We were able to remove one of the main barriers to paying a dividend by paying the final £1.2 billion to retire the Dividend Access Share.
Stakeholder Engagement We welcomed the opportunity to participate in the Department for Business, Energy and Industrial Strategy’s (BEIS) Green Paper consultation on Corporate Governance Reform. The chapter on strengthening the employee, customer and wider stakeholder voice was of particular interest. This is a cause that we care about. As noted in our response to BEIS, we are looking at ways of improving and building upon our existing arrangements in order to promote the stakeholder voice at board level. We are supportive of the proposal to increase wide stakeholder engagement, including via a panel arrangement. As an organisation, we have maintained active engagement with stakeholders over several years through our Sustainable Banking Committee which, since 2011, has regularly met with external stakeholders and asks them to challenge the most senior decision makers in RBS. We see increased formal engagement as the natural evolution of that committee’s work.
Looking ahead The progress of the last three years positions us well to achieve our vision for the future. We have the right strategy, and it is starting to deliver results. Now, we need to go further on cost reduction and faster on digital transformation.
PBB, CPB and NatWest Markets delivered increased profits and strong lending growth
� Central items adjusted operating profit of £455 million compared with £272 million in 2015 and included a £349 million FX gain, principally associated with the weakening of sterling against the US dollar, a £227 million VAT recovery, a £97 million foreign exchange reserve recycling gain and other gains, partially offset by a £510 million loss in respect of IFRS volatility(4) due to reductions in long term interest rates (2015 – £15 million profit).
During 2016, RBS narrowed the range of uncertainty around its capital position by addressing a number of legacy issues, and continued to strengthen its capital base.
� We continue to work towards our goal of having at least 30% senior women in our top three leadership layers across each business by 2020 and to be fully gender balanced (50/50) by 2030. As at 31 December 2016, in aggregate terms 34% of our top three leadership layers were female.
� We expect that income in 2017 will continue to be supported by balance sheet growth across PBB and CPB. Within UK PBB, we anticipate that income will increase in 2017 compared with 2016, as we have already absorbed significant margin pressure from the changing mortgage mix and the impact of the sharp fall in interchange rates. Across CPB, we expect income to be broadly stable with continued competitive pressure on margins, given the interest rate environment. NatWest Markets is expected to continue to benefit from increased market volatility and customer activity and we anticipate that 2017 income will be above previously indicated targets of £1.3 - £1.4 billion.
� RBS continues to deal with a range of significant risks and uncertainties in the external economic, political and regulatory environment and manage conduct-related investigations and litigation, including RMBS. Substantial additional charges and costs may be recognised in the coming quarters which would have an impact on RBS’s level of capital and financial performance and condition.
Number 1 for service, trust and advocacy Significantly increase NPS or maintain No.1 in chosen customer segments
Building a more sustainable bank Our goal is to be No.1 for customer service, trust and advocacy. We are changing our culture and priorities for the better. We are committed to building a bank that works for all stakeholders.
Financial 18.9 million customers in the UK and Republic of Ireland. In 2016, we opened 40,860 Foundation Accounts (2), helping customers who may otherwise face difficulties when opening a bank account.
Working together We care for each other and work best as one team.
St ak eh ol de r i nt er es t
Independent assurance Limited assurance provided by Ernst & Young LLP over total reported C02e emissions (tonnes) (Scope 1*, 2** and 3*** location based emissions)
In accordance with the requirements of the MSA, our first annual statement will be published and available on our website in Spring 2017. Ahead of this we published an interim statement in December 2016 setting out our approach and seeking the input of external stakeholders.
� Following the launch of the Foundation account, an improved version of our Basic bank account, we opened a further 40,860 Foundation accounts in 2016, helping customers who would generally be declined a bank account.
Bright sparks Several million homes will be more energy efficient thanks to advice from bank experts on the biggest UK smart metering finance deal to date.
Ross has more than 25 years experience in the finance, insurance and investment industries. Prior to Commonwealth Bank of Australia, he was
Experience: Mike has extensive experience in retail banking and financial services. Mike joined
The Chief Governance Officer and Board Counsel’s key responsibilities include: • working closely with the Chairman to ensure effective functioning of the Board and appropriate alignment and information flows between the Board and its committees, including the Executive Committee. This includes Board succession planning, induction, and professional development; • providing support and advice to the Board on a broad range of strategic, governance, legal and regulatory issues; • executive responsibility for Chairman/non-executive director search and appointment process; • management of the bank’s profile with key stakeholders, including oversight of relations with key influencers, such as regulators; • defining and delivering the corporate governance and regulatory affairs strategy across RBS; and
The importance of keeping Board and committee composition under regular review was highlighted, in order to ensure diversity and an orderly succession as a number of non-executive directors approach the end of their tenure with RBS.
RBS website for fixed income investors which includes information on credit ratings, securitisation programmes and securities documentation. Further information is available at rbs.com/ir.
During 2016, the Committee considered a number of potential candidates and in May 2016, Frank Dangeard was appointed to the Board as a non-executive director.
The Board is satisfied that all GAC members have recent and relevant financial experience and that each member of the GAC
Committee, members of the GAC took part in an annual programme of visits to businesses and control functions in order to gain a deeper understanding of the risks and issues they face.
The GAC received bi-annual reports on control breaches which are captured by RBS’s notifiable event process.
Bank of Scotland plc and National Westminster Bank Plc, work in connection with the Q1 and Q3 financial results and any recommendations for enhancements to RBS’s reporting and controls.
For all other permitted non-audit service engagements, where the fee is below £5,000 approval by the Director of
• EY were engaged to audit the control environment and control objectives for RBS and Ulster Bank’s internal reporting procedures relating to the Scottish & Northern Ireland Banknote Rules 2011 and the Note
The decision to approve the engagement of the external auditor for the services noted above was due to factors including synergies and efficiencies relating to the audit work, their existing knowledge of RBS which allowed work to commence quickly and with minimal disruption and the benefits in maintaining consistency between similar engagements. In each case the GAC was satisfied that the engagement did not impact the external auditor’s independence.
In 2016, members of the BRC, in conjunction with members of the Group Audit Committee, undertook a programme of visits to focus on various businesses and control functions including biannual visits to Risk and C&RA. The purpose and scope of this programme is discussed in detail in the Report of the Group Audit
• Refreshed governance arrangements for material risks and put in place plans to transition to a Board approval framework for the most significant risks in 2017. This involved a number of in depth reviews of risk appetite throughout the year in relation to the following risk areas: tax, pensions, records management, payment processing, IT stability & resilience, people, reputational, traded market risk, non-traded market risk, business risk, financial reporting, legal entity risk, operational risk, information and cyber security, retail credit, mortgage risk, wholesale credit, commercial real estate, acquisition risk, settlement risk and conduct risk.
• Considered the use of risk capacity (being the parameters within which risk appetite is set) and agreed risk capacity limits for strategic risks.
• In Q1 2016, the BRC considered the results of the 2015 budget and forecast stress testing and reviewed Internal Audit’s planned activity for assessing stress testing in 2016.
• In H2 2016, the BRC considered the 2016 budget and forecast base and stress scenarios together with opinions from the three lines of defence and draft outputs and made recommendations to the
Determined to lead standards within our employee value proposition; • overseeing the brand strategy to reposition Royal Bank of
Authority is delegated to the Sustainable Banking Committee by the Board and the SBC reports and makes recommendations to the Board as required. The terms of reference of the SBC are available on rbs.com and these are reviewed annually and approved by the Board. A report on the activities of the SBC in fulfilling its responsibilities is provided to the Board following each meeting. The principal responsibilities of the SBC are shown below: Culture
Variable pay across RBS is subject to a robust performance assessment process which allows outcomes to be adjusted if risk management or conduct has fallen short of the required standard.
Fixed share allowance 100% of salary, delivered in shares released over a five year retention period.
Why will future LTI awards not be subject to pro rating?
• The policy aims to pay people appropriately for their work and commitment to serve customers well.
Finance heading and others relating to progress in the areas of Risk &
• Changes have been made under the proposed policy to lower the maximum quantum of LTI awards combined with performance factors considered to be more within the control of management and increased shareholding requirements. Further details on the changes can be found on page 89 to 92.
Remuneration scenarios for current executive directors under the new remuneration policy
Agreement from the Board must be sought before directors accept any additional roles outside of RBS. Procedures are in place to make sure that regulatory limits on the number of directorships held are complied with. The Board would also consider whether it was appropriate for executive directors to retain any remuneration receivable in respect of any external directorships, taking into account the nature of the appointment.
Any shares awarded under the fixed share allowance and LTI awards will be treated in accordance with the relevant plan rules as approved by shareholders.
The Chairman and the non-executive directors have letters of appointment reflecting their responsibilities and time commitments. They do not have notice periods and no compensation would be paid to the Chairman or nonexecutive directors in the event of termination of appointment, other than standard payments payable for the period served up to the termination date.
Details of remuneration to be awarded in 2017 to executive directors are set out below. The long-term incentive (LTI) award is the grant due to be made in March 2017 for the 2016 performance year and the structure reflects the longer deferral period under PRA
2015 and 2016 LTI awards to executive directors – current assessment (audited)
Conditional share awards subject to performance conditions, as set out above, measured over the three year period from 1 January 2016 to 31 December 2018 Ewen Stevenson 8 March 2016 2,150 952,424
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 268% of salary, The award price of £2.2574 was calculated based on the average share price over five business days prior to the grant date. (2) The awards are eligible to vest in equal tranches in 2020 and 2021, subject to the achievement of performance conditions. Malus provisions will apply up until vesting and clawback provisions will also apply for a period of seven years from the date of grant.
Taxation and other charges recognised in the income statement: - Social security, Bank levy and Corporation tax 747 597 25.1%
Notes: (1) Numbers exclude discontinued operations, principally CFG in 2015. (2) Remuneration paid to all employees represents total staff expenses per Note 3 to the Financial Statements, exclusive of social security and other staff costs. (3) Includes final payment relating to the Dividend Access Share of £1,193 million in 2016. (4) Input VAT and other indirect taxes not recoverable by RBS due to it being partially exempt.
Board on remuneration arrangements for executive directors; • approving remuneration arrangements for members and formal attendees of the Executive Committee and employees with total annual compensation which exceeds an amount determined by the Committee, currently £1 million; and
Positive comments were received on moving to a reduced number of meetings with appropriate use of delegation, giving time to focus on important issues such as the future pay construct. There was good evidence of challenge on key points of principle during debates and overall it was felt that the dynamic of the Committee worked well. The Masterclass sessions, where indepth consideration is given to specific matters, continued to be well received by members.
£m Total £m 2. Amounts and form of fixed and variable remuneration
• Those responsible for managing our balance sheet and liquidity and funding positions across the business.
The effectiveness of RBS’s internal controls is reviewed regularly by the Board, the Group Audit Committee and the Board Risk
NYSE confirming its full compliance with those and other applicable provisions. More detailed information about the Group
HMT in the form of B shares. HMT sold 630 million of its holding of the company’s ordinary shares in August 2015. In October 2015 HMT converted its entire holding of 51 billion B shares into 5.1 billion new ordinary shares of £1 each in the company.
The reported results of RBS are also sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. Details of RBS’s critical accounting policies and key sources of accounting judgments are included in
To really live our values we continue to reinforce them in our systems, our policies and processes, our communications, training and leadership role modelling.
We have a focus on paying the right wage to colleagues and our rates of pay continue to exceed the Living Wage Foundation
We have been recognised for our work on Equality, Diversity and
A number of the company’s employee share plans include restrictions on transfers of shares while shares are subject to the plans or the terms under which the shares were awarded.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the Annual Report and Accounts complies with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
UK PBB NIM decreased by 17 basis points to 3.01% reflecting the impact of the overall portfolio mix being increasingly weighted towards secured lending and mortgage customers switching from standard variable rate (SVR) to lower rate products. During the second half of 2016 SVR balances stabilised at approximately 12% of mortgage balances.
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
Glyn, including £146 million of termination costs associated with the decision to discontinue the programme to create a cloned banking platform.
Adjusted operating profit of £2,202 million was £33 million, or 2%, higher than 2015 principally reflecting increased net interest income combined with lower costs, partially offset by a higher impairment charge.
Total income of £5,290 million increased by £90 million, or 2%, compared with 2015, despite the lower rate environment depressing earnings on current accounts and the impact of regulatory changes impacting interchange fees. Net interest income was robust, increasing by £135 million, or 3%, reflecting continued strong asset growth combined with the active repricing of our deposit book. This more than offset the impact of lower current account hedge returns and lower mortgage margins. Net interest margin declined by 17 basis points to 3.01% reflecting the change in the overall portfolio mix and reduced mortgage margins. During the second half of 2016 mortgage SVR balances stabilised at approximately 12%, broadly in line with historical levels.
Notes: (1) Excluding own credit adjustments. (2) Excluding restructuring costs, 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 11% of the monthly average of segmental RWAes, assuming 15% tax rate.
to £1,257 million driven by a loss of £34 million from the sale of non-strategic asset portfolios and the transfer of the commercial cards business to UK PBB in 2014.
Despite challenging market conditions, assets under management and net loans and advances to customers were broadly stable compared with the prior year.
Operating expenses decreased from £4,951 million to £4,255 million in 2016 principally driven by lower adjusted operating expenses and lower restructuring costs. Adjusted expenses decreased by £775 million, or 50%, to £764 million, principally reflecting a 1,000 reduction in headcount.
Loans and advances grew by £0.4 billion, or 2%, to £20.3 billion.
RWAs fell £0.2 billion to £9.9 billion due to the better credit quality of the overall portfolio.
Movements in the value of derivative assets, down £15.5 billion, 6%, to £247.0 billion, and liabilities, down £18.2 billion, 7% to £236.5 billion, reflecting lower trading volumes of £34 million, partially offset by the impact of foreign exchange movements.
Subordinated liabilities decreased by £0.4 billion, 2% to £19.4 billion, primarily as a result of the net decrease in dated and undated loan capital with redemptions of £0.9 billion and £2.6 billion respectively. This was offset by exchange rate movements and mark-to-market adjustments of £3.1 billion.
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.
Risk culture and appetite 164 Governance, assurance and risk models 169 Capital risk 170 Definition and sources 170 Key developments 170 Determination of capital sufficiency 170 Minimum going concern capital requirements 173 Regulatory changes 176 Capital management 178 Measurement 180 Liquidity and funding risk 187 Definitions and sources 187 Key developments 187 Policy, framework and governance 187 Liquidity risk 189 Funding risk 190 Encumbrance 197 Business risk 199
To embed and strengthen the required risk culture behaviours, a number of RBS-wide activities have been undertaken.
Enabling employees to have the capabilities and confidence to manage risk is core to RBS’s learning strategy.
Aligned to RBS’s values is the Code of Conduct. The Code provides guidance on expected behaviour and sets out the standards of conduct that support the values. It explains the effect of decisions that are taken and describes the principles that must be followed.
RBS frequently reviews its risk profile to ensure it remains within risk appetite and that management focus is brought to bear on all strategic risks, material risks and emerging risk issues. RBS has effective processes in place to report against risk appetite to the
Once approved through internal governance, the new or amended model is implemented. Models used for regulatory reporting may additionally require regulatory approval before implementation.
(PFE). During 2016, approximately half the interest rate trades cleared through London Clearing House have been settled-to-market each day, rather than being collateralised, reducing PFE by £10.3 billion.
The Group is considered a going concern if it can operate in the foreseeable future to carry out its objectives and commitments without the need or intention on the part of management to liquidate.
The determination of what instruments and financial resources are eligible to be counted as capital is laid down by applicable regulation.
There are strict rules that govern the resources that the Group can count as capital. Details of constituents are set out in the section below.
There are two types of capital ratios based on different exposure types: Capital Held
SIB buffer rate. As noted above, based on the most recent determination of the FSB, the G-SIB buffer rate for the Group is 1.0%.
MREL will be set by the BoE on a case-by-case basis but it has stated that it expects institutions that are G-SIBs and subject to a bail-in resolution strategy, such as the Group, to meet interim MREL requirements from 1 January 2019 and end state MREL requirements from 1 January 2022 as follows: Interim MREL
• The higher of: o Two times the applicable leverage ratio requirement for the Group; and o 6.75% of the Group’s leverage exposure
The BoE is intending to review its general approach to the calibration of MREL before the end of 2020 prior to setting end-state MRELs.
On the basis of the BoE policy statement, the Group expects to issue between £3 billion and £5 billion of MREL compliant senior debt from the single resolution entity (RBSG) each year to meet this requirement.
The Group maintains a recovery plan that sets out credible recovery options that could be implemented in the event of a severe stress to restore its business to a stable and sustainable condition, focussing on addressing the Group’s capital and liquidity position.
Wholesale markets Short-term (less than 1 year) unsecured money markets and secured repo market funding.
The risk appetite statement defines key metrics, risk trigger levels and capacity for liquidity and funding management within RBS The Board also sets the appetite for funding risk to ensure that stable sources of funding are used to fund
Measurement, monitoring and contingency planning In implementing the liquidity risk management framework, a suite of tools are used to monitor, limit and stress test the risks within the balance sheet. Set limits control the amount and composition of funding sources, asset and liability mismatches and funding concentrations, in addition to the level of liquidity risk.
• The net customer funding surplus has decreased by £7 billion during 2016 to £31 billion, driven by loan growth in addition to deposit rundown in Capital Resolution, partially offset by underlying deposit growth.
Corporate Development. The Risk and Finance functions are key contributors to strategic planning.
RBS articulated its appetite for reputational risk through the implementation of a qualitative reputational risk appetite statement and framework. This has improved the identification, assessment and management of customers and issues that present a material reputational risk, resulting in a greater awareness and focus on the importance of this risk and an increase in the number of cases brought to franchise and RBSwide Reputational Risk fora.
Operational risk may directly affect customers, lead to financial loss or damage RBS’s reputation (for example, a major IT
Commission on Banking’s ring-fencing proposals, the planned divestment of Williams & Glyn, and the impact on RBS’s control environment due to cost reduction measures. These are essential to the achievement of RBS’s strategic objectives and, accordingly, Operational Risk continued to oversee these, ensuring the associated risks were assessed and understood with mitigating activity in place wherever possible.
At 31 December 2016, events aligned to the ‘clients, products and business practices’ event category accounted for 99% of
A small number of operational risk events contributed a high percentage of the total losses. In 2016, around 1% of the events contributed 97% of the losses. This was in line with 2015.
Pension obligation risk is the risk to RBS caused by its contractual or other liabilities to or with respect to a pension scheme (whether established for its employees or those of a related company or otherwise). It also means the risk that RBS
Pension scheme liabilities vary with changes in long-term interest rates and inflation as well as with pensionable salaries, the longevity of scheme members and legislation. Pension scheme assets vary with changes in interest rates, inflation expectations, credit spreads, exchange rates, and equity and property prices.
European Banking Authority stress-testing requirements. For more information on stress testing, refer to the following page.
of RBS’s pension plan assets at 31 December 2016, are invested in a diversified portfolio. This includes quoted and private equity, government and corporate fixed interest and index-linked bonds, property and other alternative assets.
Derivatives and securities financing - RBS enters into derivatives contracts and securities financing transactions. These result in counterparty credit risk, which is the risk of financial loss arising from the failure of a counterparty to meet obligations that vary in value by reference to a market rate or asset price. To mitigate the risk of loss, collateral and netting are used along with the additional legal rights provided under the terms of over-thecounter contracts.
Finance, Risk and Services is delivering the additional capabilities in terms of models, systems and operational processes.
• Outside these sectors, the impact of risk transfer is less material. However, the impact of netting impairment provisions means that for most other wholesale sectors
RBS mitigates counterparty credit risk arising from both derivatives transactions and repurchase agreements through the use of market standard documentation, enabling netting, and through collateralisation.
• Portfolio-level emergence periods are based on products or businesses with similar homogenous characteristics. Emergence periods range from 120 to 365 days.
LGD) re-approved annually. The review process addresses borrower performance, including reconfirmation or adjustment of risk parameter estimates; the adequacy of security; compliance with terms and conditions; and refinancing risk.
Includes lending secured against property portfolios comprising numerous properties across multiple UK locations.
The other reductions are attributable to the continued run-off of the US and APAC portfolios and active risk management in all regions.
Bank RoI also offers payment concessions in the form of discounted interest rates that involve the forgiveness of some interest.
• Ulster Bank: forborne and previously forborne mortgages form a separate risk pool taking into account the term of the forbearance treatment and applicable probationary periods.
• Fixed interest rate products of varying time durations accounted for approximately 73% by value of the mortgage portfolio with 2% a combination of fixed and variable rates and the remainder variable rate. The proportion of the portfolio on fixed rate products rose due to the very high proportion of customers taking out fixed rate mortgages in
December 2015 as a result of amortisation and portfolio sales (£588 million). The volume of new business has increased reflecting continuing market demand.
• Tracker-rate products accounted for approximately 64% of the portfolio, while variable rate totalled 21% and fixed rate
• The majority of the £227.9 billion net exposure comprises cash and balances at central banks, unsecured commercial and personal bank lending and sovereign debt securities.
• Commercial Banking: lending growth of £9.7 billion was across a variety of sectors supporting businesses in the UK
(2) Includes US agency and Dutch government guaranteed securities. (3) Comprises HFT £282 million (2015 - £303 million), AFS £99 million (2015 - £106 million) and LAR nil (2015 - £37 million). (4) Comprises HFT £25 million (2015 - £46 million), AFS nil (2015 - £28 million) and LAR £48 million (2015 - £475 million).
It manages its traded and non-traded market risk exposures separately, largely in line with the regulatory definitions of the trading and non-trading books.
• The majority of the VaR back-testing exceptions by legal entity during the year were driven by the increased market volatility.
However, the sensitivity of interest income to a further downward shock in interest rates increased after the referendum as interest rates fell sharply, with the UK base rate cut from 0.5% to 0.25%. This reflected the limited ability of banks, including RBS, to pass on further rate cuts to customers that already receive low nominal returns on deposits. For more commentary on earnings sensitivity, refer to page 268.
• Specific interest rate risk - which arises from the impact of changes in the credit spreads of sovereign bonds, corporate bonds, securitised products and credit derivatives.
• Total traded SVaR was broadly unchanged in 2016 compared to 2015, although it fluctuated during the year.
• A stress-scenario approach. Under this approach, an assessment of ten-day extreme, but plausible, market moves is used in combination with position sensitivities to give a stress-type loss number - the stress-based RNIV
Historical stress tests form part of the market risk limit framework and their results are reported daily to senior management
The bond portfolios in the non-trading book are high-quality securities that are primarily maintained as a liquidity buffer to ensure RBS can continue to meet its obligations in the event that access to wholesale funding markets is restricted. Additionally other high-quality bond portfolios are held for collateral purposes and to support payment systems.
Notes: (1) Certain 2015 year end numbers have been restated for comparison purposes in light of the enhancement of the risk appetite framework in 2016. (2) RBS benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
• Structural hedges reduce income sensitivity to interest rate shocks over a 12-month period because only a relatively small amount of the hedge matures and rolls forward at the lower rate. For example, one-fifth of a five-year hedging programme will mature over a 12-month period.
Internal Capital Adequacy Assessment Process (ICAAP). The approach combines both earnings based and economic value based methodologies, in accordance with regulatory guidelines.
The appropriateness of provisions for these matters is also impacted by developments, for example the settlement of RMBS claims by other banks, the partial settlement of claims made by certain shareholders with respect to the UK 2008 rights issue shareholder litigation and the judgement from
We are satisfied that the Group’s provisions for conduct, litigation and regulatory matters, customer remediation and claims are within a reasonable range and recognised in accordance with IFRS. We did not identify any material unrecorded provisions.
We highlighted the following matters: • In considering the total U.S. RMBS provision of £6.8 billion, management and the Board considered other industry settlements and claims. It is a reasonable reflection of the Group’s current position given developments in Q4 given the prevailing uncertainty as to the outcome of the discussions with the U.S. Department of Justice. The risk of future substantial additional charges and costs is appropriately disclosed in the financial statements.
We highlighted the results of our sensitivity analysis of the carrying values to key assumptions in the forecasts including the long term growth rate, discount rate and factors impacting the underlying level of profitability both at a Group level and for individual franchises. We noted the inherent uncertainty of the five year forecasts and the difficulty predicting revenue and costs over this period, particularly with respect to the impact of banking Structural Reform and the economic consequences of the EU referendum and other political developments over an extended period. We also noted the independent review of the forecasts undertaken by the Risk function and management’s challenge of the carrying values and key assumptions in relevant executive committees of the Group.
The Group’s recognition of fair value adjustments on uncollateralised derivatives is within a reasonable range of outcomes based upon our testing procedures which included revaluation exercises, benchmarking to peer practice and experience from new trades or trade exists.
We also tested the controls associated with the measurement of the fair value of the schemes’ assets and the actuarial assumptions and valuations.
In determining the accounting for the pension scheme we considered the impact of IFRIC 14 on the amount of the surplus recognised and compliance with IFRS.
environment. These are key to ensuring IT dependent and application based controls are operating effectively.
Of the 9 components selected, we performed an audit of the complete financial information of five components (“full scope components”) which were selected based on their size or risk characteristics. For the remaining four components (“specific scope components”), we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest impact on the accounts and disclosures in the financial statements either because of the size of these accounts or their risk profile.
Audit work of component teams for the purpose of obtaining coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component team is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated by the primary audit engagement team to components was between £50 million and £100 million.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
We are required to give a statement as to whether we have anything material to add or to draw attention to in relation to: • the directors’ confirmation in the Annual Report and Accounts that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; • the disclosures in the Annual Report and Accounts that describe those risks and explain how they are being managed or mitigated; • the directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and
Foreign currency (losses)/gains on hedges of net assets (278) (176) 108
International Accounting Standards Board (IASB) and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union (EU) (together
A non-current asset (or disposal group) is classified as held for sale if the Group will recover its carrying amount principally through a sale transaction rather than through continuing use. A
Financial liabilities are recognised initially at fair value and classified into held-for-trading; designated as at fair value through profit or loss; or amortised cost. Issues of financial liabilities measured at amortised cost are recognised on settlement date; all other regular way transactions in financial liabilities are recognised on trade date.
transfer requires that the Group either (a) transfers the contractual rights to receive the asset's cash flows; or (b) retains the right to the asset's cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group assesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. The asset remains on the balance sheet if substantially all the risks and rewards have been retained. It is derecognised if substantially all the risks and rewards have been transferred. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether or not it has retained control of the asset. If the Group has retained control of the asset, it continues to recognise the asset to the extent of its continuing involvement; if the Group has not retained control of the asset, it is derecognised.
The Group operates a number of share-based compensation schemes under which it awards RBSG shares and share options to its employees. Such awards are generally subject to vesting conditions: conditions that vary the amount of cash or shares to which an employee is entitled. Vesting conditions include service conditions (requiring the employee to complete a specified period of service) and performance conditions (requiring the employee to complete a specified period of service and specified performance targets to be met). Other conditions to which an award is subject are non-vesting conditions (such as a requirement to save throughout the vesting period).
IFRS 9’s credit impairment requirements apply to financial assets measured at amortised cost, to those measured at fair value through other comprehensive income, to lease receivables and to certain loan commitments and financial guarantee contracts. On initial recognition a loss allowance is established at an amount equal to 12-month expected credit losses (ECL) that is the portion of life-time expected losses resulting from default events that are possible within the next 12 months. Where a significant increase in credit risk since initial recognition is identified, the loss allowance increases so as to recognise all expected default events over the expected life of the asset. The Group expects that financial assets where there is objective evidence of impairment under IAS 39 will be credit impaired under IFRS 9, and carry loss allowances based on all expected default events.
To determine the risk of a default occurring, management intends to apply a default definition that is consistent with the
The assets of the Main scheme, which represent 89% of plan assets at 31 December 2016 (2015 - 88%), are invested in a diversified portfolio of quoted and private equity, government and corporate fixed-interest and index-linked bonds, and other assets including real estate and hedge funds.
The schemes can have exposure to the Group within their investment programmes. At 31 December 2016 the Main scheme’s exposure to the Group was £2,087 million (2015: £1,146 million) which includes indirect exposure to ordinary shares of the Group through index tracking investments, swaps contracts (before allowing for collateral posted against the mark value of the swaps) and cash deposits held with National
Return on plan assets above recognised interest income (415) 415 (458) 458
Actual return on plan assets - % 32.2% 2.3% 23.8% 8.9% 6.3% 30.9% 2.2% 22.8% 8.6% 6.8%
Fees payable to the auditor and its associates in respect of audits of associated pension schemes 0.1 0.5
Losses and temporary differences in year where no deferred tax asset recognised (742) (1,086) (89)
Reclassified from HFT to AFS (1) 206 206 14 — 8 (6)
The own credit adjustment does not alter cash flows, is not used for performance management, is disregarded for regulatory capital reporting processes and will reverse over time provided the liability is not repaid at a premium or a discount.
Interest and foreign exchange contracts 2.5 1.7 Option pricing model Correlation -45% 99%
Cost Provision value Cost Provision value £m £m £m £m £m £m
hedges its net investments in foreign operations with currency borrowings and forward foreign exchange contracts.
Currency translation and other adjustments 1,273 70 1,343 (430) (13) (443)
Charge/(credit) to income statement 162 (292) (84) (187) 48 (45) — 100 3 134 155 (6)
UK tax losses carried forward - The Royal Bank of Scotland plc 182 462 - UK branch of RBS NV — 1 - National Westminster Bank Plc 605 628
US$564 million floating rate dated notes Ineligible — 380 €415 million floating rate dated notes Ineligible — 294 €5 million floating rate dated notes Ineligible — 4
and certain members of the Group are party to legal proceedings and the subject of investigation and other regulatory and governmental action (“Matters”) in the United Kingdom (UK), the
Financial Conduct Authority (FCA) redress programme, as well as customers who were outside of the scope of that programme, which was closed to new entrants on 31 March 2015. RBS
Commerzbank) are defendants in an action first commenced in the United States District Court for the Eastern District of New
According to the plaintiffs’ allegations, RBS N.V. and the other defendants are liable for damages arising from the attacks because they allegedly conspired with Iran and certain Iranian banks to assist Iran in transferring money to Hezbollah and the
In April 2013, RBS Securities Japan Limited entered a plea of guilty to one count of wire fraud relating to Yen LIBOR and in
Swap Rate. RBS made various undertakings and agreed to make a voluntary contribution of A$1.6 million to fund independent financial literacy projects in Australia.
In November 2014, RBS plc reached a settlement with the FCA
On 8 June 2015, a regulation on interchange fees for card payments entered into force. The regulation requires the capping of both cross-border and domestic MIF rates for debit and credit consumer cards. The regulation also sets out other reforms including to the Honour All Cards Rule which require merchants to accept all cards with the same level of MIF but not cards with different MIF levels.
Paragon Personal Finance Ltd in November 2014. That decision was that the sale of a single premium PPI policy could create an
claims, including an additional provision of £601 million in 2016, in response to the anticipated further delay in guidance. Of the £4.9 billion cumulative provision, £3.3 billion in redress and £0.4 billion administrative expenses had been utilised by 31 December
At this very early stage, as there is considerable uncertainty around the outcome of this market study, it is not practicable reliably to estimate the aggregate impact, if any, on RBS which may be material.
In 2013 the FCA conducted a thematic review of the advice processes across the UK wealth management industry. As a result of this review, Coutts & Co undertook a past business review into the suitability of investment advice provided to its clients. This review has concluded, as Coutts & Co has contacted affected clients and offered redress in appropriate cases. The majority of these redress payments have now been paid, having been met by RBS’s existing provision.
Review and investigation of treatment of tracker mortgage customers in Ulster Bank Ireland DAC (formerly Ulster Bank
Commercial & Private Banking (CPB) comprises three reportable segments; Commercial Banking, Private Banking and RBS
International (RBSI). Commercial Banking serves commercial and mid-corporate customers in the UK and Western Europe.
Debt securities comprise the partial repurchase of preferred securities issued by the trusts referred to in Note 26 on the consolidated accounts.
Notes: (1) The company does not hold any of the NatWest preference shares in issue. (2) Coutts & Company is incorporated with unlimited liability. Its registered office is 440 Strand, London WC2R 0QS. (3) Ulster Bank Limited and its subsidiaries also operate in the Republic of Ireland. (4) RFS Holdings B.V. (RFS) owns 100% of the outstanding shares of RBS Holdings N.V. (ABN AMRO Holding N.V. prior to 1 April 2010). RBS Holdings N.V. has one direct subsidiary, The Royal Bank of Scotland N.V. (RBS N.V.), a fully operational bank within the Group. RBS N.V. is independently rated and regulated by the Dutch Central Bank. On the division of an entity by demerger, Dutch law establishes a cross liability between surviving entities in respect of the creditors at the time of the demerger. RBS N.V.’s cross liability is limited by law to the lower of its equity and the debts of ABN AMRO Bank N.V. on 1 April 2010. The likelihood of any cross liability crystallising is considered remote.
Gain on redemption of investment in Group undertakings (298) — —
Distant Planet Productions Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Euro Sales Finance Plc BF Smith House, P.O.Box 343, Elmwood Avenue, Feltham, TW13 7WH, England
Lombard Corporate Finance (15) Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
NatWest Property Investments Ltd INV 135 Bishopsgate, London, EC2M 3UR, England
RBS Investments (UK) Ltd BF 250 Bishopsgate, London, EC2M 4AA, England
RoboScot DevCap Ltd BF 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Royal Bank Development Capital Ltd BF 1 Princes Street, London, EC2R 8PB, England
W. & G. Lease Finance Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Winchcombe Finance Ltd BF The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Cayman Islands Coutts General Partner (Cayman) V Ltd BF Coutts House, 1446, West Bay Road, PO Box 707, Georgetown, Grand Cayman, KY1-1107
Finland Koy Espoon Entresse II BF C/O Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130 Finland, Helsingfors
Finland Koy Nummelan Portti BF C/O Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130 Finland, Helsingfors
Finland Koy Vapaalan Service-Center BF C/O Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130 Finland, Helsingfors
Ulster Bank Commercial Services Ltd BF Ulster Bank Group Centre, George's Quay, Dublin 2
Sweden Eurohill 4 KB BF C/O Nordisk Renting AB, Box 14044, SE-104 40 Sweden, Stockholm
Saudi Arabia Alawwal Bank CI EAA 40 Al-Dhabab Street, Riyadh, 11431, Saudi Arabia
BF FC 0 Rodney Square North, 1100 N Market Street Wilmington, Delaware, 19808
Netherlands Vadrid B.V. FC 98 Gustav Mahlerlaan 350, Amsterdam, 1082 ME
United Kingdom RBS Lease Finance (UK) Ltd FC 100 250 Bishopsgate, London, EC2M 4AA, England United Kingdom RBS Overseas (UK) Ltd FC 100 250 Bishopsgate, London, EC2M 4AA, England
India RBS Corporate Finance India Private Ltd FC 98 Empire Complex (South Wing), 414, Senapati Bapat Marg, Lower Parel, Mumbai 400013
United Kingdom Freehold Managers (Nominees) Ltd FC 100 135 Bishopsgate, London, EC2M 3UR England United Kingdom Glyns Nominees Ltd FC 100 135 Bishopsgate, London, EC2M 3UR England
Notes: (1) Activity: Banking and Financial institution - BF Credit institution – CI Investment (shares or property) holding company - INV Service company - SC Trustee - TR Other – OTH
September 2013 in relation to a pre-IPO investment was terminated on 21 October 2016 when the £600 million exchangeable bond which was issued by RBS on 21 October 2013 was redeemed by RBS. Further details are provided in the
RMBS investigations and litigation matters, taking the total of such provisions to £6.8 billion ($8.3 billion) at 31 December 2016.
Following the settlements described above, a number of claims remain outstanding with the final shareholder group and the
Glyn would not be achieved by the 31 December 2017 deadline.
Group and impact customer service quality for RBS’s own customers with consequent competitive, financial and reputational implications.
Group remains required to divest Williams & Glyn, there is no guarantee that the Group will be able to identify or recommence discussions with interested buyers for Williams & Glyn at that time or that it will be able to agree a divestment on commercially beneficial terms, and there is no certainty that any such discussions would lead to a viable transaction. In addition, the
The Group is subject to cybersecurity attacks which have regularly targeted financial institutions and corporates as well as governments and other institutions and have materially increased in frequency, sophistication and severity in recent years. The
The credit ratings of RBSG, RBS plc and other Group members directly affect the cost of funding and capital instruments issued by the Group, as well as secondary market liquidity in those instruments. A number of UK and other European financial institutions, including RBSG, RBS plc and other Group companies, have been downgraded multiple times in recent years in connection with rating methodology changes and credit rating agencies’ revised outlook relating to regulatory developments, macroeconomic trends and a financial institution’s capital position and financial prospects.
As discussed above, the success of the implementation of the UK
January 2017 to increase 100% in January 2018 (as required by the CRR). The PRA may also impose additional liquidity requirements to reflect risks not captured in the leverage coverage ratio by way of Pillar 2 add-ons, which may increase from time to time and require the Group to obtain additional funding or diversify its sources of funding. Current proposals by the FSB and the European Commission also seek to introduce certain liquidity requirements for financial institutions, including the introduction of a net stable funding ratio (NSFR). Under the
The Group’s businesses and performance can be negatively affected by actual or perceived economic conditions in the
Valuations in future periods reflecting, among other things, the then-prevailing market conditions and changes in the credit ratings of certain of the Group’s assets may result in significant changes in the fair values of the Group’s exposures, such as credit market exposures, and the value ultimately realised by the
Increased regulatory focus in certain areas, including conduct, consumer protection regimes, anti-money laundering, payment systems, and antiterrorism laws and regulations, have resulted in the Group facing greater regulation and scrutiny in the UK, the
Group”. In addition, the Group and its counterparties may no longer be able to rely on the European passporting framework for financial services and could be required to apply for authorisation in multiple European jurisdictions, the costs, timing and viability of which is uncertain.
Some of the analytical models used by the Group are predictive in nature. In addition, a number of internal models used by Group subsidiaries are designed, managed and analysed by the Group and may not appropriately capture risks and exposures at subsidiary level. Some of the Group's internal models are subject to periodic review by its regulators and, if found deficient, the
Group through an inability to achieve its strategic objectives for its customers, employees and wider stakeholders.
and SME bank products, increase the transparency of price comparison between banks and amend PCA overdraft charging.
In addition, in order to ensure the independence of the RFB, the
Group’s transformation programme and related cost-reduction targets may cause experienced staff members to leave and prospective staff members not to join the Group. The lack of continuity of senior management and the loss of important personnel coordinating certain or several aspects of the Group’s restructuring could have an adverse impact on its implementation.
The failure to attract or retain a sufficient number of appropriately skilled personnel to manage the complex restructuring required to implement the Group’s strategy could prevent the Group from successfully implementing its strategy and meeting regulatory commitments. This could have a material adverse effect on the
As a result, there is no assurance that the Group will be able to sell, exit or run down these businesses, portfolios or assets either on favourable economic terms to the Group or at all or that it may do so within the intended timetable. Material tax or other contingent liabilities could arise on the disposal or run-down of assets or businesses and there is no assurance that any conditions precedent agreed will be satisfied, or consents and approvals required will be obtained in a timely manner or at all.
The Group may be exposed to deteriorations in the businesses, portfolios or assets being sold between the announcement of the disposal and its completion, which period may span many months.
In light of these potential developments as well as the impact of the UK’s decision to leave the EU following the result of the EU
authorities designed to enable them to take a range of actions in relation to UK banks or investment firms and certain of their affiliates in the event a bank or investment firm in the same group is considered to be failing or likely to fail. Under the Banking Act, wide powers are granted to the relevant resolution authorities, as appropriate as part of a special resolution regime (the “SRR”).
disapply or modify laws in the UK (with possible retrospective effect) to enable the powers under the Banking Act to be used effectively.
Although the SRR sets out the pre-conditions for determining whether an institution is failing or likely to fail, it is uncertain how the Bank of England would assess such conditions in any particular pre-insolvency scenario affecting RBSG and/or other members of the Group and in deciding whether to exercise a resolution power. Further regulatory developments, including proposals by the FSB on cross-border recognition of resolution actions, could also influence the conditions for the exercise of the stabilisation powers. There has been no application of the SRR
England, in consultation with the FCA and HM Treasury. As a result, it will be difficult to predict when, if at all, the exercise of the bail-in power may occur.
‘should’, ‘intend’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘may’, ‘endeavour’, ‘outlook’,
Expected loss (EL, a regulatory measure) – is the product of the regulatory credit exposure, the probability of default over the next 12 months, averaged through an economic cycle, and the downturn loss given default. It is applied to exposures whether performance is recognised in income or reserves. Credit exposures include all financial assets, customer facilities and are subject to regulatory overlays.
Forbearance - forbearance takes place when a concession is made on the contractual terms of a loan in response to a customer’s financial difficulties.
Prudential Regulation Authority (PRA) - the statutory body responsible for the prudential supervision of banks, building societies, insurers and a small number of significant investment firms in the UK. The PRA is a subsidiary of the Bank of England.