Approval of Strategic Report The Strategic Report for the year ended 31 December 2019 set out on pages 2 to 49 was approved by the Board of directors on 13 February 2020.
Strategic report 2019 highlights and our future strategy Performance against our 2019 targets 03
Disclosures on our capital, liquidity and funding position and a detailed overview of the management of key risks relating to our business operations.
A description of certain risk factors that could adversely affect our future results, financial condition and prospects and cause them to be materially different.
Assurance The scope of work performed by the RBS Group’s independent auditor as part of their review of other information included in the 2019 Annual Report and Accounts is described in the Independent auditor’s report to the members of The Royal Bank of Scotland Group plc on pages 191 to 201. In addition, The Royal Bank of Scotland Group plc appointed Ernst & Young LLP to provide limited independent assurance over selected sustainability content marked with (*) within the Strategic Report, as at and for the year ended 31 December 2019. The assurance engagement was planned and performed in accordance with the International Standard for Assurance Engagements (ISAE) 3000 Revised, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information. An opinion was issued and is available on rbs.com. This opinion includes details of the scope, respective responsibilities, work performed, limitations and conclusion.
We are building a simple, safe and more customer focused bank
Two place improvement in CMA rank for both NatWest and Royal Bank of Scotland brands (1)
2019 highlights and our future strategy 2018 13p Notes: (1) CMA scores for NatWest Personal and Royal Bank of Scotland Personal as at August 2018/2019 reflecting the CMA reporting cycle.
(4) Reduction in total operating expenses excluding litigation and conduct costs of £895 million (2018 – £1,282 million) and strategic costs of £1,381 million (2018 – £1,004 million).
(6) Based on end-point Capital Requirements Regulation (CRR) Tier 1 capital and leverage exposure under the CRR Delegated Act.
The Bank reduced its operating costs while maintaining a sound control environment. In 2019, costs reduced by a further £310 million, taking the cumulative cost reduction to £4.5 billion since 2014. The Bank’s balance sheet remains strong, and we obtained a clear pass in the Bank of England stress test in December 2019. Our Common Equity Tier 1 ratio – the key measure of financial strength – is the highest of the major UK banks.
Shareholder returns We are pleased to announce that, subject to shareholder approval at the Annual General Meeting, we will pay a final ordinary dividend of 3 pence per share and a special dividend of 5 pence per share. This year, our total ordinary dividend of 5 pence per share is excluding the post-tax FX recycling gains of £1.6 billion, given this is purely an accounting adjustment. If approved, this will mean that we have returned £4.2 billion in capital to shareholders since we resumed dividend payments in 2018, of which £2.6 billion has gone to the UK taxpayer.
Looking ahead, we expect to maintain ordinary dividends of around 40% of attributable profit and retain approval from shareholders to buy back shares - equivalent to 4.99% of the RBS Group’s issued share capital - from HM Treasury. Any buyback of these shares will be at the discretion of HM Treasury, but the Board believes that participating in government share sales in the future is an excellent mechanism to return excess capital to shareholders in an efficient way.
Becoming more diverse and inclusive Our renewed sense of purpose is reflected in continued efforts to become more diverse and inclusive. We are making progress towards our goal of having at least 30% senior women in our top three leadership layers in each of our businesses by 2020 and to be fully gender balanced across the Bank by 2030.
In our top 4,000 leadership positions, female representation has improved, with 44% women in those roles. That is a 12% increase over the same timeframe. So we are making progress but must continue with momentum to meet our ambition of having a fully gender balanced workforce at all levels of the organisation by 2030.
Listening to and engaging with stakeholders During 2019, we conducted regular engagement with a broad range of stakeholders, ensuring their views informed our discussion and thinking. Engagement included visits and the ‘Meet the Board’ event with colleagues. Our Colleague Advisory Panel (CAP) met twice in 2019, providing a valuable mechanism for colleagues to gain a greater understanding of the Board’s role and provide feedback to directors. Two-way communication is crucial for both colleagues and Board members and embodies the open and inclusive culture of the Bank. Furthermore, we hold regular retail shareholder events, where shareholders can ask questions to a panel of executives and Non-Executive Directors and learn more about the business, our progress to date and our plans for the future. We held two such events during 2019, one of which was our first virtual shareholder evening.
Board changes In addition to the change of Group CEO, Brendan Nelson stepped down as a non-executive director on 25 April 2019. Patrick Flynn succeeded Brendan as Chairman of the Group Audit Committee. Aileen Taylor left the role of Chief Governance & Regulatory Officer and Board Counsel, and Company Secretary on 5 August 2019 following 19 years with RBS. Jan Cargill, previously Deputy Secretary and Director, Corporate Governance, has very successfully stepped up to the role of Chief Governance Officer and Company Secretary. I would like, once again, to thank Brendan and Aileen for their contributions to the Bank over many years.
Purpose-led organisation – Building more sustainable returns Today marks a new era, as we provide an update to our plans and a new Purpose for the Bank that will help us become a more sustainable business, delivering better outcomes for our customers and our shareholders.
We are privileged to play a central role in the UK economy. That brings with it, a deep responsibility to the communities we serve and to wider society. That is why we have a refreshed Purpose: We champion potential, helping people, families and businesses to thrive.
It also means we must play our role in tackling the issues which hold people, families and businesses back.
The Board and management team have worked together to define an approach to becoming a Purpose-led organisation based on balancing the interests of all our stakeholders. As part of this, we have worked with the not-for-profit organisation a Blueprint for Better Business.
We have set out some significant ambitions across these three areas that will deliver important benefits for our customers and the wider economy.
An ambition to take the lead in combating the causes of climate change Today, we are setting a bold new ambition – to be a leading bank in the UK & Republic of Ireland helping to address the climate challenge; by making our own operations net carbon zero in 2020 and climate positive by 2025, and by driving material reductions in the climate impact of our financing activity. We are setting ourselves the challenge to at least halve the climate impact of our financing activity by 2030, and intend to do what is necessary to achieve alignment with the 2015 Paris Agreement.
We are already taking positive steps in the right direction. This year we became one of the Founding Signatories of the United Nations Environment Programme Finance Initiative (UNEP FI) Principles for Responsible Banking, committing to begin strategically aligning our business with the UN Sustainable Development Goals (SDGs) and the 2015 Paris Agreement. We have been reviewing specific SDGs with relevance to our Purpose focus areas of Climate Change, Enterprise and Learning.
In November 2019 we issued the first exclusively social bond under ICMA's Social Bond Principles in the UK by any financial institution. The impact of the lending funded by this bond will be reported 12 months after issuance, measuring the number of jobs created and retained in some of the UK’s most deprived areas.
This is good progress, but we can, and will, do more.
Our focus will be on under-represented populations, with women making up at least 60% of those we support and more than 20% being Black, Asian, Minority Ethnic-led businesses. We will also make sure that at least 75% of the people we support are in regions outside of London
Starting with strong foundations, but with much more to do We have built strong foundations, but our performance doesn’t yet match its full potential and we need to support our customers better at the key moments in their lives. This means running a bank that is safe, simple and smart – supporting our customers with what they need and also making some tough choices in order to deliver for shareholders and colleagues.
Simple We are still too complicated for our customers. Much of the potential value in this Bank is locked in business lines and business models that are too complex and generating too little return. This complexity also creates ‘bad costs’ – costs that provide no benefit to customers.
Driving out bad costs also means simplifying our core customer journeys, like our account opening and lending application processes. Aligning and accelerating the transformation of these with more automation and less manual processing will save money, deliver better controls and improve service.
We will target a return on tangible equity of 9%-11% from a CET 1 ratio of 13%-14% in the medium to long-term. Subject to shareholder approval of our 2019 final and special dividends, we will have returned £4.2 billion to shareholders, with £2.6 billion returned to UK taxpayers since 2018. We have a clear plan to continue to return capital to our shareholders over time.
Our initial areas of focus contribute to UN Sustainable Development Goals
50k Incremental new businesses created by 2023 through inspiring and supporting 500k+ people
Of our UK & RoI customers’ homes at or above EPC or equivalent rating C by 2030 £20bn3
Additional funding and financing for climate and sustainable finance by 2022
Purpose will sit at the core of all our decision making, and we will aspire to live by it every day. Delivering on our Purpose will create longer-term, deeper relationships with our customers helping them to thrive throughout their lives. When our customers succeed, our communities succeed, our economy thrives and we too succeed.
UK & RoI and the skills of employees 2.5m People reached through financial capability interactions each year 2m Additional customers helped to start saving by 2023
Greater than 3% lending growth in 2020 2 £250m Reduction in other operating expenses in 2020 1 13-14% CET 1 ratio in the medium to long term
Notes: 1. Excluding operating lease depreciation. 2. Across our retail and commercial businesses.
We plan ongoing operating cost takeout by reducing operating expenses excluding strategic costs, litigation and conduct costs and operating lease depreciation costs by £250 million in 2020 compared with 2019. We expect to incur £0.8-1.0 billion of strategic costs during 2020 resulting from a refocusing of NatWest Markets and the continued resizing of the Group’s cost base. We anticipate that NatWest Markets exit, restructuring and disposal costs will be around £0.6 billion in 2020, with around £0.4 billion as disposal losses through income and £0.2 billion through strategic costs.
RBS Group (RBSG) capital and funding plans focus on issuing £2-4 billion of MREL-compliant instruments, of which we would expect around £1 billion to be issued under our Green, Social and Sustainable Bond Framework, up to £1.5 billion of AT1 and up to £2.5 billion of Tier 2 instruments. As in prior years, we will continue to target other funding sources to diversify our funding structure, including senior secured from NatWest Bank subject to funding and liquidity considerations.
Medium term outlook We expect to achieve a return on tangible equity of 9-11% in the medium to long term. In addition, we expect ongoing operating cost take-out.
Within NatWest Markets franchise, we anticipate that RWAs will reduce to around £20 billion in the medium term, which, after accounting for strategic costs and disposal losses, is expected to be capital ratio accretive in year one and over the course of the transition plan period.
We anticipate that the overall RWA impact of Basel 3 amendments to be around 5-10% and phased across 2021 to 2023, with the details still subject to regulatory uncertainty on both quantum and timing.
NatWest Markets Plc Whilst we have announced a refocusing of the business, NatWest Markets Plc remains a regulated entity and is targeting to maintain a CET1 ratio above 15%, MREL ratio of at least 30%, leverage ratio of at least 4%, and to reduce RWAs by around £14-18 billion in the medium term.
Note: (1) The targets, expectations and trends discussed in this section represent RBS Group’s and NatWest Markets Plc’s management current expectations and are subject to change, including as a result of the factors described in the “Risk Factors” section on pages 281 to 295 and on pages 143 to 156 of NatWest Markets Plc’s 2019 Annual Report and Accounts. These statements constitute forward-looking statements; refer to Forward-looking statements in this document.
As the biggest supporter of UK business, we are committed to addressing regional inequality and promoting economic growth, by supporting businesses to create and retain jobs in some of the UK’s most deprived areas. In 2019, we issued an inaugural social bond to help conserve and create jobs in areas with the highest levels of unemployment and lowest job creation.
Maintained a CET1 ratio of 16.2% after accruing £2.7 billion of distributions to shareholders and a £0.4 billion post tax charge in respect of foreseeable pension contributions.
Ordinary dividend of 5 pence per share calculated from earnings, excluding FX recycling gains, of 13 pence per share.
>70 % of eligible Private Banking clients, used our digital channels in 2019.
Colleague sentiment on inclusion is at an all time high at 91 points (10 points above the global financial services norm).
Operating expenses, excluding strategic, litigation and conduct costs reduced by £310 million, ahead of target, despite incurring an additional £38 million of authorised push payment fraud costs in line with new industry practice.
RWAs reduced by £9.5 billion during 2019 to £179.2 billion, below our £185 – 190 billion guidance, in part reflecting a £4.7 billion reduction associated with the Alawwal bank merger.
(3) Comprises gross new mortgage lending in our UK Personal Banking, Ulster Bank RoI and Private Banking operating segments.
We continue to achieve net lending growth at attractive returns in a challenging market. Across UK Personal Banking, Ulster Bank RoI, Commercial Banking and Private Banking; net loans to customers increased by 3.7% in 2019, exceeding our 2-3% net loan growth target. Gross new mortgage lending increased by £2.7 billion, 8%, in 2019.
The topics have been mapped to the bank’s five strategic priorities for 2019
The UK economy continued to slow in 2019 as uncertainty in relation to the UK’s exit from the EU weighed on activity. Interest rate and foreign exchange markets were also volatile in response to the changing political landscape. The uncertainty weighed on business investment and contributed to slowing house price growth. House prices fell modestly in London and the South East, but transaction levels remained relatively resilient. Low interest rates, very low unemployment and improving wage growth supported demand for mortgage lending. Consumer credit growth continued to gradually cool, influenced by regulatory interventions. Despite economic headwinds, impairments remained at very low levels across all portfolios. A slowing global economy and heightened geopolitical risks, particularly in regard to trade tensions, further complicated the outlook. Despite an uncertain economic outlook, RBS remained focused on meeting the diverse needs of customers locally, across the UK regions and internationally.
The level of competition in the UK banking market remained intense in 2019 driven by a combination of technology, lower barriers to entry and regulation including Open Banking. The competitive landscape is evolving as fintech and large technology companies contribute to greater choice for how banking needs are met. RBS remained focused on innovation to evolve our business model and deliver first-class, compelling propositions to our customers. The launch of RBS’s new digital retail and business banks, Bó and Mettle, was a significant milestone in the evolution of our competitive offering.
The Bank’s long-term success depends on building and nurturing a healthy culture where colleagues are engaged, and where our working environment is underpinned by robust risk behaviours.
Demographic shifts mean that the needs and behaviours of our customers are changing, amplified by rapid technological change. Key trends impacting our customers include retiring later and working longer, buying a house later in life and often with the support of family members and more focus on financial planning for retirement. RBS is committed to supporting the evolving needs of our customers ranging from helping first time buyers to supporting customers in vulnerable situations.
RBS operates in a highly regulated market which continues to evolve in scope to include competition, financial risks from climate change, customer vulnerability, operational resilience and cyber-attack. The Bank seeks to comply with all regulation and welcomes the positive impact on customers and other stakeholders.
Restoring trust and safeguarding reputation remains a key priority for most banks. RBS continues to strive to build a reputation for serving our customers well, and in a safe and secure manner, in addition to generating value for our shareholders and broader society, through the products, services and facilities we provide.
The pace of technological change continues to accelerate, influencing the behaviours of our customers and redefining traditional business models. Technologies such as cloud computing and machine learning offer huge opportunities, but also create new risks that must be closely managed. Through 2019, RBS has invested £755 million on technology, helping to deliver innovative solutions for our customers whilst simplifying processes, reducing cost and improving our resilience and stability. For example, facial recognition technology has allowed account opening in under 10 minutes for NatWest Bank personal customers.
How we create value 1. Our resources 2. Our business activities
We are helping people to build and grow businesses through innovative enterprise programmes and financing.
We pay interest to customers and investors who have placed deposits with us and bought our debt securities. We also pay customer benefits, through loyalty products like our Reward Account.
The attributable profit generated is either reinvested to improve products and services for our customers or returned to shareholders.
We believe in treating customers fairly, offering flexibility in how customers choose to bank with us and providing extra help to customers in vulnerable situations and those in financial difficulty. This means keeping their funds safe and secure, improving financial capability and supporting enterprise.
One of the largest UK employers with a workforce of 64,397. We recruited 226 graduates and 205 apprentices in 2019.
Payment of £1.25 billion in tax to the UK Government, which supports central government and local authority spending. (1)
We issued our inaugural Social Bond, the first from a UK financial institution under ICMA’s Social Bond Principals, the proceeds of which finance or refinance lending to SME’s in some of the most deprived areas of the UK. We will measure the impact of our lending by the number of jobs created or retained.
Improving digital capability 73% of our active personal current account customers used either mobile or online channels (*).
Leading the way on mobile – 6.9 million active mobile app users – finalist for ‘Best Banking App’ at the British Bank Awards in 2019.
Launched our green, social and sustainability bond framework, which paves the way for future issuance in support of our sustainability ambitions, while enabling our customers to make a positive impact on society or the environment.
(1) Comprises £222 million corporate tax, £595 million irrecoverable VAT, £163 million bank levies and £270 million employer payroll taxes.
RBS International is one of the largest banks operating in both the local and institutional banking sectors in the Channel Islands, Isle of Man and Gibraltar. It also has wholesale branches and depositary service businesses in the UK and Luxembourg to further serve our institutional clients.
In NatWest Markets we help our customers manage their financial risks and achieve their short and long-term financial goals, whilst navigating changing markets and regulation. We do this by providing global market access, financing, risk management and trading solutions.
Commercial Banking offers comprehensive banking and financing solutions to start-up, SME, Commercial and Corporate customers in the UK. This includes financing business assets and invoices, as well as providing specialist finance and transaction services, through a dedicated network of relationship managers. We continue to digitise the customer experience, through our growing digital channels and propositions.
Private Banking serves UK connected high net worth individuals and their business interests. We continue to focus on delivering the best client experience through a pro-active engagement model which supports clients across both sides of their balance sheet. Our client-centric strategy is focused on improving returns by deepening client relationships and improving our digital banking capabilities to make it easier for clients to deal with us.
To develop this pilot, we’ve used new technologies to make banking more accessible for people who may have difficulty using our digital channels or coming into branch. Testing out voice banking is also helping us to improve service and security for our customers.
With security front of mind, we are continually working to fight fraud, identify suspicious transactions and safeguard payments. We are the first UK bank to pilot biometric cards, and the only UK bank to let customers lock their cards via our mobile banking app, yet still get cash from an ATM.
Our commitment to customers has resulted in improved UK Personal Banking NPS scores. NatWest moved up three places in the CMA Service Quality Survey rankings for ‘overall service’ in 2019, Customer Trust in RBS is improving. NatWest were also named best online current account provider, best online student account provider and best direct current account provider at the Your Money Awards.
Despite challenging operating conditions, UK Personal Banking delivered an operating profit of £855 million. Operating expenses of £2,403 million, excluding strategic, litigation and conduct costs, were 1.0% lower than in 2018 despite incurring an additional £29 million for push payment fraud costs. Gross new mortgage lending was £33.3 billion in 2019, giving a new business market share of approximately 12.5% supporting balance growth of 6.7%, more than double the market, and a stock share of around 10.2%, whilst maintaining a prudent approach to risk and pricing in a very competitive market.
Ulster Bank RoI continues to build a more sustainable bank that supports the communities we operate in, helping more customers than ever to buy a home or build their businesses in 2019.
Now in its second year, Ulster Bank’s intrapreneurship programme, StartUp, aims to tap into the creative spirit of our people to solve customer problems like a start-up company would. Through our unique partnership with Dogpatch Labs, a technology start-up hub based in the heart of Dublin, colleagues are transported from their day-to-day roles and immersed in a start-up ecosystem that empowers them to think differently and solve problems in a customer centric and agile way.
Ulster Bank RoI sponsored over 200 professional qualifications in 2019, upskilling colleagues through programmes such as the Personal Banker qualification for branch staff. We also partnered with Code Institute, Europe's only credit rated coding bootcamp, giving over 100 colleagues the opportunity to participate in a five day coding challenge.
Startup, Ulster Bank RoI's intrapreneurship programme, won the Learning award at the Deloitte Financial Services Innovation Awards in 2019. We also received the IBEC KeepWell Mark accreditation, an award for companies that make their employees’ wellbeing a priority for their business, and were reaccredited with the BITC (Business in the Community), Business Working Responsibly Mark; the only independently audited standard for CSR and Sustainability in Ireland.
Operating profit of €55 million, increased by €40 million compared to 2018 primarily as a result of higher impairment releases and lower conduct charges as remediation projects near completion. Net loans to customers increased by €0.4 billion reflecting strong personal and commercial lending, offset by the continued run down of the tracker mortgage book.
Operating profit of £1,327 million was 32.6% lower than 2018 primarily due to £169 million asset disposal and fair value gains in 2018 combined with lower deposit and non interest income, higher impairments and higher strategic costs. Lending across Business Banking, SME & Mid-Corporates and Specialised business was £1.1 billion, or 2.1%, higher than 2018.
We were approached in 2019 to provide senior debt facilities and hedging for the construction of Neart na Gaoithe (NNG), EDF’s latest offshore wind farm project, now co-owned with ESB Energy.
This transaction demonstrates our leadership in this rapidly growing sector and showcases our commitment to Sustainable Finance.
Networking is important to our clients, so we built Coutts Connect. An exclusive networking website where Coutts clients can talk to each other, share opportunities and promote events.
Private Banking incorporates the Coutts and Adam & Co. brands to provide a relationship led, digitally enabled, client engagement model. We have been investing in the business, focusing on efficiencies and improving client satisfaction by seeking to meet more of our clients’ needs across the full suite of banking, lending and wealth management products.
Private Banking continues to deliver against our digital strategy with more functionality to enable clients to access their complete financial world. Coutts24 and Adam24 call centres augment the digital capabilities and Coutts Connect, a social platform for clients to network, has attracted over 1,700 registrations since inception in 2018.
Private Bank Awards 2019 and the Portfolio Asset Manager award for Innovation in 2019.
Return on equity of 15.4% was in line with 2018. Operating profit of £297 million was 2.0% lower than in 2018 primarily due to lower deposit income and higher strategic costs partially offset by volume growth and lower back office operations costs. Net loans to customers increased by £1.2 billion, or 8.4%. Assets under management and administration increased by £4.0 billion, or 15.2%, reflecting positive investment performance of £3.2 billion and net new business of £0.8 billion.
Note: (1) Private Banking manages assets under management portfolios on behalf of UK PB and RBSI. Private Banking receives a management fee from UK PB and clients of RBSI in respect of providing this service.
The Bosdet Foundation is a not for profit organisation that supports local Charities in Jersey. We’re helping them achieve their vision of donating £1 million a year by 2030.
We have made it quicker to open personal savings accounts and request credit. For sole applicants, automated account opening has enabled the savings account journey for the majority of existing customers to reduce from 14 days to 8 minutes, with over 3,000 new accounts opened this year. There have been 26 updates across RBSI’s Local Banking digital channels; driven by customer feedback, supporting a 17% increase in mobile adoption.
80% of our colleagues completed the staff opinion survey. Scores improved in all 15 categories and 13 are now above the Global Financial Services norm. Through volunteering and fundraising RBSI raised £61,279 for charity. For the 11th year running, the Bank were proud sponsors of the NatWest International Island Games. The 2019 games, held in Gibraltar, supported 1,700 athletes from 22 participating islands and the Bank’s commitment to sponsor the Games continues in Guernsey 2021.
RBSI continues to develop its longer term climate commitments in line with the wider Bank strategic response, supporting renewable energy funds, which invest in a wide array of renewable energy assets including onshore and offshore wind, solar, biomass and other renewable technologies. Additionally, in 2019, RBSI completed its first investor backed leverage facility supporting investment into large scale battery storage projects.
NatWest Markets (1) continued to focus on supporting clients consistently with market leading colour, content and ideas.
Global market conditions continued to be dominated by geo-political uncertainty, creating challenging conditions for our clients and us. Total income decreased by £100 million, or 6.9%, to £1,342 million reflecting lower core income and own credit adjustments (OCA), partially offset by increased legacy income following the £444 million gain on the merger of Alawwal bank with SABB. RWAs decreased by £7.0 billion to £37.9 billion driven by the £4.7 billion reduction following the merger of Alawwal bank with SABB and other legacy reductions.
Note: (1) The NatWest Markets operating segment is not the same as the NatWest Markets Plc legal entity or group. For 2019, NatWest Markets Plc entity includes NatWest Markets N.V. from the 29 November 2019 only, whereas the NatWest Markets franchise excludes the Central items & other segment. For periods prior to Q4 2019, NatWest Markets N.V. was also excluded from the NatWest Markets Plc entity.
Consumer groups, NGOs and academics who research, campaign and advocate on issues.
The ecosystem of suppliers and partners who collaborate to deliver our products and services.
Defining our Purpose together On her first day as Group CEO, Alison Rose set out her vision to become a purpose-led bank. The planning had begun more than a year ago, with colleagues involved every step of the way.
“Through the Bank’s engagement with Blueprint, it’s heartening to see RBS set themselves the challenge of becoming a purpose-led company.” Charles Wookey, CEO, A Blueprint for Better Business
Partnering to support customers New partnerships were established to help customers in vulnerable situations. SafeLives provided expertise on policies, and training focused on awareness raising and support. A pilot with GamCare began using branch space for private consultations and talking therapies.
“Banks play an important role in our life, often for many years and sometimes for a lifetime, and they therefore have a crucial role to play in improving the response to abuse, using the insight and tools they have. We’re delighted to see NatWest’s commitment to addressing financial abuse and look forward to working together.” Suzanne Jacob, OBE, CEO of SafeLives
Leading in step with clients Alongside our client Landsec, the Bank achieved a global first by pledging commitments to all three initiatives of an international non-profit organisation. The Climate Group’s EV100 is focused on electric vehicles, EP100 on energy productivity, and RE100 on renewable electricity.
“Congratulations to RBS and Landsec on showing it is already possible for the private sector to go further and faster in driving the clean energy transition.” Mike Peirce, The Climate Group
Our ambition is to build the best bank for customers in the UK and Republic of Ireland
We are determined to make a difference with the things that matter most to our customers. We listen to customer feedback and, via our closed-loop feedback programme, respond to any issues that they identify. Through fixing our core processes we will get our core service right first time more consistently while at the same time innovating to deliver better solutions.
Our brands are our main connection with customers. Each takes a clear and differentiated position with the aim of helping us strengthen our relationship with them. For this reason, we measure customer advocacy by brand. The tables on the following show NPS and Trust scores for our key brands.
Source: Savanta MarketVue Business Banking, YE Q4 2019. Based on interviews with businesses with an annual turnover over £2 million. Latest base sizes: 586 for NatWest (England & Wales), 100 for Royal Bank of Scotland (Scotland). 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.
Colleagues going through gender transition now have the option to regularly update their photo as they go through the stages of medical transition, so that they too have an identity pass which bears resemblance to them, and in turn can make them feel more comfortable at work.
Performance and Reward Our approach to performance management provides clarity for our employees about how their contribution links to our ambition and all our employees have goals set across a balanced scorecard of measures. We continue to ensure employees are paid fairly for the work they do and are supported by simple and transparent pay structures in line with industry best practices. We keep our HR policies and processes under review to ensure we do so. This clarity and certainty on how we pay is also helping to improve our employees’ financial wellbeing, which is a priority. In the UK, our rates of pay continue to exceed the Living Wage and we ensure employees performing the same roles are paid fairly. We ensure colleagues have a common awareness of the financial and economic factors affecting the Bank’s performance through quarterly ‘Results Explained’ communications and Workplace Live events with our Group Chief Executive Officer and Group Chief Financial Officer. More information on our remuneration policies and employee share plans can be found in the 2019 Directors’ Remuneration Report in the 2019 Annual Report and Accounts.
Developing Skills and Capabilities Culturally, becoming a learning organisation is a strategic priority. We need to prepare colleagues for the future and we continue to focus broader development on our Critical People Capabilities. We are committed to developing colleagues in key critical capability areas we have identified, that will help build the right knowledge, skills and behaviours, to help our colleagues stay relevant and employable, and support our ambition and purpose. In addition, we are encouraging agility and shifting mindsets so that a focus on the future, continuous learning, knowledge sharing and reflective practice becomes the norm.
This year we were the first UK retail bank to launch a Data Academy, to nurture and grow data expertise, innovation and collaboration. We also created an Agile Capability Hub, providing learning content to support colleagues to confidently engage in new ways of working.
Outstanding Employer of the Year 2019 at the Investing in Ethnicity Awards
Sales Excellence is our complete bankwide sales programme. It teaches the tools and techniques that enable those in sales roles to be the best at ethical, needs-based selling. We were awarded a Princess Royal Training Award for our Sales Excellence programme in 2019.
We had a second intake on our NextGen talent development programme for high potential colleagues at managerial level, helping them become the future leaders we need. The learning opportunities available through the programme align to the Critical People Capabilities and we received a Princess Royal Training Award in 2019 for our NextGen programme.
• As at the 31 December 2019 we have, on aggregate, 35% women in our top three leadership layers, and our pipeline (c.4000 of our most senior roles) has 44% women.
• RBS policy is that people with disabilities are given full and fair consideration for employment and subsequent training, career development and promotion based on merit. If colleagues become disabled, it is the policy of RBS, wherever possible, to retain them in their existing jobs or to re-deploy them in suitable alternative duties.
• During 2019 we continued to roll out our Disability Career and Personal Development Programme for colleagues with disabilities which supports development and career progression by addressing common barriers colleagues with disabilities can face. We also extended this Programme externally, hosting delegates from outside the bank at our campus in Edinburgh.
• From the start of 2018 we introduced formal UK targets to improve the representation of BAME /non white colleagues in our top four leadership layers to at least 14% (in line with the working age UK BAME population identified by the Office for National Statistics) by 2025.
• Given our focus on becoming more ethnically diverse and desire to be transparent, we use the same methodology as gender pay gap reporting to look at our ethnicity pay gap.
• The bank’s mean ethnicity pay gap is 11.8% (median: 15.7%), and the mean bonus pay gap is 24.7% (median: 12.3%), which we disclose at an RBS Group Combined UK and Ireland level.
LGBT+ Innovative: • Our LGBT+ agenda continues to deliver a better experience for our LGBT+ colleagues and customers, reflected within our policies and ways of working, across our locations globally. While reflecting local legislation and jurisdictional requirements, we are clear that
LGBT+ colleagues and customers are welcome at RBS and will be supported.
Inclusive Culture: • We continue to support our strong colleague led networks that have c.20,000 members.
• During 2019 we introduced ‘Good Judgement’ inclusion and diversity learning to create a solid platform for behavioural and cultural change, supplementing existing learning.
There were 362 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.
In the first half of the year, our simple payments solution Tyl by NatWest and our unique credit facility NatWest Rapid Cash were launched. This is giving customers the option to increase their overdraft against outstanding invoices and free up cash.
Further establish climate change reporting and monitoring rhythm at Board and Executive level across the RBS Group structure.
Strategy Internal review of climate related risks and opportunities. Continued engagement with external partners to inform development of climate change strategy.
Detailed review of methodology and best practice as it emerges in the market, including participating in the UNEP FI TCFD scenario analysis pilot.
Targeted analysis for climate change/physical risk impact on UK residential mortgage portfolio using a range of climate change scenarios.
Commenced updating of RBS Group’s Enterprise Risk Management Framework to include climate change in the risk toolkit.
Risk identification and measurement, risk management, risk monitoring, and risk reporting to be performed in line with principles set out in the Enterprise Wide Framework.
Additional £20 billion funding and financing for climate and sustainable finance between 2020 and 2022. Refer to the strategy section for further targets set as part of our ambition to be a leading bank in the UK and RoI helping to address the climate challenge.
We recognise that climate change is a critical global issue which has significant implications for our customers, employees, suppliers, partners and ourselves. RBS Group has many years’ experience in supporting our customers’ transition to a low carbon economy but the scale and pace of activity required is now rapidly accelerating. Our ambition is to be a leading bank in the UK & RoI helping to address the climate challenge; by making our own operations net carbon zero in 2020 and climate positive by 2025, and by driving material reductions in the climate impact of our financing activity. We are setting ourselves the challenge to at least halve the climate impact of our financing activity by 2030, and intend to do what is necessary to achieve alignment with the 2015 Paris Agreement.
• Jointly the first company globally to commit to all three of the Climate Group’s initiatives on electric vehicles EV100, renewable energy RE100 and energy productivity EP100.
Governance It is recognised that climate change, including the associated financial risks, must have greater prominence at both senior management and Board level across RBS Group. Further details on RBS Group’s Corporate Governance structure is included on page 45.
A climate governance map detailing the relevant roles and responsibilities of RBSG plc Board, board committees, management committees and individuals, as well as operational working groups tasked with managing the Bank’s transition, has been prepared to support internal mobilisation and planning. While the Sustainable Banking Committee’s role in overseeing climate related opportunities will continue going forward, the Board and other board committees will also play a prominent role in overseeing the interaction between climate change, strategy and risk appetite.
Strategy Our Group CEO Alison Rose announced on her first day that she intends to run the Bank with the understanding that if our customers do well, if our economy does well and if our communities do well, then we all succeed together. She was clear that shared success also means playing our part to help tackle the problems that can hold the country back, including the threat from climate change. Addressing this challenge forms a key part of our future strategy.
Our ambition to be a leading bank in the UK and RoI helping to address the climate challenge is supported by the following key areas of activity: a. Helping to end the most harmful activity: We plan to stop lending and underwriting to companies with more than 15% of activities related to thermal and lignite coal; unless they have a credible transition plan in line with the 2015 Paris Agreement in place by end of 2021. We plan a full phase-out from coal by 2030. Also, to stop lending and underwriting to major oil & gas producers unless they have a credible transition plan aligned with the 2015 Paris Agreement in place by the end of 2021.
We are already working to support our customers’ ambitions to mitigate their emissions, save energy and reduce costs. We have many years’ experience in supporting our customers in the sustainable energy sector – providing bespoke solutions to mitigate their emissions, funding their renewable energy generation, and financing innovative projects to spread new and more efficient energy technologies.
Scenario analysis In 2019 we included a qualitative assessment of climate risk as one of the contributing factors in our annual ICAAP scenario. To the extent possible, we aim to use the insight from both the UNEP FI TCFD scenario analysis pilot and the BES to make a more quantitative statement about climate risk in the next ICAAP.
RBS Group is currently undertaking climate scenario analysis on agriculture and real estate sectors as part of the UNEP FI TCFD scenario analysis pilot. Findings from this analysis will be published in 2020. We are using climate scenarios aligned with the Network for Greening the Financial System (NGFS) recommended framework and developed using Integrated Assessment Models (IAM) by Potsdam Institute for Climate Impact Research (PIK) and the International Institute for Applied Systems Analysis (IIASA). Both physical and transitional risks are being incorporated.
We are also developing our own internal climate scenario analysis and stress testing capability. The aim of this work is twofold: • prepare for the BES starting in the second half of 2020, which will explore three climate scenarios over a 30-year horizon to test the financial system’s resilience to physical and transition climate-related risks
• develop the necessary methodology and processes to be able to run climate risk scenario analysis for risk management and strategic decision making purposes.
We recognise this is a fast evolving space and we will be continually reviewing and updating our approach, scenarios and assumptions as best practice emerges.
We are reviewing external modelling specialists and will partner with one, if appropriate, to supplement our in-house analytics. We recognise the unique nature of this risk and the need for us to build our in house expertise.
Sustainable energy funding and financing: Provide lending and wider financing to customers of all sizes for their sustainable energy projects encompassing various low carbon generation and energy efficiency technologies, low carbon vehicles and helping clients raise funds through green bonds, green loans and green private placements.
Note: (1) includes financing of solar, onshore wind, offshore wind, hydro, biomass, anaerobic digestion, LED lighting, energy from waste, smart metering, offshore transmission operators (OFTOs), interconnectors, heat pumps, air and ground source heat pumps, Gas to Grid Plants, Combined Heat & Power (CHP) and alternative fuelled/low-carbon vehicles including hybrid buses.
We are performing an assessment of the potential financial impact of climate change on the UK mortgage portfolio, with a focus on flood risk from a physical risk perspective and energy efficiency (EPC) from a transitional risk perspective. We are using established methodologies and data from third party providers to establish flood risk at a property level for the UK mortgage portfolio. Factors considered include surface flooding, river, ground water and coastal flooding on a range of scenarios.
RBS Group will be working to embed consideration of climate change risks into its wholesale sector framework, which forms the basis for the Bank’s risk appetite to sectors on a qualitative basis initially. Quantitative analysis of flood and EPC related risk in the Commercial Real Estate portfolio will be developed using applicable methodologies from the assessment of our Retail mortgage portfolio.
Flood risk assessment tool We are currently piloting innovative climate risk tools to assess the physical risk to our retail and commercial portfolios.
Jointly the first company globally to commit to all three of the Climate Group’s initiatives on electric vehicles EV100, renewable energy RE100 and energy productivity EP100, pledging to: • Use only renewable electricity in our direct global operations by 2025 (RE100)
• Install electric vehicle charging infrastructure in more than 600 spaces across our UK&I portfolio by 2030 (EV100)
• Upgrade our job need cars of around 300 vehicles to electric models by 2025(EV100)
• Reduce our energy consumption 40% by 2025 against its 2015 baseline (EP100).
As part of our RE100 commitment, RBS Group purchases 100% of its UK and Irish energy from renewable energy sources. Globally, in 2019 RBS Group purchased 79% of its energy from renewable sources.
(1) Exposure percentage represents the gross lending and related off balance sheet exposure to a sector as a percentage of total gross lending and the related off balance sheet exposures.
Sustainable energy lending: Loans towards low carbon and environmental assets as well as companies and funds that operate in this sector.
Green and sustainable bond and private placements: Debt capital market issuance for sustainable energy projects and clients that operate in this sector
Green and sustainable market funding: Other market funding facilities to support customers' transition to the low carbon economy including Sustainability Linked Loans which enables borrowers to incorporate sustainability objectives and targets into the banking facilities.
We have reported on all emission sources required under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. Our reporting year runs from October 2018 to September 2019. The emissions reporting boundary is defined as all entities and facilities either owned or under our operational control. *Scope 1 Emissions from fluorinated gas losses and fuel combustion in RBS Group premises/ vehicles, **Scope 2 Emissions from electricity, district heating and cooling used in RBS Group premises, ***Market-based Scope 2 Emissions and ****Scope 3 Emissions associated with business travel by RBS Group employees have been calculated using the Greenhouse Gas Protocol Corporate Standard, (2015), Scope 2 guidance, (2015) and Scope 3 calculation guidance, (2013). To our knowledge there are no material omissions. Independent limited assurance of total reported emissions in tonnes of CO2e, (Scope 1, 2 and 3 location-based emissions) has been provided by Ernst & Young LLP. Emissions factors used are from UK Government Emissions Conversion Factors for Greenhouse Gas Company Reporting (Department for Business, Energy & Industrial Strategy, 2019), CO2 Emissions from Fuel Combustion (International Energy Agency, 2018) or from relevant local authorities as required. For more information please see our website ( business.html).
The framework allows RBS to: • Understand the risk environment and its drivers.
All RBS colleagues share ownership of risk management. RBS uses the three lines of defence model to define responsibilities and accountabilities, ensuring that risks are properly identified, measured, monitored, controlled and reported. Risk management is integrated into dayto -day business activities and key processes, including strategic planning.
Risk appetite, which defines the level and types of risk RBS is willing to accept, is set in line with overall strategy and approved by the RBSG plc Board.
Further progress was made on the journey towards RBS’s target of embedding a generative risk culture across all three lines of defence. The aim, to make risk part of the way colleagues work and think, supports intelligent risk-taking, better customer outcomes, stronger and more sustainable business, and an improved cost base. The multi-year programme to enhance risk management capability at every level of the organisation continues with an emphasis on training, empowerment and proactivity.
Cyber security Increasing digitisation to ensure families and businesses can access banking support wherever and whenever they need to – along with the increasing emphasis on digital services globally – requires intense vigilance relating to cyber security. RBS has a multilayered approach to its defences. While the threat landscape continued to evolve in 2019, further investment in control enhancements was made. This included new anti-malware controls and improved security testing tooling to quickly detect and remediate potential vulnerabilities.
Risk Management tax evasion, bribery and corruption and financial sanctions develop. Understanding and responding to them appropriately remains a key area of focus. There was further emphasis during 2019 on ensuring proportionate, risk-focused customer due diligence standards are in place and significant investment was made in enhancing those controls. Improvements to the financial crime control environment also remained a key focus.
Business model disruption The threat of disruption to RBS’s business model has intensified due to a combination of new technologies, changing customer behaviour and the evolving regulatory landscape. During 2019 there was a significant focus on anticipating developments and ensuring these were addressed by appropriate management activities. A number of technology-based innovations – such as the Esme end-toend digital lending platform for business customers and the new Bó banking app for personal banking customers – were introduced to provide cutting-edge solutions. Effective risk management was a vital element of the development process and continues to be at the heart of RBS’s technology strategy.
Model risk Given the increasing importance and complexity of predictive analytics, during 2019 significant management time was devoted to model risk. This included improvements to the internal model control environment and the introduction of a model risk uncertainty framework for stress testing to enhance the accuracy of projections under stress. The focus on model usage and model risk across RBS continues to increase, both in relation to regulatory focus and as artificial intelligence applications become more integral to decision-making across the industry.
Common Equity Tier 1 ratio RBS maintained a strong CET1 ratio of 16.2%. This reflected the solid capital position given distributions to shareholders totalling £2.7 billion and a £0.4 billion charge for pension contributions. Excluding the impact of the Alawwal bank merger and PPI, RBS generated approximately 110 basis points of capital from attributable profits and approximately 60 basis points from a reduction in RWAs and other capital movements.
Stress testing Under the 2019 Bank of England hypothetical stress test, on an IFRS 9 transitional basis RBS’s low point CET1 ratio was 9.9%. This was significantly above the hurdle rate of 7.2%. After the impact of strategic management actions, RBS’s low point CET1 ratio improved to 10.3%. The transitional Tier 1 leverage ratio low point was projected to be 4.7% under stress, which was above the leverage ratio hurdle rate of 3.56%. The Bank of England did not require RBS to submit a revised capital plan.
Liquidity and funding The liquidity portfolio increased by £1 billion to £199 billion, with primary liquidity reducing by £3 billion to £125 billion. The reduction in primary liquidity was driven by reduced customer surplus in NatWest Holdings Group, dividend payments and Term Funding Scheme (TFS) repayment, offset by increased net term issuance. The increase in secondary liquidity was driven primarily by TFS repayment, resulting in the return of previously encumbered assets.
Litigation and conduct Litigation and conduct costs of £895 million included an additional provision of £900 million in relation to PPI. This reflected greater than expected complaints volumes in advance of the 29 August 2019 deadline for new PPI complaints as well as a £169 million reimbursement under indemnification agreements relating to residential mortgage-backed securities.
As a UK-focused bank, RBS is exposed to the economic and political risks facing the UK including risks from a sustained period of low economic growth and low interest rates. A range of complementary approaches is used to inform strategic planning and risk mitigation. This includes active management of portfolios and adjustment of risk appetite, scenario planning and stress testing. In addition, RBS has implemented plans to prepare for the loss of access to the European Single Market and continues to monitor domestic political risk including developments in relation to a second Scottish independence referendum, as well as geopolitical risks. In the longer term, demographic change, high levels of debt and financial inequality in the UK could all have financial impacts and, as a result, are closely monitored with strategic plans adapted as appropriate.
Accelerating climate change may lead to heightened financial risks and faster-than-anticipated impacts on RBS and the wider economy. These include financial loss as a result of deterioration in credit quality, market risk exposure and operational risk. The operation and business strategy continues to be adapted to mitigate the direct and indirect physical risks of climate change and the transition to a low carbon economy. In addition, climate-related financial risk is being integrated into the risk management framework.
LIBOR transition UK and international regulators are driving a transition from the use of interbank offer rates (IBORs), including LIBOR, to alternative risk-free rates. Uncertainties around the transition represent a number of risks including elevated legal and conduct risks. While a programme to manage the transition is underway, there is a risk that this may not be done effectively.
Third Party Suppliers Inadequate control over selection, governance and oversight of third-party suppliers could affect operational resilience. RBS is diligent in its screening of suppliers with strict contractual obligations governing supplier relationships and activity.
IT System Resilience RBS continues to invest in IT infrastructure to prevent customer service disruption, which could result in reputational and regulatory damage. To mitigate these risks, a major investment programme has significantly improved the resilience of the systems and further progress is expected.
In 2019, the Board and committee evaluation process was conducted by the Company Secretary.
Group Executive Committee The Group Executive Committee supports the Group Chief Executive Officer (CEO) in managing RBS’s businesses. It considers strategic, financial, capital, risk and operational issues affecting RBS. It reviews and debates relevant items before consideration by the Board.
In addition, the Group Sustainable Banking Committee held two dedicated sessions on customer service performance and customers in vulnerable situations, inviting the SafeLives charity to join for the latter session to gain a better understanding of how the Bank can support those suffering financial abuse.
Our Colleague Advisory Panel (CAP), established in 2018, met twice during 2019, providing a valuable mechanism for directors to engage directly with colleagues on topics of strategic interest affecting RBS and the workforce; and offering our colleagues a greater understanding of the Board’s role. A number of directors attended CAP meetings during the year and discussion topics included Purpose, future strategy, executive pay, inclusion and sustainability. Outputs were reported to the Board and have influenced the Board’s consideration of these topics.
The colleague opinion survey results were one culture oversight tool available to the Board. The survey results confirmed to the Board that 2019 targets had been achieved
Governance and compliance across key measurements, trends and benchmarks in relation to leadership, engagement and culture.
Through the Group Sustainable Banking Committee, the Board received a culture measurement report which supported the Board in assessing progress in building a healthy culture across the Bank and alignment of values and culture.
Shareholders All shareholders have the opportunity to ask questions at our Annual General Meeting (AGM) and any other General Meetings which may be held. We also hold regular retail shareholder events, where shareholders can ask questions of a panel of executives and nonexecutive directors and learn more about the business, our progress to date and our plans for the future. We held two such events during 2019. The first took place in London on 10 September 2019 and on 25 November 2019 we held our first virtual shareholder event. We plan to hold further similar events in 2020.
Communication with RBSG plc's largest institutional shareholders is undertaken as part of the Investor Relations programme. The Chairman, CEO and Group Chief Financial Officer (CFO) undertook an extensive programme of meetings with our largest institutional shareholders, including UK Government Investments (UKGI). The Chairman’s regular engagement with major shareholders allows him to understand their views on governance and performance against strategy. The Chairman of the Group Performance and Remuneration Committee met with institutional shareholders to discuss remuneration matters, including the executive directors' remuneration policy and updated the Board on those discussions. The Board met a number of investors during September 2019 to understand investor sentiment across a range of issues.
In October 2019, the Chairman and Senior Independent Director hosted a corporate governance roundtable event attended by a number of institutional shareholders. Issues covered included
Regulators The Board recognises the importance of open and continuous dialogue with our regulators. Representatives from the Financial Conduct Authority (FCA) attended the February 2019 Board meeting to present and discuss their annual Firm Evaluation letter. The Prudential Regulation Authority (PRA) conducted a Board effectiveness review in 2019, which included attendance at the October 2019 Board meeting and meetings with directors. The Chairman and executive directors have regular meetings with both the FCA and PRA. In addition, individual directors engage regularly with our regulators through Continuous Assessment and Proactive Engagement meetings.
Community and Environment The role of the Bank in supporting the communities in which we operate has been an important topic of discussion during 2019 as the Board, together with management, explored the Bank’s broader purpose in society and the UK economy. It is recognised by the Board that climate change must have greater prominence at both senior management and board levels across RBS Group. This year the Board took steps towards building greater knowledge and understanding of climate-related risks through a dedicated teach-in session. The Bank’s high-level plan for responding to the latest prudential expectations was also approved by the Board, covering deliverables across governance, risk management, scenario analysis and stress testing and disclosure. While there is much to do, the Board is encouraged by the internal mobilisation reported and is committed to its role in addressing and overseeing climate risks within the Bank’s overall business strategy and risk appetite.
This feedback, alongside Board oversight tools such as colleague survey results and the Banking Standards Board Survey, helped directors to satisfy themselves that the areas of focus being considered for our Purpose were aligned to the organisation’s values, and would support an open and inclusive culture which values and embeds continuous learning.
2 – CEO Appointment As described in the report of the Group Nominations and Governance Committee on pages 68 and 69, in 2019 the Board approved the appointment of Alison Rose as Group Chief Executive Officer with effect from 1 November 2019. From the outset, the Board placed stakeholder interests at the core of its objectives in the search for Ross McEwan’s successor.
In reaching its decision, the interests of the Bank’s customers were a key focus for the Board, particularly each candidate’s ability to lead a business that would be recognised as truly customer centric. The Board also ensured that colleague interests were taken into account when agreeing the critical capabilities used to assess potential candidates. These required candidates to demonstrate the strong ethical and moral principles needed to lead the culture and values of RBS Group. The Board ensured that the Bank’s regulators, another of its key stakeholder groups, were kept regularly apprised of progress during the search.
There is regular interaction with key stakeholders in relation to capital distributions. Engagement with institutional shareholders prior to the Board’s decisions had indicated a desire for RBSG plc to return excess capital in an efficient way. Institutional shareholders also indicated a desire for us to help UKGI reduce its stake through directed buybacks and other directed capital distribution methods and voted in favour of resolutions to do this at both a General Meeting and AGM in 2019. In considering dividends, the directors have ensured that RBSG plc always has capacity to participate in a directed buyback of UKGI’s shares to the full extent allowed. Regulators also confirmed they had no objection. Passing regulatory stress tests and operating within our capital and double leverage risk appetite were key determinants in the resumption of dividends. Resuming dividends also sent a positive message to colleagues about the overall financial strength of RBSG plc.
The Board will continue to take key stakeholders’ views into account in considering further capital distributions, whilst promoting the long-term sustainable success of RBSG plc.
Viability Statement In accordance with Provision 31 of the UK Corporate Governance Code, the Board has assessed RBSG plc’s viability taking into account its current position, the Board’s assessment of its business prospects, and its principal risks. The Board considers a period of three years to be an appropriate time frame for this assessment.
RBSG plc’s top risks (those that could have a significant negative impact on the RBSG plc’s ability to operate or meet its strategic objectives over the period of the plans) and emerging risks (those that could do so over the medium term) as well as the likely impact of those risks crystallising, both individually and in combination.
RBSG plc’s current capital position and projections over the period of the plans.
A five year time frame is used for planning and is the basis for internal stress test scenarios. 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 Group’s approach to stress testing and reverse stress testing is also described in the Capital and Risk Management section on pages 116 to 119.
Page Presentation of information 50 Segmental reporting 50 Financial summary 51 Segment performance 56
The company publishes its financial statements in pounds sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions and thousands of millions of pounds sterling, respectively, and references to ‘pence’ represent pence in the United Kingdom (‘UK’). Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of dollars, respectively, and references to ‘cents’ represent cents in the US. The abbreviation ‘€’ represents the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively. RBS\Finance\0000012\Secret
Reportable operating segments The reportable operating segments are as follows. For full business descriptions see Note 4 on page 216.
Allocation of central items RBS allocates all central costs relating to Services and Functions to the business using appropriate drivers, these are reported as indirect costs in the segmental income statements. Assets and risk-weighted assets held centrally, mainly relating to RBS Treasury, are allocated to the business using appropriate drivers.
RBS Group ring-fencing The UK ring-fencing legislation required the separation of essential banking services from investment banking services from 1 January 2019. RBS Group has placed the majority of the UK and Ireland banking business in ring-fenced banking entities under an intermediate holding company, NatWest Holdings Limited. The Western European corporate business continues to be transferred from the ring-fenced bank entities to NatWest Markets N.V. (NWM N.V.), a subsidiary of NatWest Markets Plc (NWM Plc). NWM Plc and RBS International Ltd (RBSI Ltd) are separate banks outside the ring-fence, both subsidiaries of RBSG plc.
NatWest Markets N.V. NWM N.V. began transacting new business on 25 March 2019 to ensure continuity of service to European Economic Area (EEA) customers when the UK leaves the European Union (EU). The activities transferred primarily relate to Markets and Corporate Lending portfolios for EEA customers previously served from NWM Plc and the ring-fenced bank. NWM N.V. Group was acquired by NWM Plc and became a part of NWM Group with effect from 29 November 2019.
RBS Group’s economic interest in the merged entity, amounting to 4.1%, was then sold to NWM Plc, and the balance of shares was transferred separately to RFS Holdings B.V. consortium partners, as part of the unwind of those arrangements. On 29 November 2019, RBSH Group transferred to become a subsidiary of NWM Plc following regulatory approval. At the same time, the liquidation of RFS Holdings B.V. commenced.
Net interest income 8,047 8,656 8,987 8,708 8,767 Non-interest income 6,206 4,746 4,146 3,882 4,156 Total income 14,253 13,402 13,133 12,590 12,923 Operating expenses (9,325) (9,645) (10,401) (16,194) (16,353) Profit/(loss) before impairment (losses)/releases 4,928 3,757 2,732 (3,604) (3,430) Impairment (losses)/releases (696) (398) (493) (478) 727 Operating profit/(loss) before tax 4,232 3,359 2,239 (4,082) (2,703) Tax charge (432) (1,208) (731) (1,107) (3) Profit/(loss) from continuing operations 3,800 2,151 1,508 (5,189) (2,706) Profit/(loss) from discontinued operations, net of tax — — — — 1,541 Profit/(loss) for the year 3,800 2,151 1,508 (5,189) (1,165)
Attributable to: Ordinary shareholders 3,133 1,622 752 (6,955) (1,979) Preference shareholders 39 182 234 260 297 Dividend access share — — — 1,193 — Paid-in equity holders 367 355 487 303 108 Non-controlling interests 261 (8) 35 10 409
Return on tangible equity (%) 9.4 4.8 4.6 Bank net interest margin (RBS NIM excluding NWM) (%) (1) 1.99 2.09 (10bps) Average interest earning assets (RBS excluding NWM) (£m) 413,112 409,106 4,006 Cost:income ratio (%) (2) 65.1 71.7 (6.6) Earning per share (pence) - basic 26.0p 13.5p 12.5p *Restated for IAS12 ‘income taxes’ refer to accounting policy 1, Other amendments to IFRS, for further details.
Notes: (1) Net interest margin is net interest income of the banking business as a percentage of interest earning assets (IEA) of the banking business. (2) Cost:income ratio is total operating expenses less operating lease depreciation divided by total income less operating lease depreciation.
Impairment (losses)/releases (393) 34 (391) 6 (2) 51 (1) (696) Operating profit/(loss) 855 49 1,327 297 344 (25) 1,385 4,232 Return on equity (1) 9.6% 2.3% 8.4% 15.4% 25.7% (3.2%) nm 9.4% Cost:income ratio (2) 74.4% 97.4% 58.9% 62.5% 43.3% 105.7% nm 65.1% Average interest earning assets 167,186 25,100 145,933 21,689 29,912 35,444 nm 448,556
Third party customer asset rate (3) 3.22% 2.27% 3.16% 2.91% 2.89% nm nm nm Third party customer funding rate (3) (0.38%) (0.16%) (0.43%) (0.43%) (0.13%) nm nm nm
Other expenses (2,428) (490) (2,288) (456) (260) (1,213) (224) (7,359) Strategic costs (226) (22) (155) (21) (9) (238) (333) (1,004) Litigation and conduct costs (213) (71) (44) (1) 9 (153) (809) (1,282)
(2) Operating lease depreciation included in income £138 million (2018 - £121 million). Refer to the Non-IFRS financial measures section for details of the basis of preparation.
Net fees and commissions 2,511 2,357 154 7% Income from trading activities 1,012 1,415 (403) (28%) Other non-interest income 2,683 974 1,709 175% Non interest income 6,206 4,746 1,460 31% Total income 14,253 13,402 851 6%
Notable items within total income Alawwal bank merger gain in NatWest Markets 444 — FX recycling gain in Central items & other (3) 1,459 — Legacy liability release in Central items & other 256 — Insurance indemnity — 357 of which: NatWest Markets — 165 Central items & other — 192 IFRS volatility in Central items & other (4) 9 (59) UK Personal Banking debt sale gain 49 61 FX gains/(losses) in Central items & other 21 (46) Commercial Banking fair value and disposal (loss)/gain (16) 169 NatWest Markets legacy business disposal loss (35) (86)
Notes: (1) Negative interest on net loans to customers is classed as interest payable and on customer deposits is classed as interest receivable. (2) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities (3) Includes £290 million arising on the completion of the Alawwal bank merger in June 2019, £1,102 million arising on the liquidation of RFS Holdings and £67 million in relation to dividends in UBI DAC. (4) IFRS volatility relates to loans which are economically hedged but for which hedge accounting is not permitted under IFRS.
 Total income increased by £851 million, or 6.3%. Excluding notable items, income decreased by £813 million, or 6.3%, due to a reduction in retail and commercial income, lower NatWest Markets income and increased Treasury funding costs, reflecting increased MREL costs and lower structural hedge income.
 Across the retail and commercial businesses, income decreased by £301 million, or 2.6%, excluding notable items, principally reflecting margin pressure in a challenging market.
Staff expenses 3,567 3,649 (82) (2.2%) Premises and equipment 1,020 1,241 (221) (17.8%) Other administrative expenses 1,638 1,787 (149) (8.3%) Strategic costs 1,381 1,004 377 37.5% Litigation and conduct costs 895 1,282 (387) (30.2%) Administrative expenses 8,501 8,963 (462) (5.2%) Depreciation and amortisation 824 645 179 27.8% Impairment of other intangible assets — 37 (37) (100.0%) Operating expenses 9,325 9,645 (320) (3.3%)
 Strategic costs of £1,381 million included: a £470 million charge relating to the reduction in our property portfolio; £299 million of technology costs; and a £178 million direct charge in NatWest Markets relating to both the wind-down of the legacy business and ongoing development of the core business infrastructure; with the remaining charge largely relating to restructuring costs to achieve cost efficiencies across front and back book operations.
 Excluding strategic, litigation and conduct costs, operating expenses reduced by £310 million, ahead of target, despite incurring an additional £38 million of authorised push payment fraud costs in line with new industry practice. In line with the reduction in costs, headcount was c.3,100, or 4.6%, lower than 2018.
Loans - amortised cost (1) 339,968 320,256 19,712 6% ECL provisions (2) 3,792 3,851 (59) (2%)
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS for further details.
Tax charge 432 1,208 UK corporation tax rate 19.0% 19.0% Effective tax rate 10.2% 36.0%
 The tax charge for the year ended 31 December 2019 is lower than the UK statutory rate reflecting the impact of the Alawwal bank merger gain on disposal, FX recycling gain on liquidation of RFS Holdings, a deferred tax credit on the recognition of tax losses following the transfer of business under the ring-fencing regulations and adjustments in respect of prior periods. These factors have been partially offset by the impact of conduct charges, the banking surcharge and a reduction in the carrying value of deferred tax assets in respect of losses in the UK and Ireland.
Liabilities Bank deposits 20,493 23,297 (2,804) (12%) Customer deposits 369,247 360,914 8,333 2% Settlement balances 4,069 3,066 1,003 33% Trading liabilities 73,949 72,350 1,599 2% Derivatives 146,879 128,897 17,982 14% Other financial liabilities 45,220 39,732 5,488 14% Subordinated liabilities 9,979 10,535 (556) (5%) Other liabilities 9,647 8,954 693 8% Total liabilities 679,483 647,745 31,738 5%
Tangible net asset value per ordinary share (pence) (1) 268p 287p 19p 7%
 Movements in derivative assets, up £16.7 billion, 13%, to £150.0 billion, and liabilities, up £18.0 billion, 14% to £146.9 billion, mainly driven by mark-to-market increases due to a downward shift in interest rate yields and new business during the year, partially offset by the strengthening of sterling against major currencies since 2018 year end.
 Other financial assets includes debt securities, equity shares and other loans and increased by £2.0 billion, 3%, to £61.5 billion, primarily driven by the equity holding in SABB partially offset by liquidity management.
 Other assets decreased by £1.5 billion, 9% to £14.9 billion primarily driven by the reduction in assets of disposal group following the Alawwal bank merger.
 Owners’ equity decreased by £2.2 billion, 5%, to £43.5 billion, primarily driven by the payment of ordinary dividends of £3 billion, offset by the £3.5 billion profit for the year, which included FX recycling of £1.5 billion.
Loans to customers (amortised cost) - personal advances 8.5 7.6 0.9 12% - mortgages 147.5 138.5 9.0 6% - cards 4.3 4.0 0.3 8% Total loans to customers (amortised cost) 160.3 150.1 10.2 7% Loan impairment provisions (1.4) (1.2) (0.2) 17% Net loans to customers 158.9 148.9 10.0 7%
Total assets 182.3 171.0 11.3 7% Customer deposits 150.3 145.3 5.0 3% Risk-weighted assets 37.8 34.3 3.5 10%
 Total income was £188 million, or 3.7%, lower than 2018, impacted by lower overall mortgage margins, an IFRS 9 accounting change for interest in suspense recoveries of £29 million and a £12 million decrease in debt sale gains, partially offset by strong lending growth.
 Net interest margin decreased by 20 basis points reflecting mortgage margin pressure, as front book margins remain lower than back book margin and the book re-prices to the current rate.
 Litigation and conduct costs include a £900 million charge in respect of PPI claims following greater than predicted complaints volumes in the lead up to the 29 August 2019 deadline.
 Impairment losses were £54 million higher than 2018 reflecting lending growth and lower debt sale recoveries, partially offset by interest in suspense recoveries following an IFRS 9 accounting change and a £25 million lower charge for economic uncertainty than in 2018. Default rates increased slightly since 2018, but, the overall trend flattened in the second half of the year as a result of unsecured risk appetite tightening.
 Net loans to customers increased by £10.0 billion, or 6.7%, to £158.9 billion. The business has maintained a prudent approach to risk and pricing in a very competitive market, with gross new mortgage lending in 2019 of £33.3 billion, 9.6% higher than 2018. Mortgage new business market share increased to approximately 12.5%, supporting a stock share of around 10.2% up from 9.8% in 2018. Momentum also continued in personal advances and credit cards, increasing by 11.8% and 7.5% respectively.
 Customer deposits increased by £5.0 billion, or 3.4%, as growth continued across current accounts and savings.
 RWAs increased by £3.5 billion, or 10.2%, principally due to strong lending, £2.2 billion, mortgage predictive loss adjustments, £0.6 billion, and an increase linked to IFRS 16 changes, £0.7 billion.
Loans to customers (amortised cost) - mortgages 16.0 16.2 (0.2) (1%) 13.6 14.5 (0.9) (6%) - other lending 6.3 5.9 0.4 7% 5.4 5.3 0.1 2% Total loans to customers (amortised cost) 22.3 22.1 0.2 1% 19.0 19.8 (0.8) (4%) Loan impairment provisions (0.9) (1.1) 0.2 (18%) (0.8) (1.0) 0.2 (20%) Net loans to customers 21.4 21.0 0.4 2% 18.2 18.8 (0.6) (3%)
 Customer deposits increased by €1.6 billion, or 8.0%, supporting a reduction in the loan:deposit ratio to 98% from 105%.
Performance ratios Return on equity (1) 8.4% 12.1% (3.7%) Net interest margin 1.95% 1.96% (0.01%) Cost:income ratio 58.9% 52.8% 6.1%
Loans to customers (amortised cost) - business banking 6.9 6.7 0.2 3% - SME & mid-corporates 29.7 30.0 (0.3) (1%) - specialised business 16.1 18.0 (1.9) (11%) - large corporates & institutions 21.0 18.4 2.6 14% - real estate 21.3 20.7 0.6 3% - commercial - EU divestment 5.6 7.0 (1.4) (20%) - other 1.9 2.0 (0.1) (5%) Total loans to customers (amortised cost) 102.5 102.8 (0.3) (0%) Loan impairment provisions (1.3) (1.4) 0.1 (7%) Net loans to customers (amortised cost) 101.2 101.4 (0.2) (0%) Total assets 165.4 166.4 (1.0) (1%) Customer deposits (excluding repos) 135.0 134.4 0.6 0% Loan:deposit ratio (excluding repos) 75% 75% — — Risk-weighted assets 72.5 78.4 (5.9) (8%)
 Total income decreased by £284 million, or 6.2%, reflecting asset disposal and fair value gains of £169 million in 2018, compared with a £16 million loss in 2019, combined with lower deposit income and lower non-interest income. Net interest margin decreased by 1 basis point in comparison to 2018 as a result of lower deposit income, with lending margins broadly stable.
 Excluding strategic, litigation and conduct costs, operating expenses decreased by £51 million, or 2.2%, reflecting lower back office operations costs and VAT recoveries, partially offset by £17 million higher operating lease depreciation, £9 million authorised push payment fraud costs in line with new industry practice, and higher remediation, innovation and technology spend.
 RWAs decreased by £5.9 billion due to model improvements, active capital management and business transfers of £2.4 billion, resulting in a RWA intensity(2) of 70.7% in comparison to 76.3% in 2018.
Loans to customers (amortised cost) - personal 2.1 2.0 0.1 5% - mortgages 10.0 8.9 1.1 12% - other 3.4 3.4 — — Total Net loans to customers (amortised cost) 15.5 14.3 1.2 8%
prior to Q1 2019 and 14% prior to Q1 2018) of the monthly average of segmental RWAes, assuming 28% tax rate. (2) Comprises assets under management, assets under custody and investment cash. (3) Private Banking manages assets under management portfolios on behalf of UK Personal Banking and RBSI. Prior to Q4 2018, the assets under management portfolios of UK Personal Banking and RBSI were not included. Private Banking receives a management fee from UK Personal Banking and clients of RBSI in respect of providing this service.
 Private banking offers a service-led, digitally enabled experience for its clients, with approximately 75% of eligible clients banking with us digitally. Our client servicing model utilises both digital and telephony through Coutts24 and Adam24, which have client satisfaction ratings of 96% and 92% respectively. Coutts Connect, our social platform which allows clients to network and build working relationships with one another, now has over 1,700 active users since launching in 2018.
 A net impairment release of £6 million reflected a number of one-off releases.
Net interest income 478 466 12 3% Non-interest income 132 128 4 3% Total income 610 594 16 3% Other costs (244) (260) 16 (6%) Strategic costs (20) (9) (11) 122% Litigation and conduct costs — 9 (9) (100%) Operating expenses (264) (260) (4) 2% Impairment (losses)/releases (2) 2 (4) (200%) Operating profit 344 336 8 2%
 Excluding strategic, litigation and conduct costs, operating expenses decreased £16 million, or 6.2%, reflecting a £24 million reduction in back office operations costs, partially offset by higher investment spend relating to the digital proposition.
 RWAs decreased by £0.4 billion as the impact of model updates was partially offset by increased lending and business transfers.
Net loans to customers (amortised cost) 8.4 8.4 — — Total assets 263.9 244.5 19.4 8% Funded assets 116.2 111.4 4.8 4% Customer deposits 3.7 2.6 1.1 42% Risk-weighted assets 37.9 44.9 (7.0) (16%)
 NatWest Markets continued to play a leading role in market structural reform. We were first-to-market with our Realised Rate calculator and we acted as the sole solicitation agent for the first ever LIBOR to SONIA bond amendment issued in the market.
 A core income reduction of £177 million, or 14.1%, was due to challenging market conditions, most significantly in Q3 2019 when the business was impacted by weak performance in the Rates business.
 RWAs decreased by £7.0 billion driven by the £4.7 billion reduction following the merger of Alawwal bank with SABB and other legacy reductions.
 Central items not allocated include £1,459 million of FX recycling gains, a £169 million reimbursement under indemnification agreements relating to US residential mortgage-backed securities (RMBS) and strategic costs of £450 million. FY 2018 included a litigation and conduct charge of £809 million, principally in respect of the settlement with the US Department of Justice.
Group Audit Committee Group Executive Committee Group Nominations and Governance Committee Group Performance and Remuneration Committee
Group Board Risk Committee Group Sustainable Banking Committee Technology and Innovation Committee Committee Chairman 1 Howard Davies Appointed: 14 July 2015 (Board), 1 September 2015 (Chairman) Experience: Howard was chair of the UK Airports Commission between 2012 and 2015; Chairman of Phoenix plc from 2012 to 2015; Director of the London School of Economics and Political Science from 2003 until May 2011; Chairman of the UK Financial Services Authority from 1997 to 2003; and Deputy Governor of the Bank of England from 1995 to 1997.
3 Katie Murray Appointed: 1 January 2019 Experience: Katie joined RBS as Director of Finance in November 2015 and was appointed as Deputy Chief Financial Officer in March 2017. She was appointed Chief Financial Officer in January 2019. Katie has worked in Finance and Accounting for nearly 30 years with experience in capital management, investor relations, financial planning and all areas of financial services. Katie was previously the Group Finance Director for Old Mutual Emerging Markets, based in Johannesburg from 2011 to 2015, having held various roles in Old Mutual from 2002. Prior to this, Katie worked at KPMG for 13 years.
External appointments: Non-executive director, and member of the audit committee of Fiserv Inc; non-executive director and chair of the audit committee of Ooma Inc; and nonexecutive director and chair of the audit committee of Collibra.
Patrick is a Fellow of Chartered Accountants Ireland; and a member of the Association of Corporate Treasurers in the UK.
External appointments: Non-executive director of Aviva plc and chair of the audit committee, and member of the risk and nomination committees.
8 Robert Gillespie Appointed: 2 December 2013 Experience: Robert had a long career in investment banking, specialising in corporate advisory work. He was Director General of the Takeover Panel from 2010 until 2013 and prior to that held a number of senior management positions at UBS including being global head of investment banking from 1999 until 2005, chief executive of UBS for EMEA from 2004 to 2006 and Vice Chairman of UBS Investment Bank from 2005 to 2008. He commenced his career at Price Waterhouse where he qualified as a Chartered Accountant and in 1981 joined S.G. Warburg which subsequently became part of UBS.
External appointments: Chairman of The Boat Race Company Limited; director of Social Finance Limited; and professor of practice, Durham University Business School.
External appointments: Chairman of Experian plc; Chairman of Aegon UK and Chairman of its Remuneration Committee.
Chief Governance Officer and Company Secretary 13 Jan Cargill Appointed: 5 August 2019 Experience: Jan is a chartered company secretary with over 20 years corporate governance experience. She was appointed Deputy Company Secretary in 2010, and prior to that held various roles in the legal and secretariat functions in RBS, including Head of Board and Shareholder Services.
Jan has a law degree and is a Fellow of the Chartered Banker Institute. She is also an Associate of The Chartered Governance Institute, and has an INSEAD Certificate in Corporate Governance.
Report of the Group Nominations and Governance Committee 68 Report of the Group Audit Committee 70 Report of the Group Board Risk Committee 74
Dear Shareholder, I am pleased to present the corporate governance report for 2019. This has been a noteworthy year for the Board with the appointment of a new Group Chief Executive Officer (CEO), and much time dedicated to the development of RBS Group’s purpose and strategy.
Purpose and strategy The Board spent significant time on strategic development and planning in 2019. Pending the appointment of a new CEO, the Board maintained a constructive dialogue with executive management on development of RBS Group’s future purpose and strategy, including at the annual strategy offsite in June 2019.
Stakeholder engagement In developing its annual objectives, the Board identified a number of key stakeholders, and the Board’s agenda and engagement plans were structured to enhance the Board’s understanding of these stakeholders’ views and interests. This in turn has supported informed Board discussions and decisionmaking. Of particular note is the developing role of the Colleague Advisory Panel (CAP), which was established in 2018 in response to the requirements of the 2018 UK Corporate Governance Code (the Code). For further details on the Board’s engagement with the CAP and other key stakeholders, including shareholders, and how stakeholder interests have influenced the Board’s principal decisions, see pages 46 to 48 of the Strategic Report. Further information on RBS’s approach to investing in and rewarding our colleagues can be found on page 32 of the Strategic Report (Our Colleagues).
Culture and values The Board is responsible for leading the development of RBS’s culture. In February 2019, the Banking Standards Board presented a summary of their 2018 culture assessment report on RBS, and in October 2019, the Board considered another set of encouraging results from the annual colleague opinion survey and the 2019 Banking Standards Board survey. The colleague opinion survey results were one culture oversight tool available to the Board. The survey results confirmed to the Board that 2019 targets had been achieved across key measurements, trends and benchmarks in relation to leadership, engagement and culture.
The directors continue to be mindful of their responsibility to set the “tone from the top” and take every opportunity to role model the desired culture both within the Boardroom and beyond. Directors’ personal interactions with colleagues provided useful opportunities to do so, for example through CAP events and business and function visits. Further, through the Group Sustainable Banking Committee, the Board received culture measurement reports which helped to support the Board on assessing progress on building a healthy culture across the Bank and assessing alignment between culture and values.
Further information on the 2019 internal evaluation can be found on page 67.
Board and company secretary changes I have already mentioned the resignation of Ross McEwan as CEO and the appointment of Alison Rose as Ross’s successor.
2018 UK Corporate Governance Code and 2019 statutory reporting requirements This is the first year in which RBSG plc has reported against the Code and in accordance with the new statutory requirements set out in The Companies (Miscellaneous Reporting) Regulations 2018, as they apply to RBSG plc. In preparation for this year’s disclosures, Board policies, processes and terms of reference were reviewed, and adjusted to reflect the Code and new reporting requirements. A section 172(1) statement can be found on page 46 of the Strategic Report.
Throughout the year RBSG plc has applied the Principles and complied with the Provisions of the Code, except in relation to:
In addition, the Board has delegated two particular aspects of the Code’s provisions to Board Committees, with regular updates provided to the Board as appropriate:  The Group Audit Committee retains responsibility for reviewing and monitoring RBS’s whistleblowing procedures.
For further details please refer to the relevant Committee reports on the following pages.
All directors are committed to observing high standards of corporate governance, integrity and professionalism. A statement of compliance with the Code can be found on page 106.
Division of responsibilities The Board has 12 directors comprising the Chairman, two executive directors and nine independent non-executive directors, one of whom is the Senior Independent Director.
Director biographies and details of the Board committees of which they are members can be found on pages 62 and 63
The Board The Board is collectively responsible for promoting the long-term sustainable success of RBSG plc, driving both shareholder value and contribution to wider society. The Board’s role is to provide leadership of RBSG plc within a framework of prudent and effective controls which enables risk to be assessed and managed. The Board sets the strategic aims of RBSG plc and its subsidiaries, ensures that the necessary resources are in place for RBS Group to meet its objectives, is responsible for the raising and allocation of capital and reviews business and financial performance. The Board establishes RBS’s purpose, values and strategy and leads the development of RBS’s culture. It ensures that RBSG plc’s obligations to its shareholders and other key stakeholders are understood and met.
The Board 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 on rbs.com.
Non-executive directors Along with the Chairman and executive directors, the non-executive directors are responsible for ensuring the Board fulfils its responsibilities under its terms of reference.
The non-executive directors combine broad business and commercial experience with independent and objective judgement. They provide constructive challenge, strategic guidance, and specialist advice to the executive directors and the executive management team, and hold management to account.
The balance between non-executive and executive directors enables the Board to provide clear and effective leadership across RBS’s business activities and ensures no one individual or small group of individuals dominates the Board’s decision-making.
Details of the key responsibilities of the Chairman, CEO, Senior Independent Director and Non-executive Directors are available on rbs.com.
Company Secretary The Chief Governance Officer and Company Secretary, Jan Cargill, works closely with the Chairman to ensure effective and efficient functioning of the Board and appropriate alignment and information flows between the Board and its committees.
The Company Secretary is responsible for advising the Board and individual directors on all governance matters, and also facilitates Board induction and directors’ professional development.
Conflicts of interest The Directors’ Conflicts of Interest policy sets out procedures to ensure that the Board’s management of conflicts of interest and its powers for authorising certain conflicts are operating effectively.
Each director is required to notify the Board of any actual or potential situational or transactional conflict of interest and to update the Board with any changes to the facts and circumstances surrounding such conflicts. Situational conflicts can be authorised by the Board in accordance with the Companies Act 2006 and the company’s Articles of Association. The Board considers each request for authorisation on a case by case basis and has the power to impose conditions or limitations on any authorisation granted as part of the process. Details of all directors’ conflicts of interest are recorded in a register which is maintained by the Company Secretary and reviewed annually by the Board.
Howard Davies 6/6 3/3 — — — — — Alison Rose (1) 1/1 — — — — — — Katie Murray 6/6 — — — — — — Frank Dangeard 6/6 — — — — 5/5 7/7 Alison Davis 6/6 — — — 5/5 5/5 7/7 Patrick Flynn (2) 6/6 2/2 6/6 9/9 — 5/5 — Morten Friis 6/6 — 6/6 9/9 — — — Robert Gillespie 6/6 3/3 — 9/9 5/5 — 7/7 Baroness Noakes 6/6 3/3 6/6 9/9 — — — Mike Rogers (3) 6/6 — — — 5/5 — 6/7 Mark Seligman 6/6 3/3 6/6 — — — 7/7 Lena Wilson 6/6 — — — 5/5 5/5 — Former Directors Ross McEwan (4,5) 4/5 — — — — — — Brendan Nelson (6) 2/2 1/1 2/2 2/2 — — — Notes: (1) Alison Rose was appointed Group CEO and executive director on 1 November 2019. (2) Patrick Flynn joined the Group Nominations and Governance Committee on 1 April 2019. (3) Mike Rogers did not attend the January RemCo due to a scheduling clash with a pre-existing commitment. (4) Ross McEwan did not attend the October Board due to a private commitment. (5) Ross McEwan resigned as Group Chief Executive Officer and executive director on 31 October 2019. (6) Brendan Nelson resigned as a non-executive director on 25 April 2019.
GRG Board Oversight Committee The GRG Board Oversight Committee was established in 2015 in relation to the Financial Conduct Authority (FCA) review of the treatment of SME customers. The Committee oversaw and provided advice to the Board in relation to the review, the external independent review of GRG instigated by RBS and other matters generally related to GRG. The Committee was disbanded on 30 June 2019, following publication of the FCA’s report.
How the Board operated in 2019 At each scheduled Board meeting the directors receive reports from the Chairman, Board Committee Chairmen, CEO, Group Chief Financial Officer (CFO) and other members of the executive management team, as appropriate. Other senior executives attended Board meetings throughout the year to present reports to the Board. This provides the Board with an opportunity to engage directly with management on key issues and supports succession planning.
An integral part of RBS Group’s governance arrangements is the appointment of four ‘Double Independent Non-Executive Directors’ or ‘DINEDs’ to the boards, and board committees, of the NWH Sub Group. The DINEDs are independent in two respects: (i) independent of management as nonexecutives; and (ii) independent of the rest of RBS Group by virtue of their NWH Sub Group-only directorships. The DINEDs play a critical role in RBS Group’s ring-fencing governance structure, and are responsible for exercising appropriate oversight of the independence and effectiveness of the NWH Sub Group’s governance arrangements, including the ability of each board to take decisions independently.
Composition of the Board The Board is structured to ensure that the directors provide RBSG plc with the appropriate combination 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 the Board has a number of directors with substantial experience in that area, including retail and commercial banking. In addition, the directors have relevant experience in customer service; government and regulatory matters; mergers and acquisitions; corporate restructuring; stakeholder management; technology, digital and innovation; finance and accountancy; risk; and change management.
In 2019, Katie Murray undertook an induction programme following her appointment as CFO. This programme included focus on building existing knowledge of RBS; meetings with relevant internal and external stakeholders; and personal development. Alison Rose has commenced an induction programme following her appointment as CEO.
During 2019, bespoke training was arranged for the directors on a range of subjects to enhance their knowledge, including:  Financial crime
Information All directors receive accurate, timely and clear information on all relevant matters and have access to the advice and services of the Company Secretary. In addition, all directors are able, if necessary, to obtain independent professional advice at the company’s expense. A new Board reporting style was embedded during 2019 which seeks to improve the presentation of management information in a more engaging, thoughtful way and which covers explicitly the stakeholder impacts relevant to decisions.
The Code emphasises the importance of ensuring directors have sufficient time to meet their board responsibilities. Under the Code, external appointments require prior Board approval, with the reasons for permitting significant appointments explained in the annual report. In line with these requirements, the Board considered the following during 2019:  Appointment of Patrick Flynn as a director of Aviva plc on 16 July 2019; and
 Appointment of Mike Rogers as Chairman of Experian plc on 24 July 2019.
Following careful review of the anticipated time commitment for the new roles in the context of the directors’ existing portfolios, and taking into account their respective confirmations that they would continue to meet their RBS responsibilities, the Board approved these additional external appointments.
Evaluation In accordance with the Code, an external evaluation of the Board, its Committees and individual directors takes place every three years. An internal evaluation takes place in the intervening years.
Progress following the 2018 evaluation A number of actions were progressed during 2019 in response to the findings of the 2018 external performance evaluation, which was facilitated by Independent Board Evaluation. Progress was overseen by the Group
 Agreeing “ways of working” guidelines to promote a healthy Boardroom culture.
 Further enhancing the NED induction programme through the creation of online learning modules covering both technical topics and business spotlights. These modules have been designed to serve as reference materials for existing directors, as well as forming part of the induction programme.
2019 Performance evaluation The 2019 Board evaluation was internally facilitated by the Chief Governance Officer and Company Secretary, Jan Cargill, during Q4 2019. The process included:  holding 1:1 interviews with directors;  discussing key findings and recommendations for action with the Chairman; and
Key findings and recommendations The conclusion of the 2019 Board evaluation was that the Board operated effectively throughout the year and fulfilled its remit as set out in its terms of reference. Directors engaged fully with the evaluation exercise and commented positively in relation to many aspects of the Board’s operations.
 Ring-fencing governance arrangements had embedded well. The DINED role was clearly understood and functioning effectively, and the recovery fire drill had provided a useful opportunity to test the conflicts of interest process.
 Although the Board’s size had reduced following the departure of Brendan Nelson, most directors still felt the Board was too large, although not necessarily unwieldy or unworkable.
 Maintain focus on Board composition and succession planning, balancing the desire to reduce overall Board size with the requirement to ensure an appropriate balance of skills, knowledge and experience, and the need to improve diversity.
 Develop a structured programme for the Board to meet key executive talent.
Implementation of the 2019 Board evaluation actions will be overseen by the Group Nominations and Governance Committee during 2020.
Committee evaluations Details of the Board committee evaluations carried out during 2019 can be found in the committee reports.
Dear Shareholder, As Chairman of the Board and Chairman of the Group Nominations and Governance Committee I am pleased to present our report on the Committee's activity during 2019.
Role and responsibilities The Committee is responsible for reviewing the structure, size and composition of the Board, and membership and chairmanship of Board Committees and recommends appointments to the Board. In addition, the Committee monitors the RBS Group’s governance arrangements to ensure that best corporate governance standards and practices are upheld and considers developments relating to banking reform and analogous issues affecting RBS Group. The Committee makes recommendations to the Board in respect of any consequential amendments to RBS Group’s operating model.
Principal activity during 2019 On 25 April 2019 it was announced that Ross McEwan would step down as CEO and the formal search for his successor commenced immediately, led by the Chairman and the Committee on behalf of the Board. Spencer Stuart was engaged to support the recruitment process for the new CEO and conducted a global search for potential external candidates as well as engaging fully with internal candidates. This enabled the internal candidates to be benchmarked against the highest calibre candidates in the market. The Committee held a number of discussions on potential candidates, assessing the credentials of each internal and external candidate against the qualities and capabilities set out in the role specification agreed by the Committee. Following a formal, rigorous and transparent process the Committee recommended a final shortlist of candidates to the Board for consideration. Alison Rose was identified as the strongest candidate on the basis of her extensive banking experience and the leadership she had already demonstrated during her time at RBS, including as CEO, Commercial &
The Committee holds a minimum of four meetings per year and meets on an ad hoc basis as required. In 2019, there were 7 meetings. Individual attendance by directors at these meetings is shown in the table on page 66.
Committee they may then be appointed for a further 3 year term. Non-executive directors may continue to serve beyond 6 years, subject to a maximum tenure of nine years.
The tenure of non-executive directors as at 31 December 2019 is set out below.
Objectives and targets The Boardroom Inclusion Policy’s objectives 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
Notwithstanding the largely common membership between boards, RBS remains committed to ensuring that the RBSG plc Board meets the targets on a standalone basis. Throughout 2019, significant progress has been made towards delivering on this commitment, including through the appointment of Alison Rose as CEO on 1 November 2019 and Katie Murray as CFO on 1 January 2019. The RBSG plc Board is delighted that these appointments have contributed to a board composition currently including 42% female representation, rising from 25% at 31
December 2018. In measuring industry progress against the targets, we are proud to have been identified by the 2019 HamptonAlexander Review Update as one of the year’s highest rising FTSE companies. The RBSG plc Board also remains committed to meeting the Parker Target by 2020/2021.
Diversity and inclusion progress, including information about the appointment process, will continue to be reported in the Group Nominations and Governance Committee’s report in the RBSG plc Annual Report. The balance of skills, experience, independence, knowledge and diversity on the Board, and how the Board operates together as a unit is reviewed annually as part of the Board evaluation. Where appropriate, findings from the evaluation will be considered in the search, nomination and appointment process. Further details on RBS’s approach to diversity can be found on page 35.
Howard Davies Chairman of the Group Nominations and Governance Committee 13 February 2020
Membership Full biographical details of the GAC members are set out on pages 62 and 63. The members are all independent non-executive directors and each sit on other Board committees in addition to the GAC (as shown on pages 62 and 63. This cross committee membership helps facilitate effective governance, ensures agendas are aligned and avoids overlap of responsibilities.
2019 also saw the deadline for the submission of Payment Protection Insurance (PPI) claims. PPI has been an important area of focus for the GAC for a number of years but the unprecedented volume of claims in the run up to the PPI deadline resulted in the GAC reviewing the adequacy of provisioning and recommending an incremental charge of £900 million in 2019.
Issues such as FX recycling, recoverability of deferred tax assets, goodwill, fair value , the valuation of financial instruments with higher risk characteristics and investment in in subsidiaries were other areas of review and debate throughout the year.
Upon assuming the role of GAC Chairman this year, I also became RBS Group whistleblowers’ champion. The GAC oversees the framework and its operational effectiveness and reports to the Board on this. As whistleblowers’ champion I have specific responsibility for overseeing the integrity, independence and effectiveness of the firms policies and procedures on whistleblowing. I have been pleased to observe that the framework is operating effectively in line with our legislative and regulatory obligations and that this has been validated by external reviews during 2019.
The GAC considered a number of accounting judgements and reporting issues in the preparation of RBS Group’s financial results throughout 2019.
Provisions and disclosures – The GAC debated the level and appropriateness of provisions for regulatory, litigation and conduct issues including in particular; PPI. The RBS Group received an unprecedented volume of complaints shortly before the deadline resulting in the GAC recommending a £900 million increase in provision The GAC also carefully reviewed the quality and transparency of RBS’s financial and risk disclosures. Expected Credit Loss – Judgements in relation to credit impairments and the impact of macroeconomic risks on the credit environment were discussed throughout the year. The GAC focused on the methodology applied to provisions under IFRS 9. In particular the GAC considered the impact of ongoing economic uncertainty and increased the RBS Group’s provision in this respect by a further £55 million during 2019. The Committee was satisfied that the overall loan impairment provisions and underlying assumptions and methodologies adopted by RBS were reasonable and applied consistently; Valuation methodologies – The GAC considered valuation methodologies and assumptions for financial instruments carried at fair value and scrutinised judgements made by management in relation to the carrying value of intangible assets. Accounting Developments – The GAC considered the impact of various changes to accounting standards during 2019, including in particular IFRS 16, in respect of leases, and amendments to IAS 12, in respect of income taxes, both of which are reflected in this annual report. The GAC also considered enhancements and clarifications to non-GAAP reconciliations. Management’s assessment of the adequacy of internal controls over financial reporting – The GAC noted that there were no Material Weaknesses for RBS Group at the year-end. Viability statement and the going concern basis of accounting – GAC considered evidence of RBSG plc’s capital, liquidity and funding position and considered the process to support the assessment of principal risks. The GAC reviewed the company’s prospects in light of its current position and the identified principal risks. The GAC reviewed RBS’s viability and going concern statements and recommended them to the Board. (Refer to the Report of the directors for further information); and Fair balanced & understandable – The GAC oversaw the review process which supports the GAC and Board in concluding that the disclosures in the annual report and accounts, taken as a whole, were fair, balanced and understandable and provided the information necessary for shareholders to assess the company’s position and performance, business model and strategy. The process included: central co-ordination of the annual report and accounts by the Finance function; review of the annual report and accounts by the Group Executive Disclosure Committee prior to consideration by the GAC; and a management certification process. The External Auditor also considered the fair balanced and understandable statement as part of the audit process.
The GAC is particularly interested in the systems of internal control relating to financial management, reporting and accounting issues. The GAC received a number of reports throughout the year in this regard and evaluated the effectiveness of RBS’s internal control systems, including any significant failings or weaknesses.
Control Environment Certification – The GAC received bi-annual updates on control environment ratings of RBS’s businesses, functions and material subsidiaries and management’s plans to address areas of weakness. Sarbanes-Oxley Act of 2002 – The GAC considered RBSG plc’s compliance with the requirements of section 404 of the Sarbanes-Oxley Act of 2002, and was satisfied in this respect. No Material Weaknesses were reported in RBS Group at the year end. Legal and Regulatory Reports – Quarterly reports on the material current and emerging legal and regulatory investigations, risks and developments affecting RBS enabled the GAC to assess the related disclosures in RBSG plc’s financial statements. Notifiable Event Process – The GAC considered semi-annual reports on control breaches, captured by RBS’s notifiable event process. All Board directors were alerted to the most significant breaches. Whistleblowing – The GAC monitored the effectiveness of the bank’s whistleblowing procedures and received updates on the volume of whistleblowing reports, any trends and staff awareness of the processes and reported to the Board on this. The GAC Chairman acts as RBS Group Whistleblowing Champion, in line with PRA and FCA regulations and meets regularly with RBS’s whistleblowing team. Taxation – The GAC received an update on RBS’s tax position and discussed matters including tax disclosures and provisions, tax risks, RBS’s tax compliance status, ongoing tax projects and emerging tax issues. Annual Risk and Control Report – The GAC also reviewed RBSG plc’s disclosure on internal control matters in conjunction with the related guidance from the Financial Reporting Council. Non-Financial Information – The GAC received a number of updates on RBS’s non-financial information reporting framework, which has been enhanced in order to meet growing investor interest in non-financial disclosures. Capital – The GAC reviewed RBS’s controls over the calculation and reporting of Risk Weighted Assets and related regulatory developments.
RBS has a policy in relation to the engagement of the external auditors to perform audit and non-audit services (the policy). The GAC reviews the policy annually to ensure it remains fit for purpose. All audit and non-audit services are pre-approved by, or on behalf of, the GAC to safeguard the external auditor’s independence and objectivity.
The GAC reviews and approves RBS’s audit and non-audit services policy at least annually. During 2019 the GAC approved amendments to the policy in line with the changes set out in the Financial Reporting Council’s revised Ethical Standard. Under the policy, audit related services and permitted non-audit service engagements may be approved by the CFO up to certain financial thresholds. Engagements in excess of these limits require the approval of the GAC Chairman. Where the fee for a non-audit service engagement is expected to exceed £100,000, a competitive tender process must be held and approval of the full GAC is required. The policy permits the external auditor to undertake engagements which are required by law or regulation or which relate to the provision of comfort letters in respect of debt issuances by RBS Group, provided prior approvals are in place in accordance with the policy. The policy also allows RBS to receive services from EY which result from a customer banking relationship, provided prior approvals are in place in accordance with the policy. All such approvals are reported to the GAC biannually.
The Group Board Risk Committee (the Committee or BRC) has an important role in overseeing the management of risk, and this report describes how the Committee fulfilled this responsibility during 2019. More detail on the remit of the Committee can also be found in its terms of reference which are reviewed annually and available on RBS’s website: rbs.com.
Patrick Flynn is chairman of the GAC of which Baroness Noakes and Morten Friis are also members. Robert Gillespie is chairman of the Group Performance and Remuneration Committee (Remco). This common membership across committees helps to ensure effective governance across the committees.
Regular attendees at meetings include: the Group Chairman, CEO, CFO, Group Chief Risk Officer, NWH Ltd Chief Risk Officer, Group Chief Legal Officer and General Counsel, Group Chief Audit Executive, and the External Auditor. External advice is sought by the Committee where appropriate. Two non-executive directors of NWH Ltd attended meetings as observers in their capacity as members of the NWH sub Group BRC. Meetings of RBSG plc and NWH sub Group BRCs share much of a common agenda and are generally run in parallel.
Capital and liquidity are core issues for any bank and BRC reviewed them regularly, including in the context of the resumption of dividends. BRC has also continued to play a central role in the oversight of RBS’s internal and external stress testing exercises including enhancements to RBS’s model risk management. The 2019 Bank of England Annual Cyclical Scenario (ACS) stress test results were published in Q4, and RBS remained well above the expected hurdle rate.
As in previous years, during 2019, members of the Committee undertook a programme of visits to the Risk, Internal Audit and Finance functions, in conjunction with members of the GAC.
Performance Evaluation The annual review of the effectiveness of the Board and its senior Committees, including the BRC, was conducted internally in 2019.
The Committee held a dedicated session to discuss its performance. The session was structured around a number of themes: operating rhythm; effectiveness; focus and priorities; and culture and dynamics.
The Committee considered that it continued to operate effectively and identified some areas for potential enhancement. This included the structure/focus, length and frequency of meetings.
“RBS continues to focus on innovation and technology and BRC looks at the associated risks”
Recovery and Resolution – BRC continued to monitor progress made by the Resolution Programme to deliver resolution capabilities in line with agreed plans, including RBS’s approach to the resolvability self-assessment. The Committee also reviewed the 2019 Recovery plan, noting the enhancements made since the previous year *.
ICAAPs, ILAAPs and Budget Stress Tests – BRC considered the results of the 2018 ICAAPs and ILAAPs and the Reverse Stress tests for RBS Group. An important part of the annual budgetary cycle is an analysis of the resilience of the budget under stress and BRC looks at this in detail on behalf of the Board. The Committee also kept under review improvements in the stress testing processes and the related work to strengthen and validate models and improve supporting governance. Bank of England Stress Tests – The Committee provided challenge throughout the process of preparing and submitting both the ACS and the Biennial Exploratory Scenario stress tests with emphasis on the key assumptions and judgements selected by management*.
BRC continued its oversight of the programmes which could impact RBS’s control environment.
Transformation – Progress on the delivery of RBS’s transformation and change programme and its position relative to risk appetite was regularly considered by the Committee, with a particular focus on GDPR compliance, payments and open banking. LIBOR Transition – BRC received reports on RBS’s plans and preparedness for LIBOR transition to new risk free rates. Consideration was given to steps being taken to mitigate key risks including potential conduct issues, litigation risk and other risks associated with legacy transition. Control Environment Certification – As in 2018, the Committee was provided with bi-annual reports on the control environment ratings of the segments and functions. Where significant control weaknesses were identified BRC sought management’s assurance that measures were in place to ensure that the businesses could continue to operate safely. BRC also monitored the programme to remediate customer due diligence as well as plans to build robust processes for the future on a quarterly basis. Risk Culture – BRC received a high level summary of the outputs of the H1 2019 risk culture assessment and requested management independently validated progress through a series of structured interviews with Board, Group Exco and NWH Exco members. The Committee will review outputs of this exercise in early 2020.
Capital and Liquidity – These remain important areas for risk management and in addition to reviewing the RBSG plc and NWH Ltd ICAAPS* and ILAAPs*, BRC received regular reports on RBS’s approach to capital, liquidity and funding management and risk appetite, including double leverage and capital buffer requirements. Operational risk, resilience and cyber security - In addition to considering RBS’s overall approach to resilience, BRC received regular updates in relation to the external threat landscape, potential vulnerabilities and the control environment. BRC also received specific updates on the transition of services to the Cloud and the use of Artificial Intelligence given the opportunities and risks associated with both technologies and the need for an appropriate control framework. Credit and Market risk – In addition to routine reporting on credit and market risk, updates were received in relation to specific portfolios including large corporate exposures, commercial retail estate, ESME loans, and NWM Plc’s prudential programme designed to deliver compliance with capital reforms. Management of traded and non-traded market risk, the process for approval of large transactions and the most material decisions of the Executive Credit Group, were also considered. Model risk management – Given the importance of models to stress testing and RBS’s digitisation strategy, BRC dedicated time to reviewing progress in strengthening the model risk framework, with a focus on compliance with regulatory guidelines, implementing a new model risk inventory system and adequacy of resources. Conduct and compliance risk – BRC conducted the annual review of the RBS Compliance and Conduct Risk Framework and received reports on the overall conduct and compliance profile and on individual conduct matters, including mystery shopping exercises. In the light of risk metrics BRC challenged management to review whether there were any underlying systemic themes which needed to be addressed. Financial crime – The annual Group Money Laundering Reporting Officer’s Report* was reviewed by the Committee as well as a specific report on broader financial crime matters. BRC also received regular progress updates on the programme to improve and remediate customer due diligence and build sustainable processes and controls for the future. Data Management and GDPR – BRC received reports on RBS’s data management risk profile and oversaw management’s plans to drive consistency, completeness and to simplify data management and reduce inherent risk. The Committee spent time on data ethics which included the introduction of information principles to support colleague decision making in relation to data. The Committee also received bi-annual updates on the delivery of full compliance with GDPR. Financial Risk from Climate Change – The Committee reviewed RBS’s assessment of how it identifies and manages this risk along with the approach to strengthen the management of the financial risks from climate change *.
BRC continued to provide oversight over the risk dimension of performance and remuneration arrangements, working closely with the RemCo.
Further detail on how risk is taken into account in remuneration decisions can be found in the Report of RemCo from page 79.
“As a Committee dedicated to sustainable banking, we appreciate spending quality time discussing matters such as financial capability, society and environment, and culture.”
Letter from Mike Rogers Chairman of the Group Sustainable Banking Committee
Dear Shareholder, I am pleased to present my second report as Chairman of the Group Sustainable Banking Committee (the Committee or SBC).
Renewed focus The Committee spent time last year considering its remit. This year we have delivered a refreshed Committee model structured under four pillars of sustainable banking: Customers and Brands; People and Culture; the Competitive Environment; and Society and Environment. These have informed our meeting structure and have proved helpful in prioritising matters which the Committee felt oversight and challenge, on behalf of the RBSG plc Board, was most valuable.
The Committee’s stakeholder engagement model was also refreshed. Integrated engagement sessions – more aligned to our pillars of sustainable banking - aim to bring internal and external voices and challenging perspectives into the boardroom. This also reflects the fact that the Board as a whole is spending more time on stakeholder engagement, which is in itself very pleasing.
Transition in thinking RBS Group has for many years championed sustainable banking and stakeholder engagement.
2019 Highlights I am pleased to report that good progress was made in 2019. As a Committee dedicated to sustainable banking, we appreciate spending quality time discussing matters such as financial capability, society and environment, and culture. Below are the key discussion points and outcomes from the year: Customer & brands
 During our April 2019 meeting we focused on how the bank creates value for customers and how we protect and develop our brands.
 The June 2019 meeting centred on how we manage wider social and environmental issues Topics included risks, opportunities and changing expectations of customers, investors, and regulators on how we approach issues like financial health, climate change and social inequality.
 During a later session we had the pleasure of receiving a presentation from one of our young bankers on a green initiative to encourage customers to spend sustainably. As a result, the presenter was asked to join the internal climate programme to progress his idea.
 Against notable disruption of the sector, the Committee challenged management on their understanding of new entrants’ business models, changing customer expectations and ‘non-bank’ competitors.
 We debated the strategic health of our business, took inspiration from the external environment and discussed the impact of technology on customers.
 Monitoring reports considered included OurView employee survey results, culture measures, inclusion and wellbeing data. We also discussed the latest Banking Standards Board survey. The Committee, on behalf of the Board, considered workforce policies and practices to ensure they are consistent with the RBS Group’s values and support long-term sustainable success. Outcomes included challenging management on future cultural ambition and agreeing to engagement exemplars and external insights being added to future culture monitoring reports.
Membership, Meetings and Escalation Membership, meetings and escalation mechanisms have not changed since last year’s report. In many cases the Committee and the Sustainable Banking Committee of NatWest Holdings Limited met concurrently.
Performance evaluation The annual review of the effectiveness of the RBSG plc Board and its senior Committees, was conducted internally in 2019. Overall the feedback on the Committee was positive. Areas of focus for 2020 will be overseeing purposeful progress across RBS Group and ensuing that the wider RBSG plc Board is aware of the important topics debated by the Committee.
2020 presents challenges and opportunities for the sustainable banking agenda as it enters a new leadership phase and sets its strategic and purposeful objectives. I am looking forward to steering future SBC discussions and to reporting on progress next year.
“Yesterday’s innovation is today’s norm – we must continue to challenge what we do and how we do it to improve tomorrow’s customer expectations”
Letter from Alison Davis Chairman of the Technology and Innovation Committee
Authority is delegated to TIC by the RBSG plc Board and a regular report of the Committee’s activities is provided to the Board. The terms of reference are available on rbs.com. These are reviewed annually and approved by the RBSG plc Board.
As part of this theme, the Committee has spent time on the ongoing modernisation of the technology stack, the transformation of important customer journeys, the expanding use of artificial intelligence and new digital sales capabilities.
 Mettle, a digital banking platform, launched in November 2019 following a successful pilot, giving small businesses a ‘new’ way to manage their finances by combining a current account with invoicing, payment chasing and bookkeeping capabilities.
TIC has monitored developments through engagement with third parties with whom we partner. We obtained external views of how RBS approached innovation and gained a better understanding of how RBS leverages its internal scouting network to obtain a timely and informed view of threats and opportunities. We met with the scouting team to better understand how it translates challenges and opportunities from our franchises into innovative solutions, through engagement with their broad network of contacts from disruptive start-ups to wellknown technology companies.
The Committee additionally held a joint meeting with management’s Technology Advisory Board (TAB). Discussions centred on areas of technology and innovation where TAB members saw future customer opportunities that RBS might explore further including platform banking, identity and privacy management.
Obtaining an external view of industry and Fintech development remains a critical role of the Committee, particularly given the continued pace of change in the sector. This ensures the bank is sighted on both opportunities and emerging threats from continued market disruption.
Performance evaluation The Committee held a dedicated session to discuss its performance. The session was structured around a number of themes: operating rhythm; effectiveness; focus and priorities. The Committee considered that it continued to operate effectively and identified topics to be considered in the coming year and the importance of increasing the level of external insight gained.
The outcomes of the evaluation have been reported to the RBSG plc Board and the Committee will track progress during 2020.
Conclusion I am delighted to Chair this Committee as TIC continues to support the Board in an area critical to the bank’s future success.
Together with my fellow directors, we will retain our focus on monitoring the future technology and innovation landscape and its impact on RBS. The Committee will continue to shape opportunities arising from management’s response to both threats and opportunities.
I want to take the opportunity to thank the Committee members and attendees for their contribution, enthusiasm and support in 2019.
Dear Shareholder, This is my third report as Chairman of the Group Performance and Remuneration Committee (the Committee). It has been a busy year with a number of specific issues to address including remuneration for the former and new CEO and the remuneration policy for executive directors ahead of its renewal at the 2020 AGM. I met with many of our major shareholders and other stakeholders as part of that process and would like to place on record my sincere thanks for their willingness to engage and the input provided.
The 2017 LTI award held by Mr McEwan was granted under the previous policy and was pro-rated to his final date of employment. Outstanding LTI awards granted in 2018 and 2019 will continue to vest on their scheduled vesting dates, subject to the assessment of performance and, in line with the policy, prorating does not apply to these awards after grant. Mr McEwan will also receive a further LTI award in 2020, based on performance during 2019 and pro-rated for time served during the year prior to grant. Further details are set out on page 93.
In moderating the level of salary increase for Ms Rose to below that of the wider workforce since 2013, the Committee recognised that salary for an internal promotion would normally be below that of the incumbent. Any further increases to Ms Rose’s salary will be reviewed annually subject to satisfactory performance and development in role.
The maximum LTI opportunity remains at 175% of base salary only (as opposed to fixed pay), with a shareholding requirement of 400% of base salary. Ms Rose's remuneration continues to represent a restrained pay position in terms of comparable roles at peer companies who also operate a bonus arrangement and typically allow variable pay up to a maximum of 200% of total fixed pay (i.e. including FSA and pension).
Over time, the expected value of LTI awards is estimated at 80% of the maximum LTI opportunity, taking into account the impact of both the pre-grant and pre-vest tests. This reflects the less leveraged nature of the construct with lower award levels compared to traditional LTI plans. Nearly 70% of expected remuneration for executive directors is delivered in shares.
Katie Murray Ms Murray was appointed CFO on 1 January 2019 following a successful period as interim CFO. Pay was set with a base salary of £750,000 per annum, pension at 10% of base salary and an FSA at 100% of base salary. No changes are proposed to the CFO’s remuneration at this time.
For Mr McEwan the performance assessment resulted in vesting at 56.25% reflecting improvements in total shareholder return (TSR) and targets also being met for CET1 ratio and employee engagement. The cost:income target was partially met whilst economic profit and customer and trust targets were missed. The Committee exercised its discretion in determining that the cost:income element should vest at the mid point of the scale and believed this was a fair reflection of performance.
Ms Rose and Ms Murray also received LTI awards in 2017 in respect of their previous roles, prior to appointment to the Board. These awards were subject to similar performance categories but with slightly different weightings and with return on equity replacing economic profit. The performance assessment for Ms Rose and Ms Murray resulted in 60% of the awards vesting. Full details of the 2017 LTI assessments can be found on page 91.
Ms Murray had demonstrated good overall performance during 2019 with a seamless transition into role, quickly establishing credibility, and making good progress on risk culture. Ms Murray also achieved financial targets for cost reduction with a good focus on people and employee engagement scores in the Finance function.
Broader pay considerations The Committee also considers wider workforce remuneration and approves the Group-wide remuneration policy. It is supported by subsidiary performance and remuneration committees for all key legal entities which review and provide input to pay decisions at a subsidiary level and help to ensure there is a transparent and robust remuneration governance framework in place across the RBS Group.
Bonus pool – Where employees are eligible for bonus awards, a balanced scorecard is used to assess performance across financial, customer, people, risk and conduct measures. The bonus pool for 2019 is £307 million, which is around 8% less than 2018. Immediate cash bonuses continue to be limited to £2,000.
We believe that having an engaged and inclusive workforce is a key element of a successful business. Feedback from colleagues forms part of the measures used in the performance assessment before LTI awards are granted to executive directors.
We remain committed to paying the workforce fairly and transparently, with a focus on paying people the right rate for the job. I strongly believe that the remuneration policy is the right one for RBS and its wider stakeholders and hope that shareholders will vote for its approval at the forthcoming AGM.
Built around a restrained pay position for executive directors, with variable pay delivered entirely in shares as LTI awards.
The maximum value of LTI awards is smaller than traditional long-term incentive plans and there are significant shareholding requirements in place.
The current policy introduced in 2017 reflected the Executive Remuneration Working Group and Government announcements on executive pay, calling for reduced complexity and quantum.
Investors continue to call for restraint, meaningful shareholdings and flexibility of pay design.
No further changes proposed for 2020. Salary will be reviewed annually within the terms of the policy.
Pension (cash) £110,000 £75,000 Pension rate has been reduced from 35% to 10% of base salary, in line with the rate for the wider RBS workforce*.
Benefits (cash) £26,250 £26,250 No change to the level of benefit funding.
Pro-rata vesting over years three to seven from grant. No change.
No change. Details on why the disapplication of pro-rating is considered appropriate under the RBS construct can be found on page 86.
No change in approach to performance measurement but some enhancements will be made to disclosures to provide additional narrative on performance outcomes.
400% of salary 250% of salary A post-employment shareholding requirement has been added to fully comply with the Code and the Investment Association’s Principles.
Fixed pay elements for current executive directors Fixed pay is intended to provide competitive remuneration for performing the role. The intention is to have less reliance on variable pay and thus discourage excessive risk-taking.
Purpose and link to strategy Operation Maximum potential value Base Salary To provide a competitive level of fixed cash remuneration and aid recruitment and retention of high performing individuals.
Fixed share allowance To provide fixed pay that reflects the skills and experience required and responsibilities for the role.
The fixed share allowance will broadly be paid in arrears, in four instalments per year or at any other frequency that the Committee deems appropriate (1). The fixed share allowance is not pensionable.
An award of shares with an annual value of up to 100% of base salary at the time of award, or such higher amount which represents such value rounded up to the nearest whole share.
Benefits To provide a range of flexible and market competitive benefits that is valued by the recipients and assist individuals in carrying out their duties effectively.
Executive directors can select from a range of standard benefits including: company car; private medical cover; life assurance; and critical illness insurance.
In addition, executive directors are 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. On rare occasions where they are accompanied by their spouse / partner to business events, RBS may also meet the costs and any associated tax liability. Executive directors are also entitled to holiday and sick pay.
The maximum potential value of benefits will depend on the type of benefit and cost of its provision, which will vary according to market rates. Any non-standard benefits would be subject to approval from the Board.
Provision of a monthly pension allowance paid in cash and based on a percentage of salary. Opportunity to use the cash to participate in a defined contribution pension scheme.
Variable pay Variable pay incentivises the delivery of sustainable long-term performance, based on RBS’s strategic objectives and its aim of becoming a purpose-led organisation. Performance is assessed against measures which, though demanding, executive directors would reasonably be expected to achieve, encouraging safe and secure growth. Variable pay is delivered entirely in shares with extensive deferral and retention requirements to create strong shareholder alignment.
Delivery in shares with the ability to apply malus adjustments and clawback further supports longer-term alignment with shareholders’ interests.
The number of shares awarded may be calculated using a share price discounted to reflect the absence of the right to receive dividends or dividend equivalents during the vesting period. In the event regulations permit the use of dividend equivalents in future, awards may be eligible to receive dividend equivalents instead.
With RBSG plc resuming dividend payments to ordinary shareholders, the Committee believes it is appropriate to have the ability to grant LTI awards with reference to an adjusted share price as recipients will not receive the benefit of any dividends or dividend equivalents during the vesting period. Subject to shareholders approving the policy at the 2020 AGM, the earliest date that this discount methodology would be applied would be for LTI awards granted in 2021.
The discounted share price will be calculated with reference to estimated dividend yields based on market consensus and the length of the vesting period, and will be reviewed by an independent advisor. For the avoidance of doubt, there is no intention to reflect special dividends in the calculation.
Prior performance will be taken into account when determining the value of the award at the time of grant.
Using pre-grant and pre-vest tests, performance will be assessed in the areas of Finance & Business Delivery, Risk & Operations, Customers & Stakeholder and People & Culture.
The Committee will use a robust framework to consider performance against pre-set objectives for each of the categories, in line with RBS’s strategic aims and purpose, but will apply its judgement without reference to formulaic targets and weightings.
The majority of the performance variation is expected to take place under the pre-grant test, with the prevest assessment representing a final check that, taking all circumstances into account, overall performance has remained satisfactory.
Further details on the performance factors and assessment will be set out in the annual report on remuneration for the relevant year.
 The performance factors for variable pay awards have been chosen to reward sustained long-term performance which, together with significant shareholding requirements, creates strong alignment with shareholders. Targets are set in line with RBS’s strategic priorities.
 The fixed share allowance is part of fixed remuneration and is therefore not subject to any performance adjustment.
 Executive director remuneration is considered against market positioning for similar roles.
 Remuneration for executive directors broadly follows the policy for all employees but generally with a higher element of variable pay and greater delivery in shares which are released over a long time frame.
Executive directors are required to build up a shareholding equivalent to a percentage of salary. The net of tax shares acquired under the fixed share allowance will qualify towards the shareholding requirement. In the case of LTI awards, shares will be deemed to count on a net of tax basis towards meeting the requirement following the pre-vest performance assessment at the end of year three. Once the respective retention periods have passed, executive directors are permitted to dispose of up to 25% of the net of tax shares received until the shareholding requirement is met. Any shares purchased voluntarily will count towards the requirement but are excluded from the sale restriction.
Following cessation of employment, regardless of leaver status, executive directors will be required to hold shares of a value equal to the lower of their shareholding requirement immediately prior to departure or the actual shareholding on departure, for a period of two years. A fixed number of shares for the post-employment shareholding requirement will be determined at the date of departure. The requirement encompasses vested and unvested shares but shares purchased voluntarily are excluded from the post-employment shareholding requirement.
Statutory limits imposed by HMRC or the limits under the relevant share plan rules.
To ensure RBS can continue to honour payments due to executive directors.
In approving this policy, authority is given to honour any previous commitments or arrangements entered into with current or former directors, including share awards granted under the 2014 Employee Share Plan. For the avoidance of doubt, all outstanding LTI awards granted prior to 2018, where the performance cycle has been completed, will continue to vest in line with the terms agreed at the time of grant. Authority is also given to honour arrangements agreed with an employee prior to appointment as an executive director that may have different terms or performance conditions.
Base Salary Fixed share allowance Pension & Benefits LTI award (vesting value) Notes: (1) The charts above are for illustration only, with minimum representing fixed remuneration. The expected value has been calculated based on LTI awards vesting at 80% of the maximum opportunity. This is considered appropriate for a less leveraged remuneration construct, with lower award levels and performance assessed on factors which, though demanding, executive directors would reasonably be expected to achieve, encouraging performance within risk appetite.
Fees are paid monthly in cash. The Board retains discretion to pay fees in cash, shares or a combination of the two.
Any future increases to fees will be considered against fees paid to directors of comparable companies and will not normally be greater than the average inflation rate or salary increases for the wider RBS workforce over the period of the policy, taking into account that any change in responsibilities, role or time commitment may merit a larger increase. Other than in exceptional circumstances, fees will not increase by more than 15% over the course of this policy.
To provide a level of benefits in line with market practice.
The Chairman is entitled to private medical cover and life insurance cover will also be offered provided that the costs are considered by the Board to be reasonable.
Recruitment policy RBSG plc has a Boardroom Inclusion Policy which aims to promote diversity and inclusion in the composition of the Board. The framework aims to ensure RBS can attract, motivate and retain the best talent and avoid limiting potential caused by bias, prejudice or discrimination. RBS values and promotes inclusion in all areas of recruitment and employment. The key elements of the recruitment policy for directors are set out below.
 The policy on the recruitment of new directors aims to be competitive and to structure pay in line with the policy applicable to current directors, based on the elements of pay detailed in the policy table, recognising that some adjustment to quantum may be necessary to secure the preferred candidate.
 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. No sign-on awards will be offered on joining.
 Any awards granted following the recruitment of a candidate may be made under RBS’s employee share plans in place from time to time or under the relevant provisions in the Listing Rules and will need to comply with regulatory requirements. Full details will be disclosed in the next remuneration report following recruitment.
Chairman and non-executive directors The Chairman and the non-executive directors do not have service contracts, they have letters of appointment reflecting their responsibilities and time commitments. They do not have notice periods and no compensation would be paid in the event of termination of appointment, other than standard payments payable for the period served up to the termination date.
Under the Board Appointment Policy, non-executive directors are appointed for an initial term of three years, subject to annual re-election by shareholders. At the end of this initial term, a further three year term may be agreed. Non-executive directors may be invited to serve beyond six years, up to a maximum tenure of nine years. The Chairman is not subject to the Board Appointment Policy but is subject to the requirements relating to the maximum tenure period for chairs under the Code. All directors stand for annual election or re-election by shareholders at the company’s AGM.
On termination, share awards will be treated in accordance with the relevant plan rules as approved by shareholders.
Fixed share allowances Shares will continue to be released over the applicable retention period helping to ensure that former executive directors maintain an appropriate interest in RBS shares. In all leaver circumstances, executive directors will continue to be eligible to receive a pro-rated fixed share allowance to reflect the period up to the termination date.
In line with typical practice, awards will be pro-rated for the period worked during the financial year prior to the grant of the award. For LTI awards made in 2018 onwards, following the grant, no further pro-rating will occur. Awards will also generally be made to good leavers in respect of the final year of employment, again pro-rated for the period worked during the financial year prior to the grant of the award, and based on performance against the objectives set. The rationale for this approach is set out below.
 No pro-rating after grant is fundamental to RBS’s LTI construct and allows for a fair level of value to be delivered to the executives whilst having significantly lower maximum variable pay levels compared to peers.
 The main emphasis of the performance assessment is on the pre-grant test, given the award has already been ‘earned’ to a large extent by the time of grant.
 The removal of pro-rating creates higher levels of shareholding for up to eight years post departure meaning executives can be held accountable for, and are financially exposed to, the long-term consequences of their actions, including through malus and clawback.
Factors the Committee would expect to be present before agreeing to good leaver treatment under retirement include: whether the individual has been in role for at least five years, or otherwise qualifies for retirement under RBS’s policy, has demonstrated satisfactory performance, is not leaving to work in a capacity considered to be competing directly and materially with RBS, and is leaving at a time and in a manner that is agreed with the Board.
Malus allows the amount of any unvested variable pay awards to be reduced, potentially to zero, prior to payment. Clawback allows for recovery of variable pay awards that have already vested. Any variable pay awarded to executive directors in respect of the 2014 performance year onwards is subject to clawback for seven years from the date of grant. For awards made in respect of the 2016 performance year onwards, this period can be extended to ten years where there are outstanding internal or regulatory investigations at the end of the normal seven year clawback period.
The above list of circumstances is not exhaustive and RBS may consider any further circumstances as it deems appropriate.
Approach to the 2018 UK Corporate Governance Code The Committee undertook a review and where appropriate made changes to remuneration policy and practices in order to comply with the changes under the Code, as set out below. The Committee will continue to monitor and reflect on best practice developments.
 The pension rate for executive directors under the new policy will be aligned with the rate applicable to the wider workforce, currently 10% of base salary.
 RBS moved to this approach on the appointment of the CFO in January 2019 and this was also applied on the appointment of the new CEO in November 2019.
 The Committee considers a range of papers on the broader workforce, for example, the RBS Group-wide remuneration policy principles, annual pay outcomes across RBS Group including diversity information, bonus pool allocations and the deferral policy, and the annual Sharesave offer for employees.
 Culture is part of a suite of measures used to assess progress in building a healthy and inclusive workplace and performance against culture targets directly impacts the variable pay of both senior executives and other employees. Executive remuneration is based around a less incentivised construct to encourage safe & secure growth and the governance of culture is clearly laid out with specific Senior Management Function roles having defined accountabilities, which is taken into account in their pay decisions.
 In 2019, the committees held a joint session to review the employee value proposition and will continue to consider culture and topics of shared interest, such as the financial wellbeing of the wider workforce.
 The remuneration policy for executive directors has been designed around themes of simplicity, alignment with strategy and culture and ensuring rewards are supported by risk-adjusted performance.
 Engagement will continue with the Panel on an annual basis and if the Panel expresses any concerns on pay matters these would be raised with the Committee. Further information on the Panel and how the views of colleagues are taken into account is set out below.
 There is the ability to apply discretion in appropriate circumstances and the Committee has used discretion in the past to apply downwards adjustments to LTI outcomes.
Colleague Advisory Panel (CAP) In 2018, the CAP was established in order to enhance existing mechanisms for colleague engagement. The Panel is chaired by Lena Wilson as a designated non-executive director, with the aim of facilitating dialogue between colleagues and Board members. The CAP includes colleagues who volunteered to be involved, representatives from trade union bodies and works councils, the colleague-led networks and junior management teams.
Wider workforce remuneration policy Consistent with the principles for executive remuneration, 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 individuals are rewarded for delivering sustained performance in line with risk appetite and for demonstrating the right behaviours.
Employees are provided with salary and pension funding and certain roles are eligible for benefit funding and variable pay awards. Further details on the policy and remuneration levels for 2019 including pay ratios can be found later in this report. Many employees are shareholders through the company’s employee share plans and have the ability to express their views on executive pay by voting on the Directors’ Remuneration Policy.
Making RBS a great place to work Fulfilling job The aim is for every colleague to have a clear and fulfilling job that connects to RBS’s purpose. Each colleague is set clear goals and objectives that reflect RBS’s strategy. Progress is reviewed throughout the year.
Wellbeing is essential for people to bring the best of themselves to work. A range of measures are provided to support: physical wellbeing, encouraging a healthy lifestyle; mental wellbeing to challenge the stigma of mental health and encourage colleagues to talk; financial wellbeing on helping colleagues make the most of their money; and social wellbeing to connect with the community and to support inclusion and volunteering. There is also an Employee Assistance Programme where employees can access confidential advice, support and short-term counselling.
Diversity and inclusion is at the core of RBS culture. RBS is recognised in Bloomberg’s Global Gender Equality Index, holds Leader level in the UK Government’s Disability Confident Scheme and is regularly in the top Stonewall Global equality index. The inclusion category in the colleague opinion survey continues to score highly, and around 20,000 colleagues who are members of employee-led networks continue to educate and drive the inclusion conversation.
RBS has a positive action approach to improve the proportion of women and ethnic minority leaders across all business areas. Targets to improve gender and BAME/nonwhite representation are part of the measures that impact executive remuneration.
RBS has supported key causes, including being a founding signatory of the UK Government’s Race Equality Charter, and retained its status as a Stonewall Top Global Employer, one of just 14 organisations to feature on the 2019 list.
Fairness is built around a number of themes. A full pay review is undertaken each year for all salary ranges. Pay is compared against the external market so that pay and benefits are competitive. RBS is a fully accredited Living Wage Employer in the UK with rates of pay that continue to exceed the Living Wage Foundation Benchmarks.
Flexible benefits are provided allowing employees to change pension contributions and choose from a range of protection, healthcare and lifestyle options. Employees in the UK and Republic of Ireland can also participate in employee share plans and around 22,500 employees currently do so.
The number of employees at RBS who believe they are paid fairly increased further during 2019 and is significantly above the Global Financial Services Norm.
Excellent training Culturally, becoming a learning organisation is a strategic priority. RBS needs to prepare colleagues for the future and is committed to developing colleagues in key critical capability areas. This will help to build the right knowledge, skills and behaviours, to help people stay relevant and employable, and support RBS’s ambition and purpose. There is a focus on the future, continuous learning, knowledge sharing and reflective practice.
RBS continues to innovate learning to support core and common capability needs by creating a blend of learning experiences (e.g. classroom, webinar, e-learning and video) to support personal development, individual capability or prepare people for future roles. RBS also remains committed to embedding a strong service and sales mindset with training which supports the business strategy on customer service, trust and advocacy.
Gender and ethnicity pay gaps The latest gender and ethnicity pay gap reporting for RBS can be found in the ‘Our Colleagues’ section of the Strategic Report and on rbs.com.
Notes: (1) The fixed share allowance is based on 100% of salary and, as part of fixed remuneration, it is not subject to any performance conditions. (2) Includes standard benefit funding for all at £26,250 per annum. Ross McEwan also received travel assistance (£40,124), relocation expenses (£4,757)
(5) Reflects fixed remuneration paid to Ross McEwan for the period to 31 October 2019, the date he stepped down from the Board, together with an estimate of the vesting value of the 2017 LTI award which was pro-rated to his final date of employment. Mr McEwan also received fixed remuneration of £198,020 for the period after stepping down from the Board until 30 November 2019, the date he ceased to be employed by RBS, see page 96 for further details.
CET1 ratio (12.5%) LTI cost:income ratio target: significant progress to 56%
Performance category and weightings (see previous page for details) per category shares due to vest value (1)
Economic Profit (25%) 0% 414,216 — Relative TSR (25%) 100% 414,216 414,216 Safe & Secure Bank (25%) 75% 414,216 310,662 Customers & People (25%) 50% 414,216 207,108 Maximum shares for performance assessment 1,656,864 Outcome following performance assessment (56.25% vesting) 931,986 Outcome following performance assessment and application of pro-rating to date of cessation 906,077 Maximum shares capped at the time of grant 1,188,800 Maximum shares following the application of pro-rating to date of cessation 1,155,753 Final vesting outcome post pro-rating 906,077 £2,038,673
Maximum Shares due Estimated category shares to vest value (1) shares to vest value (1)
RoTE (10%) 0% 74,559 — 10,397 — Relative TSR (25%) 100% 186,398 186,398 25,993 25,993 Cost income ratio (10%) 50% 74,559 37,280 10,397 5,199 CET1 ratio (15%) 100% 111,838 111,838 15,595 15,595 Customer advocacy (15%) 0% 111,838 — 15,595 — Customer trust (10%) 0% 74,559 — 10,397 — Employee engagement (15%) 100% 111,838 111,838 15,595 15,595 Maximum shares under the award 745,589 103,969 Outcome following performance assessment (60% vesting) 447,354 £1,006,547 62,382 £140,360
Note: (1) Based on a RBS share price of £2.25, the average over the three month period from October to December 2019.
Notes: (1) Awards were granted as conditional share awards. The number of shares was calculated taking into account performance and the maximum potential award for each individual. The award price of £2.637 was based on the average share price over five business days prior to grant. Ross McEwan subsequently left RBS and qualified for good leaver treatment as set out earlier in this report. The pre-grant assessment of performance for Alison Rose related to a period prior to becoming an executive director. Subject to the pre-vest assessment, these awards will be eligible to vest in equal amounts between years 2022 and 2026. Service conditions and malus provisions apply up until vest, and clawback provisions apply for a period of at least seven years from the date of grant.
(2) Katie Murray received a deferred share award in March 2019 in respect of performance year 2018, a period prior to appointment to the Board, and was therefore not eligible to receive an LTI award in 2019. The award price of £2.637 was based on the average share price over five business days prior to grant. The award will be eligible to vest in equal amounts between years 2019 and 2026. Service conditions and malus provisions apply up until vest, and clawback provisions apply for a period of at least seven years from the date of grant.
Performance assessment framework for LTI awards granted from 2018 onwards For each of the core performance areas, the Committee will consider whether the executive director has achieved what would reasonably have been expected over the relevant period. The achievement of reasonable or ‘target’ performance expectations will deliver full or nearly full payout of the LTI awards, as long as executives deliver good, sustainable performance. This approach reflects the significantly reduced level of LTI awards compared to traditional LTI structures, creating more predictable outcomes and encouraging safe and secure growth within risk appetite.
The Committee will follow a robust process to review performance against pre-set goals relevant to RBS’s strategic aims for that year, but will apply its judgement without a formulaic range for vesting or mechanistic weightings. Performance will be assessed taking into account circumstances applying over the period. Risk & Control and Stakeholder Perception underpins will also apply under which the Committee can consider if there are any other factors that would lead to a downwards adjustment. Awards may be reduced, potentially down to zero, further to the application of either the pre-grant or pre-vest tests where there has been significant underperformance or risk management failings.
RoTE for both RBS Group and NWH Group was behind target largely due to increased PPI charges, margin pressure and, in the case of the Group RoTE target, lower income in NatWest Markets.
 14.4% for NWH Group and with appropriate repatriation of capital to the RBS Group.
RBS Group and NWH Group achieve/maintain and embed a control environment rating of 2.
Most areas had achieved the required control environment ratings, but four business units continued to have a control environment rating of 3.
The Risk management performance across the RBS Group is improving, but the Group as a whole, and also NWH Group, had not attained the required target.
Ring-fencing compliance maintained in line with policy and reporting on activities provided to the PRA.
No evidence to indicate noncompliance with work continuing on embedding policy and controls.
While risk culture has continued to improve in line with the trajectory set in 2015, the 2019 target was not fully met.
Meaningfully Increase customer advocacy for brands and chosen segments. Build a strong internal customer service.
Customer performance remains a difficult area, with limited progress having been achieved outside of NatWest Commercial and Coutts & Company (Coutts).
 core service behaviour score of 65 for RBS Group and NWH Group.
Pre-grant assessment for LTI awards to be made in 2020 Core area and goals Performance targets for 2019 (1) Pre-grant assessment Summary
Provide clarity, build capability and motivate our people. Build up and strengthen a healthy culture. Improve diversity across leaders to create a more mature, inclusive culture.
 The culture score also increased by 2 to 79, resulting in the target being met.
Progress by RBS Group and NWH Group on the number of women in senior roles across the top three layers of the Group globally by 2020.
Satisfactory progress has been made. As at Q3, 8 out of 12 business units had met the target, with a further 2 of the remaining 4 such areas expected to achieve the target by year end.
Progress by RBS Group and NWH Group on the number of BAME/non-white UK employees in the top four layers of the Group by 2025.
The 2019 actual was 9% of BAME/non-white UK employees in the top four layers of the Group.
Notes: (1) The performance of the Finance function in contributing to the overall targets was also taken into account for Katie Murray as CFO. Alison Rose was the CEO of
Commercial & Private Banking prior to becoming CEO in November 2019 and the performance of those business areas was also assessed in terms of contribution to the NWH Group targets.
Target 21 and 1st 57% or 6th -27 37 63% or 7th 52% or 13th -5 or 2nd
Outcome of the pre-grant assessment for the 2020 LTI award The Committee also received advice from the BRC and SBC in making its final assessment. The Committee assessed non-formulaic measures in order to determine the pre-grant assessment, as follows: As part of its ‘performance in the round’ judgement, the Committee noted the lack of progress in certain key areas, with poor financial and customer performance considered a significant lag on the areas of improvement for 2019. The Committee concluded that this should be reflected by an award level for Ross McEwan of 69% of the maximum possible award. Mr McEwan’s award was also pro-rated to reflect that he was employed for 11 months of the performance year. In the case of Katie Murray, an award level of 73% of the maximum possible award was proposed, the relative increase compared to Mr McEwan’s award being justified by strong risk management performance within the Finance function, which achieved a control environment rating of 2 and a systematic risk culture. The Committee also determined an award level for Alison Rose of 78% of the maximum possible award, based on the new CEO LTI maximum, which was primarily driven by Ms Rose’s performance in her previous role, notable achievements being the launch of the Rose review and progress on risk and culture.
Committee to be representative of a weaker overall performance in 2020 across key finance and customer performance areas.
 Full year net lending growth across UK Personal Banking, Ulster Bank RoI, Commercial Banking and Private Banking was 3.7%, which was well in excess of the stated target of 2-
Pre-vest assessment for 2020 LTI awards In addition to the pre-grant assessment detailed on the previous page, a further assessment of performance will take place at the end of three years, prior to vesting. It is intended to be a look-back at the performance year for which the LTI award was granted to consider whether anything has come to light which might call into question the original award. Once the vesting amount has been approved, employment conditions as well as malus and clawback will continue to apply.
Purpose alignment Has a Purpose which delivers long term sustainable performance
Achieve RBS Group cost reduction target based on operating expense reduction. RBS Group cost reduction of £250m.
Targets will be disclosed as part of the performance assessment in the 2020 Directors’ Remuneration Report.
Achieve net loan growth target for Retail and Commercial franchises consisting of UK Personal Banking, Ulster, Private, Commercial and RBSI.
NWM RWA reduction of £6-8billion and capital ratio accretive in year 1.
When assessing the performance of the year for which the award was granted, and “knowing what we know now”, has RBS: 1. Remained safe and secure, taking into account financial results and capital position? 2. Been a good bank for customers taking into account 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 its stated values?
Evidenced by: i. Has RBS breached a minimum capital ratio over the period? (core assessment question 1) ii. Has there been a material fall in the RBS share price over the period (core assessment question 1) iii. Has NPS fallen across the business? (core assessment question 2) iv. Have there been indicators of a material deterioration in the risk culture or profile, taking into account annual assessments by the Risk function and the BRC? (core assessment question 3) v. Has the Banking Standards Board survey position fallen materially? (core assessment question 4) vi. Have employee engagement scores fallen materially? (core assessment question 4)
Achieve or maintain an effective control environment rating, including progress on Financial Crime improvement plans, with control and risk implications considered in strategic and cost change programmes.
Effective management of compliance with the ring-fencing rules across NWH Group.
Positive progress towards (‘1’) generative with RBS Group and NWH Group to be rated (‘2’) systematic as a minimum.
Net trust score improvement of 6 percentagepoints for NatWest (England & Wales) and improvement of 10 percentage-points for Royal Bank of Scotland (Scotland).
Creation of 6,500 new businesses, ensuring everyone has the same opportunity to progress irrespective of gender, background or geography.
Create an additional 6,500 new businesses with support being distributed as follows: 75% to the UK regions outside London & South East, 60% to females, 20% to BAME individuals and 10% to people intending to create purpose-led businesses.
To be a leading bank helping to address the climate challenge.
RBS will set sector-specific targets for high impact sectors that are scenario-based for aggregate balance sheet alignment to the objectives of the 2015 Paris Agreement, and be in a position to publish such targets at or before the time of the FY2020 results announcements to give full transparency to all our stakeholders.
Based on the Banking Standards Board assessment and achieving the culture target for RBS Group and NWH Group, as measured through the RBS ‘Our View’ colleague survey.
To increase the percentage of females in the top three layers of RBS Group from 35% to 36% on aggregate.
Progress on the number of BAME/non-white UK employees in the top four layers of RBS Group.
Payments for loss of office (audited) On 25 April 2019, Ross McEwan announced his intention to retire as CEO. He stepped down from the Board on 31 October 2019 and ceased to be an employee on 30 November 2019. Both parties agreed that the notice period would be brought to an end on 30 November 2019 and that no payment would be made in lieu of notice. In line with his contractual arrangements, Mr McEwan continued to receive standard payments in respect of his fixed pay for the period up to his final date of employment. Payments for the period from 1 November to 30 November 2019 comprised salary (£83,333), fixed share allowance (£83,333), pension funding (£29,167) and benefit funding (£2,188), a total of £198,020 before tax.
In line with good leaver status, outstanding LTI awards granted in 2018 and 2019 will continue to vest on their scheduled vesting dates and pro‐ rating will not apply. The 2017 LTI award was granted under the previous remuneration structure and pro‐rating will apply based on Mr McEwan’s final date of employment. All awards remain subject to a performance assessment prior to vesting and the potential application of malus and clawback provisions. In line with the policy, Mr McEwan remained eligible for a further LTI award to be granted in 2020 in respect of his performance during 2019 and pro-rated to reflect his employment ended on 30 November 2019. This included the requirement to provide an orderly handover as a condition of his good leaver status. As set out on page 93, an LTI award of £1,100,000 was agreed in respect of the 2019 performance year. Any vesting of awards will be disclosed in the Directors' Remuneration Report for the relevant year.
Payments to past directors (audited) Payments made to Ross McEwan during the year are set out above and in the total remuneration paid to executive directors table earlier in this report. There are no other payments to past directors to disclose for 2019.
Total remuneration for the Chairman and non-executive directors for 2019 The GRG Board Oversight Committee was stood down at the end of June 2019. There were no other changes to Committees during the year and the level of fees remained unchanged. For RBSG plc Board directors who also serve on the boards and committees of NatWest Holdings Limited, National Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank Limited, the fees below reflect membership of all five boards and their respective board committees. Where appropriate, RBSG plc Board directors also received fees in respect of membership of other subsidiary company boards and committees including NatWest Markets Plc, the value of which is included in the table below.
Total single figure of remuneration for the Chairman and non-executive directors during 2019 (audited)
GRG Fees Benefits Total Board N&G GAC BRC SBC TIC RemCo SID BOC CAP Other 2019 2018 2019 2018 2019 2018
Frank Dangeard (3) 260 260 252 4 4 264 256 Alison Davis 80 30 60 30 200 200 24 26 224 226 Patrick Flynn 80 11 68 34 30 223 101 10 9 233 110 Morten Friis 80 34 34 148 142 35 50 183 192 Robert Gillespie 80 15 34 30 60 8 227 219 19 8 246 227 Brendan Nelson (3) 26 4 17 8 10 31 96 284 12 31 108 315 Baroness Noakes 80 15 34 68 8 205 216 17 18 222 234 Mike Rogers 80 60 30 170 158 12 12 182 170 Mark Seligman 80 15 34 30 30 8 197 171 8 5 205 176 Lena Wilson 80 30 30 15 155 128 11 20 166 148
Implementation of remuneration policy in 2020 Details of remuneration to be awarded in 2020 to executive directors are set out below. The salary, benefits, pension and fixed share allowance for the CEO and CFO are in line with those announced on appointment. The LTI pre-grant assessment has been completed and the Committee recommended to the Board who approved that LTI awards would be granted as set out below. Details of the pre-grant assessment can be found on pages 92 to 93.
LTI award granted in 20% further assessment 20% made before any 20% vests over 2023 to 2027 with vesting takes place 20% a 12 month retention period 20% post vesting
Note: (1) No additional fees are payable where the director is also a member of the boards and respective board committees of NatWest Holdings Limited, National
Other external 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 new external directorships, taking into account the nature of the appointment. Details of the directorships held by directors can be found in the biographies section of the corporate governance report.
Notes: (1) Shares owned beneficially as at 31 December 2019 or date of stepping down from the Board if earlier. The interests shown above include shares held by persons closely associated with the directors. As at 13 February 2020, there were no changes to the shares held shown above, other than the acquisition of 68 shares by Katie Murray at the end of January 2020 as part of one of the company’s employee share plans.
(2) Performance assessment has taken place but awards are still subject to deferral periods and employment conditions before vesting. These awards count on a net of tax basis towards meeting the shareholding requirement.
(3) Awards shown are still subject to the pre-vest performance assessment and also subject to deferral periods and employment conditions before vesting. (4) Interests held under the Sharesave plan where employees can choose to save from their salary with an option to buy shares at the end of the savings period. (5) The share interest held is over 10,000 American Depositary Receipts representing 20,000 ordinary shares. (6) 10,000 shares are held in the name of M Seligman & Co Ltd, of which Mr Seligman and Louise Seligman are shareholders.
Awards held at Awards Award Awards Awards lapsed Awards Awards held at Expected vesting dates 1 January 2019 granted price £ vested for performance forfeited 31 December 2019
Ross McEwan (1) LTI award 2015 371,098 3.74 185,549 185,549 (2) 06.03.20 LTI award 2016 1,187,207 2.26 699,922 487,285 (2) 08.03.20 – 08.03.21 LTI award 2017 1,188,800 2.41 1,188,800 (3) 07.03.21 – 07.03.24 LTI award 2018 592,328 2.66 592,328 07.03.21 – 07.03.25 LTI award 2019 625,712 2.64 625,712 07.03.22 – 07.03.26
LTI award 2015 196,926 3.74 98,463 98,463 (2) 06.03.20 LTI award 2016 620,183 2.26 418,623 201,560 (2) 08.03.20 – 08.03.21 LTI award 2017 745,589 2.41 745,589 (3) 07.03.20 – 07.03.24 LTI award 2018 488,906 2.66 488,906 07.03.21 – 07.03.25 LTI award 2019 568,829 2.64 568,829 07.03.22 – 07.03.26
Annual bonus against 85% 0% 0% 0% (SH) max. opportunity n/a n/a n/a n/a n/a n/a
Notes: (1) For 2013 and 2019 the table reflects where more than one individual has served as CEO during the year. The CEOs are Stephen Hester (SH), Ross McEwan
(RM) and Alison Rose (AR) with figures based on the single total figure of remuneration for the relevant year. (2) The maximum opportunity is set according to the approved policy and, for LTI awards granted in 2015 and onwards, the regulatory cap.
Relative importance of spend on pay The table below shows a comparison of remuneration expenditure against other distributions and charges. These items have been included as they reflect the key stakeholders for RBS and the major categories of distributions and charges made by RBS.
Notes: (1) Remuneration paid to all employees represents total staff expenses per Note 3 to the Financial Statements, exclusive of social security and other staff costs. (2) In 2019 RBS paid a final dividend of 3.5p and a special dividend of 7.5p per ordinary share in respect of financial year 2018, and an interim dividend of 2.0p and a further special dividend of 12.0p per ordinary share in respect of financial year 2019. The directors have recommended a final dividend of 3.0p per ordinary share and a special dividend of 5.0p per ordinary share in respect of financial year 2019, subject to shareholders’ approval at the Annual General Meeting on 29 April 2020.
November 2019, the annual percentage change in salary from the 2018 to 2019 financial year is 1.66%. (2) Standard benefit funding for executive directors remained unchanged between 2018 and 2019. The benefits excludes other any benefits such as travel assistance in connection with company business and any relocation benefits, the value of which is disclosed each year in the total remuneration table. (3) RBSG plc is a holding company and it does not have any employees. The data above is based on full year average salary costs of UK based employees of RBS
2018 A total remuneration 143:1 97:1 56:1 total remuneration £3,577,649 £24,946 £36,727 £63,825 salary only 44:1 30:1 19:1 salary only £1,000,000 £22,526 £33,146 £51,302 2019 A total remuneration 175:1 118:1 69:1 total remuneration £4,516,873 £25,742 £38,199 £65,684 salary only 44:1 30:1 19:1 salary only £1,016,667 £23,253 £34,051 £52,439
The role and responsibilities of the Committee The Committee is responsible for:  approving the remuneration policy for all employees and reviewing the effectiveness of its implementation;  reviewing performance and making recommendations to the Board on arrangements for executive directors;  approving performance and remuneration arrangements for a defined ‘in scope’ population capturing members and attendees of the Group and NWH Executive Committees, the direct reports of the CEO and heads of key legal entities, control function heads and the Company Secretary. The Committee also approves arrangements where employees earn total compensation above £1 million; and
The remuneration policy operated as intended during the year, with adjustments made for performance where appropriate. The Committee reviews performance for senior executives and also the implementation of the remuneration policy for all employees. One of the key tasks for the Committee in 2019 was considering and engaging with shareholders on the renewal of the executive directors’ remuneration policy, with decisions shared with the Board for final approval.
To mitigate 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. Attendees also play an important role in advising the Committee. In order to avoid any potential conflict of interest, no attendee is present when their own remuneration is discussed. The Group Chief HR Officer may be present when discussions take place on senior executive pay, as there is considerable benefit from her participation, but is never present when specific details of her own remuneration are discussed.
The terms of reference of the Committee are reviewed annually and available on rbs.com.
Summary of the principal activity in 2019 Tasks undertaken by the Committee included reviewing and, where appropriate, approving: First half of 2019
 2018 performance assessments and remuneration arrangements for the Committee’s ‘in scope’ population.
 Assessments of vesting levels for LTI awards granted in 2016 and 2017.
 The renewal of the Executive Directors’ Remuneration Policy and the RBS Groupwide remuneration policy principles.
 Management’s assurance of the implementation of the RBS Group-wide remuneration policy.
Performance evaluation The 2019 performance evaluation was conducted internally by the Chief Governance Officer and Company Secretary. The evaluation was structured around: operating rhythm; purpose & priorities; subsidiary oversight; and culture & dynamics. Members were comfortable the Committee had been effective and were supportive of the approach taken on subsidiary governance. The connectivity with the Board and other committees was also viewed as working well.
The masterclass was praised as an important part of the annual cycle and it was felt to be important that the Committee continued to play an active role in reviewing the changing nature of the workforce and the impact on remuneration. Some mixed views were expressed on the length of meetings and papers. Actions arising from the evaluation will be tracked during 2020.
Advisers to the Committee PricewaterhouseCoopers LLP (PwC) was first appointed as remuneration adviser by the Committee in 2010, following a review of potential advisers and the services provided. An annual review of the quality of advice and the associated level of fees was undertaken during 2019, following which the Committee agreed to retain the services of PwC. The Committee will continue to review the performance of its advisers each year.
PwC provides professional services in the ordinary course of business including assurance, advisory, tax and legal advice to RBS subsidiaries. The Committee is satisfied that the advice received is independent and objective, and receives an annual statement setting out protocols that have been followed by PwC to maintain independence. There are no connections between PwC and individual directors to be disclosed.
Fees paid to PwC for advising the Committee are based on a fixed fee structure to cover standard services with any exceptional items charged on a time/cost basis. Fees for 2019 in relation to directors’ remuneration amounted to £194,463 excluding VAT (2018 - £128,625).
Statement of shareholder voting The tables below set out the latest resolutions to approve the Directors’ Remuneration Policy and the Annual Report on Remuneration.
Shareholder dilution and share sourcing The company has previously used a combination of new issue and market purchase shares to satisfy the exercise of share options and the vesting of share awards under its employee share plans. In future, the company is intending to use shares purchased by the RBS Group Employee Share Ownership Trust and any available treasury shares to satisfy obligations under such plans.
RBS’s employee share plans contain best practice dilution limits that govern the number of shares that may be issued to satisfy share plan awards. Such limits will continue to be monitored.
Independent control functions exist for key legal entities outside the ring-fence (NWM Plc and RBS International), with dual solid reporting lines into both the legal entity CEO and the RBS Group Control Function Head.
Long-term incentive awards The purpose is to: support a culture where good performance against a full range of measures will be rewarded; encourage the creation of value over the long-term; and align rewards with the returns to shareholders.
Operation RBS provides certain employees in senior roles with long-term incentive awards. For awards made in respect of the 2019 performance year, the population receiving long-term incentive awards will be limited to executive directors and certain members of RBS Group’s senior executive committees.
Employee share plans The purpose is to provide an efficient way for employees to hold shares in RBS, which helps to encourage long-term thinking and provides a direct involvement in RBS’s performance.
Operation Employees in certain jurisdictions are offered the opportunity to acquire shares in RBS through employee share plans. Any shares held are not subject to performance conditions.
A robust process is used to assess risk performance. A range of measures are considered, specifically capital, liquidity and funding risk, credit risk, market risk, pension risk, compliance & conduct risk, financial crime, operational risk, business risk and reputational risk. Consideration is also given to overall risk culture. RBS’s remuneration arrangements are in accordance with regulatory requirements and the steps we take to ensure appropriate and thorough risk adjustment are also fully disclosed and discussed with the PRA and the FCA.
Variable pay determination For the 2019 performance year, RBS operated a robust multi-step process, which is control function led, to assess performance and the appropriate bonus pool by business area and function. At multiple points throughout the process, reference is made to Group-wide business performance (from both affordability and appropriateness perspectives) and the need to distinguish between go-forward and resolution activities.
The process considers a balanced scorecard of performance assessments at the level of each business area or function, across financial, customer and people measures. Risk and conduct assessments at the same level are then undertaken to ensure that performance achieved without appropriate consideration of risk, risk culture and conduct controls, is not inappropriately rewarded.
BRC reviews any material risk and conduct events and, if appropriate, an underpin may be applied to the individual business and function bonus pools or to the overall bonus pool. BRC may recommend a reduction of a bonus pool if it considers that risk and conduct performance is unacceptable or that the impact of poor risk management has yet to be fully reflected in the respective inputs.
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 to ensure accountability for those events. This allows RBS to respond to 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.
Potential outcomes under the accountability review process are:  Malus - to reduce (to zero if appropriate) the amount of any unvested variable pay awards prior to payment;  Clawback - to recover awards that have already vested; and
As part of the acceptance of variable pay awards, MRTs must agree to terms that state that malus and clawback may be applied. Any variable pay awarded to MRTs in respect of the 2014 performance year onwards is subject to clawback for seven years from the date of grant. For awards made in respect of the 2016 performance year onwards, this period can be extended to ten years for MRTs who perform a ‘senior management function’ under the Senior Managers Regime where there are outstanding internal or regulatory investigations at the end of the normal seven year clawback period.
Circumstances in which malus, clawback or in-year bonus reduction may apply include:  conduct which results in significant financial losses for RBS;  the individual failing to meet appropriate standards of fitness and propriety;  an individual’s misbehaviour or material error;  RBS or the individual’s business unit suffering a material failure of risk management; and
The above list of circumstances is not exhaustive and RBS may consider any further circumstances that it deems appropriate. During 2019 a number of issues and events were considered under the accountability review framework. The outcomes covered a range of actions including reduction (to zero where appropriate) of unvested awards through malus and suspension of awards pending further investigation.
One individual is included in the table above as they have been identified as an MRT in relation to a role with a subsidiary entity. However, they do not receive any remuneration for this role and are not an MRT in relation to their core role with the RBS Group. Therefore no remuneration is included for this individual in the remaining tables. In addition, there are two MRTs who are contractors and are paid through third party agency via invoices. They are listed in the table above, but as these two individuals do not receive salary or bonus from RBS Group they have been excluded from the remaining tables.
Non-executive directors of subsidiaries within the RBS Group 3. Amounts and form of fixed and variable remuneration Fixed remuneration consisted of salaries, allowances, pension and benefit funding.
Other MRTs Total £m £m £m RBSG plc EDs — — —
4. Outstanding deferred remuneration through 2019 The table below includes deferred remuneration awarded or paid out in 2019 in respect of prior performance years. Deferred remuneration reduced during the year relates to long-term incentives lapsed when performance conditions are not met, long-term incentives and deferred awards forfeited on leaving and malus adjustments of prior year deferred awards and long-term incentives.
No severance payments were made to MRTs during the year in excess of contractual payments, local policies, standards or statutory amounts, other than payments to two individuals of €25,000 and £180,000. None of the individuals were senior management and each payment was made in commercial settlement of potential legal proceedings related to the termination of employment. Severance payments made do not reward failure or misconduct in line with regulatory requirements.
Where required, remuneration is constrained within the limit of variable to fixed remuneration in accordance with EBA guidelines.
RBS – Annual Report and Accounts 2019 105 6. Ratio between fixed and variable remuneration The variable component of total remuneration for MRTs at RBS shall not exceed 100% of the fixed component. The average ratio between fixed and variable remuneration for 2019 is approximately 1 to 0.48. The majority of MRTs are based in the UK.
Consolidated 1:0.58 1:0.47 1:0.48 7. Discount Rate Under CRD IV regulations, a notional discount is available which allows variable pay to be awarded at a level that would otherwise exceed the 1:1 ratio, provided that at least 25% of variable pay is delivered ‘in instruments’ (shares) and deferred over five years or more. The discount rate was not used for remuneration awarded in respect of the 2019 performance year.
Total remuneration by band for all employees earning >€1 million € million Number of employees
Notes: (1) Total remuneration in the table above includes fixed pay, pension and benefit funding and variable pay.
 Income generators responsible for high levels of income including those involved in managing trading activity and supporting clients with more complex financial transactions, including financial restructuring.
Throughout the year ended 31 December 2019, RBSG plc has applied the Principles and complied with all of the Provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated July 2018 (the “Code”) except in relation to:  Provision 17, in respect of the requirement that the Group Nominations and Governance Committee should ensure plans are in place for orderly succession to both the board and senior management positions and oversee the development of a diverse pipeline for succession; and
In respect of Provision 17, the RBSG plc Board considers this is a matter of significant importance which should rightly be reserved for the full Board. Adopting this approach ensures that all directors have an opportunity to contribute to succession planning discussions for Board and senior management, in support of achieving an appropriate balance of skills, experience, knowledge and diversity at senior levels within RBS and on the Board. It also means that all directors have an opportunity to review, consider and become familiar with the next generation of executive leaders.
In respect of Provision 33, the RBSG plc Board also considers that this is a matter which should rightly be reserved for the Board and this is an approach the Board has adopted for a number of years. Remuneration for the executive directors is first considered by the Group RemCo which then makes recommendations to the Board for consideration. This approach allows all nonexecutive directors, and not just those who are members of the RemCo, to participate in decisions on the executive directors’ and the Chairman’s remuneration and also allows the executive directors to input to the decision on the Chairman’s remuneration. The Board believes this approach is very much in line with the spirit of the Code and no director is involved in decisions regarding his or her own remuneration. A copy of the Code can be found at www.frc.org.uk.
RBSG plc has also implemented the recommendations arising from the Walker Review and complied in all material respects with the Financial Reporting Council Guidance on Audit Committees issued in September 2012 and April 2016.
Under the US Sarbanes-Oxley Act of 2002, specific standards of corporate governance and business and financial disclosures and controls apply to companies with securities registered in the US. RBSG plc complies with all applicable sections of the US SarbanesOxley Act of 2002, subject to a number of exceptions available to foreign private issuers.
Ongoing processes for the identification, evaluation and management of the principal risks faced by RBS operated throughout the period from 1 January 2019 to 13 February 2020, the date the directors approved the Annual Report & Accounts. These processes include the semi-annual Control Environment Certification process which requires senior members of the executive and management to assess the adequacy and effectiveness of their internal control frameworks and certify that their business or function is compliant with the requirements of Sarbanes-Oxley Section 404 and the UK Corporate Governance Code. The policies that govern these processes, and reports on internal controls arising from them, are reviewed by the Board and meet the requirements of the Financial Reporting Council’s Guidance On Risk Management Internal Control & Related Financial & Business Reporting issued in September 2014.
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 RBS’s objectives.
Work continued throughout 2019 to strengthen the control environment and progress was made across all areas. Additionally, there was significant management focus on Brexit planning, delivery of regulatory programmes and work to enhance customer due diligence standards. While enhancements to the wider control environment were made, the journey of improvement remains a continued area of focus, particularly in ensuring the operational resilience of RBS, as well as compliance with financial crime requirements, where controls are being strengthened. RBS also continues to progress the embedding of a strong risk culture.
Internal control over financial reporting RBSG plc is required to comply with Section 404 of the US Sarbanes-Oxley Act of 2002 and assess the effectiveness of internal control over financial reporting as of 31 December 2019.
Disclosure controls and procedures As required by US regulations, management (including the Group CEO and Group CFO) have conducted an evaluation of the effectiveness and design of RBS’s disclosure controls and procedures (as defined in the Exchange Act rules) as at 31 December 2019. Based on this evaluation, management (including the Group Chief Executive Officer and Chief Financial Officer) concluded that RBSG plc’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.