arising from those attacks pursuant to the U.S. Antiterrorism
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.
On 10 November 2014, RBS N.V. and certain other financial institutions
were named as defendants in a complaint filed by a number of United
States nationals (or their estates, survivors, or heirs), most of whom are or were United States military personnel, who were killed or injured in more than 70 attacks in Iraq between 2004 and 2011. The attacks were allegedly perpetrated by Hezbollah and certain Iraqi terror cells allegedly funded by the Islamic Republic of Iran. According to the complaint, RBS
RBS’s businesses and financial condition can be affected by the fiscal or other policies and actions of various governmental and regulatory authorities in the United Kingdom, the European Union (EU), the United
States and elsewhere. RBS has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities, including in the United Kingdom, the EU, the United States and elsewhere, on an ongoing and regular basis regarding operational, systems and control evaluations and issues including those related to compliance with applicable laws and regulations, including consumer protection, competition, anti-bribery, anti-money laundering and sanctions regimes. It is possible that any matters discussed or identified may result in investigatory or other action being taken by governmental and regulatory authorities, increased costs being incurred by RBS, remediation of systems and controls, public or private censure, restriction of RBS’s business activities or fines. Any of the events or circumstances mentioned below could have a material adverse effect on RBS, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it.
Department of Justice (DOJ) in relation to investigations into submissions, communications and procedures around the setting of
US$150 million to these authorities respectively to resolve the investigations. As part of the agreement with the DOJ, RBS plc entered into a Deferred Prosecution Agreement in relation to one count of wire fraud relating to Swiss Franc LIBOR and one count for an antitrust violation relating to Yen LIBOR. In addition, on 12 April 2013, RBS
In July 2014, RBS entered into an Enforceable Undertaking with the
undertakes in the Enforceable Undertaking to (a) comply with its existing undertakings arising out of the February 2013 settlement with the United
Australian Benchmark Interest Rates, (b) implement remedial measures with respect to its trading in Australian reference bank bills and (c)
Undertaking, RBS also agreed to make a voluntary contribution of A$1.6 million to fund independent financial literacy projects in Australia.
March 2008 and July 2009. RBS agreed to settle the case with the EC
RBS is co-operating with investigations and new and ongoing requests for information by various other governmental and regulatory authorities, including in the UK, US and Asia, into its submissions, communications and procedures relating to a number of trading rates, including LIBOR
and other interest rate settings, and non-deliverable forwards. RBS is providing information and documents to the CFTC and the DOJ as part of an investigation into the setting of USD, EUR and GBP ISDAFIX and related trading activities. RBS is also under investigation by competition authorities in a number of jurisdictions stemming from the actions of certain individuals in the setting of LIBOR and other trading rates, as well as interest rate-related trading. At this stage, RBS cannot estimate reliably what effect, if any, the outcome of these investigations may have on RBS.
In November 2014, RBS plc reached a settlement with the FCA in the
November 2014, RBS announced that it had reached agreement with the
FCA and the PRA over failings in relation to the incident. RBS agreed a penalty of £42 million with the FCA and £14 million with the PRA.
(UBIL), an RBS company. On 12 November 2014, the Central Bank of
Ireland announced that it had fined UBIL €3.5 million in relation to its investigation.
Interest rate hedging products In June 2012, following an industry wide review, the FSA announced that
issued a report outlining the principles to which it wished RBS and other
The Central Bank of Ireland also requested UBIL, along with a number of
Irish banks, to undertake a similar exercise and past business review in relation to the sale of interest rate hedging products to retail designated small and medium sized businesses in the Republic of Ireland. RBS also agreed to undertake a similar exercise and past business review in respect of relevant customers of RBS International. The review of the sale of interest rate hedging products to eligible RBS International customers is complete, and the review of the sale of interest rate hedging products to eligible Republic of Ireland customers is expected to be completed during Q1 2015.
In February 2013, the FSA announced the results of a mystery shopping review it undertook into the investment advice offered by banks and building societies to retail clients. As a result of that review the FSA
announced that firms involved were cooperative and agreed to take immediate action. RBS was one of the firms involved.
As a result of an uplift in packaged account complaints, RBS has proactively put in place dedicated resource to investigate and resolve complaints on an individual basis.
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 Global Restructuring Group’s treatment of SMEs. The
Tomlinson Report was passed to the PRA and FCA. Shortly thereafter, the FCA announced that an independent skilled person would be appointed under Section 166 of the Financial Services and Markets Act to review the allegations in the Tomlinson Report. On 17 January 2014,
Promontory Financial Group and Mazars were appointed as the skilled person. RBS is fully cooperating with the FCA in its investigation.
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
In May 2013, the EC announced it had reached an agreement with Visa regarding immediate cross border credit card MIF rates. This agreement has now been market tested and was made legally binding on 26
In addition, the EC has proposed a draft regulation on interchange fees for card payments. The draft regulation is subject to a consultation process, prior to being finalised and enacted. It is currently expected that the regulation will be enacted during the first half of 2015. The current draft regulation proposes the capping of both cross-border and domestic
Competition & Markets Authority (CMA), announced that it would not proceed with its investigations. The CMA took this decision primarily based on the expected implementation of the draft EC regulation on interchange fees for card payments, coupled with some commitments made by Visa and MasterCard around its implementation in the UK.
The outcomes of these ongoing investigations, proceedings and proposed regulation are not yet known, but 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.
Protection Insurance (PPI). RBS has made provisions totalling £3.7 billion to date for this matter, including £0.7 billion in 2014, of which £2.9 billion has been utilised at 31 December 2014.
Since initiating an inquiry into retail banking in the EU in 2005, the EC
continues to keep retail banking under review. In late 2010 the EC
launched an initiative pressing for greater transparency of bank fees and is currently proposing to legislate for increased harmonisation of terminology across Member States. RBS cannot predict the outcome of these actions at this stage.
UK personal current accounts/retail banking Following the OFT’s publication of a market study report into the Personal
The OFT’s PCA report following this July 2012 launch was published in
The OFT announced its market study on competition in banking for SMEs in England and Wales, Scotland and Northern Ireland on 19 June 2013.
CMA will also be reviewing the previous undertakings given following the
CC’s investigation into SME banking in 2002 and whether these undertakings need to be varied. At this stage it is not possible to estimate potential impacts on RBS.
The initial review was an exploratory exercise and focused primarily on competition in wholesale securities and investment markets, and related activities such as corporate banking. It commenced with a three month consultation exercise, including a call for inputs from stakeholders.
RBS is a party to the EC’s antitrust investigation into the CDS information market. RBS has received and responded to a Statement of Objections from the EC and continues to co-operate fully with the EC's ongoing investigation. In general terms, the EC has raised concerns that a number of banks, Markit and ISDA may have jointly prevented exchanges from entering the CDS market. At this stage, RBS cannot estimate reliably what effect the outcome of the investigation may have on RBS, which may be material.
In the United States, RBS is involved in reviews, investigations and proceedings (both formal and informal) by federal and state governmental law enforcement and other agencies and self-regulatory organisations, including the DOJ and various other members of the RMBS Working
RBS Securities Inc. relating to due diligence conducted in connection with a 2007 offering of residential mortgage-backed securities and corresponding disclosures.
General in 2008, principally producing documents related to loans that were pooled into one securitisation transaction. In May 2011, the New
RBS’s mortgage securitisation business and, following the formation of the RMBS Working Group, has focused on the same or similar issues as the other state and federal RMBS Working Group investigations described above. The investigation is ongoing and RBS continues to respond to requests for information.
(RMBS). CIB did not originate or service any US residential mortgages and it was not a significant seller of mortgage loans to government sponsored enterprises (GSEs) (e.g. the Federal National Mortgage
(whether relating to underlying loans or otherwise), CIB may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of such representations and warranties. In certain instances where it is required to repurchase loans or related securities, CIB may be able to assert claims against third parties who provided representations or warranties to CIB when selling loans to it, although the ability to recover against such parties is uncertain. Between the start of 2009 and 31 December 2014, CIB
received approximately US$741 million in repurchase demands in respect of loans made primarily from 2005 to 2008 and related securities sold where obligations in respect of contractual representations or warranties were undertaken by CIB. However, repurchase demands presented to CIB are subject to challenge and rebuttal by CIB.
Citizens Financial Group, Inc (Citizens) has not been an issuer or underwriter of non-agency RMBS. However, Citizens is an originator and servicer of residential mortgages, and it routinely sells such mortgage loans in the secondary market and to GSEs. In the context of such sales,
Citizens makes certain representations and warranties regarding the characteristics of the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of the representations and warranties concerning the underlying loans. Between the start of 2009 and 31 December 2014, Citizens received US$257 million in repurchase demands and indemnification payment requests in respect of loans originated primarily since 2003. However, repurchase demands presented to Citizens are subject to challenge and rebuttal by Citizens.
RBS cannot currently estimate what the ultimate exposure may be with respect to repurchase demands. Furthermore, RBS is unable to estimate the extent to which the matters described above will impact it, and future developments may have an adverse impact on RBS’s net assets, operating results or cash flows in any particular period.
and Citizens Bank of Pennsylvania - are subject to extensive US laws and regulations concerning unfair or deceptive acts or practices in connection with customer products. Certain of the bank subsidiaries’
Corporation (FDIC) (Consent Orders). In the Consent Orders (which are publicly available and will remain in effect until terminated by the regulators), the bank subsidiaries neither admitted nor denied the regulators’ findings that they had engaged in deceptive marketing and implementation of the bank's overdraft protection programme, checking rewards programmes, and stop-payment process for pre-authorised recurring electronic fund transfers.
In connection with the Consent Orders, the bank subsidiaries paid a total of US$10 million in civil monetary penalties. The Consent Orders also require the bank subsidiaries to develop plans to provide restitution to affected customers (the amount of which is anticipated to be approximately US$8 million), to cease and desist any operations in violation of Section 5 of the Federal Trade Commission Act, and to submit to the regulators periodic written progress reports regarding compliance with the Consent Orders.
Financial and Professional Regulation to enter into a consent Cease and
RBS plc and RBS N.V. branches. In the Governance Order, RBS agreed to create the following written plans or programmes: • a plan to strengthen board and senior management oversight of the corporate governance, management, risk management, and operations of RBS’s U.S. operations on an enterprise-wide and business line basis,
• a plan designed to enhance the U.S. Branches’ compliance with
In December 2013 RBS and The Royal Bank of Scotland plc agreed a settlement with the Board of Governors of the Federal Reserve System
(Fed), the New York State Department of Financial Services (DFS), and the Office of Foreign Assets Control (OFAC) with respect to The Royal
Royal Bank of Scotland plc entered into a consent Cease and Desist
United States, and to adopt, implement, and comply with the programme.
Prior to and in connection with the US Dollar Processing Order, RBS has made investments in technology, hired and trained personnel, and revised compliance, risk management, and other policies and procedures. RBS also agreed in the US Dollar Processing Order (as part of the OFAC compliance programme) to hire an independent consultant to conduct an annual OFAC compliance review of compliance policies and their implementation and an appropriate risk-focused sampling of
Ltd’s review were presented to the DOJ in June 2014. Coutts & Co Ltd has now completed the collection of evidence of the tax status of all US
related account holders, including those US account holders participating in an offshore voluntary disclosure programme. The results of the review were presented by Coutts to the DOJ on 5 November 2014. Coutts continues to cooperate with the DOJ pursuant to the terms of the
In 2013 the FCA conducted a thematic review of the advice processes across the UK wealth management industry. As a result of this review,
The Enterprise Finance Guarantee (EFG) is a government lending initiative for small businesses with viable business proposals that lack security for conventional lending. RBS has identified a number of instances where it has not properly explained to customers how borrower and guarantor liabilities work under the EFG scheme and will now undertake a review of affected and potentially affected customers to determine whether affected customers should be offered redress. From 2009 to the end of 2014, RBS provided over £940 million of lending under the EFG scheme.
33 Net cash flow from operating activities 2014 2013 2012 £m £m £m
Write down of goodwill and other intangible assets 533 1,403 518
34 Analysis of the net investment in business interests and intangible assets 2014 2013 2012
Net (outflow)/inflow of cash in respect of disposals (806) 1,888 1,322
Note: (1) Includes cash proceeds of £578 million in 2013 relating to the disposal of the controlling interest in Direct Line Group.
Subordinated liabilities paid-in equity and merger reserve £m £m £m £m £m £m
Net cash inflow/(outflow) from financing 314 264 120 (1,321) (1,704) 1,835
On 27 February 2014, RBS announced a revised organisational structure comprising the following reportable segments.
Ulster Bank is a retail and commercial bank in Northern Ireland and the
UK. It offers a full range of banking products and related financial services through a nationwide network of relationship managers, telephone and internet channels. The product range includes invoice finance through the RBSIF brand and asset finance through the Lombard brand.
Central Functions comprises Group and corporate functions, such as treasury, finance, risk management, compliance, legal, communications and human resources. The Centre manages the Group's capital resources and Group-wide regulatory projects and provides services to the operating segments.
Citizens Financial Group (CFG) provides financial services primarily through the Citizens and Charter One brands. CFG is engaged in retail and corporate banking activities through its branch network in 11 states in the United States and through non-branch offices in other states.
Although CFG has been reclassified as a discontinued operation, it continues to be presented as a reportable segment.
RBS Capital Resolution (RCR) became fully operational on 1 January 2014 with a pool of c.£29 billion of assets with particularly high long-term capital intensity, credit risk and/or potentially volatile outcomes in stressed environments. RCR brings assets under common management and increases focus on managing these assets so as to release capital.
• RFS Holdings minority interest (RFS MI), and includes the results of Citizens that are included in discontinued operations in the statutory results.
Gain on redemption of own debt — 20 20 — — — 20
Write down of goodwill — — — (130) — — (130)
Gain on redemption of own debt — 454 454 — — — 454
Gain on redemption of own debt 20 — 20 175 — 175 454 — 454
Segmental analysis of goodwill is as follows: UK Personal Corporate & Citizens
Banking Banking Banking Banking Group Group Total £m £m £m £m £m £m £m
Currency translation and other adjustments — — (3) (25) (169) — (197)
Write down of goodwill - continuing operations — — — (1,059) — — (1,059)
Transfers to disposal groups — — — — (3,957) — (3,957)
Write down of goodwill - continuing operations — — — (130) — — (130)
2014 UK USA Europe RoW Total £m £m £m £m £m
Net assets attributable to equity owners and non-controlling interests 35,281 15,982 5,810 3,119 60,192
Net assets attributable to equity owners and non-controlling interests 54,486 14,240 (9,994) 483 59,215
Chairman and executive directors - contributions and allowances in respect of money purchase schemes — 348 - amounts receivable under long-term incentive plans and share option plans 1,469 —
In 2014, key management includes only members of the Executive Committee; in 2013 key management also included members of the Management Committee.
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 4,089 10,750
As a result, the UK Government and UK Government controlled bodies became related parties of the Group.
Protection Scheme which the Group exited on 18 October 2012 having paid total premiums of £2.5 billion. In addition, the redemption of noncumulative sterling preference shares and the placing and open offer in
levies (page 429)) together with banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships.
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 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.
The Funding for Lending Scheme was launched in July 2012. Under the scheme UK banks and building societies are able to borrow UK treasury bills from the Bank of England at a price that depends on the participant’s net lending to the UK non-financial sector. As at 31 December 2014, the
(a) In their roles as providers of finance, Group companies provide development and other types of capital support to businesses. These investments are made in the normal course of business and on arm's length terms. In some instances, the investment may extend to ownership or control over 20% or more of the voting rights of the investee company. However, these investments are not considered to give rise to transactions of a materiality requiring disclosure under
(b) The Group recharges The Royal Bank of Scotland Group Pension
There have been no significant events between 31 December 2014 and the date of approval of these accounts which would require a change to or additional disclosure in the accounts.
The accounts were approved by the Board of directors on 25 February 2015 and signed on its behalf by: Philip Hampton
Statement of changes in equity for the year ended 31 December 2014 2014 2013 2012 £m £m £m
Adjustments for: Profit on disposal of investments in subsidiaries — (676) (157)
The accompanying notes on pages 453 to 458 form an integral part of these financial statements.
Standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB
The accounting policies that are applicable to the company are included in the Group accounting polices which are set out on pages 349 to 359 of the consolidated financial statements, except that it has no policy regarding ‘Basis of consolidation’ and that the company’s investments in its subsidiaries are stated at cost less any impairment.
Prepayments, accrued income and other assets - non-financial assets 193 36 20
Debt securities in issue - designated as at fair value through profit or loss 145 153 153
Accruals, deferred income and other liabilities - non-financial liabilities 165 49 491 80,930 82,099 82,380 Notes: (1) Due from subsidiaries. (2) Due to subsidiaries.
Carrying Fair value of hierarchy level Carrying hierarchy level Carrying value Fair value Level 2 Level 3 value Fair value Level 2 value Fair value £bn £bn £bn £bn £bn £bn £bn £bn £bn
Loans and advances to banks 24.5 26.0 13.4 12.6 24.6 24.9 24.9 24.1 24.8
The following table shows the residual maturity of financial instruments, based on contractual date of maturity.
Loans and advances to banks 5,400 19,090 24,490 4,730 19,844 24,574 6,382 17,684 24,066
Loans and advances to customers 296 3 299 150 3 153 — 1,266 1,266
The following table shows the notional amount and fair value of the company's derivatives.
Equity and commodity contracts — — — 1 4 — — — —
Debt securities comprise the partial repurchase of preferred securities issued by the trusts referred to in Note 27 on the consolidated accounts.
Investments in Group undertakings are carried at cost less impairment. Movements during the year were as follows: 2014 2013 2012 £m £m £m
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 the common stock of Citizens Financial Group and certain preference shares issued by NatWest and RBS Holdings N.V..
Nature of business Country of incorporation and principal area of operation
Notes: (1) The company does not hold any of the NatWest preference shares in issue. (2) RBS disposed of 29.5% of its interest in Citizens Financial Group, Inc. during the second half of 2014 primarily through an initial public offering in the USA. (3) Coutts & Company is incorporated with unlimited liability. Its registered office is 440 Strand, London WC2R 0QS. (4) Ulster Bank Limited and its subsidiaries also operate in the Republic of Ireland. (5) RFS Holdings B.V. (RFS) owns 100% of the outstanding shares of RBS Holdings N.V. (ABN AMRO Holding N.V. prior to 1 April 2010). RBS Holdings N.V. has one direct subsidiary, The Royal Bank of Scotland N.V. (RBS N.V.), a fully operational bank within the Group. RBS N.V. is independently rated and regulated by the Dutch Central Bank. On the division of an entity by demerger, Dutch law establishes a cross liability between surviving entities in respect of the creditors at the time of the demerger. RBS N.V.’s cross liability is limited by law to the lower of its equity and the debts of ABN AMRO Bank N.V. on 1 April 2010. The likelihood of any cross liability crystallising is considered remote.
Certain preference shares issued by the company are classified as liabilities; these securities remain subject to the capital maintenance rules of the
£m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
Currently 2013 2014 2015-2017 2018-2022 Thereafter Perpetual Total £m £m £m £m £m £m £m £m 11 Share capital
Net cash inflow from financing 314 264 120 2,159 2,216 2,747
Ordinary shares issued in respect of employee share schemes 234 174 437 — — —
*Comprises loans and advances to banks 16 Directors’ and key management remuneration
Directors’ remuneration is disclosed in Note 39 on the consolidated accounts. The directors had no other reportable related party transactions or balances with the company.
460 Financial summary 469 Exchange rates 470 Description of property and equipment 471 Major shareholders 471 Material contracts 474 Risk factors
(Loss)/profit from discontinued operations, net of tax (6) (3,445) 558 318 651 (808)
Notes: (1) Includes profit on strategic disposals of £191 million (2013 - £161 million profit; 2012 - £111 million profit; 2011 - £25 million loss; 2010 - £171 million profit). (2) Includes gain on redemption of own debt of £20 million (2013 - £175 million; 2012 - £454 million; 2011 - £255 million; 2010 - £553 million). (3) Includes own credit adjustments of £146 million loss (2013 - £120 million loss; 2012 - £4,649 million loss; 2011 - £1,914 million gain; 2010 - £242 million gain). (4) Includes write down of goodwill of £130 million (2013 - £1,059 million; 2012 - £18 million; 2011 - £80 million; 2010 - £1 million). (5) Includes sovereign debt impairment of £1,099 million and related interest rate hedge adjustments of £169 million in 2011. (6) Includes £3,994 million loss provision in 2014 relating to the transfer of Citizens to disposal groups.
Basic and diluted earnings/(loss) per ordinary and equivalent B share from
Average owners' equity as a percentage of average total assets 5.9% 5.6% 5.2% 4.9% 4.6%
Notes: (1) None of the convertible securities had a dilutive effect in the years 2010 to 2014. (2) Return on average total assets represents loss attributable to ordinary and B shareholders as a percentage of average total assets. (3) Return on average owners’ equity represents loss attributable to equity owners expressed as a percentage of average shareholder funds. (4) Return on average ordinary and B shareholders' equity represents loss attributable to ordinary and B shareholders expressed as a percentage of average ordinary and B shareholders' equity. (5) For this purpose, earnings consist of income before tax and non-controlling interests, plus fixed charges less the unremitted income of associated undertakings (share of profits less dividends received). Fixed charges consist of total interest expense, including or excluding interest on deposits and debt securities in issue, as appropriate, and the proportion of rental expense deemed representative of the interest factor (one third of total rental expenses).
Within but within After 2014 £m £m £m £m £m £m £m £m
Service industries and business activities 21,851 19,319 9,451 50,621 52,253 56,435 59,190 70,006
Finance leases and instalment credit 4,051 4,572 2,310 10,933 10,524 10,532 11,216 13,374
For details of the factors considered in determining the amount of provisions, refer to the accounting policy on page 353 and ‘Critical accounting policies and key sources of estimation uncertainty’ on page 359. The following table shows the movements in loan impairment provisions.
Total customer provisions charged to income statement (0.3%) 1.6% 0.9% 1.2% 1.3%
Closing total Closing total Closing total Closing total Closing total provision loans provision loans provision loans provision loans provision loans
Note: (1) Includes £8 million written-off in respect of loans and advances to banks (2013 - £40 million; 2012 - £29 million).
The following table analyses recoveries of amounts written-off by geographical area and type of UK customer.
Potential problem loans (PPL) are loans for which an impairment event has taken place but no impairment loss is expected. This category is used for advances which are not past due 90 days or revolving credit facilities where identification as 90 days overdue is not feasible.
The following table shows certificates of deposit and other time deposits over $100,000 or equivalent by remaining maturity.
Repos institutions (1,2) paper of deposit Total Repos institutions (1,2) paper of deposit Total Total
Notes: (1) Excludes derivative cash collateral of £39 billion at 31 December 2014 (2013 - £26 billion; 2012 - £37 billion); and 2014 average of £30 billion (2013 - £31 billion; 2012 - £38 billion). (2) Excludes Federal Home Loan Bank long-term borrowings of nil at 31 December 2014 (2013 - £2 billion; 2012 - £1 billion); and 2014 average of £1 billion (2013 and 2012 - £1 billion).
Contractual obligations to purchase goods or services 110 334 500 15 — —
Undrawn formal facilities, credit lines and other commitments to lend were £212,777 million (2013 - £213,046 million; 2012 - £215,808 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.
The following tables show the Noon Buying Rate in New York for cable transfers in sterling as certified for customs purposes by the Federal Reserve
Average rate for the year (1) 1.6461 1.5673 1.5924 1.6105 1.5415
Notes: (1) The average of the Noon Buying Rates on the last US business day of each month during the year. (2) The rates used for translating US dollars into sterling in the preparation of the financial statements. (3) On 25 February 2015, the Noon Buying Rate was £1.00 = US$1.5499.
(PRA) and the Financial Conduct Authority (FCA). As with all significant banking institutions, the PRA is the consolidated supervisor of RBS. The
National Westminster Bank Plc, Coutts & Co and Ulster Bank Limited.
Wholesale activities, other than Treasury activities, are concentrated in the Corporate & Institutional Banking business, and are undertaken under the names of The Royal Bank of Scotland plc and National Westminster
Bank Limited in Northern Ireland. The banking service in the Republic of
Investment management business is principally undertaken by companies in the Commercial & Private Banking business, including
Coutts & Co, Adam & Company Investment Management Limited, and in the Corporate & Institutional Banking business, through RBS Asset
The Royal Bank of Scotland Group plc is both a bank holding company and a financial holding company within the meaning of the US Bank
Under current Federal Reserve policy, the Group is required to act as a source of financial strength for its US bank subsidiaries. Among other things, this source of strength obligation could require the Group to inject capital into any of its US bank subsidiaries if any of them became undercapitalised.
Anti-money laundering, anti-terrorism and economic sanctions regulations are a major focus of the US government for financial institutions and are rigorously enforced by the US government agencies.
RBS’s US bank and non-bank subsidiaries, and RBS's US branches are also subject to supervision and regulation by a variety of other US
regulatory agencies. Citizens Bank, NA is supervised by the Office of the
Pennsylvania is subject to the regulation and supervision of the US
Department of Banking. Both banks are subject to supervision and regulation by the Consumer Financial Protection Bureau (CFPB). Citizens
Financial Group, Inc. is under the supervision of the Federal Reserve
Bank of Boston as a bank holding company. RBS’s Connecticut branch is supervised by the Connecticut Department of Banking and the Federal
RBS operates in over 40 countries through a network of branches, local banks and non-bank subsidiaries and these activities are subject to supervision in most cases by a local regulator or central bank.
RBS operates from a number of locations worldwide, principally in the
UK. At 31 December 2014, the Royal Bank and NatWest had 563 and 1,286 retail branches, respectively, in the UK. Ulster Bank has a footprint of 199 branches and an extensive network of business banking offices across Northern Ireland and the Republic of Ireland. Citizens Financial
During 2009, HM Treasury acquired a further 16,791 million ordinary shares of 25p each raising their holding to 70.3% of the company's issued ordinary share capital.
As far as the company is aware, there have been no significant changes in the percentage ownership of major shareholders of the company's ordinary shares, B shares or preference shares during the three years ended 25 February 2015. All shareholders within a class of the company's shares have the same voting rights.
As at 31 December 2014, almost all of the company's US$ denominated preference shares and American Depository Shares representing ordinary shares were held by shareholders registered in the US. All other shares were predominantly held by shareholders registered outside the
On 26 November 2009, the company and HM Treasury entered into the
Treasury subscribed for the initial B shares and the Dividend Access
Share (the "Acquisitions") and agreed the terms of HM Treasury's subscription (the “Contingent Subscription”) for an additional £8 billion in aggregate in the form of further B shares (the "Contingent B shares"), which will be issued on the same terms as the initial B shares. The
December 2009 or, if earlier, until the occurrence of a termination event or until the company’s decision (with PRA (formerly FSA) consent) to terminate such Contingent Subscription (the "Contingent Period"), if the
Core Tier 1 ratio of the company fell below five per cent (and if certain other conditions were met) HM Treasury committed to subscribe for the
On December 16, 2013, the company announced that, having received approval from the PRA, it had terminated the £8 billion Contingent
On entering into the Contingent Subscription in 2009, the company recognised the present value of the annual fees payable under the agreement (£1,208 million) as a liability and debited a contingent capital reserve within equity. Following termination of the Contingent
Agreement, on the date the circular was posted to shareholders, on the first date on which all of the conditions precedent were satisfied, or waived, and on the date of the Acquisitions.
Dividend Access Share have also been disapplied in the Articles of
HM Treasury has agreed that it shall not be entitled to vote the B shares or the Dividend Access Share to the extent that votes cast on such B
Amount”), in the form of one or more further DAS dividends, at the discretion of the directors of the company. Any unpaid portion of the DAS
per annum, calculated on a daily accruals basis from 1 January 2016, if such portion has not been paid before 1 January 2016 and an increase of 10 per cent. per annum, calculated on a daily accruals basis from 1
Aid rules. The company agreed a series of measures which supplemented the measures in the company's strategic plan.
These provide that RBS will comply or procure compliance with these 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.
The State Aid Commitment Deeds also provide that if the EC adopts a decision that the UK Government must recover any State Aid (a
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.
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.
Under the State Aid Costs Reimbursement Deed, RBS has agreed to reimburse HM Treasury for fees, costs and expenses associated with the
& Glyn, RBS will pursue an Initial Public Offering (IPO). The pre-IPO
investment took the form of a £600 million bond, which was issued by the
On 26 September 2014, the company entered into an SSA with Citizens
Reserve Board that the company is not deemed to control CFG for the purposes of the US Bank Holding Company Act. Certain provisions of the
below specified thresholds. The SSA details, inter alia, the governance of
CFG (and certain rights of the company relating to the appointment of directors, members of board committees and certain executives of CFG), corporate actions requiring the consent of the company, information rights and rights of access to CFG personnel and compliance covenants.
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
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.
The Group’s ability to achieve its capital targets will depend on the success of the Group's plans to further reduce the size of its business through the restructuring of its corporate and institutional banking business and make further divestments of certain of its portfolios and businesses including its remaining stake in Citizens Financial Group
November 2013, following HM Treasury’s assessment of the merits of creating an external “bad bank” to hold certain assets of the Group, the
Group committed to take a series of actions to further derisk its business and strengthen its capital position. In order to strengthen its capital position and CET1 ratio, the Group decided to accelerate the divestment of Citizens Financial Group (CFG), the Group’s US banking subsidiary, by selling off 28.75% in an initial public offering in September 2014, and fully divesting its interest in CFG by the end of 2016; and to intensify management actions to reduce risk weighted assets (including through an accelerated divestment of certain of the non-core assets transferred to
London trading operation; • exit central and eastern Europe, the Middle East and Africa, and substantially reduce its presence in Asia and in the US; and
Following the decision to refine the CIB business model, the Group has decided to lift its capital targets and move to a CET1 ratio of around 13%
during the restructuring period (higher than the targets of 11% by 31
December 2015 and above 12% by the end of 2016 previously announced).
In addition, the Group is in the process of implementing the new divisional and functional structure put into place in 2014 and, as a result of the restructuring of its CIB business, is now taking further steps to implement a number of strategic initiatives which will result in a further reduction of the Group’s balance sheet as well as the scope of its activities. Implementation by the Group of these initiatives will require significant restructuring of the Group at the same time that it will also be implementing structural changes to comply with regulatory changes including those introduced under the UK Financial Services (Banking
Group or at all. Material tax or other contingent liabilities could arise on the disposal or run-down of assets or businesses 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 businesses or portfolios being sold between the announcement of the disposal and its completion, which period may span many months. In addition, the Group may be exposed to certain risks, including risks arising out of ongoing liabilities and obligations, breaches of covenants, representations and warranties, indemnity claims, transitional services arrangements and redundancy or other transaction related costs.
September 2012 outlined material structural reforms in the UK banking industry. The measures were drawn in large part from the recommendations of the Independent Commission on Banking (“ICB”), which in its final report published in 2012, included the implementation of a ring-fence of retail banking operations. The implementation of the ringfencing of retail banking operations was introduced under the Banking
Reform Act 2013. The Banking Reform Act 2013 provided primary enabling legislation in the short term with a view to completing the legislative framework for the ring-fence of retail banking operations by
Group to the PRA and the FCA to implement the ring-fence, the Group has identified a number of material risks associated with such implementation in addition to the uncertainty associated with starting to plan implementation before final rules and guidance are in place. These risks will be exacerbated by the Group’s other ongoing restructuring efforts.
business. The establishment of the RFB and the NRFB will require a significant legal and organisational restructuring of the Group and the transfer of large numbers of customers between legal entities.
The scale and complexity of completing this process and the operational and legal challenges that will need to be overcome will pose significant execution risks for the Group. The legal restructuring and migration of customers will have a material impact on how the Group conducts its business and the Group is unable to predict how some customers may react to any requirement to deal with both the RFB and NRFB to obtain certain products and services. Such implementation will be costly and although final implementation is not required until 2019, there is no certainty that the Group will be able to complete the legal restructuring and migration of customers to the RFB or NFRB, as applicable, such that the ring-fence exercise is completed on time or in accordance with future regulatory rules for which there is currently significant uncertainty.
Group to ensure the RFB’s independence. These requirements have implications for how the Group sets up its board and committee corporate governance structure and the Group cannot predict how the Group will function as a public listed company with a subsidiary
(the RFB) that will have an independent board and committee structure. In addition, the Group will need to revise its operations infrastructure so as to establish an appropriate level of segregation of the infrastructure of the RFB in areas such as information technology (“IT”) infrastructure, human resources and the management of treasury operations, including capital and liquidity.
Although the intention is to establish corporate governance and operations in accordance with applicable rules (although not yet finalised) that are as cost efficient as possible, the effects of operating the Group, the RFB and the NRFB in this manner could have a material adverse effect on the Group’s business, financial condition and results of operations.
NRFB to leave the pension plan which will trigger certain legal and regulatory obligations. Although the Group will have a number of options available to it to meet its obligations resulting from the separation, it is expected that the costs of separation will be material, including possibly increasing annual cash contributions required to be made into the Group’s pension plans. See ‘The
Group may be required to make further contributions to its pension schemes if the value of pension fund assets is not sufficient to cover potential obligations and to satisfy ring-fencing requirements’.
Plan but will now enter a further period of major restructuring through the implementation of the regulatory regime relating to the ring-fence of financial institutions by 2019 and the restructuring of the Group’s CIB
business. Although the goals of this long period of restructuring are to emerge as a less complex and safer bank there can be no assurance that the final results will be successful and that the Group will be a viable, competitive, customer focused and profitable bank
Group’s interest in CFG. The 2013/2014 Strategic Plan was intended to reduce the size of the Group’s business, mainly within the Markets division, and further strengthen its capital position in response to continuing regulatory change and simplifying the Group by replacing the previous divisional structure with three customer facing franchises focused on the UK and a smaller group of UK based customers.
hereinafter collectively referred to as the “Transformation Plan”. With the implementation of the Transformation Plan, and in particular the restructuring of the Group’s CIB business and implementation of the regulatory ring-fence regime coming into force in the UK, the Group is entering a further period of major restructuring, that will require significant resource and management attention over the next four years, with the intent to continue simplifying the Group’s business, making the bank safer by narrowing its business focus, further strengthening its capital position and improving its customer offering.
Transformation Plan subjects the Group to increased and material execution risk’. In addition, although the goal is to emerge as a simpler, safer, customer focused and profitable bank, the aggregate business of the Group will be materially smaller and different than the institution that entered the financial crisis as one of the largest and most diverse financial institutions in the world. On completion of the Transformation
Plan in 2019 the Group will be primarily a UK and Western Europe focused bank with a much less diverse group of businesses, products and services. It will service a much smaller group of customers, including large corporate and financial institutions, with its focus and its potential for profitability and growth largely dependent on its success with its retail and SME customers in the UK.
This smaller customer base and geographic concentration also carry material business risks. As a result, in addition to the execution risks associated with completion of the Transformation Plan there can be no assurance that even if the Group executes the Transformation Plan it will prove to be a successful strategy or that the Group, on completion of the
Group’s CIB business is to further simplify and downsize the Group with an increased focus on service to its customers. Such initiatives are being combined and supplemented with significant investments in technology and more efficient support functions intended to contribute to delivering significant improvements in the Group’s Return on Equity and costs: income ratio in the longer term as well as improve the resilience, accessibility and product offering of the Group.
capability in the UK, to enhance the digital services provided to its bank customers and also improve the reliability and resilience of the IT
As with any project of comparable size and complexity, there can be no assurance that the Group will be able to implement all of the initiatives forming part of its investment plan, including the IT investment programme on time or at all, and it may experience unexpected cost increases and delays. Any failure by the Group to realise the benefits of this investment programme, whether on time or at all, could have a material adverse effect on the Group’s business, results of operations and its ability to retain or grow its customer business.
Implementation by the Group of the various initiatives and programmes which form part of the Group’s Transformation Plan subjects the Group to increased and material execution risk
The level of structural change intended to be implemented within the
Group over the medium term as a result of the Transformation Plan, taken together with the overall scale of change to make the Group a smaller, more focused financial institution, will be disruptive and is likely to increase operational and people risks for the Group and to impact its revenues and business. As a result of the material restructuring plans that make up the Transformation Plan, the Group is subject to increased and material execution risk in many areas including: • Implementation of the Transformation Plan is expected to result in significant costs, mainly in connection with the Group’s restructuring of its CIB business, which costs will be incremental to current plans and exclude potential losses on the sale of financial assets and transfer of financial liabilities. Due to material uncertainties and factors outside the Group’s control, the costs of implementation could be materially higher than currently contemplated. One of the objectives of the Transformation Plan is also to achieve a mediumterm reduction in annual underlying costs (i.e., excluding restructuring and conduct-related charges). Due to material uncertainties and factors outside the Group’s control, this level of cost saving may not be achieved within the planned timescale or at any time.
• The Transformation Plan includes assumptions on levels of customer retention and revenue generation from the new business model. Due to material uncertainties and factors outside the
• The Group will be reliant on attracting and retaining qualified employees to manage the implementation of the Transformation
Plan and, in particular, the restructuring of the Group’s CIB business and to oversee the implementation of the ring-fence and operate in the new ring-fence environment. No assurance can be given that it will be able to attract and retain such employees. See also ‘The
(including members of the board) and other skilled personnel of the appropriate qualification and competence. The Group may also suffer if it does not maintain good employee relations’.
• The significant reorganisation and restructuring resulting from the combined initiatives constituting the Transformation Plan will fundamentally change the Group’s business. Implementation will be disruptive and will increase operational risk. See ‘Operational risks are inherent in the Group’s businesses and these risks could increase as the Group implements its Transformation Plan’.
• The Transformation Plan makes certain assumptions about future regulation including, but not limited to, the rules to be issued by PRA
If any of the risks outlined above were to occur, singly or in the aggregate, they could have a material adverse effect on the Group’s business, results of operations and financial condition.
The Group is subject to a number of legal, regulatory and governmental actions and investigations. Unfavourable outcomes in such actions and investigations could have a material adverse effect on the Group’s operations, operating results, investor confidence and reputation
The Group’s operations are diverse and complex, and it operates in legal and regulatory environments that expose it to potentially significant litigation, regulatory and governmental investigations and other regulatory risk. As a result, the Group has recently settled a number of legal and regulatory investigations and is, and may in the future be, involved in a number of legal and regulatory proceedings and investigations in the UK, the EU, the US and other jurisdictions.
Corporate and Institutional Banking division. The Group agreed to pay penalties of £217 million to the FCA and $290 million to the CFTC to resolve the investigations. The Group continues to cooperate with these and other governmental and regulatory authorities and remains in discussion with these authorities on these issues including settlement discussions regarding the criminal investigation being conducted by the anti-trust and criminal division of the US Department of Justice and certain other financial regulatory authorities. Settlements in relation to these ongoing investigations may result in additional financial, nonmonetary penalties, and collateral consequences, which may be material, and may give rise to additional legal claims being asserted against the
Department of Justice relating to the Group, its subsidiaries or employees, may result in a breach of the terms of the LIBOR DPA which may lead to an extension of its terms or further prosecution.
Significant increases in provisions relating to ongoing investigations may have an adverse effect on the Group’s reputation as well as its financial condition and results of operations.
The Group, like many other financial institutions, has come under greater regulatory scrutiny in recent years and expects heightened levels of regulatory supervision to continue for the foreseeable future, particularly as it relates to compliance with historical, new and existing corporate governance, employee compensation, conduct of business, consumer protection regimes, anti-money laundering and antiterrorism laws and regulations, as well as the provisions of applicable sanctions programmes. Past, current or future failures to comply with any one or more of these laws or regulations could have a material adverse effect on the Group’s reputation, financial condition and results of operations.
Group operates and the fiscal, monetary, legal and regulatory requirements to which it is subject, and in turn could have a material adverse effect on its business, financial condition and results of operations.
(including members of the board) and other skilled personnel of the appropriate qualification and competence. The Group may also suffer if it does not maintain good employee relations
The rules implementing the new regime are still under consultation by the
In addition to the effects of such measures on the Group’s ability to retain non-executive directors, senior management and other key employees, the market for skilled personnel is increasingly competitive, thereby raising the cost of hiring, training and retaining skilled personnel.
The Group’s changing strategy, particularly as a result of the Group’s 2013/2014 Strategic Plan, including the accelerated disposal of the
Group’s interest in CFG, led to the departure of many experienced and capable employees. The continuing restructuring of the Group, including as a result of the restructuring of the Group’s CIB business and the implementation of the ring-fence regulatory regime, is expected to lead to the departure of additional experienced and capable employees. The lack of continuity of senior management and the loss of important personnel coordinating certain or several aspects of the Transformation Plan could have an adverse impact on the implementation of the Group’s
Operational risks are inherent in the Group’s businesses and these risks could increase as the Group implements its Transformation Plan
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The
The Group operates in highly competitive markets that are subject to intense scrutiny by the competition authorities. Its business and results of operations may be adversely affected by increasing competitive pressures and competition rulings and other government measures
made a market investigation reference (MIR) in relation to both SME
Group operates may be significantly affected as a result and this impact will become more significant as the Group implements its Transformation
Plan and its business is increasingly concentrated in the UK on retail activities.
to identify areas which might merit in-depth market study and in February 2015 announced that it would be launching a market study to investigate competition in investment and corporate banking services. Adverse findings resulting from this study may result in the imposition of fines or restrictions on mergers and consolidations within the UK financial sector and the FCA may also refer the matter further to the CMA, which has extensive powers to take measures to restore effective competition.
UK Government’s implementation of the ring-fence regime and other customer protection measures introduced by the Banking Reform Act 2013. Although final ring-fence rules will not be available until 2016, firms
In addition, the Group is exposed to risks arising out of geopolitical events, such as trade barriers, exchange controls and other measures taken by sovereign governments that can hinder economic or financial activity levels. Furthermore, unfavourable political, military or diplomatic events, armed conflict, pandemics and terrorist acts and 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.
• the risk of increased volatility in yields and asset valuations as central banks start or accelerate looser monetary policies or tighten or unwind historically unprecedented loose monetary policy or extraordinary measures. The resulting environment of uncertainty for the market and consumers could lead to challenging trading and market conditions.
Developments relating to current economic conditions and the risk of a return to a volatile financial environment, including those discussed above, could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
CIB business, it is increasingly exposed to the UK economy. Although the prospects for the UK and the US remain the strongest among the G-7 and Ireland’s economy continues to improve, actual or perceived difficult global economic conditions, failure to meet economic growth projections, particularly in the UK and the Group’s key markets, the worsening of the scope and severity of the weak economic conditions currently experienced by a number of EU member states and elsewhere, potential volatility in the UK housing market and restrictions on mortgage lending as well as increased competition, particularly in the UK, would create challenging economic and market conditions and a difficult operating environment for the Group’s businesses.
The Group is exposed to any weakening of the European economy and the renewed threat of default by certain countries in the Eurozone
With few exceptions, countries in Europe have not yet recovered from the effects of the financial crisis. Consensus forecasts of growth in 2015 and 2016 for some of the largest European economies such as France and
Italy are low. In addition, the possibility of a European sovereign default has risen due to the recent election in Greece and the outcome and impact of ongoing negotiations by the new Greek government with respect to its outstanding debt is uncertain. The risk that the effect of any sovereign default spreads by contagion to other EU economies and the
January 2015 a €1.1 trillion quantitative easing programme designed to improve confidence in Eurozone equities and encourage more private bank lending, there remains considerable uncertainty as to whether such measures will be successful.
The effects on the UK, European and global economies of any potential dissolution of the EMU or exit of one or more EU member states from the
The occurrence of any of these events would have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group obtained State Aid approval for the aid given to the Group by the UK Government as part of the placing and open offer undertaken by the Group in December 2008. RBS announced on 9 April 2014 that it had entered into an agreement (“DAS Retirement Agreement”) with HM
Treasury for the future retirement of the Dividend Access Share (“DAS”).
The EC concluded that these new arrangements did not constitute new
Revised State Aid Commitment Deed with HMT under which it undertook to do all acts and things necessary to ensure that HMT is able to comply with the revised State aid commitments made by HMT to the EC, which mainly relate to the deadline for the Group’s divestment of the Williams &
Furthermore, if the Group is unable to comply with the terms of the State
The occurrence of any of the risks described above could have a material adverse effect on the Group’s business, results of operations, financial condition, capital position and competitive position.
HM Treasury (or UK Financial Investments Limited (UKFI) on its behalf)
may be able to exercise a significant degree of influence over the Group and any proposed offer or sale of its interests may affect the price of securities issued by the Group
The UK Government, through HM Treasury, currently holds 62.3% of the issued ordinary share capital of the Group. On 22 December 2009, the
Group issued £25.5 billion of B Shares to the UK Government. The B
Shares are convertible, at the option of the holder at any time, into ordinary shares. The UK Government has agreed that it shall not exercise the rights of conversion in respect of the B Shares if and to the extent that following any such conversion it would hold more than 75% of the total issued shares in the Group. Any breach of this agreement could result in the delisting of RBSG from the Official List of the UK Listing
In addition, UKFI manages HM Treasury’s shareholder relationship with the Group and, although HM Treasury has indicated that it intends to respect the commercial decisions of the Group and that the Group will continue to have its own independent board of directors and management team determining its own strategy, should HM Treasury’s intentions change, its position as a majority shareholder (and UKFI’s position as manager of this shareholding) means that HM Treasury or
UKFI might be able to exercise a significant degree of influence over, among other things, the election of directors and appointment of senior management, dividend policy, remuneration policy, or limiting the Group’s operations. The manner in which HM Treasury or UKFI exercises HM
FSB list of GSIBs is updated annually, based on new data and changes to methodology. The November 2014 update placed the Group in the second from bottom category of GSIBs, subjecting it to more intensive oversight and supervision and requiring the Group to have additional loss absorption capacity of 1.5% in CET1, to be phased in from the beginning
England intends to consult with firms in the UK on the UK framework.
Regulation (collectively known as “CRD IV”) which became effective from 1 January 2014, subject to a number of transitional provisions and clarifications. A number of the requirements introduced under CRD IV
produced by the European Banking Authority (EBA) and to be adopted by the European Commission which are not yet all finalised. The EU rules deviate from the Basel III rules in certain aspects, and provide national flexibility to apply more stringent prudential requirements than set out in the Basel framework.
Pillar 2A requirements and are to be met with CET1 capital: (i) the capital conservation buffer, (ii) the institution-specific counter-cyclical buffer, (iii)
the global systemically important institutions buffer, (iv) the other systemically important institutions buffer and (v) the systemic risk buffer.
The combination of the capital conservation buffer, the institution-specific counter-cyclical capital buffer and the higher of (depending on the institution), the systemic risk buffer, the global systemically important institutions buffer and the other systemically important institution buffer, in each case (as applicable to the institution) is referred to as the “combined buffer requirement”. The PRA has also introduced a firm specific Pillar 2B buffer (“Pillar 2B buffer”) which is based on various factors including firm-specific stress test results and is to be met with CET1. The PRA will assess the Pillar 2B buffer annually and UK Banks are required to meet the higher of the combined buffer requirement or Pillar 2B requirement.
In addition, under the provisions of the CRR, which took effect from 1
January 2014, deferred tax assets that rely on future profitability (for example, deferred tax assets related to trade losses) and do not arise from temporary differences must be deducted in full from CET1 capital.
Other deferred tax assets which rely on future profitability and arise from temporary differences are subject to a threshold test and only the amount in excess of the threshold is deducted from CET1 capital. The regulatory treatment of such deferred tax assets is dependent on there being no adverse changes to regulatory requirements.
“discretionary distributions” will be permitted to be paid. In the event of a breach of the combined buffer requirement, the Group will be required to calculate its maximum distributable amount, and as a consequence it may be necessary for the Group to reduce discretionary payments.
recommended a minimum leverage ratio requirement of 3% (to be met 75% by CET1 and a maximum of 25% by additional tier 1 capital), a supplementary leverage buffer applied to G-SIBs equal to 35% of the corresponding risk weighted systemic risk buffer (to be met by CET1) and a countercyclical buffer equal to 35% of the risk weighted countercyclical capital buffer (also to be met by CET1). Transition timings have been aligned to those laid out in Basel III and the exposure measure will follow that laid out by the Basel Committee for Banking Supervision. The FPC
However, if a breach of the leverage buffers (both G-SIB and countercyclical) were to occur then a recovery plan would need to be discussed with the PRA. The current Group leverage ratio is 4.2% fully met through CET1 leaving it above the minimum requirement while the countercyclical buffer is close to zero.
In addition to the capital requirements under CRD IV, the bank resolution and recovery directive (“BRRD”) introduces requirements for banks to maintain at all times a sufficient aggregate amount of own funds and
“eligible liabilities” (that is, liabilities that may be bailed in using the bail-in tool), known as the minimum requirements for eligible liabilities (“MREL”).
The aim is that the minimum amount should be proportionate and adapted for each category of bank on the basis of their risk or the composition of their sources of funding. The UK Government has transposed the BRRD's provisions into law with a requirement that the
MREL requirements by 2016 which will take into account the regulatory technical standards to be developed by the EBA specifying the assessment criteria that resolution authorities should use to determine the minimum requirement for own funds and eligible liabilities for individual firms. The EBA noted that the technical standards would be compatible with the proposed term sheet published by the FSB on total loss absorbing capacity (“TLAC”) requirements for GSIBs but there remains a degree of uncertainty as to the extent to which MREL and
Building on changes made to requirements in relation to the quality and aggregate quantity of capital that banks must hold, the Basel Committee and other agencies are increasingly focussed on changes that will increase, or re-calibrate, measures of risk weighted assets as the key measure of the different categories of risk in the denominator of the riskbased capital ratio. There is no current global consensus regarding the key objectives of this further evolution of the international capital framework. One extreme position advocated by some regulators would materially deemphasise the role of a risk-based capital ratio. A more broadly held opinion among regulators seeks to retain the ratio but also reform it, in particular by addressing perceived excessive complexity and variability between banks and banking systems. In particular, the Basel
December 2014, in which it recommended reduced reliance on external credit ratings when assessing risk weighted assets and to replace such ratings with certain risk drivers based on the particular type of exposure of each asset. While they are at different stages of maturity, a number of initiatives across risk types and business lines are in progress that will impact RWAs at their conclusion. While the quantum of impacts is uncertain owing to lack of clarity of definition of the changes and the timing of their introduction, the likelihood of an impact resulting from each initiative is high and such impacts could result in higher levels of risk weighted assets.
Group operates, including the Group’s ability to satisfy the increasingly stringent stress case scenarios imposed by regulators and the adoption of the MREL and TLAC proposals, may require the Group to issue Tier 1 capital (including CET1), Tier 2 capital and certain loss absorbing debt securities, and may result in existing Tier 1 and Tier 2 securities issued by the Group ceasing to count towards the Group’s regulatory capital.
The requirement to increase the Group’s levels of CET1 and Tier 2 capital, or loss absorbing debt securities, which could be mandated by the Group’s regulators, could have a number of negative consequences for the Group and its shareholders, including impairing the Group’s ability to pay dividends on, or make other distributions in respect of, ordinary shares and diluting the ownership of existing shareholders of the Group.
On a fully loaded Basel III basis, the Group’s CET1 ratio was 11.2% at
Group’s ability to achieve such targets depends on a number of factors, including the implementation of the ring-fence, the execution of the restructuring of the Group’s CIB business and the implementation of the 2013/2014 Strategic Plan, which includes plans for a further significant restructuring of the Group as well as further sales of its remaining stake in CFG in the U.S. See ‘Forward looking Statements’ and ‘The Group’s ability to achieve its capital targets will depend on the success of the
Group's plans to further reduce the size of its business through the restructuring of its corporate and institutional banking business and make further divestments of certain of its portfolios and businesses including its remaining stake in Citizens Financial Group'.
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 rating of the UK Government
The credit ratings of RBSG, RBS and other Group members directly affect the cost of, access to and sources of their financing and liquidity. A
number of UK and other European financial institutions, including RBSG, the Royal Bank and other Group members, have been downgraded multiple times in recent years in connection with rating methodology changes, a review of systemic support assumptions incorporated into bank ratings and the likelihood, in the case of UK banks, that the UK
Rating agencies continue to evaluate the rating methodologies applicable to UK and European financial institutions and any change in such rating agencies’ methodologies could materially adversely affect the credit ratings of Group companies.
would increase borrowing costs, require the Group to replace funding lost due to the downgrade, which may include the loss of customer deposits, and might also limit the Group’s access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. At 31 December 2014, a simultaneous one notch long-term and associated short-term downgrade in the credit ratings of RBSG and the Royal Bank by the three main ratings agencies would have required the Group to post estimated additional collateral of £4.5 billion, without taking account of mitigating action by management.
Liquidity risk is the risk that a bank will be unable to meet its obligations, including funding commitments, as they fall due. This risk is inherent in banking operations and can be heightened by a number of factors, including an over reliance on a particular source of wholesale funding
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 significant spreads. Any uncertainty relating to the credit risk of financial institutions may lead to reductions in levels of interbank lending and may restrict the Group’s access to traditional sources of funding or increase the costs of accessing such funding. The ability of the Group’s regulator to bail-in senior and subordinated debt under the provisions of BRRD implemented in the UK since January 2015 may also increase investors’ perception of risk and hence affect the availability and cost of funding for the Group.
Under certain circumstances, the Group may need to seek funds from alternative sources potentially at higher costs than has previously been the case, and/or with higher collateral or may be required to consider disposals of other assets not previously identified for disposal to reduce its funding commitments. The Group has, at times, been required to rely on shorter-term and overnight funding with a consequent reduction in overall liquidity, and to increase its recourse to liquidity schemes provided by central banks. Such schemes require assets to be pledged as collateral. Changes in asset values or eligibility criteria can reduce available assets and consequently available liquidity, particularly during periods of stress when access to the schemes may be needed most.
(including requirements imposed by virtue of the Group’s participation in government or regulator-led initiatives), have resulted in the Group facing greater regulation and scrutiny in the UK, the US and other countries in which it operates.
Although it is difficult to predict with certainty the effect that the recent regulatory changes, developments and heightened levels of public and regulatory scrutiny will have on the Group, the enactment of legislation and regulations in the UK and the EU, the other parts of Europe in which the Group operates and the US has resulted in increased capital, funding and liquidity requirements, changes in the competitive landscape, changes in other regulatory requirements and increased operating costs and has impacted, and will continue to impact, products offerings and business models. See also ‘Implementation of the ring-fence in the UK
Transformation Plan subjects the Group to increased and material execution risk’.
Areas in which, and examples of where, governmental policies, regulatory and accounting changes and increased public and regulatory scrutiny could have an adverse impact (some of which could be material)
on the Group include those set out above as well as the following: • requirements to separate retail banking from investment banking
TLAC; • restructuring certain of the Group’s non-retail banking activities in jurisdictions outside the UK in order to satisfy local capital, liquidity and other prudential requirements; • the monetary, fiscal, interest rate and other policies of central banks and other governmental or regulatory bodies; • the design and implementation of national or supra-national mandated recovery, resolution or insolvency regimes; • additional rules and requirements adopted at the European level relating to the separation of certain trading activities from retail banking operations; • further investigations, proceedings or fines either against the Group in isolation or together with other large financial institutions with respect to market conduct wrongdoing; • the imposition of government imposed requirements and/or related fines and sanctions with respect to lending to the UK SME market and larger commercial and corporate entities and residential mortgage lending; • additional rules and regulatory initiatives and review relating to customer protection, including the FCA’s Treating Customers Fairly regime; • requirements to operate in a way that prioritises objectives other than shareholder value creation; • the imposition of restrictions on the Group’s ability to compensate its senior management and other employees and increased responsibility and liability rules applicable to senior and key employees; • regulations relating to, and enforcement of, anti-bribery, anti-money laundering, anti-terrorism or other similar sanctions regimes; • rules relating to foreign ownership, expropriation, nationalisation and confiscation of assets; • other requirements or policies affecting the Group’s profitability, such as the imposition of onerous compliance obligations, further restrictions on business growth, product offering, or pricing; • changes to financial reporting standards (including accounting standards), corporate governance requirements, corporate structures and conduct of business rules; • reviews and investigations relating to the retail banking sector in the
(whether issued by agencies in EU member states or in other countries, such as the US).
The Group is subject to resolution procedures under resolution and recovery schemes which may result in various actions being taken in relation to the Group and any securities of the Group, including the write off, write-down or conversion of the Group’s securities
Treasury published final versions of the statutory instruments transposing the BRRD which came into effect in January 2015. The PRA published its final rules and requirements implementing the BRRD in January 2015.
December 2014 on the content of resolution plans and final guidelines on measures to reduce or remove impediments to resolvability. The implementation of the BRRD in the UK may also continue to evolve over time to ensure continued consistency with the FSB recommendations on resolution regimes and resolution planning for GSIBs, in particular with respect to TLAC requirements.
Similar to other major financial institutions, both the Group and its key subsidiaries remain engaged in a constructive dialogue on resolution and recovery planning with key national regulators and other authorities.
in January 2015, the provisions of the Banking Act 2009 have been substantially amended to enable the relevant authorities to deal with and stabilise certain deposit-taking UK incorporated institutions that are failing, or are likely to fail. In addition to the existing stabilisation options available under the Banking Act 2009 being (i) the transfer of all or part of the business of the relevant entity and/or the securities of the relevant entity to a private sector purchaser, (ii) the transfer of all or part of the business of the relevant entity to a ‘bridge bank’ wholly owned by the
Bank of England and (iii) temporary public ownership (nationalisation) of the relevant entity, the resolution entity will now be able to rely on an asset separation tool which will enable the Bank of England to use property transfer powers to transfer assets, rights and liabilities of a failing bank to an asset management vehicle. In addition, the new rules have transposed the BRRD requirement that the government stabilisation options may 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 potential impact of these resolution and recovery powers may include the total loss of value of securities issued by the Group and, in addition for debt holders, the possible conversion into equity securities, and under certain circumstances the inability of the Group to perform its obligations under its securities. The possible application of bail-in to the
Group’s or certain of its subsidiaries’ debt securities and additional Tier 1 and Tier 2 capital securities may also make it more difficult to issue such securities in the capital markets and the cost of raising such funds may be higher than has historically been the case.
PRA. Ulster Bank, one of the Group’s subsidiaries, was also fined €3.5m by the Central Bank of Ireland in relation to the IT incident and IT
infrastructure attributable in part to overlapping multiple legacy systems resulting from the Group’s acquisitions and the consequential gaps in how the IT systems operate, and insufficient-investments in IT
infrastructure in the past, creating challenges in recovering from system breakdowns. Critical system failure, any prolonged loss of service availability or any material breach of data security, particularly involving confidential customer data, could cause serious damage to the Group’s ability to service its customers, could result in significant compensation costs, could breach regulations under which the Group operates and could cause long-term damage to the Group’s reputation, business and brands. The Group is also currently implementing a significant IT
Group’s operations from cyber-attacks could result in the loss of customer data or other sensitive information. During 2013, the Group experienced a number of IT failures following a series of deliberate attacks which temporarily prevented RBS, CFG and NatWest customers from accessing their accounts or making payments. The Bank of
England, the FCA and HM Treasury have identified cyber security as a systemic risk to the UK financial sector and highlighted the need for financial institutions to improve resilience to cyber-attacks and the Group expects greater regulatory engagement on cyber security in the future.
Stakeholders include customers, investors, rating agencies, employees, suppliers, government, politicians, regulators, special interest groups, consumer groups, media and the general public. Brand damage can be detrimental to the business of the Group in a number of ways, including its ability to build or sustain business relationships with customers, low staff morale, regulatory censure or reduced access to, or an increase in the cost of, funding. In particular, negative public opinion resulting from the actual or perceived manner in which the Group conducts its business activities, the Group’s financial performance, ongoing investigations and proceedings and the settlement of any such investigations and proceedings, the level of direct and indirect government support or actual or perceived practices in the banking and financial industry may adversely affect the Group’s ability to keep and attract customers and, in particular, corporate and retail depositors. Reputational risks may be increased as a result of the implementation of the Group’s
Transformation Plan. Modern technologies, in particular online social networks and other broadcast tools which facilitate communication with large audiences in short time frames and with minimal costs, may significantly enhance and accelerate the impact of damaging information and allegations. 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 exposed to risk from potential noncompliance with policies, regulatory rules, employee misconduct or negligence and fraud, which could result in regulatory 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 LIBOR and foreign exchange investigations. It is not always possible to deter employee misconduct and the precautions the Group takes to prevent and detect this activity may not always be effective.
The Group’s earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions
In previous years, severe market events resulted in the Group recording large write-downs on its credit market exposures. Any deterioration in economic and financial market conditions or weak economic growth could lead to further impairment charges and write-downs. 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. Valuations in future periods, reflecting, among other things, the then prevailing market conditions and changes in the credit ratings of certain of the Group’s assets, may result in significant changes in the fair values of the Group’s exposures, such as credit market exposures and the value ultimately realised by the Group may be materially different from the current or estimated fair value.
As part of the Group’s previous restructuring and capital initiatives, including the 2013/2014 Strategic Plan, it has already materially reduced the size of its balance sheet mainly through the sale and run-off of noncore assets. The assets transferred to RCR (which included assets formerly part of the Group’s Non-Core division together with additional assets identified as part of a HM Treasury review), became part of the
‘The Group’s ability to achieve its capital targets will depend on the success of the Group's plans to further reduce the size of its business through the restructuring of its corporate and institutional banking business and make further divestments of certain of its portfolios and businesses including its remaining stake in Citizens Financial Group’. Any of these factors could require the Group to recognise further significant write-downs, realise increased impairment charges or goodwill impairments, all of which may have a material adverse effect on its financial condition, results of operations and capital ratios.
In these circumstances, the Group could be obliged, or may choose, to make additional contributions to the schemes. Given the economic and financial market difficulties that arose out of the financial crisis and the risk that such conditions may occur again over the near and medium term, the Group has experienced and may continue to experience increasing pension deficits or be required or elect to make further contributions to its pension schemes. Such deficits and contributions could be significant and have an adverse impact on the Group’s results of operations or financial condition. In May 2014, the triennial funding valuation of The Royal Bank of Scotland Group Pension Fund was agreed which showed that the value of the liabilities exceeded the value of assets by £5.6 billion at 31 March 2013, a ratio of 82%. To eliminate this deficit, RBS will pay annual contributions of £650 million from 2014 to 2016 and £450 million (indexed in line with inflation) from 2017 to 2023.
These contributions are in addition to regular annual contributions of approximately £270 million in respect of the ongoing accrual of benefits as well as contributions to meet the expenses of running the scheme.
The Banking Reform Act 2013 requires banks to ring-fence specific activities (principally retail and small business deposits) from certain other activities. Ring-fencing will require changes to the structure of the
Pensions) Regulations 2015 requires that ring-fence banks ensure that they cannot become liable for the pension schemes of the rest of their group, or anyone else after 1 January 2026. The Group is developing a strategy to meet the requirements of these regulations, which has been discussed with the PRA. The implementation of this strategy will require the agreement of pension scheme trustees. Discussions with the pension trustee will be influenced by the Group’s overall ring-fence strategy and its pension funding and investment strategies. If agreement is not reached with the pension trustee, alternative options less favourable to the Group will need to be developed to meet the requirements of the pension regulations. The costs associated with the restructuring of the Group’s existing defined benefit pension schemes could be material and could result in higher levels of additional contributions than those described above and currently agreed with the pension trustee.
Group has significant exposure to certain individual counterparties in weaker business sectors and geographic markets and also has concentrated country exposure in the UK, the US and across the rest of
Credit quality has improved in certain of the Group’s core markets, in particular the UK and Ireland, as these economies have improved.
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 adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which the
Group interacts on a daily basis, all of which could have a material adverse effect on the Group’s access to liquidity or could result in losses which could have a material adverse effect on the Group’s financial condition, results of operations and prospects.
Ireland, additional constraints have been imposed in recent years on the ability of certain financial institutions to complete foreclosure proceedings in a timely manner (or at all), including as a result of interventions by certain states and local and national governments. These constraints have lengthened the time to complete foreclosures, increased the backlog of repossessed properties and, in certain cases, have resulted in the invalidation of purported foreclosures.
The EU, the ECB, the International Monetary Fund and various national authorities have proposed and implemented certain measures intended to address systemic financial stresses in the Eurozone, including the creation of a European Banking Union which, through a Single Resolution
Changes in interest rates, foreign exchange rates, credit spreads, bond, equity and commodity prices, basis, volatility and correlation risks and other market factors have significantly affected and will continue to affect the Group’s business and results of operations
Some of the most significant market risks the Group faces are interest rate, foreign exchange, credit spread, bond, equity and commodity prices and basis, volatility and correlation risks. Changes in interest rate levels
(or extended periods of low interest rates such as experienced over the past several years), yield curves (which remain depressed) and spreads may affect the interest rate margin realised between lending and borrowing costs, the effect of which may be heightened during periods of liquidity stress. Changes in currency rates, particularly in the sterling-US
dollar and sterling-euro exchange rates, affect the value of assets, liabilities, 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. Such changes may result from the decisions of
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
Many market counterparties have been adversely affected by their exposure to residential mortgage linked and corporate credit products, whether synthetic or otherwise, and their actual and perceived creditworthiness may deteriorate rapidly. If the financial condition of these counterparties or their actual or perceived creditworthiness deteriorates, the Group may record further credit valuation adjustments on the credit protection bought from these counterparties under the CDSs. The Group also recognises any fluctuations in the fair value of other credit derivatives. Any such adjustments or fair value changes may have a material adverse impact on the Group’s financial condition and results of operations.
The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgements and estimates that may change over time or may ultimately not turn out to be accurate
Under International Financial Reporting Standards (IFRS), the Group recognises at fair value: (i) financial instruments classified as held-fortrading or designated as at fair value through profit or loss; (ii) financial assets classified as available-for-sale; and (iii) derivatives.
Generally, to establish the fair value of these instruments, the Group relies on quoted market prices or, where the market for a financial instrument is not sufficiently active, internal valuation models that utilise observable market data. In certain circumstances, the data for individual financial instruments or classes of financial instruments utilised by such valuation models may not be available or may become unavailable due to prevailing market conditions. In such circumstances, the Group’s internal valuation models require the Group to make assumptions, judgements and estimates to establish fair value, which are complex and often relate to matters that are inherently uncertain. These assumptions, judgements and estimates also need to be updated to reflect changing facts, trends and market conditions. The resulting change in the fair values of the financial instruments has had and could continue to have a material adverse effect on the Group’s earnings, financial condition and capital position.
Given the complexity of the Group’s business, strategy and capital requirements, the Group relies on analytical models to assess the value of its assets and its risk exposure and anticipate capital and funding requirements. The Group’s valuation, capital and stress test models and the parameters and assumptions on which they are based need to be constantly updated to ensure their accuracy. Failure of these models to accurately reflect changes in the environment in which the Group operates or the failure to properly input any such changes could have an adverse impact on the modelled results or could fail to accurately capture the risk profile of the Group’s financial instruments. Some of the analytical models used by the Group are predictive in nature. The use of predictive models has inherent risks and may incorrectly forecast future behaviour, leading to flawed decision making and potential losses. The Group also uses valuation models that rely on market data inputs. If incorrect market data is input into a valuation model, it may result in incorrect valuations or valuations different to those which were predicted and used by the Group in its forecasts or decision making. Should such models prove to be incorrect or misleading, decisions made by the Group in reliance thereon could expose the Group to business, capital and funding risk.
The Group’s results could be adversely affected in the event of goodwill impairment
The Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Acquired goodwill is recognised initially at cost and subsequently at cost less any accumulated impairment losses. As required by IFRS, the Group tests goodwill for impairment annually, or more frequently when events or circumstances indicate that it might be impaired. 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. At 31 December 2014, the Group carried goodwill of £6.3 billion on its balance sheet.
Further impairments of the Group’s goodwill could have an adverse effect on the Group’s results and financial condition.
The recoverability of certain deferred tax assets recognised by the Group depends on the Group’s ability to generate sufficient future taxable profits and may be affected by changes to tax legislation
(including rates of tax) or accounting standards may reduce the recoverable amount of the recognised deferred tax assets. At 31
December 2014, the value of the Group’s deferred tax assets was £1.5 billion. In December 2014 the UK Government announced a proposed restriction on the use of certain brought forward tax losses of banking companies to 50% of relevant profits from 1 April 2015 which may also affect the recoverable amount of recognised deferred tax assets. In addition, the implementation of the rules relating to ring-fencing and the resulting restructuring of the Group may further restrict the
Shareholders requiring a Braille or audio version of the Strategic report with additional information should contact the Registrar on +44 (0)870
The company is aware that shareholders who hold a small number of shares may be retaining these shares because dealing costs make it uneconomical to dispose of them. ShareGift, the charity share donation scheme, is a free service operated by The Orr Mackintosh Foundation
(registered charity 1052686) to enable shareholders to donate shares to charity.
Donating your shares in this way will not give rise to either a gain or a loss for UK capital gains tax purposes and you may be able to reclaim UK
income tax on gifted shares. Further information can be obtained from
Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that turn out to be worthless or nonexistent, or to buy shares at an inflated price in return for an upfront payment. While high profits are promised, if you buy or sell shares in this way you will probably lose your money.
• Keep in mind that firms authorised by the FCA are unlikely to contact you out of the blue with an offer to buy or sell shares.
• Do not get into a conversation, note the name of the person and firm contacting you and then end the call.
• Check the Financial Services Register at www.fca.org.uk to see if the person and firm contacting you is authorised by the FCA.
• Remember if it sounds too good to be true, it probably is.
If you are approached by fraudsters please tell the FCA using the share fraud reporting form at www.fca.gov.uk/scams, where you can find out more about investment scams. You can also call the FCA Consumer
Helpline on 0800 111 6768. If you have already paid money to share fraudsters you should contact Action Fraud on 0300 123 2040.
The following series of American Depositary shares (ADSs) representing non-cumulative preference shares issued in the US were outstanding at 31
Each of the respective ADSs set out above represents the right to receive one corresponding preference share, and is evidenced by an American
In October 2007, the company listed ADSs, each representing one ordinary share nominal value 25p each (or a right to receive one ordinary share), and evidenced by an ADR or uncertificated securities, on the
NYSE. With effect from 7 November 2008, the ratio of one ADS
The following table shows the high and low sales prices for each of the outstanding ADSs representing non-cumulative dollar preference shares, PROs, ordinary shares and ADSs representing ordinary shares.
US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ £ US$
On 26 November 2009, RBS entered into a State Aid Commitment Deed with HM Treasury containing commitments and undertakings that were designed to ensure that HM Treasury was able to comply with the commitments to be given by it to the European Commission for the purposes of obtaining approval for the State aid provided to RBS. As part of these commitments and undertakings, RBS agreed not to pay discretionary coupons and dividends on its existing hybrid capital instruments for a period of two years. This period commenced on 30 April 2010 for RBS Group instruments and ended on 30 April 2012; the two year deferral period for RBS Holdings N.V. instruments commenced on 1
On 4 May 2012, RBS determined that it was in a position to recommence payments on RBS Group instruments. In June 2013 RBS Holdings N.V.
The company has not paid an ordinary dividend since 2007. In 2008, the company issued new ordinary shares by way of a capitalisation issue rather than paying an interim dividend.
PROs (a “US Holder”). This summary assumes that a US Holder is holding ordinary shares, ordinary ADSs, preference ADSs or PROs, as applicable, as capital assets. This summary does not address the tax consequences to a US Holder (i) that is resident in the UK for UK tax purposes, (ii) that carries on a trade, profession or vocation through a branch, agency or permanent establishment in the UK in connection with which their ordinary shares, ordinary ADSs, preference ADSs or PROs are held, used or acquired, or (iii) generally, that is a corporation which alone or together with one or more associated companies, controls, directly or indirectly, 10% or more of the voting stock of the company, nor does this summary address all of the tax consequences that may be relevant to a US Holder in light of its particular circumstances, including alternative minimum tax and Medicare contribution tax consequences, as well as differing tax consequences that may apply to US Holders subject to special rules, such as certain financial institutions, dealers or traders in securities who use a mark-to-market method of tax accounting, persons holding ordinary shares, ordinary ADSs, preference ADSs or PROs as part of a hedging transaction, straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to such securities, persons whose functional currency for US
federal income tax purposes is not the US dollar, entities classified as partnerships for US federal income tax purposes, tax-exempt entities or persons that own or are deemed to own 10% or more of the voting stock of the company.
For the purposes of the Treaty, the Estate Taxation Treaty and the US
The US Treasury has expressed concerns that parties to whom depositary receipts are released before shares are delivered to the depositary, or intermediaries in the chain of ownership between US
holders and the issuer of the security underlying the depositary receipts, may be taking actions that are inconsistent with the claiming of foreign tax credits for US holders of depositary receipts. Such actions would also be inconsistent with the claiming of the favourable US tax rates applicable to dividends received by certain non-corporate US holders
(described below). Accordingly, the availability of the favourable tax rates for dividends received by certain non-corporate US holders could be affected by actions taken by such parties or intermediaries.
Distributions by the company (other than certain pro-rata distributions of ordinary shares or rights to receive such shares) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as determined under US federal income tax principles.
Because the company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions will be reported to US Holders as dividends. Payments will not be eligible for the dividends-received deduction generally allowed to corporate US holders.
US Holders may be taxable at the favourable rates applicable to longterm capital gain. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at these favourable rates.
Holder's (or in the case of ADSs, the depositary's) receipt of the dividend.
A US Holder that is not resident in the UK will not normally be liable for
US Holder, such US Holder carries on a trade, profession or vocation in the UK through a branch or agency and, in each case, such ordinary share, ordinary ADS or preference ADS is or has been used, held or acquired by or for the purposes of such trade (or profession or vocation), carried on through such permanent establishment, branch or agency.
Special rules apply to individuals who are temporarily not resident in the
A US Holder will, upon the sale or other disposition of an ordinary share, an ordinary ADS or a preference ADS, or upon the redemption of preference ADS, generally recognise capital gain or loss for US federal income tax purposes (assuming that in the case of a redemption of a preference ADS, such US Holder does not own, and is not deemed to own, any ordinary shares or ordinary ADSs of the company) in an amount equal to the difference between the amount realised (excluding in the case of a redemption any amount treated as a dividend for US federal income tax purposes, which will be taxed accordingly) and the US
Holder's tax basis in such share or ADS. This capital gain or loss will be long-term capital gain or loss if the US Holder held the share or ADS so sold, disposed or redeemed for more than one year. The deductibility of capital losses is subject to limitations.
A US Holder who is liable for both UK and US tax on a gain recognised on the disposal of an ordinary share, an ordinary ADS or a preference
ADS may be entitled, subject to certain limitations, to credit the UK tax against its US federal income tax liability in respect of such gain.
(subject to exemptions and reliefs) on the death of the individual or in certain circumstances, if such shares or ADSs are the subject of a gift
Inheritance tax is not generally chargeable on gifts to individuals made more than seven years before the death of the donor. Ordinary shares, ordinary ADSs or preference ADSs held by the trustees of a settlement may also be subject to UK inheritance tax. Special rules apply to such settlements.
An ordinary share, an ordinary ADS or a preference ADS beneficially owned by an individual, whose domicile is determined to be the United
permanent establishment of an enterprise; or (iii) pertains to a UK fixed base of an individual used for the performance of independent personal services.
The following is a summary of the UK stamp duty and SDRT
consequences of transferring an ADS (otherwise than to the custodian on cancellation of the ADS) or of transferring an ordinary share. A transfer of an ADS executed and retained in the United States will not give rise to a liability to pay stamp duty and an agreement to transfer an ADS will not give rise to SDRT. Stamp duty or SDRT will normally be payable on or in respect of transfers of ordinary shares and accordingly any holder that acquires or intends to acquire ordinary shares is advised to consult its own tax adviser in relation to stamp duty and SDRT.
US federal income tax principles. Because the company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions will be reported to US
Holder who is entitled under the Treaty to a refund of UK tax, if any, withheld on a payment will not be entitled to claim a foreign tax credit with respect to the refundable tax. Subject to applicable limitations that vary depending upon a US Holder's particular circumstances and the discussion above regarding concerns expressed by the US Treasury, dividends paid to certain non-corporate US Holders may be taxable at the favourable rates applicable to long-term capital gain. Non-corporate US