RBS reported an operating profit before tax of £2,239 million for 2017 and an attributable profit of £752 million, its first ‘bottom-line’ profit in ten years.
We retain our target of achieving a sub 50% cost:income ratio and above 12% return on equity by 2020.
(4) Operating expenses excluding litigation and conduct costs £1,285 million (2016 - £5,868 million), restructuring costs £1,565 million (2016 - £2,106 million). Operating lease depreciation included in income of £142 million (December 2016 - £141 million). Income excluding own credit adjustments £69 million loss (2016 – £180 million gain), loss on redemption of own debt £7 million (2016 – £126 million), and strategic disposals £347 million (2016 - £164 million).
No.1 Commercial Bank NPS Our Commercial Bank ahead of its main competitors for customer advocacy
The treatment of some of our small business customers between 2008 and 2013 has been under scrutiny, and has received significant political and media attention. The Financial Conduct Authority (FCA) published a summary report into the historical operation of our former Global Restructuring Group (GRG) and the full report by Promontory was published by the Treasury Select Committee on 20 February 2017. The most serious allegations made against the bank in an earlier report by Dr. Lawrence Tomlinson were not upheld. Promontory stated that “they did not find that defaults were engineered to transfer business simply to generate revenue for RBS”. However, the bank was strongly criticised in the report and we acknowledge that we could have done better for many small business customers in GRG. I again apologise for the mistakes that were made during that time. The attitudes to customers displayed by some staff were not acceptable, and communication with clients was often poor. We have, as a result, refunded complex fees to many customers and established a complaints
We are strongly committed to having more female colleagues in senior positions across the organisation. In 2015 we set ourselves a target to have at least 30% of roles in the three most senior levels of each of our businesses
The opportunities created by greater simplification and automation, in terms of improved controls, cost reduction and a better customer experience, are significant for this bank.
We are committed to running the bank as a more sustainable business, serving today’s customers in a way that also helps future generations. As technological, social and environmental changes shape the world, it’s important to stay connected with evolving customer needs, our shareholders and the wider expectations of society. One of the ways in which we are doing this is through our Board-level stakeholder engagement programme where we proactively listen, learn and engage with our stakeholders to improve the way we do business.
We are also the biggest supporter of UK business. Our commercial bank grew lending in our target markets, this commitment supported both recognised household names and fledgling start-ups. Our commitment to business goes beyond simple financing, our Entrepreneurial Spark programme continued to grow in 2017 and has supported over 3,800 new businesses since 2012 with awardwinning facilities and an outstanding support network. Our work is also being recognised externally. In 2017 NatWest was awarded Best Business Bank in the UK by the National Association of Commercial and Finance Brokers.
For the first time we now have more active mobile users than users online, a clear indication of the direction of travel of our customers’ banking preferences.
CET1 ratio increased by 250 basis points to 15.9%, despite absorbing significant additional legacy costs.
We supported over 3,830 people through our enterprise programmes. This includes the following enterprise programmes: Entrepreneurial Spark, Prince’s Trust and Skills & Opportunities Fund.
Adjusted operating expenses reduced by 6.3% reflecting operating model simplification and productivity improvements, including a 16.4% reduction in front office headcount. Commercial Banking net impairment losses of £362 million increased by £156 million and reflecting a small number of single name impairments.
RBS is continuing to build a bank that is easy to do business with, and meets customers’ continually evolving needs.
Simplifying the bank Streamlining of processes and removing unnecessary complexity lowers our operating costs, and makes our customer interactions more straightforward.
Our programme is designed to help teachers and parents equip young people with the financial skills they need to manage their money now and in adulthood.
We have provided three examples below of how we work with different stakeholder groups: Customers All individual and business customers, past, present and future
We have also set 2020 targets to reduce water use by 10% and paper use by 60%, whilst continuing to target zero waste to landfill. We engage colleagues, suppliers and customers in these efforts and in 2017, 3,200 colleagues logged over 24,000 activities to reduce our environmental impact via our green reward app. More information on our targets and initiatives can be found on the Sustainable Banking webpages at rbs.com.
We have reported on all emission sources under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. To our knowledge there are no material omissions. Independent Limited assurance has been provided by Ernst & Young LLP over total reported CO2e emissions (tonnes) (Scope 1*,2** and 3*** location based emissions). Our reporting year runs from October 2016 to September 2017.
SSE, one of the UK’s leading energy suppliers, issued its first Green bond raising EUR600 million, the largest ever Green bond by a UK company. It will use the proceeds to re-finance existing environmentally-friendly projects, in particular onshore windfarms.
Creating a Healthy Culture Building a healthy culture that embodies Our Values is one of our core priorities. Our Values guide the way we identify the right people to serve our customers well, and how we manage, engage and reward our colleagues. Our Values are at the heart of both Our Standards, the bank-wide behavioural framework and Our Code, the bankwide Code of Conduct.
We set ourselves clear cultural priorities each year and manage these through our Executive Committee.
Our inclusion policy applies to all our colleagues globally to make sure everyone feels included and valued, regardless of their background.
Delivering appropriate digital infrastructure is important to ensure a ‘technically-able’ bank that supports its long-term future. Cyber security is also a vital part of providing a safe and secure banking service. Banks need to proactively identify and manage risks and efficiencies in their operations and facilities.
Customer needs are changing and different types of customer often have significantly different banking needs. In order to be attractive and useful, financial products and services need to fit in with customers’ lives and be flexible to differing levels of digital and financial understanding.
• Provided over 27,500 customers with ‘breathing space’ and extra time for them to find support and to put in place a repayment arrangement.
• Innovative Citizens Advice partnership, where Citizens Advice colleagues are located within one of our Specialist Support teams providing independent advice to over 900 of our most vulnerable customers.
The eurozone economy was 2.7% larger in the final quarter of 2017 than in the same period of 2016, up from 1.8% in 2016. Unemployment fell but remained high at 8.7%. While inflation increased to 1.4% it remained short of the European Central Bank’s target of “at or below” 2%. The ECB continued to provide stimulus through low interest rates and quantitative easing. It announced in October that it would reduce the amount of its monthly asset purchases while extending the period during which it will make purchases until at least September 2018.
Climate risk While no climate-related risks have been identified that would have a major impact on RBS’s strategy over a five-year horizon, RBS manages and monitors a number of associated threats. These include physical impacts, such as flooding, as well as the impact of climate-related regulation, though exposure to the sectors most vulnerable to climate risks, or climate-related regulation, has significantly reduced (for example RBS exposure to the power and oil & gas sectors has fallen to 1.2% of total lending exposures in 2017). RBS supports the work of the Financial Stability Board’s Task Force on ClimateRelated Financial Disclosures (TCFD). Adoption of the TCFD recommendations is an important step forward in pricing climate-related risks and opportunities as the transition to a low-carbon economy – under the terms of the Paris Climate Agreement – progresses.
Experience: Howard was Deputy Governor of the Bank of England from 1995 to 1997 and Chairman of the UK Financial Services Authority from 1997 to 2003. Howard was Director of the London School of Economics and Political Science from 2003 until May 2011. He is also Professor of Practice at the Paris Institute of Political Science (Sciences Po).
External appointment(s): Non-executive director and member of the audit and compensation committees of Unisys Corporation Non-executive director, and member of the audit committee of Fiserv Inc Non-executive director and chair of the audit committee of Ooma Inc
Committee membership(s): Sustainable Banking Committee (Chairman) Board Risk Committee GRG Board Oversight Committee Group Nominations and Governance Committee
External appointment(s): Non-executive director and Chairman of the audit committee and member of the remuneration and chairman’s committees of BP plc Member of the Financial Reporting Review Panel
Non-Executive Director and chairman of the audit committee of Smiths Group plc
Biographies for each director and details of which Board committees they are members of can be found on pages 51 to 56. The Board considers that the Chairman was independent on appointment and that all non-executive directors are independent for the purposes of the Code.
 Dr Lena Wilson joined the board as a non-executive director.
The Chairman’s key responsibilities are to:  provide strong and effective leadership to the Board;  ensure the Board is structured effectively, observes the highest standards of integrity and corporate governance, and sets the tone from the top in terms of culture and values;  build an effective and complementary Board with an appropriate balance of skills and personalities, and as Chairman of the Group Nominations and Governance Committee consider succession planning for Board appointments;  foster open and inclusive discussions at each Board / Committee meeting which challenge executives, where appropriate;  in conjunction with the Chief Executive and Company Secretary, ensure that members of the Board receive accurate, timely and clear information to enable the Board to lead RBS, take sound decisions and monitor effectively the performance of executive management;  ensure that the performance of individual directors and of the Board as a whole and its committees is evaluated regularly; and
Howard Davies 9/9 Ross McEwan 9/9 Ewen Stevenson 9/9 Frank Dangeard 9/9 Alison Davis 9/9 Morten Friis 9/9 Robert Gillespie 9/9 Penny Hughes 9/9 Yasmin Jetha (1) 5/5 Brendan Nelson 9/9 Baroness Noakes 9/9 Mike Rogers 9/9 Mark Seligman (2) 6/6
Boardroom Inclusion Policy The Board approved a revised Boardroom Inclusion Policy in February 2018 which reflects the most recent industry targets and is aligned to the RBS Inclusion Policy and Principles applying to the wider bank. This Policy provides a framework to ensure that the Board attracts, motivates and retains the best talent and avoids limiting potential caused by bias, prejudice or discrimination. The Boardroom Inclusion Policy currently applies to the most senior RBS boards: The Royal Bank of Scotland Group plc, The Royal Bank of Scotland plc, National Westminster Bank Plc and Ulster Bank Limited. A copy of the Boardroom Inclusion Policy is available on rbs.com>about us.
 the quality and transparency of financial and risk disclosures;  the viability statement in the 2017 report and accounts and the going concern basis of accounting including consideration of evidence of RBS’s capital, liquidity and funding position. The GAC considered the process to support the assessment of principal risks; assessed the company’s prospects in the light of its current position and the identified principal risks; challenged the evidence to support some of the statements made; and reviewed the disclosure on behalf of the Board. The GAC supported the viability statement and the directors’ going concern conclusion. (Refer to the Report of the Directors for further information); and
Complaints Updates were provided to the GAC on customer complaints, including the complaints process, compliance with complaints policy and any emerging themes. The GAC is focused in particular on complaints relating to accounting, internal accounting controls or auditing matters; or submitted directly to the Chief Executive Officer, his executive team, or the Chairman.
Taxation Reviewed RBS’s tax position, including a deep dive in October 2017 which covered: UK corporate tax compliance; tax provisions; the status of RBS’s relationship with HMRC; deferred tax assets; the RBS Tax operating model; and external tax developments including making tax digital.
Considered RBS’s compliance with the requirements of the Sarbanes-Oxley Act of 2002, and was satisfied in this respect. The GAC noted Significant Deficiencies in relation to user-access to the general ledger system and the processes around provisions for restructuring costs and action being taken by management to improve these processes. Remediation of a significant deficiency previously identified in relation to its subsidiary, NatWest Bank, in connection with legal entity recharge accounting was monitored during 2017 and downgraded in December 2017. No Material Weaknesses were reported in RBS Group at the year-end. Provided oversight of the drive to continue to improve SOX processes and received a number of updates in this regard.
 Control environment: Strengthening the control environment has been a key part of the RBS’s transformation programme. Significant progress was made in almost all parts of RBS but not enough to get the overall control environment to where it needs to be.
 Reviewed management’s lessons learned from oversight of the programme in 2016 and actions being taken to address findings.
 The Committee increased its oversight of Resolution Planning to quarterly and requested that this be classified as a major programme within risk reporting. This was reflective of the requirement to ensure adequate legal entity focus; pan-bank engagement; regulatory scrutiny and interdependency of elements with the ring-fencing deliverables. Latterly, the BRC supported management’s decision to transfer OCIR elements to the ring-fencing programme so as to increase the pace of delivery and demonstrate congruence with ring-fencing. The Committee reviewed outputs of a third party benchmarking review of RBS’s progress as compared to peers and will monitor actions being taken in response. A re-baselined plan will be reviewed in early 2018.
 Reviewed a suite of Market Risk Board Risk Appetite Measures.*
 Received regular updates on financial crime risk, with a particular focus on the customer due diligence remediation programme, including scope, accountability, the timescale to return to appetite and impact on bank-wide control environment.
“We remain committed to building a sustainable bank that is great for our stakeholders.”
(after pre-grant assessment set out below) Ross McEwan £1,000,000 £26,250 £350,000 £1,000,000 £1,575,000
Salary To provide a competitive level of fixed cash remuneration and aid recruitment and retention of high performing individuals.
Unvested shares from LTI awards will count on a net of tax basis towards meeting the shareholding requirement once the pre-vest performance assessment has taken place. Directors can dispose of up to 25% of the net of tax shares received until the shareholding requirement is met.
Benefits To provide a level of benefits in line with market practice.
A robust process is used to assess risk performance. A range of measures are considered, specifically the overall Risk Profile; Credit, Regulatory and Conduct Risk; Operational Risk; Enterprise Risk; and Market 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.
Notes: (1) The maximum number of shares is calculated in line with the underlying award structure. Each performance category could vest up to 100% of the maximum number of shares subject to the approved policy and the regulatory cap. For the 2015 award, the number of shares capped at grant was 417,486 for Ross McEwan and 578,128 shares for Ewen Stevenson. In both cases the vesting outcomes fall within the respective cap.
Notes: (1) The number of shares awarded was calculated in line with the regulatory cap that limits variable pay to the level of fixed pay and for this award equated to approximately 287%
Scores from the BSB survey improved on all items compared to 2016, demonstrating an improved culture throughout the business.
Maximum LTI award level 2018 LTI award level after pre-grant assessment
Notes: (1) Fixed share allowance will be payable broadly in arrears, currently in two instalments per year, and the shares will be released in equal tranches over a three year period. (2) Amount shown relates to standard benefit funding. Executive directors are also entitled to benefits in line with the stated policy including assistance with travel and security arrangements and the Chief Executive is entitled to a flight allowance and assistance with tax return preparation as part of his relocation arrangements. The value of benefits will be disclosed each year in the total remuneration table.
The interests shown above include shares held by persons closely associated with the directors. As at 22 February 2018, there were no changes to the directors' interests in shares shown above. John Hughes stepped down from the Board on 1 September 2017 and did not hold any RBS shares at the date of cessation. Sandy Crombie stepped down from the Board with effect from 1 January 2018. Dr Lena Wilson joined the Board with effect from 1 January 2018 and as at 22 February 2018 she did not hold any RBS shares.
Notes: (1) Remuneration earned in 2017 for eight members of the Executive Committee. (2) Disclosure includes prior year long-term incentive awards which vested during 2017. The amounts shown reflect the value of vested awards using the share price on the day the awards vested.
Our remuneration policy for all employees The remuneration policy supports the business strategy and is designed to promote the long-term success of RBS. It aims to reward employees for delivering good performance provided this is achieved in a manner consistent with our values and within acceptable risk parameters. The remuneration policy applies the same principles to all employees, including Material Risk Takers (MRTs), with some minor adjustments to the policy where necessary to comply with local regulatory requirements. The key elements of the policy are set out below.
Corporate Functions Variable remuneration (cash) Deferred remuneration (bonds) Deferred remuneration (shares)
Statement of compliance RBS is committed to high standards of corporate governance, business integrity and professionalism in all its activities.
While not being part of the bank’s system of internal control, the bank’s independent auditors present to the Group Audit Committee reports that include details of any significant internal control deficiencies they have identified. Further, the system of internal controls is also subject to regulatory oversight in the UK and overseas. Additional details of regulatory oversight are given in the Capital & Risk Management section.
Greenhouse gas emissions Disclosures relating to greenhouse gas emissions are included in the Strategic Report. These form part of the metrics and targets of the RBS climate change strategy. This is reported in accordance with the recommendations from the Financial Stability Boards Task Force on Climate-related Financial Disclosures (TCFD) on page 403. The RBS climate change strategy is driven by a range of external and internal drivers with oversight of climate related risks and opportunities through the Sustainable Banking Committee.
Net interest margin of the banking business (2,5,6) 2.13 2.18 2.12
Restructuring costs were £2,106 million for 2016, compared with £2,931 million in 2015, and included a £750 million provision in respect of the 17 February 2017 update on RBS’s remaining State Aid obligation regarding the business previously described as Williams & Glyn. In addition, £706 million of the remaining restructuring costs relate to the business previously described as Williams & Glyn, including £146 million of termination costs associated with the decision to discontinue the programme to create a cloned banking platform.
REIL reduced by £1,406 million during 2017 to £8,904 million principally reflecting reductions in NatWest Markets, as legacy portfolios are run-down, and reductions across UK PBB and Ulster Bank RoI. REIL represented 2.7% of gross customer loans, compared with 3.1% in 2016.
2016 The major factors contributing to the net cash outflow from operating activities of £3,650 million were the elimination of foreign exchange differences £6,518 million, contribution to defined benefit schemes of £4,786 million, loans and advances written-off net of recoveries of £3,586 million, operating loss before tax of £4,082 million and other provisions utilised of £2,699 million. These were partially offset by inflows from an increase of £8,413 million in operating assets and liabilities, other provisions charged net of releases of £7,216 million, interest on subordinated liabilities of £845 million and depreciation and amortisation of £778 million.
2015 The major factors contributing to the net cash inflow from operating activities of £918 million were the increase of £8,589 million in operating assets and liabilities, other provisions charged net of releases of £4,566 million, write down of goodwill and other intangible assets £1,332 million and depreciation and amortisation of £1,180 million. These were partially offset by loans and advances written-off net of recoveries of £8,789 million, other provisions utilised of £2,202 million, elimination of foreign exchange differences of £1,501 million, profit on sale of subsidiaries and associates of £1,135 million, cash contribution to defined benefit pension schemes of £1,060 million, decrease in income accruals of £1,075 million and the operating loss before tax of £937 million.
Notes: (1) The business previously described as Williams & Glyn was integrated in to the reportable operating segment UK PBB in Q4 2017 and prior year comparatives re-presented.
Commercial real estate - investment — — (0.2) — — (0.1)
The bank has proactively helped to protect customers from fraud and scams. Community Protection Advisers have run over 70 sessions across the country helping people understand how they can keep themselves safe online and outlining how to identify scams.
A litigation and conduct provision of €192 million related to customer remediation and project costs associated with legacy business issues.
Private Banking continues to focus on delivering the best customer experience, with pro-active customer contact levels up 5% in the year. Our proposition has been extended to meet wider customer needs with the launch of new products, including the offset and 10-year tracker mortgages. The customer-centric strategy is improving returns and enhancing service levels, and we were awarded Best Private Bank in the UK at the Global Private Banking Awards 2017. Coutts was also awarded the Best Benefits or Loyalty Programme of the year for our Silk Card proposition and Best Debit Card Programme of the Year for our multi-currency debit card at the Card and Payments Awards 2018.
Notes: (1) Excluding own credit adjustments and strategic disposals. (2) Excluding restructuring costs and litigation and conduct costs. (3) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity (based on 15% of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 28% tax rate.
 Top 3 for GBP Denominated DCM in EMEA (Source: Dealogic EMEA Review, Full Year 2017)
Introduction 150 Risk culture 151 Risk governance 152 Risk appetite 154 Risk control frameworks and limits 155 Risk identification, measurement, treatment and mitigation 156 Risk and conduct assurance 156 Stress testing 157 Capital, liquidity and funding risk Definition and sources 161 Key developments 161 Capital liquidity and funding management 162 Minimum requirements 164 Measurements 165 Credit risk: management basis
Given the evolving external landscape, including the structural reform required by the UK’s ring-fencing requirements, in 2017 there was an emphasis on enhancing both the risk culture and risk appetite elements of the framework – as well as the interconnectivity between framework components.
A risk culture measurement and reporting framework has been developed, enabling RBS to benchmark both internally and externally. The purpose of the framework is to assess progress in embedding RBS’s target risk culture where risk is simply part of the way we work and think. In 2017, external validation indicated that good progress had been made against that objective demonstrating that the continued focus and actions are moving RBS towards its target risk culture.
Risk governance Committee structure The diagram illustrates the risk committee structure in 2017 and the main purposes of each committee.
Independent challenge on the adequacy and effectiveness of risk and conduct management practices and behaviour, model risk management and governance
Head of Regulatory Developments and Head of Regulator & Control Function
 Ensuring appropriate controls are in place to mitigate risk, balancing control, customer service and competitive advantage.
 Engaging with management to provide perspectives, insights and challenge in order to influence the building of a sustainable bank.
Risk identification and measurement Risk identification and measurement within the risk management process comprise:  Regular assessment of the overall risk profile, incorporating market developments and trends, as well as external and internal factors.
Assurance is carried out on Anti-Money Laundering, Sanctions, and Anti-Bribery & Corruption processes and controls. This helps inform whether or not the financial crime control environment is adequate and effective and whether financial crime risk is appropriately identified, managed and mitigated. Assurance of conduct policies is predominantly focused on the Risk, Conduct & Restructuring-owned conduct policies. Targeted work is also carried out to assist RBS in meeting its promises to customers as well as its regulatory requirements.
Model Risk Management reviews may test and challenge the logic and conceptual soundness of the methodology, or the assumptions underlying a model. Reviews may also test whether or not all appropriate risks have been sufficiently captured as well as checking the accuracy and robustness of calculations. Based on the review and findings from Model Risk Management, RBS’s model or risk committees consider whether a model can be approved for use. Models used for regulatory reporting may additionally require regulatory approval before implementation.
 Based on a forecast of future business performance under adverse economic and market conditions over the forecast period. A range of scenarios of different severity may be examined.
Non-traded market risk Non-traded exposures are reported to the PRA on a quarterly basis as part of the Stress Testing Data Framework. The return provides the regulator with an overview of RBS’s banking book interest rate exposure, providing detailed product information analysed by interest rate driver and other characteristics – including accounting classification, currency and, counterparty type.
 Capital plans are produced for the Group, its key operating entities and its businesses over a five year planning horizon under expected and stress conditions. Stressed capital plans are produced to support internal stress testing through the ICAAP or for regulatory purposes.
Credit risk - non-counterparty 33.7 16.9 65.4 8.1 4.4 16.1 0.1 144.7 - counterparty — 0.1 — — — 15.3 — 15.4 Market risk — 0.1 — — — 16.2 0.7 17.0 Operational risk 9.3 0.9 6.4 1.0 0.7 5.3 0.2 23.8 Total RWAs 43.0 18.0 71.8 9.1 5.1 52.9 1.0 200.9 * Re-presented to reflect segment reorganisation.
IRB model changes relating to counterparty credit risk (in line with EBA Pillar 3 Guidelines).
 Total wholesale funding increased by £2.8 billion in the year to £82.8 billion, driven by increased TFS participation of £14.0 billion in 2017, as well as issuance activity, offset by calls and maturities of subordinated debt and debt securities in issue. Short-term wholesale funding, excluding derivative collateral, increased by £3.9 billion during 2017 to £17.8 billion driven largely by issuance activity and new bank deposits.
For Wholesale the four formal frameworks used, and their basis for classification, are detailed in the following table.
Sector Exposure (1) Risk – based on economic capital and other qualitative factors
Exposure – net/gross dependent on type of risk and limit definition.
Measured using scaled credit limit utilisation, which takes into account mark-to-market movements, any collateral held and expected market movements over a specified horizon.(3)
Commercial real estate valuations – RBS has a panel of chartered surveying firms that cover the spectrum of geography and property sectors in which RBS takes collateral. Suitable valuers for particular assets are contracted through a single service agreement to ensure consistency of quality and advice. Valuations are commissioned when an asset is taken as security; a material increase in a facility is requested; or a default event is anticipated or has occurred. In the UK, an independent third-party market indexation is applied to update external valuations once they are more than a year old.
Residential mortgages RBS takes collateral in the form of residential property to mitigate the credit risk arising from mortgages. RBS values residential property during the loan underwriting process by either appraising properties individually or valuing them collectively using statistically valid models. RBS updates residential property values quarterly using the relevant residential property index namely: Region Index used
Credit relationships are reviewed, and credit grades (PD and LGD) re-approved, annually. The review process assesses borrower performance, including reconfirmation or adjustment of risk parameter estimates; the adequacy of security; compliance with terms and conditions; and refinancing risk.
Sensitivity of impairments to assumptions Key assumptions relating to impairment levels are economic conditions, the interest rate environment, the ease and timing of enforcing loan agreements in varying legal jurisdictions and the level of customer co-operation.
In addition, for secured lending, key assumptions relate to the valuation of the security and collateral held, as well as the timing and cost of asset disposals based on underlying market depth and liquidity. Assessments are made by relationship managers on a case-by-case basis for individually-assessed provisions and are validated by credit teams. Impairments less than £1 million are approved by credit officers under their delegated authority. For individual impairments greater than £1 million, oversight is provided by the RBS Provisions Committee.
 The growth in the portfolio is mainly driven by an increase in UK exposures, which is in line with strategy and within risk appetite.
 The overall credit risk profile of the Personal portfolio, and its performance against credit risk appetite, remained stable during 2017.
 New mortgage lending was broadly inline with the levels seen in 2016. The portfolio was closely monitored against an agreed set of risk appetite parameters, which included loan-to-value, loan-to-income, buy-to-let, new-build concentrations and credit quality. This ensured that the portfolio remained appropriate for market conditions. Underwriting standards were maintained during the period.
The sector is reviewed regularly at senior executive committees. Reviews include portfolio credit quality, capital consumption and control frameworks.
 As a result of wider ongoing economic uncertainty, tightened underwriting standards were maintained, with further tightening of appetite in certain asset classes and subsectors throughout the year.
Commercial Banking UK investment portfolio by UK region on a current exposure basis (unaudited)
 Commercial Banking: customer lending decreased by £2.7 billion as a result of active capital management offset by growth in targeted segments. The increase in impairment loss was largely driven by a small number of single name impairments, principally in the second half of 2017.
Credit metrics REIL Provisions Provisions Impairment Gross as a % of as a % as a % of losses/ Amounts loans REIL Provisions gross loans of REIL gross loans (releases) written-off
Repayments and disposals — — — — — (5) — (5) —
Other financial Total Other financial Total AFS Banks institutions (2) Corporate HFT Banks institutions (2) Corporate AFS/DFV Total reserves £m £m £m £m £m £m £m £m £m £m
Credit risk: balance sheet analysis continued Derivatives Summary and net uncollateralised exposures The table below analyses derivatives by type of contract. The master netting agreements and collateral shown below do not result in a net presentation on the balance sheet under IFRS.
The table below analyses CVA relating to counterparties by rating and sector.
reduction.  The product and deal specific reserves increased primarily on a limited number of uncollateralised derivatives after the pricing impact of a significant novation in the second half of 2017 was incorporated into transactions of a similar nature.
Non-traded market risk continued Foreign exchange risk The only material non-traded open currency positions are the structural foreign exchange exposures arising from investments in foreign subsidiaries, branches and associates and their related currency funding. These exposures are assessed and managed by RBS Treasury to predefined risk appetite levels under delegated authority from the ALCo. Treasury seeks to limit the potential volatility impact on RBS’s Common Equity Tier 1 (CET1) ratio from exchange rate movements by maintaining a structural open currency position. Gains or losses arising from the retranslation of net investments in overseas operations are recognised in equity reserves and reduce the sensitivity of capital ratios to foreign exchange rate movements primarily arising from the retranslation of non-sterling-denominated RWAs. Sensitivity is minimised where, for a given currency, the ratio of the structural open position to RWAs equals the CET1 ratio.
The sensitivity of this ratio to exchange rates is monitored monthly and reported to the ALCo at least quarterly. Foreign exchange exposures arising from customer transactions are sold down by businesses on a regular basis in line with RBS policy.
Accounting volatility risk Accounting volatility can be mitigated through hedge accounting. The profit and loss impact of the derivatives can be mitigated by marking the exposure to market. However, volatility will remain in cases where accounting rules mean that hedge accounting is not an option. Accounting volatility is reported to the ALCo monthly and capitalised as part of the Internal Capital Adequacy Assessment Process.
RBS has the benefit of a significant pool of stable, non and low interest-bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed-rate assets or by the use of interest rate swaps, in order to provide a consistent and predictable revenue stream.
Note: (1) In the 25 and 100 basis point downward shifts in yield curves, interest rates are floored at zero per cent, or at current negative rates.
Change in net interest earnings − 25 basis point downward shift in yield curves
 Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. For example, a 5% strengthening or weakening in foreign currencies against sterling would respectively result in a gain or loss of £0.4 billion in equity (2016 – a 5% strengthening or weakening in foreign currencies against sterling would respectively have resulted in a gain or loss of £0.3 billion).
The total non-traded market risk capital requirement is determined by adding the different charges for each sub risk type. The ICAAP methodology captures at least ten years of historical volatility and is produced to a 99% confidence level. Methodologies are reviewed by Model Risk Management and results are approved by the Capital Management and Stress Testing Committee.
For general information on the independent model validation carried out by Model Risk Management, which applies also to market risk models (including VaR models), refer to page 156. Additional details relating to pricing and market risk models are presented below.
Sources of pension risk RBS has exposure to pension risk through its defined benefit schemes worldwide. The five largest schemes, which represent around 98% of RBS’s pension liabilities are: the Main Section of The Royal Bank of Scotland Group Pension Fund (the Main scheme), the AA Section of The Royal Bank of Scotland Group Pension Fund, the Ulster Bank Pension Scheme, the Ulster Bank Pension Scheme (Republic of Ireland), and the Royal Bank of Scotland International Pension Trust. The Main scheme is the principal source of pension risk. Further detail on RBS’s pension obligations can be found in Note 4 on the consolidated accounts.
Risk controls A pension risk management framework is in place to provide formal controls for pension risk reporting, modelling, governance and stress testing. A pension risk policy – which sits within the RBS policy framework – is also in place and is subject to associated framework controls.
The Conduct Performance Assessment was run in Q1 and Q3 2017, reporting on risk exposures and the operating effectiveness of controls across the businesses. During Q4 2017, the Conduct Performance Assessment was discontinued, in advance of the roll-out of a new approach in early 2018, providing a real-time quantitative view, supported by qualitative assessment.
Sources of operational risk Operational risk may arise from a failure to manage operations, systems, transactions and assets appropriately. This can take the form of human error, an inability to deliver change adequately or on time, the non-availability of technology services, or the loss of customer data. Fraud and theft are sources of operational risk, as is the impact of natural and man-made disasters. It can also arise from a failure to account for changes in law or regulations or to take appropriate measures to protect assets.
Risk controls The Control Environment Certification (CEC) process is a half yearly self-assessment by the CEOs of RBS’s customer-facing franchises and business units, as well as the heads of the Group’s support and control functions. It gives an assessment on the adequacy and effectiveness of the internal control environment in a consistent and comparable manner, highlighting areas where targeted effort is needed to meet the standards required in order to create a safer and more secure bank for customers. It covers material risks and the key controls that underpin them, including financial, operational and compliance controls, as well as supporting risk management frameworks.
Event and loss data management The operational risk event and loss data management process ensures RBS captures and records operational risk loss events that meet defined criteria.
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the Group and Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
Reporting threshold An amount below which identified misstatements are considered to be clearly trivial.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.
 We tested the design and operating effectiveness of the Group’s key controls by walking through key processes and testing controls.
The charge to profit or loss for pension costs (recorded in operating expenses) comprises:  the current service cost  interest, computed at the rate used to discount scheme liabilities, on the net defined benefit liability or asset  past service cost resulting from a scheme amendment or curtailment  gains or losses on settlement.
7. Property, plant and equipment Items of property, plant and equipment (except investment property - see Accounting policy 9) are stated at cost less accumulated depreciation and impairment losses. Where an item of property, plant and equipment comprises major components having different useful lives, these are accounted for separately.
(ii) Provisions for liabilities As set out in Note 20 on the accounts, at 31 December 2017 the Group recognised provisions for liabilities in respect of Payment Protection Insurance, £1,053 million (2016 - £1,253 million), other customer redress, £870 million (2016 - £1,105 million), residential mortgage backed securities, £3,243 million (2016 - £6,752 million), litigation and other regulatory proceedings, £641 million (2016 - £1,918 million) and property and other £1,950 million (2016 - £1,808 million).
The Group is currently working on the implementation of the new requirements and currently anticipates that the property lease portfolio will have the most significant implementation impact as property represents 87% of the operating lease commitments per Note 31. A preliminary estimate (excluding the impacts of tax) of the opening balance sheet adjustment as a result of the property portfolio using a modified retrospective approach to transition would be to create a Right of Use asset of c£1.4bn, also impacting RWAs and an estimated decrease (excluding the impacts of tax) in retaining earnings of some c£0.3bn. As permitted by the standard, the Group intends to apply IFRS 16 on a retrospective basis but to take advantage of the option not to restate. The Group will continue to work on the implementation throughout 2018 and therefore this estimate of the impact is subject to change. Changes could arise from the addition of non property leases, further development of calibration of models and processes, methodology and approach refinement, and sensitivity analysis performed on key assumptions such as discount factors and lease term.
Sharesave UK, Republic of Ireland, Channel Islands, Gibraltar and Isle of Man
Long-term incentives (2) Senior employees Awards of conditional shares or share options
The market value of awards vested/exercised in 2017 was £22 million (2016 - £40 million; 2015 - £55 million). There are vested options of 2 million shares exercisable up to 2020 (2016 - 4 million; 2015 - 5 million).
Variable compensation awards The following tables analyse the Group variable compensation awards for 2017.
Equity and bond put options 3 3 1 2 — 2
Return on plan assets above recognised interest income 8,562 — — (8,562) 9,254 — — (9,254) Experience gains and losses — (658) — (658) — (794) — (794) Effect of changes in actuarial financial assumptions — 8,803 — 8,803 — 9,565 — 9,565 Effect of changes in actuarial demographic assumptions — (402) — (402) — (542) — (542) Asset ceiling/minimum funding adjustments — — 1,876 1,876 — — 2,074 2,074
Return on plan assets above recognised interest income 1,580 — — (1,580) 1,728 — — (1,728) Experience gains and losses — 107 — 107 — 93 — 93 Effect of changes in actuarial financial assumptions — 678 — 678 — 737 — 737 Effect of changes in actuarial demographic assumptions — (794) — (794) — (826) — (826) Asset ceiling/minimum funding adjustments — — 1,608 1,608 — — 1,634 1,634
Contributions by plan participants and other scheme members 4 4 — — 10 10 — — Liabilities extinguished upon settlement — — — — (744) (755) — (11)
Rate of increase in pensions in payment 2.9 3.0 (RPI floor 0%, cap 5%): Limited price indexation (LPI) (0,5) swap yield curve
8 Financial instruments - classification continued The tables below present information on financial assets and financial liabilities that are offset on the balance sheet under IFRS or subject to enforceable master netting agreement together with financial collateral received or given.
 Credit spreads - where available, these are derived from prices of credit default swaps or other credit based instruments, such as debt securities. For others, credit spreads are obtained from pricing services. For counterparty credit spreads, adjustments are made to market prices (or parameters) when the creditworthiness of the counterparty differs from that of the assumed counterparty in the market price (or parameters).
 Equity and equity index prices - quoted prices are generally readily available for equity shares listed on the world's major stock exchanges and for major indices on such shares.
 The cumulative OCA decrease during the year was mainly due to the tightening of RBS issuance spreads. The OCA on senior debt is determined by reference to secondary debt issuance spreads, which tightened by 52 basis points at the five year level to 10 basis points at 31 December 2017 (31 December 2016 – 62 basis points).
(2) Credit spreads and discount margins: credit spreads and margins express the return required over a benchmark rate or index to compensate for the credit risk associated with a cash instrument. A higher credit spread would indicate that the underlying instrument has more credit risk associated with it. Consequently, investors require a higher yield to compensate for the higher risk. The discount rate comprises credit spread or margin plus the benchmark rate; it is used to value future cash flows.
Notes in circulation (1) 2.0 * Re-presented to reflect segment reorganisation.
Held-for-trading assets of £243.9 billion (2016 - £328.9 billion) and liabilities of £232.9 billion (2016 - £317.0 billion) have been excluded from the following tables.
Impairment losses/(releases) charged to the income statement 2017 2016 2015 £m £m £m
Loans and advances to customers (1) 7,423 3,424 3,999 8,865 4,055 4,810
The initial and ongoing effectiveness of fair value hedge relationships is assessed on a cumulative basis by comparing movements in the fair value of the hedged item attributable to the hedged risk with changes in the fair value of the hedging interest rate swap over a time period management feels is appropriate.
12 Derivatives continued 2017 2016 Notional Notional amount Assets Liabilities amount Assets Liabilities £bn £m £m £bn £m £m
15 Intangible assets continued The Group's goodwill acquired in business combinations is reviewed annually at 31 December for impairment. Impairment testing involves the comparison of the carrying value of each cash-generating unit (CGU) with its recoverable amount. The carrying values of the segments reflect the equity allocations made by management which are consistent with the Group’s capital targets. Recoverable amount is the higher of fair value and value in use. Value in use is the present value of expected future cash flows from the CGU. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants.
The annual review at 31 December 2017 indicated no impairment to goodwill.
Profit from Citizens discontinued operation, net of tax — — 1,525
18 Discontinued operations and assets and liabilities of disposal groups continued
Ulster Bank Ireland DAC – A deferred tax asset of £259 million has been recognised in respect of losses of £2,071 million of total tax losses of £8,596 million carried forward at 31 December 2017. The losses arose principally as a result of significant impairment charges between 2008 and 2013 during challenging economic conditions in the Republic of Ireland; subsequent movements reflect £: € exchange differences. Ulster Bank Ireland DAC returned to profitability during 2014 and expects the deferred tax asset to be substantially consumed by future taxable profits by the end of 2024.
Unrecognised deferred tax Deferred tax assets of £6,356 million (2016 - £7,940 million; 2015 - £6,349 million) have not been recognised in respect of tax losses and other temporary differences carried forward of £30,049 million (2016 - £33,376 million; 2015 - £27,483 million) in jurisdictions where doubt exists over the availability of future taxable profits. Of these losses and other temporary differences, £4,335 million expire within five years and £7,208 million thereafter. The balance of tax losses and other temporary differences carried forward has no expiry date.
Currently 2017 2018 2019-2021 2022-2026 Thereafter Perpetual Total 2016 - call date £m £m £m £m £m £m £m £m
The Royal Bank of Scotland Group plc £200 million series 1 non cumulative convertible £0.01 preference shares 7.387% (partial redemption) Ineligible 15 —
(4) Subordinated notes issued to limited partnerships that have in turn issued partnership preferred securities to RBS Capital Trust D that issued trust preferred securities to investors.
Held-for-trading Loans and advances to customers 380 95 475 588 40 628
Litigation, investigations and reviews continued For a discussion of certain risks associated with the Group’s litigation, investigations and reviews, see the Risk Factor relating to legal, regulatory and governmental actions and investigations set out on page 372.
The case of London Bridge Holdings Ltd and others v RBS plc remains stayed pending the outcome of the PAG appeal. The sum claimed in that case is £446.7 million.
RBS is co-operating with investigations and responding to inquiries from other governmental and regulatory (including competition) authorities on similar issues relating to failings in its FX business within its NatWest Markets segment. The timing and amount of financial penalties with respect to any further settlements and related litigation risks and collateral consequences remain uncertain and may well be material.
RBS provisions in relation to the above redress exercises total £1.47 billion for these matters, virtually all of which had been utilised at 31 December 2017.
As required by the Programme, Coutts & Co Ltd. subsequently conducted a review of its US related accounts and presented the results of the review to the DOJ. In December 2015, Coutts & Co Ltd. entered into a non-prosecution agreement (the NPA) in which Coutts & Co Ltd. paid a US$78.5 million penalty and acknowledged responsibility for certain conduct set forth in a statement of facts accompanying the agreement. Under the NPA, which has a term of four years, Coutts & Co Ltd. is required, among other things, to provide certain information, cooperate with DOJ’s investigations, and commit no U.S. federal offences. If Coutts & Co Ltd. abides by the NPA, the DOJ will not prosecute it for certain tax-related and monetary transaction offences in connection with US related accounts.
UK Personal & Business Banking 6,465 12 6,477 6,115 12 6,127 5,989 44 6,033 Ulster Bank RoI 609 (5) 604 584 (8) 576 569 (19) 550
Other related parties (a) In their roles as providers of finance, RBS companies provide development and other types of capital support to businesses. These investments are made in the normal course of business and on arm's length terms. In some instances, the investment may extend to ownership or control over 20% or more of the voting rights of the investee company. However, these investments are not considered to give rise to transactions of a materiality requiring disclosure under IAS 24.
41 Post balance sheet events There have been no other significant events between 31 December 2017 and the date of approval of these accounts which would require a change to or additional disclosure in the accounts.
Gain on redemption of investment in Group undertakings — (298) —
Cash and cash equivalents at 31 December 13 245 1,195 3,006
The principle features of IFRS 9 are disclosed in the RBS accounting policies. The impact on the company is as follows: Transition The classification and measurement and impairment requirements will be applied retrospectively by adjusting the opening balance sheet at the date of initial application, with no requirement to restate comparative periods.
Loans and advances due from subsidiaries 19,340 5,643 24,983 17,386 11,578 28,964
Decrease/(increase) in loans and advances to banks and customers (1) 3,031 (8,359) 4,274 Increase in securities — — (2) (Increase)/decrease in other assets (64) (65) 192 Increase in derivative assets (1) 210 (156) (38)
Gatehouse Way Developments Ltd INV PC 1 Princes Street, London, EC2R 8PB, England
R.B. Leasing Company Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBS Investment Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
RBS Property Developments Ltd INV FC 36 St Andrew Square, Edinburgh, EH2 2YB, Scotland
Royal Bank Investments Ltd BF FC 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Royal Bank Invoice Finance Ltd BF FC 250 Bishopsgate, London, EC2M 4AA, England
Finland Koy Päiväläisentie 1-6 BF FC c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
Sweden Brödmagasinet KB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Sweden Nordisk Renting Kapital AB BF FC c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Coneworx Ltd BF IA DE 40 4 Biggar Road Industrial Estate, Cleland, Motherwell, ML1 5PB, Scotland
Isobel Finance HoldCo No2 Ltd BF FC FC 0 35 Great St Helen's, London, EC3A 6AP, England
RBS Covered Bonds (LM) Ltd BF IA FC 20 35 Great St Helen's, London, EC3A 6AP, England
FC FC 98 Level 25F, Azia Center, 1233 Lu Jia Zui Ring Road, Shanghai, 200120
RoI Qulpic Ltd FC FC 67 70 Sir John Rogerson's Quay, Dublin 2
UK Coutts Group FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK Dixon Vehicle Sales Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK RBS Retirement Savings Trustee Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
UK Williams & Glyn's Bank Ltd FC FC 100 1 Princes Street, London, EC2R 8PB, England
Loans and advances to customers - UK 275,895 9,807 3.55 267,141 10,098 3.78
Debt securities in issue - UK 25,079 545 2.17 20,065 551 2.75
RBS entered into a State Aid Commitment Deed with HM Treasury at the time of the initial EC decision and, following the EC’S approval of amendments to the restructuring plan in April 2014, RBS entered into a revised State Aid Commitment Deed with HM Treasury. In September 2017, the revised State Aid Commitment Deed was amended by a Deed of Variation (as so amended, the “Revised State Aid Commitment Deed”) following the EC’s approval of an alternative remedies package (the “Alternative Remedies Package”). The Alternative Remedies Package will form the basis of a new agreement with HM Treasury to replace RBS’s final outstanding divestment commitment under its State Aid obligations (to divest the business previously known as Williams & Glyn).
By the end of 2018, the Group intends to have placed the majority of its UK banking business in ring-fenced banking entities organised as a sub-group (‘RFB’) under an intermediate holding company named NatWest Holdings Limited, which will ultimately be a direct subsidiary of RBSG and will own National Westminster Bank Plc, Adam & Company PLC (to be renamed The Royal Bank of Scotland plc) and Ulster Bank Ireland DAC (Ulster Bank). As a result, National Westminster Bank Plc will no longer be a subsidiary of the current The Royal Bank of Scotland plc (‘RBS plc’). The current RBS plc and the RBS International businesses will sit outside the RFB.
The Group is currently implementing a number of complex change initiatives, including its transformation programme, the UK ring-fencing regime and the restructuring of the NatWest Markets franchise. A failure to safely and timely implement one or several of these initiatives could lead to disruptions of the Group’s IT infrastructure or loss or publication of confidential customer data and in turn could cause long-term damage to the Group’s reputation, brands, results of operations and financial position.
The longer term effects of Brexit on the Group’s operating environment are difficult to predict, and subject to wider global macro-economic trends and events, but may significantly impact the Group and its customers and counterparties who are themselves dependent on trading with the EU or personnel from the EU and may result in periodic financial volatility and slower economic growth, in the UK in particular, but also in Republic of Ireland, Europe and potentially the global economy. Until the bilateral and multilateral trading and economic relationships between the UK, the EU, members of the World Trade Organisation and other key trading partners are agreed, implemented and settled, the longer-term effects of this uncertainty are likely to endure and their severity increase in the absence of such agreements.
The last triennial valuation of the Main scheme, had an effective date of 31 December 2015. This valuation was concluded with the acceleration of the nominal value of all committed contributions in respect of past service (£4.2 billion), which was paid in the first quarter of 2016.
The next triennial period valuation will take place in the fourth quarter of 2018 and the Main scheme pension trustee agreed that it would not seek a new valuation prior to that date, except where a material change arises. The 2018 triennial valuation is expected to result in a significant increase in the regular annual contributions in respect of the ongoing accrual of benefits. Notwithstanding the 2016 accelerated payment and any additional contributions that may be required beforehand as a result of a material change, the Group expects to have to agree to additional contributions, over and above the existing committed past service contributions, as a result of the next triennial valuation. Under current legislation, such agreement would need to be reached no later than the first quarter of 2020. The cost of such additional contributions could be material and any additional contributions that are committed to the Main scheme following new actuarial valuations would trigger the recognition of a significant additional liability on the Group’s balance sheet and/or an increase in any pension surplus derecognised, which in turn could have a material adverse effect on the Group’s results of operations, financial position and prospects.
RBSG and the Group entities’ ability to meet their obligations, including funding commitments, depends on their ability to access sources of liquidity and funding. If the Group or any Group entity is unable to raise funds through deposits and/or in the capital markets, its liquidity position could be adversely affected which may require unencumbered assets to be liquidated or it may result in higher funding costs which may impact the Group’s margins and profitability. Liquidity risk is the risk that a bank will be unable to meet its obligations, including funding commitments, as they fall due. This risk is inherent in banking operations and can be heightened by a number of factors, including an over-reliance on a particular source of wholesale funding (including, for example, short-term and overnight funding), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters.
The distributable reserves of RBSG also depend on the receipt of income from subsidiaries, principally as dividends. The ability of subsidiaries to pay dividends is subject to their performance and applicable local laws and other restrictions, including their respective regulatory requirements and distributable reserves. Any of these factors, including restructuring costs, impairment charges and a reduction in the carrying value of RBSG subsidiaries or a shortage of dividends from them could limit RBSG’s ability to maintain sufficient distributable reserves to be able to pay coupons on certain capital instruments and dividends to its ordinary shareholders.
As a result of extensive reforms being implemented relating to the resolution of financial institutions within the UK, the EU and globally, material additional requirements will arise to ensure that financial institutions maintain sufficient lossabsorbing capacity. Such changes to the funding and regulatory capital framework may require the Group to meet higher capital levels than the Group anticipated within its strategic plans and affect the Group’s funding costs. In addition to the prudential requirements applicable under CRD IV, the BRRD introduces, among other things, a requirement for banks to maintain at all times a sufficient aggregate amount of own funds and ‘eligible liabilities’ (that is, liabilities that can absorb loss and assist in recapitalising a firm in accordance with a predetermined resolution strategy), known as the minimum requirements for MREL, designed to ensure that the resolution of a financial institution may be carried out, without public funds being exposed to the risk of loss and in a way which ensures the continuity of critical economic functions, maintains financial stability and protects depositors.
Developments relating to current economic conditions, including those discussed above, could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects. Any such developments may also adversely impact the financial position of the Group’s pension schemes, which may result in the Group being required to make additional contributions. See ‘The Group is subject to pension risks and will be required to make additional contributions as a result of the restructuring of its pension schemes in relation to the implementation of the UK ring-fencing regime. In addition, the Group expects to make additional contributions to cover pension funding deficits if there are degraded economic conditions of if there is any devaluation in the asset portfolio held by the pension trustee.’
Changes in laws, rules or regulations, or in their interpretation or enforcement, or the implementation of new laws, rules or regulations, including contradictory laws, rules or regulations by key regulators in different jurisdictions, or failure by the Group to comply with such laws, rules and regulations, may have a material adverse effect on the Group’s business, financial condition and results of operations. In addition, uncertainty and lack of international regulatory coordination as enhanced supervisory standards are developed and implemented may adversely affect the Group’s ability to engage in effective business, capital and risk management planning.
The Group is exposed to conduct risk which may adversely impact the Group or its employees and may result in conduct having a detrimental impact on the Group’s customers or counterparties. In recent years, the Group has sought to refocus its culture on serving the needs of its customers and continues to redesign many of its systems and processes to promote this focus and strategy. However, the Group is exposed to various forms of conduct risk in its operations. These include business and strategic planning that does not adequately reflect the Group’s customers’ needs, ineffective management and monitoring of products and their distribution, actions taken that may not conform to the Group’s customer-centric focus, outsourcing of customer service and product delivery via third parties that do not have appropriate levels of control, oversight and culture, the possibility of alleged mis-selling of financial products or the mishandling of complaints related to the sale of such product, or poor governance of incentives and rewards. Some of these risks have materialised in the past and ineffective management and oversight of conduct issues may result in customers being poorly or unfairly treated and may in the future lead to further remediation and regulatory intervention/enforcement.
The Group has implemented a number of policies and allocated new resources in order to help mitigate against these risks. The Group has also prioritised initiatives to reinforce good conduct in its engagement with the markets in which it operates, together with the development of preventative and detective controls in order to positively influence behaviour.
The Group operates in markets that are subject to intense scrutiny by the competition authorities and its business and results of operations could be materially affected by competition decisions and other regulatory interventions. The competitive landscape for banks and other financial institutions in the UK, the rest of Europe and the US is changing rapidly. Recent regulatory and legal changes have and may continue to result in new market participants and changed competitive dynamics in certain key areas, such as in retail and SME banking in the UK where the introduction of new entrants is being actively encouraged by the UK Government. The competitive landscape in the UK is also likely to be affected by the UK Government’s implementation of the UK ring-fencing regime and other customer protection measures introduced by the Banking Reform Act 2013. The implementation of these reforms may result in the consolidation of newly separated businesses or assets of certain financial institutions with those of other parties to realise new synergies or protect their competitive position and is likely to increase competitive pressures on the Group.
The Task Force published its final recommendations in June 2017. RBS welcomed the release of these recommendations and is committed to implementing them. RBS has reported on carbon emissions and climate-related matters, and submitted information to the CDP sustainability index, since 2003.
 downloadable forms - including stock transfer and change of address forms.
Company UK United Kingdom UKFI UK Financial Investments Limited US/USA United States of America VaR Value-at-risk
Common Equity Tier 1 capital (CET1) - the highest quality form of regulatory capital under Basel III comprising common shares issued and related share premium, retained earnings and other reserves excluding reserves which are restricted or not immediately available, less specified regulatory adjustments.
Investment grade - generally represents a risk profile similar to a rating of BBB-/Baa3 or better, as defined by independent rating agencies.
Business risk 228 Capital, liquidity and funding risk 161 Conduct risk 223 Credit risk: management basis 177 Credit risk: balance sheet analysis 192 Market risk 206 Operational risk 225 Pension risk 220 Reputational risk 228
Chairman’s statement 6 Corporate governance 57 Letter from the Chairman 57 Our Board 51