Financial assets other than debt securities and equity shares classified as available-for-sale Under IAS 39 financial assets classified as available-for-sale may take any legal form.
Foreign exchange gains and losses on monetary available-forsale financial assets For the purposes of recognising foreign exchange gains and losses, a monetary available-for-sale financial asset is treated as if it were carried at amortised cost in the foreign currency. Accordingly, for such financial assets, exchange differences resulting from retranslating amortised cost are recognised in profit or loss.
Under US GAAP, only debt and equity securities can be classified as available-for-sale. (Such securities are measured at fair value with unrealised gains and losses reported in a separate component of equity).
Such differences are included with other unrealised gains and losses and reported in a separate component of equity.
(h) Derivatives and hedging activities Gains and losses arising from changes in fair value of a derivative are recognised as they arise in profit or loss unless the derivative is the hedging instrument in a qualifying hedge. The Group enters into three types of hedge relationship: hedges of changes in the fair value of a recognised asset or liability or firm commitment (fair value hedges); hedges of the variability in cash flows from a recognised asset or liability or a forecast transaction (cash flow hedges); and hedges of the net investment in a foreign entity.
(j) Offset arrangements A financial asset and a financial liability are offset and the net amount reported in the balance sheet when, and only when, the reporting entity currently has a legally enforceable right to set off the recognised amounts; and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Arrangements such as master netting arrangements do not generally provide a basis for offsetting.
US GAAP principles are similar to IFRS. There are however differences in their detailed application. The Group has not recognised any hedge relationships for US GAAP purposes except hedges of net investments in foreign operations. All derivatives are measured at fair value with changes in fair value recognised in net income.
US GAAP requires similar valuations but allows a certain portion of actuarial gains and losses to be deferred and allocated in equal amounts over the average remaining service lives of current employees. An additional minimum liability must be recognised if the accumulated benefit obligation (the current value of accrued benefits without allowance for future salary increases) exceeds the fair value of plan assets and the Group has recorded a prepaid pension cost or has an accrued liability that is less than the unfunded accumulated benefit obligation. Movements in the additional minimum liability, together with the related deferred tax, are recognised in a seperate component of equity.
A financial liability is derecognised only when the creditor is paid or the debtor is legally released from being the primary obligator under the liability, either judicially or by the creditor.
SFAS 133 requires derivatives embedded in other financial instruments to be accounted for on a stand-alone basis if they have economic characteristics and risks that differ from those of the host instrument.
US GAAP requires consolidation by the primary beneficiary of a variable interest entity (VIE). An enterprise is the primary beneficiary of a VIE if it will absorb a majority of the entity’s expected losses, receive a majority of the entity's expected residual returns, or both. In accordance with the provisions of FIN46R, trust preferred securities issued by subsidiaries are in effect re-classified from minority interests to liabilities.
Other intangibles Until 2004 intangible assets acquired in a business combination were recognised separately from goodwill only if they were separable and reliably measurable. Thereafter intangibles have been recognised if they are separable or arise from contractual or other legal rights. All intangibles are amortised over their useful economic lives.
(3) Implementation timing differences This section sets out the areas where differences in amounts reported under IFRS and US GAAP arise because the effective dates of standards are different although the recognition and measurement principles are the same.
Notes on the accounts continued 46 Significant differences between IFRS and US GAAP (continued)
Net income available for ordinary shareholders – US GAAP 4,475 3,909
Outstanding options to purchase shares are excluded from the computation of diluted EPS where the exercise prices of the options are greater than the average market price of the ordinary shares during the relevant period. At 31 December 2005, there were 17.3 million such options outstanding (2004 – 8.7 million).
Projected benefit obligation at beginning of year 16,192 13,963 Service cost 457 420 Interest cost 860 768 Past service cost 3 — Net actuarial gain 2,302 1,568 Benefits and expenses paid (521) (527) Projected benefit obligation at year end 19,293 16,192
Service cost 457 420 Interest cost 860 768 Expected return on plan assets (932) (840) Amortisation of prior service cost 4 1 Amortisation of loss 364 263 Amortisation of net transition asset (6) (8) Net periodic pension cost 747 604
Weighted average assumptions used at 31 December: % per annum % per annum
Discount rate for liabilities 4.80 5.40 Salary increases 3.95 3.95 Pension increases 2.70 2.70 Long-term rate of return on assets 6.47 6.95
At 31 December 2005, the fund’s accumulated benefit obligation was underfunded by £1,433 million (2004 – £561 million). This resulted in a reduction in the accumulated other comprehensive income component of US GAAP shareholders’ equity of £4,457 million (2004 – £3,951 million), comprising the excess of the accumulated benefit obligation over the market value of assets of £1,433 million (2004 – £561 million), prepaid pension cost of £3,035 million (2004 – £3,402 million) less unrecognised prior service cost £11 million (2004 – £12 million). This was reduced by deferred tax of £1,337 million (2004 – £1,185 million). At 31 December 2003, the fund had a surplus of assets over its accumulated benefit obligation and no minimum liability was recognised.
47 Post balance sheet events 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.
Financial summary The Group’s accounts are prepared in accordance with IFRS, which differ in certain significant respects from US GAAP. For a discussion of such differences and a reconciliation between IFRS and US GAAP, see Note 46 on the accounts. The dollar financial information included below has been converted from sterling at a rate of £1.00 to US$1.7188, being the Noon Buying Rate on 30 December 2005.
Insurance net claims 7,413 4,313 4,260 Operating profit before impairment losses 16,574 9,643 8,769
2005 2005 2004 Summary consolidated balance sheet – IFRS $m £m £m
Loans and advances 838,453 487,813 408,324 Debt securities and equity shares 223,901 130,266 98,631 Derivatives at fair value and settlement balances 174,747 101,668 23,482
Derivatives at fair value, settlement balances and short positions 241,364 140,426 51,866
Earnings per ordinary share – pence 169.4 157.4 Diluted earnings per ordinary share – pence (1) 168.3 155.9 Adjusted earnings per ordinary share – pence 175.9 170.2 Dividends per ordinary share – pence 60.6 52.5 Dividend payout ratio (2) 41% 35% Share price per ordinary share at period end – £ 17.55 17.52 Market capitalisation at period end – £bn 56.1 55.6 Net asset value per ordinary share – £ 10.14 9.26 Return on average total assets (3) 0.73% 0.94% Return on average ordinary shareholders’ equity (4) 17.5% 18.3% Adjusted return on average ordinary shareholders’ equity (5) 18.2% 18.9% Average shareholders’ equity as a percentage of average total assets 4.5% 5.9% Risk asset ratio – Tier 1 7.6% 7.0% Risk asset ratio – Total 11.7% 11.7% Ratio of earnings to combined fixed charges and preference share dividends (6)
– including interest on deposits 1.67 1.88 – excluding interest on deposits 6.05 7.43
– including interest on deposits 1.69 1.94 – excluding interest on deposits 6.50 9.70
(2) Dividend payout ratio represents the interim dividend paid and final dividend proposed as a percentage of profit attributable to ordinary shareholders before integration costs, amortisation of purchased intangibles and net gain on sale of strategic investments and subsidiaries (net of tax).
Loans and advances to customers – gross 233,057 66,147 121,906 421,110 351,419
Loan impairment provisions For a discussion of the factors considered in determining the amount of the provisions, see ‘Loan impairment’ on page 93 and ‘Critical accounting polices – Loan impairment provisions on page 142.
Closing customer provisions as a % of gross loans and advances to customers (2)
Notes: (1) Includes closing provisions against loans and advances to banks of £3 million (2004 – £6 million).
The following table presents additional information in respect of the loan impairment provisions. IFRS
% of loans % of loans Closing to total Closing to total provision loans provision loans £m % £m %
Service industries and business activities 647 9.7 516 8.8 Agriculture, forestry and fishing 26 0.6 23 0.7
Service industries and business activities 176 163 Agriculture, forestry and fishing 4 9
Individuals – home mortgages 4 4 Individuals – others 948 516 Finance leases and instalment credit 15 90 Total domestic 1,250 901
Risk elements in lending and potential problem loans The Group’s loan control and review procedures do not include the classification of loans as non-accrual, accruing past due, restructured and potential problem loans, as defined by the SEC in the US. The following table shows the estimated amount of loans that would be reported using the SEC’s classifications. The figures are stated before deducting the value of security held or related provisions.
Loans accounted for on a non-accrual basis (2): Accruing loans which are contractually overdue 90 days or more as to principal or interest (3): Loans not included above which are classified as ‘troubled debt restructurings’ by the SEC: Foreign — 10
Total risk elements in lending 5,937 5,470 Potential problem loans (4)
Risk elements in lending as a % of gross lending to customers excluding reverse repos 1.60% 1.83%
Notes: (1) For the analysis above, 'Domestic' consists of the United Kingdom domestic transactions of the Group. 'Foreign' comprises the Group’s transactions conducted through offices outside the UK and through those offices in the UK specifically organised to service international banking transactions.
UK Domestic: Demand deposits – interest-free 28,833 22,307 Demand deposits – interest-bearing 91,564 72,938 Time deposits – savings 27,091 21,012 Time deposits – other 73,097 76,995 Overseas residents: Demand deposits – interest-free 396 387 Demand deposits – interest-bearing 26,663 16,965 Time deposits – savings 1,108 1,209 Time deposits – other 53,997 52,629 Total UK offices (1) 302,749 264,442 Overseas Demand deposits – interest-free 13,248 10,371 Demand deposits – interest-bearing 17,886 12,975 Time deposits – savings 21,691 21,153 Time deposits – other 97,700 74,257 Total overseas offices (see below) 150,525 118,756 Total deposits 453,274 383,198
Held for trading 66,712 Fair value through profit or loss 3,683 Amortised cost 382,879
Note: (1) Presentation of product analysis data has been refined and 2004 has been restated onto a basis consistent with 2005.
Over 3 months Over 6 months Within but within but within Over 2005 3 months 6 months 12 months 12 months Total £m £m £m £m £m
d d iti on al in fo rm at io n
Net income available for ordinary shareholders (1) 7,692 4,475 3,909 2,564 3,108 2,062
Basic earnings per ordinary share – pence 140.6 126.7 87.5 107.9 74.7 Diluted earnings per ordinary share – pence (2) 140.0 125.9 86.8 106.3 73.2 Dividends per ordinary share – pence 60.6 52.5 45.6 39.7 34.5
Return on average total assets (3) 0.64% 0.70% 0.55% 0.75% 0.57% Return on average ordinary shareholders’ equity (4) 13.4% 13.2% 9.5% 12.1% 8.8% Average shareholders’ equity as a percentage
Notes: (1) The dollar information included above has been converted from sterling at a rate of US$1.7188, the Noon Buying Rate on 30 December 2005.
Summary consolidated profit and loss account – UK GAAP £m £m £m £m
Provisions for bad and doubtful debts 1,428 1,461 1,286 984 Amounts written off fixed asset investments 83 33 59 7 Profit on ordinary activities before tax 6,917 6,076 4,852 4,252 Tax on profit on ordinary activities 2,155 1,888 1,582 1,537 Profit on ordinary activities after tax 4,762 4,188 3,270 2,715 Minority interests (including non-equity) 250 210 133 90 Preference dividends – non-equity 256 261 305 358 4,256 3,717 2,832 2,267 Additional Value Shares dividend – non-equity — 1,463 798 399 Profit attributable to ordinary shareholders 4,256 2,254 2,034 1,868
Notes: (1) Includes integration expenditure of £269 million for the year ended 31 December 2004 (2003 – £229 million; 2002 – £957 million; 2001 – £875 million).
Other financial data based upon UK GAAP 2004 2003 2002 2001
Earnings per ordinary share – pence 138.0 76.9 70.6 67.6 Diluted earnings per ordinary share – pence (1) 136.9 76.3 69.6 66.3 Adjusted earnings per ordinary share – pence 172.5 157.2 146.3 127.9 Dividends per ordinary share – pence 58.0 50.3 43.7 38.0
– including interest on deposits 1.84 1.95 1.74 1.49 – excluding interest on deposits 7.09 7.08 5.20 4.45
(3) Return on average equity shareholders’ funds represents profit attributable to ordinary shareholders expressed as a percentage of average equity shareholders’ funds.
A dd iti on al in fo rm a tio n
Analysis of loans and advances to customers The following table analyses loans and advances to customers before provisions by geographical area and type of customer.
Gross loans and advances to customers Domestic 196,589 167,377 145,274 127,650
The following table presents additional information with respect to the provisions for bad and doubtful debts under UK GAAP.
Provisions at end of year: Customer provision at end of year as % of loans and advances to customers at end of year: Average loans and advances to customers (gross) 298,150 245,798 211,206 181,584
Amounts written-off (net of recoveries) – customers 0.44% 0.59% 0.46% 0.42%
Service industries and business activities 516 8.8 599 11.4 699 11.5 627 12.9
Service industries and business activities 163 393 180 176 Agriculture, forestry and fishing 9 4 10 5
Finance leases and instalment credit 90 160 45 62 * Includes amounts written-off in respect of banks of nil in 2004 (2003 – nil; 2002 – £1 million; 2001 – £6 million).
Loans accounted for on a non-accrual basis(3): Accruing loans which are contractually overdue 90 days or more as to principal or interest(4): Loans not included above which are classified as ‘troubled debt restructurings’ by the SEC: Total risk elements in lending 5,529 5,157 4,871 4,493 Potential problem loans(5)
Closing provisions for bad and doubtful debts as a % of total risk elements in lending 76% 76% 80% 81%
(3) The Group’s UK banking subsidiary undertakings account for loans on a non-accrual basis from the point in time at which the collectability of interest is in significant doubt. Certain subsidiary undertakings of the Group, principally Citizens, generally account for loans on a non-accrual basis when interest or principal is past due 90 days.
Analysis of deposits – product analysis The following table shows the distribution of the Group’s deposits by type and geographical area: UK GAAP
UK Domestic: Demand deposits – interest-free 22,249 20,567 Demand deposits – interest-bearing 78,178 78,670 Time deposits – savings 18,205 13,238 Time deposits – other 68,662 57,994 Overseas residents: Demand deposits – interest-free 376 830 Demand deposits – interest-bearing 12,740 9,559 Time deposits – savings 836 1,014 Time deposits – other 64,141 32,531 Total UK offices 265,387 214,403 Overseas Demand deposits – interest-free 10,371 7,937 Demand deposits – interest-bearing 12,975 7,471 Time deposits – savings 21,153 15,450 Time deposits – other 74,257 59,025 Total overseas offices (see below) 118,756 89,883 Total deposits 384,143 304,286
Other currencies 123,426 94,412 Total customer accounts 285,062 236,963 Total deposits 384,143 304,286
(3) On 24 February 2006, the Noon Buying Rate was £1.00 = US$1.7448.
Commercial paper Outstanding at year end 8,391 6,968 Maximum outstanding at any month end during the year 8,391 7,032 Approximate average amount during the year 7,450 5,499 Approximate weighted average interest rate during the year 1.9% 1.6% Approximate weighted average interest rate at year end 2.6% 1.5%
Lending commitments and other commitments Under a loan commitment, the Group agrees to make funds available to a customer in the future. Loan commitments, which are usually for a specified term, may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and unutilised overdraft facilities. Other commitments include documentary credits, which are commercial letters of credit providing for payment by the Group to a named beneficiary against presentation of specified documents, forward asset purchases, forward deposits placed and undrawn note issuance and revolving underwriting facilities.
The Group’s contingent liabilities and commitments are set out below. More than More than 1 year but 3 years but
Less than less than less than Over 1 year 3 years 5 years 5 years Total 2005 £m £m £m £m £m
The Bank of England has operational independence in setting the repo rate to achieve the inflation target. The Bank was given independence by the Chancellor of the Exchequer in 1997, with the aim of making monetary policy free from political influence, and therefore more stable and credible. The Bank’s Monetary Policy Committee (“MPC”) meets each month to agree any change to interest rates, and the minutes of these meetings are published two weeks later. One-off meetings can also be held in exceptional circumstances. In response to the downturn in the global economy and the terrorist attacks, the Bank of England, along with other major central banks around the world, cut rates sharply in 2001. Rates remained at exceptionally low levels throughout 2002, and were reduced again in the first half of 2003, reflecting the uncertain nature of the global and domestic economic circumstances. Signs of recovery in the global economy led the Bank of England to increase rates five times since November 2003, to 4.75%, before interest rates were cut to 4.5% in August 2005.
The value of sterling is also important for UK monetary conditions. The monetary authorities do not have an exchange rate target, but movements in sterling play a role in the MPC’s monthly debates.
European Economic and Monetary Union (“EMU”) The European single currency, the euro, came into being on 1 January 1999. The third stage of EMU started on schedule on 1 January 1999. During the course of 1998, it was determined that eleven countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain) would participate. The UK, along with Denmark, exercised its right to opt out at that stage, and Sweden also determined not to be part of this first wave.
The Group continues to co-operate with the UK government, and to work within the financial services sector, to develop thinking and plans regarding a range of practical issues that would arise if the UK were to decide to enter EMU. In particular, the Group continues its involvement in discussions as to how a phased transition could be achieved, in order to minimise cost and risk. In addition, due attention is being paid to the implications, for elements of the Group and for customers, of the introduction of euro notes and coins and the withdrawal of sterling.
Uncertainty continues on the likelihood and timing of the euro being introduced in the UK. It is not possible to estimate with any degree of certainty the ultimate cost of making systems and operations fully compliant. Expenditure in the year ended 31 December 2005 in preparation for the possible introduction of the euro in the UK was minimal.
Supervision and regulation 1 United Kingdom 1.1 The regulatory regime applying to the UK financial services industry The Financial Services and Markets Act 2000 (“FSMA 2000”), containing an integrated legislative framework for regulating most of the UK financial services industry, came into force at the end of 2001. This and subsequent amendments established the Financial Services Authority (the “FSA”) as the single statutory regulator responsible for regulating deposit taking, insurance and investment business in the UK.
Under the FSMA 2000, businesses require the FSA’s permission to undertake specified types of activities including entering into and carrying out contracts of insurance; managing, dealing in or advising on, investments; accepting deposits; and issuing electronic money (“regulated activities”). The FSA has published detailed regulatory requirements contained in a Handbook of Rules and Guidance.
The FSA’s statutory objectives are to maintain confidence in, and to promote public understanding of, the UK financial system; to secure an appropriate degree of consumer protection; and to reduce the scope for financial crime. In achieving these objectives, the FSA must take account of certain “principles of good regulation” which include recognising the responsibilities of authorised firms’ own management, facilitating innovation and competition and acting proportionately in imposing burdens on the industry.
The FSA supervises the banking business of the UK based banks in the Group, including the Royal Bank, NatWest, Coutts & Co, Ulster Bank Limited and Tesco Personal Finance Limited.
Firms must also meet standards relating to senior management and internal systems and controls and must comply with rules designed to reduce the scope for firms to be used for money laundering. Revised Joint Money Laundering Steering Group Guidance Notes will come into force approximately mid 2006. The EU has published its draft Third Money Laundering Directive which will supersede the two previous Anti Money Laundering Directives. Implementation is expected in 2007.
Conduct of business standards essentially govern key aspects of firms’ relationships with customers, and require the provision of clear and adequate information, the managing of conflicts of interest and the recommending of products suitable to the needs of customers. The marketing of financial products (particularly investment products) is subject to detailed requirements.
The FSA’s high level principles require all regulated firms to treat their customers fairly. The FSA has undertaken a number of industry wide thematic reviews on this issue, and this is expected to continue in 2006. The FSA has indicated that it will include assessment of firms' effectiveness in this area in regular risk assessments of firms.
1.9 The European dimension Much of the regulatory agenda in the UK and other European Member States in which the Group operates continues to be set by the European Union. Legislation comprising the Union’s Financial Services Action Plan is nearly complete and implemented, with attention now turning to the policy agenda through to 2010. The Commission wishes to pursue a different approach to policymaking: costed, evidence-based and targeted. Nonetheless, there are some major initiatives already in the pipeline; including a revised Consumer Credit Directive, a directive to establish a Legal Framework for the Euro Payments Area, Solvency II (a revised EU capital framework for insurance companies), and possible legislation on mortgage credit. In addition, the Capital Requirements Directive and Markets in Financial Instruments Directive, both of which apply to the Group are expected to be implemented in the next two years. The Group has been increasingly engaged with EU and national policymakers on all these priority measures, and will aim to maintain this level of involvement.
The BHCA generally prohibits the company from acquiring, directly or indirectly, the ownership or control of more than 5% of the voting shares of any company engaged in nonbanking activities in the United States unless the Board has determined, by order or regulation, that such activities are so closely related to banking or managing or controlling banks as to be a proper incident thereto. In addition, the BHCA requires the company to obtain the prior approval of the Federal Reserve Board before acquiring, directly or indirectly, the ownership or control of more than 5% of any class of the voting shares of any US bank or bank holding company. With passage of the Gramm-Leach-Bliley Act of 1999 (the “GLBA”), bank holding companies that have met certain eligibility criteria and elected to become ‘financial holding companies’ are permitted to engage in a significantly expanded set of non-banking activities, including making controlling investments in non-bank business ventures without prior approval from the Federal Reserve Board under the Federal Reserve Board’s merchant banking authority. The company elected to become a financial holding company effective in February 2004. In November 2005, the company notified the Federal Reserve Board that it had commenced its merchant banking activities through its US subsidiary, Greenwich Capital Markets, Inc.
The company’s US bank and non-bank subsidiaries, and the Royal Bank’s US offices, are subject to direct supervision and regulation by various other federal and state authorities. Citizens’ state chartered bank subsidiaries are subject to regulation and supervision by state banking authorities and the US Federal Deposit Insurance Corporation, and the Royal Bank’s New York branch is supervised by the New York State Banking Department. The company's US insurance agencies are regulated by state insurance authorities. The company’s US securities affiliates, including Greenwich Capital Markets Inc., are subject to regulation and supervision by the US Securities and Exchange Commission and various self-regulating organisations. The futures activities of Greenwich Capital Markets, Inc. are also subject to oversight by the US Commodity Futures Trading Commission and the Chicago Board of Trade. Charter One Bank N.A., Citizens Bank NA, and RBS National Bank are regulated and supervised primarily by the US Office of the Comptroller of the Currency.
3 Regulatory developments for capital and risk management The Basel Committee on Banking Supervision, which meets at the Bank of International Settlements in Switzerland, sets the standards for firm’s weighted risk asset calculations and associated regulatory capital triggers. This Committee published a revised framework, called Basel 2, in June 2004.
Basel 2, based around three Pillars, presents a fundamental change to the current capital adequacy regime and will have wide ranging consequences for the banking industry as a whole. RBS is making good progress in satisfying the requirements for credit, market and operational risk which, together, represent the minimum capital standards (Pillar 1). Work on the other Pillars of Basel 2, supervisory review (Pillar 2) and market disclosures (Pillar 3) are also progressing as the standards are emerging from the regulatory authorities.
Description of property and equipment The Group operates from a number of locations worldwide, principally in the UK. At 31 December 2005, the Royal Bank and NatWest had 643 and 1,631 retail branches, respectively, in the UK. Ulster Bank and First Active had a network of 272 branches in Northern Ireland and the Republic of Ireland. Citizens had 1,635 retail banking offices (including in-store branches) covering Connecticut, Delaware, Illinois, Indiana, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Vermont. A substantial majority of the UK branches are owned by the Royal Bank, NatWest and their subsidiaries or are held under leases with unexpired terms of over 50 years. The Group’s principal properties include its headquarters at Gogarburn, Edinburgh, its principal offices in London at 135 and 280 Bishopsgate and the Drummond House administration centre located at South Gyle, Edinburgh.
With the exception of Banco Santander Central Hispano S.A. which sold (i) 79 million shares representing 2.5% of the company’s ordinary share capital on 9 September 2004 and (ii) 82 million shares representing 2.5% of the company’s ordinary share capital on 27 January 2005, there have been no significant changes in the percentage ownership of major shareholders of the company’s ordinary and preference shares during the three years ended 27 February 2006. All shareholders within a class of the company’s shares have the same voting rights. The company is not directly or indirectly owned or controlled by another corporation or any foreign government.
Contents 260 Financial calendar 260 Shareholder enquiries 260 Capital gains tax 261 Analyses of ordinary shareholders 261 Trading market 263 Dividend history 264 Taxation for US holders 268 Exchange controls 268 Memorandum and articles of association 268 Documents on display
Ex-dividend dates: Ordinary shares (2005 Final) 8 March 2006 Cumulative preference shares 3 May 2006
Braille and audio Annual Review and Summary Financial Statement Shareholders requiring a Braille or audio version of the Annual Review and Summary Financial Statement should contact the
Donating your shares in this way will not give rise to either a gain or a loss for UK capital gains tax purposes and you may be able to reclaim UK income tax on gifted shares. Further information can be obtained from HM Revenue & Customs.
Range of shareholdings: Trading market On 13 September 1995, 16 October 1996, 26 March 1997, 12 February 1998, 8 February 1999, 30 July 1999, 30 September 1999, 12 June 2001, 30 September 2004, 26 August 2004, 19 May 2005 and 9 November 2005 the company issued the following American Depositary Shares (“ADSs”) in the United States: 7,000,000 Series D (“Series D ADSs”) representing 7,000,000 non-cumulative dollar preference shares, Series D; 8,000,000 Series E (“Series E ADSs”) representing 8,000,000 non-cumulative dollar preference shares, Series E; 8,000,000 Series F (“Series F ADSs”) representing 8,000,000 non-cumulative dollar preference shares, Series F; 10,000,000 Series G (“Series G ADSs”) representing 10,000,000 non-cumulative dollar preference shares, Series G; 12,000,000 Series H (“Series H ADSs”) representing 12,000,000 non-cumulative dollar preference shares, Series H; 12,000,000 Series I (“Series I ADSs”) representing 12,000,000 non-cumulative dollar preference shares, Series I; 9,000,000 Series J (“Series J ADSs”) representing 9,000,000 non-cumulative dollar preference shares, Series J; 16,000,000 Series K (“Series K ADSs”) representing 16,000,000 non-cumulative dollar preference shares, Series K; 34,000,000 Series L (“Series L ADSs”) representing 34,000,000 non-cumulative dollar preference shares, Series L; 37,000,000 Series M (“Series M ADSs”) representing 37,000,000 non-cumulative dollar preference shares, Series M; 40,000,000 Series N (“Series N ADSs”) representing 40,000,000 non-cumulative dollar preference shares, Series N; and 22,000,000 Series P (“Series P ADSs”) representing 22,000,000 non-cumulative dollar preference shares, Series P.
On 28 November 2005, the company redeemed the 9 million Series J non-cumulative preference shares of US$0.01 each. The company has given notice that it will, on 6 March 2006, redeem the 7 million Series D and the 12 million Series I, noncumulative preference shares of US$0.01.
On 29 March 1994 and 23 June 2003, respectively, the company issued 8,000,000 Exchangeable Capital Securities (“X-CAPs”), Series A and 34,000,000 Exchangeable Capital Securities, Series B, each in connection with a public offering in the United States. On 30 September 2004, all of the outstanding Series B X-CAPs were exchanged into 34,000,000 non-cumulative dollar preference shares, Series L. On 31 December 2005, all of the outstanding Series A X-CAPS were redeemed.
The following table shows the high and low sales prices for each of the outstanding ADSs and PROs for the periods indicated, as reported on the NYSE composite tape: Series D Series E Series F Series G Series H Series I Series K Series L Series M Series N Series P Figures in US$ ADSs ADSs ADSs ADSs ADSs ADSs ADSs ADSs ADSs ADSs ADSs PROs(1)
Non-cumulative convertible preference shares of £0.25 — — — — — 0.08 Additional Value Shares of £0.01 — — — 0.55 0.30 0.15
Total dividends on equity shares 124.6 72.5 58.0 50.3 43.7 38.0
Subject to applicable limitations that may vary depending upon a holder’s individual circumstances, dividends paid to certain non-corporate US Holders in taxable years beginning before 1 January 2009 will be taxable at a maximum tax rate of 15%. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at this favourable rate.
If a corporate US Holder is subject to UK corporation tax by reason of carrying on a trade in the UK through a permanent establishment and its non-cumulative dollar preference share or ADS is, or has been, used, held or acquired for the purposes of that permanent establishment, certain provisions introduced by the Finance (No. 2) Act 2005 will apply if the US Holder holds its non-cumulative dollar preference share or ADS for a “tax avoidance purpose”. If these provisions apply, dividends on the non-cumulative dollar preference share or ADS, as well as certain fair value credits and debits arising in respect of such share or ADS, will be brought within the charge to UK corporation tax on income and the UK tax position outlined in the preceding paragraphs will not apply in relation to such US Holder.
Estate and gift tax A non-cumulative dollar preference share or ADS beneficially owned by an individual, whose domicile is determined to be the United States for purposes of the Estate Tax Treaty and who is not a national of the UK, will not be subject to UK inheritance tax on the individual’s death or on a lifetime transfer of the non-cumulative dollar preference share or ADS, except in certain cases where the non-cumulative dollar preference share or ADS (i) is comprised in a settlement (unless, at the time of the settlement, the settlor was domiciled in the United States and was not a national of the UK); (ii) is part of the
UK stamp duty and stamp duty reserve tax (“SDRT”) The following is a summary of the UK stamp duty and SDRT consequences of transferring an ADS in registered form (otherwise than to the custodian on cancellation of the ADS) or of transferring a non-cumulative dollar preference share. A transfer of a registered ADS executed and retained in the United States will not give rise to stamp duty and an agreement to transfer a registered ADS will not give rise to SDRT. Stamp duty or SDRT will normally be payable on or in respect of transfers of non-cumulative dollar preference shares and accordingly any holder who acquires or intends to acquire non-cumulative dollar preference shares is advised to consult its own tax advisers in relation to stamp duty and SDRT.
X-CAPs United States Because the X-CAPs have no stated maturity, can be exchanged for preference shares or ADSs at the option of the company, would be treated as if they were preference shares in a winding-up of the company, and the company may elect not to make payments on the X-CAPs, the X-CAPs will be treated as equity for US federal income tax purposes.
Payments (including any UK withholding tax, as to which see below) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as determined for US federal income tax purposes. Payments will not be eligible for the dividends-received deduction allowed to corporate US Holders. A US Holder who is entitled under the Treaty to a refund of UK tax, if any, withheld on a payment will not be entitled to claim a foreign tax credit with respect to such tax.
A US Holder who is liable for both UK and US tax on gain recognised on the disposal of the X-CAPs will generally be entitled, subject to certain limitations, to credit the UK tax against its US federal income tax liability in respect of such gain.
Gain or loss will not be recognised by a US Holder upon the exchange of X-CAPs for preference shares or ADSs pursuant to the company’s exercise of its exchange right. A US Holder’s basis in the preference shares or ADSs received in exchange for its X-CAPs will be the same as the US Holder’s basis in the X-CAPs at the time of the exchange and the US Holder’s holding period for the preference shares or ADSs received in the exchange will include the holding period of the X-CAPs exchanged.
Any paying agent or other person through whom interest is paid to, or by whom interest is received on behalf of, an individual, may be required to provide information in relation to the payment and the individual concerned to HM Revenue & Customs. HM Revenue & Customs may communicate this information to the tax authorities of other jurisdictions.
HM Revenue & Customs confirmed at around the time of issue of the X-CAPs that interest payments should not be treated as distributions for UK tax purposes by reason of (i) the fact that interest may be deferred under the terms of issue or (ii) the undated nature of the X-CAPs, provided that at the time an interest payment is made, the X-CAPs are not held by a company which is ‘associated’ with the company or by a ‘funded company’. A company will be associated with the company if, broadly speaking, it is in the same group as the company. A company will be a ‘funded company’ for these purposes if there are arrangements involving that company being put in funds (directly or indirectly) by the company, or an entity associated with the company. In this respect,
Interest on the X-CAPs constitutes UK source income for UK tax purposes and, as such, may be subject to income tax by direct assessment even where paid without withholding. However, interest with a UK source received without deduction or withholding on account of UK tax will not be chargeable to UK tax in the hands of a US Holder unless, in the case of a corporate US Holder, such US Holder carries on a trade in the UK through a UK permanent establishment or in the case of other US Holders, such persons carry on a trade, profession or vocation in the UK through a UK branch or agency in connection with which the interest is received or to which the X-CAPs are attributable. There are exemptions for interest received by certain categories of agents (such as some brokers and investment managers).
A transfer of X-CAPs by a US Holder will not give rise to a charge to UK tax on accrued but unpaid interest payments, unless the US Holder is an individual or other non-corporate taxpayer and at any time in the relevant year of assessment or accounting period carries on a trade in the UK through a branch or agency to which the X-CAPs are attributable.
Inheritance tax X-CAPs in bearer form physically held outside the UK should not be subject to UK inheritance tax in respect of a lifetime transfer by, or the death of, a US Holder who is neither domiciled nor deemed to be domiciled in the UK for inheritance tax purposes. However, in relation to X-CAPs held through DTC (or any other clearing system), the position is not free from doubt and the HM Revenue and Customs is known to consider that the situs of securities held in this manner is not necessarily determined by the place in which the securities are physically held. If X-CAPs in bearer form are or become situated in the UK, or if X-CAPs are held in registered form, there may be a charge to UK inheritance tax as a result of a lifetime transfer at less than fair market value by, or on the death of, such US Holder. However, exemption from, or a reduction of, any such UK tax liability may be available under the Estate Tax Treaty in the same manner as for non-cumulative dollar preference shares. US Holders should consult their professional advisers in relation to such potential liability.
PROs United States Payments of interest on a PRO (including any UK withholding tax, as to which see below) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as determined for US federal income tax purposes. Payments will not be eligible for the dividendsreceived deduction allowed to corporate US Holders. A US Holder who is entitled under the Treaty to a refund of UK tax, if any, withheld on a payment will not be entitled to claim a foreign tax credit with respect to such tax.
United Kingdom Taxation of payments on the PROs Payments on the PROs will constitute interest rather than dividends for UK withholding tax purposes. However, the PROs will constitute “quoted eurobonds” within the meaning of section 349 of the Income and Corporation Taxes Act 1988 and therefore payments of interest will not be subject to withholding or deduction for or on account of UK taxation as long as the PROs remain at all times listed on a ‘recognised stock exchange’ within the meaning of section 841 of the Income and Corporation Taxes Act 1988. In all other cases, an amount must be withheld on account of UK income tax at the lower rate (currently 20%) subject to any direction to the contrary by HM Revenue & Customs under the Treaty and except that the withholding obligation is disapplied in respect of payments to persons who the company reasonably believes are within the charge to corporation tax or fall within various categories enjoying a special tax status (including charities and pension funds), or are partnerships consisting of such persons (unless HM Revenue & Customs directs otherwise). Where interest has been paid under deduction of UK withholding tax, US Holders may be able to recover the tax deducted under the Treaty.
HM Revenue & Customs confirmed at around the time of the issue of the PROs that interest payments would not be treated as distributions for UK tax purposes by reason of (i) the fact that interest may be deferred under the terms of issue or (ii) the undated nature of the PROs, provided that at the time an interest payment is made, the PROs are not held by a company which is ‘associated’ with the company or by a ‘funded company’. A company will be associated with the company if, broadly speaking, it is part of the same group as the company. A company will be a ‘funded company’ for these purposes if there are arrangements involving that company being put in funds (directly or indirectly) by the company, or an entity associated with the company. In this respect, HM Revenue & Customs has confirmed that a company holding an interest in the PROs which incidentally has banking facilities with any company associated with the company will not be a ‘funded company’ by virtue of such facilities.
There are no restrictions under the articles of association of the company or under UK law, as currently in effect, which limit the right of non-UK resident owners to hold or, when entitled to vote, freely to vote the company’s non-cumulative dollar preference shares.
Executive directors’ service contracts and copies of directors’ indemnities granted by the company in terms of section 309C of the Companies Act 1985 may be inspected at the company’s office at Gogarburn, Edinburgh, EH12 1HQ
In addition, we file reports and other information with the SEC. You can read and copy these reports and other information at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can call the SEC at 1-800SEC -0330 for further information on the Public Reference Room or contact the offices of The New York Stock Exchange, on which certain of our securities are listed, at 20 Broad Street, New York, New York 10005. The SEC also maintains a website at www.sec.gov which contains in electronic form each of the reports and other information that we have filed electronically with the SEC.
Shareholder enquiries Registrar Computershare Investor Services PLC PO Box 82 The Pavilions Bridgwater Road Bristol BS99 7NH