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The Strategic Report for the year ended 31 December 2017 set out on pages 1 to 49 was approved by the Board of directors on 22 February 2018.
RBS delivered against its targets to increase income, reduce costs and use less capital across its businesses. In addition, RBS made substantive progress on resolving its remaining legacy issues. Net loans and advances growth of 2.2% across PBB, CPB and RBSI was lower than target, however, the bank made greater progress than anticipated on RWA reductions.
Common Equity Tier 1 (CET1) ratio of 15.9% increased by 2.5 percentage points during 2017 and remains ahead of our 13% target.
Strength and sustainability £2,239 million Operating profit before tax £752 million Profit attributable to ordinary shareholders
Simplifying the Bank £810 million Reduction in adjusted operating expenses (3)
Notes: (1) Based on end-point Capital Requirements Regulation (CRR) Tier 1 capital and leverage exposure under the CRR Delegated Act.
(3) Operating expenses excluding litigation and conduct costs £1,285 million (2016 - £5,868 million), restructuring costs £1,565 million (2016 - £2,106 million), and VAT recoveries of £86 million (2016 - £227 million).
(5) Includes people supported through the following enterprise programmes during 2017: The Prince’s Trust, Skills & Opportunities Fund and Entrepreneurial Spark.
Our share price increased 20% in the year, outperforming other main UK banks. We also welcomed the UK Treasury announcement in November 2017 to potentially restart the privatisation process by the end of March 2019. This announcement showed confidence in our strategic approach, the progress that we have made in making the bank safer and in a position to succeed as we approach a new era of disruption in banking.
The bank made an operating profit before tax of £2,239 million, and an attributable profit of £752 million, the first full year profit since 2007.
Progress in resolving legacy issues We resolved a number of major legacy issues during the year. The Competition Directorate of the European Commission announced that it had agreed a revised scheme to satisfy the remaining State Aid obligations which were imposed on the bank in 2009. The new scheme replaces the need to divest the business formerly described as Williams & Glyn, and involves the creation of a capability fund to benefit challenger banks, alongside incentivised transfers of some of our small business customers. The scheme is not only practical, it will enhance competition.
Another potentially damaging reputational risk was the 2008 Rights Issue litigation. That has now been resolved. The settlement announced in June 2017 brought the proceedings to an end.
We also settled an action with the Federal Housing Finance Agency related to this bank’s participation in the US subprime mortgage market in the run up to the financial crisis.
There is, however, one major piece of litigation we need to resolve in relation to our past subprime mortgage activity, with the Department of Justice in the United States. At this point we cannot say when that issue will be closed, as the timing is not in our gift, but we continue to hope to resolve it in the coming months.
Economy and Regulation In 2017 the UK economy continued to grow, albeit below its long-term trend rate. Inflation is currently running at around 3%, above the Bank of England’s 2% target. In its latest outlook the Bank of England has indicated that rates may have to rise somewhat sooner, and to a somewhat greater extent that they had previously anticipated. The Monetary Policy Committee believes that inflation will still be above target three years from now when they expect price pressures to be mounting, necessitating a monetary tightening.
Surveys of business confidence increasingly point to longer term uncertainty over how businesses will structure their operations, once the UK leaves the EU. The depreciation of sterling pushed up inflation but provided a boost to UK exporters, giving them the opportunity to reduce prices in overseas markets or to boost margins. With the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD) pointing to improving global growth prospects in 2018, the UK economy could gain from this favourable tailwind, albeit the scale of these gains is uncertain. In recent weeks, sterling has appreciated against the dollar, but remains weak against the euro.
Colleague engagement, diversity and inclusion We are making good progress in improving the culture of the organisation. Our annual colleague sentiment survey scores are the highest they have been in ten years and there is generally a more positive outlook from colleagues across the bank.
In 2017 we were recognised as the ‘Diverse Company of the Year’ at the National Diversity Awards; a Top 10 Employer for Working Families; a Times Top 50 Employer for Women and retained a gold rating for our work on Race in Business in the Community’s Race for Opportunity benchmark. We also have a Black, Asian and Minority Ethnic (BAME) focus on recruitment, talent identification and promotion, and have introduced explicit targets for BAME representation at senior levels in 2018.
Today, for the first time, we have also published details of the average pay gap between male and female colleagues in the bank, which is 37.2%. Gender pay is markedly different to equal pay which looks at the difference in pay between men and women for similar roles. We are confident that we pay our employees fairly and keep our HR policies and processes under regular review to ensure we do so.
Chairman’s statement filled by women by 2020. Our latest figures show we are now at 37% on aggregate, and on track to achieve 40% by 2020. Furthermore, 44% of our top 5000 roles are occupied by women and we are aspiring to achieve full gender balance at all levels of our business by 2030.
Building a sustainable bank We are committed to running the bank as a more sustainable business, serving today’s customers in a way that also safeguards future generations.
Board Changes In 2017 Mark Seligman and Yasmin Jetha joined the Board and have already brought a wealth of experience and fresh perspectives to our discussions. Mark became the Senior Independent Director at the end of the year. Sadly, John Hughes, who joined in June 2017, had to step down in September 2017 for health reasons. Dr Lena Wilson was appointed as a nonexecutive director on 1 January 2018. Lena brings strong commercial and public sector experience to the Board, having previously served as Chief Executive of Scottish Enterprise and Senior Investment Advisor to The World Bank. With effect from 1 January 2018, Sandy Crombie stepped down from the Board and Penny Hughes has told us that she does not plan to stand for re-election at the 2018 Annual General Meeting. I would like to thank both Sandy and Penny for their outstanding commitment and huge contributions to RBS over a number of years. Sandy was, as Senior Independent Director, a great support to my predecessor and to me. Penny has led the Remuneration and, later, the Sustainable Banking Committee with great enthusiasm. We wish them both well for the future.
Putting the past behind us. Investing for the future. In 2017 we continued to make good progress in building a simpler, safer and more customer focused bank. I am pleased to report to shareholders that the bank made an operating profit before tax of £2,239 million in 2017, and for the first time in ten years we have delivered a bottom Iine profit of £752 million.
We have achieved profitability through delivering on the strategic plan that was set out in 2014. The first part of this plan was focused on building financial strength by reducing risk and building a more sustainable cost base. So far, we have reduced our risk-weighted assets by £228 billion and today can report a Common Equity Tier 1 ratio of 15.9% up from 8.6% in 2013. Our financial strength is now much clearer. Over the same period we have reduced operating costs by £3.9 billion. We still have more to do on cost reduction, however this reflects the progress we have made in making the bank more efficient.
At the same time as building financial strength, we have also made progress with the legacy of our past and improving our core bank. We have delivered on this by resolving a number of our litigation and conduct issues. This includes reaching settlements last year with FHFA in respect of our historical Retail Mortgage Backed Securities (RMBS) activities and with claimants in relation to our 2008 Rights Issue. In 2017 we also continued to run down our legacy assets. The wind-up of our noncore division, Capital Resolution in 2017, was an important moment.
The bank has received significant media attention for its treatment of some small business customers between 2008 and 2013. To those customers who did not receive the experience they should have done while in GRG we have apologised. We accept that we got a lot wrong in how we treated customers in GRG during the crisis. However, these were complex and subjective cases with each case having unique facts about what was the right thing to do. The bank welcomes the FCA’s confirmation that the most serious allegations made against the bank have not been upheld and that the steps the bank announced in November 2016 to put things right for customers are appropriate.
I want to thank our colleagues for their commitment and resolve during what has been a difficult chapter in the bank’s history. Our most recent colleague survey, Our View, reported the highest engagement levels in ten years. We also recently won the ‘Employee Engagement Company of the Year’ at the UK Employee Engagement Awards. This shows that our culture is improving. This bank is now more open, less hierarchical and more focused on our customers. Our colleagues serve and support millions of customers across the UK and Republic of Ireland every day, it is vital to our success that they feel engaged and motivated.
Investing to transform our business When I started as CEO in 2014 the bank was far too complex. We operated in 38 countries, with over 5,000 systems supporting hundreds of different products. In our credit card business alone we offered 55 different card designs, as the organisation had grown we had added complexity which distracted us from our key stakeholder, the customer. Our customers want a bank which protects their safety and security, and is also responsive to their needs.
Throughout 2017 NatWest Markets has continued to deepen its customer relationships by providing global market access and innovative and tailored solutions. As well as increasing employee engagement and improving the control environment, the business has made material progress to realise cost and operating efficiencies.
Responding to technological change The financial services industry is going through one of the most significant periods of change we have seen in many years, and we are responding.
Our ambition is for the standard of service we provide to always be outstanding, no matter how our customers choose to interact with us. In 2018 our branches will increasingly focus providing specialised expertise and advice as well as on helping customers tap into the wealth of ease and efficiency they can experience through using our digital channels.
In our commercial bank, we are supporting customers shift to mobile through building our online service Bankline service into an app. Currently, 90,000 commercial customers are active on Bankline. In the future we expect this to move increasingly to mobile. In 2018, we will also launch Bankline mobile for our larger commercial customers. This new service will act as a companion to our current Bankline on-line technology. Initially, customers will be able to view transactions and send payments with biometric approval. In the coming quarters we will further expand the scope of what Bankline Mobile offers.
Looking forward In the past our legacy has dominated our corporate story. In 2017 our financial strength improved and we continued to put the past behind us. We are entering a new phase of transforming the core bank through technology innovation and end-to-end process re-engineering. Our future will be high tech and high touch, which means lower cost, high quality digital services with human expertise available when required.
We recognise our responsibility towards the society we serve and operate in. It is only by supporting our customers and communities to succeed that we will be become a more sustainable bank. I, together with my management team, view this as a core part of our ambition to be No.1 for customer service, trust and advocacy.
4.0% increase in adjusted income(1) and an 8.1% reduction in adjusted operating expenses(2) driving a 12.1% improvement in operating leverage.
Supported the UK economy through a £6.0 billion, or 2.2%(3), increase in net lending across PBB, CPB and RBSI. Whilst behind our 3% target, this represents strong growth in a competitive environment.
Banking remains ahead of its main competitors. Trust has improved for both
Employee engagement improved by 7 points to 83, 1 point above the GFS norm
Notes: (1) Income excluding own credit adjustments £69 million loss (2016 - £180 million gain), loss on redemption of own debt £7 million (2016 - £126 million) and strategic disposals £347 million ( 2016 - £164 million).
(3) Excluding transfers. See notes on page 15 for further details.
15 minutes to apply for a business account The process of applying for an account with us is now quicker than ever for our business customers.
Reduce capital usage: Excluding volume growth, RWAs reduced by £20.8 billion across PBB (£0.6 billion), CPB (£12.9 billion), RBSI (£4.4 billion) and NatWest Markets core (£2.9 billion), already achieving our 2018 target.
Our Board Sustainable Banking Committee hosted four stakeholder engagement sessions, inviting a broad mix of stakeholders to share their perspective on key issues with us.
RBS was recognised by InfraDeals as the leading lender to the UK renewables sector by number of transactions over the past six years (2012- 2017).
We helped over one million customers with a free Financial Health Checks to help customers organise their finances and achieve their financial goals.
Ulster Bank RoI Ulster Bank RoI reported an adjusted operating profit of €109 million and an adjusted return on equity of 3.6% in 2017. Adjusted income decreased by €8 million, or 1.1%, primarily reflecting a reduction in income on free funds, partially offset by one-off items, higher lending income and reduced funding costs.
Gross new lending increased by 3.4% from €2.5 billion in 2016 to €2.6 billion. Further cost efficiencies have been achieved, with adjusted expenses reducing by €43 million in 2017.
Gross new mortgage lending was £31.0 billion, with market share of new mortgages at approximately 12%, supporting growth in stock share to approximately 10%. Mortgage approval share in Q4 2017 decreased to approximately 12%, from around 14% in Q3 2017, and mortgage new business margins were 14 basis points lower in the quarter, in part reflecting intense price competition in the market.
UK PBB continues to invest in its digital offering and now has 5.5 million customers regularly using its mobile app, 20% higher than December 2016, and in 2017 was the first bank to launch a paperless mortgage journey.
Segmental highlights RBS continues to deliver on its plan to build a strong, simple and fair bank for both customers and shareholders. During 2017 RBS’s activities were organised on a franchise basis as follows; Personal & Business Banking (PBB) comprising two reportable segments, UK Personal & Business Banking (UK PBB) and Ulster Bank RoI; Commercial & Private Banking (CPB) comprising two reportable segments, Commercial Banking and Private Banking; RBS International and NatWest Markets.
Commercial Banking Commercial Banking includes selected assets from the former Capital Resolution business from 1 October 2017. Adjusted operating profit of £1,308 million was 2.7% higher than 2016 and adjusted return on equity remained broadly stable at 8.2%. Income increased by 2.0% due to increased volumes in targeted segments and deposit re-pricing benefits.
Adjusting for transfers (1), net lending decreased by £4.9 billion in 2017, as growth in targeted segments has been more than offset by active management of the lending book, achieving gross RWA reductions of £12.5 billion.
RWAs of £5.1 billion reduced by £4.4 billion compared with 2016 reflecting the benefit of receiving regulatory approval for RBSI to adopt an advanced internal ratings based approach on the wholesale corporate book.
(3) Shipping and other activities which were formerly in Capital Resolution were transferred to Commercial Banking on 1 October 2017, including RWAs of £2.1 billion. Whole business securitisations and relevant financial institutions (RFI) were transferred from Commercial Banking during December 2017, including RWAs of £0.6 billion. Comparatives were not re-presented for these transfers.
Video banking – a different way to bank Today’s busy lifestyles mean visiting a branch is not convenient for everyone. So we are developing alternative ways for customers to bank with us.
Our new Video Banking service lets customers chat face-to-face with a senior personal banker – at a time and location to suit them, whether they are at home, at work or on the move. Appointments are available from 9am- 8pm Monday to Friday and 9am-3pm on Saturday.
We reiterate our medium term outlook on both return on tangible equity and cost:income ratio. We also now intend to accelerate the transformation of the bank which necessitates increased investment and innovation spend together with additional restructuring costs. As a result operating costs, excluding restructuring and litigation and conduct costs, will reduce compared with 2017, but the rate of cost reduction will be materially lower than in 2017. We expect to incur restructuring charges of around £2.5 billion across 2018 to 2019 cumulatively, of which c.£0.3 billion relates to the completion of the State Aid remedy and reintegration of the former Williams & Glyn (W&G) business into UK PBB. This is compared to previous guidance of around £1 billion excluding the impact of W&G, with around two thirds of the remaining c.£1.2 billion increase being driven by costs associated with the accelerated transformation.
RBS Group capital and funding issuance plans for 2018 focus on issuing £4-6 billion MREL-compliant securities. We do not currently anticipate the need for either AT1 or Tier 2 issuances. As in 2017, we will continue to target other funding markets to diversify our funding structure. In support of the ring-fencing requirements and to build up RBS Plc (to be renamed NatWest Markets Plc) as a standalone non ring-fenced bank, we anticipate issuing £2-4 billion of senior unsecured issuance from this entity in addition to continued reliance on short term funding.
In the near to medium term, we would expect the bank to maintain a CET1 ratio in excess of our 13% target given a range of variables that are likely to impact us over the coming years. These include: potential final costs of a resolution with the US Department of Justice; future potential pension contributions and the interplay with capital buffers for the bank for investment risk being run in the pension plan; RWA inflation as a result of IFRS 16, Bank of England mortgage floors and Basel 3 amendments; expected increased and pro-cyclical impairment volatility as a result of IFRS 9; and the collective impact of these items on our stress test results
While we expect operating costs to reduce each year from 2018 to 2020, given the increased level of investment and innovation spend expected over the coming years we are no longer guiding to an absolute 2020 cost base.
The NatWest Markets segment balance sheet as at end 2017 is broadly similar to the expected target balance sheet of the NatWest Markets Plc after the ringfence transfer schemes to be carried out during 2018. In preparation for the UK ring-fencing regime, the previously reported operating segments were realigned in Q4 2017 and a number of business transfers completed. These changes included the NatWest Markets segment absorbing the former Capital Resolution segment (other than for certain shipping and portfolio assets). Notwithstanding a planned capital reduction exercise in July 2018, by 2020 this entity is targeting a capital base with a consolidated end state CET1 of 14%, a leverage ratio greater than 4% and a total capital ratio of at least twice the CET1 ratio, including the benefit of downstreamed internal MREL.
Banking is no different, and that is why, in partnership with IBM, we have introduced Cora – our helpful, digital assistant – for Royal Bank of Scotland, NatWest and Ulster Bank customers. Cora answers questions from customers 24/7, freeing up colleagues’ time, so they can help customers with more complex queries. Customers can find Cora across our digital channels whenever they need help. Whether that is when they are using online banking, or browsing our websites, she is there to solve the tricky questions.
We are building a better bank for our customers, and one that will deliver sustainable returns for shareholders. Our purpose is to serve customers well, and to do so, we are becoming a safe, simple, customer-focused UK and Ireland bank.
Underpinning that ambition is our blueprint for success. This is our plan which drives our strategic decision making.
The bank of 2020 will be high tech and high touch, which means lower cost, high quality digital services with human expertise available when required. This will be underpinned by a clear commitment to our customers, shareholders and other stakeholders.
Supporting sustainable growth A strong sustainable business grows with its customers. We continue to support our customers through offering products and services which meet their needs.
Employee engagement Engaged colleagues lead to engaged customers. At RBS we are committed to investing in our colleagues and creating leaders who inspire and empower their teams.
Our Structure We have four customer franchises, and each is underpinned by a range of distinct brands, which are the route through which we engage with our customers.
Services provide business-aligned technology, operations and property services across the bank.
It is also accountable for technology risk, payments, data, change management and the bank’s fraud and security functions.
Most functions are a mix of control, expertise and advisory. All common support activities across the organisation are included.
Personal and Business Banking (PBB) With a branch network and mobile, telephone and online banking propositions PBB provides services in the UK and the Republic of Ireland. Through a simple range of products PBB meets the needs of our retail banking, mass affluent and small business customers.
Commercial and Private Banking (CPB) CPB serves our commercial and high net worth customers in the UK and Western Europe. Commercial Banking supports our corporate clients by providing comprehensive commercial banking and financing services with sector expertise. Our Private Banking business offers high net worth clients private banking, wealth planning and investment management services.
We wanted to help make their lives easier, so we have partnered with FreeAgent, an Edinburgh-based Fintech that provides accounting software which lets smallbusiness owners track their finances and report their taxes digitally.
Now all of our small-business customers can sign up to FreeAgent using their existing business banking login details. The process is safe, secure and completely paperfree, and the software helps to make financial reporting and cash flow management quick and easy.
Our Brands Our brands are our main connection with customers. Each takes a clear and differentiated position that will help us strengthen our relationships with our customers, stand out in the market, and build the value of our brands.
Royal Bank of Scotland is committed to serving Scottish communities and English commercial business.
Adam & Company provides progressive private banking, tailoring its services and solutions to match each client and their unique needs.
As the bank of the British Armed Forces, Holt’s prides itself on understanding the complexities of serving in the military and providing a personalised service.
NatWest Markets offers its customers global market access, providing them with trading, risk management and financing solutions through its trading and sales operations.
We make use of shareholder capital and other forms of financial capital, including £367.0 billion in customer deposits.
Social and Relationship 19 million customers in the UK and Republic of Ireland.
A capable, caring and motivated workforce of 71,924 (permanent headcount). We recruited 216 graduates and 255 apprentices.
Over 64,600 employees underwent training by the Chartered Banker Professional Standards Board (CB:PSB), with 94% of applicable employees achieving the CB:PSB Foundation Standard
We earn income by providing lending and deposit services to our customers.
We pay interest to customers and other investors who have placed deposits with us and bought our debt securities. The difference between these is our net interest income. We also pay benefits to our customers, through loyalty products such as our Reward Account.
Notes: (1) Comprises £443 million corporate tax, £504 million irrecoverable VAT, £237 million bank levies and £273 million employer payroll taxes. (2) Data relates to reported attempted fraud cases and prevented third party losses in the UK (not including policy declines for debit cards). (3) Includes people supported through the following enterprise programmes during 2017: The Prince’s Trust, Skills & Opportunities Fund and Entrepreneurial Spark. (4) SME lending balances in over 9,854 postcode sectors across England, Scotland and Wales.
(5) Data is compiled by Project North East (PNE) and is based on the total spend allocated by each Regional Board.
Offering lending advice and services to individuals. Supporting customers with financial life events, including £33.9 billion of gross new mortgage lending to help our customers buy homes.
We have over twenty-five years experience in supporting the sector. We were recognised by InfraDeals as the leading lender to the UK renewables sector by number of transactions over the past six years (2012-2017).
Over 40,000 colleagues completed CPR training. Three colleagues have since had to apply their training, which helped save three lives.
Keeping money safe and accessible for our depositors, including preventing 485,000 cases of attempted fraud amounting to £244 million in the UK. There has been a sustained improvement in the number of customers impacted by fraud in 2017 with a 26% reduction from 2016.(2) We completed over one million Financial Health Checks with our personal, private and business customers.
Following a successful pilot we launched FreeAgent, free cloudbased accounting software which helps small and medium sized enterprises keep track of their finances and report taxes digitally.
Our Skills & Opportunities Fund distributed £2.5 million to 110 organisations that support people from disadvantaged communities to access the skills and opportunities they need to build their financial capability skills or to start or develop a new business in 2017.(5)
We launched ‘Building a great place to work’ to outline our commitment to giving our employees a fulfilling job, fair pay, excellent training and good leadership.
We prize fairness and diversity and exercise judgment with thought and integrity.
TechXperts As our customers’ lives change, so to does the way they choose to interact with us. One in five customers already exclusively uses digital channels for their everyday banking, and this number is only expected to rise.
Our Stakeholders RBS exists to serve customers well and we put our customers at the heart of everything we do. This means having an understanding of our impact across all stakeholders of the bank. Understanding who our stakeholders are and their views helps inform our overall strategy. Below is an overview of some of our stakeholder groups.
These events gave those in attendance the opportunity to hear from different parts of RBS, ask questions about progress so far and learn more about our plans for the future. We set up market stalls on topics of interest including customer experience, innovation and security. They could talk with employees from different parts of the bank on progress and our plans for the future.
NatWest sponsored the production of a Code of Practice on protecting customers from financial harm. The specification, launched in November 2017, included input from Financial Fraud Action UK, the National Trading Standards Scams Team, the Office of the Public Guardian, the Metropolitan Police, and two other major UK banks.
“I want all audio statements to have a braille section that allows the customer to know who and what the audio tape is for and what month this relates to”. All our audio statements now have a date so that customers can easily differentiate between them.
In addition, as part of our net promoter system in 2017 we sent out 11.5 million survey invites, with 875,500 responses.
Bank Representatives Includes employees, suppliers, and partners. They are responsible for product and service delivery and are the face of our brands.
Since 2014, customers are choosing to do their banking in different ways that suit them and reflect what they do in everyday life. The number of customers using our branches across the UK has fallen by 40% and during the same period mobile banking transactions increased by 73%; in the first half of 2017, there were 1.1 billion mobile and online transactions carried out by our customers.
We are working hard to develop new services to respond to the changing needs and expectations of our customers. All our personal customers can bank with us using our mobile app and online banking services and we have Bankline for business and commercial customers. We also provide a 24/7 webchat service for personal customers, telephony and secure text messaging for when customers want to contact us quickly, digitally and securely.
Closing branches is always a difficult decision and one we do not take lightly. When these decisions are made, we look at each branch and take into account a range of factors including, how customers are choosing to bank with us; how often customers are using the branch; the impact on customers who currently use the branch; other options available to customers including online, mobile, telephony, webchat, cash machines, video banking and local Post Offices and, the proximity of our other branches, including our network of mobile branches and local transport routes and timetables.
We acknowledge that some of our customers are not comfortable with using online or mobile banking, and for those customers who would value some support we have created a specialist taskforce of TechXperts who are dedicated to supporting our customers with training and support with digital skills. Our TechXperts support customers with the varied ways to bank and for example accompany customers to the local Post Office to show them how their banking can be done.
Our team of Community Bankers take the branch to the places where it is convenient for our customers, including libraries, rugby clubs and church halls. They also deliver community events on fraud, scams and online security, to help people keep their money safe.
Aby Evans is a Community Banker on the Kent coast. “I run regular drop in clinics in the local libraries,” she explains. “Although I’m not in a bank building, customers know where and when they can find me each week.
We recognise climate change is a significant global issue and we fully support the objectives of the Paris Climate Agreement and the emissions reductions strategies set by the UK and devolved governments. We have publicly pledged our support for the Financial Stability Board’s (FSB) Taskforce on Climate-related Financial Disclosures (TCFD) and we have included more detail on our approach to the TCFD recommendations in the Additional Information section of the 2017 Annual Report and Accounts. We also plan to announce further details of our long term approach to climate change.
Scope 3**** CO2e emissions from business travel (tonnes) 105,352 89,036 68,452 -35%
RBS takes a proactive approach to upholding our commitment to respect human rights and our approach is centred on identifying and mitigating potential human rights risks across our business and our wider sphere of influence. The Modern Slavery Act 2015 (MSA) forms part of our approach to human rights as this regulation brings together the serious criminal offences of slavery, servitude, forced or compulsory labour and human trafficking together under one piece of legislation. In 2017 we published our first annual statement on the MSA on rbs.com. This built upon our interim statement which was published in December 2016 and our existing policy framework.
We are committed to the implementation of the United Nations Guiding Principles on Business and Human Rights and participate with our peers in groups such as the Thun Group and United Nations Environment Programme Finance Initiative. We have been adopters of the Equator Principles since their inception in 2003 to manage social and environmental risks, including human rights, in projectrelated transactions.
We have sector-specific Environmental, Social and Ethical (ESE) risk policies (available at rbs.com/sustainable) which include human rights considerations for high-risk sectors. For customers outside these sectors, our general ESE risk concerns policy ensures due diligence is carried out on clients when human rights risks are identified. We expect our customers to share our commitment to respecting human rights within their operations.
We are aware that as a High Street bank we come into contact with millions of customers, some of whom may be victims of modern slavery. Our relationship with our customers is governed by a wide range of risk considerations, including our Anti-Money Laundering (AML) and Environmental, Social, and Ethical (ESE) risk assessments on current or new customers, to consider whether any of their activities carry human rights infringements.
All of our people are recruited legally and must meet the 1998 Immigration Act requirements.
We expect our suppliers to uphold the same values and commitments that we have made in relation to social and environmental impacts. Adherence to these policies is required as part of our supply chain tendering process and within our supplier contracts.
Our values are integral to the way we behave and do business and we continue to reinforce them in our systems, policies and processes, communications training and leadership role modelling.
Almost 60,000 colleagues completed our most recent colleague opinion survey. The results were the most positive we’ve seen in recent times and showed we’re changing the culture of the bank for the better. Key measures of engagement, leadership and our culture have improved significantly, and we’re now above the global financial services norm in the majority of our survey categories. The results are encouraging, and show that our hard work is paying off. However, we recognise that we have more to do to make this a stronger bank and a great place to work.
We are confident that we pay our employees fairly. We keep our HR policies and processes under review to ensure we do so.
Our rates of pay continue to exceed the Living Wage and changes have been introduced to ensure people performing the same roles are paid more consistently.
There were 347 senior managers (in accordance with the definition contained within the relevant Companies Act legislation), which comprises our executive population and individuals who are directors of our subsidiaries. The RBS Board of directors has fourteen members, consisting of nine male and five female directors.
2017 saw over 16,000 colleagues undertake stage one of Service Excellence training, our customer service programme. This first module introduces our Core Service Behaviours and provides an awareness of the tools and techniques that will help us to deliver the best possible service, every time.
We continue to work closely with the Chartered Banker Institute and Chartered Banker Professional Standards Board (CB:PSB) to professionalise our colleagues. In 2017 we again achieved an Excel rating in the CB:PSB Foundation Standard review , and remain one of only two CB:PSB member firms to have secured ‘Earned Autonomy’.
During 2017 we have continued to support Time to Change (removing the stigma of mental health) and actively encouraged open dialogue across the bank to support Mental Health in the Workplace. We were successful in running bankwide major online campaigns to support Mental Health Awareness Week and World Mental Health Day.
u As at 31 December 2017, our permanent headcount was 71,924. 49% were male and 51% female.
u We continue to work towards our target of having at least 30% senior women in our top three leadership layers across each Function and Franchise by 2020. As at the 31 December 2017 we have, on aggregate, 37% women in our top three leadership layers, and our pipeline (around 5000 of our most senior roles) has 44% women. We are on track to have a fully balanced workforce at all levels of the organisation by 2030.
u RBS plc’s gender pay gap in Great Britain is 37.2% (median 36.5%). The figures also show a gender bonus gap of 64.4% (median 36.6%).
u During 2017, we continued to roll out unconscious bias learning to all our colleagues to create a solid platform for the wider inclusion agenda. 70% of colleagues have now participated in unconscious bias training since it was introduced in 2015.
u We have plans in place for all segments of our pan-bank disability plan. It addresses areas for improvement including branch access, accessible services, improving colleague adjustment processes and inserting disability checkpoints into our key processes and practices.
u Our LGBT agenda continues to deliver a better experience for our LGBT colleagues and customers. We have processes in place to support updating gender and title on customers’ banking records and to support colleagues undergoing gender transition. And, we continue to support our c.20,000-strong colleague networks.
Helping young people keep their money safe Were you thinking about identity theft, fraud or insurance as a youngster? Probably not, but thanks to MoneySense – our flagship financial education programme for 5 to 18 year olds – today’s young people are becoming a lot more financially aware.
MoneySense has been helping young people towards a better financial future for more than 23 years and the varied content aims to help them to understand the changing nature of fraud and how they can protect themselves. A range of resources for each age group are available including quizzes, videos and worksheets.
These resources help teach pupils about money safety in the real world and how to avoid the dangers of fraud in a fun and interactive way.
MoneySense content also looks at a wide range of financial dilemmas including budgeting for a party, choosing a mobile phone contract and understanding when it is important to have insurance.
MoneySense has now reached more than five million young people and over 5,000 colleagues from across the bank have signed up as MoneySense volunteers to help deliver workshops in schools.
Customer In 2017 we made it our goal to significantly increase NPS or maintain number one in our chosen customer segments. This strategy was implemented to support the overall aim of being the number one bank for customer service, trust and advocacy by 2020.
We use independent surveys to track the progress we are making to achieve our goals in each of our markets and to also measure our customers’ experience.
Our Commercial Banking NPS has remained stable during 2017 and remains ahead of its main competitors. In England & Wales, NPS for NatWest Personal Banking has also remained stable and we have met our target for customer trust. In Scotland, while we have not met our target for customer trust for Royal Bank of Scotland, it has increased strongly year on year. We do recognise that significant work is required to improve our customer experience and we continue our work to resolve the ongoing reputational and legacy issues.
Notes: (1) Source: GfK FRS 6 month rolling data. Latest base sizes: NatWest (England & Wales) (3361) Royal Bank of Scotland (Scotland) (440). Based on the question: “How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?“ Base: Claimed main banked current account customers.
(3) Source: Charterhouse Research Business Banking Survey, YE Q4 2017. Based on interviews with businesses with an annual turnover up to £2 million. Latest base sizes: NatWest England & Wales (1245), RBS Scotland (437). Question: “How likely would you be to recommend (bank)”. Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.
(4) Source: Charterhouse Research Business Banking Survey, YE Q4 2017. Commercial £2m+ in GB (RBSG sample size, excluding don’t knows: (904). Question: “How likely would you be to recommend (bank)”. Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.
Taking paper out of the mortgage process Our new paperless mortgage process is saving our customers time and money. Documents which were previously received by post can now be uploaded in seconds via a safe, temporary portal. Signatures can also be provided digitally, so customers no longer have to sign paper documents and post them back to us.
As well as being much more convenient for customers, the new process is also more environmentally friendly (saving around 4.3 million sheets of paper a year) and much more efficient. By removing the need for paper documents, which need to be sent through the postal system, we are now able to complete the appointment to offer in less than half the time than before, from 23 working days to 11 on average.
Our ability to serve customers and create value for the long term is heavily influenced by the environment in which we operate. Every year we assess the importance of these influences both in terms of their relevance to our stakeholders (including customers, investors, UK government, employees and civil society) and their potential commercial impact on us.
In the following pages, each influence is briefly described together with selected highlights in 2017 and with guidance on where you can find more information on that key influence.
Delivering excellent customer service is essential for the banking sector to build trust. Maintaining and growing a loyal and satisfied customer base requires an appropriate digital and physical presence and clear distribution strategy.
• Approximately 5.5 million active users regularly benefit from the speed and convenience of our mobile banking app with +51 net promoter score.
Employee engagement and satisfaction is highly correlated with overall performance. A key determinant of the bank’s success will be ensuring all of its employees are clear on their roles and responsibilities, capable and feel motivated to do the best job possible.
• Actively supported Mental Health Awareness Week, enabling employees to speak more openly about mental health and support each other.
Professional integrity is a key governance consideration in the banking sector. Services provided must satisfy the highest professional standards, avoid conflicts of interest, bias, or negligence, and ensure that all stakeholders, including employees, contractors and business partners, are treated fairly and equally.
• Improved our position in the latest Banking Standards Board (BSB) survey, which seeks to promote high standards of behaviour and competence across the UK banking industry. RBS improved in all nine BSB survey categories compared with 2016 results and in quartile performance against its peer group.
• There has been a sustained improvement in the number of customers impacted by fraud with a 26% reduction compared with 2016.
• Resilient, simple and efficient systems are critical to building the number one bank for customer service, trust and advocacy. Our systems are available 99.9% of the time.
• The CET1 ratio increased by 250 basis points to 15.9% in 2017 despite absorbing significant additional legacy costs.
• NatWest Markets aligned the majority of Functions and Services employees in 2017 in preparation for operating as a non-ring-fenced bank.
• RBS Group published a Tax Strategy. • Regulatory changes that RBS worked on in 2017 included
• Partnered with FreeAgent, an Edinburgh-based Fintech that provides online accounting software, to help our small business customers track their finances and report their taxes digitally.
• Introduced a chat bot called ‘Cora’ that answers questions from customers 24/7, freeing up colleagues time so that they can help customers with more complex queries. Cora currently handles over 100,000 customer conversations per month across our web and online channels.
• Supported the International Day of Persons with Disability sharing stories across the bank and with customers.
• RBS was named a Times Top 50 employer for Women and rated as a Stonewall Top Global Employer.
• The main development in 2017 was higher inflation. Along with weak wage growth it meant that households’ incomes were squeezed.
• The eurozone economy was 2.7% larger in the final quarter of 2017 than in the same period of 2016, up from 1.8% in 2016. Unemployment fell but remained high at 8.7%.
• US growth accelerated to 2.3%. The job market remained buoyant with 1.8 million jobs added during the year and the unemployment rate falling to 4.1%.
Privacy As a bank our customers not only trust us with their finances but also with their information. It is therefore important that we deal with their information the right way. By doing the right thing in meeting the privacy expectations of our employees, customers and shareholders we build confidence, which in turn builds trust and therefore has a tangible influence on delivering the bank’s ambition to be No.1 for customer service, trust and advocacy.
• The bank takes privacy and the protection of customers and employee data very seriously, and has worked with other banks to make sure it is factored into the Open Baking architecture.
• Delivered the Entrepreneurial Development Academy, a programme designed in partnership with E-Spark, specifically for RBS employees to develop an entrepreneurial mindset. Over 5,900 employees participated in the programme.
• Over 64,600 employees underwent training by the Chartered Banker Professional Standards Board (CB:PSB) with 94% of applicable staff achieving the CB:PSB Foundation Standard.
• Introduced a new tool to help our people learn and develop for example career development days and mobile learning.
• RBS was recognised as a Top 5 Apprentice UK Employer.
A healthy economy needs a pipeline of new and growing businesses to spur innovation and growth. Entrepreneurs, start-ups and small businesses require particular support in terms of financing and building market share.
• Rolled out ESME, a digital platform which offers SMEs the ability to digitally obtain loans quickly, potentially within an hour, on a 24/7 basis.
• Entrepreneurial Spark opened an accelerator hub in London, our 12 accelerators are now in every region of the UK.
• Customer trust in NatWest in England & Wales has met its 2017 target of 57%, improving from 55% at Q4 2016 to 57% at Q4 2017.
Housing Demand for housing in some parts of the UK and Republic of Ireland outstrips supply, reducing affordability and harming family disposable incomes.
• Your Mortgage Awards 2016 - 2017: Best First-Time Buyer Mortgage Lender, Best Bank.
• Launched Strategic Account Opening meaning our personal customers can open an account in five minutes.
• Launched the UK’s first ever paperless mortgage - customers can now apply for a completely digital mortgage which uses the latest technology to securely share and verify documents online.
• Our Home Insurance Quote and Buy system gives customers cover in less than fifteen minutes.
Climate change The Paris Agreement provides a framework by which the world will seek to prevent dangerous climate change but further challenges remain. Climate change presents both physical and transition risks. The transition to a low carbon economy is also presenting opportunities for low carbon sectors of the economy. There are also increasing regulatory and stakeholder expectations of banks to address climate change.
• RBS has pledged its support to the Task Force on Climaterelated Financial Disclosures (TCFD).
• Board Sustainable Banking Committee held a stakeholder engagement session on Climate risk, inviting a variety of external stakeholders groups to share their perspectives with us.
• We have been recognised by InfraDeals as the leading lender to the UK renewables sector by number of transactions over the past six years (2012- 2017).
Executive pay Shareholders, employees and the general public have shown increasing concerns about the inequality in pay in large companies between senior executives and the general workforce.
A customer’s ability to manage money well, both day to day and through significant life events, and their ability to handle periods of financial difficulty. It focuses on developing financial skills and knowledge, attitudes, and motivation, which can help customers avoid falling into financial difficulty and can improve their financial health and well being.
• MoneySense, our financial education programme for 5 to 18 year olds, won Digital Information Product of the Year (PPA Digital Awards) in recognition of how it has adapted to the digital age with engaging and interactive content to support teachers and parents.
The UK has a significant need for new infrastructure, such as energy, transport and project finance. Banks have an important role in supporting infrastructure investment across the UK.
These procedures were designed to conclude on: • The consistency of selected narrative claims on sustainability with underlying performance information, and; • The accuracy and completeness of the sustainability performance indicators listed below: � Value (£) of attempted fraud prevented in the UK � Total gender balance in top 3 senior layers � Total number of people supported through our enterprise programmes � % personal customers who are digitally active � Total number of Financial Health Checks � Banking Standards Board survey results � % of staff who received CB:PSB standards certification � Total scope 1 and 2 location based CO2e emissions and
Keeping the UK economy moving Whether it’s supporting tourism or business, and creating local jobs, airports provide an essential service and play a vital role in the UK economy.
We’ve helped Gatwick with seven bond issuances – including its September issue of £350 million 22-year bonds; prepared Manchester Airports Group for its first bond issuance since 2014, and provided long-term debt financing for Leeds Bradford and London Luton airports.
Reflecting on the support he received in 2017, Neil Thompson, Chief Financial Officer for Manchester Airport Group says: “We were delighted to work with NatWest for the launch of this important bond transaction. The bond will form a key part of the company’s capital structure to fund future growth of Manchester Airport Group’s airports.”
In a healthy job market, the number of people in work increased by around 400,000 and unemployment fell to 4.3%, the lowest rate since 1975. As a result of the 17% fall in the value of sterling that began in 2015, inflation accelerated, peaking at 3.1%. Higher inflation was one reason the Monetary Policy Committee (MPC) voted to increase Bank Rate to 0.5% in November. With wage growth of around 2.5%, households’ spending power was squeezed. Business profitability remained strong and business investment grew by 1.7% in the year to the third quarter. House price inflation remained around 5%.
The Republic of Ireland appears to have grown strongly. Unemployment continued to fall, ending the year at 6.2%, its lowest rate since 2008. Consumer price inflation remained subdued at 0.4%. House price inflation accelerated to around 12% from 9.0% in 2016. This returned prices to their 2009 level and still almost one-quarter below the peak in nominal terms.
In China, growth was broadly stable at 6.9%. This was in part a consequence of continued stimulus, which resulted in a further rise in indebtedness. Recognising this, the authorities took steps to limit the growth of credit.
An emphasis on strong risk management has a key role in positioning RBS to prepare for, and respond to, developments in the wider competitive, economic and regulatory environment. Risk appetite is set in line with overall strategy and approved by the Board. Current and emerging risks, that could materially affect the delivery of the strategy, are identified and managed through the risk management framework.
There was a strong focus during 2017 on developing an enhanced operating model for the risk management function. This work aims to ensure the function continues to meet the needs of our evolving business as well as the structural requirements of the UK’s ring-fencing legislation.
Cyber Security In an increasingly digital landscape across the industry, cyber security continued to be a priority issue in 2017. RBS has a multi-layered defence approach and continues to invest in its defences as the external threat evolves. As part of this ongoing focus, a number of enhancements were made during the year ranging from improved protection of IT systems to mandatory awareness training for all employees. RBS has continued to participate in industrywide initiatives to monitor and anticipate developments, identify vulnerabilities and share best practice. However, ongoing vigilance will be essential as the threat continues to evolve.
Innovation RBS continues to embrace innovation in the field of financial technology. From the roll-out of the award-winning NatWest and Royal Bank of Scotland mobile app in 2011 to the launch, in 2017, of the NatWest Invest online investment advice service, developments with the potential to improve the banking experience are an integral element of the customer service proposition. Strong risk oversight has kept the security agenda at the forefront of these developments. Throughout the year RBS continued to focus on innovation while emphasising the importance of safety and protection for customers.
Anti-Bribery & Corruption (ABC) RBS is committed to ensuring it acts responsibly and ethically, both when
Risk overview Effective risk management is at the heart of the successful development and execution of the RBS strategy
RBS considers ABC risk in its business processes where there could be a risk of offering an improper advantage or being perceived to do so. This includes, but is not limited to, corporate donations, charitable sponsorships, political activities and commercial sponsorships.
To mitigate against bribery and corruption risks, RBS’s ABC policy and supporting mandatory procedures require employees to assess bribery and corruption risk, and conduct the appropriate level of ABC due diligence on business activities. Where appropriate, there is a requirement for ABC contract clauses in written agreements. In adopting this approach, RBS aims to protect the interests of its customers, shareholders and employees.
Risk-weighted assets (RWAs) RWAs reduced by £27 billion (12%), ending the year at £201 billion (from £228 billion in 2016). This reduction was driven by NatWest Markets, where RWAs fell by £16.8 billion due to the continued run-off of the legacy business and mitigation activities in the core business, together with active management of the lending book in Commercial Banking.
Common Equity Tier 1 ratio The CET1 ratio increased by 250 basis points to 15.9% in 2017. This was well above the 13% target and reflected the profit in the year and the RWA reductions in NatWest Markets and Commercial Banking.
Refer to the Risk Factors section on pages 372 to 402.
Macro-economic and political risks RBS remains vulnerable to changes and uncertainty in the external economic and political environment, which have intensified in the past year. Stress testing and scenario planning is used extensively to inform strategic planning and risk mitigation relating to a range of macroeconomic and political risks. Scenarios identified as having a potentially material negative impact on RBS include: the impact of the UK’s exit from the EU; a second Scottish independence referendum; a UK recession including significant
Risks related to the competitive environment RBS’s target markets are highly competitive, which poses challenges in terms of achieving some strategic objectives. Moreover, changes in technology, customer behaviour and business models in these markets have accelerated. RBS monitors the competitive environment and associated regulatory technological strategy development and makes adjustments as appropriate.
An increase in obligations to support pension schemes The value of pension scheme assets may not be adequate to fund pension scheme liabilities. The actuarial deficit in the RBS pension schemes may therefore increase, requiring RBS to increase its current and future cash contributions. An acceleration of certain previouslycommitted pension contributions was made in Q1 2016 to reduce this risk. Depending on the economic and monetary conditions and longevity of scheme members prevailing at that time, the actuarial deficit may increase at subsequent valuations and is also expected to be affected by ring-fencing.
Risks to income, costs and business models arising from regulatory requirements RBS is exposed to the risk of further increases in regulatory capital requirements as well as risks related to new regulations that could affect its business models.
The full Governance report is on pages 50 to 105 of the 2017 Annual Report and Accounts.
Group Audit Committee Assists the Board in discharging its responsibilities for monitoring the quality of the financial statements of RBS. It reviews the accounting policies, financial reporting and regulatory compliance practices of RBS and RBS’s systems and standards of internal controls, and monitors the work of internal audit and external audit.
Technology and Innovation Committee The Technology and Innovation Committee was established in August 2017 and is responsible for assisting the
Board in overseeing and monitoring execution of the Group’s strategic direction in relation to technology and innovation.
UK Corporate Governance Code Throughout the year ended 31 December 2017, RBS has complied with all of the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated April 2016 except in relation to provision (D.2.2) that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. RBS considers that this is a matter which should rightly be reserved for the Board.
Governance at a glance Our Board The Board has fourteen directors comprising the Chairman, two executive directors and eleven independent non-executive directors, one of whom is the Senior Independent Director. Biographies for each director can be found on pages 51 to 55.
In 2017, the Board and committee evaluation process was conducted internally by the Deputy Secretary and Director, Corporate Governance, and overseen by the Company Secretary.
The Board consider a period of three years to be an appropriate period for the assessment to be made. This period is within the bank’s strategic plan and regulatory and internal stress testing periods.
The bank’s business and strategic plans provide long term direction and are reviewed on, at least, an annual basis, including multi-year forecasts showing the expected financial position throughout the planning horizon. The base case plan indicates that the bank will have sufficient capital and liquidity resources over the three year assessment period.
The bank’s base case plan is also tested in a series of extreme stress scenarios as part of internal and external stress testing. Results from the stress scenarios, including management’s response, are used as part of the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP). These processes are summarised in the Capital and Risk Management section of the Annual Report and Accounts on pages 157 to 165.
Howard Davies Nationality: British Date of appointment: 14 July 2015 (Board), 1 September 2015 (Chairman)
External appointment(s): Independent director of Prudential plc and chair of the Risk Committee Member of the Regulatory and Compliance Advisory Board of Millennium Management LLC Chair of the International Advisory Council of the China Securities Regulatory Commission Member of the International Advisory Council of the China Banking Regulatory Commission
Committee membership(s): Group Nominations and Governance Committee (Chairman) UBI DAC Board Oversight Committee (Chairman)
Experience: Ross became Chief Executive of The Royal Bank of Scotland Group in October 2013. Between August 2012 and September 2013, he was Chief Executive Officer for UK Retail, joining from Commonwealth Bank of Australia where he was Group Executive for Retail Banking Services for five years. Prior to this he was Executive General Manager with responsibility for the branch network, contact centres and third party mortgage brokers.
Experience: Prior to his current role, Ewen was at Credit Suisse for 25 years where he was latterly co-Head of the EMEA Investment Banking Division and co-Head of the Global Financial Institutions Group. He has over 20 years of experience advising the banking sector while at Credit Suisse.
Ewen has a Bachelor of Commerce and Administration majoring in Accountancy and a Bachelor of Law from Victoria University of Wellington, New Zealand.
External appointment(s): Non-executive director of the RPX Corporation Non-executive director of Symantec Corporation
Experience: Previously, Morten had a 34 year financial services career and held various roles at Royal Bank of Canada and its subsidiaries including Associate Director at Orion Royal Bank, Vice President, Business Banking and Vice President, Financial Institutions. In 1997, he was appointed as Senior Vice President, Group Risk Management and served as the Chief Credit Officer then Chief Risk Officer from 2004 to 2014. He was also previously a Director of RBC Bank (USA), Westbury Life Insurance Company, RBC Life Insurance Company and of RBC Dexia Investor Services Trust Company.
External appointment(s): Member of the Board of Directors of The Canadian Institute for Advanced Research Member of the Board of Directors of the Harvard Business School Club of Toronto Non-executive director of Jackson National Life Insurance Company
Experience: Robert began his career with Price Waterhouse (now PricewaterhouseCoopers) where he qualified as a chartered accountant. He then moved into banking joining SG Warburg, specialising in corporate finance, and was appointed as Co-Head and Managing Director of its US investment banking business in 1989. Following the acquisition in 1995 of Warburg by Swiss Bank Corporation (which subsequently merged with UBS), he then held the roles of Head of UK Corporate Finance, Head of European Corporate Finance and Co-Head of its global business and CEO of the EMEA region. He relinquished his management roles at the end of 2005, and was appointed Vice Chairman of UBS Investment Bank. Robert left UBS to join Evercore Partners, from where he was seconded to the UK Panel on Takeovers and Mergers, as Director General, from 2010 to 2013.
External appointment(s): Independent board director at Ashurst LLP Chairman of Council at the University of Durham Chairman of the Boat Race Company Limited Director of Social Finance Limited
Experience: Previously a non-executive director and chairman of the corporate compliance and responsibility committee of Wm Morrison Supermarkets plc. Other former non-executive directorships include Skandinaviska Enskilda Banken AB, Home Retail Group plc, Vodafone Group plc, Reuters Group PLC, Cable & Wireless Worldwide plc and The Gap Inc. Penny spent the majority of her executive career at Coca-Cola where she held a number of leadership positions, latterly as President, Coca-Cola Great Britain and Ireland.
External appointment(s): Non-executive Chairman of The Gym Group plc. Also chair of the nominations and member of the audit, risk and remuneration committees Non-executive director, chairman of the remuneration committee and member of the audit and nomination committees of Superdry plc Non-executive Chairman of IQSA Group Limited
Experience: Baroness Noakes is an experienced director on UK listed company boards with extensive and varied political and public sector experience. A qualified chartered accountant, she previously headed KPMG’s European and International Government practices and has been President of the Institute of Chartered Accountants in England and Wales. She was appointed to the House of Lords in 2000 and has served on the Conservative front bench in various roles including as shadow treasury minister between 2003 and May 2010. Previously held non-executive roles on the Court of the Bank of England, Hanson, ICI, Severn Trent, Carpetright, John Laing and SThree.
Committee membership(s): Board Risk Committee (Chairman) Group Audit Committee GRG Board Oversight Committee Group Nominations and Governance Committee UBI DAC Board Oversight Committee
Experience: Mark, is a former senior investment banker with broad financial services knowledge, has substantial FTSE 100 Board experience gained in various industry sectors, including as a Committee Chair and Senior Independent Director.
Committee membership(s): Group Nominations and Governance Committee Group Performance and Remuneration Committee UBI DAC Board Oversight Committee
Experience: Experience: Lena is an experienced CEO with an international career, who spent a significant proportion of her executive career with Scottish Enterprise, latterly as Chief Executive from 2009 until 2017. Prior to that, Lena held the role of Senior Investment Advisor to The World Bank in Washington DC. Dr Wilson is a visiting Professor at the University of Strathclyde and has previously served as a member of Scotland's Financial Services Advisory Board and as Chair of Scotland's Energy Jobs Taskforce. In June 2015 she received a CBE for services to economic development in Scotland.
Chairman’s introduction The corporate governance report provides an overview of key roles and responsibilities of the Board, how the Board spent its time in 2017 and how we communicate with shareholders. Board effectiveness and performance evaluation are also covered.
I would like to take this opportunity to thank my fellow Directors for their continued commitment and dedication throughout 2017.
The Board The Board has fourteen directors comprising the Chairman, two executive directors and eleven independent non-executive directors, one of whom is the Senior Independent Director.
Board and committee changes A number of changes were made to Board and committee composition during 2017, as follows:  Mark Seligman was appointed as a non-executive director on 1 April 2017.  Yasmin Jetha was appointed as a non-executive director on 21 June 2017, and became a member of the Sustainable Banking Committee with effect from 3 August 2017.
 On 1 September 2017 the Technology and Innovation Committee was established with Alison Davis as Chairman and Yasmin Jetha and Frank Dangeard as members.
John Hughes was also appointed as a non-executive director on 21 June 2017, but unfortunately resigned on 1 September 2017 due to health reasons.
Also, with effect from 1 January 2018:  Sandy Crombie stepped down as a non-executive director of RBS, and as Senior Independent Director and Chairman of the Group Performance & Remuneration Committee;  Mark Seligman assumed the role of Senior Independent Director and became a member of the Group Performance & Remuneration Committee;  Robert Gillespie assumed the role of Chairman of the Group Performance & Remuneration Committee; and
In addition, with effect from close of business of the 2018 Annual General Meeting, Penny Hughes will step down as a nonexecutive director of RBS and Chairman of the Sustainable Banking Committee. Mike Rogers will assume the role of Chairman of the Sustainable Banking Committee.
Roles and responsibilities The Board The Board is collectively responsible for the long-term success of RBS and delivery of sustainable shareholder value. The terms of reference include a formal schedule of matters specifically reserved for the Board’s decision and are reviewed at least annually. They are available at rbs.com>about.
The Chief Executive’s key responsibilities are to:  exercise executive accountability for the RBS businesses delivering operational management and oversee the full range of activities of the customer businesses and functions;  develop, drive and deliver the strategy approved by the Board;  drive and deliver performance against financial plans, acting in accordance with authority delegated by the Board;  consult regularly with the Chairman and Board on matters which may have a material impact on RBS;  lead the culture and values of RBS, creating an environment where employees are engaged and committed to good customer outcomes;  lead, manage and develop RBS’s senior leadership team, ensuring professional capability is developed and that succession coverage meets the needs of RBS;  ensure RBS has effective frameworks and structures to identify, assess and mitigate risks; and
 in conjunction with the Chairman and Company Secretary, ensure the Board receives accurate, timely and clear information.
The standard terms and conditions of appointment of nonexecutive directors are available on rbs.com or from RBS Corporate Governance and Regulatory Affairs.
Board Committees In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. Refer to page 48 of the Strategic Report for more details. The terms of reference are available on rbs.com.
The GRG Board Oversight Committee was established in 2015 in relation to the Financial Conduct Authority review of the treatment of SME customers and continued to meet during 2017. The Committee oversees and provides advice to the Board in relation to the review, the external independent review of GRG instigated by the Group and other matters generally related to GRG.
The US Risk Committee was disbanded in May 2017 following the closure of the Connecticut branch.
Company Secretary Aileen Taylor is the Company Secretary. Aileen also leads the Bank’s Regulatory Affairs function.
The key responsibilities of the Company Secretary include:  working closely with the Chairman to ensure effective functioning of the Board and appropriate alignment and information flows between the Board and its committees, including the Executive Committee. This includes Board succession planning, induction, and professional development;  providing support and advice to the Board on a broad range of strategic, governance, legal and regulatory issues;  executive responsibility for Chairman/non-executive director search and appointment process;  management of RBS’s profile with key stakeholders, including oversight of relations with key influencers and regulators;  defining and delivering the corporate governance and regulatory affairs strategy across RBS; and
 the provision of professional support to the Board and its committees and leading on implementation of recommendations from the annual Board evaluation.
Board meetings In 2017, 9 Board meetings were scheduled and individual attendance by directors at these meetings is shown in the table below.
Notes: (1) Appointed to the Board on 21 June 2017. (2) Appointed to the Board on 1 April 2017. (3) Stepped down from the Board with effect from 1 January 2018. (4) Appointed to the Board on 21 June 2017 and stepped down from the Board on 1
An overview of the principal areas of Board focus during 2017 is set out below.
Customer & Culture  customer service  open banking and innovation  branch network strategy  payments strategy  customer metrics  branding, communications and marketing updates  overseeing culture and quarterly culture updates  external fraud update  Banking Standards Board assessments
Finance  annual financial budget and plan  capital strategy and planning  Internal Capital Adequacy Assessment Process  Individual Liquidity Adequacy Assessment Process  dividend planning and policy  pension strategy  tax strategy  mergers and acquisition strategy  recovery and resolution planning  results and analysts’ presentations  IFRS 9 accounting policies  legal entity capability and plans
Risk & Conduct  stress testing  risk appetite governance and framework  annual review of strategic risk appetite  preventing the facilitation of tax evasion
The Board also visited the RBS International (“RBSI”) business in Jersey in September 2017. The agenda included a deep dive on the RBSI business, strategy, risks and challenges, and directors also met with key customers and local businesses.
Board effectiveness Skills and experience of the Board The Board is structured to ensure that the directors provide RBS with the appropriate balance of skills, experience and knowledge as well as independence. Given the nature of RBS’s businesses, experience of banking and financial services is clearly of benefit, and we have a number of directors with substantial experience in that area. The Board also benefits from directors with experience in other fields.
Banking  Government and regulatory  Mergers and acquisitions  Corporate restructuring  Stakeholder management
(infrastructure)  Digital and innovation  Operations  Change management  Consumer facing
Board committees also comprise directors with a variety of skills and experience so that no undue reliance is placed on any individual.
The directors have access to a wide range of briefing and training sessions and other professional development opportunities. Internal training relevant to the business of RBS is also provided. Business visits are arranged as part of the Group Audit Committee and Board Risk Committee schedule (details of which can be found on pages 67 and 74) and all non-executive directors are invited to attend. Non-executive directors are also welcome to attend the stakeholder engagement sessions run by the Sustainable Banking Committee (further details of which are on page 82).
Directors undertake the training they consider necessary to assist them in carrying out their duties and responsibilities as directors. Directors may also request individual in-depth briefings from time to time on areas of particular interest.
In addition, all directors have access to an online resources portal, which contains internal policy information and external briefing notes on topical subjects, to support their professional development and competence.
Time commitment It is anticipated that non-executive directors will allocate sufficient time to RBS to discharge their responsibilities effectively and will devote such time as is necessary to fulfil their role. Directors have been briefed on the limits on the number of other directorships that they can hold under the requirements of the fourth Capital Requirements Directive (CRD IV).
Each director is required to advise RBS as early as possible and to seek the agreement of the Board before accepting additional commitments that might affect the time the director is able to devote to his or her role as a non-executive director of RBS. The Board monitors the other commitments of the Chairman and directors and is satisfied that they are able to allocate sufficient time to enable them to discharge their duties and responsibilities effectively. The time commitment currently required of our nonexecutive directors continues to be significant.
2017 Performance evaluation process In 2017, the Board and committee evaluation process was conducted internally by the Deputy Secretary and Director, Corporate Governance, and overseen by the Company Secretary.
Outcomes of the 2017 performance evaluation The conclusion of the 2017 performance evaluation was that the Board operated effectively throughout the year and fulfilled its remit as set out in its terms of reference.
Risk Noting the work of the Board Risk Committee, it was agreed that continued Board focus on major strategic risks should remain a priority.
Board information and time commitment Acknowledging the progress made during 2017, it was noted that there remains room for improvement in length and timeliness of papers. The length of committee meetings was also raised in the context of directors’ time commitment.
Individual director and Chairman effectiveness reviews The Chairman met with each director individually to discuss their own performance and ongoing professional development and also shared peer feedback provided as part of the evaluation process. Separately, the Senior Independent Director sought feedback on the Chairman’s performance from the non-executive directors, executive directors and key external stakeholders and discussed it with the Chairman.
Throughout the year, the Chairman, Chief Executive, Chief Financial Officer and Chairman of the Group Performance and Remuneration Committee communicate shareholder feedback to the Board. The directors also receive reports reviewing share price movements and performance against the sector. Detailed market and shareholder feedback is provided to the Board after major public announcements such as a results release. The arrangements in place are to ensure that directors develop an understanding of the views of major shareholders.
The Investor Relations programme also includes communications aimed specifically at its fixed income (debt) investors. The Chief Financial Officer and/or the RBS Treasurer give regular presentations to fixed income investors to discuss strategy and financial performance. There is also a separate section on the RBS website for fixed income investors which includes information on credit ratings, securitisation programmes and securities documentation. Further information is available at rbs.com/ir.
Principal activity during 2017 As highlighted in the Board’s 2016 performance review, the Committee acknowledges the tenure of a number of the current Board directors and therefore made succession planning a priority in 2017.
The Committee holds at least four scheduled meetings per year and also meets on an ad hoc basis as required. In 2017, there were seven meetings. Individual attendance by directors at these meetings is shown in the tables below.
Howard Davies (Chairman) 7/7 Robert Gillespie 7/7 Penny Hughes (1) 1/2 Brendan Nelson 7/7 Baroness Noakes (2) 2/2 Mark Seligman (3) 2/2
(1) Became a member of the committee on 3 August 2017. Did not attend meeting in
(2) Became a member of the committee on 3 August 2017 (3) Became a member of the committee on 3 August 2017 (4) Stood down from the Board with effect from 1 January 2018. (5) Stood down from the committee on 3 August 2017
Consideration of new non-executive directors Both JCA Group and Spencer Stuart have been engaged during this year to support the search for new non-executive directors. JCA Group and Spencer Stuart do not provide search services to any other part of RBS. During 2017, the Committee considered a number of potential candidates. In April 2017, June 2017 and January 2018 respectively, Mark Seligman, Yasmin Jetha and Dr Lena Wilson, were appointed to the Board as non-executive directors.
Tenure of non-executive directors The tenure of non-executive directors is set out below.
Objectives and targets The Boardroom Inclusion Policy contains a number of measurable objectives, targets and ambitions reflecting the Board’s ongoing commitment to inclusion progress.
The Policy’s objectives exist to ensure that the Board, and any Committee to which it delegates nominations responsibilities, follows an inclusive process when making nomination decisions. That includes ensuring that the nomination process is based on the principles of fairness, respect and inclusion, that all nominations and appointments are made on the basis of individual competence, skills and expertise measured against identified objective criteria and that searches for Board candidates are conducted with due regard to the benefits of diversity and inclusion.
Targets and ambitions The Board aims to meet the highest industry standards and recommendations wherever possible. This includes, but is not limited to, aspiring to meet the targets set by the HamptonAlexander Report: FTSE100 Women Leaders (33% female representation on the board) and the Parker Report: Beyond 1 by ’21 (at least one director from an ethnic minority background on the board) by the recommended target dates, 2020/2021. The policy supports our bank-wide ambition to aim for a 50/50 gender balance across all levels of the organisation by 2030.
The Group Audit Committee (GAC) has responsibility for monitoring and reviewing RBS’s financial reports and disclosures, its accounting policies and practices and standards of internal control. This report provides an overview of the issues considered and debated by the GAC during 2017 and our expected priorities for 2018.
In H2 2017 we then provided guidance on the drafting of the IFRS 9 Transition Report, which is published alongside this report, and explains the pillars of IFRS 9 compared with IAS 39 and the updated impact on RBS.
Systems of internal control RBS made substantial progress in improving its control environment during 2017. The GAC, in conjunction with the Board Risk Committee (BRC), oversees RBS’s control environment. In particular, we monitor the systems of internal control relating to financial management, financial reporting and accounting issues. During the year we received bi-annual updates on the control environment certification process, quarterly reports on internal controls over financial reporting plus updates from the internal and external auditors on the control environment. Most areas of the bank succeeded in obtaining an improved control environment rating by the year end and the GAC will continue to oversee this work over the coming months.
“Our primary focus is the integrity and quality of RBS’s financial statements”
Key priorities for 2018 Looking forward to 2018, the GAC will continue to ensure the integrity of the financial statements of both RBS and its subsidiaries. The changes that will be introduced to reporting structures as a result of the ring-fencing programme will be a key focus and we will continue to monitor the impact of the economic environment on RBS’s credit portfolio and financial results. The GAC will also review Internal Audit’s validation of control environment ratings and will strive to ensure that recent improvements in the control environment are sustained.
As ever, I would like to thank all GAC members and attendees for their continued support and dedication during 2017, in particular Sandy Crombie who stepped down from the Board at the end of the year. I would personally like to thank Sandy for his extremely valuable contribution to the work of the GAC over the years.
In addition to these business and functional visits, the GAC and BRC also undertook a teach-in session on IFRS 9 and visited the bank’s operations in Poland. During the visit to Poland the GAC and BRC received updates on the control environment in the Global Hub Europe, met with key leaders and talent and with the external audit team in Poland.
Allocation of Group Audit Committee agenda time during 2017 was as follows: Financial affairs of the group 42% Standards of internal control 19% Internal audit 18% External audit 13% Regulatory relationships and compliance 4% Governance and procedural 4%
Performance evaluation The performance of the GAC is evaluated annually, and at least once every three years is facilitated by an external party. Following an externally facilitated evaluation in 2015, the evaluation of the GAC’s performance in 2017 was conducted internally. The evaluation process involved the completion of questionnaires by both GAC members and members of management and follow up interviews to discuss the findings.
The Board and the GAC have considered and discussed the outcomes of this evaluation. Overall the evaluation concluded that the GAC operated effectively during 2017. A small number of recommendations for improvement were made in relation to the length and timeliness of Committee papers, the length of meetings and the schedule of visits, which were approved by the GAC and the Board. Progress against these actions will be tracked in 2018 and reported back to the GAC and the Board.
 the comprehensive review process which supports the GAC and the Board in reaching the conclusion that the disclosures in the annual report and accounts, taken as a whole, are fair, balanced and understandable and provided the information necessary for shareholders to assess the company’s position and performance, business model and strategy. The review process included: central co-ordination of the annual report and accounts by the Finance function with guidance on requirements being provided to individual contributors; review of the annual report and accounts by the Executive Disclosure Committee prior to consideration by the GAC; and a management certification process which required members of the Executive Committee and other senior executives to provide confirmation following their review of the annual report and accounts that they considered them to be fair, balanced and understandable. This process was also undertaken in respect of the half year and quarterly results announcements. The External Auditor also considered the fair balanced and understandable statement as part of the audit process.
Ring-fencing In Q3 2017, the Committee considered the basis of preparation and governance of the pro forma financial information, including the adjustments made, and forecast information that was included within the Ring-fencing Transfer Scheme and recommended this to the Board for approval.
Considered the effectiveness of RBS’s internal control system, including any significant failings or weaknesses. The GAC also considered RBS’s disclosure on internal control matters in conjunction with the related guidance from the Financial Reporting Council subsequent to review by the Board Risk Committee.
Considered the outputs of bi-annual self-assessments of the robustness of the internal control environment for RBS’s customer-facing businesses, and its support and control functions. This informs the control environment disclosure in the annual report and accounts. Most areas reported an improved Control Environment Certification rating by the year end and the remaining areas are expected to report an improved rating during 2018. Management’s plans to address certain control issues are covered in more detail in the report of the Board Risk Committee on page 75.
Received a report on RBS’s three lines of defence model, including accountabilities under each of the lines of defence, the impact of ring-fencing governance and actions taken to improve the understanding and effectiveness of the model across RBS.
Received updates in relation to the delivery of RBS’s new general ledger which was implemented in August 2017. The new ledger replaces previous legacy systems and supports new functionality such as discrete legal entity views and multi-currency accounting on a single ledger platform. The implementation of the new ledger was an important step in improving the Finance function’s control environment.
Received bi-annual reports on control breaches which are captured by RBS’ notifiable event process. Under this process all Board directors were alerted to the most significant breaches.
Considered and approved Internal Audit’s plan for 2017, which is focussed on RBS’s highest risks. An interim update on performance against the plan was provided to GAC at the end of H1 2017. The GAC also considered Internal Audit’s budget and was satisfied that this was sufficient to allow Internal Audit to deliver the plan.
The annual review of the effectiveness of Internal Audit was undertaken internally in 2017. Feedback on Internal Audit was provided by GAC members and attendees (including the external auditors), chairmen of subsidiary audit committees, key members of franchise and function risk committees and other key members of management. The evaluation concluded that Internal Audit had operated effectively during the year. Certain recommendations were made to aid continuous improvement within the function including continuing to bolster succession planning and bench strength, increasing connectivity between Internal Audit teams and sharing best practice. These recommendations will be implemented during 2018 and progress will be tracked by the GAC.
Received regular reports on the status of RBS’s relationships with its key regulators. The GAC Chairman also attended continuous assessment meetings with the PRA and FCA, a trilateral meeting with the PRA, a meeting with the FRC as well as two meetings with UK Financial Investments Limited during 2017.
Jonathan Bourne has been EY’s lead audit partner for RBS since EY assumed the role of external auditor in March 2016. Jonathan Bourne attended each meeting of the GAC throughout 2017 and reported to the GAC each quarter on their audit work and related conclusions, including the appropriateness of judgements made by management and their compliance with international financial reporting standards.
Received updates in relation to the external auditor’s 2017 plan and approved the 2017 audit fees including the fee for the 2017 interim results. The GAC was authorised by shareholders at the last Annual General Meeting to fix the remuneration of the external auditors.
CASS Opinions The external auditor presented the results of its assurance procedures on compliance with the FCA’s Client Asset Rules for RBS’ regulated legal entities for the year ended 31 December 2016. The GAC also considered the CASS Audit plan for 2018, the findings of which will be reported to the GAC once the audit is complete.
The GAC considered EY’s 2016 report to the PRA under supervisory statement SS1/16 which set out the PRA’s expectation for auditors to provide written reports to the PRA concerning the audits of major banks and building societies, as set out in chapter 8 of the Auditors Part of the PRA rulebook. The report responded to specific questions posed by the PRA relating broadly to credit impairment, hedge accounting, trading/valuation, forecasting and conduct. GAC also discussed the questions received from the PRA in relation to the report required for 2017.
Under the policy certain services are classed as Audit-Related Services and these may be approved by the Deputy Chief Financial Officer, on behalf of the GAC, up to a limit of £100,000 each financial quarter. Engagements for Audit-Related Services in excess of this quarterly limit require the approval of the GAC Chairman. All Audit-Related Services are reported to the GAC quarterly. The GAC has also delegated authority to the Deputy Chief Financial Officer to approve the provision of services by the external auditor to non-consolidated subsidiaries of RBS within an annual cap and to approve engagements with the external auditor where RBS has limited or no influence in the selection process. All such engagements are reported to the GAC each quarter.
For all other permitted non-audit service engagements, where the fee is below £5,000 approval by the Deputy Chief Financial Officer is required. Where the fee is above £5,000 but below £100,000 approval by the GAC Chairman is required. For engagements where the fee is expected to exceed £100,000 a competitive tender process must be held and approval of the full GAC is required. In addition all engagements must be approved by the Deputy Chief Financial Officer and by Supply Chain Services. All such ad hoc approvals of non-audit services are ratified by the GAC each quarter.
 an independent review of UBI DAC compliance with the Code of Conduct Mortgage Arrears requested by the Central Bank of Ireland;  provision of resource support to help support RBS’s Technology teams with understanding and implementing an end to end technology delivery framework and embed these new ways of working within Technology teams;  review of the financial position of a customer to allow Senior Lenders, including RBS, to work with the customer on a medium term restructuring solution;  support to the businesses and Finance Central SOX team in documenting the end to end processes underlying statutory financial reporting, confirming the associated risk and mitigating suite of SOX controls ;  to build an iOS application for an Entrepreneurial Spark concept  quality assurance services for RBS’s customer due diligence remediation programme;  development of an initial proposition and development roadmap for a new digital platform that will enable us to launch, test and refine innovative offerings for both customers and non-customers;  development of a risk assessment process, control framework and review framework in relation to new corporate tax offences under the Criminal Finances Act;  as the skilled person to continue to support the Bank’s ring-fencing programme under ICB; and  to support the Bank in implementing new technologies to create excellent customer experiences, contribute to a strong cost:income ratio and simplify business processes. Further details of the non-audit services that are prohibited and permitted under the policy can be found on rbs.com. Information on fees paid in respect of audit and non-audit services carried out by the External Auditor can be found in Note 5 on the consolidated accounts.
A key part of RBS becoming a simpler, safer and customer focused bank is excellent risk management. The Board Risk Committee (BRC) plays an important role in overseeing how well RBS manages its risks. The purpose of this report is to describe how the BRC discharged this responsibility during 2017.
2017 has been another busy year for the BRC and our detailed report, which follows, sets out the detail of what we have done. I would like to focus on two key areas, both of which are driven by regulatory requirements.
The separation of our core UK and European banking business from activities that are required to be outside the ring-fence involves many complex activities including: legal restructuring of the RBS group; detailed analysis and transfer arrangements for individual customers and products; and changes to the way in which we manage the business.
In parallel with this RBS needs to have plans acceptable to the regulators which allow RBS to be dealt with effectively in the event of financial failure. An important part of this is Operational Continuity in Resolution (OCIR) which is aimed at ensuring that the ring-fence bank has all the systems and resources it needs to operate. This in turn requires much more formality and structure around the way that individual parts of RBS trade with each other through inter-group agreements and these agreements are a key part of how we deliver ring-fencing as well.
Capital and Liquidity Capital and liquidity are important areas for risk management in any bank and the regulatory requirements are intensifying, particularly in the context of ring-fencing.
The Committee devoted considerable time this year to stress testing. The 2017 Bank of England exercise incorporated a requirement to undertake two stress scenarios (an Annual Cyclical Scenario (ACS) and a Biennial Exploratory Scenario (BES)) followed by a further two IFRS 9 exercises on non-credit card and credit card exposures. The BRC reviewed the various components and stages of these exercises and recommended that the Board approve them.
We also conducted detailed reviews of the Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) returns for the Group. In preparation for ring-fencing, the Committee also oversaw the preparation of an ICAAP for the future ring-fenced bank and both an ICAAP and ILAAP for RBS’s future NatWest Markets subsidiary which will sit outside the ring-fence.
Key Priorities for 2018 Successful delivery of ring-fencing and OCIR will continue to be a key focus area in 2018 given the regulatory deadline of 1 January 2019. Our focus will shift from legal compliance to ensuring that we have the right risk management and oversight processes to underpin the new structures. I expect that we will continue to focus on the control environment – in particular the parts of the business which still need to improve long term sustainability.
“A key part of RBS becoming a simpler, safer and customer focused bank is excellent risk management”
Committee meetings are also attended by the RBS Chairman, relevant executives, (including the Chief Executive, Chief Financial Officer, Chief Risk Officer, Chief Conduct & Regulatory Affairs Officer, Chief Legal Officer and General Counsel and Chief Audit Executive), and the lead partner of the External Auditor. External advice is sought by the Committee, where appropriate.
Meetings and visits Nine scheduled meetings and six ad hoc meetings were held in 2017. The ad hoc meetings were required to consider: the results of various phases of internal and external stress tests; review of ICAAP and ILAAPs and reverse stress testing results; and the processes supporting the formal documentation required for the Ring-fencing Transfer Scheme.
In 2017, members of the Committee undertook a programme of visits to various businesses and control functions including biannual visits to Risk, Conduct and Restructuring function in conjunction with members of the Group Audit Committee. The purpose and scope of this programme is discussed in detail in the Report of the Group Audit Committee on page 67.
Performance Evaluation The annual review of the effectiveness of the Board and its senior Committees, including the Board Risk Committee, was conducted internally in 2017. The Committee has considered and discussed the outcomes of this evaluation and accepts the findings. Overall the review concluded that the Board Risk Committee continued to operate effectively.
The outcomes of the evaluation have been reported to the Board and the Committee will track progress on its 2018 priorities during the year.
Accountability and Remuneration 6% Governance & Procedural 7% Risk, conduct and regulatory affairs focus sessions 7% Franchise and function focus sessions 21%
 The General Counsel reported to the Committee at each meeting on current and emerging key legal developments and significant litigation risks affecting the bank. RBS’s plans to comply with the General Data Protection Regulation were kept under review.
 A Board Oversight Committee (BOC) has been established to oversee required enhancements to the governance and risk management practices in UBI DAC and, where appropriate, the BRC will work in conjunction with the BOC to understand implications for RBS processes.
Control Environment  Received bi-annual reports on the control environment of the franchises and functions and monitored the route and achievability of being within appetite by end of 2017. Sought management’s assurance that appropriate measures were in place to ensure that the businesses could continue to operate safely, where control weaknesses had been identified.
 Technical ERF is also overseeing in detail, management’s plans to return the control environment within UBIDAC to a within risk appetite position, ensuring identified best practices are applied as adopted and learned through Nat West Markets remediation. BRC will receive regular updates on those discussions through 2018.
 Received quarterly reports from the Chairman of the US Risk Committee to the point of its retirement in May 2017. The US Risk Committee was established to provide oversight of the risk management framework of RBS’s combined US operations. Following closure of its Connecticut Branch, alternative governance processes, commensurate with the scale of RBS’s residual US activity were established. The BRC retains oversight of key regulatory submissions.
 Transitioned reporting to quarterly, reflective of the progress made to clearly report and track deliverables; the improving status of the programme; and the increased alignment between management, Risk, Conduct and Restructuring function and Internal Audit.
 Following the announcement of the European Commission’s decision to approve HMT’s alternative remedy package in September 2017, the BRC considered implementation plans to establish the required schemes, including critical path dependencies/progress towards operational readiness.
 Reviewed plans to reintegrate the business previously described as Williams & Glyn into RBS’s retail business including controls and safeguards to ensure appropriate oversight of the portfolio and the timing of transition.
Ring-fencing  Developed a programme of detailed quarterly reporting on the ring-fencing implementation programme, supplemented by shorter updates at intervening meetings given the considerable volume of activity and criticality of the deliverable.
 Considered the key execution risks in the programme and oversaw key regulatory deliverables. Reviewed the Ring Fence Transfer Scheme documentation and Skilled Person Report, including the required management representation letter and regulatory attestation. The Skilled Person also attended relevant meetings to update on its findings. Latterly, the BRC supported the integration of Operational Continuity in Resolution delivery within the programme given the interdependencies with ring-fencing activity. Throughout, the Committee sought to ensure the programme remained focussed on the delivery of ring-fencing over discretionary strategic deliverables.
 Received opinions from Risk, Conduct and Restructuring function and Internal Audit on progress. Oversaw the appointment of KPMG as independent third party assurance provider and received the outputs of the work undertaken. An integrated assurance approach was adopted in the period, the scope of which was reviewed by the BRC to ensure effective assurance activity across Risk, Conduct and Restructuring function, Internal Audit and KPMG.
 Following work undertaken in 2016 to transition to a position where the Board/BRC played a greater role in the approval of risk appetite for RBS’s most significant risks, it was agreed that this would take place on a phased basis. The BRC reviewed qualitative risk appetite statements and certain quantitative risk appetite measures relating to Market Risk and Credit Risk, being those measures where the Board would wish to be informed if those limits were exceeded (Board Risk Measures).*
 Considered a report on the approach to risk appetite under structural reform (reflecting the future legal entity status of the Group). The BRC reviewed the proposed cascade of strategic risk appetite limits for the legal entities within and outwith the future ring-fenced structure. It was noted that process and limits would continue to be refined in 2018.*
 Considered various detailed risk appetite statements and associated metrics for material risks.
 Reviewed work being undertaken across RBS to improve risk culture including the status of the various ongoing bank-wide risk culture initiatives. Considered the outputs of a PwC review of progress in strengthening and embedding risk culture and discussed the actions identified that would have the greatest impact on risk culture.
 Reviewed management’s proposed framework to measure risk culture maturity against target state and considered the outcome of the assessment of progress against agreed performance criteria.
RDAR  Monitored progress towards full compliance with the Basel Principles on Effective Risk Data Aggregation and Reporting (RDAR) and undertook an annual review of the RDAR framework.*
Risk Assurance  Received quarterly reports from the Risk Assurance team, on issues highlighted by reviews conducted in each of the franchises.
 Reviewed the bank’s risk profile relative to credit, market and operational risk, and examined detailed management information (MI) within the quarterly Risk Management Report in this regard.
Operational Risk  Change capacity - Discussed the change risk profile of the bank and the prioritisation and impact of mandatory change programmes and considered opinion as to whether RBS had the required resource, processes and systems to deliver its change portfolio within agreed timescales. Reporting on change capacity has now been incorporated within routine quarterly risk reporting.
 Reviewed the statutory Annual Risk and Control Disclosure regarding the internal control system in RBS prior to its review by the Group Audit Committee.*
Credit Risk  Oversaw the Executive Credit Group (ECG) receiving a summary of the decisions made by the ECG in the period. Reviewed the most material credit decisions made in 2017 and examined trends in the market. The BRC requested more data on declined requests and explanation of risk/return relative to each decision.
 Reviewed a revised governance framework for large credit exposure decisions, designed to enhance the level of Committee and Board oversight.*
 Reviewed a suite of Credit Risk Board Risk Appetite Measures.* Undertook a deep dive on the mortgage portfolio with a focus on drivers of growth and controls and received a report on NonPerforming Loans and Provision Coverage.
Market Risk  Held a teach-in on the impact of the Fundamental Review of the Trading Book and the impact of the new regulation.
 While a Board Oversight Committee (BOC) had been established to oversee required enhancements to the governance and risk management practices in UBI DAC, where appropriate, the BRC will work in conjunction with the BOC to understand the implications for RBS processes.
 Reviewed reports relating to the 2015 US Cease & Desist Order.
Stress Testing  Considered the 2017 Bank of England Stress Tests, comprising, for the first time, two stress scenarios – the Annual Cyclical Scenario (ACS) and the Biennial Exploratory Scenario (BES). The Committee reviewed the scenario expansion and expansion of market risk factors and considered key assumptions and judgements and reviewed the outputs and management actions.*
 Reviewed the Bank of England IFRS 9 stress tests on non-credit card and credit card exercises including the assurance provided by Internal Audit and confirmation that management had undertaken robust review.*
 Reviewed the 2017 budget and stress test results (including IFRS 9) and 2017 ICAAP Stress Test Scenarios together with opinions from Risk and Internal Audit.*
 Considered 2018 budget and stress test results including Risk and Internal Audit opinions.*
 Oversaw enhancements to the bank’s stress testing capability, in particular the remediation actions taken in response to the PRA review of stress testing capability. Work being undertaken to strengthen and validate models and improve supporting governance was a key focus.
 Reviewed the risk profile of the Treasury Function in a focus session held to understand better its position relative to risk appetite, emerging trends, threats and regulatory developments over the following year.
 Undertook a teach-in on capital with a focus on legal entities (including the operation of external and internal MREL), future RWA developments and capital headwinds (Basel 3 amendments, PRA mortgage floors, IFRS 16).
 the proposed Executive Director Future Remuneration Policy as detailed on pages 87 to 88 from a risk and control perspective.
I am pleased to report on the progress made by the Sustainable Banking Committee (SBC) during another busy year for RBS.
The Committee has retained its forward looking, strategic outlook focusing on its five priority areas: culture; customers; people; brand & communications; and environmental, social and ethical (ESE) issues.
We have made good progress this year and below are some of the highlights of our achievements:  an enhanced stakeholder engagement programme;  a dedicated session on Personal & Business Banking’s plan to improve Net Promoter Scores and reduce complaints;  continuing the integration of sustainable banking into our core businesses and enhancing disclosure of integrated reporting elements in the Strategic Report;  supporting and challenging management to make tangible progress on culture;  development of a sustainable banking dashboard to provide the Committee with a consolidated view on RBS’s performance in respect of key priorities such as the customer, culture and our reputation, to monitor progress against becoming a truly sustainable bank;  supporting management in setting more ambitious environmental targets given the excellent progress RBS made in respect of previous targets set on carbon, paper and water;  encouraging management to consider and understand external benchmarks, surveys and ratings and the insights those provide in terms of RBS’s reputation and experience for customers;  a focus on people, with the Committee holding a spotlight session on the wellbeing agenda, being engaged on our inclusion strategy and the employee value proposition; and
In August 2017 we were delighted to welcome Yasmin Jetha as a member of the Committee. Yasmin brings a fresh perspective and enthusiasm for the work that we do. In January 2018 we then welcomed Dr Lena Wilson as a member and with her strong public sector and commercial background is a valuable addition to the Committee.
Customers  With clearer customer segmentation in place, good progress is being made in meeting the needs and expectations of NatWest and RBS Premier customers and those customers looking to buy a home. The significant trend to online is supported by our leading mobile app and digital banking propositions for business and commercial customers.
ESE Issues  While we saw a drop in our Dow Jones Sustainability Index rating this year we have retained our place in the FTSE4GOOD index and achieved a leadership category listing in the Carbon Disclosure Project Index (A-) for the second year running.
As you will have seen earlier in the report, I intend to stand down as a director of RBS in the coming months. I have thoroughly enjoyed my time as Chairman of SBC and have been pleased by the progress and positive changes that are underway as we remain committed to building a sustainable bank that is focused on delivering for a diversity of stakeholders. I look forward to handing over the role of Committee Chairman to Mike Rogers who has been an engaged and valuable member of SBC since 2016.
Report of the Sustainable Banking Committee Meetings The Sustainable Banking Committee held six scheduled Committee meetings in 2017 which were attended by the Chairman, senior representatives from the customer-facing franchises as well as Human Resources, Sustainability, Risk, Conduct & Restructuring, Communications & Marketing, and the Chief Economist.
The Committee also recognises the importance of engaging with a wide range of stakeholders so members visited Business Banking and Mortgages during 2017, providing valuable frontline colleague and customer insight. We also hosted a lunch with representatives from our Employee Led Networks. This allowed the Committee to hear first hand what it feels like to work for RBS. The themes from this session were reported to the Board to provide insight into the issues facing our employees.
Following the sessions opportunities for follow up, further engagement and challenge to management are identified. In December, we welcomed back a number of our past stakeholders to share the progress made and to continue engagement.
The feedback from both members and attendees was very positive, although there was some room for improvement in the information received by the SBC. It was suggested that the scope of SBC could be reviewed to ensure its role is clearly defined and understood as its remit has evolved over the last year.
Role and responsibilities of the Sustainable Banking Committee Authority is delegated to the SBC by the Board and the SBC reports and makes recommendations to the Board as required. The terms of reference of the SBC are available on rbs.com and these are reviewed annually and approved by the Board. A regular report on the activities of the SBC in fulfilling its responsibilities is provided to the Board.
The principal responsibilities of the SBC are shown below: Culture and People  to receive a regular culture measurement report to monitor progress of embedding the Board approved culture;  to understand areas of the business where there is an opportunity to improve, supporting and challenging management on their plans;  to receive updates on what RBS is doing in areas such as wellbeing and inclusion, which form part of how it feels to work here; Customer  to oversee customer centricity priorities and how RBS is supporting and engaging with key customer segments;  to oversee progress being made to achieve the long term target of being number one for customer service, trust and advocacy in each of our chosen businesses;  to receive updates on complaints including understanding how management is addressing the root causes and how that impacts the customer experience; Brand & Communications  to oversee the brand strategy in embedding the bank of brands approach focusing on building equity in our customer brands;  to oversee actions being taken by management to manage RBS’s reputation with reference to how RBS is viewed by our customers, consumers and related interest groups; ESE Issues  to consider RBS’s environmental strategy and progress against its environmental targets;  to understand what RBS is doing for financial capability and how we operate in our communities; and  our wider sustainable banking strategy.
Group-wide remuneration policy, fair pay and the views of employees 89
Total remuneration paid to the Chairman and non-executive directors for 2017 95
Annual statement from Robert Gillespie Chairman of the Group Performance and Remuneration Committee
This is my first report as Chairman of the Committee and I would like to start by thanking my predecessor, Sandy Crombie, for all his hard work. Sandy joined the Committee in 2009 and served as Chairman from 2014 until the end of 2017, helping to oversee a great number of positive changes in remuneration practices at RBS. He was also instrumental in introducing a new directors’ remuneration policy at the 2017 AGM.
We have moved to a long-term incentive structure with much lower maximum potential awards and where the performance of our executives is assessed on what they reasonably should be expected to achieve, while operating within our risk appetite. This helps to create more predictable outcomes and encourages safe and secure growth.
The policy also supports our cultural aim of making sure that remuneration encourages the right behaviours. Executives are required to build up larger shareholdings and retain them for longer. This creates stronger alignment with the experience of shareholders both during and after employment.
Broader pay policy The Committee also oversees the broader employee pay policy. We continue to make good progress in ensuring that employees are paid fairly and are supported by simple and transparent pay structures. Over the last two years we have removed variable pay for frontline and clerical employees with increases to their fixed pay instead, which provides greater certainty. As a result, 26,500 employees are compensated solely by fixed pay and benefits. Our rates of pay exceed the Living Wage and changes have been introduced so that people performing similar roles are paid more consistently.
“the new policy creates a simpler way of aligning the interests of executives with shareholders”
c. 40% reduction in max. variable pay c.30% reduction in max. variable pay
Aligns executives with shareholders predominantly through holding shares, both during and after employment
The maximum LTI award has been greatly reduced, while shareholding requirements have been significantly increased
Underperformance or risk failings would impact the vesting level or lead to a cancellation in the case of significant issues
Helps to ensure remuneration encourages good behaviours and embeds the right culture
Pre-grant performance assessment for 2018 LTI awards A summary of the assessment is set out below and further details can be found in the annual report on remuneration. The Committee assessed performance against pre-set objectives for 2017, across the core areas of Finance, Risk & Operations, Customers and People & Culture. The Committee considered whether the executive directors had achieved what would reasonably have been expected over the period and then applied its judgement without reference to formulaic targets and weightings.
Continued improvements in risk profile and culture. There was an increase in the number of franchises and functions achieving the desired control rating of 2, although this hadn’t been reached across every area.
Work is well underway in readiness for ring-fencing and the required legal entity changes. The programme remains on track with the critical path still delivering to plan.
Customer Trust performance was ahead of target in 2 out of the 5 chosen segments with improvements in 2 further segments.
Employee engagement and leadership scores increased significantly in 2017, with RBS above the Global Financial Services norm. Employee engagement was up 7 points on 2016 and was our highest score to date.
LTI award granted in further assessment at the end of three years before vesting with a 12 month retention period post vesting
Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 The percentage vesting boxes in the diagram above show when the share awards are released following the end of the applicable vesting and retention periods.
A fixed allowance paid entirely in shares. The shares vest immediately subject to any deductions for tax and are released in equal tranches over a three year retention period.
Executive directors can select from a range of standard benefits including: company car; private medical cover; life assurance; and critical illness insurance. Executive directors are also entitled to travel assistance in connection with company business including the use of a car and driver. RBS will meet the cost of any tax due on the benefit. Further benefits including relocation costs may be offered in line with market practice. RBS may also put in place certain security arrangements for executive directors.
Provision of a monthly cash pension allowance based on a percentage of salary. Opportunity to use the cash to participate in a defined contribution pension scheme.
35% of salary for current executive directors. 25% of salary for new executive directors.
Variable pay award (long-term incentive) To support a culture where individuals are rewarded for the delivery of sustained performance, taking into account RBS’s strategic objectives.
The vesting level of the award can vary between 0% and 100% dependent on the delivery of sustained performance.
The policy on the recruitment of new directors aims to be competitive and to structure pay in line with the framework applicable to current directors, based on the elements of pay detailed in the policy table, recognising that some adjustment to quantum within that framework may be necessary to secure the preferred candidate. A buy-out policy exists to replace awards forfeited or payments foregone which is in line with regulatory requirements. The Committee will minimise buy-outs wherever possible and ensure they are no more generous than, and on substantially similar terms to, the original awards or payments they are replacing.
Share awards will be treated in accordance with the relevant plan rules as approved by shareholders. In line with the remuneration policy approved by shareholders at the 2017 AGM, LTI awards made in 2018 onwards will involve a significant reduction in maximum opportunity and will not be subject to pro rating for time in good leaver circumstances, for the reasons set out below.
Individuals will qualify for good leaver treatment if they leave due to ill-health, injury, disability, death, retirement (as agreed with RBS), redundancy, the employing company ceasing to be a member of RBS, transfer of the employing business, or any other reason if and to the extent the Committee decides in any particular case.
Wider employee considerations The group-wide remuneration policy applies to all employees. Consistent with our executive remuneration principles, the aim is to deliver a simple and transparent pay policy which promotes the long-term success of RBS. The policy supports a culture where employees are rewarded for delivering sustained performance in line with our risk appetite and for demonstrating the right conduct and behaviours. Further details on the group-wide policy can be found on page 102 to 103.
Simplifying pay Providing a simple pay structure supports employees in doing the right thing for customers, allowing them to concentrate on providing excellent customer service.
Steps we have taken to simplify pay since 2015 include:  the removal of incentives for frontline employees in UK PBB
and Ulster Bank Republic of Ireland.  the removal of discretionary bonus for all Clerical employees in the UK and Republic of Ireland in 2017 and extending this to equivalent roles in India and Poland from 1 January 2018.
 the removal of discretionary bonus for the vast majority of Appointed employees in the UK and the Republic of Ireland from 1 January 2018.
 reducing the number of salary ranges by around 50%.  removing the long-term incentive element of pay for employees below Executive Committee level.
Steps we have taken to ensure fairness include:  setting rates of pay that exceed the Living Wage Foundation
Great place to work RBS provides a range of resources and supporting tools to make sure individuals are capable and motivated to perform at their best.
Some of the elements of great place to work include:  inclusion - employee led groups play a key role in influencing our inclusion strategy. Over 70% of employees have been trained to tackle unconscious bias and the inclusion score from our employee opinion survey is significantly above the Global Financial Services norm.
 wellbeing - support for good physical, mental and financial health.
 good leadership - equipping managers to help their teams flourish - including our Determined to lead programme which won the Princess Royal training award in 2017.
 volunteering - employees are provided with time off to work with charities and local communities.
Further details on our employee initiatives and successes can be found in the ‘our colleagues’ section of the Strategic Report.
Views of employees Our main listening tool is the biannual employee opinion survey which collects views on a range of topics including pay, engagement, wellbeing, inclusion and leadership.
The 2017 results showed improvement in the majority of categories. The number of employees who believe they are paid fairly for the work they do increased significantly during the year and is above the Global Financial Services norm.
Proposed reforms to the UK Corporate Governance Code build on the theme of ensuring the employee voice is heard at Board level. We are supportive of the proposals and are currently considering the most appropriate options to enhance our existing channels for employee engagement.
How risk is reflected in our remuneration process RBS’s approach to remuneration and related policies promotes effective risk management through a clear distinction between fixed remuneration, which reflects the role undertaken by an individual, and variable remuneration, which is directly linked and reflective of performance and can be risk-adjusted. Fixed pay is set at an appropriate level to avoid incentives that are adverse to sound risk management.
Focus on risk is achieved through clear risk input into objectives, performance reviews, the determination of variable pay pools and incentive plan design as well as the application of malus and clawback. The Committee is supported in this by the Board Risk Committee (BRC) and the RBS Risk, Conduct and Restructuring function.
Following further review against overall performance and conduct, the Chief Executive will make a final recommendation to the Committee, informed by all the previous steps in the process and his strategic view of the business. The Committee will then make an independent decision on the final bonus pool taking all of these earlier steps into account.
The assessment process for LTI awards to executive directors is founded on the balanced scorecard approach used for the multistep bonus pool process, reflecting a consistent risk management performance assessment.
Accountability review process and malus/clawback The accountability review process was introduced in 2012 to identify any material risk management, control and general policy breach failures and ensure accountability for those events. This allows RBS to respond in instances where new information would change the variable pay decisions made in previous years and/or the decisions to be made in the current year.
Circumstances in which RBS may apply malus, clawback or inyear reduction include:  the individual being culpable, responsible or ultimately accountable for conduct which results in significant financial losses for RBS;  the individual failing to meet appropriate standards of fitness and propriety;  reasonable evidence of an individual’s misbehaviour or material error;  RBS or the individual’s relevant business unit suffering a material failure of risk management; and
 for malus and in-year reduction only, circumstances where there has been a material downturn in financial performance.
The above list of circumstances is not exhaustive and RBS may consider any further circumstances that it feels appropriate.
Annual report on remuneration The sections audited by the company's auditors, Ernst and Young LLP, are as indicated.
(3) The executive directors receive a monthly cash allowance to help fund pension arrangements but do not participate in the company’s defined benefit pension schemes. The executive directors can choose to participate in the company’s defined contribution pension arrangements.
(4) The 2017 value relates to an LTI award granted in 2015. Performance has been assessed over the three year period to 31 December 2017 as set out below together with an estimate of the vesting value. The award will vest in two equal tranches in March 2019 and March 2020. The value for 2016 has been amended from the estimated value of £1,030,000 provided in the 2016 report to reflect the actual value on the vesting date in March 2017.
Economic Profit (25%) (£500 million) 25% £500 million £613 million 100% 25%
(2) Based on a RBS share price of £2.76, the average over the three month period from October to December 2017.
Vesting at maximum 2016 LTI award current assessment 2017 LTI award current assessment
Vesting between 0% – 100% qualified by Committee discretion taking into account the margin by which targets have been missed or exceeded and any other relevant factors
Ross McEwan 7 March 2017 2,870 1,188,800 Between 0% - 100% with minimum vesting as set out above
Conditional share awards subject to performance conditions, as set out above, measured over the three year period from 1 January 2017 to 31 December 2019 Ewen Stevenson 7 March 2017 2,305 954,768
Risk Culture to be rated at 3 (Proactive) on a blended basis, with strong tone from the top.
Strong oversight of ring-fencing, ensuring timely remediation of issues and maintain delivery as planned.
Continued improvements in risk profile with an increase in the number of franchises and functions rated at 2. While progress had been made, the ultimate desired control rating hadn’t been reached across every franchise and function.
Work is well underway in readiness for ring-fencing and the required legal entity changes. The programme remains in line with plan for delivery.
Customers Increase or maintain number 1 for Net Promoter Scores and increase Trust Scores in our chosen segments.
Year on year improvement from the Banking Standards Board (BSB) assessment.
Progress towards target of >30% women in ‘senior roles’ by 2020
Satisfactory progress had been made. The target population (top three leadership layers) had increased to 37%, representing an 8% increase since targets were introduced at the end of 2014.
Outcome of the assessment The Committee also received advice from the Board Risk Committee and the Sustainable Banking Committee in making its final assessment. After considering all the factors above, the Committee determined that good performance and progress towards our longterm goals had been achieved in 2017. Performance had been very strong in relation to financial and people & culture measures but, on balance, a 10% reduction was considered appropriate as risk and customer performance was not fully at the desired level. The resulting award levels are set out below.
The pre-vest assessment allows the Committee to make a balanced assessment of performance in the round rather than relying on formulaic adjustments. It is to provide comfort that sustainable performance has been delivered since the award, and that nothing new has come to light which might call into question the original award. Adjustments will also be made in the event of underperformance or required risk adjustment.
Factors considered in assessing pre-vest performance Four core questions will be considered as part of the pre-vest assessment under the themes of Finance; Customers; People; and Risk & Control. When assessing the performance of the year for which the award was made, “knowing what we know now” and taking into account all circumstances, has RBS: (1) Remained safe and secure, taking into account our financial results and capital position? (2) Been a good bank for customers taking into account our customer and advocacy performance? (3) Operated in an environment in which risk is seen as part of the way we work and think? (4) Operated in a way that reflects our stated values?
In addition, the Committee will consider the potential application of Risk & Control and Stakeholder Perception underpins following advice from the Board Risk Committee and Sustainable Banking Committee. This provides scope to consider significant risk, stakeholder or reputational matters not already captured in the performance assessment.
In determining the final vesting level of the award, the Committee will consider both individual and collective performance which means that there may be different vesting levels by participant. If a threshold level of sustainable performance has been delivered then no further assessment is required and the award vests in full.
Objectives for Performance Year 2018 (for the pre-grant assessment of LTI awards to be made in 2019) The table below forms the basis of the pre-grant assessment for LTI awards to be made in early 2019. Further details on the 2018 objectives and targets and the assessment of performance against these will be set out in the 2018 Directors’ Remuneration Report.
Improve governance and control environment Franchise and function control environment to meet the required rating within appetite
Progress towards 2020 target of number of women in ‘senior roles’ (at least 30% for each franchise and function)
Progress towards 2025 target of number of Black Asian Minority Ethnic (BAME) UK employees in the top four layers of RBS
Payments for loss of office (audited) No payments for loss of office were made to directors during 2017.
Notes: (1) The benefits column for Howard Davies includes private medical cover. (2) In line with market practice, non-executive directors are reimbursed expenses incurred in connection with travel and attendance at Board meetings. HMRC has confirmed that it deems these expenses as taxable where the Board meetings take place at the company’s main offices in London and Edinburgh. The value in the benefits column above, including restated amounts for 2016, is the value of the assistance provided together with the associated tax liability which RBS settles on behalf of the non-executive directors.
(4) Alison Davis stepped down from the Nominations and Governance Committee and Penny Hughes, Baroness Noakes and Mark Seligman were appointed to the Nominations and Governance Committee during the year.
(5) Mark Seligman joined the Board on 1 April 2017 and Yasmin Jetha joined the Board on 21 June 2017. John Hughes joined the Board on 21 June 2017 but stepped down with effect from 1 September 2017 due to health reasons. Mr Hughes made a voluntary decision to repay the fees that he received for this period.
UBI DAC BOC Board Oversight Committee for the Ulster Bank Ireland business
Board Risk Committee Group Audit Committee Group Performance and Remuneration Committee Sustainable Banking Committee Technology and Innovation Committee NatWest Markets Working Group
Other directorships Agreement from the Board must be sought before directors accept any additional roles outside of RBS. Procedures are in place to make sure that regulatory limits on the number of directorships held are complied with. The Board would also consider whether it was appropriate for executive directors to retain any remuneration receivable in respect of any external directorships, taking into account the nature of the appointment.
Neither of the executive directors holds a non-executive director role at any other company at this time. Details of the directorships held by other directors can be found in the biographies section of the corporate governance report.
Directors’ interests in RBS shares and shareholding requirements The shareholding requirement is to hold shares to the value of 400% of salary for the Chief Executive and 250% of salary for the Chief Financial Officer. Unvested shares from LTI awards will count on a net of tax basis towards meeting the shareholding requirement once the pre-vest performance assessment has taken place, at the end of the three year period. Once the respective retention periods have passed, directors are permitted to dispose of up to 25% of the shares received until the shareholding requirement is met. As set out below, the executive directors exceeded the shareholding requirement as at 31 December 2017. There are no shareholding requirements for non-executive directors.
Notes: (1) Ross McEwan holds 201,189 shares from his 2015 and 2016 fixed share allowances that are included in the total shares beneficially owned below but these have been excluded from the shareholding requirements calculation as he will transfer these shares to charity at the end of the retention period. (2) Value of shares held is based on the share price of £2.78 as at 31 December 2017. During the year ended 31 December 2017, the share price ranged from £2.15 to £2.86.
Note: (1) Award granted to Ewen Stevenson on appointment in May 2014 to replace awards forfeited on leaving Credit Suisse.
Total Shareholder Return (TSR) performance The graph below shows the performance of RBS over the past nine years in terms of TSR compared with that of the companies comprising the FTSE 100 Index. This index has been selected because it represents a cross-section of leading UK companies. The TSR for FTSE UK banks for the same period has been added for comparison. Source: Datastream
Salary Benefits Annual Bonus 2016 to 2017 change 2016 to 2017 change 2016 to 2017 change
Notes: (1) Executive directors are not eligible for an annual bonus. Standard benefit funding for executive directors remained unchanged between 2016 and 2017. The benefits for the
(2) The data represents full year average salary costs of the UK based employee population, which covers the majority of RBS employees and is considered to be the most representative comparator group. The increase in the average annual bonus is driven in part by the one time impact of the removal of LTI eligibility for employees below the Executive Committee in 2017, with these employees now eligible for an annual discretionary bonus award only.
Relative importance of spend on pay The table below shows a comparison of remuneration expenditure against other distributions and charges.
Remuneration paid to all employees (1) 4,217 4,670 (10%) Distributions to holders of ordinary shares — — — Distributions to holders of preference shares and paid-in equity (2) 628 1,697 (63%) Taxation and other charges recognised in the income statement: - Social security, Bank levy and Corporation tax 1,100 747 47% - Irrecoverable VAT and other indirect taxes incurred by RBS (3) 533 697 (24%)
The items above have been included as they reflect the key stakeholders for RBS and the major categories of distributions and charges made by RBS.
 setting the remuneration framework and principles for employees identified as Material Risk Takers falling within the scope of UK regulatory requirements.
In mitigating potential conflicts of interest, directors are not involved in decisions regarding their own remuneration and remuneration advisers are appointed by the Committee rather than management. The terms of reference of the Committee are reviewed annually and available on rbs.com.
First half of 2017  2016 performance reviews and remuneration arrangements for executive directors, Executive Committee members and attendees, and high earners.
 Executive Committee members’ 2017 objectives.  Development of the future pay construct for Executive
Executive Committee level.  Review of retirement and leaver policies.  Annual review of external advisers to the Committee.  Remuneration governance across legal entities, international locations and the impact of ring-fencing.  External stakeholder engagement plan.  Approval of the 2017 employee Sharesave offer.  Review of draft Directors’ Remuneration Report for 2017.  Risk / remuneration process review.  The annual evaluation of the Committee’s performance.
Performance evaluation process The Committee has considered the findings of the annual review of the effectiveness of the Committee. This year the evaluation process was conducted internally by the Deputy Secretary and overseen by the Company Secretary.
While the quality of information was generally considered to be good, some responses indicated there was scope for better comparative data and context. A number of Committee members and attendees suggested that, while the right things were on the agenda and meetings were well run, further consideration should be given to the number of meetings during the year.
The fees paid to PwC for advising the Committee in relation to directors’ remuneration were charged on a time/cost basis until September 2017. A fixed fee structure has operated from October 2017 onwards to cover standard services with any exceptional items charged on a time/cost basis. The fees for 2017 in relation to directors’ remuneration amounted to £170,476 excluding VAT (2016 - £214,706).
This section contains a number of voluntary disclosures on remuneration as well as disclosures which are required in accordance with Article 450 of the Capital Requirements Regulation. This section should be read in conjunction with both the Directors’ Remuneration Report and the Annual Report on Remuneration (pages 84 to 100).
All staff total remuneration the average salary for all employees is £32,785 12,445 employees earn between £50,000 and £100,000 5,025 employees earn between £100,000 and £250,000 934 employees earn total remuneration over £250,000
 Those responsible for managing our balance sheet and liquidity and funding positions across the business.
 Employees who managed the successful disposal of assets in Capital Resolution, reducing RBS’s capital requirements.
To provide fixed pay that reflects the skills and experience required for the role.
Role-based allowances are a fixed allowance which form an element of the employee’s overall fixed remuneration for regulatory requirements and are based on the role the individual performs.
The allowances are pre-determined, permanent, and can only be adjusted or cancelled if an employee relinquishes the role or responsibilities which made them eligible for the allowance. They are not intended to be adjusted other than where there is a change of role.
Pension forms part of fixed remuneration and RBS does not as a rule award discretionary pension benefits.
The performance measures are set in line with the business strategy and typically include: financial measures such as return on equity; cost:income ratio; expenses and headcount (dependent on the franchise / function); net promoter score and/or customer satisfaction to assess customer advocacy; and internal survey results to assess progress in employee engagement.
Risk and conduct performance is also taken into account. Control functions are assessed independently of the business units that they oversee.
Executive directors and members of the Executive Committee are required to build up and hold a shareholding equivalent to a percentage of salary. There is a restriction on the number of shares that individuals can sell until the requirement is met.
To offer employees in certain jurisdictions the opportunity to acquire shares.
The qualitative criteria can be summarised as: staff within the management body; senior management; other staff with key functional or managerial responsibilities; staff, individually or as part of a Committee, with authority to approve new business products or to commit to credit risk exposures and market risk transactions above certain levels. The quantitative criteria are: individuals earning €500,000 or more in the previous year; individuals in the top 0.3% of earners in the previous year; individuals who earned more than the lowest paid identified staff per the qualitative criteria, subject to specific exceptions in the criteria. In addition to the qualitative and quantitative criteria, RBS has applied its own minimum standards to identify roles that are considered to have a material influence over its risk profile.
Remuneration of MRTs The quantitative disclosures below are made in accordance with Article 450 of the EU Capital Requirements Regulation in relation to 637 employees who have been identified as MRTs.
All Other Business Areas 2 36 38 2. Aggregate remuneration expenditure Aggregate remuneration expenditure in respect of 2017 performance was as follows: Senior management
Variable remuneration awarded for 2017 performance Variable remuneration consisted of a combination of annual bonus and long-term incentive awards, deferred over a three to seven year period in accordance with regulatory requirements. Under the RBS bonus deferral structure, immediate cash awards are limited to £2,000 per employee.
Unvested at year end 41.7 167.5 209.2 5. Guaranteed Awards (including ‘Sign-on’ awards) and Severance Payments RBS does not offer ‘Sign-on awards’. Guaranteed awards may only be granted to new hires in exceptional circumstances in compensation for awards foregone in their previous company and are limited to the first year of service. No new hire guarantees were made in respect of the 2017 performance year.
Severance payments and / or arrangements can be made to employees who leave RBS in certain situations, including redundancy. Such payments are determined by a predetermined formula set out within the relevant social plans, policies, agreements or local laws. Where local laws permit, there is a cap on the maximum amount that can be awarded.
Commercial & Private Banking 1 to 0.74 1 to 0.56 1 to 0.57
Corporate Functions 1 to 0.74 1 to 0.48 1 to 0.49
Internal Control Functions 1 to 0 1 to 0.36 1 to 0.33
Ongoing processes for the identification, evaluation and management of the principal risks faced by RBS operated throughout the period from 1 January 2017 to 22 February 2018, the date the directors approved the Annual Report & Accounts.
The effectiveness of RBS’s internal controls is reviewed regularly by the Board, the Group Audit Committee and the Board Risk Committee. Internal Audit undertakes independent assurance activities and provides reports to the Board and executive management on the quality and effectiveness of governance, risk management and internal controls to monitor, manage and mitigate risks in achieving the bank’s objectives. In addition, the Board receives a risk management report at each scheduled Board meeting. Executive management committees in each of the RBS businesses also receive regular reports on significant risks facing their business and how they are being controlled. Details of the bank’s approach to risk management are given in the Capital & Risk Management section.
In recent years, RBS has made progress in strengthening its control environment. Throughout 2017, there was a sustained focus on consolidating progress and driving further improvements across each of the franchises and functions. In particular, this resulted in measurable improvement in the Personal & Business Banking (PBB) franchise and the Chief Administration Office (CAO) among others. Work also continued to develop and enhance both the risk appetite framework and the operational risk management framework in support of a robust and holistic control approach. In parallel with this, further progress was made in embedding a consistent end-to-end risk and control assessment process. While more work is required, and the journey of improvement will continue, significant steps forward have been made in terms of developing, enhancing and embedding a strong and dynamic risk culture across RBS.
The remediation of known control issues remained an important focus of the Group Audit Committee and the Board Risk Committee during 2017. For further information on their oversight of remediation of the most significant issues, please refer to the Report of the Group Audit Committee and the Report of the Board Risk Committee.
Internal control over financial reporting RBS is required to comply with Section 404 of the US SarbanesOxley Act of 2002 and assess the effectiveness of internal control over financial reporting as of 31 December 2017.
RBS has assessed the effectiveness of its internal control over financial reporting as of 31 December 2017 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 publication of ‘Internal Control - Integrated Framework'.
RBS’s auditors have audited the effectiveness of RBS’s internal control over financial reporting and have given an unqualified opinion.
Management's report on RBS’s internal control over financial reporting will be filed with the Securities and Exchange Commission as part of the 2017 Annual Report on Form 20-F.
The New York Stock Exchange As a foreign private issuer with American Depository Shares representing ordinary shares, preference shares and debt securities listed on the New York Stock Exchange (the “NYSE”), RBS is not required to comply with all of the NYSE standards applicable to US domestic companies (the “NYSE Standards”) provided that it follows home country practice in lieu of the NYSE Standards and discloses any significant ways in which its corporate governance practices differ from the NYSE Standards. RBS is also required to provide an Annual Written Affirmation to the NYSE of its compliance with the mandatory applicable NYSE Standards.
RBS has reviewed its corporate governance arrangements and is satisfied that these are consistent with the NYSE Standards, subject to the following departures: (i) NYSE Standards require the majority of the Board to be independent. The NYSE Standards contain different tests from the Code for determining whether a director is independent. RBS follows the Code’s requirements in determining the independence of its directors and currently has 9 independent non-executive directors, one of whom is the senior independent director (ii) The NYSE Standards require non-management directors to hold regular sessions without management present and that independent directors meet at least once a year. The Code requires the Chairman to hold meetings with non-executive directors without the executives present and non-executive directors are to meet without the Chairman present at least once a year to appraise the Chairman’s performance and RBS complies with the requirements of the Code. (iii) The NYSE Standards require that the nominating/corporate governance committee of a listed company be composed entirely of independent directors.
The NYSE Standards require that the compensation committee must have direct responsibility to review and approve the Chief Executive’s remuneration.
Following placing and open offers in December 2008 and in April 2009, HM Treasury (HMT) owned approximately 70.3% of the enlarged ordinary share capital of the company. In December 2009, the company issued a further £25.5 billion of new capital to HMT in the form of B shares. HMT sold 630 million of its holding of the company’s ordinary shares in August 2015. In October 2015 HMT converted its entire holding of 51 billion B shares into 5.1 billion new ordinary shares of £1 each in the company.
At 31 December 2017, HMT’s holding in the company’s ordinary shares was 70.5%.
RBS Group ring-fencing The UK ring-fencing legislation requiring the separation of essential banking services from investment banking services will take effect from 1 January 2019.
To comply with these requirements it is RBS’s intention to place the majority of the UK and Western European banking business in ring-fenced banking entities under an intermediate holding company. NatWest Markets Plc (NatWest Markets) will be a separate non ring-fenced bank and The Royal Bank of Scotland International (Holdings) Limited (RBSI Holdings) will also be placed outside the ring-fence, both as direct subsidiaries of RBSG.
The RFTS is expected to take effect over the weekend of 28-30 April 2018. At the same time, RBS plc will be renamed “NatWest Markets Plc”, Adam will be renamed “The Royal Bank of Scotland plc” and assume banknote-issuing responsibility.
January 2019 Once the RFTS, other restructuring and the ring-fencing legislation is in force: Ring-fenced activities
Non-ring-fenced activities  NatWest Markets Plc (former RBS plc) will continue to undertake RBS’s trading and investment banking activities; and
Segmental reporting Segmental reorganisation and business transfers RBS continues to deliver on its plan to build a strong, simple and fair bank for both customers and shareholders. To support this, and in preparation for the UK ring-fencing regime, the previously reported operating segments were realigned in Q4 2017 and a number of business transfers completed.
Segmental reorganisation The previously reported operating segments are now realigned and comparatives have been re-presented as follows:  The former Williams & Glyn reportable operating segment has been integrated into the UK PBB reportable segment;  The former Capital Resolution reportable operating segment has been integrated into the NatWest Markets reportable segment, with the exception of the costs in relation to the RMBS claims, which have been transferred to the Central & Other items reportable segment; and
Central items & other includes corporate functions, such as RBS treasury, finance, risk management, compliance, legal, communications and human resources. Central functions manages RBS capital resources and RBS-wide regulatory projects and provides services to the reportable segments. Balances in relation to legacy litigation issues and the international private banking business are included in the relevant periods.
Risk factors RBS’s future performance and results could be materially different from expected results depending on the outcome of certain potential risks and uncertainties. Full details of these and other risk factors are set out on pages 372 to 402.
The reported results of RBS are also sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. Details of RBS’s critical accounting policies and key sources of accounting judgments are included in Accounting policies on pages 251 to 263.
Financial performance A review of RBS’s performance during the year ended 31 December 2017, including details of each operating segment, and RBS’s financial position as at that date is contained in the Business review on pages 117to 148!Syntax Error, #.
Business divestments Following the change of terms in respect of the business previously described as Williams & Glyn and agreed with the European Commission in September 2017, RBS will make a £425 million contribution to a Capability and Innovation Fund to be established to support competition in UK SME banking. The agreed alternative remedy package also requires a £350 million Incentivised Switching Scheme which will provide funding for eligible challenger bodies to help them incentivise SME customers to switch their accounts and loans from RBS. Should the uptake within the Incentivised Switching Scheme not be sufficient, RBS may be required to make a further contribution, capped at £50 million.
Employees Our colleagues As at 31 December 2017, RBS employed 71,200 people (full-time equivalent basis, including temporary workers) throughout the world. Details of related costs are included in Note 3 on the consolidated accounts. The Board has considered ring-fencing preparations during the year and in advance of the legislation taking effect on 1 January 2019.
Building a healthy culture Building a healthy culture that embodies Our Values is one of RBS’s core priorities.
Our Values guide the way RBS identify the right people to serve our customers well, and how RBS manage, engage and reward colleagues. They are at the heart of both Our Standards (the bank wide behavioural framework) and Our Code (the bank wide Code of Conduct).
The 2017 results were the most positive we’ve seen in recent times. Key measures of engagement, leadership and our culture have improved significantly, and RBS are now above the global financial services norm in the majority of our survey categories.
Rewarding our colleagues RBS’s approach to performance management provides clarity for our colleagues about how their contribution links to our ambition. It recognises behaviour that supports our values and holds individuals to account for behaviour and performance that does not.
RBS have a focus on paying the right wage to colleagues and the RBS rates of pay continue to exceed the Living Wage Foundation Benchmarks.
Developing our colleagues RBS continued to deliver ‘Determined to Lead’, which is the core management system for the bank. It provides consistent tools to lead and engage colleagues. This programme has continued in 2017 with over 3,000 leaders participating.
Health and wellbeing of our colleagues Wellbeing is a strong foundation for making RBS a great place to work. For the third year running RBS participated in the Global Challenge (formerly GCC) and with 34,000 colleagues taking part we won the Global Challenge 1st Most Active Organisation Financial Industry. Building on this success, we embraced the rapid acceleration of digital wellbeing and are one of the few large organisations to pilot a digital wellbeing platform.
As RBS continue to support our colleagues through change we have fully utilised the services of our Employee Assistance Programme.
Inclusion Building a more inclusive RBS is essential for our customers and colleagues. Our inclusion policy standard applies to all colleagues globally.
During 2017, RBS continued to roll out unconscious bias learning to all colleagues (over 70,000 trained, to date) to create a solid platform for the wider inclusion agenda.
We continue to focus on building an ethnically diverse RBS. We will introduce explicit targets for BAME representation at senior levels in 2018.
For more information on our approach and progress please read the RBS Strategic Report. Further information is available on rbs.com/sustainability.
Going concern RBS’s business activities and financial position, the factors likely to affect its future development and performance and its objectives and policies in managing the financial risks to which it is exposed and its capital are discussed in the Business review. The risk factors which could materially affect RBS’s future results are set out on pages 372 to 402. RBS’s regulatory capital resources and significant developments in 2017 and anticipated future developments are detailed in the Capital, liquidity and funding section on pages 161 to 176. This section also describes RBS’s funding and liquidity profile, including changes in key metrics and the build up of liquidity reserves.
Viability statement Under the revised UK Corporate Governance Code the directors are required to confirm that they have carried out a robust assessment of the RBS’s principal risks and make a longer term viability statement. This is set out in the Strategic Report on page 49.
BBA disclosure code RBS’s 2017 financial statements have been prepared in compliance with the principles set out in the Code for Financial Reporting Disclosure published by the British Bankers' Association in 2010.The Code sets out five disclosure principles together with supporting guidance. The principles are that RBS and other major UK banks will provide high quality, meaningful and decision-useful disclosures; review and enhance their financial instrument disclosures for key areas of interest to market participants; assess the applicability and relevance of good practice recommendations to their disclosures acknowledging the importance of such guidance; seek to enhance the comparability of financial statement disclosures across the UK banking sector; and clearly differentiate in their annual reports between information that is audited and information that is unaudited.
Enhanced Disclosure Task Force (EDTF) The EDTF established by the Financial Stability Board, published its report ‘Enhancing the Risk Disclosures of Banks’ in October 2012. All EDTF recommendations are reflected in the 2017 Annual Report and Accounts and Pillar 3 Report.
Corporate governance The company is committed to high standards of corporate governance. Details are given in the Corporate governance report on pages 57 to 105. The Corporate governance report and compliance report (pages 106 to 108) form part of this Report of the directors.
Share capital Details of the ordinary and preference share capital at 31 December 2017 and movements during the year are shown in Note 25 on the consolidated accounts.
During 2017, the company allotted and issued a total of 119 million new ordinary shares of £1 each for the purposes of ensuring 2017 coupon payments on discretionary hybrid capital securities were partly neutralised from a Core Tier 1 capital perspective.
The shares were allotted to UBS AG at the subscription prices determined by reference to the average market prices during the sale periods set out below.
In the three years to 31 December 2017, the percentage increase in issued share capital due to non-pre-emptive issuance (excluding employee share schemes) for cash was 2.94%. In addition the company issued 22 million new ordinary shares in connection with employee share schemes in 2017.
Additional information Where not provided elsewhere in the Report of the directors, the following additional information is required to be disclosed by Part 6 of Schedule 7 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.
The rights and obligations attached to the company’s ordinary shares and preference shares are set out in the company’s Articles of Association, copies of which can be obtained from Companies House in the UK or can be found at rbs.com/about/board-and-governance.
On a show of hands at a general meeting of the company every holder of ordinary shares and cumulative preference shares present in person or by proxy and entitled to vote shall have one vote. On a poll, every holder of ordinary shares or cumulative preference shares present in person or by proxy and entitled to vote shall have four votes for every share held. The notices of Annual General Meetings and General Meetings specify the deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the meeting.
The rights and obligations of holders of non-cumulative preference shares are set out in Note 25 on the consolidated accounts.
The company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights. There are no persons holding securities carrying special rights with regard to control of the company. A number of the company’s employee share plans include restrictions on transfers of shares while shares are subject to the plans or the terms under which the shares were awarded.
The Royal Bank of Scotland Group plc 2001 Employee Share Trust and The Royal Bank of Scotland Group plc 2007 US Employee Share Trust hold shares on behalf of RBS’s employee share plans. The voting rights are exercisable by the Trustees, however, in accordance with investor protection guidelines, the Trustees abstain from voting. The Trustees would take independent advice before accepting any offer in respect of their shareholdings for the company in a takeover bid situation.
Awards granted under the company’s employee share plans may be met through a combination of newly issued shares and shares acquired in the market by the company’s employee benefit trusts.
Directors The names and brief biographical details of the current directors are shown on pages 51 to 56.
Howard Davies, Frank Dangeard, Alison Davis, Morten Friis, Robert Gillespie, Penny Hughes, Ross McEwan, Brendan Nelson, Baroness Noakes, Mike Rogers and Ewen Stevenson all served throughout the year and to the date of signing of the financial statements.
Directors’ interests The interests of the directors in the shares of the company at 31 December 2017 are shown on page 97. None of the directors held an interest in the loan capital of the company or in the shares or loan capital of any of the subsidiary undertakings of the company, during the period from 1 January 2017 to 22 February 2018.
In terms of section 236 of the Companies Act, Qualifying Pension Scheme Indemnity Provisions have been issued to all trustees of RBS pension schemes.
Post balance sheet events Other than the matter disclosed on page 347, there have been no significant events between the year end and the date of approval of these accounts which would require a change to or disclosure in the accounts.
Shareholdings The table below shows shareholders that have notified RBS that they hold more than 3% of the total voting rights of the company at 31 December 2017.
As at 22 February 2018, there were no changes to the shareholdings shown in the table above.
Listing Rule 9.8.4 In accordance with the UK Financial Conduct Authority’s Listing Rules the information to be included in the Annual Report and Accounts under LR 9.8.4, is set out in this Directors’ report with the exception of details of contracts of significance under LR 9.8.4. (10) and (11) given in Additional Information on pages 370 and 371.
Directors’ disclosure to auditors Each of the directors at the date of approval of this report confirms that: (a) so far as the director is aware, there is no relevant audit information of which the company’s auditors are unaware; and
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 230 to 243.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required by Article 4 of the IAS Regulation (European Commission Regulation No 1606/2002) to prepare Group accounts, and as permitted by the Companies Act 2006 have elected to prepare company accounts, for each financial year in accordance with International Financial Reporting Standards as adopted by the European Union. They are responsible for preparing accounts that present fairly the financial position, financial performance and cash flows of the Group and the company. In preparing those accounts, the directors are required to:  select suitable accounting policies and then apply them consistently;  make judgements and estimates that are reasonable and prudent; and  state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts.
 the Strategic Report and Directors’ report (incorporating the Business review) include a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Key operating indicators RBS prepares its financial statements in accordance with IFRS as issued by the IASB and as adopted by the European Union, which constitutes a body of generally accepted accounting principles (‘GAAP’). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP financial measures. These measures exclude certain items which management believe are not representative of the underlying performance of the business and which distort periodon -period comparison. These measures include:  ‘Adjusted’ measures of financial performance, principally operating performance before: own credit adjustments; gain or loss on redemption of own debt; strategic disposals, restructuring costs, litigation and conduct costs. and write down of goodwill;  Performance, funding and credit metrics such as ‘return on tangible equity’, ‘adjusted return on tangible equity’ and related RWA equivalents incorporating the effect of capital deductions (RWAes), total assets excluding derivatives (funded assets) and net interest margin (NIM) adjusted for items designated at fair value through profit or loss (nonstatutory NIM), cost:income ratio, loan:deposit ratio and REIL/impairment provision ratios. These are internal metrics used to measure business performance;  Personal & Business Banking (PBB) franchise, combining the reportable segments of UK Personal & Business Banking (UK PBB) and Ulster Bank RoI, Commercial & Private Banking (CPB) franchise, combining the reportable segments of Commercial Banking and Private Banking; and
. RBS Group ring-fencing The UK ring-fencing legislation requiring the separation of essential banking services from investment banking services will take effect from 1 January 2019.
Citizens RBS sold the final tranche of its interest in Citizens Financial Group, Inc. during the second half of 2015. Consequently, Citizens was classified as a disposal group at 31 December 2014 and presented as a discontinued operation until October 2015. From 3 August 2015 until the final tranche was sold in October 2015, Citizens was an associated undertaking.
Memo: Notes: (1) Excluding own credit adjustments, loss on redemption of own debt and strategic disposals. Tax on these items was a £24 million charge in 2017 (2016 - £90 million charge; 2015 - £15 million charge). (2) Excluding restructuring costs, litigation and conduct costs and write down of goodwill. Tax on these items was £369 million in 2017 (2016 - £286 million; 2015 - £563 million).
UK Ulster Bank RBS NatWest Central items Total 2017 PBB RoI Commercial Banking Private Banking International Markets & other RBS £m £m £m £m £m £m £m £m
Total income - adjusted 6,477 607 3,484 678 389 1,090 137 12,862 Own credit adjustments — (3) — — — (66) — (69) Loss on redemption of own debt — — — — — — (7) (7)
Operating profit/(loss) - adjusted 3,084 96 1,308 227 184 (264) 183 4,818 Operating profit/(loss) 2,413 (132) 1,108 143 167 (977) (483) 2,239
2015 Total income - adjusted 6,033 550 3,254 644 367 1,809 377 13,034 Own credit adjustments — — — — — 295 14 309 Loss on redemption of own debt — — — — — — (263) (263)
Total income 6,033 550 3,254 644 367 2,066 9 12,923 Operating expenses - adjusted (3,397) (427) (1,801) (518) (156) (3,006) (51) (9,356)
Write down of goodwill — — — (498) — — — (498)
Return on equity - adjusted (1,2) 25.3% 10.6% 10.9% 4.9% 18.9% (3.0%) nm 11.0% Cost income ratio (3) 75.7% 78.0% 57.2% 171.0% 43.6% nm nm 126.9% Cost income ratio - adjusted (2,3) 56.3% 77.6% 53.3% 80.4% 42.5% 166.2% nm 71.4%
Gross yield on interest-earning assets of the banking business (3) 2.57 2.80 2.88
Cost of interest-bearing liabilities of the banking business (0.69) (0.94) (1.11)
Notes: (1) Negative interest on loans and advances is classed as interest payable and on customer deposits is classed as internet receivable. (2) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. (3) Gross yield is the interest earned on average interest-earning assets of the banking book. (4) Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. (5) For the purpose of net interest margin calculations, there was no increase in interest receivable (2016 - nil; 2015 - nil) and no increase in interest payable
(2016 - nil; 2015 - £15 million) in respect of interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have been adjusted where applicable.
(6) Net interest margin is net interest income of the banking business as a percentage of interest-earning assets (IEA) of the banking business.
Commercial Banking NIM decreased by 2 basis points as active re-pricing of assets and deposits has been more than offset by asset margin pressure in a low rate environment.
Private Banking NIM decreased by 19 basis points to 2.47% reflecting the competitive market and low rate environment, partially offset by higher funding benefits on deposits following the Q4 2017 base rate increase.
2016 compared with 2015 Net interest income of £8,708 million reduced by £59 million compared with 2015 principally driven by a £126 million reduction in legacy NatWest Markets business, in line with the planned shrinkage of the balance sheet.
NIM was 2.18% for 2016, 6 basis points higher than 2015 as the benefit associated with reductions in low yielding ‘non-core’ assets has been partially offset by modest asset margin pressure and mix impacts across PBB, CPB and RBSI.
Average interest earning assets across the combined PBB, CPB and RBSI increased by 10% on 2015, compared with a 3% decline for RBS total, and represented 88% of total average interest earning assets (2015 - 77%). NIM across PBB, CPB and RBSI was 2.34%, 13 basis points lower than 2015.
UK PBB NIM decreased by 16 basis points to 2.97% reflecting the impact of the overall portfolio mix being increasingly weighted towards secured lending and mortgage customers switching from standard variable rate (SVR) to lower rate products. During the second half of 2016 SVR balances stabilised at approximately 12% of mortgage balances. Ulster Bank RoI NIM increased by 5 basis points to 1.62% driven by a continued reduction in the cost of deposits and a reduced volume of low yielding liquid assets, partly offset by reduced income on free funds.
Commercial Banking NIM fell by 12 basis points to 1.76% driven by asset margin pressure in a competitive market and low rate environment. Private Banking NIM reduced by 9 basis points to 2.66% principally driven by asset margin pressure. RBSI NIM fell by 12 basis points to 1.36% reflecting asset and liability margin pressures, partially offset by mitigating pricing actions.
Analysis of results continued Non-interest income 2017 2016 2015 £m £m £m
Total non-interest income 4,146 3,882 4,156 2017 compared with 2016 Non-interest income of £4,146 million increased by £264 million, or 6.8%, compared with 2016, primarily reflecting a £185 million debt sale gain in UK PBB and a £183 million increase in strategic disposals gains, partially offset by an own credit adjustment loss of £69 million compared with a gain of £180 million in 2016.
Net fees and commissions decreased by £80 million, or 3.2%, compared with 2016 reflecting a £48 million reduction in UK PBB, driven by increased cash back payments as the Reward proposition continued to grow with customer accounts 26% higher than 2016, and lower income in NatWest Markets.
Income from trading activities increased by £14 million to £820 million as an £86 million increase in NatWest Markets income has been partially offset by an increased charge for volatile items under IFRS.
Other operating income reduced by £219 million principally reflecting planned asset disposals in the legacy NatWest Markets business.
Analysis of results continued Operating expenses 2017 2016 2015 £m £m £m
Staff costs as a percentage of total income 29.9% 35.6% 37.9%
Restructuring costs of £1,565 million included: a £303 million charge relating to the reduction in our property portfolio; a £319 million charge in NatWest Markets principally relating to the rundown and closure of the legacy business; £221 million relating to the business previously described as Williams & Glyn; £194 million in respect of implementing ring-fencing requirements; and a £73 million net settlement relating to the RBS Netherlands pension scheme.
Adjusted operating expenses reduced by £1,136 million, or 12%, compared with 2015 to £8,220 million. Excluding expenses associated with the business previously described as Williams & Glyn, write down of intangibles and a £227 million VAT recovery, adjusted expenses reduced by £985(1) million, or 11%, in excess of our £800 million target. RBS has achieved a cumulative cost reduction of £3.1 billion across 2014 - 2016.
Analysis of results continued Impairment losses 2017 2016 2015 £m £m £m
2017 compared with 2016 A net impairment loss of £493 million, 15 basis points of gross customer loans, compared with £478 million in 2016.
UK PBB reported a net impairment charge of £235 million, or 14 basis points of gross customer loans, reflecting continued benign credit conditions.
Ulster Bank RoI reported a net impairment loss of €68 million compared with a €138 million release in 2016. The charge for the year included a provision relating to a change in the non performing loan strategy to allow for further portfolio sales whilst 2016 included gains arising from the impact of asset disposals.
Commercial Banking net impairment losses of £362 million were £156 million higher than 2016, reflecting a small number of single name impairments.
UK PBB reported a net impairment loss of £125 million compared with £8 million in 2015.
Commercial Banking net impairment losses of £206 million were £137 million higher than 2015 and comprised a small number of single name impairments.
REIL reduced by £1,847 million during 2016 to £10,310 million reflecting Capital Resolution run-down and a portfolio sale in Ulster Bank RoI partially offset by an increase in the shipping portfolio, foreign exchange movements and the implementation of a revised mortgage methodology in Ulster Bank RoI.
2016 compared with 2015 The tax charge for the year ended 31 December 2016 reflects the impact of the banking surcharge, non-deductible bank levy and conduct charges for which no tax relief has been recognised, a reduction in the carrying value and impact of UK tax rate changes on deferred tax balances, and the release of tax provisions that reflect the reduction of exposures in countries where RBS is ceasing operations.
Consolidated balance sheet as at 31 December 2017 2017 2016 £m £m
Commentary on consolidated balance sheet 2017 compared with 2016 Total assets of £738.1 billion as at 31 December 2017 were down £60.6 billion, 7.6%, compared with 31 December 2016. This was primarily driven by decreases in derivative assets, partly offset by increased central bank deposits and loan growth in UK PBB and Commercial Banking.
Loans and advances to banks increased by £0.2 billion, 0.7%, to £30.3 billion. Excluding reverse repurchase agreements and stock borrowing (‘reverse repos’), which were up £1.1 billion, 8.5%, to £14.0 billion, bank placings declined £1.0 billion, 5.8%, to £16.3 billion.
Loans and advances to customers decreased by £2.0. billion, 0.6%, to £349.9 billion. Within this, reverse repos were down £2.2 billion, 7.6%, to £26.7 billion. Customer lending increased by £0.2 billion, 0.1%, to £323.2 billion. This reflected increases across the retail and commercial business, in particular in UK PBB mortgage lending offset by the run-down of the NatWest Markets legacy business.
Debt securities were up £6.4 billion, 8.8%, to £78.9 billion, mainly due to increased holdings in UK and European government securities in RBS Treasury.
Settlement balances decreased by £3.0 billion, 54.5%, to £2.5 billion, primarily as a result of the run-down in the NatWest legacy business.
Movements in the value of derivative assets, down £86.2 billion, 34.9%, to £160.8 billion, and liabilities, down £82.0 billion, 34.7% to £154.5 billion, due to maturities, derivative mitigation activities, buyouts in NatWest Markets and mark-to-market movement as US dollar weakened against the Euro and Sterling.
Subordinated liabilities decreased by £6.7 billion, 34.5% to £12.7 billion, primarily as a result of the net decrease in dated and undated loan capital with redemptions of £4.2 billion and £1.5 billion respectively, reflecting on-going liability management activities.
Net cash outflows from financing activities of £5,107 million relate primarily to the redemption of subordinated liabilities of £3,606 million, redemption of equity preference shares of £1,160 million, the final payment to retire the Dividend Access Share of £1,193 million and interest paid on subordinated liabilities of £813 million. These outflows were partly offset by the inflow from the issuance of Additional Tier 1 capital notes of £2,046 million.
Financial summary RBS's financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the last five years is presented below.
Profit/(loss) from discontinued operations, net of tax (5) — — 1,541 (3,445) 558
Share price per ordinary share at year end - £ 2.78 2.25 3.02 3.94 3.38
Return on average ordinary shareholders' equity (4) 1.9% (15.3%) (4.0%) (6.5%) (14.7%)
Average total equity as a percentage of average total assets 7.0% 6.2% 6.0% 5.8% 5.5%
Loan impairment charge/(release) as a % of gross customer loans and advances
Notes: (1) Excluding restructuring costs and litigation and conduct costs. (2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 15% of the monthly average of segmental RWAes, assuming 28% tax rate.
UK PBB continued to deliver strong support to personal customers with mortgage balance growth of 7.0% compared with 2016. We continued to drive improvements in our customer mortgage experience, including being the first bank to launch a paperless mortgage journey, with NatWest Intermediary Solutions named Best Overall Lender at the 2017 Mortgage Advice Bureau Awards. Personal unsecured loans also saw balance growth of 7% compared with 2016 supported by an improved customer experience, with increased mobile functionality and simplified application processing resulting in digital loan sales growth of 20% compared with 2016 and 50% of sales transacted via this channel. Our overall personal unsecured risk appetite remains consistent with 2016, with new business quality stable on 2016.
Our business banking risk appetite remains consistent with 2016 with new business quality broadly stable on 2016.
2017 compared with 2016 Operating profit was £2,413 million compared with £1,726 million in 2016. The increase was driven by higher income, lower adjusted operating expenses and lower litigation and conduct charges, partially offset by higher restructuring costs, largely relating to the reduction in our property portfolio and costs associated with the business previously described as Williams & Glyn, and higher impairments. Return on equity increased to 23.7% from 16.2% in 2016.
The net impairment charge of £235 million, or 14 basis points of gross customer loans, reflected continued benign credit conditions. 2017 had lower recoveries partly as a result of the debt sales undertaken, compared with 2016. Defaults remained at very low levels across all portfolios compared to historic trends, although slightly higher than in 2016.
Net loans and advances increased by £9.0 billion, or 5.9%, to £161.7 billion as UK PBB continued to deliver support for both personal and business banking customers. Gross new mortgage lending in 2017 was £31.0 billion with market share of new mortgages at approximately 12%, resulting in stock share of approximately 10% at 31 December 2017 compared with 9.7% at 31 December 2016. Positive momentum continued across business banking lending, with net balances up 3.0% compared with 31 December 2016, adjusting for transfers(3).
Customer deposits increased by £10.6 billion, or 6.2%, to £180.6 billion, driven by strong personal current account and business deposit growth.
UK PBB includes commercial income from the business previously described as Williams & Glyn of approximately £417 million, gross loans and advances of £8.3 billion and deposits of £14.3 billion. An estimated £70 million of the commercial income, £1.7 billion of gross loans and advances and £1.8 billion of deposits relates to mid-corporate customers not subject to the European Commission alternative remedies package. 120,000 of the remaining approximately 220,000 customers will be subject to the remedies package.
UK Personal & Business Banking continued 2016 compared with 2015 Operating profit was £1,726 million, compared with £1,461 million in 2015, and included a £634 million litigation and conduct charge, principally in respect of additional PPI provisions. Adjusted operating profit of £2,604 million was £24 million, or 1%, lower than 2015 principally reflecting higher impairment losses, partially offset by Net interest income.
Total income of £6,127 million increased by £94 million, or 2%, compared with 2015, despite the lower rate environment depressing earnings on current accounts and the impact of regulatory changes impacting interchange fees. Net interest income was robust, increasing by £135 million, or 3%, reflecting continued strong asset growth combined with the active repricing of our deposit book. This more than offset the impact of lower current account hedge returns and lower mortgage margins. Net interest margin declined by 16 basis points to 2.97% reflecting the change in the overall portfolio mix and reduced mortgage margins. During the second half of 2016 mortgage SVR balances stabilised at approximately 12%, broadly in line with historical levels.
Adjusted operating expenses remained the same. Direct staff costs were £118 million, or 12%, lower driven by an 17% reduction in headcount reflecting the continued movement to digital channels, exiting of business lines with returns below required levels and some centralisation of administrative activities. This was partially offset by additional investment costs of £102 million, including one-off intangible asset write-downs of £56 million in 2016, together with a £21 million increase in regulatory charges and increase in costs related to the business previously described as Williams & Glyn.
We continue to build on our strong mortgage market position with gross balances increasing by 11% to £128.0 billion compared with 3% growth for the overall mortgage market. Gross new lending in 2016 was £31.9 billion, representing a market share of approximately 13% compared with a stock share of approximately 9.7% at 31 December 2016, up from 8.9% in 2015.
New business margins were stable over 2016 whilst margins on existing customers remortgaging have improved. Gross new business banking lending to small and medium-sized enterprises of £1.6 billion was up 43% compared with 2015. Personal loan gross new lending of £2.7 billion was up 25% supported by the launch of functionality for a customer to apply via the mobile app combined with improvements to customer experience. We have continued to take a cautionary risk approach to personal unsecured lending. As a result, personal unsecured cards and overdrafts balances have decreased by £0.3 billion, or 5%, compared with 2015, and margins have widened. Deposit balances performed strongly, increasing by £8.1 billion, or 5%, to £170.0 billion driven by 11% growth in personal current account balances. Personal savings balances increased 2% despite repricing activity.
RWAs decreased by £0.9 billion, or 3%, to £33.0 billion due to asset mix benefits and overall improved credit quality, largely reflecting the current benign credit conditions, partly offset by increased lending.
(2) UK PBB Collective Investment Funds (CIFL) business was transferred to Private Banking on 1 October 2017. CIFL Business transfer included total income of £33 million and total expenses of £9 million. Comparatives were not re-presented.
(3) Transfers include £0.4 billion loans and advances transferred from Commercial Banking to UK PBB during 2017 to better align Business banking customers. Comparatives were not re-presented.
Net fees and commissions 107 100 116 94 82 85 Other non-interest income 106 100 139 92 82 100 Own credit adjustments (4) 3 — (3) 3 —
Loan impairment charge/(release) as a % of gross customer loans and advances (excluding reverse repurchase agreements) by sector Mortgages 0.5% 0.2% (0.5%) 0.5% 0.2% (0.5%)
Capital and balance sheet 2017 2016 2015 2017 2016 2015 €bn €bn €bn £bn £bn £bn
Total loans and advances to customers (gross) 23.3 23.5 25.3 20.6 20.1 18.6
Risk elements in lending . - mortgages 3.4 3.7 3.5 3.0 3.1 2.6
Note: (1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
Gross new lending increased 3.4% on prior year primarily reflecting higher commercial lending. The bank’s mortgage lending exceeded €1 billion in 2017 supported by successful home mover advertising campaigns and an improved customer proposition.
In August, Ulster Bank RoI was the first in Ireland to launch Open Banking. Using market-leading technology, Ulster Bank RoI gives approved third parties limited access to a customer's account balance and transaction history, if the customer approves access.
Adjusted operating expenses of €516 million were 7.7% lower than 2016 primarily due to continued progress in the delivery of cost saving initiatives, as evidenced by a 12.9% reduction in headcount, and lower pension costs. Adjusted cost:income ratio of 74.3% compared with 79.8% in 2016.
A net impairment loss of €68 million compared with a €138 million release in 2016. The movement was driven by a provision relating to a change in the non performing loan strategy to allow for further portfolio sales, gains associated with asset disposals in 2016 and refinements to the mortgage provision models in 2017. REILs were €3.7 billion, 9.8% lower than 2016 reflecting credit quality improvements.
RWAs of €20.2 billion reduced by €0.9 billion, or 4.3%, compared with 2016.
Litigation and conduct costs of €211 million principally reflects a provision for remediation and programme costs associated with an industry wide examination of tracker mortgages. Restructuring costs increased by €27 million to €48 million, primarily driven by costs associated with asset disposal activity.
A net impairment release of €138 million comprised write-backs associated with asset disposals and benefited from improved macroeconomic conditions.
The sale of a portfolio of loans contributed to a €0.6 billion, or 13%, reduction in risk elements in lending in 2016 to €4.1 billion. This was partially offset by a widening of the definition of loans which are considered to be impaired to include multiple forbearance arrangements and probationary mortgages. The provision coverage ratio reduced from 55% in 2015 to 34% in 2016 largely reflecting a further de-risking of the balance sheet following recent asset sales of largely non-performing loans.
- Private sector services (education, health, etc) 6.9 6.9 6.7 - Wholesale and retail trade repairs 7.8 8.4 7.5
Our existing Bankline platform is used by 90% of our active customer base with over 400,000 payments processed every day. We continue to upgrade our new best-in-class Bankline, and have migrated around 25% of customers to the improved platform
2017 compared with 2016 Operating profit of £1,108 million compared with £742 million in 2016, primarily reflecting a reduction in litigation and conduct costs. Adjusted operating profit of £1,308 million was £35 million, or 2.7%, higher than 2016 reflecting lower adjusted operating expenses and higher income, partially offset by higher impairments. Adjusted return on equity remained broadly stable at 8.2%.
Total income increased by £69 million, or 2.0%, to £3,484 million primarily reflecting increased volumes in targeted segments and re-pricing benefits on deposits. Net interest margin decreased by 2 basis points as active re-pricing of assets and deposits has been more than offset by wider asset margin pressure in a low rate environment.
Adjusting for transfers(1), RWAs decreased by £8.2 billion, or 10.4%, to £71.8 billion compared with 2016 reflecting active capital management of the lending book, achieving £12.5 billion of gross RWA reductions.
RWAs were £78.5 billion, an increase of £6.2 billion compared with 2015 reflecting asset growth partially offset by reduced RWA intensity.
(2)The business transfers included impact on total income of £218 million (2015 - £79 million) and operating expenses of £109 million (2015 - £25 million).
Total loans and advances to customers (gross) 13.5 12.2 11.2 Total assets 20.3 18.6 17.0 Funded assets 20.3 18.5 17.0 Assets under management (3) 21.5 17.0 13.9 Risk elements in lending 0.1 0.1 0.1 Provision coverage (4) 34% 30% 28% Customer deposits (excluding repos) 26.9 26.6 23.1 Loan:deposit ratio (excluding repos) 50% 46% 48% Risk-weighted assets - Credit risk (non-counterparty) 8.1 7.5 7.6 - Operational risk 1.0 1.1 1.1
Private Banking has delivered top quartile investment performance on the majority of discretionary portfolios and UK multi-asset funds over the one, three and five year performance periods. Coutts won Gold Awards at the Portfolio Adviser Wealth Manager Awards 2018 for our Absolute Return portfolios and Cautious portfolios.
Investing in digital has seen the launch of Coutts Invest, a costeffective, online investment solution, and delivery of an enhanced mobile experience for clients. Coutts won the Service Innovation Award at the Private Asset Manager Awards for the second consecutive year for client security innovations such as CouttsID and Behavioural Biometrics.
2017 compared with 2016 Operating profit increased by £32 million, or 28.8%, to £143 million compared with 2016 and return on equity increased from 5.6% to 6.4%. Adjusted operating profit of £227 million was £78 million, or 52.3%, higher than 2016 primarily reflecting lower adjusted operating expenses and higher income. Adjusted return on equity increased to 11.3% from 7.8% in 2016.
Adjusted operating expenses of £445 million decreased by £66 million, or 12.9%, compared with 2016 largely reflecting management actions to reduce costs, including an 11.8% reduction in front office headcount. Adjusted cost:income ratio improved to 65.6% compared with 77.8% in 2016.
, assets under management were £2.4 billion, or 14.4%, higher than 2016 at £21.5 billion, reflecting both organic growth and favourable market conditions.
RWAs of £9.1 billion were £0.5 billion, or 5.8%, higher than 2016 primarily due to increased mortgage lending.
Adjusted operating expenses of £511 million were £7 million, or 1%, lower than 2015 driven by reductions in the direct cost base, with employee numbers down 10%, partially offset by increased infrastructure costs absorbed following the sale of the international business.
Note: (1) The UK PBB Collective Investment Funds (CIFL) business was transferred from UK PBB on 1 October 2017, including total income in Q4 2017 of £11 million and assets under management of £3.3 billion. Private Banking transferred Coutts Crown Dependencies (CCD) to RBS International during Q4 2017, including total income of £2 million and assets under management of £1.2 billion. Comparatives were not re-presented for these transfers.
Net loans and advances to customers 8.7 8.8 7.3 Total assets 25.9 23.4 23.1
Notes: (1) Excluding restructuring costs. (2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 16% (12% prior to November 2017) of the monthly average of segmental RWAes, assuming 10% tax rate. (3) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
RBS International continued Serving our customers RBS International continues to focus on meeting more of our retail, commercial, corporate and financial institution customers’ needs. We are nearing the final stages of our transition to becoming a non ring-fenced bank, and during 2017 we opened new wholesale branches in Luxembourg and London, supporting our financial institution customers in these important funds banking jurisdictions.
Across our personal banking propositions we continue to maintain our position as market leader in the Isle of Man and top three market positions in Guernsey and Jersey. To better meet our personal customers’ savings needs, we delivered a new suite of fixed term deposits. At the same time we have supported over 1,900 customers buy new homes, exceeding £480 million of new mortgages
Outside of our home jurisdictions, we have taken action to meet more of the international needs of our customers. Our mobile app now averages over one million log-ins per month, and has been upgraded to open access to international customers, assisting in our 14% increase in users.
Net loans and advances were broadly stable compared with 2016 and customer deposits increased by £3.8 billion to £29.0 billion primarily reflecting increased short term placements in the Funds sector.
RWAs of £5.1 billion reduced by £4.4 billion, or 46.3%, compared with 2016, reflecting the benefit of receiving the Advanced Internal Rating Based Waiver on the wholesale corporate book in November 2017, in advance of becoming a bank outside the ringfence.
2016 compared with 2015 Operating profit decreased by £17 million to £190 million principally reflecting increased impairment losses and operating expenses. Adjusted operating profit of £195 million was £16 million lower than 2015.
A net impairment loss of £10 million was reported in 2016.
Net loans and advances of £8.8 billion increased by £1.5 billion compared with 2015 reflecting balance draw-downs in the corporate lending portfolio, mainly within the Funds sector.
Net loans and advances to customers (excluding reverse repos) 22.7 30.2 39.7
Loans and advances to banks (excluding reverse repos) (1) 7.5 7.9 12.8
NatWest Markets has put customers at the centre of the way it does business. Since 2015 NatWest Markets has focused on the core products and markets where it has a strong track record, longstanding relationships and market leading positions. NatWest Markets is making strong progress with its multi-year transformation to build a business focused on delivering sustainable returns.
Following the closure of the former Capital Resolution business in 2017, NatWest Markets now includes legacy run-off assets alongside its core businesses. The business continues to focus on customer service and trust in its core markets and technology is enhancing the way NatWest Markets provides financial solutions to its customers. This is demonstrated by a number of industry awards and rankings:  No.1 for Gilts by Market Share – EMEA FIs (Source: Greenwich Associates, European Fixed Income 2017 – Government Bonds)
 No.1 for FX Service Quality – UK Corporates (Source: Greenwich Associates, European FX 2017)
2017 compared with 2016 An operating loss of £977 million compared with £1,865 million in 2016. The core business operating profit increased by £427 million to £41 million reflecting lower litigation and conduct costs, lower adjusted costs and higher income, partially offset by increased restructuring costs reflecting back office restructuring activity. Adjusted operating loss of £264 million, compared with £1,231 million in 2016, reflecting lower adjusted costs and a net impairment release of £174 million in 2017, compared with a charge of £253 million in 2016.
Total income of £1,050 million compared with £1,212 million in 2016. In the core business, adjusted income increased by £144 million, or 9.5%, to £1,665 million, principally driven by Rates as the business navigated markets well despite a lower level of customer activity than in 2016, which benefited from favourable market conditions following the EU referendum.