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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-10306
THE ROYAL BANK OF SCOTLAND GROUP plc
(Exact name of Registrant as specified in its charter)
United Kingdom
(Jurisdiction of incorporation)
RBS Gogarburn, PO Box 1000, Edinburgh EH12 1HQ, United Kingdom
(Address of principal executive offices)
Aileen Taylor, Chief Governance Officer and Board Counsel, Tel: +44 (0) 131 626 4099, Fax: +44 (0) 131 626 3081
PO Box 1000, Gogarburn, Edinburgh EH12 1HQ
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Name of each exchange on which |
Title of each class |
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registered |
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American Depositary Shares, each representing 2 ordinary shares, nominal value £1 per share |
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New York Stock Exchange* |
Ordinary shares, nominal value £1 per share |
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American Depositary Shares Series U each representing one Non-Cumulative Dollar Preference Share, Series U |
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New York Stock Exchange* |
Dollar Perpetual Regulatory Tier 1 Securities |
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New York Stock Exchange |
5.625% Senior Notes due 2020 |
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New York Stock Exchange |
6.125% Senior Notes due 2021 |
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New York Stock Exchange |
6.125% Subordinated Tier 2 Notes due 2022 |
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New York Stock Exchange |
6.000% Subordinated Tier 2 Notes due 2023 |
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New York Stock Exchange |
6.100% Subordinated Tier 2 Notes due 2023 |
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New York Stock Exchange |
3.875% Senior Notes due 2023 |
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New York Stock Exchange |
3.498% Fixed Rate / Floating Rate Senior Notes due 2023 |
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New York Stock Exchange |
4.519% Fixed Rate / Floating Rate Senior Notes due 2024 |
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New York Stock Exchange |
5.076% Fixed Rate / Floating Rate Senior Notes due 2030 |
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New York Stock Exchange |
Senior Floating Rate Notes due 2023 |
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New York Stock Exchange |
Senior Floating Rate Notes due 2024 |
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New York Stock Exchange |
5.125% Subordinated Tier 2 Notes due 2024 |
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New York Stock Exchange |
4.892% Fixed Rate / Floating Rate Senior Notes due 2029 |
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New York Stock Exchange |
Leveraged CPI Linked Securities due January 13, 2020 |
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NYSE MKT |
* Not for trading, but only in connection with the registration of American Depositary Shares representing such ordinary shares or non-cumulative dollar preference shares, as applicable, pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2020 Irish Stock Exchange
Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2021 Irish Stock Exchange
Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2025 Irish Stock Exchange
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of December 31, 2018, the close of the period covered by the annual report:
(Title of each class) |
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(Number of outstanding shares) |
Ordinary shares of £1 each 11% cumulative preference shares 5½% cumulative preference shares Non-cumulative dollar preference shares, Series U |
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12,048,605,298 500,000 400,000 10,130 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, and emerging growth company in Rule 12b-2 of the Exchange Act.
x Large accelerated filer |
o Accelerated filer |
o Non-accelerated filer |
o Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
The term new or revised financial accounting standard refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
o U.S. GAAP
x International Financial Reporting Standards as issued by the International Accounting Standards Board
o Other
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
SEC Form 20-F cross reference guide
Forward-looking statements
Cautionary statement regarding forward-looking statements
Certain sections in this document contain forward-looking statements as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words expect, estimate, project, anticipate, commit, believe, should, intend, plan, could, probability, risk, Value-at-Risk (VaR), target, goal, objective, may, endeavour, outlook, optimistic, prospects and similar expressions or variations on these expressions.
In particular, this document includes forward-looking statements relating, but not limited to: future profitability and performance, including financial performance targets such as return on tangible equity; cost savings and targets, including cost:income ratios; litigation and government and regulatory investigations, including the timing and financial and other impacts thereof; the implementation of the Alternative Remedies Package; the continuation of the Groups balance sheet reduction programme, including the reduction of risk-weighted assets (RWAs) and the timing thereof; capital and strategic plans and targets; capital, liquidity and leverage ratios and requirements, including CET1 Ratio, RWA equivalents (RWAe), Pillar 2 and other regulatory buffer requirements, minimum requirement for own funds and eligible liabilities, and other funding plans; funding and credit risk profile; capitalisation; portfolios; net interest margin; customer loan and income growth; the level and extent of future impairments and write-downs, including with respect to goodwill; restructuring and remediation costs and charges; the Groups exposure to political risk, economic risk, climate change risk, operational risk, conduct risk, cyber and IT risk and credit rating risk and to various types of market risks, including interest rate risk, foreign exchange rate risk and commodity and equity price risk; customer experience including our Net Promotor Score (NPS); employee engagement and gender balance in leadership positions.
Limitations inherent to forward-looking statements
These statements are based on current plans, estimates, targets and projections, and are subject to significant inherent risks, uncertainties and other factors, both external and relating to the Groups strategy or operations, which may result in the Group being unable to achieve the current targets, predictions, expectations and other anticipated outcomes expressed or implied by such forward-looking statements. In addition, certain of these disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations, including assumptions and estimates made by management. By their nature, certain of these disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated. Accordingly, undue reliance should not be placed on these statements. Forward-looking statements speak only as of the date we make them and we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Groups expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Important factors that could affect the actual outcome of the forward-looking statements
We caution you that a large number of important factors could adversely affect our results or our ability to implement our strategy, cause us to fail to meet our targets, predictions, expectations and other anticipated outcomes or affect the accuracy of forward-looking statements we describe in this document, including in the risk factors and other uncertainties set out in the document and other risk factors and uncertainties discussed in this document. These include the significant risks for the Group presented by: operational and IT resilience risk (including in respect of: the Group being subject to cyberattacks; operational risks inherent in the Groups business; the Groups operations being highly dependent on its IT systems; the Group relying on attracting, retaining and developing senior management and skilled personnel and maintaining good employee relations; the Groups risk management framework; and reputational risk), economic and political risk (including in respect of: the uncertainties surrounding the UKs withdrawal from the European Union; increased political and economic risks and uncertainty in the UK and global markets; climate change and the transition to a low carbon economy; HM Treasurys ownership of RBSG and the possibility that it may exert a significant degree of influence over the Group; continued low interest rates and changes in foreign currency exchange rates), financial resilience risk (including in respect of: the Groups ability to meet targets and make discretionary capital distributions to shareholders; the highly competitive markets in which the Group operates; deterioration in borrower and counterparty credit quality; the ability of the Group to meet prudential regulatory requirements for capital and MREL, or to manage its capital effectively; the ability of the Group to access adequate sources of liquidity and funding; changes in the credit ratings of RBSG, any of its subsidiaries or any of its respective debt securities; the Groups ability to meet requirements of regulatory stress tests; possible losses or the requirement to maintain higher levels of capital as a result of limitations or failure of various models; sensitivity of the Groups financial statements to underlying accounting policies, judgements, assumptions and estimates; changes in applicable accounting policies or rules; the value or effectiveness of any credit protection purchased by the Group; the level and extent of future impairments and write-downs, including with respect to goodwill; and the application of UK statutory stabilisation or resolution powers) and legal, regulatory and conduct risk (including in respect of: the Groups businesses being subject to substantial regulation and oversight; legal, regulatory and governmental actions and investigations; the replacement of LIBOR, EURIBOR and other benchmark rates; heightened regulatory and governmental scrutiny (including by competition authorities); implementation of the Alternative Remedies Package and the costs related thereto; and changes in tax legislation).
The forward-looking statements contained in this document speak only as at the date hereof, and the Group does not assume or undertake any obligation or responsibility to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicit of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.
Presentation of information
In this document, and unless specified otherwise, the term company or RBSG means The Royal Bank of Scotland Group plc, RBS, RBS Group or the Group means the company and its subsidiaries, the Royal Bank or RBS plc means The Royal Bank of Scotland plc; NWH Ltd means NatWest Holdings Limited; and NatWest means National Westminster Bank Plc.
The company publishes its financial statements in pounds sterling (£ or sterling). The abbreviations £m and £bn represent millions and thousands of millions of pounds sterling, respectively, and references to pence represent pence in the United Kingdom (UK). Reference to dollars or $ are to United States of America (US) dollars. The abbreviations $m and $bn represent millions and thousands of millions of dollars, respectively, and references to cents represent cents in the US. The abbreviation represents the euro, and the abbreviations m and bn represent millions and thousands of millions of euros, respectively .
Any information contained on websites linked or reports referenced in this annual report on Form 20-F is for information only and shall not be deemed to be incorporated by reference herein.
Non-GAAP financial information
RBS prepares its financial statements in accordance with IFRS as issued by the IASB which constitutes a body of generally accepted accounting principles (GAAP). This document contains a number of non-GAAP (or non-IFRS) financial measures. A non-GAAP financial measure is defined as one that measures historical or future financial performance, financial position or cash flows but which excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure.
The non-GAAP financial measures used in this document generally exclude certain items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. These measures are used internally by management, in conjunction with IFRS financial measures, to measure performance and make decisions regarding the future direction of the business. Management believes these non-GAAP financial measures, when provided in combination with reported IFRS results, provide helpful supplementary information for investors. These non-GAAP financial measures are not a substitute for, and should be read in conjunction with, reported IFRS financial measures.
The main non-GAAP measures used in this document include:
· Performance, funding and credit metrics such as return on tangible equity, and related RWA equivalents incorporating the effect of capital deductions (RWAes), total assets excluding derivatives (funded assets), net interest margin (NIM) adjusted for items designated at fair value through profit or loss (non-statutory NIM), operating expenses analysis, and cost:income ratio and loan:deposit ratio. These are internal metrics used to measure business performance; and
· Personal & Business Banking (PBB) franchise results, combining the reportable segments of UK Personal & Business Banking (UK PBB) and Ulster Bank RoI, and Commercial & Private Banking (CPB) franchise results, combining the reportable segments of Commercial Banking and Private Banking, which are presented to provide investors with a summary of the Groups business performance.
· The Commercial Banking, Private Banking, RBS International and NatWest Markets operating segment period on period comparison is impacted by a number of business transfers executed in preparation for ring-fencing. Commentary on the movements in the period for these segments has been adjusted for these items and reconciliation notes are provided.
· The Group also presents a pro forma CET1 ratio which is on an adjusted basis. This has not been prepared in accordance with Regulation S-X and should be read in conjunction with the notes provided, as well as the section Forward-looking statements on page 1 of this document.
Key operating indicators
This document includes a number of operational metrics which management believes may be helpful to investors in understanding the Groups business, including the Groups position against its own targets. These metrics include performance, funding and credit metrics such as return on tangible equity and related RWA equivalents incorporating the effect of capital deductions (RWAes), total assets excluding derivatives (funded assets) and net interest margin (NIM) adjusted for items designated at fair value through profit or loss (non-statutory NIM), cost:income ratio, and loan:deposit ratio. These are internal metrics used to measure business performance.
Capital and liquidity measures
Certain liquidity and capital measures and ratios are presented in this document as management believes they are helpful for investors understanding of the liquidity and capital profile of the business and the Groups position against its own targets and applicable regulatory requirements. Some of these measures are used by management for risk management purposes and may not be required to be disclosed by a government, governmental authority or self-regulatory organisation. As a result, the basis of calculation of these measures may not be the same as that used by the Groups peers. These capital and liquidity measures and ratios include: the liquidity coverage ratio, stressed outflow coverage and net stable funding ratio.
Recent developments
Update on NatWest Markets transfer scheme
In anticipation of the UK's departure from the European Union on 29 March 2019, the RBS Group has been making its Dutch subsidiary, NatWest Markets N.V., operationally ready to serve NatWest Markets Plc customers who are incorporated or located in the European Economic Area (EEA). On 22 February 2019 the Court of Session in Scotland approved the RBS Group's petition for an order under Part VII of the Financial Services and Markets Act 2000 for the replication of master trade documentation for non-UK EEA customers and the transfer of certain existing transactions of EEA customers from NatWest Markets Plc to NatWest Markets N.V. (the Scheme). The effective dates of the Scheme will now be as follows:
(i) 22 March 2019 - for Phase 1 of the Scheme, where master documentation with NatWest Markets Plc will be replicated with NatWest Markets N.V.; and
(ii) a date between 23 March and 31 December 2019 - for Phase 2 of the Scheme, which will transfer certain existing transactions for some EEA customers (as at the Phase 2 Effective Date) from NatWest Markets Plc to NatWest Markets N.V. The flexibility of Phase 2 is designed to take advantage of any transitional period or other possible outcomes of the Brexit negotiations. NatWest Markets Plc and NatWest Markets N.V. will provide non-UK EEA customers with ten business days notice.
We are a financial services company, providing a wide range of products and services to personal, commercial, large corporate and institutional customers.
Our purpose is to serve customers well. We are building a safe, simple and customer-focused bank. To do so we are doing business in a way that aligns with our values and considers the longer-term impacts of our decisions and actions. Underpinning that ambition is our blueprint for lasting success.
Assurance
The scope of work performed by the Groups independent auditor as part of their review of other information included in the 2018 Annual Report and Accounts is described in the Independent auditors report to the members of The Royal Bank of Scotland Group plc on pages 178 to 179. In addition, The Royal Bank of Scotland Group plc appointed Ernst & Young LLP to provide limited independent assurance over selected sustainability content marked with (*) within the Strategic Report, as at and for the period ended 31 December 2018. The assurance engagement was planned and performed in accordance with the International Standard for Assurance Engagements (ISAE) 3000 Revised, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information. An opinion was issued and is available on rbs.com. This opinion includes details of the scope, respective responsibilities, work performed, limitations and conclusions.
Further information on environmental, social, employee and human rights matters is available on the Sustainable Banking webpages on rbs.com.
Why go online?
Many shareholders are now benefitting from more accessible information and helping the environment too. If you havent already tried it, visit our online Annual Report.
rbs.com/annualreport
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Strategic Report |
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An overview of our business performance, including our external operating environment and how we are building a more sustainable bank. |
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2018 highlights |
5 |
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Chairmans statement |
7 |
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Chief Executives review |
9 |
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Our operating environment |
11 |
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Building a more sustainable bank |
15 |
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Our business performance |
25 |
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Our investment case and outlook |
29 |
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Risk overview |
31 |
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Governance at a glance |
35 |
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Business Review
The financial performance of our business and our operating segments. |
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Governance
A detailed review of our corporate governance and remuneration, including the Report of the directors and annual report on remuneration. |
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Capital and risk management
Disclosures on our capital, liquidity and funding position and a detailed overview of the management of key risks relating to our business operations. |
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Financial Statements
Our audited financial statements and related notes, including our Independent auditors report. |
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Risk Factors
A description of certain risk factors that could adversely affect our future results, financial condition and prospects and cause them to be materially different. |
Approval of Strategic Report
The Strategic Report for the year ended 31 December 2018 set out on pages 4 to 36 was approved by the Board of directors on 14 February 2019.
By order of the Board.
Company Secretary
Aileen Taylor
14 February 2019
Chairman
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Executive directors
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Non-executive directors
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2018 Highlights
How we have performed on Our Priorities
Note:
(1) Based on end-point Capital Requirements Regulation (CRR) Tier 1 capital and leverage exposure under the CRR Delegated Act.
(2) Return on tangible equity is calculated using profit for the period attributable to ordinary shareholders.
In 2018 the bank delivered a good financial performance, despite an uncertain economic outlook and a highly competitive environment. Paying a dividend for the first time in a decade showed continued progress in building a stronger, safer bank that is capable of delivering improving returns for shareholders.
A pre-tax operating profit of £3.4 billion and an attributable profit of £1.6 billion represent a more consistent financial performance, following a return to profitability in 2017. We achieved that improvement through stable income generation - despite the low interest rate environment as well as by reducing operating costs and de-risking the balance sheet further.
With the bank financially stronger and the largest legacy issues resolved, the Board and Management Team are focused on delivering a more consistent and improved level of customer service across all areas. Customers expectations of all service providers are high and the range of competitors in the market using diverse delivery mechanisms is as wide as it has ever been.
Shareholder returns and privatisation
Our stronger financial position has enabled us to provide clarity on how we intend to return excess capital to shareholders. We believe that to sustain a sound bank of this kind we need a strong capital base. We paid our first ordinary dividend in a decade of 2 pence per share at our 2018 interim results. We are pleased to announce that, subject to shareholder approval being obtained at the 2019 Annual General Meeting, we will pay a final dividend of 3.5 pence per share and a special dividend of 7.5 pence per share. Together this will mean over £1.6 billion in capital returns to shareholders for the Financial Year 2018. We expect to maintain ordinary dividends of around 40% of attributable profit.
The bank received approval from shareholders on 6 February to buyback shares - equivalent to 4.99% of the Groups issued share capital - from HM Treasury. Any buyback of these shares will be at the discretion of HM Treasury, however this approval provides another mechanism to return excess capital to shareholders in an efficient way.
The journey towards a return to private ownership continues and further progress was made in 2018. In June, the government undertook a further sell down of its majority stake in the bank, selling 925 million shares, raising total proceeds of £2.5 billion, and reducing its stake to 62.3%. In addition, the Chancellor indicated in the Autumn Budget that the UK government plans fully to exit its ownership of RBS by 2024.
Brexit and the economy
The Brexit process continues and we have planned for a range of scenarios associated with exiting the European Union. We have put in place plans that will enable us to continue to serve our customers in continental Europe. We have our Dutch Banking entity in Amsterdam and we are in the final stages of seeking approval for two branches in Frankfurt, which we expect to be operationally ready if required, to support among other things the continued clearing of euro payments. These actions are prudent given the uncertainty and will allow us to serve our large corporate customers in Western Europe while we wait for clarity on the terms of the deal.
In the UK, we are seeing large corporate customers delay investment decisions until they have more detail on the outcome of the Brexit process. As one of the largest commercial lenders in the UK we recognise our responsibility to provide support at a highly uncertain time.
As a predominantly UK and RoI focused bank, our performance and lending growth will broadly reflect those economies. UK economic growth remained behind its long term average in 2018. While the inflationary pressure induced by sterlings depreciation post the EU referendum subsided, consumer confidence remains muted. It remains to be seen what fiscal and monetary policy levers the Bank of England will pull in the event of an economic downturn, but lower interest rates for longer would affect the banks ability to deliver significant income growth.
Progress on resolving our legacy issues
The bank resolved its remaining major legacy issues in 2018. We settled the US Department of Justice investigations into our historic (pre-2007) activities in the US RMBS market in August 2018. While settling this long-running issue was welcome, the £3.6 billion settlement was a stark reminder of how in the past this bank failed to put the interests of customers first.
We have seen good progress on the revised scheme to satisfy our remaining State Aid obligations. In 2017, Her Majestys Treasury agreed with the European Commission a two part scheme comprising of a Capability & Innovation Fund, and an incentivised transfer of some of our Small and Medium sized Enterprise customers who were due to move to Williams & Glyn. We welcome the progress that the independent body Banking Competition Remedies Ltd has made and are operationally ready to fully support the switching scheme and impacted customers at its launch.
Ring-fence regulation
In 2018, we continued to reshape the bank in response to UK ring-fencing legislation. This involved transferring 4.5 million customers between different legal entities. In July, we reached a key milestone when the Scottish Court approved the banks request to transfer the customers who were affected by a change in legal entity. We also introduced some significant changes to the way our Boards operate to comply with regulatory requirements. We met the PRA deadline on 1 January 2019 and are fully ring-fence compliant. This has been a complex project and I am pleased it has been undertaken with minimal impact on customers.
Building a more sustainable bank and community engagement
We are aware of our responsibilities to the communities we serve, given the central role we play in the economy. In 2018 we provided £30.4 billion in gross new lending to UK homeowners and supported over £100 billion of lending to UK businesses, as we helped our customer continue to grow.
Our volunteering and fundraising partnerships continue to make a difference for the communities we serve. In 2018, our employees supported a wide variety of charities raising £4.4 million through their giving and fundraising efforts. Our flagship financial education programme, MoneySense, met its annual targets. Since 2015, we have reached 1.8 million young people and RBS employees have supported 59,000 in-school workshops.
Last year, we witnessed a growing focus on climate change from regulators and investors. In 2017, the bank publicly committed its support of the Financial Stability Boards Task Force on Climate-related Financial Disclosures (TCFD) - a voluntary set of guidelines encouraging consistent climate-related disclosures in annual reporting. We have now committed a further £10 billion to the Sustainable Energy sector by 2020. This will include continued financing of low carbon generation as well as energy efficiency projects, such as in the real estate sector, and alternative fuelled vehicles.
Shareholders
We have continued to engage actively with our shareholders. A resolution to establish a formal Shareholder Committee was requisitioned by a group of shareholders at our AGM in 2018. It did not receive approval, in part, we believe, because we have made efforts to engage with shareholders large and small. Our investor relations efforts are highly rated. Our Sustainable Banking Committee has met a wide range of stakeholders for a number of years. Last year we held retail shareholder events in Glasgow and Birmingham. The events gave shareholders the opportunity to meet with our Board and ask questions on performance and strategy. Feedback was positive and we plan to hold more events in 2019.
Diversity and inclusion
In 2014, we set ourselves a target to have at least 30% of roles in the three most senior levels of each of our businesses filled by women by 2020. In 2018, on aggregate across the bank, this representation stands at 37%. We also are aspiring to achieve full gender balance at all levels of our business by 2030.
We are focused on becoming a more ethnically diverse organisation, to reflect the communities in which we operate. We introduced formal UK targets in 2017 to improve the proportion of non-white colleagues in our top 4 leadership layers, to at least 14% by 2025, and are already making good progress against this, with 8% representation.
Board changes
We were pleased to welcome Patrick Flynn to the Board on 1 June 2018. Patricks appointment further strengthens our overall board composition and supports succession planning. Brendan Nelson will step down as Chairman of the Group Audit Committee with effect from 31 March 2019 at which time Patrick will assume the role of Chairman of the Group Audit Committee. Brendan has indicated that he will not stand for re-election at the 2019 Annual General Meeting. Id like to thank Brendan for his significant contribution since joining the Board as a Non-Executive Director in 2010. The Board and the wider organisation have benefited from his extensive knowledge and experience and his presence will be greatly missed.
Penny Hughes resigned as a non- executive director on 30 May and Ewen Stevenson resigned as Chief Financial Officer and Director on 30 September. I would like to thank Penny and Ewen for all their hard work and dedication to RBS.
As a result of Ewens resignation we appointed Katie Murray as Chief Financial Officer, effective from 1 January 2019. Katie brings nearly 30 years of finance and accounting experience in capital management, investor relations and financial planning to the role. She has already contributed significantly to RBS over the last three years.
Conclusion
Overall, the Board is pleased with the banks performance in 2018 during a period of significant uncertainty in the macroeconomic environment. We dealt with our last major outstanding legacy issue, reduced our cost base, delivered lending growth in a tough operating environment and paid our first dividend in a decade. We still have more work to do to reach our 2020 ambitions, but we continue to make good progress on improving returns for shareholders and delivering better service for customers.
2018 was a year of strong progress on our strategy - we settled our remaining major legacy issues, paid our first dividend in ten years and delivered another full year bottom line profit. However, while our financial performance is more assured, we know that a significant gap remains to achieving our ambition to be the best bank for customers. We are fully focused on closing this gap.
Today we are reporting a pre-tax operating profit of £3.4 billion and a bottom line attributable profit of £1.6 billion for 2018. In addition, we are pleased to propose a full year ordinary dividend of 3.5 pence per share, and a special dividend of 7.5 pence per share. These are in addition to the ordinary dividend we paid at our interim results. Together, we will have returned £1.6 billion to shareholders, and around £1 billion to the UK taxpayer in dividends. We also have shareholder approval to participate in a directed buyback should the government seek to dispose of a portion of its shares.
The UK economy faces a heightened level of uncertainty related to the ongoing Brexit negotiations. We have continued to support our customers, providing £30.4 billion in gross new UK mortgage lending in 2018, and Commercial Banking made or renewed commitments of around £30 billion of term lending facilities to mainly UK businesses. Our Commercial and Business Banking businesses supported total lending of more than £100 billion in 2018.
We have also committed an additional £2 billion to our Growth Fund to support British business, taking the total fund to £3 billion. This fund is helping businesses manage their supply chains in what is a very uncertain time. These actions help maintain our position as the largest supporter of UK business.
A good financial performance in uncertain economic conditions
Our financial performance is good, given the uncertain economic outlook. In 2018, we continued to take costs out of the business and reduced operating expenses by £278 million. This means that we have now reduced operating costs by more than £4 billion in five years.
Our long-term target remains to reach a cost to income ratio of below 50%, however we note that as an industry we are required to carry additional costs to deal with Brexit and the ongoing operational obligations of ring- fencing. Given the continued low rate environment and highly competitive mortgage market, coupled with the uncertainty in the economy, income remains under pressure. We continue to focus on cost reduction to ensure we are preparing our business for the future and to meet our customers and shareholders needs.
In 2019, we are committing to reducing our operating costs by c.£300 million. Our consistent delivery on cost targets in recent years gives me the confidence we will achieve this.
Our strategic plan has served us well and we will continue to focus on our five key priorities, as set out below, as we strive to become the UK and Republic of Irelands best bank for customers.
Strength and Sustainability
The banks financial strength is much improved. Our Common Equity Tier 1 ratio has increased from 8.6% at the end of 2013 to 16.2% at the end of 2018. This progress helped us to obtain a clear pass in the 2018 Bank of England stress test - a very important milestone. Alongside our financial strength we have continued to build greater resilience into our systems, helping to protect our customers who are at greater risk of fraud and scams more than ever before. We are the first and only UK bank to partner with National Trading Standards on their Friends Against Scams initiative. More than 31,000 colleagues completed the training in 2018 and we have committed to training a million customers by 2020.
Customer Experience
While our financial performance is more assured, we know that a significant gap remains to achieving our ambition to be the best bank for customers. We are very aware that we need to deliver
better service, more consistently. The Competition and Markets Authority (CMA) results, which now provide the public with a ranking of banks performance for customers, bring this into sharp focus. With the large major legacy issues behind us, we are putting all of our focus into improving our customer experience.
We are investing in innovation, with £1 billion committed to invest in 2019 aimed at improving legacy systems and delivering better solutions for customers. We continue to develop our mobile app which for NatWest now scores +41 for customer advocacy.
Our Commercial Bank, the UKs largest supporter of business, remains ahead of the rest of the market for customer advocacy and in Coutts we have a market leading private banking brand.
Customers want and need to do their banking quickly and safely. When we help them to do this, and combine it with expert advice, we see advocacy scores increase. That is how we are focusing the business, and we are confident the changes we are making will deliver a consistently higher quality of service.
Simplifying the Bank
We are a simpler bank, but we cant yet call ourselves simple to deal with. While we are now more efficient with a lower cost base, as we have shrunk in size, many of our processes are still too difficult for our customers to deal with, and are frustrating for our colleagues as they try to serve our customers.
Whether it is booking travel, watching a film or shopping online, customers now expect a fast and reliable service. Banking is no different from any other customer focused industry, and we are responding to those changes in customer behaviour.
Our first digital lending journey for Commercial Banking customers is now live. The new platform allows existing customers to apply digitally for secured and unsecured loans up to £750,000, subject to eligibility criteria. Customers are able to complete their loan application in a matter of minutes, and usually get a decision in principle within 24 hours. We have simplified and streamlined the customer experience, giving our customers a rapid response, all the while supported by the vast industry knowledge and insight of our Relationship Managers.
We are also embracing artificial intelligence (AI), which is helping us lower our cost base and deliver a 24/7 customer experience . Take Cora for instance our AI Chat Bot which we launched in partnership with IBM Watson - she now handles an average of 83,000 queries a week. Given the success in the personal business, we have recently rolled out Cora to Commercial Banking.
Supporting sustainable growth
Supporting our customers ambitions is a key part of our role in society. We have focused on growing lending in our target markets. Gross mortgage lending in UK Personal and Business Banking increased £1.5 billion in 2018, and we helped around 45,000 customers buy their first home. Our support doesnt only extend to lending, we now have 12 NatWest accelerators. These hubs make up the UKs largest fully-funded business accelerator network, capable of supporting up to 1,000 entrepreneurs.
NatWest Markets continued to support large corporate customers with a range of financing needs in 2018. Our FX team was voted number one for customer satisfaction in the 2017 Greenwich Associates FX Survey and we helped clients raise £312 billion on the debt capital markets.
Employee engagement
The turnaround of the bank would not have been possible without the hard work and determination of our colleagues. Over the last four years we have seen a significant reduction in the number of roles across the bank, as a result of divestment and restructuring aligned to our strategy. Despite this activity, colleague engagement is at its highest level since we started measuring in 2002. The independent Banking Standards Board report on culture also showed improvements in every category. Of course, there is always more we can do, and we have set stretching targets as we strive to become a more diverse and inclusive organisation.
Innovating and investing to improve customer service
We have taken a dual approach to innovation by transforming our core banking services and delivering new products and services outside of traditional banking. In 2018, we continued to invest in our existing infrastructure, improving system resilience and migrating to latest in cloud technologies. Last year we experienced 19 Criticality 1 Incidents, compared to 318 four years ago.
Our customers continued to migrate to our mobile app during 2018. In UK PBB we now have 6.4 million regular mobile customers, 16% higher than 2017.
Today close to three quarters of active current account customers in UK PBB are regular digital users. Sales through our digital channels in UK PBB are up 19% on last year and now represent almost half of all product sales. Four years ago this figure would have been 26%.
At the same time we are trying new things outside our core banking services. We are piloting Bó and Mettle as two standalone digital banks. Bó is our digital personal bank targeted at helping people to manage their money better. Mettle is our digital bank for business customers.
We are learning a lot from these innovations and applying our findings back into the core bank.
These innovations complement the wider eco-systems that we want to build around key customer experiences be it buying a home, or running a business. Building or acquiring complementary services to the core banking services we already offer in these areas will allow us to deepen our relationships with customers, and ultimately grow revenue.
2019, a year of focusing forward
In 2019, we will focus forward, into a rapidly changing market. We have set annual goals for 2019 based around our five priorities in order to keep up momentum on the delivery of our strategic plan. There are two areas in particular that we need to focus on customer experience and simplifying the bank. This year we aim to spend £1 billion on upgrading legacy infrastructure, improving systems, processes and delivering new innovations which will improve our customers experience. We will simplify the bank further in 2019, given this we have set a operating cost reduction target of c.£300 million for 2019, and continue to strive for a sub 50% cost to income ratio.
We have made good progress on making RBS a much simpler, safer and more customer focused bank. From a position of capital strength, we will aim to improve returns for you, our shareholders.
Our operating environment
Key economic indicators
UK GDP grew by 1.4% in 2018, down from a 1.8% rise in 2017. Weaker business investment has been a contributing factor. Between Q3 2018 and Q4 2018, business investment fell by 1.4%, the fourth consecutive quarterly decline, meaning investment was 3.7% lower in Q4 2018 compared with a year previously. Business borrowing increased slightly towards the end of 2018, with loans to non-financial companies up 2.6% in the year to December 2018, compared with 2.1% at the end of 2017. However, within that, it was larger firms who were primarily responsible for the growth in lending (up 4% in the year to December 2018). In comparison, SMEs loan growth was 0.1% year on year. Annual inflation hovered just above the Monetary Policy Committees target in December 2018, at 2.1%.
The labour market remained strong with employment rising further to a new record 32.5 million in the three months to November 2018 compared to 32.2 million for the three months to November 2017. This helped push unemployment down to 4.0% in the three months of November 2018, compared to 4.4% at the end of 2017. Pay growth rose to 3.4% in the three months to November 2018 and vacancies reached new highs. The Bank of Englands mounting concerns that the pace of activity is exceeding the potential growth rate of the UK economy prompted a rise in the Bank Rate to 0.75% in August 2018, the second increase since November 2017. However, the Bank of England signalled it expects UK economic growth to slow again in 2019 and therefore envisages any further tightening to be gradual and limited, contingent on the nature of the UKs withdrawal from the EU.
Key influences in our operating environment
The environment in which we operate influences our ability to serve customers and create value for the long term.
Every year we assess the importance and materiality of external influences both in terms of their relevance to our stakeholders (including customers, investors, policy makers, bank representatives and topic specialists) and their potential commercial impact on the bank.
In 2018 the key influences review involved interviews with internal and external stakeholders and a cross-bank workshop.
The results help evaluate our performance in the context of wider societal issues, inform the banks future strategy and stakeholder engagement.
For more on our key influences process refer to the Sustainable Banking pages on rbs.com
Understanding the key influences in our operating environment
Shorter term considerations
UK productivity & economic growth
The UK economy continued to grow in 2018, albeit below its long-term trend. RBSs performance is strongly tied to the economic performance of the UK economy. With the short and long-term outlook for the UK and global economy remaining uncertain, RBS recognises its role in supporting productivity and economic growth.
Political landscape
Political risks continue to evolve with uncertainties related to Brexit.
Generating sustained returns
To generate sustained returns to its stakeholders, RBS needs to have a robust business model with a well- managed cost base that adapts and responds to changing socio-economic and environmental factors.
Technology & innovation
Digital maturity is seen as critical to the future success of RBS as the banking sector goes through a period of rapid technological change. Together with digital innovation and ongoing efforts to reduce costs, there is potential for significant disruption to traditional banking business models.
Changing customer expectations
Customers lives are following less predictable paths. RBS needs to continue helping customers with new ways to bank while meeting personalised service expectations and catering to a broad range of lifestyles and differing levels of digital and financial understanding.
Competition
Regulators continue to encourage competition in the banking sector, with January 2018 seeing the arrival of Open Banking and Payment Services Directive 2 (PSD2). To respond to growing competitive pressures, RBS will need to continue to improve the banks products and services in order to increase market share.
Reputation & trust
A significant level of trust is required to ensure RBS is sustainable for the long term. Continued efforts to restore trust and safeguard reputation remain a key focus area.
Conduct & litigation
Although RBS has resolved the majority of legacy conduct issues and litigation costs are falling, the focus remains on putting in place and maintaining measures to prevent future issues related to conduct.
Cyber security
With the increasing possibility of significant scale attacks resulting in data breaches and ultimately, damaging consumer trust, RBS must continue to build on a multi-layered approach to cyber security and continue to take part in industry-wide initiatives to monitor and anticipate developments.
Operational resilience
2018 has seen heightened media coverage on the operational competency of UK banks, including data breaches and technology failures. To provide continuity of service for customers with minimal disruption, RBS must continue to monitor and assess a diverse array of threats, both external and internal, as well as developing, strengthening or adapting existing control capability to be able to absorb and adapt to such disruptions.
Banking regulation
RBS continues to operate in an increasingly complex regulatory environment. Regulatory and legislative focus is broadening from banking regulation to include non-banking specific regulation, for example relating to artificial intelligence and climate change.
Longer term considerations
Inclusion & diversity
Building a more inclusive RBS is essential for our customers and colleagues. We will only achieve our ambition to be number one for customer service, trust and advocacy if we understand the needs of all of our people and our customers.
Culture, engagement & wellbeing
A healthy culture and engagement are critical drivers for overall performance and wellbeing, underpinning the banks long-term success.
Skills, capabilities & reward
RBS faces competition for skilled people. Recruiting, developing and retaining talent remains a key priority.
Climate and sustainable finance
As the scientific evidence on climate change becomes even clearer, RBS needs to further embed climate risk in its existing risk management framework and proactively assist its customers and clients with the transition to a low carbon economy.
Financial capability
Against a backdrop of increased focus on debt, fraud and customers in vulnerable situations, RBS has a key role to play in supporting customers to use our various banking channels and manage money well on a day to day basis, through significant life events and during periods of financial difficulty.
Social inequality & financial exclusion
Squeezed incomes, the gig economy and rising cost of living means many UK consumers find themselves in precarious financial situations. Access to mainstream financial services coupled with a lack of digital footprint and skills remains a concern across a number of stakeholders.
Housing
Housing is a major expense for most people and in many parts of the UK there are concerns about the affordability, standard and availability of housing. RBS is a major mortgage provider and also lends to the housing and construction sectors.
Where to find out more
Creating a Healthy Culture
Building a healthy culture is one of our core priorities. We have clear cultural goals to reinforce Our Values and set ourselves cultural priorities each year, regularly engaging our management. We gather feedback from our colleagues through our listening strategy, and through metrics and key performance indicators to assess our progress and respond accordingly.
We do this along with feedback from regulators and industry bodies.
Almost 60,000, 80%, of our colleagues completed our most recent opinion survey, the highest participation in the last five years. The results were the most positive we have seen since we started measuring engagement in 2002 and showed we are changing the culture of the bank for the better. Key measures of engagement, leadership and our culture have improved significantly, and we are now above the global financial services norm in all of our comparable survey categories. The results are encouraging, and show that our hard work is paying off. However, we recognise that we have more to do to continue to nurture this culture, and we encourage colleagues to tell us what they think via the bi-annual colleague survey and our regular comments boards. When colleagues wish to report concerns relating to wrong doing or misconduct one of the ways in which they can do this is by raising their concerns via Speak Up, our whistleblowing service.
Our opinion survey has shown the highest ever score when asking colleagues if they feel safe to speak up, as well as understanding the process of how they do that. In 2018, 480 cases were raised compared to 290 in 2017.
Performance and Reward
Our approach to performance management provides clarity for our employees about how their contribution links to our ambition and all our employees have goals set across a balanced scorecard of measures. Further progress has been made in making sure employees are paid fairly for the work they do and are supported by simple and transparent pay structures. We simplified our Value Account construct, making it easier for our employees to understand the value of their fixed pay and to bring it more in line with industry best practices. We are confident that we pay our employees fairly. We keep our HR policies and processes under review to ensure we do so. In the UK, our rates of pay continue to exceed the Living Wage and we ensure people performing the same roles are paid fairly and consistently. More information on our remuneration policies can be found in the 2018 Directors Remuneration Report in the 2018 Annual Report and Accounts.
Developing Skills and Capabilities
We have launched the NextGen talent development programme for high potential colleagues at managerial level, helping them become the future leaders we need. The learning opportunities available through the programme align to the banks Critical People Capabilities. There are five people capabilities that we have identified that will help build the right knowledge, skills and behaviours and help the bank to be successful now and in the future. We have developed a Capability Checker to support our colleagues in identifying the capabilities most relevant to their current and future roles, aligning learning to those capabilities.
Our Female Development Programmes focus on supporting women to reach their full potential and manage their careers effectively. They support our aspiration to be fully gender balanced by 2030.
Sales Excellence is our complete bank-wide sales programme.
It teaches the tools and techniques that enable those in sales roles to be the best at ethical, needs-based selling. It covers both core and advanced techniques that help to uncover the full financial needs and goals of customers and present compelling options on the ways we can help. Over 60% of the appropriate colleagues have already completed a Sales Knowledge Assessment level 1 and training for all front line sales colleagues, sales specialists and sales leaders is underway.
Health and Wellbeing
As a strong component of making RBS a great place to work, wellbeing initiatives have successfully delivered against three pillars; Physical, Mental and Social with the final fourth pillar, Financial Wellbeing well established and continuing to build momentum.
Our internal wellbeing index has increased by 3% taking us 1% above other high performing norm companies. We continue to embrace the rapid acceleration of digital wellbeing by offering our colleagues online and on-site wellbeing tools and resources. This year weve seen over 20,000 onsite health checks completed across a number of our keyhubs. We continue to support the Time to Change pledge and this year launched our new wellbeing campaign Live Well, Being You. Our month long wellbeing campaign in May 2018 focused on each of our four pillars with a specific focus on Mental Health Awareness Week and World Mental Health Day in October 2018. In 2018 we again supported our colleagues through change and have fully utilised the services of our Employee Assistance Programme.
2018 Gender profile (*)
Grade |
#Women |
#Men |
%Women |
CEO 1 |
7 |
9 |
44 |
CEO 2 |
37 |
72 |
34 |
CEO 3 |
243 |
412 |
37 |
CEO 4 |
1438 |
1760 |
45 |
Target population (CEO 3 and above) |
287 |
493 |
37 |
Note: We report to reflect our organisational (CEO) levels. This method more accurately describes our gender balance at leadership/pipeline levels. As well as being more reflective of our organisational structure, this enables comparison to be made externally.
|
Male |
Female |
Executive Employees |
76 (75%) |
26 (25%) |
Directors of Subsidiaries |
220 (80%) |
54 (20%) |
There were 376 senior managers (in accordance with the definition contained within the relevant Companies Act legislation), which comprises our executive population and individuals who are directors of our subsidiaries.
Human rights and Modern Slavery Act
At RBS we are committed to our responsibilities to respect and uphold human rights across our business and sphere of influence. The Modern Slavery Act 2015 (MSA) forms part of our approach to human rights.
Our second statement is available on our corporate website alongside our Human Rights Position Statement. Our approach covers our customers, our people and our suppliers.
Our Customers
Our relationship with our customers is governed by a wide range of risk considerations, including our Anti-Money Laundering (AML) and Environmental, Social, and Ethical (ESE) risk assessments on current and new customers, to consider whether any of their activities carry human rights infringements.
Our People
All of our people are legally recruited subject to local jurisdiction and in the UK must meet 1998 Immigration Act requirements.
The bank also has policies and processes such as Our Code, the Yes Check and Speak Up and is an early adopter of the Living Wage to support the banks position on Modern Slavery.
Our Suppliers
In 2018 we updated and enhanced our Sustainable Procurement Code, now referred to as the Supplier Code of Conduct (SCoC) (available on rbs.com). The SCoC continues to be a contractual requirement - we expect our suppliers to uphold the same values and commitments we have made on social and environmental impacts.
Our Values
Doing the right thing
■ We do the right thing.
■ We take risk seriously and manage it prudently.
■ We prize fairness and diversity and exercise judgement with thought and integrity.
Thinking long term
■ We know we succeed only when our customers and communities succeed.
■ We do business in an open, direct and sustainable way.
Working together
■ We care for each other and work best as one team.
■ We bring the best of ourselves to work and support one another to realise our potential.
Serving customers
■ We exist to serve customers.
■ We earn their trust by focusing on their needs and delivering excellent service.
Measuring Customer Advocacy
We track customer advocacy for our key brands using the net-promoter score (NPS), a commonly used metric in banking and other industries across the world. This is measured through independent customer surveys in which customers are asked how likely they would be to recommend their bank to a friend or colleague, on a scale of 0-10, with a score of 10 being extremely likely and 0 being extremely unlikely.
Our Performance
We are aware that there is a significant gap to achieving our ambition to be No. 1 for customer service, trust and advocacy. Colleagues across the bank are fully focused on delivering a more consistent service which is right first time. In addition, our digital innovations continue to attract strong customer advocacy, proof that when we get the product and service proposition right, our NPS improves.
Latest Scores
Our brands are our main connection with customers. Each takes a clear and differentiated position with the aim of helping us strengthen our relationship with them. For this reason we measure customer advocacy by brand.
Personal Banking
Improvements in customer service have been offset by branch closures which have reduced customer advocacy.
This has been most keenly felt for the Royal Bank of Scotland whose reputation continues to be impacted by legacy issues.
NatWest and Royal Bank of Scotland data sourced from Ipsos MORI FRS using 6 month rolling data. Latest base sizes: 3,111 for NatWest (England & Wales); 421 for Royal Bank of Scotland (Scotland). Based on the question: How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking? Base: Claimed main banked current account customers. Ulster Bank data sourced from Coyne Research using 12 month rolling data. Question: Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a scale of 0 to 10 where 0 is not at all likely and 10 is extremely likely. Latest base sizes: 274 Northern Ireland; 297 Republic of Ireland.
Business Banking
Business Banking continues to be affected by operating model charges. Our Business Banking customers have also been heavily impacted by branch closures.
Source: Charterhouse Research Business Banking Survey, YE Q4 2018. Based on interviews with businesses with an annual turnover up to £2 million. Latest base sizes: 1134 for NatWest (England & Wales), 455 for Royal Bank of Scotland (Scotland). Question: How likely would you be to recommend (bank). Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.
Commercial Banking
Our Commercial Banking NPS has fallen recently, however it remains ahead of the rest of the market. Our NatWest and Royal Bank of Scotland brands are ahead of the rest of their respective markets.
Source: Charterhouse Research Business Banking Survey, YE Q4 2018. Based on interviews with businesses with an annual turnover over £2 million. Latest base sizes: 558 for NatWest (England & Wales), 103 for Royal Bank of Scotland (Scotland). Question: How likely would you be to recommend (bank). Base: Claimed main bank.
Data weighted by region and turnover to be representative of businesses in Great Britain.
Trust
We measure Trust by asking customers how much do you trust the bank to do the right thing? Scores for NatWest have fluctuated during 2018 and, over the last five years, have improved in line with the market. Trust in the Royal Bank of Scotland has also improved over the last five years, but legacy issues are still in customers memories and it remains the least trusted bank in the sector.
Source: Populus. Latest quarters data. Measured as a net % of those that trust RBS/NatWest to do the right thing, less those that do not. Latest base sizes: 891 for NatWest (England & Wales), 215 for Royal Bank of Scotland (Scotland).
How we create value
Our long term success is dependent on serving our customers well and generating value for society through our products, services and facilities.
UK Personal & Business Banking
We are focused on serving customers brilliantly. This means treating customers fairly, offering them flexibility in how they choose to bank with us and offering extra help to vulnerable customers and those in financial difficulty. It also means keeping their funds safe and secure, improving financial capability, and supporting them in the moments that matter.
Despite a highly uncertain economic outlook, and a continued low interest rate environment, we delivered an operating profit of £2,458 million in 2018 as we delivered an operating expense reduction of £347 million in 2018, or 9% compared with 2017.
Gross new mortgage lending in 2018 was £30.4 billion, giving a market share of 11.3% and supporting stock share of around 10%. In achieving this, the business has maintained a prudent approach to risk and pricing, in a very competitive market.
We were the first bank to launch a paperless mortgage process with customers continuing to embrace the simplicity and ease of our market leading innovation. Approximately half of all mortgage applications in Q4 2018 were paperless. As a proactive bank we are using automation and technology to simplify and streamline our key customer journeys. We are also continuing to invest in roles such as Community Banker and TechXperts to help customers get the most from our award-winning digital services including our mobile banking app which now has 6.4 million regular users and was awarded Best Banking App at the British Banking Awards in 2018.
We have the third largest branch network across the UK. 99.7% of the UK population live within 15 minutes of a branch, a mobile-van stop or a Post Office location and our fleet of 41 mobile vans serve more than 600 communities each week. We are also proud to have the most professional workforce of any bank in the UK, with over 13,000 colleagues achieving their Professional Banker Certificate.
Ulster Bank RoI
We are focused on our strategic ambition to become the number one bank in the Republic of Ireland for customer service, trust and advocacy. We have continued to deliver on growth in new lending, building lasting relationships with customers and on digital and technological innovation that creates benefits for customers and operational efficiency.
Operating profit was £12 million ( 15 million) compared with a loss of £132 million ( 151 million) in 2017. Total income was £610 million ( 689 million) compared with £604 million ( 689 million) in 2017, and operating expenses decreased by £93 million, or 13.8% ( 115 million, or 14.9% in euro terms). Net loans reduced by £0.7 million ( 1.0 billion) principally reflecting the successful sale of a portfolio of non-performing loans of £0.5 million ( 0.6 billion) which contributed to a reduction in the non-performing loan ratio from 16.7% in 2017 to 11.3% in 2018.
The Help for what matters initiative and First Five mortgage campaign continued to support lending growth in 2018. New mortgage lending increased by 14% to £1.02 million, or 13% to 1.13 billion in euro terms, compared to 2017, supported by a positive uptake on the market leading two, four and seven year fixed rate products.
We have continued to strengthen our digital proposition in 2018 through enhancements to digital and mobile customer offerings. 69% of our active personal current account customers are choosing to bank with us through digital channels. We introduced a faster, more convenient and secure digital application experience for customers applying for current accounts and personal loans and made further enhancements to the mobile app during the year. Mobile payments and transfers increased 36% on prior year, reflecting the continued customer migration from physical to digital channels.
Commercial Banking
In our position as the largest UK commercial bank (1) , with professional relationship management at our core and a strong regional network, we provide deep sector and business insight to help UK businesses and the UK economy succeed. This commitment and support has generated market-leading customer advocacy. In 2018, within total utilised lending of around £90 billion, we either made or renewed commitments for around £30 billion of term lending facilities, of which £18 billion utilised as at 31 December 2018, to our mainly UK-based customers. Additionally at Q3 2018, we provided a further £2 billion of growth funding to help British businesses prepare for the Brexit transition, bringing the total commitment to £3 billion.
Operating profit (2) was £1,358 million compared with £944 million in 2017. Total income (2) was £3,374 million (2017 £3,238million) and operating expenses (2) decreased by £132 million, or 6.6%, reflecting continued operating model simplification and efficiencies.
In the year, we made £10.5 billion RWA reductions through active capital management activity, leading also to lower impairment loss rates.
Customer banking preferences continue to evolve and we are working hard to anticipate and respond. Approximately 85% of customers now interact with us digitally and we have developed solutions they value. We successfully launched our Bankline Mobile in the Apple app store, while our lending journey now enables customers to apply digitally for loans of up to £750,000 through a self-service application process.
This is the largest value offered by a UK commercial bank, giving customers rapid, digital access to funding decisions, with around 50% of loan applications given a decision in principle in under 24 hours.
Notes:
(1) Market share includes personal bank accounts used as business accounts; includes NatWest, RBS & W&G; Source Charterhouse Business Banking Survey, Q4 2018. Commercial £2m+ in GB. Sample size 3,075; sample size excluding dont knows: NatWest (598); Royal Bank of Scotland (271). Question: How likely would you be to recommend (bank). Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.
(2) Comparisons with prior periods are impacted by transfers in preparation for ring-fencing. The net impact of these transfers on 2017 operating profit would have been to reduce income by £246 million, operating expenses by £10 million and impairments by £72 million. The variances in the commentary have been adjusted for the impact of these transfers.
Private Banking
Through the Coutts and Adam & Company brands, our business provides private banking and wealth management services to UK connected high net worth clients with domestic and international needs. Coutts is recognised as one of the leading private banks, wealth and investment managers in the UK with a 325 year history. A strategy of providing a personal approach to private banking and wealth management, combined with outstanding brand recognition, drove strong customer volumes in 2018.
Operating profit was £303 million compared with £152 million in 2017. Total income (1) was £775 million (2017 £702 million) and operating expenses (1) decreased by £66 million, or 12.1%, as we continued to focus on front-to-back simplification and the digitalisation of key processes. Net lending growth was £0.9 billion, or 6.7%, compared with 2017. Assets under management have decreased by £1.0 billion, or 4.8%, reflecting negative market movements partially offset by new business inflows of £0.6 billion.
We continue to shift from a physical to a digital client offering as we deliver more innovative solutions. Approximately 60% of clients bank with us digitally, and 94% of clients positively rate our Coutts24 telephony service. We also recently launched Coutts Connect, a social platform which allows clients to network and build working relationships between one another.
We gained further external recognition for our investment management performance having won two Gold awards at the Portfolio Advisor Wealth Manager (PAM) awards in 2018.
Note:
(1) Comparisons with prior periods are impacted by the transfers in preparation for ring-fencing.
The net impact of the transfers on 2017 would have been to increase income by £24 million and increase operating expenses by £15 million. The net impact on the 2017 balance sheet would have been to reduce net loans to customers by £0.1 billion and assets under management by £0.7 billion. The variances in the commentary have been adjusted for the impact of these transfers.
RBS International
We are one of the largest banks operating in the Channel Islands, Isle of Man and Gibraltar and in 2017 established new wholesale branches in Luxembourg and London. In line with the wider Group we are focused on serving customers well and becoming a bank that is simpler and easier to deal with.
During 2018, we repositioned our balance sheet so that excess funds were no longer up streamed to RBS. Instead some funds have been deployed into funding customer assets in our new London branch which looks after long-standing alternative investment fund customers who could not remain inside the UK ring- fence. We have also established a liquidity portfolio across central and correspondent banks and sovereign bond holdings.
These changes preserve value for the banking group, provide continuity for our customers and support compliance with incoming Basel III Liquidity Coverage Ratio rules.
Operating profit was £336 million compared with £304 million in 2017. Total income (1) was £594 million (2017 £540 million), the increase largely driven by deposit margin benefits. Operating expenses (1) increased by £27 million, or 11.6%, primarily due to £39 million higher back-office costs associated with becoming a non ring- fenced bank. Net loans to customers were £13.2 billion and gross new mortgage lending in 2018 was £0.3 billion compared with £0.5 billion in 2017.
Our mobile app has been further developed to include new functionality, allowing customers to manage their finances more effectively and we have 23% more users compared with 2017 with NPS at +59.
71% of wholesale customer payments are now processed using our newly introduced international banking platform, making the payments process simpler for customers.
We transformed our retail branches in each of our jurisdictions to include self service automation terminals giving customers more options in how they bank with us and in 2018 we helped our customers buy over 1000 new homes.
2018 was a very successful year for community investment activities across all of our jurisdictions due to the commitment and generosity of our colleagues who supported our Do Good Feel Good Campaign.
Note:
(1) Comparisons with prior periods are impacted by the transfers in relation to ring-fencing. The net impact of the transfers on 2017 would have increased income by £151 million and increase operating expenses by £14 million. The net impact on the 2017 balance sheet would have been to increase net loans to customers by £4.5 billion. The variances in the commentary have been adjusted for the impact of these transfers.
NatWest Markets
We continue to put customers at the centre of the way we do business and have focused on the core products and markets where we have a strong track record, longstanding relationships and market leading positions.
An operating loss of £70 million compared with a loss of £977 million in 2017. Total income (1) increased by £288 million, or 25.0%, primarily reflecting lower disposal losses in the legacy business and a £165 million indemnity insurance recovery, partially offset by lower income in the core business. The reduction in the core business was driven by challenging fixed income, currencies and commodities (FICC) market conditions in Q4 2018, together with turbulence in European bond markets earlier in the year.
Operating expenses decreased by £595 million, or 27.1%. This reflects reductions in other expenses (1) across both the core and legacy businesses, down £313 million to £1,213 million, lower strategic costs, down £198 million to £238 million, and reduced litigation and conduct costs, down £84 million to £153 million.
NatWest Markets is increasingly using technology to enhance the way it provides innovative financial solutions to its customers and partners. For example, FXmicropay makes it simpler for businesses operating globally to accept payments in multiple currencies, reducing costs and increasing revenues for our customers. Our success in harnessing technology has been recognised with the award for Best in Service Globally among Corporates for Algorithmic trading in the 2018 Euromoney FX Survey.
Awards and rankings
· Sterling Bond House of the Year 2018 (Source:International Financing Review (IFR))
· #1 for Overall Service Quality for UK Corporate (Source: 2017 Greenwich Associates FX Survey)
· Tied #1 for Rates* Service Quality UK FIs (* Government Bonds and Interest Rate Derivative Investors) (Source: Greenwich Associates, European Fixed Income 2018 Rates).
Notes:
(1) Comparisons with 2017 are impacted by the transfer of business activities in preparation for ring-fencing. The net impact of the transfers would have been to increase total income by £104 million in 2017 and reduce operating expenses by £2 million in 2017. The commentary has been adjusted for the impact of these transfers.
(2) The NatWest Markets operating segment should not be assumed to be the same as the NatWest Markets Plc legal entity or group.
Notes:
(1) The targets, expectations and trends discussed in this section represent RBSG managements current expectations and are subject to change, including as a result of the factors described in the Risk Factors section on pages 265 to 278 of the 2018 Annual Report on Form 20-F. These statements constitute forward-looking statements; refer to Forward-looking statements in this document.
(2) Return on tangible equity is calculated using profit for the period attributable to ordinary shareholders.
(3) c.14% at the end of 2021, previous target stated as >13%.
Outlook (1)
RBS, like all companies, continues to deal with a range of significant risks and uncertainties in the external economic, political and regulatory environment. Our central economic forecast, which supports our corporate plan, is in line with consensus as at the end of December 2018 and shows average UK GDP growth of around 1.0-2.0% from 2019 to 2023 and continued low interest rates. Given the current uncertainties we will continue to actively monitor and react to market conditions.
2019 Outlook
As part of our continued cost savings plans, we expect to incur aggregate strategic costs of around £2.5 billion across 2018 and 2019, with £1.0 billion of this having been incurred during 2018. We plan to reduce operating expenses, excluding strategic costs and conduct and litigation costs, by £300 million in 2019 compared with 2018, excluding one-off items.
2018 saw a continuation of the period of benign economic conditions with low defaults and strong cash recoveries.
However, the potential impact on the real economy of ongoing political uncertainties and geopolitical tensions could affect our credit loss outcome. As a result, impairments are expected to increase in 2019 but remain below our through-the-cycle loss rate assumption of 30-40 basis points.
The threat from single name and sector driven events remains.
We expect to end 2019 with risk weighted assets (RWAs) of around £185 190 billion as the RWAs associated with Alawwal Bank are expected to reduce by around £5 billion, subject to regulatory approvals relating to the merger and our shareholding.
RBS Group (RBSG) capital and funding plans focus on issuing £3-5 billion of MREL-compliant instruments and around £1 billion of Tier 2 instruments. We do not plan to issue AT1 in 2019.
As in prior years, we will continue to target other funding sources to diversify our funding structure, including senior secured issuance of £2-3 billion from NatWest Bank. NatWest Markets Plc, as a standalone bank, plans to issue £3-5 billion of term senior unsecured instruments.
Medium term outlook
While we remain comfortable with our 2020 target of a return on tangible equity of more than 12%, we recognise our 2020 target of a cost:income ratio of less than 50% is increasingly challenging for the business to achieve with the risk being to the downside. This reflects the ongoing economic and political uncertainty and the additional ongoing costs associated with ring- fencing and Brexit.
Our previous guidance on RWAs beyond 2020 was an estimated 10% increase in 2021 relating to Basel 3 amendments, in addition to RWA inflation as a result of IFRS 16, which requires lease obligations to be brought on balance sheet, of £1.3 billion in 2019 and Bank of England mortgage floors of £10.5 billion in 2020. We now expect the overall impact of Basel 3 amendments to be in the range of 5-10% and phased across 2021 to 2023, with the details still subject to significant regulatory uncertainty.
RBS Group capital distributions
We propose a 3.5 pence final ordinary dividend and a 7.5 pence special dividend for the 2018 financial year, while maintaining a CET1 ratio of 16.2% as at 31 December 2018.
Pro-forma for the introduction of IFRS16 - Leases, the CET1 ratio was 16.0%, with the c.20 basis points reduction reflecting a £1.3 billion increase in RWAs and £0.3 billion charge against reserves.
We expect to maintain ordinary dividends of around 40% of attributable profit. We have updated our medium term guidance of CET1 to be approximately 14% at the end of 2021.
We have shareholder and regulatory approval to carry out directed buybacks of the UK government stake in RBS, but recognise that any exercise of this authority would be dependant upon HMTs intentions and is limited to 4.99% of issued share capital in any 12 month period. As a reminder, we have also committed to make further pre tax contributions to the pension scheme of up to £1.5 billion in aggregate from 1 January 2020 linked to future distributions to RBS shareholders.
NatWest Markets (NWM)
The NWM franchise includes NWM Plc and NWM N.V., both of which are currently direct subsidiaries of RBSG. RBS has previously announced its intention for NWM N.V. to become a subsidiary of NWM Plc following the completion of the sale of the consortium holding in Alawwal. As such, NWM Plcs financial reporting does not currently include NWM N.V.
NWM Plc is regulated and discloses capital ratios and RWAs on a standalone bank basis and is targeting by 2020 a CET1 ratio of circa 15%, MREL ratio of at least 30% and a leverage ratio of at least 4%.
We plan to transfer our Western Europe corporate business into NWM N.V. from the ring-fenced bank, in addition to the NWM business that is expected to be part of a FSMA Part VII Transfer Scheme from NWM Plc to NWM N.V., subject to court approval and as announced on 6 December 2018. NWM Plc legal entity RWAs are expected to be around £35 billion, NWM N.V. RWAs are expected to be around £8 billion with the consolidated NWM franchise position, excluding RWAs related to intercompany positions, expected to be around £39 billion by 2020.
Note:
(1) The targets, expectations and trends discussed in this section represent RBSG managements current expectations and are subject to change, including as a result of the factors described in the Risk Factors section on pages 265 to 278 of the 2018 Annual Report on Form 20-F. These statements constitute forward-looking statements; refer to Forward-looking statements in this document.
Risk overview
Prudent risk management is central to the successful delivery of the RBS strategy.
RBS operates an integrated framework that facilitates effective risk management. The framework which is centred around the embedding of a strong risk culture ensures that the tools are in place to identify and manage both internal and external threats, including top and emerging risks. Risk appetite, which defines the level and types of risk RBS is willing to accept, is set in line with overall strategy and approved by the RBS Group board.
An emphasis on prudent risk management has a key role in positioning RBS to prepare for, and respond to, developments in the wider competitive, economic and regulatory environment.
All RBS employees share ownership of the way risk is managed.
Progress in 2018
RBS continued to reduce risk and strengthen both the balance sheet and the capital position in 2018. While continuing progress against the Groups strategic objectives, there was also a significant focus on a number of key themes. These included wider economic uncertainty relating to the UKs exit from the European Union, the accelerating evolution of the technological landscape and regulatory change.
The final settlement with the US Department of Justice (DoJ) in relation to the RBS Groups issuance and underwriting of US Residential Mortgage-Backed Securities (RMBS) during the period 2005 to 2007 brought to an end a major legacy issue, leading to further improvement of the risk profile.
In October 2018, the Federal Reserve Board terminated a Cease & Desist Order originally imposed in December 2013 in relation to historical compliance with Office of Foreign Assets Control (OFAC) economic sanctions regulations.
The termination recognised RBSs multi-year programme to establish a robust, sustainable OFAC Sanctions compliance framework. In March 2018, the Federal Reserve Board also terminated a Cease & Desist Order originally imposed in July 2011 in relation to RBSs US operations.
A memorandum of understanding with the Trustees of the Group Pension Fund, to align the scheme with the UKs ring-fencing rules and the £2 billion contribution made in October 2018 significantly reduced the Groups exposure to pension risk. The contribution to the scheme which could be followed by up to a further £1.5 billion of dividend- linked contributions facilitated a reduction in the risk profile of the fund, principally the sale of approximately £6 billion of quoted equity exposure and the purchase of further interest rate and inflation hedging.
RBS continued to make progress towards its aim of making risk simply part of the way colleagues work and think. In 2018 the risk culture action plan focused on building clarity, developing capability and embedding a standardised risk culture assessment and reporting approach.
There was a continuing emphasis on refining risk appetite during the year. Significant work was done to enhance the approach at both Group and subsidiary levels in advance of compliance with the UKs ring-fencing rules. Limits and triggers for material risks were reviewed and refined as part of the continuous improvement of the risk appetite framework. Limits and triggers were also set for material subsidiaries.
From an operational risk perspective, throughout 2018 there was a continued focus on the control environment, ensuring that RBS maintains a safe and secure approach to doing business.
Oversight of the Groups transformation to meet the evolving needs of customers as well as to address the changing economic, regulatory and technology landscapes was further enhanced in order to effectively align with the innovation agenda.
Continuity of service for customers also remained a key area of focus. A number of activities aimed at minimising the impact of disruptive events such as system outages on overall service were undertaken.
These included preventative measures, control improvements and work to calibrate limits or triggers for the most critical processes. RBS continues to monitor and assess a diverse array of threats both external and internal as well as developing, strengthening or adapting existing control capability to protect continuity of service.
Brexit
RBS maintained a consistent focus on risks arising as a result of uncertainties related to the UKs planned exit from the European Union. Oversight of planning for regulatory and legislative impacts as well as economic impacts remained a critical part of forward- looking risk management throughout the year. This included stress testing and scenario modelling as well as capital planning. In view of continued uncertainty, RBS is implementing plans to ensure continuity of service for its customers in the event of an immediate loss of access to the European Single Market. This includes finalising a third-country licence for the Frankfurt branch of its National Westminster Bank subsidiary to allow for continued clearing of euro- denominated payments.
While the longer-term effects on the operating environment of the UKs exit are difficult to predict, consideration has also been given to the potential second and third order effects on the Group and its customers, including planning for the results of periodic financial volatility and slower economic growth.
Cyber Security
RBS has a multi-layered defence approach to cyber security and continues to invest in its defences as the external threat evolves. In 2018, RBS continued to take part in industry-wide initiatives to monitor and anticipate developments, identify vulnerabilities and share best practice.
Financial crime
The financial crime threat continues to evolve in line with changes in technology, the economy and wider society. As risks relating to money laundering, terrorist financing, tax evasion, sanctions, bribery and corruption develop, understanding and responding to them appropriately remains a key area of focus.
In 2018, RBS continued its journey of improvement in relation to the policies, processes and systems used to combat financial crime. RBS also maintained an emphasis on ensuring proportionate, risk-focused customer due diligence standards were in place, particularly for higher-risk customer segments. In addition, improvements to the financial crime control environment remained a key focus in accordance with the evolving nature of the risk.
RBS is committed to ensuring it acts responsibly and ethically, both when pursuing its own business opportunities and when awarding business. Consequently it has embedded appropriate policies, mandatory procedures and controls to ensure its employees, and any other parties it does business with, understand these obligations and abide by them, whenever they act for RBS. Anti-bribery and corruption (ABC) training is mandatory for all staff on an annual basis, with targeted training appropriate for certain roles. RBS considers ABC risk in its business processes including, but not limited to, corporate donations, charitable sponsorships, political activities and commercial sponsorships. Where appropriate, there is a requirement for ABC contract clauses in written agreements.
Climate risk
The impact of multiple risks relating to climate change continues to be assessed. This includes physical risks such as those resulting from extreme weather events and a more unstable climate as well as economic and regulatory risks.
In addition, RBS continues to focus on risks arising as a result of government undertakings to limit carbon emissions, which will require adjustments in all sectors of the economy. Though the nature and timing of these transitional risks remain uncertain, RBS classifies climate risk as an emerging threat and is integrating it into core risk management.
RBS supports the recommendations of the Financial Stability Boards Task Force on Climate-Related Financial Disclosures and has established a climate risk working group.
LIBOR transition
The UK regulators have reiterated the intention to move from LIBOR to alternative interest-rate benchmarks by the end of 2021. A significant number of transactions across the industry reference LIBOR and, as a result, the transition will be a major undertaking. RBS is conducting risk assessments of the likely impact across each of its franchises and the Risk function will continue to provide oversight as the programme develops.
The factors discussed on page 33 and elsewhere in this report should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties facing RBS. Refer to the Risk Factors section on page 265 to 278.
Top and Emerging Risks (1)
RBS employs a continuous process for identifying and managing its top and emerging risks. These are risks that could have a significant negative impact on RBSs ability to operate or meet its strategic objectives.
Note:
(1) The factors discussed in this section and elsewhere in this document should not be regarded as complete and comprehensive statement of all potential risks and uncertainties facing RBS. Please refer to the section Risk Factors on pages 265 to 278.
Climate related financial disclosures
Climate change presents both risks and opportunities to our business across our customers, operations and suppliers.
The Board has governance oversight on climate via the Sustainable Banking Committee. From 2019 this will be shared with the Board Risk Committee. A Climate Change Working Group (CCWG) has been established with the accountable executive being the Chief Risk Officer. The CCWG is responsible for addressing climate- related regulation, risks, opportunities, metrics and analysis. Membership includes senior representatives from Risk, Sustainable Banking, Corporate Governance, Regulatory Affairs and Legal. Frontline business representatives will join in 2019. The Sustainable Energy Forum (SEF) also co-ordinates products and services that help business and corporate customers to transition to a low carbon economy.
As part of our developing strategy to address climate change, we are helping to accelerate the transition to a low carbon economy by supporting our customers and integrating climate change into core business decision making. To support this, RBS is currently undertaking climate scenario analysis across our main lending portfolio. Two scenarios are being considered: a Business as Usual 3.7°C rise and a Paris Agreement 2°C rise. The time frames used for analysis are aligned to RBS strategy: short 0-2 years, medium 3-5 years and long 6-30 years. Both physical and transitional risks are being incorporated. The results of the analysis will inform future strategy and focus areas for more in-depth climate scenario analysis.
Climate risk management covers both physical and transitional risks. RBS employs a continuous process for identifying and managing top and emerging risks (refer to page 33), including climate-related risks. The nature and timing of the far-reaching commercial, technological and regulatory changes the low carbon transition will bring are currently uncertain, for our customers and business. The impact of such changes may be disruptive, especially if such changes do not occur in an orderly or timely manner or are ineffective in reducing emissions sufficiently. Whilst these risks are significant and growing, they are not inconsistent with our strategy to be a leading UK-focused banking service provider to personal and business customers. To help manage climate related risks around individual lending decisions, we use sector-specific Environmental, Social and Ethical risk policies (refer to rbs. com). The Power Generation, Mining and Metals, Oil & Gas and Forestry, Fisheries and Agribusiness policies were updated in 2018 in relation to climate-related risks. To help us manage operational risks, we joined RE100, committing to purchase 100% global renewable energy by 2020.
RBS uses a range of metrics and targets to assess our climate-related financial impacts, including operational emissions figures, (refer to the table below (*) and rbs.com), volumes of sustainable energy sector financing, and proportion of lending associated with high carbon or high climate risk sectors. Our greenhouse gas (GHG) emissions are independently verified each year by an external auditor. As at 31 December 2018, our exposure to the Power and Oil & Gas sectors remains at 1.2% of our total lending exposures. The PRA report Transition in Thinking highlighted the energy, transport, property (domestic
and non-domestic) and agriculture sectors as having particular exposure to climate risks and opportunities and these equated to approximately 44% of total RBS exposures in 2018(*). These were calculated using Exposure at Default (EAD).
We were recognised by InfraDeals as the leading lender to the UK renewables sector by number of transactions over the past ten years (2008- 2018). Between 2014 and 2018 we reduced our operational greenhouse gas emissions (Scopes 1, 2 and 3 Business Travel) by 49%, exceeding our Science Based Target of 45% by 2020.
Greenhouse Gas (GHG) Emissions |
2014
|
2017 |
2018 |
|
|
|
|
Location-based CO 2 e emissions (Scope 1, 2 & business travel) (tonnes) |
496,249 |
312,731 |
252,340 |
Scope 1* CO 2 e emissions (tonnes) |
30,695 |
25,578 |
29,959 |
Scope 2** Market-based*** CO 2 e emissions (tonnes) |
377,337 |
69,391 |
57,735 |
Scope 2 Location-based CO 2 e emissions (tonnes) |
360,201 |
219,979 |
166,179 |
Scope 3**** CO 2 e emissions from business travel (tonnes) |
105,352 |
67,174 |
56,203 |
Location-based CO 2 e emissions per FTE (Scope 1, 2 & business travel) (tonnes) |
5.07 |
4.08 |
3.56 |
Total energy use (GWh) |
862 |
693 |
619 |
We have reported on all emission sources required under the Companies Act 2006 (Strategic Report and Directors Reports) Regulations 2013. To our knowledge there are no material omissions. Independent limited assurance of total reported emissions in tonnes of CO2e, (Scope 1*, 2** and 3*** location based emissions) has been provided by Ernst & Young LLP. Our reporting year runs from October 2017 to September 2018. *Scope 1: Emissions from fluorinated gas loss and fuel combustion in RBS premises/vehicles. **Scope 2: Emissions from electricity, district heating and district cooling used in RBS premises. *** market-based emissions have been calculated using the GHG Protocol guidelines. ****Scope 3: Emissions associated with business travel (air, rail and road) by RBS employees.
These emissions are calculated using The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard revised edition (2004). The emissions reporting boundary is defined as all entities and facilities either owned or under operational control. Emissions factors used are from UK Government Emissions Conversion Factors for Greenhouse Gas Company Reporting (BEIS,2018), CO2 Emissions from Fuel Combustion (IEA,2017) or from relevant local authorities as required. For more information please see our website (https://www.rbs.com/rbs/sustainability/ responsible-business/).
Governance at a glance
Our Board
The Board has thirteen directors comprising the Chairman, two executive directors and ten independent non-executive directors, one of whom is the Senior Independent Director. Biographies for each director can be found on pages 59 and 60.
The Board is collectively responsible for the long-term success of RBS and delivery of sustainable shareholder value. Its role is to provide leadership of RBS within a framework of prudent and effective controls which enables risks to be assessed and managed.
In 2018, the Board and committee evaluation process was conducted externally by Independent Board Evaluation.
Our Board commitees
In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. The work of the Board committees is discussed in their individual reports. The terms of reference for each of these committees is available on rbs.com.
The full Governance report is on pages 59 to 100 of the 2018 Annual Report on Form 20-F.
Group Audit Committee
Assists the Board in discharging its responsibilities for monitoring the quality of the financial statements of RBS. It reviews the accounting policies, financial reporting and regulatory compliance practices of RBS and RBSs systems and standards of internal controls, and monitors the work of internal audit and external audit.
Group Board Risk Committee Provides oversight and advice to the Board on current and potential future risk exposures of RBS and future risk strategy. It reviews RBSs compliance with approved risk appetite and oversees the operation of the RBS Policy Framework and submissions to regulators.
Group Sustainable Banking Committee
Provides support to the Board in overseeing actions being taken by management to run a sustainable long term business, with specific focus on culture, people, customer, brand and environmental social and ethical issues.
Group Performance and Remuneration Committee Responsible for approving remuneration policy and reviewing the effectiveness of its implementation. It also considers senior executive remuneration and makes recommendations to the Board on the remuneration of executive directors.
Group Nominations and Governance Committee
Assists the Board in the selection and appointment of directors. It reviews the structure, size and composition of the Board, and the membership and chairmanship of Board committees. It considers succession planning taking into account the skills and expertise which will be needed on the Board in the future. Its remit also includes governance oversight.
Technology and Innovation Committee
Assists the Board in overseeing and monitoring the execution of RBSs strategic direction in relation to technology and innovation.
Group Executive Committee
The Board is supported by the Group Executive Committee, comprising the executive directors and the Group Chief Risk Officer. It supports the Chief Executive in managing RBSs businesses. It is responsible for managing strategic, financial, capital, risk and operational issues affecting RBS. It reviews and debates relevant items before consideration by the Board.
UK Corporate Governance Code
Throughout the year ended 31 December 2018, RBS has complied with all of the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated April 2016 except in relation to provision (D.2.2) that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. RBS considers that this is a matter which should rightly be reserved for the Board.
|
Page |
Presentation of information |
36 |
Financial summary |
38 |
Segment performance |
46 |
Presentation of information
In the Report and Accounts, unless specified otherwise, the terms company and RBSG mean The Royal Bank of Scotland Group plc, RBS, RBS Group and the Group mean the company and its subsidiaries; the Royal Bank and RBS plc mean The Royal Bank of Scotland plc; NWH Ltd means NatWest Holdings Limited; NatWest means National Westminster Bank Plc and NWM Plc means NatWest Markets Plc.
The company publishes its financial statements in pounds sterling (£ or sterling). The abbreviations £m and £bn represent millions and thousands of millions of pounds sterling, respectively, and references to pence represent pence in the United Kingdom (UK). Reference to dollars or $ are to United States of America (US) dollars. The abbreviations $m and $bn represent millions and thousands of millions of dollars, respectively, and references to cents represent cents in the US. The abbreviation represents the euro, and the abbreviations m and bn represent millions and thousands of millions of euros, respectively.
Segmental reporting
RBS continues to deliver on its plan to build a strong, simple and fair bank for both customers and shareholders.
Reportable operating segments
The reportable operating segments are as follows. For full business descriptions see Note 4 on page 195.
Franchise |
Reportable operating segment |
Personal & Business Banking (PBB) |
UK Personal & Business Banking (UK PBB) |
Ulster Bank RoI |
|
Commercial & Private Banking (CPB) |
Commercial Banking |
Private Banking |
|
Other reportable segments |
RBS International (RBSI) |
NatWest Markets |
|
Central items & other |
Allocation of central items
RBS allocates all central costs relating to Services and Functions to the business using appropriate drivers, these are reported as indirect costs in the segmental income statements. Assets (and risk-weighted assets) held centrally, mainly relating to RBS Treasury, are allocated to the business using appropriate drivers.
Key operating indicators
RBS prepares its financial statements in accordance with IFRS as issued by the IASB and as adopted by the European Union, which constitutes a body of generally accepted accounting principles (GAAP). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP financial measures. These measures exclude certain items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. These measures include:
· Performance, funding and credit metrics such as return on tangible equity, and related RWA equivalents incorporating the effect of capital deductions (RWAes), total assets excluding derivatives (funded assets) and net interest margin (NIM) adjusted for items designated as fair value through profit or loss (non-statutory NIM), cost:income ratio, loan:deposit ratio and impairment provision ratios. These are internal metrics used to measure business performance.
· Personal & Business Banking franchise, combining the reportable segments of UK Personal & Business Banking (UK PBB) and Ulster Bank RoI and Commercial & Private Banking (CPB) franchise, combining the reportable segments of Commercial Banking and Private Banking.
RBS Group ring-fencing
The UK ring-fencing legislation requires the separation of essential banking services from investment banking services from 1 January 2019. RBS Group has placed the majority of the UK and Western European banking business in ring-fenced banking entities under an intermediate holding company, NatWest Holdings. NatWest Markets Plc (NWM Plc) and RBS International (RBSI) are separate banks outside the ring-fence, both subsidiaries of RBSG. Key activities in 2018 included:
· NatWest Group Holdings Corporation (NWGH) which owns NatWest Markets Securities Inc. (NWMSI) was transferred to NWM Plc (formerly RBS plc). NWGH was previously a direct subsidiary of NatWest.
· The majority of NWM Plcs (formerly RBS plc) PBB and CPB business, and certain parts of Central items and the NatWest Markets segment to be a part of the ring-fenced bank, were transferred to subsidiaries of NatWest Holdings. The second phase of ring-fencing which related to the transfer, of certain markets products from NatWest to NWM Plc, was completed in the third quarter of 2018.
· On 29 June 2018, the Court of Session in Scotland approved the reduction of capital and the cancellation of the share premium account and capital redemption reserve (together the capital reduction) of NWM Plc. As part of the capital reduction, NatWest Holdings transferred to RBSG with effect from 2 July 2018, thereby creating the legal separation of those RBS Group entities that will be within the ring-fenced sub-group from those held outside the ring-fence.
· NatWest Markets N.V. (formerly Royal Bank of Scotland N.V.), the Groups banking entity in the Netherlands, continues to implement its plan to be operationally ready to serve European Economic Area (EEA) customers [when the UK leaves the European Union on 29 March 2019], in the event that there is a loss of access to the EU Single Market. In October 2018 approval was received from the Dutch regulator (DNB) for the repurposing of the existing NatWest Markets N.V. banking licence. NatWest Markets N.V. is expected to become a subsidiary of NWM Plc in 2019 subject to regulatory approval.
Business review
Competition
Personal & Business Banking (comprising UK PBB and Ulster Bank RoI)
In the personal and small business banking business, the Bank competes with a range of providers including UK banks and building societies, major retailers and life assurance companies, as well as the UK subsidiaries of major international banks. In the mortgage market, the Bank competes with UK banks, building societies and specialist lenders. Increasingly, the ambitions of non-traditional players in the UK market are gaining credibility, with new entrants active and seeking to build their platforms either through organic growth or in some cases by acquiring businesses made available through the restructuring of incumbents. Entrants with new business models such as peer-to-peer lending platforms, while currently small, continue to grow rapidly and are emerging as significant competitors. Such competitors often target specific elements of the value chain, providing specialised services to particular customer segments.
RBS distributes life assurance products to banking customers in competition with independent advisors and life assurance companies.
In Ireland, Ulster Bank competes in retail and commercial banking with the major Irish banks and building societies, and with other UK and international banks and building societies active in the market.
In the UK credit card market large retailers and specialist card issuers are active in addition to the UK banks. In addition to physical distribution channels, providers compete through direct marketing activity and digital channels.
In an environment in which central banks have maintained very low interest rates for an unusually long period or introduced negative rates, competitive dynamics have changed in some of the principal markets in which we operate. In this environment an ability to attract and manage funding remains a critical competitive advantage. Other key competitive factors in this market segment include cost management, growing digital sales focus, branch network re-shaping, and product simplification. Cost management remains a key focus in the market, as banks seek to simplify their organisational and IT architectures while at the same time investing to ensure that they can meet customers evolving channel preferences. Customers have increasingly focused on the use of internet and mobile as sales and service channels for certain types of products. Therefore, competitive position and performance in the sector increasingly depends on the possession of user-friendly, diverse and efficient online solutions.
Although conveniently located branches are still important, RBS faces competitive pressure to adjust its branch formats to meet changing customer expectations and to manage its branch footprint as over-the-counter transaction volumes decline. In terms of product offering, the industry trend is to limit the number of products and present the product structure and costs in a clear and transparent manner.
Commercial & Private Banking (comprising Commercial Banking, Private Banking and RBS International)
Competition for corporate and institutional customers in the UK is from UK banks, from specialised global and regional investment banks and from large foreign universal banks that offer combined investment and commercial banking capabilities as well as from new entrants and non-bank challengers. In asset finance and invoice finance, the bank competes with banks and specialist finance providers, both captive and non-captive. In the small business banking market, the bank competes with other UK banks, specialist finance providers and building societies. In all of these areas, entrants with new technology-based business model are also showing rapid growth. RBS International competes with other UK and international banks to offer offshore banking services as well as domestic banking services in the Channel Islands, Gibraltar and the Isle of Man. Coutts and Adam & Company compete as private banks with UK clearing and private banks, asset managers and with international private banks. Competition in wealth management remains strong as banks maintain their focus on competing for affluent and high net worth customers.
NatWest Markets
NatWest Markets (formerly CIB) focuses on the needs of large corporates operating in the UK and Western Europe as well as global financial institution customers. NatWest Markets provides financing and risk management for these customers, and trades with financial institutions and counterparties for distribution and market making. There are sales and trading operations in London, the US and Singapore and offices in a select number of countries. NatWest Markets therefore competes with large domestic banks, major international banks and a number of investment banks that offer such products in these regions.
The Banks product proposition is built around our core strengths: supporting customers across currencies, rates and financing. Key competitive factors in this market include the ability to develop automation across flow products as well as delivering value-adding bespoke solutions for our customers.
With an evolving regulatory landscape and continued pressure on margins, competition in this market remains strong. Many market participants are also revising their strategy in order to ensure they deliver sustainable returns.
Business review
Financial summary
RBSs financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the last five years is presented below.
Summary consolidated income statement |
2018 |
2017 |
2016 |
2015 |
2014 |
£m |
£m |
£m |
£m |
£m |
|
Net interest income |
8,656 |
8,987 |
8,708 |
8,767 |
9,258 |
Non-interest income |
4,746 |
4,146 |
3,882 |
4,156 |
5,892 |
Total income |
13,402 |
13,133 |
12,590 |
12,923 |
15,150 |
Operating expenses |
(9,645) |
(10,401) |
(16,194) |
(16,353) |
(13,859) |
Profit/(loss) before impairment (losses)/releases |
3,757 |
2,732 |
(3,604) |
(3,430) |
1,291 |
Impairment (losses)/releases |
(398) |
(493) |
(478) |
727 |
1,352 |
Operating profit/(loss) before tax |
3,359 |
2,239 |
(4,082) |
(2,703) |
2,643 |
Tax charge |
(1,275) |
(824) |
(1,166) |
(23) |
(1,909) |
Profit/(loss) from continuing operations |
2,084 |
1,415 |
(5,248) |
(2,726) |
734 |
Profit/(loss) from discontinued operations, net of tax |
|
|
|
1,541 |
(3,445) |
Profit/(loss) for the year |
2,084 |
1,415 |
(5,248) |
(1,185) |
(2,711) |
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
Ordinary shareholders |
1,622 |
752 |
(6,955) |
(1,979) |
(3,470) |
Preference shareholders |
182 |
234 |
260 |
297 |
330 |
Dividend access share |
|
|
1,193 |
|
320 |
Paid-in equity holders |
288 |
394 |
244 |
88 |
49 |
Non-controlling interests |
(8) |
35 |
10 |
409 |
60 |
|
2,084 |
1,415 |
(5,248) |
(1,185) |
(2,711) |
|
|
|
|
|
|
Notable items within total income |
2018 |
2017 |
|
|
|
£m |
£m |
|
|
|
|
IFRS volatility in Central items & other |
(59) |
2 |
|
|
|
Insurance indemnity |
357 |
|
|
|
|
Of which: |
|
|
|
|
|
NatWest Markets |
165 |
|
|
|
|
Central items & other |
192 |
|
|
|
|
UK PBB debt sale gain |
61 |
185 |
|
|
|
FX losses in Central items & other |
(46) |
(183) |
|
|
|
Commercial Banking fair value and disposal gain |
169 |
6 |
|
|
|
NatWest Markets legacy business disposal losses |
(86) |
(712) |
|
|
|
Own credit adjustment |
92 |
(69) |
|
|
|
Loss on redemption of own debt |
|
(7) |
|
|
|
Strategic disposals |
|
347 |
|
|
|
|
488 |
(431) |
|
|
|
|
|
|
|
|
|
Performance key metrics and ratios |
2018 |
2017 |
|
|
|
Return on tangible equity (%) |
4.8 |
2.2 |
|
|
|
Net interest margin (%) (1) |
1.98 |
2.13 |
|
|
|
Average interest earning assets (£m) |
436,957 |
422,337 |
|
|
|
Cost:income ratio (%) |
71.7 |
79.0 |
|
|
|
Earning per share (pence) - basic |
13.5p |
6.3p |
|
|
|
Note:
(1) Net interest margin is net interest income of the banking business as a percentage of interest earning assets (IEA) of the banking business.
Business review
Financial summary continued |
2018 |
2017 |
2016 |
2015 |
2014 |
Summary consolidated balance sheet |
£m |
£m |
£m |
£m |
£m |
Cash and balances at central banks |
88,897 |
98,337 |
74,250 |
79,404 |
74,872 |
Trading assets |
75,119 |
85,991 |
86,660 |
103,972 |
150,005 |
Derivatives |
133,349 |
160,843 |
246,981 |
262,514 |
353,590 |
Settlement balances |
2,928 |
2,517 |
5,526 |
4,116 |
4,667 |
Loans to banks and customers - amortised cost |
318,036 |
321,633 |
320,016 |
297,020 |
325,954 |
Other financial assets |
59,485 |
51,929 |
48,637 |
47,004 |
38,298 |
Other assets |
16,421 |
16,806 |
16,586 |
21,378 |
103,633 |
Total assets |
694,235 |
738,056 |
798,656 |
815,408 |
1,051,019 |
|
|
|
|
|
|
Deposits |
384,211 |
391,712 |
357,173 |
338,326 |
346,172 |
Trading liabilities |
72,350 |
81,982 |
84,536 |
92,299 |
130,920 |
Settlement balances, derivatives, and other financial liabilities |
182,230 |
200,398 |
267,257 |
288,023 |
402,829 |
Other liabilities |
8,954 |
14,871 |
40,286 |
42,613 |
112,389 |
Owners equity |
45,736 |
48,330 |
48,609 |
53,431 |
55,763 |
Non-controlling interests |
754 |
763 |
795 |
716 |
2,946 |
Total liabilities and equity |
694,235 |
738,056 |
798,656 |
815,408 |
1,051,019 |
Other financial data |
|
|
|
|
|
|
|
|
|
|
|
Share information |
2018 |
2017 |
2016 |
2015 |
2014 |
Dividend payout ratio (%) |
14.9 |
|
|
|
|
Basic and diluted earnings/(loss) per ordinary share from |
|
|
|
|
|
continuing operations - pence (1) |
13.5 |
6.3 |
(59.5) |
(27.7) |
0.5 |
Share price per ordinary share at year end - £ |
2.17 |
2.78 |
2.25 |
3.02 |
3.94 |
Market capitalisation at year end - £bn |
26.1 |
33.3 |
26.6 |
35.1 |
45.2 |
Net asset value per ordinary share - £ |
3.86 |
4.10 |
4.18 |
4.66 |
5.12 |
|
|
|
|
|
|
Capital ratios |
|
|
|
|
|
Return on average total assets (2) |
0.2% |
0.1% |
(0.8%) |
(0.2%) |
(0.3%) |
Return on average total equity (3) |
3.7% |
2.0% |
(10.2%) |
(2.9%) |
(4.6%) |
Return on average ordinary shareholders equity (4) |
4.0% |
1.9% |
(15.3%) |
(4.0%) |
(6.5%) |
Average total equity as a percentage of average total assets |
7.2% |
7.0% |
6.2% |
6.0% |
5.8% |
Risk asset ratio - Tier 1 (5) |
19.2% |
19.7% |
17.7% |
19.1% |
13.2% |
Risk asset ratio - Total (5) |
23.4% |
23.9% |
22.9% |
24.7% |
17.1% |
Notes:
(1) Basic fully diluted earnings per ordinary share in 2018 is 13.4p. There was no diluted impact in any other year.
(2) Return on average total assets represents profit/(loss) attributable to ordinary shareholders as a percentage of average total assets.
(3) Return on average total equity represents profit/(loss) attributable to equity owners expressed as a percentage of average shareholder funds.
(4) Return on average ordinary shareholders equity represents profit/(loss) attributable to ordinary shareholders expressed as a percentage of average ordinary shareholders equity.
(5) 2018, 2017, 2016, 2015 and 2014 are calculated on a PRA transitional basis.
Business review
Financial summary continued
Segmental summary income statements
|
PBB |
|
CPB |
|
|
|
|
||
|
UK |
Ulster Bank |
|
Commercial |
Private |
RBS |
NatWest |
Central items |
Total |
|
PBB |
RoI |
|
Banking |
Banking |
International |
Markets |
& other |
RBS |
2018 |
£m |
£m |
|
£m |
£m |
£m |
£m |
£m |
£m |
Net interest income |
5,098 |
444 |
|
2,040 |
518 |
466 |
112 |
(22) |
8,656 |
Non-interest income |
1,184 |
166 |
|
1,334 |
257 |
128 |
1,330 |
347 |
4,746 |
Total income |
6,282 |
610 |
|
3,374 |
775 |
594 |
1,442 |
325 |
13,402 |
Other expenses |
(2,991) |
(490) |
|
(1,725) |
(456) |
(260) |
(1,213) |
(224) |
(7,359) |
Strategic costs |
(275) |
(22) |
|
(106) |
(21) |
(9) |
(238) |
(333) |
(1,004) |
Litigation and conduct costs |
(216) |
(71) |
|
(41) |
(1) |
9 |
(153) |
(809) |
(1,282) |
Operating expenses |
(3,482) |
(583) |
|
(1,872) |
(478) |
(260) |
(1,604) |
(1,366) |
(9,645) |
Impairment (losses)/releases |
(342) |
(15) |
|
(144) |
6 |
2 |
92 |
3 |
(398) |
Operating profit/(loss) |
2,458 |
12 |
|
1,358 |
303 |
336 |
(70) |
(1,038) |
3,359 |
Return on equity (1) |
24.3% |
0.5% |
|
10.2% |
15.4% |
24.4% |
(2.0%) |
nm |
4.8% |
Cost:income ratio (2) |
55.4% |
95.6% |
|
53.8% |
61.7% |
43.8% |
111.2% |
nm |
71.7% |
Third party customer asset rate (3) |
3.40% |
2.41% |
|
2.87% |
2.89% |
2.15% |
nm |
nm |
nm |
Third party customer funding rate |
(0.30%) |
(0.20%) |
|
(0.36%) |
(0.25%) |
(0.09%) |
nm |
nm |
nm |
Average interest earning assets |
183,577 |
24,834 |
|
122,382 |
20,547 |
27,266 |
27,851 |
30,500 |
436,957 |
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
Net interest income |
5,130 |
421 |
|
2,286 |
464 |
325 |
203 |
158 |
8,987 |
Non-interest income |
1,347 |
183 |
|
1,198 |
214 |
64 |
847 |
293 |
4,146 |
Total income |
6,477 |
604 |
|
3,484 |
678 |
389 |
1,050 |
451 |
13,133 |
Other expenses |
(3,158) |
(451) |
|
(1,814) |
(445) |
(202) |
(1,528) |
47 |
(7,551) |
Strategic costs |
(461) |
(56) |
|
(167) |
(45) |
(9) |
(436) |
(391) |
(1,565) |
Litigation and conduct costs |
(210) |
(169) |
|
(33) |
(39) |
(8) |
(237) |
(589) |
(1,285) |
Operating expenses |
(3,829) |
(676) |
|
(2,014) |
(529) |
(219) |
(2,201) |
(933) |
(10,401) |
Impairment (losses)/releases |
(235) |
(60) |
|
(362) |
(6) |
(3) |
174 |
(1) |
(493) |
Operating profit/(loss) |
2,413 |
(132) |
|
1,108 |
143 |
167 |
(977) |
(483) |
2,239 |
Return on equity (1) |
23.7% |
(5.0%) |
|
6.6% |
6.4% |
11.2% |
(9.0%) |
nm |
2.2% |
Cost:income ratio (2) |
59.1% |
111.9% |
|
56.0% |
78.0% |
56.3% |
nm |
nm |
79.0% |
Third party customer asset rate (3) |
3.47% |
2.38% |
|
2.73% |
2.71% |
2.71% |
nm |
nm |
nm |
Third party customer funding rate |
(0.16%) |
(0.31%) |
|
(0.15%) |
(0.09%) |
(0.02%) |
nm |
nm |
nm |
Average interest earning assets |
179,453 |
25,214 |
|
131,177 |
18,799 |
23,930 |
31,231 |
12,533 |
422,337 |
|
|
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
Net interest income |
4,945 |
409 |
|
2,143 |
449 |
303 |
343 |
116 |
8,708 |
Non-interest income |
1,182 |
167 |
|
1,272 |
208 |
71 |
869 |
113 |
3,882 |
Total income |
6,127 |
576 |
|
3,415 |
657 |
374 |
1,212 |
229 |
12,590 |
Other expenses |
(3,398) |
(457) |
|
(1,936) |
(511) |
(169) |
(2,084) |
335 |
(8,220) |
Strategic costs |
(244) |
(40) |
|
(108) |
(37) |
(5) |
(190) |
(1,482) |
(2,106) |
Litigation and conduct costs |
(634) |
(172) |
|
(423) |
(1) |
|
(550) |
(4,088) |
(5,868) |
Operating expenses |
(4,276) |
(669) |
|
(2,467) |
(549) |
(174) |
(2,824) |
(5,235) |
(16,194) |
Impairment (losses)/releases |
(125) |
113 |
|
(206) |
3 |
(10) |
(253) |
|
(478) |
Operating profit/(loss) |
1,726 |
20 |
|
742 |
111 |
190 |
(1,865) |
(5,006) |
(4,082) |
Return on equity (1) |
16.2% |
0.7% |
|
4.1% |
5.6% |
13.8% |
(12.5%) |
nm |
(17.9%) |
Cost:income ratio (2) |
69.8% |
116.1% |
|
71.0% |
83.6% |
46.5% |
nm |
nm |
129.0% |
Third party customer asset rate (3) |
|
|
|
|
|
|
nm |
nm |
nm |
Third party customer funding rate |
|
|
|
|
|
|
nm |
nm |
nm |
Average interest earning assets |
166,778 |
25,193 |
|
121,677 |
16,887 |
22,254 |
37,856 |
8,953 |
399,598 |
Notes:
(1) RBSs CET 1 target is approximately 14% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers of capital usage, segmental operating profit after tax and adjusted for preference share dividends is divided by average notional equity allocated at different rates of 14% (Ulster Bank RoI), 11% (Commercial Banking), 13.5% (Private Banking - 14% prior to Q1 2018), 16% (RBS International - 12% prior to November 2017) and 15% for all other segments, of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes). Return on equity is calculated using profit for the period attributable to ordinary shareholders.
(2) Operating lease depreciation included in income £121 million (2017 - £142 million; 2016 - £141 million).
(3) Ulster Bank Ireland DAC manages its funding and liquidity requirements locally. Its liquid asset portfolios and non-customer related funding sources are included within its net interest margin, but excluded from its third party asset and liability rates.
Business review
|
2018 |
2017 |
2016 |
Income |
£m |
£m |
£m |
Interest receivable (1,2) |
11,049 |
11,034 |
11,258 |
Interest payable (1,2) |
(2,393) |
(2,047) |
(2,550) |
Net interest income |
8,656 |
8,987 |
8,708 |
|
|
|
|
Net fees and commissions |
2,357 |
2,455 |
2,535 |
Income from trading activities |
1,507 |
634 |
974 |
of which: Own credit adjustments |
92 |
(69) |
154 |
Other non-interest income |
882 |
1,057 |
373 |
Non interest income |
4,746 |
4,146 |
3,882 |
Total income |
13,402 |
13,133 |
12,590 |
Notes:
(1) Negative interest on net loans to customers is classed as interest payable and on customer deposits is classed as interest receivable.
(2) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
2018 compared with 2017
· Total income increased by £269 million, or 2.0%. Excluding notable items, income decreased by £650 million, or 4.8%, primarily reflecting lower NatWest Markets income and reduced net interest income. Excluding notable items, NatWest Markets and Central items, income was stable. Notable items are detailed on page 38.
· Net interest income decreased by £331 million, or 3.7%, driven by margin pressure, active capital management in Commercial Banking, a reduction in the NatWest Markets legacy business and one-off Central items (1) in 2017.
· Net interest margin was 15 basis points lower than 2017, or 13 basis points lower excluding one-off items (1) reflecting an 8 basis points reduction relating to increased liquidity, 3 basis points from competitive pressures and 2 basis points from mix impacts.
· Structural hedges of £159 billion generated £0.9 billion of incremental net interest income for the year, compared with £1.5 billion of incremental net interest income on a balance of £149 billion in 2017.
· Non-interest income increased by £600 million, or 14.5%. Excluding notable items, non-interest income decreased by £381 million principally due to lower core NatWest Markets income driven by challenging fixed income, currencies and commodities (FICC) market conditions in Q4 2018, together with turbulence in European bond markets earlier in the year.
2017 compared with 2016
· Net interest income of £8,987 million increased by £279 million compared with 2016. The movement was principally driven by higher mortgage volumes in UK PBB, up £185 million or 3.7%, and deposit re-pricing benefits in Commercial Banking, up £143 million or 6.7%, partially offset by planned balance sheet reductions in NatWest Markets.
· The net interest margin (NIM) was 2.13% for 2017, 5 basis points lower than 2016 reflecting increased liquidity, mix impacts and competitive pressures on margin.
· Structural hedges of £129 billion generated a benefit of £1.3 billion through net interest income for the year.
· Non-interest income of £4,146 million increased by £264 million, or 6.8%, compared with 2016, primarily reflecting a £185 million debt sale gain in UK PBB and a £183 million increase in strategic disposals gains, partially offset by an own credit adjustment loss of £69 million compared with a gain of £180 million in 2016.
· Net fees and commissions decreased by £80 million, or 3.2%, compared with 2016 reflecting a £48 million reduction in UK PBB, driven by increased cash back payments as the Reward proposition continued to grow with customer accounts 26% higher than 2016, and lower income in NatWest Markets.
· Income from trading activities, excluding own credit adjustments, decreased by £117 million, or 14.3%, compared with 2016 primarily reflecting lower income in NatWest Markets, down £247 million, or 29.8%, driven by increased losses in the legacy business. A gain of £2 million for volatile items under IFRS in 2017 compared with a charge of £510 million in 2016. This movement was broadly offset by FX losses of £183 million in 2017, compared with FX gains of £446 million in 2016, following the strengthening of sterling against the US dollar.
Note:
(1) One-off items in 2017 include central interest releases of £30 million and £44 million relating to Capital resolution.
Business review
Financial summary continued |
Statutory analysis (1,2) |
|
Non- statutory analysis |
||||
|
2018 |
2017 |
2016 |
|
2018 |
2017 |
2016 |
Operating expenses |
£m |
£m |
£m |
|
£m |
£m |
£m |
Staff expenses |
4,122 |
4,676 |
5,124 |
|
3,649 |
3,923 |
4,482 |
Premises and equipment |
1,383 |
1,565 |
1,388 |
|
1,241 |
1,218 |
1,297 |
Other administrative expenses |
3,372 |
3,323 |
8,745 |
|
1,787 |
1,710 |
1,619 |
Strategic costs (1) |
|
|
|
|
1,004 |
1,565 |
2,106 |
Litigation and conduct costs (2) |
|
|
|
|
1,282 |
1,285 |
5,868 |
Administrative expenses |
8,877 |
9,564 |
15,257 |
|
8,963 |
9,701 |
15,372 |
Depreciation and amortisation |
731 |
808 |
778 |
|
645 |
684 |
705 |
Write down of other intangible assets |
37 |
29 |
159 |
|
37 |
16 |
117 |
Operating expenses |
9,645 |
10,401 |
16,194 |
|
9,645 |
10,401 |
16,194 |
Notes:
(1) On a statutory, or GAAP, basis, strategic costs are included within staff, premises and equipment, and other administrative expenses.
(2) On a statutory, or GAAP, basis, litigation and conduct costs are included within other administrative expenses.
2018 compared with 2017
· Operating expenses decreased by £756 million, or 7.3%, primarily reflecting £561 million lower strategic costs and a £192 million reduction in other expenses, with litigation and conduct costs remaining broadly stable despite the US Department of Justice charge in the year. Excluding £86 million of one-off VAT releases in 2017, other expenses decreased by £278 million, or 3.6%, and FTEs reduced by 5.8%.
· Strategic costs of £1,004 million included: a £195 million direct charge in NatWest Markets relating to both the wind-down of the legacy business and ongoing development of the core business infrastructure; £177 million in respect of implementing ring-fencing requirements; £171 million of technology costs; a £133 million charge relating to the reduction in our property portfolio; a £76 million net settlement relating to the International Private Bank pension scheme; with the remaining charge largely relating to restructuring costs to achieve cost efficiencies across front and back office operations.
· Litigation and conduct costs of £1,282 million largely comprises the £1,040 million charge relating to the settlement with the Department of Justice and a £200 million charge relating to Payment Protection Insurance, partially offset by a £241 million provision release relating to a RMBS litigation indemnity.
· The cost:income ratio of 71.7% is elevated due to the inclusion of the net RMBS related conduct charge. Excluding this item the cost:income ratio, including strategic costs, would be 65.7%.
2017 compared with 2016
· Total operating expenses of £10,401 million were £5,793 million, or 35.8%, lower than 2016 reflecting a £4,583 million reduction in litigation and conduct costs, a £541 million reduction in restructuring costs, and a £669 million, or 8.1%, reduction in other operating expenses. Excluding VAT recoveries of £86 million (2016 - £227 million), other operating expenses have reduced by £810 million for the year, ahead of our £750 million targeted reduction, with approximately 45% of the total cost reduction delivered across PBB (comprising the reportable segments UK PBB and Ulster Bank RoI), CPB (comprising the reportable segments Commercial Banking and Private Banking, RBSI and the NatWest Markets core business, adjusting for transfers (1).
· Excluding staff restructuring costs in 2017 and 2016 of £753 million and £642 million respectively, staff costs of £3,923 million were £559 million, or 12.5%, lower than 2016 underpinned by a 6,600, or 8.5%, reduction in FTEs.
· Restructuring costs of £1,565 million included: a £303 million charge relating to the reduction in the property portfolio; a £319 million charge in NatWest Markets principally relating to the run-down and closure of the legacy business; £221 million relating to the business previously described as Williams & Glyn; £194 million in respect of implementing ring-fencing requirements; and a £73 million net settlement relating to the RBS Netherlands pension scheme.
· Litigation and conduct costs of £1,285 million included: additional charges in respect of settlement with Federal Housing Finance Agency (FHFA) and the California State Attorney General and additional RMBS related provisions in the US; a further provision in relation to settling the 2008 rights issue shareholder litigation; an additional £175 million PPI provision; and a £169 million provision in Ulster Bank RoI for customer remediation and project costs relating to tracker mortgages and other legacy business issues.
Note:
(1) Refer to footnotes on pages 27 and 28.
Business review
Financial summary continued |
2018 |
2017 |
Impairments |
£m |
£m |
Loans - amortised cost (1) |
319,800 |
321,633 |
ECL provisions (2) |
3,368 |
3,814 |
|
|
|
Impairment losses |
|
|
ECL charge (3,4) |
398 |
493 |
ECL loss rate - annualised (basis points) |
12.45 |
15.33 |
Amounts written off |
1,494 |
1,210 |
Notes:
(1) The table above summarises loans and related credit impairment measures on an IFRS 9 basis at 31 December 2018 and on an IAS 39 basis at 31 December 2017.
(2) 2018 ECL provisions in the above table are provisions on loan assets only. Other ECL provisions not included, relate to cash, debt securities and contingent liabilities, and amount to £28 million, of which £5 million was FVOCI.
(3) 2018 ECL charge balance in the above table included a £3 million charge relating to other financial assets, of which a £1 million charge related to assets at FVOCI; and a £31 million release related to contingent liabilities.
(4) 2017 comprises loan impairment losses of £530 million and releases on securities of £37 million.
2018 compared with 2017
· A net impairment loss of £398 million, 13 basis points of gross customer loans, decreased by £95 million, or 19.3%, compared with 2017 primarily reflecting lower single name charges in Commercial Banking, partially offset by fewer provision releases in UK PBB and NatWest Markets.
· In addition, we took an additional £101 million charge in Q3 2018 reflecting the more uncertain economic outlook and a net £60 million impairment charge in Ulster Bank RoI principally in relation to ongoing sales from our loan book to further reduce the level of non performing loans. Underlying credit conditions remained benign during 2018.
Business review
Tax
|
2018 |
2017 |
2016 |
|
£m |
£m |
£m |
Tax charge |
(1,275) |
(824) |
(1,166) |
UK corporation tax rate |
19.00% |
19.25% |
20.00% |
2018 compared with 2017
· The tax charge for the year ended 31 December 2018 is higher than the UK statutory tax rate reflecting the impact of the banking surcharge, non-deductible bank levy and conduct charges for which no tax relief has been recognised. These factors have been offset partially by adjustments in respect of prior years.
2017 compared with 2016
· The tax charge for the year ended 31 December 2017 is higher than the UK statutory tax rate reflecting the impact of the banking surcharge, non-deductible bank levy and conduct charges for which no tax relief has been recognised, a reduction in the carrying value and impact of UK tax rate changes on deferred tax balances. These factors have been offset partially by the release of tax provisions that reflect the reduction of exposures in countries where RBS is ceasing operations.
Business review
Financial summary continued
Summary consolidated balance sheet as at 31 December 2018
|
|
2018 |
|
2017 |
|
2016 |
|
|
£m |
|
£m |
|
£m |
Assets |
|
|
|
|
|
|
Cash and balances at central banks |
|
88,897 |
|
98,337 |
|
74,250 |
Trading assets |
|
75,119 |
|
85,991 |
|
86,660 |
Derivatives |
|
133,349 |
|
160,843 |
|
246,981 |
Loans to banks - amortised cost |
|
12,947 |
|
11,517 |
|
12,238 |
Loans to customers - amortised cost |
|
305,089 |
|
310,116 |
|
307,778 |
Settlement balances |
|
2,928 |
|
2,517 |
|
5,526 |
Other financial assets |
|
59,485 |
|
51,929 |
|
48,637 |
Other assets |
|
16,421 |
|
16,806 |
|
16,586 |
Total assets |
|
694,235 |
|
738,056 |
|
798,656 |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Bank deposits |
|
23,297 |
|
30,396 |
|
13,675 |
Customer deposits |
|
360,914 |
|
361,316 |
|
343,498 |
Trading liabilities |
|
72,350 |
|
81,982 |
|
84,536 |
Derivatives |
|
128,897 |
|
154,506 |
|
236,475 |
Other financial liabilities |
|
42,798 |
|
33,170 |
|
30,782 |
Subordinated liabilities |
|
10,535 |
|
12,722 |
|
19,419 |
Other liabilities |
|
8,954 |
|
14,871 |
|
20,867 |
Total liabilities |
|
647,745 |
|
688,963 |
|
749,252 |
|
|
|
|
|
|
|
Total equity |
|
46,490 |
|
49,093 |
|
49,404 |
Total liabilities and equity |
|
694,235 |
|
738,056 |
|
798,656 |
|
|
|
|
|
|
|
Tangible net asset value per ordinary share (1) |
|
287 |
p |
288 |
p |
294p |
Note:
(1) Tangible net asset value per ordinary share represents tangible equity divided by the number of ordinary shares in issue
From 1 January 2018, the Group adopted IFRS 9 Financial Instruments. IFRS 9 changed the balance sheet classification categories from IAS 39. Refer to Note 33 for full details of the impact of IFRS 9 on the Groups balance sheet.
· Total assets of £694.2 billion as at 31 December 2018 were down £43.8 billion, 5.9%, compared with 31 December 2017. This was primarily driven by reductions in trading assets and derivatives reflecting the wind-down of the legacy business and management of the leverage exposure.
· Cash and balances at central banks decreased by £9.4 billion, 9.6%, to £88.9 billion representing liquidity management, the payment of the settlement with the US Department of Justice and the pension contribution in the year.
· Trading assets decreased by £10.9 billion, 12.6%, to £75.1 billion and trading liabilities decreased by £9.6 billion, 11.7%, to £72.4 billion mainly due to the wind-down of the legacy business in NatWest Markets.
· Movements in the value of derivative assets, down £27.5 billion, 17.1%, to £133.3 billion, and liabilities, down £25.6 billion, 16.6% to £128.9 billion, due to trading volumes and valuations in NatWest Markets.
· Loans to customers - amortised cost, decreased by £5.0 billion, 1.6%, to £305.1 billion including £2.2 billion in Commercial Banking due to active capital management, activity and approximately £0.7 billion, in Ulster Bank RoI, primarily in relation to the sale of a portfolio of non-performing loans.
· Other financial assets includes debt securities, equity shares and other loans and increased by £7.6 billion, 14.6%, to £59.5 billion, primarily reflecting increases in the liquidity portfolio driven by increased customer surplus within in the ring-fenced banks, reduced funding requirement and net term issuance in NatWest Markets.
· Other assets includes property, plant & equipment, deferred tax, assets of disposal groups, accruals, deferred income and pension scheme surpluses and decreased by £0.4 billion, 2.3% to £16.4 billion.
· Bank deposits decreased by £7.1 billion, 23.4%, to £23.3 billion, with decreases relating to funding management including a £5 billion payment in relation to the Bank of England Term Funding Scheme participation.
· Customer deposits decreased by £0.4 billion, 0.1% to £360.9 billion with increases in UK PBB, Ulster Bank RoI and Private Banking offset by decreases in Commercial Banking and RBS International.
· Other financial liabilities included customer deposits at fair value through profit and loss and debt securities and increased by £9.6 billion, 29.0%, to £42.8 billion primarily including issuances in the year of covered bonds and MREL in the year.
· Subordinated liabilities decreased by £2.2 billion, 17.2% to £10.5 billion, primarily as a result of redemptions of £2.0 billion reflecting on-going liability management activities.
· Other liabilities included deferred awards, deferred income, notes in circulation and accruals and decreased by £5.9 billion, 39.8% to £9.0 billion mainly due to the reduction in provisions in the year, primarily in relation to the settlement with the US Department of Justice.
· Owners equity decreased by £2.6 billion, 5.4%, to £45.7 billion, primarily driven by preference share redemptions and the pension contribution in the year offset by the £2.1 billion profit for the year.
Cash flow
Refer to page 185 for the consolidated cash flow statement.
Business review
Segment performance
UK Personal & Business Banking
Income statement |
|
2018 |
|
2017 |
|
2016 |
|
£m |
|
£m |
|
£m |
|
Net interest income |
|
5,098 |
|
5,130 |
|
4,945 |
Non-interest income |
|
1,184 |
|
1,347 |
|
1,182 |
Total income |
|
6,282 |
|
6,477 |
|
6,127 |
Other costs |
|
(2,991) |
|
(3,158) |
|
(3,398) |
Strategic costs |
|
(275) |
|
(461) |
|
(244) |
Litigation and conduct costs |
|
(216) |
|
(210) |
|
(634) |
Operating expenses |
|
(3,482) |
|
(3,829) |
|
(4,276) |
Impairment losses |
|
(342) |
|
(235) |
|
(125) |
Operating profit |
|
2,458 |
|
2,413 |
|
1,726 |
Performance ratios |
|
|
|
|
|
|
Return on equity (1) |
|
24.3% |
|
23.7% |
|
16.2% |
Net interest margin |
|
2.78% |
|
2.86% |
|
2.97% |
Cost:income ratio |
|
55.4% |
|
59.1% |
|
69.8% |
Note:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 15% of the monthly average of segmental RWAes, assuming 28% tax rate.
Capital and balance sheet |
|
2018 |
|
2017 |
|
2016 |
|
£bn |
|
£bn |
|
£bn |
|
Loans to customers (amortised cost) |
|
|
|
|
|
|
- personal advances |
|
7.6 |
|
7.1 |
|
6.9 |
- mortgages |
|
138.3 |
|
136.8 |
|
128.0 |
- cards |
|
4.0 |
|
4.0 |
|
4.2 |
- business banking |
|
6.8 |
|
6.8 |
|
6.3 |
- commercial |
|
7.0 |
|
8.3 |
|
8.8 |
Total loans to customers (amortised cost) |
|
163.7 |
|
163.0 |
|
154.2 |
Loan impairment provisions |
|
(1.4 |
) |
(1.3 |
) |
(1.5) |
Net loans to customers |
|
162.3 |
|
161.7 |
|
152.7 |
|
|
|
|
|
|
|
Total assets |
|
194.2 |
|
190.6 |
|
181.4 |
Customer deposits |
|
184.1 |
|
180.4 |
|
169.6 |
Risk-weighted assets |
|
45.1 |
|
43.0 |
|
42.3 |
Business review
Segment performance continued
2018 compared with 2017
· UK PBB now has 6.4 million regular mobile app users, 16% higher than 2017, with 72% of our active current account customers being regular digital users. Total digital sales increased by 19% representing 45% of all sales. 61% of mortgage switching is now done digitally, compared with 51% in 2017. 57% of personal unsecured loans sales are via the digital channel, with digital volumes 31% higher. In business banking, 91% of current accounts and 68% of loans under £50,000 were originated digitally.
· Total income was £195 million, or 3.0%, lower reflecting £124 million lower debt sale gains and a £33 million transfer of the Collective Investment Funds business to Private Banking in Q4 2017. Excluding these items, income was £38 million, or 0.6%, lower, including a £28 million reduction in overdraft fees following changes implemented in H2 2017, which included increasing the number of customer alerts. Net interest income of £5,098 million decreased by 0.6% as balance growth and deposit margin benefits were offset by lower mortgage new business margins, with net interest margin down by 8 basis points to 2.78%.
· Operating expenses decreased by £347 million, or 9.1%. Excluding strategic, litigation and conduct costs, operating expenses were £167 million, or 5.3%, lower driven by reduced back-office operations costs and lower headcount reflecting continued operating efficiencies, partially offset by increased technology investment spend as we continue to build our digital capability.
· Impairments were £107 million higher driven by fewer provision releases and lower recoveries following debt sales in prior years, as well as increased provisioning requirements under IFRS 9. The underlying default rate remained broadly stable with asset growth also accounting for an element of the uplift.
· Net loans to customers increased by 0.4% to £162.3 billion. The business has maintained a prudent approach to risk and pricing in a very competitive market, with gross new mortgage lending in 2018 at £30.4 billion, 1.9% lower than 2017. Mortgage market share was maintained at 11.3% supporting a stock share of around 10%. Momentum continued in personal advances and business banking, increasing by 7.0% and 0.4% respectively.
· Customer deposits increased by £3.7 billion, or 2.1%, as growth continued across current accounts and savings.
· RWAs increased by £2.1 billion, or 4.9%, principally due to modelling changes on mortgages and unsecured loans.
2017 compared with 2016
· Operating profit was £2,413 million compared with £1,726 million in 2016. The increase was driven by higher income, lower litigation and conduct charges and lower other operating expenses, partially offset by higher restructuring costs, largely relating to the reduction in our property portfolio and costs associated with the business previously described as Williams & Glyn (1) , and higher impairments. Return on equity increased to 23.7% from 16.2% in 2016.
· Total income of £6,477 million was £350 million, or 5.7%, higher than 2016, principally reflecting strong balance growth, savings re-pricing benefits and a £185 million debt sale gain. Net interest margin declined by 11 basis points to 2.86% driven by lower mortgage margins, asset mix and reduced current account hedge yield, partially offset by savings re-pricing benefits from actions taken in 2016 and following the Q4 2017 base rate increase.
· Operating expenses decreased £447 million, or 10.5%, to £3,829 million. Excluding litigation and conduct costs, and restructuring costs, other operating expenses decreased by £240 million, or 7.1%, to £3,158 million compared with 2016 driven by a £59 million, or 7.1%, reduction in staff costs, with headcount down 8.3%, and a £181 million reduction in operational costs following process and productivity improvements in service operations and re-integration benefits in respect of the business previously described as Williams & Glyn (1). Cost:income ratio improved to 59.1% in 2017 compared with 69.8% in 2016.
· The net impairment charge of £235 million, or 14 basis points of gross customer loans, reflected continued benign credit conditions. 2017 had lower recoveries partly as a result of the debt sales undertaken, compared with 2016. Defaults remained at very low levels across all portfolios compared to historic trends, although slightly higher than in 2016.
· Net loans and advances increased by £9.0 billion, or 5.9%, to £161.7 billion as UK PBB continued to deliver support for both personal and business banking customers. Gross new mortgage lending in 2017 was £31.0 billion with market share of new mortgages at approximately 12%, resulting in stock share of approximately 10% at 31 December 2017 compared with 9.7% at 31 December 2016. Positive momentum continued across business banking lending, with net balances up 3.0% compared with 31 December 2016, adjusting for transfers (2).
· Customer deposits increased by £10.8 billion, or 6.4%, to £180.4 billion, driven by strong personal current account and business deposit growth.
· UK PBB includes commercial income from the business previously described as Williams & Glyn (1) of approximately £417 million, gross loans and advances of £8.3 billion and deposits of £14.3 billion. An estimated £70 million of the commercial income, £1.7 billion of gross loans and advances and £1.8 billion of deposits relates to mid-corporate customers not subject to the European Commission alternative remedies package. 120,000 of the remaining approximately 220,000 customers will be subject to the remedies package.
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.
(2) UK PBB Collective Investment Funds (CIFL) business was transferred to Private Banking on 1 October 2017. CIFL Business transfer included total income of £33 million and total expenses of £9 million. Comparatives were not re-presented. Transfers also included £0.4 billion loans and advances transferred from Commercial Banking to UK PBB during 2017 to better align Business banking customers. Comparatives were not re-presented.
Business review
Ulster Bank RoI
Income statement |
|
2018 |
|
2017 |
|
2016 |
|
2018 |
|
2017 |
|
2016 |
|
m |
|
m |
|
m |
|
£m |
|
£m |
|
£m |
|
Net interest income |
|
502 |
|
480 |
|
501 |
|
444 |
|
421 |
|
409 |
Non-interest income |
|
187 |
|
209 |
|
100 |
|
166 |
|
183 |
|
167 |
Total income |
|
689 |
|
689 |
|
704 |
|
610 |
|
604 |
|
576 |
Other costs |
|
(553) |
|
(516) |
|
(559) |
|
(490) |
|
(451) |
|
(457) |
Strategic costs |
|
(25) |
|
(64) |
|
(48) |
|
(22) |
|
(56) |
|
(40) |
Litigation and conduct costs |
|
(79) |
|
(192) |
|
(211) |
|
(71) |
|
(169) |
|
(172) |
Operating expenses |
|
(657) |
|
(772) |
|
(818) |
|
(583) |
|
(676) |
|
(669) |
Impairment losses |
|
(17) |
|
(68) |
|
138 |
|
(15) |
|
(60) |
|
113 |
Operating profit/(loss) |
|
15 |
|
(151) |
|
24 |
|
12 |
|
(132) |
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average exchange rate - /£ |
|
|
|
|
|
|
|
1.130 |
|
1.142 |
|
1.224 |
Performance ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Return on equity (1) |
|
0.5% |
|
(5.0%) |
|
0.7% |
|
0.5% |
|
(5.0%) |
|
0.7% |
Net interest margin |
|
1.79% |
|
1.67% |
|
1.62% |
|
1.79% |
|
1.67% |
|
1.62% |
Cost:income ratio |
|
95.6% |
|
111.9% |
|
116.1% |
|
95.6% |
|
111.9% |
|
116.1% |
Note:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 14% of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming a nil tax rate.
Capital and balance sheet |
|
2018 |
|
2017 |
|
2016 |
|
2018 |
|
2017 |
|
2016 |
|
bn |
|
bn |
|
bn |
|
£bn |
|
£bn |
|
£bn |
|
Loans to customers (amortised cost) |
|
|
|
|
|
|
|
|
|
|
|
|
- mortgages |
|
16.0 |
|
17.3 |
|
17.9 |
|
14.4 |
|
15.4 |
|
15.3 |
- other lending |
|
5.9 |
|
6.0 |
|
5.6 |
|
5.2 |
|
5.2 |
|
4.8 |
Total loans to customers (amortised cost) |
|
21.9 |
|
23.3 |
|
23.5 |
|
19.6 |
|
20.6 |
|
20.1 |
Loan impairment provisions |
|
(0.9) |
|
(1.3) |
|
(1.4) |
|
(0.8) |
|
(1.1) |
|
(1.2) |
Net loans to customers |
|
21.0 |
|
22.0 |
|
22.1 |
|
18.8 |
|
19.5 |
|
18.9 |
Total assets |
|
28.1 |
|
27.7 |
|
28.2 |
|
25.2 |
|
24.6 |
|
24.1 |
Funded assets |
|
28.1 |
|
27.6 |
|
28.0 |
|
25.2 |
|
24.5 |
|
24.0 |
Customer deposits |
|
20.1 |
|
19.1 |
|
17.7 |
|
18.0 |
|
16.9 |
|
15.2 |
Risk-weighted assets |
|
16.4 |
|
20.2 |
|
21.1 |
|
14.7 |
|
18.0 |
|
18.1 |
Spot exchange rate - /£ |
|
|
|
|
|
|
|
1.117 |
|
1.127 |
|
1.168 |
Business review
Segment performance continued
2018 compared with 2017
· Ulster Bank RoI continued to strengthen its digital proposition in 2018 through enhancements to digital and mobile customer offerings. 69% of our active personal current account customers are choosing to bank with us through digital channels. A faster, more convenient and secure digital application experience was introduced for customers who are applying for current accounts and personal loans and further enhancements were made to the mobile app during the year. Mobile payments and transfers increased 36% compared with 2017, reflecting the continued customer migration from physical to digital channels.
· Total income was in line with 2017. Net interest income increased by £23 million, or 5.5% (22 million, or 4.6% in euro terms), supporting a 12 basis point increase in net interest margin, primarily driven by an improving asset mix, lower cost of deposits and a one-off funding benefit in 2018, partially offset by a reduction in income on free funds. Non-interest income decreased by £17 million, or 9.3% (22 million, or 10.5% in euro terms), principally due to a lower number of non-recurring benefits and a reduction in fee income.
· Operating expenses decreased by £93 million, or 13.8% (115 million, or 14.9% in euro terms), principally due to a £98 million (113 million) reduction in litigation and conduct costs and £34 million (39 million) lower strategic costs. 2018 included a £71 million (79 million) conduct and litigation provision for customer remediation and project costs associated with legacy business issues. Other expenses increased by £39 million (37 million) primarily reflecting: the investment made into strengthening the risk, compliance and control environment; increased bank levies and regulatory fees; and higher spend on technology and innovation.
· A net impairment charge of £15 million (17 million) reflects a charge associated with a non-performing loan sale partially offset by observable improvements in the performance of the loan portfolio.
· Net loans to customers reduced by £0.7 billion, or 3.6% (1.0 billion, or 4.5% in euro terms), principally reflecting the sale of a portfolio of non-performing loans of £0.5 billion (0.6 billion) in 2018 and a continued reduction in the tracker mortgage book.
· Customer deposits increased by £1.1 billion, or 6.5% (1.0 billion, or 5.2% in euro terms), supporting a reduction in the loan:deposit ratio to 105% from 115%.
· RWAs reduced by £3.3 billion, or 18.3% (3.8 billion, or 18.8% in euro terms), principally reflecting the impact of the non-performing loan sale and an improvement in credit metrics.
2017 compared with 2016
· An operating loss of £132 million (151 million) compared with a £20 million (24 million) profit in 2016 primarily reflecting a £173 million (206 million) increase in impairment losses, largely relating to a change in the non performing loan strategy to allow for further portfolio sales.
· Total income of £604 million (689 million) was £28 million, or 4.9% higher than in 2016 (15 million, or 2.1% lower in euro terms). Adjusted income (1) of £607 million (693 million) was £34 million, or 5.9% higher than 2016 (8 million, or 1.1%, lower than 2016 in euro terms), primarily reflecting a £46 million (53 million) reduction in income on free funds, partially offset by one off items, higher lending income and reduced funding costs. Net interest margin of 1.67% was 5 basis points higher than 2016 reflecting a combination of improved deposit and loan margins, one-off income adjustments and successful deleveraging measures in 2016 which have reduced the concentration of low yielding loans.
· Operating expenses were £676 million, an increase of £7 million, or 1.0% compared with 2016 (a decrease of 46 million, or 5.6% to 772 million in euro terms). Excluding restructuring, and litigation and conduct costs, other operating expenses (1) decreased £6 million or 1.3% to £451 million; in euro terms other operating expenses of 516 million were 43 million, or 7.7%, lower than 2016. This was primarily due to continued progress in the delivery of cost saving initiatives, as evidenced by a 12.9% reduction in headcount, and lower pension costs. Cost:income ratio was 111.9% compared with 116.1% in 2016.
· A litigation and conduct provision of £169 million (192 million) related to customer remediation and project costs associated with legacy business issues.
· A net impairment loss of £60 million (68 million) compared with a £113 million (138 million) release in 2016. The movement was driven by a provision relating to a change in the non performing loan strategy to allow for further portfolio sales, gains associated with asset disposals in 2016 and refinements to the mortgage provision models in 2017. REILs were £3.3 billion, 5.7% lower than 2016 (3.7 billion, 9.8% in euro terms) reflecting credit quality improvements.
· Ulster Bank RoI gross new lending was £2.3 billion in 2017, up 7.2% compared with 2016 (2.6 billion, up 3.4% in euro terms).
· RWAs remained stable at £18.0 billion, compared with £18.1 billion in 2016. In euro terms, RWAs of 20.2 billion reduced by 0.9 billion, or 4.3%, compared with 2016.
Note:
(1) Excludes: Income - own credit adjustments of £3 million debit (2016 - £3 million credit); Costs - restructuring costs of £56 million (2016 - £40 million) and litigation and conduct costs of £169 million (2016 - £172 million).
Business review
Segment performance continued
Commercial Banking
Income statement |
|
2018 |
|
2017 |
|
2016 |
|
£m |
|
£m |
|
£m |
|
Net interest income |
|
2,040 |
|
2,286 |
|
2,143 |
Non-interest income |
|
1,334 |
|
1,198 |
|
1,272 |
Total income |
|
3,374 |
|
3,484 |
|
3,415 |
Other costs |
|
(1,725 |
) |
(1,814 |
) |
(1,936) |
Strategic costs |
|
(106 |
) |
(167 |
) |
(108) |
Litigation and conduct costs |
|
(41 |
) |
(33 |
) |
(423) |
Operating expenses |
|
(1,872 |
) |
(2,014 |
) |
(2,467) |
Impairment losses |
|
(144 |
) |
(362 |
) |
(206) |
Operating profit |
|
1,358 |
|
1,108 |
|
742 |
Performance ratios |
|
|
|
|
|
|
Return on equity (1) |
|
10.2% |
|
6.6% |
|
4.1% |
Net interest margin |
|
1.67% |
|
1.74% |
|
1.76% |
Cost:income ratio |
|
53.8% |
|
56.0% |
|
71.0% |
|
|
|
|
|
|
|
Capital and balance sheet |
|
2018 |
|
2017 |
|
2016 |
|
£bn |
|
£bn |
|
£bn |
|
Loans to customers (amortised cost) |
|
|
|
|
|
|
- SME & mid-corporates |
|
30.0 |
|
30.7 |
|
32.2 |
- large corporates |
|
18.3 |
|
21.5 |
|
22.9 |
- real estate |
|
20.7 |
|
22.9 |
|
24.8 |
- specialised business |
|
18.0 |
|
19.7 |
|
20.5 |
- other |
|
2.0 |
|
3.3 |
|
0.4 |
Total loans to customers (amortised cost) |
|
89.0 |
|
98.1 |
|
100.8 |
Loan impairment provisions |
|
(1.0 |
) |
(1.2 |
) |
(0.8) |
Net loans to customers (amortised cost) |
|
88.0 |
|
96.9 |
|
100.0 |
Total assets |
|
143.2 |
|
149.5 |
|
150.5 |
Customer deposits (excluding repos) |
|
95.6 |
|
98.0 |
|
97.8 |
Loan:deposit ratio (excluding repos) |
|
92.0% |
|
99.0% |
|
102.0% |
Risk-weighted assets |
|
67.6 |
|
71.8 |
|
78.5 |
Notes:
(1) 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 RWAe, assuming 28% tax rate.
(2) Comparisons with prior periods are impacted by preparations for ring-fencing, including the transfer of shipping and other activities from NatWest Markets, the transfer of whole business securitisations and Relevant Financial Institutions and other activities to NatWest Markets and the transfer of the funds and trustee depositary business to RBS International. The net impact of transfers on 2017 would have been to reduce income by £246 million, operating expenses by £10 million, impairments by £72 million, net loans to customers by £5.3 billion, customer deposits by £1.2 billion and RWAs by £2.2 billion. There is an additional £1.4 billion reduction in 2017 net loans to customers as a result of 2018 asset reclassifications under IFRS9. The variances in the commentary below have been adjusted for the impact of these items excluding net interest margin.
Business review
Segment performance continued
2018 compared with 2017 (comparisons adjusted for transfers)
· Approximately 85% of customers now interact with Commercial Banking digitally and we have developed solutions they value. We successfully launched the Bankline mobile app in the Apple app store, whilst our lending journey now enables customers to apply digitally for loans of up to £750,000 through a self-service application process. This is the largest value offered by a UK commercial bank, giving customers rapid, digital access to funding decisions, with approximately 50% of loan applications given a decision in principle in under 24 hours.
· Total income increased by £136 million, or 4.2%, reflecting asset disposal and fair value gains of £169 million, compared with a £64 million loss in 2017, partially offset by lower lending. Net interest margin decreased by 7 basis points to 1.67% primarily reflecting reclassification of net interest income to non-interest income under IFRS 9, the impact of transfers and asset margin compression, partially offset by higher funding benefits from deposit balances.
· Operating expenses decreased by £132 million, or 6.6%. Excluding strategic, litigation and conduct costs, operating expenses were £79 million, or 4.4%, lower reflecting continued operating model simplification.
· Impairments decreased by £146 million, or 50.3%, mainly reflecting lower single name charges.
· Net loans to customers decreased by £2.2 billion, or 2.4%, principally driven by significant active capital management reductions, with underlying lending growth of £3.5 billion, or 3.8%. At Q3 2018, we announced an additional £2 billion of growth funding to help British businesses prepare for the Brexit transition, bringing the total commitment to £3 billion.
· Customer deposits decreased by £1.2 billion, or 1.2%, supporting a broadly stable loan:deposit ratio of 92%.
· RWAs decreased by £2.0 billion, or 2.9%, driven by £10.5 billion of gross RWA reductions associated with active capital management, partially offset by model updates of £2.9 billion, underlying business growth and partial reinvestment of gross RWA reductions through refinancing to existing clients under our revised pricing framework.
2017 compared with 2016
· Operating profit of £1,108 million compared with £742 million in 2016, primarily reflecting a reduction in litigation and conduct costs. Excluding litigation and conduct costs, and restructuring costs, operating profit of £1,308 million, was £35 million, or 2.7%, higher than 2016, reflecting lower other operating expenses and higher income, partially offset by higher impairments. Return on equity was 250 basis points higher than 2016 at 6.6%. Adjusted return on equity (1) remained broadly stable at 8.2%.
· Total income increased by £69 million, or 2.0%, to £3,484 million primarily reflecting increased volumes in targeted segments and re-pricing benefits on deposits. Net interest margin decreased by 2 basis points as active re-pricing of assets and deposits has been more than offset by wider asset margin pressure in a low rate environment.
· Operating expenses decreased by £453 million to £2,014 million. Excluding litigation and conduct costs, and restructuring costs, other operating expenses of £1,814 million, were £122 million, or 6.3%, lower than 2016, reflecting operating model simplification and productivity improvements, including a 16.4% reduction in front office headcount, and a £25 million intangible asset write-down in 2016. The cost:income ratio improved to 56.0% compared with 71.0% in 2016.
· Net impairment losses of £362 million were £156 million higher than 2016, reflecting a small number of single name impairments.
· Net loans and advances decreased by £3.1 billion to £96.9 billion. Adjusting for transfers (2) of £1.8 billion, net loans and advances decreased by £4.9 billion to £96.9 billion, compared with 2016, as growth in targeted segments has been more than offset by active capital management of the lending book.
· RWAs decreased by £6.7 billion to £71.8 billion. Adjusting for transfers (2) of £1.5 billion, RWAs decreased by £8.2 billion, or 10.4%, to £71.8 billion compared with 2016 reflecting active capital management of the lending book, achieving £12.5 billion of gross RWA reductions.
Notes:
(1) Excluding restructuring costs, and litigation and conduct costs.
(2) Shipping and other activities, which were formerly in Capital Resolution, were transferred from NatWest Markets on 1 October 2017, including net loans and advances to customers of £2.6 billion and RWAs of £2.1 billion. Commercial Banking transferred whole business securitisations and relevant financial institutions (RFI) to NatWest Markets during December 2017, including net loans and advances to customers of £0.8 billion and RWAs of £0.6 billion. Comparatives were not re-presented for these transfers.
Business review
Segment performance continued
Private Banking
Income statement |
|
2018 |
|
2017 |
|
2016 |
|
£m |
|
£m |
|
£m |
|
Net interest income |
|
518 |
|
464 |
|
449 |
Non-interest income |
|
257 |
|
214 |
|
208 |
Total income |
|
775 |
|
678 |
|
657 |
Other costs |
|
(456) |
|
(445) |
|
(511) |
Strategic costs |
|
(21) |
|
(45) |
|
(37) |
Litigation and conduct costs |
|
(1) |
|
(39) |
|
(1) |
Operating expenses |
|
(478) |
|
(529) |
|
(549) |
Impairment releases/(losses) |
|
6 |
|
(6) |
|
3 |
Operating profit |
|
303 |
|
143 |
|
111 |
Performance ratios |
|
|
|
|
|
|
Return on equity (1) |
|
15.4% |
|
6.4% |
|
5.6% |
Net interest margin |
|
2.52% |
|
2.47% |
|
2.66% |
Cost:income ratio |
|
61.7% |
|
78.0% |
|
83.6% |
|
|
|
|
|
|
|
Capital and balance sheet |
|
2018 |
|
2017 |
|
2016 |
|
£bn |
|
£bn |
|
£bn |
|
Loans to customers (amortised cost) |
|
|
|
|
|
|
- personal |
|
2.0 |
|
2.3 |
|
2.3 |
- mortgages |
|
8.9 |
|
8.2 |
|
7.0 |
- other |
|
3.4 |
|
3.0 |
|
2.9 |
Total Net loans to customers (amortised cost) |
|
14.3 |
|
13.5 |
|
12.2 |
|
|
|
|
|
|
|
Total assets |
|
22.0 |
|
20.3 |
|
18.6 |
Assets under management (2) |
|
19.8 |
|
21.5 |
|
17.0 |
Customer deposits |
|
28.4 |
|
26.9 |
|
26.6 |
Loan:deposit ratio |
|
50% |
|
50% |
|
46% |
Risk-weighted assets |
|
9.4 |
|
9.1 |
|
8.6 |
Notes:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 13.5% (14% prior to Q1 2018) of the monthly average of segmental RWAes, assuming 28% tax rate.
(2) Comprises assets under management, assets under custody and investment cash.
(3) Comparisons with prior periods are impacted by the transfer of the Collective Investment Fund business from UK PBB and by the transfers of Coutts Crown Dependency and the International Client Group Jersey to RBS International. The net impact of the transfers on 2017 would have been to increase income by £24 million and operating expenses by £15 million and reduce net loans to customers by £0.1 billion, customer deposits by £0.5 billion and assets under management by £0.7 billion. The variances in the commentary below have been adjusted for the impact of these transfers excluding net interest margin.
Business review
Segment performance continued
2018 compared with 2017 (comparisons adjusted for transfers)
· Approximately 60% of clients bank with us digitally and 94% of clients positively rate our Coutts24 telephony service. Private Banking also recently launched Coutts Connect, a social platform which allows clients to network and build working relationships with one another.
· Total income increased by £73 million, or 10.4%, largely due to increased lending, higher funding benefits from deposit balances and higher investment income. Net interest margin increased by 5 basis points as higher deposit income was partially offset by asset margin pressure.
· Operating expenses decreased by £66 million, or 12.1%. Excluding strategic, litigation and conduct costs, operating expenses decreased by £4 million, or 0.8% driven by operating model efficiencies.
· A net impairment release of £6 million largely reflects a £9m release in Q4 2018 due to data quality improvements.
· Net loans to customers increased by £0.9 billion, or 6.7%, primarily in mortgages.
· Customer deposits increased by £2.0 billion, or 7.6%, mainly due to higher personal client account balances.
· Assets under management decreased by £1.0 billion, or 4.8%, reflecting market movements partially offset by new business inflows of £0.6 billion.
· Private Banking manages a further £6.7 billion of assets under management on behalf of RBS Group which sit outside of Private Banking. Total assets under management overseen by Private Banking have decreased by 5.7% to £26.5 billion as a result of market movements partially offset by net new business.
· RWAs increased by £0.3 billion, or 3.3%, relative to 6.7% growth in net loans to customers.
2017 compared with 2016
· Operating profit increased by £32 million, or 28.8%, to £143 million compared with 2016 and return on equity increased from 5.6% to 6.4%. Excluding litigation and conduct costs, and restructuring costs, adjusted operating profit of £227 million was £78 million, or 52.3%, higher than 2016 primarily reflecting lower other operating expenses and higher income. Adjusted return on equity (1) increased to 11.3% from 7.8% in 2016.
· Total income increased by £21 million to £678 million. Adjusting for transfers (2) of £9 million, total income increased by £12 million to £678 million due to increased lending volumes and an £8 million gain on a property sale, partially offset by ongoing margin pressure. Net interest margin fell 19 basis points to 2.47% reflecting the competitive market and low rate environment.
· Operating expenses decreased by £20 million to £529 million. Excluding litigation and conduct costs, and restructuring costs, adjusted operating expenses of £445 million decreased by £66 million, or 12.9%, compared with 2016 largely reflecting management actions to reduce costs, including an 11.8% reduction in front office headcount. The cost:income ratio improved to 78.0% from 83.6% in 2016.
· Net loans and advances of £13.5 billion were £1.3 billion, or 10.7%, higher than 2016 principally driven by growth in mortgages.
· Assets under management were £4.5 billion higher than 2016 at £21.5 billion. Adjusting for transfers (2) of £2.1 billion, assets under management were £2.4 billion, or 14.4%, higher than 2016 at £21.5 billion, reflecting both organic growth and favourable market conditions.
· RWAs of £9.1 billion were £0.5 billion, or 5.8%, higher than 2016 primarily due to increased mortgage lending.
Notes:
(1) Excluding restructuring costs, litigation and conduct costs and write down of goodwill.
(2) The UK PBB Collective Investment Funds (CIFL) business was transferred from UK PBB on 1 October 2017, including total income in Q4 2017 of £11 million and assets under management of £3.3 billion. Private Banking transferred Coutts Crown Dependencies (CCD) to RBS International during Q4 2017, including total income of £2 million and assets under management of £1.2 billion. Comparatives were not re-presented for these transfers.
Business review
Segment performance continued
RBS International
Income statement |
|
2018 |
|
2017 |
|
2016 |
|
£m |
|
£m |
|
£m |
|
Net interest income |
|
466 |
|
325 |
|
303 |
Non-interest income |
|
128 |
|
64 |
|
71 |
Total income |
|
594 |
|
389 |
|
374 |
Other costs |
|
(260) |
|
(202) |
|
(169) |
Strategic costs |
|
(9) |
|
(9) |
|
(5) |
Litigation and conduct costs |
|
9 |
|
(8) |
|
|
Operating expenses |
|
(260) |
|
(219) |
|
(174) |
Impairment releases/(losses) |
|
2 |
|
(3) |
|
(10) |
Operating profit |
|
336 |
|
167 |
|
190 |
Performance ratios |
|
|
|
|
|
|
Return on equity (1) |
|
24.4% |
|
11.2% |
|
13.8% |
Net interest margin |
|
1.71% |
|
1.36% |
|
1.36% |
Cost:income ratio |
|
43.8% |
|
56.3% |
|
46.5% |
|
|
|
|
|
|
|
Capital and balance sheet |
|
2018 |
|
2017 |
|
2016 |
|
£bn |
|
£bn |
|
£bn |
|
Loans to customers (amortised cost) |
|
|
|
|
|
|
- corporate |
|
10.2 |
|
5.7 |
|
6.2 |
- mortgages |
|
2.7 |
|
2.7 |
|
2.6 |
- other |
|
0.4 |
|
0.3 |
|
|
Total Net loans to customers (amortised cost) |
|
13.3 |
|
8.7 |
|
8.8 |
|
|
|
|
|
|
|
Total assets |
|
28.4 |
|
25.9 |
|
23.4 |
Customer deposits |
|
27.5 |
|
28.9 |
|
25.1 |
Risk-weighted assets |
|
6.9 |
|
5.1 |
|
9.5 |
Notes:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 16% (12% prior to November 2017) of the monthly average of segmental RWAes
(2) Comparisons with prior periods are impacted by the transfer of the funds and trustee depositary business from Commercial Banking and by the transfer of Coutts Crown Dependency and the International Client Group from Private Banking. The net impact of the transfers on 2017 would have been to increase income by £151 million and operating expenses by £14 million, net loans to customers by £4.5 billion, customer deposits by £1.7 billion and RWAs by £1.9 billion. The variances in the commentary below have been adjusted for the impact of these transfers excluding net interest margin.
Business review
Segment performance continued
2018 compared with 2017 (comparisons adjusted for transfers)
· The RBS International mobile app has been further developed to include new functionality, allowing customers to manage their finances more effectively and has 67 thousand users, an increase of 23% from 2017. 71% of wholesale customer payments are now processed using our newly introduced international banking platform, making the payments process simpler for customers.
· Total income increased by £54 million, or 10.0%, largely driven by deposit margin benefits. Institutional Banking contributed 62% to income in 2018, with Local Banking contributing 32% and Depositary Services 6%. Net interest margin increased by 35 basis points primarily driven by the impact of transfers and a change in product mix.
· Operating expenses increased by £27 million, or 11.6%, due to £39 million higher back-office costs associated with becoming a non ring-fenced bank and £5 million of remediation costs, partially offset by lower conduct and litigation costs.
· Impairments decreased by £5 million reflecting a number of small releases and improvements in underlying lending quality.
· Net loans to customers remained broadly stable at £13.3 billion and are split: £9.2 billion within Institutional Banking, of which £2.2 billion relates to real estate exposures; and £4.1 billion in Local Banking, of which £2.7 billion relates to mortgages.
· Customer deposits decreased by £3.1 billion reflecting a large inflow of short term placements in Institutional Banking in 2017. Customer deposits represent RBS Internationals primary funding source and are split: £18.1 billion Institutional Banking and £9.4 billion Local Banking.
· RWAs decreased by £0.1 billion, or 1.4%, with model updates offset by business movements.
· During 2018, we repositioned our balance sheet so that excess funds previously placed with RBS Group are now deployed into funding customer assets in our new London branch. We have also established a liquidity portfolio across central and correspondent banks and sovereign bond holdings. These changes provide continuity for our customers and support compliance with incoming Basel III Liquidity Coverage Ratio rules.
2017 compared with 2016
· Operating profit of £167 million decreased by £23 million, or 12.1%, compared with 2016 and return on equity decreased to 11.2% from 13.8%, reflecting increased operational costs associated with the creation of a bank outside the ring-fence, partially offset by higher income. Adjusted return on equity (1) decreased to 12.6% from 14.2% in 2016 .
· Total income increased by £15 million, or 4.0%, to £389 million driven by increased average lending balances in 2017 and re-pricing benefits on the deposit book.
· Net loans and advances were broadly stable compared with 2016 and customer deposits increased by £3.8 billion to £28.9 billion primarily reflecting increased short term placements in the Funds sector.
· RWAs of £5.1 billion reduced by £4.4 billion, or 46.3%, compared with 2016, reflecting the benefit of receiving the Advanced Internal Rating Based Waiver on the wholesale corporate book in November 2017, in advance of becoming a bank outside the ring-fence.
· From 1st Jan 2018 RBS International will include the funds and trustee depositary business transferred from Commercial Banking, which generated around £150 million of income and £60 million of costs in 2017.
Note:
(1) Excluding restructuring costs.
Business review
Segment performance continued
NatWest Markets
Income statement |
|
2018 |
|
2017 |
|
2016 |
|
£m |
|
£m |
|
£m |
|
Net interest income |
|
112 |
|
203 |
|
343 |
Non-interest income |
|
1,330 |
|
847 |
|
869 |
Total income |
|
1,442 |
|
1,050 |
|
1,212 |
Other costs |
|
(1,213) |
|
(1,528) |
|
(2,084) |
Strategic costs |
|
(238) |
|
(436) |
|
(190) |
Litigation and conduct costs |
|
(153) |
|
(237) |
|
(550) |
Operating expenses |
|
(1,604) |
|
(2,201) |
|
(2,824) |
Impairment releases |
|
92 |
|
174 |
|
(253) |
Operating loss |
|
(70) |
|
(977) |
|
(1,865) |
|
|
|
|
|
|
|
Analysis of income by product |
|
|
|
|
|
|
Rates |
|
662 |
|
959 |
|
807 |
Currencies |
|
432 |
|
496 |
|
581 |
Financing |
|
382 |
|
456 |
|
344 |
Revenue share paid to other segments |
|
(217) |
|
(246) |
|
(211) |
Core income excluding OCA |
|
1,259 |
|
1,665 |
|
1,521 |
Legacy |
|
91 |
|
(549) |
|
(496) |
Own credit adjustments |
|
92 |
|
(66) |
|
187 |
Total income |
|
1,442 |
|
1,050 |
|
1,212 |
|
|
|
|
|
|
|
Performance ratios |
|
|
|
|
|
|
Return on equity (2) |
|
(2.0%) |
|
(9.0%) |
|
(12.5%) |
Net interest margin |
|
0.40% |
|
0.65% |
|
0.91% |
|
|
|
|
|
|
|
Capital and balance sheet |
|
2018 |
|
2017 |
|
2016 |
|
£bn |
|
£bn |
|
£bn |
|
Net loans to customers (amortised cost) |
|
8.4 |
|
9.7 |
|
13.1 |
Total assets |
|
244.5 |
|
277.9 |
|
372.5 |
Funded assets |
|
111.4 |
|
118.7 |
|
128.5 |
Customer deposits |
|
2.6 |
|
3.3 |
|
5.1 |
Risk-weighted assets |
|
44.9 |
|
52.9 |
|
69.7 |
Notes:
(1) The NatWest Markets operating segment should not be assumed to be the same as the NatWest Markets Plc legal entity or group.
(2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity (based on 15% of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 28% tax rate.
(3) Comparisons with prior periods are impacted by the transfer of shipping and other activities to Commercial Banking and the transfer of whole business securitisations and Relevant Financial Institutions from Commercial Banking in preparation for ring-fencing. The net impact of the transfers on 2017 would have been to increase income by £104 million, reduce operating expenses by £2 million, reduce the net release of impairments by £72 million and increase funded assets by £1.3 billion and RWAs by £0.4 billion. The variances in the full year commentary below have been adjusted for the impact of these transfers.
Business review
Segment performance continued
2018 compared with 2017 (comparisons adjusted for transfers)
· NatWest Markets continues to focus on customer service and is increasingly using technology to enhance the way it provides innovative financial solutions to its customers and partners. For example, FXmicropay makes it simpler for businesses operating globally to accept payments in multiple currencies, reducing costs and increasing revenues for our customers. Our success in harnessing technology has been recognised with two awards: Best in Service Globally among Corporates for Algorithmic trading in the 2018 Euromoney FX Survey and Best Order Management award in the Profit & Loss 2018 Digital FX Awards.
· Total income increased by £288 million, or 25.0%, primarily reflecting lower disposal losses in the legacy business and a £165 million indemnity insurance recovery, partially offset by lower income in the core business. The reduction in the core business was driven by challenging fixed income, currencies and commodities (FICC) market conditions in Q4 2018, together with turbulence in European bond markets earlier in the year.
· Operating expenses decreased by £595 million, or 27.1%. This reflects reductions in other expenses across both the core and legacy businesses, down £313 million to £1,213 million, lower strategic costs, down £198 million to £238 million, and reduced litigation and conduct costs, down £84 million to £153 million.
· The net impairment release decreased by £10 million to £92 million reflecting a lower level of legacy releases.
· Funded assets decreased by £8.6 billion, or 7.2%, reflecting the wind down of the legacy business.
· RWAs decreased by £8.4 billion to £44.9 billion, including RWAs for Alawwal bank of £5.9 billion. The decrease was driven by the legacy business, down £7.1 billion, in addition to reductions in the core business.
2017 compared with 2016
· An operating loss of £977 million compared with £1,865 million in 2016. The core business operating profit increased by £427 million to £41 million reflecting lower litigation and conduct costs and higher income, partially offset by increased restructuring costs reflecting back office restructuring activity. Adjusted operating loss (1) of £264 million, compared with £1,231 million in 2016, reflecting lower adjusted costs(1) and a net impairment release of £174 million in 2017, compared with a charge of £253 million in 2016.
· Total income of £1,050 million compared with £1,212 million in 2016. In the core business, total income increased by £42 million, or 2.7%, to £1,616 million, whereas adjusted income(1) increased by £144 million, or 9.5%, to £1,665 million, principally driven by Rates as the business navigated markets well despite a lower level of customer activity than in 2016, which benefited from favourable market conditions following the EU referendum.
· Operating expenses of £2,201 million were £623 million, or 22.1%, lower than 2016, whereas adjusted operating expenses(1) of £1,528 million were £556 million, or 26.7%, lower than 2016. In the legacy business, operating expenses decreased by £238 million, or 27.5%, to £627 million, whereas adjusted operating expenses decreased significantly reflecting a 77.7% reduction in headcount as the business moved towards closure. In the core business, operating expenses decreased by £383 million, 19.5%, to £1,577 million as the business continues to drive cost reductions, where as adjusted operating expenses were £1,268 million compared to £1,320 million in 2016.
· RWAs decreased by £15.3 billion, adjusting for transfers (2) , to £52.9 billion primarily reflecting reductions in the legacy business. In the core business RWAs decreased by £3.1 billion to £32.3 billion reflecting lower counterparty credit risk through mitigation activities and business initiatives. At the end of 2017 the legacy business within NatWest Markets had RWAs of £14.0 billion, excluding RBSs stake in Alawwal Bank, a reduction of £10.9 billion, adjusting for transfers, over the course of the year.
· Total assets fell by £94.6 billion to £277.9 billion, funded assets fell to £118.7 billion, a reduction of £7.3 billion, adjusting for transfers (2) , mainly reflecting disposal activity.
Notes:
(1) Excludes: Income - own credit adjustments of £66 million debit (2016 - £187 million credit), strategic disposals of £26 million credit (2016 - £81 million debit). Costs - restructuring costs of £436 million (2016 - £190 million) and litigation and conduct costs of £237 million (2016 - £550 million).
(2) Shipping and other activities, which were formerly in Capital Resolution, were transferred to Commercial Banking on 1 October 2017, including total funded assets of £3.3 billion, net loans and advances to customers of £2.6 billion, and RWAs of £2.1 billion. Whole business securitisations and relevant financial institutions (RFI) were transferred from Commercial Banking during December 2017, including net loans and advances to customers of £0.8 billion, and RWAs of £0.6 billion. Comparatives were not re-presented for these transfers.
Business review
Segment performance continued
Central items & other
|
|
2018 |
|
2017 |
|
2016 |
|
£m |
|
£m |
|
£m |
|
Central items not allocated |
|
(1,038) |
|
(483) |
|
(5,006) |
Funding and operating costs have been allocated to operating segments based on direct service usage, the requirement for market funding and other appropriate drivers where services span more than one segment. Residual unallocated items relate to volatile corporate items that do not naturally reside within a segment.
2018 compared with 2017
· Central items not allocated represented a charge of £1,038 million in 2018, largely comprises the £1,040 million charge relating to the civil settlement with the US Department of Justice and £333 million of strategic costs, partially offset by a £241 million provision release relating to an RMBS litigation indemnity and indemnity insurance recoveries of £192 million.
2017 compared with 2016
Central items not allocated represented a charge of £483 million in 2017, compared with a £5,006 million charge in 2016, and included litigation and conduct costs of £589 million, compared with £4,088 million in 2016. Treasury funding costs were a charge of £58 million, compared with a charge of £94 million in 2016. Restructuring costs in the year included £94 million relating to the former Williams & Glyn business, compared with £1,399 million in 2016. In addition to a VAT recovery of £86 million, compared with £227 million in 2016, a £156 million gain on the sale of Vocalink and a £135 million gain in relation to the sale of EuroClear (1 ) .
Note:
(1) The total gain in relation to the sale of Euroclear was £161 million, of which £135 million central items and £26 million NatWest Markets.
Our Board
Key |
|
Group audit committee |
|
Re |
|
Group performance and remuneration committee |
A |
|
Group Executive committee |
|
Ri |
|
Group Board risk committee |
E |
|
GRG Board Oversight Committee |
|
S |
|
Group Sustainable banking committee |
G |
|
Group nominations and governance committee |
|
T |
|
Technology and innovation committee |
N |
|
|
|
Underlined |
|
Committee Chairman |
1 Howard Davies
Appointed: 14 July 2015 (Board),
1 September 2015 (Chairman)
Experience: Howard was chair of the UK Airports Commission between 2012 and 2015; Director of the London School of Economics and Political Science from 2003 until May 2011; Chairman of the UK Financial Services Authority from 1997 to 2003; and Deputy Governor of the Bank of England from 1995 to 1997.
He is also Professor of Practice at the Paris Institute of Political Science (Sciences Po) and author of several books on financial subjects.
External appointment(s): Independent director of Prudential plc and chair of the Risk Committee; Member of the Regulatory and Compliance Advisory Board of Millennium Management LLC; Chair of the International Advisory Council of the China Securities Regulatory Commission; and Member of the International Advisory Council of the China Banking Regulatory Commission.
2 Ross McEwan
Appointed: 1 October 2013
Experience: Ross has more than 25 years experience in the finance, insurance and investment industries. He became Chief Executive of The Royal Bank of Scotland Group in October 2013 and between August 2012 and September 2013, was Chief Executive Officer for UK Retail, joining from Commonwealth Bank of Australia where he was Group Executive for Retail Banking Services for five years. Prior to this, Ross was Executive General Manager with responsibility for the branch network, contact centres and third party mortgage brokers. Prior to Commonwealth Bank of Australia, he was Managing Director of First NZ Capital Securities. He was also Chief Executive of National Mutual Life Association of Australasia Ltd/AXA New Zealand Ltd.
External appointments : None.
3 Katie Murray
Appointed: 1 January 2019
Experience: Katie joined RBS as Director of Finance in November 2015 and was appointed as Deputy Chief Financial Officer in March 2017. Katie has worked in Finance and Accounting for nearly 30 years with experience in capital management, investor relations, financial planning and all areas of financial services. Katie was previously the Group Finance Director for Old Mutual Emerging Markets, based in Johannesburg from 2011 to 2015, having held various roles in Old Mutual from 2002. Prior to this Katie worked at KPMG for 13 years. Katie is a Chartered Accountant having trained in Scotland and is a member of The Institute of Chartered Accountants of Scotland.
External appointments: None.
Independent non-executive directors
4 Frank Dangeard
Appointed 16 May 2016
Experience: Frank assumed the role of Chairman, NatWest Markets Plc on 30 April 2018. Previously, Frank served as a non-executive director of Crédit Agricole CIB, EDF, Home Credit, Orange, Sonaecom SGPS, and as Deputy Chairman and acting Chairman of Telenor ASA. During his executive career he held various roles at Thomson S.A., including Chairman and Chief Executive Officer, and was Deputy Chief Executive Officer of France Telecom. Prior to that he was Chairman of SG Warburg France and Managing Director of SG Warburg .
Frank is a graduate of HEC and IEP in Paris and of the Harvard Law School in the US.
External appointments : Non-executive director of the Symantec Corporation and Arqiva.
5 Alison Davis
Appointed 1 August 2011
Experience: Previously, Alison served as a director of City National Bank, First Data Corporation, Xoom, Presidio Bank and Diamond foods, and as a non-executive director and chair of the board of LECG Corporation. She has also worked at McKinsey & Company; AT Kearney; as Chief Financial Officer at Barclays Global Investors (now BlackRock); and as managing partner of Belvedere Capital, a private equity firm focused on buy-outs in the financial services sector.
Alison is a graduate of Cambridge University and Stanford Business School .
External appointments : Non-executive director, and member of the audit committee of Fiserv Inc; and non-executive director and chair of the audit committee of Ooma Inc.
6 Patrick Flynn
Appointed 1 June 2018
Experience : Patrick Flynn was the Chief Financial Officer and a member of the Executive Board of ING Group (Netherlands largest financial services group) from April 2009 to May 2017. Prior to that, he was Chief Financial Officer of HSBC Insurance from 2007 to 2009 and prior to that, from 2002 to 2007, was Chief Financial Officer of HSBC South America based in Brazil where he was responsible for HSBCs banking and insurance operations.
Patrick is a Chartered Accountant; a Fellow of the Institute of Chartered Accountants Ireland; and a member of the Association of Corporate Treasurers in the UK.
External appointments: None.
Our Board
7 Morten Friis
Appointed 10 April 2014
Experience: Previously, Morten had a 34 year financial services career. He held various roles at Royal Bank of Canada and its subsidiaries including Associate Director at Orion Royal Bank; Vice President, Business Banking; and Vice President, Financial Institutions. In 1997, he was appointed as Senior Vice President, Group Risk Management and served as the Chief Credit Officer, then Chief Risk Officer, from 2004 to 2014. He was also previously a Director of RBC Bank (USA); Westbury Life Insurance Company; RBC Life Insurance Company; and RBC Dexia Investor Services Trust Company.
External appointments: Member of the Board of Directors of The Canadian Institute for Advanced Research; member of the Board of Directors of the Harvard Business School Club of Toronto; and non-executive director of Jackson National Life Insurance Company.
8 Robert Gillespie
Appointed 2 December 2013
Experience: Robert had a long career in investment banking, specialising in corporate advisory work. He was Director General of the Takeover Panel from 2010 until 2013 and prior to that held a number of senior management positions at UBS including being global head of investment banking from 1999 until 2005, chief executive of UBS for EMEA from 2004 to 06 and Vice Chairman of UBS Investment Bank from 2005 to 2008. He commenced his career at Price Waterhouse where he qualified as a Chartered Accountant and in 1981 joined S.G. Warburg which subsequently became part of UBS.
External appointments: Independent board director at Ashurst LLP; chairman of the Boat Race Company Limited; director of Social Finance Limited; and professor of practice, Durham University Business School.
9 Brendan Nelson
Appointed 1 April 2010
Experience: Brendan is a non-executive director of NatWest Markets Plc and chair of its audit committee. Previously Brendan was global chairman, financial services for KPMG. He held senior leadership roles within KPMG, including as a member of the KPMG UK board from 1999 to 2006 and as vice-chairman from 2006 until his retirement in 2010. He was Chairman of the Audit Committee of the Institute of Chartered Accountants of Scotland from 2005 to 2008 and President of the Institute of Chartered Accountants of Scotland 2013/14.
External appointments: Non-executive director and Chairman of the audit committee and member of the remuneration, nominations & governance committee and chairmans committees of BP plc; and member of the Financial Reporting Review Panel.
10 Baroness Noakes, DBE
Appointed 1 August 2011
Experience: Baroness Noakes is an experienced director on UK listed company boards with extensive and varied political and public sector experience. A qualified chartered accountant, she previously headed KPMGs European and International Government practices and has been President of the Institute of Chartered Accountants in England and Wales. She was appointed to the House of Lords in 2000 and has served on the Conservative front bench in various roles including as shadow Treasury minister between 2003 and May 2010. Baroness Noakes previously held non-executive roles on the Court of the Bank of England, Hanson, ICI, Severn Trent, Carpetright, John Laing and SThree.
External appointments: Member of the House of Lords Select Committee on the European Union and its sub-committee on the internal market.
11 Mike Rogers
Appointed 28 January 2016
Experience: Mike was previously Chief Executive of Liverpool Victoria Group for 10 years. Mike has extensive experience in retail banking and financial services. He joined Barclays in 1986 where he undertook a variety of roles in the UK and overseas across business banking, wealth management and retail banking and was Managing Director of Small Business, Premier Banking and UK Retail Banking.
External appointments: Non-executive Chairman of Aegon UK; Director of Experian plc; and Chairman of its Remuneration Committee.
12 Mark Seligman
Appointed 1 April 2017; Senior Independent Director since 1 January 2018
Experience: Mark, is a former senior investment banker with broad financial services knowledge, has substantial FTSE 100 Board experience gained in various industry sectors, including as a Committee Chair and Senior Independent Director. During his executive career, he held various senior roles at Credit Suisse/BZW (including Deputy Chairman, CSFB Europe and Chairman, UK Investment Banking, CSFB); and previously SG Warburg (ultimately as Managing Director, Head of Advisory). He has also previously served as a non-executive Director of BG Group plc and as Deputy Chairman of G4S plc.
External appointments: Senior Independent Director of Kingfisher plc and non-Executive Director and Chairman of the audit committee of Smiths Group plc.
13 Dr Lena Wilson, CBE
Appointed 1 January 2018
Experience: Lena is an experienced CEO with an international career, who spent a significant proportion of her executive career with Scottish Enterprise, latterly as Chief Executive from 2009 until 2017. Prior to that, Lena held the role of Senior Investment Advisor to The World Bank in Washington DC . She is a visiting Professor at the University of Strathclyde and has previously served as a member of Scotlands Financial Services Advisory Board and as Chair of Scotlands Energy Jobs Taskforce. In June 2015 she received a CBE for services to economic development in Scotland. Lena is Chair of the Colleague Advisory Panel established by RBS during 2018.
External appointments: Non-Executive Director of Intertek Group plc and member of its audit and nomination committees, and non-Executive Director of Scottish Power Renewables Limited. Visiting Professor, University of Strathclyde Business School. Advisory Board member of MCR Pathways.
Chief Governance & Regulatory Officer and Board Counsel; Company Secretary
14 Aileen Taylor
Appointed 1 May 2010
Experience: A qualified solicitor, Aileen joined RBS in 2000. She was appointed Group Secretary in 2010 and extended her remit further in 2015, becoming Chief Governance Officer and Board Counsel. In 2017 she also assumed responsibility for Regulatory Affairs. Prior to that Aileen held various legal, secretariat and risk roles including Head of External Risk (Retail), Head of Regulatory Risk (Retail Direct) and Head of Legal and Compliance (Direct Line Financial Services).
Aileen is a fellow of the Chartered Institute of Bankers in Scotland and a member of the European Corporate Governance Council and the GC 100. She is also a member of the FCAs Listing Authority Advisory Panel.
Corporate governance
|
Page |
Our Board |
59 |
Corporate governance |
61 |
Report of the Group Nominations and Governance Committee |
65 |
Report of the Group Audit Committee |
66 |
Report of the Group Board Risk Committee |
69 |
Report of the Group Sustainable Banking Committee |
72 |
Report of the Technology and Innovation Committee |
73 |
Directors Remuneration report |
74 |
Compliance report |
95 |
Report of the directors |
97 |
Statement of directors responsibilities |
100 |
Chairmans introduction
Dear Shareholder,
I am pleased to present the corporate governance report. During 2018 the Board considered a range of key strategic, financial, regulatory and risk matters, including:
· Future strategy, including RBSs purpose and long term future, technology and innovation
· Banking structural reform
· Dividend policy and declaration of an interim dividend
· US Department of Justice: US RMBS investigation - final settlement
· Group Pension Fund: MoU on structural changes and additional related funding contribution
· Risks associated with the transition of LIBOR and other IBOR rates to alternative risk free rates
· Building a healthy culture
· Implications of Brexit
The Board also dedicated time to engagement with employees, shareholders, customers and other stakeholders, as set out in more detail on page 63.
Ring-Fencing Governance
We also introduced some significant changes to the way our board operates. In Q1 the Board approved a new board and committee operating model in order to align with UK ring-fencing requirements effective from 1 January 2019. The transition towards the new model began in May 2018 and I am pleased to report that the revised operating rhythm is now embedded. Under the new arrangements, the RBSG Board has adopted a revised remit aligned primarily to the legal and regulatory obligations of a listed holding company. This includes: strategy; significant acquisitions and disposals; budget and financial results; risk appetite; regulatory submissions; board and committee appointments; executive pay and performance; culture; and shareholder relations.
NatWest Holdings Limited (NWH Ltd) is now the holding company for our ring-fenced operations. NWH Ltd shares a common board membership with NatWest, the Royal Bank and Ulster Bank Limited (together, the NWH Ltd sub-group) and the four boards meet concurrently.
Under the new model, the NWH Ltd board is the designated forum for matters relating specifically to our ring-fenced operations, with a strong focus on the customer-facing businesses operating within the NWH Ltd sub-group. It receives regular business reviews and updates from franchise and function CEOs and also considers NWH Ltd strategy; risk profile; customer, innovation and people issues; regulatory submissions; financial results; budget; and board and committee appointments as they relate to the NWH Ltd sub-group.
An integral part of our ring-fencing governance arrangements is the appointment of Double Independent Non-Executive Directors or DINEDs to the NWH Ltd sub-group boards and board committees.
The DINEDs are independent in two respects: (i) independent of management as non-executives; and (ii) independent of the rest of the Group by virtue of their NWH Ltd sub-group only directorships. They play a critical role in our ring-fencing governance structure, with an enhanced role in managing any conflicts which may arise between the interests of NWH Ltd and RBSG. The DINEDs attend RBSG Board meetings in an observer capacity.
On 30 April 2018 Yasmin Jetha stood down as a director of RBSG allowing her to assume DINED status. A further 3 DINEDs were appointed to the NWH Ltd sub-group boards with effect from 1 May: Francesca Barnes, Graham Beale and Ian Cormack. On 3 December Alison Rose-Slade was appointed as Deputy CEO, NatWest Holdings, and as a director of the NWH Ltd sub-group boards.
RBSs principal subsidiary entities outside the ring-fence, including NatWest Markets Plc, operate separate board and committee meeting cycles. In April 2018 Frank Dangeard stood down from the NWH Ltd sub-group boards and assumed the role of Chairman of NatWest Markets Plc.
Other Board changes
Penny Hughes resigned as a non-executive director on 30 May 2018, and Ewen Stevenson resigned as Chief Financial Officer and director on 30 September 2018. I would like to thank Penny and Ewen for all their hard work and dedication to RBS during their time with us.
On 1 June 2018, we were pleased to welcome Patrick Flynn to the Board. Patricks appointment further strengthens our overall board composition and supports succession planning.
We were also delighted to announce the appointment of Katie Murray as Executive Director and Chief Financial Officer (CFO) with effect from 1 January 2019. Katies appointment followed a successful period as interim CFO.
In addition, Brendan Nelson will step down as Chairman of the Group Audit Committee with effect from close of business on 31 March 2019, and as a non-executive director with effect from the end of the 2019 Annual General Meeting. Patrick Flynn will assume the role of Chairman of the Group Audit Committee with effect from close of business on 31 March 2019.
2018 UK Corporate Governance Code and Statutory Reporting Changes
In July 2018 the Financial Reporting Council published the 2018 UK Corporate Governance Code (the 2018 Code), which applies to accounting periods beginning on or after 1 January 2019. Having conducted a comprehensive impact analysis we believe we are well placed to report on our application of the new 2018 Codes principles in our 2019 report. We have also noted the new statutory reporting requirements (as set out in the Companies (Miscellaneous Reporting) Regulations 2018) that apply to the company for accounting periods beginning on or after 1 January 2019. We will make the relevant disclosures in our 2019 Annual Report on Form 20-F although we have opted for early disclosure on certain remuneration reporting requirements which can be found in the Directors Remuneration Report on page 74.
In conclusion, I and my fellow directors are committed to observing high standards of corporate governance, integrity and professionalism. Our statement of compliance with the UK Corporate Governance Code (the Code) can be found on page 95.
Howard Davies
Chairman of the Board
14 February 2019
The Board
The Board has thirteen directors comprising the Chairman, two executive directors and ten independent non-executive directors, one of whom is the Senior Independent Director.
Biographies for each director and details of the Board committees they are members of can be found on pages 59 and 60. The Board considers that the Chairman was independent on appointment and that all non-executive directors are independent for the purposes of the Code.
Roles and responsibilities
The Board
The Board is collectively responsible for the long-term success of RBS and delivery of sustainable shareholder value. The terms of reference include a formal schedule of matters specifically reserved for the Boards decision and are reviewed at least annually. They are available on rbs.com. During 2018 an internal review confirmed that the Board had fulfilled its remit as set out in its terms of reference.
Board Committees
In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. Refer to page 35 of the Strategic Report for more details. The terms of reference are available on rbs.com.
Corporate governance
Executive Management
The Board and the CEO are supported by the Executive Committee (ExCo), which is responsible for overseeing all aspects of the Groups operations. ExCos membership comprises the executive directors and the Group Chief Risk Officer; who are also members of the wider executive management team. Biographies of the executive management team can be found on rbs.com.
Chairman and Chief Executive
The role of Chairman is distinct and separate from that of the Chief Executive and there is a clear division of responsibilities with the Chairman leading the Board and the Chief Executive managing business day to day. Details of the key responsibilities of the Chairman and the Chief Executive are available on rbs.com.
Senior Independent Director
Throughout 2018 Mark Seligman, as Senior Independent Director, acted as a sounding board for the Chairman and as an intermediary for other directors when necessary. He was also available to shareholders to discuss any concerns they may have had, as appropriate.
Non-executive directors
Along with the Chairman and executive directors, the non-executive directors are responsible for ensuring the Board fulfils its responsibilities under its terms of reference.
The non-executive directors combine broad business and commercial experience with independent and objective judgement and they provide independent challenge to the executive directors and the leadership team.
The balance between non-executive and executive directors enables the Board to provide clear and effective leadership across RBSs business activities. The standard terms and conditions of appointment of non-executive directors are available on rbs.com.
Company Secretary
The Company Secretary, Aileen Taylor, works closely with the Chairman to ensure effective functioning of the Board and appropriate alignment and information flows between the Board and its committees.
As Chief Corporate Governance and Regulatory Officer & Board Counsel, Aileen advises the Board and individual directors on a broad range of strategic, governance, legal and regulatory issues. Aileen also facilitates Board induction and directors professional development.
Conflicts of interest
The Directors Conflicts of Interest policy sets out procedures to ensure that the Boards management of conflicts of interest and its powers for authorising certain conflicts are operating effectively.
Each director is required to notify the Board of any actual or potential situational or transactional conflict of interest and to update the Board with any changes to the facts and circumstances surrounding such conflicts.
Situational conflicts can be authorised by the Board in accordance with the Companies Act 2006 and the companys Articles of Association. The Board considers each request for authorisation on a case by case basis and has the power to impose conditions or limitations on any authorisation granted as part of the process.
Details of all directors conflicts of interest are recorded in a register which is maintained by the Company Secretary and reviewed annually by the Board.
Board and Committee meetings
The table below shows Board and Committee meeting attendance during 2018.
In addition to scheduled meetings, additional meetings of the Board and its Committees were held on an ad hoc basis to deal with time-critical matters. There were nine ad hoc Board meetings, six ad hoc N&G meetings, four ad hoc RemCo meetings, six ad hoc BRC meetings and 1 ad hoc GAC meeting. The Chairman and the non-executive directors meet at least once per year without executive directors present.
Board and committee membership and attendance 2018
|
Board |
Group
|
Group
|
Group
|
Group
|
Group
|
Technology
|
Howard Davies |
9/9 |
4/4 |
|
|
|
|
|
Ross McEwan |
9/9 |
|
|
|
|
|
|
Frank Dangeard 1 |
9/9 |
|
|
4/4 |
3/3 |
|
6/6 |
Alison Davis 2 |
9/9 |
|
|
|
6/7 |
6/6 |
6/6 |
Patrick Flynn 3 |
5/5 |
|
3/3 |
5/5 |
|
|
4/4 |
Morten Friis |
9/9 |
|
7/7 |
9/9 |
|
|
|
Robert Gillespie 4 |
9/9 |
4/4 |
|
5/5 |
7/7 |
6/6 |
|
Brendan Nelson |
9/9 |
4/4 |
7/7 |
9/9 |
|
|
|
Baroness Noakes 5 |
9/9 |
3/4 |
7/7 |
9/9 |
|
|
|
Mike Rogers 6,7 |
8/9 |
|
|
|
7/7 |
5/6 |
|
Mark Seligman 8 |
9/9 |
3/4 |
|
|
7/7 |
|
|
Lena Wilson 9,10 |
8/9 |
|
|
|
|
6/6 |
4/4 |
Former Directors |
|
|
|
|
|
|
|
Yasmin Jetha 11 |
3/3 |
|
|
|
|
2/2 |
1/1 |
Penny Hughes 12 |
4/4 |
1/1 |
|
4/4 |
|
2/2 |
|
Ewen Stevenson 13 |
7/7 |
|
|
|
|
|
|
Notes:
(1) Frank Dangeard was appointed to RemCo, and stood down from BRC, on 1 June 2018.
(2) Alison Davis did not attend the February RemCo meeting due to a scheduling clash with a pre-existing commitment.
(3) Patrick Flynn was appointed to the Board, GAC, BRC and TIC on 1 June 2018.
(4) Robert Gillespie was appointed to BRC on 1 June 2018.
(5) Baroness Noakes did not attend the December N&G meeting due to a scheduling clash with a pre-existing commitment.
(6) Mike Rogers assumed the role of SBC Chairman on 30 May 2018.
(7) Mike Rogers did not attend the March Board and SBC meetings due to a scheduling clash with a pre-existing commitment.
(8) Mark Seligman was not able to attend the December N&G meeting due to a private commitment.
(9) Lena Wilson did not attend the August Board meeting due to a scheduling clash with a pre-existing commitment.
(10) Lena Wilson was appointed to the TIC on 1 June 2018.
(11) Yasmin Jetha resigned from the Board on 30 April 2018.
(12) Penny Hughes resigned from the Board on 30 May 2018.
(13) Ewen Stevenson resigned from the Board on 30 September 2018.
(14) Sandy Crombie resigned from the Board on 1 January 2018.
Board Oversight Committees
GRG Board Oversight Committee
The GRG Board Oversight Committee was established in 2015 in relation to the Financial Conduct Authority review of the treatment of SME customers and continued to meet during 2018. The Committee oversees and provides advice to the Board in relation to the review, the external independent review of GRG instigated by the Group and other matters generally related to GRG.
UBI DAC Board Oversight Committee
A Board Oversight Committee was established in September 2017 in order to provide oversight of required enhancements to the governance and risk management practices within Ulster Bank Ireland DAC (UBI DAC), reporting to the Board, as appropriate . The journey of improvement remains a continued area of focus within UBI DAC. The Committee was disbanded in October 2018.
2019 Board Committee Changes
Mark Seligman was appointed to the Group Audit Committee on 1 January 2019.
Corporate governance
How the Board operated in 2018
At each scheduled Board meeting the directors receive reports from the Chairman, Board Committee Chairmen, Chief Executive, Chief Financial Officer, and other members of the executive management team, as appropriate.
Other senior executives attended Board meetings throughout the year to present reports to the Board. This provides the Board with an opportunity to engage directly with management on key issues and supports succession planning.
In addition to its scheduled meetings, the Board also met with the executive management team in June for the annual Board strategy offsite, which included particular focus on RBSs purpose and long-term future, technology and innovation. In October the Board held a focused and forward-looking discussion on culture, in support of the Boards critical role in leading the development of RBSs culture, values and standards.
Board engagement with stakeholders
The board maintained its stakeholder focus through a range of activities involving employees, shareholders, customers and others.
At a Meet the Board event for employees in May we announced the creation of our new Colleague Advisory Panel. In creating the Panel we are complying early with one of the key features of the new UK Corporate Governance Code 2018. Further information about the Panel can be found in the Strategic Report on page 15 and the Report of the directors on page 98.
We held dedicated events for retail shareholders in Glasgow and Birmingham, which provided an opportunity for shareholders to meet board members and ask questions. Further details on our relations with investors can be found on page 64.
In September the Board met in Manchester, and spent time with local businesses, customers and staff, including branch visits.
Our annual event for subsidiary non-executive directors took place in November, enabling attendees to focus on topics of mutual interest, including stakeholder engagement, culture and purpose. A Board reception was also held in Edinburgh, providing a further opportunity for some directors to meet and spend time with customers and other stakeholders and influencers.
Non-executive directors are also welcome to attend the stakeholder engagement sessions run by the Sustainable Banking Committee (further details of which are on page 72).
Board effectiveness
Skills and experience of the Board
The Board is structured to ensure that the directors provide RBS with the appropriate balance of skills, experience and knowledge as well as independence. Given the nature of RBSs businesses, experience of banking and financial services is clearly of benefit, and we have a number of directors with substantial experience in that area. In addition, our directors have relevant experience of government and regulatory matters; mergers & acquisitions; corporate restructuring; stakeholder management; technology, digital and innovation; finance and accountancy; risk; and change management.
Board committees also comprise directors with a variety of skills and experience so that no undue reliance is placed on any individual.
Induction and professional development
Each new director receives a formal induction on joining the Board, which is co-ordinated by the Company Secretary and tailored to suit the requirements of the individual concerned. This includes visits to RBSs major businesses and functions and meetings with directors and senior management. Meetings with external auditors, counsel and stakeholders are also arranged as appropriate.
The directors have access to a wide range of briefing and training sessions and other professional development opportunities. Internal training relevant to the business of RBS is also provided. Directors undertake the training they consider necessary to assist them in carrying out their duties and responsibilities as directors. Directors may also request individual in-depth briefings from time to time on areas of particular interest.
During 2018, bespoke training was arranged for the directors on a range of subjects to enhance their knowledge, including:
· Banking structural reform;
· Conflicts of interest;
· Competition law;
· Cyber security;
· The balance sheet; and
· EU General Data Protection Regulation.
In addition, all directors have access to an online resources portal, Diligent, through which they receive their board and committee papers. Diligent also contains internal policy information, corporate governance updates and external briefing notes on topical subjects, to support directors professional development and competence.
The Company Secretary maintains continuing professional development logs. These are reviewed regularly between the Chairman and each director individually, to assist in identifying future training and development opportunities that are specific to the individual directors requirements.
Information
All directors receive accurate, timely and clear information on all relevant matters and have access to the advice and services of the Company Secretary. In addition, all directors are able, if necessary, to obtain independent professional advice at the companys expense.
Time commitment
It is anticipated that non-executive directors will allocate sufficient time to RBS to discharge their responsibilities effectively and will devote such time as is necessary to fulfil their role. Directors have been briefed on the limits on the number of other directorships that they can hold under the requirements of the fourth Capital Requirements Directive.
Each director is required to advise RBS as early as possible and to seek the agreement of the Board before accepting additional commitments that might affect the time the director is able to devote to his or her role as a non-executive director of RBS. The Board monitors the other commitments of the Chairman and directors and is satisfied that they are able to allocate sufficient time to enable them to discharge their duties and responsibilities effectively. The time commitment required of our non-executive directors continues to be significant.
Election and re-election of directors
In accordance with the provisions of the Code, all directors stand for election or re-election by shareholders at the companys AGM. I n accordance with the UK Listing Rules, the election or re-election of independent directors also requires approval by a majority of independent shareholders.
Under the Board Appointment Policy all non-executive directors appointed since 1 January 2017 are appointed for an initial 3 year term, subject to annual re-election at the AGM. Following assessment by the Group Nominations & Governance Committee they may then be appointed for a further 3 year term, and subsequent 12 month terms up to a maximum of nine years.
Corporate governance
Performance evaluation
In accordance with the Code, an external evaluation of the Board, its Committees and individual directors takes place every 3 years. An internal evaluation takes place in the intervening years.
Progress following the 2017 evaluation
A number of actions were progressed during 2018 in response to the findings of the 2017 internal performance evaluation, overseen by the Group Nominations and Governance Committee.
These in cluded:
· a focus on longer-term issues during strategy discussions, including RBSs purpose;
· a dedicated Board discussion on culture, led by the Chairman;
· continued opportunities for the Board to meet RBSs customers, for example during the Manchester board visit;
· additional Board focus on executive succession planning; and
· enhancing the quality of information the Board receives through revised formats for regular reporting.
2018 Performance evaluation
During September and October the 2018 Board and Committee evaluation was externally facilitated by Independent Board Evaluation (IBE). IBE was selected following a competitive tender process and the Board is satisfied that IBE have no other connection with RBS.
IBE undertook a formal and rigorous evaluation by:
· holding 1:1 interviews with directors, senior management and external advisers;
· discussing the key themes and recommendations for action with the Chairman and Committee Chairmen; and
· presenting Board and Committee effectiveness reports.
This was the first performance evaluation undertaken since the introduction of our ring-fencing governance arrangements. It considered the effectiveness of both the RBSG and NWH Ltd Boards, but was predominantly focused on RBSG. The relatively early stage nature of the feedback was acknowledged, given the Boards were transitioning to the new operating model during the review period.
Key findings and recommendations
The 2018 Board evaluation findings and recommendations included the following:
· the Board is committed and hard-working, with a strong Chairman in position and a good working relationship with the CEO;
· Board members are clear on their roles and accountability to shareholders and wider stakeholders;
· The Board should strive to role model the culture and values of the organisation and balance holding management to account with encouragement and support;
· the Board has reached an inflexion point, and there is now a clear need to focus on the longer term and forward-looking growth strategy;
· there is scope to improve the quality of Board papers and review the length/number of Board and Committee meetings;
· Board composition and succession planning should continue to be a priority; and in particular consideration should be given to reducing the Boards size; and
· the induction programme had proved a positive experience for new non-executive directors, and a small number of improvements were suggested.
Actions
An action plan has been developed in response to the 2018 Board evaluation report, and its implementation will be overseen by the Group Nominations and Governance Committee during 2019. The plan includes measures to:
· agree key objectives, drive a focused board agenda for 2019, and prioritise board time accordingly (including between RBSG and NWH Ltd);
· support a healthy Boardroom culture, focused on the development of effective working relationships between the directors and senior management;
· improve the quality of Board papers and presentations;
· proactively review Board and committee composition and succession plans; and
· further enhance the NED induction programme .
Individual director and Chairman effectiveness reviews
The Chairman met each director individually to discuss their own performance and continuing professional development and also shared peer feedback provided to IBE as part of the evaluation process. Separately, the Senior Independent Director sought feedback on the Chairmans performance from the non-executive directors, executive directors, DINEDs, and key external stakeholders and discussed it with the Chairman.
Relations with investors
The Chairman is responsible for ensuring effective communication with shareholders.
Shareholders are given the opportunity to ask questions at the AGM and any General Meetings held or can submit written questions in advance.
Communication with the companys largest institutional shareholders is undertaken as part of the Investor Relations programme:
· The Chairman, Chief Executive and Chief Financial Officer undertake an extensive annual programme of meetings with the companys largest institutional shareholders;
· the Senior Independent Director is available if any shareholder has concerns that they feel are not being addressed through the normal channels; and
· the Chairman of the Group Performance and Remuneration Committee consults with major shareholders in respect of the Groups remuneration policy.
Report of the Group Nominations and Governance Committee
Letter from Howard Davies
Chairman of the Group Nominations and Governance Committee
Dear Shareholder,
As Chairman of the Board and Chairman of the Group Nominations and Governance Committee I am pleased to present our report on the Committees activity during 2018.
Role and responsibilities
The Committee is responsible for reviewing the structure, size and composition of the Board, and membership and chairmanship of Board Committees and recommends appointments to the Board. In addition, the Committee monitors the Groups governance arrangements to ensure that best corporate governance standards and practices are upheld and considers developments relating to banking reform and analogous issues affecting the Group. The Committee makes recommendations to the Board in respect of any consequential amendments to the Groups operating model.
The terms of reference of the Committee are reviewed annually, approved by the Board and are available at rbs.com.
Principal activity during 2018
As highlighted in the Boards 2017 effectiveness review, the Committee acknowledges the tenure of a number of current Board directors and therefore made succession planning a priority in 2018. Ring-fencing also gave rise to a requirement to recruit additional non-executive directors to the boards of our material regulated subsidiaries, which the Committee has overseen.
In addition to recruitment, the Committee has overseen the process to reach agreement with the PRA in respect of a governance model that is compatible with ring-fencing legislation. The Committee has also spent time considering the Groups arrangements in respect of legal entity governance. This has included overseeing work aimed at continuing to enhance the Groups subsidiary governance framework. As part of this work, the Group has proposed the appointment of individuals to act as its representative on the boards of a number of material regulated subsidiaries. The aim of these appointments is to strengthen oversight and enhance communication between the subsidiary boards and the Group.
Membership and meetings
Penny Hughes stepped down from the Committee with effect from 30 May 2018, meaning that for most of 2018 the Committee comprised the Chairman of the Board and four independent non-executive directors. Graham Beale also attends meetings of the Committee in an observer capacity, following his appointment as Senior Independent Director of NatWest Holdings Limited.
The Committee holds at least four scheduled meetings per year and also meets on an ad hoc basis as required. In 2018, there were ten meetings. Individual attendance by directors at these meetings is shown in the table on page 62.
Board and Committee membership
Both Spencer Stuart and Hay Korn Ferry have been engaged during the year to support the search for new executive and non-executive directors. Spencer Stuart and Hay Korn Ferry are also members of the retained executive search panel of suppliers (managed by RBS Executive Search) and provide leadership advisory and senior executive search and assessment services to the Human Resources function within RBS. During 2018, the Committee considered a number of potential candidates. In June 2018, Patrick Flynn was appointed to the Board as a non-executive director and at the same time was appointed to the Boards Risk, Audit and Technology and Innovation Committees. The Committee also oversaw the search for a successor to Ewen Stevenson who stepped down from the Board on 30 September 2018. On 1 January 2019, Katie Murray joined the Board as executive director and Chief Financial Officer.
Tenure of non-executive directors
The tenure of non-executive directors as at 31 December 2018 is set out below.
0 3 years |
42% |
3 6 years |
33% |
6+ years |
25% |
|
100% |
Performance evaluation
The 2018 review of the effectiveness of the Board and its senior Committees was facilitated by Independent Board Evaluation, a specialist board evaluation consultancy. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings. Overall the review concluded that the Committee operated effectively with no material recommendations being identified for action. The Committee will continue to ensure that the full Board is appropriately sighted on the work of the Committee
The outcomes of the evaluation have been reported to the Board and the Committee will track progress during the year.
Boardroom Inclusion Policy
The Board operates a Boardroom Inclusion Policy 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 policy currently applies to the most senior RBS boards: The Royal Bank of Scotland Group plc (RBSG), NatWest Holdings Limited, 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.
Objectives and targets
The Boardroom Inclusion Policys objectives ensure that the Board, and any Committee to which it delegates nominations responsibilities, follows an inclusive process when making nomination decisions. That includes ensuring that the nomination process is based on the principles of fairness, respect and inclusion, that all nominations and appointments are made on the basis of individual competence, skills and expertise measured against identified objective criteria and that searches for Board candidates are conducted with due regard to the benefits of diversity and inclusion.
The Boardroom Inclusion Policy contains a number of measurable objectives, targets and ambitions reflecting the ongoing commitment of the Board to inclusion progress. The Board aims to meet the highest industry standards and recommendations wherever possible. That includes, but is not limited to, aspiring to meet the targets set by the Hampton-Alexander Report: FTSE100 Women Leaders (33% female representation on the boards) and the Parker Report: Beyond 1 by 21 (at least one director from an ethnic minority background on the boards) by 2020/2021. The policy supports our bank-wide ambition to aim for a 50/50 gender balance across all levels of the organisation by 2030.
Monitoring and reporting
The Boards performance against these targets varied throughout 2018 as the Group made a number of changes to its board governance structure in order to comply with ring-fencing legislation. These changes included a number of appointments to the board of NatWest Holdings Limited, the holding company of the ring-fenced sub-group. The boards of RBSG and NatWest Holdings Limited meet consecutively and share a largely common membership. When considered together, the director population across both boards currently meets the Parker target and exceeds the Hampton-Alexander target with a female representation of 39%.
Notwithstanding the largely common membership between the two boards, RBS remains committed to ensuring that the RBSG board meets the targets on a standalone basis. Following Katie Murrays appointment on 1 January 2019, the RBSG board composition currently includes 31% female representation, rising from 25% at 31 December 2018. The RBSG board also remains committed to meeting the Parker Target by 2020/2021.
Inclusion and diversity progress, including information about the appointment process, will continue to be reported in the Group Nominations and Governance Committees report in the RBS Annual Report on Form 20-F. The balance of skills, experience, independence, knowledge and diversity on the Board, and how the Board operates together as a unit is reviewed annually as part of the Board evaluation. Where appropriate, findings from the evaluation will be considered in the search, nomination and appointment process. Further details on RBSs approach to diversity can be found on pages 17 and 98.
Howard Davies
Chairman of the Group Nominations and Governance Committee
14 February 201 9
Report of the Group Audit Committee
Letter from Brendan Nelson
Chairman of the Group Audit Committee
Dear Shareholder,
This report outlines the key areas of focus of the Group Audit Committee (GAC) and explains how it fulfilled its responsibilities during 2018.
The GAC has responsibility for monitoring and reviewing RBSs financial reports and disclosures, its accounting policies and practices and standards of internal control. The GACs responsibilities are set out in more detail in its terms of reference which are reviewed annually and are available on rbs.com.
The Committees primary focus is the integrity and quality of RBSs financial statements. During the year we scrutinised the quarterly, interim and full year results announcements and supporting documentation, and this document.
Detailed reports from management on the key assumptions and accounting judgements behind RBSs financial results, IFRS 9 expected credit losses and the conclusions of the External Auditor and other management reports, enabled the Committee to scrutinise disclosures in the financial statements and the underlying judgements and estimates were appropriate.
Further detail on the most material issues considered by the Committee is provided in the report below.
The effectiveness of RBSs standards of internal control, in particular controls relating to financial management, reporting and accounting issues , was another key focus of the Committee.
The Committees primary focus is the integrity and quality of RBSs financial statements
RBS, in common with other large banks, was required to deliver ring-fencing by the beginning of 2019. Throughout 2018 the Committee received regular updates on the ring-fencing programme including, in particular, its impact on financial reporting for RBS and its subsidiaries.
During 2018 RBS resolved significant legacy issues, in particular the settlement of the US Department of Justices investigation into Residential Mortgage Backed Securities . The GAC was closely engaged to ensure this was appropriately disclosed and provided for. Similarly, t he GAC kept existing provisions for liabilities under close review throughout the year.
2018 also saw significant developments in relation to Brexit. Whilst Brexit was largely discussed at Board level, given its potential strategic impact, the Committee considered the potential impact on the economic environment and, subsequently on RBSs financial results.
In my role as GAC Chairman I also act as RBSs Whistleblowing Champion. As such, I carry responsibility for ensuring and overseeing the integrity, independence and effectiveness of the firms whistleblowing arrangements. RBSs whistleblowing framework and procedures promote a culture where individuals feel comfortable raising concerns and challenging poor practice and behaviour. During 2018, the FCA completed its review of the whistleblowing arrangements of RBS and other firms. I am pleased to report that the FCAs review concluded that RBSs arrangements were well developed and cited several examples of good practice.
Looking forward to 2019, the GAC will continue its focus on financial reporting; accounting policies and internal controls, ensuring robust scrutiny of RBSs financial reports and disclosures.
As you will have seen earlier in the report, I retire as a director of the Group at the forthcoming AGM and after 9 years as Chairman of the GAC I will be succeeded by Patrick Flynn who has been a valuable member of the GAC since June 2018.
Brendan Nelson
Chairman of the Group Audit Committee
14 February 2019
Membership
Full biographical details of the GAC members are set out on pages 59 and 60. With effect from 1 January 2019 Mark Seligman was also appointed to the GAC. The members are all independent non-executive directors and each sit on other Board Committees (as shown on pages 59 and 60) in addition to the GAC. This cross committee membership helps facilitate effective governance, ensures agendas are aligned and avoids overlap of responsibilities.
The members of GAC are selected with a view to the expertise and experience of the GAC as a whole and with proper regard to the key issues and challenges facing RBS.
The Board is satisfied that all GAC members have recent and relevant financial experience and are independent as defined in the SEC rules under the US Securities Exchange Act of 1934 (the Exchange Act) and related guidance. The Board has further determined that Brendan Nelson, GAC Chairman, Baroness Noakes, Patrick Flynn and Mark Seligman are all financial experts for the purposes of compliance with the Exchange Act Rules and the requirements of the New York Stock Exchange, and that they have competence in accounting and auditing as required under the Disclosure Guidance and Transparency Rules.
Regular attendees at GAC meetings included: the RBS Chairman; Chief Executive; Chief Financial Officer; Deputy Chief Financial Officer; Chief Accountant; Chief Legal Officer and General Counsel; and the Internal and External Auditors. The GAC also met privately with the external auditors and separately with Internal Audit management.
Meetings and visits
The GAC held seven scheduled meetings in 2018, four of which were held shortly prior to submission of the quarterly financial statements to the Board. During 2018 a ll members attended the meetings scheduled during their term as Committee members.
In conjunction with the BRC, the GAC took part in an annual programme of visits to control functions in order to maintain a thorough understanding of their priorities and operational structure. This programme comprised two visits to Risk; two visits to Internal Audit and a visit to Finance. In addition, the GAC and BRC visited RBSs operations in India where they met with RBS India Executive Committee members, the local internal and external audit teams and HR team, as well as key employee groups. During the visit the GAC and BRC received updates on the RBS India business units, the top risks in the Indian business and plans for their remediation, the people plan and Technology strategy for India.
Performance evaluations
The performance of the GAC was evaluated by an external party in 2018. The evaluation concluded that the GAC operated effectively during 2018 . The Committee was described as thorough and diligent in tackling its agenda. Some recommendations for improvement were identified mainly on length of meetings and paper submissions. The Board and the GAC have considered and discussed the outcomes of the evaluation and will track progress on the recommendations during 2019.
Evaluations of the External Auditor and Internal Audit function are conducted each year. The 2018 Internal Audit evaluation was conducted by KPMG who assessed Internal Audit against the Institute of Internal Audit International Standards and also against relevant regulatory guidance. The overall findings were positive and recommendations for improvement are being progressed by Internal Audit and overseen by the GAC. The 2018 evaluation of the External Auditor was conducted internally. It concluded that the external auditor was operating effectively. Some recommendations for continuous improvement were identified and are being implemented by the External Auditor .
Report of the Group Audit Committee
Report of the Group Audit Committee
Matter |
Context of discussion |
How the Committee addressed the matter |
Internal audit |
The Committee has responsibility for overseeing the I nternal Audit function. In addition to considering quarterly opinions from Internal Audit, GAC is required to monitor the functions effectiveness and confirm its independence and was fully satisfied in this regard.
|
Opinions Quarterly opinion reports updated GAC on Internal Audits view of the risk and control environment and risk and control awareness of each business and function, and the risks which could impact RBS achieving its targets. Internal Audit also outlined material and emerging concerns identified through their audit work. In addition, Internal Audit reported on items including Pillar 3 reporting and the whistleblowing process. Annual Plan and Budget GAC considered and approved Internal Audits plan for 2018. Updates and anticipated changes to the plan were provided to the GAC periodically. The GAC also considered Internal Audits budget. The Committee was satisfied that Internal Audit had adequate budget and resources to deliver the plan. Internal Audit Charter and Independence Updates to Internal Audits charter reflecting changes to RBSs legal entity structure were noted by the GAC. The GAC also noted the Chief Audit Executives independence statement. Visits Together with the BRC, GAC participated in two visits to Internal Audit during 2018. A variety of issues impacting the Internal Audit function were discussed, including: resourcing and structure; succession planning; quality assurance; the future of internal audit; and the 2019 Audit Plan. Performance The Chief Audit Executive continued to report to the GAC Chairman, with a secondary reporting line to the Chief Executive for administrative purposes. The GAC assessed the annual performance (including risk performance) of the function and Chief Audit Executive. Evaluation The 2018 annual review of the effectiveness of Internal Audit was undertaken externally by KPMG. The evaluation assessed the function against the Institute of Internal Auditor International Standards and found that it Generally Conforms to the requirements, and is in line with peer organisations. There were some areas where the function Partially Conforms to a limited number of requirements, but none were considered to be significant and in most cases, steps were already being taken to address these. |
External audit |
Ernst & Young LLP (EY) has been RBSs external auditor since 2016. The GAC has responsibility for monitoring EYs independence and objectivity, the effectiveness of the audit process and for reviewing RBSs financial relationship with the External Auditor and fixing remuneration.
|
Audit Partner Jonathan Bourne has been EYs lead audit partner for RBS since 2016. Mr Bourne attended each meeting of the GAC in 2018. External Audit Reports EY reported to the GAC each quarter on their audit work and related conclusions, including the appropriateness of judgements made by management and their compliance with international financial reporting standards. The GAC also reviewed EYs annual management letter. Audit Plan and fees The GAC considered updates on EYs 2018 plan and approved the 2018 audit fees including the fee for the 2018 interim results. The GAC was authorised by shareholders at the last Annual General Meeting to fix the remuneration of the external auditors. Annual Evaluation An internal evaluation was carried out at the GACs request to assess the independence and objectivity of the External Auditor and the effectiveness of the audit process during 2018. GAC members, attendees, the Franchise and Functional Finance Directors and key members of the Finance team were consulted as part of the evaluation. The evaluation assessed the external auditors mindset and culture, skills, character and knowledge, quality control and judgement. The evaluation found that the External Auditor was operating effectively. A number of recommendations for continuous improvement were identified which are being implemented by the External Auditor. Following the evaluation the GAC recommended that the Board seek the reappointment of EY as external auditor at the next annual general meeting. CASS Opinions During 2018 the external auditor presented the results of its assurance procedures on compliance with the FCAs Client Asset Rules for RBSs regulated legal entities for the year ended 31 December 2017. The GAC also considered the CASS Audit plan for 2018, the findings of which will be reported to the GAC once the audit is complete. External Auditor Report to the PRA GAC considered EYs 2018 written report to the PRA under supervisory statement SS1/16. The report responded to specific questions posed by the PRA, most of which concerned the interpretation of the IFRS 9 accounting rules by RBS. GAC also discussed the questions received from the PRA in relation to the report required for 2019. |
Audit & non-audit services |
RBS has a policy in relation to the engagement of the external auditors to perform audit and non-audit services (the policy). GAC reviews the policy annually to ensure it remains fit for purpose. All audit and non-audit services are pre-approved by the Committee to safeguard the external auditors independence and objectivity. |
Under the policy, audit related services and permitted non-audit service engagements may be approved by the Director of Finance up to certain financial thresholds. Engagements in excess of these limits require the approval of the GAC chairman. The Director of Finance may also approve the provision of services by the external auditor to non-consolidated subsidiaries of RBS within an annual cap and approve engagements with the external auditor where RBS has limited or no influence in the selection process. Where the fee for a non-audit service engagement is expected to exceed £100,000, a competitive tender process must be held and approval of the full GAC is required. All such approvals are reported to the GAC each quarter.
During 2018, approval was granted under the policy for the external auditors to undertake significant engagements in relation to a gap assessment in relation to IFRS 9 reporting infrastructure and to provide assurance over LIBOR submissions. The decision to approve EY was made in the first case as a result of EYs existing knowledge of RBS systems which allowed work to commence quickly and in the second case, following a tender process. In each case the GAC was satisfied that the engagement did not impact the external auditors independence.
Further details of the non-audit services that are prohibited and permitted under the policy can be found on rbs.com. Information on fees paid in respect of audit and non-audit services carried out by the External Auditor can be found in Note 6 to the consolidated accounts. |
Report of the Group Board Risk Committee
Letter from Baroness Noakes
Chairman of the Group Board Risk Committee
Dear Shareholder,
I am pleased to present my report setting out how the Group Board Risk Committee (the Committee or BRC) discharged its responsibilities in 2018.
The BRC has responsibility for overseeing the management of risks that could impact RBSs businesses and operations. The Committee also monitors risk profile, risk appetite and the promotion of a culture of risk awareness within the organisation. The BRCs responsibilities are set out in more detail in its terms of reference which are reviewed annually by the Committee and are available on RBSs website: rbs.com.
RBSs risk profile improved materially in 2018, with progress made in relation to pensions, the settlement of the US Department of Justices investigation into Residential Mortgage Backed Securities and, ring-fencing implementation.
RBS, in common with other large banks, was required to deliver both ring-fencing and key parts of its resolution plans by the beginning of 2019. The ring-fencing programme was a key focus for the Committee throughout the year and detailed progress reports were scrutinised at each meeting.
After the successful legal restructuring of the RBS Group on 30 April 2018, RBS began to operate under a transitional governance structure and BRC continued to oversee the subsequent stages of the ring-fencing implementation work
RBSs risk profile improved materially in 2018
A large part of the Group BRCs work is the review of reports and regulatory submissions on behalf of the Board and recommending them for approval. Where this is the case, the Report below is annotated with an asterix (*).
Other key areas of focus in 2018 included: risk profile and reporting, stress testing, risk appetite, and recovery and resolution. Further detail on each of these key topics is provided on the pages that follow. Brexit risks, while considered by the BRC from time to time, were largely discussed at Board level given the potential strategic impact.
Now that the majority of legacy issues have been addressed and ring-fencing delivered, RBS is increasingly looking to the future and I anticipate that BRC will spend progressively more time overseeing aspects of innovation and technology. Operational resilience, cyber security and a satisfactory control environment are, however, key to ensuring that RBS can continue to provide excellent service to its customers and these areas will be monitored closely by the BRC in the year ahead.
Baroness Noakes
Chairman of the Group Board Risk Committee
14 February 2019
Membership
The Board Risk Committee is comprised of five independent non-executive directors. The details of the members and their skills and experience are set out on pages 59 and 60. Brendan Nelson is chairman of the Group Audit Committee of which Baroness Noakes and Morten Friis are also members.
Robert Gillespie is chairman of the Group Performance and Remuneration Committee. This common membership across Committees helps to ensure effective governance across the committees.
Regular attendees at meetings include: the RBS Chairman, Chief Executive, Chief Financial Officer, Chief Risk Officer, Chief Legal Officer and General Counsel, Chief Audit Executive, and the External Auditor. External advice is sought by the Committee where appropriate.
Meetings and visits
All members attended the nine scheduled meetings held in 2018 during the period in which they were Committee members. In addition, six ad hoc meetings were arranged to consider: Banks Executive Committee (ExCo) risk and conduct performance, ExCo risk & control objectives, risk and conduct management performance of Franchises and Functions, the year-end remuneration process, the results of various phases of internal and external stress tests; and the capital plans required for the Ring-fencing Transfer Scheme.
In 2018, members of the Committee undertook a programme of visits across various locations in conjunction with members of the Group Audit Committee, including a visit to India. The purpose and scope of this programme is discussed in detail in the Report of the Group Audit Committee on pages 66 to 68.
The Committee also held an in-depth session on risk reporting and held a teach-in on capital and liquidity.
Performance Evaluation
The annual review of the effectiveness of the Board and its senior Committees, including the Board Risk Committee, was conducted externally in 2018 by independent Board Evaluation. Overall the review concluded that the BRC continued to operate effectively. The Committee was described as very capable with robust, well-established processes. The review also made a number of recommendations including reducing the length of meetings and level of detail considered by the Committee and transitioning to a more strategic mode over time. The Committee has considered and discussed the outcomes of this evaluation and accepts the findings.
The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2019.
Report of the Group Board Risk Committee
Key matters considered by the Committee in 2018
Report of the Group Board Risk Committee
Report of the Group Sustainable Banking Committee
Letter from Mike Rogers
Chairman of the Group Sustainable Banking Committee
Engagement sessions continue to provide a valuable opportunity for the Board to listen to the external perspective.
Dear Shareholder,
I am delighted to present my first report as Chairman of the Group Sustainable Banking Committee (the Committee or SBC).
SBC has continued to play a forward-looking and strategic role on behalf of the Board, focusing on its priority areas of culture; customers; people; brand & communications; and environmental, social and ethical (ESE) issues.
2018 Highlights
I can report that good progress was made in 2018 with some particular areas to highlight set out below.
· Culture and people remain two areas where the Committee focuses its efforts via a regular culture update as well as spotlights on wellbeing, inclusion and how we are supporting colleagues to develop skills and capabilities needed for the future.
· The Committee has prioritised customer matters, having received updates from the customer facing franchises, including digital and mobile strategy, customer journey management and business banking.
· The Committee recognises the importance of customer service so time has been dedicated to understanding the actions needed to be taken by management to improve RBSs position in the customer service rankings published by the Competition and Markets Authority. This was with a keen focus on managements longer term ambition.
· The Committee has considered the Environmental strategy, with a focus on activity relating to colleagues and suppliers as well as being updated on the approach to climate change.
· New areas of interest for 2018 included RBSs reputation and relationships with the media.
· The Committee received a spotlight on suppliers which included how RBS ensures it works with suppliers that share the same values as well as understanding the quality of supplier relationships. This was complemented by obtaining the internal audit perspective.
· The Committee supported management in developing a sustainable banking dashboard which provides a consolidated view on performance in respect of key priorities.
Stakeholder engagement
The Committee has continued with its stakeholder engagement programme and during 2018 met with 16 external stakeholders over four sessions. Topics were:
· Sustainable credit;
· Ethics of artificial intelligence;
· Purpose; and
· Transparency.
The sessions continue to provide a valuable opportunity for Board members and senior management to listen to the external perspective.
During the year the Committee also undertook visits to our Private Banking and Premier Banking businesses along with visiting the Digital Studio in Bristol and the London Entrepreneurial Accelerator Hub. The purpose of these visits is to provide Board members with customer and entrepreneur insights and interaction.
The Committees programme of stakeholder engagement was enhanced by hosting a lunch with some of the members of the recently formed Colleague Advisory Panel, with the key themes of the discussion being shared with the Board. Further information about the Panel can be found in the Strategic Report on page 15.
Membership, Meetings and Escalation
The structure of the Committee was amended part way through the year in preparation for ring-fencing. More information on ring-fencing governance can be found on page 61 of the Governance Report.
A Sustainable Banking Committee of NatWest Holdings Limited (NWH Ltd SBC) was established, with its focus on customer and people matters within the ring-fenced bank.
Authority is delegated to Group SBC by Group Board and a regular report of the Committees activities is provided to the Group Board. The terms of reference are available on rbs.com and these are reviewed annually and approved by the Group Board.
Group SBC began the year with six independent non-executive directors, with that changing to four independent non-executive directors due to changes in the structure of the Committee as referenced above. More details of membership and attendance at meetings can be found on page 62 of the Governance Report.
Performance evaluation
The annual review of the effectiveness of the Group Board and its senior Committees, including Group SBC, was conducted externally in 2018. Group SBC has considered the outcomes of this evaluation and accepts the findings. Overall the feedback on the Committee was positive, although it was recognised that there was an opportunity to be clearer and simpler on remit.
The outcomes of the evaluation have been reported to the Group Board and the Committee will follow up during the year through the development of the pillars of sustainable banking as described below.
Conclusion
I want to take the opportunity to thank the Committee members and attendees for their continued contribution and support in 2018.
I would also like to record my thanks to Penny Hughes, my predecessor, as Chairman of the Committee who stood down at the AGM in May 2018. Penny was a champion for sustainable banking and stakeholder engagement and I look forward to building further on the progress made under her direction.
In preparation for 2019, the Committee has spent time considering its remit and how best to continue to have a long-term and strategic focus. In future, the Committees work will be structured under four pillars of: Customers and Brands; People and Culture; the Competitive Environment; and Society and Environment.
I am energised to continue to lead the Committees work during 2019 and look forward to reporting on progress of the sustainable banking agenda next year.
Mike Rogers
Chairman of the Group Sustainable Banking Committee
14 February 2019
Report of the Technology and Innovation Committee
Letter from Alison Davis
Chairman of the Technology and Innovation Committee
In this digital era, technology and innovation is fundamental to the banks strategy and customers
Dear Shareholder,
I am pleased to present the first report of the Technology and Innovation Committee (the Committee or TIC).
Role and responsibilities
TIC was established in September 2017 in order to support the Board in overseeing and monitoring RBSs strategic direction in relation to technology and innovation. Technology and innovation is transforming banking and it was agreed that a Board Committee should be established to allow the Board to dedicate sufficient time to this area of critical importance to our strategy and our customers.
Authority is delegated to TIC by the Board and a regular report of the Committees activities is provided to the Board. The terms of reference are available on rbs.com and these are reviewed annually and approved by the Group Board.
Board Committee structures were reviewed in preparation for ring-fencing and the TIC has remained a Group-level Committee, given the strategic nature of its remit.
Membership and meetings
I have chaired the Committee since it was established, at which time, Frank Dangeard and Yasmin Jetha became the first members.
In June 2018, following review of the Committees membership in preparation for ring-fencing, Patrick Flynn and Lena Wilson were appointed as members of the Committee. Frank Dangeard continued as a member while Yasmin Jetha stood down and became a standing attendee following her appointment as a Double Independent Non-executive Director.
I am confident that the mix of relevant skills, knowledge and commercial experience contributed by the Committees members has greatly enhanced the quality of our discussions.
The Committee is supported by management and the Chief Executive, Chief Administrative Officer, Chief Risk Officer, Chief Financial Officer, CEO Special Projects, Director of Innovation and Director of Strategy and Corporate Development are all standing attendees.
The Committee held six meetings during 2018. Details of meeting attendance can be found at page 62 of the Governance Report.
Principal activity during 2018
We know that the nature of banking services and the way they are provided is changing and the Committee agendas are therefore focused across three key themes:
· Digitising the core the Committee considered how the Group is using new technology to improve the core business, including how it enhances the customer value proposition and reduces the cost base. Each of the franchises and functions were invited to present an update on steps being taken to digitise their area. The Committee has also considered data strategy; GDPR; cyber security; technology modernisation; and the core infrastructure under this theme.
· New revenue streams the Committee considered new initiatives that could generate revenue streams, challenge disruption and deliver innovative digital propositions for customers.
· Innovation strategy, culture and capability the Committee discussed how managements consideration of the future innovation strategy, culture and capability of the organisation is developing. Open Banking, the innovation budget and quantum computing were also discussed.
Given the focus of the Committee, it is important that it spends time considering external perspectives to ensure that it keeps abreast of emerging technology and innovation trends and can identify key threats resulting from new business models, technologies, processes, products and concepts. During the year, the Committee invited a number of speakers to meetings to provide an external perspective and insight.
Performance evaluation
The annual review of the effectiveness of the Board and its Committees, including the TIC, was conducted externally in 2018. Overall, the review concluded that the Committee operated effectively. It included observations regarding the remit of the Committee and the focus of the agenda which will be taken into account in 2019. The outcomes of the evaluation have been reported to the Board.
Conclusion
I am delighted to chair the TIC, which supports the Board in an area so crucial to the future of the organisation. RBS needs to remain relevant to customers in a changing world and the Committee will continue to support the Board in considering how we can use technology and innovation to advance the bank for our customers and shareholders. I want to take the opportunity to thank the Committee members and attendees for their contribution, enthusiasm and support in 2018.
Alison Davis
Chairman of the Technology and Innovation Committee
14 February 2019
Directors Remuneration Report
|
Page |
Annual statement from the Committee Chairman |
74 |
Remuneration at a glance |
75 |
Directors Remuneration Policy |
77 |
Annual Report on Remuneration |
81 |
Other Remuneration Disclosures |
91 |
Letter from Robert Gillespie
Chairman of the Group Performance and Remuneration Committee
Capital strength has been a key performance measure and I am delighted that progress in this area has enabled RBS to resume dividend payments.
Dear Shareholder,
This is my second report as Chairman of the Group Performance and Remuneration Committee (the Committee) and it has proved to be another busy year. We have established additional remuneration committees for a number of RBS subsidiaries as part of our governance arrangements for ring-fencing. This will provide additional oversight of remuneration across our key legal entities before proposals are considered by the Committee.
In addition, the Committee spent time considering the latest updates to reporting regulations and the UK Corporate Governance Code (the Code). We remain strong supporters of reforms aimed at improving the effectiveness, transparency and fairness of pay structures.
Broader pay considerations
Colleague engagement In preparation for the new Code, we have taken steps to supplement our existing channels for colleagues to be heard at Board level. We have established a Colleague Advisory Panel to provide direct engagement with Board members. Amongst other strategic topics, this forum will be used to discuss executive remuneration and how it aligns with the wider company pay policy.
We believe that having an engaged and inclusive workforce is a key element of a successful business. This is why it is one of the areas included in the performance assessment for executive directors. The latest opinion survey shows engagement is at its highest level since we started measuring it and inclusion is our highest scoring category. We are now above the Global Financial Services (GFS) norms in all comparable survey categories.
Fairness and simplicity We continue to make good progress. The number of employees at RBS who believe they are paid fairly rose during the year and is significantly above the GFS norm. In the UK, our rates of pay continue to exceed the Living Wage. Over the last four years we have made improvements to starting salaries and faster progression for those on lower levels of pay.
We have also removed variable pay for a significant number of these employees and increased their fixed pay. This provides more certainty and allows employees to concentrate on customers needs. As a result of these changes, 56% of employees across the Group are rewarded through fixed pay only.
We are confident we pay our employees fairly and our policies and processes are kept under review to ensure we continue to do so.
On pensions, action was taken during the year to significantly address the deficit in the main defined benefit pension scheme. Employees are provided with a range of flexible, market-leading benefits and wellbeing support. Over 23,000 employees have chosen to participate in share plans, which provide direct alignment with the companys success and shareholders interests.
Transparency Ahead of new reporting regulations coming into force next year, we have included the Chief Executive to employee pay ratios in this report along with broader disclosures on employee remuneration. Gender and ethnicity pay gap information can be found in the Strategic Report section, as well as the steps we are taking to address the position.
Executive director pay policy
Turning to executive pay, the Directors Remuneration Policy was approved by shareholders at the 2017 AGM. No changes are being made to the policy at this time. Variable pay is delivered entirely in shares as long-term incentive (LTI) awards with no annual bonus. The Chief Executives management team receive a similar remuneration construct.
The policy is based around a restrained pay position, with lower levels of LTI awards, reasonable performance expectations and significant shareholdings. Shares must be retained for the long-term, both during and after employment. I believe this creates a simple way of aligning executive directors interests with shareholders.
Executive director changes during 2018
Ewen Stevenson resigned as Chief Financial Officer (CFO) during the year. In line with policy, he continued to receive fixed pay until his departure date and all outstanding LTI awards were forfeited. No payment was made in lieu of notice.
After a successful period as interim CFO, Katie Murray was appointed to the Board as CFO from 1 January 2019. Katies pay has been set at a competitive level within the approved remuneration policy. The pension rate is 10% of salary. This is in line with the rate applicable to the wider RBS workforce and recognises emerging best practice.
Performance and pay decisions
The latest results demonstrate the business is building on its return to profitability in 2017 with a clear plan to deliver sustainable returns for shareholders. Income has risen and our core tier 1 capital ratio remains strong, exceeding our long-term target.
Remuneration structures are designed to support our strategic aims, one of which is building a safe and sustainable business. Capital strength has been one of the key performance measures for executive directors and I am delighted that progress in this area has enabled RBS to resume paying dividends to our ordinary shareholders.
Ross McEwan will be granted an LTI award in early 2019, following an assessment of performance over 2018. The assessment determined that overall performance had been strong, particularly in relation to capital and people measures, but the Committee applied a modest downwards adjustment of around 6% to the maximum grant as customer performance was not at the desired level.
Performance has also been assessed for the LTI award granted to the Chief Executive in 2016, following the end of the performance period in 2018. The award will vest at 27.5% reflecting improvements in capital strength and employee engagement, but with no vesting in areas where performance did not meet targets, such as total shareholder return. No discretion was exercised in determining the outcome. Full details of the assessments against the objectives and the award levels can be found in this report.
In terms of pay decisions for our broader employees, the bonus pool for 2018 is £335 million, which is around 2% lower than 2017. The size of the bonus pool in recent years reflects our transition to a smaller and simpler bank, staffed by highly capable and engaged people. Immediate cash bonuses continue to be limited to £2,000.
Looking ahead
One of the main priorities for the Committee during 2019 will be preparing the executive directors remuneration policy for its renewal at the 2020 AGM. The new Code requirements and engagement with our stakeholders will be part of that process. The Committee will also look at how it can enhance its existing role in considering wider workforce remuneration.
I would like to thank my fellow Committee members for their guidance and constructive challenge during the year and I look forward to considering how we can continue to develop remuneration practices at RBS for the benefit of all our stakeholders.
Robert Gillespie
Chairman of the Group Performance and Remuneration Committee
14 February 2019
Directors Remuneration Report at a glance
The at a glance section summarises the key features of the executive directors remuneration policy and arrangements for 2018 and 2019.
Summary of the remuneration policy for executive directors approved at the 2017 AGM
Alignment with strategy of building a strong, simple and fair bank |
Alignment via shares between executives and shareholders |
Alignment with the growing external consensus on executive pay |
|
Built around a restrained pay position for executives, with variable pay delivered entirely in LTI awards.
Performance assessed on factors that executive directors would reasonably be expected to achieve, encouraging safe and secure growth.
Quantum and structure of pay appropriate for a smaller, safer bank.
|
Aligns executives with shareholders predominantly through holding shares, both during and after employment.
The maximum value of LTI award is smaller and we have significantly increased the value of shares that executive directors need to hold.
LTI awards will be adjusted for underperformance or risk failings and are released over eight years with malus and clawback for a long-term view of performance. |
Reduced complexity and quantum, in line with the Executive Remuneration Working Group and Government announcements on executive pay.
Reflects emerging investor guidelines with their common themes of restraint, meaningful shareholdings and flexibility of pay design.
Continues to provide transparency between performance and reward, with performance measured against pre-set objectives and disclosed each year. |
|
|
|
|
|
Summary of pay construct |
Chief Executive |
Chief Financial Officer (from 2019) |
|
Fixed pay |
Base salary
|
£1,000,000
|
£750,000
|
Fixed Share Allowance
|
100% of salary
|
100% of salary
|
|
Pension
|
35% of salary
|
10% of salary
|
|
Maximum LTI award (delivered in shares)
|
175% of salary
|
200% of salary
|
|
Vesting period and conditions |
· Pre-grant and pre-vest performance assessments along with risk and stakeholder underpins. · Vests in equal amounts between years three to seven after grant. · 12 months retention period following each vesting. · Malus and clawback provisions apply. · No pro-rating of LTI awards will apply in agreed good leaver circumstances. |
||
Expected average vesting |
80% of maximum over time. |
|
|
Shareholding requirement |
400% of salary |
250% of salary |
Summary of 2018 performance assessments for the Chief Executive
2018 highlights |
Performance assessment for
|
Performance assessment for
|
· Operating profit before tax of £3,359 million and CET1 ratio remains strong at 16.2%, exceeding our long-term target. · The major legacy issues have now been resolved and 2018 saw the payment of the first dividend in 10 years. · Arrangements for ring-fencing have been implemented on time. · Employee engagement is at its highest level yet and there have been continued improvements in culture and inclusion scores. · Customer service results, however, are not consistently where they need to be to achieve our long-term ambition.
|
Performance assessed against pre-set objectives for 2016 2018, covering: · Economic Profit 0% vesting. · Total Shareholder Return 0% vesting. · Safe & Secure Bank 12.5% vesting. · Customers & People 15% vesting.
The performance assessment resulted in a total vesting percentage of 27.5% due to progress in capital strength, customer trust scores and employee engagement. The other elements did not meet the required performance levels for vesting. Full details can be found in the annual report on remuneration. |
Performance assessed against pre-set objectives for 2018, covering core areas of: · Finance & Business capital and RoTE targets met, ring-fencing structure in place. · Risk & Operations risk culture target met, control environment not met in full. · Customers Net Promoter Score was mixed, some but not all segments on target. · People & Culture engagement, culture and diversity performance all meeting targets.
While overall performance was strong, the Committee concluded that a reduction of around 6% to the maximum grant would be appropriate for the Chief Executive to recognise that some areas were not fully at the desired level. A further assessment will take place prior to any vesting taking place. Full details can be found in the annual report on remuneration. |
Directors Remuneration Report at a glance
Executive directors who have left/joined during the year
Ewen Stevenson
Ewen Stevenson stepped down from the Board on 30 September 2018 and left RBS on 30 November 2018. He did not receive any payment in lieu of notice and all outstanding LTI awards were forfeited on his final date of employment.
Katie Murray
Katie Murray was appointed to the Board as Chief Financial Officer with effect from 1 January 2019. Benchmarking was undertaken for the role and the Committee agreed a remuneration package that was considered to be positioned appropriately compared to peers both in terms of fixed pay and projected total compensation. Remuneration includes a base salary at £750,000 per annum and a fixed share allowance of £750,000 per annum. Pension funding has been set at 10% of salary. This rate of 10% is the same as the pension rate applicable to the vast majority of RBS employees and recognises emerging best practice under the UK Corporate Governance Code and investor guidelines.
Any variable pay awards for performance year 2019 onwards (to be made in early 2020) will be delivered as LTI awards, with a maximum award of 200% of salary. For performance year 2018, a period prior to appointment to the Board, variable pay will continue to be awarded in line with arrangements in place at that time.
Remuneration outcomes for executive directors in 2018
Ross McEwan |
|
Ewen Stevenson (as at 30 September 2018) (1) |
|
|
|
|
(1) Ewen Stevenson also received fixed pay of £317,708 in 2018 for the period after stepping down from the Board until he left RBS on 30 November 2018.
Shareholding requirements
Ross McEwan |
|
Ewen Stevenson (as at 30 September 2018) |
|
|
|
|
Timing of payments for 2019 awards to Ross McEwan
Variable pay awarded to Katie Murray in 2019 for performance year 2018, a period prior to appointment to the Board, will be subject to deferral over seven years and retention periods in line with regulatory requirements.
Directors Remuneration Policy
Key features of the remuneration policy for executive directors
The Directors Remuneration Policy was approved by shareholders at the AGM on 11 May 2017. The policy will apply until the 2020 AGM unless changes are required which mandate a revised policy be submitted to shareholders for approval. There are no changes requiring shareholder approval at this time. The table below summarises the key features of the policy for executive directors. In the event of any conflict the approved policy, which can be found under the Board and Governance section of rbs.com, takes precedence over the information set out below.
Directors Remuneration Policy
Remuneration for the Chairman and non-executive directors
Element of pay |
Operation |
Maximum potential value |
Fees To reflect the required skills, experience and time commitment. |
Fees are paid monthly in cash and reviewed regularly. Additional fees may be paid for new Board Committees provided these are not greater than fees payable for the existing Board Committees.
No variable pay is provided so that the Chairman and non-executive directors can maintain appropriate independence.
|
The rates for the year ahead are set out in the annual report on remuneration.
Other than in exceptional circumstances, fees will not increase by more than 15% over the course of the policy. |
Benefits To provide a level of benefits in line with market practice.
|
Reimbursement of reasonable out-of-pocket expenses. The Chairman and non-executive directors are entitled to travel assistance in connection with company business including the use of a car and driver. RBS will meet the cost of any tax due on the benefit. Other benefits may be offered in line with market practice.
The Chairman receives private medical cover. |
The value of the private medical cover provided to the Chairman and any other benefits will be in line with market rates and disclosed in the annual report on remuneration. |
Other policy elements
Directors Remuneration Policy
Approach to the new UK Corporate Governance Code (the new Code)
Ahead of its formal application in 2019, detailed analysis of the new Code was undertaken in 2018 with findings presented to the Committee. The majority of the changes are in line with existing practice at RBS. A summary of the main provisions is set out below. The Committee will continue to monitor and reflect on best practice for these new requirements.
Directors Remuneration Report
Wider workforce remuneration policy
Consistent with our executive remuneration principles, the aim is to deliver a simple and transparent pay policy which promotes the long-term success of RBS. The policy supports a culture where individuals are rewarded for delivering sustained performance in line with risk appetite and for demonstrating the right conduct and behaviours.
Employees are provided with salary and pension funding and certain roles are eligible for benefit funding and variable pay awards. Further details on the policy and remuneration levels for 2018 including pay ratios can be found later in this report.
Making RBS a great place to work
RBS is committed to providing four key things: a fulfilling job; fair pay; excellent training and a good leader.
Fulfilling job
The aim is for every colleague to have a clear and fulfilling job that connects to our purpose. Each colleague is set clear goals and objectives that reflect RBSs overall strategy. Progress is reviewed throughout the year.
Wellbeing is essential for people to bring the best of themselves to work. A range of measures are provided to support good physical, mental, social and financial health. There is also an Employee Assistance Programme where employees can access confidential advice, support and short-term counselling.
Flexible working is offered where this is possible and appropriate. This allows colleagues to explore working patterns with their line manager and select a more flexible approach to work that meets their current needs.
Inclusion and diversity is another key element of creating a great place to work and also understanding the needs of our customers. RBS supports a variety of colleague-led groups that help influence strategy and employees also undertake unconscious bias training and mandatory annual inclusion training.
The inclusion category in our colleague opinion survey is the highest scoring category. Targets are in place to improve the proportion of women and ethnic minority leaders across all business areas and RBS is on track to meet these aspirations. Inclusion targets are also part of the measures that impact executive remuneration.
In June 2018, RBS was awarded the Employer of the Year award at the Women in Finance Awards.
Fair Pay
RBS is committed to providing a fair wage for the role performed and also being very clear on how pay works. Employees are provided with flexibility in terms of how they wish to receive pay to suit their personal circumstances.
Fairness is built around a number of themes. A full pay review is undertaken each year for all salary ranges. Pay is compared against the external market so that pay and benefits are competitive. RBS is a fully accredited Living Wage Employer in the UK and our rates of pay continue to exceed the Living Wage Foundation Benchmarks.
RBS has also implemented a more transparent approach by moving more employees to published salary ranges. Improvements have been made to starting salaries with faster progression to the rate for the job. Investment in pay levels in recent years has focused mostly on junior employees, while not increasing fixed pay for executive directors.
RBS has also removed front-line incentives and variable pay for large numbers of employees, with an increase to fixed pay instead. This provides greater certainty for these employees and allows them to focus fully on providing the best service for customers.
We are confident that we pay our employees fairly and keep our HR policies and processes under review to ensure we do so.
Flexible benefits are provided allowing employees to change pension contributions and choose from a range of protection, healthcare and lifestyle options. E mployees in the UK and Republic of Ireland can also participate in employee share plans and over 23,000 currently do so.
The number of employees at RBS who believe they are paid fairly increased during 2018 and is significantly above the Global Financial Services Norm.
Excellent training
RBS offers a number of ways for colleagues to learn and develop. This includes technical training, continuing professional development and further education qualifications on the job. Support is also provided for personal development. This helps employees serve customers well and also assists colleagues with their career aspirations.
RBS remains committed to embedding a strong service mindset through Service Excellence training which sits at the heart of achieving our ambition to be number 1 for customer service, trust and advocacy.
RBS continues to work closely with the Chartered Banker Institute and Chartered Banker Professional Standards Board to improve professional standards across the industry.
A Good Leader
RBS is continuing to develop great leaders and supporting the development of talent across the Group. Part of this commitment is delivering and embedding our flagship leadership programme Determined to lead (Dtl). It teaches the skills to lead, manage and coach people so they make positive behaviour changes and improve their performance. By the end of 2018, around 11,000 leaders had completed their Dtl training.
Gender and ethnicity pay gaps
The latest gender and ethnicity pay gap reporting for RBS can be found in the Our Colleagues section of the Strategic Report contained herein .
Listening to colleagues
In 2018 a more frequent approach to listening to our workforce was developed. This provides more opportunities to improve by assessing colleague sentiment and feedback, and checking progress in making RBS a great place to work.
Our colleague opinion survey provides everyone with the opportunity to have a say on what it feels like to work at RBS. Feedback in terms of engagement and leadership has a direct impact on executive pay. A survey by the Banking Standards Board, an independent body, is also used to help raise standards of behaviour and competence across the UK banking sector.
Regular engagement takes place with colleagues and representative bodies throughout the year. Board members visit business areas to hear directly from colleagues and there are regular townhall meetings and online forums to facilitate question and answer sessions with senior executives.
In 2018, a new Colleague Advisory Panel was established to enhance the colleague voice at Board level and a meet the Board event took place for the first time following the AGM.
Annual Report on Remuneration
The sections audited by the companys auditors, Ernst and Young LLP, are as indicated.
Single total figure of remuneration for executive directors for 2018 (audited)
|
Ross McEwan |
|
Ewen Stevenson (5) |
||
|
2018 £000 |
2017 £000 |
|
2018 £000 |
2017 £000 |
Salary |
1,000 |
1,000 |
|
600 |
800 |
Fixed share allowance (1) |
1,000 |
1,000 |
|
600 |
800 |
Benefits (2) |
117 |
113 |
|
20 |
26 |
Pension (3) |
350 |
350 |
|
210 |
280 |
Total fixed remuneration |
2,467 |
2,463 |
|
1,430 |
1,906 |
Annual bonus |
n/a |
n/a |
|
n/a |
n/a |
Long-term incentive award (4) |
1,111 |
1,024 |
|
- |
1,418 |
Total remuneration |
3,578 |
3,487 |
|
1,430 |
3,324 |
Notes:
(1) The value of the fixed share allowance is based on 100% of salary and, as part of fixed remuneration, it is not subject to any performance conditions.
(2) Includes standard benefit funding of £26,250 with the remainder for Ross McEwan in 2018 being travel assistance in connection with company business (£72,220), relocation expenses (£15,493) consisting of a flight allowance and assistance with tax return preparation, and home security arrangements (£2,676).
(3) The executive directors receive a monthly cash allowance to help fund pension arrangements but do not participate in the companys defined benefit pension schemes. The executive directors can choose to participate in the companys defined contribution pension arrangements.
(4) The 2018 value relates to an LTI award granted in 2016. Performance has been assessed over the three year period to 31 December 2018 as set out below resulting in 487,285 shares due to vest in two equal tranches in March 2020 and March 2021. No discretion was exercised by the Committee as a result of share price appreciation or depreciation over the performance period. The estimated value above is £11,013 higher than the value of 487,285 shares at the time of grant, as a result of the share price rising from £2.2574 to £2.28 over the period.
(5) Reflects remuneration paid to Ewen Stevenson for the period to 30 September 2018, the date he stepped down from the Board.
2016 LTI award final assessment of performance measures (audited)
An assessment of performance of each relevant element was provided by internal control functions and PwC assessed relative Total Shareholder Return (TSR) performance against a peer group of comparator banks.
* Vesting in the Safe & Secure and Customers & People categories can be qualified by Committee discretion taking into account changes in circumstances over the period, the margin by which individual targets have been missed or exceeded, and any other relevant factors.
Economic Profit was defined as profit after tax and preference share charges less tangible net asset value multiplied by the cost of equity. The companies in the relative TSR group for this award were: Barclays, Lloyds, HSBC, Standard Chartered, BBVA, BNP Paribas, Crédit Agricole, Santander, Société Générale, Unicredit, ING, Intesa San Paolo and Nordea Bank.
Final outcome and discretionary underpin
If the Committee considers that the vesting outcome calibrated in line with the performance conditions above does not reflect underlying financial results, or if the Committee is not satisfied that conduct and risk management during the performance period has been effective, then the terms of the award allow for an underpin to be used to reduce the vesting.
In making its final judgement, the Committee considered the overall context of performance, noting significant improvements in capital strength and employee engagement over the period and the Trust score for NatWest also meeting the target. Relative TSR, the cost:income ratio and customer performance were not at the required level. The Committee also considered the potential impact of the US Department of Justice charge on the Economic Profit outcome. Input was also received from the Board Risk Committee on risk performance. Taking all circumstances into account, the Committee determined that no further adjustment was necessary under the discretionary underpin.
Annual Report on Remuneration
2016 LTI vesting amounts included in the total remuneration table (audited)
LTI awards were granted in March 2016. The award held by Ewen Stevenson lapsed on 30 November 2018, his final date of employment. The performance period ended on 31 December 2018 and the performance conditions have been assessed as set out on the previous page. While performance has been assessed, the shares will not vest until March 2020 and March 2021 and remain subject to employment conditions.
Notes:
(1) The maximum number of shares for the performance assessment is calculated in line with the underlying award structure, however the actual number of shares received will never exceed the number of shares capped under the approved policy and the regulatory maximum at the time of grant. Each performance category can vest up to 100% of salary at grant as shown above. For the 2016 award, the number of shares capped at grant was 1,187,207 and therefore the vesting outcome falls within the cap.
(2) Based on a RBS share price of £2.28, the average over the three month period from October to December 2018.
2017 LTI awards to executive directors current assessment
The table represents an early indication of the potential vesting outcome as at 31 December 2018. Details of the final performance assessment against targets at the end of the three year period and any use of discretion will be disclosed in the 2019 remuneration report. The Committee may consider the proximity of legacy items to the executive directors when assessing the vesting level.
Performance category |
Measure |
Weighting |
Target |
2017 LTI award
|
|
Economic Profit |
Economic Profit (total Bank) |
25% |
Targets set based on spot economic profit in FY2019 with vesting range from 25% up to 100% for performance ahead of Strategic Plan |
Broadly tracking in range for vesting |
|
Relative TSR |
Relative Total Shareholder Return |
25% |
Relative TSR performance between median and upper quartile against comparator group results in vesting between 20% and 100%. |
Currently upper quartile, which would result in full vesting |
|
Safe & Secure Bank |
Cost:income ratio |
12.5% |
C:I ratio significant progress to 56% |
Vesting under the Safe & Secure and Customers & People categories will be qualified by Committee discretion taking into account the margin by which targets have been missed or exceeded and any other relevant factors
|
C:I ratio is broadly in range for vesting |
CET1 ratio |
12.5% |
CET1 ratio target of >= 13% |
CET1 ratio is in range for full vesting |
||
Customers & People |
Advocacy |
7.5% |
Significant progress to Number 1 in our chosen segments for customer advocacy and trust (further details below). |
Some segments on track but overall behind target range |
|
Trust |
5% |
Trust broadly in range for some vesting |
|||
Employee Engagement |
12.5% |
1 point above Global Financial Services Norm. |
Engagement tracking above target for full vesting |
Note:
(1) There are six chosen customer segments for advocacy and five customer segments for Trust. Customer advocacy is measured by Net Promoter Score and Trust is measured by the percentage of customers that trust RBS to do the right thing. Chosen segments reflect RBSs key products, service channels and customer groups. There are targets for each segment and full details will be disclosed in the 2019 report prior to any vesting. LTI awards granted in 2018 onwards have been made under the new remuneration construct. See overleaf for further details.
LTI awards granted during 2018 (audited)
|
Grant date |
Face value of
|
Number of
|
% vesting at
|
Performance Requirements |
Ross McEwan |
7 March 2018 |
1,575 |
592,328 |
Between 0% - 100% with no set minimum vesting |
The awards were subject to a pre-grant performance assessment and a further assessment will take place at the end of three years. Full details can be found in the 2017 Report and Accounts and the performance assessment framework is also set out overleaf. |
Ewen Stevenson |
7 March 2018 |
1,440 |
541,557 |
Note:
(1) Awards were granted as conditional share awards. The number of shares was calculated in line with the approved policy with the maximum potential award being 175% of salary for the Chief Executive and 200% of salary for the Chief Financial Officer. The award price of £2.659 was based on the average share price over five business days prior to grant. The award levels reflected a reduction of 10% to the maximum award following the pre-grant assessment of performance over 2017. Ewen Stevensons award was forfeited on 30 November 2018, his final date of employment. For Ross McEwan, subject to the pre-vest assessment, the award will be eligible to vest in equal amounts between years 2021 and 2025. Malus provisions will apply up until vest and clawback provisions will also apply for a period of at least seven years from the date of grant. Further details on malus and clawback can be found on page 92.
Annual Report on Remuneration
Performance assessment framework for LTI awards granted from 2018 onwards
For each of the core performance areas, the Committee will consider whether the executive director has achieved what would reasonably have been expected over the relevant period. The Committee will follow a robust process to review performance against pre-set objectives relevant to RBS s strategic aims, but will apply its judgement without reference to formulaic targets and weightings. Performance will be assessed taking into account circumstances applying over the period. Risk & Control and Stakeholder Perception underpins will also apply under which the Committee, with input from the Board Risk Committee and Sustainable Banking Committee, can consider if there are any other factors that would lead to a downwards adjustment.
The majority of the performance variation will normally take place under the pre-grant assessment, with a further assessment prior to any vesting taking place. Overall, the achievement of reasonable or target performance expectations will deliver full or nearly full payout of the LTI awards, as long as executives deliver good, sustainable performance. This approach reflects the significantly reduced level of awards compared to the previous policy , creating more predictable outcomes and encouraging safe and secure growth within risk appetite. Each year, the performance factors will be determined in light of RBSs priorities for that year.
Pre-grant assessment for LTI awards to be made in 2019
Core area |
Objectives for Performance Year 2018 |
Pre-grant assessment |
Financial & Business Delivery |
Reasonable performance against RoTE budget with a target of -1%.
CET1 ratio of 13% or more.
Delivery of ring-fencing requirements to meet the 1 January 2019 implementation deadline, ensuring timely remediation of issues throughout. |
Good financial performance for 2018. RoTE at 4.8% exceeded the target.
CET1 ratio of 16.2%, above the target.
Ring-fencing structure delivered as planned with all key activities completed in order to ensure compliance. Reporting on activities will be provided to the PRA. |
Risk & Control |
Improve the control environment. Franchise/Function control environment to be rated 2 within appetite and achievement of self declared forecasted control environment ratings by the end of 2018.
Material progress towards our desired risk culture. Positive progress towards 2 (systematic) with strong tone from the top and effective action plans in place. Achieve Proactive Risk Culture rating as a minimum with no deterioration from 2017 assessment. |
While improvements had been made, a number of franchises and functions had still to attain the desired control environment ratings. This part of the objective was therefore not considered to have been met in full.
Risk Culture target met, with overall assessment as Positive progress towards 2 (systematic) with strong tone from the top and effective plans in place. With one exception, all areas had achieved the required Proactive Risk Culture rating.
|
Customers & Stakeholder |
Achieve planned progress towards becoming number 1 for customer service, trust and advocacy by 2020 in chosen customer segments and brands. |
Net Promoter Score performance was mixed during 2018, with three of the six customer segments on target. While the digital strategy was delivering positive customer advocacy, it was recognised that progress was not consistent enough. |
People & Culture |
Year-on-year improvement in engagement and leadership indices, with a one point increase in each. |
Engagement score increased by three points and the leadership score increased by two points since 2017, exceeding the targets. |
Year-on-year improvement in Culture index, with a target of a one point increase. |
The Culture index had continued to improve with a three point increase since 2017, exceeding the target. |
|
Progress towards target of at least 30% women in senior roles by 2020 in each franchise and function. |
Satisfactory progress had been made. As at Q3, there had been a 7% increase since the targets were introduced at the end of 2014 and six of the business areas were already at or above the 30% target. |
|
Progress towards 2025 target of number of Black Asian Minority Ethnic (BAME)/non-white UK employees in the top four layers of RBS, of at least 14% (UK only). |
Improvements made during the year. As at Q3, eight business areas had met their 2018 target and a further three business areas had already reached the longer term 14% target. |
Outcome of the pre-grant assessment
The Committee also received advice from the Board Risk Committee and the Sustainable Banking Committee in making its final assessment. After considering all the factors above, the Committee determined that good progress had been made with strong performance particularly in relation to capital and people scores. 2018 was seen as a milestone year with a number of important legacy issues resolved, the resumption of dividends and arrangements in place for ring-fencing. Overall, the Committee considered that a 6% reduction was appropriate as customer and risk performance was not fully at the desired level. The resulting award level for the Chief Executive is set out below. As the Chief Financial Officer was appointed from 1 January 2019, the first LTI award will be granted in 2020, following an assessment of performance over 2019.
|
maximum LTI award level |
2019 LTI award level |
Ross McEwan |
£1,750,000 |
£1,650,000 |
Annual Report on Remuneration
Pre-vest assessment for 2019 LTI awards
In addition to the pre-grant assessment detailed on the previous page, a further assessment of performance will take place at the end of three years, prior to vesting. It is intended to be a look-back at the performance year for which the LTI award was granted to consider whether anything has come to light which might call into question the original award. Once the vesting amount has been approved, employment conditions as well as malus and clawback will continue to apply.
The pre-vest assessment allows the Committee to make a balanced assessment of performance in the round rather than relying on formulaic adjustments. Adjustments will be made if there have been failures of risk management and in the event of underperformance.
Factors considered in assessing pre-vest performance
Four core questions will be considered as part of the pre-vest assessment under the themes of Finance; Customers; People; and Risk & Control.
When assessing the performance of the year for which the award was made, knowing what we know now, and taking into account all circumstances, has RBS:
· Remained safe and secure, taking into account our financial results and capital position?
· Been a good bank for customers taking into account our customer and advocacy performance?
· Operated in an environment in which risk is seen as part of the way we work and think?
· Operated in a way that reflects our stated values?
Evidence used to support the Committees assessment of these questions will include whether there has been: a material fall in share price, net promoter scores, employee engagement or culture scores; a breach of minimum capital ratio; or a material deterioration in the risk culture or profile.
In addition, the Committee will consider the potential application of Risk & Control and Stakeholder Perception underpins following advice from the Board Risk Committee and Sustainable Banking Committee. This provides scope to consider significant risk, stakeholder or reputational matters not already captured in the performance assessment. The underpins allow the Committee to consider events arising during the period between grant and the end of year three.
In determining the final vesting level of the award, t he Committee will consider both individual and collective performance which means that there may be different vesting levels by participant.
Performance Goals for 2019 (for the pre-grant assessment of LTI awards to be made in 2020)
The table below forms the basis of the pre-grant assessment for LTI awards to be made in early 2020. Further details on the 2019 goals and targets and the assessment of performance against these will be set out in the 2019 Directors Remuneration Report.
Core area |
Performance Goals for 2019 |
Measures for assessing pre-grant performance for 2020 LTI awards |
Financial & Business Delivery |
Run a safe and secure bank.
|
Achieve planned RoTE targets for Group and NatWest Holdings (NWH Ltd).
|
Achieve CET1 ratio targets for Group and NWH Ltd, with appropriate repatriation of capital to the Group.
|
||
Risk & Control |
Improve or maintain control environment.
|
Group and NWH Ltd achievement/maintenance and embedding of desired control environment rating.
|
Compliance with ring-fencing rules.
|
Compliance with the minimum controls for the effective management of compliance with ring-fencing rules.
|
|
Material progress towards our desired risk culture target where risk is simply part of the way we work and think.
|
Positive progress on risk culture rating for Group and NWH Ltd with strong tone from the top and effective action plans in place.
|
|
Customer & Stakeholder |
Increase customer advocacy for our brands and chosen customer segments.
|
Achievement of targets for brands against Competition and Markets Authority (CMA) rankings and Net Promoter Scores (NPS).
|
Build a strong internal customer service.
|
Achievement of Group and NWH Ltd targets for internal NPS and Core Service Behaviour scores.
|
|
People & Culture |
Provide clarity, build capability and
|
Based on employee engagement and leadership scores for Group and NWH Ltd.
|
Build up and strengthen a healthy culture.
|
Based on the Banking Standards Board assessment and achieving the culture target for Group and NWH Ltd.
|
|
Improve diversity across our leaders to create a more mature, inclusive culture.
|
Progress on the number of women in senior roles across the top three layers of the Bank.
|
|
Progress on the number of BAME/non-white UK employees in the top four layers of RBS.
|
For the Chief Financial Officer, performance will be assessed in line with the framework and measures above and the performance of the Finance function will also be taken into account.
Annual Report on Remuneration
Payments for loss of office (audited)
Ewen Stevenson resigned as Chief Financial Officer on 29 May 2018. He stepped down from the Board on 30 September 2018 and ceased to be an employee of RBS on 30 November 2018. Taking into account a range of business factors, it was agreed that Mr Stevenson could be released early from his 12 month notice period. No payment was made in lieu of notice.
In line with his contractual arrangements, Mr Stevenson continued to receive standard payments in respect of his fixed pay for the period up to his final date of employment. Payments for the period from 30 September to 30 November 2018 comprised salary (£133,333), fixed share allowance (£133,333), pension funding (£46,667) and benefit funding (£4,375), a total of (£317,708) before tax.
No other remuneration payment was made in connection with his departure and all outstanding long-term incentive awards were forfeited on his final date of employment.
Payments to past directors (audited)
Payments made to Ewen Stevenson during the year are set out above and in the total remuneration paid to executive directors table earlier in this report. There are no other payments to past directors to disclose for 2018.
Total remuneration for the Chairman and non-executive directors for 2018
As part of the implementation of ring-fencing arrangements during 2018, a number of additional Boards and Board Committees were established for key legal entities. The increase in governance structures results in additional responsibilities and time commitment, particularly for non-executive directors serving on the Group Board Risk Committee and Group Audit Committee.
Taking into account that fees for these committees had remained unchanged since 2014 and market practice by peers, the Chairman and the executive directors agreed it would be appropriate to raise the fees for the Chairman of the Group Board Risk Committee and Group Audit Committee from £60,000 to £68,000, and for members of the Group Board Risk Committee and Group Audit Committee from £30,000 to £34,000. The changes are within the 15% limit for fee increases under the directors remuneration policy and took effect from 1 October 2018.
For RBSG Board directors who also serve on the boards and committees of NatWest Holdings Limited, The Royal Bank of Scotland plc, National Westminster Bank Plc and Ulster Bank Limited, the fees below reflect membership of all five boards and their respective board committees.
Where appropriate, RBSG Board directors also received fees in respect of membership of other subsidiary company boards and committees including NatWest Markets Plc, the value of which is included in the table below. In terms of other changes during the year, the NatWest Markets Working Group was replaced by the NatWest Markets Plc Board from 1 May 2018 and the UBIDAC Board Oversight Committee was stood down at the end of October 2018.
Lena Wilson was appointed as Chair of the Colleague Advisory Panel during 2018. This is considered a key role that will enhance our existing engagement mechanisms and strengthen the colleague voice at Board level. The Panel will also meet the new requirements for workforce engagement under the UK Corporate Governance Code.
After considering the time commitment, number of meetings and responsibilities for this role, including providing regular updates to the Board, it was agreed that fees of £15,000 per annum should be paid to the Chair of the Panel with effect from 1 November 2018. The fees are equivalent to that paid to a member of our Board Oversight Committees.
Notes:
(1) The benefits column for Howard Davies includes private medical cover.
(2) Non-executive directors are reimbursed expenses incurred in connection with travel and attendance at Board meetings. HMRC deems these expenses as taxable where the meetings take place at the companys main offices and RBS settles the tax on behalf of the non-executive directors.
(3) Under the Other column, Frank Dangeard received fees as Chairman of the NatWest Markets Working Group and from 1 October 2018 received a composite fee as Chairman of the NatWest Markets Plc (NWM Plc) Board. Brendan Nelson received fees as a member of the Board and Audit Committee of NWM Plc from the end of April 2018. Lena Wilson joined the Board on 1 January 2018 and received fees as Chair of the Colleague Advisory Panel from 1 November 2018.
(4) Penny Hughes stepped down from the Board on 30 May 2018. Yasmin Jethas fees are until 30 April 2018, the date she stepped down from the RBSG Board but she continues to receive fees as a member of the boards of NatWest Holdings Limited. Patrick Flynn joined the Board on 1 June 2018.
Annual Report on Remuneration
Implementation of remuneration policy in 2019
Details of remuneration to be awarded in 2019 to executive directors are set out below. The salary, benefits, pension and fixed share allowance for the Chief Executive are unchanged from 2018 and arrangements for the Chief Financial Officer are in line with those announced on appointment. The LTI pre-grant assessment has been completed and the Committee recommended to the Board who approved that an LTI award of £1,650,000 would be granted to the Chief Executive in March 2019. Details of the pre-grant assessment are set out on page 83.
Executive directors remuneration to be awarded in 2019
|
Salary |
Standard benefits |
Pension (% of salary) |
Fixed share allowance
|
LTI award following pre-grant assessment over 2018 |
Ross McEwan |
£1,000,000 |
£26,250 (2) |
£350,000 (35%) |
£1,000,000 |
£1,650,000 |
Katie Murray |
£750,000 |
£26,250 |
£75,000 (10%) |
£750,000 |
(3) |
Notes:
(1) Fixed share allowance payable broadly in arrears, currently in two instalments per year, with shares released in equal tranches over a three year period.
(2) Amount shown relates to standard benefit funding. Executive directors are also entitled to travel assistance and security arrangements and the Chief Executive receives a flight allowance and assistance with tax returns as part of his relocation arrangements. The value of benefits received will be disclosed each year.
(3) The first LTI award will be made to Katie Murray in her capacity as an executive director in 2020, following a pre-grant assessment of performance over 2019. For performance year 2018, a period prior to appointment to the Board, variable pay will continue to be awarded in line with arrangements in place at that time.
Chairman and non-executive directors annual fees for 2019
Fees for RBSG Board (1) |
Rates from 1 January 2019 |
|
Chairman (composite fee) |
|
£750,000 |
Non-executive director basic fee |
|
£80,000 |
Senior Independent Director |
|
£30,000 |
|
|
|
Fees for RBSG Board Committees (1) |
Member |
Chairman |
Group Board Risk Committee |
£34,000 |
£68,000 |
Group Audit Committee |
£34,000 |
£68,000 |
Group Performance and Remuneration Committee |
£30,000 |
£60,000 |
Group Sustainable Banking Committee |
£30,000 |
£60,000 |
Technology and Innovation Committee |
£30,000 |
£60,000 |
GRG Board Oversight Committee |
£15,000 |
£30,000 |
Group Nominations and Governance Committee |
£15,000 |
|
|
|
|
Other fees for RBSG Board directors |
|
|
Chairman of NatWest Markets Plc (composite fee to cover all boards and committees) |
|
£260,000 |
Chairman of the Colleague Advisory Panel |
|
£15,000 |
Note:
(1) No additional fees are payable where the director is also a member of the boards and respective board committees of NatWest Holdings Limited, The Royal Bank of Scotland plc, National Westminster Bank Plc and Ulster Bank Limited. Where appropriate, directors receive additional fees in respect of membership of other subsidiary company boards and committees including NatWest Markets Plc. The value of fees received will be disclosed in this report each year.
Other external directorships
Agreement from the Board must be sought before directors accept any additional roles outside of RBS. Procedures are in place to make sure that regulatory limits on the number of directorships held are complied with. The Board would also consider whether it was appropriate for executive directors to retain any remuneration receivable in respect of any external directorships, taking into account the nature of the appointment. Neither of the executive directors hold a non-executive director role at any other company at this time. Details of the directorships held by other directors can be found in the biographies section of the corporate governance report.
Directors interests in RBS shares and shareholding requirements (audited)
The shareholding requirement is to hold shares to the value of 400% of salary for the Chief Executive and 250% of salary for the Chief Financial Officer. Unvested shares from LTI awards count on a net of tax basis towards meeting the shareholding requirement once the pre-vest performance assessment has taken place, at the end of the three year period. Once the respective retention periods have passed, directors can only sell up to 25% of the shares received until the requirement is met. There are no shareholding requirements for non-executive directors.
Annual Report on Remuneration
Shareholding requirements (audited)
Ross McEwan
|
|
Ewen Stevenson (as at 30 September 2018)
|
|
|
|
Notes:
(1) Ross McEwan holds 142,925 shares from his 2015 and 2016 fixed share allowances that are included in the shares held below but these have been excluded from the shareholding requirements calculation as he will transfer these shares to charity at the end of the retention period.
(2) Value is based on the share price of £2.17 as at 31 December 2018 for Ross McEwan and £2.50 as at 30 September 2018 for Ewen Stevenson, the date he stepped down from the Board. In both cases the shareholding requirement was exceeded. During the year the share price ranged from £2.03 to £3.02.
Share interests held by directors (audited)
|
Ross
|
Ewen
|
Howard
|
Frank
|
Alison
|
Patrick
|
Morten
|
Robert
|
Penny
|
Yasmin
|
Brendan
|
Baroness
|
Mike
|
Mark
|
Lena
|
Shares held (1) |
2,302,031 |
1,182,272 |
80,000 |
5,000 |
20,000 |
|
20,000 |
25,000 |
562 |
20,000 |
12,001 |
41,000 |
20,000 |
20,000 |
6,000 |
% of issued share capital |
0.0191 |
0.0098 |
0.0007 |
|
0.0002 |
|
0.0002 |
0.0002 |
|
0.0002 |
0.0001 |
0.0003 |
0.0002 |
0.0002 |
|
LTI awards subject to service (2) |
371,098 |
513,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
LTI awards subject to performance (3) |
2,968,335 |
2,448,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
(1) Shares owned beneficially as at 31 December 2018 or date of stepping down from the Board if earlier. The interests shown above include shares held by persons closely associated with the directors. As at 14 February 2019, there were no changes to the shares held shown above. Katie Murray joined the Board on 1 January 2019 and held 34,282 shares as at 14 February 2019.
(2) Performance assessment has taken place but awards are still subject to deferral periods and employment conditions before vesting. These awards count on a net of tax basis towards meeting the shareholding requirement. In Ewen Stevensons case, the award was forfeited on his final date of employment.
(3) Still subject to performance assessment. All LTI awards held by Ewen Stevenson were forfeited on 30 November 2018, his final date of employment.
(4) Interest is 10,000 American Depositary Receipts representing 20,000 ordinary shares.
Breakdown of all shares and share interests held by the Chief Executive as at 31 December 2018
Shares owned outright |
Shares subject to conditions |
Total |
|||
shares purchased
|
shares from vested
|
shares from fixed share
|
unvested LTI award from 2015 -
|
unvested LTI awards from 2016
|
the vesting dates for
|
299,458 |
1,442,951 |
559,622 |
371,098 |
2,968,335 |
5,641,464 |
Directors interests under the companys share plans (audited)
Long-term incentive awards
Notes:
(1) The performance period ended on 31 December 2017 resulting in the lapse of 46,388 shares due to the performance conditions not being met in full. The remaining 371,098 shares will vest in two equal amounts in 2019 and 2020, subject to continued employment conditions.
(2) The performance period ended on 31 December 2018 as set out earlier in this report. Following the assessment in January 2019, it was agreed that 487,285 shares would vest in 2020 and 2021, subject to continued employment conditions. The remaining shares will be lapsed and reflected in the 2019 report.
(3) Ewen Stevenson ceased to be an employee on 30 November 2018, at which point all outstanding awards were forfeited.
Annual Report on Remuneration
Total Shareholder Return (TSR) performance
The graph below shows the performance of RBS over the past ten years in terms of TSR compared with that of the companies comprising the FTSE 100 Index. This index has been selected because it represents a cross-section of leading UK companies. The TSR for FTSE UK banks for the same period has been added for comparison. Source: Datastream
Chief Executive pay over the same period
|
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 (1) |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
Total remuneration (£000s) (1) |
|
1,647 |
|
3,687 |
|
1,646 |
|
1,646 |
|
1,235 (SH)
|
|
1,878 |
|
3,492 |
|
3,702 |
|
3,487 |
|
3,578 |
Annual bonus against max. opportunity |
|
0% |
|
85% |
|
0% |
|
0% |
|
0% |
|
n/a |
|
n/a |
|
n/a |
|
n/a |
|
n/a |
LTI vesting rates against max. opportunity (2) |
|
0% |
|
0% |
|
0% |
|
0% |
|
0% |
|
73% |
|
62% |
|
56% |
|
89% |
|
41% |
Notes:
(1) 2013 remuneration includes Stephen Hester (SH) as Chief Executive for the period to 30 September and Ross McEwan (RM) for October to December 2013.
(2) The maximum opportunity is set according to the approved policy and, for LTI awards granted in 2015 and onwards, the regulatory cap.
Relative importance of spend on pay
The table below shows a comparison of remuneration expenditure against other distributions and charges. These items have been included as they reflect the key stakeholders for RBS and the major categories of distributions and charges made by RBS.
|
|
2018
|
|
2017
|
|
Change |
Remuneration paid to all employees (1) |
|
3,628 |
|
3,945 |
|
(8.0%) |
Distributions to holders of ordinary shares (2) |
|
241 |
|
|
|
|
Distributions to holders of preference shares and paid-in equity |
|
470 |
|
628 |
|
(25.2%) |
Taxation and other charges recognised in the income statement: |
|
|
|
|
|
|
- Social security, Bank levy and Corporation tax |
|
1,062 |
|
1,100 |
|
(3.5%) |
- Irrecoverable VAT and other indirect taxes incurred by RBS (3) |
|
616 |
|
533 |
|
15.6% |
Notes:
(1) Remuneration paid to all employees represents total staff expenses per Note 3 to the Financial Statements, exclusive of social security and other staff costs. As the contents of other staff costs per Note 3 is different to prior years, the 2017 balance has been re-presented for consistency.
(2) In 2018 RBS paid an interim dividend of 2.0p per ordinary share. In addition, the company announced that the directors have recommended a final dividend of 3.5p per ordinary share, and a further special dividend of 7.5p per ordinary share, which are both subject to shareholders approval at the Annual General Meeting on 25 April 2019.
(3) Input VAT and other indirect taxes not recoverable by RBS due to it being partially exempt.
Annual Report on Remuneration
Change in Chief Executive pay compared with employees
The table below shows the percentage change in remuneration for the Chief Executive between 2017 and 2018 compared with the percentage change in the average remuneration of RBS employees based in the UK. In each case, remuneration is based on salary, benefits and annual bonus. The Chief Executive also receives a fixed share allowance as part of his fixed pay and this remained unchanged over the period.
|
|
Salary |
|
Benefits |
|
Annual Bonus |
|
|
2017 to 2018 change |
|
2017 to 2018 change |
|
2017 to 2018 change |
Chief Executive (1) |
|
0% |
|
0% |
|
n/a |
UK employees (2) |
|
17% |
|
-51% |
|
8% |
Notes:
(1) Executive directors are not eligible for an annual bonus but receive variable pay in LTI awards. Standard benefit funding for executive directors remained unchanged between 2017 and 2018. The benefits for the Chief Executive excludes other benefits such as travel assistance in connection with company business and relocation benefits, the value of which is disclosed each year in the total remuneration table .
(2) The data represents full year average salary costs of the UK based employee population. This is considered to be the most representative comparator group as it covers the majority of employees and the Chief Executive is based in the UK. The changes in salary and benefits for employees have largely been driven by a simplification and rebalancing of fixed pay arrangements. There was no material change to total remuneration as a result of these changes. The percentage reduction in benefits is not equal to the percentage uplift in salary because the underlying values are different and salary makes up a larger proportion of total remuneration.
CEO to employee pay ratios
We are including the table below ahead of new reporting requirements formally applying next year. The ratios compare the total remuneration of the Chief Executive, as set out in this report, against the remuneration of the median UK employee as well as employees at the lower and upper quartiles. The disclosure will build up over time to cover a rolling 10-year period.
A significant proportion of the Chief Executives pay is delivered in LTI awards, where awards are linked to the companys performance and share price movements over the longer-term. Therefore, the ratios will depend significantly on LTI outcomes and may fluctuate from one year to the next. None of the three employees identified at the 25 th , 50 th and 75 th percentiles this year received LTI awards. The table also includes ratios covering salary only so that a further comparison is possible as well as the remuneration values for the identified employees. The steps that RBS takes to ensure employees are paid fairly are set out earlier in this report.
|
|
Pay ratios |
Remuneration values |
||||||||||||||
Financial Year |
|
Methodology |
|
P25
|
|
P50
|
|
P75
|
Calculation |
|
Chief
|
|
Y25
|
|
Y50
|
|
Y75
|
2018 |
|
A (see notes) |
|
143:1 |
|
97:1 |
|
56:1 |
total remuneration |
|
£3,577,649 |
|
£24,946 |
|
£36,727 |
|
£63,825 |
|
salary only |
|
44:1 |
|
30:1 |
|
19:1 |
salary only |
|
£1,000,000 |
|
£22,526 |
|
£33,146 |
|
£51,302 |
Notes:
(1) The employees at the 25 th , 50 th and 75 th percentiles (lower, median and upper quartile) were determined as at 31 December 2018 based on full-time equivalent remuneration for all UK employees other than for variable pay where the actual amount to be paid has been used.
(2) Option A methodology was selected as this is considered the most statistically accurate method under the reporting regulations. UK employees receive a pension funding allowance set as a percentage of salary. Some employees, but not the Chief Executive, continue to participate in the defined benefit pension scheme, under which it would be possible to recognise a higher value. For simplicity and consistency with our regulatory disclosures, the pension funding allowance value has been included in the calculation for all employees.
(3) The data for the three individuals identified has been considered and fairly reflects pay at the relevant quartiles amongst the UK employee population. Each of the three individuals was a full-time employee during the year and none received an exceptional award which would otherwise inflate their pay figures.
Summary of remuneration levels for employees in 2018
49,875 employees earned total remuneration up to £50,000 |
11,508 employees earned total remuneration between £ 50,000 and £ 100,000 |
4,924 employees earned total remuneration between £ 100,000 and £ 250,000 |
932 employees earned total remuneration over £ 250,000 |
Remuneration of the eight highest paid senior executives below Board (1)
|
|
Executive 1 |
|
Executive 2 |
|
Executive 3 |
|
Executive 4 |
|
Executive 5 |
|
Executive 6 |
|
Executive 7 |
|
Executive 8 |
|
|
£000 |
|
£000 |
|
£000 |
|
£000 |
|
£000 |
|
£000 |
|
£000 |
|
£000 |
Salary |
|
800 |
|
800 |
|
141 |
|
792 |
|
650 |
|
600 |
|
450 |
|
444 |
Fixed allowance (cash) |
|
475 |
|
400 |
|
71 |
|
396 |
|
325 |
|
300 |
|
113 |
|
111 |
Fixed allowance (shares) |
|
475 |
|
400 |
|
71 |
|
396 |
|
325 |
|
300 |
|
113 |
|
111 |
Annual bonus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTI awards (2) |
|
714 |
|
714 |
|
|
|
460 |
|
460 |
|
410 |
|
246 |
|
47 |
Buyout award (3) |
|
|
|
|
|
1,962 |
|
|
|
|
|
|
|
|
|
|
Total remuneration |
|
2,464 |
|
2,314 |
|
2,245 |
|
2,044 |
|
1,760 |
|
1,610 |
|
922 |
|
713 |
Notes:
(1) Remuneration for 2018 for eight members of the Chief Executives executive management team.
(2) The value of the LTI awards reflects awards that were granted in 2016 and performance-assessed at the end of 2018. An estimated value is shown above based on the average share price between October and December 2018, consistent with the method used for executive directors in this report.
(3) The buyout includes awards granted in replacement of awards forfeited on leaving a previous employer and also an award in respect of lost variable pay opportunity for 2018.
Annual Report on Remuneration
Consideration of matters relating to directors remuneration
Membership of the Group Performance and Remuneration Committee
All members of the Group Performance and Remuneration Committee (the Committee) are independent non-executive directors. Robert Gillespie served as Chairman of the Committee and Alison Davis, Mike Rogers and Mark Seligman were members of the Committee throughout 2018. Frank Dangeard joined the Committee with effect from 1 June 2018.
The Committee held seven scheduled meetings in 2018 and a further four ad hoc meetings. Details of attendance can be found in the Our Board section of the governance report.
The role and responsibilities of the Committee
The Committee is responsible for:
· approving the remuneration policy for all employees and reviewing the effectiveness of its implementation;
· reviewing performance and making recommendations to the Board on arrangements for executive directors;
· approving performance and remuneration arrangements for a defined in scope population capturing members and attendees of the Group Executive Committee, and the direct reports of the Chief Executive including heads of key legal entities, control function heads and the company secretary. The Committee also approves arrangements where employees earn total compensation which exceeds an amount determined by the Committee, currently £1 million; and
· setting the remuneration framework and principles for employees identified as Material Risk Takers falling within the scope of UK regulatory requirements.
In mitigating potential conflicts of interest, directors are not involved in decisions regarding their own remuneration and remuneration advisers are appointed by the Committee rather than management.
The terms of reference of the Committee are reviewed annually and available on rbs.com.
Summary of the principal activity of the Committee in 2018
The tasks that the Committee undertook during the year included reviewing and, where appropriate, approving:
First half of 2018
· 2017 performance reviews and remuneration arrangements for the Committees in scope population.
· 2018 performance objectives for the in scope population.
· Variable pay allocations and the 2017 Directors Remuneration Report.
· Vesting levels for LTI awards granted in 2015 and the interim assessment of 2016/17 LTI awards.
· Remuneration governance arrangements for ring-fencing.
· Regulatory updates and submissions.
· Fixed and variable pay spend across all RBS employees, including analysis by employee level, geography and diversity.
· The Group-wide remuneration policy principles.
· Service provided by external advisers.
· The bonus pool methodology.
Second half of 2018
· Half-year and year-end performance reviews for the in scope population.
· The implications of the UK Corporate Governance Code changes and new pay ratio disclosures.
· Year end planning and external stakeholder engagement plan.
· Managements assurance of the implementation of the Group-wide remuneration policy.
· Fixed pay proposals across RBS for the annual cycle.
· The 2018 employee Sharesave offer.
· The draft Directors Remuneration Report for 2018.
· 2018 variable pay proposals.
Performance evaluation
The Committee has considered the findings of the annual review of the effectiveness of the Committee. This year the evaluation process was conducted externally by Independent Board Evaluation.
The Committee was felt to be fulfilling its remit in an effective way and is trusted by the Group Board to handle this potentially sensitive issue well. The Committee was encouraged to take a broad view of its agenda and to communicate as freely as possible with the Board so that remuneration decisions are seen to be taken in a strategic context. Actions were agreed as part of the evaluation and progress will be tracked and reported to the Committee during 2019.
Advisers to the Committee
PricewaterhouseCoopers LLP (PwC) was first appointed as remuneration adviser by the Committee in 2010, following a review of potential advisers and the services provided. An annual review of the quality of advice and the associated level of fees was undertaken during 2018, following which the Committee agreed to retain the services of PwC. The Committee will continue to review the performance of its advisers each year. PwC is a signatory to the voluntary code of conduct in relation to remuneration consulting in the UK.
As well as receiving advice from PwC, the Committee took account at meetings of the views of the Chairman; the Chief Executive; the Chief Financial Officer; the Chief HR Officer; the Director of Reward, Pension & Benefits; the Company Secretary; and the Chief Risk Officer. The Committee also received input from the Board Risk Committee, the Group Audit Committee and the Sustainable Banking Committee.
PwC also provides professional services in the ordinary course of business including assurance, advisory, tax and legal advice to RBS subsidiaries. There are processes in place to ensure the advice received by the Committee is independent of any support provided to management.
In relation to the fees paid to PwC for advising the Committee, a fixed fee structure has operated since October 2017 to cover standard services with any exceptional items charged on a time/cost basis. The fees for 2018 in relation to directors remuneration amounted to £128,625 excluding VAT (2017 - £170,476).
Statement of shareholder voting
The tables below set out the voting by shareholders on the resolutions to approve the Directors Remuneration Policy at the 2017 AGM and the Annual Report on Remuneration at the 2018 AGM.
Directors Remuneration Policy 2017
Vote |
|
No of shares |
|
Percentage |
For |
|
42,143,861,332 |
|
96.33% |
Against |
|
1,603,968,780 |
|
3.67% |
Withheld |
|
40,411,396 |
|
|
Annual Report on Remuneration 2018
Vote |
|
No of shares |
|
Percentage |
For |
|
44,384,841,256 |
|
99.18% |
Against |
|
366,523,976 |
|
0.82% |
Withheld |
|
38,493,640 |
|
|
Shareholder dilution
The company meets its employee share plan obligations through a combination of new issue shares and market purchase shares. In line with the Investment Associations Principles of Remuneration, RBSs employee share plans contain monitored limits that govern the number of shares that may be issued to satisfy share plan awards.
Robert Gillespie
Chairman of the Group Performance and Remuneration Committee
14 February 2019
Other Remuneration Disclosures
This section contains a number of disclosures which are required in accordance with Article 450 of the Capital Requirements Regulation. This section should be read in conjunction with the Directors Remuneration Report starting on page 74.
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 RBS 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.
Base salary
The purpose is to provide a competitive level of fixed cash remuneration.
Operation
Base salaries are reviewed annually and should reflect the talents, skills and competencies that the individual brings to the business.
Role-based allowance
The purpose is to provide fixed pay that reflects the skills and experience required for the role.
Operation
Role-based allowances are fixed allowances which form an element of the employees overall fixed remuneration for regulatory purposes and are based on the role the individual performs.
They are delivered in cash and/or shares depending on the level of the allowance and the seniority of the recipient. Shares are subject to an appropriate retention period, not less than six months.
Benefits and pension
The purpose is to provide a range of flexible and competitive benefits.
Operation
In most jurisdictions, employee benefits or a cash equivalent are provided from a flexible benefits account.
Pension funding forms part of fixed remuneration and RBS does not as a rule award discretionary pension benefits.
Annual bonus
The purpose is to support a culture where employees recognise the importance of serving customers well and are rewarded for superior performance.
Operation
The annual bonus pool is based on a balanced scorecard of measures including Customer, People, Financial & Business Delivery, and Risk & Control measures. Allocation from the pool depends on performance of the franchise or function and the individual.
Individual performance assessment is supported by a structured performance management framework. This is designed to assess performance against longer term business requirements across a range of financial and non-financial metrics as well as an evaluation of adherence to internal controls and risk management. A balanced scorecard is used to align with the business strategy. Each individual will have defined measures of success appropriate to their role.
Risk and conduct performance is also taken into account. Control functions are assessed independently of the business units that they oversee, with the objectives and remuneration being set according to the priorities of the control area, not the targets of the businesses they support. The Group Chief Risk Officer and the Chief Audit Executive have the authority to escalate matters to Board level if management do not respond appropriately.
Independent control functions exist for key legal entities outside the ring-fence (NatWest Markets Plc and RBS International), with dual solid reporting lines into both the legal entity Chief Executive Officer and the Group Control Function Head.
For awards made in respect of the 2018 performance year, immediate cash awards continue to be limited to a maximum of £2,000. In line with regulatory requirements, a significant proportion of annual bonus awards for our more senior employees is deferred and includes partial delivery in shares.
The deferral period varies from three years for standard MRTs, rising to five years for individuals identified as Risk Manager MRTs and seven years for Senior Managers under the UKs Senior Managers Regime. All awards are subject to malus and clawback provisions. For MRTs, a minimum of 50% of any annual bonus is delivered in shares and a twelve month retention period will apply post vesting in line with regulatory requirements
Long-term incentive awards
The purpose is to: support a culture where good performance against a full range of measures will be rewarded; encourage the creation of value over the long-term; and align rewards with the returns to shareholders.
Operation
RBS provides certain employees in senior roles with long-term incentive awards. For awards made in respect of the 2018 performance year, the population receiving long-term incentive awards will be limited to executive directors and certain members of the Groups senior executive committees.
Awards will be subject to pre-grant and pre-vest performance assessments that consider progress against Customer, People, Financial & Business Delivery, and Risk & Control measures, aligned with RBSs strategic aims. Vesting will take place over a three to seven year period following grant.
The number of shares that vest under the award may vary between 0% -100% depending on the performance achieved. Awards are subject to malus and clawback provisions and a twelve month retention period applies post vesting.
Shareholding requirements
The requirements promote long-term alignment between senior executives and shareholders.
Operation
Executive directors and certain senior executives are required to build up and hold a shareholding equivalent to a percentage of salary. There is a restriction on the number of shares that individuals can sell until the requirement is met.
Other share plans
The purpose is to offer employees in certain jurisdictions the opportunity to acquire shares.
Operation
Employees in certain countries are eligible to contribute to share plans which are not subject to performance conditions.
Other Remuneration Disclosures
Criteria for identifying MRTs
The European Banking Authority has issued criteria for identifying MRT roles, those staff whose activities have a material influence over RBSs performance or risk profile. The criteria are both qualitative (based on the nature of the role) and quantitative (for example those who exceed the stipulated total remuneration threshold).
The qualitative criteria can be summarised as: staff within the management body; senior management; other staff with key functional or managerial responsibilities; and staff who individually, or as part of a Committee, have authority to approve new business products or to commit to credit risk exposures and market risk transactions above certain levels. The quantitative criteria are: individuals earning 500,000 or more in the previous year; individuals in the top 0.3% of earners in the previous year; and individuals who earned more than the lowest paid identified staff per certain qualitative criteria. In addition to the qualitative and quantitative criteria, RBS has applied its own minimum standards to identify roles that are considered to have a material influence over its risk profile.
Personal hedging strategies
In accordance with UK regulatory requirements and internal dealing rules that apply to employees, the conditions attached to discretionary share-based awards prohibit the use of any personal hedging strategies to lessen the impact of a reduction in value of such awards. These conditions are explicitly acknowledged and accepted by employees when any share-based awards are granted.
Risk in our remuneration process
RBSs approach to remuneration and related policies promotes effective risk management through a clear distinction between fixed remuneration, which reflects the role undertaken by an individual, and variable remuneration, which is directly linked and reflective of performance and can be risk-adjusted. Fixed pay is set at an appropriate level to avoid incentives that are adverse to sound risk management, and at a level which would allow RBS to pay zero variable pay.
Focus on risk is achieved through clear risk input into objectives, performance reviews, the determination of variable pay pools, and incentive plan design as well as the application of malus and clawback. The Committee is supported by the Group Board Risk Committee (BRC) and the RBS Risk function.
A robust process is used to assess risk performance. A range of measures are considered, specifically capital, liquidity and funding risk, credit risk, market risk, pension risk, compliance & conduct risk, financial crime, operational risk, business risk and reputational risk. Consideration is also given to overall risk culture. RBSs remuneration arrangements are in accordance with regulatory requirements and the steps we take to ensure appropriate and thorough risk adjustment are also fully disclosed and discussed with the PRA and the FCA.
Variable pay determination
For the 2018 performance year, RBS operated a robust multi-step process, which is control function led, to assess performance and the appropriate bonus pool by franchise and function. At multiple points throughout the process, reference is made to Group-wide business performance (from both affordability and appropriateness perspectives) and the need to distinguish between go-forward and resolution activities.
The process considers a balanced scorecard of performance assessments at the level of each franchise or function, across financial, customer and people measures. Risk and conduct assessments at the same level are then undertaken to ensure that performance achieved without appropriate consideration of risk, risk culture and conduct controls, is not inappropriately rewarded.
BRC reviews any material risk and conduct events and, if appropriate, an underpin may be applied to the individual business and function bonus pools or to the overall bonus pool. BRC may recommend a reduction of a bonus pool if it considers that risk and conduct performance is unacceptable or that the impact of poor risk management has yet to be fully reflected in the respective inputs.
Following further review against overall performance and conduct, the Chief Executive will make a final recommendation to the Committee, informed by all the previous steps in the process and his strategic view of the business. The Committee will then make an independent decision on the final bonus pool taking all of these earlier steps into account.
The assessment process for LTI awards to executive directors and other recipients is founded on the balanced scorecard approach used for the multi-step bonus pool process, reflecting a consistent risk management performance assessment.
Remuneration and culture
RBS continues to assess conduct and its impact on remuneration as part of the annual Group-wide bonus pool process and also via the accountability review framework. RBS has continued to simplify its approach to reward and removed incentives for employees where this could drive unintended behaviours. The Committee will continue to review workforce remuneration and the alignment of incentives and reward with culture.
The governance of culture is clearly laid out with Senior Management Function roles having clearly defined accountabilities. The Board and Sustainable Banking Committee also play key roles in building our cultural priorities. Clear measurement frameworks are in place to measure progress.
Accountability review process and malus/clawback
The accountability review process was introduced in 2012 to identify any material risk management, control and general policy breach failures, and to ensure accountability for those events. This allows RBS to respond in instances where new information would change the variable pay decisions made in previous years and/or the decisions to be made in the current year.
Under the accountability review process RBS can apply:
· Malus - to reduce (to zero if appropriate) the amount of any unvested variable pay awards prior to payment;
· Clawback - to recover awards that have already vested; and
· In-year bonus reductions - to adjust variable pay that would have otherwise been awarded for the current year.
Any variable pay awarded to MRTs from 1 January 2015 onwards is subject to clawback for seven years from the date of grant. For awards made in respect of the 2016 performance year onwards, this period has been extended to ten years for executive directors and other Senior Managers under the Senior Managers Regime where there are outstanding internal or regulatory investigations at the end of the normal seven year clawback period.
Circumstances in which RBS may apply malus, clawback or in-year bonus reduction include:
· the individual being culpable, responsible or ultimately accountable for conduct which results in significant financial losses for RBS;
· the individual failing to meet appropriate standards of fitness and propriety;
· reasonable evidence of an individuals misbehaviour or material error;
· RBS or the individuals relevant business unit suffering a material failure of risk management; and
· for malus and in-year bonus reduction only, circumstances where there has been a material downturn in financial performance.
The above list of circumstances is not exhaustive and RBS may consider any further circumstances that it feels appropriate.
During 2018 a number of issues and events were considered under the accountability review framework. The outcomes covered a range of actions including: reduction and forfeiture of unvested awards through malus; dismissal with forfeiture of unvested awards; and suspension of awards pending further investigation.
Other Remuneration Disclosures
Remuneration of MRTs
The quantitative disclosures below are made in accordance with Article 450 of the EU Capital Requirements Regulation in relation to 588 employees who have been identified as MRTs.
1. Number of MRTs by business area
Number of beneficiaries |
|
Senior
|
|
Other
|
|
Total |
Executive Directors |
|
2 |
|
|
|
2 |
Non-Executive Directors |
|
|
|
13 |
|
13 |
PBB |
|
1 |
|
55 |
|
56 |
CPB |
|
1 |
|
75 |
|
76 |
RBSI |
|
1 |
|
23 |
|
24 |
NatWest Markets |
|
1 |
|
228 |
|
229 |
Corporate Functions |
|
7 |
|
136 |
|
143 |
Control Functions |
|
0 |
|
15 |
|
15 |
Other Business Areas |
|
1 |
|
29 |
|
30 |
Total |
|
14 |
|
574 |
|
588 |
2. Aggregate remuneration expenditure
Aggregate remuneration expenditure in respect of 2018 performance was as follows:
Aggregate remuneration |
|
Senior
|
|
Other
|
|
Total |
Number of beneficiaries |
|
14 |
|
574 |
|
588 |
|
|
|
|
|
|
|
|
|
£m |
|
£m |
|
£m |
Executive Directors |
|
5.77 |
|
|
|
5.77 |
Non-Executive Directors |
|
|
|
2.95 |
|
2.95 |
PBB |
|
2.54 |
|
18.82 |
|
21.36 |
CPB |
|
3.39 |
|
33.24 |
|
36.63 |
RBSI |
|
1.22 |
|
5.08 |
|
6.30 |
NatWest Markets |
|
3.56 |
|
152.36 |
|
155.92 |
Corporate Functions |
|
12.01 |
|
48.18 |
|
60.19 |
Control Functions |
|
|
|
4.81 |
|
4.81 |
Other Business Areas |
|
2.65 |
|
14.66 |
|
17.31 |
Total |
|
31.14 |
|
280.10 |
|
311.24 |
3. Amounts and form of fixed and variable remuneration
Fixed remuneration consisted of salaries, allowances, pension and benefit funding.
Fixed remuneration |
|
Senior
|
|
Other
|
|
Total |
Number of beneficiaries |
|
14 |
|
574 |
|
588 |
|
|
|
|
|
|
|
|
|
£m |
|
£m |
|
£m |
Executive Directors |
|
4.12 |
|
|
|
4.12 |
Non-Executive Directors |
|
|
|
2.95 |
|
2.95 |
PBB |
|
1.44 |
|
13.27 |
|
14.71 |
CPB |
|
1.89 |
|
20.52 |
|
22.41 |
RBSI |
|
0.66 |
|
3.63 |
|
4.29 |
NatWest Markets |
|
2.06 |
|
96.29 |
|
98.35 |
Corporate Functions |
|
6.94 |
|
32.35 |
|
39.29 |
Control Functions |
|
|
|
3.26 |
|
3.26 |
Other Business Areas |
|
1.55 |
|
10.13 |
|
11.68 |
Total |
|
18.66 |
|
182.40 |
|
201.06 |
Variable remuneration awarded for 2018 performance
Variable remuneration consisted of a combination of annual bonus and long-term incentive awards, deferred over a three to seven year period in accordance with regulatory requirements. Under the RBS bonus deferral structure, immediate cash awards are limited to £2,000 per employee.
Long-term incentive awards vest subject to the extent to which performance conditions are met and can result in zero payment.
Annual bonus |
|
Senior
|
|
Other
|
|
Total |
Number of beneficiaries |
|
3 |
|
469 |
|
472 |
|
|
|
|
|
|
|
|
|
£m |
|
£m |
|
£m |
Executive Directors |
|
|
|
|
|
|
Non-Executive Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
PBB |
|
|
|
|
|
|
Cash remuneration |
|
|
|
0.09 |
|
0.09 |
Deferred bonds |
|
|
|
1.90 |
|
1.90 |
Deferred shares |
|
|
|
3.56 |
|
3.56 |
|
|
|
|
5.55 |
|
5.55 |
CPB |
|
|
|
|
|
|
Cash remuneration |
|
|
|
0.11 |
|
0.11 |
Deferred bonds |
|
|
|
2.78 |
|
2.78 |
Deferred shares |
|
|
|
9.83 |
|
9.83 |
|
|
|
|
12.72 |
|
12.72 |
RBSI |
|
|
|
|
|
|
Cash remuneration |
|
|
|
0.05 |
|
0.05 |
Deferred bonds |
|
0.06 |
|
0.79 |
|
0.85 |
Deferred shares |
|
0.50 |
|
0.62 |
|
1.12 |
|
|
0.56 |
|
1.46 |
|
2.02 |
NatWest Markets |
|
|
|
|
|
|
Cash remuneration |
|
|
|
0.39 |
|
0.39 |
Deferred bonds |
|
|
|
9.65 |
|
9.65 |
Deferred shares |
|
|
|
46.03 |
|
46.03 |
|
|
|
|
56.07 |
|
56.07 |
Corporate Functions |
|
|
|
|
|
|
Cash remuneration |
|
|
|
0.24 |
|
0.24 |
Deferred bonds |
|
0.06 |
|
5.36 |
|
5.42 |
Deferred shares |
|
1.44 |
|
10.23 |
|
11.67 |
|
|
1.50 |
|
15.83 |
|
17.33 |
Control Functions |
|
|
|
|
|
|
Cash remuneration |
|
|
|
0.02 |
|
0.02 |
Deferred bonds |
|
|
|
0.45 |
|
0.45 |
Deferred shares |
|
|
|
1.08 |
|
1.08 |
|
|
|
|
1.55 |
|
1.55 |
Other Business Areas |
|
|
|
|
|
|
Cash remuneration |
|
|
|
0.05 |
|
0.05 |
Deferred bonds |
|
|
|
1.18 |
|
1.18 |
Deferred shares |
|
|
|
3.30 |
|
3.30 |
|
|
|
|
4.53 |
|
4.53 |
|
|
|
|
|
|
|
Total |
|
2.06 |
|
97.71 |
|
99.77 |
|
|
|
|
|
|
|
Long-term incentives |
|
Senior
|
|
Other
|
|
Total |
Number of beneficiaries |
|
9 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
£m |
|
£m |
|
£m |
Executive Directors |
|
1.65 |
|
|
|
1.65 |
Non-Executive Directors |
|
|
|
|
|
|
PBB |
|
1.10 |
|
|
|
1.10 |
CPB |
|
1.50 |
|
|
|
1.50 |
RBSI |
|
|
|
|
|
|
NatWest Markets |
|
1.50 |
|
|
|
1.50 |
Corporate Functions |
|
3.58 |
|
|
|
3.58 |
Control Functions |
|
|
|
|
|
|
Other Business Areas |
|
1.10 |
|
|
|
1.10 |
Total |
|
10.43 |
|
|
|
10.43 |
4. Outstanding deferred remuneration through 2018
The table below includes deferred remuneration awarded or paid out in 2018 in respect of prior performance years . Deferred remuneration reduced during the year relates to long-term incentives lapsed when performance conditions are not met, long-term incentives and deferred awards forfeited on leaving and malus adjustments of prior year deferred awards and long-term incentives .
Category of deferred
|
|
Senior
|
|
Other
|
|
Total
|
Unvested from prior year |
|
44.59 |
|
137.10 |
|
181.69 |
Awarded during year |
|
11.73 |
|
108.16 |
|
119.89 |
Paid out |
|
1.76 |
|
81.99 |
|
83.75 |
Reduced from prior years |
|
14.39 |
|
14.77 |
|
29.16 |
Unvested at year end |
|
40.17 |
|
148.51 |
|
188.68 |
5. Guaranteed Awards (including Sign-on awards) and Severance Payments
RBS does not offer Sign-on awards. Guaranteed awards may only be granted to new hires in exceptional circumstances in compensation for awards foregone in their previous company and are limited to the first year of service. Three new hire guarantees were made in respect of the 2018 performance year.
Severance payments and / or arrangements can be made to employees who leave RBS in certain situations, including redundancy. Such payments are calculated by a pre-determined formula set out within the relevant social plans, policies, agreements or local laws. Where local laws permit, there is a cap on the maximum amount that can be awarded.
No severance payments were made during the year in excess of contractual payments, local policies, standards or statutory amounts, other than payments to three individuals of £215,869, £81,923 and 502,877 each made in commercial settlement of potential legal proceedings related to the termination of employment.
Where required, remuneration is constrained within the limit of variable to fixed remuneration in accordance with EBA rules.
Definitions
PBB Personal & Business Banking
CPB Commercial & Private Banking
RBSI RBS International
Other Remuneration Disclosures
6. Ratio between fixed and variable remuneration
The variable component of total remuneration for MRTs at RBS shall not exceed 100% of the fixed component. The average ratio between fixed and variable remuneration for 2018 is approximately 1 to 0.62. The majority of MRTs are based in the UK.
Ratio of fixed to variable |
|
Senior
|
|
Other
|
|
Total |
Number of beneficiaries |
|
12 |
|
469 |
|
481 |
|
|
|
|
|
|
|
|
|
ratio |
|
ratio |
|
ratio |
Executive Directors |
|
1:0.69 |
|
|
|
1:0.69 |
Non-Executive Directors |
|
|
|
1:0 |
|
1:0 |
PBB |
|
1:0.77 |
|
1:0.47 |
|
1:0.50 |
CPB |
|
1:0.80 |
|
1:0.69 |
|
1:0.70 |
RBSI |
|
1:0.85 |
|
1:0.42 |
|
1:0.49 |
NatWest Markets |
|
1:0.73 |
|
1:0.65 |
|
1:0.65 |
Corporate Functions |
|
1:0.89 |
|
1:0.53 |
|
1:0.58 |
Control Functions |
|
1:0 |
|
1:0.52 |
|
1:0.52 |
Other Business Areas |
|
1:0.71 |
|
1:0.52 |
|
1:0.65 |
Consolidated |
|
1:0.80 |
|
1:0.60 |
|
1:0.62 |
7. Discount Rate
Under CRD IV regulations, a notional discount is available which allows variable pay to be awarded at a level that would otherwise exceed the 1:1 ratio, provided that at least 25% of variable pay is delivered in instruments (shares) and deferred over five years or more. The discount rate was not used for remuneration awarded in respect of the 2018 performance year.
Total remuneration by band for all employees earning > 1 million
million |
|
Number of employees
|
1.0 - 1.5 |
|
45 |
1.5 - 2.0 |
|
23 |
2.0 - 2.5 |
|
5 |
2.5 - 3.0 |
|
2 |
3.0 - 3.5 |
|
1 |
3.5 - 4.0 |
|
0 |
4.0 - 4.5 |
|
1 |
4.5 - 5.0 |
|
1 |
Total |
|
78 |
Notes:
(1) Total remuneration in the table above includes fixed pay, pension and benefit funding and variable pay.
(2) Executive directors are included. The table is based on an exchange rate where applicable of 1.13 to £1 as at 31 December 2018.
Employees who earned total remuneration of over 1 million in 2018 represent just 0.1% of our employees. This number reduces to 67 employees if we exclude pension and benefit funding. These employees include those who manage major businesses and functions with responsibility for significant assets, earnings or areas of strategic activity and can be grouped as follows:
· The Chief Executives responsible for each area and their direct reports.
· Employees managing large businesses within a franchise.
· Income generators responsible for high levels of income including those involved in managing trading activity and supporting clients with more complex financial transactions, including financial restructuring.
· Those responsible for managing our balance sheet and liquidity and funding positions across the business.
Compliance report
Statement of compliance
RBS is committed to high standards of corporate governance, business integrity and professionalism in all its activities.
Throughout the year ended 31 December 2018, RBS has complied with all of the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated April 2016 (the Code) except in relation to provision (D.2.2) that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. RBS considers that this is a matter which should rightly be reserved for the Board and this is an approach RBS has adopted for a number of years. Remuneration for the executive directors is first considered by the Group Performance and Remuneration Committee which then makes recommendations to the Board for consideration. This approach allows all non-executive directors, and not just those who are members of the Group Performance and Remuneration Committee, to participate in decisions on the executive directors and the Chairmans remuneration and also allows the executive directors to input to the decision on the Chairmans remuneration. The Board believes this approach is very much in line with the spirit of the Code and no director is involved in decisions regarding his or her own remuneration. We do not anticipate any changes to our approach on this aspect of the Code. Information on how RBS has applied the main principles of the Code can be found in the Corporate governance report on pages 50 to 105. A copy of the Code can be found at www.frc.org.uk.
RBS has also implemented the recommendations arising from the Walker Review and complied in all material respects with the Financial Reporting Council Guidance on Audit Committees issued in September 2012 and April 2016.
Under the US Sarbanes-Oxley Act of 2002, specific standards of corporate governance and business and financial disclosures and controls apply to companies with securities registered in the US. RBS complies with all applicable sections of the US Sarbanes-Oxley Act of 2002, subject to a number of exceptions available to foreign private issuers.
Internal control
Management of The Royal Bank of Scotland Group plc is responsible for the system of internal controls that is designed to maintain effective and efficient operations, compliant with applicable laws and regulations. The system of internal controls is designed to manage, or mitigate, risk to an acceptable residual level rather than eliminate it entirely. Systems of internal control can only provide reasonable and not absolute assurance against material misstatement, fraud or loss.
Managements report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for RBS.
RBSs internal control over financial reporting is a component of an overall system of internal control and is designed to provide reasonable assurance regarding the preparation, reliability and fair presentation of financial statements for external purposes in accordance with International Financial Reporting Standards (IFRS) and includes:
· Policies and procedures that relate to the maintenance of records that, in reasonable detail, fairly and accurately reflect the transactions and disposition of assets.
· Controls providing reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS, and that receipts and expenditures are being made only as authorised by management.
· Controls providing reasonable assurance regarding the prevention or timely detection of unauthorised acquisition, use or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.
Management assessed the effectiveness of RBSs internal control over financial reporting as of 31 December 2018 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 publication of Internal Control - Integrated Framework.
Based on its assessment, management believes that, as of 31 December 2018, RBSs internal control over financial reporting is effective.
The effectiveness of RBSs internal control over financial reporting as of 31 December 2018 has been audited by Ernst & Young LLP, RBSs independent registered public accounting firm. The report of the independent registered public accounting firm to the directors of the Royal Bank of Scotland Group plc expresses an unqualified opinion on RBSs internal control over financial reporting as of the 31 December 2018.
Disclosure controls and procedures
M anagement, including RBSs Chief Executive and Chief Financial Officer, have conducted an evaluation of the effectiveness and design of RBSs disclosure controls and procedures (as such term is defined in the Exchange Act Rule 13a-15(e)). Based on this evaluation, RBSs Chief Executive and Chief Financial Officer concluded that RBSs disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Changes in internal control
There was no change in RBSs internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, RBSs internal control over financial reporting.
The New York Stock Exchange
As a foreign private issuer with American Depository Shares representing ordinary shares, preference shares and debt securities listed on the New York Stock Exchange (the NYSE), RBS is not required to comply with all of the NYSE standards applicable to US domestic companies (the NYSE Standards) provided that it follows home country practice in lieu of the NYSE Standards and discloses any significant ways in which its corporate governance practices differ from the NYSE Standards. RBS is also required to provide an Annual Written Affirmation to the NYSE of its compliance with the mandatory applicable NYSE Standards.
The Group Audit Committee fully complies with the mandatory provisions of the NYSE Standards (including by reference to the rules of the Exchange Act) that relate to the composition, responsibilities and operation of audit committees. In April 2018 RBS submitted its required annual written affirmation to the NYSE, and in June 2018 it submitted an interim written affirmation, both confirming RBSs full compliance with those and other applicable provisions. More detailed information about the Group Audit Committee and its work during 2018 is set out in the Group Audit Committee report on pages 67 to 69.
RBS has reviewed its corporate governance arrangements and is satisfied that these are consistent with the NYSE Standards, subject to the following departures: (i) NYSE Standards require the majority of the Board to be independent. The NYSE Standards contain different tests from the Code for determining whether a director is independent. RBS follows the Codes requirements in determining the independence of its directors and currently has 9 independent non-executive directors, one of whom is the senior independent director. (ii) The NYSE Standards require non-management directors to hold regular sessions without management present and that independent directors meet at least once a year. The Code requires the Chairman to hold meetings with non-executive directors without the executives present and non-executive directors are to meet without
Compliance report
the Chairman present at least once a year to appraise the Chairmans performance and RBS complies with the requirements of the Code. (iii) The NYSE Standards require that the nominating/corporate governance committee of a listed company be composed entirely of independent directors.
The Chairman of the Board is also the Chairman of the Group Nominations and Governance Committee, which is permitted under the Code (since the Chairman was considered independent on appointment). The terms of reference of the Group Nominations and Governance Committee differ in certain limited respects from the requirements set out in the NYSE Standards, including because the Group Nominations and Governance Committee does not have responsibility for overseeing the evaluation of management. (iv) The NYSE standards require that the compensation committee of a listed company be composed of entirely of independent directors.
Although the members of the Group Performance and Remuneration Committee are deemed independent in compliance with the provisions of the Code, the Board has not assessed the independence of the members of the Group Performance and Remuneration Committee and the Group Performance and Remuneration Committee has not assessed the independence of any compensation consultant, legal counsel or other adviser, in each case, in accordance with the independence tests prescribed by the NYSE Standards.
The NYSE Standards require that the compensation committee must have direct responsibility to review and approve the Chief Executives remuneration.
As stated at the start of this Compliance Report, in the case of RBS, the Board, rather than the Group Performance and Remuneration Committee, reserves the authority to make the final determination of the remuneration of the Chief Executive. (v) The NYSE Standards require listed companies to adopt and disclose corporate governance guidelines.
Throughout the year ended 31 December 2018, RBS has complied with all of the provisions of the Code (subject to the exception described above) and the Code does not require RBS to disclose the full range of corporate governance guidelines with which it complies. (vi) The NYSE Standards require listed companies to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. RBS has adopted a code of conduct which is supplemented by a number of key policies and guidance dealing with matters including , among others, anti-bribery and corruption, anti-money laundering, sanctions, confidentiality, inside information, health, safety and environment, conflicts of interest, market conduct and management records. This code of conduct applies to all officers and employees and is fully aligned to the PRA and FCA Conduct Rules which apply to all directors . The Code of Conduct is available to view on RBSs website at rbs.com .
This Compliance report forms part of the Corporate governance report and the Report of the directors.
Report of the directors
The directors present their report together with the audited accounts for the year ended 31 December 2018.
Other information incorporated into this report by reference can be found at:
|
|
Page/Note |
Strategic Report |
|
4 |
Sustainability |
|
15 |
Climate change |
|
34 |
Business review |
|
36 |
RBS Group ring-fencing |
|
36 |
Board of directors and secretary |
|
59 |
Corporate governance |
|
61 |
Segmental analysis |
|
Note 4 |
Share Capital and other equity |
|
Note 22 |
Post balance sheet events |
|
Note 35 |
Risk factors |
|
265 |
Group structure
During 2018 in preparation for ring-fencing a number of changes were made to the Group structure. Following these changes the company owns three main subsidiaries, NatWest Holdings Limited (the parent of the ring-fenced group which includes, National Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank Ireland DAC), NatWest Markets Plc (the investment bank) and The Royal Bank of Scotland International (Holdings) Limited (the parent of The Royal Bank of Scotland International Limited).
Further details of the principal subsidiary undertakings are shown in Note 6.
Following placing and open offers in December 2008 and in April 2009, HM Treasury (HMT) owned approximately 70.3% of the enlarged ordinary share capital of the company. In December 2009, the company issued a further £25.5 billion of new capital to HMT in the form of B shares. HMT sold 630 million of its holding of the companys 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. HMT sold a further 925 million of its holding of the companys ordinary shares in June 2018.
At 31 December 2018, HMTs holding in the companys ordinary shares was 62.3%.
NatWest Markets N.V. (formerly Royal Bank of Scotland N.V. renamed in 2018)
NatWest Markets N.V. (NWM N.V.), the RBS Groups banking entity in the Netherlands, continues to implement its plan to be operationally ready to serve our European Economic Area customers when the UK leaves the European Union on 29 March 2019, in the event that there is a loss of access to the EU Single Market. NWM N.V. is expected to become a subsidiary of NatWest Markets Plc, subject to regulatory approvals.
Activities
RBS is engaged principally in providing a wide range of banking and other financial services. Further details of the organisational structure and business overview of RBS, including the products and services provided by each of its operating segments and the markets in which they operate are contained in the Business review. Details of the strategy for delivering the companys objectives can be found in the Strategic Report.
Results and dividends
The profit attributable to the ordinary shareholders of the Group for the year ended 31 December 2018 amounted to £1,622 million compared with a profit of £752 million for the year ended 31 December 2017, as set out in the consolidated income statement on page 180.
In 2018 RBS paid an interim dividend of £241 million, or 2.0p per ordinary share. In addition, the company announced that the directors have recommended a final dividend of 3.5p per ordinary share, and a further special dividend of 7.5p per ordinary share.
The final and special dividends recommended by directors are subject to shareholders approval at the Annual General Meeting on 25 April 2019. If approved, payment will be made on 30 April 2019 to shareholders on the register at the close of business on 22 March 2019. The ex-dividend date will be 21 March 2019. No dividend was paid in 2017.
In the context of prior macro-prudential policy discussions, previously RBS partially neutralised the impact on Core Tier 1 capital of coupon and dividend payments in relation to hybrid capital instruments through equity issuances of ordinary shares, this policy was cancelled in 2018. Approximately £300 million was raised each year in 2016 and 2017 through the issue of new ordinary shares, and during 2018 £136 million was raised.
Employees
As at 31 December 2018, RBS employed 67,000 people (full-time equivalent basis, including temporary workers). Details of related costs are included in Note 3 on the consolidated accounts.
Creating a healthy culture
Building a healthy culture that embodies Our Values is a core priority for RBS.
Our Values, which guide the way RBS identifies the right people to serve customers well, and how it manages, engages and rewards colleagues, are at the heart of Our Code (the bank-wide Code of Conduct).
Engaging colleagues
Engaging colleagues is crucial to achieving RBSs ambition. Every year colleagues are asked to share their thoughts on what its like to work for RBS via a colleague opinion survey. The results from the 2018 survey are the most positive ever reported since engagement started to be measured in 2002. All key measures have improved and RBS is now above the global financial norms in all comparable survey categories. The continued strengthening of the culture in RBS was also echoed in this years improved Banking Standards Board assessment which provided further proof of progress across a range of measures.
Rewarding employees
RBSs approach to performance management provides clarity for employees about how their contribution links to RBSs ambition.
RBS has made further progress on making sure employees are paid fairly for the work they do with simple and transparent pay structures, and in the UK RBSs rates continue to exceed the Living Wage. More information can be found on page 74 of this document.
Developing colleagues
RBS offers a wide range of additional learning opportunities. In 2018 the NextGen talent development programme was launched for high potential colleagues at managerial level, helping them become the future leaders RBS will need.
RBS also has a range of Female Development Programmes supporting women to reach their full potential, and helping RBS to become fully gender balanced by 2030.
2018 also saw Sales Excellence, the RBS bank-wide sales programme, get underway, teaching the tools and techniques that enable those in sales roles to be the best at ethical, needs-based selling. More information can be found on page 16 of the Strategic Report included herein.
Youth Employment
In 2018, RBS welcomed 516 people across the Graduate and Apprenticeship schemes as well as around 150 Interns into internship programmes.
Health and wellbeing of colleagues
As a strong component of making RBS a great place to work , wellbeing ha s successfully delivered against three pillars physical, mental, and social ; and in 2018 built momentum on the fourth pillar, f inancial wellbeing . Further details can be found on page 17 of the Strategic R eport included herein.
Report of the directors
Employee consultation
RBS recognises employee representatives such as trade unions and work councils in a number of businesses and countries, and management regularly discuss developments and updates on the progress of its strategic plans with the European Employee Council (EEC). RBS has ongoing engagement and discussion with those bodies, given the scale of change taking place across RBS.
Colleague Voice
In response to changes which have been made to the UK Corporate Governance Code, RBS has established a Colleague Advisory Panel (the Panel) which is chaired by Lena Wilson, Non-executive Director. The purpose of the Panel is to promote greater colleague voice in the boardroom and provide an additional way for the Board to engage directly with colleagues. The Panel consists of existing employee representatives (e.g. Unite, Financial Services Union (FSU), EEC, Employee Led Networks, Junior Management/Colleague Focus Groups and colleagues who have volunteered to be involved). Colleagues from locations outside of the UK and Ireland also sit on the Panel to ensure a broad, diverse range of views. In total, there are approximately 20 colleagues (or their representatives) who attend each Panel meeting. The Panel does not duplicate existing methods to inform and consult, in particular with employee representatives, focusing instead on broader strategic issues facing RBS. The design of the Panel has been built around having two-way dialogue with clear outputs from the sessions and follow-up to ensure it is viewed as a valuable addition to existing colleague voice methods. More detail can be found on the Panel on page 15 of the Strategic Report.
In clusion
Building a more inclusive RBS is essential for customers and colleagues. The ambition to be number one for customer service, trust and advocacy will only be achieved by understanding the needs of all colleagues and customers.
RBSs inclusion guidelines apply to all colleagues globally and cover being LGBT Innovative, Gender Balanced, Disability Smart, Ethnically Diverse, all leading to Inclusive Culture. Detailed information can be found on page 17 of the Strategic Report included herein.
RBS has been recognised for work on Equality, Diversity and Inclusion in 2018 by retaining a position in the Times Top 50 Employers for Women; being recognised again as a Top 10 Employer for Working Families; being rated as an Exemplary Level Employer by Carer Positive Scotland; being named a Stonewall Global Diversity Champion; being Platinum Ranked by Business in the Community for both Gender and Ethnicity work; and being upgraded to Gold Rated Disability Standard for the
Business Disability Forum. RBS was also proud to be named Employer of the Year by Women in Finance 2018.
Going concern
RBSs business activities and financial position, the factors likely to affect its future development and performance and its objectives and policies in managing the financial risks to which it is exposed and its capital are discussed in the Business review. The risk factors which could materially affect RBSs future results are set out on pages 265 to 278. R BSs regulatory capital resources and significant developments in 2018 and anticipated future developments are detailed in the Capital, liquidity and funding section on pages 109 to 122. This section also describes RBSs funding and liquidity profile, including changes in key metrics and the build up of liquidity reserves.
Having reviewed RBSs forecasts, projections and other relevant evidence, the directors have a reasonable expectation that RBS and the company will continue in operational existence for the foreseeable future. Accordingly, the financial statements of RBS and of the company have been prepared on a going concern basis.
UK Finance disclosure code
RBSs 2018 financial statements have been prepared in compliance with the principles set out in the Code for Financial Reporting Disclosure published by the British Bankers Association in 2010 and adopted by UK Finance. The Code sets out five disclosure principles together with supporting guidance. The principles are that RBS and other major UK banks will provide high quality, meaningful and decision-useful disclosures; review and enhance their financial instrument disclosures for key areas of interest to market participants; assess the applicability and relevance of good practice recommendations to their disclosures, acknowledging the importance of such guidance; seek to enhance the comparability of financial statement disclosures across the UK banking sector; and clearly differentiate in their annual reports between information that is audited and information that is unaudited.
Enhanced Disclosure Task Force (EDTF) and Disclosures on Expected Credit Losses (DECL) Taskforce recommendations
The EDTF, established by the Financial Stability Board, published its report Enhancing the Risk Disclosures of Banks in October 2012, with an update in November 2015 covering IFRS 9 expected credit losses (ECL). In November 2018, the DECL Taskforce, jointly established by the Financial Conduct Authority, Financial Reporting Council and the Prudential Regulatory Authority, published its phase 1 report, further articulating EDTF (2015) recommendations. RBSs 2018 Annual Report on Form 20-F and Pillar 3 Report reflect EDTF and have regard to DECL Taskforce recommendations.
Authority to repurchase shares
At the Annual General Meeting in 2018 shareholders authorised the company to make market purchases of up to 1,199,376,674 ordinary shares. The directors have not exercised this authority to date. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2019.
On 6 February 2019 RBS held a General Meeting and shareholders approved a special resolution to give authority for the Company to make off-market purchases of up to 4.99 per cent of the Companys ordinary share capital in issuance from HM Treasury (or its nominee) at such times as the Directors may determine is appropriate. Full details of the proposal are set out in the Circular and Notice of General Meeting available on www.rbs.com . Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2019.
Additional information
Where not provided elsewhere in the Report of the directors, the following additional information is required to be disclosed by Part 6 of Schedule 7 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.
The rights and obligations attached to the companys ordinary shares and preference shares are set out in our Articles of Association, copies of which can be obtained from Companies House in the UK or can be found at rbs.com/about/board-and-governance. Non-cumulative preference share details are set out in Note 22 of the consolidated accounts.
The cumulative preference shares represent less than 0.008% of the total voting rights of the company, the remainder being represented by the ordinary shares.
On a show of hands at a General Meeting of the company, every holder of ordinary shares and cumulative preference shares, present in person or by proxy and entitled to vote, shall have one vote. On a poll, every holder of ordinary shares or cumulative preference shares present in person or by proxy and entitled to vote, shall have four votes for every share held. The notices of Annual General Meetings and General Meetings specify the deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the meeting.
Report of the directors
There are no restrictions on the transfer of ordinary shares in the company other than certain restrictions which may from time to time be imposed by laws and regulations (for example, insider trading laws). At the 2018 Annual General Meeting, shareholders gave authority to directors to offer a scrip dividend alternative on any dividend paid up to the conclusion of the Annual General Meeting in 2021.
Pursuant to the UK Listing Rules, certain employees of the company require the approval of the company to deal in the companys shares.
The rules governing the powers of directors, including in relation to issuing or buying back shares and their appointment, are set out in our Articles of Association. It will be proposed at the 2019 Annual General Meeting that the directors authorities to allot shares under the Companies Act 2006 (the Companies Act) be renewed. The Articles of Association may only be amended by a special resolution at a general meeting of shareholders.
The company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights. There are no persons holding securities carrying special rights with regard to control of the company. A number of the companys employee share plans include restrictions on transfers of shares while shares are subject to the plans. Note 3 sets out a summary of the plans.
Under the rules of certain employee share plans, voting rights are exercised by the Trustees of the plan on receipt of participants instructions. If a participant does not submit an instruction to the Trustee no vote is registered.
For shares held in the Companys other Employee Share Trusts, the voting rights are exercisable by the Trustees. However, in accordance with investor protection guidelines, the Trustees abstain from voting. The Trustees would take independent advice before accepting any offer in respect of their shareholdings for the company in a takeover bid situation. The Trustees have chosen to waive their entitlement to the dividend on shares held by the Trusts. The total amount of dividends waived during the year ended 31 December 2018 was £0.2 million.
A change of control of the company following a takeover bid may cause a number of agreements to which the company is party to take effect, alter or terminate. All of the companys employee share plans contain provisions relating to a change of control. In the context of the company as a whole, these agreements are not considered to be significant.
Directors
The names and brief biographical details of the current directors are shown on pages 59 and 60.
Howard Davies, Frank Dangeard, Alison Davis, Morten Friis, Robert Gillespie, Ross McEwan, Brendan Nelson, Baroness Noakes, Mike Rogers, Mark Seligman and Lena Wilson all served throughout the year and to the date of signing of the financial statements.
Patrick Flynn was appointed on 1 June 2018 and Katie Murray was appointed on 1 January 2019.
All directors of the company are required to stand for election or re-election annually by shareholders at the Annual General Meeting and, in accordance with the UK Listing Rules, the election or re-election of independent directors requires approval by all shareholders and also by independent shareholders.
Directors interests
The interests of the directors in the shares of the company at 31 December 2018 are shown on page 87. None of the directors held an interest in the loan capital of the company or in the shares or loan capital of any of the subsidiary undertakings of the company, during the period from 1 January 2018 to 14 February 2019.
Directors indemnities
In terms of section 236 of the Companies Act, Qualifying Third Party Indemnity Provisions have been issued by the company to its directors, members of the RBS Executive Committee, individuals authorised by the PRA/FCA, certain directors and/or officers of RBS subsidiaries and all trustees of RBS pension schemes.
Controlling shareholder
In accordance with the UK Listing Rules, the company has entered into an agreement with HM Treasury (the Controlling Shareholder) which is intended to ensure that the Controlling Shareholder complies with the independence provisions set out in the UK Listing Rules. The company has complied with the independence provisions in the relationship agreement and as far as the company is aware the independence and procurement provisions in the relationship agreement have been complied with in the period by the controlling shareholder.
Shareholdings
The table below shows shareholders that have notified RBS that they hold more than 3% of the total voting rights of the company at 31 December 2018.
Solicitor For The
|
|
Number of
|
|
% of share
|
|
% of total
|
Ordinary shares |
|
7,509 |
|
62.3 |
|
62.3 |
As at 14 February 2019, there were no changes to the shareholdings shown in the table above.
Listing Rule 9.8.4
The information to be disclosed in the Annual Report on Form 20-F under LR 9.8.4, is set out in this Directors report with the exception of details of contracts of significance under LR 9.8.4 (10) and (11) given in Additional Information on page 279.
Political donations
At the Annual General Meeting in 2018, shareholders gave authority under Part 14 of the Companies Act 2006, for a period of one year, for the company (and its subsidiaries) to make political donations and incur political expenditure up to a maximum aggregate sum of £100,000. This authorisation was taken as a precaution only, as the company has a longstanding policy of not making political donations or incurring political expenditure within the ordinary meaning of those words. During 2018, RBS made no political donations, nor incurred any political expenditure in the UK or EU and it is not proposed that RBSs longstanding policy of not making contributions to any political party be changed. Shareholders will be asked to renew this authorisation at the Annual General Meeting in 2019.
Directors disclosure to auditors
Each of the directors at the date of approval of this report confirms that:
(a) so far as the director is aware, there is no relevant audit information of which the companys auditors are unaware; and
(b) the director has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to establish that the companys auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act.
Auditors
EY LLP are the auditors and have indicated their willingness to continue in office. A resolution to re-appoint EY LLP as the companys auditors will be proposed at the forthcoming Annual General Meeting.
By order of the Board
Aileen Taylor
Company Secretary
14 February 2019
The Royal Bank of Scotland Group plc
is registered in Scotland No. SC45551
Statement of directors responsibilities
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 178 and 179.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required by Article 4 of the IAS Regulation (European Commission Regulation No 1606/2002) to prepare Group accounts, and as permitted by the Companies Act 2006 have elected to prepare company accounts, for each financial year in accordance with International Financial Reporting Standards as adopted by the European Union. They are responsible for preparing accounts that present fairly the financial position, financial performance and cash flows of the Group and the company. In preparing those accounts, the directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable and prudent; and
· state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts.
The 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.
The directors confirm that to the best of their knowledge:
· the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
· the Strategic Report and Directors report (incorporating the Business review) include a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
In addition, the directors are of the opinion that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the companys position and performance, business model and strategy.
By order of the Board
Howard Davies |
Ross McEwan |
Katie Murray |
Chairman |
Chief Executive |
Chief Financial Officer |
14 February 2019
Board of directors
Chairman |
Executive directors |
Non-executive directors |
Howard Davies |
Ross McEwan Katie Murray |
Frank Dangeard Alison Davis Patrick Flynn Morten Friis Robert Gillespie Brendan Nelson Baroness Noakes Mike Rogers Mark Seligman Dr Lena Wilson |
Capital and risk management
|
|
Page |
Presentation of information |
|
101 |
Risk management framework |
|
|
Introduction |
|
101 |
Risk culture |
|
102 |
Risk governance |
|
103 |
Risk appetite |
|
104 |
Risk controls and limits |
|
104 |
Risk identification and measurement |
|
104 |
Risk treatment and mitigation |
|
104 |
Risk assurance |
|
105 |
Model risk |
|
105 |
Stress testing |
|
105 |
Capital, liquidity and funding risk |
|
|
Definitions, sources and key developments |
|
109 |
Capital, liquidity and funding management |
|
110 |
Minimum requirements |
|
111 |
Measurement |
|
112 |
Credit risk |
|
|
Definition, sources and key developments |
|
123 |
Risk governance, appetite and controls |
|
123 |
Risk identification and measurement |
|
123 |
Risk models |
|
124 |
Risk mitigation |
|
124 |
Risk assessment and monitoring |
|
124 |
Banking activities |
|
134 |
Trading activities |
|
158 |
Key IFRS 9 terms and differences |
|
161 |
Market risk |
|
|
Non-traded market risk |
|
163 |
Traded market risk |
|
169 |
Pension risk |
|
172 |
Compliance & conduct risk |
|
172 |
Financial crime |
|
173 |
Operational risk |
|
173 |
Business risk |
|
175 |
Reputational risk |
|
176 |
Presentation of information
Where indicated in the section headers, information in the Capital and risk management section (pages 101 to 176) is within the scope of the Independent auditors report. Where a main section header, presented in bold, is marked as audited all sub sections are also audited.
Risk management framework
Introduction
RBS operates an integrated risk management framework, centred around the embedding of a strong risk culture, which is designed to achieve compliance with prudential and conduct obligations. Each element of the risk management framework functions both individually and as part of a larger continuum. The framework ensures the tools and capability are in place to facilitate risk management and decision-making across the organisation.
RBSs strategy is informed and shaped by an understanding of the risk landscape, including a range of significant risks and uncertainties in the external economic, political and regulatory environment. Identifying these risks and understanding how they affect RBS informs risk appetite and risk management practice.
Risk appetite, which is supported by a robust set of principles, policies and practices, defines our levels of tolerance for a variety of risks. It is a key element of RBSs risk management framework and culture, providing a structured approach to risk-taking within agreed boundaries.
Effective governance, underpinned by the three lines of defence model, is essential to ensure the right decisions are being made by the right people at the right time. Governance includes regular and transparent risk reporting as well as discussion and decision-making at senior management committees, which informs management strategies across the organisation.
RBS aims to have the right tools in place to support effective risk management. Having the appropriate capability, people and infrastructure is central. This is supported by a strong emphasis on systems, training and development to ensure threats are anticipated and managed appropriately within the boundaries determined by the agreed risk appetite.
Measurement, evaluation and transparency are also fundamental elements of the framework, providing robust analysis of the materiality and likelihood of specific threats as well as supporting understanding and communication of the financial and non-financial risks to which RBS is exposed.
RBS has a strong focus on defining the control environment to ensure the effective operation of policies and processes embedded in the customer-facing businesses, thus facilitating the management of the risks they take in the course of their day-to-day activities.
RBS also has a strong focus on continually improving the way risk is managed, particularly in terms of how threats are anticipated or responded to, but also in terms of simplifying or enhancing existing controls, policies and practice.
Essential to this is the ability to scan both the medium and long-term horizon for risks. Stress testing is used to quantify, evaluate and understand the potential impact that changes to risks may have on the financial strength of RBS, including its capital position. In turn, the results of stress tests can be used to inform and shape strategy.
Given the evolving landscape, including the structural reform required by the UKs ring-fencing requirements, in 2018 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.
Capital and risk management
Risk management framework continued
All RBS employees share ownership of the way risk is managed. The businesses, the control and support functions, and Internal Audit work together to make sure business activities and policies are consistent with risk appetite; following the three lines of defence model. RBS constantly monitors its risk profile against its defined risk appetite and limits, taking action when required to balance risk and return.
The methodology for setting, governing and embedding risk appetite across RBS is being further enhanced with the aim of simplifying current risk appetite processes and increasing alignment with strategic planning and external threat assessments.
Risk culture
A strong risk culture is essential if RBS is to achieve its ambition to build a truly customer-focused bank. RBSs risk culture target is to make risk simply part of the way that employees work and think.
Such a culture must be built on strong risk practices and appropriate risk behaviours must be embedded throughout the organisation.
To achieve this, RBS is focusing on leaders as role models and taking action to build clarity, continuing to develop capability and motivate employees to reach the required standards of risk culture behaviour. This includes: taking personal responsibility for understanding and proactively managing the risks associated with individual roles; respecting risk management and the part it plays in daily work; understanding clearly the risks associated with individual roles; aligning decision-making to RBSs risk appetite; considering risk in all actions and decisions; escalating risks and issues early; taking action to mitigate risks; learning from mistakes and near-misses; challenging others attitudes, ideas and actions; and reporting and communicating risks transparently.
RBSs target risk culture behaviours are embedded in Our Standards and are clearly aligned to the core values of serving customers, working together, doing the right thing and thinking long-term. These act as an effective basis for a strong risk culture because Our Standards are used for performance management, recruitment and development.
A risk culture measurement and reporting approach has been developed, enabling RBS to benchmark both internally and externally. This allows RBS to assess progress in embedding its target risk culture where risk is simply part of the way staff work and think.
Training
Enabling employees to have the capabilities and confidence to manage risk is core to RBSs learning strategy.
RBS offers a wide range of risk learning, both technical and behavioural, across the risk disciplines. This training can be mandatory, role-specific or for personal development.
Code of Conduct
Aligned to RBSs 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.
These principles cover conduct-related issues as well as wider business activities. They focus on desired outcomes, with practical guidelines to align the values with commercial strategy and actions. The embedding of these principles facilitates sound decision-making and a clear focus on good customer outcomes.
A simple decision-making guide the YES check has been included in the Code of Conduct. It is a simple set of five questions, designed to ensure RBS values guide day-to-day decisions:
· Does what I am doing keep our customers and RBS safe and secure?
· Would customers and colleagues say I am acting with integrity?
· Am I happy with how this would be perceived on the outside?
· Is what I am doing meeting the standards of conduct required?
· In five years time would others see this as a good way to work?
Each of the five questions is a prompt to think about how the situation fits with RBS Groups values. It ensures that employees can think through decisions that do not have a clear answer, and guides their judgements.
If conduct falls short of RBSs required standards, the accountability review process is used to assess how this should be reflected in pay outcomes for those individuals concerned. RBS-wide remuneration policy ensures that the remuneration arrangements for all employees reflect the principles and standards prescribed by the PRA rulebook and the FCA handbook. Any employee falling short of the expected standards would also be subject to internal disciplinary policies and procedures. If appropriate, the relevant authority would be notified.
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Risk governance
Committee structure
The diagram illustrates RBSs risk committee structure in 2018 and the main purposes of each committee.
Risk management structure
The diagram illustrates RBSs risk management structure in 2018 and key risk management responsibilities.
Notes:
(1) While separate roles, the individual undertaking the RBS Group Chief Executive role also performs the NatWest Holdings Chief Executive role.
(2) The RBS Group Risk function is led by the RBS Group Chief Risk Officer. The RBS Group Chief Risk Officer reports directly to the RBS Group Chief Executive and has a secondary reporting line to the chair of the Group Board Risk Committee as well as a right of access to the committee.
(3) The NatWest Holdings Chief Risk Officer (Chief Risk Officer, Ring-Fenced Bank) reports directly to the RBS Group Chief Risk Officer and the NatWest Holdings Chief Executive, along with a secondary reporting line to the NatWest Holdings Board Risk Committee chair and right of access to the committee including the Deputy Chairman.
(4) The NatWest Holdings Risk function provides risk management services across the RBS Group, including to the RBS Group Chief Risk Officer and where agreed to the NatWest Markets and RBSI Chief Risk Officers. These services are managed, as appropriate, through service level agreements.
(5) The NatWest Holdings Risk function is independent of the NatWest Holdings customer-facing franchises and support functions. It provides oversight of risk management ensuring that risk exposures arising from management and business activities are adequately monitored and controlled. The directors of Financial Risk & Analytics, Compliance & Conduct, Restructuring, Risk Policy & Frameworks and Operational Risk & Services as well as the Chief Financial Crime Officer, Chief Credit Officer, Deputy Chief Risk Officer and Head of Risk Strategy & Transformation report to the NatWest Holdings Chief Risk Officer. The Director of Risk, Ulster Bank Ireland DAC and the Director of Compliance, Ulster Bank Ireland DAC, report to the Ulster Bank Ireland DAC Chief Executive; they also have a reporting line to the NatWest Holdings Chief Risk Officer.
(6) The Chief Risk Officers for NatWest Markets and RBSI have dual reporting lines into the RBS Group Chief Risk Officer and the respective chief executives of their entities. There are additional reporting lines to the NatWest Markets and RBSI Board Risk Committee chairs and a right of access to the committee.
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Three lines of defence
RBS uses the three lines of defence model to articulate accountabilities and responsibilities for managing risk across the organisation. The three lines of defence model is adopted across the industry to support the embedding of effective risk management and is expressed through a set of principles as outlined below. All roles, regardless of level, sit within one of these three lines.
First line of defence Management and supervision
The first line of defence encompasses most roles within RBS, including those in customer franchises, Technology and Services as well as support functions such as Human Resources, Communications & Marketing and Finance. Responsibilities include:
· Owning, managing and supervising, within a defined risk appetite, the risks which exist in business areas and support functions.
· Ensuring the business has effective mechanisms for identifying, reporting and managing risk and controls.
· Ensuring appropriate controls are in place to mitigate risk, balancing control, customer service and competitive advantage.
· Ensuring that the culture of the business supports balanced risk decisions and compliance with policy, laws and regulations.
Second line of defence Oversight and control
The second line of defence is the Risk function as well as the policy and control elements of Human Resources, Legal and the Finance function. Responsibilities include:
· Leading the articulation, design and development of risk culture and appetite.
· Setting the standard for risk management across the Group.
· Overseeing and challenging the management of risks and controls.
· Analysing the aggregate risk profile and ensuring that risks are being managed within risk appetite.
· Providing expert advice to the first line on risk management, including the application of effective risk and control frameworks and the consideration of risk in decision-making.
· Providing senior executives with relevant management information and reports, and escalating concerns where appropriate.
Third line of defence Internal Audit
Responsibilities include:
· Providing assurance to the Group Audit Committee on the appropriateness of the design and operational effectiveness of governance, risk management and internal controls to monitor and mitigate material risks.
· Engaging with management to provide perspectives, insights and challenge in order to influence the building of a sustainable bank.
· Providing independent assurance to the Financial Conduct Authority, Prudential Regulation Authority, Central Bank of Ireland and other key jurisdictional regulators on specific risks and controls.
Risk appetite
Risk appetite defines the level and types of risk RBS is willing to accept, within risk capacity, in order to achieve strategic objectives and business plans. It links the goals and priorities to risk management in a way that guides and empowers staff to serve customers well and achieve financial targets.
For certain strategic risks, risk capacity defines the maximum level of risk the RBS Group can assume before breaching constraints determined by regulatory capital and liquidity needs, the operational environment, and from a conduct perspective. Articulating risk capacity helps determine where risk appetite should be set, ensuring there is a buffer between internal risk appetite and the Groups ultimate capacity to absorb losses.
Risk appetite framework
The risk appetite framework bolsters effective risk management by promoting sound risk-taking through a structured approach, within agreed boundaries. It also ensures emerging risks and risk-taking activities that would be out of appetite are identified, assessed, escalated and addressed in a timely manner.
To facilitate this, a detailed annual review of the framework is carried out. The review includes:
· Assessing the adequacy of the framework when compared to internal and external expectations.
· Ensuring the framework remains effective as a strong control environment for risk appetite.
· Assessing the level of embedding of risk appetite across the organisation.
The Board approves the risk appetite framework annually.
Establishing risk appetite
Risk appetite is communicated across RBS through risk appetite statements. The risk appetite statements provide clarity on the scale and type of activities that can be undertaken in a manner that is easily conveyed to staff.
Risk appetite statements consist of qualitative statements of appetite supported by risk limits and triggers that operate as a defence against excessive risk-taking. They are established at RBS-wide level for all strategic risks and material risks, and at legal entity, franchise, and function level for all other risks.
The annual process of establishing risk appetite statements is completed alongside the business and financial planning process. This ensures plans and risk appetite are appropriately aligned.
The Board sets risk appetite for the most material risks to help ensure RBS is well placed to meet its priorities and long-term targets even under challenging economic environments. It is the basis on which RBS remains safe and sound while implementing its strategic business objectives.
RBSs risk profile is frequently reviewed and monitored to ensure it remains within appetite and that management focus is concentrated on all strategic risks, material risks and emerging risk issues. Risk profile relative to risk appetite is reported regularly to the Board and senior management.
Risk controls and limits
Risk controls and their associated limits are an integral part of the risk appetite approach and a key part of embedding risk appetite in day-to-day risk management decisions. A clear tolerance for material risk types is set in alignment with business activities.
RBS policies directly support the qualitative aspects of risk appetite, helping to rebuild and maintain stakeholder confidence in RBSs risk control and governance. Its integrated approach is designed to ensure that appropriate controls, aligned to risk appetite, are set for each of the strategic and material risks it faces, with an effective assurance process put in place to monitor and report on performance.
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.
· Monitoring of the risks associated with lending and credit exposures.
· Assessment of trading and non-trading portfolios.
· Review of potential risks in new business activities and processes.
· Analysis of potential risks in any complex and unusual business transactions.
The financial and non-financial risks that RBS faces each day are detailed in the Risk Directory. This provides a common risk language to ensure consistent terminology is used across RBS. The Risk Directory is subject to annual review. This ensures that it continues to provide a comprehensive and meaningful list of the inherent risks within the businesses.
Risk treatment and mitigation
Risk treatment and mitigation is an important aspect of ensuring that risk profile remains within risk appetite. Risk mitigation strategies are discussed and agreed with the businesses. When evaluating possible strategies, costs and benefits, residual risks (risks that are retained) and secondary risks (those caused by the risk mitigation actions) are considered. Monitoring and review processes are in place to track results. Early identification and effective management of changes in legislation and regulation are critical to the successful mitigation of conduct risk. The effects of all changes are managed to ensure timely compliance readiness. Changes assessed as having a high or medium-high impact are managed closely.
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Significant and emerging risks that may affect future results and performance are reviewed and monitored. Action is taken to mitigate potential risks as and when required. In depth analysis is carried out, including the stress testing of exposures relative to the risk.
Risk assurance
Assurance is carried out on targeted credit risk, market risk, compliance and conduct risk and financial crime risk activities to provide assurance to both internal and external stakeholders including the Board, senior management, the customer-facing franchises, Internal Audit and the Groups regulators. Selected key controls are also reviewed. Qualitative reviews are carried out to assess various risk aspects as appropriate, including: the quality of risk portfolios, the accuracy of the Basel model inputs and related probability of default/loss given default classifications, the quality of risk management practices, policy compliance and adherence to risk appetite. This can include testing the Groups credit portfolios and market risk exposures to assist in the early identification of emerging risks, as well as undertaking targeted reviews to examine specific issues.
The adequacy and effectiveness of selected key controls owned and operated by the second line of defence are also tested (with a particular focus on credit risk and market risk controls). Selected controls within the scope of Section 404 of the US Sarbanes-Oxley Act 2002 as well as selected controls supporting risk data aggregation and reporting are also reviewed. 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. The Risk Assurance Committee ensures a consistent and fair approach to all aspects of the second-line assurance review activities. The committee also monitors and validates the ongoing programme of reviews and tracks the remediation of the more material review actions.
Model risk
Model risk is the risk that a model is specified incorrectly (not achieving the objective for which it is designed), implemented incorrectly (an error in translating the model specification into the version actually used), or being used incorrectly (correctly specified but applied inappropriately).
RBS uses a variety of models as part of its risk management process and activities. Key examples include the use of model outputs to support risk assessments in the credit approval process, ongoing credit risk management, monitoring and reporting, as well as the calculation of risk-weighted assets. Other examples include the use of models to measure market risk exposures and calculate associated capital requirements, as well as for the valuation of positions. The models used for stress-testing purposes also play a key role in ensuring RBS holds sufficient capital, even in stressed market scenarios.
Key developments in 2018
In April 2018, the PRA set out its expectations on the model risk management practices that should be adopted when using stress test models. RBS has a strong focus on model risk management and, as a result, practices were reviewed and, where appropriate, work to enhance them in line with regulatory expectations continues.
RBS further invested in model risk management during 2018, particularly given business demand and the growing complexity of requirements, such as new regulation and AI. This included the specification of additional IT systems to enhance capability in this area.
Model Risk G overnance
Model Risk Governance is responsible for setting policy and providing a governance framework for all of RBSs models and related processes. It is also responsible for defining and monitoring model risk appetite in conjunction with model owners and model users, monitoring the model risk profile and reporting on the model population as well as escalating issues to senior management, through the Model Risk Forum, and the respective franchise and function risk committees.
Model Risk Management
Model Risk Management performs independent model validation for material models. It works with individual businesses and functions to monitor adherence to model risk standards, ensuring that models are developed and implemented appropriately and that their operational environment is fit for purpose.
Model Risk Management performs reviews of relevant risk and pricing models in two instances: (i) for new models or amendments to existing models and (ii) as part of its ongoing programme to assess the performance of these models. 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, RBSs 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.
Model Risk Management reassesses the appropriateness of approved risk models on a periodic basis. Each periodic review begins with an initial assessment. Based on the initial assessment, an internal model governance committee will decide to re-ratify a model or to carry out additional work. In the initial assessment, Model Risk Management assesses factors such as a change in the size or composition of the portfolio, market changes, the performance of or any amendments to the model and the status of any outstanding issues or scheduled activities carried over from previous reviews. Model Risk Management also monitors the performance of RBSs portfolio of models to ensure they appropriately capture underlying business rationale. For more information relating to market risk models and pricing models, refer to page 171.
Stress testing
Stress testing capital management
Stress testing is a key risk management tool and a fundamental component of RBSs approach to capital management. It is used to quantify, evaluate and understand the potential impact of specified changes to risk factors on the financial strength of RBS, including its capital position. Stress testing includes:
· Scenario testing, which examines the impact of a hypothetical future state to define changes in risk factors.
· Sensitivity testing, which examines the impact of an incremental change to one or more risk factors.
The process for stress testing consists of four broad stages:
Define scenarios |
· Identify RBS-specific vulnerabilities and risks. · Define and calibrate scenarios to examine risks and vulnerabilities. · Formal governance process to agree scenarios. |
Assess impact |
· Translate scenarios into risk drivers. · Assess impact to positions, income and costs. · Impact assessment captures input from across RBS. |
Calculate results and assess implications |
· Aggregate impacts into overall results. · Results form part of risk management process. · Scenario results are used to inform RBSs business and capital plans. |
Develop and agree management actions |
· Scenario results are analysed by subject matter experts and appropriate management actions are then developed. · Scenario results and management actions are reviewed and agreed by senior management through executive committees including Executive Risk Committee, Board Risk Committee and the Board. |
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Stress testing is used widely across RBS. The diagram below summarises key areas of focus:
Specific areas that involve capital management include:
· Strategic financial and capital planning through assessing the impact of sensitivities and scenarios on the capital plan and capital ratios.
· Risk appetite through gaining a better understanding of the drivers of and the underlying risks associated with risk appetite.
· Risk identification through a better understanding of the risks that could potentially impact RBSs financial strength and capital position.
· Risk mitigation through identifying actions that can be taken to mitigate risks, or could be taken, in the event of adverse changes to the business or economic environment. Risk mitigation is substantially supplemented through RBSs recovery plan.
Reverse stress testing is also carried out. This examines circumstances that can lead to specific, defined outcomes such as business failure. Reverse stress testing allows RBS to examine potential vulnerabilities in its business model more fully.
Capital sufficiency going-concern forward-looking view
With a view to ensuring that RBS and its operating subsidiaries maintain sufficient CET1 capital, going-concern capital requirements are assessed on a forward-looking basis including as part of the annual budgeting process. These assessments consider the resilience of capital adequacy and leverage ratios under a range of hypothetical future states. The assessments incorporate assumptions regarding a range of regulatory and accounting aspects such as IFRS 9, taking account of a number of factors including economic variables and impairments.
In particular, assessments of capital requirements rely on forecasts of:
· Future business performance given expectations of economic and market conditions over the forecast period.
· Future business performance under adverse economic and market conditions over the forecast period. A range of scenarios of different severity may be examined.
The examination of capital requirements under normal economic and market conditions enables RBS to demonstrate how its projected business performance allows it to meet all internal and regulatory capital requirements as they arise over the plan horizon. For example, RBS will assess its ability to issue loss-absorbing debt instruments in sufficient quantity to meet regulatory timelines. The cost of issuance will be factored into business performance metrics.
The examination of capital requirements under adverse economic and market conditions is assessed through stress testing.
The results of stress tests are not only used widely across RBS but also by the regulators to set specific capital buffers. RBS takes part in a number of stress tests run by regulatory authorities to test industry-wide vulnerabilities under crystallising global and domestic systemic risks. In 2018, RBS took part in the Bank of England and European Banking Authority stress tests. Details are set out on page 105.
Under stress testing, IFRS 9 volatility can have a more material impact. This is because the peak-to-trough change in CET1 may be affected by the transitions from Stage 1 to Stage 2 in stress conditions. RBS uses stress and the peak-to-trough movements to help assess the amount of CET1 capital it needs to hold in stress conditions, in accordance with the capital risk appetite framework.
Internal assessment of capital adequacy
An internal assessment of material risks is carried out annually to enable an evaluation of the amount, type and distribution of capital required to cover these risks. This is referred to as the Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP consists of a point-in-time assessment of RBSs exposures and risks at the end of the financial year together with a forward-looking stress capital assessment. The ICAAP is approved by the Board and submitted to the PRA.
The ICAAP is used to form a view of capital adequacy separately to the minimum regulatory requirements. The ICAAP is used by the PRA to make an assessment of RBS-specific capital requirements through the Pillar 2 framework.
Capital allocation
RBS has mechanisms to allocate capital across its legal entities and businesses which aim to optimise the utilisation of capital resources taking into account applicable regulatory requirements, strategic and business objectives and risk appetite. The framework for allocating capital is approved by the Asset & Liability Management Committee.
Governance
Capital management is subject to substantial review and governance. Formal approval of capital management policies is either by the Asset & Liability Management Committee or by the Board on the recommendation of the Board Risk Committee.
The Board approves the capital plans, including those for key legal entities and businesses as well as the results of the stress tests relating to those capital plans.
Stress testing liquidity
Liquidity risk monitoring and contingency planning
In implementing the liquidity risk management framework, a suite of tools is used to monitor, limit and stress test the risks on the balance sheet. Limit frameworks are in place to control the level of liquidity risk, asset and liability mismatches and funding concentrations.
Liquidity risks are reviewed at significant legal entity and business levels daily, with performance reported to the Asset & Liability Management Committee at least monthly. Liquidity Condition Indicators are monitored daily which ensures any build-up of stress is detected early and the response escalated appropriately through recovery planning.
Internal assessment of liquidity
Under the liquidity risk management framework, RBS undertakes the Individual Liquidity Adequacy Assessment Process. This includes assessment of net stressed liquidity outflows. RBS considers a range of extreme but plausible stress scenarios on its liquidity position over various time horizons, as outlined below.
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Type |
Description |
Idiosyncratic scenario |
The market perceives RBS to be suffering from a severe stress event, which results in an immediate assumption of increased credit risk or concerns over solvency. |
Market-wide scenario |
A market stress event affecting all participants in a market through contagion, counterparty failure and other market risks. RBS is affected under this scenario but no more severely than any other participants with equivalent exposure. |
Combined scenario |
This scenario models the combined impact of an idiosyncratic and market stress occurring at once. The combined scenario reflects the contingency that a severe name-specific event occurs at RBS in conjunction with a broader market stress, causing wider damage to the market and financial sector and severely affecting funding markets and assets. |
RBS uses the most severe combination of these to set the internal stress testing scenario. The results of this enable RBS to set its internal liquidity risk appetite, which complements the regulatory liquidity coverage ratio requirement .
Stress testing r ecovery and resolution planning
The RBS Group Recovery Plan explains how The Royal Bank of Scotland Group plc (RBSG) and its subsidiaries as a consolidated group would identify and respond to a financial stress event and restore its financial position to remain viable on an ongoing basis.
The Recovery Plan ensures that risks which could delay the implementation of a recovery strategy are highlighted and preparations are made to minimise the impact of these risks. Preparations RBS has taken include:
· developing a series of recovery indicators to provide early warning of potential stress events
· clarifying roles, responsibilities and escalation routes to minimise uncertainty or delay
· developing a recovery playbook to provide a concise description of the actions required during recovery
· detailing a range of options to address different stress conditions
· appointing dedicated option owners to reduce the risk of delay and bandwidth concerns
The Recovery Plan is intended to enable RBS to maintain critical services and products it provides to its customers (its critical economic functions), maintain its important business lines (core business lines) and operate within risk appetite whilst restoring the banks financial condition.
The Recovery Plan is assessed for appropriateness on an ongoing basis and is updated annually, in line with regulatory requirements. It is reviewed and approved by the Board prior to submission to the PRA each year.
Individual Recovery Plans have been prepared for NatWest Holdings Limited, NatWest Markets Plc, RBS International Holdings Limited, Ulster Bank Ireland DAC and NatWest Markets N.V. These plans reflect the structure and operations of the post-ring-fenced group and detail the recovery options, recovery indicators and escalation routes for each entity to manage its own response to a financial stress.
If RBS was assessed by the UK authorities as failing or likely to fail the authorities have a wide range of powers to place RBS into Resolution. The UKs Special Resolution Regime places an obligation on banks to ensure they are resolvable. Resolvability is a measure of how effectively a set of actions could be taken to manage the failure of RBS, through execution of a preferred resolution strategy which the Group is Single Point of Entry Bail-in of the Group Hold Co. The process of resolution is owned and implemented by the Bank of England (as UK Resolution Authority).
RBS has a multi-year programme of work through to 1 January 2022 to ensure impediments to resolvability are removed and the regulatory resolution strategy could be executed.
Stress testing market risk
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 RBSs banking book interest rate exposure, providing detailed product information analysed by interest rate driver and other characteristics including accounting classification, currency and, counterparty type.
Scenario analysis based on hypothetical adverse scenarios is performed on non-traded exposures as part of the industry-wide Bank of England and European Banking Authority stress exercises. In addition, RBS produces its own internal scenario analysis as part of the financial planning cycles.
Non-traded market risk exposures which are not captured under Pillar 1 are capitalised through the ICAAP. The process covers the following risk types: gap risk, basis risk, credit spread risk, pipeline risk, structural foreign exchange risk, prepayment risk and accounting volatility risk. The ICAAP is completed with a combination of value and earnings measures. 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, produced with 99% confidence level. Methodologies are reviewed by RBS Model Risk and the results are approved by the Technical Asset & Liability Management Committee.
Traded market risk
RBS undertakes daily market risk stress testing to identify vulnerabilities and potential losses in excess of, or not captured in, value-at-risk. The calculated stresses measure the impact of changes in risk factors on the fair values of the trading and fair value through other comprehensive income portfolios.
RBS conducts historical, macroeconomic and vulnerability-based stress testing. Historical stress testing is a measure that is used for internal management. Using the historical simulation framework employed for value-at-risk, the current portfolio is stressed using historical data since 1 January 2005. This methodology simulates the impact of the 99.9 percentile loss that would be incurred by historical risk factor movements over the period, assuming variable holding periods specific to the risk factors and the businesses.
Historical stress tests form part of the market risk limit framework and their results are reported daily to senior management. Macroeconomic stress tests are carried out periodically as part of the bank-wide, cross-risk capital planning process. The scenario narratives are translated into risk factor shocks using historical events and insights by economists, risk managers and the first line.
Market risk stress results are combined with those for other risks into the capital plan presented to the Board. The cross-risk capital planning process is conducted once a year, with a planning horizon of five years. The scenario narratives cover both regulatory scenarios and macroeconomic scenarios identified by RBS.
Vulnerability-based stress testing begins with the analysis of a portfolio and expresses its key vulnerabilities in terms of plausible, vulnerability scenarios under which the portfolio would suffer material losses. These scenarios can be historical, macroeconomic or forward-looking/hypothetical. Vulnerability-based stress testing is used for internal management information and is not subject to limits. However, the results for relevant scenarios are reported to senior management
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Regulatory stress testing
In 2018, RBS took part in regulatory stress tests conducted by the Bank of England and the European Banking Authority. The scenarios are hypothetical in nature and do not represent forecasts of RBSs future business or profitability. The results of the regulatory stress tests are carefully assessed by RBS and form part of the wider risk management of RBS.
Capital and risk management
Capital, liquidity and funding risk
Definitions
Capital consists of reserves and instruments issued that are available, have a degree of permanency and are capable of absorbing losses. A number of strict conditions set by regulators must be satisfied to be eligible as capital.
Capital adequacy risk is the risk that there is or will be insufficient capital and other loss absorbing debt instruments to operate effectively including meeting minimum regulatory requirements, operating within Board approved risk appetite and supporting its strategic goals.
Liquidity consists of assets that can be readily converted to cash within a short timeframe at a reliable value. Liquidity risk is the risk of being unable to meet financial obligations as and when they fall due.
Funding consists of on-balance sheet liabilities that are used to provide cash to finance assets. Funding risk is the risk of not maintaining a diversified, stable and cost-effective funding base.
Liquidity and funding risks arise in a number of ways, including through the maturity transformation role that banks perform. The risks are dependent on factors such as:
· Maturity profile;
· Composition of sources and uses of funding;
· The quality and size of the liquidity portfolio;
· Wholesale market conditions; and
· Depositor and investor behaviour.
Sources of risk
Capital
The eligibility of instruments and financial resources as regulatory capital is laid down by applicable regulation. Capital is categorised under two tiers (Tier 1 and Tier 2) according to the ability to absorb losses, degree of permanency and the ranking of absorbing losses on either a going or gone concern basis. There are three broad categories of capital across these two tiers:
· CET1 capital. CET1 capital must be perpetual and capable of unrestricted and immediate use to cover risks or losses as soon as these occur. This includes ordinary shares issued and retained earnings.
· Additional Tier 1 (AT1) capital. This is the second type of loss absorbing capital and must be capable of absorbing losses on a going concern basis. These instruments are either written down or converted into CET1 capital when a pre-specified CET1 ratio is reached.
· Tier 2 capital. Tier 2 capital is the Groups supplementary capital and provides loss absorption on a gone concern basis. Tier 2 capital absorbs losses after Tier 1 capital. It typically consists of subordinated debt securities with a minimum maturity of five years.
Minimum requirement for own funds and eligible liabilities (MREL)
In addition to capital, other specific loss absorbing instruments, including senior notes issued by the Group, may be used to cover certain gone concern capital requirements which, in the EU, is referred to as MREL. Gone concern refers to the situation in which resources must be available to enable an orderly resolution, in the event that the Bank of England (BoE) deems that the Group has failed, or is likely to fail.
Liquidity
RBS maintains a prudent approach to the definition of liquidity resources. RBS manages its liquidity to ensure it is always available when and where required, taking into account regulatory, legal and other constraints. Following ring-fencing legislation, liquidity is no longer considered fungible across the Group and the liquidity portfolio has been restructured during 2018 to reflect this. Principal liquidity portfolios are maintained in the UK Domestic Liquidity Sub-Group (UK DoLSub) (primarily in NatWest Bank Plc), UBI DAC, NatWest Markets Plc, RBS International and NWM N.V.. Some disclosures in this section where relevant are presented, on a consolidated basis, for RBS, the UK DoLSub and on a solo basis for NatWest Markets plc.
Liquidity resources are divided into primary and secondary liquidity as follows:
· Primary liquid assets include cash and balances at central banks, Treasury bills and other high quality government and US agency bonds.
· Secondary liquid assets are eligible as collateral for local central bank liquidity facilities. These assets include own-issued securitisations or whole loans that are retained on balance sheet and pre-positioned with a central bank so that they may be converted into additional sources of liquidity at very short notice.
Funding
RBS maintains a diversified set of funding sources, including customer deposits, wholesale deposits and term debt issuance. RBS also retains access to central bank funding facilities.
For further details on capital constituents and the regulatory framework covering capital, liquidity and funding requirements, please refer to the RBS Pillar 3 Report 2018 on page 6. For MREL refer to page 8.
Key developments in 2018
· RBS continued to strengthen and de-risk its capital position; CET1 ratio remains ahead of the c14% target and increased by 30 basis points in the year to 16.2%. The directors have recommended a final dividend of 3.5p per ordinary share, and a further special dividend of 7.5p per ordinary share, which are both subject to shareholders approval at the Annual General Meeting on 25 April 2019.
· IFRS 9 adoption on 1 January 2018 favourably impacted CET1 by 30 basis points. RWAs reduced by £12.2 billion to £188.7 billion primarily driven by the legacy business in NatWest Markets, the impact of capital initiatives in Commercial Banking and the impact of the non-performing loan sale and improvement in credit metrics in Ulster Bank RoI.
· CRR leverage ratio increased to 5.4% (2017 5.3%). UK leverage ratio improved to 6.2% (2017 6.1%) in line with the balance sheet reduction.
· During the year the BOE published indicative data on the minimum amount of loss-absorbing resources for the larger UK banks comprising MREL plus buffers. RBS is expected to require loss-absorbing resources of 22.9% of RWAs by 1 January 2020, rising to 26.5% by 1 January 2022. Total loss absorbing capital, based on RBSs interpretation of the rules and including the benefit of legacy securities, was 30.7% of RWAs at 31 December 2018.
· In 2018, RBSG plc issued approximately £7 billion MREL compliant senior debt bringing the total MREL senior debt issues to approximately £16 billion relative to the end state (1 January 2022) requirements of approximately £24 billion. These funds enabled RBSG plc to invest in £4.8 billion of NatWest Holdings MREL eligible issuance and £5.1 billion NWM plc eligible issuance in December 2018.
· During the year, RBS changed its approach to managing liquidity in preparation for ring-fencing. NatWest Markets left the UK DoLSub and now manages its liquidity on a stand-alone basis.
· The liquidity portfolio increased by £11 billion in 2018 to £198 billion, with primary liquidity increasing by £4 billion to £128 billion. The increase in primary liquidity is driven by increased customer surplus within NatWest Holdings, reduced funding requirement in NatWest Markets and net term issuance, partially offset by settlement of the payment to the US Department of Justice, contribution to the Group pension fund and Term Funding Scheme (TFS) repayment. Increase in secondary liquidity is driven primarily by repayment of TFS, resulting in the return of previously encumbered assets.
· The rise in primary liquidity resulted in higher liquidity coverage ratio (LCR) of 158% (2017 152%). The internal Stressed Outflow coverage ratio decreased to 154% (2017 168%) due to stress methodology changes and higher stressed behavioural outflows over the three month horizon.
· The net stable funding ratio is 141% (2017 139% on estimated comparable basis) above the minimum target of 100%.
· The regulatory agenda continues to rapidly evolve in the UK, Europe and internationally. RBS manages its capital, liquidity and funding to meet both current and future regulatory requirements whilst ensuring that we continue to serve customers well.
Capital and risk management
Capital, liquidity and funding risk continued
Capital management
Capital management ensures that there is sufficient capital and other loss absorbing instruments to operate effectively including meeting minimum regulatory requirements, operating within Board approved risk appetite, maintaining its credit rating and supporting its strategic goals.
Capital management is critical in supporting the businesses and is enacted through an end to end framework across businesses and the legal entities. Capital is managed both on a Group consolidated level, as well as at NatWest Holdings Group, NatWest Markets Plc, NatWest Markets NV, and RBS International levels. In addition, NatWest Holdings banking subsidiaries are also subject to the same principles, processes and management as the Group of which it is a part. Note that although the aforementioned entities are regulated in line with Basel III principles, local implementation of the framework differs across geographies.
Capital planning is integrated into the Groups wider annual budgeting process and is assessed and updated at least monthly. Regular returns are submitted to the PRA which include a two year rolling forward view. Other elements of capital management, including risk appetite and stress testing, are set out on pages 104 and 105.
Produce capital plans
i |
· 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 in the ICAAP for regulatory purposes. · Shorter term forecasts are developed frequently in response to actual performance, changes in internal and external business environment and to manage risks and opportunities. |
Assess capital adequacy
i |
· Capital plans are developed to maintain capital of sufficient quantity and quality to support the Groups business, its subsidiaries and strategic plans over the planning horizon within approved risk appetite, as determined via stress testing, and minimum regulatory requirements. · Capital resources and capital requirements are assessed across a defined planning horizon. · Impact assessment captures input from across the Group including from businesses. |
Inform capital actions |
· Capital planning informs potential capital actions including buy backs, redemptions, dividends and new issuance to external investors or via internal transactions. · Decisions on capital actions will be influenced by strategic and regulatory requirements, risk appetite, costs and prevailing market conditions. · As part of capital planning, RBS will monitor its portfolio of external capital securities and assess the optimal blend and most cost effective means of financing. |
Capital planning is one of the tools that the Group uses to monitor and manage capital risk on a going and gone concern basis, including the risk of excessive leverage.
Liquidity risk management
RBS manages its liquidity risk taking into account regulatory, legal and other constraints to ensure sufficient liquidity is available where required to cover liquidity stresses. The principal levels at which liquidity risk is managed are:
· NatWest Holdings Group
· UK DoLSub
· UBI DAC
· NatWest Markets
· NatWest Markets Securities Inc.
· RBS International
· NWM N.V.
The UK DoLSub is PRA regulated and comprises RBSs four licensed deposit taking UK banks: National Westminster Bank Plc, The Royal Bank of Scotland plc, Coutts & Company and Ulster Bank Limited.
NatWest Markets Plc left the UK DoLSub during 2018 and now manages its own liquidity portfolio, as required by ring-fencing legislation.
RBS categorises its liquidity portfolio, including its locally managed liquidity portfolios, into primary and secondary liquid assets. The size of the liquidity portfolios are determined by referencing RBSs liquidity risk appetite. RBS retains a prudent approach to setting the composition of the liquidity portfolios, which is subject to internal policies applicable to all entities and limits over quality of counterparty, maturity mix and currency mix.
RBS International, NWM N.V. and UBI DAC hold locally managed portfolios that comply with local regulations that may differ from PRA rules.
The liquidity value of the portfolio is determined by taking current market prices and applying a discount or haircut, to give a liquidity value that represents the amount of cash that can be generated by the asset.
Funding risk management
RBS manages funding risk through a comprehensive framework which measures and monitors the funding risk on the balance sheet.
Asset and liability types broadly match. Customer deposits provide more funding than customer loans utilise; repurchase agreements are largely covered by reverse repurchase agreements; derivative assets are broadly netted against derivative liabilities.
Capital and risk management
Capital, liquidity and funding risk continued
Minimum requirements
Capital adequacy ratios
The Group is subject to minimum capital requirements relative to RWAs. The table below summarises the minimum ratios of capital to RWAs that the Group is expected to have to meet once CRR is fully implemented by 1 January 2019. These ratios apply at the consolidated group level. Different minimum capital requirements may apply to individual legal entities or sub-groups.
Minimum requirements |
|
Type |
|
CET1 |
|
Total Tier 1 |
|
Total capital |
System wide |
|
Pillar 1 minimum requirements |
|
4.5% |
|
6.0% |
|
8.0% |
|
|
Capital conservation buffer |
|
2.5% |
|
2.5% |
|
2.5% |
|
|
Countercyclical capital buffer (1) |
|
0.7% |
|
0.7% |
|
0.7% |
|
|
G-SIB buffer (2) |
|
1.0% |
|
1.0% |
|
1.0% |
Bank specific |
|
Pillar 2A (4) |
|
2.0% |
|
2.7% |
|
3.6% |
Total (excluding PRA buffer) (5) |
|
|
|
10.7% |
|
12.9% |
|
15.8% |
Notes:
(1) The countercyclical capital buffer (CCyB) applied to UK designated assets is set by the Financial Policy Committee (FPC). The UK CCyB is currently 1.0% (effective from November 2018). The rate had previously increased from 0.0% to 0.5% (effective June 2018). The Republic of Ireland CCyB is currently 0.0%, the CBI have announced an increase to 1.0% effective July 2019. Foreign exposures may be subject to different CCyB rates depending on the rate set in those jurisdictions . Firm specific CCyB is based on a weighted average at CCyBs applicable to countries in which the Bank has exposures.
(2) Globally systemically important banks (G-SIBs), as designated by the Financial Stability Board (FSB), are subject to an additional capital buffer of between 1% and 3.5%. In November 2018 the FSB announced that RBS is no longer a GSIB. From 1 January 2020, RBS will be released from this global buffer requirement.
(3) The Group will be subject to a systemic risk buffer (SRB) of between 0% and 3%. The SRB will apply from 1 January 2019 and will apply at the ring-fenced bank sub-group level rather than at the consolidated group level. The RFB SRB may require the Group to hold a minimum amount of capital at the consolidated group level beyond the levels set out in the table above.
(4) From 1 January 2015, UK banks have been required to meet at least 56% of its Pillar 2A capital requirement with CET1 capital and with balance with Additional Tier 1 and/or Tier 2 capital. Additional capital requirements under Pillar 2A may be specified by the PRA as a ratio or as an absolute value. The table sets out an implied ratio to cover the full value of Pillar 2A requirements. The PRA has recently determined that the Pillar 2A capital requirement for 2018 remains unchanged.
(5) The Group may be subject to a PRA buffer requirement as set by the PRA. The PRA buffer consists of two components:
- A risk management and governance buffer that is set as a scalar of the Pillar 1 and Pillar 2A requirements. The scalar could range between 10% and 40%.
- A buffer to cover stress risks informed by the results of the BoE concurrent stress testing results.
- The PRA requires that the level of this buffer is not publicly disclosed.
(6) The capital conservation buffer, the countercyclical capital buffer, the G-SIB buffer and systemic risk buffer (where applicable) make up the combined buffer. If the Group fails to meet the combined buffer requirement, it is subject to restrictions on distributions on CET1 instruments, discretionary coupons on AT1 instruments and on payment of variable remuneration or discretionary pension benefits. These restrictions are calculated by reference to the Groups Maximum Distributable Amount (MDA). Where a PRA buffer is applicable, the MDA trigger is below the PRA buffer and MDA restrictions are not automatically triggered if the Group fails to meet its PRA buffer. The MDA is calculated as the amount of interim or year-end profits not yet incorporated into CET1 capital multiplied by a factor ranging from 0 to 0.6 depending on the size of the CET1 shortfall against the combined buffer.
Leverage ratios
The table below summarises the minimum ratios of capital to leverage exposure under the PRA UK leverage framework that the Group must meet. In November 2016, the European Commission published a package of legislative proposals (CRR 2) for the adoption of a legally binding 3% of Tier 1 capital minimum leverage ratio with consideration of a leverage buffer ratio for G-SIBs once a final international agreement had been reached. Different minimum requirements may apply to individual legal entities or sub-groups.
Type |
|
CET1 |
|
Total Tier 1 |
Minimum ratio |
|
2.4375% |
|
3.2500% |
Countercyclical leverage ratio buffer (1) |
|
0.2500% |
|
0.2500% |
Additional leverage ratio buffer |
|
0.3500% |
|
0.3500% |
Total |
|
3.0375% |
|
3.8500% |
Note:
(1) The countercyclical leverage ratio buffer is set at 35% of the Groups CCyB. As noted above th e UK CCyB is currently 1.0% (effective from November 2018). The rate had previously increased from 0.0% to 0.5% (effective June 2018). Foreign exposures may be subject to different CCyB rates depending on the rate set in those jurisdictions . On 3 October 2017 the PRA, via revised policy statement (PS21/17), increased the Tier 1 leverage ratio requirement for UK banks by 25 basis points to 3.25% (CET1 requirement of 2.4375%). The PRA minimum leverage ratio requirement is supplemented with a G-SII additional leverage ratio buffer, currently 0.2625% under transitional arrangements (2017 0.175%) increasing to 0.35% from 1 January 2019.
Liquidity and funding ratios
The table below summarises the minimum requirements for key liquidity and funding metrics, under the relevant legislative framework.
Type |
|
From 1 January 2018 |
|
From 1 January 2019 |
Liquidity coverage ratio (LCR) |
|
100% |
|
100% |
Net stable funding ratio (NSFR) (1) |
|
N/A |
|
N/A |
Note:
(1) In November 2016, the European Commission published its proposal for NSFR rules within the EU as part of its CRR2 package of regulatory reforms. CRR2 NSFR is expected to become the regulatory requirement in future within the EU and the UK. RBS has changed its policy on the NSFR to align with its interpretation of the CRR2 proposals with effect from 1 January 2018.
Capital and risk management
Capital, liquidity and funding risk continued
Measurement
Capital, risk-weighted assets and leverage: Key metrics
The table below sets out the key Capital and Leverage ratios.
|
|
2018 |
|
2017 |
||||
|
|
End-point |
|
PRA transitional |
|
End-point |
|
PRA transitional |
|
|
CRR basis (1) |
|
basis |
|
CRR basis (1) |
|
basis |
Capital |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
CET1 |
|
30.6 |
|
30.6 |
|
32.0 |
|
32.0 |
Tier1 |
|
34.7 |
|
36.2 |
|
36.0 |
|
39.6 |
Total |
|
41.2 |
|
44.2 |
|
42.8 |
|
47.9 |
|
|
|
|
|
|
|
|
|
RWAs |
|
|
|
|
|
|
|
|
Credit risk |
|
137.9 |
|
137.9 |
|
144.7 |
|
144.7 |
Counterparty credit risk |
|
13.6 |
|
13.6 |
|
15.4 |
|
15.4 |
Market risk |
|
14.8 |
|
14.8 |
|
17.0 |
|
17.0 |
Operational risk |
|
22.4 |
|
22.4 |
|
23.8 |
|
23.8 |
Total RWAs |
|
188.7 |
|
188.7 |
|
200.9 |
|
200.9 |
|
|
|
|
|
|
|
|
|
Capital adequacy ratios |
|
% |
|
% |
|
% |
|
% |
CET1 |
|
16.2 |
|
16.2 |
|
15.9 |
|
15.9 |
Tier 1 |
|
18.4 |
|
19.2 |
|
17.9 |
|
19.7 |
Total |
|
21.8 |
|
23.4 |
|
21.3 |
|
23.9 |
|
|
|
|
|
|
|
|
|
Leverage ratios |
|
2018 |
|
2017 |
||||
Tier 1 capital (£bn) |
|
34.7 |
|
36.2 |
|
36.0 |
|
39.6 |
CRR leverage exposure (£bn) |
|
644.5 |
|
644.5 |
|
679.1 |
|
679.1 |
CRR leverage ratio (%) |
|
5.4% |
|
5.6% |
|
5.3% |
|
5.8% |
Average Tier 1 capital (£bn) (2) |
|
35.7 |
|
37.9 |
|
36.4 |
|
40.0 |
Average leverage exposure (£bn) (2) |
|
665.2 |
|
665.2 |
|
692.5 |
|
692.5 |
Average leverage ratio (%) (2) |
|
5.4% |
|
5.7% |
|
5.3% |
|
5.8% |
UK leverage ratio |
|
6.2% |
|
6.5% |
|
6.1% |
|
6.7% |
Notes:
(1) CRR as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for both bases.
(2) Based on the daily average of on-balance sheet items and three month-end average of off-balance sheet items (2017 three month-end average of both on and off-balance sheet items).
Liquidity key metrics
The table below sets out the key liquidity and related metrics monitored by RBS.
2018 |
|
RBS |
|
UK DoLSub |
Liquidity coverage ratio (1) |
|
158% |
|
153% |
Stressed outflow coverage (2) |
|
154% |
|
147% |
Net stable funding ratio (3) |
|
141% |
|
144% |
2017 |
|
|
|
|
Liquidity coverage ratio (1) |
|
152% |
|
|
Stressed outflow coverage (2) |
|
168% |
|
|
Net stable funding ratio (3) |
|
132% |
|
|
Notes:
(1) On 1 October 2015 the LCR became the PRAs primary regulatory liquidity standard. It is a Pillar 1 metric to which the PRA apply Pillar 2 add-ons. The published LCR excludes Pillar 2 add-ons. RBS calculates the LCR using its own interpretations of the EU LCR Delegated Act, which may change over time and may not be fully comparable with those of other financial institutions.
(2) RBSs stressed outflow coverage (SOC) is an internal measure calculated by reference to liquid assets as a percentage of net stressed contractual and behavioural outflows over three months under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both as per ILAAP. This assessment is performed in accordance with PRA guidance.
(3) In November 2016, the European Commission published its proposal for NSFR rules within the EU as part of its CRR2 package of regulatory reforms. CRR2 NSFR is expected to become the regulatory requirement in future within the EU and the UK. RBS has changed its policy on the NSFR to align with its interpretation of the CRR2 proposals with effect from 1 January 2018. The pro forma CRR2 NSFR at 31 December 2017 under CRR2 proposals is estimated to be 139%.
Capital and risk management
Capital, liquidity and funding risk continued
Capital and leverage: Capital resources (audited)
Capital, RWAs and capital adequacy ratios, on the basis of end-point Capital Requirements Regulation (CRR) and transitional rules, calculated in accordance with PRA definitions, are set out below.
|
|
2018 |
|
2017 |
||||
|
|
|
|
PRA |
|
PRA |
|
|
|
|
End-point |
|
transitional |
|
End-point |
|
transitional |
|
|
CRR basis |
|
basis |
|
CRR basis |
|
basis |
|
|
£m |
|
£m |
|
£m |
|
£m |
Shareholders equity (excluding non-controlling interests) |
|
|
|
|
|
|
|
|
Shareholders equity |
|
45,736 |
|
45,736 |
|
48,330 |
|
48,330 |
Preference shares - equity |
|
(496) |
|
(496) |
|
(2,565) |
|
(2,565) |
Other equity instruments |
|
(4,058) |
|
(4,058) |
|
(4,058) |
|
(4,058) |
|
|
41,182 |
|
41,182 |
|
41,707 |
|
41,707 |
|
|
|
|
|
|
|
|
|
Regulatory adjustments and deductions |
|
|
|
|
|
|
|
|
Own credit |
|
(405) |
|
(405) |
|
(90) |
|
(90) |
Defined benefit pension fund adjustment |
|
(394) |
|
(394) |
|
(287) |
|
(287) |
Cash flow hedging reserve |
|
191 |
|
191 |
|
(227) |
|
(227) |
Deferred tax assets |
|
(740) |
|
(740) |
|
(849) |
|
(849) |
Prudential valuation adjustments |
|
(494) |
|
(494) |
|
(496) |
|
(496) |
Goodwill and other intangible assets |
|
(6,616) |
|
(6,616) |
|
(6,543) |
|
(6,543) |
Expected losses less impairments |
|
(654) |
|
(654) |
|
(1,286) |
|
(1,286) |
Foreseeable ordinary and special dividends |
|
(1,326) |
|
(1,326) |
|
|
|
|
Other regulatory adjustments |
|
(105) |
|
(105) |
|
28 |
|
28 |
|
|
(10,543) |
|
(10,543) |
|
(9,750) |
|
(9,750) |
|
|
|
|
|
|
|
|
|
CET1 capital |
|
30,639 |
|
30,639 |
|
31,957 |
|
31,957 |
|
|
|
|
|
|
|
|
|
Additional Tier 1 (AT1) capital |
|
|
|
|
|
|
|
|
Qualifying instruments and related share premium |
|
4,051 |
|
4,051 |
|
4,041 |
|
4,041 |
Qualifying instruments and related share premium subject to phase out |
|
|
|
1,393 |
|
|
|
3,416 |
Qualifying instruments issued by subsidiaries and held by third parties subject to phase out |
|
|
|
140 |
|
|
|
140 |
AT1 capital |
|
4,051 |
|
5,584 |
|
4,041 |
|
7,597 |
|
|
|
|
|
|
|
|
|
Tier 1 capital |
|
34,690 |
|
36,223 |
|
35,998 |
|
39,554 |
|
|
|
|
|
|
|
|
|
Qualifying Tier 2 capital |
|
|
|
|
|
|
|
|
Qualifying instruments and related share premium |
|
6,301 |
|
6,386 |
|
6,396 |
|
6,501 |
Qualifying instruments issued by subsidiaries and held by third parties |
|
182 |
|
1,565 |
|
369 |
|
1,876 |
Tier 2 capital |
|
6,483 |
|
7,951 |
|
6,765 |
|
8,377 |
|
|
|
|
|
|
|
|
|
Total regulatory capital |
|
41,173 |
|
44,174 |
|
42,763 |
|
47,931 |
The table below analyses the movement in end-point CRR CET1, AT1 and Tier 2 capital for the year.
|
|
CET1 |
|
AT1 |
|
Tier 2 |
|
Total |
|
|
£m |
|
£m |
|
£m |
|
£m |
At 1 January 2018 |
|
31,957 |
|
4,041 |
|
6,765 |
|
42,763 |
Profit for the year |
|
1,381 |
|
|
|
|
|
1,381 |
Own credit |
|
(315) |
|
|
|
|
|
(315) |
Share capital and reserve movements in respect of employee share schemes |
|
77 |
|
|
|
|
|
77 |
Ordinary shares issued |
|
135 |
|
|
|
|
|
135 |
Foreign exchange reserve |
|
308 |
|
|
|
|
|
308 |
FVOCI reserves |
|
88 |
|
|
|
|
|
88 |
Goodwill and intangibles deduction |
|
(73) |
|
|
|
|
|
(73) |
Deferred tax assets |
|
109 |
|
|
|
|
|
109 |
Prudential valuation adjustments |
|
2 |
|
|
|
|
|
2 |
Expected loss less impairment |
|
632 |
|
|
|
|
|
632 |
Pension contribution |
|
(1,476) |
|
|
|
|
|
(1,476) |
Capital instruments issued |
|
|
|
|
|
(89) |
|
(89) |
Net dated subordinated debt/grandfathered instruments |
|
|
|
|
|
(537) |
|
(537) |
Foreign exchange movements |
|
(734) |
|
|
|
334 |
|
(400) |
Foreseeable ordinary and special dividends |
|
(1,326) |
|
|
|
|
|
(1,326) |
Other movements |
|
(126) |
|
10 |
|
10 |
|
(106) |
At 31 December 2018 |
|
30,639 |
|
4,051 |
|
6,483 |
|
41,173 |
Capital and risk management
Capital, liquidity and funding risk continued
Leverage exposure
The leverage exposure is based on the CRR Delegated Act.
|
|
End-point basis(1) |
||
|
|
2018 |
|
2017 |
Leverage exposure |
|
£bn |
|
£bn |
Cash and balances at central banks |
|
88.9 |
|
98.3 |
Trading assets |
|
75.1 |
|
86.0 |
Derivatives |
|
133.3 |
|
160.8 |
Loans |
|
318.0 |
|
321.6 |
Other assets |
|
78.9 |
|
71.4 |
|
|
|
|
|
Total assets |
|
694.2 |
|
738.1 |
|
|
|
|
|
Derivatives |
|
|
|
|
- netting and variation margin |
|
(141.3) |
|
(161.7) |
- potential future exposures |
|
42.1 |
|
49.4 |
Securities financing transactions gross up |
|
2.1 |
|
2.3 |
Undrawn commitments (analysis below) |
|
50.3 |
|
53.1 |
Regulatory deductions and other adjustments |
|
(2.9) |
|
(2.1) |
|
|
|
|
|
CRR Leverage exposure |
|
644.5 |
|
679.1 |
Claims on central banks |
|
(85.0) |
|
(92.0) |
UK leverage exposure |
|
559.5 |
|
587.1 |
Notes:
(1) Based on end-point CRR Tier 1 leverage exposure under the CRR Delegated Act.
(2) The UK leverage ratio excludes central bank claims from the leverage exposure where deposits held are denominated in the same currency and of contractual maturity that is equal or longer than that of the central bank claims.
Weighted undrawn commitments
The table below provides a breakdown of weighted undrawn commitments.
|
|
2018 |
|
2017 |
|
|
£bn |
|
£bn |
Unconditionally cancellable credit cards |
|
2.0 |
|
2.1 |
Other unconditionally cancellable items |
|
7.1 |
|
4.7 |
Unconditionally cancellable items (1) |
|
9.1 |
|
6.8 |
|
|
|
|
|
Undrawn commitments <1 year which may not be cancelled |
|
1.7 |
|
1.8 |
Other off-balance sheet items with 20% credit conversion factor (CCF) |
|
0.6 |
|
0.6 |
Items with a 20% CCF |
|
2.3 |
|
2.4 |
|
|
|
|
|
Revolving credit risk facilities |
|
27.1 |
|
27.0 |
Term loans |
|
3.5 |
|
3.6 |
Mortgages |
|
0.2 |
|
|
Other undrawn commitments >1 year which may not be cancelled & off-balance sheet |
|
2.2 |
|
2.1 |
|
|
|
|
|
Items with a 50% CCF |
|
33.0 |
|
32.7 |
Items with a 100% CCF |
|
5.9 |
|
11.2 |
Total |
|
50.3 |
|
53.1 |
Note:
(1) Based on a 10% CCF.
Capital and risk management
Capital, liquidity and funding risk continued
Loss absorbing capital
The following table illustrates the components of estimated loss absorbing capital (LAC) in RBSG plc and operating subsidiaries and includes external issuances only. The table is prepared on a transitional basis, including the benefit of regulatory capital instruments issued from operating companies, to the extent they meet MREL criteria. For further details regarding regulatory requirements in relation to MREL, refer to page 109.
The roll-off profile relating to senior debt and subordinated debt instruments is set out on the next page.
|
|
2018 |
|
2017 |
||||||||||||
|
|
|
|
Balance |
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
Par |
|
sheet |
|
Regulatory |
|
LAC |
|
Par |
|
sheet |
|
Regulatory |
|
LAC |
|
|
value (1) |
|
value |
|
value (2) |
|
value (3) |
|
value (1) |
|
value |
|
value (2) |
|
value (3) |
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
CET1 capital (4) |
|
30.6 |
|
30.6 |
|
30.6 |
|
30.6 |
|
32.0 |
|
32.0 |
|
32.0 |
|
32.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital: end-point CRR compliant AT1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of which: RBSG (holdco) |
|
4.0 |
|
4.0 |
|
4.0 |
|
4.0 |
|
4.0 |
|
4.0 |
|
4.0 |
|
4.0 |
of which: RBSG operating subsidiaries (opcos) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0 |
|
4.0 |
|
4.0 |
|
4.0 |
|
4.0 |
|
4.0 |
|
4.0 |
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital: end-point CRR non compliant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of which: holdco |
|
1.4 |
|
1.6 |
|
1.4 |
|
0.5 |
|
3.5 |
|
3.6 |
|
3.5 |
|
2.6 |
of which: opcos |
|
0.1 |
|
0.1 |
|
0.1 |
|
0.1 |
|
0.1 |
|
0.1 |
|
0.1 |
|
0.1 |
|
|
1.5 |
|
1.7 |
|
1.5 |
|
0.6 |
|
3.6 |
|
3.7 |
|
3.6 |
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 2 capital: end-point CRR compliant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of which: holdco |
|
6.8 |
|
6.7 |
|
6.3 |
|
5.1 |
|
6.5 |
|
6.5 |
|
6.4 |
|
4.9 |
of which: opcos |
|
0.5 |
|
0.5 |
|
0.3 |
|
0.5 |
|
2.3 |
|
2.4 |
|
0.5 |
|
0.5 |
|
|
7.3 |
|
7.2 |
|
6.6 |
|
5.6 |
|
8.8 |
|
8.9 |
|
6.9 |
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 2 capital: end-point CRR non compliant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of which: holdco |
|
0.1 |
|
0.1 |
|
0.1 |
|
0.1 |
|
0.3 |
|
0.4 |
|
0.1 |
|
0.1 |
of which: opcos |
|
1.9 |
|
2.0 |
|
1.4 |
|
1.6 |
|
2.1 |
|
2.3 |
|
1.5 |
|
2.0 |
|
|
2.0 |
|
2.1 |
|
1.5 |
|
1.7 |
|
2.4 |
|
2.7 |
|
1.6 |
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured debt securities issued by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RBSG holdco |
|
16.8 |
|
16.8 |
|
|
|
15.5 |
|
9.3 |
|
9.2 |
|
|
|
8.3 |
RBS opcos |
|
17.1 |
|
16.9 |
|
|
|
|
|
14.4 |
|
14.7 |
|
|
|
|
|
|
33.9 |
|
33.7 |
|
|
|
15.5 |
|
23.7 |
|
23.9 |
|
|
|
8.3 |
Total |
|
79.3 |
|
79.3 |
|
44.2 |
|
58.0 |
|
74.5 |
|
75.2 |
|
48.1 |
|
54.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RWAs |
|
|
|
|
|
|
|
188.7 |
|
|
|
|
|
|
|
200.9 |
CRR leverage exposure |
|
|
|
|
|
|
|
644.5 |
|
|
|
|
|
|
|
679.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LAC as a ratio of RWAs |
|
|
|
|
|
|
|
30.7% |
|
|
|
|
|
|
|
27.1% |
LAC as a ratio of CRR leverage exposure |
|
|
|
|
|
|
|
9.0% |
|
|
|
|
|
|
|
8.0% |
Notes:
(1) Par value reflects the nominal value of securities issued.
(2) Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation, to the extent they meet the MREL criteria.
(3) LAC value reflects RBSs interpretation of the Bank of Englands approach to setting a minimum requirement for own funds and eligible liabilities (MREL), published in June 2018. MREL policy and requirements remain subject to further potential development, as such RBS estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the MREL criteria. Includes Tier 1 and Tier 2 securities prior to incentive to redeem.
(4) Corresponding shareholders equity was £45.7 billion (2017 - £48.3 billion).
(5) Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.
Capital and risk management
Capital, liquidity and funding risk continued
Roll-off profile
The following table illustrates the roll-off profile and weighted average spreads of RBSs major wholesale funding programmes.
|
|
As at and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for year ended |
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt roll-off profile (1) |
|
31 December |
Roll-off profile |
|
|
|||||||||
RBSG |
|
2018 |
|
H1 2019 |
|
H2 2019 |
|
2020 |
|
2021 |
|
2022 & 2023 |
|
2024 & later |
- amount (£m) |
|
16,830 |
|
535 |
|
781 |
|
2 |
|
|
|
7,037 |
|
8,474 |
- weighted average rate spread (bps) |
|
205 |
|
129 |
|
283 |
|
162 |
|
|
|
224 |
|
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NWM Plc |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- amount (£m) |
|
16,523 |
|
3,186 |
|
3,239 |
|
4,704 |
|
2,066 |
|
2,022 |
|
1,306 |
- weighted average rate spread (bps) |
|
102 |
|
13 |
|
177 |
|
123 |
|
91 |
|
80 |
|
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NatWest Plc |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- amount (£m) |
|
329 |
|
253 |
|
77 |
|
|
|
|
|
|
|
|
- weighted average rate spread (bps) |
|
7 |
|
4 |
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitisation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- amount (£m) |
|
1,375 |
|
|
|
|
|
|
|
|
|
|
|
1,375 |
- weighted average rate spread (bps) |
|
418 |
|
|
|
|
|
|
|
|
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- amount (£m) |
|
5,367 |
|
|
|
|
|
3,145 |
|
|
|
|
|
2,222 |
- weighted average rate spread (bps) |
|
122 |
|
|
|
|
|
99 |
|
|
|
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes issued (£m) |
|
40,424 |
|
3,974 |
|
4,097 |
|
7,852 |
|
2,066 |
|
9,059 |
|
13,377 |
Weighted average spread |
|
158 |
|
27 |
|
194 |
|
113 |
|
91 |
|
192 |
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt instruments roll-off profile (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RBSG (£m) |
|
6,815 |
|
1,003 |
|
|
|
|
|
|
|
4,049 |
|
1,763 |
NWM Plc (£m) |
|
658 |
|
|
|
36 |
|
99 |
|
|
|
450 |
|
73 |
NatWest Plc (£m) |
|
1,159 |
|
727 |
|
|
|
|
|
343 |
|
90 |
|
|
NWM N.V. (£m) |
|
668 |
|
147 |
|
65 |
|
11 |
|
|
|
106 |
|
339 |
UBI DAC (£m) |
|
76 |
|
|
|
|
|
|
|
|
|
|
|
76 |
Total (£m) |
|
9,377 |
|
1,876 |
|
101 |
|
110 |
|
343 |
|
4,695 |
|
2,252 |
Notes:
(1) Based on final contractual instrument maturity.
(2) Based on first call date of instrument, however this does not indicate RBSs strategy on capital and funding management. The table above does not include debt accounted Tier 1 instruments although those instruments form part of the total subordinated debt balance.
(3) The weighted average spread reflects the average net funding cost to RBS and is calculated on an indicative basis.
(4) The roll-off table is based on sterling-equivalent balance sheet values.
Risk-weighted assets
The table below analyses the movement in credit risk RWAs on the end-point CRR basis during the year, by key drivers.
|
|
|
|
Counterparty |
|
|
|
|
|
|
|
|
Credit risk |
|
credit risk |
|
Market risk |
|
Operational risk |
|
Total RWAs |
|
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
At 1 January 2018 (1) |
|
144.6 |
|
15.4 |
|
17.0 |
|
23.8 |
|
200.8 |
Foreign exchange movement |
|
1.0 |
|
(0.1) |
|
|
|
|
|
0.9 |
Business movements |
|
(11.3) |
|
(0.9) |
|
(1.4) |
|
(1.4) |
|
(15.0) |
Risk parameter changes (2) |
|
(0.9) |
|
(0.1) |
|
|
|
|
|
(1.0) |
Methodology changes |
|
|
|
|
|
(0.2) |
|
|
|
(0.2) |
Model updates |
|
4.5 |
|
|
|
(0.6) |
|
|
|
3.9 |
Other movements |
|
|
|
(0.7) |
|
|
|
|
|
(0.7) |
At 31 December 2018 |
|
137.9 |
|
13.6 |
|
14.8 |
|
22.4 |
|
188.7 |
Notes:
(1) There was a £0.1 billion reduction in RWAs from 31 December 2017 to 1 January 2018 reflecting the day one impact of the adoption of IFRS 9.
(2) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well as IRB model changes relating to counterparty credit risk in line with EBA Pillar 3 Guidelines.
Capital and risk management
Capital, liquidity and funding risk continued
RWAs by segment
The chart below illustrates the concentration of risk-weighted assets by segment.
The table below analyses the movement in end-point CRR RWAs by segment during the year.
|
|
|
|
Ulster |
|
|
|
|
|
|
|
|
|
Central |
|
|
|
|
|
|
Bank |
|
Commercial |
|
Private |
|
|
|
NatWest |
|
items |
|
|
|
|
UK PBB |
|
RoI |
|
Banking |
|
Banking |
|
RBSI |
|
Markets |
|
& other |
|
Total |
Total RWAs |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
At 1 January 2018 (1) |
|
43.0 |
|
18.0 |
|
71.8 |
|
9.1 |
|
5.1 |
|
52.9 |
|
0.9 |
|
200.8 |
Foreign exchange movement |
|
|
|
0.1 |
|
0.3 |
|
|
|
|
|
0.4 |
|
0.1 |
|
0.9 |
Business movements |
|
(0.3) |
|
(2.2) |
|
(4.9) |
|
0.3 |
|
0.3 |
|
(8.3) |
|
0.1 |
|
(15.0) |
Risk parameter changes (2) |
|
0.8 |
|
(1.2) |
|
(0.5) |
|
|
|
|
|
|
|
(0.1) |
|
(1.0) |
Methodology changes |
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2) |
|
(0.2) |
Model updates |
|
1.7 |
|
|
|
2.9 |
|
|
|
(0.1) |
|
(0.6) |
|
|
|
3.9 |
Other movements |
|
(0.1) |
|
|
|
(2.0) |
|
|
|
1.6 |
|
0.5 |
|
(0.7) |
|
(0.7) |
At 31 December 2018 |
|
45.1 |
|
14.7 |
|
67.6 |
|
9.4 |
|
6.9 |
|
44.9 |
|
0.1 |
|
188.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit risk |
|
35.8 |
|
13.8 |
|
61.0 |
|
8.3 |
|
6.2 |
|
12.7 |
|
0.1 |
|
137.9 |
Counterparty credit risk |
|
|
|
|
|
|
|
|
|
|
|
13.6 |
|
|
|
13.6 |
Market risk |
|
|
|
|
|
|
|
|
|
|
|
14.8 |
|
|
|
14.8 |
Operational risk |
|
9.3 |
|
0.9 |
|
6.6 |
|
1.1 |
|
0.7 |
|
3.8 |
|
|
|
22.4 |
Total RWAs |
|
45.1 |
|
14.7 |
|
67.6 |
|
9.4 |
|
6.9 |
|
44.9 |
|
0.1 |
|
188.7 |
Notes:
(1) There was a £0.1 billion reduction in RWAs from 31 December 2017 to 1 January 2018 reflecting the day one impact of the adoption of IFRS 9.
(2) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well as IRB model changes relating to counterparty credit risk in line with EBA Pillar 3 Guidelines.
Key points
· RWAs decreased by £12.2 billion (excluding the day one impact of the adoption of IFRS 9) in 2018 primarily driven by the legacy business in NatWest Markets, the impact of capital initiatives in Commercial Banking and Ulster Bank RoI asset sale. These reductions were partially offset by increases in UK PBB and RBSI.
· The decrease in NatWest Markets primarily driven by the legacy business, in addition to reductions in the core business.
· The reduction within Commercial Banking was due to active capital management, partially offset by the impact of model updates and underlying business growth.
· Ulster Bank RoI RWAs reduced principally reflecting the impact of a non-performing loan sale and an improvement in credit metrics.
· RWAs in UK PBB increased mainly due to model updates and movements in risk parameters.
· As part of the preparation for ICB ring-fencing, assets have transferred from UK PBB, Commercial Banking and Treasury into RBSI and NatWest Markets which are shown in other movements. Other movements also reflects NWM Securities Inc. being granted the regulatory waiver to use the AIRB approach to calculate its counterparty credit risk capital requirements.
Capital and risk management
Capital, liquidity and funding risk continued
Liquidity portfolio ( audited )
The table below shows the liquidity portfolio by product, liquidity value and carrying value. Liquidity value is lower than carrying value as it is stated after discounts (or haircuts) applied to instruments by the Bank of England and other central banks. Secondary liquidity comprises assets eligible for discount at central Banks but these do not form part of the liquid asset portfolio reported for regulatory LCR purposes or internal stressed outflow coverage purposes.
|
|
Liquidity value |
||||||||
|
|
2018 |
|
2017 |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
RBS (1) |
|
UK DoLSub (2) |
|
NWM Plc |
|
RBS |
|
UK DoLSub (2) |
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Cash and balances at central banks |
|
83,781 |
|
59,745 |
|
11,005 |
|
93,657 |
|
91,377 |
Central and local government bonds |
|
|
|
|
|
|
|
|
|
|
AAA rated governments |
|
8,188 |
|
4,386 |
|
615 |
|
3,944 |
|
2,760 |
AA- to AA+ rated governments and US agencies |
|
35,683 |
|
25,845 |
|
5,256 |
|
26,233 |
|
24,084 |
|
|
43,871 |
|
30,231 |
|
5,871 |
|
30,177 |
|
26,844 |
Primary liquidity |
|
127,652 |
|
89,976 |
|
16,876 |
|
123,834 |
|
118,221 |
Secondary liquidity (3) |
|
70,231 |
|
69,642 |
|
344 |
|
62,555 |
|
62,144 |
Total liquidity value |
|
197,882 |
|
159,618 |
|
17,220 |
|
186,389 |
|
180,365 |
|
|
|
|
|
|
|
|
|
|
|
Total carrying value |
|
225,039 |
|
186,340 |
|
17,388 |
|
209,892 |
|
203,733 |
Notes:
(1) RBS includes UK DoLSub, NatWest Markets plc and other significant operating subsidiaries that hold liquidity portfolios. These include RBS International, NWM N.V. and Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules.
(2) UK DoLSub comprises RBSs four licensed deposit-taking UK banks within the ring-fenced bank: National Westminster Bank Plc The Royal Bank of Scotland plc, Coutts & Co and Ulster Bank Limited. The reduction in the UK DoLSub liquidity balances during 2018 is driven by NatWest Markets and RBS International managing liquidity on a stand-alone basis, with NatWest Markets plc leaving the UK DoLSub during H2 2018 and RBS International building its own liquidity portfolio.
(3) Comprises assets eligible for discounting at the Bank of England and other central banks.
Capital and risk management
Capital, liquidity and funding risk continued
Funding sources ( audited )
The table below shows the carrying values of the principal funding sources based on contractual maturity. Balance sheet captions include balances held at all classifications under IFRS 9/IAS 39 but excludes derivative cash collateral.
|
|
2018 |
|
2017 |
||||||||
|
|
Short-term |
|
Long-term |
|
|
|
Short-term |
|
Long-term |
|
|
|
|
less than |
|
more than |
|
|
|
less than |
|
more than |
|
|
|
|
1 year |
|
1 year |
|
Total |
|
1 year |
|
1 year |
|
Total |
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Personal and corporate deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Personal (1) |
|
178,293 |
|
1,499 |
|
179,792 |
|
173,314 |
|
1,497 |
|
174,811 |
Corporate (2) |
|
131,575 |
|
142 |
|
131,717 |
|
127,708 |
|
861 |
|
128,569 |
|
|
309,868 |
|
1,641 |
|
311,509 |
|
301,022 |
|
2,358 |
|
303,380 |
Financial institutions deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Banks (3) |
|
6,758 |
|
15,865 |
|
22,623 |
|
7,480 |
|
19,595 |
|
27,075 |
Non-bank financial institutions (NBFI) (4) |
|
46,800 |
|
564 |
|
47,364 |
|
52,284 |
|
1,091 |
|
53,375 |
|
|
53,558 |
|
16,429 |
|
69,987 |
|
59,764 |
|
20,686 |
|
80,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities in issue |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial papers (CPs) and certificates of deposits (CDS) |
|
3,157 |
|
|
|
3,157 |
|
4,637 |
|
|
|
4,637 |
Medium-term notes |
|
4,928 |
|
25,596 |
|
30,524 |
|
2,316 |
|
16,902 |
|
19,218 |
Covered bonds |
|
|
|
5,367 |
|
5,367 |
|
987 |
|
5,321 |
|
6,308 |
Securitisations |
|
|
|
1,375 |
|
1,375 |
|
|
|
396 |
|
396 |
|
|
8,085 |
|
32,338 |
|
40,423 |
|
7,940 |
|
22,619 |
|
30,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated liabilities |
|
299 |
|
10,236 |
|
10,535 |
|
2,383 |
|
10,339 |
|
12,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Repos (5) |
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign |
|
405 |
|
|
|
405 |
|
5,243 |
|
|
|
5,243 |
Financial institutions |
|
29,664 |
|
|
|
29,664 |
|
31,891 |
|
|
|
31,891 |
Corporate |
|
291 |
|
|
|
291 |
|
1,287 |
|
|
|
1,287 |
|
|
30,360 |
|
|
|
30,360 |
|
38,421 |
|
|
|
38,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funding |
|
402,170 |
|
60,644 |
|
462,814 |
|
409,530 |
|
56,002 |
|
465,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which: available in resolution (6) |
|
|
|
22,909 |
|
22,909 |
|
|
|
15,840 |
|
15,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
CET 1 capital |
|
|
|
|
|
30,639 |
|
|
|
|
|
31,957 |
CRR Leverage exposure |
|
|
|
|
|
644,498 |
|
|
|
|
|
679,120 |
Funded assets |
|
|
|
|
|
560,886 |
|
|
|
|
|
577,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding coverage of CET 1 capital |
|
|
|
|
|
15 |
|
|
|
|
|
15 |
Funding as a % of leverage exposure |
|
|
|
|
|
72% |
|
|
|
|
|
69% |
Funding as a % of funded assets |
|
|
|
|
|
83% |
|
|
|
|
|
81% |
Funding available in resolution as a % of CET1 capital |
|
|
|
|
|
75% |
|
|
|
|
|
50% |
Funding available in resolution as a % of leverage exposure |
|
|
|
|
|
4% |
|
|
|
|
|
2% |
Notes:
(1) |
Includes £206 million (2017 - £190 million) of DFV deposits included in other financial liabilities on the balance sheet. |
(2) |
Includes £428 million (2017 - £691 million) of HFT deposits included in trading liabilities and nil (2017 - £561 million) of DFV deposits included in other financial liabilities on the balance sheet. |
(3) |
Includes £267 million (2017 - £68 million) of HFT deposits included in trading liabilities on the balance sheet. Includes £14.0 billion (2017 - £19.0 billion) relating to Term Funding Scheme participation and £1.8 billion (2017 - £1.8 billion) relating to RBSs participation in central bank financing operations under the European Central Banks Targeted Long-term refinancing operations. |
(4) |
Includes £1,093 million (2017 - £543 million) of HFT deposits included in trading liabilities and £7 million (2017 - £124 million) of DFV deposits included in other financial liabilities on the balance sheet. |
(5) |
Includes held-for-trading repos of £25,645 million (2017 - £28,363 million) and amortised cost repos of £4,715 million (2017 - £10,058 million). |
(6) |
Eligible liabilities (as defined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies, guidelines, or statements of the Bank of England including the Statement of Policy published by the Bank of England in June 2018. The balance consist of £16 billion (2017 - £8 billion) under debt securities in issue (senior MREL) and £7 billion (2017 - £8 billion) under subordinated liabilities. |
Capital and risk management
Capital, liquidity and funding risk continued
Contractual maturity ( audited )
This table shows the residual maturity of financial instruments, based on contractual date of maturity of RBSs banking activities, including hedging derivatives. Trading activities comprising Mandatory fair value through profit or loss (MFVTPL) assets and held-for-trading (HFT) liabilities have been excluded from the maturity analysis due to their short-term nature and are shown in total in the table below.
|
|
Banking activities |
|
|
|
|
||||||||||||||||
|
|
Less than |
|
|
|
|
|
6 months |
|
|
|
|
|
|
|
More than |
|
|
|
Trading |
|
|
|
|
1 month |
|
1-3 months |
|
3-6 months |
|
- 1 year |
|
Subtotal |
|
1-3 years |
|
3-5 years |
|
5 years |
|
Total |
|
activities |
|
Total |
2018 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Central bank balances |
|
88,897 |
|
|
|
|
|
|
|
88,897 |
|
|
|
|
|
|
|
88,897 |
|
|
|
88,897 |
Trading assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,119 |
|
75,119 |
Derivatives |
|
224 |
|
|
|
|
|
529 |
|
753 |
|
994 |
|
345 |
|
159 |
|
2,251 |
|
131,098 |
|
133,349 |
Settlement balances |
|
2,928 |
|
|
|
|
|
|
|
2,928 |
|
|
|
|
|
|
|
2,928 |
|
|
|
2,928 |
Loans to banks |
|
11,729 |
|
182 |
|
860 |
|
62 |
|
12,833 |
|
105 |
|
9 |
|
|
|
12,947 |
|
|
|
12,947 |
Loans to customers (1) |
|
35,800 |
|
8,350 |
|
8,626 |
|
17,896 |
|
70,672 |
|
53,500 |
|
41,848 |
|
142,387 |
|
308,407 |
|
|
|
308,407 |
Personal |
|
5,733 |
|
2,475 |
|
3,350 |
|
6,233 |
|
17,791 |
|
21,949 |
|
18,658 |
|
120,728 |
|
179,126 |
|
|
|
179,126 |
Corporate |
|
26,260 |
|
4,499 |
|
4,118 |
|
7,868 |
|
42,745 |
|
27,413 |
|
21,159 |
|
20,417 |
|
111,734 |
|
|
|
111,734 |
NBFI |
|
3,807 |
|
1,376 |
|
1,158 |
|
3,795 |
|
10,136 |
|
4,138 |
|
2,031 |
|
1,242 |
|
17,547 |
|
|
|
17,547 |
Other financial assets |
|
1,252 |
|
3,165 |
|
2,473 |
|
4,754 |
|
11,644 |
|
13,904 |
|
10,630 |
|
21,669 |
|
57,847 |
|
1,638 |
|
59,485 |
Total financial assets |
|
140,830 |
|
11,697 |
|
11,959 |
|
23,241 |
|
187,727 |
|
68,503 |
|
52,832 |
|
164,215 |
|
473,277 |
|
207,855 |
|
681,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets |
|
149,774 |
|
12,333 |
|
11,190 |
|
22,517 |
|
195,814 |
|
64,939 |
|
52,064 |
|
168,380 |
|
481,197 |
|
243,867 |
|
725,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B ank deposits |
|
4,585 |
|
1,891 |
|
16 |
|
5 |
|
6,497 |
|
13,799 |
|
2,000 |
|
60 |
|
22,356 |
|
|
|
22,356 |
B ank repos |
|
517 |
|
424 |
|
|
|
|
|
941 |
|
|
|
|
|
|
|
941 |
|
|
|
941 |
C ustomer repos |
|
3,774 |
|
|
|
|
|
|
|
3,774 |
|
|
|
|
|
|
|
3,774 |
|
|
|
3,774 |
C ustomer deposits |
|
337,964 |
|
9,310 |
|
4,803 |
|
3,297 |
|
355,374 |
|
1,718 |
|
11 |
|
37 |
|
357,140 |
|
|
|
357,140 |
P ersonal |
|
170,746 |
|
3,080 |
|
1,835 |
|
2,426 |
|
178,087 |
|
1,499 |
|
|
|
|
|
179,586 |
|
|
|
179,586 |
C orporate |
|
132,994 |
|
3,056 |
|
1,842 |
|
631 |
|
138,523 |
|
83 |
|
1 |
|
35 |
|
138,642 |
|
|
|
138,642 |
N BFI |
|
34,224 |
|
3,174 |
|
1,126 |
|
240 |
|
38,764 |
|
136 |
|
10 |
|
2 |
|
38,912 |
|
|
|
38,912 |
S ettlement balances |
|
3,066 |
|
|
|
|
|
|
|
3,066 |
|
|
|
|
|
|
|
3,066 |
|
|
|
3,066 |
T rading liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,350 |
|
72,350 |
D erivatives |
|
|
|
181 |
|
306 |
|
|
|
487 |
|
1,062 |
|
416 |
|
978 |
|
2,943 |
|
125,954 |
|
128,897 |
O ther financial liabilities |
|
202 |
|
1,386 |
|
2,499 |
|
4,153 |
|
8,240 |
|
9,542 |
|
10,536 |
|
11,414 |
|
39,732 |
|
|
|
39,732 |
C Ps and CDs |
|
173 |
|
1,128 |
|
955 |
|
901 |
|
3,157 |
|
|
|
|
|
|
|
3,157 |
|
|
|
3,157 |
M edium-term notes |
|
7 |
|
225 |
|
1,490 |
|
3,149 |
|
4,871 |
|
6,397 |
|
10,536 |
|
7,817 |
|
29,621 |
|
|
|
29,621 |
C overed bonds |
|
|
|
|
|
|
|
|
|
|
|
3,145 |
|
|
|
2,222 |
|
5,367 |
|
|
|
5,367 |
S ecuritisations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,375 |
|
1,375 |
|
|
|
1,375 |
C ustomer deposits DFV |
|
22 |
|
33 |
|
54 |
|
103 |
|
212 |
|
|
|
|
|
|
|
212 |
|
|
|
212 |
S ubordinated liabilities |
|
16 |
|
39 |
|
164 |
|
80 |
|
299 |
|
450 |
|
4,534 |
|
5,252 |
|
10,535 |
|
|
|
10,535 |
O ther liabilities (2) |
|
2,152 |
|
|
|
|
|
|
|
2,152 |
|
|
|
|
|
|
|
2,152 |
|
|
|
2,152 |
T otal financial liabilities |
|
352,276 |
|
13,231 |
|
7,788 |
|
7,535 |
|
380,830 |
|
26,571 |
|
17,497 |
|
17,741 |
|
442,639 |
|
198,304 |
|
640,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities |
|
360,684 |
|
10,564 |
|
8,155 |
|
6,647 |
|
386,050 |
|
16,882 |
|
23,262 |
|
17,167 |
|
443,361 |
|
232,917 |
|
676,278 |
Note:
(1) |
Loans to customers excludes £3,318 million (2017 - £3,814 million) of Impairment provisions. |
(2) |
Represents notes in circulation. |
Capital and risk management
Capital, liquidity and funding risk continued
Funding gap: maturity and segment analysis
The contractual maturity of balance sheet assets and liabilities reflects the maturity transformation role banks perform, lending long-term but mainly obtaining funding through short-term liabilities such as customer deposits. In practice, the behavioural profiles of many liabilities show greater stability and longer maturity than the contractual maturity. This is particularly true of many types of retail and corporate deposits which, despite being repayable on demand or at short notice, have demonstrated very stable characteristics even in periods of acute stress.
In its analysis to assess and manage asset and liability maturity gaps, RBS determines the expected customer behaviour through qualitative and quantitative techniques. These incorporate observed customer behaviours over long periods of time. This analysis is subject to governance through RBS ALCo Technical committee down to a segment level.
The net behavioural funding surplus/(gap) and contractual maturity analysis is set out below.
|
|
Contractual maturity (1) |
|
Behavioural maturity |
||||||||||||||||||||||||||||
|
|
Loans to customers |
|
Customer accounts |
|
Net surplus/(gap) |
|
Net surplus/(gap) |
||||||||||||||||||||||||
|
|
Less than |
|
1-5 |
|
Greater than |
|
|
|
Less than |
|
1-5 |
|
Greater than |
|
|
|
Less than |
|
1-5 |
|
Greater than |
|
|
|
Less than |
|
1-5 |
|
Greater than |
|
|
|
|
1 year |
|
years |
|
5 years |
|
Total |
|
1 year |
|
years |
|
5 years |
|
Total |
|
1 year |
|
years |
|
5 years |
|
Total |
|
1 year |
|
years |
|
5 years |
|
Total |
2018 |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
|
£bn |
UK PBB |
|
15 |
|
39 |
|
108 |
|
162 |
|
183 |
|
1 |
|
|
|
184 |
|
168 |
|
(38) |
|
(108) |
|
22 |
|
(2) |
|
16 |
|
8 |
|
22 |
UB RoI |
|
2 |
|
6 |
|
11 |
|
19 |
|
18 |
|
|
|
|
|
18 |
|
16 |
|
(6) |
|
(11) |
|
(1) |
|
1 |
|
(3) |
|
1 |
|
(1) |
CB |
|
35 |
|
38 |
|
16 |
|
89 |
|
95 |
|
1 |
|
|
|
96 |
|
60 |
|
(37) |
|
(16) |
|
7 |
|
(1) |
|
20 |
|
(12) |
|
7 |
PB |
|
5 |
|
5 |
|
4 |
|
14 |
|
28 |
|
|
|
|
|
28 |
|
23 |
|
(5) |
|
(4) |
|
14 |
|
2 |
|
1 |
|
11 |
|
14 |
RBSI |
|
6 |
|
5 |
|
3 |
|
14 |
|
28 |
|
|
|
|
|
28 |
|
22 |
|
(5) |
|
(3) |
|
14 |
|
1 |
|
3 |
|
10 |
|
14 |
NWM |
|
17 |
|
3 |
|
1 |
|
21 |
|
13 |
|
|
|
|
|
13 |
|
(4) |
|
(3) |
|
(1) |
|
(8) |
|
(2) |
|
(4) |
|
(2) |
|
(8) |
Centre |
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
1 |
|
1 |
|
|
|
|
|
1 |
|
1 |
|
|
|
|
|
1 |
Total |
|
80 |
|
96 |
|
143 |
|
319 |
|
366 |
|
2 |
|
|
|
368 |
|
286 |
|
(94) |
|
(143) |
|
49 |
|
|
|
33 |
|
16 |
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
83 |
|
93 |
|
147 |
|
323 |
|
363 |
|
4 |
|
|
|
367 |
|
280 |
|
(89) |
|
(147) |
|
44 |
|
(6) |
|
24 |
|
26 |
|
44 |
Note:
(1) |
Loans to customers and customer accounts include trading assets and trading liabilities respectively and excludes reverse repos and repos. |
Key points
· The net customer funding surplus has increased by £5billion during 2018 to £49billion driven by £1billion deposit growth and £4billion lending reduction
· Customer deposits and customer loans are broadly matched from a behavioural perspective.
· The net funding surplus in 2018 is concentrated in the longer dated buckets, reflecting the stable characteristics of customer deposits and lending that is behaviourally shorter dated.
Encumbrance ( audited )
RBS evaluates the extent to which assets can be financed in a secured form (encumbrance), but certain asset types lend themselves more readily to encumbrance. The typical characteristics that support encumbrance are an ability to pledge those assets to another counterparty or entity through operation of law without necessarily requiring prior notification, homogeneity, predictable and measurable cash flows, and a consistent and uniform underwriting and collection process. Retail assets including residential mortgages, credit card receivables and personal loans display many of these features.
RBS categorises its assets into three broad groups, those that are:
Already encumbered and used to support funding currently in place through own-asset securitisations, covered bonds and securities repurchase agreements.
Pre-positioned with central banks as part of funding schemes and those encumbered under such schemes.
Not currently encumbered. In this category, RBS has in place an enablement programme which seeks to identify assets capable of being encumbered and to identify the actions to facilitate such encumbrance whilst not affecting customer relationships or servicing.
Programmes to manage the use of assets to support funding actively are established within UK DoLSub, UBI DAC and NatWest Markets Plc.
Capital and risk management
Capital, liquidity and funding risk continued
Balance sheet encumbrance (audited)
The table shows the retained encumbered assets of the Group. Derivatives and Reverse Repos are disclosed within the credit risk section on pages 159 and 160.
|
|
Encumbered as a result of transactions with |
|
Pre-positioned |
Unencumbered assets not pre-positioned |
|
|
||||||||||
|
|
counterparties other than central banks |
|
& encumbered |
with central banks |
|
|
||||||||||
|
|
Covered |
|
SFT, |
|
|
|
assets held |
|
|
|
|
|
|
|
|
|
|
|
debts & |
|
Derivatives |
|
|
|
at central |
Readily |
|
Other |
|
Cannot |
|
|
|
|
|
|
securitisations |
|
and similar (2) |
|
Total (3) |
|
banks (4) |
available |
|
available |
|
be used |
|
Total |
|
Total |
2018 |
|
(1) £bn |
|
£bn |
|
£bn |
|
£bn |
(5) £bn |
|
(6) £bn |
|
(7) £bn |
|
£bn |
|
£bn |
Cash and balances at central banks |
|
|
|
6.7 |
|
6.7 |
|
|
82.2 |
|
|
|
|
|
82.2 |
|
88.9 |
Trading assets |
|
|
|
49.1 |
|
49.1 |
|
|
|
|
1.3 |
|
24.7 |
|
26.0 |
|
75.1 |
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
133.3 |
|
133.3 |
|
133.3 |
Settlement balances |
|
|
|
|
|
|
|
|
|
|
|
|
2.9 |
|
2.9 |
|
2.9 |
Loans to banks - amortised cost |
|
0.4 |
|
1.0 |
|
1.4 |
|
|
6.6 |
|
0.4 |
|
4.5 |
|
11.5 |
|
12.9 |
Loans to customers - amortised cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- residential mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- UK |
|
7.1 |
|
|
|
7.1 |
|
110.1 |
20.9 |
|
11.5 |
|
|
|
32.4 |
|
149.6 |
- RoI |
|
2.8 |
|
|
|
2.8 |
|
2.1 |
8.9 |
|
|
|
|
|
8.9 |
|
13.8 |
- credit cards |
|
|
|
|
|
|
|
|
3.7 |
|
0.3 |
|
|
|
4.0 |
|
4.0 |
- personal loans |
|
|
|
|
|
|
|
|
5.8 |
|
2.6 |
|
1.8 |
|
10.2 |
|
10.2 |
- other |
|
2.4 |
|
2.4 |
|
4.8 |
|
4.9 |
2.3 |
|
91.0 |
|
24.5 |
|
117.8 |
|
127.5 |
Other financial assets |
|
|
|
10.4 |
|
10.4 |
|
|
46.0 |
|
0.8 |
|
2.3 |
|
49.1 |
|
59.5 |
Intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
6.6 |
|
6.6 |
|
6.6 |
Other assets |
|
|
|
|
|
|
|
|
|
|
2.3 |
|
7.6 |
|
9.9 |
|
9.9 |
Total assets |
|
12.7 |
|
69.6 |
|
82.3 |
|
117.1 |
176.4 |
|
110.2 |
|
208.2 |
|
494.8 |
|
694.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
13.7 |
|
69.9 |
|
83.6 |
|
113.1 |
180.0 |
|
118.6 |
|
242.8 |
|
541.4 |
|
738.1 |
Notes:
(1) |
Covered debts and securitisations include securitisations, conduits, covered bonds and secured notes. |
|
(2) |
Repos and other secured deposits, cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation are included here rather than within those positioned at the central bank as they are part of normal banking operations. Securities financing transactions (SFT) include collateral given to secure derivative liabilities. |
|
(3) |
Total assets encumbered as a result of transactions with counterparties other than central banks are those that have been pledged to provide security and are therefore not available to secure funding or to meet other collateral needs. |
|
(4) |
Assets pre-positioned at the central banks include loans provided as security as part of funding schemes and those encumbered under such schemes. |
|
(5) |
Readily available for encumbrance: including assets that have been enabled for use with central banks but not pre-positioned; cash and high quality debt securities that form part of RBSs liquidity portfolio and unencumbered debt securities. |
|
(6) |
Other assets that are capable of being encumbered are those assets on the balance sheet that are available for funding and collateral purposes but are not readily realisable in their current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and external documentation review and diligence work. |
|
(7) |
Cannot be used includes: |
|
|
(a) |
Derivatives, reverse repurchase agreements and trading related settlement balances. |
|
(b) |
Non-financial assets such as intangibles, prepayments and deferred tax. |
|
(c) |
Loans that cannot be pre-positioned with central banks based on criteria set by the central banks, including those relating to date of origination and level of documentation. |
|
(d) |
Non-recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral. |
(8) |
In accordance with market practice, RBS employs securities recognised on the balance sheet, and securities received under reverse repo transactions as collateral for repos. |
Capital and risk management
Credit risk
Definition
Credit risk is the risk that customers fail to meet their contractual obligation to settle outstanding amounts.
The following disclosures in this section are audited:
· Forbearance.
· Impairment, provisioning and write-offs.
· Transition from IAS 39 to IFRS 9.
· Key elements of IFRS 9 impairment provisions:
o Economic loss drivers (excluding economic parameters).
o IFRS 9 credit risk modelling.
o Significant increase in credit risk.
o Asset lifetimes.
· Measurement uncertainty and ECL sensitivity analysis.
· Banking activities (except PDs and additional Stage 2 and Stage 3 analysis).
· Trading activities.
Sources of risk
The principal sources of credit risk for RBS are lending, off-balance sheet products, derivatives and securities financing, and debt securities. RBS is also exposed to settlement risk through foreign exchange, trade finance and payments activities.
Key developments in 2018
· Asset quality (AQ) remained stable with 61% of the loan exposure and other financial assets rated AQ1-AQ4 (1 January 2018 62%) (equating to an indicative investment rating of BBB- or better).
· New mortgage lending declined in 2018 (£32.8 billion compared to £33.9 billion in 2017). The overall personal portfolio increased by £1.7 billion (principally driven by growth of the mortgage portfolio).
· While overall credit quality remained stable in the Wholesale portfolio, risk appetite was tightened in certain sectors where it was considered appropriate based on leading indicator information.
· IFRS 9 Financial Instruments, which covers credit provisions, was implemented with effect from 1 January 2018. In line with expectations, the new accounting standard resulted in an overall increase in provisions compared with the previous accounting standard IAS 39. Further detail is provided later in the report.
· Impairment provisions totalled £3.4 billion at the year end representing coverage on amortised cost loans excluding balances at central banks of 1.1%.
· The ECL charge for the year was £398 million. This reflected the relatively stable external environment.
Risk governance
Credit risk management activities include:
· Defining credit risk appetite for the management of concentration risk and credit policy to establish the key risks in the process of providing credit and the controls that must be in place to mitigate them.
· Approving credit limits for customers.
· Oversight of the first line of defence to ensure that credit risk remains within the risk appetite set by the Board and that credit policy controls are being operated adequately and effectively.
The Chief Credit Officer, Ring-Fenced Bank, chairs the Wholesale and Retail Credit Risk Committees. These committees provide oversight of the aggregated RBS credit risk profile and review, recommend or approve risk appetite limits (depending on their materiality) within the appetite set by the RBS Board.
The Chief Credit Officer, Ring-Fenced Bank, also chairs provisions committees in PBB and CPB. These committees review and approve individually assessed net expected credit losses (ECLs) above agreed approval thresholds and review and approve the adequacy of all portfolio level ECLs in the businesses. Similar provisions committees operate in Ulster Bank RoI, NatWest Markets and RBSI.
Risk appetite
RBSs approach to lending is governed by comprehensive credit risk appetite frameworks. The frameworks are closely monitored and actions are taken to adapt lending criteria as appropriate. Credit risk appetite aligns to the strategic risk appetite set by the Board, which includes capital adequacy, earnings volatility, funding and liquidity, and stakeholder confidence. The credit risk appetite frameworks have been designed to reflect factors (for example, strategic and emerging risks) that influence the ability to operate within risk appetite. Tools such as stress testing and economic capital are used to measure credit risk volatility and develop links between the credit risk appetite frameworks and risk appetite limits. The frameworks are supported by a suite of transaction acceptance standards that set out the risk parameters within which franchises should operate.
The Personal credit risk appetite framework sets limits that measure and control the quality of both existing and new business for each relevant franchise or business segment. The actual performance of each portfolio is tracked relative to these limits and management action is taken where necessary. The limits apply to a range of credit risk-related measures including expected loss at both portfolio and product level, projected credit default rates across products and the loan-to-value (LTV) ratio of the Personal mortgage portfolios.
For Wholesale, the four formal frameworks used and their basis for classification are detailed in the following table.
Framework |
Basis for classification |
|
Measure |
Other |
|
Single name concentration |
Exposure |
Risk based on loss given default for a given probability of default |
Sector |
Risk based on economic capital and other qualitative factors |
|
Country |
Probability of default of a sovereign and average loss given default |
|
Product and asset class |
Risk based on heightened risk characteristics |
Risk controls
Credit policy standards are in place for both the Wholesale and Personal portfolios. They are expressed as a set of mandatory controls.
Risk identification and measurement
Credit stewardship
Risks are identified through relationship management and/or credit stewardship of portfolios or customers. Credit risk stewardship takes place throughout the customer relationship, beginning with the initial approval. It includes the application of credit assessment standards, credit risk mitigation and collateral, ensuring that credit documentation is complete and appropriate, carrying out regular portfolio or customer reviews and problem debt identification and management.
Capital and risk management
Credit risk continued
Risk models
The output of credit risk models is used in the credit approval process as well as for ongoing assessment, monitoring and reporting to inform risk appetite decisions. These models are divided into different categories. Where the calculation method is on an individual counterparty or account level, the models used will be probability of default (PD), loss given default (LGD), or exposure at default (EAD). The economic capital model is used for credit risk appetite setting.
Asset quality
All credit grades map to an asset quality scale, used for external financial reporting. For Wholesale customers, a master grading scale is used for internal management reporting across portfolios. Accordingly, measures of risk exposure may be aggregated and reported at differing levels of detail depending on stakeholder or business requirements. Performing loans are defined as AQ1-AQ9 (where the PD is less than 100%) and non-performing loans as AQ10 or Stage 3 under IFRS 9 (where the PD is 100%).
Risk mitigation
Risk mitigation techniques, as set out in the appropriate credit policies, are used in the management of credit portfolios across RBS. These techniques mitigate credit concentrations in relation to an individual customer, a borrower group or a collection of related borrowers. Where possible, customer credit balances are netted against obligations. Mitigation tools can include structuring a security interest in a physical or financial asset, the use of credit derivatives including credit default swaps, credit-linked debt instruments and securitisation structures, and the use of guarantees and similar instruments (for example, credit insurance) from related and third parties. Property is used to mitigate credit risk across a number of portfolios, in particular residential mortgage lending and commercial real estate (CRE).
The valuation methodologies for residential mortgage collateral and CRE are detailed below.
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:
The current indexed value of the property is a component of the ECL provisioning calculation.
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 and every three years a formal independent valuation is commissioned.
In the Republic of Ireland, assets are revalued in line with the Central Bank of Ireland threshold requirements, which permits indexation for lower value assets, but demands regular Red Book valuations for distressed higher value assets. The current indexed value of the property is a component of the ECL provisioning calculation.
Counterparty credit risk
In addition to the credit risk management practices set out in this section, RBS mitigates counterparty credit risk arising from both derivatives transactions and repurchase agreements through the use of market standard documentation, enabling netting (for credit risk management only and not for accounting purposes), and through collateralisation.
Amounts owed by RBS to a counterparty are netted against amounts the counterparty owes RBS, in accordance with relevant regulatory and internal policies. Netting is only applied if a netting agreement is in place.
Risk assessment and monitoring
Practices for credit stewardship including credit assessment, approval and monitoring as well as the identification and management of problem debts differ between the Personal and Wholesale portfolios.
Personal
Personal customers are served through a lending approach that entails making a large number of small-value loans. To ensure that these lending decisions are made consistently, RBS analyses internal credit information as well as external data supplied from credit reference agencies (including historical debt servicing behaviour of customers with respect to both RBS and other lenders). RBS then sets its lending rules accordingly, developing different rules for different products.
The process is then largely automated, with each customer receiving an individual credit score that reflects both internal and external behaviours and this score is compared with the lending rules set. For relatively high-value, complex personal loans, including some residential mortgage lending, specialist credit managers make the final lending decisions. These decisions are made within specified delegated authority limits that are issued dependent on the experience of the individual.
Underwriting standards and portfolio performance are monitored on an ongoing basis to ensure they remain adequate in the current market environment and are not weakened materially to sustain growth.
Wholesale
Wholesale customers including corporates, banks and other financial institutions are grouped by industry sectors and geography as well as by product/asset class and are managed on an individual basis. Consideration is given to identifying groups of individual customers with sufficient inter-connectedness to merit assessment as a single risk.
A credit assessment is carried out before credit facilities are made available to customers. The assessment process is dependent on the complexity of the transaction.
For lower risk transactions below specific thresholds, credit decisions can be approved through self-sanctioning within the business. This process is facilitated through an auto-decision making system, which utilises scorecards, strategies and policy rules to provide a recommended credit decision. Such credit decisions must be within the approval authority of the relevant business sanctioner.
Capital and risk management
Credit risk continued
For all other transactions credit is only granted to customers following joint approval by an approver from the business and the credit risk function. The joint business and credit approvers act within a delegated approval authority under the Wholesale Credit Authorities Framework Policy. The level of delegated authority held by approvers is dependent on their experience and expertise with only a small number of senior executives holding the highest approval authority. Both business and credit approvers are accountable for the quality of each decision taken, although the credit risk approver holds ultimate sanctioning authority.
Transaction Acceptance Standards provide detailed transactional lending and risk acceptance metrics and structuring guidance. As such, these standards provide a mechanism to manage risk appetite at the customer/transaction level and are supplementary to the established credit risk appetite.
Credit grades (PD and LGD) are reviewed and if appropriate 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.
A key aspect of credit risk stewardship is ensuring that, when signs of customer stress are identified, appropriate debt management actions are applied.
Problem debt management
Personal
Early problem identification
Pre-emptive triggers are in place to help identify customers that may be at risk of being in financial difficulty. These triggers are both internal, using RBS data and external information from credit reference agencies. Pro-active contact is then made with the customer to establish if they require help with managing their finances. By adopting this approach the aim is to prevent a customers financial position deteriorating which may then require intervention from the Collections and Recoveries teams.
Personal customers experiencing financial difficulty are managed by the Collections team. If the Collections team is unable to provide appropriate support after discussing suitable options with the customer, management of that customer moves to the Recoveries team. If at any point in the Collections and Recoveries process, the customer is identified as being potentially vulnerable, the customer will be separated from the regular process and supported by a specialist team to ensure the customer receives appropriate support for their circumstances.
Collections
When a customer exceeds an agreed limit or misses a regular monthly payment the customer is contacted by RBS and requested to remedy the position. If the situation is not regularised then, where appropriate, the Collections team will become more fully involved and the customer will be supported by skilled debt management staff who endeavour to provide customers with bespoke solutions. Solutions include short-term account restructuring, refinance loans and forbearance which can include interest suspension and breathing space. In the event that an affordable/sustainable agreement with a customer cannot be reached, the debt will transition to the Recoveries team. For provisioning purposes, under IFRS 9, exposure to customers managed by the Collections team is categorised as Stage 2 and subject to a lifetime loss assessment.
In the Republic of Ireland, the relationship may pass to a specialist support team prior to any transfer to recoveries, depending on the outcome of customer financial assessment.
Recoveries
The Recoveries team will issue a notice of intention to default to the customer and, if appropriate, a formal demand, while also registering the account with credit reference agencies where appropriate. Following this, the customers debt may then be placed with a third-party debt collection agency, or alternatively a solicitor, in order to agree an affordable repayment plan with the customer. Exposures subject to formal debt recovery are defaulted and categorised as Stage 3 impaired.
Wholesale
Early problem identification
Each segment and sector has defined early warning indicators to identify customers experiencing financial difficulty, and to increase monitoring if needed. Early warning indicators may be internal, such as a customers bank account activity, or external, such as a publicly-listed customers share price. If early warning indicators show a customer is experiencing potential or actual difficulty, or if relationship managers or credit officers identify other signs of financial difficulty they may decide to classify the customer within the Risk of Credit Loss framework .
Risk of Credit Loss framework
The framework focuses on Wholesale customers whose credit profiles have deteriorated since origination. Expert judgement is applied by experienced credit risk officers to classify cases into categories that reflect progressively deteriorating credit risk to RBS. There are two classifications which apply to non-defaulted customers within the framework Heightened Monitoring and Risk of Credit Loss. For the purposes of provisioning, all exposures subject to the framework are categorised as Stage 2 and subject to a lifetime loss assessment. The framework also applies to those customers that have met RBSs default criteria (AQ10 exposures). Defaulted exposures are categorised as Stage 3 impaired for provisioning purposes.
Heightened Monitoring customers are performing customers that have met certain characteristics , which have led to significant credit deterioration. Collectively, characteristics reflect circumstances that may affect the customers ability to meet repayment obligations. Characteristics include trading issues, covenant breaches, material PD downgrades and past due facilities.
Heightened Monitoring customers require pre-emptive actions ( outside the customers normal trading patterns) to return or maintain their facilities within RBSs current risk appetite prior to maturity.
Risk of Credit Loss customers are performing customers that have met the criteria for Heightened Monitoring and also pose a risk of credit loss to RBS in the next 12 months (should mitigating action not be taken or not be successful).
Once classified as either Heightened Monitoring or Risk of Credit Loss, a number of mandatory actions are taken in accordance with policies. Actions include a review of the customers credit grade , facility and security documentation and the valuation of security. Depending on the severity of the financial difficulty and the size of the exposure, the customer relationship strategy is reassessed by credit officers, by specialist credit risk or relationship management units in the relevant business, or by Restructuring .
Agreed customer management strategies are regularly monitored by both the business and credit teams. The largest Risk of Credit Loss exposures are regularly reviewed by a Risk of Credit Loss Committee. The committee members are experienced credit, business and restructuring specialists. The purpose of the committee is to review and challenge the strategies undertaken for customers that pose the largest risk of credit loss to RBS.
Capital and risk management
Credit risk continued
Appropriate corrective action is taken when circumstances emerge that may affect the customers ability to service its debt (refer to Heightened Monitoring characteristics). Corrective actions may include granting a customer various types of concessions. Any decision to approve a concession will be a function of specific appetite, the credit quality of the customer, the market environment and the loan structure and security. All customers granted forbearance are classified Heightened Monitoring as a minimum.
Other potential outcomes of the relationship review are to: remove the customer from the Risk of Credit Loss framework, offer additional lending and continue monitoring, transfer the relationship to Restructuring if appropriate, or exit the relationship.
The Risk of Credit Loss framework does not apply to problem debt management for Business Banking customers in UK PBB. These customers are, where necessary, managed by specialist problem debt management teams, depending on the size of exposure or by the Business Banking recoveries team where a loan has been impaired.
Restructuring
For the Wholesale problem debt portfolio, customer relationships are mainly managed by the Restructuring team (excluding customers managed by UK PBB). The purpose of Restructuring is to protect RBSs capital. Where practicable, Restructuring does this by working with corporate and commercial customers to support their turnaround and recovery strategies and enable them to return to mainstream banking. Restructuring will always aim to recover capital in a fair and efficient manner.
Specialists in Restructuring work with customers experiencing financial difficulties and showing signs of financial stress. Throughout Restructurings involvement the mainstream relationship manager will remain an integral part of the customer relationship, unless an exit strategy is deemed appropriate. The objective is to find a mutually acceptable solution, including restructuring of existing facilities, repayment or refinancing.
Where a solvent outcome is not possible, insolvency may be considered as a last resort. However, helping the customer return to financial health and restoring a normal banking relationship is always the preferred outcome.
Forbearance ( audited )
Forbearance takes place when a concession is made on the contractual terms of a loan/debt in response to a customers financial difficulties.
The aim of forbearance is to support and restore the customer to financial health while minimising risk. To ensure that forbearance is appropriate for the needs of the customer, minimum standards are applied when assessing, recording, monitoring and reporting forbearance.
A loan/debt may be forborne more than once, generally where a temporary concession has been granted and circumstances warrant another temporary or permanent revision of the loans terms.
In the Personal portfolio, loans are considered forborne until they meet the exit criteria set out by the European Banking Authority. These include being classified as performing for two years since the last forbearance event, making regular repayments and the loan/debt being less than 30 days past due. Exit criteria are not currently applied for Wholesale portfolios.
Types of forbearance
Personal
In the Personal portfolio, forbearance may involve payment concessions and loan rescheduling (including extensions in contractual maturity), capitalisation of arrears and, in the Republic of Ireland only, temporary interest-only conversions. Forbearance is granted principally to customers with mortgages and less frequently to customers with unsecured loans. This includes instances where forbearance may be provided to customers with highly flexible mortgages.
Wholesale
In the Wholesale portfolio, forbearance may involve covenant waivers, amendments to margins, payment concessions and loan rescheduling (including extensions in contractual maturity), capitalisation of arrears, and debt forgiveness or debt-for-equity swaps.
Monitoring of forbearance
Personal
For Personal portfolios, forborne loans are separated and regularly monitored and reported while the forbearance strategy is implemented, until they exit forbearance.
Wholesale
In the Wholesale portfolio, customer PDs and facility LGDs are re-assessed prior to finalising any forbearance arrangement. The ultimate outcome of a forbearance strategy is highly dependent on the cooperation of the borrower and a viable business or repayment outcome. Where forbearance is no longer appropriate, RBS will consider other options such as the enforcement of security, insolvency proceedings or both, although these are options of last resort.
Provisioning for forbearance
Personal
The methodology used for provisioning in respect of Personal forborne loans will differ depending on whether the loans are performing or non-performing and which business is managing them due to local market conditions.
Granting forbearance will only change the arrears status of the loan in specific circumstances, which can include capitalisation of principal and interest in arrears, where the loan may be returned to the performing book if the customer has demonstrated an ability to meet regular payments and is likely to continue to do so.
The loan would remain in forbearance for the defined probation period and be subject to performance criteria. These include making regular repayments and being less than 30 days past due.
Additionally for some forbearance types a loan may be transferred to the performing book if a customer makes payments that reduce loan arrears below 90 days (UK PBB collections function).
For ECL provisioning, all forborne but performing exposures are categorised as Stage 2 and are subject to a lifetime loss provisioning assessment.
For non-performing forborne loans, the Stage 3 loss assessment process is the same as for non-forborne loans with the exception of Ulster Bank RoI, where forborne loans which result in an economic loss form a separate risk pool and are subjected to specific provisioning treatments.
Capital and risk management
Credit risk continued
Wholesale
Provisions for forborne loans are assessed in accordance with normal provisioning policies. The customers financial position and prospects as well as the likely effect of the forbearance, including any concessions granted, and revised PD or LGD gradings are considered in order to establish whether an impairment provision is required.
Wholesale loans granted forbearance are individually assessed in most cases. Performing loans subject to forbearance treatment are categorised as Stage 2 and subject to a lifetime loss assessment.
Forbearance may result in the value of the outstanding debt exceeding the present value of the estimated future cash flows. This difference will lead to a customer being classified as non-performing.
In the case of non-performing forborne loans, an individual loan impairment provision assessment generally takes place prior to forbearance being granted. The amount of the loan impairment provision may change once the terms of the forbearance are known, resulting in an additional provision charge or a release of the provision in the period the forbearance is granted.
The transfer of Wholesale loans from impaired to performing status follows assessment by relationship managers and credit. When no further losses are anticipated and the customer is expected to meet the loans revised terms, any provision is written-off or released and the balance of the loan returned to performing status. This is not dependent on a specified time period and follows the credit risk managers assessment.
Impairment, provisioning and write-offs ( audited )
In the overall assessment of credit risk, impairment, provisioning and write-offs are used as key indicators of credit quality.
The new IFRS 9 impairment provisions accounting standard was implemented with effect from 1 January 2018. Set out below is further detail regarding the impact of the transition from IAS 39 to IFRS 9 impairment provisioning, how key credit risk management activities link to IFRS 9 impairment provisioning and the key policy and modelling decisions that have been made in implementing IFRS 9 (refer also to Accounting policy 14 and Note 14 on the consolidated accounts).
Transition from IAS 39 to IFRS 9 ( audited )
RBS implemented IFRS 9 with effect from 1 January 2018 with no restatement of comparatives other than the Day One impact on implementation reflected in opening equity.
Cash flows and cash losses are unchanged by the change in impairment framework from IAS 39 to IFRS 9. IFRS 9 has changed the basis of loss calculation to expected loss (forward-looking), as opposed to the incurred loss model under IAS 39, which focused only on losses that had already occurred. There are a number of changes as well as judgements involved in measuring ECL. New elements include:
· Move from incurred loss model to expected loss model, including all performing assets having 12-month ECL on origination £513 million increase in provision partly offset by the IAS 39 latent loss provision of £390 million.
· Determination of significant increase in credit risk this moves a subset of assets from a 12-month ECL (Stage 1) to lifetime ECL (Stage 2) when credit risk has significantly increased since origination £356 million increase in provision.
· Change in scope of impaired assets (Stage 3) £73 million increase in provision primarily reflecting assets that have defaulted but with expectation of full recovery under IAS 39.
· Incorporation of forward-looking information, including multiple economic scenarios (MES). MES are assessed in order to identify non-linearity of losses in the portfolio £64 million increase in provision.
Key differences in moving from IAS 39 to IFRS 9 on impairment loss (audited) |
|
Total |
|
£m |
|
31 December 2017 - IAS 39 impairment provision (1) |
|
3,832 |
Removal of IAS 39 latent provision |
|
(390) |
IFRS 9 12 month ECL on Stage 1 and Stage 2 |
|
513 |
Increase in Stage 2 ECL to lifetime (discounted) |
|
356 |
Stage 3 loss estimation (EAD and LGD) |
|
73 |
Impact of MES |
|
64 |
1 January 2018 - IFRS 9 ECL |
|
4,448 |
Note:
(1) |
Includes £3,814 million relating to loans, less £10 million on loans that were carried at fair value and £28 million relating to FVOCI and LAR debt securities. |
Key points
· Overall provisions The overall provisioning requirement under IFRS 9 increased by £616 million a 16% increase relative to IAS 39. The main driver of the increase was the requirement to hold a minimum of 12 months of ECL on performing assets, increasing to lifetime loss for assets that have exhibited a significant increase in credit risk.
· Performing assets Compared with the latent loss provision held under IAS 39 of £390 million, the ECL requirement on performing assets (Stage 1 and Stage 2) more than doubled, increasing by £479 million to £869 million.
· Non-performing assets The IFRS 9 provisioning requirement on non-performing assets in Stage 3 was less affected. The ECL requirement of £3.6 billion was £123 million (4%) higher compared with IAS 39 impaired portfolio provisions of £3.4 billion principally on defaulted assets that did not carry a provision, reflecting the expectation of full recovery under IAS 39.
· UK PBB and Ulster Bank RoI combined The exposures in these two segments are primarily Personal. The ECL provisioning requirement was £2.8 billion, an uplift of £384 million relative to the IAS 39 provision. This was driven by the higher provisioning requirement on performing assets, principally on the UK credit card portfolio where provisions increased by £122 million (31% of the total increase).
· CPB and NatWest Markets The assets are mainly Wholesale. The ECL provisioning requirement was £1.6 billion, an uplift of £222 million relative to IAS 39. The uplift in Stage 3 assets of £83 million was principally driven by assets defaulted but with expectation of full recovery under IAS 39.
Capital and risk management
Credit risk continued
Key elements of IFRS 9 impairment provisions (audited)
IFRS 9 introduced additional complexity into the determination of credit impairment provisioning requirements. However, the building blocks that deliver an ECL calculation already existed in RBS. Existing Basel models were used as a starting point in the construction of IFRS 9 models, which also incorporate term extension and forward-looking information.
Five key areas may materially influence the measurement of credit impairment under IFRS 9 two of these relate to model build and three relate to their application:
· Model build:
o The determination of economic indicators that have most influence on credit loss for each portfolio and the severity of impact (this leverages existing stress testing mechanisms).
o The build of term structures to extend the determination of the risk of loss beyond 12 months that will influence the impact of lifetime loss for assets in Stage 2.
· Model application:
o The assessment of the significant increase in credit risk and the formation of a framework capable of consistent application.
o The determination of asset lifetimes that reflect behavioural characteristics while also representing management actions and processes (using historical data and experience).
o The determination of a base case (or central) economic scenario which has the most material impact (of all forward-looking scenarios) on the measurement of loss (RBS uses consensus forecasts to remove management bias).
Policy elections and simplifications relating to IFRS 9
In addition to the five key areas above, which are relevant from period to period, there was one further significant judgment that was made as a one-off exercise to support the Day One implementation: this was the application of the new IFRS 9 models to the determination of origination date metrics. Since it is not possible to determine the economic forecasts and alternative scenarios going backwards in time it is necessary to use a series of assumptions to enable this process. RBS assumed a flat economic forecast, for all dates historically. There were some other less significant judgments, elections and simplification assumptions that informed the ECL process; these were not seen as critical in determining the appropriate level of impairment but represented choices taken by management across areas of estimation uncertainty. The main examples of these are:
· Models for example in the case of some low default portfolios, Basel parameter estimates have been applied for IFRS 9.
· Non-modelled portfolios certain portfolios have their Basel II capital requirement calculated under the standardised framework for regulatory purposes and do not have systematically modelled PDs, EADs and LGDs. Under IFRS 9, they have bespoke treatments for the identification of significant increase in credit risk and ECL provisions. With respect to the latter, benchmark PDs, EADs and LGDs are used with the benchmarks being reviewed annually for appropriateness. The main non-modelled portfolios are Private Banking, RBSI personal and Lombard.
· Discounting of future losses the ECL calculation is based on expected future cash-flows. These are discounted using the effective interest rate for practical purposes, this is typically applied at a portfolio level rather than being established and operated at an individual asset level.
· Multiple economic scenarios (MES) it is the selection of the central (or base) scenario that is most critical to the ECL calculation, independent of the method used to generate a range of alternative outcomes and their probabilities. Different approaches to model MES around the central scenario have all been found of low significance for the overall ECL impact.
Economic loss drivers
Introduction ( audited )
The portfolio segmentation and selection of economic loss drivers for IFRS 9 follow closely the approach already used in stress testing. To enable robust modelling the forecasting models for each portfolio segment (defined by asset class and where relevant industry sector and region) are based on a selected, small number of economic factors, (typically two to four) that best explain the temporal variations in portfolio loss rates. The process to select economic loss drivers involves empirical analysis and expert judgment.
The most material primary economic loss drivers for Personal portfolios include national GDP, unemployment rate, House Price Index, and base rate for UK and Irish portfolios as relevant. In addition to some of these loss drivers, for Wholesale portfolios, world GDP is a primary loss driver.
Central base case economic scenario ( audited )
The internal base case scenario is the primary forward-looking economic information driving the calculation of ECL The same base case scenario is used for RBSs financial planning. The key elements of the current economic base case, which includes forecasts over a five year forecast horizon, are summarised as follows:
· United Kingdom The central scenario projects modest growth in the UK economy, in line with the consensus outlook. Brexit related uncertainty results in subdued confidence in the near term, placing it in the lower quartile of advanced economies. Business investment is weak at the start of the forecast, improving only gradually. Consumer spending rises steadily as households benefit from falling inflation and rising wage growth, though it is a modest upturn. The central scenario assumes slower job growth than seen in recent years, meaning unemployment edges up from its current historic lows. House price growth slows, extending the current slowdown, before picking up to low single digit growth in later years. Monetary policy follows the market implied path for Bank of England base rate at the time the scenarios were set, therefore it is assumed only two further base rate increases over the next five years.
· Republic of Ireland The economy is expected to continue on its positive trajectory with growth expected to revert closer to long run averages in the medium term. Job growth is expected to moderate with the unemployment remaining around 5%. Meanwhile house price growth continues to moderate to a low single-digit pace. As always, a small open economy such as RoI remains very sensitive to the global economic environment and expectations can change at short notice.
Use of the central base case in Personal
In Personal the internal base case is directly used as the central scenario for the ECL calculations by feeding the forecasted economic loss drivers into the respective PD and LGD models
Use of the central base case in Wholesale
As in Personal the primary input is the central base case scenario but a further adjustment is applied to explicitly enforce a gradual reversion to long run average credit cycle conditions from the first projected year onwards.
This adjustment process leverages the existing Wholesale credit models framework that utilises Credit Cycle Indices (CCI) to measure the point-in-time default rate conditions in a comprehensive set of region/industry groupings. The CCI are constructed by summarising market data based point-in-time PDs for all publicly listed entities in the respective region/industry grouping on a monthly frequency. Positive CCI values indicate better than average conditions, i.e. low default rates and a CCI value of zero indicates default rate conditions at long run average levels. The CCI can be interpreted as an aggregation of the primary economic loss drivers most relevant for each portfolio segment into a single measure. The central base case scenario forecasts provided at the level of economic loss drivers are fed into the ECL calculations by first translating them into corresponding CCI forecasts for each portfolio segment and subsequently applying the aforementioned mean-reversion adjustment.
Capital and risk management
Credit risk continued
Initially at transition, mean reversion was applied from year five onwards. Since H1 2018, mean reversion is applied from the first year onwards. The earlier application of the mean reversion adjustment was introduced to account for two empirical observations. Firstly historic credit loss rates in Wholesale portfolios show pronounced mean reversion behaviour and secondly, the accuracy of economic forecasts tends to drop significantly for horizons beyond one or two years.
Approach for MES ( audited )
The response of portfolio loss rates to changes in economic conditions is typically non-linear and asymmetric. Therefore in order to appropriately take account of the uncertainty in economic forecasts a range of MES are considered when calculating ECL.
· Personal the approach to MES is based on using a set of discrete scenarios. In addition to the central base case a further four bespoke scenarios are taken into account a base case upside and downside and an additional upside and downside. The overall MES ECL is calculated as a probability weighted average across all five scenarios. (Refer to the Probability weightings of scenarios section below).
The ECL impact on the Personal portfolio arising from the application of MES over the single, central base case is relatively low, and following review by the Provisions Committee, overlays were agreed to ensure the expected effect of non-linearity of losses was appropriately recognised. As at 31 December 2018, the value of the overlays was £26 million for UK PBB and £26 million for Ulster Bank RoI.
· Wholesale the approach to MES is a Monte Carlo method that involves simulating a large number of alternative scenarios around the central scenario (adjusted for mean reversion) and averaging the losses and PD values for each individual scenario into unbiased expectations of losses (ECL) and PD.
The simulation of alternative scenarios does not occur on the level of the individual economic loss drivers but operates on the aggregate CCI described earlier. Since the existing Wholesale credit models for PD and LGD were already built within the CCI framework the chosen Monte Carlo method provided a conceptually rigorous but still efficient approach to implement the MES requirement.
The Monte Carlo MES approach increases Wholesale ECL for Stage 1 and Stage 2 by approximately 5% above the single, central scenario outcomes. No additional MES overlay was applied for Wholesale.
For both Personal and Wholesale, the impact from MES is factored in to account level PDs through scalars. These MES-adjusted PDs are used to assess whether a significant increase in credit risk has occurred.
Key economic loss drivers average over the five year planning horizon (2019 to 2023 for 31 December 2018 and 2018 to 2022 for 1 January 2018) in the most relevant planning cycle for the central base case and two upside and downside scenarios used for ECL modelling are set out below.
Economic parameters
|
|
31 December 2018 |
|
1 January 2018 |
||||||||||||||||
UK |
|
Upside 2 |
|
Upside 1 |
|
Base case |
|
Downside 1 |
|
Downside 2 |
|
Upside 2 |
|
Upside 1 |
|
Base case |
|
Downside 1 |
|
Downside 2 |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
GDP - change |
|
2.6 |
|
2.3 |
|
1.7 |
|
1.5 |
|
1.1 |
|
2.2 |
|
1.9 |
|
1.7 |
|
1.5 |
|
1.3 |
Unemployment |
|
3.3 |
|
3.8 |
|
5.0 |
|
5.6 |
|
6.9 |
|
5.0 |
|
5.2 |
|
5.3 |
|
5.4 |
|
5.5 |
House Price Inflation - change |
|
4.3 |
|
3.3 |
|
1.7 |
|
1.1 |
|
(0.5) |
|
4.2 |
|
3.4 |
|
3.1 |
|
2.9 |
|
2.7 |
Bank of England base rate |
|
1.7 |
|
1.3 |
|
1.1 |
|
0.5 |
|
|
|
1.7 |
|
1.2 |
|
0.8 |
|
0.4 |
|
0.2 |
Republic of Ireland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GDP - change |
|
4.3 |
|
3.6 |
|
3.0 |
|
3.1 |
|
2.8 |
|
3.6 |
|
3.2 |
|
2.9 |
|
2.6 |
|
2.3 |
Unemployment |
|
4.2 |
|
4.6 |
|
5.2 |
|
6.0 |
|
6.8 |
|
5.0 |
|
5.4 |
|
5.7 |
|
5.9 |
|
6.1 |
House Price Inflation - change |
|
9.2 |
|
6.8 |
|
4.0 |
|
3.2 |
|
0.8 |
|
6.7 |
|
5.4 |
|
4.4 |
|
3.7 |
|
3.0 |
European Central Bank base rate |
|
1.3 |
|
0.8 |
|
0.3 |
|
|
|
|
|
0.6 |
|
0.4 |
|
0.1 |
|
0.1 |
|
|
World GDP - change |
|
3.6 |
|
3.2 |
|
2.7 |
|
2.5 |
|
2.3 |
|
2.9 |
|
2.7 |
|
2.6 |
|
2.5 |
|
2.4 |
Probability weight |
|
12.8 |
|
17.0 |
|
30.0 |
|
25.6 |
|
14.6 |
|
5.0 |
|
15.0 |
|
60.0 |
|
15.0 |
|
5.0 |
Probability weightings of scenarios (audited)
RBSs approach to IFRS 9 MES in Personal involves selecting a suitable set of discrete scenarios to characterise the distribution of risks in the economic outlook and assigning appropriate probability weights to those scenarios. This has the following basic steps:
· Scenario selection for 2018 two upside and two downside scenarios from Moodys inventory of scenarios were chosen. The aim is to obtain downside scenarios that are not as severe as stress tests, so typically have a severity of around one in ten and one in five of approximate likelihood, along with corresponding upsides.
· Severity assessment having selected the most appropriate scenarios their severity is then assessed based on the behaviour of UK GDP by calculating a variety of measures such as average GDP growth deviation from base and peak to trough falls in GDP. These measures are compared against a set of 1,000 model runs and it is established what percentile in the distribution most closely corresponds with each scenario.
· Probability assignment having established the relevant percentile points, probability weights are assigned to ensure that the scenarios produce an unbiased result. If the severity assessment step shows the scenarios to be broadly symmetric, then this will result in a symmetric probability weighting (same probability weight above and below the base case, as was used in the first half of 2018). However if the downsides are not as extreme as the upsides, then more probability weight is allocated to the downsides to ensure the unbiasedness requirement is satisfied (as was the case in the second half of 2018). This adjustment is made purely to restore unbiasedness, not to address any relative skew in the distribution of risks in the economic outlook, which is dealt with through overlays and covered in the section on UK economic uncertainty.
Capital and risk management
Credit risk continued
UK economic uncertainty (audited)
RBSs 2018 results were prepared during the run up to the UK leaving the European Union, a period of elevated uncertainty over the UK economic outlook. RBSs approach to capturing that elevated uncertainty is to apply an overlay to ECL. Information is used from the earnings volatility scenario that is part of the 2018 planning process and credit risk appetite setting. Key elements include an alternative path the economy could take, being characterised as more severe than the Bank of Englands Disruptive Brexit scenario (ACS) but less severe than the Disorderly Brexit scenario and then applying management judgement as to its likelihood. The RBS-wide overlay of £101 million booked in the third quarter of 2018 remained in place at the year end.
IFRS 9 credit risk modelling (audited)
IFRS 9 introduced lifetime ECL for the measurement of credit impairment. This required the development of new models or the enhancement of existing Basel models. IFRS 9 ECLs are calculated using a combination of:
· Probability of default.
· Loss given default.
· Exposure at default.
In addition, lifetime PDs (as at reporting date and at date of initial recognition) are used in the assessment of a significant increase in credit risk (SICR) criteria.
IFRS 9 ECL model design principles
To meet IFRS 9 requirements for ECL estimation, PD, LGD and EAD used in the calculations must be:
· Unbiased material regulatory conservatism has been removed to produce unbiased model estimates.
· Point-in-time recognise current economic conditions.
· Forward-looking incorporated into PD estimates and, where appropriate, EAD and LGD estimates.
· For the life of the loan all models produce a term structure to allow a lifetime calculation for assets in Stage 2 and Stage 3.
IFRS 9 requires that at each reporting date, an entity shall assess whether the credit risk on an account has increased significantly since initial recognition. Part of this assessment requires a comparison to be made between the current lifetime PD (i.e. the current probability of default over the remaining lifetime) with the equivalent lifetime PD as determined at the date of initial recognition.
For assets originated before IFRS 9 was introduced, comparable lifetime origination PDs did not exist. These have been retrospectively created using the relevant model inputs applicable at initial recognition. Due to data availability, two practical measures have been taken:
· Where model inputs were not available at the point of initial recognition the earliest available robust metrics were used. For instance, since Basel II was introduced in 2008, the earliest available and reliable production Basel PDs range from between December 2007 and April 2008 depending on the portfolio.
· Economic conditions at the date of initial recognition have been assumed to remain constant from that point forward.
PD estimates
Personal models
Personal PD models use an Exogenous, Maturity and Vintage (EMV) approach to model default rates by taking into account EMV effects. The EMV approach separates portfolio default risk trends into three components: vintage effects (quality of new business over time), maturity effects (changes in risk relating to time on book) and exogenous effects (changes in risk relating to changes in macro economic conditions). This EMV methodology has been widely adopted across the industry because it enables forward-looking information to be modelled separately by isolating exogenous or macroeconomic effects. Forward-looking information is incorporated by fitting an appropriate macroeconomic model, such as the relevant stress testing model to the exogenous component and utilising forecasts of the relevant macro-economic factors.
Wholesale models
Wholesale PD models use the existing CCI based point-in-time/through-the-cycle framework to convert one-year regulatory PDs into point-in-time estimates that reflect current economic conditions across a comprehensive set of region/industry segments.
One year point-in-time PDs are then extrapolated to multi-year PDs using a conditional transition matrix approach. The conditional transition matrix approach allows the incorporation of forward-looking information, provided in the form of yearly CCI projections, by adjusting the credit state transition probabilities according to projected, forward-looking changes of credit conditions in each region/industry segment.
This results in forward-looking point-in-time PD term structures for each obligor from which the lifetime PD for a specific exposure can be calculated according to the exposures residual contractual maturity.
LGD estimates
The general approach for the IFRS 9 LGD models was to leverage the Basel LGD models with bespoke IFRS 9 adjustments to ensure unbiased estimates, that is, the use of effective interest rate as the discount rate and the removal of downturn calibration, indirect costs, other conservatism and regulatory floors.
Personal
Forward-looking information has only been incorporated for the secured portfolios, where changes in property prices can be readily accommodated. Analysis has indicated minimal impact for the other Personal portfolios. For UBIDAC, a bespoke IFRS 9 LGD model is used, reflecting its specific regional market.
Wholesale
Current and forward-looking economic information is incorporated into the LGD estimates using the existing CCI framework. For low default portfolios (for example, sovereigns) loss data is too scarce to substantiate estimates that vary with systematic conditions. Consequently, for these portfolios, LGD estimates are assumed to be constant throughout the projection horizon.
EAD estimates
Retail
The IFRS 9 Personal modelling approach for EAD is dependent on product type.
· Revolving products use the existing Basel models as a basis, with appropriate adjustments incorporating a term structure based on time to default.
· Amortising products use an amortising schedule, where a formula is used to calculate the expected balance based on remaining terms and interest rates.
· There is no EAD model for Personal loans. Instead, debt flow (i.e. combined PD x EAD) is directly modelled.
Analysis has indicated that there is minimal impact on EAD arising from changes in the economy for all Retail portfolios except mortgages. Therefore, forward-looking information is only incorporated in the mortgage EAD model (through forecast changes in interest rates).
Wholesale
For Wholesale, EAD values are estimated on the basis of credit conversion factor (CCF) models. RBS have observed historic, realised CCF values to vary over time but there is no clear relationship between the temporal changes in CCF and economic conditions. RBS attribute changes in CCFs to changes in exposure management practices.
Therefore RBS does not include forward-looking economic information into projected CCF/EAD. To ensure CCF values reflect most recent exposure management practices, RBS update CCF coefficients in the model frequently (typically annually) using the last five years of observed data.
Capital and risk management
Credit risk continued
Governance and post model adjustments
The IFRS 9 PD, EAD and LGD models are subject to RBSs model monitoring and governance frameworks, which include approving post model adjustments (PMAs) calculated to incorporate the most recent data available and made on a temporary basis ahead of the underlying model parameter changes being implemented. These PMAs totalled approximately £60 million at the year end primarily in respect of PD under-predictions. In addition, as at 31 December 2018, judgemental ECL overlays on the UK PBB mortgage portfolio totalled £30 million, including £15 million in respect of the repayment risk not captured in the models that a proportion of customers on interest only mortgages will not be able to repay the capital element of their loan at end of term. The overlay for interest only mortgages was based on an analysis of recent experience on customer repayments pre and post end of term, and modelling that forward for maturities over the next ten years. These adjustments were over and above those covering economic uncertainty and non-linearity of losses discussed above and are also subject to over-sight and governance by the Provisions Committee.
Significant increase in credit risk (audited)
Exposures that are considered significantly credit deteriorated since initial recognition are classified in Stage 2 and assessed for lifetime ECL measurement (exposures not considered deteriorated carry a 12 month ECL). RBS has adopted a framework to identify deterioration based primarily on movements in probability of default supported by additional backstops. The principles applied are consistent across RBS and align to credit risk management practices.
The framework comprises the following elements:
· IFRS 9 lifetime PD assessment (the primary driver) on modelled portfolios the assessment is based on the relative deterioration in forward-looking lifetime PD and is assessed monthly. To assess whether credit deterioration has occurred, the residual lifetime PD at balance sheet date (which PD is established at date of initial recognition (DOIR)) is compared to the current PD. If the current lifetime PD exceeds the residual origination PD by more than a threshold amount deterioration is assumed to have occurred and the exposure transferred to Stage 2 for a lifetime loss assessment. For Wholesale, a doubling of PD would indicate a significant increase in credit risk subject to a minimum PD uplift of 0.1%. For Personal portfolios, the criteria varies by risk band, with lower risk exposures needing to deteriorate more than higher risk exposures, as outlined in the following table:
· Qualitative high-risk backstops the PD assessment is complemented with the use of qualitative high-risk backstops to further inform whether significant deterioration in lifetime risk of default has occurred. The qualitative high-risk backstop assessment includes the use of the mandatory 30+ days past due backstop, as prescribed by IFRS 9 guidance, and other features such as forbearance support, Wholesale exposures managed within the Risk of Credit Loss framework, and for Personal, adverse credit bureau results.
· Persistence (Personal and Business Banking only) the persistence rule ensures that accounts which have met the criteria for PD driven deterioration are still considered to be significantly deteriorated for three months thereafter. This additional rule enhances the timeliness of capture in Stage 2. It is a Personal methodology feature and is applied to PD driven deterioration only.
The criteria are based on a significant amount of empirical analysis and seek to meet three key objectives:
· Criteria effectiveness the criteria should be effective in identifying significant credit deterioration and prospective default population.
· Stage 2 stability the criteria should not introduce unnecessary volatility in the Stage 2 population.
· Portfolio analysis the criteria should produce results which are intuitive when reported as part of the wider credit portfolio.
Asset lifetimes (audited)
The choice of initial recognition and asset duration is another critical judgement in determining the quantum of lifetime losses that apply.
· The date of initial recognition reflects the date that a transaction (or account) was first recognised on the balance sheet; the PD recorded at that time provides the baseline used for subsequent determination of SICR.
· For asset duration, the approach applied (in line with IFRS 9 requirements) is:
o Term lending the contractual maturity date, reduced for behavioural trends where appropriate (such as, expected pre-payment and amortisation).
o Revolving facilities for Personal portfolios (except credit cards), asset duration is based on behavioural life and this is normally greater than contractual life (which would typically be overnight). For Wholesale portfolios, asset duration is based on annual counterparty review schedules and will be set to the next review date.
In the case of credit cards, the most significant judgement is to reflect the operational practice of card reissuance and the associated credit assessment as enabling a formal re-origination trigger. As a consequence a capped lifetime approach of up to 36 months is used on credit card balances. If the approach was uncapped the ECL impact is estimated at less than £90 million, compared to £75 million at transition, with the increase primarily reflecting refinements to criteria used to identify a significant increase in credit risk during the year.
The approach reflects RBS practice of a credit-based review of customers prior to credit card issuance and complies with IFRS 9. Benchmarking information indicates that peer UK banks use behavioural approaches in the main for credit card portfolios with average durations between three and ten years. Across Europe durations are shorter and are, in some cases, as low as one year.
Measurement uncertainty and ECL sensitivity analysis (audited)
The recognition and measurement of ECL is highly complex and involves the use of significant judgement and estimation. This includes the formulation and incorporation of multiple forward-looking economic conditions into ECL to meet the measurement objective of IFRS 9. The ECL provision is sensitive to the model inputs and economic assumptions underlying the estimate. Set out below is the impact of some of the material sensitivities considered for 2018 year end reporting. These ECL simulations are separate to the impact arising from MES as described earlier in this disclosure, which impacts are embedded in the reported ECL. Given the current benign environment for impairments the focus is on downsides to the existing ECL provision levels.
The focus of the simulations is on ECL provisioning requirements on performing exposures in Stage 1 and Stage 2. The simulations are run on a stand-alone basis and are independent of each other; the potential ECL uplifts reflect the simulated impact as at the year end balance sheet date. As default is an observed event as at the balance sheet date, Stage 3 provisions are not subject to the same level of measurement uncertainty, and therefore have not been considered in this analysis. The following common scenarios have been applied across the key Personal and Wholesale portfolios:
Capital and risk management
Credit risk continued
· Economic uncertainty simulating the impact arising from the Downside 2 scenario, which is one of the five discrete scenarios used in the methodology for Personal MES. In the simulation RBS have assumed that the economic macro variables associated with the Downside 2 scenario replace the existing base case economic assumptions, giving them a 100% probability weighting for Personal and using the Monte Carlo approach in Wholesale to simulate the impact of MES around the base case economic scenario.
· As reflected in the economic metrics in the following table, the Downside 2 scenario assumes a significant economic downturn in the UK in 2019 running in to 2020 with recovery in the later years. UK GDP turns negative in 2019 compared to the base case assumption of continued growth, unemployment increases and peaks at the end of 2020. House prices fall in both 2019 and 2020 before starting to recover, and interest rates are assumed to be lower for longer. An economic slowdown is also assumed in the Republic of Ireland in 2019 and 2020.
|
|
Base case economic parameters |
|
Downside 2 economic parameters |
||||||||||||||||
|
|
2019 Q4 |
|
2020 Q4 |
|
2021 Q4 |
|
2022 Q4 |
|
2023 Q4 |
|
2019 Q4 |
|
2020 Q4 |
|
2021 Q4 |
|
2022 Q4 |
|
2023 Q4 |
UK |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
GDP (year-on-year) |
|
1.7 |
|
1.5 |
|
1.9 |
|
1.8 |
|
1.8 |
|
(1.2) |
|
1.2 |
|
2.7 |
|
2.0 |
|
2.1 |
Unemployment rate |
|
4.8 |
|
5.0 |
|
5.1 |
|
5.1 |
|
5.1 |
|
6.7 |
|
7.4 |
|
7.3 |
|
6.9 |
|
6.4 |
House Price Inflation (year-on-year) |
|
1.1 |
|
0.7 |
|
1.5 |
|
2.3 |
|
3.4 |
|
(7.0) |
|
(4.5) |
|
1.0 |
|
4.1 |
|
6.3 |
Bank of England rate |
|
1.0 |
|
1.0 |
|
1.3 |
|
1.3 |
|
1.3 |
|
|
|
|
|
|
|
|
|
|
Republic of Ireland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GDP (year-on-year) |
|
4.2 |
|
2.9 |
|
2.8 |
|
2.8 |
|
2.5 |
|
0.7 |
|
3.5 |
|
4.4 |
|
4.5 |
|
4.0 |
Unemployment rate |
|
5.2 |
|
5.1 |
|
5.1 |
|
5.2 |
|
5.3 |
|
7.6 |
|
7.7 |
|
6.5 |
|
5.9 |
|
5.7 |
House Price Inflation (year-on-year) |
|
5.8 |
|
2.7 |
|
3.0 |
|
3.4 |
|
3.5 |
|
(6.7) |
|
(5.4) |
|
2.2 |
|
7.2 |
|
8.8 |
European Central Bank rate |
|
|
|
|
|
0.3 |
|
0.5 |
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
World GDP (year-on-year) |
|
2.7 |
|
2.4 |
|
2.9 |
|
2.7 |
|
2.5 |
|
(0.8) |
|
3.1 |
|
4.4 |
|
3.2 |
|
2.8 |
This scenario has been applied to all modelled portfolios in the analysis below, with the simulation impacting both PDs and LGDs. For some portfolios this creates a significant impact on ECL, for others less so but on balance the impact is deemed reasonable. In this simulation, it is assumed the existing modelled relationship between key economic variables and loss drivers holds good.
· Portfolio risk evaluation of the impact of a movement in one of the key metrics, PD, simulating a relative 25% upward shift in PDs .
These common scenarios were complemented with two specific portfolio simulations:
· Wholesale portfolios simulating the impact of PDs moving upwards to the through-the-cycle (TTC) average from their current point-in-time (PIT) estimate. This simulation looks solely at PD movements, potential movements in LGD rates have not been considered. With the current benign economic conditions wholesale IFRS 9 PIT PDs are significantly lower than TTC PD. This scenario shows the increase to ECL by immediately switching to TTC PDs providing an indication of long run average expectations. IFRS 9 PDs have been used so there remains some differences to Basel TTC PDs where conservative assumptions are required, such as caps or floors, not permitted under the IFRS 9 best estimate approach.
· Mortgages House Price Inflation (HPI) is a key economic driver and RBS have simulated a univariate scenario of a 5% decrease in HPI across the main mortgage portfolios. A univariate analysis using only HPI does not allow for the interdependence across the other key primary loss drivers to be reflected in any ECL estimate. The simulated impact is based on 100% probability weighting to demonstrate the sensitivity of HPI on the central base case. The Downside 2 scenario above has house prices falling by a more material amount, and also includes the impact of PD increases which are not captured under the HPI univariate simulation.
RBSs core criterion to identify a significant increase in credit risk is founded on PD deterioration, as discussed above. Under the simulations, PDs increase and result in exposures moving from Stage 1 to Stage 2 contributing to the ECL uplift.
Capital and risk management
Credit risk continued
Economic sensitivity analysis
|
|
Actual position at 31 December 2018 |
|
Common scenarios (3) |
|
|
|
|
|
|
||||||||||||||
|
|
Stage 1 and Stage 2 (1) |
|
Downside 2 |
|
25% PD increase |
|
Discrete scenarios (3) |
||||||||||||||||
|
|
|
|
of which in |
|
ECL |
|
|
|
|
|
Exposure in |
|
|
|
|
|
Exposure in |
|
HPI (4)/TTC PD (5) |
|
Exposure in |
||
|
|
Exposure |
|
Stage 2 |
|
provision(2) |
|
Potential ECL uplift |
|
Stage 2 |
|
Potential ECL uplift |
|
Stage 2 |
|
potential ECL uplift |
|
Stage 2 |
||||||
|
|
£bn |
|
% |
|
£m |
|
£m |
|
% |
|
% |
|
£m |
|
% |
|
% |
|
£m |
|
% |
|
% |
UK PBB |
|
155.7 |
|
9.1 |
|
589.3 |
|
186.4 |
|
31.6 |
|
11.5 |
|
174.2 |
|
29.6 |
|
10.5 |
|
|
|
|
|
|
Of which: mortgages |
|
137.7 |
|
7.3 |
|
80.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5.5 |
|
6.8 |
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ulster Bank RoI Personal and business banking |
|
12.8 |
|
11.9 |
|
100.0 |
|
60.5 |
|
60.5 |
|
24.5 |
|
24.4 |
|
24.4 |
|
17.3 |
|
|
|
|
|
|
Of which: mortgages |
|
12.2 |
|
11.4 |
|
85.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
6.1 |
|
7.2 |
|
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
261.7 |
|
4.1 |
|
333.5 |
|
79.2 |
|
23.8 |
|
8.1 |
|
86.4 |
|
25.9 |
|
5.2 |
|
106.3 |
|
31.9 |
|
7.5 |
Total |
|
430.2 |
|
6.1 |
|
1,022.8 |
|
326.1 |
|
31.9 |
|
9.8 |
|
285.0 |
|
27.9 |
|
7.5 |
|
|
|
|
|
|
Notes:
(1) Reflects drawn exposure and ECL for all modelled exposure in scope for IFRS 9; in addition to loans this includes bonds, and cash. For Personal exposures, this includes UK PBB including business banking, and also Ulster Bank RoI personal and business banking, the analysis excludes Personal exposures such as Private Banking and RBSI.
(2) The ECL provision includes the ECL overlay taken in quarter 3 to recognise the elevated economic uncertainty in the UK in the period running up to the UK leaving the European Union.
(3) All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL uplift reflecting the simulated impact at the year end balance sheet date.
(4) HPI is applied to the most material mortgage portfolios only, UK PBB and Ulster Bank RoI.
(5) TTC or long-run average PDs are applied to Wholesale portfolios only, excluding business banking exposures in PBB, the impact on which is included within the PBB portfolio for this analysis.
Key points
· In the downside 2 scenario, the ECL requirement overall was simulated to increase by £326 million on stage 1 and 2 exposures from the current level of £1,023 million. The simulation estimates the balance sheet ECL requirement as at 31 December 2018 and assumes that the economic variables associated with the Downside 2 scenario had been RBSs base case economic assumption at that time.
· For the UK PBB franchise, the simulated ECL uplift observed in the Downside 2 scenario was a little higher than under the 25% PD increase, with similar seen in the percentage of exposures simulated to move to Stage 2.
· In the Downside 2 scenario, the Ulster Bank RoI simulated uplift was more marked than on the other simulations reflecting the weight of mortgage assets in their personal lending portfolio, with the adverse movement in house prices increasing the LGD. A similar affect was observed on the UK PBB mortgage portfolio where the mortgage ECL was simulated to increase by just over 50%, and which impact is included within the overall PBB simulated result. The percentage of exposures simulated to move into Stage 2 in the Downside 2 scenario is notably higher than under the 25% PD increase for the Ulster Bank RoI due to the combined impact of the macro-economic variables utilised for the simulation.
· On the univariate HPI scenario, the impact of a 5% fall in house prices was relatively modest, the simulated impact was similar in both UK PBB and Ulster Bank RoI. The relationship between the required ECL and house price movements is expected to be non-linear should the level of house prices reduce by more material amounts, with the rate of loss accelerating when prices fall by more than 10%. Ulster Bank RoI also observed a modest increase in the percentage of exposures in Stage 2 reflecting small PD movements, whereas the UK PBB simulation was restricted to the LGD effect alone hence the percentage of assets in Stage 2 remained unchanged.
· Wholesale, the TTC PD scenario has the most significant impact on ECL highlighting that reverting to long run average PDs is more severe than a 25% increase in PDs or a switch to a downside scenario. Moving to TTC PDs requires an average PD uplift of almost 40%.
· The TTC PD and 25% PD increase scenarios see a significant ECL uplift in the property portfolio which is not observed under the Downside 2 scenario as under the Downside 2 scenario the Wholesale PDs begin to revert to long run averages (mean reversion) after 12 months so do not fully capture the further deterioration expected in the property portfolio in years 2 and 3.
· Downside 2 scenario results in more corporate exposure moving to Stage 2 than either the TTC PD or 25% PD increase scenarios. The impact is more concentrated on shorter dated exposure, reflecting the year 1 downturn, which has less of an impact on total ECL.
Capital and risk management
Credit risk Banking activities
All the disclosures in this section are audited with the exception of Stage 2 analysis and Stage 3 vintage analysis.
Introduction
This section covers the credit risk profile of RBSs banking activities. Exposures and credit risk measures presented as of and for year ended 31 December 2018 and at 1 January 2018 are on an IFRS 9 basis. Exposures and credit risk measures as of and for the year ended 31 December 2017 are on an IAS 39 basis.
Refer to Accounting policy 14 and Note 14 on the consolidated accounts for revisions to policies and critical judgements relating to impairment loss determination.
Banking activities include a small number of portfolios that were carried at fair value, the most significant of which was the lender-option/buyer-option portfolio of £0.5 billion (1 January 2018 £2.0 billion). The decrease in the portfolio reflected disposals and valuation changes.
Financial instruments within the scope of the IFRS 9 ECL framework ( audited )
Refer to Note 11 on the consolidated accounts for balance sheet analysis of financial assets that are classified as amortised cost (AC) or fair value through other comprehensive income (FVOCI), the starting point for IFRS 9 ECL framework assessment.
Financial assets
Of the total third party £471 billion AC and FVOCI balance (gross of ECL), £463.9 billion or 98% was within the scope of the IFRS 9 ECL framework and comprised by stage: Stage 1 £430.1 billion; Stage 2 £26.1 billion and Stage 3 £7.7 billion (1 January 2018 £468.8 billion of which Stage 1 £430.5 billion; Stage 2 £27.0 billion and Stage 3 £11.3 billion). Total assets within IFRS 9 ECL scope comprised the following by balance sheet caption and stage:
· Loans: £319.8 billion of which Stage 1 £286.0 billion; Stage 2 £26.1 billion and Stage 3 £7.7 billion (1 January 2018 £321.3 billion of which Stage 1 £283.3 billion; Stage 2 £26.8 billion and Stage 3 £11.2 billion).
· Other financial assets: £144.1 billion of which Stage 1 £144.1 billion; Stage 2 nil and Stage 3 nil (1 January 2018 £147.4 billion of which Stage 1 £147.2 billion; Stage 2 £0.2 billion and Stage 3 nil).
Those assets outside the IFRS 9 ECL framework were as follows:
· Settlement balances, items in the course of collection, cash balances and other non-credit risk assets of £4.9 billion. These were assessed as having no ECL unless there was evidence that they were credit impaired.
· Equity shares of £0.5 billion as not within the IFRS 9 ECL framework by definition.
· Fair value adjustments on loans hedged by interest rate swaps, where the underlying loan was within the IFRS 9 ECL scope £0.9 billion.
· Group-originated securitisations, where ECL was captured on the underlying loans of £0.4 billion.
· Commercial cards which operate in a similar manner to charge cards, with balances repaid monthly via mandated direct debit with the underlying risk of loss captured within the customers linked current account of £0.4 billion.
Contingent liabilities and commitments
In addition to contingent liabilities and commitments disclosed in Note 27 on the consolidated accounts reputationally-committed limits , are also included in the scope of the IFRS 9 ECL framework. These are offset by £3.6 billion out of scope balances primarily related to facilities that, if drawn, would not be classified as AC or FVOCI, or undrawn limits relating to financial assets exclusions. Total contingent liabilities (including financial guarantees) and commitments within IFRS 9 ECL scope of £168.9 billion comprised Stage 1 £161.4 billion; Stage 2 £6.9 billion and Stage 3 £0.6 billion.
Capital and risk management
Credit risk Banking activities continued
Portfolio summary segment analysis (audited)
The table below summarises gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework.
|
|
|
|
Ulster |
|
Commercial |
|
Private |
|
|
|
|
|
Central items |
|
|
|
|
UK PBB |
|
Bank RoI |
|
Banking |
|
Banking |
|
RBSI |
|
NWM |
|
& other |
|
Total |
31 December 2018 (1) |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Loans - amortised cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stage 1 |
|
146,764 |
|
17,822 |
|
79,106 |
|
13,750 |
|
13,383 |
|
8,196 |
|
6,964 |
|
285,985 |
Stage 2 |
|
14,954 |
|
2,080 |
|
7,809 |
|
531 |
|
289 |
|
407 |
|
27 |
|
26,097 |
Stage 3 |
|
2,220 |
|
2,308 |
|
2,136 |
|
225 |
|
101 |
|
728 |
|
|
|
7,718 |
|
|
163,938 |
|
22,210 |
|
89,051 |
|
14,506 |
|
13,773 |
|
9,331 |
|
6,991 |
|
319,800 |
ECL provisions (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stage 1 |
|
131 |
|
35 |
|
94 |
|
13 |
|
6 |
|
6 |
|
|
|
285 |
Stage 2 |
|
488 |
|
114 |
|
136 |
|
10 |
|
3 |
|
12 |
|
|
|
763 |
Stage 3 |
|
796 |
|
638 |
|
743 |
|
20 |
|
17 |
|
106 |
|
|
|
2,320 |
|
|
1,415 |
|
787 |
|
973 |
|
43 |
|
26 |
|
124 |
|
|
|
3,368 |
ECL provisions coverage (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stage 1 (%) |
|
0.09 |
|
0.20 |
|
0.12 |
|
0.09 |
|
0.04 |
|
0.07 |
|
|
|
0.10 |
Stage 2 (%) |
|
3.26 |
|
5.48 |
|
1.74 |
|
1.88 |
|
1.04 |
|
2.95 |
|
|
|
2.92 |
Stage 3 (%) |
|
35.86 |
|
27.64 |
|
34.78 |
|
8.89 |
|
16.83 |
|
14.56 |
|
|
|
30.06 |
|
|
0.86 |
|
3.54 |
|
1.09 |
|
0.30 |
|
0.19 |
|
1.33 |
|
|
|
1.05 |
Impairment losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECL charge (4) |
|
342 |
|
15 |
|
144 |
|
(6 |
) |
(2 |
) |
(92 |
) |
(3 |
) |
398 |
ECL loss rate - annualised (basis points) |
|
20.86 |
|
6.75 |
|
16.17 |
|
(4.14 |
) |
(1.45 |
) |
(98.60 |
) |
(4.29 |
) |
12.45 |
Amounts written-off |
|
557 |
|
372 |
|
460 |
|
7 |
|
9 |
|
89 |
|
|
|
1,494 |
|
|
|
|
Ulster |
|
Commercial |
|
Private |
|
|
|
|
|
Central
|
|
|
|
Balances at |
|
|
|
|
UK PBB |
|
Bank RoI |
|
Banking |
|
Banking |
|
RBSI |
|
NWM |
|
& other |
|
Total |
|
central banks |
|
Total |
1 January 2018 (1) |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stage 1 |
|
145,650 |
|
19,055 |
|
84,393 |
|
12,755 |
|
7,791 |
|
11,762 |
|
52,523 |
|
333,929 |
|
96,566 |
|
430,495 |
Stage 2 |
|
14,490 |
|
2,347 |
|
8,490 |
|
333 |
|
307 |
|
995 |
|
10 |
|
26,972 |
|
5 |
|
26,977 |
Stage 3 |
|
3,202 |
|
3,669 |
|
3,468 |
|
324 |
|
119 |
|
501 |
|
|
|
11,283 |
|
|
|
11,283 |
|
|
163,342 |
|
25,071 |
|
96,351 |
|
13,412 |
|
8,217 |
|
13,258 |
|
52,533 |
|
372,184 |
|
96,571 |
|
468,755 |
ECL provisions (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stage 1 |
|
144 |
|
29 |
|
58 |
|
18 |
|
5 |
|
2 |
|
5 |
|
261 |
|
1 |
|
262 |
Stage 2 |
|
352 |
|
106 |
|
106 |
|
9 |
|
5 |
|
42 |
|
1 |
|
621 |
|
|
|
621 |
Stage 3 |
|
1,110 |
|
1,054 |
|
1,156 |
|
27 |
|
28 |
|
190 |
|
|
|
3,565 |
|
|
|
3,565 |
|
|
1,606 |
|
1,189 |
|
1,320 |
|
54 |
|
38 |
|
234 |
|
6 |
|
4,447 |
|
1 |
|
4,448 |
ECL provisions coverage (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stage 1 (%) |
|
0.1 |
|
0.1 |
|
0.1 |
|
0.1 |
|
0.1 |
|
|
|
|
|
0.1 |
|
|
|
0.1 |
Stage 2 (%) |
|
2.4 |
|
4.5 |
|
1.2 |
|
2.7 |
|
1.6 |
|
4.2 |
|
10.0 |
|
2.3 |
|
|
|
2.3 |
Stage 3 (%) |
|
34.7 |
|
28.7 |
|
33.3 |
|
8.3 |
|
23.5 |
|
37.9 |
|
|
|
31.6 |
|
|
|
31.6 |
|
|
1.0 |
|
4.7 |
|
1.4 |
|
0.4 |
|
0.5 |
|
1.8 |
|
|
|
1.2 |
|
|
|
0.9 |
Notes:
(1) The segment analysis tables as at 31 December 2018 include all loans amortised cost within the scope of IFRS 9. The comparative tables at 1 January 2018 include all financial assets within the scope of IFRS 9, including debt securities of £50.4 billion, of which £42.7 billion related to debt securities classified as FVOCI. ECL on these debt securities at 1 January 2018 was £28 million, of which £4 million related to those classified as FVOCI.
(2) ECL provisions are provisions on loan assets only. Other ECL provisions not included, relate to cash, debt securities and contingent liabilities, and amount to £28 million, of which £5 million was FVOCI.
(3) ECL provisions coverage is ECL provisions divided by loans amortised cost.
(4) ECL charge balances in the above table include a £3 million charge related to other financial assets, of which a £1 million charge related to assets at FVOCI; and a £31 million release related to contingent liabilities.
The table below shows gross loans (excluding reverse repos) and related credit metrics by segment on an IAS 39 basis.
|
|
|
|
Ulster |
|
Commercial |
|
Private |
|
|
|
|
|
Central items |
|
|
|
|
UK PBB |
|
Bank RoI |
|
Banking |
|
Banking |
|
RBSI |
|
NWM |
|
& other |
|
Total |
2017 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Gross loans to banks |
|
500 |
|
2,447 |
|
697 |
|
109 |
|
29 |
|
7,490 |
|
4,992 |
|
16,264 |
Gross loans to customers |
|
162,957 |
|
20,623 |
|
98,182 |
|
13,514 |
|
8,743 |
|
22,902 |
|
77 |
|
321,633 |
Risk elements in lending (REIL) |
|
1,975 |
|
3,282 |
|
3,196 |
|
95 |
|
103 |
|
253 |
|
|
|
8,904 |
Provisions |
|
1,280 |
|
1,131 |
|
1,162 |
|
32 |
|
35 |
|
174 |
|
|
|
3,814 |
REIL as a % of gross loans to customers |
|
1.2 |
|
15.9 |
|
3.3 |
|
0.7 |
|
1.2 |
|
1.1 |
|
|
|
2.7 |
Provisions as a % of REIL |
|
65 |
|
34 |
|
36 |
|
34 |
|
34 |
|
69 |
|
|
|
43 |
Provisions as a % of gross loans to customers |
|
0.8 |
|
5.5 |
|
1.2 |
|
0.2 |
|
0.4 |
|
0.8 |
|
|
|
1.2 |
Impairment losses/(releases) |
|
235 |
|
60 |
|
362 |
|
6 |
|
3 |
|
(137 |
) |
1 |
|
530 |
Amounts written-off |
|
572 |
|
124 |
|
335 |
|
4 |
|
6 |
|
167 |
|
2 |
|
1,210 |
Capital and risk management
Credit risk Banking activities continued
Portfolio summary segment analysis (audited)
Key points
· Total ECL provisions have reduced since transition as a result of reduced provisioning requirements on Stage 3 impaired assets, which reflected ongoing write-offs and debt sales, partially offset by increases in Stage 1 and Stage 2.
· Stage 3 ECL provisions The reductions in the UK PBB business reflected a combination of business-as-usual write-offs and debt sale activity. For Ulster Bank RoI the significant reduction since transition was due to the sale of legacy impaired mortgage portfolio debt. In Commercial Banking and NatWest Markets the reductions were mainly attributable to write-offs.
· Stage 1 and Stage 2 The increase in Stage 1 and Stage 2 ECL was driven by a number of factors. These included an ECL uplift for economic uncertainty, which affected all businesses, model refinements, asset migrations from Stage 3 impaired and portfolio growth.
· Provision coverage remained stable in the Stage 1 population and increased in Stage 2, with the uplift including the effect of methodology refinements. The Stage 3 provision coverage reduced slightly including the effect of debt sales and underlying business as usual movements.
· The impairment charge for the year was £398 million. This reflected the relatively stable external environment.
· The reduction in the Commercial Banking portfolio reflected the transfer of customers to RBSI and NWM as well as the continued exit from legacy assets.
Segmental loans and impairment metrics (audited)
The table below summarises gross loans and ECL provisions, by days past due, by segment and stage, within the scope of the ECL framework.
|
|
Gross loans |
|
ECL provisions (3) |
||||||||||||||||||||
|
|
|
|
Stage 2 (2) |
|
|
|
|
|
|
|
Stage 2 (2) |
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Stage 1 |
|
<30 DPD |
|
>30 DPD |
|
Total |
|
Stage 3 |
|
Total |
|
Stage 1 |
|
<30 DPD |
|
>30 DPD |
|
Total |
|
Stage 3 |
|
Total |
31 December 2018 (1) |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
UK PBB |
|
146,764 |
|
14,163 |
|
791 |
|
14,954 |
|
2,220 |
|
163,938 |
|
131 |
|
434 |
|
54 |
|
488 |
|
796 |
|
1,415 |
Personal |
|
134,836 |
|
12,520 |
|
725 |
|
13,245 |
|
1,908 |
|
149,989 |
|
101 |
|
382 |
|
48 |
|
430 |
|
597 |
|
1,128 |
Wholesale |
|
11,928 |
|
1,643 |
|
66 |
|
1,709 |
|
312 |
|
13,949 |
|
30 |
|
52 |
|
6 |
|
58 |
|
199 |
|
287 |
Ulster Bank RoI |
|
17,822 |
|
1,968 |
|
112 |
|
2,080 |
|
2,308 |
|
22,210 |
|
35 |
|
103 |
|
11 |
|
114 |
|
638 |
|
787 |
Personal (4) |
|
11,059 |
|
1,353 |
|
105 |
|
1,458 |
|
2,153 |
|
14,670 |
|
13 |
|
73 |
|
11 |
|
84 |
|
530 |
|
627 |
Wholesale |
|
6,763 |
|
615 |
|
7 |
|
622 |
|
155 |
|
7,540 |
|
22 |
|
30 |
|
|
|
30 |
|
108 |
|
160 |
Commercial Banking |
|
79,106 |
|
7,445 |
|
364 |
|
7,809 |
|
2,136 |
|
89,051 |
|
94 |
|
134 |
|
2 |
|
136 |
|
743 |
|
973 |
Private Banking |
|
13,750 |
|
380 |
|
151 |
|
531 |
|
225 |
|
14,506 |
|
13 |
|
5 |
|
5 |
|
10 |
|
20 |
|
43 |
Personal |
|
10,803 |
|
183 |
|
25 |
|
208 |
|
203 |
|
11,214 |
|
5 |
|
3 |
|
|
|
3 |
|
17 |
|
25 |
Wholesale |
|
2,947 |
|
197 |
|
126 |
|
323 |
|
22 |
|
3,292 |
|
8 |
|
2 |
|
5 |
|
7 |
|
3 |
|
18 |
RBS International |
|
13,383 |
|
274 |
|
15 |
|
289 |
|
101 |
|
13,773 |
|
6 |
|
3 |
|
|
|
3 |
|
17 |
|
26 |
NatWest Markets |
|
8,196 |
|
407 |
|
|
|
407 |
|
728 |
|
9,331 |
|
6 |
|
12 |
|
|
|
12 |
|
106 |
|
124 |
Central items & other |
|
6,964 |
|
27 |
|
|
|
27 |
|
|
|
6,991 |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans excluding balances at central banks |
|
285,985 |
|
24,664 |
|
1,433 |
|
26,097 |
|
7,718 |
|
319,800 |
|
285 |
|
691 |
|
72 |
|
763 |
|
2,320 |
|
3,368 |
Personal |
|
159,553 |
|
14,106 |
|
865 |
|
14,971 |
|
4,351 |
|
178,875 |
|
122 |
|
458 |
|
59 |
|
517 |
|
1,158 |
|
1,797 |
Wholesale |
|
126,432 |
|
10,558 |
|
568 |
|
11,126 |
|
3,367 |
|
140,925 |
|
163 |
|
233 |
|
13 |
|
246 |
|
1,162 |
|
1,571 |
Balances at central banks |
|
87,181 |
|
|
|
|
|
|
|
|
|
87,181 |
|
2 |
|
|
|
|
|
|
|
|
|
2 |
Total loans |
|
373,166 |
|
24,664 |
|
1,433 |
|
26,097 |
|
7,718 |
|
406,981 |
|
287 |
|
691 |
|
72 |
|
763 |
|
2,320 |
|
3,370 |
|
|
Financial assets |
|
ECL provisions (3) |
||||||||||||
|
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
1 January 2018 (1) |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
UK PBB |
|
145,650 |
|
14,490 |
|
3,202 |
|
163,342 |
|
144 |
|
352 |
|
1,110 |
|
1,606 |
Ulster Bank RoI |
|
19,055 |
|
2,347 |
|
3,669 |
|
25,071 |
|
29 |
|
106 |
|
1,054 |
|
1,189 |
Commercial Banking |
|
84,393 |
|
8,490 |
|
3,468 |
|
96,351 |
|
58 |
|
106 |
|
1,156 |
|
1,320 |
Private Banking |
|
12,755 |
|
333 |
|
324 |
|
13,412 |
|
18 |
|
9 |
|
27 |
|
54 |
RBS International |
|
7,791 |
|
307 |
|
119 |
|
8,217 |
|
5 |
|
5 |
|
28 |
|
38 |
NatWest Markets |
|
11,762 |
|
995 |
|
501 |
|
13,258 |
|
2 |
|
42 |
|
190 |
|
234 |
Central items & other |
|
52,523 |
|
10 |
|
|
|
52,533 |
|
5 |
|
1 |
|
|
|
6 |
Total financial assets excluding balances at central banks |
|
333,929 |
|
26,972 |
|
11,283 |
|
372,184 |
|
261 |
|
621 |
|
3,565 |
|
4,447 |
Balances at central banks |
|
96,566 |
|
5 |
|
|
|
96,571 |
|
1 |
|
|
|
|
|
1 |
Total financial assets |
|
430,495 |
|
26,977 |
|
11,283 |
|
468,755 |
|
262 |
|
621 |
|
3,565 |
|
4,448 |
For the notes to this table refer to the following page.
Capital and risk management
Credit risk Banking activities continued
Segmental loans and impairment metrics (audited)
The table below summarises gross loans and ECL provisions coverage, by days past due, by segment and stage, within the scope of the ECL framework.
|
|
ECL provisions coverage |
|
ECL |
||||||||||||||
|
|
|
Stage 2 (2,3) |
|
|
|
|
|
Total |
|
|
|
Amounts |
|||||
|
|
Stage 1 |
|
<30 DPD |
|
>30 DPD |
|
Total |
|
Stage 3 |
|
Total |
|
charge |
|
Loss rate |
|
written-off |
31 December 2018 (1) |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
£m |
|
basis points |
|
£m |
UK PBB |
|
0.09 |
|
3.06 |
|
6.83 |
|
3.26 |
|
35.86 |
|
0.86 |
|
342 |
|
20.9 |
|
557 |
Personal |
|
0.07 |
|
3.05 |
|
6.62 |
|
3.25 |
|
31.29 |
|
0.75 |
|
338 |
|
22.5 |
|
420 |
Wholesale |
|
0.25 |
|
3.16 |
|
9.09 |
|
3.39 |
|
63.78 |
|
2.06 |
|
4 |
|
2.9 |
|
137 |
Ulster Bank RoI |
|
0.20 |
|
5.23 |
|
9.82 |
|
5.48 |
|
27.64 |
|
3.54 |
|
15 |
|
6.8 |
|
372 |
Personal (4) |
|
0.12 |
|
5.40 |
|
10.48 |
|
5.76 |
|
24.62 |
|
4.27 |
|
20 |
|
13.6 |
|
343 |
Wholesale |
|
0.33 |
|
4.88 |
|
|
|
4.82 |
|
69.68 |
|
2.12 |
|
(5 |
) |
(6.6 |
) |
29 |
Commercial Banking |
|
0.12 |
|
1.80 |
|
0.55 |
|
1.74 |
|
34.78 |
|
1.09 |
|
144 |
|
16.2 |
|
460 |
Private Banking |
|
0.09 |
|
1.32 |
|
3.31 |
|
1.88 |
|
8.89 |
|
0.30 |
|
(6 |
) |
(4.1 |
) |
7 |
Personal |
|
0.05 |
|
1.64 |
|
|
|
1.44 |
|
8.37 |
|
0.22 |
|
(6 |
) |
(5.4 |
) |
5 |
Wholesale |
|
0.27 |
|
1.02 |
|
3.97 |
|
2.17 |
|
13.64 |
|
0.55 |
|
|
|
|
|
2 |
RBS International |
|
0.04 |
|
1.09 |
|
|
|
1.04 |
|
16.83 |
|
0.19 |
|
(2 |
) |
(1.5 |
) |
9 |
NatWest Markets |
|
0.07 |
|
2.95 |
|
|
|
2.95 |
|
14.56 |
|
1.33 |
|
(92 |
) |
(98.6 |
) |
89 |
Central items and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
(4.3 |
) |
|
Total loans excluding balances at central banks |
|
0.10 |
|
2.80 |
|
5.02 |
|
2.92 |
|
30.06 |
|
1.05 |
|
398 |
|
12.5 |
|
1,494 |
Personal |
|
0.08 |
|
3.25 |
|
6.82 |
|
3.45 |
|
26.61 |
|
1.00 |
|
354 |
|
19.8 |
|
776 |
Wholesale |
|
0.13 |
|
2.21 |
|
2.29 |
|
2.21 |
|
34.51 |
|
1.11 |
|
44 |
|
3.1 |
|
718 |
Total loans |
|
0.08 |
|
2.80 |
|
5.02 |
|
2.92 |
|
30.06 |
|
0.83 |
|
398 |
|
9.8 |
|
1,494 |
|
|
ECL provisions coverage |
||||||||||
|
|
|
Stage 2 (2,3) |
|
|
|
|
|||||
|
|
Stage 1 |
|
<30 DPD |
|
>30 DPD |
|
Total |
|
Stage 3 |
|
Total |
1 January 2018 (1) |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
Personal |
|
0.09 |
|
2.54 |
|
4.80 |
|
2.63 |
|
28.46 |
|
1.31 |
- UK mortgages |
|
0.01 |
|
0.56 |
|
1.62 |
|
0.61 |
|
11.23 |
|
0.18 |
- RoI mortgages |
|
0.07 |
|
4.44 |
|
7.09 |
|
4.67 |
|
26.02 |
|
6.18 |
- Credit cards |
|
1.71 |
|
9.11 |
|
27.27 |
|
9.31 |
|
53.57 |
|
5.23 |
- Other |
|
0.80 |
|
7.99 |
|
19.64 |
|
8.30 |
|
59.44 |
|
8.03 |
Wholesale |
|
0.07 |
|
1.88 |
|
2.07 |
|
1.88 |
|
35.51 |
|
1.09 |
- Property |
|
0.07 |
|
1.13 |
|
1.15 |
|
1.13 |
|
32.43 |
|
1.81 |
- Corporate |
|
0.14 |
|
1.90 |
|
2.86 |
|
1.92 |
|
36.50 |
|
1.80 |
- Financial institutions |
|
0.03 |
|
3.57 |
|
|
|
3.38 |
|
65.71 |
|
0.34 |
- Other |
|
0.01 |
|
0.85 |
|
|
|
0.85 |
|
|
|
0.01 |
Total financial assets |
|
0.06 |
|
2.25 |
|
3.75 |
|
2.30 |
|
31.60 |
|
0.95 |
Notes:
(1) The segment analysis tables at 31 December 2018 include all loans amortised cost within the scope of IFRS 9. The comparative tables at 1 January 2018 include all financial assets within the scope of IFRS 9, including debt securities of £50.4 billion, of which £42.7 billion related to debt securities classified as FVOCI. ECL on these debt securities at 1 January 2018 was £28 million, of which £4 million related to those classified as FVOCI.
(2) 30 DPD 30 days past due, the mandatory 30 days past due backstop is prescribed by IFRS 9 for significant increase in credit risk.
(3) ECL provisions on contingent liabilities and commitments are included within the Financial assets section so as not to distort ECL coverage ratios.
(4) 31 December 2018, £3 million of the write offs related to business banking portfolio in Ulster Bank RoI.
Key points
· The UK PBB and Ulster Bank RoI franchises accounted for the vast majority of Personal provisions. In Ulster Bank RoI, Personal provisions were primarily driven by Stage 3 impairments on the legacy mortgage book.
· The Commercial Banking business accounted for the majority of Wholesale exposures. Wholesale provisions in UK PBB reflected exposures to business banking customers and also the commercial businesses in RBS England & Wales/NatWest Scotland.
· On performing exposures (Stage 1 and Stage 2), materially higher ECL provision was held in credit deteriorated Stage 2 exposures than in Stage 1, in line with expectations. This was also reflected in provision coverage levels.
· Also in line with expectations, the majority of Stage 2 exposures were less than 30 days past due, since PD deterioration is the primary driver of credit deterioration.
· The differing cover rates between the Personal and Wholesale portfolios and across the business largely reflected differences in asset mix, including security cover, and the differing impacts of external environment events.
Capital and risk management
Credit risk Banking activities continued
Portfolio summary sector analysis ( audited )
The table below summarises financial assets and off-balance sheet exposures gross of ECL and related ECL provisions, impairment and past due by sector, asset quality and geographical region based on the country of operation of the customer.
|
|
Personal |
|
Wholesale |
|
Total |
||||||||||||||
|
|
|
|
Credit |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages (1) |
|
cards |
|
personal |
|
Total |
|
Property |
|
Corporate |
|
FI |
|
Sovereign |
|
Total |
|
|
31 December 2018 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Loans by geography |
|
165,081 |
|
4,216 |
|
9,578 |
|
178,875 |
|
36,707 |
|
72,240 |
|
25,011 |
|
6,967 |
|
140,925 |
|
319,800 |
- UK |
|
150,233 |
|
4,112 |
|
9,117 |
|
163,462 |
|
33,855 |
|
60,657 |
|
11,611 |
|
3,089 |
|
109,212 |
|
272,674 |
- RoI |
|
14,350 |
|
104 |
|
233 |
|
14,687 |
|
1,114 |
|
3,733 |
|
392 |
|
2,497 |
|
7,736 |
|
22,423 |
- Other Europe |
|
102 |
|
|
|
67 |
|
169 |
|
1,395 |
|
3,760 |
|
5,903 |
|
1,088 |
|
12,146 |
|
12,315 |
- RoW |
|
396 |
|
|
|
161 |
|
557 |
|
343 |
|
4,090 |
|
7,105 |
|
293 |
|
11,831 |
|
12,388 |
Loans by asset quality (2,3) |
|
165,081 |
|
4,216 |
|
9,578 |
|
178,875 |
|
36,707 |
|
72,240 |
|
25,011 |
|
6,967 |
|
140,925 |
|
319,800 |
- AQ1-AQ4 |
|
104,989 |
|
35 |
|
1,040 |
|
106,064 |
|
16,133 |
|
22,587 |
|
22,397 |
|
6,802 |
|
67,919 |
|
173,983 |
- AQ5-AQ8 |
|
55,139 |
|
3,990 |
|
7,736 |
|
66,865 |
|
18,815 |
|
47,651 |
|
2,574 |
|
161 |
|
69,201 |
|
136,066 |
- AQ9 |
|
1,287 |
|
69 |
|
239 |
|
1,595 |
|
74 |
|
359 |
|
5 |
|
|
|
438 |
|
2,033 |
- AQ10 |
|
3,666 |
|
122 |
|
563 |
|
4,351 |
|
1,685 |
|
1,643 |
|
35 |
|
4 |
|
3,367 |
|
7,718 |
Loans by stage |
|
165,081 |
|
4,216 |
|
9,578 |
|
178,875 |
|
36,707 |
|
72,240 |
|
25,011 |
|
6,967 |
|
140,925 |
|
319,800 |
- Stage 1 |
|
149,760 |
|
2,851 |
|
6,942 |
|
159,553 |
|
33,145 |
|
61,844 |
|
24,502 |
|
6,941 |
|
126,432 |
|
285,985 |
- Stage 2 |
|
11,655 |
|
1,243 |
|
2,073 |
|
14,971 |
|
1,877 |
|
8,753 |
|
474 |
|
22 |
|
11,126 |
|
26,097 |
- Stage 3 |
|
3,666 |
|
122 |
|
563 |
|
4,351 |
|
1,685 |
|
1,643 |
|
35 |
|
4 |
|
3,367 |
|
7,718 |
Loans - past due analysis (4,5) |
|
165,081 |
|
4,216 |
|
9,578 |
|
178,875 |
|
36,707 |
|
72,240 |
|
25,011 |
|
6,967 |
|
140,925 |
|
319,800 |
- Not past due |
|
160,165 |
|
4,027 |
|
8,749 |
|
172,941 |
|
35,420 |
|
69,782 |
|
24,388 |
|
6,923 |
|
136,513 |
|
309,454 |
- Past due 1-29 days |
|
1,714 |
|
69 |
|
180 |
|
1,963 |
|
270 |
|
1,397 |
|
604 |
|
42 |
|
2,313 |
|
4,276 |
- Past due 30-89 days |
|
1,048 |
|
40 |
|
105 |
|
1,193 |
|
271 |
|
344 |
|
11 |
|
2 |
|
628 |
|
1,821 |
- Past due 90-180 days |
|
632 |
|
29 |
|
69 |
|
730 |
|
56 |
|
83 |
|
1 |
|
|
|
140 |
|
870 |
- Past due >180 days |
|
1,522 |
|
51 |
|
475 |
|
2,048 |
|
690 |
|
634 |
|
7 |
|
|
|
1,331 |
|
3,379 |
Loans - Stage 2 |
|
11,655 |
|
1,243 |
|
2,073 |
|
14,971 |
|
1,877 |
|
8,753 |
|
474 |
|
22 |
|
11,126 |
|
26,097 |
- Not past due |
|
9,788 |
|
1,172 |
|
1,843 |
|
12,803 |
|
1,556 |
|
8,196 |
|
472 |
|
22 |
|
10,246 |
|
23,049 |
- Past due 1-29 days |
|
1,126 |
|
43 |
|
133 |
|
1,302 |
|
68 |
|
244 |
|
1 |
|
|
|
313 |
|
1,615 |
- Past due 30-89 days |
|
741 |
|
28 |
|
97 |
|
866 |
|
253 |
|
313 |
|
1 |
|
|
|
567 |
|
1,433 |
Weighted average life * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- ECL measurement (years) |
|
8 |
|
2 |
|
3 |
|
5 |
|
3 |
|
3 |
|
4 |
|
3 |
|
3 |
|
4 |
Weighted average 12 months PDs * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- IFRS 9 (%) |
|
0.32 |
|
4.03 |
|
2.77 |
|
0.54 |
|
0.75 |
|
0.97 |
|
0.14 |
|
0.06 |
|
0.75 |
|
0.62 |
- Basel (%) |
|
0.84 |
|
3.52 |
|
3.50 |
|
1.04 |
|
0.95 |
|
1.43 |
|
0.23 |
|
0.06 |
|
1.01 |
|
1.03 |
ECL provisions by geography |
|
839 |
|
230 |
|
728 |
|
1,797 |
|
588 |
|
941 |
|
41 |
|
1 |
|
1,571 |
|
3,368 |
- UK |
|
237 |
|
227 |
|
707 |
|
1,171 |
|
518 |
|
615 |
|
27 |
|
1 |
|
1,161 |
|
2,332 |
- RoI |
|
602 |
|
3 |
|
21 |
|
626 |
|
43 |
|
125 |
|
2 |
|
|
|
170 |
|
796 |
- Other Europe |
|
|
|
|
|
|
|
|
|
22 |
|
53 |
|
10 |
|
|
|
85 |
|
85 |
- RoW |
|
|
|
|
|
|
|
|
|
5 |
|
148 |
|
2 |
|
|
|
155 |
|
155 |
ECL provisions by stage |
|
839 |
|
230 |
|
728 |
|
1,797 |
|
588 |
|
941 |
|
41 |
|
1 |
|
1,571 |
|
3,368 |
- Stage 1 |
|
23 |
|
38 |
|
61 |
|
122 |
|
43 |
|
107 |
|
12 |
|
1 |
|
163 |
|
285 |
- Stage 2 |
|
150 |
|
120 |
|
247 |
|
517 |
|
39 |
|
200 |
|
7 |
|
|
|
246 |
|
763 |
- Stage 3 |
|
666 |
|
72 |
|
420 |
|
1,158 |
|
506 |
|
634 |
|
22 |
|
|
|
1,162 |
|
2,320 |
ECL provisions coverage (%) |
|
0.51 |
|
5.46 |
|
7.60 |
|
1.00 |
|
1.60 |
|
1.30 |
|
0.16 |
|
0.01 |
|
1.11 |
|
1.05 |
- Stage 1 (%) |
|
0.02 |
|
1.33 |
|
0.88 |
|
0.08 |
|
0.13 |
|
0.17 |
|
0.05 |
|
0.01 |
|
0.13 |
|
0.10 |
- Stage 2 (%) |
|
1.29 |
|
9.65 |
|
11.92 |
|
3.45 |
|
2.08 |
|
2.28 |
|
1.48 |
|
|
|
2.21 |
|
2.92 |
- Stage 3 (%) |
|
18.17 |
|
59.02 |
|
74.60 |
|
26.61 |
|
30.03 |
|
38.59 |
|
62.86 |
|
|
|
34.51 |
|
30.06 |
ECL charge |
|
57 |
|
87 |
|
210 |
|
354 |
|
30 |
|
13 |
|
3 |
|
(2 |
) |
44 |
|
398 |
- UK |
|
38 |
|
88 |
|
207 |
|
333 |
|
31 |
|
9 |
|
6 |
|
(2 |
) |
44 |
|
377 |
- RoI |
|
19 |
|
(1 |
) |
3 |
|
21 |
|
(1 |
) |
(3 |
) |
(1 |
) |
|
|
(5 |
) |
16 |
- Other Europe |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
(2 |
) |
|
|
6 |
|
6 |
- RoW |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
(1 |
) |
(1) |
ECL loss rate (%) |
|
0.03 |
|
2.06 |
|
2.19 |
|
0.20 |
|
0.08 |
|
0.02 |
|
0.01 |
|
(0.03 |
) |
0.03 |
|
0.12 |
Amounts written-off |
|
368 |
|
79 |
|
329 |
|
776 |
|
292 |
|
395 |
|
31 |
|
|
|
718 |
|
1,494 |
* Not within audit scope.
For the notes to this table refer to the following page.
Capital and risk management
Credit risk Banking activities continued
Portfolio summary sector analysis (audited)
|
|
Personal |
|
Wholesale |
|
|
|
|
|
|
||||||||||||||
|
|
|
|
Credit |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages |
|
cards |
|
personal |
|
Total |
|
Property |
|
Corporate |
|
FI |
|
Sovereign |
|
Total |
|
Total |
|
Fixed |
|
Variable |
31 December 2018 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Loans by residual maturity |
|
165,081 |
|
4,216 |
|
9,578 |
|
178,875 |
|
36,707 |
|
72,240 |
|
25,011 |
|
6,967 |
|
140,925 |
|
319,800 |
|
152,557 |
|
167,243 |
- <1yr |
|
11,244 |
|
919 |
|
4,960 |
|
17,123 |
|
9,533 |
|
29,788 |
|
17,602 |
|
6,362 |
|
63,285 |
|
80,408 |
|
20,534 |
|
59,874 |
- 1-5yr |
|
35,184 |
|
3,297 |
|
3,816 |
|
42,297 |
|
18,797 |
|
30,772 |
|
6,167 |
|
245 |
|
55,981 |
|
98,278 |
|
34,250 |
|
64,028 |
- 5yr |
|
118,653 |
|
|
|
802 |
|
119,455 |
|
8,377 |
|
11,680 |
|
1,242 |
|
360 |
|
21,659 |
|
141,114 |
|
97,773 |
|
43,341 |
Other financial assets by asset quality (2) |
|
|
|
|
|
|
|
|
|
105 |
|
652 |
|
8,838 |
|
134,546 |
|
144,141 |
|
144,141 |
|
|
|
|
- AQ1-AQ4 |
|
|
|
|
|
|
|
|
|
105 |
|
10 |
|
8,110 |
|
134,546 |
|
142,771 |
|
142,771 |
|
|
|
|
- AQ5-AQ8 |
|
|
|
|
|
|
|
|
|
|
|
642 |
|
721 |
|
|
|
1,363 |
|
1,363 |
|
|
|
|
- AQ9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
4 |
|
|
|
|
- AQ10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
3 |
|
|
|
|
Off-balance sheet |
|
13,228 |
|
16,613 |
|
12,229 |
|
42,070 |
|
16,044 |
|
52,730 |
|
28,761 |
|
29,277 |
|
126,812 |
|
168,882 |
|
|
|
|
- Loan commitments |
|
13,228 |
|
16,613 |
|
12,229 |
|
42,070 |
|
15,335 |
|
48,569 |
|
26,684 |
|
29,276 |
|
119,864 |
|
161,934 |
|
|
|
|
- Financial guarantees |
|
|
|
|
|
|
|
|
|
709 |
|
4,161 |
|
2,077 |
|
1 |
|
6,948 |
|
6,948 |
|
|
|
|
Off-balance sheet by asset quality (2) |
|
13,228 |
|
16,613 |
|
12,229 |
|
42,070 |
|
16,044 |
|
52,730 |
|
28,761 |
|
29,277 |
|
126,812 |
|
168,882 |
|
|
|
|
- AQ1-AQ4 |
|
12,116 |
|
422 |
|
9,103 |
|
21,641 |
|
11,945 |
|
36,134 |
|
27,364 |
|
29,262 |
|
104,705 |
|
126,346 |
|
|
|
|
- AQ5-AQ8 |
|
1,101 |
|
15,900 |
|
3,116 |
|
20,117 |
|
3,928 |
|
16,390 |
|
1,397 |
|
15 |
|
21,730 |
|
41,847 |
|
|
|
|
- AQ9 |
|
1 |
|
8 |
|
10 |
|
19 |
|
6 |
|
46 |
|
|
|
|
|
52 |
|
71 |
|
|
|
|
- AQ10 |
|
10 |
|
283 |
|
|
|
293 |
|
165 |
|
160 |
|
|
|
|
|
325 |
|
618 |
|
|
|
|
|
|
|
|
Total IFRS 9 credit risk exposure by stage |
|
|
||||||||
|
|
Total credit |
|
|
|
Stage 2 (2,3) |
|
|
|
ECL |
||||
|
|
exposure |
|
Stage 1 |
|
<30 DPD |
|
>30 DPD |
|
Total |
|
Stage 3 |
|
provisions |
1 January 2018 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Personal |
|
177,196 |
|
155,843 |
|
14,460 |
|
625 |
|
15,085 |
|
6,268 |
|
2,316 |
UK mortgages |
|
146,556 |
|
134,350 |
|
10,119 |
|
431 |
|
10,550 |
|
1,656 |
|
262 |
RoI mortgages |
|
15,549 |
|
10,674 |
|
1,351 |
|
127 |
|
1,478 |
|
3,397 |
|
961 |
Credit cards |
|
4,247 |
|
3,097 |
|
999 |
|
11 |
|
1,010 |
|
140 |
|
222 |
Other personal (6) |
|
10,844 |
|
7,722 |
|
1,991 |
|
56 |
|
2,047 |
|
1,075 |
|
871 |
Wholesale |
|
194,988 |
|
178,086 |
|
11,500 |
|
387 |
|
11,887 |
|
5,015 |
|
2,131 |
Property |
|
37,877 |
|
33,884 |
|
1,942 |
|
87 |
|
2,029 |
|
1,964 |
|
685 |
Corporate |
|
73,667 |
|
62,253 |
|
8,224 |
|
245 |
|
8,469 |
|
2,945 |
|
1,325 |
Financial institutions |
|
34,064 |
|
32,923 |
|
981 |
|
55 |
|
1,036 |
|
105 |
|
115 |
Sovereign |
|
49,380 |
|
49,026 |
|
353 |
|
|
|
353 |
|
1 |
|
6 |
Total financial assets excluding balances at central banks |
|
372,184 |
|
333,929 |
|
25,960 |
|
1,012 |
|
26,972 |
|
11,283 |
|
4,447 |
Balances at central banks |
|
96,571 |
|
96,566 |
|
5 |
|
|
|
5 |
|
|
|
1 |
Total financial assets |
|
468,755 |
|
430,495 |
|
25,965 |
|
1,012 |
|
26,977 |
|
11,283 |
|
4,448 |
Total contingent liabilities and commitments |
|
146,800 |
|
139,550 |
|
6,388 |
|
113 |
|
6,501 |
|
749 |
|
|
Total exposure |
|
615,555 |
|
570,045 |
|
32,353 |
|
1,125 |
|
33,478 |
|
12,032 |
|
|
Financial assets - asset quality (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- AQ1-AQ4 |
|
230,773 |
|
223,789 |
|
6,883 |
|
101 |
|
6,984 |
|
|
|
|
- AQ5-AQ8 |
|
128,814 |
|
109,962 |
|
17,449 |
|
660 |
|
18,109 |
|
743 |
|
|
- AQ9 |
|
2,912 |
|
178 |
|
1,628 |
|
251 |
|
1,879 |
|
855 |
|
|
- AQ10 (3) |
|
9,685 |
|
|
|
|
|
|
|
|
|
9,685 |
|
|
Notes:
(1) At 31 December 2018, Mortgages include £0.7 billion secured lending in Private Banking, in line with ECL calculation methodology.
(2) AQ bandings are based on Basel PDs.
(3) At 31 December 2018, AQ10 includes £0.6 billion (31 December 2017 £0.7 billion) RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but included in Stage 3.
(4) 30 DPD 30 days past due, the mandatory 30 days past due backstop as prescribed by the IFRS 9 guidance for significant increase in credit risk.
(5) Days past due Personal products: at a high level, for amortising products, the number of days past due is derived from the arrears amount outstanding and the monthly repayment instalment. For credit cards, it is based on payments missed, and for current accounts the number of continual days in excess of borrowing limit. Wholesale products: the number of days past due for all products is the number of continual days in excess of borrowing limit.
(6) At 1 January 2018, mortgages other than UK and RoI were reported within other personal but at 31 December 2018 they are reported separately.
Capital and risk management
Credit risk Banking activities continued
Portfolio summary sector analysis ( audited )
Wholesale forbearance
The table below summarises Wholesale forbearance, Heightened Monitoring and Risk of Credit Loss by sector. Personal forbearance is disclosed on page 144.
|
FI |
Property |
Sovereigns |
Other corporate |
Total |
2018 |
£m |
£m |
£m |
£m |
£m |
Forbearance (flow) |
14 |
305 |
|
2,247 |
2,566 |
Forbearance (stock) |
15 |
477 |
|
2,756 |
3,248 |
Heightened Monitoring and Risk of Credit Loss |
100 |
503 |
16 |
4,145 |
4,764 |
2017 |
|
|
|
|
|
Forbearance (flow) |
11 |
417 |
|
1,473 |
1,901 |
Forbearance (stock) |
14 |
764 |
|
3,067 |
3,845 |
Heightened Monitoring and Risk of Credit Loss |
144 |
739 |
|
4,183 |
5,066 |
Provisions |
|
|
|
|
|
|
|
|
The table below summarises provisions by segment on an IAS 39 basis. |
||||||||
|
|
Ulster |
|
|
|
|
Central |
|
|
UK |
Bank |
Commercial |
Private |
RBS |
NatWest |
items |
|
|
PBB |
RoI |
Banking |
Banking |
International |
Markets |
& other |
Total |
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
At 1 January 2017 |
1,537 |
1,200 |
845 |
31 |
38 |
803 |
1 |
4,455 |
Inter segment transfers |
|
|
293 |
|
|
(293) |
|
|
Currency translation and other adjustments |
|
8 |
(7) |
|
|
(27) |
|
(26) |
Repayments and disposals |
|
|
|
|
|
(5) |
|
(5) |
Amounts written-off |
(572) |
(124) |
(335) |
(4) |
(6) |
(167) |
(2) |
(1,210) |
Recoveries of amounts previously written-off |
117 |
12 |
16 |
|
1 |
10 |
|
156 |
Charges/(releases) to income statement |
235 |
60 |
362 |
6 |
3 |
(137) |
1 |
530 |
Unwind of discount |
(37) |
(25) |
(12) |
(1) |
(1) |
(10) |
|
(86) |
At 31 December 2017 |
1,280 |
1,131 |
1,162 |
32 |
35 |
174 |
|
3,814 |
|
|
|
|
|
|
|
|
|
Capital and risk management
Credit risk Banking activities continued
Portfolio summary sector analysis ( audited )
Key points
· Geography The majority of exposures in both the Personal and Wholesale portfolios were in the UK and the Republic of Ireland. Other exposures in Europe and the Rest of the World were mainly Wholesale. Mortgages, the vast majority of which are in the UK, accounted for more than half of the total exposure.
· Asset quality Measured against RBSs asset quality scale, 54% of lending exposure was rated in the AQ1-AQ4 bands at 31 December 2018. This equated to an indicative investment rating of BBB- or above. Specifically 59% of Personal and 48% of Wholesale lending exposure were in the AQ1-AQ4 category respectively.
· Loans by stage 90% of exposures were in Stage 1, with 8% in Stage 2 significantly credit deteriorated. Stage 3 assets, which align to AQ10, represented 2% of total exposures. In line with expectations, the Personal portfolio had a higher proportion of unsecured lending assets in Stage 2 than the mortgage portfolio. In the Wholesale portfolio, the proportion of assets in Stage 2 was slightly lower than in Personal overall.
· Loans Past due analysis Stage 2: the vast majority of assets overall were not past due, with the Stage 2 classification driven primarily by changes in lifetime PD. (For further detail, refer to the Significant increase in credit risk section). In mortgages, the majority of assets past due by more than 180 days were in Ulster Bank RoI reflecting the legacy mortgage portfolio and the residual effects from the financial crisis. In other personal, the relatively high rate of exposures past due by more than 90 days reflected the fact that impaired assets can be held on balance sheet with commensurate ECL provision for up to six years after default. Similarly in the Wholesale portfolio, impaired assets can be held on the balance sheet for a significant period of time while restructuring and recovery processes are concluded.
· Weighted average 12 months PDs In Wholesale, Basel PDs, which are based on a through-the-cycle approach, tend to be higher than point-in-time best estimate IFRS 9 PDs, reflecting the current state in the economic cycle, and also an element of conservatism in the regulatory capital framework. In Personal, the Basel PDs, which are point-in-time estimates, tend to be higher also reflecting conservatism, higher in mortgages than other products, and an element of default rate under-prediction in the IFRS 9 PD models. This has been mitigated by ECL overlays of approximately £60 million at the year end, pending model calibrations being implemented. The IFRS 9 PD for credit cards was higher than the Basel equivalent and reflected the relative sensitivity of the IFRS 9 model to forward-looking economic drivers.
· ECL provision by geography In line with exposures by geography, the weight of ECL related to exposures in the UK and the Republic of Ireland. The ECL in RoI was mainly Stage 3 provisions in the legacy Ulster Bank RoI mortgage portfolio.
· ECL provision by stage and coverage The weight of ECL by value was in Stage 3 impaired, with similar seen in both Personal and Wholesale. Provision coverage was progressively higher by stage reflecting the lifetime nature of losses in both Stage 2 and Stage 3. In the Personal portfolio, provision coverage was materially lower in mortgages relative to credit cards and other personal reflecting the secured nature of the facilities. For Wholesale exposures, security and enterprise value mitigated against losses in Stage 3.
· The ECL charge for the year was £398 million. This reflected the relatively stable external environment.
· Other financial assets by asset quality Consisting almost entirely of cash and balances at central banks and debt securities, these assets were mainly within the AQ1-AQ4 category.
· Off-balance sheet exposures by asset quality For Personal exposures, undrawn exposures are reflective of available credit lines in credit cards and current accounts. Additionally, the mortgage portfolio had undrawn exposure, where a formal offer has been made to a customer but has not yet been drawn down. There is also a legacy portfolio of flexible mortgages where a customer has the right and ability to draw down further funds. The asset quality distribution in mortgages is heavily weighted to the highest quality bands AQ1-AQ4, with credit card concentrated in the risk bands AQ5-AQ8. In Wholesale, 83% of undrawn exposure, relating mainly to loan commitments, was in the AQ1-AQ4 category.
· Forbearance Completed forbearance flow in 2018 for Wholesale was £2.6 billion compared to £1.9 billion in 2017. Forbearance granted in the transport sector increased to £493 million from £54 million, mainly driven by a customer which has been restructured and moved to Stage 2 from Stage 3 during the year. Forbearance across the diverse services sector increased from £347 million to £763 million. Of the forbearance that completed during the year, £1.1 billion related to payment concessions (2017 £1.4 billion) and £1.4 billion related to non-payment concessions (2017 £0.5 billion). Forbearance stock reduced by £0.6 billion, from £3.8 billion to £3.2 billion, driven by a decrease in forborne exposure in the energy and resources, property and retail and leisure sectors.
· Heightened Monitoring and Risk of Credit Loss Exposure decreased from £5.1 billion at 31 December 2017, to £4.8 billion at 31 December 2018. There was also a decrease in the number of customers classified as Heightened Monitoring and Risk of Credit Loss during the year. Despite the current economic uncertainty in the UK, the portfolio has remained stable.
Capital and risk management
Notes:
(1) Includes SME customers managed in UK PBB Business Banking who are assigned a sector under RBSs sector concentration framework.
(2) Includes exposures to central governments, central banks and sub-sovereigns such as local authorities.
(3) Rest of world (RoW) also includes supranationals such as the World Bank and exposure relating to ocean-going vessels which cannot be meaningfully assigned to specific countries from a country risk perspective.
Loan sector concentration
The table below summarises gross loans to banks and customers (excluding reverse repos) and related credit metrics by sector, on an IAS 39 basis.
|
|
|
|
Credit metrics |
|
|
||
|
|
|
REIL |
Provisions |
Provisions |
Impairment |
|
|
|
Gross |
|
|
as a % of |
as a % |
as a % of |
losses/ |
Amounts |
2017 |
loans |
REIL |
Provisions |
gross loans |
of REIL |
gross loans |
(releases) |
written-off |
£m |
£m |
£m |
% |
% |
% |
£m |
£m |
|
Central and local government |
4,684 |
|
|
|
|
|
|
|
Finance |
30,832 |
54 |
44 |
0.2 |
81 |
0.1 |
3 |
7 |
Personal - mortgage (1) |
163,010 |
3,876 |
994 |
2.4 |
26 |
0.6 |
50 |
87 |
- unsecured |
14,587 |
937 |
763 |
6.4 |
81 |
5.2 |
235 |
424 |
Property |
33,381 |
1,119 |
283 |
3.4 |
25 |
0.8 |
(82) |
133 |
Construction |
3,798 |
426 |
298 |
11.2 |
70 |
7.8 |
196 |
36 |
Of which: commercial real estate |
24,784 |
1,189 |
293 |
4.8 |
25 |
1.2 |
(76) |
139 |
Manufacturing |
8,862 |
147 |
64 |
1.7 |
44 |
0.7 |
4 |
25 |
Finance leases and instalment credit |
12,019 |
170 |
88 |
1.4 |
52 |
0.7 |
23 |
14 |
Retail, wholesale and repairs |
12,300 |
446 |
193 |
3.6 |
43 |
1.6 |
93 |
81 |
Transport and storage |
4,241 |
700 |
195 |
16.5 |
28 |
4.6 |
(32) |
165 |
Health, education and leisure |
11,337 |
330 |
145 |
2.9 |
44 |
1.3 |
65 |
48 |
Hotels and restaurants |
6,049 |
193 |
80 |
3.2 |
41 |
1.3 |
17 |
46 |
Utilities |
4,172 |
35 |
21 |
0.8 |
60 |
0.5 |
(18) |
13 |
Other |
17,726 |
471 |
256 |
2.7 |
54 |
1.4 |
(10) |
131 |
Latent |
|
|
390 |
|
|
|
(14) |
|
Total customer |
326,998 |
8,904 |
3,814 |
2.7 |
43 |
1.2 |
530 |
1,210 |
|
|
|
|
|
|
|
|
|
Total banks |
16,264 |
|
|
|
|
|
|
|
Note:
(1) Mortgages are reported in sectors other than personal mortgages by certain businesses based on the nature of the relationship with the customer.
Capital and risk management
Credit risk Banking activities continued
Credit risk enhancement and mitigation (audited)
The table below summarises exposures of modelled portfolios within the scope of the ECL framework and related credit risk enhancement and mitigation (CREM). Excluded from this analysis are the non modelled portfolios, primarily Private Banking and RBSI mortgage portfolios, which are discussed in the Personal portfolio section, including loan-to-value ratios. Refer to Policy elections and simplifications relating to IFRS 9 section for details on non-modelled portfolios.
|
Gross |
|
Maximum credit risk |
|
CREM by type |
|
CREM coverage |
|
Exposure post CREM |
|||||
|
exposure |
ECL |
Total |
Stage 3 |
|
Financial (1) |
Property |
Other (2) |
|
Total |
Stage 3 |
|
Total |
Stage 3 |
2018 |
£bn |
£bn |
£bn |
£bn |
|
£bn |
£bn |
£bn |
|
£bn |
£bn |
|
£bn |
£bn |
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and balances at central banks |
87.2 |
|
87.2 |
|
|
|
|
|
|
|
|
|
87.2 |
|
Loans - amortised cost (3) |
302.6 |
3.2 |
299.4 |
5.0 |
|
4.1 |
188.1 |
19.7 |
|
211.9 |
4.5 |
|
87.5 |
0.5 |
Personal (4) |
164.6 |
1.7 |
162.9 |
2.9 |
|
|
151.7 |
|
|
151.7 |
2.7 |
|
11.2 |
0.2 |
Wholesale (5) |
138.0 |
1.5 |
136.5 |
2.1 |
|
4.1 |
36.4 |
19.7 |
|
60.2 |
1.8 |
|
76.3 |
0.3 |
Debt securities |
57.0 |
|
57.0 |
|
|
|
|
|
|
|
|
|
57.0 |
|
Total financial assets |
446.8 |
3.2 |
443.6 |
5.0 |
|
4.1 |
188.1 |
19.7 |
|
211.9 |
4.5 |
|
231.7 |
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent liabilities and commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal (6) |
31.0 |
|
31.0 |
0.3 |
|
|
4.9 |
|
|
4.9 |
|
|
26.1 |
0.3 |
Wholesale |
126.2 |
|
126.2 |
0.3 |
|
0.6 |
5.9 |
6.1 |
|
12.6 |
|
|
113.6 |
0.3 |
Total off balance sheet |
157.2 |
|
157.2 |
0.6 |
|
0.6 |
10.8 |
6.1 |
|
17.5 |
|
|
139.7 |
0.6 |
Total exposure |
604.0 |
3.2 |
600.8 |
5.6 |
|
4.7 |
198.9 |
25.8 |
|
229.4 |
4.5 |
|
371.4 |
1.1 |
Notes:
(1) Financial collateral includes cash and securities collateral.
(2) Other collateral includes guarantees, charges over trade debtors as well as the amount by which credit risk exposure is reduced through netting arrangements, mainly cash management pooling, which give RBS a legal right to set off the financial asset against a financial liability due to the same counterparty.
(3) RBS holds collateral in respect of individual loans amortised cost to banks and customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant and equipment, inventories and trade debtors; and guarantees of lending from parties other than the borrower. RBS obtains collateral in the form of securities in reverse repurchase agreements. Collateral values are capped at the value of the loan.
(4) On personal, Stage 3 mortgage exposures have relatively limited uncovered exposure reflecting the security held. On unsecured credit cards and other personal borrowing, the residual uncovered amount reflects historical experience of continued cash recovery post default through on-going engagement with customers.
(5) Stage 3 exposures post credit risk enhancement and mitigation in wholesale mainly represent enterprise value and the impact of written down collateral values; an individual assessment to determine ECL will consider multiple scenarios and in some instances allocate a probability weighting to a collateral value in excess of the written down value.
(6) At 31 December 2018, £0.3 billion personal Stage 3 balances primarily relate to loan commitments, the draw down of which is effectively prohibited.
The table below summarises financial asset exposures, both gross and net of offset arrangements, as well as credit mitigation and enhancement.
|
|
|
|
|
|
|
|
|
|
|
Exposure |
|
|
|
|
|
|
Collateral (1) |
|
|
post credit |
||||
|
Gross |
IFRS |
Carrying |
Balance sheet |
|
|
Real estate and other |
Credit |
|
mitigation and |
||
|
exposure |
offset (5) |
value (6) |
offset (7) |
Cash (2) |
Securities (3) |
Residential (4) |
Commercial (4) |
enhancement (8) |
|
enhancement |
|
2017 |
£bn |
£bn |
£bn |
£bn |
£bn |
£bn |
£bn |
£bn |
£bn |
|
£bn |
|
Cash and balances at central banks |
98.4 |
|
98.4 |
|
|
|
|
|
|
|
98.4 |
|
Trading assets |
118.6 |
(32.6) |
86.0 |
(0.3) |
|
(32.5) |
|
|
|
|
53.2 |
|
Derivatives |
177.9 |
(17.1) |
160.8 |
(128.3) |
(20.3) |
(5.9) |
|
|
(6.3) |
|
|
|
Settlement balances |
3.2 |
(0.7) |
2.5 |
|
|
|
|
|
|
|
2.5 |
|
Loans - amortised cost |
334.1 |
(12.5) |
321.6 |
(27.9) |
(0.9) |
(11.2) |
(174.2) |
(45.0) |
(2.1) |
|
60.3 |
|
Other financial assets |
52.0 |
|
52.0 |
|
|
|
|
(0.1) |
|
|
51.9 |
|
Total third party gross of short positions |
784.2 |
(62.9) |
721.3 |
(156.5) |
(21.2) |
(49.6) |
(174.2) |
(45.1) |
(8.4) |
|
266.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short positions |
(28.5) |
|
(28.5) |
|
|
|
|
|
|
|
(28.5) |
|
Net of short positions |
755.7 |
(62.9) |
692.8 |
(156.5) |
(21.2) |
(49.6) |
(174.2) |
(45.1) |
(8.4) |
|
237.8 |
|
Notes:
(1) RBS holds collateral in respect of individual loans. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. RBS obtains collateral in the form of securities in reverse repurchase agreements. Cash and securities are received as collateral in respect of derivative transactions.
(2) Includes cash collateral pledged by counterparties based on daily mark-to-market movements of net derivative positions with the counterparty.
(3) Represent the fair value of securities received from counterparties, mainly relating to reverse repo transactions as part of netting arrangements.
(4) Property valuations are capped at the loan value and reflect the application of haircuts in line with regulatory rules to indexed valuations. Commercial collateral includes ships and plan and equipment collateral.
(5) Relates to offset arrangements that comply with IFRS criteria and transactions cleared through and novated to central clearing houses, primarily London Clearing House (LCH) and US Government Securities Clearing Corporation. During 2017 changes in the legal contracts with LCH and CME led to many derivatives cleared through that counterparty being settled to market each day rather than being collateralised as previously. This led to the derecognition of the associated assets and liabilities.
(6) The carrying value on the balance sheet represents the maximum exposure to credit risk by class of financial instrument.
(7) The amount by which credit risk exposure is reduced through arrangements, such as master netting agreements and cash management pooling, which give RBS a legal right to set off the financial asset against a financial liability due to the same counterparty.
(8) Comprises credit derivatives (bought protection) and guarantees against exposures.
Capital and risk management
Credit risk Banking activities continued
Personal portfolio (audited)
Disclosures in the Personal portfolio section include drawn exposure (gross of provisions). Loan-to-value (LTV) ratios are split by stage under IFRS 9 at 31 December 2018 and by performing and non-performing status under IAS 39 at 31 December 2017.
|
2018 |
|
2017 |
|||||||||
|
UK |
Ulster |
Private |
|
|
|
UK |
Ulster |
Private |
|
|
|
Personal lending |
PBB |
Bank RoI |
Banking |
RBSI |
Total |
|
PBB |
Bank RoI |
Banking |
RBSI |
Total |
|
£m |
£m |
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
£m |
||
Mortgages |
138,250 |
14,361 |
9,082 |
2,684 |
164,377 |
|
136,625 |
15,352 |
8,421 |
2,745 |
163,143 |
|
Of which: |
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
122,642 |
13,105 |
7,953 |
1,781 |
145,481 |
|
118,764 |
13,455 |
7,275 |
1,821 |
141,315 |
|
Buy-to-let |
15,608 |
1,256 |
1,129 |
903 |
18,896 |
|
17,861 |
1,897 |
1,146 |
924 |
21,828 |
|
Interest only - variable |
8,358 |
188 |
3,871 |
489 |
12,906 |
|
11,245 |
260 |
4,076 |
636 |
16,217 |
|
Interest only - fixed |
12,229 |
12 |
3,636 |
187 |
16,064 |
|
12,584 |
8 |
2,866 |
96 |
15,554 |
|
Mixed (1) |
6,036 |
68 |
2 |
18 |
6,124 |
|
6,039 |
79 |
2 |
20 |
6,140 |
|
Impairment provisions (2) |
212 |
602 |
5 |
16 |
835 |
|
153 |
909 |
7 |
27 |
1,096 |
|
Other personal lending (3) |
11,633 |
330 |
1,676 |
55 |
13,694 |
|
11,080 |
348 |
1,701 |
65 |
13,194 |
|
Impairment provisions (2) |
909 |
25 |
19 |
1 |
954 |
|
833 |
44 |
19 |
2 |
898 |
|
Total personal lending |
149,883 |
14,691 |
10,758 |
2,739 |
178,071 |
|
147,705 |
15,700 |
10,122 |
2,810 |
176,337 |
|
Mortgage LTV ratios |
|
|
|
|
|
|
|
|
|
|
|
|
- Total portfolio |
56% |
62% |
56% |
58% |
57% |
|
56% |
69% |
55% |
58% |
57% |
|
- Stage 1 |
56% |
58% |
56% |
57% |
56% |
|
56% |
65% |
55% |
56% |
57% |
|
- Stage 2 |
58% |
67% |
58% |
55% |
59% |
|
||||||
- Stage 3 |
55% |
77% |
58% |
99% |
69% |
|
57% |
88% |
59% |
122% |
78% |
|
- Buy-to-let |
53% |
64% |
53% |
53% |
54% |
|
54% |
75% |
54% |
50% |
56% |
|
- Stage 1 |
53% |
58% |
53% |
52% |
53% |
|
|
|
|
|
|
|
- Stage 2 |
57% |
72% |
53% |
57% |
60% |
|
|
|
|
|
|
|
- Stage 3 |
58% |
78% |
68% |
75% |
71% |
|
|
|
|
|
|
|
Gross new mortgage lending |
29,555 |
1,015 |
1,846 |
353 |
32,769 |
|
30,314 |
890 |
2,243 |
481 |
33,928 |
|
of which: |
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
28,608 |
1,004 |
1,689 |
241 |
31,542 |
|
28,504 |
875 |
1,904 |
319 |
31,602 |
|
Weighted average LTV |
69% |
73% |
62% |
68% |
69% |
|
70% |
75% |
63% |
70% |
70% |
|
Buy-to-let |
947 |
11 |
157 |
112 |
1,227 |
|
1,810 |
15 |
339 |
162 |
2,326 |
|
Weighted average LTV |
61% |
57% |
55% |
61% |
60% |
|
62% |
57% |
56% |
62% |
61% |
|
Interest only - variable rate |
43 |
|
697 |
13 |
753 |
|
335 |
6 |
902 |
39 |
1,282 |
|
Interest only - fixed rate |
1,189 |
|
764 |
43 |
1,996 |
|
1,835 |
1 |
874 |
48 |
2,758 |
|
Mixed (1) |
912 |
1 |
|
|
913 |
|
893 |
|
|
|
893 |
|
Mortgage forbearance (4) |
|
|
|
|
|
|
|
|
|
|
|
|
Forbearance flow |
446 |
210 |
11 |
|
667 |
|
440 |
201 |
31 |
5 |
677 |
|
Forbearance stock |
1,338 |
2,645 |
8 |
|
3,991 |
|
1,384 |
3,893 |
7 |
25 |
5,309 |
|
Current |
724 |
1,291 |
6 |
|
2,021 |
|
834 |
1,779 |
6 |
12 |
2,631 |
|
1-3 months in arrears |
350 |
261 |
|
|
611 |
|
304 |
466 |
|
2 |
772 |
|
> 3 months in arrears |
264 |
1,093 |
2 |
|
1,359 |
|
246 |
1,648 |
1 |
11 |
1,906 |
|
Notes:
(1) Includes accounts which have an interest only sub-account and a capital and interest sub-account to provide a more comprehensive view of interest only exposures.
(2) 31 December 2018 data was prepared under IFRS 9. 31 December 2017 data was prepared under IAS 39. For UK PBB this excludes a non-material amount of provisions held on relatively small legacy portfolios.
(3) Excludes loans that are commercial in nature, for example loans guaranteed by a company and commercial real estate lending to Personal customers.
(4) The reduction in RBSI forbearance is due to reclassification.
Capital and risk management
Credit risk Banking activities continued
Key points
· Overall The overall credit risk profile of the Personal portfolio, and its performance against credit risk appetite, remained stable during 2018.
· Total lending Total mortgage lending grew by £1.2 billion with new lending partly offset by redemptions and repayments.
· New mortgage lending was lower than 2017. Existing mortgage stock and new business were closely monitored against agreed risk appetite parameters. These included loan-to-value ratios, buy-to-let concentrations, new-build concentrations and credit quality. Underwriting standards were maintained during the period.
· Owner occupied and buy-to-let Most of the mortgage growth was in the owner-occupied portfolio. New mortgages in the buy-to-let portfolio remained subdued.
· LTVs The mortgage portfolio loan-to-value ratio remained stable. The improvement in Ulster Bank RoI reflected house price recovery and the disposal of a portfolio of mortgages during the year, which also contributed to the reduction in the level of exposures in Stage 3.
· Interest only By value, the proportion of mortgages on interest only and mixed terms (capital and interest only) reduced, driven by fewer buy-to-let mortgages.
· Regional mortgage analysis For UK PBB, 42% of mortgage lending was in Greater London and the South East (31 December 2017 43%). The level of exposure in this region remained broadly unchanged, reflecting lower demand for buy-to-let properties as well as mortgage redemptions. The weighted average loan-to-value for these regions was 52% (31 December 2017 51%) compared to an average of 56%.
· Interest rate profile As at 31 December 2018, 81% of customers in the UK PBB mortgage portfolio were on fixed rates (42% on five-year deals). In addition, 97% of all new mortgage completions in 2018 were fixed rate mortgages (62% of which were five-year mortgages), as customers sought to minimise the impact of potential rate rises.
· Provisions As expected, total ECL including ECL for unsecured lending generally increased under the IFRS 9 methodology compared to provisions calculated under IAS 39. The reduction in Ulster Bank RoI mortgage provisions was driven by a sale of legacy impaired debt.
· Other lending Total unsecured lending grew modestly in 2018, driven by growth in the PBB personal loan portfolio. Overdraft balances have shown a modest decline year-on-year.
· Other lending asset quality Unsecured credit quality remained stable, reflecting active portfolio management. Credit standards and controls were tightened across all three unsecured products to ensure that higher risk customer performance remained within risk appetite.
Personal portfolio ( audited )
Mortgage LTV distribution by stage
The table below summarises gross mortgage lending and related ECL by LTV band. Mortgage lending not within the scope of IFRS 9 ECL reflected portfolios carried at fair value.
|
Mortgages |
|
ECL |
|
ECL provisions coverage (2) |
|||||||||||
|
|
|
|
Not within |
|
Of which: |
|
|
|
|
|
|
|
|
|
|
UK PBB |
|
|
|
IFRS 9 ECL |
|
gross new |
|
|
|
|
|
|
|
|
|
|
Stage 1 |
Stage 2 |
Stage 3 |
scope |
Total |
lending |
|
Stage 1 |
Stage 2 |
Stage 3 |
Total (1) |
|
Stage 1 |
Stage 2 |
Stage 3 |
Total |
|
2018 |
£m |
£m |
£m |
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
|
% |
% |
% |
% |
≤50% |
47,111 |
3,423 |
516 |
153 |
51,203 |
4,779 |
|
2 |
16 |
64 |
82 |
|
|
0.5 |
12.4 |
0.2 |
>50% and ≤70% |
44,037 |
3,632 |
459 |
49 |
48,177 |
8,535 |
|
2 |
23 |
39 |
64 |
|
|
0.6 |
8.5 |
0.1 |
>70% and ≤80% |
20,345 |
1,490 |
135 |
15 |
21,985 |
7,434 |
|
1 |
11 |
11 |
23 |
|
|
0.7 |
8.1 |
0.1 |
>80% and ≤90% |
12,733 |
1,118 |
81 |
12 |
13,944 |
7,524 |
|
2 |
12 |
8 |
22 |
|
|
1.1 |
10.0 |
0.2 |
>90% and ≤100% |
2,343 |
178 |
24 |
7 |
2,552 |
1,104 |
|
1 |
4 |
3 |
8 |
|
|
2.4 |
12.1 |
0.3 |
>100% and ≤110% |
57 |
35 |
8 |
1 |
101 |
|
|
|
2 |
1 |
3 |
|
0.1 |
4.6 |
14.1 |
2.8 |
>110% and ≤130% |
53 |
41 |
9 |
2 |
105 |
|
|
|
2 |
1 |
3 |
|
0.1 |
5.4 |
14.6 |
3.4 |
>130% and ≤150% |
23 |
23 |
6 |
|
52 |
|
|
|
1 |
1 |
2 |
|
0.1 |
6.2 |
13.4 |
4.3 |
>150% |
3 |
9 |
3 |
|
15 |
|
|
|
1 |
1 |
2 |
|
0.1 |
6.2 |
17.3 |
7.2 |
Total with LTVs |
126,705 |
9,949 |
1,241 |
239 |
138,134 |
29,376 |
|
8 |
72 |
129 |
209 |
|
|
0.7 |
10.4 |
0.2 |
Other |
96 |
13 |
4 |
3 |
116 |
179 |
|
|
1 |
2 |
3 |
|
|
4.7 |
53.5 |
2.6 |
Total |
126,801 |
9,962 |
1,245 |
242 |
138,250 |
29,555 |
|
8 |
73 |
131 |
212 |
|
|
0.7 |
10.5 |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which: |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
gross new |
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing |
performing |
Total |
lending |
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
£m |
£m |
£m |
£m |
≤50% |
|
|
|
|
|
|
|
|
|
|
|
|
50,583 |
527 |
51,110 |
4,593 |
>50% and ≤70% |
|
|
|
|
|
|
|
|
|
|
|
|
47,361 |
505 |
47,866 |
8,310 |
>70% and ≤80% |
|
|
|
|
|
|
|
|
|
|
|
|
20,514 |
150 |
20,664 |
7,709 |
>80% and ≤90% |
|
|
|
|
|
|
|
|
|
|
|
|
13,409 |
87 |
13,496 |
8,239 |
>90% and ≤100% |
|
|
|
|
|
|
|
|
|
|
|
|
2,559 |
36 |
2,595 |
1,285 |
>100% and ≤110% |
|
|
|
|
|
|
|
|
|
|
|
|
130 |
14 |
144 |
1 |
>110% and ≤130% |
|
|
|
|
|
|
|
|
|
|
|
|
114 |
10 |
124 |
1 |
>130% and ≤150% |
|
|
|
|
|
|
|
|
|
|
|
|
58 |
5 |
63 |
|
>150% |
|
|
|
|
|
|
|
|
|
|
|
|
25 |
8 |
33 |
1 |
Total with LTVs |
|
|
|
|
|
|
|
|
|
|
|
|
134,753 |
1,342 |
136,095 |
30,139 |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
512 |
18 |
530 |
175 |
Total |
|
|
|
|
|
|
|
|
|
|
|
|
135,265 |
1,360 |
136,625 |
30,314 |
For the notes to this table refer to the following page.
Capital and risk management
Credit risk Banking activities continued
Personal portfolio ( audited )
Mortgage LTV distribution by stage
|
Mortgages |
|
|
|
ECL provisions |
|
ECL provisions coverage (2) |
||||||||||
Ulster Bank RoI |
|
|
|
Not within |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stage 1 |
Stage 2 |
Stage 3 |
IFRS 9 ECL |
Total |
|
|
|
Stage 1 |
Stage 2 |
Stage 3 |
Total |
|
Stage 1 |
Stage 2 |
Stage 3 |
Total |
|
2018 |
£m |
£m |
£m |
£m |
£m |
|
|
|
£m |
£m |
£m |
£m |
|
% |
% |
% |
% |
≤50% |
3,818 |
374 |
463 |
|
4,655 |
|
|
|
1 |
5 |
40 |
46 |
|
|
1.4 |
8.6 |
1.0 |
>50% and ≤70% |
3,567 |
365 |
459 |
|
4,391 |
|
|
|
2 |
10 |
47 |
59 |
|
|
2.7 |
10.3 |
1.3 |
>70% and ≤80% |
1,564 |
190 |
241 |
|
1,995 |
|
|
|
1 |
11 |
52 |
64 |
|
0.1 |
5.5 |
21.5 |
3.2 |
>80% and ≤90% |
1,059 |
184 |
272 |
|
1,515 |
|
|
|
2 |
15 |
82 |
99 |
|
0.2 |
8.3 |
30.2 |
6.5 |
>90% and ≤100% |
570 |
154 |
261 |
|
985 |
|
|
|
2 |
17 |
99 |
118 |
|
0.4 |
11.1 |
37.7 |
11.9 |
>100% and ≤110% |
197 |
80 |
207 |
|
484 |
|
|
|
2 |
10 |
85 |
97 |
|
0.9 |
12.8 |
41.1 |
20.1 |
>110% and ≤130% |
51 |
35 |
179 |
|
265 |
|
|
|
|
6 |
84 |
90 |
|
0.8 |
16.6 |
47.0 |
34.0 |
>130% and ≤150% |
5 |
5 |
37 |
|
47 |
|
|
|
|
1 |
20 |
21 |
|
0.3 |
19.1 |
54.7 |
45.2 |
>150% |
10 |
1 |
13 |
|
24 |
|
|
|
|
1 |
7 |
8 |
|
2.1 |
27.2 |
58.9 |
33.5 |
Total with LTVs |
10,841 |
1,388 |
2,132 |
|
14,361 |
|
|
|
10 |
76 |
516 |
602 |
|
0.1 |
5.4 |
24.2 |
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing |
Non-performing |
Total |
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
£m |
|
£m |
£m |
≤50% |
|
|
|
|
|
|
|
|
|
|
|
|
3,743 |
|
333 |
4,076 |
>50% and ≤70% |
|
|
|
|
|
|
|
|
|
|
|
|
3,600 |
|
382 |
3,982 |
>70% and ≤80% |
|
|
|
|
|
|
|
|
|
|
|
|
1,858 |
|
233 |
2,091 |
>80% and ≤90% |
|
|
|
|
|
|
|
|
|
|
|
|
1,420 |
|
273 |
1,693 |
>90% and ≤100% |
|
|
|
|
|
|
|
|
|
|
|
|
1,070 |
|
309 |
1,379 |
>100% and ≤110% |
|
|
|
|
|
|
|
|
|
|
|
|
814 |
|
317 |
1,131 |
>110% and ≤130% |
|
|
|
|
|
|
|
|
|
|
|
|
378 |
|
414 |
792 |
>130% and ≤150% |
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
126 |
146 |
>150% |
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
39 |
62 |
Total with LTVs |
|
|
|
|
|
|
|
|
|
|
|
|
12,926 |
|
2,426 |
15,352 |
Notes:
(1) |
Excludes a non-material amount of provisions held on relatively small legacy portfolios. |
(2) |
ECL provisions coverage is ECL provisions divided by drawn exposure.
|
Key point
· ECL coverage rates increase through the LTV bands with both UK PBB and Ulster Bank RoI having only limited exposures in the highest LTV bands. The relatively high coverage level in the lowest LTV band for UK PBB included the effect of time-discounting on expected recoveries. Additionally, this also reflected the modelling approach that recognised an element of expected loss on mortgages that are not subject to formal repossession activity.
Capital and risk management
Credit risk Banking activities continued
Personal portfolio ( audited )
UK PBB Mortgage LTV distribution by region
|
|
50% |
80% |
100% |
|
|
Weighted |
|
|
|
|
< 50% |
< 80% |
< 100% |
< 150% |
>150% |
Total |
average LTV |
Other |
Total |
Total |
2018 |
£m |
£m |
£m |
£m |
£m |
£m |
% |
£m |
£m |
% |
South East |
14,699 |
17,147 |
2,843 |
8 |
|
34,697 |
53 |
27 |
34,724 |
25 |
Greater London |
12,928 |
9,614 |
1,298 |
3 |
|
23,843 |
48 |
19 |
23,862 |
17 |
Scotland |
3,205 |
5,612 |
1,844 |
11 |
|
10,672 |
60 |
8 |
10,680 |
8 |
North West |
4,163 |
7,756 |
1,970 |
6 |
|
13,895 |
59 |
12 |
13,907 |
10 |
South West |
4,231 |
6,843 |
1,292 |
8 |
|
12,374 |
57 |
9 |
12,383 |
9 |
West Midlands |
3,036 |
5,642 |
1,192 |
4 |
|
9,874 |
58 |
7 |
9,881 |
7 |
Rest of the UK |
8,942 |
17,548 |
6,056 |
217 |
16 |
32,779 |
62 |
34 |
32,813 |
24 |
Total |
51,204 |
70,162 |
16,495 |
257 |
16 |
138,134 |
56 |
116 |
138,250 |
100 |
2017 |
|
|
|
|
|
|
|
|
|
|
South East |
14,606 |
16,908 |
2,729 |
10 |
|
34,253 |
53 |
96 |
34,349 |
25 |
Greater London |
13,592 |
9,900 |
1,322 |
3 |
|
24,817 |
48 |
112 |
24,929 |
18 |
Scotland |
2,850 |
5,341 |
2,423 |
45 |
|
10,659 |
63 |
34 |
10,693 |
8 |
North West |
4,125 |
7,510 |
2,131 |
11 |
|
13,777 |
59 |
63 |
13,840 |
10 |
South West |
4,181 |
6,572 |
1,055 |
9 |
|
11,817 |
56 |
40 |
11,857 |
9 |
West Midlands |
2,578 |
5,264 |
1,503 |
6 |
|
9,351 |
61 |
42 |
9,393 |
7 |
Rest of the UK |
9,175 |
17,037 |
4,929 |
247 |
33 |
31,421 |
60 |
143 |
31,564 |
23 |
Total |
51,107 |
68,532 |
16,092 |
331 |
33 |
136,095 |
56 |
530 |
136,625 |
100 |
Commercial real estate (CRE)
The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential properties (including house builders but excluding housing associations, construction and building materials). The sector is reviewed regularly at senior executive committees. Reviews include portfolio credit quality, capital consumption and control frameworks. All disclosures in the CRE section are based on current exposure (gross of provisions and risk transfer). Current exposure is defined as: loans; the amount drawn under a credit facility plus accrued interest; contingent obligations; the issued amount of the guarantee or letter of credit; derivatives - the mark to market value, netted where netting agreements exist and net of legally enforceable collateral.
|
2018 |
|
2017 |
||||||
By geography and sub sector (1) |
UK |
RoI |
Other |
Total |
|
UK |
RoI |
Other |
Total |
£m |
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
|
Investment |
|
|
|
|
|
|
|
|
|
Residential (2) |
4,426 |
363 |
54 |
4,843 |
|
4,319 |
227 |
39 |
4,585 |
Office (3) |
2,889 |
164 |
651 |
3,704 |
|
3,055 |
235 |
600 |
3,890 |
Retail (4) |
5,168 |
40 |
92 |
5,300 |
|
5,401 |
42 |
132 |
5,575 |
Industrial (5) |
2,270 |
51 |
176 |
2,497 |
|
2,438 |
36 |
14 |
2,488 |
Mixed/other (6) |
3,221 |
180 |
123 |
3,524 |
|
4,609 |
203 |
228 |
5,040 |
|
17,974 |
798 |
1,096 |
19,868 |
|
19,822 |
743 |
1,013 |
21,578 |
|
|
|
|
|
|
|
|
|
|
Development |
|
|
|
|
|
|
|
|
|
Residential (2) |
2,715 |
122 |
124 |
2,961 |
|
3,107 |
145 |
154 |
3,406 |
Office (3) |
192 |
|
|
192 |
|
169 |
|
|
169 |
Retail (4) |
94 |
7 |
1 |
102 |
|
187 |
5 |
2 |
194 |
Industrial (5) |
119 |
2 |
12 |
133 |
|
49 |
|
|
49 |
Mixed/other (6) |
32 |
2 |
|
34 |
|
59 |
3 |
|
62 |
|
3,152 |
133 |
137 |
3,422 |
|
3,571 |
153 |
156 |
3,880 |
Total |
21,126 |
931 |
1,233 |
23,290 |
|
23,393 |
896 |
1,169 |
25,458 |
Notes:
(1) Geographical splits are based on country of collateral risk.
(2) Residential properties including houses, flats and student accommodation.
(3) Office properties including offices in central business districts, regional headquarters and business parks.
(4) Retail properties including high street retail, shopping centres, restaurants, bars and gyms.
(5) Industrial properties including distribution centres, manufacturing and warehouses.
(6) Mixed usage or other properties that do not fall within the other categories above. Mixed generally relates to a mixture of retail/office with residential.
Capital and risk management
Credit risk Banking activities continued
Commercial real estate (CRE)
CRE LTV distribution by stage ( audited )
The table below summarises CRE current exposure and related ECL by LTV band.
|
2018 |
|
2017 |
||||||||||||||||
|
Current exposure (gross of provisions) (1,2) |
|
ECL provisions |
|
ECL provisions coverage (4) |
|
|
|
|
||||||||||
|
|
|
|
Not within |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFRS 9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
Stage 1 |
Stage 2 |
Stage 3 |
scope (3) |
Total |
|
Stage 1 |
Stage 2 |
Stage 3 |
Total |
|
Stage 1 |
Stage 2 |
Stage 3 |
Total |
|
Performing |
performing |
Total |
|
£m |
£m |
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
|
% |
% |
% |
% |
|
£m |
£m |
£m |
< 50% |
8,229 |
245 |
52 |
795 |
9,321 |
|
7 |
4 |
14 |
25 |
|
0.1 |
1.7 |
26.4 |
0.3 |
|
9,622 |
66 |
9,688 |
>50% and < 70% |
4,769 |
297 |
78 |
703 |
5,847 |
|
6 |
6 |
14 |
26 |
|
0.1 |
2.0 |
17.8 |
0.5 |
|
6,621 |
119 |
6,740 |
>70% and < 80% |
394 |
43 |
33 |
6 |
476 |
|
1 |
1 |
8 |
10 |
|
0.3 |
2.6 |
23.4 |
2.1 |
|
405 |
52 |
457 |
>80% and < 90% |
55 |
11 |
24 |
2 |
92 |
|
|
|
5 |
5 |
|
0.3 |
3.4 |
20.9 |
6.1 |
|
158 |
42 |
200 |
>90% and < 100% |
31 |
7 |
20 |
1 |
59 |
|
|
|
7 |
7 |
|
0.6 |
5.1 |
34.9 |
12.9 |
|
89 |
31 |
120 |
>100% and < 110% |
53 |
4 |
15 |
|
72 |
|
|
|
5 |
5 |
|
0.3 |
4.2 |
34.6 |
7.6 |
|
34 |
21 |
55 |
>110% and < 130% |
22 |
3 |
111 |
4 |
140 |
|
|
|
22 |
22 |
|
0.4 |
5.4 |
19.4 |
16.0 |
|
60 |
421 |
481 |
>130% and < 150% |
6 |
10 |
10 |
|
26 |
|
|
1 |
4 |
5 |
|
0.9 |
6.3 |
40.6 |
18.1 |
|
44 |
29 |
73 |
>150% |
30 |
6 |
42 |
|
78 |
|
|
1 |
29 |
30 |
|
0.5 |
9.8 |
69.6 |
38.1 |
|
149 |
72 |
221 |
Total with LTVs |
13,589 |
626 |
385 |
1,511 |
16,111 |
|
14 |
13 |
108 |
135 |
|
0.1 |
2.1 |
27.9 |
0.9 |
|
17,182 |
853 |
18,035 |
Total portfolio average LTV% |
45 |
56 |
114 |
48 |
47 |
|
n/a |
n/a |
n/a |
n/a |
|
n/a |
n/a |
n/a |
n/a |
|
48 |
119 |
51 |
Other (5) |
2,655 |
133 |
784 |
185 |
3,757 |
|
4 |
5 |
50 |
59 |
|
0.2 |
4.0 |
6.3 |
1.7 |
|
3,112 |
431 |
3,543 |
Development (6) |
2,865 |
205 |
178 |
174 |
3,422 |
|
11 |
3 |
80 |
94 |
|
0.4 |
1.6 |
44.8 |
2.9 |
|
3,634 |
246 |
3,880 |
Total |
19,109 |
964 |
1,347 |
1,870 |
23,290 |
|
29 |
21 |
238 |
288 |
|
0.2 |
2.3 |
17.6 |
1.3 |
|
23,928 |
1,530 |
25,458 |
Notes:
(1) CRE current exposure comprises gross lending, interest rate hedging derivatives and other assets carried at fair value that are managed as part of the overall CRE portfolio.
(2) The exposure in Stage 3 mainly related to legacy assets.
(3) Includes exposures relating to non-modelled portfolios and other exposures carried at fair value, including derivatives.
(4) ECL provisions coverage is ECL provisions divided by current exposure.
(5) Relates mainly to business banking, rate risk management products and unsecured corporate lending. The low Stage 3 ECL provisions coverage was driven by a single large exposure, which has been written down to the expected recoverable amount.
(6) Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
Key points (audited)
· Overall The majority of the CRE portfolio was managed in the UK within Commercial Banking, Private Banking and UK PBB. The remainder was managed in Ulster Bank RoI and NatWest Markets. Business appetite and strategy remain aligned across the segments.
· 2018 trends Growth in the commercial property market slowed during 2018.
· Performance varied widely by sub-sector with strong growth from industrials contrasting with material decline in parts of the retail sector.
· Credit quality The CRE retail portfolio had a low default rate, with a limited number of new defaults. The sub-sector was monitored on a regular basis and credit quality was in line with the wider CRE portfolio.
· Economics Fundamentals such as rental incomes, property values and investor/occupier demand for other commercial sub-sectors appeared more robust, however, all are exposed to some degree to the risk of a disorderly exit from the EU. Conditions for the mainstream residential sector remained resilient, supported by mortgage availability and high levels of employment. However, the higher value end of the market was characterised by low transaction volumes.
· Risk appetite Lending criteria for commercial real estate were at conservative levels, contributing to materially reduced leverage for new origination in London offices and parts of the retail sector.
Capital and risk management
Credit risk Banking activities continued
Flow statements ( audited )
The ECL flow statements analyse the key elements that drive the movement of ECL and related income statement over the reporting period. The key themes are:
· The flow statements capture the changes in ECL as well as the changes in related financial assets used in determining ECL. Exposures in this section may therefore differ from those reported in other tables in the credit risk section, principally in relation to exposures in Stage 1 and Stage 2. These differences do not have a material ECL impact.
· Financial assets presented in the flow statements include treasury liquidity portfolios, comprising balances at central banks and debt securities, as well as loans. Both modelled and non-modelled portfolios are included.
· Inter-Group transfers were a feature of the ECL flows during 2018 as a result of ring-fencing related changes. These transfers had no impact at a RBS Group-wide level.
· Stage transfers (for example, exposures moving from Stage 1 to Stage 2) these transfers are a key feature of the ECL movements, with the net re-measurement cost of transitioning to a worse stage being a primary driver of income statement charges for the period (likewise there is an ECL benefit for accounts improving stage).
· Changes in risk parameters captures the reassessment of the ECL within a given stage, including any ECL overlays and residual income statement gains or losses at the point of write-off or accounting write-down.
· Other (P&L only items) includes any subsequent changes in the value of written-down assets (for example, fortuitous recoveries) along with other direct write-off items such as direct recovery costs. Note: other (P&L only items) only affects the income statement and does not impact the balance sheet ECL movements.
· Amounts written-off represent the gross asset written-down against accounts with ECL, including the net asset write-down for debt sale activity.
· There were small amounts of ECL flows from Stage 3 to Stage 1 during the year. This does not however indicate that accounts can return from Stage 3 to Stage 1 directly. On a similar basis, flows from Stage 1 to Stage 3 were observed, however this also included legitimate transfers due to unexpected default events. The small number of write-offs in Stage 1 and 2 reflect the effect of portfolio debt sales and also staging at the start of the analysis period.
· The impact of model changes during 2018 were not material at a RBS Group-wide level or on the portfolios disclosed below.
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
||||
|
Financial |
|
|
Financial |
|
|
Financial |
|
|
Financial |
|
Group total |
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
At 1 January 2018 |
419,038 |
262 |
|
29,637 |
621 |
|
10,595 |
3,565 |
|
459,270 |
4,448 |
Currency translation and other adjustments |
1,820 |
(6) |
|
88 |
17 |
|
50 |
(11) |
|
1,958 |
|
Transfers from Stage 1 to Stage 2 |
(18,416) |
(52) |
|
18,416 |
52 |
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1 |
13,723 |
228 |
|
(13,723) |
(228) |
|
|
|
|
|
|
Transfers to Stage 3 |
(1,205) |
(3) |
|
(1,837) |
(108) |
|
3,042 |
111 |
|
|
|
Transfers from Stage 3 |
1,272 |
16 |
|
1,523 |
163 |
|
(2,795) |
(179) |
|
|
|
Net re-measurement of ECL on stage transfer |
|
(207) |
|
|
247 |
|
|
447 |
|
|
487 |
Changes in risk parameters (model inputs) |
|
34 |
|
|
74 |
|
|
36 |
|
|
144 |
Other changes in net exposure |
6,312 |
29 |
|
(6,716) |
(32) |
|
(1,633) |
(85) |
|
(2,037) |
(88) |
Other (P&L only items - primarily fortuitous recoveries) |
|
1 |
|
|
3 |
|
|
(149) |
|
|
(145) |
Income statement (releases)/charges |
|
(143) |
|
|
292 |
|
|
249 |
|
|
398 |
Amounts written-off |
(3) |
(3) |
|
(28) |
(28) |
|
(1,463) |
(1,463) |
|
(1,494) |
(1,494) |
Other movements |
|
(1) |
|
|
(6) |
|
|
(94) |
|
|
(101) |
At 31 December 2018 |
422,541 |
297 |
|
27,360 |
772 |
|
7,796 |
2,327 |
|
457,697 |
3,396 |
Net carrying amount |
422,244 |
|
|
26,588 |
|
|
5,469 |
|
|
454,301 |
|
The following flow statements provide insight into the material portfolios underpinning the Group flow statements.
Personal
The following flow statements are at a portfolio level.
UK PBB - mortgages |
|
|
|
|
|
|
|
|
|
|
|
At 1 January 2018 |
124,180 |
11 |
|
10,621 |
64 |
|
1,353 |
157 |
|
136,154 |
232 |
Transfers from Stage 1 to Stage 2 |
(4,928) |
(1) |
|
4,928 |
1 |
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1 |
4,245 |
15 |
|
(4,245) |
(15) |
|
|
|
|
|
|
Transfers to Stage 3 |
(61) |
|
|
(327) |
(5) |
|
388 |
5 |
|
|
|
Transfers from Stage 3 |
7 |
|
|
235 |
23 |
|
(242) |
(23) |
|
|
|
Net re-measurement of ECL on stage transfer |
|
(15) |
|
|
11 |
|
|
17 |
|
|
13 |
Changes in risk parameters (model inputs) |
|
|
|
|
4 |
|
|
51 |
|
|
55 |
Other changes in net exposure |
4,228 |
|
|
(970) |
(6) |
|
(257) |
(14) |
|
3,001 |
(20) |
Other (P&L only items) |
|
1 |
|
|
|
|
|
(6) |
|
|
(5) |
Income statement (releases)/charges |
|
(14) |
|
|
9 |
|
|
48 |
|
|
43 |
Amounts written-off |
|
|
|
(1) |
(1) |
|
(26) |
(26) |
|
(27) |
(27) |
Other movements |
|
|
|
|
(2) |
|
|
(35) |
|
|
(37) |
At 31 December 2018 |
127,671 |
10 |
|
10,241 |
74 |
|
1,216 |
132 |
|
139,128 |
216 |
Net carrying amount |
127,661 |
|
|
10,167 |
|
|
1,084 |
|
|
138,912 |
|
Key points
· Overall ECL reduction was primarily driven by business-as-usual write-offs in Stage 3.
· Stage 1 ECL levels remained steady despite portfolio growth during 2018 as a result of modest PD reduction, with Stage 2 ECL showing an increase as a result of some additional forward-looking provisions being taken during the year.
· Transfers from Stage 3 back to the performing book were higher than those in Personal unsecured lending, due to the higher cure activity typically seen in mortgages.
· The increase in Stage 3 ECL changes in risk parameters reflected the monthly assessment of the loss requirement, capturing underlying changes in risk and forward-looking assessments.
· Write-off of any residual shortfall following the sale of a repossessed property typically occurs within five years, although this period can be longer, reflecting the ongoing support for customers who engage constructively with RBS.
Capital and risk management
Credit risk Banking activities continued
Flow statements (audited)
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
||||
|
Financial |
|
|
Financial |
|
|
Financial |
|
|
Financial |
|
UK PBB - credit cards |
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
At 1 January 2018 |
2,841 |
52 |
|
997 |
94 |
|
105 |
75 |
|
3,943 |
221 |
Transfers from Stage 1 to Stage 2 |
(739) |
(15) |
|
739 |
15 |
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1 |
763 |
50 |
|
(763) |
(50) |
|
|
|
|
|
|
Transfers to Stage 3 |
(42) |
(1) |
|
(88) |
(20) |
|
130 |
21 |
|
|
|
Transfers from Stage 3 |
1 |
1 |
|
2 |
1 |
|
(3) |
(2) |
|
|
|
Net re-measurement of ECL on stage transfer |
|
(38) |
|
|
66 |
|
|
68 |
|
|
96 |
Changes in risk parameters (model inputs) |
|
(15) |
|
|
|
|
|
(4) |
|
|
(19) |
Other changes in net exposure |
(192) |
2 |
|
343 |
17 |
|
(45) |
|
|
106 |
19 |
Other (P&L only items) |
|
3 |
|
|
(1) |
|
|
(11) |
|
|
(9) |
|
|
|
|
|
|
|
|
|
|
|
|
Income statement (releases)/charges |
|
(48) |
|
|
82 |
|
|
53 |
|
|
87 |
Amounts written-off |
|
|
|
(4) |
(4) |
|
(81) |
(81) |
|
(85) |
(85) |
Other movements |
|
|
|
|
(1) |
|
|
(6) |
|
|
(7) |
At 31 December 2018 |
2,632 |
36 |
|
1,226 |
118 |
|
106 |
71 |
|
3,964 |
225 |
Net carrying amount |
2,596 |
|
|
1,108 |
|
|
35 |
|
|
3,739 |
|
Key points
· Overall ECL increased primarily due to increased levels of Stage 2 inflows in the first half of the year. This was the result of activity to calibrate and refine the criteria used to identify significant increase in credit risk, with underlying performance stable.
· Transfers from Stage 2 to Stage 1 were higher than in other personal portfolios, primarily due to the ECL assessment period being reset when cards are re-issued.
· ECL transfers from Stage 3 back to the performing book were relatively small as expected.
· The amounts in other (P&L only items) mainly reflected cash recoveries after write-off. These benefited the income statement without affecting ECL.
· Amounts written-off primarily represented charge-offs (analogous to write-off) which typically occurs after 12 missed payments, and also 2018 debt sale activity.
UK PBB - other personal unsecured |
|
|
|
|
|
|
|
|
|
|
|
At 1 January 2018 |
4,518 |
46 |
|
1,790 |
164 |
|
705 |
582 |
|
7,013 |
792 |
Transfers from Stage 1 to Stage 2 |
(1,452) |
(18) |
|
1,452 |
18 |
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1 |
733 |
42 |
|
(733) |
(42) |
|
|
|
|
|
|
Transfers to Stage 3 |
(51) |
(1) |
|
(182) |
(50) |
|
233 |
51 |
|
|
|
Transfers from Stage 3 |
2 |
|
|
15 |
4 |
|
(17) |
(4) |
|
|
|
Net re-measurement of ECL on stage transfer |
|
(34) |
|
|
110 |
|
|
114 |
|
|
190 |
Changes in risk parameters (model inputs) |
|
2 |
|
|
58 |
|
|
(1) |
|
|
59 |
Other changes in net exposure |
1,325 |
19 |
|
(363) |
(11) |
|
(104) |
(7) |
|
858 |
1 |
Other (P&L only items - primarily fortuitous recoveries) |
|
|
|
|
|
|
|
(42) |
|
|
(42) |
Income statement (releases)/charges |
|
(13) |
|
|
157 |
|
|
64 |
|
|
208 |
Amounts written-off |
(2) |
(2) |
|
(9) |
(9) |
|
(322) |
(322) |
|
(333) |
(333) |
Other movements |
|
|
|
|
(3) |
|
|
(19) |
|
|
(22) |
At 31 December 2018 |
5,073 |
54 |
|
1,970 |
239 |
|
495 |
394 |
|
7,538 |
687 |
Net carrying amount |
5,019 |
|
|
1,731 |
|
|
101 |
|
|
6,851 |
|
Key points
· Overall ECL reduction was mainly driven by debt sale activity and business-as-usual write-offs in Stage 3, both reflected in amounts written-off.
· Increases in Stage 2 reflected the underlying performance of recent new business growth maturing. Additionally, the ECL overlay for economic uncertainty contributed to the uplift captured in changes in risk parameters.
· The portfolio continued to experience cash recoveries after write-off, reported in other (P&L only items primarily fortuitous recoveries). This benefited the income statement without affecting ECL.
· Write-off occurs once recovery activity with the customer has been concluded and there are no further recoveries expected, but no later than six years after default.
Capital and risk management
Credit risk Banking activities continued
Flow statements (audited)
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
||||
|
Financial |
|
|
Financial |
|
|
Financial |
|
|
Financial |
|
UK PBB - business banking |
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
At 1 January 2018 |
6,505 |
29 |
|
684 |
29 |
|
268 |
224 |
|
7,457 |
282 |
Transfers from Stage 1 to Stage 2 |
(691) |
(4) |
|
691 |
4 |
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1 |
366 |
12 |
|
(366) |
(12) |
|
|
|
|
|
|
Transfers to Stage 3 |
(35) |
(1) |
|
(63) |
(8) |
|
98 |
9 |
|
|
|
Transfers from Stage 3 |
2 |
2 |
|
9 |
2 |
|
(11) |
(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-measurement of ECL on stage transfer |
|
(12) |
|
|
24 |
|
|
43 |
|
|
55 |
Changes in risk parameters (model inputs) |
|
(6) |
|
|
2 |
|
|
(11) |
|
|
(15) |
Other changes in net exposure |
156 |
3 |
|
(57) |
3 |
|
(36) |
(23) |
|
63 |
(17) |
Other (P&L only items) |
|
|
|
|
|
|
|
(31) |
|
|
(31) |
|
|
|
|
|
|
|
|
|
|
|
|
Income statement (releases)/charges |
|
(15) |
|
|
29 |
|
|
(22) |
|
|
(8) |
Amounts written-off |
|
|
|
(1) |
(1) |
|
(84) |
(84) |
|
(85) |
(85) |
Other movements |
|
(1) |
|
|
|
|
|
(1) |
|
|
(2) |
At 31 December 2018 |
6,303 |
22 |
|
897 |
43 |
|
235 |
153 |
|
7,435 |
218 |
Net carrying amount |
6,281 |
|
|
854 |
|
|
82 |
|
|
7,217 |
|
Key points
· Overall ECL reduction was mainly driven by business-as-usual write-offs in Stage 3.
· Stage 2 ECL did increase during the year as a result of net Stage 2 inflows from Stage 1, partly driven by PD model refinements throughout the year.
· The portfolio continued to experience cash recoveries after write-off, reported in other (P&L only items). This benefited the income statement without affecting ECL.
· Write-off occurs once recovery activity with the customer has been concluded and there are no further recoveries expected, but no later than five years after default.
UK PBB - commercial |
|
|
|
|
|
|
|
|
|
|
|
At 1 January 2018 |
6,771 |
6 |
|
595 |
11 |
|
126 |
57 |
|
7,492 |
74 |
Currency translation and other adjustments |
1 |
|
|
|
|
|
|
|
|
1 |
|
Inter-Group transfers |
(71) |
|
|
(1) |
|
|
(5) |
|
|
(77) |
|
Transfers from Stage 1 to Stage 2 |
(781) |
(2) |
|
781 |
2 |
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1 |
389 |
6 |
|
(389) |
(6) |
|
|
|
|
|
|
Transfers to Stage 3 |
(16) |
|
|
(70) |
(1) |
|
86 |
1 |
|
|
|
Transfers from Stage 3 |
1 |
|
|
25 |
|
|
(26) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-measurement of ECL on stage transfer |
|
(4) |
|
|
10 |
|
|
19 |
|
|
25 |
Changes in risk parameters (model inputs) |
|
4 |
|
|
|
|
|
|
|
|
4 |
Other changes in net exposure |
(886) |
(1) |
|
(123) |
(1) |
|
(62) |
(6) |
|
(1,071) |
(8) |
Other (P&L only items) |
|
(2) |
|
|
1 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income statement (releases)/charges |
|
(3) |
|
|
10 |
|
|
14 |
|
|
21 |
Amounts written-off |
|
|
|
|
|
|
(27) |
(27) |
|
(27) |
(27) |
Other movements |
|
|
|
|
|
|
|
(1) |
|
|
(1) |
At 31 December 2018 |
5,408 |
9 |
|
818 |
15 |
|
92 |
43 |
|
6,318 |
67 |
Net carrying amount |
5,399 |
|
|
803 |
|
|
49 |
|
|
6,251 |
|
Key point
· Overall ECL reduced slightly during the year, with some modest Stage 1 and Stage 2 ECL increases being more than offset by Stage 3 write-offs, which was the key driver of the overall income statement charge for 2018.
Capital and risk management
Credit risk Banking activities continued
Flow statements (audited)
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
||||
|
Financial |
|
|
Financial |
|
|
Financial |
|
|
Financial |
|
Ulster Bank RoI - mortgages |
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
At 1 January 2018 |
10,650 |
8 |
|
1,532 |
72 |
|
3,167 |
881 |
|
15,349 |
961 |
Currency translation and other adjustments |
94 |
|
|
12 |
1 |
|
15 |
3 |
|
121 |
4 |
Transfers from Stage 1 to Stage 2 |
(344) |
(1) |
|
344 |
1 |
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1 |
414 |
7 |
|
(414) |
(7) |
|
|
|
|
|
|
Transfers to Stage 3 |
(32) |
|
|
(124) |
(8) |
|
156 |
8 |
|
|
|
Transfers from Stage 3 |
4 |
|
|
245 |
36 |
|
(249) |
(36) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-measurement of ECL on stage transfer |
|
(6) |
|
|
(4) |
|
|
11 |
|
|
1 |
Changes in risk parameters (model inputs) |
|
3 |
|
|
(1) |
|
|
(23) |
|
|
(21) |
Other changes in net exposure |
(4) |
|
|
(188) |
(2) |
|
(630) |
14 |
|
(822) |
12 |
Other (P&L only items) |
|
(2) |
|
|
2 |
|
|
28 |
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
Income statement (releases)/charges |
|
(5) |
|
|
(5) |
|
|
30 |
|
|
20 |
Amounts written-off |
|
|
|
(13) |
(13) |
|
(322) |
(322) |
|
(335) |
(335) |
Other movements |
|
|
|
|
|
|
|
(20) |
|
|
(20) |
At 31 December 2018 |
10,782 |
11 |
|
1,394 |
75 |
|
2,137 |
516 |
|
14,313 |
602 |
Net carrying amount |
10,771 |
|
|
1,319 |
|
|
1,621 |
|
|
13,711 |
|
Key points
· The overall ECL reduction was driven by reduced ECL in Stage 3, which was subject to significant debt sale activity in 2018 (approximately £0.9 billion of gross exposures were sold during the year).
· In addition to the debt sale activity, the reduction in ECL in Stage 3 reflected ongoing improvements in underlying portfolio performance.
· The reduction in Stage 2 exposures resulted from the portfolio debt sale and decreasing stock of exposures meeting the high-risk backstop criteria. This reflected ongoing improvements in the underlying portfolio performance.
· Write-off generally occurs once the repossessed property has been sold and there is a residual shortfall balance remaining outstanding which has been deemed irrecoverable.
Wholesale
Commercial Banking |
|
|
|
|
|
|
|
|
|
|
|
At 1 January 2018 |
84,228 |
58 |
|
9,056 |
106 |
|
3,735 |
1,156 |
|
97,019 |
1,320 |
Currency translation and other adjustments |
367 |
|
|
47 |
(1) |
|
29 |
(4) |
|
443 |
(5) |
Inter-Group transfers |
(2,106) |
(1) |
|
(92) |
|
|
(375) |
(14) |
|
(2,573) |
(15) |
Transfers from Stage 1 to Stage 2 |
(8,224) |
(9) |
|
8,224 |
9 |
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1 |
5,911 |
52 |
|
(5,911) |
(52) |
|
|
|
|
|
|
Transfers to Stage 3 |
(881) |
|
|
(938) |
(13) |
|
1,819 |
13 |
|
|
|
Transfers from Stage 3 |
1,056 |
11 |
|
937 |
89 |
|
(1,993) |
(100) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-measurement of ECL on stage transfer |
|
(57) |
|
|
13 |
|
|
160 |
|
|
116 |
Changes in risk parameters (model inputs) |
|
46 |
|
|
8 |
|
|
41 |
|
|
95 |
Other changes in net exposure |
(4,274) |
(1) |
|
(2,748) |
(19) |
|
(489) |
(40) |
|
(7,511) |
(60) |
Other (P&L only items) |
|
|
|
|
1 |
|
|
(8) |
|
|
(7) |
|
|
|
|
|
|
|
|
|
|
|
|
Income statement (releases)/charges |
|
(12) |
|
|
3 |
|
|
153 |
|
|
144 |
Amounts written-off |
|
|
|
|
|
|
(460) |
(460) |
|
(460) |
(460) |
Other movements |
|
|
|
|
|
|
|
(10) |
|
|
(10) |
At 31 December 2018 |
76,077 |
99 |
|
8,575 |
140 |
|
2,266 |
742 |
|
86,918 |
981 |
Net carrying amount |
75,978 |
|
|
8,435 |
|
|
1,524 |
|
|
85,937 |
|
Key points
· ECL reduced over the course of 2018 as write-offs outweighed ECL charges.
· Stage 3 charges were mainly driven by a charge on new to default exposures where the ECL can increase significantly following an individual assessment.
· Stage 1 and Stage 2 changes to risk parameters largely reflected the increase in ECL for economic uncertainty and a change to the forward-looking modelling approach for point-in-time PDs, where PDs now revert to long-run average after one year rather than five years.
· Inter-Group transfers reflected the impact of transfers completed in preparation of ring-fencing. The reductions in net exposure were also related to ring-fencing changes, where short-term borrowing was renewed in other franchises.
· Release in Stage 1 was driven by a reduction in ECL for exposures transferring from Stage 2 and Stage 3, which previously had a lifetime ECL but are now assessed for 12 month ECL.
Capital and risk management
Credit risk Banking activities continued
Flow statements (audited)
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
||||
|
Financial |
|
|
Financial |
|
|
Financial |
|
|
Financial |
|
NatWest Markets (1) |
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
At 1 January 2018 |
9,089 |
2 |
|
1,276 |
42 |
|
456 |
190 |
|
10,821 |
234 |
Currency translation and other adjustments |
252 |
|
|
22 |
(2) |
|
3 |
3 |
|
277 |
1 |
Inter-Group transfers |
3,590 |
|
|
(4) |
1 |
|
374 |
14 |
|
3,960 |
15 |
Transfers from Stage 1 to Stage 2 |
(393) |
|
|
393 |
|
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1 |
318 |
28 |
|
(318) |
(28) |
|
|
|
|
|
|
Transfers to Stage 3 |
|
|
|
(3) |
|
|
3 |
|
|
|
|
Transfers from Stage 3 |
|
|
|
35 |
|
|
(35) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-measurement of ECL on stage transfer |
|
(26) |
|
|
5 |
|
|
|
|
|
(21) |
Changes in risk parameters (model inputs) |
|
(5) |
|
|
4 |
|
|
|
|
|
(1) |
Other changes in net exposure |
19,902 |
8 |
|
(669) |
(8) |
|
(4) |
(6) |
|
19,229 |
(6) |
Other (P&L only items - primarily fortuitous recoveries) |
|
|
|
|
|
|
|
(64) |
|
|
(64) |
|
|
|
|
|
|
|
|
|
|
|
|
Income statement (releases)/charges |
|
(23) |
|
|
1 |
|
|
(70) |
|
|
(92) |
Amounts written-off |
|
|
|
|
|
|
(89) |
(89) |
|
(89) |
(89) |
Other movements |
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2018 |
32,758 |
7 |
|
732 |
14 |
|
708 |
112 |
|
34,198 |
133 |
Net carrying amount |
32,751 |
|
|
718 |
|
|
596 |
|
|
34,065 |
|
Note:
(1) Reflects NatWest Markets segments and include NWM N.V..
Key points
· Stage 3 financial assets include £166 million (1 January 2018 £105 million) purchased or originated credit impaired (POCI) assets. No ECL impairment was held on these positions and a £61 million impairment recovery was recognised on these POCI assets during 2018 (included in other (P&L only items primarily fortuitous recoveries) ).
· Stage 1 and Stage 2 changes to risk parameters largely reflected the increase in ECL for economic uncertainty, and a change to the forward-looking modelling approach for point-in-time PDs, where PDs now revert to long run average after one year rather than five years.
· The release in Stage 1 was driven by a reduction in ECL on exposures transferring from Stage 2, which previously had a lifetime ECL but are now assessed for 12 month ECL.
· The increase in Stage 1 exposure was due to a combination of transfers and short-term borrowing to governments and central banks which are now in NatWest Markets following changes in preparation for ring-fencing.
· The portfolio experienced fortuitous recoveries, reported in other (P&L only items primarily fortuitous recoveries ). This benefited the income statement without affecting ECL.
Private Banking |
|
|
|
|
|
|
|
|
|
|
|
At 1 January 2018 |
13,046 |
18 |
|
412 |
9 |
|
300 |
27 |
|
13,758 |
54 |
Currency translation and other adjustments |
12 |
|
|
1 |
2 |
|
|
|
|
13 |
2 |
Inter-Group transfers |
23 |
|
|
|
|
|
|
|
|
23 |
|
Transfers from Stage 1 to Stage 2 |
(270) |
(1) |
|
270 |
1 |
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1 |
92 |
2 |
|
(92) |
(2) |
|
|
|
|
|
|
Transfers to Stage 3 |
(60) |
|
|
(8) |
|
|
68 |
|
|
|
|
Transfers from Stage 3 |
7 |
|
|
1 |
|
|
(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-measurement of ECL on stage transfer |
|
(2) |
|
|
3 |
|
|
1 |
|
|
2 |
Changes in risk parameters (model inputs) |
|
(3) |
|
|
(2) |
|
|
1 |
|
|
(4) |
Other changes in net exposure |
1,100 |
|
|
(65) |
(1) |
|
(121) |
(2) |
|
914 |
(3) |
Other (P&L only items) |
|
|
|
|
|
|
|
(1) |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Income statement releases |
|
(5) |
|
|
|
|
|
(1) |
|
|
(6) |
Amounts written-off |
|
|
|
|
|
|
(7) |
(7) |
|
(7) |
(7) |
Other movements |
|
|
|
|
|
|
|
(1) |
|
|
(1) |
At 31 December 2018 |
13,950 |
14 |
|
519 |
10 |
|
232 |
19 |
|
14,701 |
43 |
Net carrying amount |
13,936 |
|
|
509 |
|
|
213 |
|
|
14,658 |
|
Key points
· ECL reduced due to a combination of write-offs and impairment releases.
· The majority of the release was in Stage 1, due to a reduction in loss rates for Retail exposures.
· Exposure increased in Stage 1 reflecting growth in the portfolio (primarily mortgages driven) with minimal ECL impact due to high credit quality.
Capital and risk management
Credit risk Banking activities continued
Flow statements (audited)
|
Stage 1 |
|
Stage 2 |
|
Stage 3 |
|
Total |
||||
|
Financial |
|
|
Financial |
|
|
Financial |
|
|
Financial |
|
RBS International |
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
|
assets |
ECL |
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
At 1 January 2018 |
8,652 |
5 |
|
385 |
5 |
|
118 |
28 |
|
9,155 |
38 |
Currency translation and other adjustments |
98 |
(2) |
|
|
2 |
|
|
(1) |
|
98 |
(1) |
Inter-Group transfers |
1,834 |
|
|
95 |
|
|
|
|
|
1,929 |
|
Transfers from Stage 1 to Stage 2 |
(299) |
|
|
299 |
|
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1 |
340 |
5 |
|
(340) |
(5) |
|
|
|
|
|
|
Transfers to Stage 3 |
(14) |
|
|
(11) |
|
|
25 |
|
|
|
|
Transfers from Stage 3 |
190 |
|
|
4 |
|
|
(194) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-measurement of ECL on stage transfer |
|
(4) |
|
|
2 |
|
|
|
|
|
(2) |
Changes in risk parameters (model inputs) |
|
2 |
|
|
|
|
|
|
|
|
2 |
Other changes in net exposure |
15,948 |
|
|
(156) |
|
|
155 |
(1) |
|
15,947 |
(1) |
Other (P&L only items) |
|
(1) |
|
|
1 |
|
|
(1) |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Income statement (releases)/charges |
|
(3) |
|
|
3 |
|
|
(2) |
|
|
(2) |
Amounts written-off |
|
|
|
|
|
|
(9) |
(9) |
|
(9) |
(9) |
Other movements |
|
|
|
|
|
|
|
|
|
|
|
At 31 December 2018 |
26,749 |
6 |
|
276 |
4 |
|
95 |
17 |
|
27,120 |
27 |
Net carrying amount |
26,743 |
|
|
272 |
|
|
78 |
|
|
27,093 |
|
Key points
· The reduction in ECL was driven by write-offs and Stage 3 impairment releases, both of which are primarily in the Spanish mortgage portfolio.
· The increases in exposure were partly due to new lending, but mainly due to the establishment of a liquidity portfolio across central and correspondent banks and sovereign bond holdings. These exposures were in Stage 1 with very low credit risk and contribute minimal ECL.
Capital and risk management
Credit risk Banking activities continued
Stage 2 decomposition arrears status and contributing factors
The tables below summarise Stage 2 decomposition for the Personal and Wholesale portfolios.
|
UK mortgages |
|
RoI mortgages |
|
Other mortgages |
|
Credit cards |
|
Other |
|
Total |
||||||
|
Loans |
ECL |
|
Loans |
ECL |
|
Loans |
ECL |
|
Loans |
ECL |
|
Loans |
ECL |
|
Loans |
ECL |
31 December 2018 |
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
£m |
£m |
Personal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently in arrears (>30 DPD) |
658 |
10 |
|
90 |
10 |
|
3 |
|
|
17 |
6 |
|
88 |
22 |
|
856 |
48 |
Currently up-to-date |
9,612 |
64 |
|
1,292 |
66 |
|
|
|
|
1,226 |
114 |
|
1,985 |
225 |
|
14,115 |
469 |
- PD deterioration |
3,855 |
54 |
|
680 |
44 |
|
|
|
|
778 |
85 |
|
1,255 |
176 |
|
6,568 |
359 |
- Up-to-date, PD persistence |
1,448 |
5 |
|
54 |
1 |
|
|
|
|
337 |
17 |
|
440 |
26 |
|
2,279 |
49 |
- Other driver (adverse credit, forbearance etc) |
4,309 |
5 |
|
558 |
21 |
|
|
|
|
111 |
12 |
|
290 |
23 |
|
5,268 |
61 |
Total Stage 2 |
10,270 |
74 |
|
1,382 |
76 |
|
3 |
|
|
1,243 |
120 |
|
2,073 |
247 |
|
14,971 |
517 |
Key point
· In Personal exposures, as expected, ECL coverage was higher on accounts that are more than 30 days past due. Also in line with expectations, accounts exhibiting PD deterioration have a higher ECL coverage than accounts in Stage 2 for other reasons.
|
Property |
|
Corporate |
|
FI |
|
Other |
|
Total |
|||||
|
Loans |
ECL |
|
Loans |
ECL |
|
Loans |
ECL |
|
Loans |
ECL |
|
Loans |
ECL |
31 December 2018 |
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
£m |
£m |
|
£m |
£m |
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently in arrears (>30 DPD) |
255 |
7 |
|
315 |
5 |
|
1 |
|
|
|
|
|
571 |
12 |
Currently up-to-date |
1,622 |
32 |
|
8,438 |
195 |
|
473 |
7 |
|
22 |
|
|
10,555 |
234 |
- PD deterioration |
924 |
23 |
|
5,564 |
138 |
|
281 |
6 |
|
8 |
|
|
6,777 |
167 |
- Up-to-date, PD persistence |
57 |
1 |
|
170 |
5 |
|
4 |
|
|
|
|
|
231 |
6 |
- Other driver (forbearance, RoCL etc.) |
641 |
8 |
|
2,704 |
52 |
|
188 |
1 |
|
14 |
|
|
3,547 |
61 |
Total Stage 2 |
1,877 |
39 |
|
8,753 |
200 |
|
474 |
7 |
|
22 |
|
|
11,126 |
246 |
Key point
· In Wholesale exposures, the ECL coverage was broadly consistent in total. Coverage can vary across categories or sectors reflecting the individual characteristics of the customer and exposure type.
Stage 2 decomposition by SICR trigger
|
UK mortgages |
|
RoI mortgages |
|
Other mortgages |
|
Credit cards |
|
Other |
|
Total |
||||||
31 December 2018 |
£m |
% |
|
£m |
% |
|
£m |
% |
|
£m |
% |
|
£m |
% |
|
£m |
% |
Personal trigger (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PD movement |
4,273 |
41.6 |
|
767 |
55.6 |
|
|
|
|
793 |
63.8 |
|
1,307 |
63.0 |
|
7,140 |
47.7 |
PD persistence |
1,450 |
14.1 |
|
54 |
3.9 |
|
|
|
|
338 |
27.2 |
|
440 |
21.2 |
|
2,282 |
15.2 |
Adverse credit bureau recorded with credit reference agency |
2,996 |
29.2 |
|
|
|
|
|
|
|
61 |
4.9 |
|
101 |
4.9 |
|
3,158 |
21.1 |
Forbearance support provided |
206 |
2.0 |
|
2 |
0.1 |
|
|
|
|
|
|
|
13 |
0.6 |
|
221 |
1.5 |
Customers in collections |
144 |
1.4 |
|
57 |
4.1 |
|
|
|
|
5 |
0.4 |
|
36 |
1.7 |
|
242 |
1.6 |
Other reasons (2) |
982 |
9.6 |
|
502 |
36.3 |
|
|
|
|
46 |
3.7 |
|
151 |
7.3 |
|
1,681 |
11.2 |
Days past due >30 |
219 |
2.1 |
|
|
|
|
3 |
100.0 |
|
|
|
|
25 |
1.2 |
|
247 |
1.6 |
|
10,270 |
100 |
|
1,382 |
100 |
|
3 |
100 |
|
1,243 |
100 |
|
2,073 |
100 |
|
14,971 |
100 |
Key point
· The primary driver of credit deterioration was PD, which including persistence, accounted for the majority of movements to Stage 2. High risk back-stops, for example, forbearance, adverse credit bureau, provide additional valuable discrimination particularly on mortgages.
|
Property |
|
Corporate |
|
FI |
|
Other |
|
Total |
|||||
31 December 2018 |
£m |
% |
|
£m |
% |
|
£m |
% |
|
£m |
% |
|
£m |
% |
Wholesale trigger (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PD movement |
940 |
50.1 |
|
5,617 |
64.2 |
|
281 |
59.3 |
|
8 |
36.4 |
|
6,845 |
61.5 |
PD persistence |
57 |
3.0 |
|
171 |
2.0 |
|
4 |
0.8 |
|
|
|
|
232 |
2.1 |
Risk of Credit Loss |
321 |
17.1 |
|
1,964 |
22.4 |
|
103 |
21.7 |
|
|
|
|
2,388 |
21.5 |
Forbearance support provided |
65 |
3.5 |
|
209 |
2.4 |
|
|
|
|
|
|
|
274 |
2.5 |
Customers in collections |
9 |
0.5 |
|
43 |
0.5 |
|
|
|
|
|
|
|
52 |
0.5 |
Other reasons (3) |
251 |
13.4 |
|
525 |
6.0 |
|
85 |
17.9 |
|
14 |
63.6 |
|
875 |
7.9 |
Days past due >30 |
234 |
12.5 |
|
224 |
2.6 |
|
1 |
0.2 |
|
|
|
|
460 |
4.1 |
|
1,877 |
100 |
|
8,753 |
100 |
|
474 |
100 |
|
22 |
100 |
|
11,126 |
100 |
Notes:
(1) The data table is built on a hierarchical basis from top to bottom, for example, accounts with PD deterioration may also trigger backstop(s) but are only reported under PD deterioration.
(2) Includes customers who have accessed payday lending, interest only mortgages past end of term, a small number of mortgage customers on a highly flexible mortgage significantly behind their outline repayment plan and customers breaching risk appetite thresholds for new business acquisition. On the RoI mortgage portfolio, this reflected customers who remained in probation following the conclusion of forbearance support, exposures breaching risk appetite thresholds for new business acquisition and exposures classified as non-performing exposures under EBA requirements.
(3) Includes customers where a PD assessment cannot be undertaken due to missing PDs.
Key point
· The primary driver of credit deterioration was PD, which including persistence, accounted for 62% of Stage 2. The Risk of Credit Loss framework accounted for a further 21% highlighting the importance of expert judgement being used to identify deterioration.
Capital and risk management
Credit risk Banking activities continued
Stage 3 vintage analysis
The table below provides estimated vintage analysis of the material Stage 3 portfolios totalling 87% of the Stage 3 loans of £7.7 billion.
|
UK PBB |
Ulster RoI |
|
2018 |
mortgages |
mortgages |
Wholesale |
Stage 3 loans (£bn) |
1.2 |
2.1 |
3.4 |
Vintage (time in default): |
|
|
|
<1 year |
26% |
7% |
22% |
1-3 years |
21% |
12% |
19% |
3-5 years |
14% |
14% |
9% |
5-10 years |
35% |
63% |
50% |
>10 years |
4% |
4% |
|
|
100% |
100% |
100% |
Key points
· Mortgages The proportion of the Stage 3 defaulted population who have been in default for over five years reflected RBSs support for customers in financial difficulty. When customers continue to engage constructively with RBS making regular payments, RBS continues to support them. RBSs provisioning approach retains customers in Stage 3 for a life-time loss provisioning calculation even when their arrears status reverts to below 90 days past due.
· Wholesale The value of Stage 3 loans that have been impaired for 5-10 years was mainly due to customers being in a protracted formal insolvency process or subject to litigation or a complaints process.
Asset quality ( audited )
Asset quality analysis is based on internal asset quality ratings which have ranges for the probability of default. Customers are assigned credit grades, based on various credit grading models that reflect the key drivers of default for the customer type. All credit grades across RBS map to both an asset quality scale, used for external financial reporting, and a master grading scale for wholesale exposures used for internal management reporting across portfolios. The table that follows details the relationship between internal asset quality (AQ) bands and external ratings published by Standard & Poors (S&P), for illustrative purposes only. This relationship is established by observing S&Ps default study statistics, notably the one year default rates for each S&P rating grade. A degree of judgement is required to relate the probability of default ranges associated with the master grading scale to these default rates given that, for example, the S&P published default rates do not increase uniformly by grade and the historical default rate is nil for the highest rating categories.
The mapping to the S&P ratings is used by RBS as one of several benchmarks for its wholesale portfolios, depending on customer type and the purpose of the benchmark. The mapping is based on all issuer types rated by S&P. It should therefore be considered illustrative and does not, for instance, indicate that exposures reported against S&P ratings either have been or would be assigned those ratings if assessed by S&P. In addition, the relationship is not relevant for retail portfolios, smaller corporate exposures or specialist corporate segments given that S&P does not typically assign ratings to such entities.
Capital and risk management
Credit risk Banking activities continued
Asset quality (audited)
The table below summarises asset quality bands of gross loans and ECL by stage for the Personal portfolio.
Note:
(1) At 31 December 2018, AQ10 includes £0.6 billion RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but included in Stage 3.
Key points
· The majority of exposures were in AQ1-AQ4, with a significant proportion in AQ5-AQ8. As expected, mortgage exposures have a higher proportion in AQ1-AQ4 than unsecured borrowing.
· The relatively high level of Stage 3 impaired assets (AQ10) in RoI mortgages reflected their legacy mortgage portfolio and the residual effects from the financial crisis. In other personal, the relatively high level of exposures in AQ10 reflected the fact that impaired assets can be held on balance sheet with commensurate ECL provision for up to six years after default.
· ECL provisions coverage shows the expected trend with increased coverage in the poorer asset quality bands, and also by stage.
Capital and risk management
Credit risk Banking activities continued
Asset quality (audited)
The table below summarises asset quality bands of gross loans and ECL by stage for the Wholesale portfolio.
|
|
Gross loans |
|
ECL provisions |
|
ECL provisions coverage |
||||||||||||
|
|
Stage 1 |
Stage 2 |
Stage 3 |
|
Total |
|
Stage 1 |
Stage 2 |
Stage 3 |
|
Total |
|
Stage 1 |
Stage 2 |
Stage 3 |
|
Total |
2018 |
|
£m |
£m |
£m |
|
£m |
|
£m |
£m |
£m |
|
£m |
|
% |
% |
% |
|
% |
Property |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AQ1-AQ4 |
|
15,740 |
393 |
|
|
16,133 |
|
8 |
9 |
|
|
17 |
|
0.05 |
2.29 |
|
|
0.11 |
AQ5-AQ8 |
|
17,397 |
1,418 |
|
|
18,815 |
|
35 |
26 |
|
|
61 |
|
0.20 |
1.83 |
|
|
0.32 |
AQ9 |
|
8 |
66 |
|
|
74 |
|
|
4 |
|
|
4 |
|
|
6.06 |
|
|
5.41 |
AQ10 |
|
|
|
1,685 |
|
1,685 |
|
|
|
506 |
|
506 |
|
|
|
30.03 |
|
30.03 |
|
|
33,145 |
1,877 |
1,685 |
|
36,707 |
|
43 |
39 |
506 |
|
588 |
|
0.13 |
2.08 |
30.03 |
|
1.60 |
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AQ1-AQ4 |
|
21,814 |
773 |
|
|
22,587 |
|
13 |
14 |
|
|
27 |
|
0.06 |
1.81 |
|
|
0.12 |
AQ5-AQ8 |
|
40,004 |
7,647 |
|
|
47,651 |
|
93 |
171 |
|
|
264 |
|
0.23 |
2.24 |
|
|
0.55 |
AQ9 |
|
26 |
333 |
|
|
359 |
|
1 |
15 |
|
|
16 |
|
3.85 |
4.50 |
|
|
4.46 |
AQ10 |
|
|
|
1,643 |
|
1,643 |
|
|
|
634 |
|
634 |
|
|
|
38.59 |
|
38.59 |
|
|
61,844 |
8,753 |
1,643 |
|
72,240 |
|
107 |
200 |
634 |
|
941 |
|
0.17 |
2.28 |
38.59 |
|
1.30 |
Financial institutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AQ1-AQ4 |
|
22,150 |
247 |
|
|
22,397 |
|
5 |
5 |
|
|
10 |
|
0.02 |
2.02 |
|
|
0.04 |
AQ5-AQ8 |
|
2,352 |
222 |
|
|
2,574 |
|
7 |
2 |
|
|
9 |
|
0.30 |
0.90 |
|
|
0.35 |
AQ9 |
|
|
5 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
AQ10 |
|
|
|
35 |
|
35 |
|
|
|
22 |
|
22 |
|
|
|
62.86 |
|
62.86 |
|
|
24,502 |
474 |
35 |
|
25,011 |
|
12 |
7 |
22 |
|
41 |
|
0.05 |
1.48 |
62.86 |
|
0.16 |
Sovereign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AQ1-AQ4 |
|
6,780 |
22 |
|
|
6,802 |
|
1 |
|
|
|
1 |
|
0.01 |
|
|
|
0.01 |
AQ5-AQ8 |
|
161 |
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
AQ10 |
|
|
|
4 |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,941 |
22 |
4 |
|
6,967 |
|
1 |
|
|
|
1 |
|
0.01 |
|
|
|
0.01 |
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AQ1-AQ4 |
|
66,484 |
1,435 |
|
|
67,919 |
|
27 |
28 |
|
|
55 |
|
0.04 |
1.95 |
|
|
0.08 |
AQ5-AQ8 |
|
59,914 |
9,287 |
|
|
69,201 |
|
135 |
199 |
|
|
334 |
|
0.23 |
2.14 |
|
|
0.48 |
AQ9 |
|
34 |
404 |
|
|
438 |
|
1 |
19 |
|
|
20 |
|
2.94 |
4.70 |
|
|
4.57 |
AQ10 |
|
|
|
3,367 |
|
3,367 |
|
|
|
1,162 |
|
1,162 |
|
|
|
34.51 |
|
34.51 |
|
|
126,432 |
11,126 |
3,367 |
|
140,925 |
|
163 |
246 |
1,162 |
|
1,571 |
|
0.13 |
2.21 |
34.51 |
|
1.11 |
Key points
· Across the Wholesale portfolio, the asset quality band distribution differed reflecting the diverse nature of differing sectors. 48% of Wholesale lending exposure was in the AQ1-AQ4 band.
· The relatively low provision coverage for Stage 3 loans in the property sector reflected the secured nature of the exposures.
Credit risk Trading activities
This section covers the credit risk profile of RBSs trading activities. All disclosures are audited.
Security funding transactions and collateral (audited)
The table below captures securities funding transactions in NWM and Treasury. All transactions that are outside netting arrangements are in NWM.
|
Reverse repos |
|
Repos |
||||
|
|
|
Outside |
|
|
|
Outside |
|
|
Of which: |
netting |
|
|
Of which: |
netting |
|
Total |
can be offset |
arrangements |
|
Total |
can be offset |
arrangements |
2018 |
£m |
£m |
£m |
|
£m |
£m |
£m |
Gross |
68,044 |
65,057 |
2,987 |
|
70,097 |
68,940 |
1,157 |
IFRS offset |
(39,737) |
(39,737) |
|
|
(39,737) |
(39,737) |
|
Carrying value |
28,307 |
25,320 |
2,987 |
|
30,360 |
29,203 |
1,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master netting arrangements |
(762) |
(762) |
|
|
(762) |
(762) |
|
Securities collateral |
(24,548) |
(24,548) |
|
|
(28,441) |
(28,441) |
|
Potential for offset not recognised under IFRS |
(25,310) |
(25,310) |
|
|
(29,203) |
(29,203) |
|
Net |
2,997 |
10 |
2,987 |
|
1,157 |
|
1,157 |
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
Gross |
84,706 |
78,991 |
5,715 |
|
82,395 |
80,088 |
2,307 |
IFRS offset |
(43,974) |
(43,974) |
|
|
(43,974) |
(43,974) |
|
Carrying value |
40,732 |
35,017 |
5,715 |
|
38,421 |
36,114 |
2,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master netting arrangements |
(329) |
(329) |
|
|
(329) |
(329) |
|
Securities collateral |
(34,646) |
(34,646) |
|
|
(35,785) |
(35,785) |
|
Potential for offset not recognised under IFRS |
(34,975) |
(34,975) |
|
|
(36,114) |
(36,114) |
|
Net |
5,757 |
42 |
5,715 |
|
2,307 |
|
2,307 |
Capital and risk management
Credit risk Trading activities continued
Derivatives (audited)
The table below summarises 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 9. A significant proportion (more than 90%) of the derivatives relate to trading activities in NatWest Markets, the table below also includes hedging derivatives in Treasury.
|
2018 |
|
2017 |
||||||||
Notional |
|
|
|
|
|
|
|||||
GBP |
USD |
Euro |
Other |
Total |
Assets |
Liabilities |
Notional |
Assets |
Liabilities |
||
£bn |
£bn |
£bn |
£bn |
£bn |
£m |
£m |
£bn |
£m |
£m |
||
Gross exposure |
|
|
|
|
|
138,390 |
135,673 |
|
|
177,931 |
172,063 |
IFRS offset |
|
|
|
|
|
(5,041) |
(6,776) |
|
|
(17,088) |
(17,557) |
Carrying value |
2,895 |
5,129 |
4,323 |
1,632 |
13,979 |
133,349 |
128,897 |
|
15,482 |
160,843 |
154,506 |
Of which: |
|
|
|
|
|
|
|
|
|
|
|
Interest rate (1) |
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
81,855 |
74,004 |
|
|
99,065 |
91,025 |
Options purchased |
|
|
|
|
|
14,481 |
|
|
|
21,733 |
|
Options written |
|
|
|
|
|
|
16,371 |
|
|
|
21,021 |
Futures and forwards |
|
|
|
|
|
74 |
69 |
|
|
147 |
114 |
Total |
2,521 |
3,589 |
3,686 |
740 |
10,536 |
96,410 |
90,444 |
|
12,016 |
120,945 |
112,160 |
Exchange rate |
|
|
|
|
|
|
|
|
|
|
|
Spot, forwards and futures |
|
|
|
|
|
17,904 |
18,610 |
|
|
19,283 |
19,172 |
Currency swaps |
|
|
|
|
|
11,322 |
12,062 |
|
|
11,163 |
13,534 |
Options purchased |
|
|
|
|
|
7,319 |
|
|
|
8,765 |
|
Options written |
|
|
|
|
|
|
7,558 |
|
|
|
8,975 |
Total |
373 |
1,532 |
629 |
892 |
3,426 |
36,545 |
38,230 |
|
3,425 |
39,211 |
41,681 |
Credit |
1 |
7 |
8 |
|
16 |
346 |
208 |
|
38 |
531 |
558 |
Equity and commodity |
|
1 |
|
|
1 |
48 |
15 |
|
3 |
156 |
107 |
Carrying value |
|
|
|
|
13,979 |
133,349 |
128,897 |
|
15,482 |
160,843 |
154,506 |
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty mark-to-market netting |
|
|
|
|
|
(106,762) |
(106,762) |
|
|
(128,287) |
(128,287) |
Cash collateral |
|
|
|
|
|
(17,937) |
(15,227) |
|
|
(20,311) |
(18,035) |
Securities collateral |
|
|
|
|
|
(4,469) |
(3,466) |
|
|
(5,850) |
(3,952) |
Net exposure |
|
|
|
|
|
4,181 |
3,442 |
|
|
6,395 |
4,232 |
Of which outside netting arrangements |
|
|
|
|
2,061 |
1,708 |
|
|
2,261 |
1,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks (2) |
|
|
|
|
|
362 |
443 |
|
|
461 |
466 |
Other financial institutions (3) |
|
|
|
|
|
1,054 |
1,144 |
|
|
1,608 |
1,625 |
Corporate (4) |
|
|
|
|
|
2,510 |
1,817 |
|
|
3,843 |
2,065 |
Government (5) |
|
|
|
|
|
255 |
38 |
|
|
483 |
76 |
Net exposure |
|
|
|
|
|
4,181 |
3,442 |
|
|
6,395 |
4,232 |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
|
|
|
|
1,935 |
1,304 |
|
|
4,079 |
1,853 |
Europe |
|
|
|
|
|
1,308 |
1,465 |
|
|
1,643 |
1,777 |
US |
|
|
|
|
|
588 |
298 |
|
|
346 |
317 |
RoW |
|
|
|
|
|
350 |
375 |
|
|
327 |
285 |
Net exposure |
|
|
|
|
|
4,181 |
3,442 |
|
|
6,395 |
4,232 |
|
|
|
|
|
|
|
|
|
|
|
|
Asset quality of uncollateralised derivative assets |
|
|
|
|
|
|
|
|
|
||
AQ1-AQ4 |
|
|
|
|
|
3,384 |
|
|
|
5,173 |
|
AQ5-AQ8 |
|
|
|
|
|
773 |
|
|
|
1,216 |
|
AQ9 |
|
|
|
|
|
3 |
|
|
|
3 |
|
AQ10 |
|
|
|
|
|
21 |
|
|
|
3 |
|
Net exposure |
|
|
|
|
|
4,181 |
|
|
|
6,395 |
|
Notes:
(1) The notional amount of interest rate derivatives include £5,952 billion (2017 £7,400 billion) in respect of contracts cleared through central clearing counterparties.
(2) Transactions with certain counterparties with whom RBS has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions for example China where the collateral agreements are not deemed to be legally enforceable.
(3) Transactions with securitisation vehicles and funds where collateral posting is contingent on RBSs external rating.
(4) Mainly large corporates with whom RBS may have netting arrangements in place, but operational capability does not support collateral posting.
(5) Sovereigns and supranational entities with one-way collateral agreements in their favour.
Capital and risk management
Credit risk Trading activities continued
Derivatives: settlement basis and central counterparties (audited)
The table below summarises the derivative notional and fair value by trading and settlement method.
|
Notional |
|
Asset |
|
Liability |
|||||
|
|
Traded over the counter |
|
|
|
|
|
|
|
|
|
Traded on |
Settled |
Not settled |
|
|
Traded on |
Traded |
|
Traded on |
Traded |
|
recognised |
by central |
by central |
|
|
recognised |
over the |
|
recognised |
over the |
|
exchanges |
counterparties |
counterparties |
Total |
|
exchanges |
counter |
|
exchanges |
counter |
2018 |
£bn |
£bn |
£bn |
£bn |
|
£m |
£m |
|
£m |
£m |
Interest rate |
1,642 |
5,952 |
2,942 |
10,536 |
|
|
96,410 |
|
|
90,444 |
Exchange rate |
4 |
|
3,422 |
3,426 |
|
|
36,545 |
|
|
38,230 |
Credit |
|
|
16 |
16 |
|
|
346 |
|
|
208 |
Equity and commodity |
|
|
1 |
1 |
|
|
48 |
|
|
15 |
Total |
1,646 |
5,952 |
6,381 |
13,979 |
|
|
133,349 |
|
|
128,897 |
2017 |
|
|
|
|
|
|
|
|
|
|
Interest rate |
1,506 |
7,400 |
3,110 |
12,016 |
|
|
120,945 |
|
|
112,160 |
Exchange rate |
4 |
|
3,421 |
3,425 |
|
|
39,211 |
|
|
41,681 |
Credit |
|
|
38 |
38 |
|
|
531 |
|
|
558 |
Equity and commodity |
|
|
3 |
3 |
|
|
156 |
|
1 |
106 |
Total |
1,510 |
7,400 |
6,572 |
15,482 |
|
|
160,843 |
|
1 |
154,505 |
Debt securities ( audited )
The table below summarises debt securities held at mandatory fair value through profit or loss by issuer as well as ratings based on the lowest of Standard & Poors, Moodys and Fitch. A significant proportion (more than 95%) of these positions are trading securities in NatWest Markets.
|
Central and local government |
Financial |
|
|
||
|
UK |
US |
Other |
institutions |
Corporate |
Total |
2018 |
£m |
£m |
£m |
£m |
£m |
£m |
AAA |
|
|
2,093 |
1,459 |
7 |
3,559 |
AA to AA+ |
6,834 |
4,689 |
3,161 |
773 |
120 |
15,577 |
A to AA- |
|
|
4,571 |
482 |
51 |
5,104 |
BBB- to A- |
|
|
3,592 |
802 |
285 |
4,679 |
Non-investment grade |
|
|
81 |
832 |
237 |
1,150 |
Unrated |
|
|
|
572 |
8 |
580 |
Total |
6,834 |
4,689 |
13,498 |
4,920 |
708 |
30,649 |
|
|
|
|
|
|
|
Short positions |
(6,394) |
(2,008) |
(13,500) |
(1,724) |
(201) |
(23,827) |
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
|
1,474 |
1,576 |
21 |
3,071 |
AA to AA+ |
3,514 |
3,667 |
2,386 |
984 |
168 |
10,719 |
A to AA- |
|
|
7,224 |
427 |
78 |
7,729 |
BBB- to A- |
|
|
3,267 |
796 |
493 |
4,556 |
Non-investment grade |
|
|
385 |
552 |
171 |
1,108 |
Unrated |
|
|
|
255 |
43 |
298 |
Total |
3,514 |
3,667 |
14,736 |
4,590 |
974 |
27,481 |
|
|
|
|
|
|
|
Short positions |
(3,490) |
(2,501) |
(20,390) |
(1,945) |
(201) |
(28,527) |
Credit risk Cross border exposure
Cross border exposures comprise both banking and trading activities, including reverse repurchase agreements. Exposures comprise loans and advances, including finance leases and instalment credit receivables, and other monetary assets, such as debt securities. The geographical breakdown is based on the country of domicile of the borrower or guarantor of ultimate risk. Cross border exposures include non-local currency claims of overseas offices on local residents but exclude exposures to local residents in local currencies. The table below sets out cross border exposures greater than 0.5% of RBSs total assets.
|
Government |
Banks |
Other |
Total |
Short positions |
Net of short positions |
2018 |
£m |
£m |
£m |
£m |
£m |
£m |
Western Europe |
21,121 |
19,003 |
16,741 |
56,865 |
14,103 |
42,762 |
Of which: France |
3,396 |
10,209 |
1,579 |
15,184 |
1,626 |
13,558 |
Of which: Germany |
8,023 |
3,086 |
1,145 |
12,254 |
5,397 |
6,857 |
Of which: Netherlands |
1,142 |
675 |
3,739 |
5,556 |
985 |
4,571 |
United States |
13,558 |
5,458 |
8,379 |
27,395 |
2,103 |
25,292 |
Japan |
4,857 |
2,327 |
405 |
7,589 |
11 |
7,578 |
2017 |
|
|
|
|
|
|
France |
4,721 |
11,739 |
2,320 |
18,780 |
3,324 |
15,456 |
Germany |
7,643 |
5,819 |
2,165 |
15,627 |
9,957 |
5,670 |
Netherlands |
1,897 |
798 |
5,395 |
8,090 |
986 |
7,104 |
United States |
8,697 |
4,494 |
8,048 |
21,239 |
2,607 |
18,632 |
Japan |
7,533 |
4,879 |
197 |
12,609 |
15 |
12,594 |
2016 |
|
|
|
|
|
|
France |
4,275 |
7,045 |
2,003 |
13,323 |
2,392 |
10,931 |
Germany |
8,868 |
4,836 |
2,138 |
15,842 |
4,207 |
11,635 |
Netherlands |
2,809 |
563 |
6,699 |
10,071 |
1,061 |
9,010 |
United States |
7,677 |
6,012 |
8,138 |
21,827 |
5,099 |
16,728 |
Japan |
8,291 |
5,441 |
375 |
14,107 |
1 |
14,106 |
Capital and risk management
Credit risk continued
Key IFRS 9 terms and differences to the prior IAS accounting standard and regulatory framework ( audited )
Attribute |
IFRS 9 |
IAS 39 |
Regulatory (CRR) |
Default/credit impairment |
To determine the risk of a default occurring, management applies a default definition that is consistent with the Basel/regulatory definition of default.
Assets that are defaulted are shown as credit impaired. RBS uses 90 days past due as a consistent measure for default across all product classes. The population of credit impaired assets is broadly consistent with IAS 39, though measurement differs because of the application of MES. Assets that were categorised as potential problems with no impairment provision are now categorised as Stage 3. |
Default aligned to loss events, all financial assets where an impairment event had taken place 100% probability of default and an internal asset quality grade of AQ10 were classed as non-performing.
Impaired financial assets were those for which there was objective evidence that the amount or timing of future cash flows had been adversely impacted since initial recognition. |
A default shall be considered to have occurred with regard to a particular financial asset when either or both of the following have taken place:
|
Probability of default (PD) |
PD is the likelihood of default assessed on the prevailing economic conditions at the reporting date (point in time), adjusted to take into account estimates of future economic conditions that are likely to impact the risk of default; it will not equate to a long run average. |
Regulatory PDs adjusted to point in time metrics were used in the latent provision calculation. |
The likelihood that a customer will fail to make full and timely repayment of credit obligations over a one year time horizon.
For Wholesale, PD models reflect losses that would arise through-the-cycle; this represents a long run average view of default levels.
For Personal, the prevailing economic conditions at the reporting date (point-in-time) are used. |
Significant increase in credit risk (SICR) |
A framework incorporating both quantitative and qualitative measures aligned to the Groups current risk management framework has been established. Credit deterioration will be a management decision, subject to approval by governing bodies such as the Provisions Committee.
The staging assessment requires a definition of when a SICR has occurred; this moves the loss calculation for financial assets from a 12 month horizon to a lifetime horizon. Management has established an approach that is primarily informed by the increase in lifetime probability of default, with additional qualitative measures to account for assets where PD does not move, but a high risk factor is determined. |
Not applicable. |
Not applicable. |
Forward-looking and multiple scenarios |
The evaluation of future cash flows, the risk of default and impairment loss should take into account expectations of economic changes that are reasonable.
More than one outcome should be considered to ensure that the resulting estimation of impairment is not biased towards a particular expectation of economic growth. |
Financial asset carrying values based upon the expectation of future cash flows. |
Not applicable. |
Capital and risk management
Credit risk continued
Key IFRS 9 terms and differences to the prior IAS accounting standard and regulatory framework ( audited )
Attribute |
IFRS 9 |
IAS 39 |
Regulatory (CRR) |
Loss given default (LGD) |
LGD is a current assessment of the amount that will be recovered in the event of default, taking account of future conditions. It may occasionally equate to the regulatory view albeit with conservatism and downturn assumptions generally removed. |
Regulatory LGD values were often used for calculating collective and latent provisions; bespoke LGDs were also used. |
An estimate of the amount that will not be recovered in the event of default, plus the cost of debt collection activities and the delay in cash recovery. LGD is a downturn based metric, representing a prudent view of recovery in adverse economic conditions. |
Exposure at default (EAD) |
Expected balance sheet exposure at default. It differs from the regulatory method as follows:
It caps exposure at the contractual limit. |
Based on the current drawn balance plus future committed drawdowns. |
Models are used to provide estimates of credit facility utilisation at the time of a customer default, recognising that customers may make further drawings on unused credit facilities prior to default or that exposures may increase due to market movements. EAD cannot be lower than the reported balance sheet, but can be reduced by a legally enforceable netting agreement. |
Date of initial recognition |
The reference date used to assess a significant increase in credit risk is as follows. Term lending: the date the facility became available to the customer. Wholesale revolving products: the date of the last substantive credit review (typically annual) or, if later, the date facility became available to the customer. Retail Cards: the account opening date or, if later, the date the card was subject to a regular three year review or the date of any subsequent limit increases. Current accounts/overdrafts: the account opening date or, if later, the date of initial granting of overdraft facility or of limit increases. |
Not applicable for impairment but defined as the date when the entity becomes a party to the contractual provisions of the instrument. |
Not applicable. |
Modification |
A modification occurs when the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in derecognition. A modification requires immediate recognition in the income statement of any impact on the carrying value and effective interest rate (EIR) or examples of modification events include forbearance and distressed restructuring. The financial impact is recognised in the income statement as an impairment release/(loss). |
Modification was not separately defined but accounting impact arose as an EIR adjustment on changes that were not derecognition or impairment events. |
Not applicable. |
Capital and risk management
Market risk
RBS is exposed to non-traded market risk through its banking activities and to traded market risk through its trading activities. Non-traded and traded market risk exposures are managed separately. As a result, each type of market risk is discussed separately. The non-traded market risk section begins below. The traded market risk section begins on page 169.
Pension-related activities also give rise to market risk. Refer to page 172 for more information on risk related to pensions.
Non-traded market risk
Definition
Non-traded market risk is the risk to the value of assets or liabilities outside the trading book, or the risk to income, that arises from changes in market prices such as interest rates, foreign exchange rates and equity prices, or from changes in managed rates.
The following disclosures in this section are audited:
· Internal banking book VaR.
· Foreign exchange risk.
· Equity risk.
Sources of risk
RBSs non-traded market risk exposure is largely managed in line with the following key categories: interest rate risk; credit spread risk; foreign exchange risk; equity risk; and accounting volatility risk.
Interest rate risk
Non-traded interest rate risk (NTIRR) arises from the provision to customers of a range of banking products with differing interest rate characteristics. When aggregated, these products form portfolios of assets and liabilities with varying degrees of sensitivity to changes in market interest rates. Mismatches can give rise to volatility in net interest income as interest rates vary. NTIRR comprises three primary risk types: gap risk, basis risk and option risk.
Credit spread risk
Credit spread risk arises from the potential adverse economic impact of a change in the spread between bond yields and swap rates, where the bond portfolios are accounted at fair value through equity.
Foreign exchange risk
Non-traded foreign exchange risk arises from two main sources:
· Structural foreign exchange risk arises from the capital deployed in foreign subsidiaries, branches and joint arrangements and related currency funding where it differs from sterling.
· Non-trading book foreign exchange risk arises from customer transactions and profits and losses that are in a currency other than the functional currency of the transacting operation.
Equity risk
Non-traded equity risk is the potential variation in income and reserves arising from changes in the values of equity positions. Equity exposures may arise through strategic acquisitions, venture capital investments and certain restructuring arrangements.
Accounting volatility risk
Accounting volatility risk arises when an exposure is accounted for at amortised cost but economically hedged by a derivative that is accounted for at fair value. Although this is not an economic risk, the difference in accounting between the exposure and the hedge creates volatility in the income statement.
Key developments in 2018
· Interest rates rose in 2018 but remained low by historical standards. The UK base rate rose from 0.5% to 0.75% in August 2018. The five-year swap rate was 1.22% at 31 December 2018 compared to 0.98% at 31 December 2017.
· Sterling weakened against the US dollar and slightly against the euro over the year.
· The persistence of low interest rates and weaker sterling partly reflected uncertainty over Brexit.
· Compliance with ring-fencing regulations resulted in the split of non-traded market risk management responsibility for NatWest Holdings and its subsidiaries from non-ring-fenced companies.
· Changes in accounting treatment under IFRS 9, which took effect from 1 January 2018, had an impact on the way certain non-traded market risk exposures are calculated. Some structured loans were recognised at fair value through the profit and loss on transition to IFRS 9. However, this exposure had declined by the end of the year, mainly due to asset disposals.
Risk governance
Responsibility for identifying, measuring, monitoring and controlling market risk arising from non-trading activities lies with the relevant business. Oversight is provided by the independent Risk function.
Risk positions are reported monthly to the Executive Risk Committee and quarterly to the Board Risk Committee, as well as to the Asset & Liability Management Committee (monthly in the case of interest rate, credit spread and accounting volatility risks and quarterly in the case of foreign exchange and equity risks).
Market risk policy statements set out the governance and risk management framework.
Risk appetite
RBSs qualitative appetite is set out in the non-traded market risk appetite statement.
Its quantitative appetite is expressed in terms of value-at-risk (VaR), stressed value-at-risk (SVaR), sensitivity and stress limits, and earnings-at-risk limits. These limits comprise both board risk measures (which are approved by the RBS Board on the recommendation of the Board Risk Committee) and key risk measures, which are approved by the Asset & Liability Management Committee.
The limits are reviewed to reflect changes in risk appetite, business plans, portfolio composition and the market and economic environments.
To ensure approved limits are not breached and that RBS remains within its risk appetite, triggers at RBS and lower levels have been set and are actively managed.
For further information on risk appetite, refer to page 104.
Risk controls
For information on risk controls, refer to page 104.
Risk monitoring and mitigation
Interest rate risk
NTIRR factors are grouped into the following categories:
· Gap risk arises from the timing of rate changes in non-trading book instruments. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve (parallel risk) or differentially by period (non-parallel risk).
· Basis risk captures the impact of relative changes in interest rates for financial instruments that have similar tenors but are priced using different interest rate indices, or on the same interest rate indices but with different tenors.
· Option risk arises from option derivative positions or from optional elements embedded in assets, liabilities and/or off-balance sheet items, where RBS or its customer can alter the level and timing of their cash flows. Option risk also includes pipeline risk.
Due to the long-term nature of many retail and commercial portfolios and their varied interest rate repricing characteristics and maturities net interest income is likely to vary from period to period, even if interest rates remain the same. New business originated in any period will alter RBSs interest rate sensitivity if the resulting portfolio differs
Capital and risk management
Non-traded market risk continued
from portfolios originated in prior periods, depending on the extent to which exposure has been hedged. To manage exposures within appetite, RBS aggregates its interest rate positions and hedges these externally using cash and derivatives (primarily interest rate swaps).
Credit spread risk
RBSs bond portfolios primarily comprise high-quality securities 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.
Credit spread risk is monitored daily through sensitivities and VaR measures. The dealing authorities in place for the bond portfolios further mitigate the risk by imposing constraints by duration, asset class and credit rating. Exposures and limit utilisations are reported to senior management on a daily basis.
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 to predefined risk appetite levels under delegated authority from the Asset & Liability Management Committee. RBS seeks to limit the potential volatility impact on its 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 Asset & Liability Management Committee at least quarterly. Foreign exchange exposures arising from customer transactions are sold down by businesses on a regular basis in line with RBS policy.
Equity risk
Non-traded equity risk is the potential variation in the income and reserves arising from changes in equity valuations. Any such risk is identified prior to any investments and then mitigated through a framework of controls.
Investments, acquisitions or disposals of a strategic nature are referred to the Acquisitions & Disposals Committee. Once approved by the Acquisitions & Disposals Committee for execution, such transactions are referred for approval to the Board, the Executive Committee, the Chief Executive, the Chief Financial Officer or as otherwise required. Decisions to acquire or hold equity positions in the non-trading book that are not of a strategic nature, such as customer restructurings, are taken by authorised persons with delegated authority under the credit approval framework.
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 risk is reported to the Asset & Liability Management Committee monthly and capitalised as part of the Internal Capital Adequacy Assessment Process.
Risk measurement
The market risk exposures arising as a result of RBSs retail and commercial banking activities are measured using a combination of value-based metrics (VaR and sensitivities) and earnings-based metrics, as explained in greater detail for each of the exposure types discussed in this section. The following table presents one-day internal banking book VaR at a 99% confidence level, split by risk type.
|
2018 |
|
2017 |
||||||
|
Average |
Maximum |
Minimum |
Period end |
|
Average |
Maximum |
Minimum |
Period end |
|
£m |
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
Interest rate |
14.4 |
28.2 |
7.3 |
11.6 |
|
9.1 |
15.3 |
5.6 |
5.6 |
Euro |
2.1 |
3.9 |
1.0 |
1.0 |
|
3.3 |
4.3 |
2.3 |
3.3 |
Sterling |
14.5 |
26.0 |
7.9 |
13.3 |
|
6.3 |
13.8 |
1.8 |
2.8 |
US dollar |
4.7 |
8.7 |
1.4 |
8.7 |
|
5.5 |
8.8 |
2.1 |
7.7 |
Other |
0.5 |
0.7 |
0.3 |
0.7 |
|
1.0 |
1.1 |
0.8 |
0.8 |
Credit spread |
59.7 |
77.8 |
49.4 |
77.8 |
|
60.6 |
82.4 |
47.4 |
49.7 |
Structural foreign exchange rate |
13.4 |
32.7 |
5.9 |
13.0 |
|
12.4 |
17.2 |
9.3 |
15.4 |
Pipeline risk (1) |
0.6 |
1.3 |
0.3 |
0.4 |
|
0.9 |
1.7 |
0.2 |
1.0 |
Diversification (2) |
(24.9) |
|
|
(20.5) |
|
(19.2) |
|
|
(17.3) |
Total |
63.0 |
82.3 |
54.9 |
82.3 |
|
63.8 |
83.1 |
54.4 |
54.4 |
Notes:
(1) Pipeline risk is the risk of loss arising from personal customers owning an option to draw down a loan typically a mortgage at a committed rate, where interest rate changes may result in greater or fewer customers than anticipated taking up the committed offer.
(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.
Key points ( audited )
· On average, non-traded VaR remained broadly unchanged year on year.
· The main component of the VaR is credit spread risk. VaR peaked at year-end, mainly driven by higher volatility in credit spreads due to economic uncertainty that affected the UK Gilts portfolio.
· Interest rate VaR peaked in January driven by the impact of transition to IFRS 9 on interest rate exposure in the structured loan portfolio. It subsequently declined, driven by additional hedging put in place during H1 2018 and asset disposals during H2 2018.
· Structural foreign exchange rate VaR peaked in H1 2018. The VaR measures the residual spot sensitivity of the CET1 ratio to exchange rate movements. CET1 ratio sensitivity to the sterling/US dollar exchange rate increased in May when foreign exchange rate options were exercised to hedge additional US dollar liabilities that were recognised when the agreement in principle with the US Department of Justice was reached.
Capital and risk management
Non-traded market risk continued
Structural hedging
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 (such as fixed-rate mortgages or UK government Gilts) or by using interest rate swaps, which are generally booked as cash flow hedges of floating-rate assets, in order to provide a consistent and predictable revenue stream.
After hedging the net interest rate exposure externally, RBS allocates income to equity or products in structural hedges by reference to the relevant interest rate swap curve. Over time, this approach has provided a basis for stable income attribution to products and interest rate returns. The programme aims to track a time series of medium-term swap rates, but the yield will be affected by changes in product volumes and RBSs capital composition.
The table below presents the incremental income allocation (above three-month LIBOR), total income allocation (including three-month LIBOR), the period end and average notional balances and the total yield (including three-month LIBOR) associated with the structural hedges managed by RBS.
Equity structural hedges refer to income allocated primarily to equity and reserves. This includes NatWest Markets Plc and NatWest Holdings. Product structural hedges refer to income allocated to customer products, for example current accounts, in NatWest Holdings. Other structural hedges refer to hedges managed by the subsidiaries (Private Banking, Ulster Bank Limited, UBIDAC and RBSI). A significant proportion of Other structural hedges are euro-denominated.
The table below presents the incremental income associated with product structural hedges at segment level.
|
2018 |
2017 |
£m |
£m |
|
UK Personal & Business Banking |
242 |
440 |
Commercial Banking |
124 |
235 |
Other |
2 |
5 |
Total |
368 |
680 |
Key points
· The incremental income from the structural hedge was lower than that in 2017 primarily due to the increase in three-month LIBOR during 2018. The overall yield of the hedge was relatively stable.
· Five-year and ten-year sterling swap rates at 31 December 2018 were 1.22% and 1.35%, respectively. Equity structural hedges amortise over ten years whilst product hedges amortise over five years. Other structural hedges also amortise over five years except a small proportion of RBSIs hedge which amortises over ten years.
· Compliance with ring-fencing regulations during H2 2018 resulted in a split of the equity structural hedge between NatWest Holdings and NatWest Markets. Approximately £6 billion of the equity hedge was allocated to NWM Plc in 2018.
· Additionally, as a result of ring-fencing legislation, RBSI is not able to hedge with NatWest Holdings. Instead of placing hedges with NatWest Holdings Treasury, RBSI now hedges its structural exposure with bonds, primarily UK government Gilts.
Capital and risk management
Non-traded market risk continued
Interest rate risk
NTIRR can be measured from either an economic value-based or earnings-based perspective, or a combination of the two. Value-based approaches measure the change in value of the balance sheet assets and liabilities over a longer timeframe, including all cash flows. Earnings-based approaches measure the potential short-term (generally one-year) impact on the income statement of changes in interest rates.
RBS uses VaR as its value-based approach and sensitivity of net interest income (NII) as its earnings-based approach.
These two approaches provide different yet complementary views of the impact of interest rate risk on the balance sheet at a point in time. The scenarios employed in the NII sensitivity approach incorporate business assumptions and simulated modifications in customer behaviour as interest rates change. In contrast, the VaR approach assumes static underlying positions and therefore does not provide a dynamic measurement of interest rate risk. In addition, while NII sensitivity calculations are measured to a 12-month horizon and thus provide a shorter-term view of the risks on the balance sheet, the VaR approach can identify risks not captured in the sensitivity analysis, in particular the impact of duration and repricing risk on earnings beyond 12 months.
Value-at-risk
VaR is a statistical estimate of the potential change in the market value of a portfolio (and, thus, the impact on the income statement) over a specified time horizon at a given confidence level.
RBSs standard VaR metrics which assume a time horizon of one trading day and a confidence level of 99% are based on interest rate repricing gaps at the reporting date. Daily rate moves are modelled using observations from the last 500 business days. These incorporate customer products plus associated funding and hedging transactions as well as non-financial assets and liabilities. Behavioural assumptions are applied as appropriate.
The non-traded interest rate risk VaR metrics for RBSs retail and commercial banking activities are included in the banking book VaR table on page 165. The VaR captures the risk resulting from mismatches in the repricing dates of assets and liabilities.
It includes any mismatch between structural hedges and stable non and low interest-bearing liabilities such as equity and money transmission accounts as regards their interest rate repricing behavioural profile.
Sensitivity of net interest earnings
Net interest earnings are sensitive to changes in the level of interest rates because changes to coupons on some customer products do not always match changes in market rates of interest or central bank policy rates.
Earnings sensitivity to rate movements is derived from a central forecast over a 12-month period. A simplified scenario is shown below based on the period-end balance sheet (assuming that non-interest rate variables remain constant). Market-implied forward rates are used to generate the base case earnings forecast, which is then subject to interest rate shocks. The variance between the central forecast and the shock gives an indication of underlying sensitivity to interest rate movements.
The sensitivity of net interest earnings table shows the expected impact, over 12 months, to an immediate upward or downward change of 25 and 100 basis points to all interest rates. Yield curves are expected to move in parallel though interest rates are assumed to floor at zero per cent or, for euro rates, at the current negative rate.
The main driver of earnings sensitivity relates to interest rate pass-through assumptions on customer products. The scenario also captures the impact of the reinvestment of maturing structural hedges at higher or lower rates than the base-case earnings sensitivity and mismatches in the repricing dates of loans and deposits.
However, reported sensitivities should not be considered a guide to future performance. They do not capture potential management action in response to sudden changes in the interest rate environment. Actions that could reduce NII sensitivity and mitigate adverse impacts are changes in pricing strategies on customer loans and deposits as well as hedging. Management action may also be targeted at stabilising total income taking into account non-interest income in addition to NII.
|
|
Parallel shifts in yield curve |
|
||||||
|
|
+25 basis points |
|
-25 basis points |
|
+100 basis points |
|
-100 basis points |
|
2018 |
|
£m |
|
£m |
|
£m |
|
£m |
|
Euro |
|
29 |
|
(3) |
|
114 |
|
(1) |
|
Sterling |
|
152 |
|
(201) |
|
651 |
|
(717) |
|
US dollar |
|
15 |
|
(8) |
|
63 |
|
(42) |
|
Other |
|
1 |
|
2 |
|
2 |
|
3 |
|
Total |
|
197 |
|
(210) |
|
830 |
|
(757) |
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
Euro |
|
13 |
|
(8) |
|
53 |
|
(11) |
|
Sterling |
|
151 |
|
(218) |
|
664 |
|
(504) |
|
US dollar |
|
14 |
|
(13) |
|
58 |
|
(49) |
|
Other |
|
|
|
(4) |
|
|
|
(7) |
|
Total |
|
178 |
|
(243) |
|
775 |
|
(571) |
|
Key point
· Net interest earnings sensitivity to a 100-basis-point downward shift in yield curves rose in 2018 compared to 2017. In the shock scenarios, rates fell further at 31 December 2018 than at 31 December 2017 before hitting an assumed zero per cent floor on interest rates. This was mainly due to rises in short-term cash rates since December 2017, which increased the impact of the rate shock. This effect was not seen in the 25-basis-point downward shift as most rates remain above zero per cent after the interest rate shock.
Capital and risk management
Non-traded market risk continued
The tables below show the net interest earnings sensitivity on a one-year, two-year and three-year forward-looking basis to a parallel upward or downward shift in interest rates of 25 basis points. The projection is a simplified sensitivity in which the balance sheet is assumed to be constant, with no change in customer behaviour or margin management strategy as a result of rate changes. The benefit of structural hedges increases (or decreases) as maturing hedges are reinvested over the three-year period.
|
|
+25 basis points parallel upward shift |
|
-25 basis points parallel downward shift |
||||||||
|
|
Year 1 |
|
Year 2 (1) |
|
Year 3 (1) |
|
Year 1 |
|
Year 2 (1) |
|
Year 3 (1) |
2018 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Structural hedges |
|
32 |
|
98 |
|
170 |
|
(32) |
|
(98) |
|
(167) |
Managed margin (2) |
|
150 |
|
171 |
|
170 |
|
(177) |
|
(189) |
|
(163) |
Other |
|
15 |
|
|
|
|
|
(2) |
|
|
|
|
Total |
|
197 |
|
269 |
|
340 |
|
(210) |
|
(287) |
|
(330) |
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Structural hedges |
|
33 |
|
100 |
|
171 |
|
(33) |
|
(99) |
|
(171) |
Managed margin (2) |
|
153 |
|
170 |
|
178 |
|
(220) |
|
(137) |
|
(121) |
Other |
|
(8) |
|
|
|
|
|
10 |
|
|
|
|
Total |
|
178 |
|
270 |
|
349 |
|
(243) |
|
(236) |
|
(292) |
Notes:
(1) |
|
The projections for Year 2 and Year 3 consider only the main drivers of earnings sensitivity, namely structural hedging and margin management. |
(2) |
|
Primarily current accounts and savings accounts. |
Sensitivity of fair value through other comprehensive income (FVOCI) and cash flow hedging reserves to interest rate movements.
RBS holds most of the bonds in its liquidity portfolio at fair value. Valuation changes that are not hedged (or not in effective hedge accounting relationships) are recognised in FVOCI reserves. This is a component of credit spread risk.
Interest rate swaps are used to implement the structural hedging programme and also hedging of some personal and commercial lending portfolios, primarily fixed rate mortgages. Generally these swaps are booked in hedge accounting relationships. Changes in the valuation of swaps that are in effective cash flow hedge accounting relationships are recognised in cash flow hedge reserves.
The table below shows the sensitivity of FVOCI reserves and cash flow hedge reserves to a parallel shift in all rates. In this analysis, interest rates have not been floored at zero. Hedges are assumed to be fully effective. Hedge ineffectiveness would be expected to result in a portion of the reserve gains or losses shown below being recognised in P&L instead of reserves. Hedge ineffectiveness P&L is monitored and the effectiveness of cash flow and fair value hedge relationships are regularly tested in accordance with IFRS requirements. Note that a movement in the FVOCI reserve would have an impact on CET1 capital but a movement in the cash flow hedge reserve would not be expected to do so. Volatility in both reserves affects tangible net asset value.
|
|
+25 basis points |
|
-25 basis points |
|
+100 basis points |
|
-100 basis points |
|
2018 |
|
£m |
|
£m |
|
£m |
|
£m |
|
FVOCI reserves |
|
(55) |
|
55 |
|
(220) |
|
216 |
|
Cash flow hedge reserves |
|
(318) |
|
323 |
|
(1,250) |
|
1,315 |
|
Total |
|
(373) |
|
378 |
|
(1,470) |
|
1,531 |
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
FVOCI reserves |
|
(41) |
|
42 |
|
(164) |
|
167 |
|
Cash flow hedge reserves |
|
(443) |
|
448 |
|
(1,744) |
|
1,819 |
|
Total |
|
(484) |
|
490 |
|
(1,908) |
|
1,986 |
|
Key points
· The sensitivity of the cash flow hedge reserve to interest rate movements fell in 2018. In part this reflected an increase in customer demand for longer fixed rates on mortgage products. Customers increasingly opted to fix mortgage rates for five years. This reduced the requirement for five-year interest rate swaps.
· The increase in FVOCI reserve sensitivity was driven by the increase in the bonds held in liquidity portfolios due to the establishment of the NatWest Markets Plc liquid asset buffer as a result of ring-fencing implementation.
Capital and risk management
Non-traded market risk continued
Foreign exchange risk (audited)
The table below shows structural foreign currency exposures.
|
|
|
|
|
|
Net investments in |
|
Net |
|
Structural foreign |
|
|
|
Residual structural |
|
|
|
Net investments in |
|
Non-controlling |
|
foreign operations |
|
investment |
|
currency exposures |
|
Economic |
|
foreign currency |
|
|
|
foreign operations |
|
interests (NCI) (1) |
|
excluding NCI |
|
hedges |
|
pre-economic hedges |
|
hedges (2) |
|
exposures |
|
2018 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
US dollar |
|
553 |
|
|
|
553 |
|
(4) |
|
549 |
|
(549) |
|
|
|
Euro |
|
6,428 |
|
33 |
|
6,395 |
|
(853) |
|
5,542 |
|
|
|
5,542 |
|
Other non-sterling |
|
2,600 |
|
710 |
|
1,890 |
|
(1,249) |
|
641 |
|
(81) |
|
560 |
|
Total |
|
9,581 |
|
743 |
|
8,838 |
|
(2,106) |
|
6,732 |
|
(630) |
|
6,102 |
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US dollar |
|
766 |
|
|
|
766 |
|
(14) |
|
752 |
|
(752) |
|
|
|
Euro |
|
7,160 |
|
61 |
|
7,099 |
|
(342) |
|
6,757 |
|
(2,224) |
|
4,533 |
|
Other non-sterling |
|
2,493 |
|
645 |
|
1,848 |
|
(930) |
|
918 |
|
(453) |
|
465 |
|
Total |
|
10,419 |
|
706 |
|
9,713 |
|
(1,286) |
|
8,427 |
|
(3,429) |
|
4,998 |
|
Notes:
(1) Non-controlling interests (NCI) represents the structural foreign exchange exposure not attributable to owners equity.
(2) Economic hedges of US dollar net investments in foreign operations represent US dollar equity securities that do not qualify as net investment hedges for accounting purposes. They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available. Economic hedges of other currency net investments in foreign operations represent monetary liabilities that are not booked as net investment hedges.
Key points
· The main driver of the reduction in structural foreign currency exposures was lower net investment in eurozone subsidiaries as a result of the 1.5 billion dividend paid by UBI DAC to NatWest Holdings Limited during Q1 2018. The reduction in US dollar exposures reflected the impact of the agreement with the US Department of Justice in relation to RMBS conduct fines.
· Euro economic hedges reduced as a result of the redemption of equity securities.
· Changes in exchange rates affect equity in proportion to structural foreign currency exposures. At 31 December 2018, a 5% strengthening in all foreign currencies against sterling results in a £0.4 billion increase in equity reserves, while a 5% weakening in all foreign currencies against sterling results in a £0.3 billion reduction in equity reserves.
Equity risk ( audited )
Equity positions are carried at fair value on the balance sheet based on available market prices where possible. If market prices are not available, fair value is based on appropriate valuation techniques or management estimates.
The table below shows the balance sheet carrying value of non-traded book equity positions.
|
|
2018 |
|
2017 |
|
|
£m |
|
£m |
Exchange-traded equity |
|
41 |
|
41 |
Private equity |
|
303 |
|
243 |
Other |
|
87 |
|
136 |
|
|
431 |
|
420 |
The exposures may take the form of (i) equity shares listed on a recognised exchange, (ii) private equity shares defined as unlisted equity shares with no observable market parameters or (iii) other unlisted equity shares.
|
|
2018 |
|
2017 |
|
|
£m |
|
£m |
Net realised gains arising from disposals |
|
23 |
|
82 |
Unrealised gains included in Tier 1 or Tier 2 capital |
|
153 |
|
60 |
Note:
(1) Includes gains or losses on FVOCI instruments only .
Capital and risk management
Traded market risk
Definition
Traded market risk is the risk arising from changes in fair value on positions, assets, liabilities or commitments in trading portfolios as a result of fluctuations in market prices.
The following disclosures in this section are audited:
· Traded VaR (1-day 99%)
Sources of risk
Traded market risk mainly arises from RBSs trading activities. These activities provide a range of financing, risk management and investment services to clients including corporations and financial institutions around the world. From a market risk perspective, activities are focused on rates; currencies; securitised products; and traded credit. RBS undertakes transactions in financial instruments including debt securities, as well as securities financing and derivatives.
All material traded market risk resides in NatWest Markets. The key categories are interest rate risk, credit spread risk and foreign currency price risk.
Trading activities may also give rise to counterparty credit risk. For further detail refer to the Credit risk section on page 123.
Key developments in 2018
· Geopolitical risk resulted in periods of market volatility during the year. This mainly related to threats of a trade war between China and the US, elections in Italy and negotiations on a Brexit deal. European interest rates remained at low levels, although the Bank of England and US Federal Reserve continued raising rates.
· Traded VaR fluctuated throughout 2018, reflecting political developments and geopolitical risk, but remained broadly unchanged on an average basis compared to 2017.
Risk governance
Responsibility for identifying, measuring, monitoring and controlling market risk arising from trading activities lies with the relevant trading business. Oversight is provided by the Market Risk function. Traded market risk positions are reported monthly to the Executive Risk Committee and quarterly to the Board Risk Committee. Market risk policy statements set out the governance and risk management framework.
Risk appetite
RBSs qualitative appetite for traded market risk is set out in the traded market risk appetite statement. Quantitative appetite is expressed in terms of exposure limits. The limit framework at RBS level comprises value-at-risk (VaR) and stressed value-at-risk (SVaR). More details on these are provided on the following pages.
The limit framework at trading unit level also comprises additional metrics specific to the market risk exposures within its scope. These additional metrics aim to control various risk dimensions such as product type, exposure size, aged inventory, currency and tenor. For each trading business, a document known as a dealing authority compiles details of all applicable limits and trading restrictions.
The limits are reviewed to reflect changes in risk appetite, business plans, portfolio composition and the market and economic environments. To ensure approved limits are not breached and that RBS remains within its risk appetite, triggers at RBS and lower levels have been set such that if exposures exceed a specified level, action plans are developed by the relevant business and the Market Risk function and implemented.
For more detail on risk appetite, refer to page 104.
Risk controls
For information on risk controls, refer to page 104.
Risk monitoring and mitigation
Traded market risk is identified and assessed by gathering, analysing, monitoring and reporting market risk information at desk, business, franchise and RBS-wide levels. Industry expertise, continued system developments and techniques such as stress testing are also used to enhance the effectiveness of the identification and assessment of all material market risks.
Traded market risk exposures are monitored against limits and analysed daily by market risk reporting and control functions. A daily report summarising the position of exposures against limits at RBS, franchise, business and desk levels is provided to senior management and market risk managers across the function. Limit reporting is supplemented with regulatory capital and stress testing information as well as ad hoc reporting.
A risk review of trading businesses is undertaken weekly with senior risk and front office staff. This includes a review of profit and loss drivers, notable position concentrations and other positions of concern.
Business profit and loss performance is monitored automatically through loss triggers which, if breached, require a remedial action plan to be agreed between the Market Risk function and the business. The loss triggers are set using both a fall-from-peak approach and an absolute loss level. In addition, regular updates on traded market risk positions are provided to the Executive Risk Committee and Board Risk Committee.
Risk measurement (audited)
RBS uses VaR, SVaR and the incremental risk charge to measure traded market risk. Risks that are not adequately captured by VaR or SVaR are captured by the Risks Not In VaR (RNIV) framework to ensure that RBS is adequately capitalised for market risk. In addition, stress testing is used to identify any vulnerabilities and potential losses in excess of VaR and SVaR.
The key inputs into these measurement methods are market data and risk factor sensitivities. Sensitivities refer to the changes in trade or portfolio value that result from small changes in market parameters that are subject to the market risk limit framework. Revaluation ladders are used in place of sensitivities to capture the impact of large moves in risk factors or the joint impact of two risk factors.
These methods have been designed to capture correlation effects and allow RBS to form an aggregated view of its traded market risk across risk types, markets and business lines while also taking into account the characteristics of each risk type.
Value-at-risk
For internal risk management purposes, VaR assumes a time horizon of one trading day and a confidence level of 99%.
The internal VaR model which captures all trading book positions including those products approved by the regulator is based on a historical simulation, utilising market data from the previous 500 days on an equally-weighted basis.
The model also captures the potential impact of interest rate risk; credit spread risk; foreign currency price risk; equity price risk; and commodity price risk.
When simulating potential movements in such risk factors, a combination of absolute, relative and rescaled returns is used.
Testing of the performance and adequacy of the VaR model is done on a regular basis through the following processes:
· Back-testing Internal and regulatory back-testing is conducted on a daily basis. (For information on internal back-testing, refer to page 171.)
· Ongoing model validation VaR model performance is assessed both regularly and on an ad-hoc basis if market conditions or portfolio profile change significantly.
· Model Risk Management review As part of the model lifecycle, all risk models (including the VaR model) are independently reviewed to ensure the model is still fit for purpose given current market conditions and portfolio profile.
Capital and risk management
Traded market risk continued
One-day 99% traded internal VaR
Traded VaR (1-day 99%)
The table below shows one -day 99% internal VaR for RBSs trading portfolios, split by exposure type.
|
|
2018 |
|
2017 |
||||||||||||
|
|
Average |
|
Maximum |
|
Minimum |
|
Period end |
|
Average |
|
Maximum |
|
Minimum |
|
Period end |
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Interest rate |
|
14.3 |
|
27.3 |
|
9.2 |
|
13.0 |
|
14.1 |
|
24.5 |
|
8.8 |
|
15.3 |
Credit spread |
|
11.0 |
|
24.2 |
|
6.9 |
|
8.2 |
|
12.1 |
|
19.4 |
|
8.8 |
|
16.7 |
Currency |
|
3.1 |
|
7.6 |
|
1.4 |
|
5.3 |
|
4.9 |
|
10.0 |
|
2.3 |
|
3.5 |
Equity |
|
0.8 |
|
1.6 |
|
0.3 |
|
0.8 |
|
1.2 |
|
2.1 |
|
0.4 |
|
0.4 |
Commodity |
|
0.3 |
|
1.0 |
|
0.1 |
|
0.1 |
|
0.4 |
|
1.3 |
|
|
|
0.2 |
Diversification (1) |
|
(10.5) |
|
|
|
|
|
(8.8) |
|
(12.8) |
|
|
|
|
|
(15.3) |
Total |
|
19.0 |
|
35.6 |
|
11.7 |
|
18.6 |
|
19.9 |
|
29.5 |
|
13.2 |
|
20.8 |
Note:
(1) RBS benefits from diversification since it reduces risk by allocating positions 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.
Key points
· Although traded VaR fluctuated throughout 2018 as explained earlier, it remained broadly unchanged year-on-year on both an average and period-end basis.
· The peaks in January, May and July were largely related to bond syndication activity and, in the case of January, long euro rates.
Capital and risk management
Traded market risk continued
VaR back-testing
The main approach employed to assess the VaR models ongoing performance is back-testing, which counts the number of days when a loss exceeds the corresponding daily VaR estimate, measured at a 99% confidence level.
Two types of profit and loss (P&L) are used in back-testing comparisons: Actual P&L and Hypothetical (Hypo) P&L.
The Actual P&L for a particular business day is the firms actual P&L in respect of trading activities, including intraday activities, adjusted by stripping out fees and commissions, brokerage, and additions to and releases from reserves not directly related to market risk.
The Hypo P&L reflects the firms Actual P&L excluding any intra-day activities.
A portfolio is said to produce a back-testing exception when the Actual or Hypo P&L exceeds the VaR level on a given day. Such an event may be caused by a large market movement or may highlight issues such as missing risk factors or inappropriate time series. Any such issues identified are analysed and addressed through appropriate remediation or development action. Both Actual and Hypo back-testing exceptions are monitored.
The table below shows internal back-testing exceptions for the 250-business-day period to 31 December 2018 for one-day 99% traded internal VaR compared with Actual and Hypo P&L for the major NatWest Markets businesses.
|
|
Back-testing exceptions |
|
||
|
|
Actual |
|
Hypo |
|
Rates |
|
4 |
|
8 |
|
Currencies |
|
|
|
4 |
|
Credit |
|
|
|
|
|
Key points
· Statistically RBS would expect to see back-testing exceptions 1% of the time over the 250-day period.
· The exceptions in the Rates business were mainly driven by the increased volatility connected with large market movements due to political uncertainty in Italy and Spain.
· The exceptions in the Currencies business were mainly due to market movements.
Stressed VaR (SVaR)
As with VaR, the SVaR methodology produces estimates of the potential change in the market value of a portfolio, over a specified time horizon, at a given confidence level. SVaR is a VaR-based measure using historical data from a one-year period of stressed market conditions.
A simulation of 99% VaR is run on the current portfolio for each 250-day period from 2005 to the current VaR date, moving forward one day at a time. The SVaR is the worst VaR outcome of the simulated results.
This is in contrast with VaR, which is based on a rolling 500-day historical data set. A time horizon of ten trading days is assumed with a confidence level of 99%.
The internal traded SVaR model captures all trading book positions.
|
|
Period-end 2018
|
|
Period-end 2017
|
|
10-day 99% traded internal SVaR |
|
161 |
|
172 |
|
Key point
· Traded SVaR remained broadly unchanged.
Risks not in VaR (RNIVs)
The RNIV framework is used to identify and quantify market risks that are not fully captured by the internal VaR and SVaR models.
RNIV calculations form an integral part of ongoing model and data improvement efforts to capture all market risks in scope for model approval in VaR and SVaR.
For quantitative disclosures on RNIVs, refer to the Market Risk section of the Pillar 3 Report.
Stress testing
For information on stress testing, refer to page 105.
Incremental risk charge (IRC)
The IRC model quantifies the impact of rating migration and default events on the market value of instruments with embedded credit risk (in particular, bonds and credit default swaps) held in the trading book. It further captures basis risk between different instruments, maturities and reference entities.
Model validation
RBS uses a variety of models to manage and measure market risk. These include pricing models (used for valuation of positions) and risk models (for risk measurement and capital calculation purposes). They are developed and approved in NatWest Markets, with material models subject to independent review by Model Risk Management. For further detail on the independent model validation carried out by Model Risk Management refer to page 105. Information relating to pricing and market risk models is presented below.
Pricing models
Pricing models are developed by a dedicated first line team, in conjunction with the trading desk. The models are used to value positions for which prices are not directly observable as well as for the risk management of the portfolio. Any pricing models that are used as the basis for valuing portfolios and records are subject to approval and oversight by asset-level modelled product review committees. These committees comprise representatives of the trading, finance, market risk, model development and model review functions. Approval requires review and approval by these stakeholders as well as Model Risk Management.
The review process includes the following steps:
· The committees prioritise models for review by Model Risk Management, considering the materiality of the risk booked against the model and an assessment of the degree of model risk, which is the valuation uncertainty arising from the choice of modelling assumptions.
· Model Risk Management quantifies the model risk, which may include comparing the model outputs with those of alternative models developed by Model Risk Management.
· The sensitivities derived from the pricing models are validated.
· The conclusions of the review are used to inform risk limits and by the Finance function to inform model reserves.
Risk models
All model changes are approved through model governance committees at franchise level. Changes to existing models are subject to Model Risk Management review. RBS follows regulatory guidance for assessing the materiality of extensions and changes to the internal model approach for market risk. In addition to Model Risk Managements independent oversight which provides additional assurance that RBS holds appropriate capital for the market risk to which it is exposed the model testing team monitors the model performance for market risk through back-testing and other processes.
Capital and risk management
Pension risk
Definition
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 is also the risk that RBS will make payments or other contributions to, or with respect to, a pension scheme because of a moral obligation or because RBS considers that it needs to do so for some other reason.
Sources of risk
RBS has exposure to pension risk through its defined benefit schemes worldwide. The Main section of The Royal Bank of Scotland Group Pension Fund (the Main section) is the largest source of pension risk with £43.8 billion of assets and £35.5 of liabilities at 31 December 2018 (2017 £44.7 billion assets and £37.9 billion liabilities). Further detail on RBSs pension obligations, including sensitivities to the main risk factors, can be found in Note 5 on the consolidated accounts.
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. RBS is exposed to the risk that the schemes assets, together with future returns and additional future contributions, are insufficient to meet liabilities as they fall due. In such circumstances, RBS could be obliged (or might choose) to make additional contributions to the schemes, or be required to hold additional capital to mitigate this risk.
Key developments in 2018
· A Memorandum of Understanding between RBS and the Trustee of the Main section was reached in April 2018, which enabled RBS to bring the pension scheme into alignment with ring-fencing rules and reduce exposure to pension risk.
· RBS made a £2 billion contribution to the Main section in H2 2018 and it was agreed this could be followed by up to a further £1.5 billion of dividend linked contributions to be paid from 2020, capped at £500 million per year.
· The contribution to the scheme facilitated a reduction in the risk profile of the fund, principally the sale of approximately £6 billion of quoted equity exposure and the purchase of further interest rate and inflation hedging.
Risk governance
The Pension Committee is chaired by the RBS Chief Financial Officer. It receives its authority from the Group Executive Committee and formulates RBSs view of pension risk. The Pension Committee is a key component of RBSs approach to managing pension risk and it reviews and monitors risk management, asset strategy and financing issues on behalf of RBS. It also considers investment strategy proposals from the Trustee.
For further information on Risk governance, refer to page 103.
Risk appetite
RBS maintains an independent view of the risk inherent in its pension funds. RBS has an annually reviewed pension risk appetite statement incorporating defined metrics against which risk is measured. RBS undertakes regular pension risk monitoring and reporting to the Board, the Board Risk Committee and the Pension Committee on the material pension schemes that RBS has an obligation to support.
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.
Risk monitoring and measurement
Pension risk reports are submitted to the Executive Risk Committee and the Board Risk Committee four times a year in the Risk Management Quarterly Report.
RBS also undertakes stress tests and scenario analyses on its material defined benefit pension schemes each year. These tests are also used to satisfy the requests of regulatory bodies such as the Bank of England. The stress testing framework includes pension risk capital calculations for the purposes of the Internal Capital Adequacy Assessment Process as well as additional stress tests for a number of internal management purposes.
The results of the stress tests and their consequential impact on RBSs balance sheet, income statement and capital position are incorporated into the overall RBS stress test results.
Risk mitigation
The trustee has taken measures to mitigate inflation and interest rate risks, both by investing in suitable financial assets and by entering into inflation and interest rate swaps. The Main section also uses derivatives to manage the allocation of the portfolio to different asset classes and to manage risk within asset classes. The contribution made to the Main section also facilitated a £6 billion reduction in quoted equity exposure and an increase in interest rates and inflation hedging in 2018.
Compliance & conduct risk
Definition
Compliance risk is the risk that the behaviour of RBS towards customers fails to comply with laws, regulations, rules, standards and codes of conduct. Such a failure may lead to breaches of regulatory requirements, organisational standards or customer expectations and could result in legal or regulatory sanctions, material financial loss or reputational damage.
Conduct risk is the risk that the conduct of RBS and its subsidiaries and its staff towards customers or in the markets in which it operates leads to unfair or inappropriate customer outcomes and results in reputational damage, financial loss or both.
Sources of risk
Compliance and conduct risks exist across all stages of RBSs relationships with its customers and arise from a variety of activities including product design, marketing and sales, complaint handling, staff training, and handling of confidential insider information. As set out in Note 27 on the consolidated accounts, RBS and certain members of staff are party to legal proceedings and are subject to investigation and other regulatory action in the UK, the US and other jurisdictions.
Key developments in 2018
· An enhanced compliance and conduct risk framework was developed, setting minimum standards for the management and measurement of compliance and conduct risks across RBS.
· Enhanced product monitoring and reporting was introduced.
· Controls, systems and processes were revised to ensure compliance with the UKs ring-fencing rules.
· PPI remediation continued in advance of the FCAs August 2019 deadline for claims (refer to Note 20 on the consolidated accounts).
· Work to address legacy GRG complaints continued. The process closed to new complaints in the UK on 22 October 2018.
· Product and pricing continued to be simplified for new and existing customers.
Risk governance
RBS defines appropriate standards of compliance and conduct and ensures adherence to those standards through its risk management framework.
Capital and risk management
Compliance & conduct risk continued
Risk appetite
Risk appetite for compliance and conduct risks is set at Board level. RBS Risk appetite statements articulate the levels of risk that legal entities, franchises and functions work within when pursuing their strategic objectives and business plans.
Risk controls
RBS operates a range of controls to ensure its business is conducted in accordance with legal and regulatory requirements, as well as delivering good customer outcomes. A suite of policies addressing compliance and conduct risks set appropriate standards across RBS. Examples of these include the Complaints Management Policy, Client Assets & Money Policy, and Product Lifecycle Policy as well as policies relating to customers in vulnerable situations, cross-border activities and market abuse. Continuous monitoring and targeted assurance is undertaken, as appropriate.
Risk monitoring and measurement
Compliance and conduct risks are measured and managed through continuous assessment and reporting to RBSs senior risk committees and at Board level.
The compliance and conduct risk framework facilitates the consistent monitoring and measurement of compliance with laws and regulations and the delivery of consistently good customer outcomes.
The first line of defence is responsible for effective risk identification, reporting and monitoring, with oversight, challenge and review by the second line. Compliance and conduct risk management is also integrated into RBSs strategic planning cycle.
Risk mitigation
Activity to mitigate the most-material compliance and conduct risks is carried out across RBS with specific areas of focus in the customer-facing franchises and legal entities. Examples of mitigation include consideration of customer needs in business and product planning, targeted training, complaints management, as well as independent assurance activity. Internal policies help support a strong customer focus across RBS. Independent assessments of compliance with applicable regulations are also carried out at a legal entity level.
Financial crime
Definition
Financial crime risk is the risk presented by criminal activity in the form of money laundering, terrorist financing, bribery and corruption, sanctions and tax evasion. It does not include fraud risk management.
Sources of risk
Financial crime risk may be presented if RBSs employees, customers or third parties undertake or facilitate financial crime, or if RBSs products or services are used to facilitate such crime. Financial crime risk is an inherent risk across all of RBSs lines of business.
Key developments in 2018
· In March 2018, the Federal Reserve Board terminated a Cease & Desist Order originally imposed in July 2011 for financial crime compliance weaknesses identified across RBSs US businesses and concerns about the level of oversight that the RBS Board of Directors had over large and complex US operations. The termination of the Order followed a multi-year programme of work to establish an enhanced governance and oversight framework, risk management programme and compliance programme.
· In October 2018, the Federal Reserve Board terminated a Cease & Desist Order originally imposed in December 2013. The Order, which related to RBS Group and RBS plcs historical compliance with Office of Foreign Assets Control (OFAC) economic sanctions regulations, was terminated following a multi-year programme of work to establish a robust, sustainable OFAC Sanctions compliance framework.
· While the financial crime governance framework was strengthened during 2018 along with the introduction of enhanced control effectiveness assurance processes, enhancements to existing risk assessment models, the introduction of a new Anti-Tax Evasion risk assessment; and improved monitoring controls and enhanced investigation processes the journey of improvement continues.
Risk governance
Financial crime risk is principally governed through the Financial Crime Risk Executive Committee, which is chaired by the Chief Financial Crime Officer. The committee reviews and, where appropriate, escalates material risks and issues to the Group Executive Risk Committee and the Group Board Risk Committee.
Risk appetite
RBS has no appetite to operate in an environment where systems and controls do not enable RBS to identify, assess, monitor, manage and mitigate financial crime risk. RBSs systems and controls must be comprehensive and proportionate to the nature, scale and complexity of its businesses. RBS has no tolerance to systematically or repeatedly breach relevant financial crime regulations and laws.
Risk controls
RBS operates a framework of preventative and detective controls designed to ensure RBS mitigates the risk that it could facilitate financial crime. These controls are supported by a suite of policies, procedures and detailed instructions to ensure they operate effectively.
Risk monitoring and measurement
Financial crime risks are identified and reported through continuous risk management and regular monthly reporting to RBSs senior risk committees and the Board. Quantitative and qualitative data is reviewed and assessed to measure whether financial crime risk is within the Groups risk appetite.
Risk mitigation
Through the financial crime framework, RBS employs relevant policies, systems, processes and controls to mitigate financial crime risk. This would include the use of dedicated screening and monitoring controls to identify people, organisations, transactions and behaviours which might require further investigation or other actions. RBS ensures that centralised expertise is available to detect and disrupt threats to the Group and its customers. Intelligence is shared with law enforcement, regulators and government bodies to strengthen national and international defences against those who would misuse the financial system for criminal motives.
Operational risk
Definition
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events. It arises from day-to-day operations and is relevant to every aspect of the business.
Sources of 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 as well as the increasing threat of cyber attacks are sources of operational risk, as is the impact of natural and man-made disasters. Operational risk can also arise from a failure to account for changes in law or regulations or to take appropriate measures to protect assets.
Capital and risk management
Operational risk continued
Key developments in 2018
· Risk provided oversight of several bank-wide programmes including the Transformation portfolio, structural reform, European Commission (EC) State Aid obligations and Brexit preparations.
· Key corporate structural reform milestones were delivered, including the implementation of the Financial Services Markets Act Part VII and migration activities to separate the ring-fence bank from the non ring-fenced bank.
· RBS is well positioned to deliver the activities required to support the Business Banking Switch Scheme that is due to commence in 2019, as part of the Groups final EC State Aid obligation.
· RBS has established an Innovation Risk Oversight team to provide bank-wide oversight of its innovation portfolio to help deliver safely and at pace.
· RBS continued to review its well established incident management and coordination procedures to manage the persistent and evolving nature of information and cyber security risks.
· Internal security improvement programmes and controls were developed and strengthened to protect RBS and its customers. RBS uses proactive threat management and intelligence processes to identify, manage and mitigate credible threats.
· RBS continued to reduce and simplify its technology estate through strategic investment and Technology transformation initiatives to limit opportunities for hackers and fraudsters. Improvements in capability were also made to the Security Operations Centre, strengthening controls to prevent data leakage, enhance malware defences and management of user access to key systems.
· The number of critical customer impacting incidents that RBS experiences continues to reduce year-on-year. There were 17 such incidents in 2018 compared to 20 in 2017.
· Internal training programmes ensure all employees are aware of the threats facing RBS and remain vigilant to unauthorised attempts to access systems and data.
Risk governance
A strong operational risk management function is vital to support RBSs ambitions to serve its customers better. Improved management of operational risk against defined appetite directly supports the strategic risk objective of improving stakeholder confidence and is vital for stability and reputational integrity.
The Operational Risk function, which is the second line of defence, delivers a robust operational risk management framework and culture across RBS.
The Operational Risk function is responsible for the execution and continuous improvement of the operational risk management framework.
The Operational Risk Executive Committee (OREC) is responsible for reviewing operational risk exposure; identifying and assessing both current and emerging material operational risks; reviewing and monitoring the operational risk profile; and reviewing and approving material operational risk policy changes.
Risk appetite
Operational risk appetite supports effective management of material operational risks. It expresses the level and types of operational risk RBS is willing to accept to achieve its strategic objectives and business plans.
The Group-wide operational risk appetite statement encompasses the full range of operational risks faced by its legal entities, franchises and functions. A subset of the most material risk appetite measures are defined as board risk measures, which are those that, should the limit be breached, would impact on the ability to achieve business plans and threaten stakeholder confidence.
Risk controls
The Control Environment Certification (CEC) process is a half yearly self-assessment by the CEOs of RBSs franchises and business units, as well as the heads of the support and control functions, providing a view on the adequacy and effectiveness of the internal control environment in a consistent and comparable manner. In line with ring-fencing requirements, from H2 2018 certificates were also produced for the following legal entities: NatWest Holdings Limited; NatWest Markets Plc; The Royal Bank of Scotland International Limited; Ulster Bank Ireland DAC; and Coutts and Co.
CEC covers material risks and the underlying key controls, including financial, operational and compliance controls, as well as supporting risk management frameworks. The CEC outcomes, including forward-looking assessments for the next two half-yearly cycles and progress on control environment improvements, are reported to the Board, Group Audit Committee and Board Risk Committee. They are also shared with external auditors.
The CEC process helps to ensure compliance with the RBS Policy Framework, Sarbanes-Oxley 404 requirements concerning internal control over financial reporting (as referenced in the Compliance report on page 95), and certain requirements of the UK Corporate Governance Code.
Risk monitoring and measurement
Risk and control assessments are used across all business areas and support functions to identify and assess material operational and conduct risks and key controls. All risks and controls are mapped to RBSs Risk Directory. Risk assessments are refreshed at least annually to ensure they remain relevant and capture any emerging risks, with associated trigger processes to ensure risks are reassessed at key periods of change.
The process is designed to confirm that risks are effectively managed and prioritised in line with risk appetite. Controls are tested at the appropriate frequency to verify that they remain fit-for-purpose and operate effectively.
RBS uses the standardised approach to calculate its Pillar 1 operational risk capital requirement. This is based on multiplying three years average historical gross income by coefficients set by the regulator based on business line. As part of the wider Internal Capital Adequacy Assessment Process an operational risk economic capital model is used to assess Pillar 2A, which is a risk-sensitive add-on to Pillar 1.The model uses historical loss data (internal and external) and forward-looking scenario analysis that is provided by Operational Risk to provide a risk-sensitive view of RBSs P2A capital requirement.
Scenario analysis is used to assess how extreme but plausible operational risks will affect RBS. It provides a forward-looking basis for evaluating and managing operational risk exposures.
Refer to the Capital, liquidity and funding risk section for operational risk capital requirement figures.
Event and loss data management
The operational risk event and loss data management process ensures RBS captures and records operational risk financial and non financial events that meet defined criteria. Loss data is used for regulatory and industry reporting and is included in capital modelling when calculating economic capital for operational risk. The most serious events are escalated in a simple, standardised process to all senior management, by way of a Group Notifiable Event Process.
Capital and risk management
Operational risk continued
All financial impacts associated with an operational risk event are reported against the date they were recorded in RBSs financial accounts. A single event can result in multiple losses (or recoveries) that may take time to crystallise. Losses and recoveries with a financial accounting date in 2018 may relate to events that occurred, or were identified in, prior years. RBS purchases insurance against specific losses and to comply with statutory or contractual requirements.
Percentage and value of events
At 31 December 2018, events aligned to the clients, products and business practices event category accounted for 98% of RBSs operational risk losses (compared to 93% in 2017). The increase reflected new or additional conduct-related provisions recorded during 2018, most notably the US Department of Justice mortgage-backed securities-related settlement.
|
|
Value of events |
|
Volume of events (1) |
||||||||
|
|
£m |
|
Proportion |
|
Proportion |
||||||
|
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
Fraud |
|
19 |
|
28 |
|
1% |
|
2% |
|
74% |
|
74% |
Clients, products and business practices (2) |
|
1,552 |
|
1,264 |
|
98% |
|
93% |
|
15% |
|
12% |
Execution, delivery and process management |
|
12 |
|
58 |
|
1% |
|
4% |
|
10% |
|
9% |
Employment practices and workplace safety |
|
1 |
|
5 |
|
|
|
1% |
|
1% |
|
5% |
|
|
1,584 |
|
1,355 |
|
100% |
|
100% |
|
100% |
|
100% |
Notes:
(1) The calculation in the table above is based on the volume and value of events (the proportion and cost of operational risk events to RBS) where the associated loss is more than or equal to £10,000.
(2) 2017 losses have been restated from £732 million following finalisation of material MBS-related settlements.
Operational resilience
RBS manages and monitors operational resilience through its risk and control assessments methodology. As challenges to operational resilience become more demanding, given a hostile cyber environment and a greater focus on serving customers through digital platforms, RBS is working with supervisory authorities in the UK to ensure the provision of its products and services can be maintained regardless of the cause of disruption.
This is underpinned by setting, monitoring and testing tolerances for key business services, which define the amount of disruption that could be tolerated.
Risk mitigation
Risks are mitigated by applying key preventative and detective controls, an integral step in the risk assessment methodology which determines residual risk exposure. Control owners are accountable for the design, execution, performance and maintenance of key controls. Key controls are regularly assessed for adequacy and tested for effectiveness. The results are monitored and, where a material change in performance is identified, the associated risk is re-evaluated.
Business risk
Definition
Business risk is the risk that RBS does not have a strategy that is sufficiently well defined to provide clarity on its long-term ambitions to key internal and external stakeholders, or that it is not able to execute upon its chosen strategy as communicated to the market, regulators and other key stakeholders. The risk is that RBS does not deliver its expected business performance which could give rise to a deterioration in stakeholder trust and confidence and/or a breach of regulatory thresholds. RBS may not be able to execute its chosen strategy if there are material changes to RBSs internal or external operating environment.
Sources of risk
Business risk arises as a result of RBSs exposure to the macro-economy (including economic and political factors), the competitive environment, regulatory and technological changes. In addition, internal factors such as the ability to deliver complex change, volatility in sales volumes, input costs, and other operational risks affect RBSs ability to execute its chosen strategic business plan as intended and thus contribute to business risk.
Key developments in 2018
· As part of its requirement by UK law to separate its everyday banking services from its investment banking by 1 January 2019 known as ring-fencing RBS made a number of changes to the way its business was structured. Certain Personal & Business Banking businesses and Commercial Banking businesses of The Royal Bank of Scotland plc transferred to Adam & Company PLC and National Westminster Bank Plc. The role of issuer under the covered bond programme transferred to National Westminster Bank Plc. Adam & Company PLC was renamed The Royal Bank of Scotland plc, and The Royal Bank of Scotland plc was renamed NatWest Markets Plc. The Royal Bank of Scotland plc superseded the prior issuer (former RBS plc) in respect of banknotes.
· RBS also restructured the NatWest Markets Plc (former RBS plc) capital structure. The shares in NatWest Holdings Limited, which owns the ring-fenced sub-group, were distributed to RBS. This separated the ring-fenced sub-group from the non-ring-fenced entities, as required by ring-fencing legislation. RBS also transferred the customer interest rate and foreign exchange derivatives business of National Westminster Bank Plc to NatWest Markets Plc.
· RBS reached a civil settlement in principle with the US Department of Justice in relation its investigation into RBSs issuance and underwriting of US Residential Mortgage Backed Securities (RMBS) between 2005 and 2007, resulting in a £1.0 billion additional provision.
· UK Government Investments Limited announced the successful completion of the disposal of part of HM Treasurys shareholding in The Royal Bank of Scotland Group plc, representing approximately 7.7% of the ordinary share capital of the Group. HM Treasurys shareholding in RBS now represents 62.3% of the Groups ordinary share capital.
· On 17 April 2018 RBS agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of ring-fencing. NatWest Markets Plc cannot continue to be a participant in the Main section and separate arrangements are required for its employees. Under the MoU NatWest Bank made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant.
Capital and risk management
Business risk continued
· RBS declared an interim ordinary dividend of 2 pence per share the first since September 2008.
Risk governance
The Board has ultimate responsibility for business risk and for approving strategic plans, initiatives and changes to strategic direction.
RBSs strategic planning process is managed by Strategy and Corporate Development. The Risk and Finance functions are key contributors to strategic planning.
Responsibility for the day-to-day management of business risk lies primarily with the franchises, with oversight by the Finance function. The franchises are responsible for delivery of their business plans and the management of such factors as pricing, sales volumes, marketing expenditure and other factors that can introduce volatility into earnings.
Risk appetite
Risk Appetite defines the level and types of risk it is willing to accept in order to achieve its strategic objectives and business plans. RBS articulates its appetite for business risk through the implementation of qualitative risk appetite statements and quantitative risk measures at franchise and function level. These statements and measures help determine the level and types of business risk RBS is willing to accept.
Risk controls
For information on risk controls, refer to page 104.
Risk monitoring and measurement
Business risk is identified and managed at the product and transaction level. Estimated revenue, costs and capital are key considerations in the design of any new product or in any new investment decision. Business risk is reported, assessed and challenged at every governance level within the organisation. Each franchise monitors its financial performance relative to plans and reports this on a regular basis to the finance directors of each franchise.
Risk mitigation
RBS operates a monthly rolling forecasting process to identify projected changes in, or risks to, key financial metrics, and ensures appropriate actions are taken.
Reputational risk
Definition
Reputational risk is the risk to RBSs public image from a failure to meet stakeholders expectations in relation to performance, conduct or business profile. Stakeholders include customers, investors, employees, suppliers, government, regulators, special interest and consumer groups, media and the general public.
Sources of risk
Reputational risk can arise from the conduct of employees; customer activities and the sectors and countries in which they operate; provision of products and transactions; as well as operations and infrastructure.
Key developments in 2018
· Metrics were reviewed and enhanced to help measure reputational risk across the Group.
· Risk appetite positions for countries and sectors identified as presenting heightened reputational risk continued to be reviewed and strengthened.
Risk governance
A reputational risk policy supports reputational risk management across RBS. Reputational risk committees in PBB, CPB, RBSI, Ulster Bank RoI and NatWest Markets review relevant issues at an individual franchise or entity level, while the Group Reputational Risk Committee which has delegated authority from the Executive Risk Committee opines on cases, issues, sectors and themes that represent a material reputational risk to the Group. The Board Risk Committee oversees the identification and reporting of reputational risk. The Sustainable Banking Committee has a specific focus on environmental, social and ethical issues.
Risk appetite
RBS manages and articulates its appetite for reputational risk through a qualitative reputational risk appetite statement and quantitative measures. RBS seeks a continued improvement in the identification, assessment and management of customers, transactions, products and issues that present a material reputational risk.
Risk controls
For information on risk controls, refer to page 104.
Risk monitoring and measurement
Primary reputational risk measures are in place to assess internal activity relating to the management of reputational risk, including training. A number of secondary risk measures including measures also used in the management of operational, conduct and financial risks are used to assess relevant external factors. Quarterly reports on performance against these measures are provided to the Executive Risk Committee and Board Risk Committee.
Risk mitigation
Reputational risk is mitigated through the policy and governance framework, with ongoing staff training to ensure early identification, assessment and escalation of material issues.
The most material threats to RBSs reputation continued to originate from historical and more recent conduct issues. As a result, RBS has been the subject of investigations and reviews by a number of regulators and governmental authorities, some of which have resulted in fines, settlements and public censure. Refer to the Litigation, investigations and reviews section of Note 27 on the consolidated accounts.
Financial statements
|
Page |
|
Report of Independent Registered Public Accounting Firm |
178 |
|
Consolidated income statement |
180 |
|
Consolidated statement of comprehensive income |
181 |
|
Consolidated balance sheet |
182 |
|
Consolidated statement of changes in equity |
183 |
|
Consolidated cash flow statement |
185 |
|
Accounting policies |
186 |
|
Notes on the consolidated accounts |
|
|
1 |
Net interest income |
191 |
2 |
Non-interest income |
191 |
3 |
Operating expenses |
192 |
4 |
Segmental analysis |
195 |
5 |
Pensions |
199 |
6 |
Auditors remuneration |
203 |
7 |
Tax |
204 |
8 |
Earnings per share |
206 |
9 |
Trading assets and liabilities |
206 |
10 |
Derivatives |
207 |
11 |
Financial instruments - classification |
209 |
12 |
Financial instruments - valuation |
211 |
13 |
Financial instruments - maturity analysis |
218 |
14 |
Loan impairment provisions |
221 |
15 |
Other financial assets |
222 |
16 |
Intangible assets |
223 |
17 |
Other assets |
224 |
18 |
Other financial liabilities |
224 |
19 |
Subordinated liabilities |
224 |
20 |
Other liabilities |
226 |
21 |
Non-controlling interests |
227 |
22 |
Share capital and other equity |
227 |
23 |
Leases |
229 |
24 |
Structured entities |
230 |
25 |
Asset transfers |
231 |
26 |
Capital resources |
232 |
27 |
Memorandum items |
233 |
28 |
Analysis of the net investment in business interests and intangible assets |
239 |
29 |
Analysis of changes in financing during the year |
239 |
30 |
Analysis of cash and cash equivalents |
240 |
31 |
Directors and key management remuneration |
240 |
32 |
Transactions with directors and key management |
240 |
33 |
Adoption of IFRS 9 |
241 |
34 |
Related parties |
242 |
35 |
Post balance sheet events |
242 |
36 |
Consolidating financial information |
243 |
Financial statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of The Royal Bank of Scotland Group plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Royal Bank of Scotland Group plc (the Group) as of 31 December 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended 31 December 2018, the related Accounting policies and Notes 1 to 36, and the information identified as audited in the Annual Report on Remuneration in the Directors Remuneration Report and in the Capital and risk management section (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Group at 31 December 2018 and 2017 and the consolidated results of its operations and its cash flows for each of the three years in the period ended 31 December 2018, in conformity with International Financial Reporting Standards (IFRS) as adopted for use in the European Union and IFRS as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Groups internal control over financial reporting as of 31 December 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated 14 February 2019 expressed an unqualified opinion thereon.
Adoption of International Financial Reporting Standard 9 Financial Instruments
As discussed in section 1. Presentation of accounts of the Accounting policies to the financial statements, the Group changed its method of accounting for the classification, measurement and impairment of financial instruments in 2018 due to the adoption of IFRS 9 Financial Instruments.
Basis for Opinion
These financial statements are the responsibility of the Groups management. Our responsibility is to express an opinion on the Groups financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Groups auditors since 2016.
London, United Kingdom
14 February 2019
Financial statements
To the Shareholders and the Board of Directors of The Royal Bank of Scotland Group plc
Opinion on Internal Control over Financial Reporting
We have audited The Royal Bank of Scotland Group plcs (the Group) internal control over financial reporting as of 31 December 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of 31 December 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Group as of 31 December 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended 31 December 2018, the related Accounting policies and Notes 1 to 36, and the information identified as audited in the Annual Report on Remuneration in the Directors Remuneration Report and in the Capital and risk management section and our report dated 14 February 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Groups management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Groups internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
London, United Kingdom
14 February 2019
Consolidated income statement for the year ended 31 December 2018
|
Note |
2018 |
2017 |
2016 |
£m |
£m |
£m |
||
Interest receivable |
|
11,049 |
11,034 |
11,258 |
Interest payable |
|
(2,393) |
(2,047) |
(2,550) |
Net interest income |
1 |
8,656 |
8,987 |
8,708 |
Fees and commissions receivable |
|
3,218 |
3,338 |
3,340 |
Fees and commissions payable |
|
(861) |
(883) |
(805) |
Income from trading activities |
|
1,507 |
634 |
974 |
Loss on redemption of own debt |
|
|
(7) |
(126) |
Other operating income |
|
882 |
1,064 |
499 |
Non-interest income |
2 |
4,746 |
4,146 |
3,882 |
Total income |
|
13,402 |
13,133 |
12,590 |
Staff costs |
|
(4,122) |
(4,676) |
(5,124) |
Premises and equipment |
|
(1,383) |
(1,565) |
(1,388) |
Other administrative expenses |
|
(3,372) |
(3,323) |
(8,745) |
Depreciation and amortisation |
|
(731) |
(808) |
(778) |
Write down of goodwill and other intangible assets |
|
(37) |
(29) |
(159) |
Operating expenses |
3 |
(9,645) |
(10,401) |
(16,194) |
Profit/(loss) before impairment losses |
|
3,757 |
2,732 |
(3,604) |
Impairment losses |
14 |
(398) |
(493) |
(478) |
Operating profit/(loss) before tax |
|
3,359 |
2,239 |
(4,082) |
Tax charge |
7 |
(1,275) |
(824) |
(1,166) |
Profit/(loss) for the year |
|
2,084 |
1,415 |
(5,248) |
|
|
|
|
|
Attributable to: |
|
|
|
|
Ordinary shareholders |
|
1,622 |
752 |
(6,955) |
Preference shareholders |
|
182 |
234 |
260 |
Dividend access share |
|
|
|
1,193 |
Paid-in equity holders |
|
288 |
394 |
244 |
Non-controlling interests |
|
(8) |
35 |
10 |
|
|
2,084 |
1,415 |
(5,248) |
|
|
|
|
|
Earnings/(loss) per ordinary share |
8 |
13.5p |
6.3p |
(59.5p) |
Earnings/(loss) per ordinary share - fully diluted |
8 |
13.4p |
6.3p |
(59.5p) |
The accompanying notes on pages 191 to 249, the accounting policies on pages 186 to 190 and the audited sections of the Business review: Capital and risk management on pages 101 to 176 form an integral part of these financial statements.
Consolidated statement of comprehensive income for the year ended 31 December 2018
|
|
2018 |
2017 |
2016 |
Note |
£m |
£m |
£m |
|
Profit/(loss) for the year |
|
2,084 |
1,415 |
(5,248) |
Items that do not qualify for reclassification |
|
|
|
|
Remeasurement of retirement benefit schemes |
5 |
|
|
|
- contributions in preparation for ring-fencing (1) |
|
(2,053) |
|
|
- other movements |
|
86 |
90 |
(1,049) |
Profit/(loss) on fair value of credit in financial liabilities designated at fair value |
|
|
|
|
through profit or loss due to own credit risk |
|
200 |
(126) |
|
Fair value through other comprehensive income (FVOCI) financial assets (2) |
|
48 |
|
|
Tax |
|
502 |
(10) |
288 |
|
|
(1,217) |
(46) |
(761) |
Items that do qualify for reclassification |
|
|
|
|
Fair value through other comprehensive income (FVOCI) financial assets (2) |
|
7 |
26 |
(94) |
Cash flow hedges |
|
(581) |
(1,069) |
765 |
Currency translation |
|
310 |
100 |
1,263 |
Tax |
|
189 |
256 |
(106) |
|
|
(75) |
(687) |
1,828 |
Other comprehensive (loss)/income after tax |
|
(1,292) |
(733) |
1,067 |
Total comprehensive income/(loss) for the year |
|
792 |
682 |
(4,181) |
Attributable to: |
|
|
|
|
Ordinary shareholders |
|
305 |
2 |
(5,999) |
Preference shareholders |
|
182 |
234 |
260 |
Dividend access share |
|
|
|
1,193 |
Paid-in equity holders |
|
288 |
394 |
244 |
Non-controlling interests |
|
17 |
52 |
121 |
|
|
792 |
682 |
(4,181) |
Notes:
(1) |
On 17 April 2018 RBS agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of ring-fencing. NatWest Markets Plc cannot continue to be a participant in the Main section and separate arrangements are required for its employees. Under the MoU NatWest Bank made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant. Also under the MoU, NatWest Markets Plc is required to make a £53 million contribution to the NWM section in Q1 2019. |
(2) |
Refer to Note 33 for further information on the impact of IFRS 9 on classification and basis of preparation, year ended 31 December 2018 prepared under IFRS 9 and prior years under IAS 39. |
The accompanying notes on pages 191 to 249, the accounting policies on pages 186 to 190 and the audited sections of the Business review: Capital and risk management on pages 101 to 176 form an integral part of these financial statements.
Consolidated balance sheet as at 31 December 2018
|
Note |
2018 |
2017 |
£m |
£m |
||
Assets |
|
|
|
Cash and balances at central banks |
11 |
88,897 |
98,337 |
Trading assets |
9 |
75,119 |
85,991 |
Derivatives |
10 |
133,349 |
160,843 |
Settlement balances |
|
2,928 |
2,517 |
Loans to banks - amortised cost |
11 |
12,947 |
11,517 |
Loans to customers - amortised cost |
11 |
305,089 |
310,116 |
Securities subject to repurchase agreements |
|
9,890 |
13,717 |
Other financial assets excluding securities subject to repurchase agreements |
|
49,595 |
38,212 |
Other financial assets |
15 |
59,485 |
51,929 |
Intangible assets |
16 |
6,616 |
6,543 |
Other assets |
17 |
9,805 |
10,263 |
Total assets |
|
694,235 |
738,056 |
|
|
|
|
Liabilities |
|
|
|
Bank deposits |
11 |
23,297 |
30,396 |
Customer deposits |
11 |
360,914 |
361,316 |
Settlement balances |
|
3,066 |
2,844 |
Trading liabilities |
9 |
72,350 |
81,982 |
Derivatives |
10 |
128,897 |
154,506 |
Other financial liabilities |
18 |
39,732 |
30,326 |
Subordinated liabilities |
19 |
10,535 |
12,722 |
Other liabilities |
20 |
8,954 |
14,871 |
Total liabilities |
|
647,745 |
688,963 |
|
|
|
|
|
|
|
|
Ordinary shareholders interests |
|
41,182 |
41,707 |
Other owners interests |
|
4,554 |
6,623 |
Owners equity |
22 |
45,736 |
48,330 |
Non-controlling interests |
21 |
754 |
763 |
Total equity |
|
46,490 |
49,093 |
Total liabilities and equity |
|
694,235 |
738,056 |
The accompanying notes on pages 191 to 249, the accounting policies on pages 186 to 190 and the audited sections of the Business review: Capital and risk management on pages 101 to 176 form an integral part of these financial statements.
The accounts were approved by the Board of directors on 14 February 2019 and signed on its behalf by:
Howard Davies
|
Ross McEwan
|
Katie Murray
|
The Royal Bank of Scotland Group plc
Registered No. SC45551
Consolidated statement of changes in equity for the year ended 31 December 2018
|
2018 |
2017 |
2016 |
|
£m |
£m |
£m |
Called-up share capital - at 1 January |
11,965 |
11,823 |
11,625 |
Ordinary shares issued |
84 |
142 |
198 |
At 31 December |
12,049 |
11,965 |
11,823 |
|
|
|
|
Paid-in equity - at 1 January |
4,058 |
4,582 |
2,646 |
Redeemed/reclassified (1) |
|
(524) |
(110) |
Securities issued during the year (2) |
|
|
2,046 |
At 31 December |
4,058 |
4,058 |
4,582 |
|
|
|
|
Share premium account - at 1 January |
887 |
25,693 |
25,425 |
Ordinary shares issued |
140 |
235 |
268 |
Redemption of debt preference shares (3) |
|
748 |
|
Capital reduction (4) |
|
(25,789) |
|
At 31 December |
1,027 |
887 |
25,693 |
|
|
|
|
Merger reserve - at 1 January and 31 December |
10,881 |
10,881 |
10,881 |
|
|
|
|
FVOCI reserve at 1 January (5) |
255 |
238 |
307 |
Implementation of IFRS 9 on 1 January 2018 |
34 |
|
|
Unrealised gains |
97 |
202 |
282 |
Realised gains |
(42) |
(176) |
(376) |
Tax |
(1) |
(9) |
25 |
At 31 December |
343 |
255 |
238 |
|
|
|
|
Cash flow hedging reserve - at 1 January |
227 |
1,030 |
458 |
Amount recognised in equity (6) |
(63) |
(277) |
1,867 |
Amount transferred from equity to earnings (7) |
(518) |
(792) |
(1,102) |
Tax |
163 |
266 |
(193) |
At 31 December (8) |
(191) |
227 |
1,030 |
|
|
|
|
Foreign exchange reserve - at 1 January |
2,970 |
2,888 |
1,674 |
Retranslation of net assets |
195 |
111 |
1,470 |
Foreign currency losses on hedges of net assets |
(33) |
(6) |
(278) |
Tax |
23 |
(1) |
62 |
Recycled to profit or loss on disposal of businesses (9) |
123 |
(22) |
(40) |
At 31 December (8) |
3,278 |
2,970 |
2,888 |
|
|
|
|
Capital redemption reserve - at 1 January |
|
4,542 |
4,542 |
Capital reduction (4) |
|
(4,542) |
|
At 31 December |
|
|
4,542 |
Retained earnings - at 1 January |
17,130 |
(12,936) |
(4,020) |
Implementation of IFRS 9 on 1 January 2018 (5) |
(105) |
|
|
Profit/(loss) attributable to ordinary shareholders and other equity owners |
2,092 |
1,380 |
(5,258) |
Equity preference dividends paid |
(182) |
(234) |
(260) |
Paid-in equity dividends paid, net of tax |
(288) |
(394) |
(244) |
Ordinary dividends paid |
(241) |
|
|
Capital reduction (4) |
|
30,331 |
|
Dividend access share dividend |
|
|
(1,193) |
Redemption of debt preference shares (3) |
|
(748) |
|
Redemption of equity preference shares (10) |
(2,805) |
|
(1,160) |
Redemption/reclassification of paid-in equity |
|
(196) |
(21) |
Realised gains in period on FVOCI equity shares, net of tax |
6 |
|
|
Remeasurement of the retirement benefit schemes |
|
|
|
- contributions in preparation for ring-fencing (11) |
(2,053) |
|
|
- other movements |
86 |
90 |
(1,049) |
- tax |
539 |
(28) |
288 |
Changes in fair value of credit in financial liabilities designated at fair value through profit or loss |
|
|
|
- gross |
200 |
(126) |
|
- tax |
(33) |
18 |
|
Shares issued under employee share schemes |
(2) |
(5) |
(10) |
Share-based payments |
(32) |
(22) |
(9) |
At 31 December |
14,312 |
17,130 |
(12,936) |
|
|
|
|
Own shares held - at 1 January |
(43) |
(132) |
(107) |
Shares issued under employee share schemes |
87 |
161 |
41 |
Own shares acquired |
(65) |
(72) |
(66) |
At 31 December |
(21) |
(43) |
(132) |
|
|
|
|
Owners equity at 31 December |
45,736 |
48,330 |
48,609 |
Consolidated statement of changes in equity for the year ended 31 December 2018
|
2018 |
2017 |
2016 |
|
£m |
£m |
£m |
Non-controlling interests (see Note 21) - at 1 January |
763 |
795 |
716 |
Currency translation adjustments and other movements |
25 |
17 |
111 |
(Loss)/profit attributable to non-controlling interests |
(8) |
35 |
10 |
Dividends paid |
(5) |
(25) |
|
Equity withdrawn and disposals |
(21) |
(59) |
(42) |
At 31 December |
754 |
763 |
795 |
|
|
|
|
Total equity at 31 December |
46,490 |
49,093 |
49,404 |
|
|
|
|
Total equity is attributable to: |
|
|
|
Ordinary shareholders |
41,182 |
41,707 |
41,462 |
Preference shareholders |
496 |
2,565 |
2,565 |
Paid-in equity holders |
4,058 |
4,058 |
4,582 |
Non-controlling interests |
754 |
763 |
795 |
|
46,490 |
49,093 |
49,404 |
Notes:
(1) |
Paid-in equity reclassified to liabilities as a result of the call of US$564 million and CAD321 million EMTN notes in August 2017 (redeemed in October 2017), the call of RBS Capital Trust D in March 2017 (redeemed in June 2017), the call of RBS Capital Trust C in May 2016 (redeemed in July 2016). |
(2) |
AT1 capital notes totalling £2.0 billion issued in August 2016. |
(3) |
During 2017, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.1 billion. The nominal value of £0.3 million was credited to the capital redemption reserve; share premium increased by £0.7 billion in respect of the premium received on issue, with a corresponding decrease in retained earnings. During 2016, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.5 billion. The nominal value of £0.3 million was transferred from share capital to capital redemption reserve and ordinary owners equity was reduced by £0.4 billion in respect of the movement in exchange rates since issue. |
(4) |
On 15 June 2017, the Court of Session approved a reduction of RBSG plc capital so that the amounts which stood to the credit of share premium, account and capital redemption reserve were transferred to retained earnings. |
(5) |
Refer to Note 33 for further information on the impact of IFRS 9 on classification and basis of preparation, year ended 31 December 2018 prepared under IFRS 9 prior years under IAS 39. |
(6) |
The amount debited direct to the cash flow hedging reserve comprised £166 million in relation to interest rate hedges less a credit of £103 million in relation to foreign exchange hedges. |
(7) |
The cash flow hedging reserve was reduced by £25 million in relation to foreign exchange hedges and £493 million in relation to interest rate hedges which were credited in aggregate to net interest income. |
(8) |
The hedging element of the cash flow hedging reserve and foreign exchange reserve relate mainly to de-designated hedges. |
(9) |
No tax impact. |
(10) |
During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed. |
(11) |
On 17 April 2018 RBS agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of ring-fencing. NatWest Markets Plc cannot continue to be a participant in the Main section and separate arrangements are required for its employees. Under the MoU NatWest Bank made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant Also under the MoU, NatWest Markets Plc is required to make a £53 million contribution to the NWM section in Q1 2019. |
The accompanying notes on pages 191 to 249, the accounting policies on pages 186 to 190 and the audited sections of the Business review: Capital and risk management on pages 101 to 176 form an integral part of these financial statements.
Consolidated cash flow statement for the year ended 31 December 2018
|
|
|
2018 |
2017 |
2016 |
|
Note |
|
£m |
£m |
£m |
Cash flows from operating activities |
|
|
|
|
|
Operating profit/(loss) before tax |
|
|
3,359 |
2,239 |
(4,082) |
Interest on subordinated liabilities |
|
|
461 |
572 |
845 |
Impairment releases on loans to banks and customers |
|
|
(1,197) |
(647) |
(3,221) |
Profit on sale of subsidiaries and associates |
|
|
|
(155) |
(22) |
Profit on sale of securities |
|
|
(34) |
(226) |
(71) |
Defined benefit pension schemes |
|
|
(2,055) |
(252) |
(4,518) |
Provisions: expenditure in excess of charges |
|
|
(5,016) |
(4,546) |
4,517 |
Depreciation, amortisation and impairment of property, plant, equipment, goodwill and intangibles |
|
|
718 |
762 |
919 |
Loss on redemption of own debt |
|
|
|
7 |
126 |
Elimination of foreign exchange differences |
|
|
(160) |
(426) |
(6,518) |
Other non-cash items |
|
|
767 |
(214) |
133 |
Net cash outflow from trading activities |
|
|
(3,157) |
(2,886) |
(11,892) |
Decrease/(increase) in net loans to banks and customers |
|
|
2,627 |
2,466 |
(12,960) |
(Increase)/decrease in securities |
|
|
(47) |
(1,319) |
16,741 |
Decrease/(increase) in other assets |
|
|
258 |
(221) |
1,195 |
Increase in trading assets and liabilities |
|
|
(2,087) |
|
|
Decrease/(increase) in derivative assets and liabilities |
|
|
1,885 |
4,169 |
(2,696) |
(Decrease)/increase in settlement balance assets and liabilities and short positions |
|
|
(189) |
8,658 |
104 |
(Decrease)/increase in banks and customers deposits |
|
|
(8,164) |
25,449 |
10,418 |
Increase/(decrease) in debt securities in issue |
|
|
10,068 |
3,326 |
(3,967) |
Decrease in other liabilities |
|
|
(956) |
(381) |
(422) |
Changes in operating assets and liabilities |
|
|
3,395 |
42,147 |
8,413 |
Income taxes paid |
|
|
(466) |
(520) |
(171) |
Net cash flows from operating activities (1) |
|
|
(228) |
38,741 |
(3,650) |
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
Sale and maturity of securities |
|
|
9,062 |
11,656 |
8,599 |
Purchase of securities |
|
|
(16,181) |
(17,212) |
(11,607) |
Sale of property, plant and equipment |
|
|
264 |
405 |
447 |
Purchase of property, plant and equipment |
|
|
(619) |
(1,132) |
(912) |
Net investment in business interests and intangible assets |
28 |
|
(481) |
(199) |
(886) |
Net cash flows from investing activities |
|
|
(7,955) |
(6,482) |
(4,359) |
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
Issue of ordinary shares |
|
|
144 |
306 |
300 |
Issue of other equity instruments: Additional Tier 1 capital notes |
|
|
|
|
2,046 |
Redemption of other equity instruments |
|
|
(2,826) |
(779) |
(1,312) |
Redemption of debt preference shares |
|
|
|
(748) |
|
Own shares disposed/(acquired) |
|
|
22 |
89 |
(25) |
Redemption of subordinated liabilities |
|
|
(2,258) |
(5,747) |
(3,606) |
Service cost of other equity instruments |
|
|
(803) |
(612) |
(1,697) |
Interest on subordinated liabilities |
|
|
(566) |
(717) |
(813) |
Net cash flows from financing activities |
|
|
(6,287) |
(8,208) |
(5,107) |
Effects of exchange rate changes on cash and cash equivalents |
|
|
676 |
(16) |
8,094 |
|
|
|
|
|
|
Net (decrease)/increase in cash and cash equivalents |
|
|
(13,794) |
24,035 |
(5,022) |
Cash and cash equivalents at 1 January |
|
|
122,605 |
98,570 |
103,592 |
Cash and cash equivalents at 31 December |
30 |
|
108,811 |
122,605 |
98,570 |
Note:
(1) |
Includes interest received of £10,927 million (2017 - £10,946 million, 2016 - £11,321 million) and interest paid of £2,511 million (2017 - £2,300 million, 2016 - £2,638 million). |
The accompanying notes on pages 191 to 249, the accounting policies on pages 186 to 190 and the audited sections of the Business review: Capital and risk management on pages 101 to 176 form an integral part of these financial statements.
Accounting policies
1. Presentation of accounts
The accounts, set out on pages 180 to 249 including these accounting policies on pages 186 to 190 and the audited sections of the Financial review: Capital and risk management on pages 101 to 176, are prepared on a going concern basis (see the Report of the directors, page 98) and in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB) and interpretations as issued by the IFRS Interpretations Committee of the IASB and adopted by the European Union (EU) (together IFRS). ).
The company is incorporated in the UK and registered in Scotland. Its accounts are presented in accordance with the Companies Act 2006.
With the exception of investment property and certain financial instruments as described in Accounting policies 8, 13, and 21, the accounts are presented on an historical cost basis.
Adoption of IFRS 9
Refer to Note 33 for details of the adoption of IFRS 9.
Other amendments to IFRS
IFRS 15 Revenue from Contracts with Customers has been adopted with effect from 1 January 2018. The Accounting policy is updated to reflect the terminology in the new standard but it has had no effect on financial information reported in the current or comparative periods. Interest income and expense continues to be recognised using the effective interest rate method for financial instruments measured at historical cost. There has been no restatement of profit or loss for comparative periods.
Other amendments to IFRS effective for 2018, including IFRS 2 Share-based payments and IAS 40 Investment Property have not had a material effect on the Groups financial statements.
2. Basis of consolidation
The consolidated accounts incorporate the financial statements of the company and entities (including certain structured entities) that are controlled by the Group. The Group controls another entity (a subsidiary) when it is exposed, or has rights, to variable returns from its involvement with that entity and has the ability to affect those returns through its power over the other entity; power generally arises from holding a majority of voting rights. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated accounts at their fair value. A subsidiary is included in the consolidated financial statements from the date it is controlled by the Group until the date the Group ceases to control it through a sale or a significant change in circumstances.
Changes in the Groups interest in a subsidiary that do not result in the Group ceasing to control that subsidiary are accounted for as equity transactions. All intergroup balances, transactions, income and expenses are eliminated on consolidation. The consolidated accounts are prepared under uniform accounting policies.
3. Revenue recognition
Interest income or expense on financial instruments that are measured at amortised cost and fair value through comprehensive income is determined using the effective interest rate method. The effective interest rate allocates the interest income or interest expense over the expected life of the asset or liability at the rate that exactly discounts all estimated future cash flows to equal the instruments initial carrying amount. Calculation of the effective interest rate takes into account fees payable or receivable that are an integral part of the instruments yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows. Negative effective interest accruing to financial assets is presented in interest payable.
Net interest income in the income statement only relates to financial instruments measured at amortised cost; the interest on debt instruments classified as fair value through OCI; and the effective part of any related accounting hedging instruments. Other interest relating to financial instruments measured at fair value is recognised as part of the movement in fair value.
Fees in respect of services are recognised as the right to consideration accrues through the performance of each distinct service obligation to the customer. The arrangements are generally contractual and the cost of providing the service is incurred as each service is performed. The price is usually fixed and always determinable.
4. Assets held for sale and discontinued operations
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 non-current asset (or disposal group) classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell.
5. Employee benefits
Short-term employee benefits, such as salaries, paid absences, and other benefits are accounted for on an accruals basis over the period in which the employees provide the related services. Employees may receive variable compensation satisfied by cash, by debt instruments issued by the Group or by RBSG shares. The treatment of share-based compensation is set out in Accounting policy 23. Variable compensation that is settled in cash or debt instruments is charged to profit or loss over the period from the start of the year to which the variable compensation relates to the expected settlement date taking account of forfeiture and clawback criteria.
Contributions to defined contribution pension schemes are recognised in profit or loss when payable.
For defined benefit schemes, the defined benefit obligation is measured on an actuarial basis using the projected unit credit method and discounted at a rate determined by reference to market yields at the end of the reporting period on high quality corporate bonds of equivalent term and currency to the scheme liabilities. Scheme assets are measured at their fair value. The difference between scheme assets and scheme liabilities, the net defined benefit asset or liability, is recognised in the balance sheet. A defined benefit asset is limited to the present value of any economic benefits available to the Group in the form of refunds from the plan or reduced contributions to it.
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.
A curtailment occurs when the Group significantly reduces the number of employees covered by a plan. A plan amendment occurs when the Group introduces, or withdraws, a defined benefit plan or changes the benefits payable under an existing defined benefit plan. Past service cost may be either positive (when benefits are introduced or changed so that the present value of the defined benefit obligation increases) or negative (when benefits are withdrawn or changed so that the present value of the defined benefit obligation decreases). A settlement is a transaction that eliminates all further obligation for part or all of the benefits.
Actuarial gains and losses (i.e. gains or and losses on re-measuring the net defined benefit asset or liability) are recognised in other comprehensive income in full in the period in which they arise.
6. Intangible assets and goodwill
Intangible assets acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss over the assets estimated economic lives using methods that best reflect the pattern of economic benefits and is included in Depreciation and amortisation. These estimated useful economic lives are:
Computer software |
3 to 12 years |
Other acquired intangibles |
5 to 10 years |
Expenditure on internally generated goodwill and brands is written-off as incurred. Direct costs relating to the development of internal-use computer software are capitalised once technical feasibility and economic viability have been established. These costs include payroll, the costs of materials and services, and directly attributable overheads. Capitalisation of costs ceases when the software is capable of operating as intended. During and after development, accumulated costs are reviewed for impairment against the benefits that the software is expected to generate. Costs incurred prior to the establishment of technical feasibility and
Accounting policies
economic viability are expensed as incurred as are all training costs and general overheads. The costs of licences to use computer software that are expected to generate economic benefits beyond one year are also capitalised.
Intangible assets include goodwill arising on the acquisition of subsidiaries and joint ventures. Goodwill on the acquisition of a subsidiary is the excess of the fair value of the consideration transferred, the fair value of any existing interest in the subsidiary and the amount of any non-controlling interest measured either at fair value or at its share of the subsidiarys net assets over net fair value of the subsidiarys identifiable assets, liabilities and contingent liabilities.
Goodwill arises on the acquisition of a joint venture when the cost of investment exceeds the Groups share of the net fair value of the joint ventures identifiable assets and liabilities. Goodwill is measured at initial cost less any subsequent impairment losses. Goodwill arising on the acquisition of associates is included within their carrying amounts. The gain or loss on the disposal of a subsidiary, associate or joint venture includes the carrying value of any related goodwill.
7. Impairment of intangible assets and property, plant and equipment
At each balance sheet date, the Group assesses whether there is any indication that its intangible assets, or property, plant and equipment are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
If an asset does not generate cash flows that are independent from those of other assets or groups of assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. For the purposes of impairment testing, goodwill acquired in a business combination is allocated to each of the Groups cash-generating units or groups of cash-generating units expected to benefit from the combination. The recoverable amount of an asset or cash-generating unit is the higher of its fair value less cost to sell and its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cash-generating unit that have not been taken into account in estimating future cash flows. If the recoverable amount of an intangible or tangible asset is less than its carrying value, an impairment loss is recognised immediately in profit or loss and the carrying value of the asset reduced by the amount of the loss. A reversal of an impairment loss on intangible assets (excluding goodwill) or property, plant and equipment can be recognised when an increase in service potential arises provided the increased carrying value is not greater than it would have been had no impairment loss been recognised. Impairment losses on goodwill are not reversed.
8. Investment property
Investment property comprises freehold and leasehold properties that are held to earn rentals or for capital appreciation or both. Investment property is not depreciated but is stated at fair value. Fair value is based on current prices for similar properties in the same location and condition. Any gain or loss arising from a change in fair value is recognised in profit or loss. Rental income from investment property is recognised on a straight-line basis over the term of the lease in Other operating income. Lease incentives granted are recognised as an integral part of the total rental income.
9. Foreign currencies
The Groups consolidated financial statements are presented in sterling which is the functional currency of the company.
Transactions in foreign currencies are recorded in the functional currency at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the relevant functional currency at the foreign exchange rates ruling at the balance sheet date. Foreign exchange differences arising on the settlement of foreign currency transactions and from the translation of monetary assets and liabilities are reported in income from trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign operations (see Accounting policy 21).
Non-monetary items denominated in foreign currencies that are stated at fair value are translated into the relevant functional currency at the foreign exchange rates ruling at the dates the values are determined. Translation differences arising on non-monetary items measured at fair value are recognised in profit or loss except for differences arising on non-monetary financial assets classified as available for sale, for example equity shares, which are recognised in other comprehensive income unless the asset is the hedged item in a fair value hedge.
Assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into sterling at foreign exchange rates ruling at the balance sheet date. Income and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on the translation of a foreign operation are recognised in other comprehensive income. The amount accumulated in equity is reclassified from equity to profit or loss on disposal of a foreign operation.
10. Leases
As lessor
Contracts with customers to lease assets are classified as finance leases if they transfer substantially all the risks and rewards of ownership of the asset to the customer; all other contracts with customers to lease assets are classified as operating leases.
Finance lease receivables are included in the balance sheet, within net loans to customers, at the amount of the net investment in the lease being the minimum lease payments and any unguaranteed residual value discounted at the interest rate implicit in the lease. Finance lease income is allocated to accounting periods so as to give a constant periodic rate of return before tax on the net investment and included in Interest receivable. Unguaranteed residual values are subject to regular review; if there is a reduction in their value, income allocation is revised and any reduction in respect of amounts accrued is recognised immediately.
Rental income from operating leases is recognised in income on a straight-line basis over the lease term unless another systematic basis better represents the time pattern of the assets use. Operating lease assets are included within Property, plant and equipment and depreciated over their useful lives. Operating lease rentals receivable are included in Other operating income.
As lessee
The Groups contracts to lease assets are principally operating leases. Operating lease rental expense is included in Premises and equipment costs and recognised as an expense on a straight-line basis over the lease term unless another systematic basis better represents the benefit to the Group.
11. Provisions
The Group recognises a provision for a present obligation resulting from a past event when it is more likely than not that it will be required to transfer economic benefits to settle the obligation and the amount of the obligation can be estimated reliably.
Provision is made for restructuring costs, including the costs of redundancy, when the Group has a constructive obligation to restructure. An obligation exists when the Group has a detailed formal plan for the restructuring and has raised a valid expectation in those affected by starting to implement the plan or by announcing its main features.
If the Group has a contract that is onerous, it recognises the present obligation under the contract as a provision. An onerous contract is one where the unavoidable costs of meeting the Groups contractual obligations exceed the expected economic benefits. When the Group vacates a leasehold property, a provision is recognised for the costs under the lease less any expected economic benefits (such as rental income).
Contingent liabilities are possible obligations arising from past events, whose existence will be confirmed only by uncertain future events, or present obligations arising from past events that are not recognised because either an outflow of economic benefits is not probable or the amount of the obligation cannot be reliably measured. Contingent liabilities are not recognised but information about them is disclosed unless the possibility of any outflow of economic benefits in settlement is remote.
Accounting policies
12. Tax
Income tax expense or income, comprising current tax and deferred tax, is recorded in the income statement except income tax on items recognised outside profit or loss which is credited or charged to other comprehensive income or to equity as appropriate.
Current tax is income tax payable or recoverable in respect of the taxable profit or loss for the year arising in profit or loss, other comprehensive income or equity. Provision is made for current tax at rates enacted or substantively enacted at the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable in respect of temporary differences between the carrying amount of an asset or liability for accounting purposes and its carrying amount for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that the asset will be recovered.
Deferred tax is not recognised on temporary differences that arise from initial recognition of an asset or a liability in a transaction (other than a business combination) that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is calculated using tax rates expected to apply in the periods when the assets will be realised or the liabilities settled, based on tax rates and laws enacted, or substantively enacted, at the balance sheet date.
Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to offset and where they relate to income taxes levied by the same taxation authority either on an individual Group company or on Group companies in the same tax group that intend, in future periods, to settle current tax liabilities and assets on a net basis or on a gross basis simultaneously.
13. Financial instruments
On initial recognition, financial instruments are measured at fair value. Subsequently they are classified as follows: designated at fair value through profit or loss; amortised cost, the default class for liabilities; fair value through profit or loss, the default class for assets; or financial assets may be designated as at fair value through other comprehensive income. Regular way purchases of financial assets classified as amortised cost are recognised on the settlement date; all other regular way transactions in financial assets are recognised on the trade date.
Designated as at fair value through profit or loss a financial instrument may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both, that the Group manages and evaluates on a fair value basis; or (c) relates to a financial liability that contains an embedded derivative which is not evidently closely related to the host contract. Financial assets that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss, and are subsequently measured at fair value. Gains and losses are recognised in profit or loss as they arise.
Amortised cost assets have to meet both the following criteria:
(a) the asset is held within a business model whose objective is solely to hold assets to collect contractual cash flows; and
(b) the contractual terms of the financial asset are solely payments of principal and interest on the outstanding balance.
Amortised cost liabilities all liabilities that are not subsequently measured at fair value are measured at amortised cost.
Assets designated at fair value through other comprehensive income An equity instrument may be designated irrevocably at fair value through other comprehensive income. Other assets have to meet both the following criteria:
(a) the asset is held within a business model whose objective is both to hold assets to collect contractual cash flows and selling financial assets; and
(b) the contractual terms of the financial asset are solely payments of principal and interest on the outstanding balance.
Fair value through profit or loss - a financial liability is measured at fair value if it arises from: a financial guarantee contract; a commitment to lend at below market rates; an obligation arising from the failed sale of an asset; or a contingent consideration for a business acquisition. Fair value through profit or loss is the default classification for a financial asset.
Reclassifications financial liabilities cannot be reclassified. Financial assets are only reclassified where there has been a change in the business model.
Fair value the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Business model assessment b usiness models are assessed at portfolio level, being the level at which they are managed. This is expected to result in the most consistent classification of assets because it aligns with the stated objectives of the portfolio, its risk management, managers remuneration and the ability to monitor sales of assets from a portfolio. The criteria for classifying cash flows as solely principal and interest are assessed against the contractual terms of a facility, with attention to leverage features; prepayment and extension terms; and triggers that might reset the effective rate of interest.
14. Impairments
At each balance sheet date each financial asset or portfolio of loans measured at amortised cost or at fair value through other comprehensive income, issued financial guarantee and loan commitment is assessed for impairment. Loss allowances are forward-looking, based on 12 month expected credit losses where there has not been a significant increase in credit risk rating, otherwise allowances are based on lifetime expected losses. Loss allowances for lease receivables are always made on a lifetime basis.
Expected credit losses are a probability-weighted estimate of credit losses. The probability is determined by the risk of default which is applied to the cash flow estimates. In the absence of a change in credit rating, allowances are recognised when there is reduction in the net present value of expected cash flows. On a significant increase in credit risk, allowances are recognised without a change in the expected cash flows, although typically expected cash flows do also change; and expected credit losses are rebased from 12 month to lifetime expectations.
On restructuring a financial asset without causing derecognition of the original asset the revised cash flows are used in re-estimating the credit loss. Where restructuring causes derecognition of the original financial asset, the fair value of the replacement asset is used as the closing cash flow of the original asset.
Where, in the course of the orderly realisation of a loan, it is exchanged for equity shares or property, the exchange is accounted for as the sale of the loan and the acquisition of equity securities or investment property. Where the Groups interest in equity shares following the exchange is such that the Group controls an entity, that entity is consolidated.
The costs of loss allowances on assets held at amortised cost are presented as impairments in the income statement. Allowances in respect financial guarantees and loan commitments are presented in administrative expenses.
Impaired loans and receivables are written off, when the Group concludes that there is no longer any realistic prospect of recovery of part or all of the loan. For loans that are individually assessed for impairment, the timing of write off is determined on a case-by-case basis. Such loans are reviewed regularly and write off will be prompted by bankruptcy, insolvency, renegotiation and similar events.
The typical time frames from initial impairment to write off for the Groups collectively-assessed portfolios are:
· Retail mortgages: write off usually occurs within five years, or when an account is closed if earlier.
· Credit cards: the irrecoverable amount is written off after 12 months; three years later any remaining amounts outstanding are written off. Overdrafts and other unsecured loans: write off occurs within six years.
· Overdrafts and other unsecured loans: write off occurs within six years
· Commercial loans: write offs are determined in the light of individual circumstances; the period does not exceed five years.
· Business loans are generally written off within five years.
15. Financial guarantee contracts
Under a financial guarantee contract, the Group, in return for a fee, undertakes to meet a customers obligations under the terms of a debt instrument if the customer fails to do so.
Accounting policies
A financial guarantee is recognised as a liability; initially at fair value and, if not designated as at fair value through profit or loss, subsequently at the higher of its initial value less cumulative amortisation and any provision under the contract measured in accordance with Accounting policy 13. Amortisation is calculated so as to recognise fees receivable in profit or loss over the period of the guarantee.
16. Loan commitments
Provision is made for expected credit loss on loan commitments, other than those classified as held-for-trading. Syndicated loan commitments in excess of the level of lending under the commitment approved for retention by the Group are classified as held-for-trading and measured at fair value.
17. Derecognition
A financial asset is derecognised when the contractual right to receive cash flows from the asset has expired or when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the Group either (a) transfers the contractual rights to receive the assets cash flows; or (b) retains the right to the assets 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.
A financial liability is removed from the balance sheet when the obligation is discharged, or is cancelled, or expires. On the redemption or settlement of debt securities (including subordinated liabilities) issued by the Group, the Group derecognises the debt instrument and records a gain or loss being the difference between the debts carrying amount and the cost of redemption or settlement. The same treatment applies where the debt is exchanged for a new debt issue that has terms substantially different from those of the existing debt. The assessment of whether the terms of the new debt instrument are substantially different takes into account qualitative and quantitative characteristics including a comparison of the present value of the cash flows under the new terms with the present value of the remaining cash flows of the original debt issue discounted at the effective interest rate of the original debt issue.
18. Sale and repurchase transactions
Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the Group continue to be shown on the balance sheet and the sale proceeds recorded as a financial liability. Securities acquired in a reverse sale and repurchase transaction under which the Group is not exposed to substantially all the risks and rewards of ownership are not recognised on the balance sheet and the consideration paid is recorded as a financial asset.
Securities borrowing and lending transactions are usually secured by cash or securities advanced by the borrower. Borrowed securities are not recognised on the balance sheet or lent securities derecognised. Cash collateral given or received is treated as a loan or deposit; collateral in the form of securities is not recognised. However, where securities borrowed are transferred to third parties, a liability for the obligation to return the securities to the stock lending counterparty is recorded.
19. Netting
Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group currently has a legally enforceable right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financial liabilities, but where it does not intend to settle the amounts net or simultaneously, the assets and liabilities concerned are presented gross.
20. Capital instruments
The Group classifies a financial instrument that it issues as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms and as equity if it evidences a residual interest in the assets of the Group after the deduction of liabilities. The components of a compound financial instrument issued by the Group are classified and accounted for separately as financial assets, financial liabilities or equity as appropriate. Incremental costs and related tax that are directly attributable to an equity transaction are deducted from equity.
The consideration for any ordinary shares of the company purchased by the Group (treasury shares) is deducted from equity. On the cancellation of treasury shares their nominal value is removed from equity and any excess of consideration over nominal value is treated in accordance with the capital maintenance provisions of the Companies Act. On the sale or reissue of treasury shares the consideration received and related tax are credited to equity, net of any directly attributable incremental costs.
21. Derivatives and hedging
In accordance with IAS 39 hedge relationships, derivative financial instruments are initially recognised, and subsequently measured, at fair value.
A derivative embedded in a contract is accounted for as a stand-alone derivative if its economic characteristics are not closely related to the economic characteristics of the host contract; unless the host is a financial asset or the entire contract is measured at fair value with changes in fair value recognised in profit or loss.
Gains and losses arising from changes in the fair value of derivatives that are not the hedging instrument in a qualifying hedge are recognised as they arise in profit or loss. Gains and losses are recorded in Income from ordinary activities except for gains and losses on those derivatives that are managed together with financial instruments designated at fair value; these gains and losses are included in Other operating income. The Group enters into three types of hedge relationship: hedges of changes in the fair value of a recognised asset or liability or unrecognised firm commitment (fair value hedges); hedges of the variability in cash flows from a recognised asset or liability or a highly probable forecast transaction (cash flow hedges); and hedges of the net investment in a foreign operation.
Hedge relationships are formally designated and documented at inception. The documentation identifies the hedged item and the hedging instrument and details the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge. If the hedge is not highly effective in offsetting changes in fair values or cash flows attributable to the hedged risk, consistent with the documented risk management strategy, hedge accounting is discontinued. Hedge accounting is also discontinued if the Group revokes the designation of a hedge relationship.
Fair value hedge - in a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss. The gain or loss on the hedged item attributable to the hedged risk is recognised in profit or loss and, where the hedged item is measured at amortised cost, adjusts the carrying amount of the hedged item. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting; or if the hedging instrument expires or is sold, terminated or exercised; or if hedge designation is revoked. If the hedged item is one for which the effective interest rate method is used, any cumulative adjustment is amortised to profit or loss over the life of the hedged item using a recalculated effective interest rate.
Cash flow hedge - in a cash flow hedge, the effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income and the ineffective portion in profit or loss. When the forecast transaction results in the recognition of a financial asset or financial liability, the cumulative gain or loss is reclassified from equity to profit or loss in the same periods in which the hedged forecast cash flows affect profit or loss. Otherwise the cumulative gain or loss is removed from equity and recognised in profit or loss at the same time as the hedged transaction. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting; if the hedging instrument expires or is sold, terminated or exercised; if the forecast transaction is no
Accounting policies
longer expected to occur; or if hedge designation is revoked. On the discontinuance of hedge accounting (except where a forecast transaction is no longer expected to occur), the cumulative unrealised gain or loss is reclassified from equity to profit or loss when the hedged cash flows occur or, if the forecast transaction results in the recognition of a financial asset or financial liability, when the hedged forecast cash flows affect profit or loss. Where a forecast transaction is no longer expected to occur, the cumulative unrealised gain or loss is reclassified from equity to profit or loss immediately.
Hedge of net investment in a foreign operation - in the hedge of a net investment in a foreign operation, the portion of foreign exchange differences arising on the hedging instrument determined to be an effective hedge is recognised in other comprehensive income. Any ineffective portion is recognised in profit or loss. Non-derivative financial liabilities as well as derivatives may be the hedging instrument in a net investment hedge. On disposal or partial disposal of a foreign operation, the amount accumulated in equity is reclassified from equity to profit or loss.
22. Associates and joint ventures
An associate is an entity over which the Group has significant influence. A joint venture is one which it controls jointly with other parties. Investments in associates and interests in joint ventures are recognised using the equity method. They are stated initially at cost, including attributable goodwill, and subsequently adjusted for post-acquisition changes in the Groups share of net assets.
23. Share-based compensation
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).
The cost of employee services received in exchange for an award of shares or share options is measured by reference to the fair value of the shares or share options on the date the award is and takes into account non-vesting conditions and market performance conditions (conditions related to the market price of RBSG shares): an award is treated as vesting irrespective of whether any market performance condition or non-vesting condition is met. The fair value of options is estimated using valuation techniques which incorporate exercise price, term, risk-free interest rates, the current share price and its expected volatility. The cost is expensed on a straight-line basis over the vesting period (the period during which all the specified vesting conditions must be satisfied) with a corresponding increase in equity in an equity-settled award, or a corresponding liability in a cash-settled award. The cost is adjusted for vesting conditions (other than market performance conditions) so as to reflect the number of shares or share options that actually vest.
If an award is modified, the original cost continues to be recognised as if there had been no modification. Where modification increases the fair value of the award, this increase is recognised as an expense over the modified vesting period. A new award of shares or share options is treated as the modification of a cancelled award if, on the date the new award is, the Group identifies them as replacing the cancelled award. The cancellation of an award through failure to meet non-vesting conditions triggers an immediate expense for any unrecognised element of the cost of an award.
24. Cash and cash equivalents
In the cash flow statement, cash and cash equivalents comprises cash and deposits with banks with an original maturity of less than three months together with short-term highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.
Critical accounting policies and key sources of estimation uncertainty
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. UK company law and IFRS require the directors, in preparing the Groups financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASBs Conceptual Framework for Financial Reporting. The judgements and assumptions involved in the Groups accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results
Critical accounting policy |
|
Note |
Deferred tax |
|
204 |
Fair value: financial instruments |
|
209 |
Loan impairment provisions |
|
221 |
Goodwill |
|
223 |
Provisions for liabilities and charges |
|
226 |
Accounting Developments
International Financial Reporting Standards
A number of IFRSs and amendments to IFRS were in issue at 31 December 2018 that would affect the Group from 1 January 2019 or later
Effective 1 January 2019
IFRS 16 Leases was issued in January 2016 to replace IAS 17 Leases. The Group will apply the standard with effect from 1 January 2019. Lessees will capitalise operating leases through the recognition of assets representing the contractual rights of use. The present value of contractual payments will be recognised as lease liabilities.
The Group has new models and processes to implement IFRS 16. The most significant impact from initially applying IFRS 16 will be to recognise rights of use assets in respect of branches and office properties leased by the Group under contracts classified as operating leases under IAS 17. The present value of other contracts is immaterial. The Group will apply IFRS 16 on a modified retrospective basis without restating prior years and electing for the following exemptions on transition at 1 January 2019. The Group will
· apply IFRS 16 to contracts previously identified as leases by IAS 17
· use the incremental borrowing rate as the discount rate
· not apply IFRS 16 to operating leases with a remaining lease term of less than 12 months or low value leases (non property leases)
· rely on the assessment of whether the lease contract is onerous under IAS 37 at 31 December 2018 as an alternative to performing an impairment review of the right of use assets created on 1 January 2019 Where this is the case the carrying amount of the assets will be adjusted by the onerous lease provision.
· exclude initial direct costs from the measurement of the right of use asset
The opening balance sheet at 1 January 2019 will be adjusted to create a right of use asset of approximately £1.3 billion. A lease liability will also be recognised of £1.9 billion. Retained earnings will decrease by £0.2 billion after tax. This will have an estimated impact of 21 basis points on the CET 1 ratio. Application of IFRS 16 by the Group is not expected to have a significant impact on lessor accounting or for finance lease accounting by lessees.
Effective after 2019
IFRS 17 Insurance contracts was issued in May 2017 to replace IFRS 4 and to establish a comprehensive standard for inceptors of insurance policies. The effective date is 1 January 2021, subject to IASBs approval of a deferral until 1 January 2022.
In February 2018 the IASB amended IAS 19 Employee Benefits to clarify the need to update assumptions whenever there is a plan amendment, curtailment or settlement.
The Group is assessing the effect of adopting these standards on its financial statements.
Notes on the consolidated accounts
1 Net interest income |
|
|
|
|
2018 |
2017 |
2016 |
|
£m |
£m |
£m |
Loans to banks - amortised cost |
522 |
277 |
246 |
Loans to customers - amortised cost |
9,993 |
10,409 |
10,706 |
Other financial assets |
534 |
348 |
306 |
Interest receivable (1) |
11,049 |
11,034 |
11,258 |
|
|
|
|
Balances with banks |
250 |
175 |
97 |
Customer deposits: demand |
223 |
99 |
433 |
Customer deposits: savings |
510 |
445 |
432 |
Customer deposits: other time |
116 |
179 |
190 |
Other financial liabilities |
791 |
554 |
557 |
Subordinated liabilities |
461 |
572 |
845 |
Internal funding of trading businesses |
42 |
23 |
(4) |
Interest payable (1) |
2,393 |
2,047 |
2,550 |
|
|
|
|
Net interest income |
8,656 |
8,987 |
8,708 |
Note:
(1) Negative interest on loans is classed as interest payable and on customer deposits is classed as interest receivable.
2 Non-interest income |
|
|
|
|
2018 |
2017 |
2016 |
|
£m |
£m |
£m |
Net fees and commissions |
2,357 |
2,455 |
2,535 |
|
|
|
|
Loss on redemption of own debt |
|
(7) |
(126) |
|
|
|
|
Income from trading activities |
|
|
|
Foreign exchange |
643 |
525 |
989 |
Interest rate |
695 |
(50) |
(480) |
Credit |
45 |
197 |
336 |
Changes in fair value of own debt and derivative liabilities attributable to own credit |
|
|
|
- debt securities in issue |
72 |
12 |
87 |
- derivative liabilities |
20 |
(81) |
67 |
Equities, commodities and other |
32 |
31 |
(25) |
|
1,507 |
634 |
974 |
Other operating income |
|
|
|
Operating lease and other rental income |
256 |
276 |
287 |
Changes in the fair value of financial assets and liabilities designated at fair value through profit or loss |
(26) |
60 |
(13) |
Changes in the fair value of own debt designated as at fair value through profit or loss |
|
|
|
attributable to own credit risk |
|
|
|
- debt securities in issue |
|
|
41 |
- subordinated liabilities |
|
|
(15) |
Changes in fair value of other financial assets fair value through profit or loss |
18 |
|
|
Hedge ineffectiveness |
(65) |
39 |
|
Profit/(loss) on disposal of amortised cost assets |
44 |
(35) |
(277) |
Profit on disposal of fair value through other comprehensive income assets |
34 |
226 |
71 |
Profit on sale of property, plant and equipment |
50 |
75 |
18 |
Share of profits of associated entities |
83 |
104 |
59 |
(Loss)/profit on disposal of subsidiaries and associates |
(72) |
245 |
273 |
Other income (1) |
560 |
74 |
55 |
|
882 |
1,064 |
499 |
|
|
|
|
Non-interest income |
4,746 |
4,146 |
3,882 |
Note:
(1) Includes income from activities other than banking. 2018 includes insurance recoveries of £357 million.
Notes on the consolidated accounts
3 Operating expenses |
|
|
|
|
2018 |
2017 |
2016 |
|
£m |
£m |
£m |
Salaries |
3,002 |
3,180 |
3,771 |
Variable compensation |
225 |
298 |
281 |
Social security costs |
307 |
318 |
388 |
Pension costs |
401 |
467 |
357 |
Other |
187 |
413 |
327 |
Staff costs |
4,122 |
4,676 |
5,124 |
|
|
|
|
Premises and equipment |
1,383 |
1,565 |
1,388 |
UK bank levy |
179 |
215 |
190 |
Depreciation and amortisation |
731 |
808 |
778 |
Other administrative expenses (1) |
3,193 |
3,108 |
8,555 |
Administrative expenses |
5,486 |
5,696 |
10,911 |
Write down of goodwill and other intangible assets |
37 |
29 |
159 |
|
9,645 |
10,401 |
16,194 |
Note:
(1) Includes litigation and conduct costs, net of amounts recovered. Refer to Notes 20 and 27 for further details .
The average number of persons employed, rounded to the nearest hundred, during the year, excluding temporary staff, was 67,600 (2017 - 73,400; 2016 - 82,400). The average number of temporary employees during 2018 was 4,000 (2017 - 5,000; 2016 - 6,700). The number of persons employed at 31 December, excluding temporary staff, by reportable segment, was as follows:
During 2018 the reporting lines of central and support staff directly supporting a reportable Group segment were realigned to that segment.
Share-based payments
As described in the Remuneration report, the Group grants share-based awards to employees principally on the following bases:
Award plan |
Eligible employees |
Nature of award |
Vesting conditions (1) |
Settlement |
Sharesave |
UK, Republic of Ireland, Channel Islands, Gibraltar and Isle of Man |
Option to buy shares under employee savings plan |
Continuing employment or leavers in certain circumstances |
2019 to 2023 |
Deferred performance awards |
All |
Awards of ordinary shares |
Continuing employment or leavers in certain circumstances |
2019 to 2025 |
Long-term incentives (2) |
Senior employees |
Awards of conditional shares or share options |
Continuing employment or leavers in certain circumstances and/or achievement of performance conditions |
2019 to 2025 |
Notes:
(1) All awards have vesting conditions and therefore some may not vest.
(2) Long-term incentives include the Executive Share Option Plan, the Long-Term Incentive Plan and the Employee Share Plan .
Notes on the consolidated accounts
3 Operating expenses continued
The fair value of options granted in 2018 was determined using a pricing model that included: expected volatility of shares determined at the grant date based on historical volatility over a period of up to five years; expected option lives that equal the vesting period; no dividends on equity shares; and risk-free interest rates determined from UK gilts with terms matching the expected lives of the options.
The strike price of options and the fair value on granting awards of fully paid shares is the average market price over the five trading days (three trading days for Sharesave) preceding grant date.
Sharesave |
2018 |
|
2017 |
|
2016 |
|||
|
Average |
Shares |
|
Average |
Shares |
|
Average |
Shares |
|
exercise price |
under option |
|
exercise price |
under option |
|
exercise price |
under option |
|
£ |
(million) |
|
£ |
(million) |
|
£ |
(million) |
At 1 January |
2.38 |
60 |
|
2.46 |
56 |
|
2.87 |
56 |
Granted |
1.89 |
28 |
|
2.27 |
21 |
|
1.68 |
17 |
Exercised |
2.44 |
(4) |
|
2.46 |
(3) |
|
2.37 |
|
Cancelled |
2.46 |
(9) |
|
2.49 |
(14) |
|
3.02 |
(17) |
At 31 December |
2.18 |
75 |
|
2.38 |
60 |
|
2.46 |
56 |
Options are exercisable within six months of vesting; 4.9 million options were exercisable at 31 December 2018 (2017 3.7 million; 2016 8.1 million). The weighted average share price at the date of exercise of options was £2.13 (2017 - £2.77; 2016 - £1.78). At 31 December 2018, exercise prices ranged from £1.68 to £3.43 (2017 - £1.68 to £4.34; 2016 - £1.68 to £4.34) and the remaining average contractual life was 2.9 years (2017 - 2.9 years; 2016 2.9 years). The fair value of options granted in 2018 was £21 million (2017 - £21 million; 2016 - £18 million).
Deferred performance awards |
2018 |
|
2017 |
|
2016 |
|||
|
Value at |
Shares |
|
Value at |
Shares |
|
Value at |
Shares |
|
grant |
awarded |
|
grant |
awarded |
|
grant |
awarded |
|
£m |
(million) |
|
£m |
(million) |
|
£m |
(million) |
At 1 January |
264 |
101 |
|
296 |
102 |
|
276 |
80 |
Granted |
156 |
59 |
|
152 |
63 |
|
170 |
75 |
Forfeited |
(21) |
(8) |
|
(11) |
(4) |
|
(19) |
(7) |
Vested |
(166) |
(60) |
|
(173) |
(60) |
|
(131) |
(46) |
At 31 December |
233 |
92 |
|
264 |
101 |
|
296 |
102 |
The awards granted in 2018 vest in equal tranches on their anniversaries, predominantly over three years.
The market value of awards vested/exercised in 2018 was £5 million (2017 - £22 million; 2016 - £40 million). There are vested options of 2 million shares exercisable up to 2020 (2017 - 2 million; 2016 - 4 million).
Notes on the consolidated accounts
3 Operating expenses continued
Variable compensation awards |
|
|
|
|
|
|
|
The following tables analyse the Groups variable compensation awards for 2018. |
|
|
|
|
|
|
|
|
2018 |
2017 |
Change |
|
£m |
£m |
% |
Non-deferred cash awards (1) |
37 |
51 |
(27) |
Total non-deferred variable compensation |
37 |
51 |
(27) |
Deferred bond awards |
191 |
134 |
43 |
Deferred share awards |
107 |
157 |
(32) |
Total deferred variable compensation |
298 |
291 |
2 |
Total variable compensation (2) |
335 |
342 |
(2) |
|
|
|
|
Variable compensation as a % of operating profit before tax (3) |
9% |
13% |
|
Proportion of variable compensation that is deferred |
89% |
85% |
|
of which |
|
|
|
- deferred bond awards |
64% |
46% |
|
- deferred share awards |
36% |
54% |
|
Reconciliation of variable compensation awards to income statement charge |
2018 |
2017 |
2016 |
£m |
£m |
£m |
|
Variable compensation awarded |
335 |
342 |
343 |
Less: deferral of charge for amounts awarded for current year |
(130) |
(133) |
(103) |
Income statement charge for amounts awarded in current year |
205 |
209 |
240 |
|
|
|
|
Add: current year charge for amounts deferred from prior years |
86 |
96 |
147 |
Less: forfeiture of amounts deferred from prior years |
(66) |
(7) |
(106) |
Income statement charge for amounts deferred from prior years |
20 |
89 |
41 |
|
|
|
|
Income statement charge for variable compensation (2) |
225 |
298 |
281 |
|
Actual |
|
Expected |
|||
|
|
|
|
|
|
|
Year in which income statement charge is expected to be taken for
|
|
|
|
|
|
2020 |
2016 |
2017 |
2018 |
|
2019 |
and beyond |
|
£m |
£m |
£m |
|
£m |
£m |
|
Variable compensation deferred from 2016 and earlier |
147 |
96 |
5 |
|
9 |
4 |
Variable compensation deferred from 2017 |
|
|
81 |
|
22 |
15 |
Less: forfeiture of amounts deferred from prior years |
(106) |
(7) |
(66) |
|
|
|
Variable compensation for 2018 deferred |
|
|
|
|
89 |
41 |
|
41 |
89 |
20 |
|
120 |
60 |
Notes:
(1) Cash awards are limited to £2,000 for all employees.
(2) Excludes other performance related compensation.
(3) Operating profit before tax and variable compensation expense. This was previously measured against adjusted operating profit before variable compensation expense (2017: 7%).
Notes on the consolidated accounts
4 Segmental analysis
Reportable segments
The directors manage RBS primarily by class of business and present the segmental analysis on that basis. This includes the review of net interest income for each class of business. Interest receivable and payable for all reportable segments is therefore presented net. Segments charge market prices for services rendered between each other; funding charges between segments are determined by RBS Treasury, having regard to commercial demands. The segment performance measure is operating profit/(loss).
Reportable operating segments
The reportable operating segments are as follows:
Personal & Business Banking (PBB) comprises two reportable segments: UK Personal & Business Banking (UK PBB) and Ulster Bank RoI. UK PBB serves individuals and mass affluent customers in the UK, together with small businesses (generally up to £2 million turnover). UK PBB includes Ulster Bank customers in Northern Ireland. Ulster Bank RoI serves individuals and businesses in the Republic of Ireland (RoI).
Commercial & Private Banking (CPB) comprises two reportable segments: Commercial Banking and Private Banking. Commercial Banking serves commercial and corporate customers in the UK. Private Banking serves UK high net worth individuals and their business interests.
RBS International (RBSI) serves retail, commercial, corporate and financial institution customers in Jersey, Guernsey, Isle of Man and Gibraltar and financial institution customers in Luxembourg and London.
NatWest Markets helps global financial institutions and corporates manage their financial risks and achieve their short and long-term financial goals while navigating changing markets and regulation. NatWest Markets does this by providing global market access, financing, risk management and trading solutions from trading hubs in London, Singapore and Stamford with sales offices across key locations in the UK, EU, US and Asia.
Central items & other includes corporate functions, such as RBS Treasury, finance, risk management, compliance, legal, communications and human resources. Central functions manages RBS capital resources and RBS-wide regulatory projects and provides services to the reportable segments. Balances in relation to legacy litigation issues and the international private banking business are included in Central items in the relevant periods.
Allocation of central balance sheet items
RBS allocates all central costs relating to Services and Functions to the business using appropriate drivers, these are reported as indirect costs in the segmental income statements. Assets (and risk-weighted assets) held centrally, mainly relating to RBS Treasury, are allocated to the business using appropriate drivers.
|
Net |
Net fees |
Other |
|
|
Depreciation |
Impairment |
|
|
interest |
and |
non-interest |
Total |
Operating |
and |
(losses)/ |
Operating |
|
income |
commissions |
income |
income |
expenses |
amortisation |
releases |
profit/(loss) |
2018 |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
UK Personal & Business Banking |
5,098 |
1,078 |
106 |
6,282 |
(3,482) |
|
(342) |
2,458 |
Ulster Bank RoI |
444 |
91 |
75 |
610 |
(583) |
|
(15) |
12 |
|
|
|
|
|
|
|
|
|
Personal & Business Banking |
5,542 |
1,169 |
181 |
6,892 |
(4,065) |
|
(357) |
2,470 |
|
|
|
|
|
|
|
|
|
Commercial Banking |
2,040 |
897 |
437 |
3,374 |
(1,747) |
(125) |
(144) |
1,358 |
Private Banking |
518 |
228 |
29 |
775 |
(476) |
(2) |
6 |
303 |
|
|
|
|
|
|
|
|
|
Commercial & Private Banking |
2,558 |
1,125 |
466 |
4,149 |
(2,223) |
(127) |
(138) |
1,661 |
|
|
|
|
|
|
|
|
|
RBS International |
466 |
101 |
27 |
594 |
(254) |
(6) |
2 |
336 |
NatWest Markets |
112 |
(33) |
1,363 |
1,442 |
(1,589) |
(15) |
92 |
(70) |
Central items & other |
(22) |
(5) |
352 |
325 |
(783) |
(583) |
3 |
(1,038) |
Total |
8,656 |
2,357 |
2,389 |
13,402 |
(8,914) |
(731) |
(398) |
3,359 |
2017 |
|
|
|
|
|
|
|
|
UK Personal & Business Banking |
5,130 |
1,099 |
248 |
6,477 |
(3,829) |
|
(235) |
2,413 |
Ulster Bank RoI |
421 |
94 |
89 |
604 |
(676) |
|
(60) |
(132) |
|
|
|
|
|
|
|
|
|
Personal & Business Banking |
5,551 |
1,193 |
337 |
7,081 |
(4,505) |
|
(295) |
2,281 |
|
|
|
|
|
|
|
|
|
Commercial Banking |
2,286 |
1,030 |
168 |
3,484 |
(1,870) |
(144) |
(362) |
1,108 |
Private Banking |
464 |
179 |
35 |
678 |
(529) |
|
(6) |
143 |
|
|
|
|
|
|
|
|
|
Commercial & Private Banking |
2,750 |
1,209 |
203 |
4,162 |
(2,399) |
(144) |
(368) |
1,251 |
|
|
|
|
|
|
|
|
|
RBS International |
325 |
42 |
22 |
389 |
(217) |
(2) |
(3) |
167 |
NatWest Markets |
203 |
24 |
823 |
1,050 |
(2,250) |
49 |
174 |
(977) |
Central items & other |
158 |
(13) |
306 |
451 |
(222) |
(711) |
(1) |
(483) |
Total |
8,987 |
2,455 |
1,691 |
13,133 |
(9,593) |
(808) |
(493) |
2,239 |
2016 |
|
|
|
|
|
|
|
|
UK Personal & Business Banking |
4,945 |
1,147 |
35 |
6,127 |
(4,278) |
2 |
(125) |
1,726 |
Ulster Bank RoI |
409 |
82 |
85 |
576 |
(669) |
|
113 |
20 |
|
|
|
|
|
|
|
|
|
Personal & Business Banking |
5,354 |
1,229 |
120 |
6,703 |
(4,947) |
2 |
(12) |
1,746 |
|
|
|
|
|
|
|
|
|
Commercial Banking |
2,143 |
1,031 |
241 |
3,415 |
(2,324) |
(143) |
(206) |
742 |
Private Banking |
449 |
181 |
27 |
657 |
(549) |
|
3 |
111 |
|
|
|
|
|
|
|
|
|
Commercial & Private Banking |
2,592 |
1,212 |
268 |
4,072 |
(2,873) |
(143) |
(203) |
853 |
|
|
|
|
|
|
|
|
|
RBS International |
303 |
50 |
21 |
374 |
(174) |
|
(10) |
190 |
NatWest Markets |
343 |
55 |
814 |
1,212 |
(2,810) |
(14) |
(253) |
(1,865) |
Central items & other |
116 |
(11) |
124 |
229 |
(4,612) |
(623) |
|
(5,006) |
Total |
8,708 |
2,535 |
1,347 |
12,590 |
(15,416) |
(778) |
(478) |
(4,082) |
Notes on the consolidated accounts
4 Segmental analysis continued
|
2018 |
|
2017 |
|
2016 |
||||||
Total revenue |
|
Inter |
|
|
|
Inter |
|
|
|
Inter |
|
External |
segment |
Total |
|
External |
segment |
Total |
|
External |
segment |
Total |
|
£m |
£m |
£m |
|
£m |
£m |
£m |
|
£m |
£m |
£m |
|
UK Personal & Business Banking |
7,153 |
68 |
7,221 |
|
7,348 |
44 |
7,392 |
|
7,197 |
52 |
7,249 |
Ulster Bank RoI |
668 |
|
668 |
|
676 |
(4) |
672 |
|
660 |
1 |
661 |
|
|
|
|
|
|
|
|
|
|
|
|
Personal & Business Banking |
7,821 |
68 |
7,889 |
|
8,024 |
40 |
8,064 |
|
7,857 |
53 |
7,910 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
3,611 |
84 |
3,695 |
|
3,590 |
74 |
3,664 |
|
3,638 |
68 |
3,706 |
Private Banking |
681 |
195 |
876 |
|
585 |
143 |
728 |
|
567 |
172 |
739 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Private Banking |
4,292 |
279 |
4,571 |
|
4,175 |
217 |
4,392 |
|
4,205 |
240 |
4,445 |
|
|
|
|
|
|
|
|
|
|
|
|
RBS International |
506 |
148 |
654 |
|
309 |
119 |
428 |
|
313 |
156 |
469 |
NatWest Markets |
1,882 |
916 |
2,798 |
|
1,408 |
809 |
2,217 |
|
1,708 |
1,539 |
3,247 |
Central items & other |
2,155 |
(1,411) |
744 |
|
2,147 |
(1,185) |
962 |
|
1,862 |
(1,988) |
(126) |
Total |
16,656 |
|
16,656 |
|
16,063 |
|
16,063 |
|
15,945 |
|
15,945 |
|
|
|
|
|
|
|
|
|
|
|
|
Total income |
|
|
|
|
|
|
|
|
|
|
|
UK Personal & Business Banking |
6,260 |
22 |
6,282 |
|
6,465 |
12 |
6,477 |
|
6,115 |
12 |
6,127 |
Ulster Bank RoI |
613 |
(3) |
610 |
|
609 |
(5) |
604 |
|
584 |
(8) |
576 |
|
|
|
|
|
|
|
|
|
|
|
|
Personal & Business Banking |
6,873 |
19 |
6,892 |
|
7,074 |
7 |
7,081 |
|
6,699 |
4 |
6,703 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
3,840 |
(466) |
3,374 |
|
3,851 |
(367) |
3,484 |
|
3,787 |
(372) |
3,415 |
Private Banking |
655 |
120 |
775 |
|
594 |
84 |
678 |
|
554 |
103 |
657 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Private Banking |
4,495 |
(346) |
4,149 |
|
4,445 |
(283) |
4,162 |
|
4,341 |
(269) |
4,072 |
|
|
|
|
|
|
|
|
|
|
|
|
RBS International |
469 |
125 |
594 |
|
281 |
108 |
389 |
|
239 |
135 |
374 |
NatWest Markets |
1,510 |
(68) |
1,442 |
|
1,077 |
(27) |
1,050 |
|
1,296 |
(84) |
1,212 |
Central items & other |
55 |
270 |
325 |
|
256 |
195 |
451 |
|
15 |
214 |
229 |
Total |
13,402 |
|
13,402 |
|
13,133 |
|
13,133 |
|
12,590 |
|
12,590 |
Analysis of net fees and commissions |
UK |
Ulster |
Commercial |
Private |
RBS |
NatWest |
Central items |
|
PBB |
Bank RoI |
Banking |
Banking |
International |
Markets |
& other |
Total |
|
2018 |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
|
|
|
|
|
|
|
|
Fees and commissions receivable |
|
|
|
|
|
|
|
|
- Payment services |
470 |
34 |
313 |
33 |
25 |
3 |
|
878 |
- Credit and debit card fees |
474 |
22 |
103 |
13 |
|
|
|
612 |
- Lending (credit facilities) |
465 |
29 |
358 |
2 |
29 |
88 |
|
971 |
- Brokerage |
62 |
6 |
|
5 |
|
85 |
|
158 |
- Investment management, trustee and fiduciary services |
49 |
4 |
|
191 |
42 |
|
|
286 |
- Trade finance |
1 |
2 |
121 |
1 |
4 |
3 |
|
132 |
- Underwriting fees |
27 |
|
3 |
|
|
144 |
|
174 |
- Other |
8 |
1 |
54 |
16 |
2 |
67 |
(141) |
7 |
Total |
1,556 |
98 |
952 |
261 |
102 |
390 |
(141) |
3,218 |
|
|
|
|
|
|
|
|
|
Fees and commissions payable |
(478) |
(7) |
(55) |
(33) |
(1) |
(423) |
136 |
(861) |
Net fees and commissions |
1,078 |
91 |
897 |
228 |
101 |
(33) |
(5) |
2,357 |
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and commissions receivable |
|
|
|
|
|
|
|
|
- Payment services |
435 |
30 |
302 |
37 |
24 |
1 |
|
829 |
- Credit and debit card fees |
527 |
27 |
99 |
12 |
|
|
|
665 |
- Lending (credit facilities) |
495 |
30 |
438 |
2 |
10 |
83 |
2 |
1,060 |
- Brokerage |
69 |
10 |
|
6 |
|
63 |
|
148 |
- Investment management, trustee and fiduciary services |
72 |
4 |
35 |
133 |
4 |
1 |
|
249 |
- Trade finance |
1 |
2 |
163 |
1 |
3 |
3 |
|
173 |
- Underwriting fees |
|
|
|
|
|
157 |
|
157 |
- Other |
6 |
|
46 |
15 |
2 |
132 |
(144) |
57 |
Total |
1,605 |
103 |
1,083 |
206 |
43 |
440 |
(142) |
3,338 |
|
|
|
|
|
|
|
|
|
Fees and commissions payable |
(506) |
(9) |
(53) |
(27) |
(1) |
(416) |
129 |
(883) |
Net fees and commissions |
1,099 |
94 |
1,030 |
179 |
42 |
24 |
(13) |
2,455 |
Notes on the consolidated accounts
4 Segmental analysis continued
|
|
UK |
|
Ulster |
|
Commercial |
|
Private |
|
RBS |
|
NatWest |
|
Central items |
|
|
|
|
PBB |
|
Bank RoI |
|
Banking |
|
Banking |
|
International |
|
Markets |
|
& other |
|
Total |
2016 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and commissions receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Payment services |
|
429 |
|
27 |
|
320 |
|
32 |
|
24 |
|
24 |
|
|
|
856 |
- Credit and debit card fees |
|
507 |
|
25 |
|
93 |
|
18 |
|
2 |
|
|
|
|
|
645 |
- Lending (credit facilities) |
|
500 |
|
30 |
|
406 |
|
2 |
|
11 |
|
95 |
|
|
|
1,044 |
- Brokerage |
|
63 |
|
7 |
|
1 |
|
7 |
|
1 |
|
71 |
|
4 |
|
154 |
- Investment management, trustee and fiduciary services |
|
84 |
|
3 |
|
37 |
|
118 |
|
(3) |
|
|
|
11 |
|
250 |
- Trade finance |
|
1 |
|
2 |
|
157 |
|
1 |
|
5 |
|
30 |
|
|
|
196 |
- Underwriting fees |
|
|
|
|
|
|
|
|
|
|
|
83 |
|
|
|
83 |
- Other |
|
7 |
|
|
|
65 |
|
28 |
|
21 |
|
202 |
|
(211) |
|
112 |
Total |
|
1,591 |
|
94 |
|
1,079 |
|
206 |
|
61 |
|
505 |
|
(196) |
|
3,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and commissions payable |
|
(444) |
|
(12) |
|
(48) |
|
(25) |
|
(11) |
|
(450) |
|
185 |
|
(805) |
Net fees and commissions |
|
1,147 |
|
82 |
|
1,031 |
|
181 |
|
50 |
|
55 |
|
(11) |
|
2,535 |
|
|
2018 |
|
2017 |
|
2016 |
||||||
|
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
UK Personal & Business Banking |
|
194,247 |
|
187,678 |
|
190,636 |
|
183,410 |
|
181,357 |
|
173,040 |
Ulster Bank RoI |
|
25,193 |
|
21,189 |
|
24,564 |
|
19,853 |
|
24,111 |
|
19,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal & Business Banking |
|
219,440 |
|
208,867 |
|
215,200 |
|
203,263 |
|
205,468 |
|
192,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
143,242 |
|
100,918 |
|
149,545 |
|
105,144 |
|
150,453 |
|
104,441 |
Private Banking |
|
21,983 |
|
28,554 |
|
20,290 |
|
27,049 |
|
18,578 |
|
26,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Private Banking |
|
165,225 |
|
129,472 |
|
169,835 |
|
132,193 |
|
169,031 |
|
131,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
RBS International |
|
28,398 |
|
27,663 |
|
25,867 |
|
29,077 |
|
23,420 |
|
25,280 |
NatWest Markets |
|
244,531 |
|
227,399 |
|
277,886 |
|
248,553 |
|
372,496 |
|
340,471 |
Central items & other |
|
36,641 |
|
54,344 |
|
49,268 |
|
75,877 |
|
28,241 |
|
60,048 |
Total |
|
694,235 |
|
647,745 |
|
738,056 |
|
688,963 |
|
798,656 |
|
749,252 |
Segmental analysis of goodwill is as follows:
|
|
UK Personal |
|
Commercial & |
|
|
|
|
|
|
& Business |
|
Private |
|
RBS |
|
|
|
|
Banking |
|
Banking |
|
International |
|
Total |
|
|
£m |
|
£m |
|
£m |
|
£m |
At 1 January 2017 and 31 December 2017 |
|
3,351 |
|
1,907 |
|
300 |
|
5,558 |
Acquisitions |
|
48 |
|
|
|
|
|
48 |
Inter-segment transfers |
|
(9) |
|
9 |
|
|
|
|
At 31 December 2018 |
|
3,390 |
|
1,916 |
|
300 |
|
5,606 |
Notes on the consolidated accounts
4 Segmental analysis continued
Geographical segments
The geographical analysis in the tables below has been compiled on the basis of location of office where the transactions are recorded.
|
|
UK |
|
USA |
|
Europe |
|
RoW |
|
Total |
2018 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Total revenue |
|
15,351 |
|
300 |
|
838 |
|
167 |
|
16,656 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
8,223 |
|
|
|
404 |
|
29 |
|
8,656 |
Net fees and commissions |
|
2,183 |
|
12 |
|
102 |
|
60 |
|
2,357 |
Income from trading activities |
|
1,308 |
|
124 |
|
68 |
|
7 |
|
1,507 |
Other operating income |
|
467 |
|
119 |
|
229 |
|
67 |
|
882 |
Total income |
|
12,181 |
|
255 |
|
803 |
|
163 |
|
13,402 |
|
|
|
|
|
|
|
|
|
|
|
Operating profit/(loss) before tax |
|
3,805 |
|
(718) |
|
150 |
|
122 |
|
3,359 |
Total assets |
|
624,228 |
|
32,573 |
|
34,441 |
|
2,993 |
|
694,235 |
Total liabilities |
|
588,185 |
|
31,329 |
|
27,183 |
|
1,048 |
|
647,745 |
Net assets attributable to equity owners and non-controlling interests |
|
36,043 |
|
1,244 |
|
7,258 |
|
1,945 |
|
46,490 |
Contingent liabilities and commitments |
|
121,267 |
|
|
|
5,408 |
|
208 |
|
126,883 |
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
15,011 |
|
192 |
|
655 |
|
205 |
|
16,063 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
8,611 |
|
(4) |
|
346 |
|
34 |
|
8,987 |
Net fees and commissions |
|
2,192 |
|
97 |
|
113 |
|
53 |
|
2,455 |
Income from trading activities |
|
570 |
|
83 |
|
(24) |
|
5 |
|
634 |
Other operating income |
|
806 |
|
22 |
|
121 |
|
108 |
|
1,057 |
Total income |
|
12,179 |
|
198 |
|
556 |
|
200 |
|
13,133 |
|
|
|
|
|
|
|
|
|
|
|
Operating profit/(loss) before tax |
|
3,230 |
|
(580) |
|
(485) |
|
74 |
|
2,239 |
Total assets |
|
662,314 |
|
38,485 |
|
34,280 |
|
2,977 |
|
738,056 |
Total liabilities |
|
626,103 |
|
36,564 |
|
25,171 |
|
1,125 |
|
688,963 |
Net assets attributable to equity owners and non-controlling interests |
|
36,211 |
|
1,921 |
|
9,109 |
|
1,852 |
|
49,093 |
Contingent liabilities and commitments |
|
128,127 |
|
78 |
|
7,823 |
|
22 |
|
136,050 |
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
14,606 |
|
264 |
|
738 |
|
337 |
|
15,945 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
8,243 |
|
82 |
|
302 |
|
81 |
|
8,708 |
Net fees and commissions |
|
2,287 |
|
9 |
|
175 |
|
64 |
|
2,535 |
Income from trading activities |
|
790 |
|
159 |
|
18 |
|
7 |
|
974 |
Other operating income |
|
261 |
|
(40) |
|
9 |
|
143 |
|
373 |
Total income |
|
11,581 |
|
210 |
|
504 |
|
295 |
|
12,590 |
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)/profit before tax |
|
(2,214) |
|
(1,652) |
|
(266) |
|
50 |
|
(4,082) |
Total assets |
|
715,685 |
|
44,447 |
|
32,142 |
|
6,382 |
|
798,656 |
Total liabilities |
|
675,089 |
|
44,513 |
|
26,311 |
|
3,339 |
|
749,252 |
Net assets attributable to equity owners and non-controlling interests |
|
40,596 |
|
(66) |
|
5,831 |
|
3,043 |
|
49,404 |
Contingent liabilities and commitments |
|
141,963 |
|
639 |
|
8,038 |
|
51 |
|
150,691 |
Notes on the consolidated accounts
5 Pensions
Defined contribution schemes
The Group sponsors a number of defined contribution pension schemes in different territories, which new employees are offered the opportunity to join.
Defined benefit schemes
The Group sponsors a number of pension schemes in the UK and overseas, including the Main section of The Royal Bank of Scotland Group Pension Fund (the Main section) which operates under UK trust law and is managed and administered on behalf of its members in accordance with the terms of the trust deed, the scheme rules and UK legislation.
Pension fund trustees are appointed to operate each fund and ensure benefits are paid in accordance with the scheme rules and national law. The trustees are the legal owner of a schemes assets, and have a duty to act in the best interests of all scheme members.
The schemes generally provide a pension of one-sixtieth of final pensionable salary for each year of service prior to retirement up to a maximum of 40 years and are contributory for current members. These have been closed to new entrants for over ten years, although current members continue to build up additional pension benefits, currently subject to 2% maximum annual salary inflation, while they remain employed by the Group.
The Main section corporate trustee is RBS Pension Trustee Limited (the Trustee), a wholly owned subsidiary of National Westminster Bank Plc, Principal Employer of the Main section. The Board of the Trustee comprises four member trustee directors selected from eligible active staff, deferred and pensioner members who apply and six appointed by the Group. Under UK legislation a defined benefit pension scheme is required to meet the statutory funding objective of having sufficient and appropriate assets to cover its liabilities (the pensions that have been promised to members).
Similar governance principles apply to the Groups other pension schemes.
Investment strategy
The assets of the Main section, which is typical of other group schemes, represent 90% of plan assets at 31 December 2018 (2017 - 90%) and are invested in a diversified portfolio as shown below.
The Main section employs derivative instruments to achieve a desired asset class exposure and to reduce the sections interest rate, inflation and currency risk. This means that the net funding position is considerably less sensitive to changes in market conditions than the value of the assets or liabilities in isolation.
|
|
2018 |
|
2017 |
||||||||
Major classes of plan assets as a percentage of |
|
Quoted |
|
Unquoted |
|
Total |
|
Quoted |
|
Unquoted |
|
Total |
total plan assets of the Main section |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
Equities |
|
3.7% |
|
5.2% |
|
8.9% |
|
21.9% |
|
4.0% |
|
25.9% |
Index linked bonds |
|
40.1% |
|
|
|
40.1% |
|
30.6% |
|
|
|
30.6% |
Government bonds |
|
12.9% |
|
|
|
12.9% |
|
9.2% |
|
|
|
9.2% |
Corporate and other bonds |
|
12.2% |
|
5.2% |
|
17.4% |
|
15.8% |
|
1.0% |
|
16.8% |
Real estate |
|
|
|
5.5% |
|
5.5% |
|
|
|
5.2% |
|
5.2% |
Derivatives |
|
|
|
6.1% |
|
6.1% |
|
|
|
8.1% |
|
8.1% |
Cash and other assets |
|
|
|
9.1% |
|
9.1% |
|
|
|
4.2% |
|
4.2% |
|
|
68.9% |
|
31.1% |
|
100.0% |
|
77.5% |
|
22.5% |
|
100.0% |
The Main sections holdings of derivative instruments are summarised in the table below:
|
|
2018 |
|
2017 |
||||||||
|
|
Notional |
|
Fair value |
|
Notional |
|
Fair value |
||||
|
|
amounts |
|
Assets |
|
Liabilities |
|
amounts |
|
Assets |
|
Liabilities |
|
|
£bn |
|
£m |
|
£m |
|
£bn |
|
£m |
|
£m |
Inflation rate swaps |
|
13 |
|
347 |
|
502 |
|
11 |
|
310 |
|
555 |
Interest rate swaps |
|
55 |
|
8,132 |
|
5,362 |
|
44 |
|
8,161 |
|
4,779 |
Currency forwards |
|
10 |
|
22 |
|
164 |
|
12 |
|
160 |
|
34 |
Equity and bond call options |
|
1 |
|
277 |
|
|
|
2 |
|
428 |
|
|
Equity and bond put options |
|
4 |
|
3 |
|
1 |
|
3 |
|
3 |
|
1 |
Other |
|
4 |
|
1,027 |
|
1,092 |
|
4 |
|
327 |
|
444 |
Swaps have been executed at prevailing market rates and within standard market bid/offer spreads with a number of counterparty banks, including NatWest Markets Plc.
At 31 December 2018, the gross notional value of the swaps was £72 billion (2017 - £57 billion) and had a net positive fair value of £2,557 million (2017 - £3,045 million) against which the banks had posted approximately 103% collateral.
The schemes do not invest directly in the Group but can have exposure to the Group. The trustees of the respective UK schemes are responsible for ensuring that indirect investments in the Group do not exceed the 5% regulatory limit.
Notes on the consolidated accounts
5 Pensions continued
|
|
Main section |
|
All schemes |
||||||||||||
|
|
|
|
Present
|
|
Asset |
|
Net |
|
|
|
Present
|
|
Asset |
|
Net |
|
|
Fair |
|
of defined |
|
ceiling/ |
|
pension |
|
Fair |
|
of defined |
|
ceiling/ |
|
pension |
|
|
value of |
|
benefit |
|
minimum |
|
liability/ |
|
value of |
|
benefit |
|
minimum |
|
liability/ |
|
|
plan assets |
|
obligation |
|
funding (1) |
|
(asset) |
|
plan assets |
|
obligation |
|
funding (1) |
|
(asset) |
Changes in value of net pension liability/(asset) |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
At 1 January 2017 |
|
43,824 |
|
38,851 |
|
4,973 |
|
|
|
49,229 |
|
43,990 |
|
5,326 |
|
87 |
Currency translation and other adjustments |
|
|
|
|
|
|
|
|
|
46 |
|
46 |
|
3 |
|
3 |
Income statement |
|
1,155 |
|
1,266 |
|
134 |
|
245 |
|
1,285 |
|
1,518 |
|
142 |
|
375 |
Statement of comprehensive income |
|
1,580 |
|
(9) |
|
1,608 |
|
19 |
|
1,728 |
|
4 |
|
1,634 |
|
(90) |
Contributions by employer |
|
264 |
|
|
|
|
|
(264) |
|
627 |
|
|
|
|
|
(627) |
Contributions by plan participants and other scheme members |
|
4 |
|
4 |
|
|
|
|
|
10 |
|
10 |
|
|
|
|
Liabilities extinguished upon settlement |
|
|
|
|
|
|
|
|
|
(744) |
|
(755) |
|
|
|
(11) |
Benefits paid |
|
(2,175) |
|
(2,175) |
|
|
|
|
|
(2,435) |
|
(2,435) |
|
|
|
|
At 1 January 2018 |
|
44,652 |
|
37,937 |
|
6,715 |
|
|
|
49,746 |
|
42,378 |
|
7,105 |
|
(263) |
Currency translation and other adjustments |
|
|
|
|
|
|
|
|
|
20 |
|
17 |
|
(1) |
|
(4) |
Income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense |
|
1,123 |
|
939 |
|
171 |
|
(13) |
|
1,242 |
|
1,043 |
|
179 |
|
(20) |
Current service cost |
|
|
|
190 |
|
|
|
190 |
|
|
|
240 |
|
|
|
240 |
Past service cost |
|
|
|
14 |
|
|
|
14 |
|
|
|
14 |
|
|
|
14 |
Loss on curtailments or settlements |
|
|
|
|
|
|
|
|
|
|
|
74 |
|
|
|
74 |
|
|
1,123 |
|
1,143 |
|
171 |
|
191 |
|
1,242 |
|
1,371 |
|
179 |
|
308 |
Statement of comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on plan assets excluding recognised interest income |
|
(1,891) |
|
|
|
|
|
1,891 |
|
(2,090) |
|
|
|
|
|
2,090 |
Experience gains and losses |
|
|
|
122 |
|
|
|
122 |
|
|
|
81 |
|
|
|
81 |
Effect of changes in actuarial financial assumptions |
|
|
|
(2,338) |
|
|
|
(2,338) |
|
|
|
(2,537) |
|
|
|
(2,537) |
Effect of changes in actuarial demographic assumptions |
|
|
|
820 |
|
|
|
820 |
|
|
|
826 |
|
|
|
826 |
Asset ceiling adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to contributions required by ring fencing |
|
|
|
|
|
2,000 |
|
2,000 |
|
|
|
|
|
2,053 |
|
2,053 |
Other movements in the year |
|
|
|
|
|
(468) |
|
(468) |
|
|
|
|
|
(546) |
|
(546) |
|
|
(1,891) |
|
(1,396) |
|
1,532 |
|
2,027 |
|
(2,090) |
|
(1,630) |
|
1,507 |
|
1,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions by employer |
|
2,218 |
|
|
|
|
|
(2,218) |
|
2,363 |
|
|
|
|
|
(2,363) |
Contributions by plan participants and other scheme members |
|
7 |
|
7 |
|
|
|
|
|
12 |
|
12 |
|
|
|
|
Liabilities extinguished upon settlement |
|
|
|
|
|
|
|
|
|
(259) |
|
(259) |
|
|
|
|
Transfer of pension assets and liabilities from Main section (2) |
|
(276) |
|
(198) |
|
(78) |
|
|
|
|
|
|
|
|
|
|
Benefits paid |
|
(2,027) |
|
(2,027) |
|
|
|
|
|
(2,282) |
|
(2,282) |
|
|
|
|
At 31 December 2018 |
|
43,806 |
|
35,466 |
|
8,340 |
|
|
|
48,752 |
|
39,607 |
|
8,790 |
|
(355) |
Notes:
(1) The group recognises the net pension scheme surplus or deficit as a net asset or liability. In doing so, the funded status is adjusted to reflect any schemes with a surplus that the Group may not be able to access, as well as any minimum funding requirement to pay in additional contributions. This is most relevant to the Main section, where the surplus is not recognised.
(2) Includes adjustment for assets of £276 million and liabilities of £198 million transferred at no consideration to establish two separate sections of the RBS Group Pension Fund because ring-fencing rules do not allow employees outside the ring-fenced group to be members of the Main section.
(3) The Group expects to make contributions to the Main section of £218 million in 2019.
|
|
All schemes |
||
|
|
2018 |
|
2017 |
Amounts recognised on the balance sheet |
|
£m |
|
£m |
Fund assets at fair value |
|
48,752 |
|
49,746 |
Present value of fund liabilities |
|
39,607 |
|
42,378 |
Funded status |
|
9,145 |
|
7,368 |
Asset ceiling/minimum funding |
|
8,790 |
|
7,105 |
|
|
355 |
|
263 |
|
|
2018 |
|
2017 |
Net pension asset/(liability) comprises |
|
£m |
|
£m |
Net assets of schemes in surplus (included in Other assets, Note 17) |
|
520 |
|
392 |
Net liabilities of schemes in deficit (included in Other liabilities, Note 20) |
|
(165) |
|
(129) |
|
|
355 |
|
263 |
Notes on the consolidated accounts
5 Pensions continued
Funding and contributions by the Group
In the UK, the trustees of defined benefit pension schemes are required to perform funding valuations every three years. The trustees and the sponsor, with the support of the Scheme Actuary, agree the assumptions used to value the liabilities and a Schedule of Contributions required to eliminate any funding deficit. The funding assumptions incorporate a margin for prudence over and above the expected cost of providing the benefits promised to members, taking into account the sponsors covenant and the investment strategy of the scheme. Similar arrangements apply in the other territories where the Group sponsors defined benefit pension schemes. The last funding valuation of the Main section was at 31 December 2017 and next funding valuation is due at 31 December 2020, to be agreed by 31 March 2022.
The triennial funding valuation of the Main section as at 31 December 2017 determined the funding level to be 96%, pension liabilities to be £47 billion and the deficit to be £2 billion, which was eliminated by a £2 billion cash payment in October 2018. The average cost of the future service of current members is 44% of basic salary before administrative expenses and contributions from those members.
In October 2018 the Court ruled on the requirement to and method for equalising guaranteed minimum pension benefits arising between 1990 and 1997 between men and women. In 2017 the Group considered that equalisation would change the Main sections defined benefit obligation by 0.2%.The estimate was updated following the clarity provided by the Court ruling and the impact of any future conversion exercise to rectify the position. The £102 million cost on revision of the previous estimate of the financial assumptions in respect of equalisation is recognised in equity.
Assumptions
Placing a value on the Groups defined benefit pension schemes liabilities requires the Groups management to make a number of assumptions, with the support of independent actuaries. The ultimate cost of the defined benefit obligations depends upon actual future events and the assumptions made are unlikely to be exactly borne out in practice, meaning the final cost may be higher or lower than expected.
The most significant assumptions used for the Main section are shown below:
|
Principal IAS 19 actuarial |
Principal assumptions of 2017 triennial valuation |
|
|
assumptions |
|
|
|
2018 |
2017 |
2017 |
|
% |
% |
|
Discount rate |
2.9 |
2.6 |
Fixed interest swap yield curve plus 0.8% per annum |
Inflation assumption (RPI) |
3.2 |
3.1 |
RPI swap yield curve |
Rate of increase in salaries |
1.8 |
1.8 |
|
Rate of increase in deferred pensions |
3.1 |
3.0 |
|
Rate of increase in pensions in payment |
2.9 |
2.9 |
Modelled allowance for relevant caps and floors |
Lump sum conversion rate at retirement |
20 |
21 |
18% |
Longevity at age 60: |
years |
years |
|
Current pensioners |
|
|
|
Males |
27.2 |
27.2 |
28.1 |
Females |
29.0 |
28.7 |
29.7 |
Future pensioners, currently aged 40 |
|
|
|
Males |
28.4 |
28.6 |
29.3 |
Females |
30.5 |
30.4 |
31.5 |
Discount rate
The IAS 19 valuation uses a single discount rate by reference to the yield on a basket of high quality sterling corporate bonds. For the triennial valuation discounting is by reference to a yield curve.
The weighted average duration of the Main sections defined benefit obligation at 31 December 2018 is 20 years (2017 21 years).
Significant judgement is required when setting the criteria for bonds to be included in IAS 19s basket of bonds that is used to determine the discount rate used in the valuations. The criteria include issue size, quality of pricing and the exclusion of outliers. Judgement is also required in determining the shape of the yield curve at long durations: a constant credit spread relative to gilts is assumed. Sensitivity to the main assumptions is presented below.
Notes on the consolidated accounts
5 Pensions continued
The chart below shows the projected benefit payment pattern for the Main section in nominal terms. These cashflows are based on the most recent formal actuarial valuation, effective 31 December 2017.
The larger outflow in the first four years represents the expected level of transfers out to 31 December 2021.
The table below shows how the present value of the defined benefit obligation of the Main section would change if the key assumptions used were changed independently. In practice the variables are somewhat correlated and do not move completely in isolation.
|
|
|
|
|
|
Increase in |
|
|
(Decrease)/increase |
|
(Decrease)/increase |
|
net pension assets/ |
|
|
in value of assets |
|
in value of liabilities |
|
(obligations) |
2018 |
|
£m |
|
£m |
|
£m |
0.25% increase in interest rates/discount rate |
|
(2,214) |
|
(1,644) |
|
(570) |
0.25% increase in inflation |
|
1,487 |
|
1,199 |
|
288 |
0.25% increase in credit spreads |
|
(5) |
|
(1,644) |
|
1,639 |
Longevity increase of one year |
|
|
|
1,414 |
|
(1,414) |
0.25% additional rate of increase in pensions in payment |
|
|
|
1,215 |
|
(1,215) |
Increase in equity values of 10% (1) |
|
419 |
|
|
|
419 |
2017 |
|
|
|
|
|
|
0.25% increase in interest rates/discount rate |
|
(2,218) |
|
(1,964) |
|
(254) |
0.25% increase in inflation |
|
1,289 |
|
1,329 |
|
(40) |
0.25% increase in credit spreads |
|
(7) |
|
(1,964) |
|
1,957 |
Longevity increase of one year |
|
|
|
1,478 |
|
(1,478) |
0.25% additional rate of increase in pensions in payment |
|
|
|
1,328 |
|
(1,328) |
Increase in equity values of 10% (1) |
|
909 |
|
|
|
909 |
Note:
(1) Includes both quoted and private equity.
Notes on the consolidated accounts
5 Pensions continued
The defined benefit obligation of the Main section is attributable to the different classes of scheme members in the following proportions:
|
|
2018 |
|
2017 |
Membership category |
|
% |
|
% |
Active members |
|
12.9 |
|
16.2 |
Deferred members |
|
48.6 |
|
47.3 |
Pensioners and dependants |
|
38.5 |
|
36.5 |
|
|
100.0 |
|
100.0 |
The experience history of Group schemes is shown below:
|
|
Main section |
|
All schemes |
||||||||||||||||
|
|
2018 |
|
2017 |
|
2016 |
|
2015 |
|
2014 |
|
2018 |
|
2017 |
|
2016 |
|
2015 |
|
2014 |
History of defined benefit schemes |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Fair value of plan assets |
|
43,806 |
|
44,652 |
|
43,824 |
|
30,703 |
|
30,077 |
|
48,752 |
|
49,746 |
|
49,229 |
|
34,708 |
|
34,359 |
Present value of plan obligations |
|
35,466 |
|
37,937 |
|
38,851 |
|
30,966 |
|
31,776 |
|
39,607 |
|
42,378 |
|
43,990 |
|
35,152 |
|
36,643 |
Net surplus/(deficit) |
|
8,340 |
|
6,715 |
|
4,973 |
|
(263 |
) |
(1,699 |
) |
9,145 |
|
7,368 |
|
5,239 |
|
(444 |
) |
(2,284) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Experience (losses)/gains on plan liabilities |
|
(122 |
) |
(107 |
) |
658 |
|
233 |
|
3 |
|
(81 |
) |
(93 |
) |
794 |
|
258 |
|
18 |
Experience (losses)/gains on plan assets |
|
(1,891 |
) |
1,580 |
|
8,562 |
|
(415 |
) |
4,629 |
|
(2,090 |
) |
1,728 |
|
9,254 |
|
(458 |
) |
5,171 |
Actual return on plan assets |
|
(768 |
) |
2,735 |
|
9,872 |
|
703 |
|
5,766 |
|
(848 |
) |
3,013 |
|
10,708 |
|
749 |
|
6,485 |
Actual return on plan assets - % |
|
(1.7% |
) |
6.2% |
|
32.2% |
|
2.3% |
|
23.8% |
|
(1.7% |
) |
6.1% |
|
30.9% |
|
2.2% |
|
22.8% |
6 Auditors remuneration
Amounts paid to the Groups auditors for statutory audit and other services are set out below. All audit-related and other services are approved by the Group Audit Committee and are subject to strict controls to ensure the external auditors independence is unaffected by the provision of other services. The Group Audit Committee recognises that for certain assignments the auditors are best placed to perform the work economically; for other work the Group selects the supplier best placed to meet its requirements. The Groups auditors are permitted to tender for such work in competition with other firms where the work is permissible under audit independence rules.
Amounts paid to the Groups auditors for statutory audit and other services are set out below:
|
|
2018 |
|
2017 |
|
2016 |
|
|
£m |
|
£m |
|
£m |
Fees payable for the audit of the Groups annual accounts (1) |
|
3.5 |
|
4.0 |
|
4.0 |
- the audit of the companys subsidiaries (1) |
|
27.5 |
|
22.9 |
|
20.7 |
- audit-related assurance services (1,2) |
|
2.9 |
|
4.3 |
|
4.0 |
Total audit and audit-related assurance services fees |
|
33.9 |
|
31.2 |
|
28.7 |
|
|
|
|
|
|
|
Other assurance services |
|
1.3 |
|
1.7 |
|
3.4 |
Corporate finance services (3) |
|
0.2 |
|
0.2 |
|
0.2 |
Non-audit services |
|
|
|
|
|
|
Total other services |
|
1.5 |
|
1.9 |
|
3.6 |
Notes:
(1) The 2018 audit fee was approved by the Group Audit Committee. At 31 December 2018, £16 million has been billed in and paid in respect of 2018 Group audit fees.
(2) Comprises fees of £1.1 million (2017 - £1.1 million) in relation to reviews of interim financial information, £1.1 million (2017 - £2.5 million) in respect of reports to the Groups regulators in the UK and overseas, £0.7 million (2017 - £0.7 million) in relation to non-statutory audit opinions.
(3) Comprises fees of £0.2 million (FY 2017 - £0.2 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances undertaken by the Group.
Notes on the consolidated accounts
7 Tax |
|
|
|
|
2018 |
2017 |
2016 |
|
£m |
£m |
£m |
Current tax: |
|
|
|
Charge for the year |
(1,092) |
(1,018) |
(1,126) |
Over provision in respect of prior years |
125 |
227 |
186 |
|
(967) |
(791) |
(940) |
Deferred tax: |
|
|
|
(Charge)/credit for the year |
(280) |
108 |
246 |
Increase/(reduction) in the carrying value of deferred tax assets |
7 |
(30) |
(317) |
Under provision in respect of prior years |
(35) |
(111) |
(155) |
Tax charge for the year |
(1,275) |
(824) |
(1,166) |
The actual tax charge differs from the expected tax (charge)/credit computed by applying the standard rate of UK corporation tax of 19% (2017 19.25%; 2016 20.00%) as follows:
|
2018 |
2017 |
2016 |
|
£m |
£m |
£m |
Expected tax (charge)/credit |
(638) |
(431) |
816 |
Losses and temporary differences in year where no deferred tax asset recognised |
(55) |
(303) |
(742) |
Foreign profits taxed at other rates |
(8) |
104 |
340 |
UK tax rate change impact (1) |
|
(7) |
6 |
Items not allowed for tax: |
|
|
|
- losses on disposals and write-downs |
(44) |
(69) |
(45) |
- UK bank levy |
(38) |
(45) |
(41) |
- regulatory and legal actions |
(203) |
(56) |
(952) |
- other disallowable items |
(63) |
(110) |
(141) |
Non-taxable items |
47 |
134 |
136 |
Taxable foreign exchange movements |
(27) |
27 |
(57) |
Losses brought forward and utilised |
14 |
11 |
10 |
Increase/(reduction) in carrying value of deferred tax asset in respect of: |
|
|
|
- UK losses |
7 |
(30) |
(317) |
Banking surcharge |
(357) |
(165) |
(210) |
Adjustments in respect of prior years (2) |
90 |
116 |
31 |
Actual tax charge |
(1,275) |
(824) |
(1,166) |
Notes:
(1) In recent years, the UK government has steadily reduced the rate of UK corporation tax, with the latest enacted rates standing at 19% from 1 April 2017 and 17% from 1 April 2020.
(2) Prior year tax adjustments incorporate refinements to tax computations made on submission and agreement with the tax authorities. C urrent taxation balances include provisions in respect of uncertain tax positions, in particular in relation to restructuring and other costs where the taxation treatment remains subject to agreement with the relevant tax authorities.
Judgment: Tax contingencies
The Groups income tax charge and its provisions for income taxes necessarily involve a degree of estimation and judgement. The tax treatment of some transactions is uncertain and tax computations are yet to be agreed with the tax authorities in a number of jurisdictions. The Group recognises anticipated tax liabilities based on all available evidence and, where appropriate, in the light of external advice. Any difference between the final outcome and the amounts provided will affect current and deferred income tax charges in the period when the matter is resolved.
Deferred tax |
|
|
|
2018 |
2017 |
£m |
£m |
|
Deferred tax asset |
(1,412) |
(1,740) |
Deferred tax liability |
454 |
583 |
Net deferred tax asset |
(958) |
(1,157) |
Notes on the consolidated accounts
7 Tax continued
Net deferred tax asset comprised:
|
|
|
|
|
Tax |
|
|
|
|
Accelerated |
|
|
losses |
|
|
|
|
capital |
Expense |
Financial |
carried |
|
|
|
Pension |
allowances |
provisions |
instruments |
forward |
Other |
Total |
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
At 1 January 2017 |
(662) |
361 |
(322) |
395 |
(1,050) |
137 |
(1,141) |
Acquisitions and disposals of subsidiaries |
|
(29) |
|
|
|
|
(29) |
Charge/(credit) to income statement |
3 |
(126) |
55 |
46 |
121 |
(66) |
33 |
Charge/(credit) to other comprehensive income |
266 |
|
|
(243) |
|
(19) |
4 |
Currency translation and other adjustments |
|
(14) |
1 |
|
(10) |
(1) |
(24) |
At 1 January 2018 |
(393) |
192 |
(266) |
198 |
(939) |
51 |
(1,157) |
Implementation of IFRS9 on 1 January 2018 |
|
|
|
16 |
|
|
16 |
(Credit)/charge to income statement |
(40) |
22 |
121 |
154 |
5 |
46 |
308 |
(Credit)/charge to other comprehensive income |
(95) |
1 |
|
(23) |
|
33 |
(84) |
Currency translation and other adjustments |
|
5 |
(14) |
4 |
(2) |
(34) |
(41) |
At 31 December 2018 |
(528) |
220 |
(159) |
349 |
(936) |
96 |
(958) |
Deferred tax assets in respect of unused tax losses are recognised if the losses can be used to offset probable future taxable profits after taking into account the expected reversal of other temporary differences. Recognised deferred tax assets in respect of tax losses are analysed further below.
|
2018 |
2017 |
£m |
£m |
|
UK tax losses carried forward |
|
|
- NatWest Markets Plc |
151 |
125 |
- National Westminster Bank Plc |
505 |
541 |
- Ulster Bank Limited |
19 |
14 |
Total |
675 |
680 |
Overseas tax losses carried forward |
|
|
- Ulster Bank Ireland DAC |
261 |
259 |
|
936 |
939 |
Critical accounting policy: Deferred Tax
The deferred tax assets of £1,412 million at 31 December 2018 (2017 - £1,740 million) principally comprise losses that arose in the UK, and temporary differences. These deferred tax assets are recognised to the extent that it is probable that there will be future taxable profits to recover them.
Judgment - The Group has considered the carrying value of deferred tax assets and concluded that, based on managements estimates, sufficient taxable profits will be generated in future years to recover recognised deferred tax assets.
Estimate - These estimates are partly based on forecast performance beyond the horizon for managements detailed plans. They have regard to inherent uncertainties, such as Brexit and climate change.
UK tax losses - Under UK tax rules, tax losses can be carried forward indefinitely. As the recognised tax losses in the Group arose prior to 1 April 2015, credit in future periods is given against 25% of profits at the main rate of UK corporation tax, excluding the Banking Surcharge 8% rate introduced by The Finance (No. 2) Act 2015. Deferred tax assets and liabilities at 31 December 2018 take into account the reduced rates in respect of tax losses and temporary differences and where appropriate, the banking surcharge inclusive rate in respect of other banking temporary differences.
NatWest Markets Plc NatWest Markets Plc expects that the balance of recognised deferred tax asset at 31 December 2018 of £151 million in respect of tax losses amounting to approximately £800 million will be recovered by the end of 2024. Since 2012 NatWest Markets Plc has reported mixed levels of taxable profits and losses because core banking profitability was offset by a series of restructuring plans as the group reshaped to meet commercial and regulatory demands. In total, £10.2 billion of losses have not been recognised in the deferred tax balance at 31 December 2018; such losses will be available to offset 25% of future taxable profits in excess of those forecast in the closing deferred tax asset.
National Westminster Bank Plc A deferred tax asset of £505 million has been recognised in respect of total losses of £2,936 million. The losses arose principally as a result of significant impairment and conduct charges between 2009 and 2012 during challenging economic conditions in the UK banking sector. National Westminster Bank plc returned to tax profitability during 2015 and expects the deferred tax asset to be consumed by future taxable profits by the end of 2023.
Notes on the consolidated accounts
7 Tax continued
Overseas tax losses
Ulster Bank Ireland DAC A deferred tax asset of £261 million has been recognised in respect of losses of £2,089 million of total losses of £8,855 million carried forward at 31 December 2018. 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 the £: exchange differences. As UBIDAC continues to operate in a small open economy subject to short term volatility and extended non-performing loan realisation periods the company expects, in assessing its deferred tax asset on tax losses, that they will be consumed by future taxable profits by the end of 2027.
Unrecognised deferred tax
Deferred tax assets of £5,118 million (2017 - £6,356 million; 2016 - £7,940, million) have not been recognised in respect of tax losses and other temporary differences carried forward of £25,597 million (2017 - £30,049 million; 2016 - £33,376 million) in jurisdictions where doubt exists over the availability of future taxable profits. Of these losses and other temporary differences, £939 million expire within five years and £5,992 million thereafter. The balance of tax losses and other temporary differences carried forward has no expiry date.
Deferred tax liabilities of £257 million (2017 - £255 million; 2016 - £258 million) have not been recognised in respect of retained earnings of overseas subsidiaries and held-over gains on the incorporation of overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation. No taxation is expected to arise in the foreseeable future in respect of held-over gains. Changes to UK tax legislation largely exempts from UK tax, overseas dividends received on or after 1 July 2009.
8 Earnings per share
Notes on the consolidated accounts
10 Derivatives
Companies within RBS transact derivatives as principal either as a trading activity or to manage balance sheet foreign exchange, interest rate and credit risk.
|
2018 |
|
2017 |
||||
|
Notional |
|
|
|
Notional |
|
|
|
amount |
Assets |
Liabilities |
|
amount |
Assets |
Liabilities |
|
£bn |
£m |
£m |
|
£bn |
£m |
£m |
Exchange rate contracts |
3,426 |
36,545 |
38,230 |
|
3,425 |
39,211 |
41,681 |
Interest rate contracts |
10,536 |
96,410 |
90,444 |
|
12,016 |
120,945 |
112,160 |
Credit derivatives |
16 |
346 |
208 |
|
38 |
531 |
558 |
Equity and commodity contracts |
1 |
48 |
15 |
|
3 |
156 |
107 |
|
|
133,349 |
128,897 |
|
|
160,843 |
154,506 |
RBS enters into fair value hedges, cash flow hedges and hedges of net investments in foreign operations. The majority of RBSs interest rate hedges relate to the management of RBSs non-trading interest rate risk. RBS manages this risk within approved limits. Residual risk positions are hedged with derivatives principally interest rate swaps. Suitable larger financial instruments are fair value hedged; the remaining exposure, where possible, is hedged by derivatives documented as cash flow hedges.
The majority of RBSs fair value hedges involve interest rate swaps hedging the fixed interest rate risk in recognised financial assets and financial liabilities. Cash flow hedges relate to exposures to the variability in future interest payments and receipts due to the movement of benchmark interest rates or foreign exchange rates on forecast transactions and on recognised financial assets and financial liabilities. This variability in cash flows is hedged by interest rate swaps and forward foreign exchange contracts. RBS hedges its net investments in foreign operations with currency borrowings and forward foreign exchange contracts.
For cash flow hedge relationships of interest rate risk, the hedged items are actual and forecast variable interest rate cash flows arising from financial assets and financial liabilities with interest rates linked to the relevant benchmark rate LIBOR, EURIBOR or the Bank of England Official Bank Rate. The financial assets are loans to banks and customer and the financial liabilities are bank and customer deposits and LIBOR linked medium-term notes and other issued securities. The variability in cash flows due to movements in the relevant benchmark rate is hedged; this risk component is identified using the risk management systems of RBS. This risk component comprises the majority of cash flow variability risk.
For cash flow hedging relationships RBS determines that there is an economic relationship between the hedged item and hedging instrument via assessing the initial and ongoing effectiveness by comparing movements in the fair value of the expected highly probable forecast interest cash flows with movements in the fair value of the expected changes in cash flows from the hedging interest rate swap. Hedge effectiveness is measured on a cumulative basis over a time period management determines to be appropriate. The method of calculating hedge ineffectiveness is the hypothetical derivative method. RBS uses the actual ratio between the hedged item and hedging instrument to establish the hedge ratio for hedge accounting. For fair value hedge relationships of interest rate risk, the hedged items are typically large corporate fixed-rate loans, government securities, fixed rate finance leases, fixed rate medium-term notes or preference shares classified as debt. The hedged risk is the risk of changes in the hedged items fair value attributable to changes in the benchmark interest rate embedded in the hedged item. This risk component is identified using the risk management systems of RBS. This risk component comprises the majority of the hedged items fair value risk.
For fair value hedge relationships RBS determines that there is an economic relationship between the hedged items and hedging instrument via assessing the initial and ongoing effectiveness by comparing movements in the fair value of the hedged item attributable to the hedged risk with movements in the fair value of the expected changes in cash flows from the hedging interest rate swap. Hedge effectiveness is measured on a cumulative basis over a time period management determines to be appropriate. RBS uses either the actual ratio between the hedged item and hedging instrument(s) or one that minimises hedge ineffectiveness to establish the hedge ratio for hedge accounting. RBS hedges the currency risk of its net investment in foreign currency denominated operations with currency borrowings and forward foreign exchange contracts. RBS reviews the value of the investments net assets, executing hedges where appropriate to reduce the sensitivity of capital ratios to foreign exchange rate movement.
The Group hedges currency risk in respect of its net investment in foreign currency denominated operations with currency borrowings and forward foreign exchange contracts. The Group reviews the value of the investments net assets, executing hedges where appropriate, to reduce the sensitivity of capital ratios to foreign exchange movements.
Included in the table above are derivatives held for hedging purposes as follows:
|
|
2018 |
|
|
2017 |
|
|
Notional |
Assets |
Liabilities |
|
Assets |
Liabilities |
|
£bn |
£m |
£m |
|
£m |
£m |
Fair value hedging |
|
|
|
|
|
|
Interest rate contracts |
60.0 |
965 |
2,061 |
|
904 |
2,211 |
|
|
|
|
|
|
|
Cash flow hedging |
|
|
|
|
|
|
Interest rate contracts |
149.7 |
1,148 |
872 |
|
1,989 |
1,295 |
Exchange rate contacts |
12.5 |
106 |
|
|
63 |
37 |
|
|
|
|
|
|
|
Net investment hedging |
|
|
|
|
|
|
Exchange rate contracts |
2.0 |
32 |
10 |
|
11 |
28 |
|
224.2 |
2,251 |
2,943 |
|
2,967 |
3,571 |
Notes on the consolidated accounts
10 Derivatives continued
Notes on the consolidated accounts
10 Derivatives continued
The main sources of ineffectiveness for interest rate risk hedge accounting relationships are:
· The effect of the counterparty credit risk on the fair value of the interest rate swap, which is not reflected in the fair value of the hedged item attributable to the change in interest rate (fair value hedge).
· Differences in the repricing basis between the hedging instrument and hedged cash flows (cash flow hedge); and
· Upfront present values on the hedging derivatives where hedge accounting relationships have been designated after the trade date (cash flow hedge and fair value hedge).
Additional information on cash flow hedging and hedging of net assets can be found in the Statement of Changes in Equity.
11 Financial instruments classification
The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments on an IFRS 9 basis at 31 December 2018 and on an IAS39 basis at 31 December 2017. Assets and liabilities outside the scope of IFRS 9/IAS 39 are shown within other assets and other liabilities.
Assets |
|
|
|
Hedging |
|
Amortised |
Other |
|
|
MFVTPL (1) |
DFV(2) |
derivatives |
FVOCI |
cost |
assets |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
Cash and balances at central banks |
|
|
|
|
|
88,897 |
|
88,897 |
Trading assets |
|
75,119 |
|
|
|
|
|
75,119 |
Derivatives |
|
131,098 |
|
2,251 |
|
|
|
133,349 |
Settlement balances |
|
|
|
|
|
2,928 |
|
2,928 |
Loans to banks - amortised cost (3) |
|
|
|
|
|
12,947 |
|
12,947 |
Loans to customers - amortised cost |
|
|
|
|
|
305,089 |
|
305,089 |
Other financial assets |
|
1,638 |
|
|
46,077 |
11,770 |
|
59,485 |
Intangible assets |
|
|
|
|
|
|
6,616 |
6,616 |
Other assets |
|
|
|
|
|
|
9,805 |
9,805 |
31 December 2018 |
|
207,855 |
|
2,251 |
46,077 |
421,631 |
16,421 |
694,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for- |
|
Hedging |
Available- |
Loans and |
Held-to- |
Other |
|
|
trading |
DFV(2) |
derivatives |
for-sale |
receivables |
maturity |
assets |
Total |
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
Cash and balances at central banks |
|
|
|
|
98,337 |
|
|
98,337 |
Trading assets |
85,991 |
|
|
|
|
|
|
85,991 |
Derivatives |
157,876 |
|
2,967 |
|
|
|
|
160,843 |
Settlement balances |
|
|
|
|
2,517 |
|
|
2,517 |
Loans to banks - amortised cost (3) |
|
|
|
|
11,517 |
|
|
11,517 |
Loans to customers - amortised cost |
|
|
|
|
310,116 |
|
|
310,116 |
Other financial assets |
|
190 |
|
43,968 |
3,643 |
4,128 |
|
51,929 |
Intangible assets |
|
|
|
|
|
|
6,543 |
6,543 |
Other assets |
|
|
|
|
|
|
10,263 |
10,263 |
31 December 2017 |
243,867 |
190 |
2,967 |
43,968 |
426,130 |
4,128 |
16,806 |
738,056 |
|
|
|
|
|
|
|
|
|
Notes:
(1) Mandatory fair value through profit or loss.
(2) Designated as at fair value through profit or loss.
(3) Includes items in the course of collection from other banks of £484 million (2017 - £1,017 million).
Notes on the consolidated accounts
11 Financial instruments - classification continued
|
Held-for- |
|
Hedging |
|
Other |
|
Liabilities |
trading |
DFV (1) |
derivatives |
Amortised cost |
liabilities |
|
£m |
£m |
£m |
£m |
£m |
£m |
|
Bank deposits (2) |
|
|
|
23,297 |
|
23,297 |
Customer deposits (3) |
|
|
|
360,914 |
|
360,914 |
Settlement balances |
|
|
|
3,066 |
|
3,066 |
Trading liabilities |
72,350 |
|
|
|
|
72,350 |
Derivatives |
125,954 |
|
2,943 |
|
|
128,897 |
Other financial liabilities |
|
2,840 |
|
36,892 |
|
39,732 |
Subordinated liabilities |
|
867 |
|
9,668 |
|
10,535 |
Other liabilities |
|
|
|
2,218 |
6,736 |
8,954 |
31 December 2018 |
198,304 |
3,707 |
2,943 |
436,055 |
6,736 |
647,745 |
Bank deposits (2) |
|
|
|
30,396 |
|
30,396 |
Customer deposits (3) |
|
|
|
361,316 |
|
361,316 |
Settlement balances |
|
|
|
2,844 |
|
2,844 |
Trading liabilities |
81,982 |
|
|
|
|
81,982 |
Derivatives |
150,935 |
|
3,571 |
|
|
154,506 |
Other financial liabilities |
|
4,277 |
|
26,049 |
|
30,326 |
Subordinated liabilities |
|
939 |
|
11,783 |
|
12,722 |
Other liabilities |
|
|
|
2,181 |
12,690 |
14,871 |
31 December 2017 |
232,917 |
5,216 |
3,571 |
434,569 |
12,690 |
688,963 |
Notes:
(1) Designated as at fair value through profit or loss.
(2) Includes items in the course of transmission to other banks of £125 million (2017 - £214 million).
(3) The carrying amount of other customer accounts designated as at fair value through profit or loss is £26 million (2017 - £114 million) higher than the principal amount.
The Groups financial assets and liabilities include: |
2018 |
2017 |
|
|
£m |
£m |
|
Reverse repos |
|
|
|
Loans to banks - amortised cost |
3,539 |
2,152 |
|
Loans to customers - amortised cost |
9 |
2,308 |
|
Trading assets |
24,759 |
36,272 |
|
|
|
|
|
Repos |
|
|
|
Bank deposits |
941 |
3,839 |
|
Customer deposits |
3,774 |
6,669 |
|
Trading liabilities |
25,645 |
28,363 |
|
|
|
|
|
|
2018 |
2017 |
2016 |
Amounts included in operating profit/(loss) before tax: |
£m |
£m |
£m |
(Losses)/Gains on financial assets/liabilities designated as at fair value through profit or loss |
(26) |
60 |
(13) |
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 agreements together with financial collateral received or given.
|
Instruments which can be offset |
|
Potential for offset not recognised by IFRS |
|
|
|
|||||
|
|
|
|
|
Effect of |
|
|
Net amount after |
|
Instruments |
|
2018 |
|
|
|
|
master netting |
|
Other |
the effect of netting |
|
outside |
|
|
IFRS |
Balance |
|
and similar |
Cash |
financial |
arrangements and |
|
netting |
Balance |
|
Gross |
offset |
sheet |
|
agreements |
collateral |
collateral |
related collateral |
|
arrangements |
sheet total |
|
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
|
£m |
£m |
|
Derivative assets |
136,329 |
(5,041) |
131,288 |
|
(106,762) |
(17,937) |
(4,469) |
2,120 |
|
2,061 |
133,349 |
Derivative liabilities |
133,965 |
(6,776) |
127,189 |
|
(106,762) |
(15,227) |
(3,466) |
1,734 |
|
1,708 |
128,897 |
Net position (1) |
2,364 |
1,735 |
4,099 |
|
|
(2,710) |
(1,003) |
386 |
|
353 |
4,452 |
|
|
|
|
|
|
|
|
|
|
|
|
Trading reverse repos |
53,148 |
(31,376) |
21,772 |
|
(762) |
|
(21,000) |
10 |
|
2,987 |
24,759 |
Trading repos |
55,864 |
(31,376) |
24,488 |
|
(762) |
|
(23,726) |
|
|
1,157 |
25,645 |
Net position |
(2,716) |
|
(2,716) |
|
|
|
2,726 |
10 |
|
1,830 |
(886) |
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
175,670 |
(17,088) |
158,582 |
|
(128,287) |
(20,311) |
(5,850) |
4,134 |
|
2,261 |
160,843 |
Derivative liabilities |
170,405 |
(17,557) |
152,848 |
|
(128,287) |
(18,035) |
(3,952) |
2,574 |
|
1,658 |
154,506 |
Net position (1) |
5,265 |
469 |
5,734 |
|
|
(2,276) |
(1,898) |
1,560 |
|
603 |
6,337 |
|
|
|
|
|
|
|
|
|
|
|
|
Trading reverse repos |
65,508 |
(32,639) |
32,869 |
|
(329) |
|
(32,498) |
42 |
|
3,403 |
36,272 |
Trading repos |
58,695 |
(32,639) |
26,056 |
|
(329) |
|
(25,727) |
|
|
2,307 |
28,363 |
Net position |
6,813 |
|
6,813 |
|
|
|
(6,771) |
42 |
|
1,096 |
7,909 |
Note:
(1) The net IFRS offset balance of £1,735 million (2017 - £469 million) relates to variation margin netting reflected on other balance sheet lines.
Notes on the consolidated accounts
12 Financial instruments - valuation
Critical accounting policy: Fair value - financial instruments
In accordance with Accounting policies 13 and 21, financial instruments classified as mandatory fair value through profit or loss, held-for-trading or designated as at fair value through profit or loss and financial assets classified as fair value through other comprehensive income are recognised in the financial statements at fair value. All derivatives are measured at fair value.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. It also uses the assumptions that market participants would use when pricing the asset or liability. In determining fair value the Group maximises the use of relevant observable inputs and minimises the use of unobservable inputs.
Modelled approaches may be used to measure instruments classed as Level 2 or 3. Estimation expertise is required in the selection, implementation and calibration of appropriate models. The resulting modelled valuations are considered for accuracy and reliability. Portfolio level adjustments consistent with IFRS 13 are raised to incorporate counterparty credit risk, funding and margining risks. Expert judgement is used in the initial measurement of modelled products by control teams.
Where the Group manages a group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, it measures the fair value of a group of financial assets and financial liabilities on the basis of the price that it would receive to sell a net long position (i.e. an asset) for a particular risk exposure or to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction at the measurement date under current market conditions. Credit valuation adjustments are made when valuing derivative financial assets to incorporate counterparty credit risk. Adjustments are also made when valuing financial liabilities measured at fair value to reflect the Groups own credit standing.
Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instruments complexity and the availability of market-based data. Further details about the valuation methodologies and the sensitivity to reasonably possible alternative assumptions of the fair value of financial instruments valued using techniques where at least one significant input is unobservable are given below.
|
2018 |
|
2017 |
||||
|
Level 1 |
Level 2 |
Level 3 |
|
Level 1 |
Level 2 |
Level 3 |
|
£m |
£m |
£m |
|
£m |
£m |
£m |
Assets |
|
|
|
|
|
|
|
Trading assets |
|
|
|
|
|
|
|
Loans |
|
44,983 |
120 |
|
|
58,331 |
150 |
Securities |
22,003 |
7,312 |
701 |
|
19,648 |
7,009 |
853 |
Derivatives |
|
131,513 |
1,836 |
|
10 |
159,109 |
1,724 |
Other financial assets |
|
|
|
|
|
|
|
Loans |
|
768 |
136 |
|
|
|
56 |
Securities |
40,132 |
6,172 |
507 |
|
37,147 |
6,450 |
505 |
Total financial assets held at fair value |
62,135 |
190,748 |
3,300 |
|
56,805 |
230,899 |
3,288 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Trading liabilities |
|
|
|
|
|
|
|
Deposits |
|
47,243 |
377 |
|
|
52,109 |
239 |
Debt securities in issue |
|
791 |
112 |
|
|
1,057 |
50 |
Short positions |
18,941 |
4,886 |
|
|
23,715 |
4,796 |
16 |
Derivatives |
|
127,709 |
1,188 |
|
2 |
152,886 |
1,618 |
Other financial liabilities |
|
|
|
|
|
|
|
Debt securities in issue |
|
2,348 |
280 |
|
|
3,141 |
262 |
Other deposits |
|
212 |
|
|
|
874 |
|
Subordinated liabilities |
|
867 |
|
|
|
939 |
|
Total financial liabilities held at fair value |
18,941 |
184,056 |
1,957 |
|
23,717 |
215,802 |
2,185 |
Notes:
(1) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instruments were transferred.
(2) For an analysis of debt securities, by issuer, measurement classification and analysis of asset backed securities, and derivatives, by type and contract, refer to Capital and Risk management Credit risk.
(3) The determination of an instruments level cannot be made at a global product level as a single product type can be in more than one level. For example, a single name corporate credit default swap could be in level 2 or level 3 depending on whether the reference counterpartys obligations are liquid or illiquid.
Notes on the consolidated accounts
12 Financial instruments - valuation continued
Fair value hierarchy
Financial Instruments carried at fair value have been classified under the IFRS fair value hierarchy as follows.
Level 1 Instruments valued using unadjusted quoted prices in active and liquid markets, for identical financial instruments. Examples include government bonds, listed equity shares and certain exchange-traded derivatives.
Level 2 - instruments valued using valuation techniques that have observable inputs., Examples include most government agency securities, investment-grade corporate bonds, certain mortgage products, including CLOs, most bank loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most notes issued, and certain money market securities and loan commitments and most OTC derivatives.
Level 3 - instruments valued using a valuation technique where at least one input which could have a significant effect on the instruments valuation, is not based on observable market data. Examples include cash instruments which trade infrequently, certain syndicated and commercial mortgage loans, certain emerging markets and derivatives with unobservable model inputs.
Valuation techniques
RBS derives fair value of its instruments differently depending on whether the instrument is a non-modelled or a modelled product.
Non-modelled products are valued directly from a price input typically on a position by position basis and include cash, equities and most debt securities.
Modelled products valued using a pricing model range in complexity from comparatively vanilla products such as interest rate swaps and options (e.g. interest rate caps and floors) through to more complex derivatives. The valuation of modelled products requires an appropriate model and inputs into this model. Sometimes models are also used to derive inputs (e.g. to construct volatility surfaces). RBS uses a number of modelling methodologies.
Inputs to valuation models
Values between and beyond available data points are obtained by interpolation and extrapolation. When utilising valuation techniques, the fair value can be significantly affected by the choice of valuation model and by underlying assumptions concerning factors such as the amounts and timing of cash flows, discount rates and credit risk. The principal inputs to these valuation techniques are as follows:
Bond prices - quoted prices are generally available for government bonds, certain corporate securities and some mortgage-related products.
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 third-party benchmarking 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).
Interest rates - these are principally benchmark interest rates such as the London Interbank Offered Rate (LIBOR), Overnight Index Swaps (OIS) rate and other quoted interest rates in the swap, bond and futures markets.
Foreign currency exchange rates - there are observable prices both for spot and forward contracts and futures in the worlds major currencies.
Equity and equity index prices - quoted prices are generally readily available for equity shares listed on the worlds major stock exchanges and for major indices on such shares.
Commodity prices - many commodities are actively traded in spot and forward contracts and futures on exchanges in London, New York and other commercial centres.
Price volatilities and correlations - volatility is a measure of the tendency of a price to change with time.
Correlation measures the degree which two or more prices or other variables are observed to move together.
Prepayment rates - the fair value of a financial instrument that can be prepaid by the issuer or borrower differs from that of an instrument that cannot be prepaid. In valuing prepayable instruments that are not quoted in active markets, RBS considers the value of the prepayment option.
Recovery rates/loss given default - these are used as an input to valuation models and reserves for asset-backed securities and other credit products as an indicator of severity of losses on default. Recovery rates are primarily sourced from market data providers or inferred from observable credit spreads.
Valuation control
RBSs control environment for the determination of the fair value of financial instruments includes formalised protocols for the review and validation of fair values independent of the businesses entering into the transactions.
Independent price verification (IPV) is a key element of the control environment. Valuations are first performed by the business which entered into the transaction. Such valuations may be directly from available prices, or may be derived using a model and variable model inputs. These valuations are reviewed, and if necessary amended, by a team independent of those trading the financial instruments, in the light of available pricing evidence.
Where measurement differences are identified through the IPV process these are grouped by fair value level and quality of data. If the size of the difference exceeds defined thresholds adjustment to independent levels are made.
IPV takes place at least each monthly, for all fair value positions. The IPV control includes formalised reporting and escalation of any valuation differences in breach of established thresholds.
The Modelled Product Review Committee sets the policy for model documentation, testing and review, and prioritises models with significant exposure being reviewed by the RBS Model Risk team. Valuation Committees are made up of valuation specialists and senior business representatives from various functions and oversees pricing, reserving and valuations issues. These committees meet monthly to review and ratify any methodology changes. The Executive Valuation Committee meets quarterly to address key material and subjective valuation issues, to review items escalated by Valuation Committees and to discuss other relevant matters of including prudential valuation.
Initial classification of a financial instrument is carried out by the Product Control team following the principles in IFRS 13. They base their judgment on information gathered during the IPV process for instruments which include the sourcing of independent prices and model inputs. The quality and completeness of the information gathered in the IPV process gives an indication as to the liquidity and valuation uncertainty of an instrument. These initial classifications are subject to senior management review. Particular attention is paid to instruments crossing from one level to another, new instrument classes or products, instruments that are generating significant profit and loss and instruments where valuation uncertainty is high.
RBS uses consensus prices for the IPV of some instruments. The consensus service encompasses the equity, interest rate, currency, commodity, credit, property, fund and bond markets, providing comprehensive matrices of vanilla prices and a wide selection of exotic products.
Notes on the consolidated accounts
12 Financial instruments - valuation continued
RBS contributes to consensus pricing services where there is a significant interest either from a positional point of view or to test models for future business use. Data sourced from consensus pricing services are used for a combination of control processes including direct price testing, evidence of observability and model testing. In practice this means that RBS submits prices for all material positions for which a service is available. Data from consensus services are subject to the same level of quality review as other inputs used for IPV process.
In order to determine a reliable fair value, where appropriate, management applies valuation adjustments to the pricing information gathered from the above sources. The sources of independent data are reviewed for quality and are applied in the IPV processes using a formalised input quality hierarchy. These adjustments reflect RBSs assessment of factors that market participants would consider in setting a price.
Where unobservable inputs are used, RBS may determine a range of possible valuations derived from differing stress scenarios to determine the sensitivity associated with the valuation. When establishing the fair value of a financial instrument using a valuation technique, RBS considers adjustments to the modelled price which market participants would make when pricing that instrument. Such adjustments include the credit quality of the counterparty and adjustments to compensate for model limitations.
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread, funding and credit risk. These adjustments are presented in the table below:
Adjustment |
|
2018
|
|
2017
|
Funding FVA |
|
250 |
|
440 |
Credit CVA |
|
419 |
|
346 |
Bid Offer |
|
238 |
|
285 |
Product and deal specific |
|
327 |
|
1,033 |
|
|
1,234 |
|
2,104 |
The reduction in valuation reserves was primarily driven by a combination of trade close-out activity and a reallocation of product and deal specific reserves that are now included within the discount rate applied to the derivative cash flows. There was a net increase in CVA due to the extension of the CVA reserve to include margin period of risk on collateralised counterparties and a reclassification of product and deal specific reserves to CVA.
Funding valuation adjustment (FVA)
FVA represents an estimate of the adjustment that a market participant would make to incorporate funding costs and benefits that arise in relation to derivative exposures. FVA is calculated as a portfolio level adjustment.
Funding levels are applied to estimated potential future exposures. For uncollateralised derivatives, the modelling of the exposure is consistent with the approach used in the calculation of CVA, and the counterparty contingent nature of the exposure is reflected in the calculation. For collateralised derivatives, the exposure reflects initial margin posting requirements.
Credit valuation adjustments (CVA)
CVA represents an estimate of the adjustment to fair value that a market participant would make to incorporate the counterparty credit risk inherent in derivative exposures. CVA is actively managed by a credit and market risk hedging process, and therefore movements in CVA are partially offset by trading revenue on the hedges.
The CVA is calculated on a portfolio basis reflecting an estimate of the amount a third party would charge to assume the credit risk.
Collateral held under a credit support agreement is factored into the CVA calculation. In such cases where RBS holds collateral against counterparty exposures, CVA is held to the extent that residual risk remains.
Bid-offer
Fair value positions are adjusted to bid (long positions) or offer (short positions) levels, by marking individual cash positions directly to bid or offer or by taking bid-offer reserves calculated on a portfolio basis for derivatives exposures. The bid-offer approach is based on current market spreads and standard market bucketing of risk.
Bid-offer spreads vary by maturity and risk type to reflect different spreads in the market. For positions where there is no observable quote, the bid-offer spreads are widened in comparison to proxies to reflect reduced liquidity or observability. Bid-offer methodologies may also incorporate liquidity triggers whereby wider spreads are applied to risks above pre-defined thresholds.
As permitted by IFRS 13, netting is applied on a portfolio basis to reflect the value at which RBS believes it could exit the portfolio, rather than the sum of exit costs for each of the portfolios individual trades. This is applied where the asset and liability positions are managed as a portfolio for risk and reporting purposes.
The discount rates applied to derivative cash flows in determining fair value reflect any underlying collateral agreements. Collateralised derivatives are generally discounted at the relevant OIS-related rates at an individual trade level. Reserves are held to the extent that the discount rates applied do not reflect all of the terms of the collateral agreements.
Product and deal specific
On initial recognition of financial assets and liabilities valued using valuation techniques incorporating information other than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred. Such amounts are recognised in profit or loss over the life of the transaction; when market data becomes observable; or when the transaction matures or is closed out as appropriate. At 31 December 2018, net gains of £59 million (2017 - £56 million) were carried forward. During the year, net gains of £151 million (2017 - £64 million) were deferred and £148 million (2017 - £80 million) were recognised in the income statement.
Where system generated valuations do not accurately recover market prices, manuals valuation adjustments are applied either at a position or portfolio level. Manual adjustments are subject to the scrutiny of independent control teams and are subject to monthly review by senior management.
Notes on the consolidated accounts
12 Financial instruments valuation: Level 3 ranges of unobservable inputs
|
|
|
|
|
|
|
|
2018 |
|
2017 |
||||
Financial instrument |
|
Valuation Technique |
|
Unobservable inputs |
|
Units |
|
Low |
|
High |
|
Low |
|
High |
Trading assets and Other financial assets |
|
|
|
|
|
|
|
|
|
|
||||
Loans |
|
Price-based |
|
Price |
|
% |
|
0 |
|
132 |
|
0 |
|
101 |
Debt securities |
|
Price-based |
|
Price |
|
GBP |
|
0 |
|
154 |
|
0 |
|
370 |
Equity Shares |
|
Price-based |
|
Price |
|
GBP |
|
0 |
|
24,181 |
|
0 |
|
585,066 |
|
|
Valuation |
|
Discount factor |
|
% |
|
8 |
|
11 |
|
9 |
|
13 |
|
|
Valuation |
|
Fund NAV |
|
% |
|
80 |
|
120 |
|
80 |
|
120 |
Trading liabilities and Other financial liabilities |
|
|
|
|
|
|
|
|
|
|
||||
Customer accounts |
|
DCF based on recoveries |
|
Correlation |
|
% |
|
(45) |
|
99 |
|
(29) |
|
86 |
|
|
|
|
Interest rate |
|
% |
|
(0.36) |
|
1.74 |
|
(0.38) |
|
2.61 |
Debt securities in issue |
|
Price-based |
|
Price |
|
CCY |
|
21 JPY |
|
136 EUR |
|
56 JPY |
|
149 EUR |
|
|
Valuation |
|
Fund NAV |
|
GBP |
|
0 |
|
622 |
|
0 |
|
977 |
Derivative assets and liabilities |
|
|
|
|
|
|
|
|
|
|
||||
Credit derivatives |
|
DCF based on recoveries |
|
Credit spreads |
|
bps |
|
18 |
|
500 |
|
0 |
|
500 |
|
|
Option pricing |
|
Correlation |
|
% |
|
(50) |
|
80 |
|
(50) |
|
80 |
|
|
|
|
Volatility |
|
% |
|
47 |
|
80 |
|
38 |
|
80 |
|
|
|
|
Upfront points |
|
% |
|
0 |
|
100 |
|
0 |
|
99 |
|
|
|
|
Recovery rate |
|
% |
|
10 |
|
40 |
|
10 |
|
40 |
|
|
Price-based |
|
Price |
|
% |
|
90 |
|
110 |
|
|
|
|
Interest rate & FX derivatives |
|
Option pricing |
|
Correlation |
|
% |
|
(45) |
|
99 |
|
(75) |
|
100 |
|
|
|
Volatility |
|
% |
|
1 |
|
76 |
|
0 |
|
292 |
|
Equity derivatives |
|
Option pricing |
|
Correlation |
|
% |
|
(57) |
|
92 |
|
(57) |
|
95 |
|
|
|
|
Forward |
|
Points |
|
864 |
|
7,106 |
|
146 |
|
189 |
|
|
|
|
Volatility |
|
% |
|
1 |
|
49 |
|
7 |
|
11 |
Notes:
(1) The table above presents the range of values for significant inputs used in the valuation of level 3 assets and liabilities. The range represents the highest and lowest values of the input parameters and therefore is not a measure of parameter uncertainty. Movements in the underlying input may have a favourable or unfavourable impact on the valuation depending on the particular terms of the contract and the exposure. For example, an increase in the credit spread of a bond would be favourable for the issuer but unfavourable for the note holder. Whilst RBS indicates where it considers that there are significant relationships between the inputs, their inter-relationships will be affected by macro economic factors including interest rates, foreign exchange rates or equity index levels.
(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.
(3) Price and yield: There may be a range of prices used to value an instrument that may be a direct comparison of one instrument or portfolio with another or, movements in a more liquid instrument may be used to indicate the movement in the value of a less liquid instrument. The comparison may also be indirect in that adjustments are made to the price to reflect differences between the pricing source and the instrument being valued.
(4) Recovery rate: reflects market expectations about the return of principal for a debt instrument or other obligations after a credit event or on liquidation. Recovery rates tend to move conversely to credit spreads.
(5) Valuation: for private equity investments, values may be estimated by looking at past prices of similar stocks and from valuation statements where valuations are usually derived from earnings measures such as EBITDA or net asset value (NAV). Similarly for equity or bond fund investments, prices may be estimated from valuation or credit statements using NAV or similar measures.
(6) Correlation: measures the degree by which two prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. Correlations typically include relationships between: default probabilities of assets in a basket (a group of separate assets), exchange rates, interest rates and other financial variables.
(7) Volatility: a measure of the tendency of a price to change with time.
(8) Interest rate delta: these ranges represent the low/high marks on the relevant discounting curve.
(9) Upfront points: where CDS contracts are standardised, the inherent spread of the trade may exceed the standard premium paid or received under the contract. Upfront points will compensate for the difference between the standard premium and the actual premium at the start of the contract.
(10) RBS does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
Notes on the consolidated accounts
12 Financial instruments valuation: areas of judgment
Whilst the business has simplified, the diverse range of products historically traded by RBS results in a wide range of instruments that are classified into Level 3 of the hierarchy. Whilst the majority of these instruments naturally fall into a particular level, for some products an element of judgment is required. The majority of RBS financial instruments carried at fair value are classified as Level 2. IFRS requires extra disclosures in respect of level 3 instruments.
Active and inactive markets
A key input in the decision making process for the allocation of assets to a particular level is market activity. In general, the degree of valuation uncertainty depends on the degree of liquidity of an input.
Where markets are liquid, little judgment is required. However, when the information regarding the liquidity in a particular market is not clear, a judgment may need to be made. This can be more difficult as assessing the liquidity of a market is not always straightforward. For an equity traded on an exchange, daily volumes of trading can be seen, but for an over-the-counter (OTC) derivative assessing the liquidity of the market with no central exchange is more difficult.
A key related matter is where a market moves from liquid to illiquid or vice versa. Where this change is considered to be temporary, the classification is not changed. For example, if there is little market trading in a product on a reporting date but at the previous reporting date and during the intervening period the market has been considered to be liquid, the instrument will continue to be classified in the same level in the hierarchy. This is to provide consistency so that transfers between levels are driven by genuine changes in market liquidity and do not reflect short term or seasonal effects. Material movements between levels are reviewed quarterly.
The breadth and depth of the IPV data allows for a rules based quality assessment to be made of market activity, liquidity and pricing uncertainty, which assists with the process of allocation to an appropriate level. Where suitable independent pricing information is not readily available, the quality assessment will result in the instrument being assessed as Level 3.
Modelled products
For modelled products the market convention is to quote these trades through the model inputs or parameters as opposed to a cash price equivalent. A mark-to-market is derived from the use of the independent market inputs calculated using RBSs model.
The decision to classify a modelled instrument as Level 2 or 3 will be dependent upon the product/model combination, the currency, the maturity, the observability and quality of input parameters and other factors. All these must be assessed to classify the asset. If an input fails the observability or quality tests then the instrument is considered to be in Level 3 unless the input can be shown to have an insignificant effect on the overall valuation of the product.
The majority of derivative instruments for example vanilla interest rate swaps, foreign exchange swaps and liquid single name credit derivatives are classified as Level 2 as they are vanilla products valued using observable inputs. The valuation uncertainty on these is considered to be low and both input and output testing may be available.
Non-modelled products
Non- modelled products are generally quoted on a price basis and can therefore be considered for each of the three levels. This is determined by the market activity, liquidity and valuation uncertainty of the instruments which is in turn measured from the availability of independent data used by the IPV process to allocate positions to IPV quality levels.
The availability and quality of independent pricing information are considered during the classification process. An assessment is made regarding the quality of the independent information. For example, where consensus prices are used for non- modelled products, a key assessment of the quality of a price is the depth of the number of prices used to provide the consensus price. If the depth of contributors falls below a set hurdle rate, the instrument is considered to be Level 3. This hurdle rate is that used in the IPV process to determine the IPV quality rating. However, where an instrument is generally considered to be illiquid, but regular quotes from market participants exist, these instruments may be classified as Level 2 depending on frequency of quotes, other available pricing and whether the quotes are used as part of the IPV process or not.
For some instruments with a wide number of available price sources, there may be differing quality of available information and there may be a wide range of prices from different sources. In these situations the highest quality source is used to determine the classification of the asset. For example, a tradable quote would be considered a better source than a consensus price.
|
|
2018 |
|
2017 |
||||||||
|
|
Level 3 |
|
Favourable |
|
Unfavourable |
|
Level 3 |
|
Favourable |
|
Unfavourable |
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
120 |
|
10 |
|
(10) |
|
150 |
|
|
|
|
Securities |
|
701 |
|
20 |
|
(10) |
|
853 |
|
30 |
|
(10) |
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
1,487 |
|
120 |
|
(120) |
|
1,340 |
|
140 |
|
(140) |
Foreign exchange |
|
130 |
|
10 |
|
(10) |
|
148 |
|
10 |
|
(10) |
Other |
|
219 |
|
10 |
|
(20) |
|
236 |
|
10 |
|
(20) |
Other financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
136 |
|
10 |
|
(20) |
|
56 |
|
|
|
|
Securities |
|
507 |
|
50 |
|
(30) |
|
505 |
|
20 |
|
(30) |
|
|
3,300 |
|
230 |
|
(220) |
|
3,288 |
|
210 |
|
(210) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
377 |
|
40 |
|
(40) |
|
239 |
|
20 |
|
(20) |
Debt securities in issue |
|
112 |
|
10 |
|
(10) |
|
50 |
|
|
|
|
Short positions |
|
|
|
|
|
|
|
16 |
|
|
|
|
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
808 |
|
70 |
|
(70) |
|
1,104 |
|
120 |
|
(120) |
Foreign exchange |
|
279 |
|
10 |
|
(10) |
|
358 |
|
10 |
|
(10) |
Other |
|
101 |
|
|
|
(10) |
|
156 |
|
10 |
|
(10) |
Other financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities in issue |
|
280 |
|
10 |
|
(10) |
|
262 |
|
10 |
|
(10) |
|
|
1,957 |
|
140 |
|
(150) |
|
2,185 |
|
170 |
|
(170) |
Notes on the consolidated accounts
12 Financial instruments valuation: level 3 sensitivities
The Level 3 sensitivities presented above are calculated at a trade or low level portfolio basis. They are not calculated on an overall portfolio basis and therefore do not reflect the likely potential uncertainty on the portfolio as a whole. The figures are aggregated and do not reflect the correlated nature of some of the sensitivities. In particular, for some of the portfolios the sensitivities may be negatively correlated where a downwards movement in one asset would produce an upwards movement in another, but due to the additive presentation of the above figures this correlation cannot be displayed. The actual potential downside sensitivity of the total portfolio may be less than the non-correlated sum of the additive figures as shown in the above table.
Reasonably plausible alternative assumptions of unobservable inputs are determined based on a specified target level of certainty of 90%. The assessments recognise different favourable and unfavourable valuation movements where appropriate. Each unobservable input within a product is considered separately and sensitivity is reported on an additive basis.
Alternative assumptions are determined with reference to all available evidence including consideration of the following: quality of independent pricing information taking into account consistency between different sources, variation over time, perceived tradability or otherwise of available quotes; consensus service dispersion ranges; volume of trading activity and market bias (e.g. one-way inventory); day 1 profit or loss arising on new trades; number and nature of market participants; market conditions; modelling consistency in the market; size and nature of risk; length of holding of position; and market intelligence.
Other considerations
Whilst certain inputs used to calculate CVA, FVA and own credit adjustments are not based on observable market data, the uncertainty of the inputs is not considered to have a significant effect on the net valuation of the related derivative portfolios and issued debt. The classification of the derivative portfolios and issued debt is not determined by the observability of these inputs and any related sensitivity does not form part of the Level 3 sensitivities presented.
Level 3
The following table shows the movement in level 3 assets and liabilities in the year.
|
2018 |
|
2017 |
||||||
|
Trading |
Other financial |
Total |
Total |
|
Trading |
Other financial |
Total |
Total |
|
assets (3) |
assets (4) |
assets |
liabilities |
|
assets (3) |
assets (4) |
assets |
liabilities |
|
£m |
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
At 1 January (1) |
2,692 |
530 |
3,222 |
2,187 |
|
3,933 |
604 |
4,537 |
2,997 |
Amounts recorded in the income statement (2) |
(147) |
178 |
31 |
(344) |
|
(593) |
21 |
(572) |
(341) |
Amounts recorded in the statement of comprehensive income |
|
23 |
23 |
|
|
|
2 |
2 |
|
Level 3 transfers in |
1,307 |
19 |
1,326 |
419 |
|
679 |
315 |
994 |
530 |
Level 3 transfers out |
(624) |
(1) |
(625) |
(231) |
|
(1,015) |
(3) |
(1,018) |
(672) |
Issuances |
|
|
|
47 |
|
371 |
|
371 |
|
Purchases |
871 |
16 |
887 |
401 |
|
1,788 |
20 |
1,808 |
412 |
Settlements |
(512) |
(3) |
(515) |
(204) |
|
(161) |
|
(161) |
(423) |
Sales |
(930) |
(125) |
(1,055) |
(316) |
|
(2,286) |
(369) |
(2,655) |
(323) |
Foreign exchange and other adjustments |
|
6 |
6 |
(2) |
|
11 |
(29) |
(18) |
5 |
At 31 December |
2,657 |
643 |
3,300 |
1,957 |
|
2,727 |
561 |
3,288 |
2,185 |
Amounts recorded in the income statement in respect of balances held at year end |
|
|
|
|
|
|
|
|
|
- unrealised |
(134) |
158 |
24 |
(330) |
|
(59) |
(21) |
(80) |
595 |
- realised |
(2) |
6 |
4 |
|
|
271 |
5 |
276 |
(100) |
Notes:
(1) Refer to Note 33 for further information on the impact of IFRS9 on classification and basis of preparation, year ended 31 December 2018 prepared under IFRS9 and prior years under IAS39.
(2) There were £185 million net losses on trading assets and liabilities (2017 - £240 million HFT) recorded in income from trading activities. Net losses on other instruments of £190 million (2017 - £9 million gains) were recorded in other operating income and interest income as appropriate.
(3) Trading assets comprise assets held at fair value in trading portfolios.
(4) Other financial assets comprise fair value through other comprehensive income (2017 - available-for-sale), designated at fair value through profit or loss and other fair value through profit or loss.
Notes on the consolidated accounts
12 Financial instruments: fair value of financial instruments not carried at fair value
The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.
|
|
Items where fair value |
|
|
|
|
|
|
|
|
|
|
|
approximates |
|
Carrying |
|
|
Fair value hierarchy level |
||||
|
|
carrying value |
|
value |
|
Fair value |
Level 1 |
|
Level 2 |
|
Level 3 |
2018 |
|
£bn |
|
£bn |
|
£bn |
£bn |
|
£bn |
|
£bn |
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
Cash and balances at central banks |
|
88.9 |
|
|
|
|
|
|
|
|
|
Settlement balances |
|
2.9 |
|
|
|
|
|
|
|
|
|
Loans to banks |
|
0.5 |
|
12.4 |
|
12.4 |
|
|
9.2 |
|
3.2 |
Loans to customers |
|
|
|
305.1 |
|
301.7 |
|
|
0.5 |
|
301.2 |
Other financial assets |
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
11.8 |
|
11.8 |
7.3 |
|
3.0 |
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
Bank deposits |
|
4.2 |
|
19.1 |
|
18.5 |
|
|
13.9 |
|
4.6 |
Customer deposits |
|
307.1 |
|
53.8 |
|
54.6 |
|
|
10.4 |
|
44.2 |
Settlement balances |
|
3.1 |
|
|
|
|
|
|
|
|
|
Other financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
Debt securities in issue |
|
|
|
36.9 |
|
38.6 |
|
|
36.9 |
|
1.7 |
Subordinated liabilities |
|
|
|
9.7 |
|
10.0 |
|
|
9.9 |
|
0.1 |
Other liabilities - notes in circulation |
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
Cash and balances at central banks |
|
98.3 |
|
|
|
|
|
|
|
|
|
Settlement balances |
|
2.5 |
|
|
|
|
|
|
|
|
|
Loans to banks |
|
1.0 |
|
10.5 |
|
10.5 |
|
|
9.1 |
|
1.4 |
Loans to customers |
|
|
|
310.1 |
|
306.8 |
|
|
1.3 |
|
305.5 |
Other financial assets |
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
7.8 |
|
7.9 |
4.3 |
|
1.5 |
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
Bank deposits |
|
4.5 |
|
25.9 |
|
26.0 |
|
|
22.4 |
|
3.6 |
Customer deposits |
|
321.5 |
|
39.8 |
|
39.9 |
|
|
12.9 |
|
27.0 |
Settlement balances |
|
2.8 |
|
|
|
|
|
|
|
|
|
Other financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
Debt securities in issue |
|
|
|
26.0 |
|
27.3 |
|
|
22.2 |
|
5.1 |
Subordinated liabilities |
|
|
|
11.8 |
|
12.6 |
|
|
12.5 |
|
0.1 |
Other liabilities - notes in circulation |
|
2.2 |
|
|
|
|
|
|
|
|
|
Notes on the consolidated accounts
12 Financial instruments: fair value of financial instruments not carried at fair value continued
The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Quoted market values are used where available; otherwise, fair values have been estimated based on discounted expected future cash flows and other valuation techniques. These techniques involve uncertainties and require assumptions and judgments covering prepayments, credit risk and discount rates. Furthermore there is a wide range of potential valuation techniques. Changes in these assumptions would significantly affect estimated fair values. The fair values reported would not necessarily be realised in an immediate sale or settlement.
The assumptions and methodologies underlying the calculation of fair values of financial instruments at the balance sheet date are as follows:
Short-term financial instruments
For certain short-term financial instruments: cash and balances at central banks, items in the course of collection from other banks, settlement balances, items in the course of transmission to other banks, customer demand deposits and notes in circulation, carrying value is a reasonable approximation of fair value.
Loans to banks and customers
In estimating the fair value of net loans to customers and banks measured at amortised cost, RBSs loans are segregated into appropriate portfolios reflecting the characteristics of the constituent loans. Two principal methods are used to estimate fair value:
(a) Contractual cash flows are discounted using a market discount rate that incorporates the current spread for the borrower or where this is not observable, the spread for borrowers of a similar credit standing. This method is used for portfolios where counterparties have external ratings: institutional and corporate lending in NatWest Markets.
(b) Expected cash flows (unadjusted for credit losses) are discounted at the current offer rate for the same or similar products. This approach is adopted for lending portfolios in UK PBB, Ulster Bank RoI, Commercial Banking (SME loans) and Private Banking in order to reflect the homogeneous nature of these portfolios.
For certain portfolios where there are very few or no recent transactions, a bespoke approach is used.
Debt securities
The majority of debt securities are valued using quoted prices in active markets, or using quoted prices for similar assets in active markets. Fair values of the rest are determined using discounted cash flow valuation techniques.
Deposits by banks and customer accounts
Fair values of deposits are estimated using discounted cash flow valuation techniques.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted prices for similar liabilities where available or by reference to valuation techniques, adjusting for own credit spreads where appropriate.
13 Financial instruments - maturity analysis
Remaining maturity
The following table shows the residual maturity of financial instruments, based on contractual date of maturity.
|
|
2018 |
|
2017 |
||||||||
|
|
Less than |
|
More than |
|
|
|
Less than |
|
More than |
|
|
|
|
12 months |
|
12 months |
|
Total |
|
12 months |
|
12 months |
|
Total |
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and balances at central banks |
|
88,897 |
|
|
|
88,897 |
|
98,337 |
|
|
|
98,337 |
Trading assets |
|
49,094 |
|
26,025 |
|
75,119 |
|
66,315 |
|
19,676 |
|
85,991 |
Derivatives |
|
28,503 |
|
104,846 |
|
133,349 |
|
32,372 |
|
128,471 |
|
160,843 |
Settlement balances |
|
2,928 |
|
|
|
2,928 |
|
2,517 |
|
|
|
2,517 |
Loans to banks - amortised cost |
|
12,833 |
|
114 |
|
12,947 |
|
11,424 |
|
93 |
|
11,517 |
Loans to customers - amortised cost |
|
67,354 |
|
237,735 |
|
305,089 |
|
69,832 |
|
240,284 |
|
310,116 |
Other financial assets |
|
11,681 |
|
47,804 |
|
59,485 |
|
8,776 |
|
43,153 |
|
51,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits |
|
7,438 |
|
15,859 |
|
23,297 |
|
10,813 |
|
19,583 |
|
30,396 |
Customer deposits |
|
359,148 |
|
1,766 |
|
360,914 |
|
358,857 |
|
2,459 |
|
361,316 |
Settlement balances |
|
3,066 |
|
|
|
3,066 |
|
2,844 |
|
|
|
2,844 |
Trading liabilities |
|
50,668 |
|
21,682 |
|
72,350 |
|
53,787 |
|
28,195 |
|
81,982 |
Derivatives |
|
29,028 |
|
99,869 |
|
128,897 |
|
32,212 |
|
122,294 |
|
154,506 |
Other financial liabilities |
|
8,240 |
|
31,492 |
|
39,732 |
|
8,467 |
|
21,859 |
|
30,326 |
Subordinated liabilities |
|
299 |
|
10,236 |
|
10,535 |
|
2,383 |
|
10,339 |
|
12,722 |
Notes on the consolidated accounts
13 Financial instruments maturity analysis continued
Assets and liabilities by contractual cash flow maturity
The tables below show the contractual undiscounted cash flows receivable and payable, up to a period of 20 years, including future receipts and payments of interest of financial assets and liabilities by contractual maturity. The balances in the following tables do not agree directly with the consolidated balance sheet, as the tables include all cash flows relating to principal and future coupon payments, presented on an undiscounted basis. The tables have been prepared on the following basis:
Financial assets have been reflected in the time band of the latest date on which they could be repaid, unless earlier repayment can be demanded by RBS. Financial liabilities are included at the earliest date on which the counterparty can require repayment, regardless of whether or not such early repayment results in a penalty. If the repayment of a financial instrument is triggered by, or is subject to, specific criteria such as market price hurdles being reached, the asset is included in the time band that contains the latest date on which it can be repaid, regardless of early repayment.
The liability is included in the time band that contains the earliest possible date on which the conditions could be fulfilled, without considering the probability of the conditions being met.
For example, if a structured note is automatically prepaid when an equity index exceeds a certain level, the cash outflow will be included in the less than three months period, whatever the level of the index at the year end. The settlement date of debt securities in issue, issued by certain securitisation vehicles consolidated by RBS, depends on when cash flows are received from the securitised assets. Where these assets are prepayable, the timing of the cash outflow relating to securities assumes that each asset will be prepaid at the earliest possible date. As the repayments of assets and liabilities are linked, the repayment of assets in securitisations is shown on the earliest date that the asset can be prepaid, as this is the basis used for liabilities.
The principal amounts of financial assets and liabilities that are repayable after 20 years or where the counterparty has no right to repayment of the principal are excluded from the table, as are interest payments after 20 years.
MFVTPL assets of £207.9 billion (2017 - £243.9 billion) and HFT liabilities of £198.3 billion (2017 - £232.9 billion) have been excluded from the following tables.
|
|
0-3 months |
|
3-12 months |
|
1-3 years |
|
3-5 years |
|
5-10 years |
|
10-20 years |
2018 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Assets by contractual maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and balances at central banks |
|
88,897 |
|
|
|
|
|
|
|
|
|
|
Settlement balances |
|
2,928 |
|
|
|
|
|
|
|
|
|
|
Loans to banks - amortised cost |
|
11,920 |
|
925 |
|
106 |
|
|
|
|
|
|
Other financial assets (1) |
|
4,451 |
|
7,397 |
|
14,138 |
|
11,279 |
|
11,826 |
|
2,744 |
Total maturing assets |
|
108,196 |
|
8,322 |
|
14,244 |
|
11,279 |
|
11,826 |
|
2,744 |
Loans to customers - amortised cost |
|
43,096 |
|
32,087 |
|
66,441 |
|
51,839 |
|
66,978 |
|
79,543 |
Derivatives held for hedging |
|
224 |
|
529 |
|
995 |
|
345 |
|
152 |
|
130 |
|
|
151,516 |
|
40,938 |
|
81,680 |
|
63,463 |
|
78,956 |
|
82,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities by contractual maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits |
|
7,417 |
|
21 |
|
13,785 |
|
2,003 |
|
|
|
59 |
Settlement balance |
|
3,066 |
|
|
|
|
|
|
|
|
|
|
Other financial liabilities |
|
1,736 |
|
7,226 |
|
10,724 |
|
11,658 |
|
9,316 |
|
2,029 |
Subordinated liabilities |
|
131 |
|
637 |
|
1,476 |
|
7,532 |
|
1,737 |
|
1,422 |
Other liabilities (2) |
|
2,152 |
|
|
|
|
|
|
|
|
|
|
Total maturing liabilities |
|
14,502 |
|
7,884 |
|
25,985 |
|
21,193 |
|
11,053 |
|
3,510 |
Customer deposits |
|
351,054 |
|
8,114 |
|
1,727 |
|
14 |
|
6 |
|
26 |
Derivatives held for hedging |
|
181 |
|
306 |
|
1,062 |
|
416 |
|
637 |
|
531 |
|
|
365,737 |
|
16,304 |
|
28,774 |
|
21,623 |
|
11,696 |
|
4,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees and commitments notional amount |
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees (3) |
|
3,952 |
|
|
|
|
|
|
|
|
|
|
Commitments (4) |
|
116,843 |
|
|
|
|
|
|
|
|
|
|
|
|
120,795 |
|
|
|
|
|
|
|
|
|
|
For notes to the above table refer to the following page.
Notes on the consolidated accounts
13 Financial instruments maturity analysis continued
|
0-3 months |
3-12 months |
1-3 years |
3-5 years |
5-10 years |
10-20 years |
2017 |
£m |
£m |
£m |
£m |
£m |
£m |
Assets by contractual maturity |
|
|
|
|
|
|
Cash and balances at central banks |
98,337 |
|
|
|
|
|
Settlement balances |
2,517 |
|
|
|
|
|
Loans to banks - amortised cost |
10,792 |
633 |
94 |
|
|
|
Other financial assets (1) |
3,675 |
5,889 |
11,960 |
11,312 |
12,813 |
3,638 |
Total maturing assets |
115,321 |
6,522 |
12,054 |
11,312 |
12,813 |
3,638 |
Loans to customers - amortised cost |
45,898 |
32,031 |
65,077 |
52,016 |
68,500 |
81,995 |
Derivatives held for hedging |
281 |
832 |
1,336 |
334 |
166 |
111 |
|
161,500 |
39,385 |
78,467 |
63,662 |
81,479 |
85,744 |
|
|
|
|
|
|
|
Liabilities by contractual maturity |
|
|
|
|
|
|
Bank deposits |
9,180 |
1,740 |
3,614 |
16,023 |
61 |
71 |
Settlement balances |
2,844 |
|
|
|
|
|
Other financial liabilities |
4,360 |
4,777 |
10,640 |
3,731 |
9,762 |
49 |
Subordinated liabilities |
87 |
2,645 |
1,515 |
1,620 |
7,746 |
2,582 |
Other liabilities (2) |
2,186 |
|
|
|
|
|
Total maturing liabilities |
18,657 |
9,162 |
15,769 |
21,374 |
17,569 |
2,702 |
Customer deposits |
356,340 |
3,843 |
1,052 |
77 |
20 |
28 |
Derivatives held for hedging |
212 |
289 |
1,188 |
526 |
813 |
738 |
|
375,209 |
13,294 |
18,009 |
21,977 |
18,402 |
3,468 |
|
|
|
|
|
|
|
Guarantees and commitments notional amount |
|
|
|
|
|
|
Guarantees (3) |
7,718 |
|
|
|
|
|
Commitments (4) |
121,229 |
|
|
|
|
|
|
128,947 |
|
|
|
|
|
Notes: |
|
(1) |
Other financial assets excludes equity shares. |
(2) |
Other liabilities include notes in circulation. |
(3) |
RBS is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. RBS expects most guarantees it provides to expire unused. |
(4) |
RBS has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by the counterparty. RBS does not expect all facilities to be drawn, and some may lapse before drawdown. |
Notes on the consolidated accounts
14 Loan impairment provisions
Loan exposure and impairment metrics
The table below summarises loans and related credit impairment measures on an IFRS 9 basis at 31 December 2018 and 1 January 2018 and on an IAS 39 basis at 31 December 2017.
|
31 December |
1 January |
31 December |
|
2018 (1) |
2018 (1) |
2017 |
|
£m |
£m |
£m |
Loans - amortised cost |
|
|
|
Stage 1 |
285,985 |
333,929 |
|
Stage 2 |
26,097 |
26,972 |
|
Stage 3 |
7,718 |
11,283 |
|
|
319,800 |
372,184 |
321,633 |
ECL provisions (2) |
|
|
|
- Stage 1 |
285 |
261 |
|
- Stage 2 |
763 |
621 |
|
- Stage 3 |
2,320 |
3,565 |
|
|
3,368 |
4,447 |
3,814 |
ECL provision coverage (3) |
|
|
|
- Stage 1 % |
0.10 |
0.1 |
|
- Stage 2 % |
2.92 |
2.3 |
|
- Stage 3 % |
30.06 |
31.6 |
|
|
1.05 |
1.2 |
1.20 |
Impairment losses |
|
|
|
ECL charge (4) |
398 |
|
530 |
ECL loss rate - annualised (basis points) |
12.45 |
|
16.48 |
Amounts written off |
1,494 |
|
1,210 |
Notes: |
|
(1) |
The analysis tables as at 31 December 2018 include all loans within IFRS 9 ECL scope and exclude debt securities. The comparative table at 1 January 2018 includes loans and debt securities of £50.4 billion, of which £42.7 billion related to debt securities classified as FVOCI. ECL on these debt securities at 1 January 2018 was £28 million, of which £4 million related to those classified as FVOCI. |
(2) |
ECL provisions in the above table are provisions on loan assets only. Other ECL provisions not included, relate to cash, debt securities and contingent liabilities and amount to £28 million, of which £5 million was FVOCI. |
(3) |
ECL provisions coverage is ECL provisions divided by loans - amortised cost. |
(4) |
ECL charge balances in the above table included a £3 million charge relating to other financial assets, of which a £1 million charge related to assets at FVOCI; and a £31 million release related to contingent liabilities. |
Notes on the consolidated accounts
14 Loan impairment provisions continued
Critical accounting policy: Loan impairment provisions
The Groups 2017 loan impairment provisions were established in accordance with IAS 39 in respect of incurred losses. They comprised individual and collective components as more fully explained in the 2017 Annual Report on Form 20-F. In 2018 the loan impairment provisions have been established in accordance with IFRS 9. Accounting policy 14 sets out how the expected loss approach is applied. At 31 December 2018, customer loan impairment provisions amounted to £3,368 million (2017 - £3,814 million). A loan is impaired when there is objective evidence that the cash flows will not occur in the manner expected when the loan was advanced. Such evidence includes changes in the credit rating of a borrower, the failure to make payments in accordance with the loan agreement; significant reduction in the value of any security; breach of limits or covenants; and observable data about relevant macroeconomic measures.
The impairment loss is the difference between the carrying value of the loan and the present value of estimated future cash flows at the loans original effective interest rate.
The measurement of credit impairment under the IFRS expected loss model depends on managements assessment of any potential deterioration in the creditworthiness of the borrower, its modelling of expected performance and the application of economic forecasts. All three elements require judgments that are potentially significant to the estimate of impairment losses. Further information and sensitivity analyses are on Page 119.
IFRS 9 ECL model design principles
To meet IFRS 9 requirements for ECL estimation, PD, LGD and EAD used in the calculations must be:
· Unbiased - material regulatory conservatism has been removed to produce unbiased model estimates;
· Point-in-time - recognise current economic conditions;
· Forward-looking - incorporated into PD estimates and, where appropriate, EAD and LGD estimates; and
· For the life of the loan - all models produce a term structure to allow a lifetime calculation for assets in Stage 2 and Stage 3.
IFRS 9 requires that at each reporting date, an entity shall assess whether the credit risk on an account has increased significantly since initial recognition. Part of this assessment requires a comparison to be made between the current lifetime PD (i.e. the current probability of default over the remaining lifetime) with the equivalent lifetime PD as determined at the date of initial recognition.
The general approach for the IFRS 9 LGD models has been to leverage the Basel LGD models with bespoke IFRS 9 adjustments to ensure unbiased estimates, i.e. use of effective interest rate as the discount rate and the removal of: downturn calibration, indirect costs, other conservatism and regulatory floors.
For Wholesale, while conversion ratios in the historical data show temporal variations, these cannot (unlike in the case of PD and some LGD models) be sufficiently explained by the CCI measure and are presumed to be driven to a larger extent by exposure management practices. Therefore point-in-time best estimates measures for EAD are derived by estimating the regulatory model specification on a rolling five year window.
Approach for multiple economic scenarios (MES)
The base scenario plays a greater part in the calculation of ECL than the approach to MES.
15 Other financial assets
|
Debt securities |
|
|
|
|
|
|
|||||||||
|
Central and local government |
|
Other |
|
|
|
Equity |
|
Other |
|
|
|||||
|
|
UK |
|
US |
|
Other |
|
debt |
|
Total |
|
shares |
|
loans |
|
Total |
2018 |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Mandatory fair value through profit or loss |
|
|
|
|
|
|
|
669 |
|
669 |
|
65 |
|
904 |
|
1,638 |
Fair value through other comprehensive income |
|
17,192 |
|
11,767 |
|
11,329 |
|
5,306 |
|
45,594 |
|
483 |
|
|
|
46,077 |
Amortised cost |
|
6,928 |
|
264 |
|
120 |
|
4,458 |
|
11,770 |
|
|
|
|
|
11,770 |
Total |
|
24,120 |
|
12,031 |
|
11,449 |
|
10,433 |
|
58,033 |
|
548 |
|
904 |
|
59,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as at fair value through profit or loss |
|
|
|
|
|
|
|
|
|
|
|
134 |
|
56 |
|
190 |
Available-for-sale |
|
17,656 |
|
8,461 |
|
11,454 |
|
6,110 |
|
43,681 |
|
287 |
|
|
|
43,968 |
Loans and receivables |
|
|
|
|
|
|
|
3,643 |
|
3,643 |
|
|
|
|
|
3,643 |
Held-to-maturity |
|
4,128 |
|
|
|
|
|
|
|
4,128 |
|
|
|
|
|
4,128 |
Total |
|
21,784 |
|
8,461 |
|
11,454 |
|
9,753 |
|
51,452 |
|
421 |
|
56 |
|
51,929 |
Equity shares classified as fair value through other comprehensive income include the following entities and 2018 dividend income received; VISA Inc. £98 million (dividend of £1 million) and Tradeweb Markets LLC £89 million (dividend of £4 million).
Notes on the consolidated accounts
16 Intangible assets
|
2018 |
|
2017 |
||||
|
Goodwill |
Other (1) |
Total |
Goodwill |
Other (1) |
Total |
|
Cost |
£m |
£m |
£m |
£m |
£m |
£m |
|
At 1 January |
18,039 |
2,259 |
20,298 |
17,756 |
2,095 |
19,851 |
|
Currency translation and other adjustments |
77 |
9 |
86 |
283 |
(3) |
280 |
|
Acquisition of subsidiaries |
48 |
2 |
50 |
|
|
|
|
Additions |
|
364 |
364 |
|
384 |
384 |
|
Disposals and write-off of fully amortised assets |
|
(610) |
(610) |
|
(217) |
(217) |
|
At 31 December |
18,164 |
2,024 |
20,188 |
18,039 |
2,259 |
20,298 |
|
Accumulated amortisation and impairment |
|
|
|
|
|
|
|
At 1 January |
12,481 |
1,274 |
13,755 |
12,198 |
1,173 |
13,371 |
|
Currency translation and other adjustments |
77 |
5 |
82 |
283 |
(5) |
278 |
|
Disposals and write-off of fully amortised assets |
|
(573) |
(573) |
|
(145) |
(145) |
|
Charge for the year |
|
271 |
271 |
|
222 |
222 |
|
Write down of goodwill and other intangible assets |
|
37 |
37 |
|
29 |
29 |
|
At 31 December |
12,558 |
1,014 |
13,572 |
12,481 |
1,274 |
13,755 |
|
Net book value at 31 December |
5,606 |
1,010 |
6,616 |
5,558 |
985 |
6,543 |
|
Note: |
|
(1) |
Principally internally generated software. |
Intangible assets other than goodwill are reviewed for indicators of impairment. In 2018 £37 million (2017 - £29 million) of previously capitalised software was impaired primarily as a result of software which is no longer expected to yield future economic benefit.
The Groups goodwill acquired in business combinations analysed by reportable segment in Note 4, Segmental analysis. It is reviewed annually at 31 December for impairment. No impairment was indicated at 31 December 2018 or 2017.
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 Groups capital targets. In 2018, the methodology was enhanced to reflect legal entity changes in the group. Consequently certain corporate assets, represented primarily by bonds and liquidity assets in Treasury are no longer considered to be directly attributable or directly available to the CGUs. These assets are, therefore, not included in the carrying value of the CGUs, resulting in an increase in the available headroom for some CGUs. 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 recoverable amounts for all CGUs at 31 December 2018 were based on value in use, using managements latest five-year revenue and cost forecasts. The long-term growth rates have been based on expected nominal growth of the CGUs. The pre-tax risk discount rates are based on those observed to be applied to businesses regarded as peers of the CGUs.
Critical accounting policy: Goodwill
Critical estimates
Impairment testing involves a number of judgemental areas: the preparation of cash flow forecasts for periods that are beyond the normal requirements of management reporting; the assessment of discount rates appropriate to each business; estimation of the fair value of the CGUs; and the valuation of separable assets of each business whose goodwill is reviewed.
The sensitivity to the more significant variables in each assessment is presented below.
|
|
|
|
|
Consequential impact of 1% |
Consequential impact of 5% |
Break |
||
|
|
Assumptions |
Recoverable |
adverse movement in |
adverse movement |
even |
|||
|
|
Terminal |
Pre-tax |
amount exceeded |
Discount |
Terminal |
Forecast |
Forecast |
discount |
|
Goodwill |
growth rate |
discount rate |
carrying value |
rate |
growth rate |
Income |
cost |
rate |
31 December 2018 |
£bn |
% |
% |
£bn |
£bn |
£bn |
£bn |
£bn |
% |
UK Personal & Business Banking |
3.4 |
1.8 |
13.1 |
14.4 |
(2.2) |
(1.4) |
(4.0) |
(1.7) |
27.7 |
Commercial & Private Banking |
1.9 |
1.8 |
13.0 |
4.5 |
(1.2) |
(0.8) |
(2.3) |
(1.0) |
17.6 |
RBS International |
0.3 |
1.8 |
12.9 |
0.7 |
(0.2) |
(0.2) |
(0.4) |
(0.1) |
18.5 |
|
|
|
|
|
|
|
|
|
|
31 December 2017 |
|
|
|
|
|
|
|
|
|
UK Personal & Business Banking |
3.4 |
2.0 |
13.1 |
9.7 |
(1.8) |
(1.2) |
(4.0) |
(1.7) |
21.6 |
Commercial & Private Banking |
1.9 |
2.0 |
12.9 |
1.3 |
(1.2) |
(0.8) |
(2.4) |
(1.0) |
13.9 |
RBS International |
0.3 |
2.0 |
11.0 |
0.6 |
(0.4) |
(0.3) |
(0.4) |
(0.1) |
12.8 |
Notes on the consolidated accounts
17 Other assets
Notes: |
|
(1) |
Includes interest in Alawwal Bank £1,179 million (2017 - nil). |
(2) |
Includes interest in Business Growth Fund £387 million (2017 - £316 million). |
18 Other financial liabilities
|
2018 |
2017 |
|
£m |
£m |
Customer deposits |
|
|
- designated as at fair value through profit or loss |
212 |
874 |
Debt securities in issue |
|
|
- designated as at fair value through profit or loss |
2,628 |
3,403 |
- amortised cost |
36,892 |
26,049 |
Total |
39,732 |
30,326 |
19 Subordinated liabilities
|
2018 |
2017 |
|
£m |
£m |
Dated loan capital |
8,262 |
10,394 |
Undated loan capital |
2,127 |
2,169 |
Preference shares |
146 |
159 |
|
10,535 |
12,722 |
Certain preference shares issued by the company are classified as liabilities; these securities remain subject to the capital maintenance rules of the Companies Act 2006.
Notes on the consolidated accounts
19 Subordinated liabilities continued
|
|
Capital |
|
|
|
|
|
|
treatment |
|
2018 |
|
2017 |
Redemptions |
|
£m |
|
£m |
|
£m |
The Royal Bank of Scotland Group plc |
|
|
|
|
|
|
US$350 million 4.70% dated notes 2018 |
|
Ineligible |
|
267 |
|
|
£200 million 7.387% Series 1 non-cumulative convertible £0.01 preference shares |
|
|
|
|
|
|
(partial redemption) |
|
Ineligible |
|
|
|
15 |
US$1,000 million 9.118% Series 1 non-cumulative convertible preference shares of US$0.01 |
|
|
|
|
|
|
(partial redemption) |
|
Ineligible |
|
|
|
48 |
$156 million 7.65% Series F non-cumulative preference shares (callable) |
|
Ineligible |
|
|
|
120 |
$242 million 7.25% Series H non-cumulative preference shares (callable) |
|
Ineligible |
|
|
|
186 |
$751 million 5.75% Series L non cumulative preference shares (callable) |
|
Ineligible |
|
|
|
577 |
US$750 million 6.8% dated notes 2042 (partial redemption) |
|
Ineligible |
|
|
|
360 |
|
|
|
|
267 |
|
1,306 |
|
|
|
|
|
|
|
NatWest Markets Plc |
|
|
|
|
|
|
2,000 million 6.934% dated notes 2018 |
|
Tier 2 |
|
1,743 |
|
|
£103 million 9.5% undated subordinated bonds 2018 (callable August 2018) |
|
Ineligible |
|
103 |
|
|
750 million 4.35% subordinated notes 2017 |
|
Tier 2 |
|
|
|
645 |
CHF124 million 9.375% subordinated notes 2022 |
|
Tier 2 |
|
|
|
101 |
CAD420 million 10.50% subordinated notes 2022 |
|
Tier 2 |
|
|
|
255 |
£564 million 10.50% subordinated notes 2022 |
|
Tier 2 |
|
|
|
489 |
AU$880 million 13.125% subordinated notes 2022 |
|
Tier 2 |
|
|
|
548 |
US$2,132 million 9.50% subordinated notes 2022 |
|
Tier 2 |
|
|
|
1,724 |
100 million floating rate subordinated notes 2017 |
|
Tier 2 |
|
|
|
90 |
£51 million 2.35% + 5 year UK Gilts yield undated subordinated notes (callable December 2012) |
|
Ineligible |
|
|
|
51 |
|
|
|
|
1,846 |
|
3,903 |
|
|
|
|
|
|
|
NatWest Plc |
|
|
|
|
|
|
US$300 million 8.6250% non-cumulative preference shares (callable) |
|
Tier 1 |
|
|
|
178 |
|
|
|
|
|
|
178 |
|
|
|
|
|
|
|
NWM N.V. and subsidiaries |
|
|
|
|
|
|
US$500 million 4.65% dated notes 2018 |
|
Tier 2 |
|
141 |
|
|
US$16 million floating rate notes 2019 (partial redemption) |
|
Tier 2 |
|
2 |
|
|
15 million floating rate notes 2022 (partial redemption) |
|
Tier 2 |
|
|
|
2 |
250 million 4.70% notes 2019 (partial redemption) |
|
Tier 2 |
|
|
|
80 |
US$500 million 4.65% notes 2018 (partial redemption) |
|
Tier 2 |
|
|
|
244 |
|
|
|
|
143 |
|
326 |
|
|
|
|
|
|
|
NatWest Holdings Limited |
|
|
|
|
|
|
£20 million 11.75% perpetual Tier 2 capital (partial redemption) |
|
Tier 2 |
|
|
|
9 |
38 million 11.375% perpetual Tier 2 capital (partial redemption) |
|
Tier 2 |
|
|
|
6 |
|
|
|
|
|
|
15 |
There were no issuances in 2018 or 2017.
Notes on the consolidated accounts
20 Other liabilities
|
|
2018 |
|
2017 |
|
|
£m |
|
£m |
Retirement benefit liabilities (Note 5) |
|
165 |
|
129 |
Deferred tax (Note 7) |
|
454 |
|
583 |
Liabilities of disposal groups |
|
1 |
|
10 |
Notes in circulation |
|
2,152 |
|
2,186 |
Current tax |
|
100 |
|
227 |
Accruals |
|
1,047 |
|
1,074 |
Deferred income |
|
451 |
|
469 |
Other liabilities |
|
1,580 |
|
2,436 |
Provisions for liabilities and charges |
|
3,004 |
|
7,757 |
|
|
8,954 |
|
14,871 |
|
|
Payment |
|
Other |
|
|
|
Litigation |
|
|
|
|
|
|
protection |
|
customer |
|
|
|
and other |
|
|
|
|
Provisions for liabilities and charges |
|
insurance |
|
redress |
|
DoJ (2) |
|
regulatory |
|
Other (3) |
|
Total |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
At 1 January 2018 |
|
1,053 |
|
870 |
|
3,243 |
|
641 |
|
1,950 |
|
7,757 |
Implementation of IFRS 9 on 1 January 2018 |
|
|
|
|
|
|
|
|
|
85 |
|
85 |
ECL impairment charge |
|
|
|
|
|
|
|
|
|
(18) |
|
(18) |
RMBS transfer |
|
|
|
|
|
(683) |
|
683 |
|
|
|
|
Transfer from accruals and other liabilities |
|
|
|
(4) |
|
|
|
(4) |
|
15 |
|
7 |
Currency translation and other movements |
|
|
|
8 |
|
161 |
|
21 |
|
(1) |
|
189 |
Charge to income statement |
|
200 |
|
245 |
|
1,040 |
|
181 |
|
429 |
|
2,095 |
Releases to income statement |
|
|
|
(134) |
|
|
|
(325) |
|
(304) |
|
(763) |
Provisions utilised |
|
(558) |
|
(449) |
|
(3,761) |
|
(414) |
|
(1,166) |
|
(6,348) |
At 31 December 2018 |
|
695 |
|
536 |
|
|
|
783 |
|
990 |
|
3,004 |
Notes:
(1) Refer to Note 33 for further details on the impact of IFRS 9 on classification and basis of preparation.
(2) The RMBS provision has been redesignated DoJ and the remaining RMBS litigation matters transferred to Litigation and other regulatory as of 1 January 2018 to reflect progress on resolution.
(3) Materially comprises provisions relating to property closures and restructuring costs. At 1 January 2018 Other provisions for liabilities and charges included £800 million in respect of a package of remedies that would conclude its State Aid commitments which were paid during 2018.
Payment protection insurance
To reflect the increased volume of complaints following the FCAs introduction of an August 2019 PPI timebar as outlined in FCA announcement CP17/3 and the introduction of new Plevin (unfair commission) complaint handling rules, RBS increased its provision for PPI by £200 million in 2018 (2017 - £175 million, 2016 - £601 million, 2015 - £600 million) bringing the cumulative charge to £5.3 billion, of which £4.2 billion (79%) in redress and £0.4 billion in administrative expenses had been paid by 31 December 2018. Of the £5.3 billion cumulative charge, £4.8 billion relates to redress and £0.5 billion to administrative expenses.
The principal assumptions underlying the Groups provision in respect of PPI sales are: assessment of the total number of complaints that the Group will receive; the proportion of these that will result in redress; and the average cost of such redress. The number of complaints has been estimated from an analysis of the Groups portfolio of PPI policies sold by vintage and by product. Estimates of the percentage of policyholders that will lodge complaints (the take up rate) and of the number of these that will be upheld (the uphold rate) have been established based on recent experience, guidance in FCA policy statements and the expected rate of responses from proactive customer contact. The average redress assumption is based on recent experience and FCA calculation rules. The table below shows the sensitivity of the provision to changes in the principal assumptions (all other assumptions remaining the same).
|
|
|
|
|
|
Sensitivity |
||
Assumptions |
|
Actual to
|
|
Future
|
|
Change in assumption
|
|
Consequential change in
|
Customer initiated complaints (1) |
|
2,779k |
|
260k |
|
+/- 5 |
|
+/- 18 |
Uphold rate (2) |
|
89% |
|
90% |
|
+/- 1 |
|
+/- 4 |
Average redress (3) |
|
£1,664 |
|
£1,512 |
|
+/- 5 |
|
+/- 18 |
Processing costs per claim (4) |
|
£152 |
|
£151 |
|
+/- 20k claims |
|
+/- 3 |
Notes:
(1) Claims received directly by RBS to date, including those received via CMCs and Plevin (commission) only. Excluding those for proactive mailings and where no PPI policy exists.
(2) Average uphold rate per customer initiated claims received directly by RBS including those received via CMCs, to end of timebar for both PPI (mis-sale) and Plevin (commission), excluding those for which no PPI policy exists.
(3) Average redress for PPI (mis-sale) and Plevin (commission) pay-outs.
(4) Processing costs per claim on a valid complaints basis, includes direct staff costs and associated overhead - excluding FOS fees.
Background information for all material provisions is given in Note 27
Critical accounting policy: Provisions for liabilities
Judgment is involved in determining whether an obligation exists, and in estimating the probability, timing and amount of any outflows. Where the Group can look to another party such as an insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is recognised when, and only when, it is virtually certain that it will be received.
Estimates - Provisions are liabilities of uncertain timing or amount, and are recognised when there is a present obligation as a result of a past event, the outflow of economic benefit is probable and the outflow can be estimated reliably. Any difference between the final outcome and the amounts provided will affect the reported results in the period when the matter is resolved.
Notes on the consolidated accounts
21 Non-controlling interests
|
|
|
|
Other |
|
|
|
|
NWM N.V. |
|
interests |
|
Total |
|
|
£m |
|
£m |
|
£m |
At 1 January 2017 |
|
733 |
|
62 |
|
795 |
Currency translation and other adjustments |
|
22 |
|
(5) |
|
17 |
Profit attributable to non-controlling interests |
|
30 |
|
5 |
|
35 |
Dividends paid |
|
(20) |
|
(5) |
|
(25) |
Equity withdrawn and disposals |
|
(59) |
|
|
|
(59) |
At 1 January 2018 |
|
706 |
|
57 |
|
763 |
Currency translation and other adjustments |
|
24 |
|
1 |
|
25 |
Profit/(loss) attributable to non-controlling interests |
|
13 |
|
(21) |
|
(8) |
Dividends paid |
|
|
|
(5) |
|
(5) |
Equity withdrawn and disposals |
|
|
|
(21) |
|
(21) |
At 31 December 2018 |
|
743 |
|
11 |
|
754 |
22 Share capital and other equity
|
|
|
|
|
|
Number of shares |
|
||
Allotted, called up and fully paid |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
|
£m |
|
£m |
|
000s |
|
000s |
|
|
Ordinary shares of £1 |
|
12,049 |
|
11,965 |
|
12,048,605 |
|
11,964,565 |
|
Non-cumulative preference shares of US$0.01 (1) |
|
|
|
|
|
10 |
|
26,459 |
|
Non-cumulative preference shares of 0.01 (2) |
|
|
|
|
|
|
|
2,044 |
|
Non-cumulative preference shares of £1 (3) |
|
|
|
|
|
|
|
54 |
|
Cumulative preference shares of £1 |
|
1 |
|
1 |
|
900 |
|
900 |
|
Notes:
(1) 26 million shares with a total nominal value of £0.2 million were redeemed in December 2018. (2017 46 million shares with a total nominal value of £0.3 million were redeemed).
(2) 2 million shares, with a nominal value of 20 thousand, were redeemed in December 2018.
(3) 54,442 shares, with a nominal value of £54 thousand, were redeemed in December 2018.
Movement in allotted, called up and fully paid ordinary shares |
|
|
|
Number of |
|
£m |
|
shares - 000s |
|
At 1 January 2017 |
|
11,823 |
|
11,823,163 |
Shares issued |
|
142 |
|
141,402 |
At 1 January 2018 |
|
11,965 |
|
11,964,565 |
Shares issued |
|
84 |
|
84,040 |
At 31 December 2018 |
|
12,049 |
|
12,048,605 |
Ordinary shares
There is no authorised share capital under the companys constitution. At 31 December 2018, the directors had authority granted at the 2018 Annual General Meeting to issue up to £600 million nominal of ordinary shares other than by pre-emption to existing shareholders.
On 6 February 2019 RBS held a General Meeting and shareholders approved a special resolution to give authority for the Company to make off-market purchases of ordinary shares from HM Treasury (or its nominee) at such times as the Directors may determine is appropriate. Full details of the proposal are set out in the Circular and Notice of General Meeting.
During 2018, the company allotted and issued the following new ordinary shares of £1 each. The shares were allotted to UBS AG at the subscription prices determined by reference to the average market prices during the sale periods set out below:
Month |
|
Number
|
|
Subscription
|
|
Sale period
|
|
Gross
|
|
Share price
|
April |
|
32 million |
|
261.7265p |
|
23 Feb17 Apr |
|
£85.0m |
|
268.4p |
July |
|
20 million |
|
253.5641p |
|
27 Apr16 Jul |
|
£50.7m |
|
243.7p |
In the three years to 31 December 2018, the percentage increase in issued share capital due to non pre-emptive issuance (excluding employee share schemes) for cash was 2.6%. In addition, the company issued 32 million ordinary shares of £1 each in connection with employee share plans.
In 2018 RBS paid an interim dividend of £241 million, or 2.0p per ordinary share. In addition, the company announced that the directors have recommended a final dividend of 3.5p per ordinary share, and a further special dividend of 7.5p per ordinary share, which are both subject to shareholders approval at the Annual General Meeting on 25 April 2019.
If approved, payment will be made on 30 April 2019 to shareholders on the register at the close of business on 22 March 2019. The ex-dividend date will be 21 March 2019. No dividend was paid in 2017.
Other securities
Additional Tier 1 Notes issued by RBS having the legal form of debt are classified as equity under IFRS. Capital recognised for regulatory purposes cannot be redeemed without Prudential Regulation Authority consent. This includes ordinary shares, preference shares and additional Tier 1 Notes.
These securities entitle the holders to interest which may be deferred at the sole discretion of the company. Repayment of the securities is at the sole discretion of the company on giving between 30 and 60 days notice.
Non-cumulative preference shares
Non-cumulative preference shares entitle their holders to periodic non-cumulative cash dividends at specified fixed rates for each Series payable out of distributable profits of the company.
The company may redeem some or all of the non-cumulative preference shares from time to time at the rates detailed in the table below plus dividends otherwise payable for the then current dividend period to the date of redemption.
In December 2018, the company redeemed in whole the Series S non-cumulative preference shares of US$0.01, Series 1,2 and 3 non-cumulative preference shares of 0.01 and Series 1 non-cumulative preference shares of £1. In December 2017, the company redeemed in whole the Series F, H, L and 1 non-cumulative preference shares of US$0.01 and Series 1 non-cumulative convertible preference shares of £0.01.
Notes on the consolidated accounts
22 Share capital and other equity continued
Non-cumulative preference shares classified as equity |
|
Number of shares |
|
|
|
Redemption |
|
Redemption |
|
in issue |
|
Interest rate |
|
date on or after |
|
price per share |
|
Shares of US$0.01 - Series U |
|
10,130 |
|
floating |
|
29 September 2017 |
|
US$100,000 |
Note:
(1) Those preference shares where distributions are discretionary are classified as equity.
In the event that the non-cumulative convertible preference shares are not redeemed on or before the redemption date, the holder may convert them into ordinary shares in the company at the prevailing market price.
On a winding-up or liquidation of the company, the holders of the non-cumulative preference shares are entitled to receive, out of any surplus assets available for distribution to the companys shareholders (after payment of arrears of dividends on the cumulative preference shares up to the date of repayment) pari passu with the cumulative preference shares and all other shares of the company ranking pari passu with the non-cumulative preference shares as regards participation in the surplus assets of the company, a liquidation distribution per share equal to the applicable redemption price detailed in the table above, together with an amount equal to dividends for the then current dividend period accrued to the date of payment, before any distribution or payment may be made to holders of the ordinary shares as regards participation in the surplus assets of the company.
Except as described above, the holders of the non-cumulative preference shares have no right to participate in the surplus assets of the company.
Holders of the non-cumulative preference shares are not entitled to receive notice of or attend general meetings of the company except if any resolution is proposed for adoption by the shareholders of the company to vary or abrogate any of the rights attaching to the non-cumulative preference shares or proposing the winding-up or liquidation of the company. In any such case, they are entitled to receive notice of and to attend the general meeting of shareholders at which such resolution is to be proposed and are entitled to speak and vote on such resolution (but not on any other resolution). In addition, in the event that, prior to any general meeting of shareholders, the company has failed to pay in full the most recent dividend payment due on the Series U non-cumulative dollar preference shares, the holders shall be entitled to receive notice of, attend, speak and vote at such meeting on all matters together with the holders of the ordinary shares. In these circumstances only, the rights of the holders of the non-cumulative preference shares so to vote shall continue until the company shall have resumed the payment in full of the dividends in arrears.
Paid-in equity - comprises equity instruments issued by the company other than those legally constituted as shares.
|
|
2018 |
|
2017 |
|
2016 |
|
|
£m |
|
£m |
|
£m |
Additional Tier 1 notes (1) |
|
|
|
|
|
|
US$2.0 billion 7.5% notes callable August 2020 (2) |
|
1,278 |
|
1,278 |
|
1,278 |
US$1.15 billion 8% notes callable August 2025 (2) |
|
734 |
|
734 |
|
734 |
US$2.65 billion 8.625% notes callable
|
|
2,046 |
|
2,046 |
|
2,046 |
EMTN notes |
|
|
|
|
|
|
US$564 million 6.99% capital securities
|
|
- |
|
- |
|
275 |
CAD321 million 6.666% notes
|
|
- |
|
- |
|
156 |
Trust preferred issues: subordinated notes (4) |
|
|
|
|
|
|
£93 million 5.6457% 2047
|
|
- |
|
- |
|
93 |
|
|
4,058 |
|
4,058 |
|
4,582 |
Notes:
(1) The coupons on these notes are non-cumulative and payable at the companys discretion. In the event the Groups CET1 ratio falls below 7% any outstanding notes will be converted into ordinary shares at a fixed price. While taking the legal form of debt these notes are classified as equity under IFRS.
(2) Issued in August 2015. In the event of conversion, converted into ordinary shares at a price of $3.606 nominal per £1 share.
(3) Issued in August 2016. In the event of conversion, converted into ordinary shares at a price of $2.284 nominal per £1 share.
(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.
(5) Preferred securities in issue - £93 million RBS Capital Trust D, fixed/floating rate non-cumulative trust preferred securities.
Merger reserve - the merger reserve comprises the premium on shares issued to acquire NatWest, less goodwill amortisation charged under previous GAAP.
Notes on the consolidated accounts
22 Share capital and other equity continued
Capital redemption reserve - under UK companies legislation, when shares are redeemed or purchased wholly or partly out of the companys profits, the amount by which the companys issued share capital is diminished must be transferred to the capital redemption reserve. The capital maintenance provisions of UK companies legislation apply to the capital redemption reserve as if it were part of the companys paid up share capital. On 15 June 2017, the Court of Session approved a reduction of RBSG plc capital so that the amounts which stood to the credit of the capital redemption reserve were transferred to retained earnings.
Own shares held - at 31 December 2018, 8 million ordinary shares of £1 each of the company (2017 - 16 million) were held by employee share trusts in respect of share awards and options granted to employees. During the year, the employee share trusts purchased 25 million ordinary shares and delivered 33 million ordinary shares in satisfaction of the exercise of options and the vesting of share awards under the employee share plans.
RBS optimises capital efficiency by maintaining reserves in subsidiaries, including regulated entities. Certain preference shares and subordinated debt are also included within regulatory capital. The remittance of reserves to the company or the redemption of shares or subordinated capital by regulated entities may be subject to maintaining the capital resources required by the relevant regulator.
UK law prescribes that only the reserves of the company are taken into account for the purpose of making distributions and in determining permissible applications of the share premium account.
23 Leases
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease |
|
|
Finance lease contracts and hire purchase agreements |
|
assets: |
||||||||
|
|
Gross |
|
Present value |
|
Other |
|
Future |
|
Present |
|
future minimum |
Year in which receipt will occur |
|
amounts |
|
adjustments |
|
movements |
|
drawdowns |
|
value |
|
lease rentals |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
3,237 |
|
(208) |
|
(123) |
|
(70) |
|
2,836 |
|
139 |
After 1 year but within 5 years |
|
4,566 |
|
(370) |
|
(100) |
|
|
|
4,096 |
|
325 |
After 5 years |
|
1,935 |
|
(710) |
|
(38) |
|
|
|
1,187 |
|
49 |
Total |
|
9,738 |
|
(1,288) |
|
(261) |
|
(70) |
|
8,119 |
|
513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
3,164 |
|
(212) |
|
(125) |
|
(70) |
|
2,757 |
|
129 |
After 1 year but within 5 years |
|
4,686 |
|
(444) |
|
(94) |
|
|
|
4,148 |
|
257 |
After 5 years |
|
2,062 |
|
(742) |
|
(27) |
|
|
|
1,293 |
|
21 |
Total |
|
9,912 |
|
(1,398) |
|
(246) |
|
(70) |
|
8,198 |
|
407 |
Nature of operating lease assets on the balance sheet |
|
2018 |
|
2017 |
|
£m |
|
£m |
|
Transportation |
|
313 |
|
283 |
Cars and light commercial vehicles |
|
11 |
|
45 |
Other |
|
285 |
|
271 |
|
|
609 |
|
599 |
|
|
2018 |
|
2017 |
|
2016 |
|
|
£m |
|
£m |
|
£m |
Amounts recognised as income and expense |
|
|
|
|
|
|
Finance leases - contingent rental rebate |
|
(44) |
|
(34) |
|
(76) |
Operating leases - minimum rentals payable |
|
233 |
|
221 |
|
239 |
|
|
|
|
|
|
|
Finance lease contracts and hire purchase agreements |
|
|
|
|
|
|
Accumulated allowance for uncollectable minimum receivables |
|
62 |
|
63 |
|
54 |
Residual value exposures
The table below gives details of the unguaranteed residual values included in the carrying value of finance lease receivables and operating lease assets.
|
|
2018 |
|
2017 |
||||||||||||||||
|
|
Year in which residual value will be recovered |
|
Year in which residual value will be recovered |
||||||||||||||||
|
|
|
|
After 1 year |
|
After 2
|
|
|
|
|
|
|
|
After 1 year |
|
After 2
|
|
|
|
|
|
|
Within 1 |
|
but within |
|
but within |
|
After 5 |
|
|
|
Within 1 |
|
but within |
|
but within |
|
After 5 |
|
|
|
|
year |
|
2 years |
|
5 years |
|
years |
|
Total |
|
year |
|
2 years |
|
5 years |
|
years |
|
Total |
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Operating leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- transportation |
|
25 |
|
15 |
|
94 |
|
14 |
|
148 |
|
29 |
|
22 |
|
69 |
|
17 |
|
137 |
- cars and light commercial vehicles |
|
1 |
|
1 |
|
2 |
|
|
|
4 |
|
5 |
|
7 |
|
7 |
|
|
|
19 |
- other |
|
26 |
|
19 |
|
37 |
|
10 |
|
92 |
|
21 |
|
24 |
|
30 |
|
9 |
|
84 |
Finance lease contracts |
|
68 |
|
32 |
|
67 |
|
38 |
|
205 |
|
88 |
|
20 |
|
72 |
|
27 |
|
207 |
Hire purchase agreements |
|
55 |
|
2 |
|
|
|
|
|
57 |
|
38 |
|
2 |
|
1 |
|
|
|
41 |
|
|
175 |
|
69 |
|
200 |
|
62 |
|
506 |
|
181 |
|
75 |
|
179 |
|
53 |
|
488 |
Acting as a lessor, RBS provides asset finance to its customers. It purchases plant, equipment and intellectual property, renting them to customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases.
Notes on the consolidated accounts
24 Structured entities
A structured entity (SE) is an entity that has been designed such that voting or similar rights are not the dominant factor in deciding who controls the entity, for example, when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. SEs are usually established for a specific, limited purpose. They do not carry out a business or trade and typically have no employees. They take a variety of legal forms - trusts, partnerships and companies - and fulfil many different functions. As well as being a key element of securitisations, SEs are also used in fund management activities in order to segregate custodial duties from the provision of fund management advice.
Consolidated structured entities
Securitisations
In a securitisation, assets, or interests in a pool of assets, are transferred generally to an SE which then issues liabilities to third party investors. The majority of securitisations are supported through liquidity facilities or other credit enhancements.
RBS arranges securitisations to facilitate client transactions and undertakes own asset securitisations to sell or to fund portfolios of financial assets. RBS also acts as an underwriter and depositor in securitisation transactions in both client and proprietary transactions.
RBS involvement in client securitisations takes a number of forms. It may: sponsor or administer a securitisation programme; provide liquidity facilities or programme-wide credit enhancement; and purchase securities issued by the vehicle.
Own asset securitisations
In own-asset securitisations, the pool of assets held by the SE is either originated by RBS, or (in the case of whole loan programmes) purchased from third parties.
The table below analyses the asset categories for those own-asset securitisations where the transferred assets continue to be recorded on RBS balance sheet.
|
|
2018 |
|
2017 |
|
||||||||||||
|
|
|
|
Debt securities in issue |
|
|
|
Debt securities in issue |
|
||||||||
|
|
|
|
Held by third |
|
Held by |
|
|
|
|
|
Held by third |
|
Held by |
|
|
|
|
|
Assets |
|
parties |
|
RBS (1) |
|
Total |
|
Assets |
|
parties |
|
RBS (1) |
|
Total |
|
Asset type |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
Mortgages - RoI |
|
2,817 |
|
778 |
|
2,239 |
|
3,017 |
|
4,073 |
|
|
|
4,688 |
|
4,688 |
|
Cash deposits |
|
221 |
|
|
|
|
|
|
|
518 |
|
|
|
|
|
|
|
|
|
3,038 |
|
|
|
|
|
|
|
4,591 |
|
|
|
|
|
|
|
Note:
(1) Debt securities retained by RBS may be pledged with central banks .
Other credit risk transfer securitisations
RBS also transfers credit risk on originated loans and mortgages without the transfer of assets to an SE. As part of this, RBS enters into credit derivative and financial guarantee contracts with consolidated SEs. At 31 December 2018, debt securities in issue by such SEs (and held by third parties) were £596 million (2017 - £398 million). The associated loans and mortgages at 31 December 2018 were £8,402 million (2017 - £6,092 million).
Covered debt programme
Group companies have assigned loans to customers and debt investments to bankruptcy remote limited liability partnerships to provide security for issues of debt securities. RBS retains all of the risks and rewards of these assets and continues to recognise them. The partnerships are consolidated by RBS and the related covered bonds included within other financial liabilities. At 31 December 2018, £9,446 million (2017 - £8,915) of loans to customers and £478 million (2017 - £76 million) of debt investments provided security for debt securities in issue and other borrowing of £6,627 million (2017 - £6,307 million).
Notes on the consolidated accounts
24 Structured entities continued
Unconsolidated structured entities
RBSs interests in unconsolidated structured entities are analysed below
|
|
2018 |
|
2017 |
||||||||
|
|
Asset backed |
|
Investment |
|
|
|
Asset backed |
|
Investment |
|
|
|
|
securitisation |
|
funds |
|
|
|
securitisation |
|
funds |
|
|
|
|
vehicles |
|
and other |
|
Total |
|
vehicles |
|
and other |
|
Total |
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Trading assets and derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets |
|
590 |
|
164 |
|
754 |
|
884 |
|
131 |
|
1,015 |
Derivative assets |
|
495 |
|
325 |
|
820 |
|
660 |
|
117 |
|
777 |
Derivative liabilities |
|
(223) |
|
(332) |
|
(555) |
|
(561) |
|
(131) |
|
(692) |
Total |
|
862 |
|
157 |
|
1,019 |
|
983 |
|
117 |
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non trading assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans to customers |
|
1,636 |
|
544 |
|
2,180 |
|
1,243 |
|
120 |
|
1,363 |
Other financial assets |
|
4,461 |
|
|
|
4,461 |
|
3,888 |
|
141 |
|
4,029 |
Total |
|
6,097 |
|
544 |
|
6,641 |
|
5,131 |
|
261 |
|
5,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity facilities/loan commitments |
|
2,138 |
|
213 |
|
2,351 |
|
2,117 |
|
455 |
|
2,572 |
Guarantees |
|
3 |
|
10 |
|
13 |
|
229 |
|
5 |
|
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum exposure |
|
9,100 |
|
924 |
|
10,024 |
|
8,460 |
|
838 |
|
9,298 |
25 Asset transfers
Transfers that do not qualify for derecognition
RBS enters into securities repurchase, lending and total return transactions in accordance with normal market practice which includes the provision of additional collateral if necessary. Under standard terms in the UK and US markets, the recipient has an unrestricted right to sell or repledge collateral, subject to returning equivalent securities on settlement of the transaction.
Securities sold under repurchase transactions and transactions with the substance of securities repurchase agreements are not derecognised if RBS retains substantially all the risks and rewards of ownership. The fair value (and carrying value) of securities transferred under such transactions included on the balance sheet, are set out below. All of these securities could be sold or repledged by the holder.
The following assets have failed derecognition (1) |
|
2018 |
|
2017 |
|
£m |
|
£m |
|
Trading assets |
|
14,020 |
|
10,463 |
Other financial assets |
|
9,890 |
|
13,717 |
|
|
23,910 |
|
24,180 |
Note:
(1) Associated liabilities were £23,222 million (2017 - £23,692 million).
Assets pledged as collateral
The Group pledges collateral with its counterparties in respect of derivative liabilities and bank and other borrowings.
Assets pledged against liabilities |
|
2018 |
|
2017 |
|
£m |
|
£m |
|
Trading assets |
|
35,571 |
|
36,631 |
Loans to banks - amortised cost |
|
1,050 |
|
738 |
Loans to customers - amortised cost |
|
25,930 |
|
31,312 |
Other financial assets |
|
713 |
|
3,397 |
|
|
63,264 |
|
72,078 |
|
|
|
|
|
Liabilities secured by assets |
|
|
|
|
Bank deposits |
|
16,326 |
|
20,226 |
Derivatives |
|
21,884 |
|
22,956 |
|
|
38,210 |
|
43,182 |
Notes on the consolidated accounts
26 Capital resources
Under Capital Requirements Regulation (CRR), regulators within the European Union monitor capital on a legal entity basis, with local transitional arrangements on the phasing in of end-point CRR.
The capital resources based on the PRA transitional basis for Bank are set out below.
|
|
PRA transitional basis |
||
|
|
2018 |
|
2017 |
|
|
£m |
|
£m |
Shareholders equity (excluding non-controlling interests) |
|
|
|
|
Shareholders equity |
|
45,736 |
|
48,330 |
Preference shares - equity |
|
(496) |
|
(2,565) |
Other equity instruments |
|
(4,058) |
|
(4,058) |
|
|
41,182 |
|
41,707 |
|
|
|
|
|
Regulatory adjustments and deductions |
|
|
|
|
Own credit |
|
(405) |
|
(90) |
Defined benefit pension fund adjustment |
|
(394) |
|
(287) |
Cash flow hedging reserve |
|
191 |
|
(227) |
Deferred tax assets |
|
(740) |
|
(849) |
Prudential valuation adjustments |
|
(494) |
|
(496) |
Goodwill and other intangible assets |
|
(6,616) |
|
(6,543) |
Expected losses less impairments |
|
(654) |
|
(1,286) |
Foreseeable ordinary and special dividends |
|
(1,326) |
|
|
Other regulatory adjustments |
|
(105) |
|
28 |
|
|
(10,543) |
|
(9,750) |
|
|
|
|
|
CET1 capital |
|
30,639 |
|
31,957 |
|
|
|
|
|
Additional Tier 1 (AT1) capital |
|
|
|
|
Qualifying instruments and related share premium |
|
4,051 |
|
4,041 |
Qualifying instruments and related share premium subject to phase out |
|
1,393 |
|
3,416 |
Qualifying instruments issued by subsidiaries and held by third parties subject to phase out |
|
140 |
|
140 |
AT1 capital |
|
5,584 |
|
7,597 |
|
|
|
|
|
Tier 1 capital |
|
36,223 |
|
39,554 |
|
|
|
|
|
Qualifying Tier 2 capital |
|
|
|
|
Qualifying instruments and related share premium |
|
6,386 |
|
6,501 |
Qualifying instruments issued by subsidiaries and held by third parties |
|
1,565 |
|
1,876 |
Tier 2 capital |
|
7,951 |
|
8,377 |
|
|
|
|
|
Total regulatory capital |
|
44,174 |
|
47,931 |
It is RBS policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, RBS has regard to the supervisory requirements of the PRA. The PRA uses capital ratios as a measure of capital adequacy in the UK banking sector, comparing a banks capital resources with its risk-weighted assets (the assets and off-balance sheet exposures are weighted to reflect the inherent credit and other risks); by international agreement, the Pillar 1 capital ratios should be not less than 8% with a Common Equity Tier 1 component of not less than 4.5%. RBS has complied with the PRAs capital requirements throughout the year.
A number of subsidiaries and sub-groups within RBS, principally banking entities, are subject to various individual regulatory capital requirements in the UK and overseas. Furthermore, the payment of dividends by subsidiaries and the ability of members of RBS to lend money to other members of RBS may be subject to restrictions such as local regulatory or legal requirements, the availability of reserves and financial and operating performance.
Notes on the consolidated accounts
27 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December 2018. Although RBS is exposed to credit risk in the event of a customers failure to meet its obligations, the amounts shown do not, and are not intended to, provide any indication of RBSs expectation of future losses.
|
|
|
|
More than |
|
More than |
|
|
|
|
|
|
|
|
|
|
1 year but |
|
3 years but |
|
|
|
|
|
|
|
|
Less than |
|
less than |
|
less than |
|
Over |
|
|
|
|
|
|
1 year |
|
3 years |
|
5 years |
|
5 years |
|
2018 |
|
2017 |
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees and assets pledged as collateral security |
|
1,296 |
|
414 |
|
250 |
|
1,992 |
|
3,952 |
|
7,718 |
Other contingent liabilities |
|
1,111 |
|
582 |
|
211 |
|
1,148 |
|
3,052 |
|
3,391 |
Standby facilities, credit lines and other commitments |
|
61,105 |
|
20,934 |
|
32,535 |
|
5,305 |
|
119,879 |
|
124,941 |
Contingent liabilities and commitments |
|
63,512 |
|
21,930 |
|
32,996 |
|
8,445 |
|
126,883 |
|
136,050 |
Banking commitments and contingent obligations, which have been entered into on behalf of customers and for which there are corresponding obligations from customers, are not included in assets and liabilities. RBSs maximum exposure to credit loss, in the event of its obligation crystallising and all counterclaims, collateral or security proving valueless, is represented by the contractual nominal amount of these instruments included in the table above. These commitments and contingent obligations are subject to RBSs normal credit approval processes.
Guarantees - RBS gives guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that RBS will meet a customers specified obligations to third party if the customer fails to do so. The maximum amount that RBS could be required to pay under a guarantee is its principal amount as in the table above. RBS expects most guarantees to expire unused.
Other contingent liabilities - these include standby letters of credit, supporting customer debt issues and contingent liabilities relating to customer trading activities such as those arising from performance and customs bonds, warranties and indemnities.
Standby facilities and credit lines - under a loan commitment, RBS agrees to make funds available to a customer in the future. Loan commitments, which are usually for a specified term, may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and unutilised overdraft facilities.
Other commitments - these include documentary credits, which are commercial letters of credit providing for payment by RBS to a named beneficiary against presentation of specified documents, forward asset purchases, forward deposits placed and undrawn note issuance and revolving underwriting facilities, and other short-term trade related transactions.
Contractual obligations for future expenditure not provided for in the accounts
The following table shows contractual obligations for future expenditure not provided for in the accounts at the year end.
|
|
2018 |
|
2017 |
|
|
£m |
|
£m |
Operating leases |
|
|
|
|
Minimum rentals payable under non-cancellable leases (1) |
|
|
|
|
- within 1 year |
|
232 |
|
220 |
- after 1 year but within 5 years |
|
736 |
|
696 |
- after 5 years |
|
1,721 |
|
1,676 |
|
|
2,689 |
|
2,592 |
Capital expenditure on property, plant and equipment |
|
17 |
|
18 |
Contracts to purchase goods or services (2) |
|
541 |
|
682 |
|
|
3,247 |
|
3,292 |
Notes:
(1) Predominantly property leases.
(2) Of which due within 1 year: £253 million (2017 - £276 million).
Notes on the consolidated accounts
27 Memorandum items continued
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, the Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in the Groups financial statements. The Group earned fee income of £257 million (2017 - £244 million; 2016 - £251 million) from these activities.
The Financial Services Co mpensati on Scheme
The Financial Services Compensation Scheme (FSCS), the UKs statutory fund of last resort for customers of authorised financial services firms, pays compensation if a firm is unable to meet its obligations. The FSCS funds compensation for customers by raising management expenses levies and compensation levies on the industry. In relation to protected deposits, each deposit-taking institution contributes towards these levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year (which runs from 1 April to 31 March), subject to annual maxima set by the Prudential Regulation Authority. In addition, the FSCS has the power to raise levies on a firm that has ceased to participate in the scheme and is in the process of ceasing to be authorised for the costs that it would have been liable to pay had the FSCS made a levy in the financial year it ceased to be a participant in the scheme.
The FSC had borrowed from HM Treasury to fund compensation costs associated with the failure of Bradford & Bingley, Heritable Bank, Kaupthing Singer & Friedlander, Landsbanki Icesave and London Scottish Bank plc. The industry has now repaid all outstanding loans with the final £4.7 billion being repaid in June 2018. The loan was interest bearing with the reference rate being the higher of 12 month LIBOR plus 111 basis points or the relevant gilt rate for the equivalent cost of borrowing from HMT.
RBS Group has accrued £1.8 million for its share of estimated FSCS levies.
Litigation, investigations and reviews
The Royal Bank of Scotland Group plc (the company or RBSG) 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 United States (US), the European Union (EU) and other jurisdictions.
RBS recognises a provision for a liability in relation to these Matters when it is probable that an outflow of economic benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the amount of the obligation.
In many proceedings and investigations, it is not possible to determine whether any loss is probable or to estimate reliably the amount of any loss, either as a direct consequence of the relevant proceedings and investigations or as a result of adverse impacts or restrictions on RBSs reputation, businesses and operations. Numerous legal and factual issues may need to be resolved, including through potentially lengthy discovery and document production exercises and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a liability can reasonably be estimated for any claim. RBS cannot predict if, how, or when such claims will be resolved or what the eventual settlement, damages, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages.
There are situations where RBS may pursue an approach that in some instances leads to a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implications of continuing to contest liability, or in order to take account of the risks inherent in defending claims or investigations, even for those Matters for which RBS believes it has credible defences and should prevail on the merits. The uncertainties inherent in all such Matters affect the amount and timing of any potential outflows for both Matters with respect to which provisions have been established and other contingent liabilities.
The future outflow of resources in respect of any Matter may ultimately prove to be substantially greater than or less than the aggregate provision that RBS has recognised. Where (and as far as) liability cannot be reasonably estimated, no provision has been recognised.
Other than those discussed below, no member of the Group is or has been involved in governmental, legal or regulatory proceedings (including those which are pending or threatened) that are expected to be material, individually or in aggregate. RBS expects that in future periods, additional provisions, settlement amounts and customer redress payments will be necessary, in amounts that are expected to be substantial in some instances.
For a discussion of certain risks associated with the Groups litigation, investigations and reviews, see the Risk Factor relating to legal, regulatory and governmental actions and investigations set out on page 274 .
Litigation
Residential mortgage-backed securities (RMBS) litigation in the US
RBS companies continue to defend RMBS-related claims in the US in which plaintiffs allege that certain disclosures made in connection with the relevant offerings of RMBS contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the RMBS were issued. The remaining RMBS lawsuits against RBS companies consist of cases filed by the Federal Home Loan Banks of Boston and Seattle and the Federal Deposit Insurance Corporation that together involve the issuance of less than US$1 billion of RMBS issued primarily from 2005 to 2007. In addition, NatWest Markets Securities Inc. previously agreed to settle a purported RMBS class action entitled New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al. for US$55.3 million, which has been paid into escrow pending court approval of the settlement.
London Interbank Offered Rate (LIBOR) and other rates litigation
NatWest Markets Plc and certain other members of the Group, including RBSG, are defendants in a number of class actions and individual claims pending in the US (primarily in the United States District Court for the Southern District of New York (SDNY)) with respect to the setting of LIBOR and certain other benchmark interest rates. The complaints allege that certain members of the Group and other panel banks violated various federal laws, including the US commodities and antitrust laws, and state statutory and common law, as well as contracts, by manipulating LIBOR and prices of LIBOR-based derivatives in various markets through various means.
Several class actions relating to USD LIBOR, as well as more than two dozen non-class actions concerning USD LIBOR, are part of a coordinated proceeding in the SDNY. In December 2016, the SDNY held that it lacks personal jurisdiction over NatWest Markets Plc with respect to certain claims. As a result of that decision, all Group companies have been dismissed from each of the USD LIBOR-related class actions (including class actions on behalf of over-the-counter plaintiffs, exchanged-based purchaser plaintiffs, bondholder plaintiffs, and lender plaintiffs), but six non-class cases in the coordinated proceeding remain pending against Group defendants. The dismissal of Group companies for lack of personal jurisdiction is the subject of a pending appeal to the United States Court of Appeals for the Second Circuit.
Among the non-class claims dismissed by the SDNY in December 2016 were claims that the Federal Deposit Insurance Corporation (FDIC) had asserted on behalf of certain failed US banks. On 10 July 2017, the FDIC, on behalf of 39 failed US banks, commenced substantially similar claims against RBS companies and others in the High Court of Justice of England and Wales. The action alleges that the defendants breached
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English and European competition law as well as asserting common law claims of fraud under US law.
In addition, there are two class actions relating to JPY LIBOR and Euroyen TIBOR, both pending before the same judge in the SDNY. In the first class action, which relates to Euroyen TIBOR futures contracts, the court dismissed the plaintiffs antitrust claims in March 2014, but declined to dismiss their claims under the Commodity Exchange Act for price manipulation, and the case is proceeding in the discovery phase. The second class action relates to other derivatives allegedly tied to JPY LIBOR and Euroyen TIBOR. The court dismissed that case on 10 March 2017 on the ground that the plaintiffs lack standing. The plaintiffs have commenced an appeal of that decision.
There is also a class action relating to the Singapore Interbank Offered Rate and Singapore Swap Offer Rate pending in the SDNY. In that case, the court denied defendants motion to dismiss on 5 October 2018. The courts ruling would permit certain antitrust claims to proceed against NatWest Markets Plc and other non-RBS defendants, however, in November 2018, the defendants filed another motion to dismiss plaintiffs claims.
Four other class action complaints were filed against RBS companies in the SDNY, each relating to a different reference rate. In the case relating to Pound Sterling LIBOR, the court dismissed all claims against RBS companies, for various reasons, on 21 December 2018, and plaintiffs are seeking reconsideration of that decision. In the case relating to the Australian Bank Bill Swap Reference Rate, the court dismissed all claims against RBS companies for lack of personal jurisdiction on 26 November 2018, but plaintiffs have filed an amended complaint, which will be the subject of a further motion to dismiss. In the case relating to Euribor, the court dismissed all claims against RBS companies for lack of personal jurisdiction on 21 February 2017. In the case relating to Swiss Franc LIBOR, the court dismissed all claims against all defendants on various grounds on 25 September 2017, but held that it has personal jurisdiction over NatWest Markets Plc and allowed the plaintiffs to replead their complaint. Defendants renewed motion to dismiss the amended complaint relating to Swiss Franc LIBOR remains pending.
NatWest Markets Plc has also been named as a defendant in a motion to certify a class action relating to LIBOR in the Tel Aviv District Court in Israel.
NatWest Markets Plc is defending a claim in the High Court in London brought by London Bridge Holdings Ltd and others, in which the claimants allege LIBOR manipulation in connection with the sale of interest rate hedging products. The sum claimed in that case is £446.7 million.
On 4 February 2019, a claim was issued against NatWest Markets Plc by London Borough of Newham, in respect of certain lender option borrower option (LOBO) loans.
Details of UK litigation claims in relation to the alleged mis-sale of interest rate hedging products (IRHPs) involving LIBOR-related allegations are set out under Interest rate hedging products litigation on page 236.
In January 2019, a class action antitrust complaint was filed in the SDNY alleging that the defendants (USD ICE LIBOR panel banks and affiliates) have conspired to suppress USD ICE LIBOR from 2014 to the present by submitting incorrect information to ICE about their borrowing costs. The RBS defendants are RBSG, NatWest Markets Plc, NatWest Markets Securities Inc., and NatWest Plc.
FX antitrust litigation
NatWest Markets Plc and certain other members of the Group, including RBSG, are defendants in several cases relating to NatWest Markets Plcs foreign exchange (FX) business, each of which is pending before the same federal judge in the SDNY.
In 2015, RBS companies paid US$255 million to settle the consolidated antitrust class action on behalf of persons who entered into over-the-counter FX transactions with defendants or who traded FX instruments on exchanges. That settlement received final court approval in August 2018. On 7 November 2018, some members of the settlement class who opted out of the settlement filed their own non-class complaint in the SDNY asserting antitrust claims against RBS companies and others. On 31 December 2018, some of the same claimants, as well as others, filed proceedings in the High Court in London, asserting competition claims against NatWest Markets Plc and several other banks.
Two other FX-related class actions remain pending. First, there is a class action on behalf of consumers and end-user businesses, which is proceeding in the discovery phase following the SDNYs denial of the defendants motions to dismiss in March 2018. Second, there is a class action on behalf of indirect purchasers of FX instruments (which plaintiffs define as persons who transacted FX instruments with retail foreign exchange dealers that transacted directly with defendant banks). That case is also proceeding in discovery following the SDNYs denial of defendants motion to dismiss on 25 October 2018.
RBS companies have also been named as defendants in two motions to certify FX-related class actions in the Tel Aviv District Court in Israel.
Certain other foreign exchange transaction related claims have been or may be threatened against RBS companies. RBS cannot predict whether any of these claims will be pursued, but expects that some may.
US Treasury securities antitrust litigation
NatWest Markets Securities Inc. is a defendant in a consolidated antitrust class action pending in the SDNY on behalf of persons who transacted in US Treasury securities or derivatives based on such instruments, including futures and options. The plaintiffs allege that defendants rigged the US Treasury securities auction bidding process to deflate prices at which they bought such securities and colluded to increase the prices at which they sold such securities to plaintiffs. The defendants motion to dismiss this matter remains pending.
Swaps antitrust litigation
NatWest Markets Plc and other members of the Group, including RBSG, as well as a number of other interest rate swap dealers, are defendants in several cases pending in the SDNY alleging violations of the US antitrust laws in the market for interest rate swaps. There is a consolidated class action complaint on behalf of persons who entered into interest rate swaps with the defendants, as well as non-class action claims by three swap execution facilities (TeraExchange, Javelin, and trueEx). The plaintiffs allege that the swap execution facilities would have successfully established exchange-like trading of interest rate swaps if the defendants had not unlawfully conspired to prevent that from happening through boycotts and other means. Discovery in these cases is ongoing.
In addition, on 8 June 2017, TeraExchange filed a complaint against RBS companies, including RBSG, as well as a number of other credit default swap dealers, in the SDNY. TeraExchange alleges it would have established exchange-like trading of credit default swaps if the defendant dealers had not engaged in an unlawful antitrust conspiracy. On 1 October 2018, the court dismissed all claims against RBS companies.
Madoff
NatWest Markets N.V. (NWM N.V.) is a defendant in two actions filed by Irving Picard, as trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC, in bankruptcy court in New York. In both cases, the trustee alleges that certain transfers received by NatWest Markets N.V. amounted to fraudulent conveyances that should be clawed back for the benefit of the Madoff estate.
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In the primary action, filed in December 2010, the trustee originally sought to recover US$75.8 million in redemptions that NWM N.V. allegedly received from certain Madoff feeder funds and US$162.1 million that NWM N.V. allegedly received from certain swap counterparties. In August 2018, the trustee voluntarily dismissed a portion of this claim (relating to US$74.6 million received from certain swap counterparties) without prejudice to-refiling at a later date. Otherwise this action remains pending before the bankruptcy court, where it will in due course be the subject of a motion to dismiss. In the second action, filed in October 2011, the trustee seeks to recover an additional US$21.8 million. In November 2016, the bankruptcy court dismissed this case on international comity grounds, and that decision is currently on appeal to the United States Court of Appeals for the Second Circuit.
Thornburg adversary proceeding
Certain RBS companies were defendants in an adversary proceeding filed in the US bankruptcy court in Maryland by the trustee for TMST, Inc. (formerly known as Thornburg Mortgage, Inc.). The trustee sought recovery of transfers made under certain restructuring agreements as avoidable fraudulent and preferential transfers. On 26 October 2018, the bankruptcy court approved a US$23.5 million settlement of this matter. RBS companies have paid this settlement amount, which was covered by a provision existing as of 30 September 2018.
Interest rate hedging products and similar litigation
RBS is dealing with a number of active litigation claims in the UK in relation to the alleged mis-selling of interest rate hedging products (IRHPs). In general claimants allege that the relevant IRHPs were mis-sold to them, with some also alleging that misrepresentations were made in relation to LIBOR. Claims have been brought by customers who were considered under the UK Financial Conduct Authority (FCA) redress programme for IRHPs, as well as customers who were outside of the scope of that programme, which was closed to new entrants on 31 March 2015. RBS remains exposed to potential claims from customers who were either ineligible to be considered for redress or who are dissatisfied with their redress offers.
Property Alliance Group (PAG) v NatWest Markets Plc was the leading case before the English High Court involving both IRHP mis-selling and LIBOR misconduct allegations. The amount claimed was £34.8 million and the trial ended in October 2016. In December 2016 the Court dismissed all of PAGs claims. PAG appealed that decision, and the Court of Appeals judgment dismissing the appeal was handed down on 2 March 2018. On 24 July 2018 the Supreme Court declined the request from PAG for permission to appeal an aspect of the judgment relating to implied representations of Sterling LIBOR rates. The Court of Appeals decision may impact other IRHP and LIBOR-related cases currently pending in the English courts, some of which involve substantial amounts.
Separately, NatWest Markets Plc is defending claims filed in France by five French local authorities relating to structured interest rate swaps. The plaintiffs allege, among other things, that the swaps are void for being illegal transactions, that they were mis-sold, and that information / advisory duties were breached. One of the claims is now at an end following the Court of Appeals dismissal of the claim, and is not being appealed to the Supreme Court. Three of the claims were also dismissed but are subject to appeal to the Supreme Court. The fifth claim remains to be heard before the lower courts.
Tax dispute
HMRC issued a tax assessment in 2012 against NatWest Markets Plc for approximately £86 million regarding a value-added-tax (VAT) matter in relation to the trading of European Union Allowances (EUAs) by an RBS joint venture subsidiary in 2009. RBS has lodged an appeal, which is still to be heard, before the First-tier Tribunal (Tax), a specialist tax tribunal, challenging the assessment (the Tax Dispute). In the event that the assessment is upheld, interest and costs would be payable, and a penalty of up to 100 per cent of the VAT held to have been legitimately denied by HMRC could also be levied. Separately, RBS is a named defendant in civil proceedings before the High Court brought in 2015 by ten companies (all in liquidation) (the Liquidated Companies) and their respective liquidators (together, the Claimants). The Liquidated Companies previously traded in EUAs in 2009 and are alleged to be defaulting traders within (or otherwise connected to) the EUA supply chains forming the subject of the Tax Dispute. The Claimants claim approximately £71.4 million plus interest and costs and allege that NatWest Markets Plc dishonestly assisted the directors of the Liquidated Companies in the breach of their statutory duties and/or knowingly participated in the carrying on of the business of the Liquidated Companies with intent to defraud creditors. The trial in that matter concluded on 20 July 2018 and judgment is awaited.
US Anti-Terrorism Act litigation
NatWest Plc is defending lawsuits filed in the United States District Court for the Eastern District of New York by a number of US nationals (or their estates, survivors, or heirs) who were victims of terrorist attacks in Israel. The plaintiffs allege that NatWest Plc is liable for damages arising from those attacks pursuant to the US Anti-Terrorism Act because NatWest Plc previously maintained bank accounts and transferred funds for the Palestine Relief & Development Fund, an organisation which plaintiffs allege solicited funds for Hamas, the alleged perpetrator of the attacks.
In October 2017, the trial court dismissed claims against NatWest Plc with respect to two of the 18 terrorist attacks at issue. On 14 March 2018, the trial court granted a request by NatWest Plc for leave to file a renewed summary judgment motion in respect of the remaining claims, which has now been filed. No trial date has been set.
NatWest Markets N.V. and certain other financial institutions, are defendants in several actions pending in the United States District Courts for the Eastern and Southern Districts of New York, filed by a number of US nationals (or their estates, survivors, or heirs), most of whom are or were US military personnel, who were killed or injured in attacks in Iraq between 2003 and 2011. NatWest Markets Plc is also a defendant in some of these cases.
The attacks at issue in the cases were allegedly perpetrated by Hezbollah and certain Iraqi terror cells allegedly funded by the Islamic Republic of Iran. According to the plaintiffs allegations, the 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 Iraqi terror cells, in violation of the US Anti-Terrorism Act, by agreeing to engage in stripping of transactions initiated by the Iranian banks so that the Iranian nexus to the transactions would not be detected. The first of these actions was filed in the United States District Court for the Eastern District of New York in November 2014. On 27 July 2018, the magistrate judge in that case issued a report to the district court recommending that the district court deny the defendants pending motion to dismiss. NatWest Markets N.V. has requested that the district court grant the motion to dismiss notwithstanding the magistrates recommendation. The other actions are either subject to a pending motion to dismiss, or will be the subject of such a motion in due course.
Securities underwriting litigation
NatWest Markets Securities Inc. is an underwriter defendant in several securities class actions in the US in which plaintiffs generally allege that an issuer of public debt or equity securities, as well as the underwriters of the securities (including NatWest Markets Securities Inc.), are liable to purchasers for misrepresentations and omissions made in connection with the offering of such securities.
Investigations and reviews
RBSs businesses and financial condition can be affected by the actions
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of various governmental and regulatory authorities in the UK, the US, the EU and elsewhere. RBS has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities, including in the UK, the US, the EU and elsewhere, on an ongoing and regular basis, and in response to informal and formal inquiries or investigations, regarding operational, systems and control evaluations and issues including those related to compliance with applicable laws and regulations, including consumer protection, business conduct, competition/anti-trust, anti-bribery, anti-money laundering and sanctions regimes.
The NatWest Markets business in particular has been providing, and continues to provide, information regarding a variety of matters, including, for example, the setting of benchmark rates and related derivatives trading, conduct in the foreign exchange market, and various issues relating to the issuance, underwriting, and sales and trading of fixed-income securities, including structured products and government securities, some of which have resulted, and others of which may result, in investigations or proceedings.
Any matters discussed or identified during such discussions and inquiries may result in, among other things, further inquiry or investigation, other action being taken by governmental and regulatory authorities, increased costs being incurred by RBS, remediation of systems and controls, public or private censure, restriction of RBSs business activities and/or fines. Any of the events or circumstances mentioned in this paragraph or below could have a material adverse effect on RBS, its business, authorisations and licences, reputation, results of operations or the price of securities issued by it.
RBS is co-operating fully with the investigations and reviews described below.
RMBS and other securitised products investigations
In the US, RBS companies have in recent years been involved in investigations relating to, among other things, issuance, underwriting and trading in RMBS and other mortgage-backed securities and collateralised debt obligations (CDOs).
Investigations by the US Department of Justice (DoJ) and certain state attorneys general relating to the issuance and underwriting of RMBS were resolved in 2018. Certain other state attorneys general have sought information regarding similar issues, and RBS is aware that at least one such investigation is ongoing.
In October 2017, NatWest Markets Securities Inc. entered into a non-prosecution agreement (NPA) with the United States Attorney for the District of Connecticut (USAO) in connection with alleged misrepresentations to counterparties relating to secondary trading in various forms of asset-backed securities. As part of the NPA, the USAO agreed not to file criminal charges relating to certain conduct and information described in the NPA if NatWest Markets Securities Inc. complies with the terms of the NPA. In October 2018, NatWest Markets Securities Inc. agreed to a six-month extension of the NPA while the USAO reviews the circumstances of an unrelated matter reported during the course of the NPA.
US mortgages - loan repurchase matters
RBSs NatWest Markets business in North America was a purchaser of non-agency residential mortgages in the secondary market, and an issuer and underwriter of non-agency RMBS, and , in some circumstances, made certain representations and warranties regarding the characteristics of the underlying loans. As a result, NatWest Markets may be, or may have been, contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of such representations and warranties. Depending on the extent to which such loan repurchase related claims are pursued against and not rebutted by NatWest Markets on timeliness or other grounds, the aggregate potential impact on RBS, if any, may be material.
Foreign exchange related investigations
In 2014 and 2015, NatWest Markets Plc paid significant penalties to resolve investigations into its FX business by the FCA, the CFTC, the DoJ, and the Board of Governors of the Federal Reserve System (Federal Reserve). As part of its plea agreement with the DoJ, NatWest Markets Plc pled guilty to a one-count information charging an antitrust conspiracy occurring between as early as December 2007 to at least April 2010. NatWest Markets Plc admitted that it knowingly, through one of its euro/US dollar currency traders, joined and participated in a conspiracy to eliminate competition in the purchase and sale of the euro/US dollar currency pair exchanged in the FX spot market. On 5 January 2017, the United States District Court for the District of Connecticut imposed a sentence on NatWest Markets Plc consisting of a US$395 million fine and a three-year probation, which among other things, prohibits NatWest Markets Plc from committing another crime in violation of US law or engaging in the FX trading practices that form the basis for the charged crime and requires NatWest Markets Plc to implement a compliance program designed to prevent and detect the unlawful conduct at issue and to strengthen its compliance and internal controls as required by other regulators (including the FCA and the CFTC). A violation of the terms of probation could lead to the imposition of additional penalties.
As part of the settlement with the Federal Reserve, NatWest Markets Plc and NatWest Markets Securities Inc. entered into a cease and desist order (the FX Order). In the FX Order, which is publicly available and will remain in effect until terminated by the Federal Reserve, NatWest Markets Plc and NatWest Markets Securities Inc. agreed to take certain remedial actions with respect to FX activities and certain other designated market activities, including the creation of an enhanced written internal controls and compliance program, an improved compliance risk management program, and an enhanced internal audit program. NatWest Markets Plc and NatWest Markets Securities Inc. are obligated to implement and comply with these programs as approved by the Federal Reserve, and are also required to conduct, on an annual basis, a review of applicable compliance policies and procedures and a risk-focused sampling of key controls.
NatWest Markets Plc 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. 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.
FCA review of RBSs treatment of SMEs
In 2014, the FCA appointed an independent Skilled Person under section 166 of the Financial Services and Markets Act 2000 to review RBSs treatment of SME customers whose relationship was managed by RBSs Global Restructuring Group (GRG) in the period 1 January 2008 to 31 December 2013.
The Skilled Person delivered its final report to the FCA during September 2016, and the FCA published an update in November 2016. In response, RBS announced redress steps for SME customers in the UK and the Republic of Ireland that were in GRG between 2008 and 2013. These steps were (i) an automatic refund of certain complex fees; and (ii) a new complaints process, overseen by an independent third party. The complaints process closed on 22 October 2018 for new complaints in the UK and, with the exception of a small cohort of potential complainants for whom there is an extended deadline, on 31 December 2018 for new complaints in the Republic of Ireland.
RBS made a provision of £400 million in 2016, in respect of the above redress steps, of which £270 million had been utilised by 31 December 2018. An additional provision of £50 million was taken at 31 December 2018 reflecting the increased costs of the complaints process.
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Litigation, investigations and reviews
The FCA published a summary of the Skilled Persons report in November 2017. The UK House of Commons Treasury Select Committee, seeking to rely on Parliamentary powers, published the full version of the Skilled Persons report on 20 February 2018. On 31 July 2018, the FCA confirmed that it had concluded its investigation and that it does not intend to take disciplinary or prohibitory action against any person in relation to these matters. It has subsequently indicated that it will shortly publish a final summary of its investigative work.
Investment advice review
As a result of an FSA review in 2013, the FCA required RBS to carry out a past business review and customer contact exercise on a sample of historic customers who received investment advice on certain lump sum products, during the period from March 2012 until December 2012. The review was conducted by an independent Skilled Person under section 166 of the Financial Services and Markets Act 2000. Redress was paid to certain customers in that sample group.
RBS later agreed with the FCA that it would carry out a wider review/remediation exercise relating to certain investment, insurance and pension sales from 1 January 2011 to 1 April 2015. That exercise is materially complete. Phase 2 (covering sales in 2010) started in April 2018 and was targeted for completion by the end of 2018, however the deadline has now been extended to April 2019.
In addition, RBS agreed with the FCA that it would carry out a remediation exercise, for a specific customer segment who were sold a particular structured product. Redress was paid to certain customers who took out the structured product.
RBS provisions in relation to these matters totalled £206 million as at 31 December 2018, of which £144 million had been utilised by that date.
Packaged accounts
RBS has had dedicated resources in place since 2013 to investigate and resolve packaged account complaints on an individual basis. RBS provisions for this matter totalled £ 444 million as at 31 December 2018. The FCA conducted a thematic review of packaged bank accounts across the UK from October 2014 to April 2016, the results of which were published in October 2016. RBS made amendments to its sales process and complaints procedures to address the findings from that review.
FCA investigation into RBSs compliance with the Money Laundering Regulations 2007
On 21 July 2017, the FCA notified RBS that it was undertaking an investigation into RBSs compliance with the Money Laundering Regulations 2007 in relation to certain customers. Following amendment to the scope of the investigation, there are currently two areas under review: (1) compliance with Money Laundering Regulations in respect of Money Service Business customers; and (2) the Suspicious Transactions regime in relation to the events surrounding particular customers. The investigations in both areas are assessing both criminal and civil culpability. RBS is cooperating with the investigations, including responding to several information requests from the FCA.
Systematic Anti-Money Laundering Programme assessment
In December 2018, the FCA commenced a Systematic Anti-Money Laundering Programme assessment of RBS. RBS is responding to requests for information from the FCA.
Payment Protection Insurance (PPI)
Since 2011, RBS has been implementing the FCAs policy statement for the handling of complaints about the mis-selling of PPI (Policy Statement 10/12). In August 2017, the FCAs new rules and guidance on PPI complaints handling (Policy Statement 17/3) came into force. The Policy Statement introduced new so called Plevin rules, under which customers may be eligible for redress if the bank earned a high level of commission from the sale of PPI, but did not disclose this detail at the point of sale. The Policy Statement also introduced a two year PPI deadline, due to expire in August 2019, before which new PPI complaints must be made. RBS is implementing the Policy Statement.
RBS has made provisions totalling £5.3 billion to date for PPI claims, including an additional provision of £200 million taken at Q3 2018, reflecting greater than predicted complaints volumes. Of the £5.3 billion cumulative provision, £4.7 billion had been utilised by 31 December 2018.
FCA mortgages market study
In December 2016, the FCA launched a market study into the provision of mortgages. On 4 May 2018 the interim report was published. This found that competition was working well for many customers but also proposed remedies to help customers shop around more easily for mortgages. Following a period of consultation, the final report is due to be published in Q1 2019.
FCA strategic review of retail banking models
On 11 May 2017 the FCA announced a strategic review of retail banking models. The FCA used the review to understand how these models operate, including how free if in credit banking is paid for and the impact of changes such as increased use of digital channels and reduced branch usage.
On 18 December 2018, the FCA published its final report containing a number of findings, including that personal current accounts are an important source of competitive advantage for major banks. Following the review, the FCA is to continue to monitor retail banking models, analyse new payments business models and undertake exploratory work to understand certain aspects of SME banking.
US/Swiss tax programme
In December 2015, Coutts & Co Ltd., a member of the Group incorporated in Switzerland, entered into a non-prosecution agreement (the NPA) with the DoJ. This was entered into as part of the DoJs programme for Swiss banks, related to its investigations of the role that Swiss banks played in concealing the assets of US tax payers in offshore accounts (US related accounts). 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 the DoJs 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.
Since the signing of the NPA in 2015, Coutts & Co Ltd has identified and disclosed to the DoJ a number of US related accounts that were not included in its original submission supporting the NPA. Coutts & Co Ltd is in discussions with the DoJ regarding these additional accounts and has agreed with the DoJ to undertake additional review work, which is ongoing.
Enforcement proceedings and investigations in relation to Coutts & Co Ltd
In February 2017, the Swiss Financial Market Supervisory Authority (FINMA) took enforcement action against Coutts & Co Ltd with regard to failures of money laundering checks and controls on certain client accounts that were connected with the Malaysian sovereign wealth fund, 1MDB, and were held with Coutts & Co Ltd. FINMA accordingly required Coutts & Co Ltd to disgorge profits of CHF 6.5 million. There are two administrative criminal proceedings pending before the Swiss Finance Department against two former employees of Coutts & Co Ltd. In addition, the Monetary Authority of Singapore (MAS)s supervisory examination of Coutts & Co Ltds Singapore branch revealed breaches of anti-money laundering requirements. MAS imposed on Coutts & Co Ltd financial penalties amounting to SGD 2.4 million in December 2016.
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In addition, Coutts & Co Ltd continues to assist with investigations and enquiries from authorities where requested to do so.
Regulator requests concerning certain historic Russian transactions
Media coverage in 2017 highlighted an alleged money laundering scheme involving Russian entities between 2010 and 2014. Allegedly certain European banks, including RBS and 16 other UK based financial institutions, and certain US banks, were involved in processing certain transactions associated with this scheme. RBS has responded to requests for information from the FCA, PRA and regulators in other jurisdictions.
Review and investigation of treatment of tracker mortgage customers in Ulster Bank Ireland DAC
In December 2015, the Central Bank of Ireland (CBI) announced that it had written to a number of lenders requiring them to put in place a robust plan and framework to review the treatment of customers who have been sold mortgages with a tracker interest rate or with a tracker interest rate entitlement. The CBI stated that the intended purpose of the review was to identify any cases where customers contractual rights under the terms of their mortgage agreements were not fully honoured, or where lenders did not fully comply with various regulatory requirements and standards regarding disclosure and transparency for customers. The CBI has required Ulster Bank Ireland DAC (UBI DAC), a member of the Group incorporated in the Republic of Ireland, to participate in this review and UBI DAC is co-operating with the CBI in this regard. UBI DAC submitted its phase 2 report to the CBI in March 2017, identifying impacted customers. The redress and compensation phase (phase 3) commenced in Q4 2017 and is ongoing.
RBS has made provisions totalling 297 million (£266 million) to date for this matter. Of the 297 million (£266 million) cumulative provision, 211million (£189 million) had been utilised by 31 December 2018.
Separately, in April 2016, the CBI notified UBI DAC that it was also commencing an investigation under its Administrative Sanctions Procedure into suspected breaches of the Consumer Protection Code 2006 during the period 4 August 2006 to 30 June 2008 in relation to certain customers who switched from tracker mortgages to fixed rate mortgages. This investigation is ongoing and UBI DAC continues to co-operate with the CBI.
As part of an internal review of the wider retail and commercial loan portfolios extending from the tracker mortgage examination programme, UBI DAC identified further legacy business issues. A programme is ongoing to identify and remediate impacted customers. RBS has made provisions totalling 167 million (£150 million) based on expected remediation and project costs of which 41 million (£37 million) had been utilised by 31 December 2018.
28 Analysis of the net investment in business interests and intangible assets
|
2018 |
2017 |
2016 |
Acquisitions and disposals |
£m |
£m |
£m |
Fair value given for businesses acquired (1) |
(113) |
(131) |
(87) |
Additional investment in associates |
(9) |
|
|
Net outflow of cash in respect of acquisitions |
(122) |
(131) |
(87) |
Net assets/(liabilities) sold |
|
177 |
(400) |
Non-cash consideration |
|
(15) |
(5) |
Profit on disposal |
|
155 |
22 |
Net cash and cash equivalents disposed |
|
|
55 |
Net inflow/(outflow) of cash in respect of disposals |
|
317 |
(328) |
Dividends received from associates |
5 |
(1) |
9 |
Cash expenditure on intangible assets |
(364) |
(384) |
(480) |
Net (outflow)/inflow |
(481) |
(199) |
(886) |
Note:
(1) 2018 includes the purchase of Free agent.
29 Analysis of changes in financing during the year |
|
|
|
|
|
|
|
|
Share capital, share premium, |
|
|
|
|||
|
paid-in equity and merger reserve |
|
Subordinated liabilities |
||||
|
2018 |
2017 |
2016 |
|
2018 |
2017 |
2016 |
|
£m |
£m |
£m |
|
£m |
£m |
£m |
At 1 January |
27,791 |
52,979 |
50,577 |
|
12,722 |
19,419 |
19,847 |
Issue of ordinary shares |
144 |
306 |
300 |
|
|
|
|
Issue of Additional Tier 1 capital notes |
|
|
2,046 |
|
|
|
|
Redemption of paid-in equity |
|
(720) |
(110) |
|
|
|
|
Redemption of subordinated liabilities |
|
|
|
|
(2,258) |
(5,747) |
(3,606) |
Net cash (outflow)/inflow from financing |
144 |
(414) |
2,236 |
|
(2,258) |
(5,747) |
(3,606) |
Transfer to retained earnings |
|
(25,789) |
|
|
|
|
|
Ordinary shares issued in respect of employee share schemes |
80 |
71 |
166 |
|
|
|
|
Redemption of debt preference shares |
|
748 |
|
|
|
|
|
Other adjustments including foreign exchange |
|
196 |
|
|
71 |
(950) |
3,178 |
At 31 December |
28,015 |
27,791 |
52,979 |
|
10,535 |
12,722 |
19,419 |
Notes on the consolidated accounts
Note:
(1) Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £7,302 million (2017 - £6,883 million; 2016 - £6,661 million).
Certain members of RBS are required by law or regulation to maintain balances with the central banks in the jurisdictions in which they operate. These balances are set out below.
|
2018 |
2017 |
2016 |
Bank of England |
£0.9bn |
£0.6bn |
£0.5bn |
De Nederlandsche Bank |
0.1bn |
0.1bn |
0.4bn |
31 Directors and key management remuneration
|
2018 |
2017 |
Directors remuneration |
£000 |
£000 |
Non Executive Directors |
2,001 |
1,747 |
Chairman and executive directors |
|
|
-emoluments |
4,657 |
5,299 |
|
6,658 |
7,046 |
Amounts receivable under long-term incentive plans and share option plans |
|
1,225 |
Total |
6,658 |
8,271 |
No directors accrued benefits under defined benefit schemes or money purchase schemes during 2018 and 2017.
The executive directors may participate in the companys long-term incentive plans, executive share option and sharesave schemes and details of their interests in the companys shares arising from their participation are given in the Directors remuneration report. Details of the remuneration received by each director are also given in the Directors remuneration report.
Compensation of key management
The aggregate remuneration of directors and other members of key management during the year was as follows:
|
2018 |
2017 |
|
£000 |
£000 |
Short-term benefits |
20,316 |
19,019 |
Post-employment benefits |
82 |
434 |
Share-based payments |
|
3,558 |
|
20,398 |
23,011 |
A new board and committee operating model was introduced in 2018 in order to align with UK ring-fencing requirements. The definition of key management has been revised and now comprises members of the RBSG and NWH Ltd Boards, members of the RBSG and NWH Ltd Executive Committees, and the Chief Executives of NatWest Markets Plc and RBS International. This is on the basis that these individuals have been identified as Persons Discharging Managerial Responsibilities (PDMRs) of RBSG under the new governance structure.
32 Transactions with directors and key management
At 31 December 2018, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in the Group, as defined in UK legislation, were £9,660 in respect of loans to five persons who were directors of the company at any time during the financial period.
For the purposes of IAS 24 Related Party Disclosures, key management comprise directors of the company and Persons Discharging Managerial Responsibilities (PDMRs) of RBSG under the new governance structure. The captions in the Groups primary financial statements include the following amounts attributable, in aggregate, to key management:
|
2018
|
2017
|
Loans to customers |
1,544 |
3,942 |
Customer deposits |
31,361 |
23,619 |
Key management have banking relationships with Group entities which are entered into in the normal course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with other persons of a similar standing or, where applicable, with other employees. These transactions did not involve more than the normal risk of repayment or present other unfavourable features.
Notes on the consolidated accounts
33 Adoption of IFRS 9
The Groups accounting policies have significantly changed on the adoption of IFRS 9 Financial Instruments with effect from 1 January 2018. Prior years are re-presented but there has been no restatement of prior year data.
IFRS 9 changed the classification categories of financial assets from IAS 39. Held-for-trading assets were classified to mandatory fair value through profit or loss; loans and receivables were classified to amortised cost; and available-for-sale assets were classified as fair value through other comprehensive income unless they were deemed to be in a fair value business model or failed the contractual cash flow requirements under IFRS 9. There were no changes in the classification and measurement of financial liabilities.
Loans to customers of £2.1 billion were reclassified from loans and receivables under IAS 39 to fair value through profit or loss under IFRS 9. As a result, their carrying value increased by £583 million.
The net increase to loan impairments under IAS 39 was £616 million under the expected credit loss requirements of IFRS 9, including £85 million under provisions for contingent liabilities and commitments. This includes discontinued activities which is shown below on other assets and other liabilities
The impact on the Groups balance sheet at 1 January 2018 and the key movements in relation to the impact on classification and measurement, expected credit losses and tax are as follow:
|
|
Changes to presentation |
|
IFRS 9 impact |
|
|||
|
|
|
|
|
|
|
|
|
|
|
Held-for-trading |
|
|
|
|
|
|
|
31 December |
exported to |
|
30 December |
Classification |
Expected |
|
1 January |
|
2017 |
trading |
New |
2017 |
& |
credit |
|
2018 |
|
(IAS 39) |
assets/liabilities |
presentation |
re-presented |
measurement |
losses |
Tax |
(IFRS 9) |
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
Assets |
|
|
|
|
|
|
|
|
Cash and balances at central banks |
98,337 |
|
|
98,337 |
|
(1) |
|
98,336 |
Trading assets |
|
85,991 |
|
85,991 |
|
|
|
85,991 |
Derivatives |
|
|
160,843 |
160,843 |
|
|
|
160,843 |
Settlement balances |
|
|
2,517 |
2,517 |
|
|
|
2,517 |
Loans and advances to banks |
30,251 |
(18,734) |
(11,517) |
|
|
|
|
|
Loans to banks - amortised cost |
|
|
11,517 |
11,517 |
|
(3) |
|
11,514 |
Loans and advances to customers |
349,919 |
(39,747) |
(310,172) |
|
|
|
|
|
Loans to customers - amortised cost |
|
|
310,116 |
310,116 |
(2,191) |
(524) |
|
307,401 |
Debt securities |
78,933 |
(27,481) |
(51,452) |
|
|
|
|
|
Equity shares |
450 |
(29) |
(421) |
|
|
|
|
|
Other financial assets |
|
|
51,929 |
51,929 |
2,752 |
(3) |
|
54,678 |
Settlement balances |
2,517 |
|
(2,517) |
|
|
|
|
|
Derivatives |
160,843 |
|
(160,843) |
|
|
|
|
|
Intangible assets |
6,543 |
|
|
6,543 |
|
|
|
6,543 |
Property, plant and equipment |
4,602 |
|
(4,602) |
|
|
|
|
|
Deferred tax |
1,740 |
|
(1,740) |
|
|
|
|
|
Assets of disposal groups |
195 |
|
(195) |
|
|
|
|
|
Other assets |
3,726 |
|
6,537 |
10,263 |
|
|
25 |
10,288 |
Total assets |
738,056 |
|
|
738,056 |
561 |
(531) |
25 |
738,111 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits by banks |
46,898 |
(16,502) |
(30,396) |
|
|
|
|
|
Bank deposits |
|
|
30,396 |
30,396 |
|
|
|
30,396 |
Customer accounts |
398,036 |
(36,720) |
(361,316) |
|
|
|
|
|
Customer deposits |
|
|
361,316 |
361,316 |
|
|
|
361,316 |
Debt securities in issue |
30,559 |
(233) |
(30,326) |
|
|
|
|
|
Settlement balances |
2,844 |
|
|
2,844 |
|
|
|
2,844 |
Trading liabilities |
|
81,982 |
|
81,982 |
|
|
|
81,982 |
Short positions |
28,527 |
(28,527) |
|
|
|
|
|
|
Derivatives |
154,506 |
|
|
154,506 |
|
|
|
154,506 |
Other financial liabilities |
|
|
30,326 |
30,326 |
|
|
|
30,326 |
Subordinated liabilities |
12,722 |
|
|
12,722 |
|
|
|
12,722 |
Other liabilities |
14,871 |
|
|
14,871 |
|
85 |
41 |
14,997 |
Total liabilities |
688,963 |
|
|
688,963 |
|
85 |
41 |
689,089 |
|
|
|
|
|
|
|
|
|
Total equity |
49,093 |
|
|
49,093 |
561 |
(616) |
(16) |
49,022 |
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
738,056 |
|
|
738,056 |
561 |
(531) |
25 |
738,111 |
Notes on the consolidated accounts
33 Adoption of IFRS 9 continued
The table below reflects the impact of IFRS 9 on total equity:
|
Total £m |
At 31 December 2017 - under IAS 39 |
49,093 |
Classification & measurement |
561 |
- Mandatory fair value through profit or loss assets - adjustments following business model reviews (SPPI) (1) |
579 |
- Equity shares held at cost under IAS 39 - fair value adjustments through FVOCI reserve |
48 |
- Additional write-down of amortised cost assets |
(66) |
Expected credit losses |
(616) |
- Amortised cost assets |
(531) |
- Contingent liabilities and commitments |
(85) |
Tax |
(16) |
At 1 January 2018 - under IFRS on transition to IFRS 9 |
49,022 |
Note:
(1) Includes £583 million credit in relation to loans to customers and £4 million debit in relation to debt securities.
34 Related parties
UK Government
On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of The Royal Bank of Scotland Group plc. The UK Governments shareholding is managed by UK Government Investments Limited, a company wholly owned by the UK Government. As a result, the UK Government and UK Government controlled bodies became related parties of the Group.
The Group enters into transactions with many of these bodies on an arms length basis. Transactions include the payment of: taxes principally UK corporation tax (Note 7) and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy (Note 3) and FSCS levies (Note 27) together with banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships.
Bank of England facilities
The Group may participate in a number of schemes operated by the Bank of England in the normal course of business.
Members of the Group that are UK authorised institutions are required to maintain non-interest bearing (cash ratio) deposits with the Bank of England amounting to 0.296% of their average eligible liabilities in excess of £600 million. They also have access to Bank of England reserve accounts: sterling current accounts that earn interest at the Bank of England Rate.
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 arms 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.
(b) RBS recharges The Royal Bank of Scotland Group Pension Fund with the cost of administration services incurred by it. The amounts involved are not material to the Group.
(c) In accordance with IAS 24, transactions or balances between RBS entities that have been eliminated on consolidation are not reported.
(d) The captions in the primary financial statements of the parent company include amounts attributable to subsidiaries. These amounts have been disclosed in aggregate in the relevant notes to the financial statements.
35 Post balance sheet events
On 6 February 2019, a General Meeting of shareholders authorised the directors to agree buy-backs by the company of ordinary shares from HM Treasury. The authority is subject to renewal at the companys forthcoming Annual General Meeting.
Other than this there have been no other significant events between 31 December 2018 and the date of approval of these accounts which would require a change to or additional disclosure in the accounts.
Notes on the consolidated accounts
36 Consolidating financial information
NatWest Markets Plc (NWM Plc) (formerly RBS plc, renamed in 2018) is a wholly owned subsidiary of The Royal Bank of Scotland Group plc (RBSG plc) and was able to offer and sell certain securities in the US from time to time pursuant to a registration statement on Form F-3 filed with the SEC with a full and unconditional guarantee from RBSG plc.
NWM Plc utilises an exception provided in Rule 3-10 of Regulation S-X, and therefore does not file its financial statements with the SEC. In accordance with the requirements to qualify for the exception, presented below is condensed consolidating financial information for:
· RBSG plc on a stand-alone basis as guarantor;
· NWM Plc on a stand-alone basis as issuer;
· Non-guarantor Subsidiaries of RBSG plc and NWM Plc on a combined basis (Subsidiaries);
· Consolidation adjustments; and
· RBSG plc consolidated amounts (RBS Group).
Under IAS 27, RBSG plc and NWM Plc account for investments in their subsidiary undertakings at cost less impairment. Rule 3-10 of Regulation S-X requires a company to account for its investments in subsidiary undertakings using the equity method, which would decrease the results for the period of RBSG plc and increase the results for the period of NWM Plc in the information below by £811 million and £1,546 million respectively for the year ended 31 December 2018 (increase by £92 million and £934 million respectively for the year ended 31 December 2017; increase by £142 million and decrease by £1,316 million respectively for the year ended 31 December 2016).
The net assets of RBSG plc would be decreased and NWM Plc increased in the information below by £8,651 million and £165 million respectively at 31 December 2018 (decreased £6,631 million and £9,319 million respectively at 31 December 2017).
NWM Plc Disposal groups and discontinued operations
NatWest Holdings Limited (NatWest Holdings)
The transfer of the NWM Plc Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and certain parts of Central items and NatWest Markets, included in the ring-fenced bank, to subsidiaries of NatWest Holdings, was completed in 2018. It was followed by the transfer of NatWest Holdings to RBSG plc. Accordingly, all of the NWM Plc activities now undertaken by NatWest Holdings and its subsidiaries were classified as disposal groups in the NWM Plc accounts at 31 December 2017 and presented as discontinued operations until business transferred in 2018, with comparatives re-presented.
Notes on the consolidated accounts
36 Consolidating financial information continued
Income statement
|
|
|
|
Consolidation |
|
For the year ended 31 December 2018 |
RBSG plc |
NWM Plc |
Subsidiaries |
adjustments |
RBS Group |
£m |
£m |
£m |
£m |
£m |
|
Net interest income |
(368) |
(239) |
8,028 |
1,235 |
8,656 |
Non-interest income |
2,794 |
1,002 |
3,740 |
(2,790) |
4,746 |
Total income |
2,426 |
763 |
11,768 |
(1,555) |
13,402 |
Operating expenses |
(85) |
(1,262) |
(6,855) |
(1,443) |
(9,645) |
Impairment releases/(losses) |
1 |
89 |
(429) |
(59) |
(398) |
Operating profit/(loss) before tax |
2,342 |
(410) |
4,484 |
(3,057) |
3,359 |
Tax |
82 |
51 |
(1,322) |
(86) |
(1,275) |
Profit/(loss) from continuing operations |
2,424 |
(359) |
3,162 |
(3,143) |
2,084 |
Profit/(loss) from discontinued operations, net of tax |
|
54 |
|
(54) |
|
Profit/(loss) for the year |
2,424 |
(305) |
3,162 |
(3,197) |
2,084 |
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
Non-controlling interests |
|
|
(38) |
30 |
(8) |
Preference shareholders |
182 |
|
|
|
182 |
Paid-in equity holders |
288 |
|
|
|
288 |
Ordinary shareholders |
1,954 |
(305) |
3,200 |
(3,227) |
1,622 |
|
2,424 |
(305) |
3,162 |
(3,197) |
2,084 |
Statement of comprehensive income
|
|
|
|
Consolidation |
|
For the year ended 31 December 2018 |
RBSG plc |
NWM Plc |
Subsidiaries |
adjustments |
RBS Group |
£m |
£m |
£m |
£m |
£m |
|
Profit/(loss) for the year |
2,424 |
(305) |
3,162 |
(3,197) |
2,084 |
Items that do not qualify for reclassification |
|
|
|
|
|
Remeasurement of retirement benefit schemes |
|
|
|
|
|
- contributions in preparation for ring-fencing (1) |
|
(53) |
(2,000) |
|
(2,053) |
- other movements |
|
(9) |
95 |
|
86 |
Profit on fair value of credit in financial liabilities designated at |
|
|
|
|
|
fair value through profit or loss due to own credit risk |
|
121 |
79 |
|
200 |
Fair value through other comprehensive income (FVOCI) |
|
|
|
|
|
financial assets |
|
22 |
28 |
(2) |
48 |
Tax |
|
(24) |
526 |
|
502 |
|
|
57 |
(1,272) |
(2) |
(1,217) |
Items that do qualify for reclassification |
|
|
|
|
|
Fair value through other comprehensive income (FVOCI) |
|
|
|
|
|
financial assets |
|
(339) |
808 |
(462) |
7 |
Cash flow hedges |
78 |
223 |
(550) |
(332) |
(581) |
Currency translation |
|
168 |
(2,488) |
2,630 |
310 |
Tax |
(15) |
36 |
40 |
128 |
189 |
|
63 |
88 |
(2,190) |
1,964 |
(75) |
Other comprehensive income/(loss) after tax |
63 |
145 |
(3,462) |
1,962 |
(1,292) |
Total comprehensive income/(loss) for the year |
2,487 |
(160) |
(300) |
(1,235) |
792 |
|
|
|
|
|
|
Total comprehensive income/(loss) is attributable to: |
|
|
|
|
|
Non-controlling interests |
|
|
(103) |
120 |
17 |
Preference shareholders |
182 |
|
|
|
182 |
Paid-in equity holders |
288 |
|
|
|
288 |
Ordinary shareholders |
2,017 |
(160) |
(197) |
(1,355) |
305 |
|
2,487 |
(160) |
(300) |
(1,235) |
792 |
Note:
(1) On 17 April 2018 RBS agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of ring-fencing. NatWest Markets Plc cannot continue to be a participant in the Main section and separate arrangements are required for its employees. Under the MoU NatWest Bank made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in convenant. Also under the MoU, NatWest Markets Plc is required to make a £53 million contribution to the NWM section in Q1 2019.
Notes on the consolidated accounts
36 Consolidating financial information continued
Income statement
|
|
|
|
Consolidation |
|
For the year ended 31 December 2017 |
RBSG plc |
NWM Plc |
Subsidiaries |
adjustments |
RBS Group |
£m |
£m |
£m |
£m |
£m |
|
Net interest income |
203 |
(26) |
6,157 |
2,653 |
8,987 |
Non-interest income |
1,390 |
909 |
(674) |
2,521 |
4,146 |
Total income |
1,593 |
883 |
5,483 |
5,174 |
13,133 |
Operating expenses |
(122) |
(1,601) |
(3,946) |
(4,732) |
(10,401) |
Impairment releases/(losses) |
|
77 |
(370) |
(200) |
(493) |
Operating profit/(loss) before tax |
1,471 |
(641) |
1,167 |
242 |
2,239 |
Tax |
(187) |
168 |
(853) |
48 |
(824) |
Profit/(loss) from continuing operations |
1,284 |
(473) |
314 |
290 |
1,415 |
(Loss)/profit from discontinued operations, net of tax |
|
(510) |
|
510 |
|
Profit/(loss) for the year |
1,284 |
(983) |
314 |
800 |
1,415 |
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
Non-controlling interests |
|
|
5 |
30 |
35 |
Preference shareholders |
234 |
|
|
|
234 |
Paid-in equity holders |
390 |
|
|
4 |
394 |
Ordinary shareholders |
660 |
(983) |
309 |
766 |
752 |
|
1,284 |
(983) |
314 |
800 |
1,415 |
Statement of comprehensive income
|
|
|
|
Consolidation |
|
For the year ended 31 December 2017 |
RBSG plc |
NWM Plc |
Subsidiaries |
adjustments |
RBS Group |
£m |
£m |
£m |
£m |
£m |
|
Profit/(loss)for the year |
1,284 |
(983) |
314 |
800 |
1,415 |
Items that do not qualify for reclassification |
|
|
|
|
|
Profit on remeasurement of retirement benefit schemes |
|
4 |
86 |
|
90 |
Loss on fair value of credit in financial liabilities designated at |
|
|
|
|
|
fair value through profit or loss due to own credit risk |
|
(68) |
(58) |
|
(126) |
Tax |
|
(18) |
8 |
|
(10) |
|
|
(82) |
36 |
|
(46) |
Items that do qualify for reclassification |
|
|
|
|
|
Available-for-sale financial assets |
|
52 |
(341) |
315 |
26 |
Cash flow hedges |
(204) |
(424) |
(24) |
(417) |
(1,069) |
Currency translation |
|
(22) |
495 |
(373) |
100 |
Tax |
38 |
93 |
20 |
105 |
256 |
|
(166) |
(301) |
150 |
(370) |
(687) |
Other comprehensive (loss)/income after tax |
(166) |
(383) |
186 |
(370) |
(733) |
Total comprehensive income/(loss) for the year |
1,118 |
(1,366) |
500 |
430 |
682 |
|
|
|
|
|
|
Total comprehensive income/(loss) is attributable to: |
|
|
|
|
|
Non-controlling interests |
|
|
|
52 |
52 |
Preference shareholders |
234 |
|
|
|
234 |
Paid-in equity holders |
390 |
|
|
4 |
394 |
Ordinary shareholders |
494 |
(1,366) |
500 |
374 |
2 |
|
1,118 |
(1,366) |
500 |
430 |
682 |
Notes on the consolidated accounts
36 Consolidating financial information continued
Income statement
|
|
|
|
Consolidation |
|
For the year ended 31 December 2016 |
RBSG plc |
NWM Plc |
Subsidiaries |
adjustments |
RBS Group |
£m |
£m |
£m |
£m |
£m |
|
Net interest income |
267 |
4 |
6,050 |
2,387 |
8,708 |
Non-interest income |
(4,945) |
1,066 |
(5,099) |
12,860 |
3,882 |
Total income |
(4,678) |
1,070 |
951 |
15,247 |
12,590 |
Operating expenses |
(738) |
(3,864) |
(5,911) |
(5,681) |
(16,194) |
Impairment releases/(losses) |
|
73 |
(4) |
(547) |
(478) |
Operating (loss)/profit before tax |
(5,416) |
(2,721) |
(4,964) |
9,019 |
(4,082) |
Tax |
7 |
(199) |
(827) |
(147) |
(1,166) |
(Loss)/profit from continuing operations |
(5,409) |
(2,920) |
(5,791) |
8,872 |
(5,248) |
(Loss)/profit from discontinued operations, net of tax |
|
(531) |
|
531 |
|
(Loss)/profit for the year |
(5,409) |
(3,451) |
(5,791) |
9,403 |
(5,248) |
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
Non-controlling interests |
|
|
5 |
5 |
10 |
Preference shareholders |
260 |
23 |
|
(23) |
260 |
Paid-in equity holders |
235 |
|
|
9 |
244 |
Dividend access share |
1,193 |
|
|
|
1,193 |
Ordinary shareholders |
(7,097) |
(3,474) |
(5,796) |
9,412 |
(6,955) |
|
(5,409) |
(3,451) |
(5,791) |
9,403 |
(5,248) |
Statement of comprehensive income
|
|
|
|
Consolidation |
|
For the year ended 31 December 2016 |
RBSG plc |
NWM Plc |
Subsidiaries |
adjustments |
RBS Group |
£m |
£m |
£m |
£m |
£m |
|
(Loss)/profit for the year |
(5,409) |
(3,451) |
(5,791) |
9,403 |
(5,248) |
Items that do not qualify for reclassification |
|
|
|
|
|
Profit/(loss) on remeasurement of retirement benefit schemes |
|
63 |
(1,112) |
|
(1,049) |
Tax |
|
(21) |
309 |
|
288 |
|
|
42 |
(803) |
|
(761) |
Items that do qualify for reclassification |
|
|
|
|
|
Available-for-sale financial assets |
|
(61) |
293 |
(326) |
(94) |
Cash flow hedges |
189 |
(40) |
1 |
615 |
765 |
Currency translation |
|
(90) |
709 |
644 |
1,263 |
Tax |
(35) |
28 |
50 |
(149) |
(106) |
|
154 |
(163) |
1,053 |
784 |
1,828 |
Other comprehensive income/(loss) after tax |
154 |
(121) |
250 |
784 |
1,067 |
Total comprehensive (loss)/income for the year |
(5,255) |
(3,572) |
(5,541) |
10,187 |
(4,181) |
|
|
|
|
|
|
Total comprehensive (loss)/income is attributable to: |
|
|
|
|
|
Non-controlling interests |
|
|
87 |
34 |
121 |
Preference shareholders |
260 |
23 |
|
(23) |
260 |
Paid-in equity holders |
235 |
|
|
9 |
244 |
Dividend access share |
1,193 |
|
|
|
1,193 |
Ordinary shareholders |
(6,943) |
(3,595) |
(5,628) |
10,167 |
(5,999) |
|
|
|
|
|
|
|
(5,255) |
(3,572) |
(5,541) |
10,187 |
(4,181) |
Notes on the consolidated accounts
36 Consolidating financial information continued
Balance sheet
|
|
|
|
Consolidation |
|
At 31 December 2018 |
RBSG plc |
NWM Plc |
Subsidiaries |
adjustments |
RBS Group |
£m |
£m |
£m |
£m |
£m |
|
Assets |
|
|
|
|
|
Cash and balances at central banks |
|
11,095 |
77,802 |
|
88,897 |
Trading assets |
|
61,990 |
13,228 |
(99) |
75,119 |
Derivatives |
543 |
134,291 |
3,710 |
(5,195) |
133,349 |
Settlement balances |
|
1,421 |
1,507 |
|
2,928 |
Loans to banks - amortised cost |
|
454 |
12,527 |
(34) |
12,947 |
Loans to customers - amortised cost |
|
7,908 |
297,200 |
(19) |
305,089 |
Amount due from holding company and fellow subsidiaries |
22,791 |
11,800 |
70,638 |
(105,229) |
|
Other financial assets |
241 |
10,995 |
48,481 |
(232) |
59,485 |
Intangible assets |
|
|
6,314 |
302 |
6,616 |
Other assets |
56,773 |
2,087 |
10,968 |
(60,023) |
9,805 |
Total assets |
80,348 |
242,041 |
542,375 |
(170,529) |
694,235 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Bank deposits |
|
2,777 |
20,596 |
(76) |
23,297 |
Customer deposits |
|
2,390 |
358,531 |
(7) |
360,914 |
Amount due to holding company and fellow subsidiaries |
635 |
23,505 |
80,933 |
(105,073) |
|
Settlement balances |
|
1,977 |
1,089 |
|
3,066 |
Trading liabilities |
|
54,540 |
17,909 |
(99) |
72,350 |
Derivatives |
445 |
129,974 |
3,655 |
(5,177) |
128,897 |
Other financial liabilities |
16,821 |
16,279 |
6,625 |
7 |
39,732 |
Subordinated liabilities |
7,941 |
659 |
2,058 |
(123) |
10,535 |
Other liabilities |
119 |
1,018 |
8,552 |
(735) |
8,954 |
Total liabilities |
25,961 |
233,119 |
499,948 |
(111,283) |
647,745 |
|
|
|
|
|
|
Owners equity |
54,387 |
8,922 |
42,416 |
(59,989) |
45,736 |
Non-controlling interests |
|
|
11 |
743 |
754 |
Total equity |
54,387 |
8,922 |
42,427 |
(59,246) |
46,490 |
Total liabilities and equity |
80,348 |
242,041 |
542,375 |
(170,529) |
694,235 |
Notes on the consolidated accounts
36 Consolidating financial information continued
Balance sheet
|
|
|
|
Consolidation |
|
At 31 December 2017 |
RBSG plc |
NWM Plc |
Subsidiaries |
adjustments |
RBS Group |
£m |
£m |
£m |
£m |
£m |
|
Assets |
|
|
|
|
|
Cash and balances at central banks |
|
93 |
36,707 |
61,537 |
98,337 |
Trading assets |
|
73,011 |
13,051 |
(71) |
85,991 |
Derivatives |
163 |
162,005 |
3,101 |
(4,426) |
160,843 |
Settlement balances |
|
1,614 |
899 |
4 |
2,517 |
Loans to banks - amortised cost |
|
195 |
5,181 |
6,141 |
11,517 |
Loans to customers - amortised cost |
|
9,133 |
223,755 |
77,228 |
310,116 |
Amounts due from holding company and fellow subsidiaries |
24,987 |
6,470 |
14,352 |
(45,809) |
|
Other financial assets |
107 |
3,079 |
4,350 |
44,393 |
51,929 |
Intangible assets |
|
|
531 |
6,012 |
6,543 |
Other assets |
47,605 |
270,289 |
(33,032) |
(274,599) |
10,263 |
Total assets |
72,862 |
525,889 |
268,895 |
(129,590) |
738,056 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Bank deposits |
|
527 |
22,367 |
7,502 |
30,396 |
Customer deposits |
|
3,063 |
274,847 |
83,406 |
361,316 |
Amounts due to holding company and fellow subsidiaries |
163 |
14,994 |
30,652 |
(45,809) |
|
Settlement balances |
|
1,372 |
1,472 |
|
2,844 |
Trading liabilities |
|
64,182 |
17,913 |
(113) |
81,982 |
Derivatives |
284 |
155,098 |
3,289 |
(4,165) |
154,506 |
Other financial liabilities |
9,202 |
11,255 |
1,243 |
8,626 |
30,326 |
Subordinated liabilities |
7,864 |
|
2,197 |
2,661 |
12,722 |
Other liabilities |
388 |
230,876 |
(110,598) |
(105,795) |
14,871 |
Total liabilities |
17,901 |
481,367 |
243,382 |
(53,687) |
688,963 |
|
|
|
|
|
|
Owners equity |
54,961 |
44,522 |
25,382 |
(76,535) |
48,330 |
Non-controlling interests |
|
|
131 |
632 |
763 |
Total equity |
54,961 |
44,522 |
25,513 |
(75,903) |
49,093 |
Total liabilities and equity |
72,862 |
525,889 |
268,895 |
(129,590) |
738,056 |
Notes on the consolidated accounts
36 Consolidating financial information continued
Cash flow statement
|
|
|
|
Consolidation |
|
For the year ended 31 December 2018 |
RBSG plc |
NWM Plc |
Subsidiaries |
adjustments |
RBS Group |
£m |
£m |
£m |
£m |
£m |
|
Net cash flows from operating activities |
13,711 |
(1,308) |
(81,109) |
68,478 |
(228) |
Net cash flows from investing activities |
(9,481) |
18,288 |
(32,446) |
15,684 |
(7,955) |
Net cash flows from financing activities |
(4,169) |
(5,795) |
7,988 |
(4,311) |
(6,287) |
Effects of exchange rate changes on cash and cash equivalents |
1 |
332 |
565 |
(222) |
676 |
Net increase/(decrease) in cash and cash equivalents |
62 |
11,517 |
(105,002) |
79,629 |
(13,794) |
Cash and cash equivalents at 1 January 2018 |
245 |
13,058 |
196,214 |
(86,912) |
122,605 |
Cash and cash equivalents at 31 December 2018 |
307 |
24,575 |
91,212 |
(7,283) |
108,811 |
|
|
|
|
Consolidation |
|
For the year ended 31 December 2017 |
RBSG plc |
NWM Plc |
Subsidiaries |
adjustments |
RBS Group |
£m |
£m |
£m |
£m |
£m |
|
Net cash flows from operating activities |
4,973 |
(74,357) |
105,401 |
2,724 |
38,741 |
Net cash flows from investing activities |
(2,078) |
(2,077) |
1,911 |
(4,238) |
(6,482) |
Net cash flows from financing activities |
(3,831) |
(9,668) |
573 |
4,718 |
(8,208) |
Effects of exchange rate changes on cash and cash equivalents |
(14) |
87 |
(1,102) |
1,013 |
(16) |
Net (decrease)/increase in cash and cash equivalents |
(950) |
(86,015) |
106,783 |
4,217 |
24,035 |
Cash and cash equivalents at 1 January 2017 |
1,195 |
99,073 |
89,431 |
(91,129) |
98,570 |
Cash and cash equivalents at 31 December 2017 |
245 |
13,058 |
196,214 |
(86,912) |
122,605 |
|
|
|
|
Consolidation |
|
For the year ended 31 December 2016 |
RBSG plc |
NWM Plc |
Subsidiaries |
adjustments |
RBS Group |
£m |
£m |
£m |
£m |
£m |
|
Net cash flows from operating activities |
(3,026) |
3,098 |
(6,823) |
3,101 |
(3,650) |
Net cash flows from investing activities |
2,538 |
(4,495) |
(1,919) |
(483) |
(4,359) |
Net cash flows from financing activities |
(1,445) |
(13,459) |
(1,490) |
11,287 |
(5,107) |
Effects of exchange rate changes on cash and cash equivalents |
122 |
7,316 |
4,260 |
(3,604) |
8,094 |
Net (decrease)/increase in cash and cash equivalents |
(1,811) |
(7,540) |
(5,972) |
10,301 |
(5,022) |
Cash and cash equivalents at 1 January 2016 |
3,006 |
106,613 |
95,403 |
(101,430) |
103,592 |
Cash and cash equivalents at 31 December 2016 |
1,195 |
99,073 |
89,431 |
(91,129) |
98,570 |
Trust preferred securities
The Group has issued trust preferred securities through trusts 100% owned by the Group (through partnership interests held by RBSG Capital Corporation and RBS) which meet the definition of a finance subsidiary in Regulation S-X, Rule 3-10. The securities represent undivided beneficial interests in the assets of the trusts, which consist of partnership preferred securities representing non-cumulative perpetual preferred limited partnership interests issued by Delaware limited partnerships. The Royal Bank of Scotland Group plc has provided subordinated guarantees for the benefit of the holders of the trust preferred securities and the partnership preferred securities. Under the terms of the guarantees, the Group has fully and unconditionally guaranteed on a subordinated basis, payments on such trust preferred securities and partnership preferred securities, to the extent they are due to be paid and have not been paid by, or on behalf of, the trusts and the partnerships, as the case may be. Following implementation of IFRS 10 the trusts are no longer consolidated by the Group. For those securities that were classified as subordinated liabilities, the Groups outstanding instruments with the trusts are classified as subordinated liabilities.
Additional information
|
|
Page |
Adoption of IFRS 9 |
|
251 |
Financial summary |
|
251 |
Exchange rates |
|
263 |
Risk factors |
|
265 |
Description of property and equipment |
|
276 |
Major shareholders |
|
276 |
Our code of conduct |
|
276 |
Iran sanctions and related disclosures |
|
277 |
Supervision |
|
277 |
Material contracts |
|
279 |
Additional information
Adoption of IFRS9
Following the adoption of IFRS 9, certain disclosures in this section cover comparative periods only. Comparatives are presented on an IAS 39 basis. For current year disclosures in relation to loans and credit metrics refer to the Capital and risk management Credit risk section.
Financial summary
The geographic analysis, including the average balance sheet and interest rates, changes in net interest income and average interest rates, yields, spreads and margins in this report have generally been compiled on the basis of location of office - UK and overseas - unless indicated otherwise. UK in this context includes transactions conducted through the offices in the UK which service international banking transactions.
Analysis of loans and advances to customers
The following table analyses gross loans to customers by remaining maturity, geographical area (location of office) and type of customer.
RBS provides credit facilities at variable rates to its corporate and retail customers. Variable rate credit extended to RBSs corporate and commercial customers includes bullet and instalment loans, finance lease agreements and overdrafts; interest is generally charged at a margin over a benchmark rate such as LIBOR or base rate. Interest on variable rate retail loans may also be based on LIBOR or base rate; other variable rate retail lending is charged at variable interest rates set by RBS such as its mortgage standard variable rate in the UK.
Additional information
|
|
2018 |
|
2017 |
|
2016 |
Yields, spreads and margins of the banking business |
|
% |
|
% |
|
% |
Gross yield on interest-earning assets of the banking business (1) |
|
2.49 |
|
2.57 |
|
2.80 |
Cost of interest-bearing liabilities of the banking business |
|
(0.79) |
|
(0.70) |
|
(0.95) |
Interest spread of the banking business (2) |
|
1.70 |
|
1.87 |
|
1.85 |
Benefit from interest-free funds |
|
0.28 |
|
0.26 |
|
0.33 |
Net interest margin of the banking business (3) |
|
1.98 |
|
2.13 |
|
2.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross yield (1,4) |
|
|
|
|
|
|
- Group |
|
2.49 |
|
2.57 |
|
2.80 |
- UK |
|
2.71 |
|
2.79 |
|
3.12 |
- Overseas |
|
0.88 |
|
0.92 |
|
1.08 |
Interest spread (2,4) |
|
|
|
|
|
|
- Group |
|
1.70 |
|
1.87 |
|
1.85 |
- UK |
|
1.87 |
|
2.08 |
|
2.17 |
- Overseas |
|
0.64 |
|
0.42 |
|
0.03 |
Net interest margin (3,4) |
|
|
|
|
|
|
- Group |
|
1.98 |
|
2.13 |
|
2.18 |
- UK |
|
2.14 |
|
2.32 |
|
2.45 |
- Overseas |
|
0.78 |
|
0.75 |
|
0.73 |
|
|
|
|
|
|
|
The Royal Bank of Scotland plc base rate (average) |
|
0.60 |
|
0.29 |
|
0.40 |
London inter-bank three month offered rates (average) |
|
|
|
|
|
|
- Sterling |
|
0.66 |
|
0.36 |
|
0.50 |
- Eurodollar |
|
2.19 |
|
1.26 |
|
0.69 |
- Euro |
|
(0.33) |
|
(0.33) |
|
(0.26) |
Notes:
(1) Gross yield is the interest earned on average interest-earning assets of the banking book.
(2) Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business.
(3) Net interest margin is net interest income of the banking business as a percentage of interest-earning assets (IEA) of the banking business.
(4) The analysis into UK and overseas has been compiled on the basis of location of office.
Additional information
Average balance sheet and related interest
For the notes to this table refer to the following page.
Additional information
Notes:
(1) Interest receivable and interest payable have both been decreased by £158 million (2017 - £182 million; 2016 - £76 million) in respect of negative interest relating to financial assets that attracted negative interest.
(2) Interest receivable includes £201 million (2017 - £256 million; 2016 - £290 million) in respect of loan fees forming part of the effective interest rate of loans and receivables.
(3) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
(4) Interest receivable includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans to banks and loans to customers.
(5) The analysis into UK and overseas has been compiled on the basis of location of office.
Additional information
Analysis of change in net interest income - volume and rate analysis
Volume and rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are allocated pro rata to volume and rate movements.
|
|
2018 over 2017 - statutory |
|
2017 over 2016 - statutory |
||||||||
|
|
(Decrease)/increase due to changes in: |
|
Increase/(decrease) due to changes in: |
||||||||
|
|
Average |
|
Average |
|
Net |
|
Average |
|
Average |
|
Net |
|
|
volume |
|
rate |
|
change |
|
volume |
|
rate |
|
change |
|
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
|
£m |
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans to banks |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
85 |
|
174 |
|
259 |
|
119 |
|
(21) |
|
98 |
Overseas |
|
(6) |
|
(6) |
|
(12) |
|
(2) |
|
(85) |
|
(87) |
Loans to customers |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
(145) |
|
(246) |
|
(391) |
|
328 |
|
(619) |
|
(291) |
Overseas |
|
(20) |
|
17 |
|
(3) |
|
(115) |
|
23 |
|
(92) |
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
29 |
|
158 |
|
187 |
|
24 |
|
55 |
|
79 |
Overseas |
|
(3) |
|
2 |
|
(1) |
|
(14) |
|
(23) |
|
(37) |
Total interest receivable of the banking business |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
(31) |
|
86 |
|
55 |
|
471 |
|
(585) |
|
(114) |
Overseas |
|
(29) |
|
13 |
|
(16) |
|
(131) |
|
(85) |
|
(216) |
|
|
(60) |
|
99 |
|
39 |
|
340 |
|
(670) |
|
(330) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Bank deposits |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
(32) |
|
(61) |
|
(93) |
|
(55) |
|
2 |
|
(53) |
Overseas |
|
|
|
16 |
|
16 |
|
(3) |
|
(2) |
|
(5) |
Customer accounts: demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
6 |
|
(159) |
|
(153) |
|
15 |
|
279 |
|
294 |
Overseas |
|
|
|
(2) |
|
(2) |
|
16 |
|
24 |
|
40 |
Customer accounts: savings deposits |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
(57) |
|
|
|
(57) |
|
(21) |
|
88 |
|
67 |
Overseas |
|
|
|
1 |
|
1 |
|
|
|
6 |
|
6 |
Customer accounts: other time deposits |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
(1) |
|
53 |
|
52 |
|
1 |
|
(11) |
|
(10) |
Overseas |
|
3 |
|
8 |
|
11 |
|
(3) |
|
24 |
|
21 |
Debt securities in issue |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
(153) |
|
(81) |
|
(234) |
|
(157) |
|
163 |
|
6 |
Overseas |
|
(1) |
|
(2) |
|
(3) |
|
7 |
|
(10) |
|
(3) |
Subordinated liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
164 |
|
(59) |
|
105 |
|
145 |
|
45 |
|
190 |
Overseas |
|
8 |
|
(2) |
|
6 |
|
79 |
|
4 |
|
83 |
Internal funding of trading business |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
|
|
(27) |
|
(27) |
|
1 |
|
(13) |
|
(12) |
Overseas |
|
(10) |
|
18 |
|
8 |
|
|
|
(15) |
|
(15) |
Total interest payable of the banking business |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
(73) |
|
(334) |
|
(407) |
|
(71) |
|
553 |
|
482 |
Overseas |
|
|
|
37 |
|
37 |
|
96 |
|
31 |
|
127 |
|
|
(73) |
|
(297) |
|
(370) |
|
25 |
|
584 |
|
609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
UK |
|
(104) |
|
(248) |
|
(352) |
|
400 |
|
(32) |
|
368 |
Overseas |
|
(29) |
|
50 |
|
21 |
|
(35) |
|
(54) |
|
(89) |
|
|
(133) |
|
(198) |
|
(331) |
|
365 |
|
(86) |
|
279 |
Additional information
Loan impairment provisions
For details of the factors considered in determining the amount of provisions, refer to the accounting policy on page 222 and Critical accounting policies and key sources of estimation uncertainty on page 190. The following table shows the movements in loan impairment provisions.
Additional information
|
|
2017 |
|
2016 |
|
2015 |
|
2014 |
Closing customer provisions as a % of gross loans to customers (2) |
|
|
|
|
|
|
|
|
UK |
|
0.9% |
|
1.0% |
|
1.4% |
|
2.9% |
Overseas |
|
5.5% |
|
5.9% |
|
11.3% |
|
13.9% |
Total |
|
1.2% |
|
1.4% |
|
2.3% |
|
5.0% |
|
|
|
|
|
|
|
|
|
Customer losses/(releases) to income statement as a % of gross loans to customers (2) |
|
|
|
|
|
|
|
|
UK |
|
0.2% |
|
0.2% |
|
|
|
|
Overseas |
|
0.3% |
|
(0.7%) |
|
(3.1%) |
|
(1.9%) |
Total |
|
0.2% |
|
0.2% |
|
(0.3%) |
|
(0.4%) |
|
|
|
|
|
|
|
|
|
Average loans to customers - gross |
|
366,959 |
|
373,644 |
|
387,956 |
|
472,545 |
|
|
|
|
|
|
|
|
|
As a % of average loans to customers during the year |
|
|
|
|
|
|
|
|
Total customer provisions charged/(released) to income statement |
|
0.1% |
|
0.1% |
|
(0.2%) |
|
(0.3%) |
Amounts written-off (net of recoveries) - customers |
|
0.3% |
|
1.0% |
|
2.3% |
|
1.1% |
Notes:
(1) Includes nil relating to loans to banks (2016 - nil; 2015 - £4 million release; 2014 - £10 million release).
(2) Excludes reverse repos.
Analysis of closing customer loan impairment provisions
The following table analyses customer loan impairment provisions by geographical area and type of UK customer.
|
|
2017 |
|
2016 |
|
2015 |
|
2014 |
||||||||
|
|
Closing |
|
Total |
|
Closing |
|
Total |
|
Closing |
|
Total |
|
Closing |
|
Total |
|
|
provision |
|
loans |
|
provision |
|
loans |
|
provision |
|
loans |
|
provision |
|
loans |
|
|
£m |
|
% |
|
£m |
|
% |
|
£m |
|
% |
|
£m |
|
% |
UK |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central and local government |
|
|
|
1.4 |
|
1 |
|
1.8 |
|
1 |
|
2.0 |
|
1 |
|
2.2 |
Manufacturing |
|
37 |
|
2.5 |
|
69 |
|
2.8 |
|
78 |
|
2.6 |
|
142 |
|
2.7 |
Construction |
|
317 |
|
1.1 |
|
172 |
|
1.2 |
|
234 |
|
1.2 |
|
365 |
|
1.2 |
Finance |
|
8 |
|
9.2 |
|
12 |
|
9.8 |
|
17 |
|
9.5 |
|
65 |
|
9.0 |
Service industries and business activities |
|
769 |
|
15.0 |
|
1,131 |
|
16.2 |
|
993 |
|
16.4 |
|
1,510 |
|
14.4 |
Agriculture, forestry and fishing |
|
15 |
|
1.0 |
|
17 |
|
1.1 |
|
24 |
|
1.1 |
|
33 |
|
0.9 |
Property |
|
211 |
|
9.9 |
|
365 |
|
10.3 |
|
1,048 |
|
10.9 |
|
3,671 |
|
10.7 |
Residential mortgages |
|
137 |
|
45.1 |
|
143 |
|
42.0 |
|
158 |
|
39.4 |
|
191 |
|
32.3 |
Personal lending |
|
721 |
|
4.3 |
|
853 |
|
4.3 |
|
1,086 |
|
4.6 |
|
1,453 |
|
4.5 |
Finance leases and instalment credit |
|
80 |
|
3.6 |
|
69 |
|
3.7 |
|
69 |
|
3.6 |
|
82 |
|
3.1 |
Accrued interest |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
Total UK |
|
2,295 |
|
93.2 |
|
2,832 |
|
93.3 |
|
3,708 |
|
91.4 |
|
7,513 |
|
81.0 |
Overseas |
|
1,129 |
|
6.8 |
|
1,223 |
|
6.7 |
|
2,826 |
|
8.6 |
|
8,931 |
|
19.0 |
Impaired book provisions |
|
3,424 |
|
100 |
|
4,055 |
|
100 |
|
6,534 |
|
100 |
|
16,444 |
|
100 |
Latent book provisions |
|
390 |
|
|
|
400 |
|
|
|
584 |
|
|
|
1,016 |
|
|
Total provisions |
|
3,814 |
|
|
|
4,455 |
|
|
|
7,118 |
|
|
|
17,460 |
|
|
Additional information
Analysis of write-offs
The following table analyses amounts written-off by geographical area and type of UK customer.
Note:
(1) Includes nil written-off in respect of loans to banks (2016 nil; 2015 - £33 million; 2014 - £8 million).
Analysis of recoveries
The following table analyses recoveries of amounts written-off by geographical area and type of UK customer.
|
2017 |
2016 |
2015 |
2014 |
|
£m |
£m |
£m |
£m |
UK |
|
|
|
|
Manufacturing |
1 |
1 |
|
2 |
Construction |
2 |
4 |
2 |
9 |
Finance |
|
1 |
3 |
|
Service industries and business activities |
16 |
28 |
32 |
11 |
Property |
7 |
17 |
40 |
29 |
Residential mortgages |
43 |
|
|
|
Personal lending |
72 |
28 |
42 |
26 |
Finance leases and instalment credit |
1 |
1 |
11 |
|
Total UK |
142 |
80 |
130 |
77 |
Overseas |
14 |
29 |
45 |
128 |
Total recoveries |
156 |
109 |
175 |
205 |
Additional information
Risk elements in lending
Risk elements in lending (REIL) comprises of impaired loans and accruing loans past due 90 days or more as to principal or interest.
Impaired loans are all loans (including loans subject to forbearance) for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans.
Accruing loans past due 90 days or more comprises loans past due 90 days where no impairment loss is expected.
|
2017 |
2016 |
2015 |
2014 |
|
£m |
£m |
£m |
£m |
Impaired loans (1) |
|
|
|
|
UK |
4,450 |
5,557 |
6,095 |
11,562 |
Overseas |
2,973 |
3,308 |
4,755 |
13,681 |
Total |
7,423 |
8,865 |
10,850 |
25,243 |
Accruing loans which are contractually overdue 90 days or more as to principal or interest |
|
|
|
|
UK |
1,087 |
1,122 |
1,262 |
1,536 |
Overseas |
394 |
323 |
25 |
105 |
Total |
1,481 |
1,445 |
1,287 |
1,641 |
Total REIL |
8,904 |
10,310 |
12,137 |
26,884 |
|
|
|
|
|
Closing provisions for impairment as a % of total REIL |
43% |
43% |
59% |
65% |
REIL as a % of gross lending to customers excluding reverse repos |
2.7% |
3.1% |
3.9% |
7.6% |
Notes:
(1) The write-off of impaired loans affects closing provisions for impairment as a % of total REIL (the coverage ratio). The coverage ratio reduces if the loan written-off carries a higher than average provision and increases if the loan written-off carries a lower than average provision.
(2) Impaired loans at 31 December 2017 include £1,324 million (2016 - £2,496 million; 2015 - £2,300 million) of loans subject to forbearance granted during the year.
|
2017 |
2016 |
2015 |
2014 |
|
£m |
£m |
£m |
£m |
Gross income not recognised but which would have been recognised under the original terms of impaired loans |
|
|
|
|
UK |
227 |
243 |
311 |
404 |
Overseas |
80 |
122 |
125 |
165 |
|
307 |
365 |
436 |
569 |
|
|
|
|
|
Interest on impaired loans included in net interest income |
|
|
|
|
UK |
61 |
75 |
98 |
146 |
Overseas |
25 |
38 |
46 |
101 |
|
86 |
113 |
144 |
247 |
Potential problem loans
Potential problem loans (PPL) are loans for which an impairment event has taken place but no impairment loss is expected. This category is used for advances which are not past due 90 days or revolving credit facilities where identification as 90 days overdue is not feasible.
|
2017 |
2016 |
2015 |
2014 |
|
£m |
£m |
£m |
£m |
Potential problem loans |
745 |
1,196 |
1,277 |
1,206 |
Both REIL and PPL are reported gross and take no account of the value of any security held which could reduce the eventual loss should it occur, nor of any provision marked. Therefore impaired assets which are highly collateralised, such as mortgages, will have a low coverage ratio of provisions held against the reported impaired balance.
Additional information
Forbearance
The table below shows loans granted forbearance during the year. These loans are unimpaired: either the loan was performing before and after the granting of forbearance or the loan was non-performing before but subsequently transferred to the performing book. Loans with impairment provisions subject to forbearance continue to be reported as impaired loans.
|
2017 |
2016 |
2015 |
2014 |
|
£m |
£m |
£m |
£m |
Loans granted forbearance |
1,480 |
2,257 |
3,760 |
6,091 |
Notes:
(1) Wholesale loans subject to forbearance include only those arrangements above thresholds set individually by the segments, ranging from nil to £3 million.
(2) For 2017, wholesale loans subject to forbearance were £1,206 million (2016 - £1,807 million; 2015 - £2,258 million) and secured retail loans subject to forbearance were £274 million (2016 - £450 million; 2015 - £1,502 million). Unsecured retail loans subject to forbearance amounting to £31 million (2016 - £37 million; 2015 - £96 million) are not included.
Analysis of debt securities - fair value through other comprehensive income (2017 - available-for-sale)
The following table analyses available-for-sale debt securities and the related yield (based on weighted averages) by remaining maturity and issuer.
|
Within 1 year |
|
After 1 but within 5 years |
|
After 5 but within 10 years |
|
After 10 years |
|
Total |
|||||
|
Amount |
Yield |
|
Amount |
Yield |
|
Amount |
Yield |
|
Amount |
Yield |
|
Amount |
Yield |
2018 |
£m |
% |
|
£m |
% |
|
£m |
% |
|
£m |
% |
|
£m |
% |
Central and local governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- UK |
1,432 |
3.2 |
|
6,449 |
2.1 |
|
5,214 |
2.4 |
|
4,097 |
2.8 |
|
17,192 |
2.4 |
- US |
2,275 |
1.8 |
|
5,701 |
2.0 |
|
1,989 |
2.3 |
|
1,802 |
3.0 |
|
11,767 |
2.1 |
- Other |
3,641 |
0.9 |
|
4,835 |
1.0 |
|
1,959 |
0.7 |
|
894 |
2.4 |
|
11,329 |
1.0 |
Other debt |
1,326 |
1.1 |
|
2,907 |
1.2 |
|
872 |
0.9 |
|
201 |
1.2 |
|
5,306 |
1.1 |
|
8,674 |
1.6 |
|
19,892 |
1.7 |
|
10,034 |
1.9 |
|
6,994 |
2.7 |
|
45,594 |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which ABS (1) |
175 |
1.1 |
|
596 |
0.8 |
|
290 |
0.4 |
|
202 |
1.2 |
|
1,263 |
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central and local governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- UK |
1,152 |
1.7 |
|
7,000 |
2.5 |
|
5,814 |
2.0 |
|
3,690 |
3.2 |
|
17,656 |
2.4 |
- US |
455 |
0.8 |
|
4,243 |
1.9 |
|
2,221 |
2.1 |
|
1,542 |
2.8 |
|
8,461 |
2.1 |
- Other |
4,716 |
0.7 |
|
3,405 |
1.5 |
|
2,230 |
1.1 |
|
1,103 |
2.6 |
|
11,454 |
1.2 |
Other debt |
1,632 |
1.0 |
|
3,333 |
1.1 |
|
822 |
0.8 |
|
323 |
0.4 |
|
6,110 |
1.0 |
|
7,955 |
0.9 |
|
17,981 |
1.9 |
|
11,087 |
1.7 |
|
6,658 |
2.9 |
|
43,681 |
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which ABS (1) |
263 |
0.4 |
|
1,009 |
0.5 |
|
231 |
|
|
323 |
0.1 |
|
1,826 |
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central and local governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- UK |
1,722 |
0.9 |
|
2,900 |
5.2 |
|
3,318 |
3.5 |
|
2,641 |
3.0 |
|
10,581 |
3.4 |
- US |
41 |
1.9 |
|
2,797 |
1.9 |
|
2,799 |
2.1 |
|
1,316 |
3.0 |
|
6,953 |
2.2 |
- Other |
5,104 |
1.1 |
|
5,942 |
1.0 |
|
3,444 |
1.2 |
|
1,188 |
2.4 |
|
15,678 |
1.2 |
Other debt |
1,276 |
0.7 |
|
3,303 |
0.9 |
|
972 |
0.9 |
|
491 |
0.3 |
|
6,042 |
0.8 |
|
8,143 |
1.0 |
|
14,942 |
2.0 |
|
10,533 |
2.1 |
|
5,636 |
2.6 |
|
39,254 |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which ABS (1) |
377 |
0.8 |
|
974 |
0.5 |
|
415 |
|
|
497 |
|
|
2,263 |
0.3 |
Note:
(1) Includes covered bonds.
Additional information
Analysis of deposits - product analysis
The following table analyses deposits excluding repos by geographical area (location of office) and type of deposit.
Certificates of deposit and other time deposits
The following table shows certificates of deposit and other time deposits over $100,000 or equivalent by remaining maturity.
|
|
|
|
Over |
|
|
0-3 months |
3-6 months |
6-12 months |
12 months |
Total |
2018 |
£m |
£m |
£m |
£m |
£m |
UK based companies and branches |
|
|
|
|
|
Certificates of deposit |
415 |
378 |
470 |
|
1,263 |
Other time deposits |
10,093 |
2,949 |
1,963 |
15,250 |
30,255 |
|
|
|
|
|
|
Overseas based companies and branches |
|
|
|
|
|
Other time deposits |
1,660 |
953 |
392 |
1,988 |
4,993 |
|
12,168 |
4,280 |
2,825 |
17,238 |
36,511 |
Additional information
Short-term borrowings
Short-term borrowings comprise repurchase agreements, borrowings from financial institutions, commercial paper and certificates of deposit. Derivative collateral received from financial institutions is excluded from the table, as are certain long-term borrowings.
|
At the year end |
|
During the year |
|||
|
|
Weighted |
|
|
|
Weighted |
|
|
average |
|
Maximum |
Average |
average |
|
Balance |
interest rate |
|
balance |
balance |
interest rate |
2018 |
£bn |
% |
|
£bn |
£bn |
% |
Repos |
30 |
2.9 |
|
61 |
44 |
1.8 |
Financial institutions (1) |
66 |
0.4 |
|
86 |
71 |
0.3 |
Commercial paper |
2 |
(0.1) |
|
3 |
2 |
(0.2) |
Certificates of deposits |
1 |
0.4 |
|
3 |
2 |
0.2 |
Total |
99 |
1.1 |
|
153 |
119 |
0.8 |
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
Repos |
38 |
1.5 |
|
61 |
48 |
0.7 |
Financial institutions (1) |
77 |
0.2 |
|
89 |
71 |
0.2 |
Commercial paper |
2 |
(0.2) |
|
2 |
1 |
(0.1) |
Certificates of deposits |
3 |
0.2 |
|
4 |
3 |
0.2 |
Total |
120 |
0.6 |
|
156 |
123 |
0.4 |
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
Repos |
32 |
0.3 |
|
62 |
46 |
0.3 |
Financial institutions (1) |
63 |
0.2 |
|
71 |
55 |
0.3 |
Certificates of deposits |
3 |
0.2 |
|
3 |
1 |
0.8 |
Total |
98 |
0.2 |
|
136 |
102 |
0.3 |
Note:
(1) Excludes derivative cash collateral of £20 billion at 31 December 2018 (2017 - £23 billion; 2016 - £32 billion); and 2018 average of £21 billion (2017 - £26 billion; 2016 - £34 billion).
Balances are generally based on monthly data. Average interest rates during the year are computed by dividing total interest expense by the average amount borrowed. Weighted average interest rates at year end are for a single day and as such may reflect one-day market distortions, which may not be indicative of generally prevailing rates.
Other contractual cash obligations
The table below summarises other contractual cash obligations by payment date.
|
0-3 months |
3-12 months |
1-3 years |
3-5 years |
5-10 years |
10-20 years |
2018 |
£m |
£m |
£m |
£m |
£m |
£m |
Operating leases |
61 |
169 |
415 |
320 |
587 |
1,133 |
Contractual obligations to purchase goods or services |
70 |
183 |
217 |
66 |
5 |
|
|
131 |
352 |
632 |
386 |
592 |
1,133 |
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
Operating leases |
57 |
163 |
389 |
307 |
584 |
948 |
Contractual obligations to purchase goods or services |
74 |
202 |
332 |
67 |
7 |
|
|
131 |
365 |
721 |
374 |
591 |
948 |
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
Operating leases |
68 |
192 |
450 |
382 |
726 |
1,154 |
Contractual obligations to purchase goods or services |
64 |
168 |
266 |
93 |
7 |
|
|
132 |
360 |
716 |
475 |
733 |
1,154 |
Undrawn formal facilities, credit lines and other commitments to lend were £116,843 million (2017 - £121,229 million; 2016 - £134,324 million). While RBS has given commitments to provide these funds, some facilities may be subject to certain conditions being met by the counterparty. RBS does not expect all facilities to be drawn, and some may lapse before drawdown.
Additional information
Exchange rates
The following tables show the Noon Buying Rate in New York for cable transfers in sterling as certified for customs purposes by the Federal Reserve Bank of New York.
|
January |
December |
November |
October |
September |
August |
US dollars per £1 |
2019 |
2018 |
2018 |
2018 |
2018 |
2018 |
Noon Buying Rate |
|
|
|
|
|
|
High |
1.3176 |
1.2777 |
1.3144 |
1.3210 |
1.3237 |
1.3120 |
Low |
1.2598 |
1.2524 |
1.2729 |
1.2731 |
1.2833 |
1.2685 |
|
|
|
|
|
|
|
|
|
2018 |
2017 |
2016 |
2015 |
2014 |
Noon Buying Rate |
|
|
|
|
|
|
Period end rate |
|
1.2763 |
1.3529 |
1.2337 |
1.4746 |
1.5578 |
Average rate for the year (1) |
|
1.3309 |
1.3016 |
1.3444 |
1.5250 |
1.6461 |
|
|
|
|
|
|
|
Consolidation rate (2) |
|
|
|
|
|
|
Period end rate |
|
1.2790 |
1.3513 |
1.2323 |
1.4830 |
1.5615 |
Average rate for the year |
|
1.3350 |
1.2887 |
1.3552 |
1.5284 |
1.6475 |
Notes:
(1) The average of the Noon Buying Rates on the last US business day of each month during the year.
(2) The rates used for translating US dollars into sterling in the preparation of the financial statements.
(3) On 22 February 2019, the Noon Buying Rate was £1.00 = US$1.3067.
Additional information
ADR payment information
Fees paid by ADR holders
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees.
The depository may collect its annual fee for depository services by deductions from cash distributions or by directly billing investors or by changing the book-entry system accounts of participants acting for them. The depository may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay: |
|
For: |
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) |
|
Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property. |
|
|
|
|
|
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates. |
|
|
|
$0.02 (or less) per ADS |
|
Any cash distribution to ADS registered holders. |
|
|
|
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs |
|
Distribution of securities distributed to holders of securities of deposited securities to ADS registered holders. |
|
|
|
Registration or transfer fees |
|
Transfer and registration of shares on our share register to or from the name of the depository or its agent when you deposit or withdraw shares. |
|
|
|
Expenses of the depository |
|
Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement). |
|
|
|
|
|
Converting foreign currency to U.S. dollars. |
|
|
|
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes |
|
As necessary. |
|
|
|
Any charges incurred by the depository or its agents for servicing the deposited securities |
|
As necessary. |
Fees payable by the depository to the issuer
Fees incurred in past annual Period
From 1 January 2017 to 31 December 2017, the company received from the depository $300,000 for continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend cheques, electronic filling of U.S. Federal tax information, mailing required tax forms, stationary, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.
Fees to be paid in the future
The Bank of New York Mellon, as depository, has agreed to reimburse the Company for expenses they incur that are related to establishment and maintenance expenses of the ADS program. The depository has agreed to reimburse the Company for its continuing annual stock exchange listing fees, the depository has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim reports, printing and distributing dividend cheques, electronic filing of U.S. federal tax information, mailing required tax forms, stationary, postage, facsimile, and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programs of special investor relations promotional activities. In certain instances, the depository has agreed to provide additional payments to the Company based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depository will reimburse the Company, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depository collects from investors.
Risk factors
Principal Risks and Uncertainties
Set out below are certain risk factors that could adversely affect the Groups future results, its financial condition and prospects and cause them to be materially different from what is forecast or expected and either directly or indirectly impact the value of its securities in issue. These risk factors are broadly categorised and should be read in conjunction with the forward looking statements section, strategic report and the capital and risk management section of this annual report on Form 20-F, and should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties facing the Group.
Operational and IT resilience risk
The Group is subject to increasingly sophisticated and frequent cyberattacks.
The Group is experiencing continued cyberattacks across the entire Group, with an emerging trend of attacks against the Groups supply chain, re-enforcing the importance of due diligence and close working with the third parties on which the Group relies. The Group is reliant on technology, which is vulnerable to attacks, with cyberattacks increasing in terms of frequency, sophistication, impact and severity. As cyberattacks evolve and become more sophisticated, the Group will be required to invest additional resources to upgrade the security of its systems. In 2018, the Group was subjected to a small but increasing number of Distributed Denial of Service (DDOS) attacks, which are a pervasive and significant threat to the global financial services industry. The Group fully mitigated the impact of these attacks whilst sustaining full availability of services for its customers. Hostile attempts are made by third parties to gain access to and introduce malware (including ransomware) into the Groups IT systems, and to exploit vulnerabilities. The Group has information security controls in place, which are subject to review on a continuing basis, but there can be no assurance that such measures will prevent all DDOS attacks or other cyberattacks in the future. See also, The Groups operations are highly dependent on its IT systems.
Any failure in the Groups cybersecurity policies, procedures or controls, may result in significant financial losses, major business disruption, inability to deliver customer services, or loss of data or other sensitive information (including as a result of an outage) and may cause associated reputational damage. Any of these factors could increase costs (including costs relating to notification of, or compensation for customers, credit monitoring or card reissuance), result in regulatory investigations or sanctions being imposed or may affect the Groups ability to retain and attract customers. Regulators in the UK, US and Europe continue to recognise cybersecurity as an increasing systemic risk to the financial sector and have highlighted the need for financial institutions to improve their monitoring and control of, and resilience (particularly of critical services) to cyberattacks, and to provide timely notification of them, as appropriate.
Additionally, parties may also fraudulently attempt to induce employees, customers, third party providers or other users who have access to the Groups systems to disclose sensitive information in order to gain access to the Groups data or that of the Groups customers or employees. Cybersecurity and information security events can derive from human error, fraud or malice on the part of the Groups employees or third parties, including third party providers, or may result from accidental technological failure. Any such event could have a material adverse effect on the Groups business, reputation or financial condition.
In accordance with the EU General Data Protection Regulation (GDPR), the Group is required to ensure it timely implements appropriate and effective organisational and technological safeguards against unauthorised or unlawful access to the data of the Group, its customers and its employees. In order to meet this requirement, the Group relies on the effectiveness of its internal policies, controls and procedures to protect the confidentiality, integrity and availability of information held on its IT systems, networks and devices as well as with third parties with whom the Group interacts and a failure to monitor and manage data in accordance with the GDPR requirements may result in financial losses, regulatory fines and investigations and associated reputational damage. In addition, whilst the Group takes appropriate measures to prevent, detect and minimise attacks, the Groups systems, and those of third party providers, are subject to frequent cyberattacks.
The Group expects greater regulatory engagement, supervision and enforcement in relation to its overall resilience to withstand IT and related disruption, either through a cyberattack or some other disruptive event. However, due to the Groups reliance on technology and the increasing sophistication, frequency and impact of cyberattacks, it is likely that such attacks could have a material adverse effect on the Groups results of operations, financial condition or future prospects.
Operational risks are inherent in the Groups businesses.
Operational risk is the risk of loss resulting from inadequate or failed internal processes, procedures, people or systems, or from external events, including legal risks. The Group operates in many countries, offering a diverse range of products and services supported by 65,400 employees; it therefore has complex and diverse operations. As a result, operational risks or losses can arise from a number of internal or external factors. These risks are also present when the Group relies on outside suppliers or vendors to provide services to it or its customers, as is increasingly the case as the Group implements new technologies, innovates and responds to regulatory and market changes.
Operational risks continue to be heightened as a result of the Groups current cost-reduction measures and conditions affecting the financial services industry generally (including Brexit and other geo-political developments) as well as the legal and regulatory uncertainty resulting therefrom. This may place significant pressure on the Groups ability to maintain effective internal controls and governance frameworks. In particular, new governance frameworks have recently been put into place throughout the Group for certain Group entities, due to the implementation of the UK ring-fencing regime and the resulting legal entity structure. The effective management of operational risks is critical to meeting customer service expectations and retaining and attracting customer business. Although the Group has implemented risk controls and loss mitigation actions, and significant resources and planning have been devoted to mitigate operational risk, there is uncertainty as to whether such actions will be effective in controlling each of the operational risks faced by the Group. Ineffective management of such risks could have a material adverse effect on the Groups business, financial condition and results of operations.
The Groups operations are highly dependent on its IT systems.
The Groups operations are highly dependent on the ability to process a very large number of transactions efficiently and accurately while complying with applicable laws and regulations. The proper functioning of the Groups payment systems, financial and sanctions controls, risk management, credit analysis and reporting, accounting, customer service and other IT systems, as well as the communication networks between its branches and main data processing centres, are critical to the Groups operations.
Individually or collectively, any critical system failure, prolonged loss of service availability or material breach of data security could cause serious damage to the Groups ability to provide services to its customers, which could result in significant compensation costs or regulatory sanctions (including fines resulting from regulatory investigations) or a breach of applicable regulations. In particular, failures or breaches resulting in the loss or publication of confidential customer data could cause long-term damage to the Groups reputation and could affect its regulatory approvals, competitive position, business and brands, which could undermine its ability to attract and retain customers. This risk is heightened as the Group continues to innovate and offer new digital solutions to its customers as a result of the trend towards online and mobile banking.
In 2018, the Group upgraded its IT systems and technology and expects to continue to make considerable investments to further simplify, upgrade and improve its IT and technology capabilities (including migration to the Cloud) to make them more cost-effective, improve controls and procedures, strengthen cyber security, enhance digital services provided to its bank customers and improve its competitive position. Should such investment and rationalisation initiatives fail to achieve the expected results or prove to be insufficient due to cost-challenges or
Risk factors
otherwise, this could negatively affect the Groups operations, its reputation and ability to retain or grow its customer business or adversely impact its competitive position, thereby negatively impacting the Groups financial position.
The Group relies on attracting, retaining and developing senior management and skilled personnel, and is required to maintain good employee relations.
The Groups current and future success depends on its ability to attract, retain and develop highly skilled and qualified personnel, including senior management, directors and key employees, in a highly competitive labour market and under internal cost reduction pressures. This entails risk, particularly in light of heightened regulatory oversight of banks and the increasing scrutiny of, and (in some cases) restrictions placed upon, employee compensation arrangements, in particular those of banks in receipt of government support such as the Group, which may have an adverse effect on the Groups ability to hire, retain and engage well-qualified employees. The market for skilled personnel is increasingly competitive, especially for technology-focussed roles, thereby raising the cost of hiring, training and retaining skilled personnel. In addition, certain economic, market and regulatory conditions and political developments (including Brexit) may reduce the pool of candidates for key management and non-executive roles, including non-executive directors with the right skills, knowledge and experience, or increase the number of departures of existing employees. Any such failure to hire, retain or engage senior management and skilled personnel could have a material adverse impact on the Groups business, financial condition and results of operations.
Many of the Groups employees in the UK, Republic of Ireland and continental Europe are represented by employee representative bodies, including trade unions. Engagement with its employees and such bodies is important to the Group in maintaining good employee relations. Any failure to do so could impact the Groups ability to operate its business effectively. Any breakdown of these relationships could adversely affect the Groups business, reputation and results of operations.
A failure in the Groups risk management framework could adversely affect the Group, including its ability to achieve its strategic objectives.
Risk management is an integral part of all of the Groups activities and includes the definition and monitoring of the Groups risk appetite and reporting on the Groups risk exposure and the potential impact thereof on the Groups financial condition. Financial risk management is highly dependent on the use and effectiveness of internal stress tests and models and ineffective risk management may arise from a wide variety of factors, including lack of transparency or incomplete risk reporting, unidentified conflicts or misaligned incentives, lack of accountability control and governance, lack of consistency in risk monitoring and management or insufficient challenges or assurance processes. Failure to manage risks effectively could adversely impact the Groups reputation or its relationship with its customers, shareholders or other stakeholders.
The Groups operations are inherently exposed to conduct risks. These include business decisions, actions or incentives that are not responsive to or aligned with the Groups customers needs or do not reflect the Groups customer-focussed strategy, ineffective product management, unethical or inappropriate use of data, outsourcing of customer service and product delivery, the possibility of alleged mis-selling of financial products and mishandling of customer complaints. Some of these risks have materialised in the past and ineffective management and oversight of conduct risks may lead to further remediation and regulatory intervention or enforcement. The Groups businesses are also exposed to risks from employee misconduct including non-compliance with policies and regulations, negligence or fraud (including financial crimes), any of which could result in regulatory fines or sanctions and serious reputational or financial harm to the Group.
The Group is seeking to embed a strong risk culture across the organisation and has implemented policies and allocated new resources across all levels of the organisation to manage and mitigate conduct risk and expects to continue to invest in its risk management framework. However, such efforts may not insulate the Group from future instances of misconduct and no assurance can be given that the Groups strategy and control framework will be effective. Any failure in the Groups risk management framework could negatively affect the Group and its financial condition through reputational and financial harm and may result in the inability to achieve its strategic objectives for its customers, employees and wider stakeholders, any of which could have a material adverse effect on the Groups business, capital position and results of operations.
The Groups operations are subject to inherent reputational risk.
Reputational risk relates to stakeholder and public perceptions of the Group arising from an actual or perceived failure to meet stakeholder expectations due to any events, behaviour, action or inaction by the Group, its employees or those with whom the Group is associated. This includes brand damage, which may be detrimental to the Groups business, including its ability to build or sustain business relationships with customers, and may cause low employee morale, regulatory censure or reduced access to, or an increase in the cost of, funding. Reputational risk may arise whenever there is a material lapse in standards of integrity, compliance, customer or operating efficiency and may adversely affect the Groups ability attract and retain customers. In particular, the Groups ability to attract and retain customers (and, in particular, corporate and retail depositors) may be adversely affected by, amongst others: negative public opinion resulting from the actual or perceived manner in which the Group conducts or modifies its business activities and operations, media coverage (whether accurate or otherwise), employee misconduct, the Groups financial performance, IT failures or cyberattacks, the level of direct and indirect government support, or the actual or perceived practices in the banking and financial industry in general, or a wide variety of other factors.
Modern technologies, in particular online social networks and other broadcast tools which facilitate communication with large audiences in short time frames and with minimal costs, may also significantly enhance and accelerate the impact of damaging information and allegations.
Although the Group has implemented a Reputational Risk Policy to improve the identification, assessment and management of customers, transactions, products and issues which represent a reputational risk, the Group cannot be certain that it will be successful in avoiding damage to its business from reputational risk. This could result in a material adverse effect on the Groups business, financial condition, results of operations and prospects.
Economic and political risk
Uncertainties surrounding the UKs withdrawal from the European Union may adversely affect the Group.
Following the EU Referendum in June 2016, and pursuant to the exit process triggered under Article 50 of the Treaty on European Union in March 2017, the UK is scheduled to leave the EU on 29 March 2019. The terms of a Brexit withdrawal agreement negotiated by the UK Government were decisively voted against by Parliament on 15 January 2019. The UK Government and Parliament are currently actively engaged in seeking to determine the terms of this departure, including any transition period, and the resulting economic, trading and legal relationships with both the EU and other counterparties currently remain unclear and subject to significant uncertainty.
As it currently stands, EU membership and all associated treaties will cease to apply at 23:00 on 29 March 2019, unless some form of transitional arrangement encompassing those associated treaties is agreed or there is unanimous agreement amongst the UK, other EU member states and the European Commission to extend the negotiation period.
The direct and indirect effects of the UKs exit from the EU and the European Economic Area (EEA) are expected to affect many aspects of the Groups business and operating environment, including as described elsewhere in these risk factors, and may be material and/or cause a near-term impact on impairments. See also The Group faces increased political and economic risks and uncertainty in the UK and global markets.
Risk factors
The longer term effects of Brexit on the Groups operating environment are difficult to predict, and are 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, or be exacerbated by, periodic financial volatility and slower economic growth, in the UK in particular, but also in Republic of Ireland, Europe and potentially the global economy.
Significant uncertainty exists as to the respective legal and regulatory arrangements under which the Group and its subsidiaries will operate when the UK is no longer a member of the EU. See The Group is finalising the requisite regulatory permissions to implement its plans for continuity of business impacted by the UKs departure from the EU, on which it will rely going forward. The legal and political uncertainty and any actions taken as a result of this uncertainty, as well as new or amended rules, could have a significant impact on the Groups operations or legal entity structure, including attendant restructuring costs, level of impairments, capital requirements, regulatory environment and tax implications and as a result may adversely impact the Groups profitability, competitive position, viability, business model and product offering.
The Group is finalising the requisite regulatory permissions to implement its plans for continuity of business impacted by the UKs departure from the EU, on which it will rely going forward.
The Group is implementing plans designed to continue its ability to clear euro payments and minimise the impact on the Groups ability to serve non-UK EEA customers in the event that there is an immediate loss of access to the European Single Market on 29 March 2019 (or any alternative date) with no alternative arrangement for continuation of such activities under current rules (also known as Hard Brexit).
To ensure continued ability to clear Euro denominated payments, the Group is finalising a third-country licence for the Frankfurt branch of National Westminster Bank Plc (NWB) with the German regulator. In addition, the Group is working to satisfy the conditions of the Deutsche Bundesbank (DBB) for access to TARGET2 clearing and settlement mechanisms. Satisfying these DBB conditions, which include a country legal opinion, and accessing SEPA, Euro 1 and TARGET2 will allow the Group (through NWB Frankfurt branch) to continue to clear cross-border payments in euros. The capacity to process these euro payments is a fundamental requirement for the daily operations and customers of all Group franchises, including Ulster Bank. The value of such payments is typically in excess of 50 billion in any one day with more than 300,000 transactions. This capacity is also critical for management of the Groups euro-denominated central bank cash balances of around 23 billion. NatWest Markets Plc (NWM Plc) will use the NWB Frankfurt branch to clear its euro payments and has also applied for a third country license to maintain liquidity management and product settlement arrangements.
Once in place, the third country licence branch approvals will each become effective when the UK leaves the EU and the current passporting arrangements cease to apply. The Group expects to have received the requisite third country licenses and access to SEPA, Euro 1 and TARGET2 ahead of the UKs departure from the EU. However, given the quantum of affected payments and lack of short-term contingency arrangements, in the event that such euro clearing capabilities were not in place in time for a Hard Brexit or are not maintained as required in the future, it could have a material impact on the Group and its customers.
Additionally, to continue serving most of the Groups EEA customers, the Group has repurposed the banking licence of its Dutch subsidiary, NatWest Markets N.V. (NWM NV). As announced on 22 February 2019, the Group has obtained court permission for a FSMA transfer scheme to replicate the master trade documentation for NWM Plcs non-UK EEA customers and transfer certain existing transactions from NWM Plc to NWM NV. Other transactions are expected to be transferred to NWM NV during 2019 (for example certain transactions with Corporate and Sovereign customers and larger EEA customers from NWM Plc, and certain Western European corporate business from National Westminster Bank Plc). The volume and pace of business transfers to NWM NV will depend on the terms and circumstances of the UKs exit from the EU, as well as the specific contractual terms of the affected products.
These changes to the Groups operating model are costly and require further changes to its business operations and customer engagement. The regulatory permissions from the Dutch and German authorities are conditional in nature and will require on-going compliance with certain conditions, including maintaining minimum capital level and deposit balances as well as a defined local physical presence going forward; such conditions may be subject to change in the future. Maintaining these permissions and the Groups access to the euro payment infrastructure will be fundamental to its business going forward and further changes to the Groups business operations may be required. Any failure in obtaining or maintaining these permissions in the circumstances described above could have a material adverse effect on the Groups results of operations, financial condition or future prospects.
The Group faces increased political and economic risks and uncertainty in the UK and global markets.
In the UK, significant economic and political uncertainty surrounds the terms of and timing of Brexit. (See also, Uncertainties surrounding the UKs withdrawal from the European Union may adversely affect the Group.) In addition, were there to be a change of UK Government as a result of a general election, the Group may face new risks as a result of a change in government policy, including more direct intervention by the UK Government in financial markets, the regulation and ownership of public companies and the extent to which the government exercises its rights as a shareholder of the Group. This could affect, in particular, the structure, strategy and operations of the Group and may negatively impact the Groups operational performance and financial results.
The Group faces additional political uncertainty as to how the Scottish parliamentary process (including, as a result of any second Scottish independence referendum) may impact the Group. RBSG and a number of other Group entities (including NWM Plc) are headquartered and incorporated in Scotland. Any changes to Scotlands relationship with the UK or the EU (as an indirect result of Brexit or other developments) would impact the environment in which the Group and its subsidiaries operate, and may require further changes to the Groups structure, independently or in conjunction with other mandatory or strategic structural and organisational changes which could adversely impact the Group.
Actual or perceived difficult global economic conditions can create challenging economic and market conditions and a difficult operating environment for the Groups businesses and its customers and counterparties, thereby affecting its financial performance.
The outlook for the global economy over the medium-term remains uncertain due to a number of factors including: trade barriers and the increased possibility of trade wars, widespread political instability, an extended period of low inflation and low interest rates, and global regional variations in the impact and responses to these factors. Such conditions could be worsened by a number of factors including political uncertainty or macro-economic deterioration in the Eurozone, China or the US, increased instability in the global financial system and concerns relating to further financial shocks or contagion (for example, due to economic concerns in emerging markets), market volatility or fluctuations in the value of the pound sterling, new or extended economic sanctions, volatility in commodity prices or concerns regarding sovereign debt. This may be compounded by the ageing demographics of the populations in the markets that the Group serves, or rapid change to the economic environment due to the adoption of technology and artificial intelligence. Any of the above developments could impact the Group directly (for example, as a result of credit losses) or indirectly (for example, by impacting global economic growth and financial markets and the Groups customers and their banking needs).
In addition, the Group is exposed to risks arising out of geopolitical events or political developments, such as trade barriers, exchange controls, sanctions and other
Risk factors
measures taken by sovereign governments that may hinder economic or financial activity levels. Furthermore, unfavourable political, military or diplomatic events, including secession movements or the exit of other member states from the EU, armed conflict, pandemics and widespread public health crises, state and privately sponsored cyber and terrorist acts or threats, and the responses to them by governments and markets, could negatively affect the business and performance of the Group.
The value of the Groups financial instruments may be materially affected by market risk, including as a result of market fluctuations. Market volatility, illiquid market conditions and disruptions in the credit markets may make it extremely difficult to value certain of the Groups financial instruments, particularly during periods of market displacement which could cause a decline in the value of the Groups financial instruments, which may have an adverse effect on the Groups results of operations in future periods, or inaccurate carrying values for certain financial instruments.
In addition, financial markets are susceptible to severe events evidenced by rapid depreciation in asset values, which may be accompanied by a reduction in asset liquidity. Under these conditions, hedging and other risk management strategies may not be as effective at mitigating trading losses as they would be under more normal market conditions. Moreover, under these conditions, market participants are particularly exposed to trading strategies employed by many market participants simultaneously and on a large scale, increasing the Groups counterparty risk. The Groups risk management and monitoring processes seek to quantify and mitigate the Groups exposure to more extreme market moves. However, severe market events have historically been difficult to predict and the Group could realise significant losses if extreme market events were to occur.
The Group expects to face significant risks in connection with climate change and the transition to a low carbon economy.
The risks associated with climate change are subject to rapidly increasing prudential and regulatory, political and societal focus, both in the UK and internationally. Embedding climate risk into the Groups risk framework in line with expected regulatory expectations, and adapting the Groups operation and business strategy to address both the risks of climate change and the transition to a low carbon economy are likely to have a significant impact on the Groups business, results of operations and financial condition.
Multilateral and UK Government undertakings to limit increases in carbon emissions in the near and medium term will require widespread levels of adjustment across all sectors of the economy, with some sectors such as property, energy, infrastructure (including transport) and agriculture likely to be particularly impacted. The nature and timing of the far-reaching commercial, technological and regulatory changes that this transition will entail are currently uncertain but the impact of such changes may be disruptive, especially if such changes do not occur in an orderly or timely manner or are not effective in reducing emissions sufficiently. Furthermore, the nature and timing of the manifestation of the physical risks of climate change (which include more extreme specific weather events such as flooding and heat waves and longer term shifts in climate) are also uncertain, and their impact on the economy is predicted to be more acute if carbon emissions are not reduced on a timely basis or to the requisite extent. The potential impact on the economy includes, but is not limited to, lower GDP growth, significant changes in asset prices and profitability of industries, higher unemployment and the prevailing level of interest rates.
UK and international regulators that are actively seeking to develop new and existing regulations directly and indirectly focussed on climate change and the associated financial risks. Such new regulations are being developed in parallel with an increasing market focus on the risks associated with climate change. In October 2018, the Groups prudential regulator, the PRA, published a draft supervisory standard which sets forth an expectation that regulated entities adopt a Board-level strategic approach to managing and mitigating the financial risks of climate change and embed the management of them into their governance frameworks, subject to existing prudential regulatory supervisory tools (including stress testing and individual and systemic capital requirements). Climate risk is also subject to various legislative actions and proposals by, among others, the European Commissions Sustainable Finance initiative that focuses on incorporating climate risk into its financial policy frameworks, including proposals (e.g., through amendments to MiFID II) for institutional investors (including pension funds) to consider and disclose climate risk criteria as part of their investment decision, and also proposals to consider changes to RWA methodologies. Furthermore, credit ratings agencies are increasingly taking into account environmental, social and governance (ESG) factors, including climate risk, as part of the credit ratings analysis, as are investors in their investment decisions.
If the Group does not adequately embed climate risk into its risk framework to appropriately measure, manage and disclose the various financial and physical risks it faces associated with climate change, or fails to adapt its strategy and business model to the changing regulatory requirements and market expectations on a timely basis, it may have a material and adverse impact on the Groups level of business growth, its competitiveness, profitability, prudential capital requirements, credit ratings, cost of funding, results of operations and financial condition.
HM Treasury (or UKGI on its behalf) could exercise a significant degree of influence over the Group and further offers or sales of the Groups shares held by HM Treasury may affect the price of securities issued by the Group.
In its November 2018 Autumn Budget, the UK Government announced its intention to continue the process of privatisation of RBSG and to carry out a programme of sales of RBSG ordinary shares with the objective of selling all of its remaining shares in RBSG by 2023-2024. On 5 June 2018, the UK Government (via HM Treasury and UK Government Investments Limited (UKGI)) disposed of approximately 7.7% of its stake in RBSG. As at 31 December 2018, the UK Government held 62.3% of the issued ordinary share capital of RBSG. There can be no certainty as to the continuation of the sell-down process or the timing or extent of such sell-downs which could result in a period of prolonged period of increased price volatility on the Groups ordinary shares. On 6 February 2019, the Group obtained shareholder approval to participate in certain directed share buyback activities. Any offers or sale, or expectations relating to the timing thereof, of a substantial number of ordinary shares by HM Treasury, or any associated directed buyback activity by the Group, could affect the prevailing market price for the outstanding ordinary shares of RBSG, which would adversely affect the Groups capital position.
In addition, UKGI manages HM Treasurys shareholder relationship with RBSG and, although HM Treasury has indicated that it intends to respect the commercial decisions of the Group and that the Group will continue to have its own independent board of directors and management team determining its own strategy, its position as a majority shareholder (and UKGIs position as manager of this shareholding) means that HM Treasury or UKGI could exercise a significant degree of influence over, among other things, the election of directors and appointment of senior management, the Groups capital strategy, dividend policy, remuneration policy or the conduct of the Groups operations, and HM Treasurys approach depends on government policy, which could change, including as a result of a general election. The manner in which HM Treasury or UKGI exercises HM Treasurys rights as majority shareholder could give rise to conflicts between the interests of HM Treasury and the interests of other shareholders, including as a result of a change in government policy. Any such conflict could have a material adverse impact on the Groups reputation, business, capital and financial condition.
Continued low interest rates have significantly affected and will continue to affect the Groups business and results.
Interest rate risk is significant for the Group, as monetary policy has been accommodative in recent years, including as a result of certain policies implemented by the Bank of England and HM Treasury such as the Term Funding Scheme, which have helped to support demand at a time of pronounced fiscal tightening and balance sheet repair. However, there remains considerable uncertainty as to the direction of interest rates and pace of change, as set by the Bank of England and other major central banks.
Risk factors
Continued sustained low or negative interest rates could put pressure on the Groups interest margins and adversely affect the Groups profitability and prospects. In addition, a continued period of low interest rates and flat yield curves has affected and may continue to affect the Groups interest rate margin realised between lending and borrowing costs.
Conversely, while increases in interest rates may support Group income, sharp increases in interest rates could lead to generally weaker than expected growth, or even contracting GDP, reduced business confidence, higher levels of unemployment or underemployment, adverse changes to levels of inflation, and falling property prices in the markets in which the Group operates.
Changes in foreign currency exchange rates may affect the Groups results and financial position.
Although the Group is now principally a UK and ROI-focussed banking group, it is subject to foreign exchange risk from capital deployed in the Groups foreign subsidiaries, branches and joint arrangements, and non-trading foreign exchange risk, including customer transactions and profits and losses that are in a currency other than the functional currency of the transaction entity. The Group also relies on issuing securities in foreign currencies that assist in meeting the Groups minimum requirements for own funds and eligible liabilities (MREL). The Group maintains policies and procedures designed to manage the impact of exposures to fluctuations in currency rates. Nevertheless, changes in currency rates, particularly in the sterling-US dollar and euro-sterling rates, can adversely affect the value of assets, liabilities (including the total amount of MREL eligible instruments), income, RWAs, capital base and expenses and the reported earnings of the Groups UK and non-UK subsidiaries and may affect the Groups reported consolidated financial condition or its income from foreign exchange dealing and may also require incremental MREL eligible instruments to be issued.
Decisions of major central banks (including by the Bank of England, the ECB and the US Federal Reserve) and political or market events (including Brexit), which are outside of the Groups control, may lead to sharp and sudden variations in foreign exchange rates. Such variations can materially affect the Groups results of operations, financial condition or prospects.
Financial resilience risk
The Group may not meet its targets and be in a position to make discretionary capital distributions to its shareholders.
As part of the Groups strategy, the Group has become a principally UK and ROI-focussed banking group and has set a number of financial, capital and operational targets for the Group including in respect of: cost:income ratios, cost reductions, CET1 ratio targets, leverage ratio targets, funding plans and requirements, reductions in RWAs and the timing thereof, employee engagement, diversity and inclusion as well as environmental, social and customer satisfaction targets and discretionary capital distributions to shareholders.
The Groups ability to meet its targets and to successfully meet its strategy is subject to various internal and external factors and risks. These include, but are not limited to, market, regulatory, macroeconomic and political uncertainties, operational risks and risks relating to the Groups business model and strategy (including emerging risks associated with ESG issues) and litigation, governmental actions, investigations and regulatory matters.
A number of factors may impact the Groups ability to maintain its current CET1 ratio target at circa 14% (over the medium term) and make discretionary capital distributions to shareholders, see also, The Group may not meet the prudential regulatory requirements for capital and MREL, or manage its capital effectively, which could trigger certain management actions or recovery options.
The Groups ability to meet its cost:income ratio target and the planned reductions in its annual underlying costs may vary considerably from year to year. Furthermore, the focus on meeting cost reduction targets may result in limited investment in other areas which could affect the Groups long-term product offering or competitive position and its ability to meet its other targets, including those related to customer satisfaction.
Any failure of the Group to meet its targets, successfully meet its strategy or make discretionary capital distributions could have a material adverse impact on the Groups business, financial condition, results of operations and prospects. There is no certainty that the Groups strategy will be successfully executed, that the Group will meet its targets and expectations or be in a position to distribute capital to its shareholders, or that the Group will be a viable, competitive or profitable banking business.
The Group operates in markets that are highly competitive, with increasing competitive pressures and technology disruption.
The markets for UK financial services, and the other markets within which the Group operates, are highly competitive, and the Group expects such competition to continue or intensify in response to customer behaviour, technological changes (including the growth of digital banking), competitor behaviour, new entrants to the market (including non-traditional financial services providers such as large retail or technology conglomerates), industry trends resulting in increased disaggregation or unbundling of financial services or conversely the re-intermediation of traditional banking services, and the impact of regulatory actions and other factors. In particular, developments in the financial sector resulting from new banking, lending and payment solutions offered by rapidly evolving incumbents, challengers and new entrants, notably with respect to payment services and products, and the introduction of disruptive technology may impede the Groups ability to grow or retain its market share and impact its revenues and profitability, particularly in its key UK retail banking segment. These trends may be catalysed by various regulatory and competition policy interventions, particularly as a result of the UK initiative on Open Banking and other remedies imposed by the Competition and Markets Authority (CMA) which are designed to further promote competition within retail banking, as well as the competition-enhancing measures under the Groups Alternative Remedies Package (see also, The cost of implementing the Alternative Remedies Package could be more onerous than anticipated).
Increasingly many of the products and services offered by the Group are, and will become, technology intensive, for example Bό, Mettle, Esme, FreeAgent, APtimise and Path, some of the Groups recent fintech ventures. The Groups ability to develop digital solutions that comply with related regulatory changes has become increasingly important to retaining and growing the Groups customer business in the UK. There can be no certainty that the Groups innovation strategy (which includes investment in its IT capability intended to address the material increase in customer use of online and mobile technology for banking as well as selective acquisitions, which carry associated risks) will be successful or that it will allow the Group to continue to grow such services in the future. Certain of the Groups current or future competitors may be more successful in implementing innovative technologies for delivering products or services to their customers. The Group may also fail to identify future opportunities or derive benefits from disruptive technologies in the context of rapid technological innovation, changing customer behaviour and growing regulatory demands, including the UK initiative on Open Banking (PSD2), resulting in increased competition from both traditional banking businesses as well as new providers of financial services, including technology companies with strong brand recognition, that may be able to develop financial services at a lower cost base.
Furthermore, the Groups competitors may be better able to attract and retain customers and key employees and may have access to lower cost funding and/or be able to attract deposits on more favourable terms than the Group. Although the Group invests in new technologies and participates in industry and research led initiatives aimed at developing new technologies, such investments may be insufficient or ineffective, especially given the Groups focus on its cost savings targets, which may limit additional investment in areas such as financial innovation and therefore could affect the Groups offering of innovative products or technologies for delivering products or services to customers and its competitive position. Furthermore, the development of innovative products depends on the Groups ability to produce underlying high quality data, failing which its ability to
Risk factors
offer innovative products may be compromised.
If the Group is unable to offer competitive, attractive and innovative products that are also profitable, it will lose market share, incur losses on some or all of its activities and lose opportunities for growth. In this context, the Group is investing in the automation of certain solutions and interactions within its customer-facing businesses, including through artificial intelligence. Such initiatives may result in operational, reputational and conduct risks if the technology used is defective, or is not fully integrated into the Groups current solutions or does not deliver expected cost savings. The investment in automated processes will likely also result in increased short-term costs for the Group.
In addition, recent and future disposals and restructurings by the Group, cost-cutting measures, as well as employee remuneration constraints, may also have an impact on its ability to compete effectively and intensified competition from incumbents, challengers and new entrants in the Groups core markets could affect the Groups ability to maintain satisfactory returns. Furthermore, continued consolidation in certain sectors of the financial services industry could result in the Groups remaining competitors gaining greater capital and other resources, including the ability to offer a broader range of products and services and geographic diversity, or the emergence of new competitors. These and other changes in the Groups competitive environment could have a material adverse effect on the Groups business, margins, profitability, financial condition and prospects.
The Group has significant exposure to counterparty and borrower risk.
The Group has exposure to many different industries, customers and counterparties, and risks arising from actual or perceived changes in credit quality and the recoverability of monies due from borrowers and other counterparties are inherent in a wide range of the Groups businesses. The Group is exposed to credit risk if a customer, borrower or counterparty defaults, or under IFRS 9, suffers a sufficiently significant deterioration of credit quality under SICR (significant increases in credit risk) rules such that it moves to Stage 2 for impairment calculation purposes. The Groups lending strategy and associated processes may fail to identify or anticipate weaknesses or risks in a particular sector, market or borrower category, or fail to adequately value physical or financial collateral, which may result in an increase in default rates for loans, which may, in turn, impact the Groups profitability. See also, Capital and risk management Credit Risk.
The credit quality of the Groups borrowers and other counterparties is impacted by prevailing economic and market conditions and by the legal and regulatory landscape in the UK and any deterioration in such conditions or changes to legal or regulatory landscapes could worsen borrower and counterparty credit quality and consequently impact the Groups ability to enforce contractual security rights. See also, The Group faces increased political and economic risks and uncertainty in the UK and global markets. In particular, developments relating to Brexit, or the consequences thereof, may adversely impact credit quality in the UK, and the resulting negative economic outlook could drive an increased level of credit impairments reflecting the more forward-looking nature of IFRS 9.
Within the UK, the level of household indebtedness remains high although the pace of credit growth has slowed during 2018. The ability of such households to service their debts could be challenged by a period of high unemployment or increased interest rates. In particular, the Group may be affected by volatility in property prices both in the residential and commercial sectors (including as a result of Brexit) given that the Groups mortgage loan portfolio as at 31 December 2018, amounted to £165.1 billion, representing 52% of the Groups total customer loan exposure. If property prices were to weaken this could lead to higher impairment charges, particularly if default rates consequently increase. In addition, the Groups credit risk may be exacerbated if the collateral that it holds cannot be realised as a result of market conditions or regulatory intervention or if it is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure that is due to the Group. This is most likely to occur during periods of illiquidity or depressed asset valuations.
Concerns about, or a default by, a financial institution could lead to significant liquidity problems and losses or defaults by other financial institutions, since the commercial and financial soundness of many financial institutions is closely related and inter-dependent as a result of credit, trading, clearing and other relationships among these financial institutions. Any perceived lack of creditworthiness of a counterparty may lead to market-wide liquidity problems and losses for the Group. This systemic risk may also adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which the Group interacts on a daily basis. See also, The Group may not be able to adequately access sources of liquidity and funding.
As a result, borrower and counterparty credit quality may cause accelerated impairment charges under IFRS 9, increased repurchase demands, higher costs, additional write-downs and losses for the Group and an inability to engage in routine funding transactions, which would have a material adverse effect on the Groups financial condition, results of operations and prospects.
The Group may not meet the prudential regulatory requirements for capital and MREL, or manage its capital effectively, which could trigger certain management actions or recovery options.
The Group is required by regulators in the UK, the EU and other jurisdictions in which it undertakes regulated activities to maintain adequate financial resources. Adequate capital also gives the Group financial flexibility in the face of turbulence and uncertainty in the global economy and specifically in its core UK and European markets, as well as permitting the Group to make discretionary capital distributions to shareholders.
As at 31 December 2018, the Groups CET1 ratio was 16.2% and the Group currently targets to maintain its CET1 ratio at circa 14% over the medium term. The Groups target capital ratio is based on a combination of its expected regulatory requirements and internal modelling, including stress scenarios and managements and/or the PRAs views on appropriate buffers above minimum operating levels.
The Groups current capital strategy is based on: the expected accumulation of additional capital through the accrual of profits over time; the planned reduction of its RWAs through disposals and natural attrition; capital management initiatives which focus on improving capital efficiency through improved data and releasing excess capital trapped in Group subsidiaries; and discretionary capital distributions.
A number of factors may impact the Groups ability to maintain its current CET1 ratio target and achieve its capital strategy. These include, amongst other things:
· a depletion of its capital resources through increased costs or liabilities, reduced profits or losses (including as a result of extreme one-off incidents such as cyber, fraud or conduct issues) or , sustained periods of low or lower interest rates, reduced asset values resulting in write-downs, impairments, changes in accounting policy, accounting charges or foreign exchange movements;
· a failure to reduce RWAs in accordance within the timeline contemplated by the Groups capital plan;
· an increase in the quantum of RWAs in excess of that expected, including due to regulatory changes;
· changes in prudential regulatory requirements including the Groups Total Capital Requirement set by the PRA, including Pillar 2 requirements and regulatory buffers, as well as any applicable scalars; and
· double leverage and reduced upstreaming of dividends from the Groups subsidiaries as a result of the Bank of Englands and/or the Groups evolving views on distribution of capital within groups and the financial performance and condition of the Groups subsidiaries.
A shortage of capital could in turn affect the Groups capital ratio, and/or ability to make capital distributions.
In addition to regulatory capital, RBSG is required to maintain a set quantum of MREL set as a percentage of its RWAs. MREL comprises loss-absorbing senior funding and regulatory capital instruments. The Bank of
Risk factors
England has identified single point-of-entry as the preferred resolution strategy for the Group. As a result, RBSG is the only Group entity that can externally issue securities that count towards the Groups MREL requirements, the proceeds of which can then be downstreamed to meet the internal MREL issuance requirements of its operating entities and intermediate holding companies as required. The inability of the Group to reduce its RWAs in line with assumptions in its funding plans could result in failure to meet its MREL requirements.
If the Group is unable to raise the requisite amount of regulatory capital or MREL, downstream the proceeds of MREL to subsidiaries, as required, in the form of internal MREL, or to otherwise meet its regulatory capital, MREL and leverage requirements, it may be exposed to increased regulatory supervision or sanctions, loss of investor confidence and constrained or more expensive funding and be unable to make dividend payments on its ordinary shares or maintain discretionary payments on capital instruments.
If, under a stress scenario, the level of capital or MREL falls outside of risk appetite, there are a range of recovery management actions (focussed on risk reduction and mitigation) that the Group could take to manage its capital levels, which may not be sufficient to restore adequate capital levels. Under the EU Bank Recovery and Resolution Framework (BRRD), as implemented in the UK, a breach of the Groups applicable capital or leverage requirements may trigger the application of the Groups recovery plan to remediate a deficient capital position. The Groups regulator may request that the Group carry out certain capital management actions or, if the Groups CET1 ratio falls below 7%, certain regulatory capital instruments issued by the Group will be written-down or converted into equity and there may be an issue of additional equity by the Group, which could result in the dilution of the Groups existing shareholders. The success of such issuances will also be dependent on favourable market conditions and the Group may not be able to raise the amount of capital required on acceptable terms or at all. Separately, the Group may address a shortage of capital by taking action to reduce leverage exposure and/or RWAs via asset or business disposals. Such actions may, in turn, affect, among other things, the Groups product offering, credit ratings, ability to operate its businesses, pursue its current strategies and pursue strategic opportunities, any of which may have a material adverse effect on the underlying profitability of the Group and future growth potential. See also, The Group may become subject to the application of UK statutory stabilisation or resolution powers which may result in, among other actions, the write-down or conversion of certain of the Groups securities, including its ordinary shares.
The Group may not be able to adequately access sources of liquidity and funding.
The Group is required to access sources of liquidity and funding through retail and wholesale deposits, as well as through the debt capital markets. As at 31 December 2018, the Group held £384 billion in deposits. The level of deposits may fluctuate due to factors outside the Groups control, such as a loss of confidence (including in individual Group entities), increasing competitive pressures for retail customer deposits or the reduction or cessation of deposits by foreign wholesale depositors, which could result in a significant outflow of deposits within a short period of time. See also, The Group has significant exposure to counterparty and borrower risk. An inability to grow, or any material decrease in, the Groups deposits could, particularly if accompanied by one of the other factors described above, materially affect the Groups ability to satisfy its liquidity needs.
As at 31 December 2018, the Groups liquidity coverage ratio was 158%. If its liquidity position were to come under stress, and if the Group is unable to raise funds through deposits or in the debt capital markets on acceptable terms or at all, its liquidity position could be adversely affected and it might be unable to meet deposit withdrawals on demand or at their contractual maturity, to repay borrowings as they mature, to meet its obligations under committed financing facilities, to comply with regulatory funding requirements, to undertake certain capital and/or debt management activities, or to fund new loans, investments and businesses. The Group may need to liquidate unencumbered assets to meet its liabilities, including disposals of assets not previously identified for disposal to reduce its funding commitments. In a time of reduced liquidity, the Group may be unable to sell some of its assets, or may need to sell assets at depressed prices, which in either case could have a material adverse effect on the Groups financial condition and results of operations.
Any reduction in the credit rating assigned to RBSG, any of its subsidiaries or any of its respective debt securities could adversely affect the availability of funding for the Group, reduce the Groups liquidity position and increase the cost of funding.
Rating agencies regularly review the RBSG and Group entity credit ratings, which could be negatively affected by a number of factors, including political and regulatory developments, changes in rating methodologies, changes in the relative size of the loss-absorbing buffers protecting bondholders and depositors, a challenging macroeconomic environment, the impact of Brexit, a potential second Scottish independence referendum, further reductions of the UKs sovereign credit rating, market uncertainty and the inability of the Group to produce sustained profits.
Any reductions in the credit ratings of RBSG or of certain Group entities (for example, NWM Plc), including in particular downgrades below investment grade, may affect the Groups access to money markets, reduce the size of its deposit base and trigger additional collateral or other requirements in derivatives contracts and other secured funding arrangements or the need to amend such arrangements which could adversely affect the Groups cost of funding, its access to capital markets and its capital instruments and could limit the range of counterparties willing to enter into transactions with the Group and therefore also adversely impact its competitive position, any of which could have a material adverse impact on the Groups earnings, cash flow and financial condition.
The Group may be adversely affected if it fails to meet the requirements of regulatory stress tests.
The Group is subject to annual stress tests by its regulator in the UK and is also subject to stress tests by European regulators with respect to RBSG, NWM N.V. and Ulster Bank Ireland DAC. Stress tests are designed to assess the resilience of banks to potential adverse economic or financial developments and ensure that they have robust, forward-looking capital planning processes that account for the risks associated with their business profile. If the stress tests reveal that a banks existing regulatory capital buffers are not sufficient to absorb the impact of the stress, then it is possible that the bank will need to take action to strengthen its capital position.
Failure by the Group to meet the quantitative and qualitative requirements of the stress tests carried out by its regulators in the UK and elsewhere may result in the Groups regulators requiring the Group to generate additional capital, reputational damage, increased supervision and/or regulatory sanctions, restrictions on capital distributions and loss of investor confidence, which may have a material adverse impact on the Groups financial condition, results of operations and prospects.
The Group could incur losses or be required to maintain higher levels of capital as a result of limitations or failure of various models.
Given the complexity of the Groups business, strategy and capital requirements, the Group relies on analytical models for a wide range of purposes, including to manage its business, assess the value of its assets and its risk exposure, as well as to anticipate capital and funding requirements (including to facilitate the Groups mandated stress testing). In addition, the Group utilises models for valuations, credit approvals, calculation of loan impairment charges on an IFRS 9 basis, financial reporting and for financial crime and fraud risk management. The Groups models, and the parameters and assumptions on which they are based, are periodically reviewed and updated to maximise their accuracy.
Such models are inherently designed to be predictive in nature. Failure of these models, including due to errors in model design or inputs, to accurately reflect changes in the micro and macroeconomic environment in which the Group operates, to capture risks and exposures at the subsidiary level, to be updated in line with the Groups current business model or operations, or findings of
Risk factors
deficiencies by the Groups regulators (including as part of the Groups mandated stress testing) may result in increased capital requirements or require management action. The Group may also face adverse consequences as a result of actions by management based on models that are poorly developed, implemented or used, models that are based on inaccurate or compromised data or as a result of the modelled outcome being misunderstood, or by such information being used for purposes for which it was not designed. Risks arising from the use of models could have a material adverse effect on the Groups business, financial condition and results of operations, minimum capital requirements and reputation.
The Groups financial statements are sensitive to the underlying accounting policies, judgements, estimates and assumptions.
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, income, expenses, exposures and RWAs. Due to the inherent uncertainty in making estimates (particularly those involving the use of complex models), future results may differ from those estimates. Estimates, judgements, assumptions and models take into account historical experience and other factors, including market practice and expectations of future events that are believed to be reasonable under the circumstances.
The accounting policies deemed critical to the Groups results and financial position, based upon materiality and significant judgements and estimates, which include loan impairment provisions, are set out in Critical accounting policies and key sources of estimation uncertainty on page 190. New accounting standards and interpretations that have been issued by the International Accounting Standards Board but which have not yet been adopted by the Group are discussed in Accounting developments on page 190. Changes resulting from such new accounting standards and interpretations could have a material adverse effect on the Groups earnings, financial condition and capital position.
Changes in accounting standards may materially impact the Groups financial results.
Changes in accounting standards or guidance by accounting bodies or in the timing of their implementation, whether immediate or foreseeable, could result in the Group having to recognise additional liabilities on its balance sheet, or in further write-downs or impairments and could also significantly impact the financial results, condition and prospects of the Group.
In January 2018, a new accounting standard for financial instruments (IFRS 9) became effective, which introduced impairment based on expected credit losses, rather than the incurred loss model previously applied under IAS 39. The Group expects IFRS 9 to create earnings and capital volatility, and the Group took a £101 million impairment charge at 30 September 2018, reflecting the more uncertain economic outlook.
The valuation of financial instruments, including derivatives, measured at fair value can be subjective, in particular where models are used which include unobservable inputs. Generally, to establish the fair value of these instruments, the Group relies on quoted market prices or, where the market for a financial instrument is not sufficiently credible, internal valuation models that utilise observable market data. In certain circumstances, the data for individual financial instruments or classes of financial instruments utilised by such valuation models may not be available or may become unavailable due to prevailing market conditions. In such circumstances, the Groups internal valuation models require the Group to make assumptions, judgements and estimates to establish fair value, which are complex and often relate to matters that are inherently uncertain.
The Group will adopt IFRS 16 Leases with effect from 1 January 2019 as disclosed in the Accounting Policies. This is expected to increase Other assets by £1.3 billion and Other liabilities by £1.9 billion. While adoption of this standard has no effect on the Groups cash flows, it will impact financial ratios which may influence investors perception of the financial condition of the Group.
The value or effectiveness of any credit protection that the Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties.
The Group has some remaining credit exposure arising from over-the-counter derivative contracts, mainly credit default swaps (CDSs), and other credit derivatives, each of which are carried at fair value. The fair value of these CDSs, as well as the Groups exposure to the risk of default by the underlying counterparties, depends on the valuation and the perceived credit risk of the instrument against which protection has been bought. Many market counterparties have been adversely affected by their exposure to residential mortgage-linked and corporate credit products, whether synthetic or otherwise, and their actual and perceived creditworthiness may deteriorate rapidly. If the financial condition of these counterparties or their actual or perceived creditworthiness deteriorates, the Group may record further credit valuation adjustments on the credit protection bought from these counterparties under the CDSs. The Group also recognises any fluctuations in the fair value of other credit derivatives. Any such adjustments or fair value changes may have a material adverse effect on the Groups earnings, financial condition and capital position.
The Groups results could be adversely affected if an event triggers the recognition of a goodwill impairment.
The Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Acquired goodwill is recognised at cost less any accumulated impairment losses. As required by IFRS, the Group tests goodwill for impairment at least annually, or more frequently when events or circumstances indicate that it might be impaired.
An impairment test compares the recoverable amount (the higher of the value in use and fair value less cost to sell) of an individual cash generating unit with its carrying value. At 31 December 2018, the Group carried goodwill of £5.6 billion on its balance sheet. The value in use and fair value of the Groups cash-generating units are affected by market conditions and the economies in which the Group operates.
Where the Group is required to recognise a goodwill impairment, it is recorded in the Groups income statement, but it has no effect on the Groups regulatory capital position. Further impairments of the Groups goodwill could have an adverse effect on the Groups results and financial condition.
The Group may become subject to the application of UK statutory stabilisation or resolution powers which may result in, among other actions, the write-down or conversion of certain of the Groups securities, including its ordinary shares.
The Banking Act 2009, as amended (Banking Act), implements the BRRD in the UK and creates a special resolution regime (SRR). Under the SRR, HM Treasury, the Bank of England and the PRA and FCA (together Authorities) are granted substantial powers to resolve and stabilise UK-incorporated financial institutions. Five stabilisation options exist under the current SRR: (i) transfer of all of the business of a relevant entity or the shares of the relevant entity to a private sector purchaser; (ii) transfer of all or part of the business of the relevant entity to a bridge bank wholly-owned by the Bank of England; (iii) transfer of part of the assets, rights or liabilities of the relevant entity to one or more asset management vehicles for management of the transferors assets, rights or liabilities; (iv) the write-down, conversion, transfer, modification, or suspension of the relevant entitys equity, capital instruments and liabilities; and (v) temporary public ownership of the relevant entity. These tools may be applied to RBSG as the parent company or an affiliate where certain conditions are met (such as, whether the firm is failing or likely to fail, or whether it is reasonably likely that action will be taken (outside of resolution) that will result in the firm no longer failing or being likely to fail). Moreover, the SRR provides for modified insolvency and administration procedures for relevant entities, and confers ancillary powers on the Authorities, including the power to modify or override certain contractual arrangements in certain circumstances. The Authorities are also empowered by order to amend the law for the purpose of enabling the powers under the SRR to be used effectively. Such orders may promulgate provisions with retrospective applicability.
Risk factors
Under the Banking Act, the Authorities are generally required to have regard to specified objectives in exercising the powers provided for by the Banking Act. One of the objectives (which is required to be balanced as appropriate with the other specified objectives) refers to the protection and enhancement of the stability of the financial system of the UK. Moreover, the no creditor worse off safeguard contained in the Banking Act may not apply in relation to an application of the separate write-down and conversion power relating to capital instruments under the Banking Act, in circumstances where a stabilisation power is not also used; holders of debt instruments which are subject to the power may, however, have ordinary shares transferred to or issued to them by way of compensation.
Uncertainty exists as to how the Authorities may exercise the powers granted to them under the Banking Act. In addition, the determination that ordinary shares, securities and other obligations issued by the Group may be subject to write-down, conversion or bail-in (as applicable) is unpredictable and may depend on factors outside of the Groups control. Moreover, the relevant provisions of the Banking Act remain untested in practice. However, if the Group is at or is approaching the point of non-viability such that regulatory intervention is required, any exercise of the resolution regime powers by the Authorities may adversely affect holders of RBSGs ordinary shares or other Group securities that fall within the scope of bail-in powers. This may result in various actions being undertaken in relation to the Group and any securities of the Group, including the write-down or conversion of certain of the Groups securities. There would also be a corresponding material adverse effect on the market price of such securities.
Legal, regulatory and conduct risk
The Groups businesses are subject to substantial regulation and oversight, which are constantly evolving and may adversely affect the Group.
The Group is subject to extensive laws, regulations, corporate governance practice and disclosure requirements, administrative actions and policies in each jurisdiction in which it operates. Many of these have been introduced or amended recently and are subject to further material changes, which may increase compliance and conduct risks. The Group expects government and regulatory intervention in the financial services industry to remain high for the foreseeable future.
In recent years, regulators and governments have focussed on reforming the prudential regulation of the financial services industry and the manner in which the business of financial services is conducted. Among others, measures have included: enhanced capital, liquidity and funding requirements, implementation of the UK ring-fencing regime, implementation and strengthening of the recovery and resolution framework applicable to financial institutions in the UK, the EU and the US, financial industry reforms (including in respect of MiFID II), enhanced data privacy and IT resilience requirements, enhanced regulations in respect of the provision of investment services and activities, and increased regulatory focus in certain areas, including conduct, consumer protection regimes, anti-money laundering, anti-bribery, anti-tax evasion, payment systems, sanctions and anti-terrorism laws and regulations. This has resulted in the Group facing greater regulation and scrutiny in the UK, the US and other countries in which it operates.
Recent regulatory changes, proposed or future developments and heightened levels of public and regulatory scrutiny in the UK, Europe and the US have resulted in increased capital, funding and liquidity requirements, changes in the competitive landscape, changes in other regulatory requirements and increased operating costs, and have impacted, and will continue to impact, product offerings and business models.
In particular, the Group is required to comply with regulatory requirements in respect of the implementation of the UK ring-fencing regime and to ensure operational continuity in resolution; the steps required to ensure such compliance entail significant costs, and also impose significant operational, legal and execution risk. Serious consequences could arise should the Group be found to be non-compliant with such regulatory requirements. Such changes may also result in an increased number of regulatory investigations and proceedings and have increased the risks relating to the Groups ability to comply with the applicable body of rules and regulations in the manner and within the time frames required.
Any of these developments (including any failure to comply with new rules and regulations) could have a significant impact on the Groups authorisations and licenses, the products and services that the Group may offer, its reputation and the value of its assets, the Groups operations or legal entity structure, and the manner in which the Group conducts its business. Areas in which, and examples of where, governmental policies, regulatory and accounting changes and increased public and regulatory scrutiny could have an adverse impact (some of which could be material) on the Group include, but are not limited to, those set out above as well as the following:
· general changes in government, central bank, regulatory or competition policy, or changes in regulatory regimes that may influence investor decisions in the markets in which the Group operates;
· amendments to the framework or requirements relating to the quality and quantity of regulatory capital to be held by the Group as well as liquidity and leverage requirements, either on a solo, consolidated or subgroup level;
· changes to the design and implementation of national or supranational mandated recovery, resolution or insolvency regimes or the implementation of additional or conflicting loss-absorption requirements, including those mandated under UK rules, the BRRD, MREL or by the Financial Stability Boards (FSB) recommendations on total loss-absorbing capacity (TLAC);
· additional rules and regulatory initiatives and review relating to customer protection and resolution of disputes and complaints, including increased focus by regulators (including the Financial Ombudsman Service) on how institutions conduct business, particularly with regard to the delivery of fair outcomes for customers and orderly/transparent markets;
· rules and regulations relating to, and enforcement of, anti-corruption, anti-bribery, anti-money laundering, anti-terrorism, sanctions, anti-tax evasion or other similar regimes;
· the imposition of additional restrictions on the Groups ability to compensate its senior management and other employees and increased responsibility and liability rules applicable to senior and key employees;
· rules relating to foreign ownership, expropriation, nationalisation and confiscation of assets;
· changes to corporate governance practice and disclosure requirements, senior manager responsibility, corporate structures and conduct of business rules;
· financial market infrastructure reforms establishing new rules applying to investment services, short selling, market abuse, derivatives markets and investment funds;
· increased attention to the protection and resilience of, and competition and innovation in, UK payment systems and developments relating to the UK initiative on Open Banking and the European directive on payment services;
· new or increased regulations relating to customer data and privacy protection as well as IT controls and resilience, including the GDPR;
· the introduction of, and changes to, taxes, levies or fees applicable to the Groups operations, such as the imposition of a financial transaction tax, changes in tax rates, changes in the scope and administration of the Bank Levy, increases in the bank corporation tax surcharge in the UK, restrictions on the tax deductibility of interest payments or further restrictions imposed on the treatment of carry-forward tax losses that reduce the value of deferred tax assets and require increased payments of tax;
· laws and regulations in respect of climate change and sustainable finance (including ESG) considerations; and
· other requirements or policies affecting the Group and its profitability or product offering, including through the imposition of increased compliance obligations or obligations which may lead to restrictions on business growth, product offerings, or pricing.
Risk factors
Changes in laws, rules or regulations, or in their interpretation or enforcement, or the implementation of new laws, rules or regulations, including contradictory or conflicting laws, rules or regulations by key regulators or policymakers in different jurisdictions, or failure by the Group to comply with such laws, rules and regulations, may have a material adverse effect on the Groups business, financial condition and results of operations. In addition, uncertainty and insufficient international regulatory coordination as enhanced supervisory standards are developed and implemented may adversely affect the Groups ability to engage in effective business, capital and risk management planning.
The Group is subject to a number of legal, regulatory and governmental actions and investigations including conduct-related reviews and redress projects, the outcomes of which are inherently difficult to predict, and which could have an adverse effect on the Group.
The Groups operations are diverse and complex and it operates in legal and regulatory environments that expose it to potentially significant legal proceedings, and civil and criminal regulatory and governmental actions. The Group has settled a number of legal and regulatory actions over the past several years but continues to be, and may in the future be, involved in such actions in the US, the UK, Europe and other jurisdictions.
The legal and regulatory actions specifically referred to below are, in the Groups view, the most significant legal and regulatory actions to which the Group is currently exposed. However, the Group is also subject to a number of ongoing reviews, investigations and proceedings (both formal and informal) by governmental law enforcement and other agencies and litigation proceedings, the adverse resolution of which may have a material adverse impact on the Group. These relate to, among other matters, the offering of securities, conduct in the foreign exchange market, the setting of benchmark rates such as LIBOR and related derivatives trading, the issuance, underwriting, and sales and trading of fixed-income securities (including government securities), product mis-selling, customer mistreatment, anti-money laundering, antitrust and various other compliance issues. Legal and regulatory actions are subject to many uncertainties, and their outcomes, including the timing, amount of fines or settlements or the form of any settlements, which may be material and in excess of any related provisions, are often difficult to predict, particularly in the early stages of a case or investigation, and the Groups expectation for resolution may change.
In particular, the Group has for a number of years been involved in conduct-related reviews and redress projects, including a review of certain historic customer connections in its former Global Restructuring Group (GRG), management of claims arising from historic sales of payment protection insurance, and a review of tracker mortgage products in the Republic of Ireland. In relation to the GRG review, the Group established a complaints process in November 2016, overseen by an independent third party. The complaints process closed on 22 October 2018 for new complaints in the UK and, with the exception of a small cohort of potential complainants for whom there is an extended deadline, on 31 December 2018 for new complaints in the Republic of Ireland. An additional provision of £50 million was taken in Q4 2018, reflecting greater than predicted complaints volumes in the week leading up to the closure of the complaints process. In addition, the Group continues to handle claims in relation to historic sales of payment protection insurance and took additional provisions of £200 million in Q3 2018, reflecting increased complaint volumes as the complaint deadline of 31 August 2019 approaches. In the Republic of Ireland, UBI DAC, remains engaged in a review of the treatment of customers who have been sold mortgages with a tracker interest rate or with a tracker interest rate entitlement. A redress and compensation exercise is ongoing in respect of this matter. See also, Litigation, investigations and reviews of Note 27 on the consolidated accounts for details of these matters. The Group has dedicated resources in place to manage claims and complaints relating to the above and other conduct-related matters. Provisions taken in respect of such matters include the costs involved in administering the various complaints processes. Any failure to administer such processes adequately, or to handle individual complaints fairly or appropriately, could result in further claims as well as the imposition of additional measures or limitations on the Groups operations, additional supervision by the Groups regulators, and loss of investor confidence.
Adverse outcomes or resolution of current or future legal or regulatory actions, including conduct-related reviews or redress projects, could result in restrictions or limitations on the Groups operations, and could adversely impact the Groups capital position or its ability to meet regulatory capital adequacy requirements. Failure to comply with undertakings made by the Group to its regulators may result in additional measures or penalties being taken against the Group.
The Group may not effectively manage the transition of LIBOR and other IBOR rates to alternative risk free rates.
UK and international regulators are driving a transition from the use of interbank offer rates (IBORs), including LIBOR, to alternative risk free rates (RFRs). In the UK, the FCA has asserted that they will not compel LIBOR submissions beyond 2021 , thereby jeopardising its continued availability, and have strongly urged market participants to transition to RFRs, as has the CFTC and other regulators in the United States. The Group has significant exposure to IBORs primarily on its derivatives, commercial lending and legacy securities. Until there is market acceptance on the form of alternative RFRs for different products, the legal mechanisms to effect transition cannot be confirmed, and the impact cannot be determined nor any associated costs accounted for. The transition and uncertainties around the timing and manner of transition to RFRs represent a number of risks for the Group, its customers and the financial services industry more widely. These include risks related to: legal risks (as changes may be required to documentation for new or existing transactions); financial risks (which may arise from any changes in valuation of financial instruments linked to benchmarks rates and may impact the Groups cost of funds and its risk management related financial models); pricing risks (such as changes to benchmark rates could impact pricing mechanisms on certain instruments); operational risks (due to the potential requirement to adapt IT systems, trade reporting infrastructure and operational processes); and conduct risks (which may relate to communication regarding the potential impact on customers, and engagement with customers during the transition period).
It is therefore currently difficult to determine to what extent the changes will affect the Group, or the costs of implementing any relevant remedial action. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms and as to the continuation of LIBOR or EURIBOR may adversely affect financial instruments using LIBOR or EURIBOR as benchmarks. The implementation of any alternative RFRs may be impossible or impracticable under the existing terms of such financial instruments and could have an adverse effect on the value of, return on and trading market for such financial instruments
The Group operates in markets that are subject to intense scrutiny by the competition authorities.
There is significant oversight by competition authorities of the markets which the Group operates in. The competitive landscape for banks and other financial institutions in the UK, the rest of Europe and the US is rapidly changing. 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 UK retail banking sector has been subjected to intense scrutiny by the UK competition authorities and by other bodies, including the FCA and the Financial Ombudsman Service, in recent years, including with a number of reviews/inquiries being carried out, including market reviews conducted by the CMA and its predecessor the Office of Fair Trading regarding SME banking and personal banking products and services, the Independent Commission on Banking and the Parliamentary Commission on Banking Standards.
These reviews raised significant concerns about the effectiveness of competition in the retail banking sector. The CMAs Retail Banking Market Order 2017 imposes remedies primarily intended to make it easier for consumers and businesses to compare
Risk factors
personal current account (PCA) and SME bank products, increase the transparency of price comparison between banks and amend PCA overdraft charging. These remedies impose additional compliance requirements on the Group and could, in aggregate, adversely impact the Groups competitive position, product offering and revenues.
Adverse findings resulting from current or future competition investigations may result in the imposition of reforms or remedies which may impact the competitive landscape in which the Group operates or result in restrictions on mergers and consolidations within the financial sector, resulting in a material adverse effect on the Groups business, margins, profitability, financial condition and prospects.
The cost of implementing the Alternative Remedies Package could be more onerous than anticipated.
In connection with the implementation of the Alternative Remedies Package (regarding the business previously described as Williams & Glyn), an independent body (Independent Body) has been established to administer the Alternative Remedies Package. The implementation of the Alternative Remedies Package has involved costs for the Group, including but not limited to the funding commitments of £425 million for the Capability and Innovation Fund and £350 million for the incentivised switching scheme, both being administered by the Independent Body. Implementation of the Alternative Remedies Package may involve additional costs for the Group and may also divert resources from the Groups operations and jeopardise the delivery and implementation of other significant plans and initiatives. In addition, under the terms of the Alternative Remedies Package, the Independent Body may require the Group to modify certain aspects of the Groups execution of the incentivised switching scheme, which could increase the cost of implementation. Furthermore, should the uptake within the incentivised switching scheme not be sufficient, the Independent Body has the ability to extend the duration of the scheme by up to twelve months, impose penalties of up to £50 million, and can compel the Group to extend the customer base to which the scheme applies which may result in prolonged periods of disruption to a wider portion of the Groups business.
As a direct consequence of the incentivised switching scheme (which comprises part of the Alternative Remedies Package), the Group will lose existing customers and deposits, which in turn will have adverse impacts on the Groups business and associated revenues and margins. Furthermore, the capability and innovation fund (which also comprises part of the Alternative Remedies Package) is intended to benefit eligible competitors and negatively impact the Groups competitive position. To support the incentivised switching initiative, upon request by an eligible bank, the Group has agreed to grant those customers which have switched to eligible banks under the incentivised switching scheme access to its branch network for cash and cheque handling services, which may impact customer service quality for the Groups own customers with consequent competitive, financial and reputational implications. The implementation of the incentivised switching scheme is also dependent on the engagement of the eligible banks with the incentivised switching scheme and the application of the eligible banks to and approval by the Independent Body. The incentivised transfer of SME customers to third party banks places reliance on those third parties to achieve satisfactory customer outcomes which could give rise to reputational damage to the Group if these are not forthcoming.
A failure to comply with the terms of the Alternative Remedies Package could result in the imposition of additional measures or limitations on the Groups operations, additional supervision by the Groups regulators, and loss of investor confidence, any of which could have a material adverse impact on the Group.
Changes in tax legislation or failure to generate future taxable profits may impact the recoverability of certain deferred tax assets recognised by the Group.
In accordance with IFRS, the Group has recognised deferred tax assets on losses available to relieve future profits from tax only to the extent it is probable that they will be recovered. The deferred tax assets are quantified on the basis of current tax legislation and accounting standards and are subject to change in respect of the future rates of tax or the rules for computing taxable profits and offsetting allowable losses.
Failure to generate sufficient future taxable profits or further changes in tax legislation (including with respect to rates of tax) or accounting standards may reduce the recoverable amount of the recognised tax loss deferred tax assets, amounting to £1.0 billion as at 31 December 2018. Changes to the treatment of certain deferred tax assets may have a material adverse impact on the Groups capital position. In addition, the Groups interpretation or application of relevant tax laws may differ from those of the relevant tax authorities and provisions are made for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax authorities. The amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of such matters.
Additional Information
Description of property and equipment
RBS operates from a number of locations worldwide, principally in the UK. At 31 December 2018 the Royal Bank and NatWest had 199 and 656 retail branches respectively, in the UK. Ulster Bank has a footprint of 132 branches and a network of business banking offices across Northern Ireland and the Republic of Ireland. A substantial majority of the UK branches are owned by the Royal Bank, NatWest and their subsidiaries or are held under leases with unexpired terms of over 50 years. RBSs principal properties include its headquarters at Gogarburn, Edinburgh, its principal offices in London is 280 Bishopsgate and the Drummond House administration centre located at South Gyle, Edinburgh.
Major shareholders
In December 2008, The Solicitor for the Affairs of Her Majestys Treasury (HMT) acquired 22,854 million ordinary shares of 25p and during 2009 acquired a further 16,791 million ordinary shares of 25p, representing 70.3 % of the companys issued ordinary share capital.
In December 2009, HMT acquired 51 billion B shares in the company, representing the entire issued B share capital. In 2015, HMT sold 630 million of the companys ordinary shares and converted its entire holding of B shares into 5.1 billion new ordinary shares of £1 each. In June 2018 HMT sold a further 925 million of the companys ordinary shares. At 31 December 2018, HMTs holding in the companys ordinary shares was 62.3%. As far as the company is aware, there have been no other significant changes in the percentage ownership of major shareholders of the companys ordinary shares or preference shares during the three years ended 15 February 2019.
Since 1 January 2017, the company has redeemed substantially all of the preference shares that were in issue (refer to Note 19 for further details). All shareholders within a class of the companys shares have the same voting rights.
As at 31 December 2018, almost all of the companys US$ denominated preference shares and American Depository Shares representing ordinary shares were held by shareholders registered in the US. All other shares were predominantly held by shareholders registered outside the US.
Our Code of conduct
The Groups Code of Conduct (Our Code) lets everyone know what to expect of each other, what to do when unsure of a decision, and where to go for advice when needed. It is available at rbs.com>about us>our values, or without charge, and upon request, by contacting Corporate Governance and Regulatory Affairs at the telephone number listed on page 293. In 2016 we incorporated five new standards of behaviour into Our Code: (1) You must act with integrity; (2) You must act with due skill, care and diligence; (3) You must be open and cooperative with the Financial Conduct Authority (FCA), the Prudential Regulatory Authority (PRA) and other regulators; (4) You must pay due regard to the interests of customers and treat them fairly; and (5) You must observe proper standards of market conduct. These conduct rules are part of the changes our UK banking regulators, the PRA and FCA, made to improve accountability across the financial sector as part of the Individual Accountability Regime. The rules are very much in keeping with the values and behaviours that we are already following across the Group.
Additional Information
Iran sanctions and related disclosures
Disclosure pursuant to section 13(r) of the Securities Exchange Act
Section 13(r) of the Securities Exchange Act, added by section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, requires an issuer to disclose in its annual or quarterly reports, as applicable, whether, during the period covered by the report, it or any of its affiliates knowingly engaged in specified activities or transactions relating to Iran or with individuals or entities designated under Executive Order 13382 or 13224. Disclosure is required of certain activities conducted outside the United States by non-U.S. entities in compliance with local law, whether or not the activities are sanctionable under U.S. law.
In order to comply with this requirement, the following activities of RBS Groups affiliates are disclosed in response to section 13(r).
Transactions involving Iranian Government owned entities
During 2018 affiliates of RBS Group (RBSG) facilitated 9 payments which were remitted by Iranian Government owned entities and received by RBSG customers (non-designated and located in the United Kingdom) in relation to legal and professional fees).
In addition, there were two outward payments where the beneficiary was an Iranian Government owned entity. The transactions related to refund of an unfulfilled order by an RBSG customer and a payment connected to a UK oil and gas field located in the North Sea.
In 2018 RBSG affiliates also received 32 payments facilitated by entities designated under Executive Order 13599. These transactions were in relation to remittances involving non-Iranian entities.
All the payments described above were processed in full compliance with applicable sanctions and where relevant authorised under applicable licence.
Transactions involving Iranian Government owned entities totalled 43 and resulted in £21,000 of gross revenue to RBSG. Considering the processes in place to undertake such transactions, including enhanced due diligence processes, RBSG has not made any profit from these transactions. RBSG has a restrictive risk appetite in relation to transactions involving Iran. Accordingly, the number of transactions included in this disclosure is lower than included in the 2017 disclosure. RBSG intends to continue to engage in transactions similar to those described in this paragraph as long as such transactions are in compliance with applicable sanctions laws and within RBSGs risk appetite.
RBSG maintains one account for an Iranian Government entity located in the United Kingdom. The purpose of the account is to facilitate domestic transactions for employee salary, rent and operating costs such as UK taxes and utilities. No commercial activity is processed through the account.
Guarantees
Under applicable licenses granted by appropriate authorities, affiliates of RBSG hold three legacy guarantees entered into between 1998 and 2005, which support arrangements lawfully entered into by affiliates of RBSG customers with Iranian counterparties. These legacy guarantees are in favour of Iranian Government owned financial institutions. The affiliates of RBSG have made considerable efforts to exit and formally cancel the guarantees.
In 2018, one existing guarantee earned commission of EUR 96.00, and two additional existing guarantees received no revenue.
Iranian Petroleum Industry
Section 13(r) of the Securities Exchange Act (as amended) requires disclosure of any knowing engagement in activity described in section 5 (a) or (b) of the Iran Sanctions Act, including significant investments in or transactions that could develop the Iranian petroleum or petrochemical sectors. In full compliance with applicable laws an affiliate of RBSG maintained transactional banking facilities on behalf of a UK Company (Non-Iranian Party) in relation to its interest in a joint operating agreement with a company owned and controlled by the Government of Iran relating to a UK oil and gas field located in the North Sea.
Under authorisation from relevant sanctions authorities the Non-Iranian party was able to undertake all transactions and activities pertaining to the operation and production of the UK field, including the sale of gas, oil, condensate, natural gas liquids or other hydrocarbon products produced from the field.
During 2018, affiliates of RBSG also received a number of payments connected to the production, sale and transport of Iranian petroleum or related hydrocarbon products. None of these transactions directly involved Iranian Government owned entities or Iranian Government owned financial institutions. They were all processed on behalf of the Non-Iranian Party. All such payments were made in compliance with applicable sanctions and under license. These transactions form part of those disclosed in the paragraphs above. As already outlined the processes in place to undertake such transactions, including enhanced due diligence processes, means that RBSG has not made any profit from these transactions.
During the course of 2019 it is expected that most of the activity which RBSG currently facilitates connected to the UK oil and gas field located in the North Sea will cease.
Supervision
United Kingdom
The home supervisors for RBS are the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). As with all significant banking institutions, the PRA is the consolidated supervisor of RBS. The FCAs overall objective is to ensure financial markets function well. This is supported by its operational objectives of: securing an appropriate degree of protection for consumers; protecting and enhancing the integrity of the UK financial system; and promoting effective competition in the interests of consumers.
As at 31 December 2018, 17 companies in RBS, spanning a range of financial services sectors, including banking and investment business, were authorised to conduct financial activities in the UK. The UK authorised banks in RBS are The Royal Bank of Scotland plc (formerly Adam & Company PLC, renamed in 2018) (RBS plc), National Westminster Bank Plc (NatWest Plc), NatWest Markets Plc (NWM Plc), Coutts & Company and Ulster Bank Limited (UBL). Wholesale activities, other than Treasury activities, are concentrated in NatWest Markets Plc. Retail banking activities in England, Scotland and Wales are managed by the Personal Banking and Commercial and Private Banking businesses of RBS plc, NatWest Plc, Coutts & Company and UBL. Note that, along with the other major UK banks, RBS was required by UK law to separate everyday banking from investment banking. This separation (ring-fencing) is designed to make banking safer and more resilient. It is a key component of the UK Governments legislative agenda to improve financial stability. It became law from 1 January 2019, and to prepare for it, RBS made changes to the way the Group is structured during 2018. The banking service in the Republic of Ireland is provided by Ulster Bank Ireland DAC, which is supervised by the Central Bank of Ireland and the European Central Bank under the Single Supervisory Mechanism.
Investment management business is principally undertaken by companies in the Commercial and Private Banking business, including Coutts & Company, Adam & Company Investment Management Limited and RBS Asset Management Limited.
Additional Information
RBS is subject to extensive regulations that impose obligations on financial institutions to maintain appropriate policies, procedures and controls to ensure compliance with the rules and regulations to which they are subject.
United States
RBS conducts business in the US through its investment bank, NatWest Markets (NWM). NWMs regulated entities in the US are: NatWest Markets Plc (NWM Plc); its broker-dealer affiliate, NatWest Markets Securities Inc. (NWMSI); NWMSIs Futures Commission Merchant (FCM); NWM Plcs non-US-based Swap Dealer; and NWM Plcs Connecticut Representative Office. NWM is subject to the supervision of the Board of Governors of the Federal Reserve System (Federal Reserve) due to an outstanding enforcement action brought against RBS by the Federal Reserve, namely the 2015 FX Cease and Desist Consent Order (the 2011 and 2013 Cease and Desist Consent Orders were lifted earlier in 2018).
In addition, NWMSI is a Primary Dealer of the Federal Reserve, which makes it subject to the supervision of the Federal Reserve Bank of New York (FRB-NY).
NWMSI is subject to the regulations of a number of US securities regulators, mainly the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), Options Clearing Corporation (OCC), Depository Trust & Clearing Corporation (DTCC), and various state regulators. NWMSIs FCM is mainly subject to the regulations of the Commodity Futures Trading Commission (CFTC), National Futures Association (NFA), the Chicago Mercantile Exchange Group (CME), and the Intercontinental Exchange (ICE) Futures US.
NWM Plc is a non-FCM clearing member of the CME and is subject to the regulations of the CME and the CFTC. NWM Plc is also a non-US-based provisionally-registered swap dealer and as such it is subject to oversight by the US regulators the CFTC and the NFA.
The NWM Plc Connecticut Representative Office is supervised by the FRB-NY and the Connecticut Department of Banking.
The anti-money laundering, anti-terrorism and economic sanctions regulations are a major focus of the US government for financial institutions and are rigorously enforced by most of the regulators mentioned above and the Financial Crimes Enforcement Network (FinCEN) of US Department of the Treasury.
Other jurisdictions
RBS operates in a number of countries through a network of branches, local banks and non-bank subsidiaries and these activities are subject to supervision in most cases by a local regulator or central bank.
Material Contracts
The company and its subsidiaries are party to various contracts in the ordinary course of business. Material contracts include the following:
B Share Acquisition and Contingent Capital Agreement
On 26 November 2009, the company and HM Treasury entered into the Acquisition and Contingent Capital Agreement pursuant to which HM Treasury subscribed for the initial B shares and the Dividend Access Share (the Acquisitions) and agreed the terms of HM Treasurys contingent subscription (the Contingent Subscription) for an additional £8 billion in aggregate in the form of further B shares (the Contingent B shares), to be issued on the same terms as the initial B shares. The Acquisitions were subject to the satisfaction of various conditions, including the company having obtained the approval of its shareholders in relation to the Acquisitions.
On 16 December 2013, the company announced that, having received approval from the PRA, it had terminated the £8 billion Contingent Subscription. The company was able to cancel the Contingent Subscription as a result of the actions announced in the second half of 2013 to further strengthen its capital position.
On 9 October 2015, the company announced that on 8 October 2015, it had received a valid conversion notice from HM Treasury in respect of all outstanding B shares held by HM Treasury. The new ordinary shares issued on conversion of the B shares were admitted to the official list of the UK Listing Authority (UKLA), and to trading on the London Stock Exchange plc, on 14 October 2015. Following such conversion, HM Treasury no longer holds any B shares.
The company gave certain representations and warranties to HM Treasury on the date of the Acquisition and Contingent Capital Agreement, on the date the circular was posted to shareholders, on the first date on which all of the conditions precedent were satisfied, or waived, and on the date of the Acquisitions. The company also agreed to a number of undertakings.
The company agreed to reimburse HM Treasury for its expenses incurred in connection with the Acquisitions.
For as long as it is a substantial shareholder of the company (within the meaning of the UKLAs Listing Rules), HM Treasury has undertaken not to vote on related party transaction resolutions at general meetings and to direct that its affiliates do not so vote.
Directed Buyback Contract
On 7 February 2019, the company and HM Treasury entered into the Directed Buyback Contract to help facilitate the return of the company to full private ownership through the use of any excess capital to buy back the companys ordinary shares held by HM Treasury.
Under the terms of the Directed Buyback Contract, the company may agree with HM Treasury to make off-market purchases from time to time of its ordinary shares held by HM Treasury, including by way of one or more standalone purchases, through a non-discretionary, broker-managed directed trading programme, or in conjunction with any offer or sale by HM Treasury by way of an institutional placing. Neither the company nor HM Treasury would be under an obligation to agree to make such off-market purchases and would only do so subject to regulatory approval at the time.
The aggregate number of ordinary shares which the company may purchase from HM Treasury under the Directed Buyback Contract will not exceed 4.99 per cent. of the companys issued share capital and the aggregate consideration to be paid will not exceed 4.99 per cent. of the companys market capitalisation. The price to be paid for each ordinary share will be the market price at the time of purchase or, if the directed buyback is in conjunction with an institutional placing, the placing price.
Framework and State Aid Deed
As a result of the State Aid granted to the company, it was required to work with HM Treasury to submit a State Aid restructuring plan to the European Commission (EC), which was then approved by the EC under the State Aid rules on 14 December 2009. The company agreed a series of measures which supplemented the measures in the companys strategic plan.
The company entered into a State Aid Commitment Deed with HM Treasury at the time of the initial EC decision and, following the ECs approval of amendments to the restructuring plan in April 2014, the company 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 ECs approval of an alternative remedies package (the Alternative Remedies Package) to replace the companys final outstanding commitment under its State Aid obligations (to divest the business previously known as Williams & Glyn).
On 25 April 2018, the Revised State Aid Commitment Deed was replaced by the Framework and State Aid Deed between the company, HM Treasury and an independent body established to facilitate and oversee the delivery of the Alternative Remedies Package (the Independent Body). Under the Framework and State Aid Deed, the company agrees to do all acts and things necessary to ensure that HM Treasury is able to comply with its obligations under any EC decision approving State Aid to the company, including under the Alternative Remedies Package.
Pursuant to the Framework and State Aid Deed, the company has committed: (i) £425 million into a fund for eligible bodies in the UK banking and financial technology sectors to develop and improve their capability to compete with the company in the provision of banking services to small and medium-sized enterprises (SMEs) and develop and improve the financial products and services available to SMEs (the Capability and Innovation Fund); and (ii) £275 million to eligible bodies to help them incentivise SME banking customers within the division of the company previously known as Williams & Glyn to switch their business current accounts and loans to the eligible bodies (the Incentivised Switching Scheme). The company has also agreed to set aside up to a further £75 million in funding to cover certain costs customers may incur as a result of switching under the Incentivised Switching Scheme. In addition, under the terms of the Alternative Remedies Package, should the uptake within the Incentivised Switching Scheme not be sufficient, the company may be required to make a further contribution, capped at £50 million. The Independent Body will distribute funds from the Capability and Innovation Fund and implement the Incentivised Switching Scheme.
Under the Framework and State Aid Deed, the company also agreed to indemnify the Independent Body and HM Treasury, up to an amount of £320 million collectively to cover liabilities that may be incurred in implementing the Alternative Remedies Package . The provisions of the indemnity to the Independent Body are set out in the Framework and State Aid Deed and the provisions of the indemnity to HM Treasury are set out in a separate agreement between the company and HM Treasury, described under Deed of Indemnity below.
The Framework and State Aid Deed also provides that if the EC adopts a decision that the UK Government must recover any State Aid (a Repayment Decision) and the recovery order of the Repayment Decision has not been annulled or suspended by the General Court or the European Court of Justice, then the company must repay HM Treasury any aid ordered to be recovered under the Repayment Decision.
Deed of Indemnity
In the context of the Framework and State Aid Deed, the company entered into a Deed of Indemnity with HM Treasury on 25 April 2018, pursuant to which the company agreed to indemnify HM Treasury to cover liabilities that may be incurred in implementing the Alternative Remedies Package, as described under Framework and State Aid Deed above .
Trust Deed
In the context of the Framework and State Aid Deed, the company entered into a Trust Deed with the Independent Body on 25 April 2018, to set up a trust to administer the funds committed by the company under the Framework and State Aid Deed for the Alternative Remedies Package.
State Aid Costs Reimbursement Deed
Under the 2009 State Aid Costs Reimbursement Deed, the company has agreed to reimburse HM Treasury for fees, costs and expenses associated with the State Aid and State Aid approval.
HMT and UKFI Relationship Deed
On 7 November 2014, in order to comply with an amendment to the UK Listing Rules, the company entered into a Relationship Deed with HM Treasury and UK Financial Investments Limited in relation to the companys obligations under the UK Listing Rules to put in place an agreement with any controlling shareholder (as defined for these purposes in the Listing Rules). The Relationship Deed covers the three independence provisions mandated by the Listing Rules: (i) that contracts between the company and HM Treasury (or any of its subsidiaries) will be arms length and normal commercial arrangements, (ii) that neither HM Treasury nor any of its associates will take any action that would have the effect of preventing the company from complying with its obligations under the Listing Rules; and (iii) neither HM Treasury nor any of its associates will propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules.
Memorandum of Understanding Relating to The Royal Bank of Scotland Group Pension Fund
On 16 April 2018 the company entered into a Memorandum of Understanding (the MoU) with the trustee of The Royal Bank of Scotland Group Pension Fund (the Group Fund), which aimed to facilitate both the necessary changes to the Main Section of the Group Fund to align the employing entity structure with the requirements of the UK ring-fencing legislation and acceleration of the settlement framework for the 31 December 2017 triennial valuation of the Main Section of the Group Fund (brought forward from 31 December 2018).
In addition, the MoU also provided clarity on the additional related funding contributions required to be made by the company to the Main Section of the Group Fund as follows: (i) a pre-tax payment of £2 billion that was made in the second half of 2018 and (ii) from 1 January 2020, further pre-tax contributions of up to £1.5 billion in aggregate linked to the making of future distributions to RBS shareholders including ordinary and special dividends and/or share buy backs (subject to an annual cap on contributions of £500 million before tax).
On 28 September 2018, the implementation of the MoU was documented through a Framework Agreement entered into between the company and the trustee of the Group Fund.
Shareholder information
|
Page |
Financial calendar |
280 |
Shareholder enquiries |
280 |
Analysis of ordinary shareholders |
281 |
Trading market |
281 |
Dividend history |
282 |
Taxation for US holders |
283 |
Exchange controls |
285 |
Memorandum and Articles of Association |
285 |
Documents on display |
292 |
Incorporation and registration |
292 |
Important addresses |
293 |
Principal offices |
293 |
Financial calendar
Dividends
Shareholder enquiries
You can check your shareholdings in the company by visiting the Shareholder centre section of our website, www.rbs.com and clicking the Managing your shareholding tab. You will need the shareholder reference number printed on your share certificate or tax voucher to access this information.
You can use the website for shareholding and outstanding payment enquiries and to change your address or download forms. You can also sign up to E-Comms and choose to receive an email notification when shareholder communications become available instead of paper communications.
You can also check your shareholding by contacting our Registrar:
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: +44 (0)370 702 0135
Fax: +44 (0)370 703 6009
Website: www-uk.computershare.com/investor/contactus
Braille and audio Strategic report with additional information
Shareholders requiring a Braille or audio version of the Strategic report with additional information should contact the Registrar on +44 (0)370 702 0135.
ShareGift
The company is aware that shareholders who hold a small number of shares may be retaining these shares because dealing costs make it uneconomical to dispose of them. ShareGift, the charity share donation scheme, is a free service operated by The Orr Mackintosh Foundation (registered charity 1052686) to enable shareholders to donate shares to charity.
If you are a UK taxpayer, donating your shares in this way will not give rise to either a gain or a loss for UK capital gains tax purposes. You may be able to claim UK income tax relief on gifted shares and can do so in various ways. Further information can be obtained from HM Revenue & Customs.
Should you wish to donate your shares to charity please contact ShareGift for further information:
ShareGift, The Orr Mackintosh Foundation
4th Floor Rear, 67/68 Jermyn Street, London SW1Y 6NY
Telephone: +44 (0)20 7930 3737
Website:
www.sharegift.org
Share and bond scams
Share and bond scams are often run from boiler rooms where fraudsters cold-call investors, after obtaining their phone number from publicly available shareholder lists, offering them worthless, overpriced or even non-existent shares or bonds.
They use increasingly sophisticated tactics to approach investors, offering to buy or sell shares, often pressuring investors to make a quick decision or miss out on the deal. Contact can also be in the form of email, post or word of mouth. Scams are sometimes advertised in newspapers, magazines or online as genuine investment opportunities and may offer free gifts or discounts on dealing charges.
Scammers will request money upfront, as a bond or other form of security, but victims are often left out of pocket, sometimes losing their savings or even their family home. Even seasoned investors have been caught out by scams.
Clone firms
A clone firm uses the name, firm registration number (FRN) and address of a firm or individual who is FCA authorised. The scammer may claim that the genuine firms contact details on the FCA Register (Register) are out of date and then use their own details, or copy the website of an authorised firm, making subtle changes such as the phone number. They may claim to be an overseas firm, which wont always have full contact and website details listed on the Register.
How to protect yourself
Always be wary if youre contacted out of the blue, pressured to invest quickly, or promised returns that sound too good to be true. FCA authorised firms are unlikely to contact you unexpectedly with an offer to buy or sell shares or bonds.
Check the Register to ensure the firm contacting you is authorised and also check the FCAs Warning List of firms to avoid.
Ask for their (FRN) and contact details and then contact them using the telephone number on the Register. Never use a link in an email or website from the firm offering you an investment.
It is strongly advised that you seek independent professional advice before making any investment.
Report a scam
If you suspect that you have been approached by fraudsters, or have any concerns about a potential scam, report this to the FCA by contacting their Consumer Helpline on 0800 111 6768 or by using their reporting form which can be found at www.fca.org.uk/consumers/report-scam-unauthorised-firm
If you have already invested in a scam, fraudsters are likely to target you again or sell your details to other criminals. The follow-up scam may be completely separate, or may be related to the previous scam in the form of an offer to get your money back or buy back the investment on payment of a fee.
Find out more at www.fca.org.uk/scamsmart
Shareholder information
Trading market
Non-cumulative dollar preference shares
The following series of American Depositary shares (ADSs) representing non-cumulative preference shares issued in the US were outstanding at 31 December 2018:
Date of issue |
Series of ADS |
Number of ADSs/non-cumulative preference shares in issue |
Number of registered holders |
4 October 2007 |
U |
10,130 |
1 |
The ADSs set out above represents the right to receive one corresponding preference share, and is evidenced by an American Depository Receipt (ADR) and is listed on the New York Stock Exchange, a subsidiary of NYSE Euronext (NYSE).
The ADRs evidencing the ADSs above were issued pursuant to Deposit Agreements, among the company, The Bank of New York, as depository, and all holders from time-to-time of ADRs issued thereunder. Currently, there is no non-United States trading market for any of the non-cumulative dollar preference shares. All of the non-cumulative dollar preference shares are held by the depository, as custodian, in registered form.
In December 2018, the company redeemed in whole the Series S non-cumulative preference shares of US$0.01.
PROs
In August 2001, the company issued US$1.2 billion perpetual regulatory tier one securities (PROs) which are listed on the NYSE.
ADSs representing ordinary shares
In October 2007, the company listed ADSs, each representing one ordinary share nominal value 25p each (or a right to receive one ordinary share), and evidenced by an ADR or uncertificated securities, on the NYSE under the symbol RBS. With effect from 7 November 2008, the ratio of one ADS representing one ordinary share changed to one ADS representing 20 ordinary shares.
Following a sub-division and one-for-ten consolidation of RBSs ordinary shares in June 2012, the ratio of one ADS representing 20 ordinary shares was adjusted to one ADS representing two ordinary shares. As at 31 December 2018, 53.5 million ordinary ADSs were outstanding.
The ordinary ADSs were issued pursuant to a Deposit Agreement, among the company, The Bank of New York Mellon, as depository, and all owners and holders from time to time of ordinary ADSs issued thereunder. The ordinary shares of the company are listed and traded on the London Stock Exchange under the symbol RBS. All ordinary shares are deposited with the principal London office of The Bank of New York Mellon, as custodian for the depository.
Shareholder information
Dividend history |
|
|
|
|
|
|
Preference dividends |
|
|
|
|
|
|
|
2018 |
2018 |
2017 |
2016 |
2015 |
2014 |
Amount per share |
$ |
£ |
£ |
£ |
£ |
£ |
Non-cumulative preference shares of US$0.01 |
|
|
|
|
|
|
- Series F (1) |
|
|
1.13 |
1.53 |
1.25 |
1.16 |
- Series H (1) |
|
|
0.97 |
1.34 |
1.19 |
1.10 |
- Series L (1) |
|
|
0.77 |
1.06 |
0.94 |
0.87 |
- Series M (2) |
|
|
|
|
0.60 |
0.97 |
- Series N (2) |
|
|
|
|
0.60 |
0.96 |
- Series P (2) |
|
|
|
|
0.59 |
0.95 |
- Series Q (2) |
|
|
|
|
0.63 |
1.02 |
- Series R (2) |
|
|
|
0.71 |
0.99 |
0.93 |
- Series S (2) |
1.50 |
1.14 |
1.28 |
1.22 |
1.06 |
1.00 |
- Series T (2) |
|
|
|
0.84 |
1.17 |
1.10 |
- Series U (2) |
4,566 |
3,475 |
6,741 |
5,637 |
4,912 |
4,637 |
Non-cumulative convertible preference shares of US$0.01 |
|
|
|
|
|
|
- Series 1 (1) |
|
|
71.99 |
67.28 |
59.66 |
55.34 |
Non-cumulative preference shares of 0.01 |
|
|
|
|
|
|
- Series 1 (2) |
59.61 |
44.65 |
48.98 |
46.94 |
38.64 |
44.32 |
- Series 2 (2) |
87.02 |
65.18 |
44.72 |
40.00 |
37.27 |
42.31 |
- Series 3 (2) |
1,099 |
823 |
3,504 |
3,033 |
2,533 |
2,833 |
Non-cumulative convertible preference shares of £0.01 |
|
|
|
|
|
|
- Series 1 (1) |
|
|
73.87 |
73.87 |
73.87 |
73.87 |
Non-cumulative preference shares of £1 |
|
|
|
|
|
|
- Series 1 (2) |
36.60 |
27.41 |
26.67 |
28.60 |
29.04 |
29.01 |
Notes:
(1) Classified as subordinated liabilities.
(2) Classified as equity.
On 26 November 2009, RBS entered into a State Aid Commitment Deed with HM Treasury containing commitments and undertakings that were designed to ensure that HM Treasury was able to comply with the commitments to be given by it to the European Commission for the purposes of obtaining approval for the State aid provided to RBS. As part of these commitments and undertakings, RBS agreed not to pay discretionary coupons and dividends on its existing hybrid capital instruments for a period of two years. This period commenced on 30 April 2010 for RBS Group instruments and ended on 30 April 2012; the two year deferral period for RBS Holdings N.V. instruments commenced on 1 April 2011 and ended on 1 April 2013. On 4 May 2012, RBS determined that it was in a position to recommence payments on RBS Group instruments. In June 2013 RBS Holdings N.V. resumed payments on its hybrid capital instruments. Future coupons and dividends on hybrid capital instruments will only be paid subject to, and in accordance with, the terms of the relevant instruments.
Ordinary dividends
In 2018 RBS paid an interim dividend of £241 million, or 2.0p per ordinary share. In addition, the company announced that the directors have recommended a final dividend of 3.5p per ordinary share, and a further special dividend of 7.5p per ordinary share.
The final and special dividends recommended by directors are subject to shareholders approval at the Annual General Meeting on 25 April 2019. If approved, payment will be made on 30 April 2019 to shareholders on the register at the close of business on 22 March 2019. The ex-dividend date will be 21 March 2019. No dividend was paid in 2017.
Shareholder information
Taxation of US Holders
The following discussion summarises certain US federal and UK tax consequences of the ownership and disposition of ordinary shares, ADSs representing ordinary shares (ordinary ADSs), ADSs representing noncumulative dollar preference shares (preference ADSs) or PROs by a beneficial owner that is a citizen or resident of the United States or that otherwise will be subject to US federal income tax on a net income basis in respect of the ordinary shares, ordinary ADSs, preference ADSs or PROs (a US Holder). This summary assumes that a US Holder is holding ordinary shares, ordinary ADSs, preference ADSs or PROs, as applicable, as capital assets. This summary does not address the tax consequences to a US Holder (i) that is resident in the UK for UK tax purposes, (ii) that carries on a trade, profession or vocation through a branch, agency or permanent establishment in the UK in connection with which their ordinary shares, ordinary ADSs, preference ADSs or PROs are held, used or acquired, or (iii) generally, that is a corporation which alone or together with one or more associated companies, controls, directly or indirectly, 10% or more of the voting stock of the company, nor does this summary address all of the tax consequences that may be relevant to a US Holder in light of its particular circumstances, including alternative minimum tax and Medicare contribution tax consequences, as well as differing tax consequences that may apply to US Holders subject to special rules, such as certain financial institutions, dealers or traders in securities who use a mark-to-market method of tax accounting, persons holding ordinary shares, ordinary ADSs, preference ADSs or PROs as part of a hedging transaction, straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to such securities, persons whose functional currency for US federal income tax purposes is not the US dollar, persons required for US federal income tax purposes to confirm the timing of income accruals to their financial statements under Section 451 of the Internal Revenue Code of 1986, as amended (the Code), entities classified as partnerships for US federal income tax purposes, tax-exempt entities or persons that own or are deemed to own 10% or more of the stock of the company by vote or value.
The statements and practices set forth below regarding US and UK tax laws, including the US/UK double taxation convention relating to income and capital gains which entered into force on 31 March 2003 (the Treaty) and the US/UK double taxation convention relating to estate and gift taxes (the Estate Taxation Treaty), are based on those laws and practices as in force and as applied in practice on the date of this report. This summary is not exhaustive of all possible tax considerations and holders are advised to satisfy themselves as to the overall tax consequences, including specifically the consequences under US federal, state, local and other laws, and possible changes in taxation law, of the acquisition, ownership and disposition of ordinary shares, ordinary ADSs, preference ADSs or PROs by consulting their own tax advisers.
The following discussion assumes that the company was not a passive foreign investment company for the taxable year ended 31 December 2018 - see Passive Foreign Investment Company (PFIC) considerations on page 285.
Ordinary shares, ordinary ADSs and preference ADSs
Taxation of dividends
For the purposes of the Treaty, the Estate Taxation Treaty and the Code, US Holders of ordinary ADSs and preference ADSs should be treated as owners of the respective ordinary shares and the non-cumulative dollar preference shares underlying such ADSs.
The US Treasury has expressed concerns that parties to whom depositary receipts are released before shares are delivered to the depositary, or intermediaries in the chain of ownership between US holders and the issuer of the security underlying the depositary receipts, may be taking actions that are inconsistent with the claiming of foreign tax credits for US holders of depositary receipts. Such actions would also be inconsistent with the claiming of the favourable US tax rates applicable to dividends received by certain non-corporate US holders (described below). Accordingly, the availability of the favourable tax rates for dividends received by certain non-corporate US holders could be affected by actions taken by such parties or intermediaries.
The company is not required to withhold UK tax at source from dividend payments it makes or from any amount (including any amounts in respect of accrued dividends) distributed by the company. US Holders who are not resident in the UK and who do not carry on a trade, profession or vocation in the UK through a branch, agency or permanent establishment in connection with which their ordinary shares, ordinary ADSs or preference ADSs are held, used or acquired will not be subject to UK tax in respect of any dividends received on the relevant shares or ADSs.
Distributions by the company (other than certain pro-rata distributions of ordinary shares or rights to receive such shares) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as determined under US federal income tax principles. Because the company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions will be reported to US Holders as dividends. Payments will not be eligible for the dividends-received deduction generally allowed to corporate US holders.
Subject to applicable limitations that vary depending upon a US Holders particular circumstances and the discussion above regarding concerns expressed by the US Treasury, dividends paid to certain non-corporate US Holders may be taxable at the favourable rates applicable to long-term capital gain. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at these favourable rates.
Dividends will be included in a US Holders income on the date of the US Holders (or in the case of ADSs, the depositarys) receipt of the dividend. The amount of any dividend paid in pounds sterling to be included in income by a US Holder will be the US dollar amount calculated by reference to the relevant exchange rate in effect on the date of such receipt regardless of whether the payment is in fact converted into US dollars. If the dividend is converted into US dollars on the date of receipt, the US Holder generally should not be required to recognise foreign currency gain or loss in respect of the dividend income. If the amount of such dividend is converted into US dollars after the date of receipt, the US Holder may have foreign currency gain or loss.
Taxation of Capital Gains
A US Holder that is not resident in the UK will not normally be liable for UK tax on capital gains realised on the disposition of an ordinary share, an ordinary ADS or a preference ADS unless at the time of the disposal, in the case of a corporate US Holder, such US Holder carries on a trade in the UK through a permanent establishment or, in the case of any other US Holder, such US Holder carries on a trade, profession or vocation in the UK through a branch or agency and, in each case, such ordinary share, ordinary ADS or preference ADS is or has been used, held or acquired by or for the purposes of such trade (or profession or vocation), carried on through such permanent establishment, branch or agency. Special rules apply to individuals who are temporarily not resident in the UK.
A US Holder will, upon the sale or other disposition of an ordinary share, an ordinary ADS or a preference ADS, or upon the redemption of preference ADS, generally recognise capital gain or loss for US federal income tax purposes (assuming that in the case of a redemption of a preference ADS, such US Holder does not own, and is not deemed to own, any ordinary shares or ordinary ADSs of the company) in an amount equal to the difference between the amount realised (excluding, in the case of preference ADSs, any amounts attributable to declared but unpaid dividends, which will generally be treated as dividends for U.S. federal income tax purposes and excluding, in the case of a redemption, any amount otherwise treated as a dividend for US federal income tax purposes) and the US Holders tax basis in
Shareholder information
such share or ADS. This capital gain or loss will be long-term capital gain or loss if the US Holder held the share or ADS so sold, disposed or redeemed for more than one year. The deductibility of capital losses is subject to limitations.
A US Holder who is liable for both UK and US tax on a gain recognised on the disposal of an ordinary share, an ordinary ADS or a preference ADS may be entitled, subject to certain limitations, to credit the UK tax against its US federal income tax liability in respect of such gain.
Estate and gift tax
Subject to the discussion of the Estate Tax Treaty in the following paragraph, ordinary shares, ordinary ADSs or preference ADSs beneficially owned by an individual may be subject to UK inheritance tax (subject to exemptions and reliefs) on the death of the individual or in certain circumstances, if such shares or ADSs are the subject of a gift (including a transfer at less than market value) by such individual. Inheritance tax is not generally chargeable on gifts to individuals made more than seven years before the death of the donor. Ordinary shares, ordinary ADSs or preference ADSs held by the trustees of a settlement may also be subject to UK inheritance tax. Special rules apply to such settlements.
An ordinary share, an ordinary ADS or a preference ADS beneficially owned by an individual, whose domicile is determined to be the United States for purposes of the Estate Tax Treaty and who is not a national of the UK, will not be subject to UK inheritance tax on the individuals death or on a lifetime transfer of such share or ADS, except in certain cases where the share or ADS (i) is comprised in a settlement (unless, at the time of the settlement, the settlor was domiciled in the United States and was not a national of the UK); (ii) is part of the business property of a UK permanent establishment of an enterprise; or (iii) pertains to a UK fixed base of an individual used for the performance of independent personal services.
The Estate Tax Treaty generally provides a credit against US federal estate or gift tax liability for the amount of any tax paid in the UK in a case where the ordinary share, ordinary ADS or preference ADS is subject to both UK inheritance tax and US federal estate or gift tax.
UK stamp duty and stamp duty reserve tax (SDRT)
The following is a summary of the UK stamp duty and SDRT consequences of transferring an ADS (otherwise than to the custodian on cancellation of the ADS) or of transferring an ordinary share. A transfer of an ADS executed and retained in the United States will not give rise to a liability to pay stamp duty and an agreement to transfer an ADS will not give rise to SDRT. Stamp duty or SDRT will normally be payable on or in respect of transfers of ordinary shares and accordingly any holder that acquires or intends to acquire ordinary shares is advised to consult its own tax adviser in relation to stamp duty and SDRT.
PROs
United States
Payments of interest on a PRO (including any UK withholding tax, as to which see below) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as determined under US federal income tax principles. Because the company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions will be reported to US Holders as dividends. Payments will not be eligible for the dividends-received deduction generally allowed to corporate US holders.
A US Holder who is entitled under the Treaty to a refund of UK tax, if any, withheld on a payment will not be entitled to claim a foreign tax credit with respect to the refundable tax. Subject to applicable limitations that vary depending upon a US Holders particular circumstances, dividends paid to certain non-corporate US Holders may be taxable at the favourable rates applicable to long-term capital gain. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at these favourable rates. A US Holder will, upon the sale, exchange or redemption of a PRO, generally recognise capital gain or loss for US federal income tax purposes (assuming that in the case of a redemption, such US Holder does not own, and is not deemed to own, any ordinary shares or ordinary ADSs of the company) in an amount equal to the difference between the amount realised (excluding any amount in respect of mandatory interest and any missed payments which are to be satisfied on a missed payment satisfaction date, which would be treated as ordinary income) and the US Holders tax basis in the PRO. This capital gain or loss will be long-term capital gain or loss if the US Holder held the PRO so sold, disposed or redeemed for more than one year. The deductibility of capital losses is subject to limitations.
A US Holder who is liable for both UK and US tax on gain recognised on the disposal of PROs may be entitled, subject to certain limitations, to credit the UK tax against all or a portion of its US federal income tax liability in respect of such gain.
United Kingdom
Taxation of payments on the PROs
Payments on the PROs will constitute interest rather than dividends for UK withholding tax purposes. With effect from 1 January 2016, the PROs are expected to fall within the exemption from withholding tax provided for in the Taxation of Regulatory Capital Securities Regulations 2013 (as amended by the Taxation of Regulatory Capital Securities (Amendment) Regulations 2015). Further, payments of interest will not be subject to withholding or deduction for or on account of UK tax as long as the PROs continue to be listed on a recognised stock exchange within the meaning of section 1005 of the Income Tax Act 2007, such as the main market of the New York Stock Exchange. In all other cases, an amount must be withheld on account of UK income tax at the basic rate (currently 20%) subject to any direction to the contrary by HM Revenue & Customs under the Treaty and except that the withholding obligation does not apply to payments to persons who the company reasonably believes are within the charge to corporation tax or fall within various categories enjoying a special tax status (including charities and pension funds), or are partnerships consisting of such persons (unless HM Revenue & Customs directs otherwise). Where interest has been paid under deduction of UK withholding tax, US Holders may be able to recover the tax deducted under the Treaty.
HM Revenue & Customs have powers in certain circumstances to obtain information in relation to interest and payments derived from securities. HM Revenue & Customs may communicate this information to the tax authorities of other jurisdictions.
HM Revenue & Customs confirmed at around the time of the issue of the PROs that interest payments would not be treated as distributions for UK tax purposes by reason of (i) the fact that interest may be deferred under the terms of issue; or (ii) the undated nature of the PROs, provided that at the time an interest payment is made, the PROs are not held by a company which is associated with the company or by a funded company. A company will be associated with the company if, broadly speaking, it is part of the same group as the company.
A company will be a funded company for these purposes if there are arrangements involving that company being put in funds (directly or indirectly) by the company, or an entity associated with the company. In this respect, HM Revenue & Customs has confirmed that a company holding an interest in the PROs which incidentally has banking facilities with any company associated with the company will not be a funded company by virtue of such facilities.
Interest on the PROs constitutes UK source income for UK tax purposes and, as such, may be subject to income tax by direct assessment even where paid without withholding. However, interest with a UK source received without deduction or
Shareholder information
withholding on account of UK tax will not be chargeable to UK tax in the hands of a US Holder unless, in the case of a corporate US Holder, such US Holder carries on a trade in the UK through a UK permanent establishment or in the case of other US Holders, such persons carry on a trade, profession or vocation in the UK through a branch or agency in each case in connection with which the interest is received or to which the PROs are attributable. There are also exemptions for interest received by certain categories of agents (such as some brokers and investment managers).
Disposal (including redemption)
A disposal (including redemption) of PROs by a non-corporate US Holder will not give rise to any liability to UK tax on capital gains unless the US Holder carries on a trade (which for this purpose includes a profession or a vocation) in the UK through a branch or agency and the PROs are, or have been, held or acquired for the purposes of that trade, carried on through such branch or agency.
A transfer of PROs by a US Holder will not give rise to a charge to UK tax on accrued but unpaid interest payments, unless the US Holder is an individual or other non-corporate taxpayer and at any time in the relevant year of assessment or accounting period carries on a trade, profession or vocation in the UK through a branch or agency to which the PROs are attributable.
Annual tax charges
Corporate US Holders of PROs may be subject to UK tax charges (or tax relief) by reference to fluctuations in exchange rates and in respect of profits, gains and losses arising from the PROs (including on a disposal or redemption), but only if such corporate US Holders carry on a trade in the UK through a UK permanent establishment to which the PROs are attributable.
Inheritance tax
In relation to PROs held through Depository Trust Company (or any other clearing system), the UK inheritance tax position is not free from doubt in respect of a lifetime transfer, or death of, a US Holder who is not domiciled nor deemed to be domiciled in the UK for inheritance tax purposes; HM Revenue & Customs is known to consider that the situs of securities held in this manner is not necessarily determined by the place where the securities are registered. In appropriate circumstances, there may be a charge to UK inheritance tax as a result of a lifetime transfer at less than market value by, or on the death of, such US Holder. Inheritance tax is not generally chargeable on gifts to individuals made more than seven years before the death of the donor. However, exemption from, or a reduction of, any such UK tax liability may be available under the Estate Tax Treaty (see below). US Holders should consult their professional advisers in relation to such potential liability. PROs beneficially owned by an individual, whose domicile is determined to be the United States for the purposes of the Estate Tax Treaty and who is not a national of the UK, will not be subject to UK inheritance tax on the individuals death or on a lifetime transfer of the PRO, except in certain cases where the PRO (i) is comprised in a settlement (unless, at the time of the settlement, the settlor was domiciled in the United States and was not a national of the UK); (ii) is part of the business property of a UK permanent establishment of an enterprise; or (iii) pertains to a UK fixed base of an individual used for the performance of independent personal services.
The Estate Tax Treaty generally provides a credit against US federal estate or gift tax liability for the amount of any tax paid in the UK in a case where the PRO is subject to both UK inheritance tax and US federal estate or gift tax.
Stamp duty and SDRT
No stamp duty, SDRT or similar tax is imposed in the UK on the issue, transfer or redemption of the PROs.
Passive Foreign Investment Company (PFIC) considerations
In general, a foreign corporation will be a PFIC for any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to applicable look-through rules, either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the average quarterly value of its assets is attributable to assets that produce passive income or are held for the production of passive income. The company does not believe that it was a PFIC for its 2018 taxable year. Although interest income is generally passive income, a special rule allows banks to treat their banking business income as non-passive. To qualify for this rule, a bank must satisfy certain requirements regarding its licensing and activities. The companys possible status as a PFIC is determined annually, however, and may be subject to change if the company fails to qualify under this special rule for any year in which a US Holder owned ordinary shares, ordinary ADSs, preference ADSs or PROs.
If the company were to be treated as a PFIC for any taxable year during which a US Holder owns ordinary shares, ordinary ADSs, preference ADSs or PROs, US Holders would generally be subject to adverse US federal income tax consequences and certain reporting obligations. Holders should consult their own tax advisers as to the potential application of the PFIC rules to the ownership and disposition of the companys ordinary shares, ordinary ADSs, preference ADSs or PROs.
Information reporting and backup withholding
Payments on, and proceeds from the sale of, ordinary shares, ordinary ADSs, preference ADSs or PROs that are made within the United States or through certain U.S-related financial intermediaries may be subject to information reporting and backup withholding unless (i) the US Holder is an exempt recipient or (ii) in the case of backup withholding, the US Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a US Holder will be allowed as a credit against the US Holders US federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
Foreign financial assets reporting
Certain US Holders who are individuals (and certain entities controlled by individuals) may be required to report information relating to the companys securities, subject to certain exceptions (including an exception for securities held in accounts maintained by US financial institutions). US Holders are urged to consult their tax advisers regarding the application of these rules in the US Holders particular circumstances.
Exchange controls
The company has been advised that there are currently no UK laws, decrees or regulations which would prevent the import or export of capital, including the availability of cash or cash equivalents for use by the Group, or the remittance of dividends, interest or other payments to non-UK resident holders of the companys securities.
There are no restrictions under the Articles of Association of the company or under UK law, as currently in effect, which limit the right of non-UK resident owners to hold or, when entitled to vote, freely to vote the companys securities.
Memorandum and Articles of Association
The companys Memorandum and Articles of Association as in effect at the date of this Annual Report are registered with the Registrar of Companies of Scotland.
The following information is a summary of certain terms of the companys Memorandum of Association (the Memorandum) and Articles of Association (the Articles) as in effect at the date of this Annual Report on Form 20-F and certain relevant provisions of the Companies Act 2006 (the 2006 Act) where appropriate and as relevant to the holders of any class of share. The current Articles were adopted on 28 April 2010. The Articles were updated primarily to reflect the coming into force of the remaining provisions of the 2006 Act and the implementation of the Shareholder Rights Directive in the UK.
Shareholder information
An amendment was made to the Articles at a General Meeting held on 28 April 2010 in relation to the price at which certain classes of preference shares may be purchased.
A further amendment was made to the Articles at the Annual General Meeting held on 19 April 2011 to the effect that subject to existing class rights of shareholders, new preference shares can be issued with such rights and restrictions as the directors may determine. A further amendment was made to the Articles at the Annual General Meeting held on 30 May 2012 to include a new sub-article specifying the rights attaching to the Deferred shares arising as a result of share subdivision and consolidation.
The following summary description is qualified in its entirety by reference to the terms and provisions of the Memorandum and Articles (and, in the case of the summary description of the non-cumulative preference shares, the B Shares and the Dividend Access Share, by reference to the terms of issue of those shares determined by the Directors pursuant to the Articles prior to allotment). The Memorandum and Articles are registered with the Registrar of Companies of Scotland. Holders of any class of share are encouraged to read the full Memorandum and Articles, which have been filed as an exhibit to this Annual Report on Form 20-F.
Incorporation and registration
The company was incorporated and registered in Scotland under the Companies Act 1948 as a limited company on 25 March 1968 under the name National and Commercial Banking Group Limited. On 3 September 1979 the name was changed to The Royal Bank of Scotland Group Limited and on 10 March 1982, it changed its name to its present name and was registered under the Companies Acts 1948 to 1980 as a public company with limited liability. The company is registered under Company No. SC 45551.
Purpose and objects
The 2006 Act greatly reduces the constitutional significance of a companys memorandum of association and provides that a memorandum of association will record only the names of the subscribers and the number of shares each subscriber has agreed to take in the company. The 2006 Act further states that, unless a companys articles provide otherwise, a companys objects are unrestricted and abolishes the need for companies to have objects clauses. The company removed its objects clause together with all other provisions of its memorandum of association which by virtue of the 2006 Act were treated as forming part of the companys articles. The articles of association contain an express statement regarding the limited liability of the shareholders.
Directors
At each annual general meeting of the company, any Director appointed since the last annual general meeting and any Directors who were not appointed at one of the preceding two annual general meetings shall retire from office and may offer themselves for re-election by the members. Directors may be appointed by the company by ordinary resolution or by the Board. A director appointed by the Board holds office only until the next annual general meeting, whereupon he will be eligible for re-election.
Unless and until otherwise determined by ordinary resolution, the directors (other than alternate directors) shall be not more than twenty five. There is no stipulation in the Articles regarding a minimum number of directors; under the 2006 Act, and in the absence of express provision, the minimum number is two.
Directors interests
A director shall not vote at a meeting of the Board or a Committee of the Board on any resolution of the Board concerning a matter in which he has an interest (otherwise than by virtue of his interest in shares, debentures or other securities of, or otherwise in or through, the company) which (together with any interest of any person connected with him) is, to his knowledge, material unless his interests arises only because the resolution relates to one or more of the following matters:
(i) the giving of any security or indemnity to him pursuant to the Articles or in respect of money lent, or obligations incurred, by him at the request of, or for the benefit of, the company or any of its subsidiary undertakings;
(ii) the giving of any security or indemnity to a third party in respect of a debt or obligation of the company or any of its subsidiary undertakings for which he has assumed responsibility (in whole or in part) under a guarantee or indemnity or by the giving of security;
(iii) a proposal concerning an offer of shares, debentures or other securities of the company, or any of its subsidiary undertakings, for subscription or purchase, in which offer he is, or may be, entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which he is to participate;
(iv) any proposal concerning any other body corporate in which he is interested, directly or indirectly, whether as an officer or shareholder or otherwise, provided that he is not the holder of shares representing one per cent or more of any class of the equity share capital of such body corporate;
(v) any proposal concerning the adoption, modification or operation of a pension fund or retirement, death or disability benefits scheme or employees share scheme which relates both to directors and employees of the company or a subsidiary of the company and does not provide any privilege or advantage in respect of any director which it does not accord to the employees to which the fund or scheme relates;
(vi) a contract or arrangement for the benefit of the employees of the company or any of its subsidiary undertakings which does not accord him any privilege or advantage not generally accorded to the employees to whom the contract or arrangement relates; and
(vii) a proposal concerning any insurance which the company proposes to purchase and/or maintain for the benefit of any directors or for persons who include directors of the company.
Under the 2006 Act, a director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the companys interests.
The 2006 Act allows directors of public companies, where appropriate, to authorise conflicts and potential conflicts where the articles of association contain a provision to this effect. The 2006 Act also allows the articles of association to contain other provisions for dealing with directors conflicts of interest to avoid a breach of duty.
Clause 92 of the Articles, gives the directors authority to authorise any matter which would or might otherwise constitute or give rise to a breach of the duty of a director under the 2006 Act to avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict with the company.
Authorisation of any matter pursuant to Clause 92 must be approved in accordance with normal board procedures by directors who have no interest in the matter being considered. In taking the decision, the directors must act in a way they consider, in good faith, will be most likely to promote the companys success.
Any authorisation of a matter may be given on or subject to such conditions or limitations as the directors determine, whether at the time of authorisation or subsequently, including providing for the exclusion of the interested directors from the receipt of information or participation in discussion relating to the matter authorised by the directors and providing that interested directors in receipt of confidential information from a third party are not obliged to disclose such information to the company or use the information in relation to the companys affairs. Any authorisation may be terminated by the directors at any time.
A director is not, except as otherwise agreed by him, accountable to the company for any benefit which he, or a person connected with him, derives from any matter authorised by the directors and any contract, transaction or arrangement relating to such matter is not liable to be avoided on the grounds of such benefit.
Shareholder information
Directors power to allot securities
In line with market practice, the Articles provide that the authority to allot shares and the disapplication of pre-emption rights will not be set out in the Articles, but subject to resolutions passed at the companys annual general meeting to obtain these authorities on an annual basis.
Borrowing powers
The directors may exercise all the powers of the company to borrow money and to mortgage or charge its undertaking, property and uncalled capital and to issue debentures and other securities, whether outright or as collateral security for any debt, guarantee, liability or obligation of the company, or of any third party.
Qualifying shareholding
Directors are not required to hold any shares of the company by way of qualification.
Classes of shares
The company has issued and outstanding the following four general classes of shares, namely ordinary shares, preference shares, B Shares and a Dividend Access Share, to which the provisions set forth below apply. In addition, the company has as part of its share capital Additional Value Shares (AVSs). All of the issued AVSs were converted into non-voting deferred shares in December 2003. The terms of those AVSs are set out in Schedule 3 to the Articles. The terms of the issued B Shares (designated Series 1 Class B Shares) and the Dividend Access Share (designated a Series 1 Dividend Access Share) were determined by the directors pursuant to the Articles prior to the time of allotment, and apply as if they were set out in the Articles.
Dividends
General
Subject to the provisions of the 2006 Act and Clause 123 of the Articles, the company may, by ordinary resolution, declare dividends on ordinary shares save that no dividend shall be payable except out of profits available for distribution, or in excess of the amount recommended by the Board or in contravention of the special rights attaching to any share. Any dividend which has remained unclaimed for 12 years from the date of declaration shall be forfeited and shall revert to the company.
The company may cease sending dividend warrants and cheques by post or otherwise to a member if such instruments have been returned undelivered to, or left uncashed by, that member on at least two consecutive occasions, or, following one such occasion, reasonable enquiries have failed to establish any new address or account of the registered holder. The company may resume sending warrants and cheques if the holder requests such recommencement in writing.
Preference shares
Each cumulative preference share confers the right to a fixed cumulative preferential dividend payable half-yearly. Each non-cumulative preference share confers the right to a preferential dividend (not exceeding a specified amount) payable in the currency of the relevant share. The rate of such dividend and the date of payment thereof, together with the terms and conditions of the dividend, are as may be determined by the directors prior to allotment. Cumulative preference share dividends are paid in priority to any dividend on any other class of share.
The non-cumulative preference shares rank for dividend after the cumulative preference shares but rank pari passu with each other and any shares expressed to rank, in terms of participation in the profits of the company, in some or all respects pari passu therewith and otherwise in priority to dividends payable on the ordinary shares and any other share capital in the company.
The directors may resolve prior to the issue and allotment of any series of non-cumulative preference shares that full dividends in respect of a particular dividend payment date will not be declared and paid if, (i) in its sole and absolute discretion, the directors resolve prior to the relevant dividend payment date that such dividend (or part thereof) shall not be paid and/or (ii) in the opinion of the directors, payment of a dividend would cause a breach of the UK Financial Services Authoritys capital adequacy requirements applicable to the company or its subsidiaries, or subject to the next following paragraph, insufficient distributable profits of the company are available to cover the payment in full of all dividends after having paid any dividends payable on any of the cumulative preference shares.
If dividends will be paid but, in the opinion of the directors, insufficient distributable profits of the company are available to cover the payment in full of dividends after having paid any dividends payable on any of the cumulative preference shares, dividends will be declared by the directors, pro rata on the non-cumulative preference shares to the extent of the available distributable profits.
The non-cumulative preference shares will carry no further rights to participate in the profits of the company and if, and to the extent, any dividend or part of any dividend is on any occasion not paid for any of the reasons described above, holders of non-cumulative preference shares will have no claim in respect of such non-payment.
If any dividend is not payable for the reasons described in clause (ii) of the third paragraph of this subsection, the directors may pay a special dividend not exceeding US$0.01, £0.01 or 0.01 (depending on the currency of the relevant preference share) per share.
If the dividend payable on any series of non-cumulative preference shares on the most recent payment date is not paid in full, or if a sum is not set aside to provide for such payment in full, in either case for the reasons set forth in clause (ii) of the third paragraph of this subsection, no dividends may be declared on any other share capital of the company and no sum may be set aside for the payment of a dividend on any other share capital (in each case other than the cumulative preference shares), unless, on the date of declaration, an amount equal to the dividend payable in respect of the then current dividend period for such series of non-cumulative preference shares is set aside for payment in full on the next dividend payment date.
If any dividend payable on the non-cumulative preference shares is not paid in full or if a sum is not set aside to provide for such payment in full (in either case for the reasons set forth in clause (ii) of the third paragraph of this subsection), the company may not redeem or purchase or otherwise acquire any other share capital of the company and may not set aside any sum nor establish any sinking fund for its redemption, purchase or other such acquisition, until such time as dividends have been declared and paid in full in respect of successive dividend periods together aggregating not less than twelve months.
The non-payment of any dividend (in full or in part) by reason of the exercise of the directors discretion referred to in clause (i) of the third paragraph of this subsection, shall not prevent or restrict (a) the declaration and payment of dividends on any other series of non-cumulative preference shares or on any non-cumulative preference shares expressed to rank pari passu with the non-cumulative preference shares, (b) the setting aside of sums for the payment of such dividends, (c) except as set forth in the following paragraph, the redemption, purchase or other acquisition of shares in the company by the company, or (d) except as set forth in the following paragraph, the setting aside of sums, or the establishment of sinking funds, for any such redemption, purchase or other acquisition by the company.
If dividends are not declared and paid in full on any series of non-cumulative preference shares as a result of the directors discretion referred to in clause (i) of the third paragraph of this subsection, then the company may not redeem, purchase or otherwise acquire for any consideration any share capital ranking after such preference shares, and may not set aside any sum nor
Shareholder information
establish any sinking fund for the redemption, purchase or other acquisition thereof, until such time as the company has declared and paid in full dividends on such series of non-cumulative preference shares in respect of successive dividend periods together aggregating no less than twelve months. In addition, no dividend may be declared or paid on any of the companys share capital ranking after such preference shares until the dividend in respect of a particular dividend payment date payable on the preference shares to which the directors discretion in clause (i) of the third paragraph of this subsection applies has been declared and paid in full.
With effect from 19 April 2011, subject to existing class rights of shareholders, new preference shares can be issued with such rights and restrictions as the directors may determine.
Non-voting deferred shares
The holders of non-voting deferred shares are not entitled to the payment of any dividend or other distribution.
B Shares
Prior to the occurrence of a Trigger Event (as defined below) in respect of any Series 1 Class B Shares, those Series 1 Class B Shares rank equally with the holders of ordinary shares in respect of any cash dividends, and each Series 1 Class B Share will entitle its holder to the same cash dividend as is (or may, at the election of a holder of the ordinary share, be) payable to the holder of one ordinary share, as adjusted from time to time to reflect any consolidation, reclassification or subdivision in relation to the ordinary shares.
If a Trigger Event has occurred in respect of any Series 1 Class B Shares, the Series 1 Class B Shares in respect of which the Trigger Event has occurred will rank pari passu with the holders of the ordinary shares in respect of any dividends paid on the ordinary shares. Each Series 1 Class B Share will entitle its holder to the same dividend as is (or may, at the election of a holder of an ordinary share, be) payable to the holder of one (as adjusted from time to time) ordinary share.
If a bonus issue of fully paid ordinary shares is made to holders of ordinary shares in lieu of a dividend, a holder of a Series 1 Class B Share in respect of which the Trigger Event has occurred will be entitled to receive the same number of ordinary shares as is payable to the holder of one (as adjusted from time to time) ordinary share, save that if the issue of such ordinary share(s) to such holder would result in it holding directly or indirectly more than 75% of the total issued ordinary shares, then such holder will instead receive further Series 1 Class B Shares of the same value.
A Trigger Event occurs in relation to the Series 1 Class B Shares in issue at the relevant time, if the daily volume weighted average price of the companys ordinary shares on the London Stock Exchange equals or exceeds £0.65 per ordinary share (subject to adjustment) for 20 or more complete dealing days in any period of 30 consecutive dealing days.
In October 2015, HMT converted its entire holding of B shares into 5.1 billion new ordinary shares of £1 each.
Dividend Access Share
Subject to the discretions, limitations and qualifications described in this subsection, non-cumulative dividends on the Series 1 Dividend Access Share will be payable from 22 December 2009 up to and including the Stop Date (if any). No dividends will be payable on the Series 1 Dividend Access Share after the Stop Date (if any). Up to and including the Stop Date, the company will pay dividends on the Series 1 Dividend Access Share when, as and if declared by its board of directors or a duly authorised committee of such board of directors (the board of directors). Up to and including the Stop Date, subject to the discretions, limitations and qualifications described in this section, the Series 1 Dividend Access Share will entitle the holder to receive out of the distributable profits of the company a non-cumulative dividend at the rate described below (the Dividend Access Share Dividend), in priority to the payment of any dividend to the holders of any class of ordinary share or Class B Share and pari passu in such regard with the holder of any other dividend access share then in issue.
The board of directors may in its sole and absolute discretion resolve that no Dividend Access Share Dividend shall be paid on a Dividend Access Share Dividend payment date.
The board of directors will, by 31 October in each financial year of the company, decide whether or not to pay an interim dividend on the ordinary shares or make an interim Ordinary Share Bonus Issue in that financial year. If it is decided that an interim dividend on the ordinary shares or an interim Ordinary Share Bonus Issue is to be paid or made in any financial year, the corresponding semi-annual (hereinafter referred to as first semi-annual) Dividend Access Share Dividend or Bonus Issue on the Series 1 Dividend Access Share in the same financial year will be paid or made at the time set out below. The record date for any first semi-annual Dividend Access Share Dividend or Bonus Issue on the Series 1 Dividend Access Share will be the same as the record date for any interim dividend on the ordinary shares or interim Ordinary Share Bonus Issue in the relevant financial year or otherwise will be three business days before 31 October in each year.
If paid or made, the first semi-annual Dividend Access Share Dividend or Bonus Issue on the Series 1 Dividend Access Share in a financial year will be paid or made on the same date that the corresponding interim dividend on the ordinary shares is paid or interim Ordinary Share Bonus Issue is made. If it is decided that no such interim dividend on the ordinary shares or interim Ordinary Share Bonus Issue will be paid or made in a financial year, the first semi-annual Dividend Access Share Dividend or Bonus Issue on the Series 1 Dividend Access Share in such financial year will, if to be paid or made, be so paid or made on 31 October in such financial year (commencing in 2010).
The Board of directors will, by 31 May in each financial year of the company, decide whether or not to recommend a dividend on the ordinary shares or make an Ordinary Share Bonus Issue which is expressed to be a final dividend for the immediately preceding financial year. If it is decided that such a dividend on the ordinary shares or Ordinary Share Bonus Issue is to be recommended and is subsequently approved by shareholders, the corresponding semi-annual (hereinafter referred to as second semi-annual) Dividend Access Share Dividend or Bonus Issue on the Series 1 Dividend Access Share expressed to be for the corresponding period will be paid at the time set out below. The record date for any second semi-annual Dividend Access Share Dividend or Bonus Issue on the Series 1 Dividend Access Share will be the same as the record date for any final dividend on the ordinary shares or final Ordinary Share Bonus Issue for the relevant financial year or otherwise will be three business days before 31 May in each year. If paid or made, the second semi-annual Dividend Access Share Dividend or Bonus Issue on the Series 1 Dividend Access Share in a financial year will be paid or made on the same date that the corresponding final dividend on the ordinary shares is paid or final Ordinary Share Bonus Issue is made. If it is decided that no such final dividend on the ordinary shares or Ordinary Share Bonus Issue will be paid or made in any year (the current year) for the immediately preceding financial year, any second semi-annual Dividend Access Share Dividend or Bonus Issue on the Series 1 Dividend Access Share expressed to be for the corresponding period will, if to be paid or made, be so paid or made on 31 May in the current year (commencing in 2010).
Any first semi-annual Dividend Access Share Dividend or second semi-annual Dividend Access Share Dividend will only be paid if (to the extent legally required) profits are available for distribution and are permitted by law to be distributed.
If paid or made, the first semi-annual Dividend Access Share Dividend on the Series 1 Dividend Access Share will be equal to an amount which, before taking account of any withholding or deduction required to be made on account of tax from such
Shareholder information
dividend and when added to any other cash dividends previously paid by the Company on the Series 1 Dividend Access Share since the Issue Date (before taking account of any withholding or deduction required to be made on account of tax from such cash dividends) equals the DAS Retirement Dividend Amount.
If paid or made, any second semi-annual Dividend Access Share Dividend on the Series 1 Dividend Access Share will be equivalent to (a) the greater of (i) on an annual basis, 7 per cent. of the aggregate issue price of all B Shares issued to HM Treasury, and (ii) 25 per cent. (subject to adjustment) of any cash dividend paid per Ordinary Shares, multiplied by the number of B Shares issued to HM Treasury, less (b) the fair market value of the aggregate amount of any dividends or distributions paid or made on any B Shares and/or on any Ordinary Shares issued on conversion of the B Shares, provided that any second semi-annual Dividend Access Share Dividend will not in any event exceed a sum which, before taking account of any withholding or deduction required to be made on account of tax from such dividend and when added to any other cash dividends previously paid by the Company on the Series 1 Dividend Access Share since the Issue Date (before taking account of any withholding or deduction required to be made on account of tax from such cash dividends), would exceed the DAS Retirement Dividend Amount.
In the event of a change in the frequency of dividend payments on the ordinary shares such that they are not paid semi-annually consistent with the payment of Dividend Access Share Dividends on the Series 1 Dividend Access Share, the company will make such changes to the Dividend Access Share Dividend payment arrangements described above as, following consultation with the Independent Financial Adviser (acting as an expert), it determines are fair and reasonable to take account of such changed frequency.
Non-cumulative dividends on the Series 1 Dividend Access Share will be payable in respect of the period up to and including the Stop Date (if any). After the Stop Date (if any), the right of the holder of the Series 1 Dividend Access Share to any dividends (including any Dividend Access Share Dividends) shall cease and the Series 1 Dividend Access Share shall, without the need for any consent or approval from the holder of the Series 1 Dividend Access Share or any other action by the Company or the holder of the Series 1 Dividend Access Share, be re-designated as a Single Series 1 Class B Share on terms identical to all other Series 1 Class B Shares in issue at the Stop Date.
Any unpaid portion of the DAS Retirement Dividend Amount will be subject to an increase of 5 per cent per annum, calculated on a daily accrual basis from 1 January 2016, if such portion has not been paid before 1 January 2016 and an increase of 10 per cent. per annum calculated on a daily accruals basis from 1 January 2021, on any part of the balance that has not been paid before 1 January 2021.
Bonus Issue of Series 1 Class B Shares on the Series 1 Dividend Access Share
If the board of directors decides to pay a Dividend Access Share Dividend and either (i) no dividend has been paid on the ordinary shares and/or distribution made thereon in respect of the corresponding period, or (ii) a dividend has been paid and/or a distribution has been made on the ordinary shares otherwise than in cash in respect of the corresponding period, the board of directors may in its discretion determine that such Dividend Access Share Dividend will be paid in whole or in part by the company issuing Series 1 Class B Shares, credited as fully paid, to the holder of the Series 1 Dividend Access Share.
The number of such further Series 1 Class B Shares to be issued to the holder will be such number of Series 1 Class B Shares as is certified by an Independent Financial Adviser (acting as an expert) to be as nearly as possible equal to (but not greater than) the cash amount (disregarding any withholding or deduction required to be made on account of any tax and any associated tax credit) of such semi-annual Dividend Access Share Dividend or part thereof otherwise payable to such holder of the Series 1 Dividend Access Share, based on the fair market value of a Series 1 Class B Share at the time of such determination. A written opinion of such Independent Financial Adviser will be conclusive and binding on all parties, save in the case of manifest error. The additional Series 1 Class B Shares will rank pari passu in all respects with the fully paid Series 1 Class B Shares then in issue save only as regards participation in the relevant dividend.
Restrictions following non-payment of dividend
If any Dividend Access Share Dividend is not declared and paid in full in cash or otherwise, the company:
(i) may not, and will procure that no subsidiary undertaking of the company will, declare or pay dividends or other distributions on any Parity Securities (whether in cash or otherwise, and whether payable on the same date as the relevant Dividend Access Share Dividend or subsequently) or make any Ordinary Share Bonus Issue (whether to be made on the same date as the relevant Dividend Access Share Dividend or subsequently), and the company may not, and will procure that no subsidiary undertaking of the company shall, set aside any sum for the payment of these dividends or distributions; and
(ii) may not, and will procure that no subsidiary undertaking of the company will, redeem, purchase or otherwise acquire (whether on the same date as the relevant Dividend Access Share Dividend is payable or subsequently) for any consideration any of its Parity Securities or any depository or other receipts or certificates representing Parity Securities (other than any such purchases or acquisitions which are made in connection with any Employee Share Scheme (as defined in the terms of issue of the Series 1 Dividend Access Share) and (save as aforesaid) the company may not, and will procure that no subsidiary undertaking of the company shall, set aside any sum or establish any sinking fund (whether on the same date as the relevant Dividend Access Share Dividend is payable or subsequently) for the redemption, purchase or other acquisition of Parity Securities or any depositary or other receipts or certificates representing Parity Securities.
In each case until such time as Dividend Access Share Dividends are no longer payable (including as a result of the Stop Date occurring), or payment of Dividend Access Share Dividends in cash or otherwise has resumed in full, as the case may be.
Definitions in relation to this Dividend Access Share subsection
Bonus Issue means a bonus issue of Series 1 Class B Shares to the holder of the Series 1 Dividend Access Share.
DAS Retirement Dividend Amount means £1,500,000,000 (subject to increase).
Independent Financial Adviser means an independent financial institution appointed by the company and approved by HM Treasury.
Ordinary Share Bonus Issue means a bonus issue of fully paid ordinary shares to holders of ordinary shares in lieu of a dividend.
Parity Securities means ordinary shares, Series 1 Class B Shares and any other securities of the company or its subsidiary undertakings which rank pari passu with the ordinary shares, and/or Series 1 Class B Shares on a return of capital on a winding up, either issued by the company or issued by a subsidiary undertaking of the company with terms attached which benefit from a guarantee or support agreement entered into by the company which ranks pari passu with the ordinary shares, and/or Series 1 Class B Shares on a return of capital on a winding up.
Series 1 Class B Dividend Trigger Event means in relation to any Series 1 Class B Shares in issue at any time, the payment by the Company of total cash dividends on the Series 1 Dividend Access Share since the Issue Date in an aggregate amount (before taking account of any withholding or deduction required to be made on
Shareholder information
account of tax from such cash dividends) equal to the DAS Retirement Dividend Amount.
Stop Date means the date on which the Series 1 Class B Dividend Trigger Event occurs.
The final dividend payment on the Dividend Access Share (DAS) owned by HMT of £1.2 billion was paid in March 2016, effecting the immediate retirement of the DAS which was redesignated as a single B share and subsequently cancelled.
Distribution of assets on liquidation
Cumulative preference shares
In the event of a return of capital on a winding-up or otherwise, the holders of cumulative preference shares are entitled to receive out of t he surplus assets of the company available for distribution amongst the members (i) in priority to the holders of the non-cumulative preference shares and any other shares ranking pari passu therewith, the arrears of any fixed dividends including the amount of any dividend due for a payment after the date of commencement of any winding-up or liquidation but which is payable in respect of a half-year period ending on or before such date and (ii) pari passu with the holders of the non-cumulative preference shares and any other shares ranking pari passu therewith, the amount paid up or credited as paid up on such shares together with any premium.
Non-cumulative preference shares
Each non-cumulative preference share will confer on a winding up or liquidation (except (unless otherwise provided by the terms of issue) a redemption or purchase by the company of any shares in the capital of the company), the right to receive out of surplus assets of the company available for distribution amongst the members after payment of the arrears (if any) of the cumulative dividend on the cumulative preference shares and in priority to the holders of the ordinary shares, repayment of the amount paid up or credited as paid up on the non-cumulative preference shares together with any premium paid on issue pari passu with the holders of the cumulative preference shares and together with an amount equal to accrued and unpaid dividends.
Non-voting deferred shares
On a winding-up or other return of capital of the company, holders of non-voting deferred shares are entitled only to payment of the amounts paid up on the non-voting deferred shares, after repayment to the holders of ordinary shares of the nominal amount paid up on the ordinary shares held by them and payment of £100,000 on each ordinary share.
B Shares
On a winding-up, holders of the Series 1 Class B Shares will rank equally with the holders of the ordinary shares, the Series 1 Dividend Access Share and any other class of shares or securities of the company which rank equally with the Series 1 Class B Shares, the Series 1 Dividend Access Share or the ordinary shares on a winding-up or liquidation, and junior to all other shareholders and all creditors of the company. For these purposes, on a winding-up each holder of a Series 1 Class B Share will be deemed to hold one (as adjusted from time to time) ordinary share of the company for every Series 1 Class B Share held at the date of the commencement of such winding-up, and will be entitled to receive out of the surplus assets of the company remaining after payment of all prior-ranking claims, a sum equal to that payable to a holder of one (as adjusted) ordinary share in such event.
In October 2015, HMT converted its entire holding of B shares into 5.1 billion new ordinary shares of £1 each.
Dividend Access Share
On a winding-up, the holder of the Series 1 Dividend Access Share will rank equally with the holders of the ordinary shares, the Series 1 Class B Shares and any other class of shares or securities of the company which rank equally with the Series 1 Dividend Access Share, the Series 1 Class B Shares or the ordinary shares on a winding-up or liquidation, and junior to all other shareholders and all creditors of the company. For these purposes, on a winding-up the holder of the Series 1 Dividend Access Share will be deemed to hold one-tenth (as adjusted from time to time) of one ordinary share of the company, and will be entitled to receive out of the surplus assets of the company remaining after payment of all prior-ranking claims, a sum equal to that payable to a holder of one-tenth (as adjusted) of one ordinary share in such event.
The final dividend payment on the Dividend Access Share (DAS) owned by HMT of £1.2 billion was paid in March 2016, effecting the immediate retirement of the DAS which was redesignated as a single B share and subsequently cancelled.
General
On a winding-up of the company, the liquidator may, with the authority of any extraordinary resolution and any other sanction required by the Insolvency Act 1986 and subject to the rights attaching to any class of shares after payment of all liabilities, including the payment to holders of preference shares, divide amongst the members in specie or kind the whole or any part of the assets of the company or vest the whole or any part of the assets in trustees upon such trusts for the benefit of the members and may determine the scope and terms of those trusts. No member shall be compelled to accept any assets on which there is a liability.
Voting Rights
General
Subject to any rights or restrictions as to voting attaching to any shares or class of shares, on a show of hands every member who is present in person or by proxy at a general meeting shall have one vote (except that a proxy who is appointed by more than one member has one vote for and one vote against if the proxy has been instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution) and on a poll every member present in person or by proxy shall have one vote for each 25 pence in nominal amount of shares held by him. No member shall, unless the directors otherwise determine, be entitled to vote at a general meeting or at a separate meeting of the holders of shares in the capital of the company, either in person or by proxy, in respect of any share held by him unless all monies presently payable by him in respect of that share have been paid. There is no obligation on the company to check and ensure that a proxy is voting at a general meeting in accordance with the voting directions provided by the appointing member. The chairman of a general meeting does not have a casting vote in the event of an equality of votes, as this is not permitted under the 2006 Act. The quorum required for a meeting of members is not less than five members present in person and entitled to vote.
If a meeting is adjourned because of the lack of a quorum, the members present in person or by proxy and entitled to vote will constitute a quorum at the adjourned meeting.
Meetings are convened upon written notice of not less than 21 days in respect of annual general meetings of members and not less than 14 days in respect of other meetings of members subject to certain conditions. An adjourned meeting may be called at shorter notice than applied to the original meeting, but where a meeting is adjourned for lack of quorum only if the adjourned meeting is held at least ten days after the original meeting and does not include any new business.
Cumulative preference shares
At a general meeting of the company, every holder of a cumulative preference share who is present in person or by proxy shall be entitled to one vote on a show of hands and, on a poll, every person who is present in person or by proxy shall have one vote for each 25 pence in nominal amount of shares held. No member shall be entitled to vote any share in person or by proxy unless all moneys owed in respect of that share have been paid.
Shareholder information
Non-cumulative preference shares
Holders of non-cumulative preference shares are not entitled to attend or vote at any general meeting unless the business of the meeting includes the consideration of a resolution for the winding-up of the company or any resolution directly varying or abrogating the rights attached to any such shares and then in such case only to speak to and vote upon any such resolution. However, holders have the right to vote in respect of any matter when the dividend payable on their shares has not been declared in full for such number of dividend periods as the directors shall determine prior to the allotment thereof.
Whenever a holder is entitled to vote at a general meeting, on a show of hands every shareholder who is present in person has one vote and, on a poll, every such holder who is present in person or by proxy shall have such number of votes as may be determined by the directors prior to allotment.
Non-voting deferred shares
The holders of non-voting deferred shares are not entitled to receive notice of or to attend or vote at any general meeting of the company or otherwise receive any shareholder communication.
B Shares
Holders of the Series 1 Class B Shares are not entitled to attend or vote at any general meeting unless the business of the meeting includes the consideration of a resolution for the winding-up of the company or any resolution varying or abrogating the rights attached to any such shares and then in such case only to speak to and vote upon any such resolution. If entitled to vote, each holder is entitled on a poll to two votes for each Series 1 Class B Share held.
In October 2015, HMT converted its entire holding of B shares into 5.1 billion new ordinary shares of £1 each.
Dividend Access Share
The holder of the Series 1 Dividend Access Share is not entitled to attend or vote at any general meeting unless the business of the meeting includes the consideration of a resolution for the winding-up of the company or any resolution varying or abrogating the rights attached to such share and then in such case only to speak to and vote upon any such resolution. If entitled to vote, the holder is entitled on a poll to one vote.
The final dividend payment on the Dividend Access Share (DAS) owned by HMT of £1.2 billion was paid in March 2016, effecting the immediate retirement of the DAS which was redesignated as a single B share and subsequently cancelled.
Redemption
Except as set forth in the following paragraph, unless the directors determine, prior to allotment of any particular series of non-cumulative preference shares, that such series shall be non-redeemable, the preference shares will be redeemable at the option of the company on any date which (subject to certain exceptions described in the terms of such shares) falls no earlier than such date (if any) as may be fixed by the directors, prior to allotment of such shares. On redemption, there shall be paid on each non-cumulative preference share the aggregate of its nominal amount together with any premium paid on issue, where applicable a redemption premium and accruals of dividend.
If the company wishes to issue redeemable shares, the Directors are authorised to determine the terms and manner of redemption.
Purchase
General
Under the 2006 Act a company requires shareholder authority to purchase its own shares, consolidate and sub-divide its shares and reduce its share capital.
Whenever non-cumulative preference shares are issued in the future the Articles have no restriction on the maximum purchase price payable by the company unless such restriction is expressly applied by the directors in relation to an issuance of non-cumulative preference shares.
Conversion rights
Convertible preference shares carry the right to convert into ordinary shares if they have not been the subject of a notice of redemption from the company, on or before a specified date determined by the directors. The right to convert will be exercisable by service of a conversion notice on the company within a specified period. The company will use reasonable endeavours to arrange the sale, on behalf of convertible preference shareholders who have submitted a conversion notice, of the ordinary shares which result from such conversion and to pay to them the proceeds of such sale so that they receive net proceeds equal to the nominal value of the convertible preference shares which were the subject of the conversion notice and any premium at which such shares were issued, provided that ordinary shares will not be sold at below a benchmark price (as determined prior to the issue of the relevant convertible preference shares by the directors).
B Shares
The B Shares are convertible into ordinary shares at HM Treasurys option at an initial conversion price of £0.50 per share, subject to adjustment.
In October 2015, HMT converted its entire holding of B shares into 5.1 billion new ordinary shares of £1 each.
Additional Value Shares
In December 2003, following the payment of aggregate dividends of £1 in respect of each AVS, all issued and outstanding AVSs were de-listed from the Official List and from trading on the London Stock Exchanges market for listed securities and converted into non-voting deferred shares of £0.01 each.
Changes in share capital and variation of rights
Subject to the provisions of the 2006 Act and without prejudice to any rights attached to any existing shares or class of shares, any share may be issued with such rights or restrictions as the company may by ordinary resolution determine or, subject to and in default of such determination, as the Board shall determine. Subject to the provisions of the 2006 Act, the company may issue shares which are, or at the option of the company or the holder are liable, to be redeemed. Subject to the provisions of the 2006 Act and the Articles, unissued shares are at the disposal of the Board.
The company may by ordinary resolution: increase its share capital; consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; subject to the provisions of the 2006 Act, subdivide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum; or cancel any shares which have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the shares so cancelled.
Subject to the provisions of the 2006 Act, if at any time the capital of the company is divided into different classes of shares, the rights attached to any class of shares may (unless further conditions are provided by the terms of issue of the shares of that class) be varied or abrogated, whether or not the company is being wound up, either with the consent in writing of the holders of three-quarters in-nominal value of the issued shares of the class or with the sanction of an extraordinary resolution passed at a separate general meeting of holders of the shares of the class (but not otherwise). To any such separate general meeting the provision of the Articles relating to general meeting s will apply, save that:
(i) if at any adjourned meeting of such holders a quorum as defined above is not present, two people who hold shares of the class, or their proxies, are a quorum; and
(ii) any such holder present in person or by proxy may demand a poll
The rights attaching to any class of shares having preferential rights are not, unless otherwise expressly provided by the terms of
Shareholder information
issue thereof, deemed to be varied by the creation or issue of further shares ranking, as regards participation in t he profits or assets of the company, pari passu therewith, but in no respect in priority thereto.
Disclosure of interests in shares
The 2006 Act gives the company the power to require persons who it believes to be, or have been within the previous three years, interested in its shares, to disclose prescribed particulars of those interests. Failure to supply the information or supplying a statement which is materially false may lead to the Board imposing restrictions upon the relevant shares. The restrictions available are the suspension of voting or other rights conferred by membership in relation to meetings of the company in respect of the relevant shares and, additionally, in the case of a shareholding representing at least 0.25 per cent of the class of shares concerned, the withholding of payment of dividends on, and the restriction of transfers of, the relevant shares.
Limitations on rights to own share
There are no limitations imposed by UK law or the Memorandum and Articles on the right of non-residents or foreign persons to hold or vote the companys shares other than the limitations that would generally apply to all of the companys shareholders.
Members resident abroad
Members with registered addresses outside the United Kingdom are not entitled to receive notices from the company unless they have given the company an address within the United Kingdom at which such notices may be served.
Sending notices and other documents to shareholders
The company may communicate with members by electronic and/or website communications. A member whose registered address is not within the United Kingdom shall not be entitled to receive any notice from the Company unless he gives the Company a postal address within the United Kingdom at which notices may be given to him.
Documents on display
Documents concerning the company may be inspected at 36 St Andrew Square, Edinburgh, EH2 2YB.
Executive directors service contracts and copies of directors indemnities granted by the company in terms of section 236 of the Companies Act 2006 may be inspected at the companys office at Gogarburn, Edinburgh, EH12 1HQ (telephone +44 (0)131 626 4114).
In addition, we file reports and other information with the SEC. You can read and copy these reports and other information at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You can call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room or contact the offices of The New York Stock Exchange, on which certain of our securities are listed, at 20 Broad Street, New York, New York 10005. The SEC also maintains a website at www.sec.gov which contains in electronic form each of the reports and other information that we have filed electronically with the SEC.
Incorporation and registration
The company was incorporated and registered in Scotland under the Companies Act 1948 as a limited company on 25 March 1968 under the name National and Commercial Banking Group Limited, and changed its name to The Royal Bank of Scotland Group Limited on 3 September 1979. On 10 March 1982 it was re-registered under the Companies Acts 1948 to 1980 as a public company with limited liability. The company is registered under Company No. SC45551
Shareholder information
Important addresses
Shareholder enquiries
Registrar
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: +44 (0)370 702 0135
Facsimile: +44 (0)370 703 6009
Website: www-uk.computershare.com/investor/contactus
ADR Depositary Bank
BNY Mellon Shareowner Services
PO Box 505000
Louisville, KY 40233-5000
Direct Mailing for overnight packages:
BNY Mellon Shareowner Services
462 South 4th Street
Suite 1600
Louisville KY 40202
Telephone: 1-888-269-2377 (US callers toll free)
Telephone: +1 201 680 6825 (International)
Email: shrrelations@cpushareownerservices.com
Website: www.mybnymdr.com
Corporate Governance and Regulatory Affairs
The Royal Bank of Scotland Group plc
PO Box 1000
Gogarburn Edinburgh EH12 1HQ
Telephone: +44 (0)131 556 8555
Investor Relations
280 Bishopsgate
London EC2M 4AA
Telephone: +44 (0)207 672 1758
Facsimile: +44 (0)207 672 1801
Email: investor.relations@rbs.com
Registered office
36 St Andrew Square
Edinburgh EH2 2YB
Telephone: +44 (0)131 556 8555
Registered in Scotland No. SC45551
Website
rbs.com
SEC website
More information is available on the SEC website at: sec.gov
Principal offices
The Royal Bank of Scotland Group plc
PO Box 1000, Gogarburn, Edinburgh EH12 1HQ
Telephone: +44 (0)131 626 0000
NatWest Markets Plc
250 Bishopsgate, London, EC2M 4AA
The Royal Bank of Scotland plc
PO Box 1000, Gogarburn, Edinburgh EH12 1HQ
250 Bishopsgate, London EC2M 4AA
National Westminster Bank Plc
250 Bishopsgate, London EC2M 4AA
Ulster Bank Limited
11-16 Donegall Square East,
Belfast BT1 5UB, Northern Ireland
Ulster Bank Ireland DAC
Ulster Bank Group Centre,
Georges Quay
Dublin 2, D02 VR98
Republic of Ireland
NatWest Markets Group Holdings Corp.
600 Washington Blvd
Stamford, CT 06901 USA
Coutts & Company
440 Strand, London WC2R 0QS
The Royal Bank of Scotland International Limited
Royal Bank House, 71 Bath Street
St Helier, Jersey, Channel Islands JE4 8PJ
Shareholder information
Exhibit Index
Shareholder information
4.18 (1) |
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4.19 (2) |
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4.20 (2) |
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4.21 (2) |
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4.22 |
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4.23 |
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8.1 |
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Principal subsidiaries of The Royal Bank of Scotland Group plc |
12.1 |
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12.2 |
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13.1 |
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15.1 |
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Consent of independent registered public accounting firm (Ernst & Young LLP) |
101.INS |
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XBRL Instance Document |
101.SCH |
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XBRL Taxonomy Extension Scheme |
101.CAL |
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XBRL Taxonomy Extension Scheme Calculation Linkbase |
101.DEF |
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XBRL Taxonomy Extension Scheme Definition Linkbase |
101.LAB |
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XBRL Taxonomy Extension Scheme Label Linkbase |
101.PRE |
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XBRL Taxonomy Extension Scheme Presentation Linkbase |
Notes:
(1) |
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Confidential treatment has been granted. |
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(2) |
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Confidential treatment has been requested. Confidential materials have been redacted and separately filed with the SEC. |
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
The Royal Bank of Scotland Group plc
Registrant
/s/ Katie Murray
Katie Murray
Chief Financial Officer
28 February 2019
SERVICE AGREEMENT
between
NATIONAL WESTMINSTER BANK Plc
and
KATIE MURRAY
National Westminster Bank Plc
250 Bishopsgate
London
EC2M 4AA
TABLE OF CONTENTS
Clause |
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Page |
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1. |
Interpretation |
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3 |
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2. |
Position |
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4 |
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3. |
Start date |
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5 |
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4. |
Duties |
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5 |
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5. |
Outside interests |
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7 |
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6. |
Place of work |
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7 |
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7. |
Hours of work |
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7 |
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8. |
Remuneration |
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8 |
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9. |
Deductions |
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9 |
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10. |
Incentive plans |
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9 |
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11. |
Expenses |
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10 |
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12. |
Dealing in investments |
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10 |
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13. |
Pension and life cover |
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10 |
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14. |
Annual leave |
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10 |
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15. |
Sickness absence |
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11 |
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16. |
Confidentiality |
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12 |
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17. |
Group property |
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14 |
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18. |
Intellectual property |
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15 |
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19. |
Power of attorney |
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15 |
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20. |
Grievance procedure |
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16 |
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21. |
Disciplinary procedure |
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16 |
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22. |
Termination without notice |
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18 |
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23. |
Termination with notice |
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19 |
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24. |
Change of duties and garden leave during notice period |
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20 |
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25. |
Events on termination |
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21 |
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26. |
Restrictions after termination |
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22 |
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27. |
Directors and officers insurance |
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25 |
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28. |
Privacy |
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25 |
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29. |
Notices |
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26 |
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30. |
Continuing provisions |
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26 |
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31. |
Whole agreement and severability |
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26 |
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32. |
Collective agreements |
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27 |
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33. |
Governing law |
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27 |
SERVICE AGREEMENT
between
NATIONAL WESTMINSTER BANK Plc , with registered number 929027 and having its registered office at 250 Bishopsgate, London EC2M 4AA (the Company)
and
KATIE MURRAY , residing at
(the Executive).
THE AGREEMENT BETWEEN THE PARTIES IS AS FOLLOWS:-
1. Interpretation
1.1. In this service agreement (the Agreement), the following definitions apply:
1.1.1. Board means the board of directors of the Company or any duly authorised committee of the board of directors of the Company;
1.1.2. Group means the Company, any holding company or undertaking of the Company and any subsidiaries and subsidiary undertakings of the Company or such holding company or undertaking, where the terms subsidiary, subsidiary undertaking and holding company are as defined in sections 1159 and 1162 of the Companies Act 2006;
1.1.3. Group Company means any company within the Group or in respect of which the Group exercises management control, including joint venture operations; and
1.1.4. Group Performance and Remuneration Committee means the performance and remuneration committee of the Board, or any committee empowered by the Board in substitution for the Group Performance and Remuneration Committee.
1.2. In this Agreement:
1.2.1. references to statutes, rules or regulations or their provisions will also include amendments, extensions, consolidations or replacements and will also be taken to refer to any orders or regulations, instruments and subordinate legislation;
1.2.2. unless the context requires otherwise, words in the singular include the plural and the words in the plural include the singular;
1.2.3. unless otherwise stated, references to clauses and sub-clauses are references to clauses and sub-clauses of this Agreement and references to clauses will be deemed to include references to the sub-clauses of that clause; and
1.2.4. the headings to clauses are for convenience only and will not affect the construction or interpretation of this Agreement.
2. Position
2.1. The Executive will be employed as Group Chief Financial Officer and Chief Financial Officer, NatWest Holdings Limited, and the Executive agrees to accept that position on the terms and conditions set out in this Agreement. In addition to the Executives normal responsibilities the Executive will also be a member of the RBS Group Executive Committee, and the NatWest Holdings Executive Committee. Subject to clause 4.5 below the Executive will also become an Executive Director of the Boards of The Royal Bank of Scotland Group plc, NatWest Holdings Limited, National Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank Limited.
2.2. The Executive warrants that entering into this Agreement will not result in the Executive being in breach of any express or implied term of any contract or other obligation binding on the Executive.
2.3. It is a condition of the Executives appointment and continued employment that the Executive satisfies (and continues to satisfy) all relevant requirements, qualifications, recommendations, rules and regulations, as amended from time to time (including any such requirements, recommendations, rules and regulations regarding handover arrangements), of (i) any regulatory body whose consent is required to enable the Executive to undertake (or continue to undertake) the Executives duties, (ii) the UK Listing Authority; (iii) all other regulatory authorities relevant to the Company or any Group Company; and (iv) any internal policies and procedures of the Company or any Group Company (including the code of conduct) to the extent these are issued or implemented pursuant to regulatory requirements.
2.4. The Executive is required to attain any reasonable standards and qualifications and/or pass any assessments and/or training (whether internal or external) considered necessary by the Group to meet any requirements imposed on it, including those imposed by a regulatory
authority. The Executive will be provided with details of such standards and requirements separately. In the event that the Executive fails to meet this requirement, the Company may terminate the Executives employment in accordance with the provisions of clause 23 below.
3. Start date
3.1. The Executives employment under this Agreement will commence on 1 January 2019. The Executives continuous employment with the Company commenced on 16 November 2015.
4. Duties
4.1. The Executive will report to the Group/NatWest Holdings Limited Chief Executive, or to such other person as the Company may specify from time to time. The person to whom the Executive reports is referred to in this Agreement as the Executives line manager.
4.2. During the Executives employment the Executive will:
4.2.1. faithfully, efficiently, competently and diligently perform such duties and exercise such powers, authorities and discretions as may be assigned to or vested in the Executive by the Executives line manager;
4.2.2. comply with the Groups rules, policies and regulations (as amended from time to time) and obey all reasonable and lawful directions given by or under the authority of the Executives line manager;
4.2.3. comply with the terms of the Groups code of conduct (as amended from time to time);
4.2.4. not do anything prejudicial to the interests and reputation of the Group and will promote and extend the business of the Group and protect and further its interests and reputation;
4.2.5. other than in the proper performance of the Executives duties, not introduce to any other person, firm or corporation, business of a kind in which the Company or any Group Company is for the time being engaged or capable of becoming engaged or with which the Company or Group Company is able to deal in the course of its business; and
4.2.6. accept secondment to any Group Company, which may be for a fixed period that can be extended by the Company according to business requirements, and which may apply to some or all of the Executives employment duties, and during any period of secondment the Executive will continue to receive the Executives ValueAccount (as defined at clause 8.1 below) in the normal way and will remain subject to the terms of this Agreement except as otherwise provided for in any secondment agreement.
4.3. Additionally, the Executive may be required from time to time to undertake such other duties as the Company considers necessary to meet the needs of the business. The Executive may also be required to perform services for any Group Company and may be required to undertake the role and duties of an officer or director of the Company or any Group Company. No additional remuneration will be paid in respect of these appointments and the Executive will, at the request of the Company or relevant Group Company, immediately resign from any such office without claim for compensation.
4.4. Notwithstanding the provisions of clauses 4.2.6 and 4.3 above, the Executive will not be required to perform any duties that the Executive cannot reasonably be expected to perform or that are not commensurate with the Executives skills and experience.
4.5. The duties of the Executive as an officer or director of the Company or of any Group Company will be subject to the Articles of Association (or equivalent) of the relevant company and will be separate from and additional to the Executives duties under this Agreement. If the Executive ceases to be an officer or director of the Company or of any Group Company (otherwise than by resignation from employment, termination by the Company of the Executives employment under this Agreement or where the Executive is prohibited by law from acting as an officer or director of the relevant company), this Agreement will remain in force and the parties agree that in such circumstances the Executive will not be entitled to any compensation in respect of the loss of office.
4.6. The Executives performance and discharge of the Executives duties and responsibilities under this Agreement will be the subject of regular review, the purpose of which is to assess performance during the period under review and set agreed performance standards for future review periods. In the event that, in the opinion of the Board or such other person or body as the Board may nominate, the Executive fails to achieve the agreed performance standards, the Company may terminate the Executives employment in accordance with the provisions of clause 23 below.
4.7. The Executive will at all times (whether during or after the Executives employment), promptly and within the timescale specified, and in the manner requested, give to the Group and to the Groups auditors or other professional advisers for the time being all such information, explanations, data, testimony and assistance as they may reasonably require in connection with any business, investigations or other proceedings relating to or affecting the Company or any Group Company with which the Executive has been involved during the Executives employment with the Company. If this clause is invoked after the termination of the Executives employment, the Company will have reasonable regard to the Executives personal and professional diary and will reimburse her reasonable expenses in the exercise of this clause.
5. Outside interests
5.1. During the Executives employment with the Company the Executive will not (except with the prior written consent of the Executives line manager) be directly or indirectly employed, engaged, concerned or interested in any business, trade, profession or organisation other than a Group Company. Nothing in this clause 5.1 will prevent the Executive holding or being interested in investments (quoted or unquoted) not representing more than two per cent of the issued equity capital or any other class of share or debenture capital of any one company, unless that company is a direct business competitor of the Company or any Group Company, in which case the Executive will require the prior consent of the Executives line manager to the acquisition or variation of such holding.
5.2. Other than in the proper performance of the Executives normal duties, the Executive will not, without the consent of the Executives line manager, give lectures, speak in public or publish anything in any form or medium relating to the affairs of the Group.
6. Place of work
6.1. The Executive will normally work in London at the Companys Bishopsgate offices but may be required to travel elsewhere in the world in the performance of the Executives duties.
6.2 The Executive may be required to move temporarily or permanently to any other location as may be reasonably specified by the Company, in which case a minimum of four weeks notice of the move will be given and reasonable travel, subsistence and relocation expenses will be paid by the Company in accordance with the relevant policies and procedures in force at the time.
7. Hours of work
7.1. This is a full time position, and the Executive will work such hours as are necessary to perform the Executives duties to the standard required by the Company. It should be noted that the Companys normal hours of business are from 9.00 a.m. to 5.00 p.m. Monday to Friday.
8. Remuneration
8.1. The total remuneration payable by the Company to the Executive (the ValueAccount) is £851,250 per annum, which includes basic salary of £750,000 per annum (the Salary Element), and benefit and pension funding of £101,250 per annum.
8.2. The ValueAccount will be reviewed annually, with any adjustments taking effect from 1 April unless otherwise specified by the Company. The first review will take place in 2020. The Company is not obliged to increase the ValueAccount at any review.
8.3. The Salary Element is used to calculate certain benefits directly linked to salary and to calculate severance payments, including redundancy payments.
8.4. The Executive will be eligible to participate in any flexible benefits scheme that the Company may operate, subject to the rules of that scheme (as amended from time to time). An element of the benefit funding will be used to fund certain core benefits, such as life cover and disability cover, as appropriate. Any residual benefit funding may be taken in cash or used by the Executive to select optional benefits. Details of the benefits scheme are available from the Company on request.
8.5. The Executive may elect to use some or all of the pension funding to contribute to an approved pension plan as set out in clause 13. Any residual pension funding may be taken in cash.
8.6. The ValueAccount (less appropriate deductions) will be paid directly into the Executives bank account in equal monthly instalments on the 18 th day of each month (or, where the 18 th day falls on a weekend or bank holiday, on the nearest preceding working day). Payments will be made partly in advance and partly in arrears, to cover the whole of the relevant calendar month.
8.7. The fixed remuneration for the role of Group Chief Financial Officer and Chief Financial Officer, NatWest Holdings Limited includes a role based allowance, payable in such form, at such intervals and subject to such conditions as the Group Performance and Remuneration
Committee may in its absolute discretion specify from time to time. Further details of this allowance will be provided separately.
9. Deductions
9.1. The Company may at any time during the Executives employment or on its termination deduct from the Executives remuneration any sums owed by the Executive to the Company or any Group Company, including but not limited to any overpayment made and/or any outstanding loans, advances, relocation expenses, and any salary paid to the Executive in respect of excess annual leave.
10. Incentive plans
10.1. The Executive will be eligible to be considered for discretionary awards under such incentive plans as are agreed from time to time by the Group Performance and Remuneration Committee, subject to the rules of those plans and the terms of the Companys remuneration policy as amended from time to time.
10.2. Any awards made to the Executive under an incentive plan will be discretionary and will not form part of the Executives contractual remuneration under this Agreement. In addition, such awards will be contingent on sustainable and risk-adjusted performance, and will be subject to forfeiture, reduction and recovery in accordance with the rules of the relevant plans and related policies, the Companys remuneration policy and all relevant regulatory requirements, recommendations and rules.
10.3. The exercise of discretion by the Company to make an award to the Executive under an incentive plan in respect of one financial year or other period will not bind the Company or act as a precedent for the exercise of discretion at any subsequent time.
10.4. If, on or before the date when an award under an incentive plan might otherwise have been granted , the Executives employment has terminated or either party has given notice under this Agreement to terminate the Executives employment, the Executive will have no entitlement under this Agreement to be considered for any such award.
10.5. The Company reserves the right to change the rules of any incentive plans, or to cancel such plans, at any time without prior notice. In the event of any conflict, the rules of any relevant incentive plan (as amended from time to time) will take precedence over the terms of this Agreement.
11. Expenses
11.1. The Company will reimburse the Executive for all reasonable out-of-pocket expenses properly incurred in the performance of the Executives duties, subject to the Executive producing all relevant receipts or other satisfactory evidence and the Executives compliance with the Companys travel and expenses policy as amended from time to time.
12. Dealing in investments
12.1. The Executive agrees to comply with the Companys Staff Dealing Rules (and equivalent business or function rules where applicable). The Company also operates a closed period during which the Executive will not be permitted to deal in Group shares. Failure to abide by these rules will constitute serious misconduct for the purposes of any disciplinary action and may lead to criminal proceedings and/or the termination of the Executives employment without notice.
13. Pension and life cover
13.1. If the Executive is not already enrolled into one of the Groups pension arrangements, the Executive will be enrolled into The Royal Bank of Scotland Group Retirement Savings Plan (the RSP) or such other pension arrangement as the Group and/or the Company decides. Contributions will be deducted from the Executives ValueAccount at a default contribution rate, which the Executive will be informed of separately. The Executive will be able to amend the contribution rate at any time through the Companys flexible benefits scheme, but if the Executive does not wish to make any pension contributions the Executive will need to decide this (and elect all other benefits) within the first 30 days of joining the Group. If the Executive opts out or contributes less than the minimum rate set out in legislation, the Executive will be re-enrolled as required by law at a contribution rate which will be confirmed at the time.
13.2. The RSP is not contracted out of the State Second Pension and no contracting out certificate is required. Further details about the RSP are available from the Company on request.
13.3. The Executive will be provided with life cover as a core benefit under the Companys flexible benefits scheme. The cost of this benefit will be deducted from the Executives ValueAccount.
14. Annual leave
14.1. The Executive will be entitled to paid annual leave, subject to the undernoted conditions:
14.1.1. The Executive will be entitled to 30 working days leave each year, to be taken at such time or times as the Executive requests and agrees in advance with the Company, plus a further eight days to be taken on the usual public holidays. The Company reserves the right to request the Executive to work on public holidays in return for which the Executive will be entitled to time off in lieu, equal to the period worked, to be taken at another time.
14.1.2. The Companys holiday year runs from 1 January to 31 December inclusive.
14.1.3. If the Executives employment commences or terminates part way through the Companys holiday year, annual leave entitlement will be assessed on a pro rata basis for each complete month of service during the Companys holiday year.
14.1.4. The Executive may carry over a maximum of five days unused annual leave entitlement from one year to the next, but only with the prior written consent of the Company.
14.2. Upon termination of the Executives employment, the Executive will be entitled to payment in respect of any accrued unused annual leave entitlement, except where the Executives employment is terminated by the Company for misconduct or gross misconduct, in which case only accrued unused statutory annual leave will be paid.
14.3. Upon termination of the Executives employment, the Executive will repay to the Company any salary received for annual leave taken by the Executive in excess of the Executives accrued entitlement. The Executive agrees that any sums due to the Company by the Executive may be deducted by the Company from any monies owed to the Executive, all in accordance with clause 9 above.
14.4. During any period of notice, whether notice is issued by the Company or the Executive, and whether or not the period of notice is worked or spent on Garden Leave (as defined in clause 24.1.2 below), the Executive will be required to take all accrued and outstanding annual leave entitlement at times to be agreed with the Company. However, the Company retains the discretion to release the Executive from this obligation and to make a payment in lieu of such outstanding entitlement or any part of such entitlement.
15. Sickness absence
15.1. There is no contractual right to payment in respect of any period of absence due to sickness or injury, and any such payments will be made at the Companys discretion in accordance with
any sickness absence policy and procedures in operation at the time of the relevant absence.
15.2. The Executive will also be eligible to be considered on a discretionary basis for cover under the rules of the Companys Disability Cover scheme (as amended from time to time). If the Executive is incapable of performing the Executives duties because of injuries sustained wholly or partly as a result of actionable negligence, nuisance or breach of any statutory duty on the part of any person other than a Group Company (a Third Party), or if the Executive is covered by any health or other insurance scheme (an Insurance Policy), all payments made to the Executive under clause 15.1 above will (to the extent that compensation for loss of earnings is recoverable from the Third Party or under the Insurance Policy) constitute loans by the Company (or by any Group Company from whom the Company may have procured payment of the Executives remuneration) to the Executive and will require to be repaid when the Executive recovers compensation for loss of earnings from the Third Party by action or otherwise or under the Insurance Policy.
15.3. Without prejudice to the provisions of clause 15.2 above, in the event that the Executive has been incapacitated from performing the Executives duties by reason of injuries sustained wholly or partly as a result of actionable negligence or as a result of matters which are covered by an Insurance Policy, the Company will be entitled to require the Executive either:-
15.3.1. (subject to the Company agreeing to indemnify the Executive against all reasonable legal expenses) to raise legal proceedings to enforce the Executives rights against any Third Party who has committed such an actionable negligence against the Executive and/or to pursue a claim under the Insurance Policy; or
15.3.2. to assign to the Company or any Group Company the Executives right to raise legal proceedings to recover from such Third Party and/or the relevant insurance company compensation for any loss of earnings sustained by the Executive.
15.4. The Executive will at any time (including during any period of incapacity) at the request and expense of the Company submit to medical examinations by a medical practitioner nominated by the Company. The results will, subject to the provisions of the Access to Medical Reports Act 1988, be disclosed to the Company.
16. Confidentiality
16.1. The Executive will treat as strictly confidential the business affairs and trade secrets of the Company and the Group and any information about or provided by any third party that the Executive receives at any time as a result of the Executives employment.
16.2. For the purposes of this Agreement, Confidential Information means any knowledge about the commercial affairs and business transactions of the Company and the Group including, but not limited to, information about customers, clients, advisers, regulators, employees or suppliers (whether former, actual or potential), contracts, pricing structures, financial and marketing details, terms of business, proposed transactions, business plans, premises, assets, internal communications, Intellectual Property (as defined in clause 18 below), technical systems and data, designs, formulae, product lines, projects, operational procedures, research activities, negotiating positions, forward planning, technical and product developments, accounts, finances, computer software and general know-how of the Company or the Group. Confidential Information also includes, without limitation:-
16.2.1. information relating directly or indirectly to particular securities or issuers of such securities (including both Group Companies and third parties), which would, if generally available, be likely to have an effect on the price of such securities or any related investments (Price-Sensitive Information);
16.2.2. any information contained in documents marked confidential, or documents of a higher security classification, and other information that, because of its nature or the circumstances in which the Executive receives it, the Executive should reasonably consider to be confidential; and
16.2.3. confidential information (howsoever obtained) about or provided by any third party and received during the course of or as a result of the Executives employment.
16.3. The Company reserves the right to modify the categories of Confidential Information from time to time.
16.4. The obligations contained in this clause 16 will not apply:
16.4.1. to information or knowledge that is already in the public domain, other than by way of unauthorised use or disclosure (whether by the Executive or a third party);
16.4.2. where the Executives use or disclosure of the information has been expressly authorised in writing by the Company;
16.4.3. to any information that the Executive discloses in accordance with applicable public interest disclosure legislation; or
16.4.4. to any information that is required to be disclosed in accordance with an order of a court of competent jurisdiction.
16.5. The Executive will exercise all due care and diligence and will take all reasonable steps to prevent the publication or disclosure of any Confidential Information. Subject to the need to use or disclose Confidential Information in the proper performance of the Executives duties, the Executive will not, whether prior to, during or after the Executives employment, and whether on the Executives own behalf or in any capacity or on behalf of any other person, firm, company or organisation, disclose or allow to be disclosed to any person or organisation or use for the Executives own benefit or for the benefit of any third party, any Confidential Information. The Executive will use the Executives best endeavours to prevent the disclosure of any Confidential Information and will inform the Company immediately of any instances of disclosure of which the Executive becomes aware. For the avoidance of doubt, disclosure includes (but is not limited to) disclosure on the internet or through similar means or media including any social media. In relation to Price-Sensitive Information, the Executive will also ensure that any disclosure, if required in the proper performance of the Executives duties, is made in a manner compliant with applicable laws and regulations and Group procedures relating to the disclosure of such information.
16.6. Any breach by the Executive of the provisions of this clause 16 will be regarded by the Company as a serious disciplinary matter and may, if committed while the Executive is employed by the Company, result in disciplinary action being taken against the Executive, up to and including dismissal without notice. If such a breach is committed prior to the commencement of the Executives employment, it may result in the Executives offer of employment being withdrawn without notice or payment in lieu of notice. Any such breach may also lead to criminal proceedings.
16.7. The Executive acknowledges that maintaining absolute confidentiality is crucial to the Group, and the Groups business depends on the discretion of its employees. The Executive agrees that the undertakings in this clause 16 are reasonable and necessary to protect the legitimate business interests of the Group prior to, during and after the termination of the Executives employment.
17. Group property
17.1. All reports, files, notes, memoranda, e-mails, accounts, documents or other material (including all notes and memoranda of any Confidential Information as defined in clause 16.2 above and the items referred to in that clause) and any copies created or received by the Executive in connection with the Executives employment are and will remain the sole property of the Company or the relevant Group Company and will be surrendered by the Executive on demand by the Company, including in the circumstances set out in clause 25 below.
17.2. Other than in the proper performance of the Executives normal duties, the Executive is not permitted to make any copy, abstract, summary or précis of the whole or any part of any document belonging to the Group unless the Executive has been authorised to do so by the Company, and the Executive will not at any time use (or permit to be used) any such items other than for the benefit of the Group.
18. Intellectual property
18.1. For the purposes of this Agreement, Intellectual Property means patents, rights to inventions, trade marks, service marks, registered designs (including applications for and rights to apply for any of them), unregistered design rights, trade or business names, domain names, rights in get-up, rights in goodwill or to sue for passing off, unfair competition rights, copyright and related rights, rights in computer software, database rights, topography rights, rights in Confidential Information (including know-how and trade secrets) and any similar rights in any country.
18.2. All Intellectual Property that the Executive develops or produces in connection with the Executives employment duties, or that the Executive derives from any material produced by the Executive or any other employee of the Company or any Group Company in connection with their employment duties, will be owned by the Company absolutely. The Executive agrees, at the Companys expense, to sign all documents and carry out all such acts as will be necessary to achieve this. The Executive waives all moral rights in all Intellectual Property that is or will be owned by the Company as a result of this clause.
19. Power of attorney
19.1. The Executive irrevocably appoints any Board director or the Secretary of the Company to be the Executives authorised attorney to do all such things and to execute in the Executives name and on the Executives behalf all such documents as may be necessary or desirable for the Company to obtain for itself, or its nominees or any Group Company the full benefit of the provisions in clauses 18 and 25.
19.2. A letter, signed by any Board director or the Secretary of the Company, certifying that anything has been done or that any document has been executed in accordance with the authority conferred by this clause 19, will be conclusive evidence that such is the case as far as any third party is concerned, save that the Executive may not sign such a letter.
20. Grievance procedure
20.1. If the Executive has a grievance relating directly to the Executives employment, the grievance and the basis for it should be raised in writing with the Executives line manager, who will then meet with the Executive and notify the Executive in writing of the outcome of the grievance and of any action to be taken. If the Executive considers that the matter remains unresolved, the Executive should raise an appeal with the Chief HR Officer. After a further meeting with the Executive, the decision of the Chief HR Officer (or the Chief HR Officers nominated deputy) will be final and binding on the Executive.
20.2. At any stage of the grievance procedure, the Executive may be accompanied at formal meetings by either a work colleague or a trade union representative.
21. Disciplinary procedure
21.1. Without prejudice to the terms of clause 22 below, the Company may take disciplinary action against the Executive for, but not limited to:
21.1.1. conduct incompatible with the Executives status (whether or not during working hours);
21.1.2. poor attendance;
21.1.3. any material breach by the Executive of any of the terms and conditions of the Executives employment;
21.1.4. unsatisfactory performance by the Executive of the Executives duties;
21.1.5. failure to comply with the condition referred to at clause 2.3 above; or
21.1.6. failure to attain any standards or qualifications and/or pass any assessments referred to at clause 2.4 above.
21.2. Such disciplinary action may include a verbal or written warning (including a final written warning), suspension with pay or dismissal with or without notice.
21.3. The Companys general disciplinary procedure does not apply to the Executives employment under this Agreement. The Company will normally (though will not be obliged to) follow the non-contractual procedure set out for information in clauses 21.4 to 21.9 below.
21.4. The Company may suspend the Executive with pay and benefits to enable it to carry out an investigation into any matter in respect of which it is considering taking disciplinary action against the Executive, or for any other good reason.
21.5. After the investigation, the Executives line manager (or that persons nominated deputy) will write to the Executive setting out the alleged conduct and basis for the disciplinary action and inviting the Executive to a meeting to discuss the matter.
21.6. After the meeting, the Executives line manager (or that persons nominated deputy) will write to the Executive advising of the outcome, and of any disciplinary sanction to be imposed.
21.7. If the Executive is unhappy with the outcome, the Executive may appeal the decision in writing to the Chief HR Officer (or the Chief HR Officers nominated deputy).
21.8. If the Executive appeals the decision, the Chief HR Officer (or the Chief HR Officers nominated deputy) will hold an appeal meeting with the Executive.
21.9. After the meeting the Chief HR Officer (or the Chief HR Officers nominated deputy) will write to the Executive advising of the outcome. The decision of the Chief HR Officer (or the Chief HR Officers nominated deputy) will be final.
21.10. At any stage of any disciplinary procedure, the Executive may be accompanied at formal meetings by either a work colleague or a trade union representative.
21.11. For the purposes of this clause 21, the following non-exhaustive list contains examples of conduct that will be treated as gross misconduct and will likely lead to the dismissal of the Executive without notice:
21.11.1. theft;
21.11.2. damage to Company property;
21.11.3. misuse of Company property or resources, including computers and any other part of the Companys telecommunication system;
21.11.4. fraud;
21.11.5. incapacity for work due to being under the influence of alcohol or illegal drugs;
21.11.6. physical assault;
21.11.7. gross insubordination; and
21.11.8. serious harassment on any grounds.
22. Termination without notice
22.1. Notwithstanding the provisions of clauses 21 and 23 of this Agreement, the Company will (without prejudice to its other rights and remedies) be entitled to dismiss the Executive without notice or payment in lieu of notice if, in the opinion of the Company, the Executive:
22.1.1. commits any serious or persistent breach of the Executives duties, refuses or neglects to comply with any material term of this Agreement, refuses or neglects to comply with any reasonable and lawful order or direction given to the Executive by the Company, or is guilty of any gross default or incompetence or misconduct in connection with or affecting the business of the Company, or acts (whether or not in connection with the Executives employment) in a manner that, in the opinion of the Company, is prejudicial to the Company or may bring the Executive or the Company into disrepute;
22.1.2. is guilty of dishonesty, gross incompetence, wilful neglect of duty, or of mismanagement of the Executives financial affairs through failure to observe rules and procedures for the operation of bank accounts and/or borrowing;
22.1.3. is found guilty of any criminal offence (other than a minor offence under the Road Traffic Acts that does not result in imprisonment) whether or not in connection with the Executives employment;
22.1.4. becomes a patient for any purpose under any statute relating to mental health;
22.1.5. is declared bankrupt or takes advantage of any statute for the time being in force offering relief to insolvent debtors;
22.1.6. resigns as an officer of the Company or any Group Company without the agreement of the Board;
22.1.7. as the result of any default on the part of the Executive, is prohibited by law from acting as an officer of the Company or any Group Company; or
22.1.8. fails or ceases to meet the requirements of any regulatory body whose consent is required to enable the Executive to undertake the Executives duties under this Agreement, or is guilty of a serious breach of the rules and regulations (as amended from time to time) of any such regulatory body.
22.2. Notwithstanding the provisions of clauses 21 and 23 of this Agreement, the Executive agrees that the Executive will have no remedy against the Company if the Executives employment is terminated by reason of the liquidation of the Company for the purposes of amalgamation or reconstruction, provided that the Executive is offered employment with any concern or undertaking resulting from such amalgamation or reconstruction on terms and conditions that, taken as a whole, are not substantially less favourable than the terms set out in this Agreement.
23. Termination with notice
23.1. The length of notice the Executive is obliged to give the Company when seeking to terminate the Executives employment is 12 months. Notice must be given in writing.
23.2. Subject to clauses 21 and 22 above, the length of notice the Executive is entitled to receive from the Company to terminate the Executives employment is 12 months. Notice by the Company will be given in writing.
23.3. Where notice is given by either party to terminate the Executives employment, the Company reserves the right in its sole and absolute discretion to terminate the Executives employment at any time and with immediate effect by making a payment in lieu of any unexpired period notice, subject to the following:
23.3.1. Any such payment in lieu of notice will represent a payment in lieu of the Salary Element of the Executives ValueAccount only. No payment will be made in respect of any other benefit, including pension funding;
23.3.2. Any such payment in lieu of notice will be released in monthly instalments based on the Executives normal Salary Element. These payments will be made on the Companys normal pay dates;
23.3.3. Throughout the period the Executive is in receipt of such instalments, the Executive will be obliged to use reasonable endeavours to seek alternative employment or engagement. If the Executive secures new employment (or any other means of generating income, e.g. a consultancy or directorship or any
other engagement or appointment) the Executive must disclose that fact to the Company without delay. The Executive will have no right to any further payments under this clause 23 (whether in whole or in part) from the date the Executive commences such new employment or engagement; and
23.3.4. Any payment in lieu of notice made pursuant to this clause 23 will be subject to such deductions as the Company is required by law to make.
24. Change of duties and garden leave during notice period
24.1. At any stage of the Executives notice period referred to in clause 23 above (whether notice was given by the Executive or by the Company), the Company may, at its absolute discretion and without being required to give any reasons:-
24.1.1. alter the Executives duties; or
24.1.2. instruct the Executive to remain away from work on garden leave (Garden Leave).
24.2. During any period of Garden Leave:
24.2.1. the Executive must (save for periods when the Executive is on annual leave, whether pursuant to clause 14.4 or otherwise) be available for work, although the Company is not obliged to provide the Executive with any work;
24.2.2. the Company will be entitled to require the Executive to perform work at home in relation to matters of which the Executive has knowledge or that fall within the Executives field of competence;
24.2.3. the Executive will be entitled to receive the Executives ValueAccount in the normal way, but will not be entitled to any discretionary incentive award in respect of any period of Garden Leave;
24.2.4. the Executive may not, without the prior written consent of the Company, contact or attempt to contact any client, customer, prospective client or customer, agent, professional adviser, employee, consultant, supplier or broker of the Company or any Group Company in connection with any business carried on by the Company or any Group Company, and will immediately refer to the Company any communications received from any such person in relation to the same;
24.2.5. the Executive will not be permitted to work for any other organisation or on the Executives own behalf without the Companys prior written consent;
24.2.6. all other terms and conditions of the Executives employment (both express and implied) will remain in full force and effect; and
24.2.7. the Executive will continue to owe the Company a duty of fidelity and good faith and, if applicable, duties as a fiduciary, in full and to the same extent as existed prior to the period of Garden Leave.
24.3. The Restricted Period set out in clause 26.1 below will be reduced by any period spent on Garden Leave.
25. Events on termination
25.1. Upon termination of the Executives employment for whatever reason, or at any other time at the request of the Company, the Executive will immediately:
25.1.1. deliver to the Company, in accordance with its instructions, any Group property in the Executives possession or under the Executives control (including, but not limited to, any company car (together with all keys and documents relating to it), credit cards, mobile telephone, computer equipment, removable drives, disks, software, passwords, keys, security passes, correspondence, tapes, records, files, films, records, reports, plans, papers (in whatever format, including electronic), Intellectual Property, notes and memoranda of any Confidential Information and all copies of any of the above items made or received by the Executive);
25.1.2. resign, without claim for compensation, from all directorships and other offices within the Group then held by the Executive, and the Executive hereby irrevocably authorises the Company to appoint some person in the Executives name and on the Executives behalf to sign any documents and do any things necessary to effect such resignation should the Executive fail to do so; and
25.1.3. transfer (without payment in return) to the Company or, if requested by the Company, to its nominee, any qualifying or nominee shares which are subject to any Group clawback policy/rules and which are registered in the name of the Executive (either solely or jointly) and held by the Executive as nominee, beneficial owner or trustee on behalf of the Company or any Group Company.
25.2. The Executive will, if so required by the Company, confirm in writing that the Executive has complied with the Executives obligations under this clause 25.
26. Restrictions after termination
26.1. In this clause the following definitions will apply:
26.1.1. Termination Date means the date on which the Executives employment ends for whatever reason;
26.1.2. Confidential Information has the meaning given to it in clause 16.2 above;
26.1.3. Relevant Period means the period of 12 months immediately preceding the earlier of (i) the Termination Date and (ii) the date on which the Executive commences any period of Garden Leave in accordance with clause 24.1.2 above;
26.1.4. Restricted Period means the period commencing on the Termination Date and continuing for 12 months (less any time spent away from work on Garden Leave in accordance with clause 24.1.2 above);
26.1.5. Business means those parts of the business carried on at the Termination Date by the Company or any Group Company and with which the Executive was, in the opinion of the Company, involved to a material extent at any time during the Relevant Period;
26.1.6. Competitor means any business that on the Termination Date is, has plans to become, or is likely to be (at any time during the Restricted Period) in competition with the Business;
26.1.7. Key Employee means any person with whom the Executive has had material dealings at any time during the Relevant Period and who was on the Termination Date a director, employee (at appointed, managerial, senior managerial or executive level) or consultant of the Company or any Group Company;
26.1.8. Former Key Employee means any person with whom the Executive has had material dealings at any time during the Relevant Period and who was at any time during that period a director, employee (at appointed, managerial, senior managerial or executive level) or consultant of the Company or any Group Company;
26.1.9. Customer means any person, firm, company, organisation or other entity who or which, at any time during the Relevant Period, was a customer or client of the Company or any Group Company or was in negotiations or discussions about the supply or provision of products or services supplied or provided by the Company or any Group Company, and:-
26.1.9.1. with whom or which, at any time during the Relevant Period, the Executive had business dealings, negotiations or discussions in the course of the Executives employment; or
26.1.9.2. in relation to whom or which the Executive, by reason of the Executives employment with the Company, is in possession of any trade secrets or Confidential Information; and
26.1.10. Relevant Third Party means any person, firm, company, organisation or other entity who or which, at any time during the Relevant Period, was a investor with, or an exclusive supplier of services to, the Company or any Group Company (other than a supplier of utilities and goods or services for administrative purposes) and:-
26.1.10.1. with whom or which, at any time during the Relevant Period, the Executive had business dealings in the course of the Executives employment; or
26.1.10.2. in relation to whom or which the Executive, by reason of the Executives employment with the Company, is in possession of any trade secrets or Confidential Information.
26.2. The Executive agrees and undertakes with the Company (for itself and as trustee and agent for each Group Company), as separate and independent obligations, that the Executive will not at any time during the Restricted Period, without obtaining the prior written consent of the Company (which consent will not be unreasonably withheld or delayed), whether on the Executives own account, or for, with or through or on behalf of any other person, company or other entity, directly or indirectly:-
26.2.1. carry on, be engaged or concerned or interested in, or hold any position as employee, director, officer, consultant, partner, agent or principal in or with, a Competitor;
26.2.2. in competition with the Business, (a) canvass custom from, solicit or entice away or endeavour to canvass custom from, solicit or entice away the custom or business of any Customer from the Company or any Group Company, or (b) interfere adversely with or endeavour to interfere adversely with the relationship that the Company or any Group Company has with a Customer;
26.2.3. in competition with the Business, do any business with, accept any orders from, or have any business dealings with a Customer;
26.2.4. cause or endeavour to cause any Relevant Third Party to either cease investing in or doing business with the Company or any Group Company or materially alter the terms of its investment in, or the terms on which it transacts business with, the Company or any Group Company in a manner that is detrimental to the Company or any Group Company;
26.2.5. be employed in or have any dealings with any business that has had a trading relationship with the Company or any Group Company in the Relevant Period, in relation to which business, by reason of the Executives employment with the Company, the Executive is or may be able to influence the trading relationship between that business and the Company or a Group Company;
26.2.6. solicit, entice away or induce, or seek to solicit or entice away or induce, (including through any third party such as a recruitment intermediary) a Key Employee to cease working for or providing services to the Company or any Group Company, whether or not such Key Employee would thereby commit a breach of contract;
26.2.7. solicit, entice or induce, or seek to solicit, entice or induce (including through any third party such as a recruitment intermediary), a Former Key Employee to take up employment with or provide services to a Competitor, whether or not such Former Key Employee would thereby commit a breach of contract.
26.3. The Executive agrees and acknowledges that the restrictions contained in clause 16 (Confidentiality), clause 17 (Group property), clause 24 (Change of duties and garden leave during notice period), clause 25 (Events on termination) and clause 26 (Restrictions after termination) of this Agreement are reasonable and necessary to protect the business and the Confidential Information of the Company and the Group and that the benefits the Executive receives under this Agreement are sufficient compensation for these restrictions.
The Executive further acknowledges and agrees that if any such restriction or restrictions are together or individually found to be void or unenforceable, but would be valid and effective if some part or parts of them were deleted or otherwise amended, the restriction or restrictions will apply with any deletions or amendments necessary to make it or them valid, effective and enforceable. The parties also agree that the restrictions set out in this clause are separate and severable and enforceable as such, and that if any restriction is determined as being unenforceable in whole or in part for any reason, that will not affect the enforceability of the remaining restrictions or, in the case of part of a restriction being unenforceable, the remainder of that restriction.
26.4. The Executive will not, following the termination of the Executives employment with the Company, represent or maintain to any third party (either directly or indirectly and whether by act or omission) that the Executive remains in any way connected with the business of the Company or the Group.
27. Directors and officers insurance
27.1. The Executive will, insofar as the law permits, be entitled to the benefit of the directors and officers insurance policy maintained by the Company from time to time, subject to and in accordance with the terms of any such policy.
28. Privacy
28.1. The Executive undertakes to comply with the Companys Privacy and Client Confidentiality Policy and any data protection, privacy and client confidentiality policies, procedures and accountabilities as amended from time to time and any applicable local privacy law. The Executive acknowledges that breach of this undertaking could lead to disciplinary action being taken against the Executive.
28.2. The Executive expressly consents to the Company and any Group Company holding and processing personal information (including sensitive personal data) relating to the Executive to the extent necessary or reasonably required for legal, personnel, administrative, financial, regulatory, payroll, management and other purposes relating to the Executives employment with the Company or for the proper conduct of the Companys and/or any Group Companys business. The Executive also agrees that the Company and any Group Company may disclose such information to third parties in the event that such disclosure is, in the view of the Company or Group Company, required for the proper conduct of the business of the Company or any Group Company. This clause applies to information held,
used or disclosed in any medium, and whether or not the use or processing of personal information is within the European Economic Area. Further information about how the Company processes personal information is set out in the Employee Privacy Notice, which is available on the Groups intranet.
29. Notices
29.1. Any notice or other communication may be given by either party by personal delivery or prepaid first class mail to the other party at (in the case of the Company) its registered office for the time being marked For the Attention of the Company Secretary or (in the case of the Executive) the Executives last known usual address, and any such notice will be deemed to have been served (in the case of first class mail) at the expiry of 48 hours after posting, or (in the case of personal delivery) at the time of such delivery.
30. Continuing provisions
30.1. The termination of this Agreement will not affect the provisions of clause 16 (Confidentiality), clause 17 (Group property), clause 24 (Change of duties and garden leave during notice period), clause 25 (Events on termination) and clause 26 (Restrictions after termination).
31. Whole agreement and severability
31.1. This Agreement constitutes a written statement of the terms and conditions of the Executives employment in accordance with the provisions of the Employment Rights Act 1996. This Agreement supersedes any previous agreement, whether oral or in writing, between the Executive and the Company in relation to the matters dealt with in the Agreement, represents the entire agreement between the Executive and the Company.
31.2. The Company reserves the right to make changes to this Agreement from time to time, either by way of individual notice to the Executive or general notice to groups of employees through the Groups intranet or employee communications.
31.3. In addition to the terms of this Agreement, the Executive is also required to comply with all other applicable statutory, divisional or company rules, as amended from time to time.
31.4. The various provisions of this Agreement are severable. If any of them are held to be invalid or unenforceable in whole or in part this will not affect the validity or enforceability of the remaining provisions of the Agreement or the remaining parts of the relevant provision.
32. Collective agreements
32.1. There are no collective agreements directly affecting the terms and conditions of the Executives employment.
33. Governing law
33.1. The interpretation and enforcement of this Agreement will be governed by and construed in all respects in accordance with the law of England and Wales, and the parties submit to the non-exclusive jurisdiction of the English and Welsh courts.
Executed and delivered as deed for and on behalf of
NATIONAL WESTMINSTER BANK Plc |
/s/ Helen Cook |
|
on |
1 February 2019 |
(date) |
at . (place)
by Helen Cook, Chief HR Officer before the undernoted witness:-
Signature of witness .
Name of witness .
Address of witness .
.
.
Executed and delivered as a deed by KATIE MURRAY |
/s/ Katie Murray |
|
on |
1 February 2019 |
(date) |
at . (place)
before the undernoted witness:-
Signature of witness .
Name of witness .
Address of witness .
.
.
30 May 2018
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Strictly Private and Confidential |
Gogarburn |
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Edinburgh EH12 1HQ |
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Sir Howard J Davies |
Telephone: 0131 556 8555 |
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Fax: 0131 626 3010 |
|
www.rbs.com |
Dear Howard
This letter sets out the terms of your appointment as a non-executive director and Chairman of:
(1) The Royal Bank of Scotland Group plc (company number SC045551) ( Group ) and National Westminster Bank Plc (company number 00929027) ( NatWest ) with effect from 14 July 2015 as a non-executive director, and from 1 September 2015 as Chairman;
(2) NatWest Holdings Limited (company number 10142224) ( NWH ) with effect from 16 November 2016;
(3) Ulster Bank Limited (company number R0000733) ( UBL ) with effect from 28 July 2017; and
(4) The Royal Bank of Scotland plc (company number SC083026) ( RBS ) with effect from 27 April 2018,
(together the Companies ).
The term of your appointment will commence on the aforementioned effective dates and extend to the conclusion of the Groups next Annual General Meeting and thereafter will be subject to re-election as described below. It is agreed that this is a contract for services and not a contract of employment.
1. Appointment
Your appointment is subject to the articles of association of the Companies and may be terminated on the written notice of either you or the Companies as described below.
You will be required to stand for re-election by shareholders at each Annual General Meeting of each of the Companies (as applicable). Continuation of your appointment is also contingent on satisfactory performance and any relevant statutory provisions relating to the removal of a director.
2. Termination
Your appointment may be terminated by either you or any of the Companies giving written notice to the other, such notice to take immediate effect.
In the event that your re-election is not approved by shareholders, your appointment as director of all of the Companies will terminate automatically with immediate effect.
On termination of your appointment you shall, at the request of the Companies, resign as a director of each of the Companies.
No compensation or payment in lieu of notice will be payable upon termination of your appointment.
3. Time Commitment
You will devote such time as is necessary to fulfil your duties which include preparation for and attendance at the Board meetings of the Companies and committee meetings (as applicable), Annual General Meetings (as applicable) and any other General Meetings of the Companies and the annual Board strategy offsite.
As Chairman, you are expected to attend all of the Companies Board meetings and Committee meetings of which you are a member or attendee, including lunches and dinners unless you have a pressing reason for absence. You will be expected to devote appropriate preparation time ahead of each meeting.
Overall we anticipate a time commitment of at least two thirds of your time with a clear understanding that in the event of need, the bank chairmanship role would have priority over any other business time commitment.
By accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the requirements of your role.
4. Role
Your principal responsibilities and duties are set out in your role profile, as amended from time to time. A copy of your role profile as at 30 May 2018 is attached.
As Chairman you are also a director and therefore have the same legal responsibilities to the Companies as any other director and you should have particular regard to the duties set out in the Companies Act 2006 (the 2006 Act ). This includes the general duties of directors as set out in Part 10, Chapter 2 of the 2006 Act, including the duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the companys employees,
(c) the need to foster the companys business relationships with suppliers, customers and others,
(d) the impact of the companys operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
You will be required to exercise relevant powers in accordance with the Companies articles of association and in accordance with relevant policies in internal control frameworks.
5. Regulatory Requirements
Under the Senior Managers Regime, which was introduced to strengthen individual accountability in banking, certain non-executive director roles are classified as Senior Manager Functions and require prior regulatory approval. Other non-executive director positions must be notified to the regulator but do not require prior approval. Your role profile, as amended from time to time, will either (i) contain details of your Senior Manager Functions; or (ii) reflect your status as a Notified Non-executive Director.
|
The Royal Bank of Scotland Group plc Registered in Scotland No 45551 Registered Office: 36 St Andrew Square Edinburgh EH2 2YB |
It is a condition of your appointment that you comply with all applicable regulatory requirements, including but not limited to complying with the PRA and FCA Conduct Rules, as they apply from time to time. Further details are available on request from the Chief Governance & Regulatory Officer and Board Counsel.
It is also a condition of your appointment that you remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements and that you report any matter that may impact your ongoing fitness and propriety promptly to the Companies and the PRA and FCA.
6. Remuneration
As Chairman you will be paid a fee of £750,000 per annum, which covers membership of the Boards of all five companies (the Boards ) and any Board Committees on which you serve or which you attend. Your remuneration will be reviewed annually and is disclosed in Groups Report and Accounts.
You will be paid monthly and will be reimbursed for all reasonable and properly documented expenses you incur in performing your duties.
7. Healthcare
For the period of your appointment, private medical cover will be available on request to you and your spouse/partner, such cover to be subject to the terms of the Banks core cover arrangements for senior executives. These may vary from time to time but currently provide silver level cover, provided through the RBS Healthcare Trust.
8. Outside Interests
It is accepted and acknowledged that you may have business interests other than those of the Companies and that you have disclosed all interests and, where applicable, declared any actual or potential conflicts of interest that are apparent at present.
The agreement of each Board must be sought before you accept any additional commitments that might affect the time you are able to devote to your role as Chairman of the Companies. In particular, you must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if you are contemplating any additional appointments.
Please note that there are regulatory limits imposed by the Capital Requirements Directive on the number of directorships you are able to hold. These limits are a total of either (1) one executive and two non-executive positions; or (2) four non-executive director positions, in both cases including your RBS roles. Directorships in organisations which do not pursue predominantly commercial objectives do not count; and executive or non-executive directorships within the same group of companies count as a single directorship. The regulator may, at its discretion, grant a waiver to enable one additional non-executive position to be held. The Chief Governance & Regulatory Officer and Board Counsel monitors compliance with these regulatory limits and will be happy to discuss your own situation with you.
In the event that you become aware of any actual or potential conflicts of interest (including any relevant interests in transactions or arrangements), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel immediately. This is to enable such conflicts to be authorised or noted, as applicable, by the relevant Board in accordance with the 2006 Act.
Further details are set out in the Groups Conflicts of Interest Policy, a copy of which is attached to this letter.
9. Confidentiality and return of and access to information
You acknowledge that all information acquired during your appointment is confidential to the Companies and should not be released, disclosed or communicated, either during your appointment or following termination of your appointment to third parties without prior written clearance from the Boards.
You acknowledge the need to hold and retain the Companies information (in whatever format it is received) under appropriately secure conditions.
As a director, you will frequently be in possession of price sensitive information and you should avoid making any statements that might risk disclosure of unpublished price sensitive information.
Upon termination of your appointment (for whatever reason), you shall deliver to the Companies all documents, records, papers or other property which may be in your possession or under your control, and which relate in any way to the business affairs of the Companies, and you shall not retain any copies thereof.
Please contact the Chief Governance & Regulatory Officer and Board Counsel if you subsequently require access to information. The Companies will seek to accommodate all reasonable requests for information, subject to any legal or regulatory obligations or restrictions that may prohibit them from doing so.
10. Review Process
Your performance as Chairman will be subject to review annually as part of the Board evaluation exercise, which reviews the performance of individual directors, each Board as a whole and its Committees. If, in the interim, there are any matters that cause you concern about your role, you should discuss them with the Senior Independent Director as soon as is appropriate.
11. Insurance
Subject to legislative provisions, you will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by you in the execution of your duties.
In addition, the Group has in place directors and officers liability insurance. It is intended to maintain such cover for the full term of your appointment.
12. Independent Professional Advice
Should a situation arise when you consider that you need to take independent professional advice in relation to your duties as a director, you should first discuss the situation with the Chief Governance & Regulatory Officer and Board Counsel. The reasonable costs of any independent advice obtained will be reimbursed by the Companies.
13. Dealing in Securities / Investments
As a director of the Companies, you are subject to the RBS Personal Account Dealing (PAD) Policy and you cannot deal in RBS securities outside of certain scheduled Open Windows (which are periods which coincide with the announcement of Group results) or at any time while you are in possession of inside information. RBS securities are broadly defined to include shares or debt instruments of an issuing entity, or derivatives or other financial instruments linked to any such shares or debts.
You and your connected persons are also required to obtain permission before dealing on your own account in RBS securities. A copy of the PAD Policy has been provided to you along with further details of your obligations and the associated disclosure requirements.
14. Data Protection
The Companies will collect, hold and process various types of personal information about you in accordance with the Privacy Notice for Non-executive Directors, a copy of which is attached to this letter.
You shall at all times comply with the Privacy and Client Confidentiality policy, a copy of which is available on the intranet. A Company may change its policies at any time and will publish any changes on the intranet.
15. Governing Law
Your engagement with the Companies is governed by and shall be construed in accordance with the law of Scotland and your engagement shall be subject to the jurisdiction of the Scottish courts.
Please do not hesitate to contact me if you have any questions in relation to this letter. This letter has been sent to you in duplicate. Please sign and date both copies, retaining one copy for your records and returning the other to me at House G, RBS, PO Box 1000, Edinburgh, EH12 1HQ.
Yours sincerely |
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/s/ Aileen Taylor |
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Aileen Taylor |
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Chief Governance & Regulatory Officer and Board Counsel |
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For and on behalf of the Companies |
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/s/ Howard J Davies |
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Howard J Davies |
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Date: |
30 May 2018 |
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Enclosures: |
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Chairman role profile |
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Conflicts of Interest Policy |
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Privacy Notice |
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30 May 2018
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Strictly Private and Confidential |
Gogarburn |
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Edinburgh EH12 1HQ |
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Michael Rogers |
Telephone: 0131 556 8555 |
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Fax: 0131 626 3010 |
|
www.rbs.com |
Dear Mike
This letter sets out the terms of your appointment as a non-executive director of:
(1) The Royal Bank of Scotland Group plc (company number SC045551) ( Group ) and National Westminster Bank Plc (company number 00929027) ( NatWest ) with effect from 26 January 2016;
(2) NatWest Holdings Limited (company number 10142224) ( NWH ) with effect from 16 November 2016;
(3) Ulster Bank Limited (company number R0000733) ( UBL ) with effect from 28 July 2017; and
(4) The Royal Bank of Scotland plc (company number SC083026) ( RBS ) with effect from 27 April 2018,
(together the Companies ).
The term of your appointment will commence on the aforementioned effective dates and extend to the conclusion of the Groups next Annual General Meeting and thereafter will be subject to re-election as described below. It is agreed that this is a contract for services and not a contract of employment.
1. Appointment
Your appointment is subject to the articles of association of the Companies and may be terminated on the written notice of either you or the Companies as described below.
You will be required to stand for re-election by shareholders at each Annual General Meeting of each of the Companies (as applicable). Continuation of your appointment is also contingent on satisfactory performance and any relevant statutory provisions relating to the removal of a director.
2. Termination
Your appointment may be terminated by either you or any of the Companies giving written notice to the other, such notice to take immediate effect.
In the event that your re-election is not approved by shareholders, your appointment as director of all of the Companies will terminate automatically with immediate effect.
On termination of your appointment you shall, at the request of the Companies, resign as a director of each of the Companies.
No compensation or payment in lieu of notice will be payable upon termination of your appointment.
3. Time Commitment
You will devote such time as is necessary to fulfil your duties which include preparation for and attendance at the Board meetings of the Companies and committee meetings (as applicable), Annual General Meetings (as applicable) and any other General Meetings of the Companies and the annual Board strategy offsite.
By accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the requirements of your role.
4. Role
Your principal responsibilities and duties are set out in your role profile, as amended from time to time. A copy of your role profile as at 30 May 2018 is attached.
Non-executive Directors have the same legal responsibilities to the Companies as any other director and you should have particular regard to the duties set out in the Companies Act 2006 (the 2006 Act ). This includes the general duties of directors as set out in Part 10, Chapter 2 of the 2006 Act, including the duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the companys employees,
(c) the need to foster the companys business relationships with suppliers, customers and others,
(d) the impact of the companys operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
You will be required to exercise relevant powers in accordance with the Companies articles of association and in accordance with relevant policies in internal control frameworks.
5. Regulatory Requirements
Under the Senior Managers Regime, which was introduced to strengthen individual accountability in banking, certain non-executive director roles are classified as Senior Manager Functions and require prior regulatory approval. Other non-executive director positions must be notified to the regulator but do not require prior approval. Your role profile, as amended from time to time, will either (i) contain details of your Senior Manager Functions; or (ii) reflect your status as a Notified Non-executive Director.
It is a condition of your appointment that you comply with all applicable regulatory requirements, including but not limited to complying with the PRA and FCA Conduct Rules, as they apply from time to time. Further details are available on request from the Chief Governance & Regulatory Officer and Board Counsel.
It is also a condition of your appointment that you remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements and that you report any matter that may impact your ongoing fitness and propriety promptly to the Companies and the PRA and FCA.
|
The Royal Bank of Scotland Group plc Registered in Scotland No 45551 Registered Office: 36 St Andrew Square Edinburgh EH2 2YB |
6. Remuneration
As a non-executive director you will be paid a fee in accordance with the Directors Remuneration Policy approved by Groups shareholders from time to time. The fee covers membership of the Boards of all five Companies (the Boards ), plus the relevant fee(s) for any additional Committee membership(s) and/or chairmanship(s) you may assume. Your remuneration will be reviewed annually and is disclosed in Groups Report and Accounts.
You will be paid monthly and will be reimbursed for all reasonable and properly documented expenses you incur in performing your duties.
7. Outside Interests
It is accepted and acknowledged that you may have business interests other than those of the Companies and that you have disclosed all interests and, where applicable, declared any actual or potential conflicts of interest that are apparent at present.
The agreement of each Board must be sought before you accept any additional commitments that might affect the time you are able to devote to your role as a non-executive director of the Companies. In particular, you must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if you are contemplating any additional appointments.
Please note that there are regulatory limits imposed by the Capital Requirements Directive on the number of directorships you are able to hold. These limits are a total of either (1) one executive and two non-executive positions; or (2) four non-executive director positions, in both cases including your RBS roles. Directorships in organisations which do not pursue predominantly commercial objectives do not count; and executive or non-executive directorships within the same group of companies count as a single directorship. The regulator may, at its discretion, grant a waiver to enable one additional non-executive position to be held. The Chief Governance & Regulatory Officer and Board Counsel monitors compliance with these regulatory limits and will be happy to discuss your own situation with you.
In the event that you become aware of any actual or potential conflicts of interest (including any relevant interests in transactions or arrangements), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel immediately. This is to enable such conflicts to be authorised or noted, as applicable, by the relevant Board in accordance with the 2006 Act.
Further details are set out in the Groups Conflicts of Interest Policy, a copy of which is attached to this letter.
8. Confidentiality and return of and access to information
You acknowledge that all information acquired during your appointment is confidential to the Companies and should not be released, disclosed or communicated, either during your appointment or following termination of your appointment to third parties without prior written clearance from the Boards.
You acknowledge the need to hold and retain the Companies information (in whatever format it is received) under appropriately secure conditions.
As a director, you will frequently be in possession of price sensitive information and you should avoid making any statements that might risk disclosure of unpublished price sensitive information.
Upon termination of your appointment (for whatever reason), you shall deliver to the Companies all documents, records, papers or other property which may be in your possession or under your
control, and which relate in any way to the business affairs of the Companies, and you shall not retain any copies thereof.
Please contact the Chief Governance & Regulatory Officer and Board Counsel if you subsequently require access to information. The Companies will seek to accommodate all reasonable requests for information, subject to any legal or regulatory obligations or restrictions that may prohibit them from doing so.
9. Review Process
Your performance as a non-executive director will be subject to review annually as part of the Board evaluation exercise, which reviews the performance of individual directors, each Board as a whole and its Committees. If, in the interim, there are any matters that cause you concern about your role, you should discuss them with the Chairman as soon as is appropriate.
10. Insurance
Subject to legislative provisions, you will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by you in the execution of your duties.
In addition, the Group has in place directors and officers liability insurance. It is intended to maintain such cover for the full term of your appointment.
11. Independent Professional Advice
Should a situation arise when you consider that you need to take independent professional advice in relation to your duties as a director, you should first discuss the situation with the Chief Governance & Regulatory Officer and Board Counsel. The reasonable costs of any independent advice obtained will be reimbursed by the Companies.
12. Dealing in Securities / Investments
As a director of the Companies, you are subject to the RBS Personal Account Dealing (PAD) Policy and you cannot deal in RBS securities outside of certain scheduled Open Windows (which are periods which coincide with the announcement of Group results) or at any time while you are in possession of inside information. RBS securities are broadly defined to include shares or debt instruments of an issuing entity, or derivatives or other financial instruments linked to any such shares or debts.
You and your connected persons are also required to obtain permission before dealing on your own account in RBS securities. A copy of the PAD Policy has been provided to you along with further details of your obligations and the associated disclosure requirements.
13. Data Protection
The Companies will collect, hold and process various types of personal information about you in accordance with the Privacy Notice for Non-executive Directors, a copy of which is attached to this letter.
You shall at all times comply with the Privacy and Client Confidentiality policy, a copy of which is available on the intranet. A Company may change its policies at any time and will publish any changes on the intranet.
14. Governing Law
Your engagement with the Companies is governed by and shall be construed in accordance with the law of Scotland and your engagement shall be subject to the jurisdiction of the Scottish courts.
Please do not hesitate to contact me if you have any questions in relation to this letter. This letter has been sent to you in duplicate. Please sign and date both copies, retaining one copy for your records and returning the other to me at House G, RBS, PO Box 1000, Edinburgh, EH12 1HQ.
Yours sincerely |
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/s/ Aileen Taylor |
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Aileen Taylor |
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Chief Governance & Regulatory Officer and Board Counsel |
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For and on behalf of the Companies |
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/s/ Michael Rogers |
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Michael Rogers |
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Date: |
30 May 2018 |
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|||
Enclosures: |
|
|||
Non-executive director role profile |
|
|||
Conflicts of Interest Policy |
|
|||
Privacy Notice |
|
|||
30 May 2018
|
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|
Strictly Private and Confidential |
Gogarburn |
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Edinburgh EH12 1HQ |
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|
Frank Dangeard |
Telephone: 0131 556 8555 |
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Fax: 0131 626 3010 |
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www.rbs.com |
Dear Frank
This letter sets out the terms of your appointment as a non-executive director of:
(1) The Royal Bank of Scotland Group plc (company number SC045551) ( Group ) and NatWest Markets Plc (company number SC090312) ( NWM ) with effect from 16 May 2016,
(together the Companies ).
The term of your appointment will commence on the aforementioned effective date and extend to the conclusion of the Groups next Annual General Meeting and thereafter will be subject to re-election as described below. It is agreed that this is a contract for services and not a contract of employment.
1. Appointment
Your appointment is subject to the articles of association of the Companies and may be terminated on the written notice of either you or the Companies as described below.
You will be required to stand for re-election by shareholders at each Annual General Meeting of each of the Companies (as applicable). Continuation of your appointment is also contingent on satisfactory performance and any relevant statutory provisions relating to the removal of a director.
2. Termination
Your appointment may be terminated by either you or any of the Companies giving written notice to the other, such notice to take immediate effect.
In the event that your re-election is not approved by shareholders, your appointment as director of all of the Companies will terminate automatically with immediate effect.
On termination of your appointment you shall, at the request of the Companies, resign as a director of each of the Companies.
No compensation or payment in lieu of notice will be payable upon termination of your appointment.
3. Time Commitment
You will devote such time as is necessary to fulfil your duties which include preparation for and attendance at the Board meetings of the Companies and committee meetings (as applicable), Annual General Meetings (as applicable) and any other General Meetings of the Companies and the annual Board strategy offsite.
By accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the requirements of your role.
4. Role
Your principal responsibilities and duties are set out in your role profile, as amended from time to time. A copy of your role profile as at 30 May 2018 is attached.
Non-executive Directors have the same legal responsibilities to the Companies as any other director and you should have particular regard to the duties set out in the Companies Act 2006 (the 2006 Act ). This includes the general duties of directors as set out in Part 10, Chapter 2 of the 2006 Act, including the duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the companys employees,
(c) the need to foster the companys business relationships with suppliers, customers and others,
(d) the impact of the companys operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
You will be required to exercise relevant powers in accordance with the Companies articles of association and in accordance with relevant policies in internal control frameworks.
5. Regulatory Requirements
Under the Senior Managers Regime, which was introduced to strengthen individual accountability in banking, certain non-executive director roles are classified as Senior Manager Functions and require prior regulatory approval. Other non-executive director positions must be notified to the regulator but do not require prior approval. Your role profile, as amended from time to time, will either (i) contain details of your Senior Manager Functions; or (ii) reflect your status as a Notified Non-executive Director.
It is a condition of your appointment that you comply with all applicable regulatory requirements, including but not limited to complying with the PRA and FCA Conduct Rules, as they apply from time to time. Further details are available on request from the Chief Governance & Regulatory Officer and Board Counsel.
It is also a condition of your appointment that you remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements and that you report any matter that may impact your ongoing fitness and propriety promptly to the Companies and the PRA and FCA.
6. Remuneration
As a non-executive director you will be paid a fee in accordance with the Directors Remuneration Policy approved by Groups shareholders from time to time. The fee covers membership of the Boards of all six Companies (the Boards ), plus the relevant fee(s) for any additional Committee membership(s) and/or chairmanship(s) you may assume. Your remuneration will be reviewed annually and is disclosed in Groups Report and Accounts.
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The Royal Bank of Scotland Group plc Registered in Scotland No 45551 Registered Office: 36 St Andrew Square Edinburgh EH2 2YB |
You will be paid monthly and will be reimbursed for all reasonable and properly documented expenses you incur in performing your duties.
7. Outside Interests
It is accepted and acknowledged that you may have business interests other than those of the Companies and that you have disclosed all interests and, where applicable, declared any actual or potential conflicts of interest that are apparent at present.
The agreement of each Board must be sought before you accept any additional commitments that might affect the time you are able to devote to your role as a non-executive director of the Companies. In particular, you must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if you are contemplating any additional appointments.
Please note that there are regulatory limits imposed by the Capital Requirements Directive on the number of directorships you are able to hold. These limits are a total of either (1) one executive and two non-executive positions; or (2) four non-executive director positions, in both cases including your RBS roles. Directorships in organisations which do not pursue predominantly commercial objectives do not count; and executive or non-executive directorships within the same group of companies count as a single directorship. The regulator may, at its discretion, grant a waiver to enable one additional non-executive position to be held. The Chief Governance & Regulatory Officer and Board Counsel monitors compliance with these regulatory limits and will be happy to discuss your own situation with you.
In the event that you become aware of any actual or potential conflicts of interest (including any relevant interests in transactions or arrangements), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel immediately. This is to enable such conflicts to be authorised or noted, as applicable, by the relevant Board in accordance with the 2006 Act.
Further details are set out in the Groups Conflicts of Interest Policy, a copy of which is attached to this letter.
8. Confidentiality and return of and access to information
You acknowledge that all information acquired during your appointment is confidential to the Companies and should not be released, disclosed or communicated, either during your appointment or following termination of your appointment to third parties without prior written clearance from the Boards.
You acknowledge the need to hold and retain the Companies information (in whatever format it is received) under appropriately secure conditions.
As a director, you will frequently be in possession of price sensitive information and you should avoid making any statements that might risk disclosure of unpublished price sensitive information.
Upon termination of your appointment (for whatever reason), you shall deliver to the Companies all documents, records, papers or other property which may be in your possession or under your control, and which relate in any way to the business affairs of the Companies, and you shall not retain any copies thereof.
Please contact the Chief Governance & Regulatory Officer and Board Counsel if you subsequently require access to information. The Companies will seek to accommodate all reasonable requests for information, subject to any legal or regulatory obligations or restrictions that may prohibit them from doing so.
9. Review Process
Your performance as a non-executive director will be subject to review annually as part of the Board evaluation exercise, which reviews the performance of individual directors, each Board as a whole and its Committees. If, in the interim, there are any matters that cause you concern about your role, you should discuss them with the Chairman as soon as is appropriate.
10. Insurance
Subject to legislative provisions, you will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by you in the execution of your duties.
In addition, the Group has in place directors and officers liability insurance. It is intended to maintain such cover for the full term of your appointment.
11. Independent Professional Advice
Should a situation arise when you consider that you need to take independent professional advice in relation to your duties as a director, you should first discuss the situation with the Chief Governance & Regulatory Officer and Board Counsel. The reasonable costs of any independent advice obtained will be reimbursed by the Companies.
12. Dealing in Securities / Investments
As a director of the Companies, you are subject to the RBS Personal Account Dealing (PAD) Policy and you cannot deal in RBS securities outside of certain scheduled Open Windows (which are periods which coincide with the announcement of Group results) or at any time while you are in possession of inside information. RBS securities are broadly defined to include shares or debt instruments of an issuing entity, or derivatives or other financial instruments linked to any such shares or debts.
You and your connected persons are also required to obtain permission before dealing on your own account in RBS securities. A copy of the PAD Policy has been provided to you along with further details of your obligations and the associated disclosure requirements.
13. Data Protection
The Companies will collect, hold and process various types of personal information about you in accordance with the Privacy Notice for Non-executive Directors, a copy of which is attached to this letter.
You shall at all times comply with the Privacy and Client Confidentiality policy, a copy of which is available on the intranet. A Company may change its policies at any time and will publish any changes on the intranet.
14. Governing Law
Your engagement with the Companies is governed by and shall be construed in accordance with the law of Scotland and your engagement shall be subject to the jurisdiction of the Scottish courts.
Please do not hesitate to contact me if you have any questions in relation to this letter. This letter has been sent to you in duplicate. Please sign and date both copies, retaining one copy for your records and returning the other to me at House G, RBS, PO Box 1000, Edinburgh, EH12 1HQ.
Yours sincerely |
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/s/ Aileen Taylor |
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Aileen Taylor |
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Chief Governance & Regulatory Officer and Board Counsel |
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For and on behalf of the Companies |
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/s/ Frank Dangeard |
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Frank Dangeard |
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Date: |
30 May 2018 |
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Enclosures: |
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Non-executive director role profile |
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Conflicts of Interest Policy |
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Privacy Notice |
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30 May 2018
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Strictly Private and Confidential |
Gogarburn |
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Edinburgh EH12 1HQ |
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Mark Seligman |
Telephone: 0131 556 8555 |
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Fax: 0131 626 3010 |
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www.rbs.com |
Dear Mark
This letter sets out the terms of your appointment as a non-executive director of:
(1) The Royal Bank of Scotland Group plc (company number SC045551) ( Group ), National Westminster Bank Plc (company number 00929027) ( NatWest ) and NatWest Holdings Limited (company number 10142224) ( NWH ) with effect from 21 June 2017;
(2) Ulster Bank Limited (company number R0000733) ( UBL ) with effect from 28 July 2017; and
(3) The Royal Bank of Scotland plc (company number SC083026) ( RBS ) with effect from 27 April 2018,
(together the Companies ).
The term of your appointment will commence on the aforementioned effective dates and extend to the conclusion of the Groups next Annual General Meeting and thereafter will be subject to re-election as described below. It is agreed that this is a contract for services and not a contract of employment.
1. Appointment
Your appointment is subject to the articles of association of the Companies and may be terminated on the written notice of either you or the Companies as described below.
You will be required to stand for re-election by shareholders at each Annual General Meeting ( AGM ) of each of the Companies (as applicable). Continuation of your appointment is also contingent on satisfactory performance and any relevant statutory provisions relating to the removal of a director.
Your appointment is also subject to the Board Appointment Policy, which states that Non-executive Directors are appointed for an initial term of 3 years (subject to annual re-election in line with the UK Corporate Governance Code). For each of the Companies, your initial 3 year term shall be deemed to commence from the date of the first AGM of Group following the Effective Date and expires (and any subsequent terms commence and expire) on the date of the AGM of Group for the year in question. At the end of their initial 3 year term, Non-executive Directors are subject to a formal assessment by the Group Nominations & Governance Committee. Such assessment will include detailed discussion on performance, time commitment and experience.
After such formal assessment, Non-executive Directors may then serve a second 3 year term, provided they are happy to do so and if their performance has been satisfactory. A second formal review will then take place at the end of the second three year term and a Non-executive Directors will either step down from the Board or be re-appointed on a twelve month term (subject to an overall maximum tenure of nine years).
2. Termination
Your appointment may be terminated by either you or any of the Companies giving written notice to the other, such notice to take immediate effect.
In the event that your re-election is not approved by shareholders, your appointment as director of all of the Companies will terminate automatically with immediate effect.
On termination of your appointment you shall, at the request of the Companies, resign as a director of each of the Companies.
No compensation or payment in lieu of notice will be payable upon termination of your appointment.
3. Time Commitment
You will devote such time as is necessary to fulfil your duties which include preparation for and attendance at the Board meetings of the Companies and committee meetings (as applicable), Annual General Meetings (as applicable) and any other General Meetings of the Companies and the annual Board strategy offsite.
By accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the requirements of your role.
4. Role
Your principal responsibilities and duties are set out in your role profile, as amended from time to time. A copy of your role profile as at 30 May 2018 is attached.
Non-executive Directors have the same legal responsibilities to the Companies as any other director and you should have particular regard to the duties set out in the Companies Act 2006 (the 2006 Act ). This includes the general duties of directors as set out in Part 10, Chapter 2 of the 2006 Act, including the duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the companys employees,
(c) the need to foster the companys business relationships with suppliers, customers and others,
(d) the impact of the companys operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
You will be required to exercise relevant powers in accordance with the Companies articles of association and in accordance with relevant policies in internal control frameworks.
5. Regulatory Requirements
Under the Senior Managers Regime, which was introduced to strengthen individual accountability in banking, certain non-executive director roles are classified as Senior Manager Functions and require prior regulatory approval. Other non-executive director positions must be notified to the regulator but do not require prior approval. Your role profile, as amended from
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The Royal Bank of Scotland Group plc Registered in Scotland No 45551 Registered Office: 36 St Andrew Square Edinburgh EH2 2YB |
time to time, will either (i) contain details of your Senior Manager Functions; or (ii) reflect your status as a Notified Non-executive Director.
It is a condition of your appointment that you comply with all applicable regulatory requirements, including but not limited to complying with the PRA and FCA Conduct Rules, as they apply from time to time. Further details are available on request from the Chief Governance & Regulatory Officer and Board Counsel.
It is also a condition of your appointment that you remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements and that you report any matter that may impact your ongoing fitness and propriety promptly to the Companies and the PRA and FCA.
6. Remuneration
As a non-executive director you will be paid a fee in accordance with the Directors Remuneration Policy approved by Groups shareholders from time to time. The fee covers membership of the Boards of all five Companies (the Boards ), plus the relevant fee(s) for any additional Committee membership(s) and/or chairmanship(s) you may assume. Your remuneration will be reviewed annually and is disclosed in Groups Report and Accounts.
You will be paid monthly and will be reimbursed for all reasonable and properly documented expenses you incur in performing your duties.
7. Outside Interests
It is accepted and acknowledged that you may have business interests other than those of the Companies and that you have disclosed all interests and, where applicable, declared any actual or potential conflicts of interest that are apparent at present.
The agreement of each Board must be sought before you accept any additional commitments that might affect the time you are able to devote to your role as a non-executive director of the Companies. In particular, you must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if you are contemplating any additional appointments.
Please note that there are regulatory limits imposed by the Capital Requirements Directive on the number of directorships you are able to hold. These limits are a total of either (1) one executive and two non-executive positions; or (2) four non-executive director positions, in both cases including your RBS roles. Directorships in organisations which do not pursue predominantly commercial objectives do not count; and executive or non-executive directorships within the same group of companies count as a single directorship. The regulator may, at its discretion, grant a waiver to enable one additional non-executive position to be held. The Chief Governance & Regulatory Officer and Board Counsel monitors compliance with these regulatory limits and will be happy to discuss your own situation with you.
In the event that you become aware of any actual or potential conflicts of interest (including any relevant interests in transactions or arrangements), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel immediately. This is to enable such conflicts to be authorised or noted, as applicable, by the relevant Board in accordance with the 2006 Act.
Further details are set out in the Groups Conflicts of Interest Policy, a copy of which is attached to this letter.
8. Confidentiality and return of and access to information
You acknowledge that all information acquired during your appointment is confidential to the Companies and should not be released, disclosed or communicated, either during your appointment or following termination of your appointment to third parties without prior written clearance from the Boards.
You acknowledge the need to hold and retain the Companies information (in whatever format it is received) under appropriately secure conditions.
As a director, you will frequently be in possession of price sensitive information and you should avoid making any statements that might risk disclosure of unpublished price sensitive information.
Upon termination of your appointment (for whatever reason), you shall deliver to the Companies all documents, records, papers or other property which may be in your possession or under your control, and which relate in any way to the business affairs of the Companies, and you shall not retain any copies thereof.
Please contact the Chief Governance & Regulatory Officer and Board Counsel if you subsequently require access to information. The Companies will seek to accommodate all reasonable requests for information, subject to any legal or regulatory obligations or restrictions that may prohibit them from doing so.
9. Review Process
Your performance as a non-executive director will be subject to review annually as part of the Board evaluation exercise, which reviews the performance of individual directors, each Board as a whole and its Committees. If, in the interim, there are any matters that cause you concern about your role, you should discuss them with the Chairman as soon as is appropriate.
10. Insurance
Subject to legislative provisions, you will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by you in the execution of your duties.
In addition, the Group has in place directors and officers liability insurance. It is intended to maintain such cover for the full term of your appointment.
11. Independent Professional Advice
Should a situation arise when you consider that you need to take independent professional advice in relation to your duties as a director, you should first discuss the situation with the Chief Governance & Regulatory Officer and Board Counsel. The reasonable costs of any independent advice obtained will be reimbursed by the Companies.
12. Dealing in Securities / Investments
As a director of the Companies, you are subject to the RBS Personal Account Dealing (PAD) Policy and you cannot deal in RBS securities outside of certain scheduled Open Windows (which are periods which coincide with the announcement of Group results) or at any time while you are in possession of inside information. RBS securities are broadly defined to include shares or debt instruments of an issuing entity, or derivatives or other financial instruments linked to any such shares or debts.
You and your connected persons are also required to obtain permission before dealing on your own account in RBS securities. A copy of the PAD Policy has been provided to you along with further details of your obligations and the associated disclosure requirements.
13. Data Protection
The Companies will collect, hold and process various types of personal information about you in accordance with the Privacy Notice for Non-executive Directors, a copy of which is attached to this letter.
You shall at all times comply with the Privacy and Client Confidentiality policy, a copy of which is available on the intranet. A Company may change its policies at any time and will publish any changes on the intranet.
14. Governing Law
Your engagement with the Companies is governed by and shall be construed in accordance with the law of Scotland and your engagement shall be subject to the jurisdiction of the Scottish courts.
Please do not hesitate to contact me if you have any questions in relation to this letter. This letter has been sent to you in duplicate. Please sign and date both copies, retaining one copy for your records and returning the other to me at House G, RBS, PO Box 1000, Edinburgh, EH12 1HQ.
Yours sincerely |
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/s/ Aileen Taylor |
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Aileen Taylor |
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Chief Governance & Regulatory Officer and Board Counsel |
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For and on behalf of the Companies |
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/s/ Mark Seligman |
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Mark Seligman |
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Date: |
30 May 2018 |
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Enclosures: |
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Non-executive director role profile |
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Conflicts of Interest Policy |
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Privacy Notice |
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30 May 2018
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Strictly Private and Confidential |
Gogarburn |
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Edinburgh EH12 1HQ |
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Lena Wilson |
Telephone: 0131 556 8555 |
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Fax: 0131 626 3010 |
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www.rbs.com |
Dear Lena
This letter sets out the terms of your appointment as a non-executive director of:
(1) The Royal Bank of Scotland Group plc (company number SC045551) ( Group ), National Westminster Bank Plc (company number 00929027) ( NatWest ), NatWest Holdings Limited (company number 10142224) ( NWH ) and Ulster Bank Limited (company number R0000733) ( UBL ) with effect from 1 January 2018; and
(2) The Royal Bank of Scotland plc (company number SC083026) ( RBS ) with effect from 27 April 2018,
(together the Companies ).
The term of your appointment will commence on the aforementioned effective dates and extend to the conclusion of the Groups next Annual General Meeting and thereafter will be subject to re-election as described below. It is agreed that this is a contract for services and not a contract of employment.
1. Appointment
Your appointment is subject to the articles of association of the Companies and may be terminated on the written notice of either you or the Companies as described below.
You will be required to stand for re-election by shareholders at each Annual General Meeting ( AGM ) of each of the Companies (as applicable). Continuation of your appointment is also contingent on satisfactory performance and any relevant statutory provisions relating to the removal of a director.
Your appointment is also subject to the Board Appointment Policy, which states that Non-executive Directors are appointed for an initial term of 3 years (subject to annual re-election in line with the UK Corporate Governance Code). For each of the Companies, your initial 3 year term shall be deemed to commence from the date of the first AGM of Group following the Effective Date and expires (and any subsequent terms commence and expire) on the date of the AGM of Group for the year in question. At the end of their initial 3 year term, Non-executive Directors are subject to a formal assessment by the Group Nominations & Governance Committee. Such assessment will include detailed discussion on performance, time commitment and experience.
After such formal assessment, Non-executive Directors may then serve a second 3 year term, provided they are happy to do so and if their performance has been satisfactory. A second formal review will then take place at the end of the second three year term and Non-executive Directors will either step down from the Board or be re-appointed on a twelve month term (subject to an overall maximum tenure of nine years).
2. Termination
Your appointment may be terminated by either you or any of the Companies giving written notice to the other, such notice to take immediate effect.
In the event that your re-election is not approved by shareholders, your appointment as director of all of the Companies will terminate automatically with immediate effect.
On termination of your appointment you shall, at the request of the Companies, resign as a director of each of the Companies.
No compensation or payment in lieu of notice will be payable upon termination of your appointment.
3. Time Commitment
You will devote such time as is necessary to fulfil your duties which include preparation for and attendance at the Board meetings of the Companies and committee meetings (as applicable), Annual General Meetings (as applicable) and any other General Meetings of the Companies and the annual Board strategy offsite.
By accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the requirements of your role.
4. Role
Your principal responsibilities and duties are set out in your role profile, as amended from time to time. A copy of your role profile as at 30 May 2018 is attached.
Non-executive Directors have the same legal responsibilities to the Companies as any other director and you should have particular regard to the duties set out in the Companies Act 2006 (the 2006 Act ). This includes the general duties of directors as set out in Part 10, Chapter 2 of the 2006 Act, including the duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the companys employees,
(c) the need to foster the companys business relationships with suppliers, customers and others,
(d) the impact of the companys operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
You will be required to exercise relevant powers in accordance with the Companies articles of association and in accordance with relevant policies in internal control frameworks.
5. Regulatory Requirements
Under the Senior Managers Regime, which was introduced to strengthen individual accountability in banking, certain non-executive director roles are classified as Senior Manager Functions and require prior regulatory approval. Other non-executive director positions must be notified to the regulator but do not require prior approval. Your role profile, as amended from
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The Royal Bank of Scotland Group plc Registered in Scotland No 45551 Registered Office: 36 St Andrew Square Edinburgh EH2 2YB |
time to time, will either (i) contain details of your Senior Manager Functions; or (ii) reflect your status as a Notified Non-executive Director.
It is a condition of your appointment that you comply with all applicable regulatory requirements, including but not limited to complying with the PRA and FCA Conduct Rules, as they apply from time to time. Further details are available on request from the Chief Governance & Regulatory Officer and Board Counsel.
It is also a condition of your appointment that you remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements and that you report any matter that may impact your ongoing fitness and propriety promptly to the Companies and the PRA and FCA.
6. Remuneration
As a non-executive director you will be paid a fee in accordance with the Directors Remuneration Policy approved by Groups shareholders from time to time. The fee covers membership of the Boards of all five Companies (the Boards ), plus the relevant fee(s) for any additional Committee membership(s) and/or chairmanship(s) you may assume. Your remuneration will be reviewed annually and is disclosed in Groups Report and Accounts.
You will be paid monthly and will be reimbursed for all reasonable and properly documented expenses you incur in performing your duties.
7. Outside Interests
It is accepted and acknowledged that you may have business interests other than those of the Companies and that you have disclosed all interests and, where applicable, declared any actual or potential conflicts of interest that are apparent at present.
The agreement of each Board must be sought before you accept any additional commitments that might affect the time you are able to devote to your role as a non-executive director of the Companies. In particular, you must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if you are contemplating any additional appointments.
Please note that there are regulatory limits imposed by the Capital Requirements Directive on the number of directorships you are able to hold. These limits are a total of either (1) one executive and two non-executive positions; or (2) four non-executive director positions, in both cases including your RBS roles. Directorships in organisations which do not pursue predominantly commercial objectives do not count; and executive or non-executive directorships within the same group of companies count as a single directorship. The regulator may, at its discretion, grant a waiver to enable one additional non-executive position to be held. The Chief Governance & Regulatory Officer and Board Counsel monitors compliance with these regulatory limits and will be happy to discuss your own situation with you.
In the event that you become aware of any actual or potential conflicts of interest (including any relevant interests in transactions or arrangements), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel immediately. This is to enable such conflicts to be authorised or noted, as applicable, by the relevant Board in accordance with the 2006 Act.
Further details are set out in the Groups Conflicts of Interest Policy, a copy of which is attached to this letter.
8. Confidentiality and return of and access to information
You acknowledge that all information acquired during your appointment is confidential to the Companies and should not be released, disclosed or communicated, either during your appointment or following termination of your appointment to third parties without prior written clearance from the Boards.
You acknowledge the need to hold and retain the Companies information (in whatever format it is received) under appropriately secure conditions.
As a director, you will frequently be in possession of price sensitive information and you should avoid making any statements that might risk disclosure of unpublished price sensitive information.
Upon termination of your appointment (for whatever reason), you shall deliver to the Companies all documents, records, papers or other property which may be in your possession or under your control, and which relate in any way to the business affairs of the Companies, and you shall not retain any copies thereof.
Please contact the Chief Governance & Regulatory Officer and Board Counsel if you subsequently require access to information. The Companies will seek to accommodate all reasonable requests for information, subject to any legal or regulatory obligations or restrictions that may prohibit them from doing so.
9. Review Process
Your performance as a non-executive director will be subject to review annually as part of the Board evaluation exercise, which reviews the performance of individual directors, each Board as a whole and its Committees. If, in the interim, there are any matters that cause you concern about your role, you should discuss them with the Chairman as soon as is appropriate.
10. Insurance
Subject to legislative provisions, you will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by you in the execution of your duties.
In addition, the Group has in place directors and officers liability insurance. It is intended to maintain such cover for the full term of your appointment.
11. Independent Professional Advice
Should a situation arise when you consider that you need to take independent professional advice in relation to your duties as a director, you should first discuss the situation with the Chief Governance & Regulatory Officer and Board Counsel. The reasonable costs of any independent advice obtained will be reimbursed by the Companies.
12. Dealing in Securities / Investments
As a director of the Companies, you are subject to the RBS Personal Account Dealing (PAD) Policy and you cannot deal in RBS securities outside of certain scheduled Open Windows (which are periods which coincide with the announcement of Group results) or at any time while you are in possession of inside information. RBS securities are broadly defined to include shares or debt instruments of an issuing entity, or derivatives or other financial instruments linked to any such shares or debts.
You and your connected persons are also required to obtain permission before dealing on your own account in RBS securities. A copy of the PAD Policy has been provided to you along with further details of your obligations and the associated disclosure requirements.
13. Data Protection
The Companies will collect, hold and process various types of personal information about you in accordance with the Privacy Notice for Non-executive Directors, a copy of which is attached to this letter.
You shall at all times comply with the Privacy and Client Confidentiality policy, a copy of which is available on the intranet. A Company may change its policies at any time and will publish any changes on the intranet.
14. Governing Law
Your engagement with the Companies is governed by and shall be construed in accordance with the law of Scotland and your engagement shall be subject to the jurisdiction of the Scottish courts.
Please do not hesitate to contact me if you have any questions in relation to this letter. This letter has been sent to you in duplicate. Please sign and date both copies, retaining one copy for your records and returning the other to me at House G, RBS, PO Box 1000, Edinburgh, EH12 1HQ.
Yours sincerely |
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/s/ Aileen Taylor |
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Aileen Taylor |
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Chief Governance & Regulatory Officer and Board Counsel |
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For and on behalf of the Companies |
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/s/ Lena Wilson |
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Lena Wilson |
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Date: |
30 May 2018 |
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Enclosures: |
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|||
Non-executive director role profile |
|
|||
Conflicts of Interest Policy |
|
|||
Privacy Notice |
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26 April 2018
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Strictly Private and Confidential |
Gogarburn |
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Edinburgh EH12 1HQ |
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Patrick Flynn |
Telephone: 0131 556 8555 |
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Fax: 0131 626 3010 |
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www.rbs.com |
Dear Patrick
This letter sets out the terms of your appointment as a non-executive director of:
(1) The Royal Bank of Scotland Group plc (company number SC045551) ( RBS Group );
(2) NatWest Holdings Limited (company number 10142224) ( NWH );
(3) National Westminster Bank Plc (company number 00929027) ( NatWest );
(4) Ulster Bank Limited (company number R0000733) ( UBL ); and
(5) The Royal Bank of Scotland plc (company number SC083026) ( RBS ),
together the Companies , with effect from 1 June 2018.
With effect from 1 January 2019, following the implementation of new legislation to separate retail banking products and services from higher risk activities, NatWest Holdings Limited will become the intermediary holding company for the RBS Groups ring fenced sub-group. NatWest, UBL and RBS will form part of that sub-group.
The creation of a ring fenced sub-group is subject to the Ring Fencing Transfer Scheme ( RFTS ) being approved by the Court of Session and to the associated restructuring of RBS Group and its subsidiaries (the Group ). This letter assumes that the necessary transfers take place by 31 December 2018. Prior to that date, you will serve on the boards of NatWest, NWH, UBL and RBS which will be subject to ring-fencing legislation with effect from 1 January 2019. You will also serve on the board of the RBS Group.
It is agreed that this is a contract for services and not a contract of employment.
Your appointment is subject to the articles of association of the Companies and may be terminated on the written notice of either you or the Companies as described below.
Continuation of your appointment is contingent on satisfactory performance and any relevant statutory provisions relating to the removal of a director. Your appointment is also subject to the Companies Board Appointment Policy, which states that Non-executive Directors are appointed for an initial term of three years (subject to annual re-election in line with the UK Corporate Governance Code). Your initial three-year term commences from the first election by shareholders at RBS Group AGM.
At the end of their initial three-year term, Non-executive Directors are subject to a formal assessment by the Groups Nominations and Governance Committee. Such assessment will include detailed discussion on performance, time commitment and experience.
After such formal assessment, Non-executive Directors may then serve a second three-year term, provided they are happy to do so and if their performance has been satisfactory. A second formal review will then take place at the end of the second three-year term and a Non-executive
Director will either step down from the Boards or be re-appointed on a twelve-month term (subject to an overall maximum tenure of nine years).
Your appointment may be terminated by either you or the Companies giving written notice to the other, such notice to take immediate effect.
In the event that your re-election is not approved by shareholders, your appointment to all Companies will terminate automatically with immediate effect.
On termination of your appointment you shall, at the request of the Companies, resign as a director of the Companies.
No compensation or payment in lieu of notice will be payable upon termination of your appointment.
3. Committee Memberships
You may be required to serve on one or more Board committees, the terms of which will be confirmed to you when determined. Membership of Board Committees will be set out in your role profile, as amended from time to time.
4. Time Commitment
You will devote such time as is necessary to fulfil your duties which include preparation for and attendance at the Board meetings of the Companies and committee meetings (as applicable), Annual General Meetings (as applicable) and any other General Meetings of the Companies and the annual Board strategy offsite.
By accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the requirements of your role.
Your principal responsibilities and duties are set out in your role profile, as amended from time to time. A copy of your role profile as at 1 June 2018 is attached.
Non-executive Directors have the same legal responsibilities to the Companies as any other director and you should have particular regard to the duties set out in the Companies Act 2006 (the 2006 Act ). This includes the general duties of directors as set out in Part 10, Chapter 2 of the 2006 Act, including the duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the companys employees,
(c) the need to foster the companys business relationships with suppliers, customers and others,
(d) the impact of the companys operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
You will be required to exercise relevant powers in accordance with the Companies articles of association and in accordance with relevant policies in internal control frameworks.
|
The Royal Bank of Scotland Group plc Registered in Scotland No 45551 Registered Office: 36 St Andrew Square Edinburgh EH2 2YB |
6. Regulatory Requirements
Under the Senior Managers Regime which was introduced to strengthen individual accountability in banking, certain non-executive director roles are classified as Senior Manager Functions and require prior regulatory approval. Other non-executive director positions must be notified to the regulator but do not require prior approval. Your role profile, as amended from time to time, will either (i) contain details of your Senior Manager Functions; or (ii) reflect your status as a Notified Non-executive Director.
It is a condition of your appointment that you comply with all applicable regulatory requirements including, but not limited to, complying with the PRA and FCA Conduct Rules as they apply from time to time. Further details are available on request from the Chief Governance & Regulatory Officer and Board Counsel.
It is also a condition of your appointment that you remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements and that you report any matter that may impact your ongoing fitness and propriety promptly to the Companies and the FCA and PRA.
As a non-executive director you will be paid a fee in accordance with the Directors Remuneration Policy approved by RBS Groups shareholders from time to time. The fee covers membership of the Boards of all five Companies (the Boards ), plus the relevant fee(s) for any additional Committee membership(s) and/or chairmanship(s) you may assume. Your remuneration will be reviewed annually and is disclosed in RBS Groups Report and Accounts.
You will be paid monthly and will be reimbursed for all reasonable and properly documented expenses you incur in performing your duties.
It is accepted and acknowledged that you may have business interests other than those of the Companies and that you have disclosed all interests and, where applicable, declared any actual or potential conflicts of interest that are apparent at present.
The agreement of each Board must be sought before you accept any additional commitments that might affect the time you are able to devote to your role as a non-executive director of the Companies. In particular, you must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if you are contemplating any additional appointments.
Please note that there are regulatory limits imposed by the Capital Requirements Directive on the number of directorships you are able to hold. These limits are a total of either (1) one executive and two non-executive positions; or (2) four non-executive director positions, in both cases including your RBS roles. Directorships in organisations which do not pursue predominantly commercial objectives do not count; and executive or non-executive directorships within the same group of companies count as a single directorship. The regulator may, at its discretion, grant a waiver to enable one additional non-executive position to be held. The Chief Governance & Regulatory Officer and Board Counsel monitors compliance with these regulatory limits and will be happy to discuss your own situation with you.
In the event that you become aware of any actual or potential conflicts of interest (including any relevant interests in transactions or arrangements), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel immediately. This is to enable such conflicts to be authorised or noted, as applicable, by the relevant Board in accordance with the 2006 Act.
Further details are set out in the Directors Conflicts of Interest Guidance, a copy of which is attached to this letter.
You acknowledge that all information acquired during your appointment is confidential to the Companies and should not be released, disclosed or communicated, either during your appointment or following termination of your appointment to third parties without prior written clearance from the Boards.
You acknowledge the need to hold and retain the Companies information (in whatever format it is received) under appropriately secure conditions.
As a director, you will frequently be in possession of price sensitive information and you should avoid making any statements that might risk disclosure of unpublished price sensitive information.
Upon termination of your appointment (for whatever reason), you shall deliver to the Companies all documents, records, papers or other property which may be in your possession or under your control, and which relate in any way to the business affairs of the Companies, and you shall not retain any copies thereof.
Please contact the Chief Governance & Regulatory Officer and Board Counsel if you subsequently require access to information. The Companies will seek to accommodate all reasonable requests for information, subject to any legal or regulatory obligations or restrictions that may prohibit them from doing so.
10. Review Process
Subject to legislative provisions, you will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by you in the execution of your duties.
In addition, the Group has in place directors and officers liability insurance. It is intended to maintain such cover for the full term of your appointment.
Should a situation arise when you consider that you need to take independent professional advice in relation to your duties as a director, you should first discuss the situation with the Chief Governance & Regulatory Officer and Board Counsel. The reasonable costs of any independent advice obtained will be reimbursed by the Companies.
13. Dealing in Securities / Investments
As a director, you are subject to the RBS Personal Account Dealing (PAD) Policy and you cannot deal in RBS securities outside of certain scheduled Open Windows (which are periods which coincide with the announcement of RBS Group results) or at any time while you are in possession of inside information. RBS securities are broadly defined to include shares or debt instruments of an issuing entity, or derivatives or other financial instruments linked to any such shares or debts.
You and your connected persons are also required to obtain permission before dealing on your own account in RBS securities. A copy of the PAD Policy has been provided to you along with further details of your obligations and the associated disclosure requirements.
14. Data Protection
The Companies will collect, hold and process various types of personal information about you in accordance with the Privacy Notice for Non-executive Directors, a copy of which is attached to this letter.
You shall at all times comply with the Companys Privacy and Client Confidentiality policy, a copy of which is available on the intranet. The Company may change its policies at any time and will publish any changes on the intranet.
15. Governing Law
Your engagement with the Companies is governed by and shall be construed in accordance with the law of Scotland and your engagement shall be subject to the jurisdiction of the Scottish courts.
Please do not hesitate to contact me if you have any questions in relation to this letter. This letter has been sent to you in duplicate. Please sign and date both copies, retaining one copy for your records and returning the other to me at House G, RBS, PO Box 1000, Edinburgh, EH12 1HQ.
Yours sincerely |
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/s/ Aileen Taylor |
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Aileen Taylor |
|
|||
Chief Governance & Regulatory Officer and Board Counsel |
|
|||
For and on behalf of the Companies |
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/s/ Patrick Flynn |
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Patrick Flynn |
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Date: |
26 April 2018 |
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|
|||
Enclosures: |
|
|||
Non-executive director role profile |
|
|||
Directors Conflicts of Interest Guidance |
|
|||
Privacy Notice |
|
|||
30 May 2018
|
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|
|
Strictly Private and Confidential |
Gogarburn |
|
Edinburgh EH12 1HQ |
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Ms Alison Davis |
Telephone: 0131 556 8555 |
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Fax: 0131 626 3010 |
|
www.rbs.com |
Dear Alison
This letter sets out the terms of your appointment as a non-executive director of:
(1) The Royal Bank of Scotland Group plc (company number SC045551) ( Group ) and National Westminster Bank Plc (company number 00929027) ( NatWest ) with effect from 1 August 2011;
(2) NatWest Holdings Limited (company number 10142224) ( NWH ) with effect from 16 November 2016;
(3) Ulster Bank Limited (company number R0000733) ( UBL ) with effect from 28 July 2017; and
(4) The Royal Bank of Scotland plc (company number SC083026) ( RBS ) with effect from 27 April 2018,
(together the Companies ).
The term of your appointment will commence on the aforementioned effective dates and extend to the conclusion of the Groups next Annual General Meeting and thereafter will be subject to re-election as described below. It is agreed that this is a contract for services and not a contract of employment.
1. Appointment
Your appointment is subject to the articles of association of the Companies and may be terminated on the written notice of either you or the Companies as described below.
You will be required to stand for re-election by shareholders at each Annual General Meeting of each of the Companies (as applicable). Continuation of your appointment is also contingent on satisfactory performance and any relevant statutory provisions relating to the removal of a director.
2. Termination
Your appointment may be terminated by either you or any of the Companies giving written notice to the other, such notice to take immediate effect.
In the event that your re-election is not approved by shareholders, your appointment as director of all of the Companies will terminate automatically with immediate effect.
On termination of your appointment you shall, at the request of the Companies, resign as a director of each of the Companies.
No compensation or payment in lieu of notice will be payable upon termination of your appointment.
3. Time Commitment
You will devote such time as is necessary to fulfil your duties which include preparation for and attendance at the Board meetings of the Companies and committee meetings (as applicable), Annual General Meetings (as applicable) and any other General Meetings of the Companies and the annual Board strategy offsite.
By accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the requirements of your role.
4. Role
Your principal responsibilities and duties are set out in your role profile, as amended from time to time. A copy of your role profile as at 30 May 2018 is attached.
Non-executive Directors have the same legal responsibilities to the Companies as any other director and you should have particular regard to the duties set out in the Companies Act 2006 (the 2006 Act ). This includes the general duties of directors as set out in Part 10, Chapter 2 of the 2006 Act, including the duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the companys employees,
(c) the need to foster the companys business relationships with suppliers, customers and others,
(d) the impact of the companys operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
You will be required to exercise relevant powers in accordance with the Companies articles of association and in accordance with relevant policies in internal control frameworks.
5. Regulatory Requirements
Under the Senior Managers Regime, which was introduced to strengthen individual accountability in banking, certain non-executive director roles are classified as Senior Manager Functions and require prior regulatory approval. Other non-executive director positions must be notified to the regulator but do not require prior approval. Your role profile, as amended from time to time, will either (i) contain details of your Senior Manager Functions; or (ii) reflect your status as a Notified Non-executive Director.
It is a condition of your appointment that you comply with all applicable regulatory requirements, including but not limited to complying with the PRA and FCA Conduct Rules, as they apply from time to time. Further details are available on request from the Chief Governance & Regulatory Officer and Board Counsel.
It is also a condition of your appointment that you remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements and that you report any matter that may impact your ongoing fitness and propriety promptly to the Companies and the PRA and FCA.
|
The Royal Bank of Scotland Group plc Registered in Scotland No 45551 Registered Office: 36 St Andrew Square Edinburgh EH2 2YB |
6. Remuneration
As a non-executive director you will be paid a fee in accordance with the Directors Remuneration Policy approved by Groups shareholders from time to time. The fee covers membership of the Boards of all five Companies (the Boards ), plus the relevant fee(s) for any additional Committee membership(s) and/or chairmanship(s) you may assume. Your remuneration will be reviewed annually and is disclosed in Groups Report and Accounts.
You will be paid monthly and will be reimbursed for all reasonable and properly documented expenses you incur in performing your duties.
7. Outside Interests
It is accepted and acknowledged that you may have business interests other than those of the Companies and that you have disclosed all interests and, where applicable, declared any actual or potential conflicts of interest that are apparent at present.
The agreement of each Board must be sought before you accept any additional commitments that might affect the time you are able to devote to your role as a non-executive director of the Companies. In particular, you must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if you are contemplating any additional appointments.
Please note that there are regulatory limits imposed by the Capital Requirements Directive on the number of directorships you are able to hold. These limits are a total of either (1) one executive and two non-executive positions; or (2) four non-executive director positions, in both cases including your RBS roles. Directorships in organisations which do not pursue predominantly commercial objectives do not count; and executive or non-executive directorships within the same group of companies count as a single directorship. The regulator may, at its discretion, grant a waiver to enable one additional non-executive position to be held. The Chief Governance & Regulatory Officer and Board Counsel monitors compliance with these regulatory limits and will be happy to discuss your own situation with you.
In the event that you become aware of any actual or potential conflicts of interest (including any relevant interests in transactions or arrangements), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel immediately. This is to enable such conflicts to be authorised or noted, as applicable, by the relevant Board in accordance with the 2006 Act.
Further details are set out in the Groups Conflicts of Interest Policy, a copy of which is attached to this letter.
8. Confidentiality and return of and access to information
You acknowledge that all information acquired during your appointment is confidential to the Companies and should not be released, disclosed or communicated, either during your appointment or following termination of your appointment to third parties without prior written clearance from the Boards.
You acknowledge the need to hold and retain the Companies information (in whatever format it is received) under appropriately secure conditions.
As a director, you will frequently be in possession of price sensitive information and you should avoid making any statements that might risk disclosure of unpublished price sensitive information.
Upon termination of your appointment (for whatever reason), you shall deliver to the Companies all documents, records, papers or other property which may be in your possession or under your control, and which relate in any way to the business affairs of the Companies, and you shall not retain any copies thereof.
Please contact the Chief Governance & Regulatory Officer and Board Counsel if you subsequently require access to information. The Companies will seek to accommodate all reasonable requests for information, subject to any legal or regulatory obligations or restrictions that may prohibit them from doing so.
9. Review Process
Your performance as a non-executive director will be subject to review annually as part of the Board evaluation exercise, which reviews the performance of individual directors, each Board as a whole and its Committees. If, in the interim, there are any matters that cause you concern about your role, you should discuss them with the Chairman as soon as is appropriate.
10. Insurance
Subject to legislative provisions, you will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by you in the execution of your duties.
In addition, the Group has in place directors and officers liability insurance. It is intended to maintain such cover for the full term of your appointment.
11. Independent Professional Advice
Should a situation arise when you consider that you need to take independent professional advice in relation to your duties as a director, you should first discuss the situation with the Chief Governance & Regulatory Officer and Board Counsel. The reasonable costs of any independent advice obtained will be reimbursed by the Companies.
12. Dealing in Securities / Investments
As a director of the Companies, you are subject to the RBS Personal Account Dealing (PAD) Policy and you cannot deal in RBS securities outside of certain scheduled Open Windows (which are periods which coincide with the announcement of Group results) or at any time while you are in possession of inside information. RBS securities are broadly defined to include shares or debt instruments of an issuing entity, or derivatives or other financial instruments linked to any such shares or debts.
You and your connected persons are also required to obtain permission before dealing on your own account in RBS securities. A copy of the PAD Policy has been provided to you along with further details of your obligations and the associated disclosure requirements.
13. Data Protection
The Companies will collect, hold and process various types of personal information about you in accordance with the Privacy Notice for Non-executive Directors, a copy of which is attached to this letter.
You shall at all times comply with the Privacy and Client Confidentiality policy, a copy of which is available on the intranet. A Company may change its policies at any time and will publish any changes on the intranet.
14. Governing Law
Your engagement with the Companies is governed by and shall be construed in accordance with the law of Scotland and your engagement shall be subject to the jurisdiction of the Scottish courts.
Please do not hesitate to contact me if you have any questions in relation to this letter. This letter has been sent to you in duplicate. Please sign and date both copies, retaining one copy for your records and returning the other to me at House G, RBS, PO Box 1000, Edinburgh, EH12 1HQ.
Yours sincerely |
|
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|
|||
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|
|||
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|
|||
/s/ Aileen Taylor |
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|
||
Aileen Taylor |
|
|||
Chief Governance & Regulatory Officer and Board Counsel |
|
|||
For and on behalf of the Companies |
|
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|||
/s/ Alison Davis |
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||
Alison Davis |
|
|||
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|
||
Date: |
30 May 2018 |
|
|
|
|
|
|||
Enclosures: |
|
|||
Non-executive director role profile |
|
|||
Conflicts of Interest Policy |
|
|||
Privacy Notice |
|
|||
30 May 2018
|
|
|
|
Strictly Private and Confidential |
Gogarburn |
|
Edinburgh EH12 1HQ |
|
|
Brendan Nelson |
Telephone: 0131 556 8555 |
|
Fax: 0131 626 3010 |
|
www.rbs.com |
Dear Brendan
This letter sets out the terms of your appointment as a non-executive director of:
(1) The Royal Bank of Scotland Group plc (company number SC045551) ( Group ), NatWest Markets Plc (company number SC090312) (NWM) and National Westminster Bank Plc (company number 00929027) ( NatWest ) with effect from 1 April 2010;
(2) NatWest Holdings Limited (company number 10142224) ( NWH ) with effect from 16 November 2016;
(3) Ulster Bank Limited (company number R0000733) ( UBL ) with effect from 28 July 2017; and
(4) The Royal Bank of Scotland plc (company number SC083026) ( RBS ) with effect from 27 April 2018,
(together the Companies ).
The term of your appointment will commence on the aforementioned effective dates and extend to the conclusion of the Groups next Annual General Meeting and thereafter will be subject to re-election as described below. It is agreed that this is a contract for services and not a contract of employment.
1. Appointment
Your appointment is subject to the articles of association of the Companies and may be terminated on the written notice of either you or the Companies as described below.
You will be required to stand for re-election by shareholders at each Annual General Meeting of each of the Companies (as applicable). Continuation of your appointment is also contingent on satisfactory performance and any relevant statutory provisions relating to the removal of a director.
2. Termination
Your appointment may be terminated by either you or any of the Companies giving written notice to the other, such notice to take immediate effect.
In the event that your re-election is not approved by shareholders, your appointment as director of all of the Companies will terminate automatically with immediate effect.
On termination of your appointment you shall, at the request of the Companies, resign as a director of each of the Companies.
No compensation or payment in lieu of notice will be payable upon termination of your appointment.
3. Time Commitment
You will devote such time as is necessary to fulfil your duties which include preparation for and attendance at the Board meetings of the Companies and committee meetings (as applicable), Annual General Meetings (as applicable) and any other General Meetings of the Companies and the annual Board strategy offsite.
By accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the requirements of your role.
4. Role
Your principal responsibilities and duties are set out in your role profile, as amended from time to time. A copy of your role profile as at 30 May 2018 is attached.
Non-executive Directors have the same legal responsibilities to the Companies as any other director and you should have particular regard to the duties set out in the Companies Act 2006 (the 2006 Act ). This includes the general duties of directors as set out in Part 10, Chapter 2 of the 2006 Act, including the duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the companys employees,
(c) the need to foster the companys business relationships with suppliers, customers and others,
(d) the impact of the companys operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
You will be required to exercise relevant powers in accordance with the Companies articles of association and in accordance with relevant policies in internal control frameworks.
5. Regulatory Requirements
Under the Senior Managers Regime, which was introduced to strengthen individual accountability in banking, certain non-executive director roles are classified as Senior Manager Functions and require prior regulatory approval. Other non-executive director positions must be notified to the regulator but do not require prior approval. Your role profile, as amended from time to time, will either (i) contain details of your Senior Manager Functions; or (ii) reflect your status as a Notified Non-executive Director.
It is a condition of your appointment that you comply with all applicable regulatory requirements, including but not limited to complying with the PRA and FCA Conduct Rules, as they apply from time to time. Further details are available on request from the Chief Governance & Regulatory Officer and Board Counsel.
It is also a condition of your appointment that you remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements and that you report any matter that may impact your ongoing fitness and propriety promptly to the Companies and the PRA and FCA.
|
The Royal Bank of Scotland Group plc Registered in Scotland No 45551 Registered Office: 36 St Andrew Square Edinburgh EH2 2YB |
6. Remuneration
As a non-executive director you will be paid a fee in accordance with the Directors Remuneration Policy approved by Groups shareholders from time to time. The fee covers membership of the Boards of all six Companies (the Boards ), plus the relevant fee(s) for any additional Committee membership(s) and/or chairmanship(s) you may assume. Your remuneration will be reviewed annually and is disclosed in Groups Report and Accounts.
You will be paid monthly and will be reimbursed for all reasonable and properly documented expenses you incur in performing your duties.
7. Outside Interests
It is accepted and acknowledged that you may have business interests other than those of the Companies and that you have disclosed all interests and, where applicable, declared any actual or potential conflicts of interest that are apparent at present.
The agreement of each Board must be sought before you accept any additional commitments that might affect the time you are able to devote to your role as a non-executive director of the Companies. In particular, you must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if you are contemplating any additional appointments.
Please note that there are regulatory limits imposed by the Capital Requirements Directive on the number of directorships you are able to hold. These limits are a total of either (1) one executive and two non-executive positions; or (2) four non-executive director positions, in both cases including your RBS roles. Directorships in organisations which do not pursue predominantly commercial objectives do not count; and executive or non-executive directorships within the same group of companies count as a single directorship. The regulator may, at its discretion, grant a waiver to enable one additional non-executive position to be held. The Chief Governance & Regulatory Officer and Board Counsel monitors compliance with these regulatory limits and will be happy to discuss your own situation with you.
In the event that you become aware of any actual or potential conflicts of interest (including any relevant interests in transactions or arrangements), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel immediately. This is to enable such conflicts to be authorised or noted, as applicable, by the relevant Board in accordance with the 2006 Act.
Further details are set out in the Groups Conflicts of Interest Policy, a copy of which is attached to this letter.
8. Confidentiality and return of and access to information
You acknowledge that all information acquired during your appointment is confidential to the Companies and should not be released, disclosed or communicated, either during your appointment or following termination of your appointment to third parties without prior written clearance from the Boards.
You acknowledge the need to hold and retain the Companies information (in whatever format it is received) under appropriately secure conditions.
As a director, you will frequently be in possession of price sensitive information and you should avoid making any statements that might risk disclosure of unpublished price sensitive information.
Upon termination of your appointment (for whatever reason), you shall deliver to the Companies all documents, records, papers or other property which may be in your possession or under your control, and which relate in any way to the business affairs of the Companies, and you shall not retain any copies thereof.
Please contact the Chief Governance & Regulatory Officer and Board Counsel if you subsequently require access to information. The Companies will seek to accommodate all reasonable requests for information, subject to any legal or regulatory obligations or restrictions that may prohibit them from doing so.
9. Review Process
Your performance as a non-executive director will be subject to review annually as part of the Board evaluation exercise, which reviews the performance of individual directors, each Board as a whole and its Committees. If, in the interim, there are any matters that cause you concern about your role, you should discuss them with the Chairman as soon as is appropriate.
10. Insurance
Subject to legislative provisions, you will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by you in the execution of your duties.
In addition, the Group has in place directors and officers liability insurance. It is intended to maintain such cover for the full term of your appointment.
11. Independent Professional Advice
Should a situation arise when you consider that you need to take independent professional advice in relation to your duties as a director, you should first discuss the situation with the Chief Governance & Regulatory Officer and Board Counsel. The reasonable costs of any independent advice obtained will be reimbursed by the Companies.
12. Dealing in Securities / Investments
As a director of the Companies, you are subject to the RBS Personal Account Dealing (PAD) Policy and you cannot deal in RBS securities outside of certain scheduled Open Windows (which are periods which coincide with the announcement of Group results) or at any time while you are in possession of inside information. RBS securities are broadly defined to include shares or debt instruments of an issuing entity, or derivatives or other financial instruments linked to any such shares or debts.
You and your connected persons are also required to obtain permission before dealing on your own account in RBS securities. A copy of the PAD Policy has been provided to you along with further details of your obligations and the associated disclosure requirements.
13. Data Protection
The Companies will collect, hold and process various types of personal information about you in accordance with the Privacy Notice for Non-executive Directors, a copy of which is attached to this letter.
You shall at all times comply with the Privacy and Client Confidentiality policy, a copy of which is available on the intranet. A Company may change its policies at any time and will publish any changes on the intranet.
14. Governing Law
Your engagement with the Companies is governed by and shall be construed in accordance with the law of Scotland and your engagement shall be subject to the jurisdiction of the Scottish courts.
Please do not hesitate to contact me if you have any questions in relation to this letter. This letter has been sent to you in duplicate. Please sign and date both copies, retaining one copy for your records and returning the other to me at House G, RBS, PO Box 1000, Edinburgh, EH12 1HQ.
Yours sincerely |
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/s/ Aileen Taylor |
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Aileen Taylor |
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Chief Governance & Regulatory Officer and Board Counsel |
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For and on behalf of the Companies |
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/s/ Brendan Nelson |
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Brendan Nelson |
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||
Date: |
30 May 2018 |
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|||
Enclosures: |
|
|||
Non-executive director role profile |
|
|||
Conflicts of Interest Policy |
|
|||
Privacy Notice |
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|||
30 May 2018
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Strictly Private and Confidential |
Gogarburn |
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Edinburgh EH12 1HQ |
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Morten Friis |
Telephone: 0131 556 8555 |
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Fax: 0131 626 3010 |
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www.rbs.com |
Dear Morten
This letter sets out the terms of your appointment as a non-executive director of:
(1) The Royal Bank of Scotland Group plc (company number SC045551) ( Group ) and National Westminster Bank Plc (company number 00929027) ( NatWest ) with effect from 10 April 2014;
(2) NatWest Holdings Limited (company number 10142224) ( NWH ) with effect from 16 November 2016;
(3) Ulster Bank Limited (company number R0000733) ( UBL ) with effect from 28 July 2017; and
(4) The Royal Bank of Scotland plc (company number SC083026) ( RBS ) with effect from 27 April 2018,
(together the Companies ).
The term of your appointment will commence on the aforementioned effective dates and extend to the conclusion of the Groups next Annual General Meeting and thereafter will be subject to re-election as described below. It is agreed that this is a contract for services and not a contract of employment.
1. Appointment
Your appointment is subject to the articles of association of the Companies and may be terminated on the written notice of either you or the Companies as described below.
You will be required to stand for re-election by shareholders at each Annual General Meeting of each of the Companies (as applicable). Continuation of your appointment is also contingent on satisfactory performance and any relevant statutory provisions relating to the removal of a director.
2. Termination
Your appointment may be terminated by either you or any of the Companies giving written notice to the other, such notice to take immediate effect.
In the event that your re-election is not approved by shareholders, your appointment as director of all of the Companies will terminate automatically with immediate effect.
On termination of your appointment you shall, at the request of the Companies, resign as a director of each of the Companies.
No compensation or payment in lieu of notice will be payable upon termination of your appointment.
3. Time Commitment
You will devote such time as is necessary to fulfil your duties which include preparation for and attendance at the Board meetings of the Companies and committee meetings (as applicable), Annual General Meetings (as applicable) and any other General Meetings of the Companies and the annual Board strategy offsite.
By accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the requirements of your role.
4. Role
Your principal responsibilities and duties are set out in your role profile, as amended from time to time. A copy of your role profile as at 30 May 2018 is attached.
Non-executive Directors have the same legal responsibilities to the Companies as any other director and you should have particular regard to the duties set out in the Companies Act 2006 (the 2006 Act ). This includes the general duties of directors as set out in Part 10, Chapter 2 of the 2006 Act, including the duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the companys employees,
(c) the need to foster the companys business relationships with suppliers, customers and others,
(d) the impact of the companys operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
You will be required to exercise relevant powers in accordance with the Companies articles of association and in accordance with relevant policies in internal control frameworks.
5. Regulatory Requirements
Under the Senior Managers Regime, which was introduced to strengthen individual accountability in banking, certain non-executive director roles are classified as Senior Manager Functions and require prior regulatory approval. Other non-executive director positions must be notified to the regulator but do not require prior approval. Your role profile, as amended from time to time, will either (i) contain details of your Senior Manager Functions; or (ii) reflect your status as a Notified Non-executive Director.
It is a condition of your appointment that you comply with all applicable regulatory requirements, including but not limited to complying with the PRA and FCA Conduct Rules, as they apply from time to time. Further details are available on request from the Chief Governance & Regulatory Officer and Board Counsel.
It is also a condition of your appointment that you remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements and that you report any matter that may impact your ongoing fitness and propriety promptly to the Companies and the PRA and FCA.
|
The Royal Bank of Scotland Group plc Registered in Scotland No 45551 Registered Office: 36 St Andrew Square Edinburgh EH2 2YB |
6. Remuneration
As a non-executive director you will be paid a fee in accordance with the Directors Remuneration Policy approved by Groups shareholders from time to time. The fee covers membership of the Boards of all five Companies (the Boards ), plus the relevant fee(s) for any additional Committee membership(s) and/or chairmanship(s) you may assume. Your remuneration will be reviewed annually and is disclosed in Groups Report and Accounts.
You will be paid monthly and will be reimbursed for all reasonable and properly documented expenses you incur in performing your duties.
7. Outside Interests
It is accepted and acknowledged that you may have business interests other than those of the Companies and that you have disclosed all interests and, where applicable, declared any actual or potential conflicts of interest that are apparent at present.
The agreement of each Board must be sought before you accept any additional commitments that might affect the time you are able to devote to your role as a non-executive director of the Companies. In particular, you must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if you are contemplating any additional appointments.
Please note that there are regulatory limits imposed by the Capital Requirements Directive on the number of directorships you are able to hold. These limits are a total of either (1) one executive and two non-executive positions; or (2) four non-executive director positions, in both cases including your RBS roles. Directorships in organisations which do not pursue predominantly commercial objectives do not count; and executive or non-executive directorships within the same group of companies count as a single directorship. The regulator may, at its discretion, grant a waiver to enable one additional non-executive position to be held. The Chief Governance & Regulatory Officer and Board Counsel monitors compliance with these regulatory limits and will be happy to discuss your own situation with you.
In the event that you become aware of any actual or potential conflicts of interest (including any relevant interests in transactions or arrangements), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel immediately. This is to enable such conflicts to be authorised or noted, as applicable, by the relevant Board in accordance with the 2006 Act.
Further details are set out in the Groups Conflicts of Interest Policy, a copy of which is attached to this letter.
8. Confidentiality and return of and access to information
You acknowledge that all information acquired during your appointment is confidential to the Companies and should not be released, disclosed or communicated, either during your appointment or following termination of your appointment to third parties without prior written clearance from the Boards.
You acknowledge the need to hold and retain the Companies information (in whatever format it is received) under appropriately secure conditions.
As a director, you will frequently be in possession of price sensitive information and you should avoid making any statements that might risk disclosure of unpublished price sensitive information.
Upon termination of your appointment (for whatever reason), you shall deliver to the Companies all documents, records, papers or other property which may be in your possession or under your control, and which relate in any way to the business affairs of the Companies, and you shall not retain any copies thereof.
Please contact the Chief Governance & Regulatory Officer and Board Counsel if you subsequently require access to information. The Companies will seek to accommodate all reasonable requests for information, subject to any legal or regulatory obligations or restrictions that may prohibit them from doing so.
9. Review Process
Your performance as a non-executive director will be subject to review annually as part of the Board evaluation exercise, which reviews the performance of individual directors, each Board as a whole and its Committees. If, in the interim, there are any matters that cause you concern about your role, you should discuss them with the Chairman as soon as is appropriate.
10. Insurance
Subject to legislative provisions, you will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by you in the execution of your duties.
In addition, the Group has in place directors and officers liability insurance. It is intended to maintain such cover for the full term of your appointment.
11. Independent Professional Advice
Should a situation arise when you consider that you need to take independent professional advice in relation to your duties as a director, you should first discuss the situation with the Chief Governance & Regulatory Officer and Board Counsel. The reasonable costs of any independent advice obtained will be reimbursed by the Companies.
12. Dealing in Securities / Investments
As a director of the Companies, you are subject to the RBS Personal Account Dealing (PAD) Policy and you cannot deal in RBS securities outside of certain scheduled Open Windows (which are periods which coincide with the announcement of Group results) or at any time while you are in possession of inside information. RBS securities are broadly defined to include shares or debt instruments of an issuing entity, or derivatives or other financial instruments linked to any such shares or debts.
You and your connected persons are also required to obtain permission before dealing on your own account in RBS securities. A copy of the PAD Policy has been provided to you along with further details of your obligations and the associated disclosure requirements.
13. Data Protection
The Companies will collect, hold and process various types of personal information about you in accordance with the Privacy Notice for Non-executive Directors, a copy of which is attached to this letter.
You shall at all times comply with the Privacy and Client Confidentiality policy, a copy of which is available on the intranet. A Company may change its policies at any time and will publish any changes on the intranet.
14. Governing Law
Your engagement with the Companies is governed by and shall be construed in accordance with the law of Scotland and your engagement shall be subject to the jurisdiction of the Scottish courts.
Please do not hesitate to contact me if you have any questions in relation to this letter. This letter has been sent to you in duplicate. Please sign and date both copies, retaining one copy for your records and returning the other to me at House G, RBS, PO Box 1000, Edinburgh, EH12 1HQ.
Yours sincerely |
|
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|
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|
|||
/s/ Aileen Taylor |
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|
||
Aileen Taylor |
|
|||
Chief Governance & Regulatory Officer and Board Counsel |
|
|||
For and on behalf of the Companies |
|
|||
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|
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|||
/s/ Morten Friis |
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||
Morten Friis |
|
|||
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|
||
Date: |
30 May 2018 |
|
|
|
|
|
|||
Enclosures: |
|
|||
Non-executive director role profile |
|
|||
Conflicts of Interest Policy |
|
|||
Privacy Notice |
|
|||
30 May 2018
|
|
|
|
Strictly Private and Confidential |
Gogarburn |
|
Edinburgh EH12 1HQ |
|
|
Robert Gillespie |
Telephone: 0131 556 8555 |
|
Fax: 0131 626 3010 |
|
www.rbs.com |
Dear Robert
This letter sets out the terms of your appointment as a non-executive director of:
(1) The Royal Bank of Scotland Group plc (company number SC045551) ( Group ) and National Westminster Bank Plc (company number 00929027) ( NatWest ) with effect from 2 December 2013;
(2) NatWest Holdings Limited (company number 10142224) ( NWH ) with effect from 16 November 2016;
(3) Ulster Bank Limited (company number R0000733) ( UBL ) with effect from 28 July 2017; and
(4) The Royal Bank of Scotland plc (company number SC083026) ( RBS ) with effect from 27 April 2018,
(together the Companies ).
The term of your appointment will commence on the aforementioned effective dates and extend to the conclusion of the Groups next Annual General Meeting and thereafter will be subject to re-election as described below. It is agreed that this is a contract for services and not a contract of employment.
1. Appointment
Your appointment is subject to the articles of association of the Companies and may be terminated on the written notice of either you or the Companies as described below.
You will be required to stand for re-election by shareholders at each Annual General Meeting of each of the Companies (as applicable). Continuation of your appointment is also contingent on satisfactory performance and any relevant statutory provisions relating to the removal of a director.
2. Termination
Your appointment may be terminated by either you or any of the Companies giving written notice to the other, such notice to take immediate effect.
In the event that your re-election is not approved by shareholders, your appointment as director of all of the Companies will terminate automatically with immediate effect.
On termination of your appointment you shall, at the request of the Companies, resign as a director of each of the Companies.
No compensation or payment in lieu of notice will be payable upon termination of your appointment.
3. Time Commitment
You will devote such time as is necessary to fulfil your duties which include preparation for and attendance at the Board meetings of the Companies and committee meetings (as applicable), Annual General Meetings (as applicable) and any other General Meetings of the Companies and the annual Board strategy offsite.
By accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the requirements of your role.
4. Role
Your principal responsibilities and duties are set out in your role profile, as amended from time to time. A copy of your role profile as at 30 May 2018 is attached.
Non-executive Directors have the same legal responsibilities to the Companies as any other director and you should have particular regard to the duties set out in the Companies Act 2006 (the 2006 Act ). This includes the general duties of directors as set out in Part 10, Chapter 2 of the 2006 Act, including the duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the companys employees,
(c) the need to foster the companys business relationships with suppliers, customers and others,
(d) the impact of the companys operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
You will be required to exercise relevant powers in accordance with the Companies articles of association and in accordance with relevant policies in internal control frameworks.
5. Regulatory Requirements
Under the Senior Managers Regime, which was introduced to strengthen individual accountability in banking, certain non-executive director roles are classified as Senior Manager Functions and require prior regulatory approval. Other non-executive director positions must be notified to the regulator but do not require prior approval. Your role profile, as amended from time to time, will either (i) contain details of your Senior Manager Functions; or (ii) reflect your status as a Notified Non-executive Director.
It is a condition of your appointment that you comply with all applicable regulatory requirements, including but not limited to complying with the PRA and FCA Conduct Rules, as they apply from time to time. Further details are available on request from the Chief Governance & Regulatory Officer and Board Counsel.
It is also a condition of your appointment that you remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements and that you report any matter that may impact your ongoing fitness and propriety promptly to the Companies and the PRA and FCA.
|
The Royal Bank of Scotland Group plc Registered in Scotland No 45551 Registered Office: 36 St Andrew Square Edinburgh EH2 2YB |
6. Remuneration
As a non-executive director you will be paid a fee in accordance with the Directors Remuneration Policy approved by Groups shareholders from time to time. The fee covers membership of the Boards of all five Companies (the Boards ), plus the relevant fee(s) for any additional Committee membership(s) and/or chairmanship(s) you may assume. Your remuneration will be reviewed annually and is disclosed in Groups Report and Accounts.
You will be paid monthly and will be reimbursed for all reasonable and properly documented expenses you incur in performing your duties.
7. Outside Interests
It is accepted and acknowledged that you may have business interests other than those of the Companies and that you have disclosed all interests and, where applicable, declared any actual or potential conflicts of interest that are apparent at present.
The agreement of each Board must be sought before you accept any additional commitments that might affect the time you are able to devote to your role as a non-executive director of the Companies. In particular, you must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if you are contemplating any additional appointments.
Please note that there are regulatory limits imposed by the Capital Requirements Directive on the number of directorships you are able to hold. These limits are a total of either (1) one executive and two non-executive positions; or (2) four non-executive director positions, in both cases including your RBS roles. Directorships in organisations which do not pursue predominantly commercial objectives do not count; and executive or non-executive directorships within the same group of companies count as a single directorship. The regulator may, at its discretion, grant a waiver to enable one additional non-executive position to be held. The Chief Governance & Regulatory Officer and Board Counsel monitors compliance with these regulatory limits and will be happy to discuss your own situation with you.
In the event that you become aware of any actual or potential conflicts of interest (including any relevant interests in transactions or arrangements), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel immediately. This is to enable such conflicts to be authorised or noted, as applicable, by the relevant Board in accordance with the 2006 Act.
Further details are set out in the Groups Conflicts of Interest Policy, a copy of which is attached to this letter.
8. Confidentiality and return of and access to information
You acknowledge that all information acquired during your appointment is confidential to the Companies and should not be released, disclosed or communicated, either during your appointment or following termination of your appointment to third parties without prior written clearance from the Boards.
You acknowledge the need to hold and retain the Companies information (in whatever format it is received) under appropriately secure conditions.
As a director, you will frequently be in possession of price sensitive information and you should avoid making any statements that might risk disclosure of unpublished price sensitive information.
Upon termination of your appointment (for whatever reason), you shall deliver to the Companies all documents, records, papers or other property which may be in your possession or under your
control, and which relate in any way to the business affairs of the Companies, and you shall not retain any copies thereof.
Please contact the Chief Governance & Regulatory Officer and Board Counsel if you subsequently require access to information. The Companies will seek to accommodate all reasonable requests for information, subject to any legal or regulatory obligations or restrictions that may prohibit them from doing so.
9. Review Process
Your performance as a non-executive director will be subject to review annually as part of the Board evaluation exercise, which reviews the performance of individual directors, each Board as a whole and its Committees. If, in the interim, there are any matters that cause you concern about your role, you should discuss them with the Chairman as soon as is appropriate.
10. Insurance
Subject to legislative provisions, you will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by you in the execution of your duties.
In addition, the Group has in place directors and officers liability insurance. It is intended to maintain such cover for the full term of your appointment.
11. Independent Professional Advice
Should a situation arise when you consider that you need to take independent professional advice in relation to your duties as a director, you should first discuss the situation with the Chief Governance & Regulatory Officer and Board Counsel. The reasonable costs of any independent advice obtained will be reimbursed by the Companies.
12. Dealing in Securities / Investments
As a director of the Companies, you are subject to the RBS Personal Account Dealing (PAD) Policy and you cannot deal in RBS securities outside of certain scheduled Open Windows (which are periods which coincide with the announcement of Group results) or at any time while you are in possession of inside information. RBS securities are broadly defined to include shares or debt instruments of an issuing entity, or derivatives or other financial instruments linked to any such shares or debts.
You and your connected persons are also required to obtain permission before dealing on your own account in RBS securities. A copy of the PAD Policy has been provided to you along with further details of your obligations and the associated disclosure requirements.
13. Data Protection
The Companies will collect, hold and process various types of personal information about you in accordance with the Privacy Notice for Non-executive Directors, a copy of which is attached to this letter.
You shall at all times comply with the Privacy and Client Confidentiality policy, a copy of which is available on the intranet. A Company may change its policies at any time and will publish any changes on the intranet.
14. Governing Law
Your engagement with the Companies is governed by and shall be construed in accordance with the law of Scotland and your engagement shall be subject to the jurisdiction of the Scottish courts.
Please do not hesitate to contact me if you have any questions in relation to this letter. This letter has been sent to you in duplicate. Please sign and date both copies, retaining one copy for your records and returning the other to me at House G, RBS, PO Box 1000, Edinburgh, EH12 1HQ.
Yours sincerely |
|
|||
|
|
|||
|
|
|||
|
|
|||
/s/ Aileen Taylor |
|
|
||
Aileen Taylor |
|
|||
Chief Governance & Regulatory Officer and Board Counsel |
|
|||
For and on behalf of the Companies |
|
|||
|
|
|||
|
|
|||
|
|
|||
|
|
|||
/s/ Robert Gillespie |
|
|
||
Robert Gillespie |
|
|||
|
|
|
||
Date: |
30 May 2018 |
|
|
|
|
|
|||
Enclosures: |
|
|||
Non-executive director role profile |
|
|||
Conflicts of Interest Policy |
|
|||
Privacy Notice |
|
|||
30 May 2018
|
|
|
|
Strictly Private and Confidential |
Gogarburn |
|
Edinburgh EH12 1HQ |
|
|
Baroness Noakes |
Telephone: 0131 556 8555 |
|
Fax: 0131 626 3010 |
|
www.rbs.com |
Dear Sheila
This letter sets out the terms of your appointment as a non-executive director of:
(1) The Royal Bank of Scotland Group plc (company number SC045551) ( Group ) and National Westminster Bank Plc (company number 00929027) ( NatWest ) with effect from 1 August 2011;
(2) NatWest Holdings Limited (company number 10142224) ( NWH ) with effect from 16 November 2016;
(3) Ulster Bank Limited (company number R0000733) ( UBL ) with effect from 28 July 2017; and
(4) The Royal Bank of Scotland plc (company number SC083026) ( RBS ) with effect from 27 April 2018,
(together the Companies ).
The term of your appointment will commence on the aforementioned effective dates and extend to the conclusion of the Groups next Annual General Meeting and thereafter will be subject to re-election as described below. It is agreed that this is a contract for services and not a contract of employment.
1. Appointment
Your appointment is subject to the articles of association of the Companies and may be terminated on the written notice of either you or the Companies as described below.
You will be required to stand for re-election by shareholders at each Annual General Meeting of each of the Companies (as applicable). Continuation of your appointment is also contingent on satisfactory performance and any relevant statutory provisions relating to the removal of a director.
2. Termination
Your appointment may be terminated by either you or any of the Companies giving written notice to the other, such notice to take immediate effect.
In the event that your re-election is not approved by shareholders, your appointment as director of all of the Companies will terminate automatically with immediate effect.
On termination of your appointment you shall, at the request of the Companies, resign as a director of each of the Companies.
No compensation or payment in lieu of notice will be payable upon termination of your appointment.
3. Time Commitment
You will devote such time as is necessary to fulfil your duties which include preparation for and attendance at the Board meetings of the Companies and committee meetings (as applicable), Annual General Meetings (as applicable) and any other General Meetings of the Companies and the annual Board strategy offsite.
By accepting this appointment, you have confirmed that you are able to allocate sufficient time to meet the requirements of your role.
4. Role
Your principal responsibilities and duties are set out in your role profile, as amended from time to time. A copy of your role profile as at 30 May 2018 is attached.
Non-executive Directors have the same legal responsibilities to the Companies as any other director and you should have particular regard to the duties set out in the Companies Act 2006 (the 2006 Act ). This includes the general duties of directors as set out in Part 10, Chapter 2 of the 2006 Act, including the duty to promote the success of the company:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the companys employees,
(c) the need to foster the companys business relationships with suppliers, customers and others,
(d) the impact of the companys operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
You will be required to exercise relevant powers in accordance with the Companies articles of association and in accordance with relevant policies in internal control frameworks.
5. Regulatory Requirements
Under the Senior Managers Regime, which was introduced to strengthen individual accountability in banking, certain non-executive director roles are classified as Senior Manager Functions and require prior regulatory approval. Other non-executive director positions must be notified to the regulator but do not require prior approval. Your role profile, as amended from time to time, will either (i) contain details of your Senior Manager Functions; or (ii) reflect your status as a Notified Non-executive Director.
It is a condition of your appointment that you comply with all applicable regulatory requirements, including but not limited to complying with the PRA and FCA Conduct Rules, as they apply from time to time. Further details are available on request from the Chief Governance & Regulatory Officer and Board Counsel.
It is also a condition of your appointment that you remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements and that you report any matter that may impact your ongoing fitness and propriety promptly to the Companies and the PRA and FCA.
|
The Royal Bank of Scotland Group plc Registered in Scotland No 45551 Registered Office: 36 St Andrew Square Edinburgh EH2 2YB |
6. Remuneration
As a non-executive director you will be paid a fee in accordance with the Directors Remuneration Policy approved by Groups shareholders from time to time. The fee covers membership of the Boards of all five Companies (the Boards ), plus the relevant fee(s) for any additional Committee membership(s) and/or chairmanship(s) you may assume. Your remuneration will be reviewed annually and is disclosed in Groups Report and Accounts.
You will be paid monthly and will be reimbursed for all reasonable and properly documented expenses you incur in performing your duties.
7. Outside Interests
It is accepted and acknowledged that you may have business interests other than those of the Companies and that you have disclosed all interests and, where applicable, declared any actual or potential conflicts of interest that are apparent at present.
The agreement of each Board must be sought before you accept any additional commitments that might affect the time you are able to devote to your role as a non-executive director of the Companies. In particular, you must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if you are contemplating any additional appointments.
Please note that there are regulatory limits imposed by the Capital Requirements Directive on the number of directorships you are able to hold. These limits are a total of either (1) one executive and two non-executive positions; or (2) four non-executive director positions, in both cases including your RBS roles. Directorships in organisations which do not pursue predominantly commercial objectives do not count; and executive or non-executive directorships within the same group of companies count as a single directorship. The regulator may, at its discretion, grant a waiver to enable one additional non-executive position to be held. The Chief Governance & Regulatory Officer and Board Counsel monitors compliance with these regulatory limits and will be happy to discuss your own situation with you.
In the event that you become aware of any actual or potential conflicts of interest (including any relevant interests in transactions or arrangements), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel immediately. This is to enable such conflicts to be authorised or noted, as applicable, by the relevant Board in accordance with the 2006 Act.
Further details are set out in the Groups Conflicts of Interest Policy, a copy of which is attached to this letter.
8. Confidentiality and return of and access to information
You acknowledge that all information acquired during your appointment is confidential to the Companies and should not be released, disclosed or communicated, either during your appointment or following termination of your appointment to third parties without prior written clearance from the Boards.
You acknowledge the need to hold and retain the Companies information (in whatever format it is received) under appropriately secure conditions.
As a director, you will frequently be in possession of price sensitive information and you should avoid making any statements that might risk disclosure of unpublished price sensitive information.
Upon termination of your appointment (for whatever reason), you shall deliver to the Companies all documents, records, papers or other property which may be in your possession or under your control, and which relate in any way to the business affairs of the Companies, and you shall not retain any copies thereof.
Please contact the Chief Governance & Regulatory Officer and Board Counsel if you subsequently require access to information. The Companies will seek to accommodate all reasonable requests for information, subject to any legal or regulatory obligations or restrictions that may prohibit them from doing so.
9. Review Process
Your performance as a non-executive director will be subject to review annually as part of the Board evaluation exercise, which reviews the performance of individual directors, each Board as a whole and its Committees. If, in the interim, there are any matters that cause you concern about your role, you should discuss them with the Chairman as soon as is appropriate.
10. Insurance
Subject to legislative provisions, you will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by you in the execution of your duties.
In addition, the Group has in place directors and officers liability insurance. It is intended to maintain such cover for the full term of your appointment.
11. Independent Professional Advice
Should a situation arise when you consider that you need to take independent professional advice in relation to your duties as a director, you should first discuss the situation with the Chief Governance & Regulatory Officer and Board Counsel. The reasonable costs of any independent advice obtained will be reimbursed by the Companies.
12. Dealing in Securities / Investments
As a director of the Companies, you are subject to the RBS Personal Account Dealing (PAD) Policy and you cannot deal in RBS securities outside of certain scheduled Open Windows (which are periods which coincide with the announcement of Group results) or at any time while you are in possession of inside information. RBS securities are broadly defined to include shares or debt instruments of an issuing entity, or derivatives or other financial instruments linked to any such shares or debts.
You and your connected persons are also required to obtain permission before dealing on your own account in RBS securities. A copy of the PAD Policy has been provided to you along with further details of your obligations and the associated disclosure requirements.
13. Data Protection
The Companies will collect, hold and process various types of personal information about you in accordance with the Privacy Notice for Non-executive Directors, a copy of which is attached to this letter.
You shall at all times comply with the Privacy and Client Confidentiality policy, a copy of which is available on the intranet. A Company may change its policies at any time and will publish any changes on the intranet.
14. Governing Law
Your engagement with the Companies is governed by and shall be construed in accordance with the law of Scotland and your engagement shall be subject to the jurisdiction of the Scottish courts.
Please do not hesitate to contact me if you have any questions in relation to this letter. This letter has been sent to you in duplicate. Please sign and date both copies, retaining one copy for your records and returning the other to me at House G, RBS, PO Box 1000, Edinburgh, EH12 1HQ.
Yours sincerely |
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/s/ Aileen Taylor |
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Aileen Taylor |
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Chief Governance & Regulatory Officer and Board Counsel |
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For and on behalf of the Companies |
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/s/ Baroness Noakes |
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Baroness Noakes |
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30 May 2018 |
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Enclosures: |
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Non-executive director role profile |
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Conflicts of Interest Policy |
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Privacy Notice |
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STANDARD TERMS AND CONDITIONS OF NON-EXECUTIVE DIRECTORS
The standard terms and conditions of Non-executive Directors of:-
1. The Royal Bank of Scotland Group plc;
2. The Royal Bank of Scotland plc;
3. National Westminster Bank Plc;
4. NatWest Holdings Limited; and
5. Ulster Bank Limited
(together the Companies) are as follows:-
1. Appointment
Each director is required to stand for re-election by shareholders at each Annual General Meeting of each of the Companies. A directors appointment is also contingent on satisfactory performance.
For appointments after 1 January 2017, non-executive directors are appointed for an initial term of 3 years (subject to annual re-election in line with the UK Corporate Governance Code), at the end of which the director is subject to a formal assessment by the Group Nominations & Governance Committee. The director may then serve a second 3 year term if his or her performance has been satisfactory. A second formal review takes place at the end of the second 3 year term following which the director will either step down from the board or be re-appointed on a 12 month term (subject to an overall maximum tenure of 9 years).
2. Termination
A directors appointment may be terminated by either the director or the Companies giving written notice to the other, such notice to take immediate effect.
In the event that a directors re-election is not approved by shareholders, his or her appointment will terminate automatically with immediate effect.
3. Time Commitment
Directors are required to devote such time as is necessary to fulfil their roles including preparation for and attendance at the board meetings of the Companies, Annual General and any other General Meetings of the Companies and the annual board strategy offsite.
4. Role
Principal responsibilities and duties are set out in each directors role profile. Directors must also have regard to the general duties of directors as set out in the Companies Act 2006 Act, including the duty to promote the success of the company.
Public
5. Regulatory Requirements
Directors must comply with all applicable regulatory requirements and must remain fit and proper to perform the role of a non-executive director and any applicable Senior Manager Functions in line with the PRA and FCAs regulatory requirements. Directors must report any matter that may impact his or her ongoing fitness and propriety promptly to the Companies and the regulators.
6. Remuneration
Non-executive directors will be paid a fee in accordance with the Directors Remuneration Policy approved by shareholders from time to time. The fee covers membership of all five Boards, plus the relevant fee(s) for any additional committee membership(s) and/or chairmanship(s) the director may assume.
Directors will be reimbursed for all reasonable and properly documented expenses incurred in performing his or her duties.
7. Outside Interests
Directors need to seek the agreement of the boards before accepting any additional commitments that might affect the time he or she is able to devote to his or her role. Directors must notify the Chief Governance & Regulatory Officer and Board Counsel as early as possible if they are contemplating any additional appointments.
Directors must also comply with the regulatory limits imposed by the Capital Requirements Directive on the number of directorships they are able to hold.
In the event that a director becomes aware of any actual or potential conflicts of interest (including any relevant interests in transactions), these should be disclosed to the Chief Governance & Regulatory Officer and Board Counsel as soon as they are apparent to the director. This is to enable such conflicts to be authorised or noted, as applicable, by the boards in accordance with the Companies Act 2006.
8. Confidentiality and return of and access to information
All information acquired during a directors appointment is confidential to the Companies and should not be released, disclosed or communicated, either during the directors appointment or following termination of the appointment to third parties without prior written clearance from the board.
Directors are required to hold and retain the Companies information securely and, on termination of his or her appointment, must return all documents, records, papers or other property which relate in any way to the business affairs of the Companies.
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9. Review Process
The performance of individual directors is reviewed annually as part of the board evaluation exercise, which reviews the performance of individual directors, the board as a whole and its committees.
10. Insurance
Subject to legislative provisions, directors will be entitled to be indemnified out of the assets of the Group against all costs and liabilities incurred by them in the execution of their duties.
The Group has in place directors and officers liability insurance and intends to maintain such cover for the full term of directors appointments.
11. Independent Professional Advice
Directors may take independent professional advice in relation to their duties with the reasonable costs of any independent advice obtained being reimbursed by the Companies.
12. Dealing in Securities / Investments
Directors are subject to the RBS Personal Account Dealing Policy in respect of any dealing in RBS securities.
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THIS INDEMNITY is given on the XX day of XX Two thousand and XX by The Royal Bank of Scotland Group plc (the Group) which has its registered office situated at 36 St Andrew Square, Edinburgh, EH2 2YB to [DIRECTOR NAME] (the Director).
WHEREAS the Director is a duly appointed director or officer of the Group and/or a wholly-owned subsidiary of the Group (collectively, the Royal Bank Group) and may be required, in connection with the business of the Royal Bank Group and subject to the Directors consent, to accept office as:
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a director or officer of any company within the Royal Bank Group; and/or |
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as appropriate, an authorised or approved person, (or equivalent) under the rules of any regulatory body; and/or |
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a director or officer of a company in which a member of the Royal Bank Group is to invest or has invested in less than 50 per cent of the issued share capital of such company (an Investee Company). |
NOW THIS INDEMNITY WITNESSETH that in consideration of the Director continuing in or accepting (as the case may be) office as a director or officer of any company within the Royal Bank Group, or as an authorised or approved person (or equivalent), or as a director or officer of an Investee Company as contemplated above, THE GROUP hereby covenants with the Director that the Group will, at all times, hereafter indemnify and keep indemnified the Director, his estate and his personal representatives from all costs, charges, losses, expenses and liabilities incurred by him in the actual or purported execution and/or discharge of his duties and/or the exercise or purported exercise of his powers and/or otherwise in relation to or in connection with his duties, powers or office including (without prejudice to the generality of the foregoing) any liability incurred by him in defending any proceedings, civil or criminal, which relate to anything done or omitted or alleged to have been done or omitted by him as an officer or employee of any company within the Royal Bank Group (or of an Investee Company) and in which decree or judgement is given in his favour (or the proceedings are otherwise disposed of without any finding or admission of any material breach of duty on his part) or in which he is acquitted or in connection with any application for relief from liability in respect of any such act or omission in which relief is granted to him by the Court.
PROVIDED THAT this Indemnity is given subject to the provisions of Section 234 Companies Act 2006.
THE DIRECTOR as a condition precedent to his right to be indemnified hereunder, shall, to the full extent permitted by law or other applicable regulatory requirements:
(i) notify the Group in writing, addressed to the Chief Governance & Regulatory Officer and Board Counsel, as soon as reasonably possible
after having knowledge or becoming aware, of any such claim made against him or any circumstances which may subsequently give rise to a claim against him or lead to an official investigation, examination or other proceedings referred to above;
(ii) keep the Group, through its Chief Governance & Regulatory Officer and Board Counsel and or such individual nominated for that purpose by the Chief Governance & Regulatory Officer and Board Counsel, informed of all matters and supply such information as the Group shall request pertaining to any such claim and any such official investigation, examination or other proceedings referred to above;
(iii) obtain the prior consent of the Group before incurring any costs, charges or expenses in connection with any such claim, admitting any liability for or settling or compromising any such claim, and delegate to the Group the conduct of the defence against any such claim at such time and to such extent as shall be requested by the Group, and further render or cause to be rendered to the Group all such assistance as the Group shall require in connection therewith; and
(iv) use his best endeavours to have recourse to any indemnity or insurance to which he may be entitled before claiming his rights hereunder.
IN THE EVENT that the Director shall have incurred any tax liability as a result of any payment hereunder, the amount of such payment to be made by the Group to the Director shall be increased to the extent necessary to ensure that after taking into account such tax liability the Director will receive a net sum equal to the sum he would have received or retained had there been no such tax liability.
THIS INDEMNITY shall be construed in accordance with the laws of Scotland and shall extend to claims against the Director enforceable in any other jurisdiction and be fully effectual as and from the XX day of XX Two Thousand and XX.
Signed for and on behalf of The Royal Bank of Scotland Group plc conform to Commission dated the Nineteenth day of December Two Thousand and Sixteen and registered in the Books of Council and Session on the Twenty Fourth day of January Two Thousand and Seventeen.
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Commissioner and Attorney |
[DIRECTOR NAME] |
FRAMEWORK AGREEMENT DATED 28 September 2018 Between National Westminster Bank Plc The Royal Bank of Scotland Group plc NatWest Holdings Limited Royal Bank of Scotland plc (previously known as Adam & Company PLC) NatWest Markets Plc (previously known as The Royal Bank of Scotland plc) Royal Bank of Scotland International Limited Coutts and Company; and Chartered Institute of Bankers in Scotland And RBS Pension Trustee Limited relating to THE ROYAL BANK OF SCOTLAND GROUP PENSION FUND Allen & Overy LLP
This AGREEMENT is made on 28 September 2018 BETWEEN: (1) NATIONAL WESTMINSTER BANK PLC registered in England with company number 929027 whose registered office is at 135 Bishopsgate, London, EC2M 3UR (the Principal Employer); (2) THE ROYAL BANK OF SCOTLAND GROUP PLC registered in Scotland with company number SC045551 whose registered office is at 36 St Andrew Square, Edinburgh, EH2 2YB; (3) NATWEST HOLDINGS LIMITED registered in England with company number 10142224 whose registered office is at 280 Bishopsgate, London, EC2M 4RB; (4) THE ROYAL BANK OF SCOTLAND PLC (previously known as Adam & Company PLC) registered in Scotland with company number SC083026 whose registered office is at 25 St Andrew Square, Edinburgh, EH2 1AF; (collectively the Bank Group); (5) NATWEST MARKETS PLC (previously known as The Royal Bank of Scotland plc) registered in Scotland with company number SC090312 whose registered office is at 36 St Andrew Square, Edinburgh, EH2 2YB; (6) THE ROYAL BANK OF SCOTLAND INTERNATIONAL LIMITED registered in Jersey with company number 2304 whose registered office is at PO BOX 64, Royal Bank House, 71 Bath Street, St Helier, Jersey, JE4 8PJ; (7) COUTTS AND COMPANY registered in England with company number 00036695 whose registered office is at 440 Strand, London, WC2R 0QS; (8) CHARTERED INSTITUTE OF BANKERS IN SCOTLAND registered charity number SC013927 whose registered office is at 38b Drumsheugh Gardens, Edinburgh, EH3 7SW (collectively the Leaving Employers); and (9) RBS PENSION TRUSTEE LIMITED registered in England with company number 2726164 whose registered office as at 1 Princes Street, London, EC2R 8PB (the Trustee). BACKGROUND (A) The retirement benefits scheme known as the Royal Bank of Scotland Group Pension Fund (the Group Fund) is governed by a definitive trust deed and rules dated 5 April 2006 (as amended from time to time) (the Trust Deed and Rules). The Trustee is the trustee of the Main Fund Section of the Group Fund (the Main Section) and also the trustee of the AA Section of the Group Fund (the AA Section). (B) The Principal Employer is the principal employer of the Group Fund. (C) The Principal Employer and the Trustee entered into a non-legally binding Memorandum of Understanding dated 26 January 2016 under which, among other things:
(i) The Trustee acknowledged that the Royal Bank of Scotland Group must comply with the reforms proposed by the Independent Commission on Banking, including the changes made to the Financial Services and Markets Act 2000 (by the Banking Act 2013) and the Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulation 2015 (the Pension Banking Regulations); and (ii) The Principal Employer agreed to act reasonably and in good faith (and procure that each participating employer also act reasonably and in good faith) towards the Group Fund in the implementation of these changes and the Trustee agreed to act reasonably and in good faith towards each participating employer when considering any proposal (including any apportionment proposal) relating to a participating employer which results from compliance with these reforms, and the detriment that the Group Fund will actually suffer as a result of compliance with the reforms. (D) The Bank Group and the Trustee entered into a second non-legally binding Memorandum of Understanding dated 16 April 2018 (the MoU) (included at Schedule 1 of this Agreement) in good faith to document their intention in relation to the matters set out in the MoU (and the terms set out in Schedule 1 to the MoU (the Term Sheet)), including the future funding of the Main Section, the de-risking of the Main Section investment strategy, the potential withdrawal of certain participating employers (including the Leaving Employers) from the Main Section and the mitigation for any detrimental effect on the Main Section of the corporate restructuring that is necessary to comply with Part 9B of the Financial Services and Markets Act 2000. (E) The Bank Group and the Trustee entered into a third non-legally binding Memorandum of Understanding dated 16 April 2018 (the AA Section MoU) (included at Schedule 5 of this Agreement) in good faith to document their intention in relation to the matters set out in the AA Section MoU, including the future funding of the AA Section and a bulk transfer of members from the Main Section to another segregated section of the Group Fund. (F) The Bank Group and the Trustee wish to enter into this Agreement to document the implementation of the MoU and the timing of the steps required for such implementation. (G) Under clause 4 of the MoU, the parties agreed that the statutory valuation for the Main Fund, due as at 31 December 2018, would be brought forward to 31 December 2017 if the Bank Group gave notice prior to 30 June 2018 that it wished to bring forward the valuation date and paid the total cash contribution referred to in clause 5.1 below on or before 25 March 2019. In accordance with clause 4 of the MoU, the Bank Group notified the Trustee on 6 June 2018 that it wished to bring forward the valuation date to 31 December 2017 and that it intends to pay the cash contribution referred to in clause 5.1 on or before 25 March 2019. The Trustee has therefore agreed that the statutory valuation for the Main Section will be brought forward to 31 December 2017. (H) In accordance with clause 8 of the MoU, the Bank Group has obtained clearance from the Pensions Regulator in respect of the Main Section for the purposes of Regulation 4 of the Pension Banking Regulations. Clearance from the Pensions Regulator was provided on 23 August 2018 and a copy of this is included at Schedule 6. (I) Under the Term Sheet, the Principal Employer is required to notify the PRA of the proposed £2bn cash contribution to be paid into the Main Section. The Principal Employer notified the PRA of this payment on 7 June 2018 and the PRA has raised no objection to the £2bn payment. (J) A deed of amendment to the Group Fund setting up the New Sections (defined below) was executed on or shortly before the date of this Agreement;
(K) The following documents (the Agreed Documents) have been or are to be signed by their respective parties on or around the same date as this Agreement and those parties have agreed that the Agreed Documents are to be held in escrow pending the Release Date (defined below) as set out in clause 2.1 of this Agreement: (i) A flexible apportionment arrangement (attached at Schedule 2 to this Agreement) within the meaning of regulation 2(1) of the Debt Regulations (defined below) transferring the liabilities of the Leaving Employers in relation to the Main Section, to the Principal Employer (the Flexible Apportionment Arrangement); (ii) Two bulk transfer agreements (attached at Schedule 3 to this Agreement) (consisting of the NWM Bulk Transfer Agreement and the RBSI Bulk Transfer Agreement and together, the Bulk Transfer Agreements), transferring the liabilities of the Transferring Members (as defined below) from the Main Section to the New Sections (the Bulk Transfers); (iii) The actuarial funding documentation in respect of the actuarial valuation for the Main Section as at 31 December 2017 (attached at Schedule 4 to this Agreement), consisting of (A) A statement of funding principles for the Main Section agreed between the Trustee (after having taken advice from the Group Fund actuary) and the Principal Employer, as the duly appointed representative for all of the participating employers of the Main Section, in accordance with the Pensions Act 2004 (the SFP); (B) An actuarial valuation of the Main Section as at 31 December 2017 carried out in accordance with the Pensions Act 2004 and the SFP and signed by the Group Fund actuary; (C) A schedule of contributions for the Main Section agreed between the Trustee (after having taken advice from the Group Fund actuary) and the Principal Employer, as the duly appointed representative for all of the participating employers of the Main Section, in accordance with the Pensions Act 2004; and (D) A recovery plan for the Main Section agreed between the Trustee (after having taken advice from the Group Fund actuary) and the Principal Employer, as the duly appointed representative for all of the participating employers of the Main Section, in accordance with the Pensions Act 2004; (together the Actuarial Funding Agreements). OPERATIVE PROVISIONS NOW THIS DEED WITNESSES as follows:- 1. INTERPRETATION 1.1 In this Agreement: Business Day means any day other than a Saturday, Sunday or any other day which is a public holiday in Scotland or England. Conditions means the conditions set out in clause 6.1;
Debt Regulations means the Occupational Pension Schemes (Employer Debt) Regulations 2005; Employer has the meaning given in the Debt Regulations; Funding Test Completion Date means the date on or after 4 October 2018 on which the Trustee confirms the arrangement in clause 2 of the Flexible Apportionment Arrangement meets the funding test set out in regulation 2(4A) of the Debt Regulations (the Funding Test), in accordance with clause 4.3. Implementation Date means 1 November 2018 or such other date as the Principal Employer and the Trustee agree. NatWest Markets Section means the section of the Group Fund set up by the deed of amendment dated on or shortly before the date of this Agreement, mirroring the benefits provided under the Main Section for and in respect of the NatWest Markets Transferring Members. NatWest Markets Transferring Members means the members transferring from the Main Section to the NatWest Markets Section as listed in Schedule 2 to the NWM Bulk Transfer Agreement. New Sections means together (i) The Royal Bank of Scotland International Limited Section, and (ii) NatWest Markets Section. The Royal Bank of Scotland International Limited Section means the section of the Group Fund set up by the deed of amendment dated on or shortly before the date of this Agreement, mirroring the benefits provided under the Main Section for and in respect of the RBSI Transferring Members. Release Date means the date on or before the Implementation Date on which all the Conditions are satisfied. RBSI Transferring Members means the members transferring from the Main Section to The Royal Bank of Scotland International Limited Section as listed in Schedule 2 to the RBSI Bulk Transfer Agreement. Transferring Members means together the NatWest Markets Transferring Members and the RBSI Transferring Members. PART 1 - PRE-IMPLEMENTATION OBLIGATIONS 2. TIMING FOR RELEASE OF AGREED DOCUMENTS 2.1 The parties to this Agreement agree that the Agreed Documents will be held in escrow until the Release Date and that once released they will become effective and legally binding unless otherwise provided below. 2.2 The Agreed Documents will be released in accordance with clause 6 below. 3. BULK TRANSFERS 3.1 The Trustee will issue a notice to each Transferring Member on or before 1 October 2018 in the same form as that required under regulation 12(4B) of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991. 3.2 The Trustee and Principal Employer will take all steps to ensure that the New Sections are set up and able to receive the Transferring Members on the Implementation Date.
4. FLEXIBLE APPORTIONMENT ARRANGEMENT 4.1 The Bank Group and Leaving Employers agree to provide the Trustee with such information as it reasonably requests to enable it to determine if the arrangement in clause 2 of the Flexible Apportionment Arrangement meets the Funding Test. 4.2 The Trustee shall, with the Group Fund actuary, carry out the relevant calculations and obtain any other information or advice required to enable it to conclude that the arrangement in clause 2 of the Flexible Apportionment Arrangement meets the Funding Test. 4.3 The Trustee shall confirm in writing to the Principal Employer whether the arrangement in clause 2 of the Flexible Apportionment Arrangement meets the Funding Test as soon as practicable after the Group Fund actuary has carried out the relevant calculations under clause 4.2. If the Trustee has concluded that the arrangement in clause 2 of the Flexible Apportionment Arrangement meets the Funding Test, that date of confirmation will be the Funding Test Completion Date. 4.4 As soon as reasonably practical, on or after 5 October 2018, following the Funding Test Completion Date the Principal Employer will give notice to the Trustee in accordance with clause 26.2 of the Trust Deed and Rules terminating the Leaving Employers liability to contribute to the Main Section on and from the Implementation Date, and the Trustee will accept that notice (including in respect of the shorter period of that notice). 4.5 As soon as reasonably practicable after the Funding Test Completion Date the Trustee will notify the Pensions Regulator of the Flexible Apportionment Arrangement. 5. PAYMENT OF £2 BILLION CONTRIBUTION 5.1 In accordance with the Schedule of Contributions for the Main Section, the Principal Employer will, following the Funding Test Completion Date, make (or the Bank Group will procure that another group entity will make on behalf of the Principal Employer) a payment of £2 billion to the Main Section. 6. PRE-IMPLEMENTATION CONDITIONS 6.1 On or before the Implementation Date the following conditions must be satisfied: (a) A notice has been issued to each Transferring Member in accordance with clause 3.1 above; (b) The Trustee has confirmed in writing to the Principal Employer that the arrangement in clause 2 of the Flexible Apportionment Arrangement meets the Funding Test in accordance with clause 4.3 above; (c) The Principal Employer has, on or after 5 October 2018, provided notice terminating the Leaving Employers liability to contribute to the Main Section in accordance with clause 4.4 above; and (d) The Trustee has received a payment from the Principal Employer (or another group entity) of £2 billion to the Main Section in accordance with clause 5.1 above, (together the Conditions). 6.2 Following the satisfaction of the Conditions, the Agreed Documents shall thereupon automatically be released from escrow and the Agreed Documents that are deeds shall then automatically be duly delivered. The Agreed Documents shall be dated with the date of the Release Date and shall take
effect from the Release Date (or as otherwise may be expressly stated in the Agreed Documents). The parties shall use reasonable endeavours to ensure that the Agreed Documents are valid and effectual at and from the Release Date, or such other date as is expressly stated in the relevant Agreed Documents. 7. ACTUARIAL FUNDING AGREEMENTS FILING 7.1 The Trustee agrees that on or after the Release Date it will (and will request its advisers to) carry out all steps necessary to ensure that the Actuarial Funding Agreements are effective and are filed with the Pensions Regulator on or as soon as possible after the Release Date. 7.2 The Bank Group and the Trustee agree that the Bank Group shall pay to the Main Section (or procure payment of) a proportion of any amounts to be distributed to the Royal Bank of Scotland Group plc shareholders (ordinary or special dividends or share buy-backs). Such amounts shall constitute additional Employer contributions and are potentially payable for a period of up to 20 years from their start date and subject to an annual cap each calendar year in the payment to the Main Section of £500 million and an overall aggregate amount of £1,500 million in total. The agreed amount payable as an additional contribution and the start date of such additional contributions are: Date of Valuation Start date for distribution- linked contributions Amounts to be paid as contributions to the Main Section 31 December 2017 1 January 2020 100 per cent of distributions to shareholders paid on or after the start date, subject to the annual cap. 7.3 For the avoidance of doubt, where the Bank Group pays any amount to the Main Fund at its discretion (i.e. in addition to the amount described in 7.2 above), that amount shall count towards the expected level of £1,500 million. 7.4 Clauses 7.2 and 7.3 above repeat the provisions contained in the schedule of contributions forming part of the Actuarial Funding Agreements. For the avoidance of doubt, if the provisions in the schedule of contributions relating to clauses 7.2 and 7.3 above are amended or removed from any future or revised schedule of contributions for the Main Section (agreed between the Trustee and the Principal Employer) the provisions in clauses 7.2 and 7.3 above will be automatically amended or removed to the extent required to reflect the agreed amendments to the Main Section schedule of contributions. PART 2 POST-IMPLEMENTATION OBLIGATIONS 8. SETTLEMENT OF MAIN SECTION FUNDING UNTIL 31 DECEMBER 2023 8.1 Subject to Clause 8.3, the Trustee confirms that it does not expect to require any further employer contributions to the Main Section (except contributions in respect of the future service of active members and those set out in the Actuarial Funding Agreements and expenses and augmentations after 31 December 2023 on a basis consistent with the Actuarial Funding Agreements or subsequent actuarial funding agreements (or as otherwise agreed by the Trustee and Bank)) before the agreement of the statutory funding valuation for the Main Section due as at 31 December 2023.
8.2 In particular, the Bank Group and the Trustee agree that any statutory funding valuation due before 31 December 2023 will be on a basis consistent with the assumptions agreed in respect of the statutory funding valuation as at 31 December 2017 (and as set out in the SFP) taking account of experience and any changes to actuarial factors since that valuation. 8.3 The Bank Group acknowledges that the Trustee cannot fetter the exercise of its powers and discretions in a way that would be inconsistent with its fiduciary duties and legislation, so this clause 8 shall be subject to that principle. However, the Trustee will consult with the Bank Group before taking any actions which might increase the likelihood of additional contributions being required to the Main Section before the agreement of the statutory funding valuation for the Main Section due as at 31 December 2023. 8.4 The Trustee confirms that after having taken legal and actuarial advice, as at the date of this Agreement, it is satisfied that its adoption of the SFP and clauses 8.1 and 8.2 above are consistent with its fiduciary duties. 9. EXIT OF ROYAL BANK OF SCOTLAND PLC (PREVIOUSLY KNOWN AS ADAM & COMPANY PLC) 9.1 In the event that the Royal Bank of Scotland plc ceases to be an Employer under the Main Section before 31 December 2024, NatWest Holdings Limited will at or prior to that time enter into a legally binding guarantee with the Trustee. The terms of such a guarantee will be in substantially the same form as the draft guarantee in Appendix 2 of the Term Sheet. 9.2 If the Trustee and NatWest Holdings Limited enter into a guarantee in accordance with the provisions of clause 9.1 above, the Trustee and Bank Group will, subject to clause 9.3, agree to apportion any liabilities of the Royal Bank of Scotland plc under the Debt Regulations to the Principal Employer by way of a flexible apportionment arrangement. 9.3 The Bank Group acknowledges that the apportionment arrangement described above is conditional on the Trustee being satisfied that the Funding Test is met at the relevant time. 9.4 As an alternative to clauses 9.1 and 9.2 above, the Trustee and Bank Group may agree at or prior to such cessation that no covenant mitigation by way of a NatWest Holdings Limited guarantee is required. If so, the Royal Bank of Scotland plc will pay in full any debt which would arise under the Debt Regulations. 10. TRUSTEE MONITORING AND NOTIFICATION OF COVENANT 10.1 Until the dividend linked contributions set out in the Actuarial Funding Agreements above (and referred to is clause 7) have reached an aggregate of £1.5bn (the Monitoring Period), the Trustee may require the Bank Group to provide within a reasonable period the Trustee with the capital risk appetites, capital distribution plans and capital targets of each of: (a) the Principal Employer; (b) the Royal Bank of Scotland plc (previously known as Adam & Company PLC) (but only while it is a participating employer in the Main Section); (c) NatWest Holdings Limited; and (d) The Royal Bank of Scotland Group plc, as approved by that entitys Board of Directors.
10.2 The Bank Group will promptly notify the Trustee if, in the opinion of the Board of Directors of the relevant entity, at any time during the Monitoring Period, any such entity expects a material change (including any series of non-material changes which have the cumulative effect of amounting to a material change) to its stated capital risk appetite, capital distribution plans or capital targets. 10.3 Nothing in this clause 10 shall restrict the Trustees ability to monitor the covenant of the Bank Group to the Fund as required to comply with legislation and the Trustees fiduciary duties. The Bank Group shall continue to provide the Trustee with all reasonable information in order for the Trustee to carry out such monitoring. 11. MISCELLANEOUS 11.1 The Trustee, NatWest Markets Plc (previously known as the Royal Bank of Scotland plc) and the Principal Employer agree that the existing portfolio of interest rate swap and linear inflation trades with the Main Section will be novated from NatWest Markets Plc to the Principal Employer and the associated documentation (including collateral agreements) between the Trustee and the Principal Employer relating to the Main Section will be agreed, pursuant to which only collateral posted by either party in excess of £1.5 billion can be re-hypothecated by the other party. The Principal Employer, NatWest Markets Plc and the Trustee will use their reasonable endeavours to finalise the associated documentation by no later than 31 December 2018. 11.2 The Principal Employer and the Trustee agree that following the execution of this Agreement they shall conduct a joint review of the allocation of powers granted under the Trust Deed and Rules to one or more of the employers participating in the Group Fund for the purpose of agreeing a reallocation among the employers of those powers, with the objective that a power should be exercisable by the employers participating in a section of the Group Fund if its exercise would have an impact on the cost of the benefits provided under that section, or the employment relationship between an employer and a member of that section, whilst taking into account the need for an efficient process for interaction between the Trustee and the Bank Group. The Principal Employer and the Trustee agree to use their reasonable endeavours to complete this review and make such amendments to the Trust Deed and Rules as may be appropriate to implement the matters agreed by 31 December 2018. 12. AMENDMENTS 12.1 This Agreement may be amended by written agreement between the Principal Employer and the Trustee. However, no amendment shall introduce any further obligation on, or introduce or increase any liability in respect of, any other party to this Agreement without the written agreement of that party. 13. JURISDICTION 13.1 This Agreement and any non-contractual obligations arising out of or in connection with it shall be governed by English law. 13.2 The English courts have exclusive jurisdiction to settle any dispute arising out of, relating to or having any connection with this Agreement, and any dispute relating to non-contractual obligations arising out of or in connection with it and each party submits to the exclusive jurisdiction of the English courts. For the purpose of this clause, each party waives any objection to the English courts on the grounds that they are an inconvenient or inappropriate forum to settle any dispute. 14. COUNTERPARTS
14.1 This Agreement may be entered into in any number of counterparts, all of which taken together shall constitute one and the same agreement and any party may enter into this Agreement by executing a counterpart. IN WITNESS of which this Agreement has been executed as a deed by the parties (or their duly authorised representatives) and has been delivered on the date stated at the beginning of this Agreement.
SIGNATORIES EXECUTED and DELIVERED as a DEED for and on ) behalf of NATIONAL WESTMINSTER BANK PLC by ) KATIE MURRAY acting under a power of attorney ) in HER favour dated 6 September 2018 in the presence of: ) Signature of Witness: Full name: Address: EXECUTED and DELIVERED as a DEED for and on ) behalf of THE ROYAL BANK OF SCOTLAND GROUP PLC by ) KATIE MURRAY on acting under a power of attorney ) in HER favour dated 7 February 2018 in the presence of: ) Signature of Witness: Full name: Address:
EXECUTED and DELIVERED as a DEED for and on ) behalf of NATWEST HOLDINGS LIMITED by ) KATIE MURRAY acting under a power of attorney ) in HER favour dated 7 February 2018 in the presence of: ) Signature of Witness: Full name: Address: EXECUTED and DELIVERED as a DEED for and on ) behalf of THE ROYAL BANK OF SCOTLAND PLC ) (previously known as Adam & Company PLC) by ) KATIE MURRAY acting under a power of attorney ) in HER favour dated 6 September 2018 in the presence of: ) Signature of Witness: Full name: Address:
EXECUTED and DELIVERED as a DEED for and on ) behalf of NATWEST MARKETS PLC ) (previously known as The Royal Bank of Scotland plc) by ) Richard Place acting under a power of attorney ) in his favour dated 23 July 2018 in the presence of: ) Signature of Witness: Full name: Address:
EXECUTED and DELIVERED as a DEED ) for and on behalf of THE ROYAL BANK OF ) SCOTLAND INTERNATIONAL LIMITED. ) Director Director
EXECUTED and DELIVERED as a DEED for and on behalf of COUTTS & COMPANY by: Director in the presence of: Signature of Witness: Witness name: Witness address: Witness occupation:
EXECUTED as a DEED by ) CHARTERED INSTITUTE OF BANKERS ) IN SCOTLAND acting by two trustees: ) Trustee Trustee
EXECUTED as a DEED by ) RBS PENSION TRUSTEE LIMITED acting ) by two directors or a director and its secretary: ) Director Secretary
SCHEDULE 1 MEMORANDUM OF UNDERSTANDING
MEMORANDUM OF UNDERSTANDING 16 April 2018 Between
The Royal Bank of Scotland Group plc
NatWest Holdings Limited
Adam & Company PLC (to be known as Royal Bank of Scotland plc)
National Westminster Bank Plc
and
RBS Pension Trustee Limited In relation to various matters including the future funding of the
Royal Bank of Scotland Group Pension Fund (Main Section), mitigation for any detrimental effect
of corporate restructuring necessary to comply with Part 9B of the Financial Services and
Markets Act 2000 and the potential withdrawal of a number of participating employers in the
Main Section of the Group Fund Allen & Overy LLP 0011398-0004743 CO:32479019.7
This MEMORANDUM OF UNDERSTANDING is made on 16 April 2018 BETWEEN: (1) NATIONAL WESTMINSTER BANK PLC registered in England with company number 929027 whose registered office is at 135 Bishopsgate, London, EC2M 3UR (the Principal Employer); (2) THE ROYAL BANK OF SCOTLAND GROUP PLC registered in Scotland with company number SC045551 whose registered office is at 36 St Andrew Square, Edinburgh, EH2 2YB; (3) NATWEST HOLDINGS LIMITED registered in England with company number 10142224 whose registered office is at 280 Bishopsgate, London, EC2M 4RB; (4) ADAM & COMPANY PLC (to be known as Royal Bank of Scotland plc) registered in Scotland with company number SC083026 whose registered office is at 25 St Andrew Square, Edinburgh, EH2 1AF; (collectively the Bank Group); and (5) RBS PENSION TRUSTEE LIMITED registered in England with company number 2726164 whose registered office as at 1 Princes Street, London, EC2R 8PB (the Trustee). BACKGROUND: (A) The Trustee is the trustee of the Royal Bank of Scotland Group Pension Fund (the Group Fund) as governed by a definitive deed dated 5 April 2006 as amended from time to time (the Trust Deed and Rules). (B) The Principal Employer is the principal employer of the Group Fund. (C) The Principal Employer and the Trustee entered into a Memorandum of Understanding dated 26 January 2016 (the 2016 MoU) under which, among other things: (i) The Trustee acknowledged that the Royal Bank of Scotland Group must comply with the reforms proposed by the Independent Commission on Banking, including the changes made to the Financial Services and Markets Act 2000 (by the Banking Act 2013) and the Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulation 2015; and (ii) The Principal Employer agreed to act reasonably and in good faith (and procure that each participating employer also act reasonably and in good faith) towards the Group Fund in the implementation of these changes and the Trustee agreed to act reasonably and in good faith towards each participating employer when considering any proposal (including any apportionment proposal) relating to a participating employer which results from compliance with these reforms, and the detriment that the Group Fund will actually suffer as a result of compliance with the reforms. (D) The Bank Group and the Trustee wish to enter into this memorandum of understanding relating to the Main Section of the Group Fund (the Main Section) (the MoU).
(E) The Trustee and the Bank Group wish to set out their understanding in relation to various matters including the future funding of the Main Section, mitigation for any detrimental effect on the Main Section of corporate restructuring necessary to comply with Part 9B of the Financial Services and Markets Act 2000 (in accordance with clause 9 of the 2016 MoU) and the potential withdrawal of the Royal Bank of Scotland plc, Adam & Company PLC, Coutts & Company, the Royal Bank of Scotland International Limited and The Chartered Institute of Bankers in Scotland as participating employers in the Main Section in this MoU. 1. THE STATUS OF THIS MOU 1.1 The Trustee and the Bank Group enter into this MoU in good faith to document their current intention in relation to the matters hereunder. No provision of this MoU is legally binding or enforceable on either party. 2. TRUSTEE FIDUCIARY DUTIES AND PENSIONS REGULATOR 2.1 The Bank Group acknowledges that the Trustee cannot fetter the exercise of its powers and discretions in a way which would be inconsistent with its fiduciary duties and so the understanding of the Trustee recorded in this MoU must be read subject to that principle. In particular, any terms which are to be agreed under this MoU relating to the investment of Group Fund assets are subject to the Trustees duties and powers of investment and do not fetter the ability of the Trustee to change the Group Funds investments in line with those duties and powers. The Bank Group also recognises that the Trustees fiduciary duties may include taking into account the views of the Pensions Regulator (including Pensions Regulator guidance and codes of practice) and so the understanding of the Trustee recorded in this MoU must be read subject to this. 2.2 The Trustee confirms that as at the date of this MoU (i) it is satisfied that entry into this MoU is consistent with its fiduciary duties and Pensions Regulator guidance and codes of practice and (ii) it is not aware of any views of the Pensions Regulator which would conflict with the terms of this MoU. 3. BANK GROUP AND TRUSTEE TO ACT REASONABLY AND IN GOOD FAITH By entering into this MoU and in carrying out their non-binding intentions hereunder the Bank Group and the Trustee shall act reasonably and in good faith. 4. VALUATION DATE FOR MAIN SECTION The statutory funding valuation for the Main Section is due as at 31 December 2018. However the Trustee and Bank Group agree that if the Bank Group (i) has given notice to the Trustee by 30 June 2018 that it wishes to bring forward the valuation date and (ii) has made payment of the total cash contribution set out in clause 1 of the terms set out in Schedule 1 (the Term Sheet) on or before 25 March 2019, the statutory funding valuation for the Main Section will be as at 31 December 2017 and the relevant provisions of this MoU will be read accordingly. 5. SETTLEMENT OF MAIN SECTION FUNDING UNTIL 31 DECEMBER 2024 (OR 31 DECEMBER 2023) 5.1 This MoU and the Term Sheet sets out the intentions of the Bank Group and the Trustee in respect of the statutory funding valuation for the Main Section due as at 31 December 2018 (or 31 December 2017 if 4 above applies), the employer contributions payable and the de-risking of the Main Section investment strategy. Neither the Bank Group nor the Trustee expect, subject to the implementation of this MoU and the Term Sheet, that the Main Section will require any further employer
contributions (except contributions in respect of the future service of active members) before the agreement of the statutory funding valuation for the Main Section due as at 31 December 2024 (or 31 December 2023 if 4 above applies). 5.2 In particular the Bank Group and the Trustee intend that any statutory funding valuation due before 31 December 2024 (or 31 December 2023 if 4 above applies) will be on a basis consistent with the assumptions agreed in respect of the statutory funding valuation as at 31 December 2018 or 31 December 2017 (as appropriate) (and as set out in the Term Sheet) taking account of experience and any changes to actuarial factors since that valuation. Furthermore, the Trustee will consult with the Bank Group before taking any actions which might increase the likelihood of additional employer contributions being required to the Main Section before the agreement of the statutory funding valuation for the Main Section due as at 31 December 2024 (or 31 December 2023 if 4 above applies). 6. INTENTION OF THE BANK GROUP AND THE TRUSTEE TO IMPLEMENT THE TERM SHEET Subject to 1 to 3 above the Bank Group and Trustee intend to use reasonable endeavours to take all such decisions, actions and other steps (including instructing respective advisers accordingly) to implement the Term Sheet. 7. TIMING OF IMPLEMENTATION OF THE TERM SHEET 7.1 The Bank Group and the Trustee intend to use reasonable endeavours to enter into legally binding documentation to give effect to each of the provisions set out in the Term Sheet no later than the date, if any, specified in the Term Sheet in respect of each relevant provision and where no date is specified in the Term Sheet, no later than 31 March 2020. 7.2 Each member of the Bank Group confirms that it will provide to the Trustee such information as the Trustee reasonably requests to enable the Trustee to determine if the funding test is met for the purposes of the Occupational Pension Schemes (Employer Debt) Regulations 2005. 7.3 The Bank Group and the Trustee accept that either party is entitled to reopen negotiations relating to all matters to which this MoU relates if: (a) the events, actions and agreements anticipated to give effect to the Term Sheet which are due to be completed by no later than 31 March 2020 do not take place before 1 April 2020; (b) at any time the Trustee or any member of the Bank Group fails to comply with any provision of this MoU; (c) there is a material change to the position of the Main Section or the Bank Group (other than one anticipated by the parties as at the date of this MoU); (d) any event relating to the Bank Group which is anticipated by the parties as at the date of this MoU takes place in a way which is materially different to the expectation of the parties; or (e) the Bank Group or the Trustee is prevented from implementing any provision of this MoU in full or in part due to a change in any law or regulation that is applicable to either party (including but not limited to regulations on clean holding company requirements).
8. PENSIONS REGULATOR CLEARANCE 8.1 The Bank Group intends to apply for clearance from the Pensions Regulator in respect of the Main Section for the purposes of Regulation 4 of the Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulations 2015 in advance of the entry into any flexible apportionment arrangement anticipated in the Term Sheet and in any event by 31 December 2018. The Trustee confirms that it intends to support that application for clearance but on the condition that the provisions of the Term Sheet will be implemented. 8.2 The Bank Group acknowledges that the clearance referred to in 8.1 above will be based on the Term Sheet, the terms of which form part of this MoU, and on the information provided to the Pensions Regulator relating to the events which are to take place, and the consequences of those events, arising from the compliance of the Bank Group with Part 9B of the Financial Services and Markets Act 2000. Accordingly, the Bank Group confirms that it intends to apply to the Pensions Regulator for supplementary clearance in relation to the Main Section should the Bank Group and Trustee agree further provisions which differ materially from the provisions of the Term Sheet or if there is a material change to information provided to the Pensions Regulator as part of the clearance application referred to in 8.1 above. 9. CESSATION OF MOU 9.1 This MoU shall cease to apply if: (i) the Trustee or the Principal Employer gives notice of termination to the other party that it considers one or more of the circumstances set out in 7.3 above applies; or (ii) the Trustee and the Principal Employer agree to terminate this MoU. 10. COUNTERPARTS This MoU may be executed in any number of counterparts, all of which taken together will constitute one and the same document and any party may enter into this MoU by executing a counterpart.
Signed on behalf of NATIONAL WESTMINSTER BANK PLC by Signed on behalf of THE ROYAL BANK OF SCOTLAND GROUP PLC by Signed on behalf of NATWEST HOLDINGS LIMITED by Signed on behalf of ADAM & COMPANY PLC by
Signed on behalf of RBS PENSION TRUSTEE LIMITED by (Director) and (Director/Secretary)
SCHEDULE 1 TERM SHEET
Schedule 1 Term Sheet This Term Sheet is contained in a schedule to, and should be read with, the MoU between National Westminster Bank plc (as principal employer of the Main Section of the RBS Group Pension Fund), the Royal Bank of Scotland Group plc, NatWest Holdings Limited, Adam & Company PLC (to be known as Royal Bank of Scotland plc), and RBS Pension Trustee Limited. Terms defined in the MoU have the same meaning in this Term Sheet. The purpose of this Term Sheet is to outline the intention of the Bank Group and the Trustee on certain material terms relating to the Main Section. The parties propose the terms of this Term Sheet are incorporated into one or more formal legally binding agreements at a future date. In accordance with clause 1 of the MoU, the provisions set out in this Term Sheet are not legally binding or enforceable unless and until they are formalised into a legally binding agreement. The Term Sheet covers the Bank Groups and Trustees proposed arrangements in relation to the Main Section for dealing with: - the statutory funding valuation of the Main Section due as at 31 December 2018 (or 31 December 2017 if clause 4 of the MoU applies) - the future investment objectives for the Main Section; and - the mitigation required as a result of the Bank Groups proposed arrangement for implementation of the ring-fencing requirements (including the mitigation required to facilitate the withdrawal of specified participating employers)
Key terms Description
1. Cash Contributions The Principal Employer will make (or will procure that another Bank Group entity makes) a payment of £2bn to the Main Section by 31 March 2020. At the option of the Principal Employer this payment may be made in instalments, provided that the total amount paid by 31 March 2020 is £2bn.
The current intention is that the Bank Group will use reasonable endeavours to make all or part of this payment as soon as possible provided it determines it has sufficient balance sheet capacity to do so and provided that no objection has been raised by the PRA.
2. Distribution-linked contributions In addition to the payment due under 1 above, to assist with de-risking, the Bank Group intends to pay to the Main Section (or procure payment of) a proportion of any amounts to be distributed to Royal Bank of Scotland Group Plc shareholders (ordinary or special dividends or share buy-backs). Such amounts shall constitute additional contributions and are potentially payable for a period of up to 20 years from their start date
and subject to an annual cap each calendar year in the payment to the Main Section of £500m and to an expected level of £1.5bn in total. The agreed amount payable as an additional contribution and the start date of such additional contributions are set out below. Date of valuation Start date for distribution-linked contributions Amounts to be paid as contributions to the Main Section 31 December 2017 1 January 2020 100 % of distributions to shareholders paid after the start date, subject to the annual cap. 31 December 2018 1 January 2019 25 % of distributions to shareholders paid between the start date and 31 December 2020, subject to the annual cap 100 % of distributions to shareholders paid after 1 January 2021, subject to the annual cap. For the avoidance of doubt, where the Bank Group pays any amount to the Main Section at its discretion (i.e. not otherwise described in 1 or 2 above) after the signing of the MoU, that amount shall count towards the expected level of £1.5bn. 3. Technical Provisions Assumptions For the purposes of the statutory actuarial valuation of the Main Section due as at 31 December 2018 (or 31 December 2017 if clause 4 of the MoU applies), the Principal Employer and the Trustee agree the assumptions as per Appendix 1. The Principal Employer and the Trustee will work to finalise the valuation results, the Statement of Funding Principles and the Schedule of Contributions as soon as possible following the valuation date. 4. Investment Risk The Trustee has agreed to move to an investment strategy which targets a return of swaps + 80 bps over the long term based on current market conditions but subject to variation resulting from changes to market conditions. The Trustee is entitled to link the timing of the steps required
to move to this revised investment strategy with the payments due under 1 and 2 above. 5. Swap Transfer The parties intend that the existing portfolio of interest rate swap and linear inflation trades with the Main Section will move from Royal Bank of Scotland plc to the Principal Employer (either through novation or another agreed route) and that associated documentation (including collateral agreements) between the Trustee and the Principal Employer relating to the Main Section will be agreed, pursuant to which only collateral posted by either party in excess of £1.5bn can be re-hypothecated by the other party. The Principal Employer and the Trustee will work to finalise the associated documentation as soon as possible. 6. Guarantee for covenant mitigation In the event that Adam & Company PLC ceases to be an employer (as defined for the purposes of Part 3 of the Pensions Act 2004 and Section 75 of the Pensions Act 1995) under the Main Section before 31 December 2024, NatWest Holdings Limited will at or prior to such time enter into a legally binding guarantee with the Trustee. The terms of such a guarantee will be in substantially the same form as the draft guarantee contained in Appendix 2. The Trustee and Bank Group will also agree to apportion the liabilities of Adam & Company PLC under Section 75 of the Pensions Act 1995 in accordance with 7 below. The requirement for this guarantee shall not be subject to the 31 March 2020 timeframe set out in clause 7.1 of the MoU. However the Trustee and Bank Group may alternatively agree at or prior to such cessation that no covenant mitigation by way of a NatWest Holdings Limited guarantee is required. If so, Adam & Company PLC will pay in full any debt which would arise under Section 75 of the Pensions Act 1995. 7. Statutory Employers The following participating employers will cease to employ active members in the Main Section on or before 31 March 2020: Royal Bank of Scotland plc (to be known as NatWest Markets plc); Royal Bank of Scotland International Limited; Coutts & Company; and Chartered Institute of Bankers in Scotland. The Trustee will agree to apportion the liabilities of the employers listed above and any former employers who have not previously paid a debt under Section 75 of the Pensions Act 1995 to the Principal Employer by way of entering into one or more flexible apportionment arrangements. The Trustee will also agree to apportion the liabilities of Adam &
Company PLC to the Principal Employer by way of a flexible apportionment arrangement in the event that it ceases to be an employer prior to 31 December 2024 and the guarantee referred to in 6 above is put in place. This provision is not subject to the 31 March 2020 time frame set out in clause 7.1 of the MoU. The Bank Group entities acknowledge that the apportionment arrangements referred to above are conditional on: The Bank Group complying with all other aspects of this Term
Sheet; and The Trustee being satisfied that the funding test laid down by
legislation is met at the relevant time. 8. Trustee monitoring and notification of covenant In order to protect against a reduction in the overall scale of the covenant, the Trustee will continue to monitor the performance of the Bank Group under applicable confidentiality agreements and subject to applicable law and regulation (including but not limited to the Market Abuse Regulation, or equivalent U.K. regulation). In addition to the quarterly covenant review, from the date of the MoU to such time as the contribution set out in 1 above has been paid in full and the contributions set out in 2 above have reached an aggregate amount of £1.5bn (the Monitoring Period), the Trustee will be provided with the capital risk appetites, capital distribution plans and capital targets of each of: (i) the Principal Employer; (ii) Adam & Company PLC (but only while it is a participating employer in the Main Section); (iii) Natwest Holdings plc; and (iv) The Royal Bank of Scotland Group plc, as approved by that entitys Board of Directors. The Bank Group will promptly notify the Trustee if, in the opinion of the Board of Directors of the relevant entity, at any time during the Monitoring Period any such entity expects a material change (including any series of non-material changes which have the cumulative effect of amounting to a material change) to its stated capital risk appetite, capital distribution plans or capital targets.
Appendix 1 Actuarial Assumptions
Main Fund Section 1. Financial assumptions (Technical Provisions) Switching to HDC curves At the next valuation date which will be either 31/12/17 or 31/12/18 (the Valuation Date) the liabilities shall be discounted at swaps+0.8% and with inflation based on swaps RPI (LPI adjusted according to the methodology described below). At the Valuation Date the discount rate shall be restated to the HDC curve plus a fixed spread and with the inflation assumption based on the HIC curve, with the fixed spread being set at a level (to the nearest basis point) which provides a present value of the past service liability closest to that on the swaps discount and inflation basis. Discount rate: From the Valuation Date liabilities shall be discounted using the Hedging Discount Curve (HDC) plus the fixed spread where the yield at each yearly tenor is the arithmetic weighted average of: a) Spot yield at each tenor on the gilt yield curve, and b) Spot yield at each tenor on the Libor swap yield curve. By way of example, if the Valuation Date was 31/12/17 the following weightings would apply when calculating the HDC1: Tenor point band2 HDC gilt proportion HDC swap proportion 0-5 years 11% 89% 5+-10 years 15% 85% 10+-15 years 14% 86% 15+-20 years 27% 73% 20+-25 years 60% 40% 25+-30 years 67% 33% 30+-40 years 72% 28% 40+ years 77% 23% The HDC gilt and swap proportion shall be updated at 31 December 2018 and annually thereafter based on the gilts (and any other bonds used in the liability hedging portfolio) in the Trustees liability hedging portfolio as a proportion of total hedging at each tenor. The spread shall remain unchanged between valuations regardless of any update to the HDC curve except where the Trustee and the Bank agree otherwise. 1 Weightings based on 31/12/17 risk ladders (will be updated based on risk ladders at the Valuation Date, as appropriate) 2 For pragmatism, the HDC proportions are based on 5 yearly tenor point interest rate risk ladders but applied to yields at each yearly tenor point on the yield curves
In the event the proportion of gilts at any tenor exceeds 100% of the total hedging at that tenor the HDC gilt proportion shall be set as 100%. In the event the proportion of gilts at any tenor is below 0% of the total hedging at that tenor the HDC gilt proportion shall be set as 0%. RPI inflation: Hedging Inflation Curve (HIC) where the yield at each tenor is the arithmetic weighted average of: a) Spot inflation at each tenor on the gilt breakeven RPI inflation curve, and b) Spot inflation at each tenor on the RPI swap inflation curve. By way of example, if the Valuation Date was 31/12/17 the following weightings would apply when calculating the HIC 3: Tenor point band 4 HIC gilt proportion HIC swap proportion 0-5 years 11% 89% 5+-10 years 17% 83% 10+-15 years 19% 81% 15+-20 years 43% 57% 20+-25 years 96% 4% 25+-30 years 100% 0% 30+-40 years 100% 0% 40+ years 100% 0% The HIC gilt and swap proportion shall be updated at 31 December 2018 and annually thereafter based on the gilts (and any other bonds used in the liability hedging portfolio) in the Trustees liability hedging portfolio as a proportion of total hedging at each tenor. In the event the proportion of gilts at any tenor exceeds 100% of the total hedging at that tenor the HIC gilt proportion shall be set as 100%. In the event the proportion of gilts at any tenor is below 0% of the total hedging at that tenor the HIC gilt proportion shall be set as 0%. CPI inflation: RPI inflation minus 1.1% LPI pension increases: Higher of (a) LPI derived using a Black Scholes model with 1.5% implied volatility (symmetric), and (b) CPI or RPI inflation as applicable for each pension tranche
subject in all cases to the cap/floor applicable for each pension tranche. Salary and pension increases 3 Weightings based on 31/12/17 risk ladders (will be updated based on risk ladders at the Valuation Date, as appropriate) 4 For pragmatism, the HDC proportions are based on 5 yearly tenor point interest rate risk ladders but applied to yields at each yearly tenor point on the yield curves
Salary increases (pensionable/basic) 1.8% p.a. Increases to the earnings cap 1.8% p.a. Revaluations to deferred pensions in excess of GMP The RPI price inflation assumption Rate of GMP increases in active service before GMP age The RPI price inflation assumption plus 1.0% p.a. at all durations Fixed rate revaluation on GMPs GMP fixed rate revaluation according to date of leaving. For active members assumed to withdraw from service in future, a fixed revaluation rate of 3.5% p.a. is assumed to apply after the assumed date of withdrawal. Increases to pensions in payment The LPI pension increase assumption for the relevant tranche Promotional salary increases Nil Discretionary increases Nil 2. Other assumptions (Technical Provisions) Calculation method Actuarial method: Projected Unit Method Control Period: 10 years Pre-retirement mortality
Males: 40% of AM92 Ultimate
Females: 50% AF92 Ultimate Post-retirement mortality Base tables
Males: standard table S2PMA Light
Females: standard table S2PFA Light Normal health retirees and dependants: Current membership group Member sex Member base table Member equivalent single scaling factor Members dependant base table Members dependant equivalent single scaling factor Actives M S2PMA Light 113% S2PFA Light 102%
F S2PFA Light 100% S2PMA Light 124% Deferreds M S2PMA Light 113% S2PFA Light 102% F S2PFA Light 98% S2PMA Light 120% Pensioners M S2PMA Light 104% S2PFA Light 96% F S2PFA Light 96% S2PMA Light 117% Dependants M S2PMA Light 104% - - F S2PFA Light 98% - - III-health retirees: A scaling factor adjustment is applied to the standard tables shown above equal to 150% for males and 151% for females Post-retirement mortality Future improvements CMI 2017 Core Projections Model with smoothing parameter Sx = 8.0. Long term rate to the improvements of 1.5% p.a. for males and females Early retirements Allowance is made for members to retire before or after their Normal Retirement Age. Where pensions are assumed to be payable before or after Normal Retirement Age for a particular tranche of benefits, they are adjusted for early or late payment using the Main Fund Sections early and late retirement factors applicable from 1 February 2018. The tables below illustrate the percentage of members retiring each year. Active members: Age Current schedule Actives non-NPA65 Schedule Actives NPA65 Schedule Active Post-withdrawal Active Post-withdrawal 55 10% 10% 10% 10% 56 10% 5% 10% 5% 57 10% 5% 10% 5% 58 20% 5% 10% 5% 59 25% 5% 10% 5% 60 100% 100% 25% 40% 61 100% 100% 20% 20% 62 100% 100% 20% 20% 63 100% 100% 20% 20% 64 100% 100% 20% 20% 65 100% 100% 100% 100%
Deferred members with a Normal Retirement Age (for service outside the Retiring Age 65 Schedule) of 60, and not on special redundancy packages: Age Current schedule NPA60 Schedule NPA65 Schedule 55 10% 10% 56 5% 5% 57 5% 5% 58 5% 5% 59 5% 5% 60 100% 40% 61 100% 20% 62 100% 20% 63 100% 20% 64 100% 20% 65 100% 100% Deferred members with a Normal Retirement Age (for service outside the Retiring Age 65 Schedule) other than 60, and not on special redundancy packages, are assumed to retire at their Normal Retirement Age. Members on special redundancy packages are assumed to retire at age 55, with the appropriate reduction applied in each case. Family Details A man is assumed to be three years older than his wife. 90% of male and 65% of female members are assumed to be married at retirement or earlier death. A childrens loading of 5% is applied to benefits payable on death before retirement. Transfer values Allowance made for transfers equivalent to £630M per annum over the period to 31 December 2021, based on the same demographic profile as those members transferring out of the Main Fund Section over the three years to 31 December 2017. CETV assumptions are assumed to be as follows for this purpose: Discount rate: swaps +2.2% p.a. Post-retirement mortality: As above except with 1.25% p.a long term rate of improvement RPI/CPI inflation and LPI pension increases: As above Commutation: No allowance made
Notwithstanding the use of the above CETV assumptions for the purpose of the valuation, the Trustee shall review and amend CETVs from time to time in accordance with the Rules and legislation, as appropriate. Expenses An addition of £32M pa increasing annually with RPI inflation, payable by the Bank in addition to the future service rate. The allowance for expenses excludes investment-related expenses (which are paid from the Main Fund Section) and excludes PPF levies in excess of £2M in any year which are paid from the Main Fund Section. Decrements for withdrawal, death before retirement and ill health retirement As well as death before retirement, allowance made for withdrawals from service and ill health retirements:
Age Withdrawal from service Death before retirement - Males Death before retirement - Females Ill health retirement - Males Ill health retirement - Females 25 8.75 0.02 0.01 0.03 0.03 26 8.75 0.02 0.01 0.03 0.03 27 8.75 0.02 0.01 0.03 0.03 28 8.75 0.02 0.01 0.03 0.03 29 8.75 0.02 0.02 0.03 0.03 30 8.75 0.02 0.02 0.03 0.04 31 8.75 0.02 0.02 0.03 0.04 32 8.75 0.02 0.02 0.03 0.04 33 8.75 0.03 0.02 0.03 0.04 34 8.75 0.03 0.02 0.03 0.05 35 8.75 0.03 0.02 0.03 0.05 36 8.75 0.03 0.03 0.03 0.06 37 8.75 0.03 0.03 0.03 0.07 38 8.75 0.03 0.03 0.04 0.07 39 8.75 0.03 0.03 0.04 0.08 40 8.75 0.04 0.04 0.05 0.09 41 8.75 0.04 0.04 0.05 0.09 42 8.75 0.04 0.04 0.06 0.10 43 8.75 0.05 0.05 0.07 0.11 44 8.75 0.05 0.05 0.07 0.12 45 8.75 0.06 0.06 0.08 0.13 46 8.75 0.06 0.06 0.09 0.14
47 8.75 0.07 0.07 0.11 0.15 48 8.75 0.08 0.08 0.12 0.17 49 8.75 0.09 0.09 0.14 0.19 50 8.75 0.10 0.09 0.15 0.20 51 8.75 0.11 0.10 0.17 0.22 52 8.75 0.13 0.11 0.19 0.25 53 8.75 0.14 0.13 0.22 0.27 54 8.75 0.16 0.14 0.24 0.30 55 5 0.18 0.15 0.27 0.33 56 5 0.20 0.17 0.31 0.37 57 5 0.23 0.19 0.34 0.40 58 5 0.25 0.21 0.38 0.44 59 5 0.29 0.23 0.43 0.48 60 2 0.32 0.25 0.47 0.54 61 2 0.36 0.28 0.53 0.59 62 2 0.40 0.31 0.58 0.65 63 2 0.45 0.34 0.65 0.71 64 2 0.51 0.38 0.72 0.78 65 2 0.57 0.42 0.80 0.87 Factors for the calculation of the Technical Provisions Early and late retirement Where pensions are assumed to be payable before or after Normal Retirement Age for a particular tranche of benefits, they are adjusted for early or late payment using the Main Fund Sections early and late retirement factors which came into force with effect from 1 February 2018, summarised below: Years retiring early/late Early retirement (for revaluing pension in excess of GMP) Late retirement 0 1.000 1.000 1 0.962 1.027 2 0.925 1.055 3 0.890 1.084 4 0.856 1.116 5 0.824 1.150 6 0.793 1.187 7 0.762 1.227 8 0.734 1.269 9 0.706 1.314 10 0.679 1.362
Commutation Allowance for members to commute 18% of their pension under the following set of commutation factors: Age Unisex 55 23.37 56 22.86 57 22.35 58 21.83 59 21.30 60 20.76 61 20.22 62 19.68 63 19.12 64 18.56 65 18.00 3. Trustee definition of self-sufficiency All assumptions in line with Technical Provisions except as follows. Discount rate: The better (higher) of spot gilt and swap yields at each yearly tenor plus a 0% spread. Inflation: The better (lower) of spot gilt RPI breakeven and swap RPI at each yearly tenor. Expense reserve: 3% of liabilities up to £50M, 2% of liabilities between £50M and £100M, and 1% of liabilities in excess of £100M Pensioners Age Expense allowance per member < 60 £900 60 70 £800 70 80 £600 > 80 £500 Non-pensioners: An allowance of £1,000 per member. (No ongoing contributions from the employers for expenses.) 4. Future service contributions Using a discount rate 0.1% below that of the Technical Provisions and otherwise using assumptions in line with the Technical Provisions.
Appendix 2 Draft Guarantee
GUARANTEE DATED By NATWEST HOLDINGS LIMITED Relating to any detrimental effect on the Main Fund Section of Royal Bank of Scotland Group Pension Fund in respect of the withdrawal of Adam & Company PLC (to be known as Royal Bank of Scotland plc) from the Main Fund Section of the Royal Bank of Scotland Group Pension Fund. Allen & Overy LLP
CONTENTS Clause Page 1. Interpretation 1 2. Guarantee and indemnity 2 3. Termination 5 4. Affordability clause 6 5. Representations 6 6. General undertakings 7 7. Changes to the Parties 7 8. Payment mechanics 7 9. Notices 8 10. Calculations and certificates 9 11. Partial invalidity 9 12. Remedies and waivers 10 13. Amendments and waivers 10 14. Counterparts 10 15. Governing law 10 16. Enforcement 10 Signatories 11
THIS DEED is dated and is made BETWEEN: (1) NATWEST HOLDINGS LIMITED registered in England with company number 10142224 whose registered office is 280 Bishopsgate, London, England, EC2M 4RB as guarantor (the Guarantor); and (2) RBS PENSION TRUSTEE LIMITED registered in England with company number 2726164 whose registered office as at 1 Princes Street, London, EC2R 8PB (the Trustee). BACKGROUND (A) The Trustee is the trustee of the Group Fund. (B) Pursuant to a memorandum of understanding dated 2018 the Guarantor has agreed to provide a guarantee as mitigation for any detrimental effect in respect of the withdrawal of Adam & Company PLC from the Main Fund Section of the Group Fund. IT IS AGREED as follows: 1. INTERPRETATION 1.1 Definitions In this Deed: Authorisation means an authorisation, consent, approval, resolution, licence, exemption, filing, notarisation or registration. Business Day means any day other than a Saturday, Sunday or any other day which is a public holiday in Scotland or England. Employer means each or any employer participating in the Main Fund Section from time to time and Employers shall mean all of them. Group Fund means the Royal Bank of Scotland Group Pension Fund as governed by a definitive deed dated 5 April 2006 as amended from time to time. Guaranteed Liabilities means all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally and in any capacity whatsoever) of each Employer to make payments to the Main Fund Section. Main Fund Section means the segregated section of the Group Fund with that name referred to in clause 3.4 of the definitive deed dated 5 April 2006 of the Group Fund (as amended from time to time). Party means a party to this Deed. Quarter End means, in any calendar year, 31 March, 30 June, 30 September and 31 December. 1.2 Construction (a) Unless a contrary indication appears, any reference in this Deed to:
(i) either Party shall be construed so as to include its successors in title, permitted assigns and permitted transferees to, or of, its rights and/or obligations under this Deed; (ii) assets includes present and future properties, revenues and rights of every description; (iii) any agreement or instrument is a reference to that agreement or instrument as amended, novated, supplemented, extended or restated; (iv) a person includes any individual, firm, company, corporation, government, state or agency of a state or any association, trust, joint venture, consortium, partnership or other entity (whether or not having separate legal personality); (v) a regulation includes any regulation, rule, official directive, request or guideline (whether or not having the force of law) of any governmental, intergovernmental or supranational body, agency, department or of any regulatory, self-regulatory or other authority or organisation; (vi) a provision of law is a reference to that provision as amended or re-enacted; and (vii) a time of day is a reference to London time. (b) Section, clause and schedule headings are for ease of reference only. 1.3 Third party rights (a) A person who is not a Party has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce or to enjoy the benefit of any term of this Deed. (b) The consent of any person who is not a Party is not required to rescind or vary this Deed at any time. 2. GUARANTEE AND INDEMNITY 2.1 Guarantee and indemnity The Guarantor irrevocably and unconditionally: (a) guarantees to the Trustee the punctual performance by each Employer of all of its Guaranteed Liabilities; (b) undertakes with the Trustee that whenever an Employer does not pay any amount when due in respect of its Guaranteed Liabilities, it must after receiving a written demand from the Trustee pay that amount as if it instead of the Employer was the principal obligor in respect of that amount; and (c) agrees with the Trustee that if any obligation guaranteed by the Guarantor is or becomes unenforceable, invalid or illegal, it will, as an independent and primary obligation indemnify the Trustee immediately on demand against any cost, loss or liability the Trustee incurs as a result of an Employer not paying any Guaranteed Liability which would, but for such unenforceability, invalidity or illegality, have been payable by that Employer in respect of any Guaranteed Liability on the date when it would have been due. The amount payable by the Guarantor under this indemnity will not exceed the amount it would have had to pay under this Deed if the amount claimed had been recoverable on the basis of a guarantee.
2.2 Limit on the amount recoverable The amount which may be recovered from the Guarantor shall not exceed the lower of the following limits: (a) in respect of any demand made on the Guarantor by the Trustee under Subclause 2.1, an amount equal to the entire aggregate liability of every employer (within the meaning set out in Section 318 of the Pensions Act 2004 and regulations made thereunder) in relation to the Main Fund Section, were a debt under Section 75 of the Pensions Act 1995 to have become due from every employer on that date; and (b) £7 billion. 2.3 Continuing guarantee This guarantee is a continuing guarantee and will extend to the ultimate balance of sums payable by the Employers in respect of the Guaranteed Liabilities, regardless of any intermediate payment or discharge in whole or in part. 2.4 Reinstatement If any discharge, release or arrangement (whether in respect of the obligations of the Employers or any security for those obligations or otherwise) is made by the Trustee in whole or in part on the basis of any payment, security or other disposition which is avoided or must be restored in insolvency, liquidation, administration or otherwise, without limitation, then the liability of the Guarantor under this Clause will continue or be reinstated as if the discharge, release or arrangement had not occurred. 2.5 Waiver of defences The obligations of the Guarantor under this Clause will not be affected by any act, omission, matter or thing which, but for this Clause would reduce, release or prejudice any of its obligations under this Clause including (without limitation and whether or not known to it or the Trustee): (a) any time, waiver or consent granted to, or composition with, any person; (b) the release of any person under the terms of any composition or arrangement; (c) the taking, variation, compromise, exchange, renewal or release of, or refusal or neglect to perfect, take up or enforce, any rights against, or security over assets of, any person; (d) any non-presentation or non-observance of any formality or other requirement in respect of any instrument or any failure to realise the full value of any security; (e) any incapacity or lack of power, authority or legal personality of or dissolution or change in the members or status of any other person; (f) any amendment of this Deed, any Guaranteed Liability or any other document; (g) any unenforceability, illegality, invalidity or non-provability of any obligation of any person under any Guaranteed Liability or any other document; or (h) any insolvency, resolution or similar proceedings.
2.6 Immediate recourse (a) The Guarantor waives any right it may have of first requiring the Trustee to proceed against or enforce any other right or security or claim payment from any person before claiming from the Guarantor under this Clause. (b) This waiver applies irrespective of any law to the contrary. 2.7 Appropriations Until all amounts which may be or become payable by the Employers in respect of the Guaranteed Liabilities have been irrevocably paid in full, the Trustee may: (a) refrain from applying or enforcing any other moneys, security or rights held or received by the Trustee in respect of those amounts, or apply and enforce them in such manner and order as it sees fit (whether against those amounts or otherwise) and the Guarantor will not be entitled to the benefit of such moneys, security or rights; and (b) hold in an interest-bearing suspense account any moneys received from the Guarantor or on account of the Guarantors liability under this Clause. 2.8 Deferral of Guarantors rights (a) Until all amounts which may be or become payable by the Employers in respect of the Guaranteed Liabilities have been irrevocably paid in full or unless the Trustee otherwise directs, the Guarantor will not exercise any rights which it may have by reason of performance by it of its obligations in respect of the Guaranteed Liabilities or by reason of any amount being payable, or liability arising under this Clause: (i) to be indemnified by an Employer; (ii) to claim any contribution from any other guarantor of any Employers obligations in respect of the Guaranteed Liabilities; (iii) to take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Trustee in respect of the Guaranteed Liabilities or of any other guarantee or security taken pursuant to, or in connection with, the Guaranteed Liabilities by the Trustee; (iv) to bring legal or other proceedings for an order requiring any Employer to make any payment, or perform any obligation, in respect of which the Guarantor has given a guarantee, undertaking or indemnity under this Clause; (v) to exercise any right of set-off against any Employer; and/or (vi) to claim or prove as a creditor of any Employer in competition with the Trustee. (b) If the Guarantor receives any benefit, payment or distribution in relation to such rights it must hold that benefit, payment or distribution to the extent necessary to enable all amounts which may be or become payable to the Trustee by the Employers under or in connection with the Guaranteed Liabilities be repaid in full on trust for the Trustee and must promptly pay or transfer them to the Trustee or as the Trustee may direct for application in accordance with Clause 8 (Payment mechanics).
2.9 Additional security This guarantee is in addition to and is not in any way prejudiced by any other guarantee or security now or subsequently held by the Trustee. 2.10 Limitations This guarantee does not apply to any liability to the extent that it would result in this guarantee constituting unlawful financial assistance within the meaning of sections 678 or 679 of the Companies Act 2006. 3. TERMINATION 3.1 Agreement in writing This Deed may be terminated at any time by the Guarantor with the agreement in writing of the Trustee. 3.2 Automatic termination (a) This Deed will automatically terminate in the event that: (i) the Main Fund Section has been fully wound up and has ceased to exist; (ii) the Main Fund Section is on any four consecutive Quarter Ends more than 100% funded on the basis of its technical provisions (as defined under the statement of funding principles in force at the relevant time in accordance with Part 3 of the Pensions Act 2004) but using a discount rate of the better (higher) of spot gilt and swap yields at each yearly tenor plus a 0% spread and using an inflation assumption of the better (lower) of spot gilt RPI breakeven and swap RPI at each yearly tenor and incorporating an expense reserve (the Guarantee Technical Provisions); or (iii) the Guarantor demonstrates to the satisfaction of the Trustee (acting reasonably) that the Guarantor is prohibited from continuing to provide this guarantee in full or in part due to a change in any law or regulation (including but not limited to regulations on clean holding company requirements). (b) For the purpose of Clause 3.2(a)(ii) above: (i) the Guarantor may within 30 days of any Quarter End notify the Trustee that it wishes to assess the Main Fund Sections funding level in accordance with this Clause 3.2(b); (ii) on receipt of a notice from the Guarantor in accordance with Clause 3.2(b)(i), the Trustee (with the advice of the actuary to the Main Fund Section) shall within 90 days of the relevant Quarter End (or such longer period as the Trustee and the Guarantor may agree) report to the Guarantor in writing its assessment of the Funds level of funding on the basis of the Guarantee Technical Provisions as at the four relevant Quarter Ends and shall also provide such information as the Guarantor may reasonably require to enable it to verify that assessment; and (iii) in the event that the Guarantor does not agree with the Trustees assessment it may refer the matter to an independent actuary agreed between it and the Trustee (or, in the event of their failure to agree, nominated by the President for the time being of the Institute and Faculty of Actuaries) whose decision as to whether the Main Fund Section was, on the relevant Quarter
Ends, more than 100% funded on the basis of the Guarantee Technical Provisions shall be final. 4. AFFORDABILITY CLAUSE The Parties acknowledge and agree that the Trustee may give due regard to the Guarantors obligations to the Main Fund Section under this Deed when considering the strength or otherwise of the sponsor covenant supporting the Main Fund Section and in particular may take such obligations into account for the following purposes: (a) determining which methods and assumptions are to be used in calculating the Main Fund Sections technical provisions for the purpose of Part 3 of the Pensions Act 2004 and Regulations thereunder; (b) the preparation and/or revision of any recovery plan prepared for the purpose of section 226 of the Pensions Act 2004 including when assessing the affordability of contributions to be paid by the Employers under such a recovery plan; and (c) the preparation and/or revision of any schedule of contributions prepared for the purpose of section 227 of the Pensions Act 2004. 5. REPRESENTATIONS 5.1 Representations The representations and warranties set out in this Clause are made by the Guarantor to the Trustee on the dates set out in Clause 5.6 (Times for making representations). 5.2 Binding obligations (a) The obligations expressed to be assumed by it in this Deed are, subject to any general principles of law limiting its obligations, legal, valid, binding and enforceable obligations. 5.3 Non-conflict with other obligations The entry into and performance by it of, and the transactions contemplated by, this Deed do not conflict with: (a) any law or regulation applicable to it; (b) its constitutional documents; or (c) any agreement or instrument binding on it or any of its assets. 5.4 Power and authority It has the power to enter into and perform, and has taken all necessary action to authorise its entry into and performance of, this Deed and the transactions contemplated by this Deed. 5.5 Validity and admissibility in evidence All Authorisations required or desirable to enable it lawfully to enter into, exercise its rights and comply with its obligations in this Deed have been obtained or effected and are in full force and effect.
5.6 Times for making representations The representations and warranties set out in this Clause are made by the Guarantor on the date of this Deed. 6. GENERAL UNDERTAKINGS 6.1 General The Guarantor agrees to be bound by the undertakings set out in this Clause. 6.2 Authorisations The Guarantor must promptly obtain, comply with and do all that is necessary to maintain in full force and effect any Authorisation required under any applicable law or regulation to enable it to perform its obligations under this Deed. 6.3 Pari passu ranking The Guarantor must ensure that its payment obligations under this Deed at all times rank at least pari passu with the claims of all its unsecured and unsubordinated creditors, except for obligations mandatorily preferred by law applying to companies generally. 7. CHANGES TO THE PARTIES 7.1 Assignments and transfers by the Guarantor(s) The Guarantor may not assign or transfer any of its rights and obligations under this Deed without the prior consent of the Trustee. 7.2 Assignments and transfers by the Trustee The Trustee may not assign or transfer any of its rights and obligations under this Deed without the prior consent of the Guarantor except that such consent is not required for any assignment or transfer to any successor as trustee of the Group Fund. 8. PAYMENT MECHANICS 8.1 Payments to the Trustee (a) On each date on which the Guarantor is required to make a payment to the Trustee under this Deed, the Guarantor must make the payment available to the Trustee for value on the due date at the time and in such funds specified by the Trustee to the Guarantor as being customary at the time for settlement of transactions in the relevant currency in the place of payment. (b) All payments must be made to such account as the Trustee specifies. 8.2 Business Days (a) Any payment under this Deed which is due to be made on a day that is not a Business Day will be made on the next Business Day in the same calendar month (if there is one) or the preceding Business Day (if there is not).
(b) During any extension of the due date for payment of any principal under this Deed interest at the prevailing discount rate used for the Main Section at the relevant time is payable on the principal from the original due date. 8.3 Timing of payments If this Deed does not provide for when a particular payment is due, that payment will be due within three Business Days of demand by the person to whom the payment is to be made. 9. NOTICES 9.1 Communications in writing Any communication to be made under or in connection with this Deed must be made in writing and, unless otherwise stated, may be made by fax or letter. 9.2 Addresses (a) Except as provided below, the contact details of each Party for any communication to be made or delivered under or in connection with this Deed are those notified by that Party to the other Party for this purpose. (b) The contact details of the Guarantor for this purpose are: Address: Fax number: E-mail: Attention: (c) The contact details of the Trustee for this purpose are: Address: Fax number: E-mail: Attention: (d) Any Party may change its contact details by giving five Business Days notice to the other Parties. 9.3 Delivery Except as provided below, any communication made or delivered by one Party to another under or in connection with this Deed will only be effective: (a) if by way of fax, when received in legible form; or (b) if by way of letter, when it has been left at the relevant address or five Business Days after being deposited in the post postage prepaid in an envelope addressed to it at that address, and, if a particular department or officer is specified as part of its address details provided under Clause 9.2 (Addresses), if addressed to that department or officer.
9.4 Electronic communication (a) Any communication to be made between the Parties under or in connection with this Deed may be made by electronic mail or other electronic means (including, without limitation, by way of posting to a secure website), if the Parties: (i) notify each other in writing of their electronic mail address and/or any other information required to enable the transmission of information by that means; and (ii) notify each other of any change to their electronic mail address or any other such information supplied by them. (b) Any electronic communication as specified in paragraph (a) above to be made between the Guarantor and the Trustee may only be made in that way to the extent that they agree that, unless and until notified to the contrary, this is an accepted form of communication. (c) For the purposes of this Deed, an electronic communication will be treated as being in writing. (d) Any electronic communication as specified in paragraph (a) above made between the Parties will be effective only when actually received (or made available) in readable form. (e) Any electronic communication which would otherwise become effective on a non-working day or after business hours in the place in which the Party to whom the relevant communication is sent (or made available) has its address for the purposes of this Deed will be deemed only to become effective on the next working day in that place. (f) Any reference in this Deed to a communication being sent or received will be construed to include that communication being made available in accordance with this Clause 9.4 (Electronic communication). 10. CALCULATIONS AND CERTIFICATES 10.1 Accounts In any litigation or arbitration proceedings arising out of or in connection with the Guaranteed Liabilities, the entries made in the accounts maintained by the Trustee are prima facie evidence of the matters to which they relate. 10.2 Certificates and determinations Any certification or determination by the Trustee of a rate or amount in respect of the Guaranteed Liabilities is, in the absence of manifest error, conclusive evidence of the matters to which it relates. 10.3 Day count conventions Any interest, commission or fee accruing under this Deed will accrue from day to day and is calculated on the basis of the actual number of days elapsed and a year of 360 days. 11. PARTIAL INVALIDITY If, at any time, any term of this Deed is or becomes illegal, invalid or unenforceable in any respect under any law of any jurisdiction that will not affect: (a) the legality, validity or enforceability in that jurisdiction of any other term of this Deed; or
(b) the legality, validity or enforceability in other jurisdictions of that or any other term of this Deed. 12. REMEDIES AND WAIVERS No failure to exercise, nor any delay in exercising, on the part of the Trustee, any right or remedy in respect of the Guaranteed Liabilities will operate as a waiver, nor will any single or partial exercise of any right or remedy prevent any further or other exercise or the exercise of any other right or remedy. The rights and remedies provided in this Deed are cumulative and not exclusive of any rights or remedies provided by law and may be waived only in writing and specifically. 13. AMENDMENTS AND WAIVERS Any term of or any right or remedy under this Deed may be amended or waived only with the consent of the Guarantor and the Trustee and any such amendment or waiver will be binding on both Parties. 14. COUNTERPARTS This Deed may be executed in any number of counterparts. This has the same effect as if the signatures on the counterparts were on a single copy of this Deed. 15. GOVERNING LAW This Deed and any non-contractual obligations arising out of or in connection with it are governed by English law. 16. ENFORCEMENT 16.1 Jurisdiction (a) The English courts have exclusive jurisdiction to settle any dispute arising out of or in connection with this Deed (including a dispute relating to existence, validity or termination of this Deed or any non-contractual obligation arising out of or in connection with this Deed) (a Dispute). (b) The Parties agree that the English courts are the most appropriate and convenient courts to settle Disputes and accordingly no Party will argue to the contrary. This Deed has been entered into on the date stated at the beginning of this Deed.
SIGNATORIES Guarantor NATWEST HOLDINGS LIMITED By: (Director) and (Director/Secretary) Trustee RBS PENSION TRUSTEE LIMITED By: (Director) and (Director)
SCHEDULE 2 FLEXIBLE APPORTIONMENT ARRANGEMENT
FLEXIBLE APPORTIONMENT AGREEMENT DATED 2018 relating to THE ROYAL BANK OF SCOTLAND GROUP PENSION FUND FLEXIBLE APPORTIONMENT ARRANGEMENT RELATING TO: (i) NatWest Markets Plc (formerly known as The Royal Bank of Scotland plc) (ii) Royal Bank of Scotland International Limited (iii) Coutts and Company; and (iv) Chartered Institute of Bankers in Scotland Allen & Overy LLP
THIS AGREEMENT is made as a deed on 2018 BETWEEN: (1) NatWest Markets Plc (previously known as The Royal Bank of Scotland plc) registered in Scotland with company number SC090312 whose registered office is at 36 St Andrew Square, Edinburgh, EH2 2YB; (2) The Royal Bank of Scotland International Limited registered in Jersey with company number 2304 whose registered office is at PO BOX 64, Royal Bank House, 71 Bath Street, St Helier, Jersey, JE4 8PJ; (3) Coutts and Company registered in England with company number 00036695 whose registered office is at 440 Strand, London, WC2R 0QS; (4) Chartered Institute of Bankers in Scotland registered charity number SC013927 whose registered office is at 38b Drumsheugh Gardens, Edinburgh, EH3 7SW; (together the Leaving Employers); (5) RBS Pension Trustee Limited registered in England with company number 2726164 whose registered office is at 1 Princes Street, London EC2R 8PB (the Trustee); and (6) National Westminster Bank PLC registered in England with company number 929027 whose registered office is at 135 Bishopsgate, London EC2M 3UR (the Replacement Employer). BACKGROUND (A) The retirement benefits scheme known as the Royal Bank of Scotland Group Pension Fund (the Group Fund) is governed by a definitive trust deed and rules dated 5 April 2006 (as amended from time to time) (the Trust Deed and Rules). The parties wish to enter into this flexible apportionment agreement in relation to the Main Section of the Group Fund (the Main Section). (B) The Replacement Employer is a participating employer in the Main Section and the Trustee is the present trustee of the Main Section. (C) Under Clause 26.2 of the Trust Deed and Rules, a participating employer shall cease to participate in the Group Fund or a section of the Group Fund if the Replacement Employer gives three months written notice to the Trustee (or such shorter period of notice as it may accept) terminating the participating employers liability to contribute to the Group Fund or a section of the Group Fund and such notice (without being withdrawn) expires. (D) Under Clause 26.3, if an employer ceases to be a participating employer under the Group Fund or a section of the Group Fund under Clause 26.2, then from the date it ceases to participate no further pension or other benefits shall accrue under the Group Fund or section of the Group Fund for or in respect of any employees of the participating employer and its liability to contribute to the Fund shall cease, except in respect of: (i) contributions (including suspended contributions) and administration expenses which became due before the date it ceased to participate; (ii) administration expenses incurred in connection with its ceasing to participate; and (iii) any liability in relation to section 75 of the Pensions Act 1995.
(E) The Leaving Employers, the Replacement Employer and the Trustee (amongst others) entered into a Framework Agreement at or around the same date as this Agreement (the Framework Agreement). The parties to the Framework Agreement agreed that this Agreement would be held in escrow pending the Release Date (as defined in the Framework Agreement) as set out in clause 2.1 of the Framework Agreement. (F) The Replacement Employer provided written notice to the Trustee in accordance with Clause 26.2 of the Trust Deed and Rules terminating the Leaving Employers liability to contribute to the Main Section on and from the Implementation Date (as defined below), and the Trustee accepted that notice (including the shorter period of that notice). (G) On the Implementation Date (as defined below), the Leaving Employers will therefore cease to employ any active members of the Main Section. At this time, the Replacement Employer, who is not a defined contribution employer (as defined in the Occupational Pension Schemes (Employer Debt) Regulations 2005 (the Debt Regulations)), continues to employ at least one active member of the Main Section. As a result, but for the operation of regulation 6ZA(7) of the Debt Regulations and the arrangement contemplated by this Agreement, an employment cessation event (as defined below) would have occurred in relation to the Leaving Employers which would have triggered a debt under section 75 of the Pensions Act 1995 (as modified by the Debt Regulations). (H) Under Clause 26.3A of the Trust Deed and Rules, the Trustee may enter into any form of arrangement or agreement prescribed by the Debt Regulations, in respect of any sum that falls to be treated as a debt due under section 75 of the Pensions Act 1995 from an employer who ceases to participate under Clause 26.2, or which would fall to be treated as a debt, but for the existence of the arrangement under the Debt Regulations. (I) In accordance with the power under Clause 26.3A of the Trust Deed and Rules described in Recital H above and the general statutory power under the Debt Regulations, the parties wish to enter into a flexible apportionment arrangement within the meaning of regulation 2(1) of the Debt Regulations (a Flexible Apportionment Arrangement) on the terms set out in this Agreement so that the Replacement Employer takes over responsibility for all the Leaving Employers liabilities in relation to the Main Section. (J) Each of the parties consents to the liabilities of the Leaving Employers being dealt with in the manner contemplated in this Agreement, and intends that this Agreement shall constitute a Flexible Apportionment Arrangement so that, pursuant to regulation 6ZA(7) of the Debt Regulations, no employment cessation event will occur in relation to the Leaving Employers when they cease to employ any active members of the Main Section, as described in Recitals (F) and (G) above. (K) The Trustee is satisfied that the Flexible Apportionment Arrangement entered into under this Agreement has met the funding test requirement as prescribed in regulation 2(4A) of the Debt Regulations. (L) The Main Section is not currently in an assessment period under section 132 of the Pensions Act 2004 in relation to the Pension Protection Fund and the Trustee is satisfied that such an assessment period is unlikely to begin in relation to the Main Section within the period of 12 months beginning with the Implementation Date (as defined below). The Main Section is not being wound up. (M) The Leaving Employers are not in a period of grace in accordance with regulation 6A of the Debt Regulations. (N) The Leaving Employers and the Replacement Employer respectively meet the requirements of the leaving employer and the replacement employer set out in regulation 6E(7) of the Debt Regulations in relation to the Flexible Apportionment Arrangement entered into under this Agreement.
(O) In entering into this Agreement, the Trustee is not entering into a legally enforceable agreement which has the effect of reducing the amount of any debt due to the Main Section under section 75 of the Pensions Act 1995 which may be recovered by (or on behalf of) the Trustee so that the Main Section would cease to be an eligible scheme by reason of regulation 2(2) of the Pension Protection Fund (Entry Rules) Regulations 2005 (the Entry Regulations), and the parties intend that the arrangement set out in Clause 2 of this Agreement will qualify as a Flexible Apportionment Arrangement and agree that in these circumstances regulation 2(4) of the Entry Regulations will apply. OPERATIVE PROVISIONS 1. INTERPRETATION 1.1 In this Agreement: Employer and employment cessation event shall have the meanings given to them in the Debt Regulations; Implementation Date means 1 November 2018 or such other date as is determined to be the Implementation Date in accordance with the Framework Agreement; and liabilities in relation to the Main Section in relation to the Leaving Employers means all liabilities of the Leaving Employers within the meaning of Regulation 6ZB(17) of the Debt Regulations as those liabilities stand immediately before the Implementation Date. 2. FLEXIBLE APPORTIONMENT ARRANGEMENT 2.1 An employment cessation event is due to occur on the Implementation Date in relation to the Leaving Employers for the purposes of the Debt Regulations. 2.2 The Replacement Employer agrees to take over and shall, on and from the Implementation Date, take over responsibility for all of the Leaving Employers liabilities in relation to the Main Section in accordance with Regulation 6E(2)(b)(i) of the Debt Regulations. 2.3 The Trustee agrees that, in accordance with Regulation 6ZA(7) of the Debt Regulations, on and from the Implementation Date the Leaving Employers shall cease to participate in the Main Section and at this time an employment cessation event will not occur in respect of the Leaving Employers and no amount shall be treated as a debt due to the Trustee of the Main Section as a result of the Leaving Employers ceasing to employ active members in the Main Section in the circumstances set out in Recitals (C) and (G) of this Agreement. 2.4 In accordance with the power under Clause 26.3A, described in Recital (H) above and the general statutory power under the Debt Regulations, the Trustee agrees that on and from the Implementation Date, the Flexible Apportionment Arrangement entered into under this Agreement constitutes full and final discharge and/or apportionment of all of the Leaving Employers liabilities in relation to the Main Section so that the Leaving Employers shall have no further liability to or in respect of the Main Section. For the avoidance of doubt, the Trustee agrees that this shall include any liabilities under sections 75 and 75A of the Pensions Act 1995 (as amended by the Debt Regulations) and any liabilities that would otherwise be payable under Clause 26.3 of the Trust Deed and Rules, as described in Recital (D) above. 2.5 Each of the Trustee, the Leaving Employers and the Replacement Employer consents to the Flexible Apportionment Arrangement for the purposes of Regulation 6E(2)(c) of the Debt Regulations.
2.6 For the avoidance of doubt, the events contemplated by and in this Agreement, and in particular the employment cessation event referred to in Recital (C) and Clause 2.1 of this Agreement shall not trigger a partial winding-up of the Main Section in relation to the Leaving Employers. 3. FUNDING TEST 3.1 The Trustee has concluded that the arrangement in Clause 2 meets the funding test set out in regulation 2(4A) of the Debt Regulations. 3.2 The parties agree that if all of the conditions in Regulation 6E of the Debt Regulations are not met within 28 days of the date of the Funding Test Completion Date (as defined in the Framework Agreement), the Agreement will become void and the Flexible Apportionment Arrangement will not take effect. 4. GENERAL 4.1 The Replacement Employer shall pay the Trustees reasonable legal costs incurred in relation to this Agreement. 4.2 The parties intend this Agreement to satisfy the requirements for a Flexible Apportionment Arrangement. 4.3 In the event that a court decides that any provision of this Agreement breaches the requirements for a Flexible Apportionment Arrangement, that provision shall be void and unenforceable but, subject to Clauses 4.4, 4.5 and 4.6, the remainder of the provisions of this Agreement shall remain in force. 4.4 In the event that a court decides that this Agreement breaches the requirements for a Flexible Apportionment Arrangement and: (i) it is not possible to rectify that breach by declaring one or more provisions of the Agreement void under Clause 4.3; or (ii) the effect of any such declaration would, in the reasonable opinion of the Trustee, render the Agreement as no longer representing the original intention of the parties as set out in the Recitals to this Agreement, the parties will use all reasonable endeavours to agree to amend this Agreement to remedy the breach of the requirements for a Flexible Apportionment Arrangement, or enter into a similar Flexible Apportionment Arrangement or any other arrangement permitted under the Debt Regulations or provisions that replace the Debt Regulations representing the intentions of the parties as set out in the Recitals to this Agreement.
4.5 In the event that the parties are unable to agree to the amendments to this Agreement under Clause 4.4, this Agreement shall be void and unenforceable in its entirety and will not constitute a legally enforceable agreement as defined in Regulation 2(2) of the PPF Entry Regulations. 4.6 If any part of this Agreement is held to be invalid or unenforceable, the rest of this Agreement will be construed (to the maximum extent possible after making suitable grammatical and other minor consequential changes) as if it had been executed omitting the invalid or unenforceable words or parts of words and will remain in full force and effect. 4.7 The Leaving Employers and the Replacement Employer each represent and warrant to the Trustee that all authorisations required in connection with the entry into and performance of its obligations under this Agreement have been obtained or effected and are in full force and effect and that the persons signing this Agreement on its behalf are authorised to do so. 4.8 The Replacement Employer further represents and warrants to the Trustee that the entry into this Agreement and the performance of its obligations under this Agreement does not conflict with any law or regulation or judicial or official order to which it is subject or conflict with its constitutional documents or conflict with any document which is binding upon any of its assets. 4.9 The application of the Contracts (Rights of Third Parties) Act 1999 to this Agreement is expressly excluded. No person who is not a party to this Agreement may enforce any of its terms under that Act, except that any future trustee of the Main Section and any successor employer to the Replacement Employer may enforce a term of this Agreement in that respective capacity. 5. GOVERNING LAW This Agreement and any non-contractual obligations arising out of or in connection with it shall be governed by English law. 6. JURISDICTION The English courts have exclusive jurisdiction to settle any dispute arising out of, relating to or having any connection with this Agreement, and any dispute relating to non-contractual obligations arising out of or in connection with it and each party submits to the exclusive jurisdiction of the English courts. For the purpose of this Clause 6, each party waives any objection to the English courts on the grounds that they are an inconvenient or inappropriate forum to settle any Dispute. 7. COUNTERPARTS This Agreement may be entered into in any number of counterparts, all of which taken together shall constitute one and the same agreement and any party may enter into this Agreement by executing a counterpart. IN WITNESS of which this Agreement has been executed as a deed by the parties (or their duly authorised representatives) and has been delivered on the date stated at the beginning of this Agreement.
SIGNATORIES EXECUTED and DELIVERED as a DEED for and on ) behalf of NATWEST MARKETS PLC ) (previously known as The Royal Bank of Scotland plc) by ) Richard Place acting under a power of attorney ) in his favour dated 23 July 2018 in the presence of: ) Signature of Witness: Full name: Address:
EXECUTED and DELIVERED as a DEED ) for and on behalf of THE ROYAL BANK OF ) SCOTLAND INTERNATIONAL LIMITED. ) Director Director
EXECUTED and DELIVERED as a DEED for and on behalf of COUTTS & COMPANY by: Director in the presence of: Signature of Witness: Witness name: Witness address: Witness occupation:
EXECUTED as a DEED by ) CHARTERED INSTITUTE OF BANKERS ) IN SCOTLAND acting by two trustees: ) Trustee Trustee
EXECUTED as a DEED by ) RBS PENSION TRUSTEE LIMITED acting ) by two directors or a director and its secretary: ) Director Director/Secretary
EXECUTED and DELIVERED as a DEED for and on ) behalf of NATIONAL WESTMINSTER BANK PLC by ) Ewen Stevenson acting under a power of attorney ) in his favour dated 6 September 2018 in the presence of: ) Signature of Witness: Full name: Address:
SCHEDULE 3 BULK TRANSFER AGREEMENTS
BULK TRANSFER AGREEMENT dated 2018 relating to the bulk transfer from the RBS Main Fund Section to the Royal Bank of Scotland International Limited Section of the Royal Bank of Scotland Group Pension Fund Allen & Overy LLP
CONTENTS Clause Page 1 Interpretation 2 2 Transfer Conditions 2 3 Transfer of Assets 3 4 Transfer of Liabilities 4 5 Contributions to the new sections 4 6 Discharge of Liabilities 5 7 period before bulk transfer Completed 5 8 Payment on Account 5 9 Non-Satisfaction of Transfer Conditions 5 10 Fair Treatment and Discretionary Practices 5 11 HMRC and Contracting-Out 6 12 Indemnity 7 13 Governing Law and Jurisdiction 7 14 Severability 7 15 Miscellaneous 7 Schedule 1 Calculation of Transfer Amount 2 Transferring Members 3 Trustees self-sufficiency funding assumptions 4 Schedule of payments
THIS AGREEMENT is made by way of deed on 2018 BY: RBS PENSION TRUSTEE LIMITED (registered in England under number 02726164) 1 Princes Street, London, EC2R 8PB (the Trustee); and NATIONAL WESTMINSTER BANK PLC (registered in England under number 00929027) 135 Bishopsgate, London, EC2M 3UR (the Bank). BACKGROUND: The Trustee is the trustee of the RBS Main Fund Section (the Transferring Section), the Royal Bank of Scotland International Limited Section and the NatWest Markets Section (the New Sections) of the Royal Bank of Scotland Group Pension Fund (the Group Fund). The Bank and the Trustee (amongst others) entered into a non-legally binding Memorandum of Understanding dated 16 April 2018 (the AA MoU) in good faith to document their intention in relation to a bulk transfer of members from the Transferring Section to the RBS AA Section of the Group Fund or a new segregated section of the Group Fund. The parties have decided that the New Sections will be used for this purpose. The Bank and the Trustee have therefore set up the New Sections in order to facilitate the transfer of liabilities of the Transferring Members (as defined below) from the Transferring Section to the New Sections. This Agreement shall effect the transfer of Transferring Members to the Royal Bank of Scotland International Limited Section (the RBSI Section). The Transferring Members will transfer from the Transferring Section to the RBSI Section. The Royal Bank of Scotland International Limited will cease to participate in the Transferring Section on 1 November 2018. Accordingly, the Transferring Members will cease accrual in the Transferring Section. In accordance with clause 5.1 of the AA MoU the Transferring Members accrued pension benefits are to remain the same, and the Transferring Members shall be entitled to accrue future pension benefits on the same basis, after the transfer to the RBSI Section. The Transferring Members will therefore join the RBSI Section from 1 November 2018 on an identical basis to their current participation in the Transferring Section. It is also intended that the basis on which actuarial factors are determined in the RBSI Section will be no less favourable than in the Transferring Section from the Bulk Transfer Date (as defined below). However, benefits and factors may be amended in future as circumstances require. In accordance with clause 5.3 of the AA MoU, the Bank intends to transfer the past service benefits of the Transferring Members from the Transferring Section to the RBSI Section. In order to facilitate this a bulk transfer of assets and liabilities from the Transferring Section to the RBSI Section in respect of Transferring Members accrued benefits to the date of transfer is therefore also required. At the Bank's request, the Trustee has agreed to transfer from the Transferring Section to the RBSI Section assets and liabilities relating to the Transferring Members. In accordance with clause 5.4(e) of the AA MoU, the Bank and the Trustee have agreed that the transfer from the Transferring Section to the RBSI Section under this Agreement will be carried out as if it is made between two separate schemes.
(1) The Bank and the Trustee (amongst others) entered into a Framework Agreement at or around the same date as this Agreement. The parties to the Framework Agreement agreed that this Agreement would be held in escrow pending the Release Date (as defined in the Framework Agreement) as set out in clause 2.1 of the Framework Agreement. It is the intention of the parties that this document be executed as a deed. THIS DEED WITNESSES as follows: 1. INTERPRETATION 1.1 The following expressions have the following meanings in this Agreement: Actuary means, in relation to the Group Fund, the actuary appointed pursuant to section 47 of the Pensions Act 1995. Bulk Transfer Date means midnight on 31 October 2018. Conditions means the conditions set out in clause 2. GMP means a guaranteed minimum pension within the meaning of the Pension Schemes Act 1993. RBSI Section Rules means the documents governing the RBSI Section. Section 9(2B) rights has the same meaning as in the Occupational Pension Schemes (Contracting-out) Regulations 1996. Transfer means the transfer of assets from the Transferring Section to the RBSI Section pursuant to clause 3. Transfer Amount has the meaning given in Schedule 1 (Calculation of Transfer Amount). Transferring Section Rules means the documents governing the Transferring Section. Transferring Members means the employees listed in Schedule 2 (subject to any additions or removals agreed by the Trustee and Bank prior to the Bulk Transfer Date) unless any such employees have provided the Bank with notice that they wish to opt out of the Transfer and are included on a list of opt-out members provided by the Bank to the Trustee before 1 November 2018. 1.2 In this Agreement: any reference to a party to this Agreement includes the successors and assigns (immediate or otherwise) of that party; any reference to a clause, sub-clause or schedule is to a clause, sub-clause or schedule of or to this Agreement; the schedules form part of this Agreement; and the headings do not affect the interpretation of this Agreement. 2. TRANSFER CONDITIONS 2.1 The Bank and Trustee agree that the Transfer will be made without the consent of the Transferring Members and the requirements under Part IV (Protection for Early Leavers) of the Pension Schemes
Act 1993, the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 and the Contracting-out (Transfer and Transfer Payment) Regulations 1996 in respect of a transfer between two occupational pension schemes will be applied as if those requirements apply to the transfer of liabilities set out in this Agreement. 2.2 Accordingly the following conditions must be satisfied before a Transfer can be made: the Trustee has received an actuarial certificate in the same form as that required under regulation 12(3) of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991, the date of the Transfer is within three months of the date of the Actuary's signature to the relevant certificate and by the date of such Transfer there are no significant changes to the benefits, data and documents used in making the certificate; the RBSI Section is able to accept the transfer of the accrued rights to, and the liability for the payment of, guaranteed minimum pensions and section 9(2B) rights under the Transferring Section; at least one month's notice has been provided to each Transferring Member in the same form as that required under regulation 12(4B) of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991. 2.3 The parties agree to use all reasonable endeavours to satisfy the Conditions as soon as is reasonably practicable and to ensure compliance with any requirement attaching to them in relation to each Transfer. 3. TRANSFER OF ASSETS 3.1 A Transfer Amount will be calculated by the Actuary for the RBSI Section as set out in Schedule 1. 3.2 The Trustee acknowledges that the Bank will (or will procure that another group entity will) make a payment of £2 billion to the Transferring Section in accordance with clause 5 of the Framework Agreement before the Bulk Transfer Date. For the purposes of the calculation of the Transfer Amount, the assets of the Transferring Section shall be deemed to include the £2 billion contribution. 3.3 Any liability which there may be in respect of any difference as between a man and a woman relating to the guaranteed minimum pension of a Transferring Member recognised after the Bulk Transfer Date will not be included in the calculation. 3.4 The parties will promptly provide the Actuary with any documents and information which the Actuary may reasonably require to facilitate the calculation. 3.5 In accordance with clause 28.1.2 of the trust deed dated 5 April 2006 governing the Group Fund, the parties agree, having considered the advice of the Actuary, that the Transfer Amount may be greater than the cash equivalent of Transferring Members accrued rights calculated in accordance with Chapter IV of Part IV of the Pension Schemes Act 1993. 3.6 The Trustee will arrange the transfer of the relevant Transfer Amount from the Transferring Section to the RBSI Section in accordance with Schedule 1, as long as the Conditions have been and remain satisfied. 3.7 When transferring the Transfer Amount to the RBSI Section, the Trustee will also transfer any money purchase assets in respect of the relevant Transferring Members.
4. TRANSFER OF LIABILITIES 4.1 On and from the Bulk Transfer Date in relation to the Transferring Members: no further benefits will accrue or, except as stated in this Agreement, be payable under the Transferring Section; for the purposes of determining the benefits payable under the Transferring Section, the Transferring Members are deemed not to receive any increase in earnings; the provisions of the Transferring Section providing for benefits in the event of death while in any employment to which the Transferring Section applies do not apply on or after the Bulk Transfer Date and such benefits will instead be provided under the RBSI Section; and subject to the powers of alteration and termination in the RBSI Section and to the other provisions of this Agreement, the Trustee will provide under the RBSI Section the benefits set out in clause 4.2. 4.2 On the Bulk Transfer Date, the Trustee shall provide in respect of each Transferring Member the same future service benefits, entitlements and accrued rights to benefits which were payable under the Transferring Section, subject to the same employee contributions, conditions and options as applied under the Transferring Section immediately before the Bulk Transfer Date, as set out in the Transferring Section Rules. 4.3 The Trustee will apply the relevant part of the Transferring Sections assets which is attributable to Transferring Members' money purchase benefits to provide benefits in respect of each such Transferring Member on a money purchase basis and so that no such assets will be disinvested and will be transferred in specie. 4.4 The Trustee will treat as members' contributions for the purposes of the RBSI Section the amounts (if any) as decided by the Trustee. 5. CONTRIBUTIONS TO THE RBSI SECTION 5.1 The Trustee and Bank agree that the Trustee will carry out an actuarial valuation for the RBSI Section with an effective date of 31 December 2018 in accordance with the Pensions Act 2004. 5.2 The Trustee and the Bank will agree a statement of funding principles, schedule of contributions and, if necessary, recovery plan, for the RBSI Section (the Funding Documents) in accordance with the Pensions Act 2004 for an actuarial valuation with an effective date of 31 December 2018. The Trustee and the Bank agree to use reasonable endeavours to complete the Funding Documents so that the schedule of contributions takes effect from a date no later than 1 October 2019. 5.3 On and from the Bulk Transfer Date until the date the schedule of contributions referred to in clause 5.2 above takes effect, the future service contributions to the RBSI Section in respect of the Transferring Members will be as set out in the Schedule of Payments appended at Schedule 4 to this Agreement. 5.4 On and from the first valuation of the RBSI Section, the future service contribution rate for Transferring Members shall be recalculated to reflect the actuarial assumptions agreed in the statement of funding principles for the RBSI Section.
6. DISCHARGE OF LIABILITIES 6.1 On the Transfer being made, benefits of the Transferring Members cease to be payable under the Transferring Section and the Trustee is discharged from all liability under the Transferring Section in respect of the benefits which the Trustee has agreed to provide under the RBSI Section. 7. PERIOD BEFORE BULK TRANSFER COMPLETED 7.1 If a Transfer is not made to the RBSI Section on the Bulk Transfer Date, then until the relevant Transfer is made in full (or the parties agree that such Transfer will not proceed): the Trustee will exercise its powers and duties under the Transferring Section and with a view to implementing this Agreement; and benefits and entitlements in respect of relevant Transferring Members which arise or have arisen by reference to the Transferring Section Rules will be paid by the Trustee from the Transferring Section but once the Transfer has been made in full such payments will be treated as having been made from the RBSI Section. 7.2 The Bank and the Trustee undertake between the date of this Agreement and the completion of the Transfer, to the extent reasonably practicable, to administer the RBSI Section and Transferring Section in a manner consistent with their respective obligations under this Agreement and otherwise on a basis consistent with its administration in the ordinary course of business. 8. PAYMENT ON ACCOUNT The Trustee may make a payment from the Transferring Section to the RBSI Section on account of the Transfer or repay from the RBSI Section to the Transferring Section as required. 9. NON-SATISFACTION OF TRANSFER CONDITIONS If the conditions or requirements which must be fulfilled as mentioned in this Agreement or by law before the Transfer to the RBSI Section can be made have not been fulfilled by 31 March 2019 (or any later date that is agreed): the Transfer to the RBSI Section will not be made; benefits attributable to pensionable service before the Bulk Transfer Date will be payable out of the Transferring Section and benefits will be payable out of the RBSI Section (in accordance with clause 4) for subsequent pensionable service. 10. FAIR TREATMENT AND DISCRETIONARY PRACTICES 10.1 The Bank and the Trustee will (and will use reasonable endeavours to ensure that their successors will), when exercising discretionary powers under the RBSI Section relating to benefits for or in respect of Transferring Members: take into account the manner in which comparable powers have (so far as disclosed to or as may have come to the knowledge of the Trustee) been exercised under the Transferring Section prior to the Bulk Transfer Date; and consider, but not be bound by, the manner in which comparable powers have been exercised under the Transferring Section after the Bulk Transfer Date.
10.2 When exercising any discretionary powers in line with 10.1 above, the Trustee will have regard to the Discretions Table being prepared by the Trustee in relation to the Transferring Section. 10.3 On and from the Bulk Transfer Date the basis on which the actuarial factors applicable to Transferring Members are determined shall be no less favourable than the basis which applied to the Transferring Members in the Transferring Section. However, in addition to clause 10.4, such actuarial factors may be reviewed from time to time taking into account the prevailing circumstances in the RBSI Section at that time. 10.4 The Trustee shall within 12 months of the Bulk Transfer Date, review the actuarial factors relating to cash equivalent transfer values from the RBSI Section, taking into account any change in the funding position and investment strategy, and will notify the Bank of any necessary changes that have been agreed by the Trustee on the advice of the Actuary. 11. HMRC AND CONTRACTING-OUT 11.1 The RBSI Section Rules contain provisions complying with Part I of Schedule 1 to the Contracting-out (Transfer and Transfer Payment) Regulations 1996 (rights to guaranteed minimum pensions of an earner who has not entered contracted-out employment by reference to the New Sections) and Part III of Schedule 1 to the Contracting-out (Transfer and Transfer Payment) Regulations 1996 (payment of guaranteed minimum pensions in payment). 11.2 Where any Transferring Member has an entitlement to a GMP or to Section 9(2B) rights in the Transferring Section, the Trustee on behalf of the RBSI Section will: assume responsibility to provide to and in respect of that Transferring Member the GMP benefits and any Section 9(2B) rights as required by the contracting-out provisions of Pension Schemes Act 1993; in relation to the transfer of GMPs, comply with the conditions referred to in regulations 3(c) and (e) of the Contracting-out (Transfer and Transfer Payment) Regulations 1996; and in relation to the transfer of any Section 9(2B) rights, comply with the conditions referred to in regulation 9(a) of those Regulations.
10.2 When exercising any discretionary powers in line with 10.1 above, the Trustee will have regard to the "Discretions Table" being prepared by the,Trustee in relation to the Transferring Section. 10.3 On and from the Bulk Transfer Date the basis on which the actuarial factors applicable to Transferring Members are determined shall be no less favourable than the basis which applied to the Transferri:llg Members in the Transferring Section. However, in addition to clause 10.4, such actuarial factors may be reviewed from time to time taking into account the prevailing circumstances in the RBSI Section at that time. 10.4 The Trustee shall within 12 months ofthe Bulk Transfer Date, review the actuarial factors relating to cash equivalent transfer values from the RBSI Section, taking into account any change in the funding position and investment strategy, and will notify the Bank of any necessary changes that have been agreed by the Trustee on the advice of the Actuary. 11. HMRC AND CONTRACTING-OUT 11.1 The RBSI Section Rules contain provisions complying with Part I of Schedule 1 to the Contracting out (Transfer and Transfer Payment) Regulations 1996 (rights to guaranteed minimum pensions of an earner who has not entered contracted-out employment by reference to the New Sections) and Part lli of Schedule 1 to the Contracting-out (Transfer and Transfer Payment) Regulations 1996 (payment of guaranteed minimum pensions in payment). 11.2 Where any Transferring Member has an entitlement to a GMP or to Section 9(2B) rights in the Transferring Section, the Trustee on behalf of the RBSI Section will: (a) assume responsibility to provide to and in respect of that Transferring Member the GMP benefits and any Section 9(2B) rights as required by the contracting-out provisions of Pension Schemes Act 1993; (b) in relation to the transfer of GMPs, comply with the conditions referred to in regulations 3(c) and (e) of the Contracting-out (Transfer and Transfer Payment) Regulations 1996; and. (c) in relation to the transfer of any Section 9(2B) rights, comply with the conditions referred to in regulation 9(a) of those Regulations. 6 0011398-0004743 C0:33833575.11
12. INDEMNITY 12.1 The Bank will indemnify and keep indemnified the Trustee and each of its current and former directors against all or any claims, costs, losses or damages which the Trustee or director may pay or incur or which may be made against the Trustee or director in connection with the carrying out of the transfer contemplated by this Agreement. This indemnity does not apply to any amount which is attributable to a breach of trust intentionally committed by the Trustee or by a current or former director (whether by reason of their professional position or any other reason) or as a result of other circumstances where the Trustee or that current or former director fails to act in good faith. To the extent that this clause 12 is rendered ineffective by sections 232-235 of the Companies Act 2006 or by any other legislation restricting the rights of company directors to be indemnified, this clause 12 will not apply to any such director or former director of the Trustee. However, provisions identical to those in this clause 12 will apply to such director or former director to the greatest extent permitted by law. 12.2 The provisions of this clause 12 shall not entitle the Trustee to an indemnity from the Bank in circumstances where: a Transfer Amount has been incorrectly calculated or otherwise underpaid and there are sufficient assets in the Transferring Section for the Trustee to make a balancing payment in full or in part to the RBSI Section up to the correct value of the relevant Transfer Amount; or a Transferring Member makes a claim in respect of the calculation of benefits and any associated costs and increase in benefits would not have been indemnified by the Bank if those circumstances had arisen in respect of the Transferring Member under the Transferring Section. 12.3 Where payment is only obtained in part in respect of any claims, costs, losses or damages under sub-clause 12.2(a) above the indemnity from the Bank shall extend to the part remaining unpaid. 13. GOVERNING LAW AND JURISDICTION 13.1 This Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law. 13.2 The English courts have exclusive jurisdiction to settle any dispute arising out of, relating to or having any connection with this Agreement, and any dispute relating to any non-contractual obligations arising out of or in connection with it and each party submits to the exclusive jurisdiction of the English courts. 14. SEVERABILITY The provisions contained in each clause and sub-clause of this Agreement are enforceable independently of each of the others and their validity is not affected if any of the others are invalid. If any of those provisions is void but would be valid if some part of the provision were deleted, the provision in question will apply with such modification as may be necessary to make it valid. 15. MISCELLANEOUS 15.1 Each of the parties will do all things required to be done by it to implement this Agreement and will co-operate with the other parties so as to facilitate the implementation by them of this Agreement. 15.2 A person who is not a party to this Agreement may not enforce any of its terms under the Contracts (Rights of Third Parties) Act 1999.
15.3 Any amendment to this Agreement will not be binding on the parties unless set out in writing, expressed to vary this Agreement, and executed as a deed by authorised representatives of each of the parties. 15.4 This Agreement may be executed in any number of counterparts and this has the same effect as if the signatures on the counterparts were on a single copy of this Agreement. IN WITNESS of which this deed has been executed and has been delivered on the date which appears first on page 1
SIGNATORIES EXECUTED as a DEED by ) RBS PENSION TRUSTEE LIMITED acting ) by two directors or a director and its secretary: ) Director Director/Secretary
EXECUTED and DELIVERED as a DEED for and on ) behalf of NATIONAL WESTMINSTER BANK PLC by ) Ewen Stevenson acting under a power of attorney ) in his favour dated 6 September 2018 in the presence of : ) Signature of Witness: Full name: Address:
SCHEDULE 1 CALCULATION OF TRANSFER AMOUNT This Schedule sets out the manner in which the amount (Transfer Amount) to be transferred from the Transferring Section to the RBSI Section will be assessed. 1. Calculation of Transfer Amount The Transfer Amount shall be calculated as the Initial Payment plus the Core Transfer Amount plus the Market Value Adjustment where: The Initial Payment is £2m; The Core Transfer Amount is the lower of: the Transferring Members' Past Service Reserve multiplied by the value of the Transferring Sections assets divided by the Transferring Sections Past Service Reserve where for this purpose the Actuarial Assumptions used to calculate the Past Serve Reserve figures are in line with the S179 Assumptions set out below, and the Transferring Members' Past Service Reserve calculated using the Actuarial Assumptions in line with the Self-Sufficiency Assumptions set out below, Less the Initial Payment and (where relevant) the amount of any benefit paid in respect of the Transferring Members from the Transferring Section between 1 November 2018 and the date on which the Core Transfer Amount is paid. The Market Value Adjustment is the sum of The performance of the growth asset benchmark calculated by BNY Mellon as the sum across all growth assets of the nominal benchmark target exposure in each asset class multiplied by the corresponding benchmark return, in percentage terms. The calculation period shall be 1 to 30 November 2018 in which case the growth assets will be invested in line with the strategic benchmark on or around 1 December 2018 or, if the Core Transfer Amount is paid after 30 November, from 1 November to such date when the growth assets have been invested in line with the strategic benchmark, and The performance of the hedging benchmark calculated by Aon Hewitt based on the interest rate and inflation hedging ratios set out in the strategic benchmark. The calculation period shall be 1 November to 31 December 2018 and the hedging assets will be invested in line with the strategic benchmark on or around 1 January 2019. The growth asset benchmark and the hedging benchmark used in (a) and (b) above will be for the RBSI Section and the nominal amounts will be based on the nominal benchmark set by the Trustee by reference to the sum of the Initial Payment and the Core Transfer Amount (including any top-up payment if required under "Minimum Transfer Amount" below). The Past Service Reserve means the value of the liabilities calculated in accordance with the Actuarial Assumptions set out below. It will be based on the membership data as at 31 December 2017, with an adjustment made to reflect continued pensionable service to 31 October 2018 and an assumed
pensionable/basic salary increase in April 2018 of 1.8% in respect of the active membership. It will also include an allowance for transfers paid out prior to 31 October 2018. The effective date of the calculation will be 31 October 2018. The value of the Transferring Sections assets used to calculate the Core Transfer Amount will be taken from the custodian, BNY Mellon, as at 31 October 2018 and will be an unaudited asset value. A summary of the method and Actuarial Assumptions for determining the Transfer Amount for the RBSI Section is set out below: 2. Actuarial Assumptions S179 Assumptions These will be in line with those prescribed by the Pensions Protection Fund for carrying out an actuarial valuation under s.179 Pensions Act 2004 as at the effective date of the calculation. For the effective calculation date of 31 October 2018 the calculation will use the following: s179 assumptions: A8 s179 guidance: G7 Self-Sufficiency Assumptions Assumptions for Self-Sufficiency are set out in Schedule 3. Minimum Transfer Amount The Core Transfer Amount plus the Initial Payment, as calculated above, will be no less than the sum of the Transferring Members' Cash Equivalent Transfer Value (CETV), calculated as at 31 October 2018 using the Transferring Section CETV basis in force at the time of calculation. 3. Payment of Transfer Amount The Initial Payment shall be paid in cash on 1 November 2018. The Core Transfer Amount shall be calculated by the Actuary and paid in cash or in-specie non-cash assets on or before 31 December 2018. The Market Value Adjustment shall be calculated and paid as soon as reasonably practicable after the date of payment of the Core Transfer Amount. The Market Value Adjustment may be positive or negative. If the Market Value Adjustment is positive that amount will be payable from the Main Fund Section to the RBSI Section. If the Market Value Adjustment is negative that amount will be payable from the RBSI Section to the Main Fund Section.
SCHEDULE 2 TRANSFERRING MEMBERS
SCHEDULE 3 TRUSTEES SELF-SUFFICIENCY FUNDING ASSUMPTIONS Assumptions for Self-Sufficiency are the same as the technical provisions assumptions as set out in the Transferring Sections Statement of Funding Principles for the actuarial valuation as at 31 December 2017 (included as a schedule to the Framework Agreement) amended as follows: 1. Allowance for transfers out: Nil 2. Discount rate: At each yearly tenor (spot rate), the higher of: Bank of England nominal gilt yield curve plus a spread of 0.0% p.a. Nominal swap yield curve plus a spread of 0.0% p.a. 3. RPI inflation: At each yearly tenor (spot rate), the lower of: Bank of England breakeven RPI gilt yield curve RPI swap yield curve 4. Expenses: A reserve for future expenses equal to 3% of liabilities up to £50m, 2% of liabilities between £50m and £100m and 1% of liabilities in excess of £100m Non-pensioners: An allowance of £1,000 per member. Pensioners: Age Expense allowance per member < 60 £900 60 70 £800 70 80 £600 > 80 £500
SCHEDULE 4 SCHEDULE OF PAYMENTS
THE ROYAL BANK OF SCOTLAND GROUP PENSION FUND ROYAL BANK OF SCOTLAND INTERNATIONAL LIMITED SECTION ("RBSI SECTION") SCHEDULE OF PAYMENTS Introduction This Schedule of Payments has been prepared by the Trustee of The Royal Bank of Scotland Group Pension Fund (the "Fund") as part of the formation of the new RBSI Section. The contributions payable to the RBSI Section of the Fund are to be agreed between the Trustee and the Principal Employer. The Trustee and the Principal Employer have agreed this Schedule of Payments by the authorised signatories set out below. This document will apply from 1 November 2018 and will remain in force until the first formal actuarial valuation of the RBSI Section under the Pensions Act 2004 is completed. The first formal actuarial valuation of the RBSI Section is due to be undertaken with an effective date of 31 December 2018, and the first schedule of contributions will be put in place no later than 31 March 2020. Participating Employers This Schedule covers contributions payable to the RBSI Section by the employers who participate in the RBSI Section from time to time (the "Employers"). The contributions due to the RBSI Section under this schedule shall be paid by the Employers in such amounts or proportions as the Principal Employer shall determine. If any contributions are not paid within the time limits specified in this schedule the Trustee may demand payment of them by one or more of the Employers as the Trustee shall decide. Member Contributions All employees who are active members of the RBSI Section and accruing DB benefits in the RBSI Section will contribute to the RBSI Section as follows: From 1 November 2018 to 30 November 2018 (inclusive): 1.5% of Contribution Salary From 1 December 2018: 2% of Contribution Salary These amounts do not include members Additional Voluntary Contributions. The Employers will ensure that the Trustee receives the contributions payable by their employees within 19 days of the end of the calendar month in which the contributions were deducted from the employees salaries.
Normal Employer Contributions The Employers will pay contributions to the RBSI Section as follows: Period Amount Payable by From 1 At least 37.8% of Contribution Salary for Normal Employer November 2018 employees who are active members of the Contributions will be Retiring Age 65 Schedule of the RBSI calculated and paid on a Section, less any member contributions payable. monthly basis. Contributions will be paid At least 44.0% of Contribution Salary for within three months of employees who are active members of all the end of the calendar other Schedules of the RBSI Section, less month to which they any member contributions payable. relate. Plus contributions in respect of pension elections made through RBSelect The Employers may, from time to time, pay additional contributions to the RBSI Section as advised to the Trustee in writing. Administration expenses and Pension Protection Fund levies The Employers will pay contributions to the Section to meet estimated administration expenses, Pension Protection Fund levies and other levies collected by the Pensions Regulator. Period Amount Payable by From 1 Expense Contributions £10,000 per Expense Contributions will November 2018 month. be paid monthly and by no later than 90 days following Levy Contributions - Reimbursement of the period to which they PPF levies in excess of £30,000 in a levy year (nil otherwise). relate. Levy Contributions will be paid annually and by no later than 90 days following the payment of such levies from the Section or, if later, 30 days following the Trustee notifying the Employers of such amounts which are due. . Payments to cover Augmentations Augmentations and the payment of unreduced pensions on retirements at the request of the Employers will not be granted without agreement from the Employers to provide additional contributions to meet the cost of such augmentations.
Date of Schedule of Payments: Signed on behalf of the Employers Signature: Name: Capacity: Date: Signed on behalf of RBS Pension Trustee Limited Signature: Name: Capacity: Date:
BULK TRANSFER AGREEMENT dated 2018 relating to the bulk transfer from the RBS Main Fund Section to the NatWest Markets Section of the Royal Bank of Scotland Group Pension Fund Allen & Overy LLP
CONTENTS Clause Page 1. Interpretation 2 2. Transfer Conditions 2 3. Transfer of Assets 3 4. Transfer of Liabilities 4 5. Contributions to the New Sections 4 6. Discharge of Liabilities 5 7. Period before bulk transfer Completed 5 8. Payment on Account 5 9. Non-Satisfaction of Transfer Conditions 5 10. Fair Treatment and Discretionary Practices 6 11. HMRC and Contracting-Out 6 12. Indemnity 7 13. Governing Law and Jurisdiction 7 14. Severability 7 15. Miscellaneous 7 Schedule 1. Calculation of Transfer Amount 2. Transferring Members 3. Trustees self-sufficiency funding assumptions 4. Schedule of payments
THIS AGREEMENT is made by way of deed on 2018 BY: (1) RBS PENSION TRUSTEE LIMITED (registered in England under number 02726164) 1 Princes Street, London, EC2R 8PB (the Trustee); and (2) NATIONAL WESTMINSTER BANK PLC (registered in England under number 00929027) 135 Bishopsgate, London, EC2M 3UR (the Bank). BACKGROUND: (A) The Trustee is the trustee of the RBS Main Fund Section (the Transferring Section), the Royal Bank of Scotland International Limited Section and the NatWest Markets Section (the New Sections) of the Royal Bank of Scotland Group Pension Fund (the Group Fund). (B) The Bank and the Trustee (amongst others) entered into a non-legally binding Memorandum of Understanding dated 16 April 2018 (the AA MoU) in good faith to document their intention in relation to a bulk transfer of members from the Transferring Section to the RBS AA Section of the Group Fund or a new segregated section of the Group Fund. The parties have decided that the New Sections will be used for this purpose. (C) The Bank and the Trustee have therefore set up the New Sections in order to facilitate the transfer of liabilities of the Transferring Members (as defined below) from the Transferring Section to the New Sections. This Agreement shall effect the transfer of Transferring Members to the NatWest Markets Section (the NWM Section). (D) The Transferring Members will transfer from the Transferring Section to the NatWest Markets Section. (E) NatWest Markets Plc (previously known as The Royal Bank of Scotland plc) will cease to participate in the Transferring Section on 1 November 2018. Accordingly, the Transferring Members will cease accrual in the Transferring Section. In accordance with clause 5.1 of the AA MoU the Transferring Members accrued pension benefits are to remain the same, and the Transferring Members shall be entitled to accrue future pension benefits on the same basis after the transfer to the NWM Section. The Transferring Members will therefore join the NWM Section from 1 November 2018 on an identical basis to their current participation in the Transferring Section. It is also intended that the basis on which actuarial factors are determined in the NWM Section will be no less favourable than in the Transferring Section from the Bulk Transfer Date (as defined below). However, benefits and factors may be amended in future as circumstances require. (F) In accordance with clause 5.3 of the AA MoU, the Bank intends to transfer the past service benefits of the Transferring Members from the Transferring Section to the NWM Section. In order to facilitate this a bulk transfer of assets and liabilities from the Transferring Section to the NWM Section in respect of Transferring Members accrued benefits to the date of transfer is therefore also required. (G) At the Banks request, the Trustee has agreed to transfer from the Transferring Section to the NWM Section assets and liabilities relating to the Transferring Members. (H) In accordance with clause 5.4(e) of the AA MoU, the Bank and the Trustee have agreed that the transfer from the Transferring Section to the NWM Section under this Agreement will be carried out as if it is made between two separate schemes.
(I) The Bank and the Trustee (amongst others) entered into a Framework Agreement at or around the same date as this Agreement. The parties to the Framework Agreement agreed that this Agreement would be held in escrow pending the Release Date (as defined in the Framework Agreement) as set out in clause 2.1 of the Framework Agreement. (J) It is the intention of the parties that this document be executed as a deed. THIS DEED WITNESSES as follows: 1. INTERPRETATION 1.1 The following expressions have the following meanings in this Agreement: Actuary means, in relation to the Group Fund, the actuary appointed pursuant to section 47 of the Pensions Act 1995. Bulk Transfer Date means midnight on 31 October 2018. Conditions means the conditions set out in clause 2. GMP means a guaranteed minimum pension within the meaning of the Pension Schemes Act 1993. NWM Section Rules means the documents governing the NWM Section. Section 9(2B) rights has the same meaning as in the Occupational Pension Schemes (Contracting-out) Regulations 1996. Transfer means the transfer of assets from the Transferring Section to the NWM Section pursuant to clause 3. Transfer Amount has the meaning given in Schedule 1 (Calculation of Transfer Amount). Transferring Section Rules means the documents governing the Transferring Section. Transferring Members means the employees listed in Schedule 2 (subject to any additions or removals agreed by the Trustee and Bank prior to the Bulk Transfer Date) unless any such employees have provided the Bank with notice that they wish to opt out of the Transfer and are included on a list of opt-out members provided by the Bank to the Trustee before 1 November 2018. 1.2 In this Agreement: (a) any reference to a party to this Agreement includes the successors and assigns (immediate or otherwise) of that party; (b) any reference to a clause, sub-clause or schedule is to a clause, sub-clause or schedule of or to this Agreement; (c) the schedules form part of this Agreement; and (d) the headings do not affect the interpretation of this Agreement. 2. TRANSFER CONDITIONS 2.1 The Bank and Trustee agree that the Transfer will be made without the consent of the Transferring Members and the requirements under Part IV (Protection for Early Leavers) of the Pension Schemes
Act 1993, the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 and the Contracting-out (Transfer and Transfer Payment) Regulations 1996 in respect of a transfer between two occupational pension schemes will be applied as if those requirements apply to the transfer of liabilities set out in this Agreement. 2.2 Accordingly the following conditions must be satisfied before a Transfer can be made: (a) the Trustee has received an actuarial certificate in the same form as that required under regulation 12(3) of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991, the date of the Transfer is within three months of the date of the Actuarys signature to the relevant certificate and by the date of such Transfer there are no significant changes to the benefits, data and documents used in making the certificate; (b) the NWM Section is able to accept the transfer of the accrued rights to, and the liability for the payment of, guaranteed minimum pensions and section 9(2B) rights under the Transferring Section; (c) at least one months notice has been provided to each Transferring Member in the same form as that required under regulation 12(4B) of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991. 2.3 The parties agree to use all reasonable endeavours to satisfy the Conditions as soon as is reasonably practicable and to ensure compliance with any requirement attaching to them in relation to each Transfer. 3. TRANSFER OF ASSETS 3.1 A Transfer Amount will be calculated by the Actuary for the NWM Section as set out in Schedule 1. 3.2 The Trustee acknowledges that the Bank will (or will procure that another group entity will) make a payment of £2 billion to the Transferring Section in accordance with clause 5 of the Framework Agreement before the Bulk Transfer Date. For the purposes of the calculation of the Transfer Amount, the assets of the Transferring Section shall be deemed to include the £2 billion contribution. 3.3 Any liability which there may be in respect of any difference as between a man and a woman relating to the guaranteed minimum pension of a Transferring Member recognised after the Bulk Transfer Date will not be included in the calculation. 3.4 The parties will promptly provide the Actuary with any documents and information which the Actuary may reasonably require to facilitate the calculation. 3.5 In accordance with clause 28.1.2 of the trust deed dated 5 April 2006 governing the Group Fund, the parties agree, having considered the advice of the Actuary, that the Transfer Amount may be greater than the cash equivalent of Transferring Members accrued rights calculated in accordance with Chapter IV of Part IV of the Pension Schemes Act 1993. 3.6 The Trustee will arrange the transfer of the relevant Transfer Amount from the Transferring Section to the NWM Section in accordance with Schedule 1, as long as the Conditions have been and remain satisfied . 3.7 When transferring the Transfer Amount to the NWM Section, the Trustee will also transfer any money purchase assets in respect of the relevant Transferring Members.
4. TRANSFER OF LIABILITIES 4.1 On and from the Bulk Transfer Date in relation to the Transferring Members: (a) no further benefits will accrue or, except as stated in this Agreement, be payable under the Transferring Section; (b) for the purposes of determining the benefits payable under the Transferring Section, the Transferring Members are deemed not to receive any increase in earnings; (c) the provisions of the Transferring Section providing for benefits in the event of death while in any employment to which the Transferring Section applies do not apply on or after the Bulk Transfer Date and such benefits will instead be provided under the NWM Section; and (d) subject to the powers of alteration and termination in the NWM Section and to the other provisions of this Agreement, the Trustee will provide under the NWM Section the benefits set out in clause 4.2. 4.2 On the Bulk Transfer Date the Trustee shall provide in respect of each Transferring Member the same future service benefits, entitlements and accrued rights to benefits which were payable under the Transferring Section, subject to the same employee contributions, conditions and options as applied under the Transferring Section immediately before the Bulk Transfer Date, as set out in the Transferring Section Rules. 4.3 The Trustee will apply the relevant part of the Transferring Sections assets which is attributable to Transferring Members money purchase benefits to provide benefits in respect of each such Transferring Member on a money purchase basis and so that no such assets will be disinvested and will be transferred in specie. 4.4 The Trustee will treat as members contributions for the purposes of the NWM Section the amounts (if any) as decided by the Trustee. 5. CONTRIBUTIONS TO THE NWM SECTION 5.1 The Bank will (or will procure that another group entity will) make a one-off contribution, or series of contributions, to the NWM Section by no later than three months after the amount of the contribution has been calculated by the Actuary as set out in this clause and notified to the Bank. The contribution (or total contributions if more than one) shall be equal to the amount required to bring the NWM Section up to full funding as at the Bulk Transfer Date on the Trustees self-sufficiency funding basis after allowing for the Initial Payment and the Core Transfer Amount (together with any uplift required as a result of the Minimum Transfer Amount) as set out in Schedule 1. For this purpose the self-sufficiency liabilities will be calculated as at the Bulk Transfer Date in accordance with the Past Service Reserve methodology set out in Schedule 1 but using the Trustees self-sufficiency funding assumptions set out in Schedule 3 and using post retirement mortality, proportion commuted and commutation factor assumptions as recorded in the AA Section Statement of Funding Principles dated 28 June 2018. 5.2 The Trustee and Bank agree that the Trustee will carry out an actuarial valuation for the NWM Section with an effective date of 31 December 2018 in accordance with the Pensions Act 2004. 5.3 The Trustee and the Bank will agree a statement of funding principles, schedule of contributions and, if necessary, recovery plan, for the NWM Section (the Funding Documents) in accordance with the Pensions Act 2004 for an actuarial valuation with an effective date of 31 December 2018.
The Trustee and the Bank agree to use reasonable endeavours to complete the Funding Documents so that the schedule of contributions takes effect from a date no later than 1 October 2019. 5.4 On and from the Bulk Transfer Date until the date the schedule of contributions referred to in clause 5.3 above takes effect, the future service contributions to the NWM Section in respect of the Transferring Members will be as set out in the Schedule of Payments appended at Schedule 4 to this Agreement. 5.5 As part of the first actuarial valuation the future service contribution rate for Transferring Members shall be recalculated on the actuarial assumptions consistent with Trustees self-sufficiency funding basis as set out Schedule 3 to this Agreement and otherwise consistent with the demographic assumptions agreed under the Statement of Funding Principles for the actuarial valuation as at 31 December 2018. 6. DISCHARGE OF LIABILITIES 6.1 On the Transfer being made, benefits of the Transferring Members cease to be payable under the Transferring Section and the Trustee is discharged from all liability under the Transferring Section in respect of the benefits which the Trustee has agreed to provide under the NWM Section. 7. PERIOD BEFORE BULK TRANSFER COMPLETED 7.1 If a Transfer is not made to the NWM Section on the Bulk Transfer Date, then until the relevant Transfer is made in full (or the parties agree that such Transfer will not proceed): (a) the Trustee will exercise its powers and duties under the Transferring Section and with a view to implementing this Agreement; and (b) benefits and entitlements in respect of relevant Transferring Members which arise or have arisen by reference to the Transferring Section Rules will be paid by the Trustee from the Transferring Section but once the Transfer has been made in full such payments will be treated as having been made from the NWM Section. 7.2 The Bank and the Trustee undertake between the date of this Agreement and the completion of the Transfer, to the extent reasonably practicable, to administer the NWM Section and Transferring Section in a manner consistent with their respective obligations under this Agreement and otherwise on a basis consistent with its administration in the ordinary course of business. 8. PAYMENT ON ACCOUNT The Trustee may make a payment from the Transferring Section to the NWM Section on account of the Transfer or repay from the NWM Section to the Transferring Section as required. 9. NON-SATISFACTION OF TRANSFER CONDITIONS If the conditions or requirements which must be fulfilled as mentioned in this Agreement or by law before the Transfer to the NWM Section can be made have not been fulfilled by 31 March 2019 (or any later date that is agreed): (a) the Transfer to the NWM Section will not be made; (b) benefits attributable to pensionable service before the Bulk Transfer Date will be payable out of the Transferring Section and benefits will be payable out of the NWM Section (in accordance with clause 4) for subsequent pensionable service.
10. FAIR TREATMENT AND DISCRETIONARY PRACTICES 10.1 The Bank and the Trustee will (and will use reasonable endeavours to ensure that their successors will), when exercising discretionary powers under the NWM Section relating to benefits for or in respect of Transferring Members: (a) take into account the manner in which comparable powers have (so far as disclosed to or as may have come to the knowledge of the Trustee) in the past been exercised under the Transferring Section prior to the Bulk Transfer Date; and (b) consider, but not be bound by, the manner in which comparable powers have been exercised under the Transferring Section after the Bulk Transfer Date. 10.2 When exercising any discretionary powers in line with 10.1 above, the Trustee will have regard to the Discretions Table being prepared by the Trustee in relation to the Transferring Section. 10.3 On and from the Bulk Transfer Date the basis on which the actuarial factors applicable to Transferring Members are determined shall be no less favourable than the actuarial basis which applied to the Transferring Members in the Transferring Section. However, in addition to clauses 10.4 and 10.5 below, such actuarial factors may be reviewed from time to time taking into account the prevailing circumstances in the NWM Section at that time. 10.4 The Trustee shall within 12 months of the Bulk Transfer Date, review the actuarial factors relating to cash equivalent transfer values from the NWM Section, taking into account any change in the funding position and investment strategy, and will notify the Bank of any necessary changes that have been agreed by the Trustee on the advice of the Actuary. 10.5 As part of the first actuarial valuation, the actuarial factors relating to the commutation of benefits, early and late retirements will be updated based upon the factors applicable within the AA Section adjusted where appropriate for the demographic assumptions agreed under the Statement of Funding Principles for the actuarial valuation as at 31 December 2018 and any differences in benefits. 11. HMRC AND CONTRACTING-OUT 11.1 The NWM Section Rules contain provisions complying with Part I of Schedule 1 to the Contracting-out (Transfer and Transfer Payment) Regulations 1996 (rights to guaranteed minimum pensions of an earner who has not entered contracted-out employment by reference to the New Sections) and Part III of Schedule 1 to the Contracting-out (Transfer and Transfer Payment) Regulations 1996 (payment of guaranteed minimum pensions in payment). 11.2 Where any Transferring Member has an entitlement to a GMP or to Section 9(2B) rights in the Transferring Section, the Trustee on behalf of the NWM Section will: (a) assume responsibility to provide to and in respect of that Transferring Member the GMP benefits and any Section 9(2B) rights as required by the contracting-out provisions of Pension Schemes Act 1993; (b) in relation to the transfer of GMPs, comply with the conditions referred to in regulations 3(c) and (e) of the Contracting-out (Transfer and Transfer Payment) Regulations 1996; and (c) in relation to the transfer of any Section 9(2B) rights, comply with the conditions referred to in regulation 9(a) of those Regulations.
12. INDEMNITY 12.1 The Bank will indemnify and keep indemnified the Trustee and each of its current and former directors against all or any claims, costs, losses or damages which the Trustee or director may pay or incur or which may be made against the Trustee or director in connection with the carrying out of the transfer contemplated by this Agreement. This indemnity does not apply to any amount which is attributable to a breach of trust intentionally committed by the Trustee or by a current or former director (whether by reason of their professional position or any other reason) or as a result of other circumstances where the Trustee or that current or former director fails to act in good faith. To the extent that this clause 12 is rendered ineffective by sections 232-235 of the Companies Act 2006 or by any other legislation restricting the rights of company directors to be indemnified, this clause 12 will not apply to any such director or former director of the Trustee. However, provisions identical to those in this clause 12 will apply to such director or former director to the greatest extent permitted by law. 12.2 The provisions of this clause 12 shall not entitle the Trustee to an indemnity from the Bank in circumstances where: (a) a Transfer Amount has been incorrectly calculated or otherwise underpaid and there are sufficient assets in the Transferring Section for the Trustee to make a balancing payment in full or in part to the NWM Section up to the correct value of the relevant Transfer Amount; or (b) a Transferring Member makes a claim in respect of the calculation of benefits and any associated costs and increase in benefits would not have been indemnified by the Bank if those circumstances had arisen in respect of the Transferring Member under the Transferring Section. 12.3 Where payment is only obtained in part in respect of any claims, costs, losses or damages under sub-clause 12.2(a) above the indemnity from the Bank shall extend to the part remaining unpaid. 13. GOVERNING LAW AND JURISDICTION 13.1 This Agreement and any non-contractual obligations arising out of or in connection with it are governed by English law. 13.2 The English courts have exclusive jurisdiction to settle any dispute arising out of, relating to or having any connection with this Agreement, and any dispute relating to any non-contractual obligations arising out of or in connection with it and each party submits to the exclusive jurisdiction of the English courts. 14. SEVERABILITY The provisions contained in each clause and sub-clause of this Agreement are enforceable independently of each of the others and their validity is not affected if any of the others are invalid. If any of those provisions is void but would be valid if some part of the provision were deleted, the provision in question will apply with such modification as may be necessary to make it valid. 15. MISCELLANEOUS 15.1 Each of the parties will do all things required to be done by it to implement this Agreement and will co-operate with the other parties so as to facilitate the implementation by them of this Agreement. 15.2 A person who is not a party to this Agreement may not enforce any of its terms under the Contracts (Rights of Third Parties) Act 1999.
15.3 Any amendment to this Agreement will not be binding on the parties unless set out in writing, expressed to vary this Agreement, and executed as a deed by authorised representatives of each of the parties. 15.4 This Agreement may be executed in any number of counterparts and this has the same effect as if the signatures on the counterparts were on a single copy of this Agreement. IN WITNESS of which this deed has been executed and has been delivered on the date which appears first on page 1
SIGNATORIES EXECUTED as a DEED by ) RBS PENSION TRUSTEE LIMITED acting ) by two directors or a director and its secretary: ) Director Director/Secretary
EXECUTED and DELIVERED as a DEED for and on ) behalf of NATIONAL WESTMINSTER BANK PLC by ) Ewen Stevenson acting under a power of attorney ) in his favour dated 6 September 2018 in the presence of: ) Signature of Witness: Full name: Address:
SCHEDULE 1 CALCULATION OF TRANSFER AMOUNT This Schedule sets out the manner in which the amount (Transfer Amount) to be transferred from the Transferring Section to the NWM Section will be assessed. 1. Calculation of Transfer Amount The Transfer Amount shall be calculated as the Initial Payment plus the Core Transfer Amount plus the Market Value Adjustment where: The Initial Payment is £6m; The Core Transfer Amount is the Transferring Members Past Service Reserve multiplied by the value of the Transferring Sections assets divided by the Transferring Sections Past Service Reserve, less the Initial Payment and (where relevant) the amount of any benefit paid in respect of the Transferring Members from the Transferring Section between 1 November 2018 and the date on which the Core Transfer Amount is paid. The Market Value Adjustment is the sum of: a) The performance of the growth asset benchmark calculated by BNY Mellon as the sum across all growth assets of the nominal benchmark target exposure in each asset class multiplied by the corresponding benchmark return, in percentage terms. The calculation period shall be 1 to 30 November 2018 in which case the growth assets will be invested in line with the strategic benchmark on or around 1 December 2018 or, if the Core Transfer Amount is paid after 30 November, from 1 November to such date when the growth assets have been invested in line with the strategic benchmark, and b) The performance of the hedging benchmark calculated by Aon Hewitt based on the interest rate and inflation hedging ratios set out in the strategic benchmark. The calculation period shall be 1 November to 31 December 2018 and the hedging assets will be invested in line with the strategic benchmark on or around 1 January 2019. The growth asset benchmark and the hedging benchmark used in (a) and (b) above will be for the NWM Section and the nominal amounts will be based on the nominal benchmark set by the Trustee by reference to the sum of the Initial Payment and the Core Transfer Amount (including any top-up payment if required under Minimum Transfer Amount below) plus, if applicable, any top up to self-sufficiency, calculated in accordance with clause 5 of this Agreement. The Past Service Reserve means the value of the liabilities calculated in accordance with the Actuarial Assumptions set out below. It will be based on the membership data as at 31 December 2017, with an adjustment made to reflect continued pensionable service to 31 October 2018 and an assumed pensionable/basic salary increase in April 2018 of 1.8% in respect of the active membership. It will also include an allowance for transfers paid out prior to 31 October 2018. The effective date of the calculation will be 31 October 2018. The value of the Transferring Sections assets used to calculate the Core Transfer Amount will be taken from the custodian, BNY Mellon, as at 31 October 2018 and will be an unaudited asset value. A summary of the method and Actuarial Assumptions for determining the Transfer Amount for the NWM Section is set out below:
Actuarial Assumptions The technical provisions assumptions of the Transferring Sections Statement of Funding Principles for the actuarial valuation as at 31 December 2017 (included as a schedule to the Framework Agreement), updated to reflect market conditions as at the date of calculation. 2. Minimum Transfer Amount The Core Transfer Amount plus the Initial Payment, as calculated above, will be no less than the sum of the Transferring Members Cash Equivalent Transfer Value (CETV), calculated as at 31 October 2018 using the Transferring Section CETV basis in force at the time of calculation. 3. Payment of Transfer Amount The Initial Payment shall be paid in cash on 1 November 2018. The Core Transfer Amount shall be calculated by the Actuary and paid in cash or in-specie non-cash assets on or before 31 December 2018. The Market Value Adjustment shall be calculated and paid as soon as reasonably practicable after the date of payment of the Core Transfer Amount. The Market Value Adjustment may be positive or negative. If the Market Value Adjustment is positive that amount will be payable from the Main Fund Section to the NWM Section. If the Market Value Adjustment is negative that amount will be payable from the NWM Section to the Main Fund Section.
SCHEDULE 2 TRANSFERRING MEMBERS
SCHEDULE 3 TRUSTEES SELF-SUFFICIENCY FUNDING ASSUMPTIONS Assumptions for Self-Sufficiency are the same as the technical provisions assumptions as set out in the Transferring Sections Statement of Funding Principles for the actuarial valuation as at 31 December 2017 (included as a schedule to the Framework Agreement) amended as follows: 1. Allowance for transfers out: Nil 2. Discount rate: At each yearly tenor (spot rate), the higher of: Bank of England nominal gilt yield curve plus a spread of 0.0% p.a. Nominal swap yield curve plus a spread of 0.0% p.a. 3. RPI inflation: At each yearly tenor (spot rate), the lower of: Bank of England breakeven RPI gilt yield curve RPI swap yield curve 4. Expenses: A reserve for future expenses equal to 3% of liabilities up to £50m, 2% of liabilities between £50m and £100m and 1% of liabilities in excess of £100m Non-pensioners: An allowance of £1,000 per member. Pensioners: Age Expense allowance per member < 60 £900 60 70 £800 70 80 £600 > 80 £500
SCHEDULE 4 SCHEDULE OF PAYMENTS THE ROYAL BANK OF SCOTLAND GROUP PENSION FUND NATWEST MARKETS SECTION (NWM SECTION) SCHEDULE OF PAYMENTS
THE ROYAL BANK OF SCOTLAND GROUP PENSION FUND NATWEST MARKETS SECTION (NWM SECTION) SCHEDULE OF PAYMENTS Introduction This Schedule of Payments has been prepared by the Trustee of The Royal Bank of Scotland Group Pension Fund (the Fund) as part of the formation of the new NWM Section. The contributions payable to the NWM Section of the Fund are to be agreed between the Trustee and the Principal Employer. The Trustee and the Principal Employer have agreed this Schedule of Payments by the authorised signatories set out below. This document will apply from 1 November 2018 and will remain in force until the first formal actuarial valuation of the NWM Section under the Pensions Act 2004 is completed. The first formal actuarial valuation of the NWM Section is due to be undertaken with an effective date of 31 December 2018, and the first schedule of contributions will be put in place no later than 31 March 2020. Participating Employers This Schedule covers contributions payable to the NWM Section by the employers who participate in the NWM Section from time to time ( the Employers). The contributions due to the NWM Section under this schedule shall be paid by the Employers in such amounts or proportions as the Principal Employer shall determine. If any contributions are not paid within the time limits specified in this schedule the Trustee may demand payment of them by one or more of the Employers as the Trustee shall decide. Member Contributions All employees who are active members of the NWM Section and accruing DB benefits in the NWM Section will contribute to the NWM Section as follows: From 1 November 2018 to 30 November 2018 (inclusive): 1.5% of Contribution Salary From 1 December 2018: 2% of Contribution Salary These amounts do not include members Additional Voluntary Contributions. The Employers will ensure that the Trustee receives the contributions payable by their employees within 19 days of the end of the calendar month in which the contributions were deducted from the employees salaries.
Normal Employer Contributions The Employers will pay contributions to the NWM Section as follows: Period Amount Payable by From 1 At least 38.1% of Contribution Salary for Normal Employer November 2018 employees who are active members of the Contributions will be Retiring Age 65 Schedule of the NWM calculated and paid on a Section, less any member contributions payable. monthly basis. Contributions will be paid At least 42.4% of Contribution Salary for within three months of employees who are active members of all the end of the calendar other Schedules of the NWM Section, less month to which they any member contributions payable. relate. Plus contributions in respect of pension elections made through RBSelect The Employers may, from time to time, pay additional contributions to the NWM Section as advised to the Trustee in writing. Administration expenses and Pension Protection Fund levies The Employers will pay contributions to the Section to meet estimated administration expenses, Pension Protection Fund levies and other levies collected by the Pensions Regulator. Period Amount Payable by From 1 Expense Contributions £25,000 per Expense Contributions will be November 2018 month paid monthly and by no later than 90 days following the Levy Contributions - Reimbursement of period to which they relate. PPF levies in excess of £100,000 in a levy year (nil otherwise). Levy Contributions will be paid annually and by no later than 90 days following the payment of such levies from the Section or, if later, 30 days following the Trustee notifying the Employers of such amounts which are due. Payments to cover Augmentations Augmentations and the payment of unreduced pensions on retirements at the request of the Employers will not be granted without agreement from the Employers to provide additional contributions to meet the cost of such augmentations.
Date of Schedule of Payments: Signed on behalf of the Employers Signature: Name: _ _ Capacity: Date: _ Signed on behalf of RBS Pension Trustee Limited Signature: Name: _ _ Capacity: Date:
SCHEDULE 4 ACTUARIAL FUNDING AGREEMENTS
The Royal Bank of Scotland Group Pension Fund Main Fund Section Statement of Funding Principles 31 December 2017 Introduction This statement has been prepared by RBS Pension Trustee Limited (the Trustee) after obtaining the advice of David Eteen, the Scheme Actuary and after obtaining the agreement of The Royal Bank of Scotland Group plc and the Participating Employers of the Main Fund Section (collectively the Bank). It has been prepared with specific reference to the actuarial valuation being carried out as at 31 December 2017 for the Main Fund Section of the Royal Bank of Scotland Group Pension Fund (the Group Fund), and will be reviewed at subsequent actuarial valuations, or earlier if required. The Statutory Funding Objective This statement sets out the Trustees policy for securing that the Statutory Funding Objective is met. The Statutory Funding Objective is defined in section 222 of the Pensions Act 2004, which states that every scheme must have sufficient and appropriate assets to cover its Technical Provisions. Technical Provisions The Technical Provisions are the amount that will be needed to pay the Main Fund Section benefits that relate to service up to the actuarial valuation date, if the assumptions made regarding the future experience of the Main Fund Section are borne out in practice. The assumptions used to calculate the Technical Provisions are intended to provide a prudent estimate of the future experience of the Main Fund Section, with a modest allowance for the future potential outperformance of the assets from continued investment in asset classes whose expected return exceeds that of the Technical Provisions. There is an underlying assumption that the Main Fund Section continues as a going concern, i.e. benefits will continue to be met from the Main Fund Section as they fall due. The method and assumptions used to calculate the Technical Provisions are summarised in the Appendix. Employer contributions Normal Employer contributions, payable as a rate of members basic salaries, are assessed by calculating the cost of future benefit accrual for members accruing DB benefits in the Main Fund Section using more prudent assumptions than those used to calculate the Technical Provisions (as summarised in the Appendix): Less any member contributions; Plus RBSelect contributions; Plus contributions in respect of employees who are active members of the NatWest Defined Contribution Schedule of the Main Fund Section. The following Employer contributions are payable in addition: Contributions to meet estimated administration expenses, Pension Protection Fund (PPF) levies and other levies collected by the Pensions Regulator;
Contributions to meet any additional costs in excess of £10M p.a. from benefit augmentations or early retirements granted at the Banks request. The resulting contributions are then adjusted by the amounts needed to eliminate any shortfall relative to the Technical Provisions. There are no arrangements in place for any persons other than the Bank and members to contribute to the Main Fund Section. Payments to the Bank The Trust Deed does not allow for any payment of the Main Fund Sections assets back to the Bank unless it is wound up with surplus assets. Dealing with shortfalls Should an actuarial valuation reveal a shortfall of assets relative to the Technical Provisions, the Trustee will prepare an appropriate recovery plan at that time in agreement with the Bank. The shortfall will be eliminated by the payment of additional contributions over a stated recovery period of appropriate length. In determining the recovery period at any particular actuarial valuation the following factors will be taken into account: the size of the funding shortfall; the financial strength and business plans of the Bank; the Trustees overall assessment of the covenant of the Bank and its participating employers; any risk mitigation arrangements or security provided by the Bank to the Trustee; and relevant legislation and regulatory guidance. In preparing the recovery plan, the Trustee and Bank may agree for allowance to be made for the future expected investment returns on the Main Fund Sections assets to exceed the Technical Provisions discount rate over the recovery period. Any allowance made will be reviewed at each actuarial valuation. The recovery plan for the 31 December 2017 actuarial valuation will be such that a contribution of £2bn is sufficient to meet the Statutory Funding Objective. Dealing with surpluses If an actuarial valuation reveals a funding surplus, this surplus will be wholly retained within the Main Fund Section as a cushion against adverse future experience. Any alternative approach to dealing with surplus, were it to be considered in the future, would be subject to agreement between the Trustee and the Bank and subject to the provisions of the Trust Deed and Rules.
Policy on discretionary increases and funding strategy Under the provisions of the Group Funds Trust Deed and Rules, there are certain discretionary powers to provide or increase benefits for, or in respect of, all or any of the members of the Main Fund Section. The Bank has confirmed that it does not wish to make advance provision for any increases to pensions in excess of those provided for in the Trust Deed and Rules, in particular the award of discretionary pension increases in payment equal to full RPI inflation for all members. If discretionary increases to benefits are to be made for which no advance provision has been set, the Trustees current policy is to assess at that time whether a request for immediate additional contributions to meet the cost of such increases should be made. Policy on reduction of cash equivalent transfer values The Trustee will ask the Scheme Actuary to advise it at each actuarial valuation of the extent to which assets are sufficient to provide Cash Equivalent Transfer Values (CETVs) for all non-pensioners without adversely affecting the security of the benefits of other members and beneficiaries. Where coverage is less than 100%, the Trustee will take advice from the Scheme Actuary regarding whether to reduce CETVs and, if appropriate, the extent of such reduction. If at any other time, after obtaining advice from the Scheme Actuary, the Trustee is of the opinion that the payment of CETVs at a previously agreed level may adversely affect the security of the benefits of other members and beneficiaries, the Trustee will take advice from the Scheme Actuary regarding whether and, if appropriate, the extent to which, CETVs should be reduced. Monitoring employer covenant The Trustee monitors the covenant on an ongoing basis and gives due regard to its assessment of the condition of the covenant when setting the Technical Provisions, the recovery plan and the investment strategy. Every three years the Trustee shall commission an actuarial valuation for the Main Fund Section under Part 3 of the Pensions Act 2004. The Trustee may make a request to the Bank for it to consent to an actuarial valuation at an earlier effective date if, after considering the Scheme Actuarys advice, it believes it would be unsafe to continue to rely on the results of the previous actuarial valuation as the basis for future contributions or if it considers it appropriate for any other reason. Frequency of actuarial valuations Between actuarial valuations an actuarial report on developments affecting the Main Fund Sections funding level will be obtained annually or more frequently where the Trustee considers necessary. Review of the Statement of Funding Principles This Statement of Funding Principles will be updated at each actuarial valuation or more frequently, if required. Any update to the Statement of Funding Principles will be subject to the agreement of both the Trustee and the Bank.
Risks The Trustee and the Bank recognise that there are a number of risks inherent to the success of the funding plan and that additional funding may be required at future actuarial valuations if the experience of the Main Fund Section is not in line with the assumptions made. The major risks include investment risk, demographic risks including longevity and covenant risk. Investment risk The Main Fund Section invests in a portfolio of assets which has a higher expected return than the expected growth of the liabilities which is consistent with the discount rate. The Trustee expects that investing in such assets reduces the contributions which will be required from the Bank in the long-term. In consultation with the Scheme Actuary, and the Trustees other advisors, as appropriate, the expected return from such investments will be taken into account in calculating the Main Fund Sections Technical Provisions. If, due to underperformance of the assets, the Technical Provisions are not met over the long term, any shortfall will ultimately need to be met by increased contributions from the Bank. The Trustee regularly reviews the Main Fund Sections investment strategy taking into account factors such as the funding position, liability profile, risk appetite and the covenant. The Trustee will continue to consult with the Bank regarding the investment strategy. Longevity risk A funding strain could arise if life expectancies are greater than expected. In setting the Technical Provisions, mortality assumptions are set based on standard tables appropriate to comparable pension schemes with adjustments to reflect the Main Fund Sections recent experience and the socio-economic information inferred from the characteristics of the Main Fund Sections members, and to make allowance for future improvements in mortality. The mortality assumptions are reviewed at each actuarial valuation. Other demographic risks Members have options including early or late retirement, transferring out and commuting a proportion of pension to a pension commencement lump sum. The Technical Provisions are based on demographic assumptions for future retirement patterns, transfers out and commutations. These assumptions are set by the Trustee in agreement with the Bank at each actuarial valuation based on advice from the Scheme Actuary and taking account of scheme experience, where appropriate.
Covenant risk The Trustee recognises that if the Bank were to become insolvent, or if it were otherwise no longer able to meet its funding obligations to the Main Fund Section, it could have a significant impact on members benefits. If the Bank were to become insolvent then the Main Fund Section would have to be discontinued in accordance with the Group Funds Trust Deed. The Technical Provisions at that time may need to be revised and the assets held may prove to be insufficient to secure all liabilities without further contributions from the Bank. The Trustee also recognises that the affordability of the Bank to pay future contributions into the Main Fund Section is a key risk. This statement has been agreed by the Bank Signed on behalf of the Bank Signature: Name: Capacity: Date: This statement was agreed by the Trustee at their meeting on 28 June 2018. Signed on behalf of the Trustee Signature: Name: Capacity: Date: Date of Statement of Funding Principles: October 2018
Appendix: Method and financial assumptions for determining the Technical Provisions and employer contributions for future service rate accrual 1. Calculation method Actuarial method: Projected Unit Method with a control period of 10 years 2. Financial assumptions Discount rate: Technical Provisions: Hedging Discount Curve (HDC) plus a fixed spread of 0.58% p.a.. This was derived by solving for the fixed spread over the HDC curve, in conjunction with the Hedging Inflation Curve (HIC), on the left hand side of the following equation of value using market conditions as at 31 December 2017: Technical Provisions (Discount rate: HDC plus a fixed spread, Inflation assumption: HIC) = Technical Provisions (Discount rate: swaps + 0.8% p.a., Inflation: RPI swaps curve) The fixed spread above the HDC curve is determined to the nearest 0.01% p.a. Employer contributions: Hedging Discount Curve (HDC) plus a fixed spread of 0.48% p.a.. To derive the HDC, the yield at each yearly tenor is the arithmetic weighted average of: a) Spot yield at each tenor on the nominal gilt yield curve, and b) Spot yield at each tenor on the nominal Libor swap yield curve. The following weightings apply as at 31 December 2017 when calculating the HDC: Tenor point band HDC gilt proportion HDC swap proportion 0-5 years 11% 89% 5+-10 years 15% 85% 10+-15 years 14% 86% 15+-20 years 27% 73% 20+-25 years 60% 40% 25+-30 years 67% 33% 30+-40 years 72% 28% 40+ years 77% 23% The HDC gilt and swap proportion shall be updated as at 31 December 2018 and annually thereafter based on the gilts (and any other bonds used in the liability hedging portfolio) in the Trustees liability hedging portfolio as a proportion of total hedging at each tenor.
The fixed spreads shall remain unchanged between actuarial valuations regardless of any update to the HDC curve except where the Trustee and the Bank agree otherwise. In the event the proportion of gilts at any tenor exceeds 100% of the total hedging at that tenor the HDC gilt proportion shall be set as 100%. In the event the proportion of gilts at any tenor is below 0% of the total hedging at that tenor the HDC gilt proportion shall be set as 0%. RPI inflation: Hedging Inflation Curve (HIC). To derive the HIC, the yield at each yearly tenor is the arithmetic weighted average of: a) Spot inflation at each tenor on the gilt breakeven RPI inflation curve, and b) Spot inflation at each tenor on the RPI swap inflation curve. The following weightings apply as at 31 December 2017 when calculating the HIC: Tenor point band HIC gilt proportion HIC swap proportion 0-5 years 11% 89% 5+-10 years 17% 83% 10+-15 years 19% 81% 15+-20 years 43% 57% 20+-25 years 96% 4% 25+-30 years 100% 0% 30+-40 years 100% 0% 40+ years 100% 0% The HIC gilt and swap proportion shall be updated as at 31 December 2018 and annually thereafter based on the gilts (and any other bonds used in the liability hedging portfolio) in the Trustees liability hedging portfolio as a proportion of total hedging at each tenor. In the event the proportion of gilts at any tenor exceeds 100% of the total hedging at that tenor the HIC gilt proportion shall be set as 100%. In the event the proportion of gilts at any tenor is below 0% of the total hedging at that tenor the HIC gilt proportion shall be set as 0%. CPI inflation: RPI inflation minus 1.1% LPI pension increases: Higher of (a) LPI derived using a Black Scholes model with 1.5% implied volatility (symmetric), and (b) CPI or RPI inflation as applicable for each pension tranche subject in all cases to the cap/floor applicable for each pension tranche
Salary and pension increases: Salary increases (pensionable/basic) 1.8% p.a. Increases to the earnings cap 1.8% p.a. Revaluations to deferred pensions in excess of GMP The RPI price inflation assumption Rate of GMP increases in active service before GMP age The RPI price inflation assumption plus 1.0% p.a. at all durations Fixed rate revaluation on GMPs GMP fixed rate revaluation according to date of leaving. For active members assumed to withdraw from service in future, a fixed revaluation rate of 3.5% p.a. is assumed to apply after the assumed date of withdrawal. Increases to pensions in payment The LPI pension increase assumption for the relevant tranche Promotional salary increases Nil Discretionary increases Nil 3. Demographic assumptions Pre-retirement mortality: Males: 40% of AM92 Ultimate Females: 50% AF92 Ultimate Post-retirement mortality Base tables: Males: standard table S2PMA Light Females: standard table S2PFA Light The base tables and corresponding scaling factors have been derived from an analysis of the Main Fund Sections own mortality experience over the period from 1 April 2006 to 31 March 2017. Combined average scaling factors have been determined using the Aon Hewitt Longevity Model (version 3.03) based on the members date of birth, sex and socio-economic information inferred from their postcode and membership category. Current Member sex Member base Member Members Members membership table equivalent dependant dependant group single scaling factor base table equivalent single scaling factor Actives M S2PMA Light 113% S2PFA Light 102% F S2PFA Light 100% S2PMA Light 124% Deferreds M S2PMA Light 113% S2PFA Light 102% F S2PFA Light 98% S2PMA Light 120% Pensioners M S2PMA Light 104% S2PFA Light 96% F S2PFA Light 96% S2PMA Light 117% Dependants M S2PMA Light 104% - - F S2PFA Light 98% - - Ill-health retirees: A scaling factor adjustment is applied to the standard tables shown above equal to 150% for males and 151% for females
Post-retirement mortality Future improvements: CMI 2017 Core Projections Model with smoothing parameter Sê = 8.0. Long term rate to the improvements of 1.5% p.a. for males and females Early retirements: Allowance is made for members to retire before or after their Normal Retirement Age. Where pensions are assumed to be payable before or after Normal Retirement Age for a particular tranche of benefits, they are adjusted for early or late payment using the Main Fund Sections early and late retirement factors applicable from 1 February 2018, which are assumed to remain unchanged in future. The tables below illustrate the percentage of members retiring each year. Active members: Age Current schedule Non-NPA65 Schedule NPA65 Schedule From active service Post-withdrawal From active service Post-withdrawal 55 10% 10% 10% 10% 56 10% 5% 10% 5% 57 10% 5% 10% 5% 58 20% 5% 10% 5% 59 25% 5% 10% 5% 60 100% 100% 25% 40% 61 100% 100% 20% 20% 62 100% 100% 20% 20% 63 100% 100% 20% 20% 64 100% 100% 20% 20% 65+ 100% 100% 100% 100% Deferred members with a Normal Retirement Age (for service outside the Retiring Age 65 Schedule) of 60, and not on special redundancy packages: Age Current schedule NPA60 Schedule NPA65 Schedule 55 10% 10% 56 5% 5% 57 5% 5% 58 5% 5% 59 5% 5% 60 100% 40% 61 100% 20% 62 100% 20% 63 100% 20% 64 100% 20% 65+ 100% 100%
Deferred members with a Normal Retirement Age (for service outside the Retiring Age 65 Schedule) other than 60, and not on special redundancy packages, are assumed to retire at their Normal Retirement Age. Members on special redundancy packages are assumed to retire at age 55, with the appropriate reduction applied in each case. Withdrawals: Allowance made. Family Details: A man is assumed to be three years older than his wife. 90% of male and 65% of female members are assumed to be married at retirement or earlier death. A childrens loading of 5% is applied to benefits payable on death before retirement. Cash Equivalent Transfer Values (CETVs): Allowance made for transfers equivalent to £630M per annum over the period to 31 December 2021, based on the same demographic profile as those members transferring out of the Main Fund Section over the three years to 31 December 2017. CETV assumptions are assumed to be as follows for this purpose: Discount rate: swaps +2.2% p.a. Post-retirement mortality: As above except with 1.25% p.a long term rate of improvement RPI/CPI inflation and LPI pension increases: As derived above, except RPI inflation equal to the breakeven RPI swap yield curve Commutation: No allowance made Notwithstanding the use of the above CETV assumptions for the purpose of the actuarial valuation, the Trustee shall review and amend the CETV assumptions from time to time in accordance with the Rules and legislation, as appropriate. Commutation: Allowance for members to commute 18% of their pension at retirement based on factors which are assumed to remain unchanged in future. Expenses: An addition of £2.667M per month increasing annually with RPI inflation, payable by the Bank in addition to the future service rate. The allowance for expenses excludes investment-related expenses (which are paid from the Main Fund Section) and excludes PPF levies in excess of £2M in any year which are paid from the Main Fund Section.
Decrements for withdrawal, death before retirement and ill-health retirement: Age Withdrawal from service Death before retirement - Males Death before retirement - Females Ill health retirement - Males Ill health retirement - Females 25 8.75 0.02 0.01 0.03 0.03 26 8.75 0.02 0.01 0.03 0.03 27 8.75 0.02 0.01 0.03 0.03 28 8.75 0.02 0.01 0.03 0.03 29 8.75 0.02 0.02 0.03 0.03 30 8.75 0.02 0.02 0.03 0.04 31 8.75 0.02 0.02 0.03 0.04 32 8.75 0.02 0.02 0.03 0.04 33 8.75 0.03 0.02 0.03 0.04 34 8.75 0.03 0.02 0.03 0.05 35 8.75 0.03 0.02 0.03 0.05 36 8.75 0.03 0.03 0.03 0.06 37 8.75 0.03 0.03 0.03 0.07 38 8.75 0.03 0.03 0.04 0.07 39 8.75 0.03 0.03 0.04 0.08 40 8.75 0.04 0.04 0.05 0.09 41 8.75 0.04 0.04 0.05 0.09 42 8.75 0.04 0.04 0.06 0.10 43 8.75 0.05 0.05 0.07 0.11 44 8.75 0.05 0.05 0.07 0.12 45 8.75 0.06 0.06 0.08 0.13 46 8.75 0.06 0.06 0.09 0.14 47 8.75 0.07 0.07 0.11 0.15 48 8.75 0.08 0.08 0.12 0.17 49 8.75 0.09 0.09 0.14 0.19 50 8.75 0.10 0.09 0.15 0.20 51 8.75 0.11 0.10 0.17 0.22 52 8.75 0.13 0.11 0.19 0.25 53 8.75 0.14 0.13 0.22 0.27 54 8.75 0.16 0.14 0.24 0.30 55 5 0.18 0.15 0.27 0.33 56 5 0.20 0.17 0.31 0.37 57 5 0.23 0.19 0.34 0.40 58 5 0.25 0.21 0.38 0.44 59 5 0.29 0.23 0.43 0.48 60 2 0.32 0.25 0.47 0.54 61 2 0.36 0.28 0.53 0.59 62 2 0.40 0.31 0.58 0.65 63 2 0.45 0.34 0.65 0.71 64 2 0.51 0.38 0.72 0.78 65 2 0.57 0.42 0.80 0.87
Factors: Early and late retirement Years retiring early/late Early retirement * Late retirement 0 1.000 1.000 1 0.962 1.027 2 0.925 1.055 3 0.890 1.084 4 0.856 1.116 5 0.824 1.150 6 0.793 1.187 7 0.762 1.227 8 0.734 1.269 9 0.706 1.314 10 0.679 1.362 * for revaluing pension in excess of GMP Commutation Age Unisex 55 23.37 56 22.86 57 22.35 58 21.83 59 21.30 60 20.76 61 20.22 62 19.68 63 19.12 64 18.56 65 18.00
Yield curves: The tables below shows the annual forward rates for the financial assumptions used as at 31 December 2017 between time t-1 and time t. Key Technical Provisions (TP) Employer contributions for future service rate accrual (FSR) Discount rate Term HDC forward rates % TP Discount rate % FSR Discount rate % 1 0.63% 1.21% 1.11% 2 0.85% 1.43% 1.33% 3 1.06% 1.64% 1.54% 4 1.20% 1.78% 1.68% 5 1.29% 1.87% 1.77% 6 1.33% 1.91% 1.81% 7 1.49% 2.07% 1.97% 8 1.59% 2.17% 2.07% 9 1.68% 2.26% 2.16% 10 1.74% 2.32% 2.22% 11 1.78% 2.36% 2.26% 12 1.81% 2.39% 2.29% 13 1.82% 2.40% 2.30% 14 1.82% 2.40% 2.30% 15 1.82% 2.40% 2.30% 16 2.32% 2.90% 2.80% 17 1.89% 2.47% 2.37% 18 1.85% 2.43% 2.33% 19 1.81% 2.39% 2.29% 20 1.77% 2.35% 2.25% 21 4.43% 5.01% 4.91% 22 1.91% 2.49% 2.39% 23 1.83% 2.41% 2.31% 24 1.75% 2.33% 2.23% 25 1.66% 2.24% 2.14% 26 2.34% 2.92% 2.82% 27 1.50% 2.08% 1.98% 28 1.40% 1.98% 1.88% 29 1.30% 1.88% 1.78% 30 1.21% 1.79% 1.69% 31 1.71% 2.29% 2.19% 32 1.06% 1.64% 1.54% 33 1.00% 1.58% 1.48% 34 0.95% 1.53% 1.43% 35 0.92% 1.50% 1.40% 36 0.90% 1.48% 1.38% 37 0.89% 1.47% 1.37% 38 0.89% 1.47% 1.37% 39 0.90% 1.48% 1.38% 40 0.92% 1.50% 1.40% 41 1.25% 1.83% 1.73% 42 0.75% 1.33% 1.23% 43 1.29% 1.87% 1.77% 44 1.32% 1.90% 1.80% 45 1.32% 1.90% 1.80% 46 1.32% 1.90% 1.80% 47 1.32% 1.90% 1.80% 48 1.24% 1.82% 1.72% 49 1.15% 1.73% 1.63% 50 1.15% 1.73% 1.63%
Term HDC forward rates % TP Discount rate % FSR Discount rate % 51 1.15% 1.73% 1.63% 52 1.15% 1.73% 1.63% 53 1.15% 1.73% 1.63% 54 1.15% 1.73% 1.63% 55 1.15% 1.73% 1.63% 56 1.15% 1.73% 1.63% 57 1.15% 1.73% 1.63% 58 1.15% 1.73% 1.63% 59 1.15% 1.73% 1.63% 60 1.15% 1.73% 1.63% 61 1.15% 1.73% 1.63% 62 1.15% 1.73% 1.63% 63 1.15% 1.73% 1.63% 64 1.15% 1.73% 1.63% 65 1.15% 1.73% 1.63% 66 1.15% 1.73% 1.63% 67 1.15% 1.73% 1.63% 68 1.15% 1.73% 1.63% 69 1.15% 1.73% 1.63% 70 1.15% 1.73% 1.63% 71 1.15% 1.73% 1.63% 72 1.15% 1.73% 1.63% 73 1.15% 1.73% 1.63% 74 1.15% 1.73% 1.63% 75 1.15% 1.73% 1.63% 76 1.15% 1.73% 1.63% 77 1.15% 1.73% 1.63% 78 1.15% 1.73% 1.63% 79 1.15% 1.73% 1.63% 80 1.15% 1.73% 1.63% 81 1.15% 1.73% 1.63% 82 1.15% 1.73% 1.63% 83 1.15% 1.73% 1.63% 84 1.15% 1.73% 1.63% 85 1.15% 1.73% 1.63% 86 1.15% 1.73% 1.63% 87 1.15% 1.73% 1.63% 88 1.15% 1.73% 1.63% 89 1.15% 1.73% 1.63% 90 1.15% 1.73% 1.63% 91 1.15% 1.73% 1.63% 92 1.15% 1.73% 1.63% 93 1.15% 1.73% 1.63% 94 1.15% 1.73% 1.63% 95 1.15% 1.73% 1.63% 96 1.15% 1.73% 1.63% 97 1.15% 1.73% 1.63% 98 1.15% 1.73% 1.63% 99 1.15% 1.73% 1.63% 100 1.15% 1.73% 1.63%
Inflation and pension increases Term RPI inflation (HIC forward rates) CPI inflation LPI (0,5) pension increases LPI (0,3) pension increases LPI (0,2.5) pension increases LPI (3,5) pension increases LPI (2.5,7) pension increases CPI (0,3) pension increases 1 3.22% 2.12% 3.22% 3.00% 2.50% 3.64% 3.54% 2.12% 2 3.26% 2.16% 3.26% 3.00% 2.50% 3.65% 3.56% 2.16% 3 3.17% 2.07% 3.17% 3.00% 2.50% 3.61% 3.50% 2.07% 4 3.26% 2.16% 3.26% 3.00% 2.50% 3.65% 3.56% 2.16% 5 3.33% 2.23% 3.33% 3.00% 2.50% 3.68% 3.61% 2.23% 6 3.26% 2.16% 3.26% 3.00% 2.50% 3.65% 3.57% 2.16% 7 3.44% 2.34% 3.44% 3.00% 2.50% 3.73% 3.69% 2.34% 8 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.73% 2.40% 9 3.56% 2.46% 3.56% 3.00% 2.50% 3.78% 3.77% 2.46% 10 3.61% 2.51% 3.61% 3.00% 2.50% 3.81% 3.81% 2.51% 11 3.62% 2.52% 3.62% 3.00% 2.50% 3.81% 3.82% 2.52% 12 3.70% 2.60% 3.70% 3.00% 2.50% 3.85% 3.89% 2.60% 13 3.74% 2.64% 3.74% 3.00% 2.50% 3.87% 3.92% 2.64% 14 3.77% 2.67% 3.77% 3.00% 2.50% 3.89% 3.94% 2.67% 15 3.79% 2.69% 3.79% 3.00% 2.50% 3.90% 3.96% 2.69% 16 3.80% 2.70% 3.80% 3.00% 2.50% 3.90% 3.96% 2.70% 17 3.90% 2.80% 3.90% 3.00% 2.50% 3.95% 4.04% 2.80% 18 3.89% 2.79% 3.89% 3.00% 2.50% 3.94% 4.03% 2.79% 19 3.86% 2.76% 3.86% 3.00% 2.50% 3.93% 4.01% 2.76% 20 3.82% 2.72% 3.82% 3.00% 2.50% 3.91% 3.98% 2.72% 21 4.40% 3.30% 4.40% 3.00% 2.50% 4.40% 4.45% 3.00% 22 3.73% 2.63% 3.73% 3.00% 2.50% 3.87% 3.90% 2.63% 23 3.61% 2.51% 3.61% 3.00% 2.50% 3.81% 3.82% 2.51% 24 3.48% 2.38% 3.48% 3.00% 2.50% 3.75% 3.72% 2.38% 25 3.35% 2.25% 3.35% 3.00% 2.50% 3.69% 3.63% 2.25% 26 3.25% 2.15% 3.25% 3.00% 2.50% 3.65% 3.56% 2.15% 27 3.07% 1.97% 3.07% 3.00% 2.50% 3.57% 3.44% 1.97% 28 2.93% 1.83% 2.93% 2.93% 2.50% 3.52% 3.35% 1.83% 29 2.81% 1.71% 2.81% 2.81% 2.50% 3.47% 3.28% 1.71% 30 2.69% 1.59% 2.69% 2.69% 2.50% 3.43% 3.21% 1.59% 31 2.60% 1.50% 2.60% 2.60% 2.50% 3.39% 3.16% 1.50% 32 2.52% 1.42% 2.52% 2.52% 2.50% 3.37% 3.12% 1.44% 33 2.46% 1.36% 2.46% 2.46% 2.46% 3.35% 3.09% 1.40% 34 2.43% 1.33% 2.43% 2.43% 2.43% 3.34% 3.08% 1.38% 35 2.41% 1.31% 2.41% 2.41% 2.41% 3.33% 3.07% 1.37% 36 2.41% 1.31% 2.42% 2.41% 2.41% 3.33% 3.07% 1.37% 37 2.43% 1.33% 2.44% 2.43% 2.43% 3.34% 3.08% 1.38% 38 2.47% 1.37% 2.47% 2.47% 2.47% 3.35% 3.10% 1.41% 39 2.53% 1.43% 2.53% 2.53% 2.50% 3.37% 3.13% 1.44% 40 2.59% 1.49% 2.59% 2.59% 2.50% 3.39% 3.16% 1.49% 41 2.90% 1.80% 2.90% 2.90% 2.50% 3.50% 3.33% 1.80% 42 2.93% 1.83% 2.93% 2.93% 2.50% 3.51% 3.35% 1.83% 43 2.94% 1.84% 2.94% 2.94% 2.50% 3.52% 3.35% 1.84% 44 2.93% 1.83% 2.93% 2.93% 2.50% 3.51% 3.35% 1.83% 45 3.14% 2.04% 3.14% 3.00% 2.50% 3.60% 3.48% 2.04% 46 3.18% 2.08% 3.18% 3.00% 2.50% 3.62% 3.51% 2.08% 47 3.19% 2.09% 3.19% 3.00% 2.50% 3.62% 3.52% 2.09% 48 3.23% 2.13% 3.23% 3.00% 2.50% 3.64% 3.55% 2.13% 49 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 50 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39%
Term RPI inflation (HIC forward rates) CPI inflation LPI (0,5) pension increases LPI (0,3) pension increases LPI (0,2.5) pension increases LPI (3,5) pension increases LPI (2.5,7) pension increases CPI (0,3) pension increases 51 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 52 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 53 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 54 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 55 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 56 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 57 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 58 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 59 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 60 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 61 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 62 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 63 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 64 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 65 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 66 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 67 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 68 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 69 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 70 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 71 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 72 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 73 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 74 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 75 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 76 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 77 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 78 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 79 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 80 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 81 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 82 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 83 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 84 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 85 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 86 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 87 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 88 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 89 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 90 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 91 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 92 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 93 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 94 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 95 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 96 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 97 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 98 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 99 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 100 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39%
The Royal Bank of Scotland Group Pension Fund Main Fund Section Actuarial valuation as at 31 December 2017 Prepared for RBS Pension Trustee Limited Prepared by David Eteen FIA Date October 2018 Signed David Eteen FIA Scheme Actuary Copyright © 2018 Aon Hewitt Limited. All rights reserved. aon.com Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales No. 4396810 Registered office: The Aon Centre | The Leadenhall Building | 122 Leadenhall Street | London | EC3V 4AN This report and any enclosures or attachments are prepared on the understanding that it is solely for the benefit of the addressee(s). Unless the Scheme Actuary or Aon Hewitt provide express prior written consent no part of this report should be reproduced, distributed or communicated to anyone else and, in providing this report, the Scheme Actuary and Aon Hewitt do not accept or assume any responsibility for any other purpose or to anyone other than the addressee(s) of this report.
Executive Summary There was a deficit of £1,798M relative to the technical provisions (i.e. the level of assets agreed by the Trustee and the Bank as being appropriate to meet member benefits, assuming the Main Fund Section continues as a going concern) There was a deficit of £19,512M relative to the solvency liabilities (i.e. the estimated level of assets needed to buy insurance policies for benefits earned to the actuarial valuation date) As agreed with the Trustee, the Bank will pay deficit contributions of £2,000M into the Main Fund Section by 31 December 2018. If the actuarial assumptions are borne out in practice, these contributions are expected to correct the shortfall relative to the technical provisions by 31 December 2018. In addition, from 1 October 2018 the Bank will pay the following: 100% of any amounts to be distributed to Royal Bank of Scotland Group plc shareholders from 1 January 2020 (ordinary or special dividends or share buy-backs), subject to an annual cap in each calendar year of £500M and an overall aggregate amount of £1,500M Contributions to meet the cost of future final salary benefits At least 41.5% of Contribution Salary for employees who are active members of the Retiring Age 65 Schedule (less any member contributions) At least 48.5% of Contribution Salary for other active members (less any member contributions) 12% of Contribution Salary for active members of the NatWest Defined Contribution Schedule RBSelect contributions in respect of members pensions elections Expense contributions of £2.667M per month, increased each subsequent 1 July by RPI in the 12 months to the previous 31 March, subject to a minimum increase each year of 0% Reimbursement of Pension Protection Fund levies above £2M in a levy year (nil otherwise) A comparison of the results from this actuarial valuation with the previous actuarial valuation as at 31 December 2015 is provided in Appendix 2. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
The Royal Bank of Scotland Group Pension Fund Main Fund Section Actuarial valuation as at 31 December 2017 Table of Contents Introduction 1 Recap of 2015 actuarial valuation 2 Data - members 4 Data - assets 5 Benefits valued 7 Funding objective 8 Technical provisions - method and assumptions 9 Technical provisions - calculations 10 Technical provisions - reasons for change in past service position 11 Technical provisions - recovery plan 12 Cost to the Bank of future benefit accrual 13 Statutory Estimate of Solvency 14 Risks and uncertainties 15 Agreed contributions 17 Next steps 18 Appendix 1: Legal framework and alternative presentation 19 Appendix 2: Comparison of 2015 and 2017 funding 20 Appendix 3: Membership data 21 Appendix 4: Benefit summary 22 Appendix 5: Assumptions for technical provisions 29 Appendix 6: Assumptions for solvency estimate 40 Appendix 7: Certificate of technical provisions 42 Appendix 8: Glossary 43 Report Framework 46 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Introduction This report has been commissioned by and prepared for the Trustee. It sets out the results and conclusions of the actuarial valuation of the Main Fund Section of the Royal Bank of Scotland Group Pension Fund as at 31 December 2017 This is a scheme funding report. Appendix 1 sets out the legal framework within which the actuarial valuation has been completed Throughout the body of this report, defined contribution (DC) benefits (including DC AVCs) have been excluded from the actuarial valuation results because in my view this provides a clearer picture. An alternative presentation of the actuarial valuation results is shown in Appendix 1 which includes DC benefits in both the asset and liability measures Some shorthand used in this report is explained opposite. Some technical pensions terms are explained in the glossary in Appendix 8. Main Fund Section The Main Fund Section of the Royal Bank of Scotland Group Pension Fund Trustee The Directors of RBS Pension Trustee Limited Bank The Royal Bank of Scotland Group plc and all Participating Employers who participate in the Main Fund Section from time to time Rules The Trust Deed and Rules dated 5 April 2006, and amending legal documents Contribution Salary The salary element of a members ValueAccount (i.e. an amount which is equivalent to basic salary), or basic salary if the member does not have a ValueAccount Pensionable Salary As defined in the Rules Pensionable Service As defined in the Rules Actuarial Valuation Date 31 December 2017 Snapshot view The report concentrates on the Main Fund Sections financial position at the actuarial valuation date. As time moves on, the Main Fund Sections finances will fluctuate. If you are reading this report some time after it was produced, the Main Fund Sections financial position could have changed significantly. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Recap of 2015 actuarial valuation The key results from the previous actuarial valuation at 31 December 2015 were: The assets were £30,793M The technical provisions were £36,654M, which corresponded to a deficit of £5,861M and a funding level of 84% The Statutory Estimate of Solvency liabilities were £60,350M, which corresponded to a deficit of £29,557M, and a funding level of 51% The Trustee and the Bank agreed a recovery plan that was designed to restore the technical provisions funding level to 100% by 31 December 2025 through a combination of: Deficit repair contributions of £4,200M, payable in March 2016 Investment returns on the Main Fund Sections assets during the recovery period equal to the fixed interest swap-yield curve plus 3.1% p.a. for growth assets and equal to the fixed interest swap-yield curve plus 0.2% p.a. for matching assets, on both existing assets and future contributions held in respect of final salary liabilities It was also agreed that the Bank would pay the following contributions with effect from 1 July 2016: Contributions to meet the cost of future final salary benefits and administration expenses At least 32.9% of basic salary for active members of the Retiring Age 65 Schedule (less any member contributions) At least 38.6% of basic salary for other active members (less any member contributions) The Pension Protection Fund and other levies collected by the Pensioner Regulator RBSelect contributions in respect of members pensions elections and contributions for DC members as required under the Rules My formal report on the 2015 actuarial valuation, dated 21 June 2016, contains further information. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Key developments since the 2015 actuarial valuation As well as the contributions paid to the Main Fund Section since the previous actuarial valuation and the returns achieved on the Main Fund Sections assets, there have been the following main developments since the previous actuarial valuation Restructuring of the Bank Under UK ring-fencing legislation, from 1 January 2026 it will not be possible for Bank entities outside of the ring fence to participate in the same defined benefit scheme as ring-fenced entities or their wholly-owned subsidiaries. In order to comply with this legislation, the Bank intends that by the end of March 2019, the Royal Bank of Scotland plc (to be renamed NatWest Markets plc) and the Royal Bank of Scotland International Limited will have ceased to be participating employers in the Main Fund Section and their liabilities will have been apportioned to National Westminster Bank Plc. Employees within these entities will be transferred outside the Main Fund Section. Acceleration of 2017 actuarial valuation In April 2018 the Bank and Trustee entered into a Memorandum of Understanding facilitating both the necessary changes to the Main Fund Section to align the employing entity structure with the requirements of the UK ring-fencing legislation and the acceleration of a settlement framework for the 31 December 2017 actuarial valuation (brought forward from 31 December 2018). The funding outcome of this accelerated actuarial valuation as at 31 December 2017 is documented in this report. Cessation of contracting out The Main Fund Section ceased to be contracted-out of the States second tier pension arrangements with effect from 6 April 2016, when the ability of schemes to remain contracted-out terminated. Active member contributions The cessation of contracting out in 2016 generated additional national insurance contributions for the Bank and its employees. To offset these cost increases for the Bank, with effect from 1 June 2017 the contribution rates payable by active members, measured as a percentage of Contribution Salary, were increased. The resulting active member contributions are as follows: - From 1 June 2017 to 30 November 2017: 0.5% of Contribution Salary - From 1 December 2017 to 31 May 2018: 1.0% of Contribution Salary - From 1 June 2018 to 30 November 2018: 1.5% of Contribution Salary - From 1 December 2018: 2.0% of Contribution Salary In addition to the above amounts, active members of the Adam & Company Schedule of the Main Fund Section continue to pay 2.5% of pensionable salary. These contributions are documented in an updated schedule of contributions, dated 29 June 2017. Bulk transfer from AA Section On 30 April 2018 the past service benefits for 11 active members of the AA Section were transferred into the Main Fund Section, without member consent. The corresponding DB bulk transfer payment has been calculated to be £16.4M. Because this is small relative to the size of the Main Fund Section, I have made no allowance for this bulk transfer in the 31 December 2017 actuarial valuation. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Data - members This actuarial valuation is based on membership data as at 31 December 2017 supplied to us by Willis Towers Watson Overview A summary of the membership data is included in Appendix 3, alongside the membership data used for the previous actuarial valuation as at 31 December 2015. The charts below show how the membership profile of the Main Fund Section has changed over the last three actuarial valuations. The Main Fund Section closed to new entrants on 1 October 2006 and the effect of this can be seen by looking at the decline in the active membership. Note that the pensioner numbers below include dependants and children. Reliability of information For this actuarial valuation, I have carried out some general checks to satisfy myself that: The information used for this actuarial valuation is sensible compared with the information used for the previous actuarial valuation and also with that shown in the Trustees report and accounts as at 31 December 2017 The results of this actuarial valuation can be traced from the results of the previous actuarial valuation However, the results in my report rely entirely on the accuracy of the information supplied. If you believe the membership data I have used may be incomplete or inaccurate, please let me know. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Data - assets The audited accounts for the Main Fund Section for the year ended 31 December 2017 show that the value of the assets was £45,030M, of which £279M related to DC AVC assets I have used the balance of the assets, £44,751M, for the purposes of this actuarial valuation The asset portfolio is invested as follows, as taken from the Trustees report and accounts as at 31 December 2017: 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
As part of the Memorandum of Understanding agreed by the Trustee and the Bank in April 2018, the Trustee agreed to de-risk the investment strategy of the Main Fund Section by reducing its exposure to quoted equity (phase 1) and increasing its exposure to assets that give a greater certainty over cash flows (phase 2), whilst continuing to develop its liability hedging strategy with the purchase of further interest rate and inflation hedging. Implementation of the phase 1 changes began in Q1 2018. The strategic benchmark for the Main Fund Section as at 31 December 2017 is set out in the table below, shown both before and after phase 1 of the de-risking for ease of comparison (figures are shown rounded to the nearest £100M). Asset class Sub asset class Strategic Benchmark exposure at 31 December 2017 before de-risking Strategic Benchmark exposure at 31 December 2017 after phase 1 de- risking Equity Quoted equity £10,200M £4,300M Private equity Regulated utilities Infrastructure equity Shipping Timber and forestry Hedge funds - momentum Credit Global credit £8,500M £8,500M Emerging markets debt Syndicated loans Distressed debt Real estate debt Infrastructure debt Settled annuities Property UK £2,100M £2,100M Europe US residential Global Insurance Non-life risks £1,000M £1,000M Life risks (inc. life settlements) Litigation finance Liability hedging Liability hedging £22,900M £28,800M Cash & liquidity 100% of liability interest rate risk (including 4% via swaptions) Collateral management 100% of liability inflation risk The phase 2 investment strategy changes will be determined at a later date. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Benefits valued Members are entitled to benefits defined in the Rules Pension revaluation and indexation Under the Rules: increases to pensions in deferment in excess of GMPs are in line with RPI, subject to various caps and floors increases to pensions in payment in excess of GMPs are in line with RPI, subject to various caps and floors increases to GMPs in payment which accrued after 5 April 1988 are in line with CPI subject to a cap of 3% each year This has been allowed for in my assessment of the technical provisions as at 31 December 2017. At the time of writing, the Bank and Trustee are investigating the legal provisions for pensions indexation in relation to certain categories of members/service in the Rules. However, because these investigations are still ongoing the Trustee and the Bank have agreed for me to value the technical provisions based on the benefit structure which is currently being administered. This is summarised in Appendix 4. Discretionary benefits No allowance has been made for any increases to pensions in excess of those provided for in the Rules, in particular for increases to pensions in payment. GMP equalisation In July 2014 the Government stated an intention to develop fully considered proposals and to publish guidance on equalising Guaranteed Minimum Pensions (GMPs) between men and women. No target date was given for publication. Throughout 2018 there has been an ongoing Court case being heard in relation to Lloyds Banking Group, to consider whether schemes need to equalise for GMP and, if so, how. At this stage, I have made no allowance for the equalisation of GMPs in the actuarial valuation. Insured benefits I understand that the Main Fund Section holds around 65 individual annuity policies. However, because this only affects a very small proportion of the overall membership, the value of these policies is immaterial and is not separated out in the Trustees report and accounts as at 31 December 2017. I have made no adjustment for these annuity policies in this actuarial valuation. Death in service lump sum benefits are self-insured. I have included these benefits in my calculations of the future cost of accrual. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Funding objective Terminology Technical provisions The value of liabilities accrued in the scheme based on assumptions agreed as part of the actuarial valuation Statutory funding objective The scheme is required to hold sufficient and appropriate assets to meet the technical provisions Statement of funding principles Sets out the Trustees policy for meeting the statutory funding objective A key funding objective set by the Trustee is to hold assets which are at least equal to the technical provisions, i.e. to meet the statutory funding objective. In order to calculate the technical provisions and the cost to the Bank of future benefit accrual, the benefits paid out by the Main Fund Section are estimated for each year into the future. The estimated benefit payments are then discounted back to the actuarial valuation date using an agreed rate of interest known as the discount rate. The benefit payments are expected to be made for a very long period. The chart below shows the projected benefit payment pattern for the Main Fund Section in nominal terms. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Technical provisions - method and assumptions The Trustee and the Bank have agreed the assumptions to calculate the technical provisions and the cost of future benefit accrual which are, in my opinion, appropriate for the purposes for which they are used. The table below summarises the key assumptions Assumption This actuarial valuation Previous actuarial valuation Rationale for change Discount rate Hedging Discount Curve (HDC) plus 0.58% p.a. at all durations Fixed interest swap-yield curve plus 1.5% p.a. at all durations Updated to reflect de-risking of the investment strategy, as agreed by the Trustee in discussion with the Bank See Appendix 5 for further details of the HDC curve. Underlying curves updated to be consistent with the hedging strategy in place for the Main Fund Section RPI inflation Hedging Inflation Curve (HIC) RPI swap-yield curve Underlying curves updated to be consistent with the hedging strategy in place for the Main Fund Section See Appendix 5 for further details of the HIC curve. Post-retirement mortality assumption base table S2PA Light tables S2PA Light tables Updated to reflect Main Fund Sections pensioner mortality experience and postcode analysis since the last actuarial valuation Average scaling factors applied to base tables in line with 2017 experience and postcode analysis Average scaling factors applied to base tables in line with 2015 experience and postcode analysis Post-retirement mortality assumption future improvements CMI 2017 Projections Model with smoothing parameter SÊ = 8.0 CMI 2014 Core Projections Model Updated to allow for the CMI 2017 Projections Model, with parameter based on the socioeconomic profile of members in the Main Fund Section A long term rate to the improvements of 1.5% p.a. A long term rate to the improvements of 1.5% p.a. Transfers out Allowance for aggregate transfer values of £630M p.a. until 31 December 2021, and nil thereafter No allowance Updated to reflect recent experience Actuarial method Projected unit method with a ten year control period Projected unit method with a ten year control period No change 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Technical provisions - calculations The Main Fund Sections technical provisions are shown below. They have been calculated using the assumptions in the previous section £M Value of past service benefits for Actives 6,653 Deferreds 22,537 Pensioners 17,359 Total (i.e. technical provisions) 46,549 Value of assets 44,751 Past service surplus /(deficit) (1,798) Funding ratio 96% My statutory certification of the Main Fund Sections technical provisions is attached as Appendix 7. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Technical provisions - reasons for change in past service position The technical provisions funding position has improved by £4,063M over the period from 31 December 2015 to 31 December 2017, from a deficit of £5,861M to a deficit of £1,798M. This change can be explained approximately by the graphs below, with items shown rounded to the nearest £10M 1. Expected experience in line with 2015 Recovery Plan Deficit reduced from £5,861M to £1,479M 2. Impact of actual versus expected experience, and changes to swap and inflation yield curves due to changes in market conditions - Deficit of £1,479M to a surplus of £2,514M 3. Impact of changing the actuarial assumptions - Surplus of £2,514M to a deficit of £1,798M The analysis shows that the main factors affecting the funding position since the previous actuarial valuation have been: The payment of £4,200M deficit repair contributions in March 2016 The positive investment returns on growth and matching assets relative to the partially offsetting impact of changes to swap and inflation curves The changes to the actuarial assumptions, in particular the discount rate and inflation curves, which have placed a higher value on the technical provisions 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Technical provisions - recovery plan The Trustee and the Bank have agreed a recovery plan. The recovery plan is designed to eliminate the deficit at the actuarial valuation date relative to the technical provisions by the end of the recovery period The Bank has agreed to pay deficit contributions of £2,000M into the Main Fund Section by 31 December 2018. No further deficit contributions are payable in the recovery plan. If the assumptions are borne out in practice, these contributions are expected to correct the shortfall relative to the technical provisions by 31 December 2018. Terminology Recovery plan A plan for making good any deficit relative to the technical provisions. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Cost to the Bank of future benefit accrual The table below shows the cost at the actuarial valuation date of benefits that final salary members will earn in the Main Fund Section in future This cost has been calculated using the same assumptions as for the technical provisions. However, the Bank has agreed to pay contributions in respect of future final salary benefits at a higher rate than this, using the same assumptions as for the technical provisions except for the discount rate which is 0.1% p.a. lower at all durations. The actuarial method used to calculate the cost is the Projected Unit Method with a ten year Control Period. Retiring Age 65 Schedule % Contribution salaries All other members % Contribution salaries Overall % Contribution salaries Notional cost of accrual Technical provisions assumptions 40.41 47.21 43.1 1 Actual level at which the Bank will fund accrual Technical provisions assumptions less a further 0.1% p.a. in the discount rate 41.51 48.51 44.3 1 1 (less any member contributions payable) Augmentations and undiscounted early retirements The Trustee has agreed that augmentations and unreduced early retirements can be granted up to an annual allowance of £10M without requiring additional contributions from the Bank. Any costs of augmentations or unreduced retirement pensions above £10M in any year are met by the Bank. No allowance for augmentations or unreduced early retirements has been included in the actuarial valuation and this will therefore lead to an experience strain at the next actuarial valuation in respect of any augmentations or unreduced early retirements granted up to £10M a year. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Statutory Estimate of Solvency The Statutory Estimate of Solvency below represents the estimated cost of purchasing annuities at the actuarial valuation date from an insurance company to meet the Main Fund Sections benefits £M Value of past service benefits for Actives 10,673 Deferreds 33,800 Pensioners 18,157 Expenses 1,633 Value of liabilities (solvency estimate) 64,263 Value of assets 44,751 Surplus/(deficit) (19,512) Solvency ratio 70% In practice, if the Main Fund Section were to be discontinued with no solvent employer and if at the point this occurred the assets were not sufficient to provide the benefits in full then, absent any other solution which guarantees the benefits, the Fund may go into the Pension Protection Fund (PPF) in which case: Benefits corresponding to those covered by the PPF would be met first (either through the PPF or, if there were sufficient funds, by securing these benefits with an insurance company) Any remaining assets would be used to secure part of the remaining benefits with an insurance company Under the rules of the PPF, the proportion of full benefits provided will vary from member to member and may be higher or lower than the statutory estimate of solvency ratio quoted above. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Risks and uncertainties The Main Fund Section faces a number of key risks which could affect its funding position These risks include: Funding risk the risk that the technical provisions are set too low and prove insufficient to meet the liabilities (e.g. in the event of discontinuance) Sponsor covenant risk the risk that the Bank is no longer able to support the Main Fund Section Investment risks the risk that investment returns are lower than assumed in the actuarial valuation, and also that the assets are volatile and move out of line with the liabilities, so the funding position is not stable Longevity risk the risk that Main Fund Section members live for longer than assumed and that pensions would therefore need to be paid for longer Inflation risk the risk that inflation is higher than assumed, increasing the pensions that need to be paid Options for members the risk that members exercise options resulting in unanticipated extra costs. For example, members could commute less of their pension for cash at retirement than assumed or fewer members than assumed decide to transfer their benefits to another arrangement To quantify some of these risks, the chart on the following page shows the approximate impact on the technical provisions as at the actuarial valuation date of the following one-off step changes on the technical provisions assumptions: Life expectancies are one year greater than currently assumed in the technical provisions Yields on swaps, gilts and corporate bonds decrease by 1% p.a. (with no change in equity markets) Real yields on swaps, index-linked gilts and index-linked corporate bonds decrease by 1% p.a. (with fixed-interest bonds, interest rate swaps and equity markets unchanged)this is equivalent to a 1% p.a. increase in the assumed rate of inflation Members do not commute any pension for a cash lump sum on retirement No members decide to transfer their benefits to another arrangement Figures are rounded to the nearest £10M. The chart illustrates the downside position, i.e. where the technical provisions are assumed to increase, but these risks can also work in the opposite direction where the technical provisions are assumed to decrease. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Risks and uncertainties (continued) The scenarios above are modelled using a number of underlying assumptions and the results are approximate in nature only. As stated on the previous page, it should be noted that these sensitivities could also act in the opposite direction. The scenarios considered are not worst case scenarios, and could occur in combination (rather than in isolation). The analysis shows the impact on the technical provisions only. However the exposure of the Main Fund Section to the key risks of interest rate and inflation movements has been mitigated through the liability hedging strategy which is in place and reflects the Trustees strategic investment benchmark shown on page 6. Longevity risk has not been hedged. Risks in relation to member behaviours for commuting pension at retirement or taking a transfer value to another arrangement are monitored by the Trustee. From time to time the Trustee reviews the terms available to members for these options in consideration of the impact this has on the funding position of the Main Fund Section. The Solvency measure is also highly sensitive to these factors. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Agreed contributions The Bank will pay the following from 1 October 2018: Deficit contributions of £2,000M by 31 December 2018 100% of any amounts to be distributed to Royal Bank of Scotland Group plc shareholders from 1 January 2020 (ordinary or special dividends or share buy-backs), subject to an annual cap in each calendar year of £500M and an overall aggregate amount of £1,500M Contributions to meet the cost of future final salary benefits At least 41.5% of Contribution Salary for employees who are active members of the Retiring Age 65 Schedule (less any member contributions) At least 48.5% of Contribution Salary for other active members (less any member contributions) 12% of Contribution Salary for active members of the NatWest Defined Contribution Schedule RBSelect contributions in respect of members pensions elections Expense contributions of £2.667M per month, increased each subsequent 1 July by RPI in the 12 months to the previous 31 March, subject to a minimum increase each year of 0% Reimbursement of Pension Protection Fund levies above £2M in a levy year (nil otherwise) If the actuarial assumptions are borne out in practice, these contributions are expected to correct the shortfall relative to the technical provisions by 31 December 2018. Terminology Schedule of contributions Specifies the amounts and dates of contributions payable by the Bank and the members over the next five years or the recovery period, if longer. I am required to certify that the contributions in the schedule are expected to remove the deficit over the period stated based on the agreed assumptions. The contributions are set out in the schedule of contributions. As agreed, my certification of the schedule of contributions will be based on the position at the actuarial valuation date. A full review of the employer contribution rate will be completed no later than following the next actuarial valuation, which is due to take place as at 31 December 2020. I estimate that, by the next actuarial valuation due as at 31 December 2020 the technical provisions funding ratio will increase to about 102%, and the Statutory Estimate of Solvency ratio will increase to about 74%. These estimates assume that: The experience of the Main Fund Section is in line with the assumptions underlying the technical provisions and the recovery plan The Bank will pay dividend-linked contributions of £500M into the Main Fund Section in 2020 The assumptions underlying the technical provisions and Statutory Estimate of Solvency measures remain unchanged Due to the risks and uncertainties inherent in the assumptions it is normally the case that actual experience varies from the assumptions. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Next steps As part of the actuarial valuation, the Trustee and the Bank have agreed a statement of funding principles The next steps are: For the Trustee to provide a copy of this report to the Bank within 7 days For the Trustee and Bank to agree the recovery plan and schedule of contributions To submit the actuarial valuation summary and supporting documentation to the recovery plan to the Pensions Regulator via Exchange To provide a summary funding statement to members by 30 June 2019, i.e. 18 months from the actuarial valuation date Checklist The actuarial valuation process is complete when all of the following have been agreed and are in place: Statement of funding principles This scheme funding report Recovery plan Schedule of contributions Actuarial certification of the schedule of contributions The statutory deadline for completing the actuarial valuation process is 31 March 2019, i.e. 15 months after the actuarial valuation date. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Appendix 1: Legal frafl)ework and alternative presentation It is a legal requirement to carry out a full actuarial valuation at least once every three years This report is produced in compliance with: Alternative presentation including Clause 6.6 and 6.9 of the Rules Section 224 of .the Pensions Act 2004 The terms of the Scheme Actuary appointment from 1 July 2015 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section 19 defined contribution benefits Defined contribution benefits (including DC AVCs) amounted to £279M at the actuarial valuation date. If these benefits are included in the aCtuarial valuation: The value of the assets is £45,030M The technical provisions are £46,828M (funding ratio 96%) The value of the solvency liabilities is £64,542M (solvency ratio 70%)
Appendix 2: Comparison of 2015 and 2017 funding The key results of the actuarial valuation for the Main Fund Section as at 31 December 2017 are set out below, in comparison to the results of the previous actuarial valuation as at 31 December 2015 ec2015 e al Solvency Solvency s 1 EM 7,131 13,904 6,653 10,673 15,932 28,900 22,537 33,800 13,591 16,085 17,359 18,157 1,461 1,633 36,654 60,350 46,549 64,263 30,793 30,793 I 51% 84% e 31 Dec 2017 31 December 2018 31 December 2025 Swaps+3.1%p.a. on growth assets Swaps + 0.2% p.a. on matching assets £4,200M deficit contributions paid in March 2016 32.9% (paid from 1 July 2016, incl1.6% expenses) 38.6% (paid from 1 July 2016, incl1.6% expenses) In line with the assumptions underlying the technical provisions £2,000M defiCit contributions payable by 31December 2018 41.5% (paid from 1 Oct 2018, exclexpenses) 48.5% (paid from 1 Oct 2018, exclexpenses) Up to £1,500M further contingent contributions linked to dividends £2.667M per month, with RPI increases applied annually Costs over £2M p.a.met by the Bank Costs over £10M p.a. met by the Bank ' ' I 1.6% of basic salaries (incl in the contribution rates above) Met in full by the Bank Costs over£10M p.a. met by the Bank 7639 Main Fund Section actuarialvaluation report 31.12.2017 The RoyalBank of Scotland Group Pension Fund Main Fund Section 20 Benefit augmentations Pension Protection Fund Levies Administration expenses Additionalcontingent contributions All other active members Retiring age 65 Schedule Recovery Plan Contributions Investment returns End date c 2015 31 D Funding ratio Past service sur lus/(deficit) Value of assets Value of liabilities Expenses Pensioners Deferreds Actives Value of past service: (E M 31 D e c2017 31 D c2017 Techni ca l Prov is io ns ( E M ) 31 D e c2015 31 D T ec hni c Provisio n (E M )
Appendix 3: Membership Active members data -------·-39,864 .24,673 30,396 41,032 24,670 31,072 266 273 539 419 392 811 11,052 17,732 21.7 21.9 17.7 19.3 · 10,214 15,892 26,106 45.6 46.0 Total I Salary figures are full-time equivalent pensionable salary (before applying any loadings or allowing for the Main Fund Section's notional earnings c p).. Average service figures are full-time equivalent, they include transferred-in service and full service credits granted to replace Profit Related Pay Deferred pensioners ' 47.9 The deferred pension amounts shown above are at date of leaving Pensioners -----·· ==;('-·-···----.. ------·---24,943 37,162 8,719 . 70,824 24,307 33,008 ; ·· 70.9 67.7 73.9 69.6 70.4 67.3 .73.0 '480 189 80 749 465 19,245 5,087 9,151 162 77 I 8,705 8,809 66,080 69.2 704 '10,647 --------------L--------lL----------- Pensions are members' total pension in payment as at the actuarial valuation date excluding any part of pension funded directly by the Bank Dependants' and childrens' pensions are included in the figures above 7639 Main Fund Seciion actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section 21 Average pension (£ pa) Total pension (£M pa .6 207 ' 4,776 :Men I :Women Total 76,135 119,572 212 419 2,779 . 3,504 Men Women Total 44,325 77,979 122,304 46.1 46.8 I 211 205 416 I 4,762 2,633 '3,404 Average pension (£ pa Total pension (£M pa) Average age 22.2 i 21.4 Average service (years) Average pensionable salaries (£pa) Total pensionable salaries (£M pa)
Appendix 4,: Benefit summary The benefits are set out in the Rules. For illustration only, this section provides an overview of the benefits of the Main Fund Section based on the provisions in force at the actuarial valuation date Certain categories of current and former members of the.Main Fund Section are entitled to different benefits from those summarised below MEMBERS WHO HAVE JOINED THE RETIRING AGE 65 SCHEDULE (FOR PENSIONABLE SERVICE ACCRUED WHILST IN THE_RETIRING AGE 65 SCHEDULE) Normal Pension Age Members' contributions Age 65. From 1 June 2017 to 30 November 2017:0.5% of Contribution Salary From 1 December 2017 to31 May 2018: 1.0% of Contribution Salary From 1 June 2018 to 30 Noyember 2018: 1.5% of Contribution Salary From 1 December 2018: 2.0% of Contribution Salary n/60 x Final PensionablSalary at Normal Pension Date where: n =period of pensionable service in complete years and months Normal retirement pension (maximum of 45 years in aggregate across all schedules) . . . Final Pensionable Salary isdefined as the 12 best consecutive months of Pensionable Salary in the last five years of membership of the Main Fund Section. Pensionable Salary is defined as the annual rate of basic salary (or the salary element of a member's Value Account) subject, where applicable, to the Main Fund Section's Earnings Cap. From 25 August 2009, where the Bank offers to increase an Active Member's basic salary or salary element of his Value Account with RBSelect on the basis that part of the increase will not be pensionable, and the Active Member agrees, the annual increase in the Pensionable Salary shall be limited to the restricted pensionable increases as agreed with subsequent pensionable increases being based upon the Pensionable Salary immediately prior to the date of increase as adjusted for previously agreed restrictions since 25 August 2009. A pension is provided on retirement after the age of 55. This is calculated using completed service and is reduced to allow for early payment. No reduction is applied if early retirement is at the request of the employer (other than for reasons of misconduct). In the event of premature retirement due to serious ill-health or incapacity, an immediate pension may be paid based on prospective pensionable service to Normal Pension Age and with no reduction being applied due to early payment. This is contingent upon the member having been receiving long term disability benefits for a period of five years and six months, and also being prevented from taking up employment with any employer. If the member retires without waiting until the end of the long term disability period or is able to take up employment with an employer the pension is based on service up to the date of leaving only. In both Early retirement pension Ill-health pension 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section 22
cases the Trustee must be satisfied that the member's condition meets the definition of incapacity. Guaranteed LPI increases are provided to pensions in payment in excess of any GMP. For members who joined the Group Fund on or after 1 July 2005 guaranteed pension increases are limited to 2.5% per annum. Part of the member's pension may be commuted for a tax-free lump sum. If the member dies within five years of retiring, a lump sum equal to t1e balance of five years' pension payments; plus A spouse's/partner's pension of one-half of the member's pension (before any commutation for lump sum). Children's pensions may also bpayable, with the percentage of member's pension depending on marital status and the number of children. A lump slim of four times basic salary plus a refund of any member contributions paid in respect of Pensionable Service prior to joining the Retiring Age 65 Schedule; plus A spouse's/partner's pension of one-half of the member's pension th3t would be payable based on prospective service to Normal Pension Age. Children's pensions may also be payable, with the percentage of member's pension depending on marital status and the number of children. A deferred pension payable from Normal Pension Age; or A transfer payment to either a new empJoyer's scheme or a suitable insurance policy, equivalent in value to the deferred pension. Pension increases Tax-free lump sum Death after retirement Death in service Leaving service options MEMBERS WHO HAVE JOINED THE GROUP FUND SINCE 1 JANUARY 2002 (FOR PENSIONABLE SERVICE ACCRUED OUTSIDE THE RETIRING AGE 65 SCHEDULE) Normal Pension Age Members' contributions Age 60. From 1 June 2017 to 30 November 2017: 0.5% of Contribution Salary From 1 December 2017 to 31 May 2018: 1.0% of Contribution Salary From 1 June 2018 to 30 November 2018: 1.5% of Contribution Salary From 1 December 2018: 2.0% of Contribution Salary n/60 x Final Pensionable Salary at Normal Pension Date where: n = period of pensionable service in complete years and months (maximum of 40 years, or 45 years if member works beyond Normal Pension Age) Final Pensionable Salary is defined as the 12 best consecutive months of Pensionable Salary in the last five years of membership of the Main Fund Section. Pensionable Salary is defined as the annual rate of basic salary (or the salary element of a member's Value Account) subject, where applicable, to the Main Fund Section's Earnings Cap. From 25 August 2009, where the Bank offers to increase an Active Member's basic Normal retirement pension 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section 23
salary or salary element of his Value Account with RBSelect on the basis that part of the increase will not be pensionable, and the Active Member agrees, the annual increase in the Pensionable Salary shall be limited to the restricted pensionable increases as agreed with subsequent pensionable increases being ba ed upon the Pensionable Salary immediately prior to the date of increase as adjusted for previously agreed restrictions since 25 August 2009. A pension is provided on retirement after the age of 55. This is calculated using completed service and is reduced to allow for early payment. No reduction is applied if early retirement is at the request of the employer (other than for reasons of misconduct). Early retirement pension Ill-health pension In the event of premature retirement due to serious ill-health or incapacity; an immediate pension may be paid based on prospective pensionable service to Normal Pension Age and with no reduction being applied due to early payment. This is contingent upon the m mber having completed:five years of service and having been receiving long term disability benefits for a period of five years and six months, and also being prevented from taking up employment with any employer. If the member retires without waiting until the end of the long term disability period or is able to.take up employment with an employer the pension is based.on service up to the date of leaving only. In both cases the trusteE;! must be satisfied that the member's condition meets the definition of incapacity. Pension increases Guaranteed LPI increases are provided to pensions in payment in excess of any GMP. For members who joined the Group Fund on or after 1 July 2005 guaranteed pension increases are limited to 2.5% per annum. ·· Tax-free lump sum Part of the member's·pension may be commuted for a tax-free lump sum. If the member dies within five years of retiring, a lump sum equal to the balance of five years' pension payments; plus A spouse's/partner's pension of one-half of the member's pension (before any commutation for lump sum). Children's pensions may also be payable, with the percentage of member's. pension depending on marital status and the number of children.· A lump sum of four times basic salary; plus A spouse's/partner's pension of one-half of the member's pension that would be payable based on prospective service to Normal Pension Age. Children's pensions may also be payable, with the percentage of member's pension depending on marital status and the number of children. A deferred pension payable from Normal Pension Age; or A transfer payment to either a new employer's scheme or a suitable insurance policy, equivalent in value to the deferred pension. Death after retirement Death in service Leaving service options 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group'Pension Fund Main Fund Section · 24
FORMER MEMBERS OF THE NATIONAL WESTMINSTER BANK PENSION FUND (FOR PENSIONABLE SERVICE ACCRUED OUTSIDE THE RETIRING AGE 65 SCHEDULE) Normal Pension Age Age 60 for most members, although some members have other Normal Pension Ages between 55 and 65. From 1 June 2017 to 30 November 2017: 0.5% of Contribution Salary From 1 December 2017 to 31 May 2018: 1.0% of Contribution Salary From 1 June 2018 to 30 November 2018: 1.5% of Contribution Salary From 1 December 2018: 2.0% of Contribution Salary Members' contributions Normal retirement pension n/60 x Final Pensionable Salary at Normal Pension Date where: n = period of pensionable service in complete years and months (maximum of 40 years, or 45 years if member works beyond Normal Pension Age). Pensionable service includes individual service credits granted to members between 2001 and 2004 to compensate for the removal of Profit Related Pay from the definition of Pensionable Salary. A different formula applies for some former members of the NatWest Markets Pension Fund. Final Pensionable Salary is defined as the 12 best consecutive month 5 of Pensionable Salary in the last five years of membership of the Main Fund Section. This definition was phased in between 1 January 2002 and 1 January 2007, so for members leaving or retiring before 1 January 2007 Final Pensionable Salary was defined as the 12 best consecutive months of Pensionable Salary since 1 January 2002. For members who joined the Main Fund Section before 1 November 1992, benefits earned prior to 1 April 1977 are calculated using Pensionable Salary at date of leaving, rather than Final Pensionable Salary as defined above. This also applies to benefits earned before 1 April 1978 for former members of the Coutts Staff Pension Scheme. Pensionable Salary is defined as the annual rate of basic salary (or th salary element of a member's Value Account) subject, where applicable, to the MC!in Fund Section's Earnings Cap. From 25 Augus1 2009, where the Bank offers to increase an Active Member's basic . salary or salary element of his Value Account with RBSelect on the basis that part of the increase will not be pensionable, and the Active Member agrees, the annual increase in the Pensionable Salary shall be limited to the restricted pensionable increases as agreed with subsequent pensionable increases being based upon the Pensionable Salary immediately prior to the date of increase as adjusted for · previously agreed restrictions since 25 August 2009. Some members have an offset applied to their Pensionable Salary for service prior to a certain date, particularly former members of the Coutts Staff Pension Scheme for service before 1 July 1997. Early retirement pension A pension is provided on retirement after the age of 55. This is calculated using completed service and is reduced to allow for early 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section 25-
payment. No reduction is applied if early retirement is at the request of the employer (other than for reasons of misconduct). ( Ill-health pension In the event of premature retiref!1ent due to serious ill-health or incapacity, an immediate pension may be paid based on prospective pensionable service to NormaiPension Age and with no reduction being applied due to early payment. This is contingent upon the member having been receiving long term disability benefits for a specified period. If the member retires withoutwaiting until the end of the long term disability period the pension may be based on service up to the date of leaving only, with an allowance to award prospective service subject to Trustee discretion. In both cases the Trustee must be satisfied that the member's condition meets the definition of incapacity. Pension increases Guaranteed LPI increases are provided to pensions in payment in excess of the GMP. Some deferreds and pensioners who were formerly members of the . Centre-File Group of Companies Pension Scheme receive annual increases of the greater of LPI and 3% p.a. Tax-free lump sum Part of the member's pension may be commuted for a tax-free lump sum. Death after retirement · If the member dies within five years of retiring, a lump sum equal to the balance of five years' pension payments; plus A spouse's/partner's pension of one-half of the member's pension (before any commutation for lump sum). Children's pensions may also be payable, with the percentage of member's pension depending on marital status and the number of children. For most female members, dependants' pensions only apply in respect of service after 1 April1988. · . Death in service A lump sum of four times Pensionable Salary; plus A spouse's/partner's pension of one-half of the member's pension that would be payable based in prospective service to Normal Pension Age. Children's pensions may also be payable, with the percentage of member's pension depending bri marital status and the number of children. For most female members, dependants' pensions only apply in respect of service after 1 April 1988. Leaving service options A deferred pension payable from Normal Pension Age; or A transfer payment to either a new employer's scheme or a suitable insurance policy, equivalent in value to the deferred pension. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section · ' 26
FORMER MEMBERS OF THE ROYAL BANK OF SCOTLAND STAFF PENSION SCHEME (FOR PENSIONABLE SERVICE ACCRUED OUTSIDE THE RETIRING AGE 65 SCHEDULE) Normal Pension Age Age 60 for most members, although some members have other Normal Pension Ages between 55 and 65. From 1 June 2017 to 30 November 2017: 0.5% of Contribution Salary From 1 December 2017 to 31 May 2018: 1.0% of Contribution Salary From 1 June 2018 to 30 November 2018: 1.5% of Contribution Salary From 1 December 2018: 2.0% of Contribution Salary n/60 x Final Pensionable Salary at Normal Pension Date where: n =period of pensionable service in complete years and months (maximum of 40 years) Members' contributions Normal retirement pension Final Pensionable Salary is defined as the 12 best consecutive months of Pensionable Salary in the last ten years of membership of the Main Fund Section. For s6me members, benefits earned prior to 1 February 1977 are calculated using Pensionable Salary at date of leaving, rather than Final Pensionable Salary as defined above. Pensionable Salary is defined as the annual rate of basic salary (or the salary element of a member's Value Account) subject, where applicable, to the Main Fund Section's Earnings Cap. From 25 August ' ' 2009, where the Bank offers to increase an Active Member's basic salary or salary element of his Value Account with RBSelect on the · basis that part of the increase will not be pensionable, and the Active Member agrees, the annual increase in the Pensionable Salary shall be limited to the restricted pensionable increases as agreed with subsequent pensionable increases being based upon the Pensionable Salary immediately prior to the date of increase as adjusted for previously agreed restrictions since 25 August 2009. For some members (broadly those who joined before 1 October 1985), benefits are calculated with reference to a notional "loaded" salary. The loading applied is approximately 5%. State Pension Deduction From State Pension Age, a State Pension Deduction is applied, calculated as m/40 x 30% of Basic State Pension where: m = period of pensionable service prior to 1 January 2002 in complete years and months For some members the percentage in the above formula is 50% rather than 30%. Early retirement pension A pension is provided on retirement after the age of 55. This is calculated using completed service and is reduced to allow for early payment. No reduction is applied if early retirement is at the request of the employer (other than for reasons of misconduct). 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section 27
Ill-health pension In the event of premature retirement due to serious ill-health or incapacity, an immediate pensio_n may be paid based on prospective pensionable service to Normal P nsion Age and with no reduction being applied due to early payment. This is generally contingent upon the member having completed five_years of service and having been receiving long term disability benefits for a period of five years and six l " months, and also being prevented from taking up employment with any employer. If the member retires without waiting until the end of the long term disability period or is able to take up employment with an employer the pension is based on service up to the date of leaving only. In both cases the Trustee must be satisfied that the member's condition meets the definition of incapaCity. Pension increases Pensions in excess of the GMP that were accrued before 6 April 1997 increase in payment in line with price inflation up to a maximum of 3% p.a. Guaranteed LPI increases are provided to pensions in payment accrued after 5 April1997. Tax-free lump sum Part of the member's pension may be commuted for a tax-free lump sum. Death after retirement If the member dies within five years of retiring, a lump sum equal to the balance of five years' pension payments; plus A spoqse's/partner's pension of one-half of the member's pension (before any deduction or commutation for lump sum) less one-half of the member's State Pension Deduction (only applied from when the spouse/partner reaches State Pension Age). Children's pensions may also be payable, with the percentage of member's pension depending on marital status and the number of children. Death in service A lump sum of four times Pensionable Salary (including the "loading" where appropriate); plus A spouse's/partner's pension of one-half of the member's pension that would be payable based in prospective service to Normal Pension Age less one-half of the member's State Pension Deduction (only applied from when the spouse/partner reaches State Pension Age). Children's pensions may also be payable, with the percentage of member's pension depending on marital status and the number of children. A deferred pension payable from Normal Pension Age; or Leaving service options A transfer payment to either a new employer's scheme or a suitable insurance policy, equivalent in value to the deferred pension. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pensio11 Fund Main Fund Section :. - 28
Appendix 5: Assumptions for technical provisions The assumptions used for calculating the technical provisions are summarised below. Different assumptions are used for the solvency estimate, as set out in Appendix 6. Financial Assumptions Discount rate: Technical Provisions: Hedging Discount Curve (HDC) plus a fixed spread of 0.58% p.a.. This was derived by solving for the fixed spread over the HDC curve on the left hand side of the following equation of value using market conditions as at 31 December 2017: Technical Provisions (Discount rate: HDC plus a fixed spread, Inflation assumption: HIC) = Technical Provisions (Discount rate: swaps + 0.8% p.a., Inflation: RPI swap curve) Employer contributions: Hedging Discount Curve (HDC) plus a fixed spread of 0.48% p.a.. To derive the HDC, the yield at each yearly tenor is the arithmetic weighted average of: a) Spot yield at each tenor on the nominal gilt yield curve, and b) Spot yield at each tenor on the nominal Libor swap yield curve. The following weightings apply as at 31 December 2017 when calculating the HDC: Tenor point band HDC gilt proportion HDC swap proportion 0-5 years 11% 89% 5+-10 years 15% 85% 10+-15 years 14% 86% 15+-20 years 27% 73% 20+-25 years 60% 40% 25+-30 years 67% 33% 30+-40 years 72% 28% 40+ years 77% 23% The HDC gilt and swap proportion shall be updated as at 31 December 2018 and annually thereafter based on the gilts (and any other bonds used in the liability hedging portfolio) in the Trustees liability hedging portfolio as a proportion of total hedging at each tenor. The fixed spreads shall remain unchanged between actuarial valuations regardless of any update to the HDC curve except where the Trustee and the Bank agree otherwise. In the event the proportion of gilts at any tenor exceeds 100% of the total hedging at that tenor the HDC gilt proportion shall be set as 100%. In the event the proportion of gilts at any tenor is below 0% of the total hedging at that tenor the HDC gilt proportion shall be set as 0%. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
RPI inflation: Hedging Inflation Curve (HIC). To derive the HIC, the yield at each yearly tenor is the arithmetic weighted average of: a) Spot inflation at each tenor on the gilt breakeven RPI inflation curve, and b) Spot inflation at each tenor on the RPI swap inflation curve. The following weightings apply as at 31 December 2017 when calculating the HIC: Tenor point band HIC gilt proportion HIC swap proportion 0-5 years 11% 89% 5+-10 years 17% 83% 10+-15 years 19% 81% 15+-20 years 43% 57% 20+-25 years 96% 4% 25+-30 years 100% 0% 30+-40 years 100% 0% 40+ years 100% 0% The HIC gilt and swap proportion shall be updated as at 31 December 2018 and annually thereafter based on the gilts (and any other bonds used in the liability hedging portfolio) in the Trustees liability hedging portfolio as a proportion of total hedging at each tenor. In the event the proportion of gilts at any tenor exceeds 100% of the total hedging at that tenor the HIC gilt proportion shall be set as 100%. In the event the proportion of gilts at any tenor is below 0% of the total hedging at that tenor the HIC gilt proportion shall be set as 0%. CPI inflation: RPI inflation minus 1.1% LPI pension increases: Higher of (a) LPI derived using a Black Scholes model with 1.5% implied volatility (symmetric), and (b) CPI or RPI inflation as applicable for each pension tranche subject in all cases to the cap/floor applicable for each pension tranche Salary and pension increases: Salary increases (pensionable/basic) 1.8% p.a. Increases to the earnings cap 1.8% p.a. Revaluations to deferred pensions in excess of GMP The RPI price inflation assumption Rate of GMP increases in active service before GMP age The RPI price inflation assumption plus 1.0% p.a. at all durations Fixed rate revaluation on GMPs GMP fixed rate revaluation according to date of leaving. For active members assumed to withdraw from service in future, a fixed revaluation rate of 3.5% p.a. is assumed to apply after the assumed date of withdrawal. Increases to pensions in payment The LPI pension increase assumption for the relevant tranche Promotional salary increases Nil Discretionary increases Nil 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Yield curves: The tables below shows the annual forward rates for the financial assumptions used as at 31 December 2017 between time t-1 and time t. Key Technical Provisions (TP) Bank contributions for future service rate accrual (FSR) Discount rate Term HDC forward rates % TP Discount rate % FSR Discount rate % 1 0.63% 1.21% 1.11% 2 0.85% 1.43% 1.33% 3 1.06% 1.64% 1.54% 4 1.20% 1.78% 1.68% 5 1.29% 1.87% 1.77% 6 1.33% 1.91% 1.81% 7 1.49% 2.07% 1.97% 8 1.59% 2.17% 2.07% 9 1.68% 2.26% 2.16% 10 1.74% 2.32% 2.22% 11 1.78% 2.36% 2.26% 12 1.81% 2.39% 2.29% 13 1.82% 2.40% 2.30% 14 1.82% 2.40% 2.30% 15 1.82% 2.40% 2.30% 16 2.32% 2.90% 2.80% 17 1.89% 2.47% 2.37% 18 1.85% 2.43% 2.33% 19 1.81% 2.39% 2.29% 20 1.77% 2.35% 2.25% 21 4.43% 5.01% 4.91% 22 1.91% 2.49% 2.39% 23 1.83% 2.41% 2.31% 24 1.75% 2.33% 2.23% 25 1.66% 2.24% 2.14% 26 2.34% 2.92% 2.82% 27 1.50% 2.08% 1.98% 28 1.40% 1.98% 1.88% 29 1.30% 1.88% 1.78% 30 1.21% 1.79% 1.69% 31 1.71% 2.29% 2.19% 32 1.06% 1.64% 1.54% 33 1.00% 1.58% 1.48% 34 0.95% 1.53% 1.43% 35 0.92% 1.50% 1.40% 36 0.90% 1.48% 1.38% 37 0.89% 1.47% 1.37% 38 0.89% 1.47% 1.37% 39 0.90% 1.48% 1.38% 40 0.92% 1.50% 1.40% 41 1.25% 1.83% 1.73% 42 0.75% 1.33% 1.23% 43 1.29% 1.87% 1.77% 44 1.32% 1.90% 1.80% 45 1.32% 1.90% 1.80% 46 1.32% 1.90% 1.80% 47 1.32% 1.90% 1.80% 48 1.24% 1.82% 1.72% 49 1.15% 1.73% 1.63% 50 1.15% 1.73% 1.63% 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Term HDC forward rates % TP Discount rate % FSR Discount rate % 51 1.15% 1.73% 1.63% 52 1.15% 1.73% 1.63% 53 1.15% 1.73% 1.63% 54 1.15% 1.73% 1.63% 55 1.15% 1.73% 1.63% 56 1.15% 1.73% 1.63% 57 1.15% 1.73% 1.63% 58 1.15% 1.73% 1.63% 59 1.15% 1.73% 1.63% 60 1.15% 1.73% 1.63% 61 1.15% 1.73% 1.63% 62 1.15% 1.73% 1.63% 63 1.15% 1.73% 1.63% 64 1.15% 1.73% 1.63% 65 1.15% 1.73% 1.63% 66 1.15% 1.73% 1.63% 67 1.15% 1.73% 1.63% 68 1.15% 1.73% 1.63% 69 1.15% 1.73% 1.63% 70 1.15% 1.73% 1.63% 71 1.15% 1.73% 1.63% 72 1.15% 1.73% 1.63% 73 1.15% 1.73% 1.63% 74 1.15% 1.73% 1.63% 75 1.15% 1.73% 1.63% 76 1.15% 1.73% 1.63% 77 1.15% 1.73% 1.63% 78 1.15% 1.73% 1.63% 79 1.15% 1.73% 1.63% 80 1.15% 1.73% 1.63% 81 1.15% 1.73% 1.63% 82 1.15% 1.73% 1.63% 83 1.15% 1.73% 1.63% 84 1.15% 1.73% 1.63% 85 1.15% 1.73% 1.63% 86 1.15% 1.73% 1.63% 87 1.15% 1.73% 1.63% 88 1.15% 1.73% 1.63% 89 1.15% 1.73% 1.63% 90 1.15% 1.73% 1.63% 91 1.15% 1.73% 1.63% 92 1.15% 1.73% 1.63% 93 1.15% 1.73% 1.63% 94 1.15% 1.73% 1.63% 95 1.15% 1.73% 1.63% 96 1.15% 1.73% 1.63% 97 1.15% 1.73% 1.63% 98 1.15% 1.73% 1.63% 99 1.15% 1.73% 1.63% 100 1.15% 1.73% 1.63% 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Inflation and pension increases Term RPI inflation (HIC forward rates) CPI inflation LPI (0,5) pension increases LPI (0,3) pension increases LPI (0,2.5) pension increases LPI (3,5) pension increases LPI (2.5,7) pension increases CPI (0,3) pension increases 1 3.22% 2.12% 3.22% 3.00% 2.50% 3.64% 3.54% 2.12% 2 3.26% 2.16% 3.26% 3.00% 2.50% 3.65% 3.56% 2.16% 3 3.17% 2.07% 3.17% 3.00% 2.50% 3.61% 3.50% 2.07% 4 3.26% 2.16% 3.26% 3.00% 2.50% 3.65% 3.56% 2.16% 5 3.33% 2.23% 3.33% 3.00% 2.50% 3.68% 3.61% 2.23% 6 3.26% 2.16% 3.26% 3.00% 2.50% 3.65% 3.57% 2.16% 7 3.44% 2.34% 3.44% 3.00% 2.50% 3.73% 3.69% 2.34% 8 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.73% 2.40% 9 3.56% 2.46% 3.56% 3.00% 2.50% 3.78% 3.77% 2.46% 10 3.61% 2.51% 3.61% 3.00% 2.50% 3.81% 3.81% 2.51% 11 3.62% 2.52% 3.62% 3.00% 2.50% 3.81% 3.82% 2.52% 12 3.70% 2.60% 3.70% 3.00% 2.50% 3.85% 3.89% 2.60% 13 3.74% 2.64% 3.74% 3.00% 2.50% 3.87% 3.92% 2.64% 14 3.77% 2.67% 3.77% 3.00% 2.50% 3.89% 3.94% 2.67% 15 3.79% 2.69% 3.79% 3.00% 2.50% 3.90% 3.96% 2.69% 16 3.80% 2.70% 3.80% 3.00% 2.50% 3.90% 3.96% 2.70% 17 3.90% 2.80% 3.90% 3.00% 2.50% 3.95% 4.04% 2.80% 18 3.89% 2.79% 3.89% 3.00% 2.50% 3.94% 4.03% 2.79% 19 3.86% 2.76% 3.86% 3.00% 2.50% 3.93% 4.01% 2.76% 20 3.82% 2.72% 3.82% 3.00% 2.50% 3.91% 3.98% 2.72% 21 4.40% 3.30% 4.40% 3.00% 2.50% 4.40% 4.45% 3.00% 22 3.73% 2.63% 3.73% 3.00% 2.50% 3.87% 3.90% 2.63% 23 3.61% 2.51% 3.61% 3.00% 2.50% 3.81% 3.82% 2.51% 24 3.48% 2.38% 3.48% 3.00% 2.50% 3.75% 3.72% 2.38% 25 3.35% 2.25% 3.35% 3.00% 2.50% 3.69% 3.63% 2.25% 26 3.25% 2.15% 3.25% 3.00% 2.50% 3.65% 3.56% 2.15% 27 3.07% 1.97% 3.07% 3.00% 2.50% 3.57% 3.44% 1.97% 28 2.93% 1.83% 2.93% 2.93% 2.50% 3.52% 3.35% 1.83% 29 2.81% 1.71% 2.81% 2.81% 2.50% 3.47% 3.28% 1.71% 30 2.69% 1.59% 2.69% 2.69% 2.50% 3.43% 3.21% 1.59% 31 2.60% 1.50% 2.60% 2.60% 2.50% 3.39% 3.16% 1.50% 32 2.52% 1.42% 2.52% 2.52% 2.50% 3.37% 3.12% 1.44% 33 2.46% 1.36% 2.46% 2.46% 2.46% 3.35% 3.09% 1.40% 34 2.43% 1.33% 2.43% 2.43% 2.43% 3.34% 3.08% 1.38% 35 2.41% 1.31% 2.41% 2.41% 2.41% 3.33% 3.07% 1.37% 36 2.41% 1.31% 2.42% 2.41% 2.41% 3.33% 3.07% 1.37% 37 2.43% 1.33% 2.44% 2.43% 2.43% 3.34% 3.08% 1.38% 38 2.47% 1.37% 2.47% 2.47% 2.47% 3.35% 3.10% 1.41% 39 2.53% 1.43% 2.53% 2.53% 2.50% 3.37% 3.13% 1.44% 40 2.59% 1.49% 2.59% 2.59% 2.50% 3.39% 3.16% 1.49% 41 2.90% 1.80% 2.90% 2.90% 2.50% 3.50% 3.33% 1.80% 42 2.93% 1.83% 2.93% 2.93% 2.50% 3.51% 3.35% 1.83% 43 2.94% 1.84% 2.94% 2.94% 2.50% 3.52% 3.35% 1.84% 44 2.93% 1.83% 2.93% 2.93% 2.50% 3.51% 3.35% 1.83% 45 3.14% 2.04% 3.14% 3.00% 2.50% 3.60% 3.48% 2.04% 46 3.18% 2.08% 3.18% 3.00% 2.50% 3.62% 3.51% 2.08% 47 3.19% 2.09% 3.19% 3.00% 2.50% 3.62% 3.52% 2.09% 48 3.23% 2.13% 3.23% 3.00% 2.50% 3.64% 3.55% 2.13% 49 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 50 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Term RPI inflation (HIC forward rates) CPI inflation LPI (0,5) pension increases LPI (0,3) pension increases LPI (0,2.5) pension increases LPI (3,5) pension increases LPI (2.5,7) pension increases CPI (0,3) pension increases 51 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 52 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 53 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 54 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 55 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 56 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 57 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 58 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 59 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 60 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 61 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 62 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 63 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 64 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 65 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 66 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 67 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 68 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 69 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 70 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 71 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 72 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 73 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 74 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 75 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 76 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 77 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 78 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 79 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 80 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 81 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 82 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 83 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 84 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 85 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 86 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 87 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 88 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 89 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 90 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 91 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 92 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 93 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 94 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 95 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 96 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 97 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 98 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 99 3.50% 2.40% 3.50% 3.00% 2.50% 3.76% 3.74% 2.40% 100 3.49% 2.39% 3.49% 3.00% 2.50% 3.76% 3.73% 2.39% 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Demographic assumptions Pre-retirement mortality: Males: 40% of AM92 Ultimate Females: 50% AF92 Ultimate Post-retirement mortality Base tables: Males: standard table S2PMA Light Females: standard table S2PFA Light The base tables and corresponding scaling factors have been derived from an analysis of the Main Fund Sections own mortality experience over the period from 1 April 2006 to 31 March 2017. Combined average scaling factors have been determined using the Aon Hewitt Longevity Model (version 3.03) based on the members date of birth, sex and socio-economic information inferred from their postcode and membership category. Current Member sex Member base Member Members Members membership table equivalent dependant dependant group single scaling factor base table equivalent single scaling factor Actives M S2PMA Light 113% S2PFA Light 102% F S2PFA Light 100% S2PMA Light 124% Deferreds M S2PMA Light 113% S2PFA Light 102% F S2PFA Light 98% S2PMA Light 120% Pensioners M S2PMA Light 104% S2PFA Light 96% F S2PFA Light 96% S2PMA Light 117% Dependants M S2PMA Light 104% - - F S2PFA Light 98% - - Ill-health retirees: A scaling factor adjustment is applied to the standard tables shown above equal to 150% for males and 151% for females Post-retirement mortality Future improvements: CMI 2017 Core Projections Model with smoothing parameter Sê = 8.0. Long term rate to the improvements of 1.5% p.a. for males and females Early retirements: Allowance is made for members to retire before or after their Normal Retirement Age. Where pensions are assumed to be payable before or after Normal Retirement Age for a particular tranche of benefits, they are adjusted for early or late payment using the Main Fund Sections early and late retirement factors applicable from 1 February 2018, which are assumed to remain unchanged in future. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
The tables below illustrate the percentage of members retiring each year. Active members: Age Current schedule Non-NPA65 Schedule NPA65 Schedule From active service Post-withdrawal From active service Post-withdrawal 55 10% 10% 10% 10% 56 10% 5% 10% 5% 57 10% 5% 10% 5% 58 20% 5% 10% 5% 59 25% 5% 10% 5% 60 100% 100% 25% 40% 61 100% 100% 20% 20% 62 100% 100% 20% 20% 63 100% 100% 20% 20% 64 100% 100% 20% 20% 65+ 100% 100% 100% 100% Deferred members with a Normal Retirement Age (for service outside the Retiring Age 65 Schedule) of 60, and not on special redundancy packages: Age Current schedule NPA60 Schedule NPA65 Schedule 55 10% 10% 56 5% 5% 57 5% 5% 58 5% 5% 59 5% 5% 60 100% 40% 61 100% 20% 62 100% 20% 63 100% 20% 64 100% 20% 65+ 100% 100% Deferred members with a Normal Retirement Age (for service outside the Retiring Age 65 Schedule) other than 60, and not on special redundancy packages, are assumed to retire at their Normal Retirement Age. Members on special redundancy packages are assumed to retire at age 55, with the appropriate reduction applied in each case. Withdrawals: Allowance made. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Family Details: A man is assumed to be three years older than his wife. 90% of male and 65% of female members are assumed to be married at retirement or earlier death. A childrens loading of 5% is applied to benefits payable on death before retirement. Cash Equivalent Transfer Values (CETVs): Allowance made for transfers equivalent to £630M per annum over the period to 31 December 2021, based on the same demographic profile as those members transferring out of the Main Fund Section over the three years to 31 December 2017. CETV assumptions are assumed to be as follows for this purpose: Discount rate: swaps +2.2% p.a. Post-retirement mortality: As above except with 1.25% p.a long term rate of improvement RPI/CPI inflation and LPI pension increases: As derived above, except RPI inflation equal to the breakeven RPI swap yield curve Commutation: No allowance made Notwithstanding the use of the above CETV assumptions for the purpose of the actuarial valuation, the Trustee shall review and amend the CETV assumptions from time to time in accordance with the Rules and legislation, as appropriate. Commutation: Allowance for members to commute 18% of their pension at retirement based on factors which are assumed to remain unchanged in future. Expenses: An addition of £2.667M per month increasing annually with RPI inflation, payable by the Bank in addition to the future service rate. The allowance for expenses excludes investment-related expenses (which are paid from the Main Fund Section) and excludes PPF levies in excess of £2M in any year which are paid from the Main Fund Section. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Decrements for withdrawal, death before retirement and ill-health retirement: Age Withdrawal from service Death before retirement - Males Death before retirement - Females Ill health retirement - Males Ill health retirement - Females 25 8.75 0.02 0.01 0.03 0.03 26 8.75 0.02 0.01 0.03 0.03 27 8.75 0.02 0.01 0.03 0.03 28 8.75 0.02 0.01 0.03 0.03 29 8.75 0.02 0.02 0.03 0.03 30 8.75 0.02 0.02 0.03 0.04 31 8.75 0.02 0.02 0.03 0.04 32 8.75 0.02 0.02 0.03 0.04 33 8.75 0.03 0.02 0.03 0.04 34 8.75 0.03 0.02 0.03 0.05 35 8.75 0.03 0.02 0.03 0.05 36 8.75 0.03 0.03 0.03 0.06 37 8.75 0.03 0.03 0.03 0.07 38 8.75 0.03 0.03 0.04 0.07 39 8.75 0.03 0.03 0.04 0.08 40 8.75 0.04 0.04 0.05 0.09 41 8.75 0.04 0.04 0.05 0.09 42 8.75 0.04 0.04 0.06 0.10 43 8.75 0.05 0.05 0.07 0.11 44 8.75 0.05 0.05 0.07 0.12 45 8.75 0.06 0.06 0.08 0.13 46 8.75 0.06 0.06 0.09 0.14 47 8.75 0.07 0.07 0.11 0.15 48 8.75 0.08 0.08 0.12 0.17 49 8.75 0.09 0.09 0.14 0.19 50 8.75 0.10 0.09 0.15 0.20 51 8.75 0.11 0.10 0.17 0.22 52 8.75 0.13 0.11 0.19 0.25 53 8.75 0.14 0.13 0.22 0.27 54 8.75 0.16 0.14 0.24 0.30 55 5 0.18 0.15 0.27 0.33 56 5 0.20 0.17 0.31 0.37 57 5 0.23 0.19 0.34 0.40 58 5 0.25 0.21 0.38 0.44 59 5 0.29 0.23 0.43 0.48 60 2 0.32 0.25 0.47 0.54 61 2 0.36 0.28 0.53 0.59 62 2 0.40 0.31 0.58 0.65 63 2 0.45 0.34 0.65 0.71 64 2 0.51 0.38 0.72 0.78 65 2 0.57 0.42 0.80 0.87 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Factors: Early and late retirement Years retiring early/late Early retirement * Late retirement 0 1.000 1.000 1 0.962 1.027 2 0.925 1.055 3 0.890 1.084 4 0.856 1.116 5 0.824 1.150 6 0.793 1.187 7 0.762 1.227 8 0.734 1.269 9 0.706 1.314 10 0.679 1.362 * for revaluing pension in excess of GMP Commutation Age Unisex 55 23.37 56 22.86 57 22.35 58 21.83 59 21.30 60 20.76 61 20.22 62 19.68 63 19.12 64 18.56 65 18.00 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund Main Fund Section
Appendix 6: Assumptions for solvency estimate The solvency estimate has been calculated in line with statutory requirements. I have taken into account the investment strategies that a life assurance company is likely to use to back its annuity business and the resulting pricing we would expect to see under the market conditions at the actuarial valuation date, taking into account the size of the Main Fund Section. However, this estimate is only a guide. The true position can only be established by conducting a competitive buy-out auction and fully defining the scope and likely cost of a wind-up process for the Main Fund Section. The assumptions used are described on the next page. Solvency estimate This considers the position if: The Main Fund Section was discontinued on the actuarial valuation date Member benefits were crystallised and, for active members, were based on their Pensionable Service and Pensionable Salary at the actuarial valuation date The assets were used to buy immediate and deferred annuities from an insurance company, with an extra margin needed to cover the expenses of shutting down the Main Fund Section The solvency estimate is a regulatory requirement and also provides a useful benchmark against which the Trustees and others can assess the prudence of other funding measures. 7639 Main Fund Section actuarial valuation report 31.12.2017 The Royal Bank of Scotland Group Pension Fund
Appendix 6: Assumptions for solvency estimate (continued) The table below shows the main assumptions used in calculating the solvency estimate, where these are different from those used for the technical provisions. Pensioner discount rate Aon Hewitt Bulk Annuity Market Monitor yield curve for pensioners, which is constructed from swap and UK corporate bond market curves Non-pensioner discount rate (before and after retirement) Aon Hewitt Bulk Annuity Market Monitor yield curve for non-pensioners, which is constructed from swap and UK corporate bond market curves Increase in RPI Term-dependent rates derived from the RPI swap markets Increase in CPI Equal to the RPI assumption less 0.5% pa Pension increases Derived from the price inflation assumptions with allowance for caps and floors and with the aim of approximately reflecting the cost of hedging these increases using LPI-linked swaps Withdrawals All members assumed to immediately withdraw from service with entitlement to deferred pension Commutation / Transfers Out No allowance Post-retirement mortality As for the technical provisions basis except future mortality improvements assume CMI 2016 and are subject to a long-term rate of improvement of 1.75% p.a. for both men and women. Expenses A reserve for future expenses equal to: 3% of liabilities up to £50M; 2% of liabilities between £50M and £100M; and 1% of liabilities in excess of £100M £50,000 plus per member expenses as set out below and two years worth of estimated PPF levies Pensioners: Age Expense allowance per member < 60 £900 60 70 £800 70 80 £600 > 80 £500 Non-pensioners: An allowance of £1,000 per member. The reserve for expenses also includes an allowance for the cost of forced sales of the Main Fund Sections holdings. All of these allowances for expenses are presented as additions to the liabilities as the regulations require the assets to be shown at audited market value.
Appendix 7: Certificate of technical provisions Actuarial certificate given for the purposes of Regulation 7(4)(a) of the Occupational Pension Schemes (Scheme Funding) Regulations 2005 The Royal Bank of Scotland Group Pension Fund Main Fund Section Calculation of technical provisions I certify that, in my opinion, the calculation of the Main Fund Sections technical provisions as at 31 December 2017 is made in accordance with regulations under section 222 of the Pensions Act 2004. The calculation uses a method and assumptions determined by the Trustee of the Royal Bank of Scotland and set out in the Statement of Funding Principles dated October 2018. Signature: Date: David Eteen Fellow of the Institute and Faculty of Actuaries Aon Hewitt Limited Verulam Point Station ay St Albans AH1 5HE
Appendix 8: Glossary Attained age method This is one of the methods used by actuaries to calculate a contribution rate to the scheme. This method calculates the present value of the benefits expected to accrue to members over their expected remaining membership of the scheme expressed as a percentage of their expected future pensionable pay. It allows for projected future increases to pay through to retirement or date of leaving service. The method is based on the current membership and takes no account of the possibility of further members joining the scheme. If there are no new members, this method would be expected to result in a stable contribution rate, once surpluses or shortfalls are taken into account, and if all the other assumptions are borne out. However, if more members join the scheme to replace older leavers, the contribution rate can be expected to fall. Cash transfer sum This is a benefit available to early leavers who have between three months and two years of pensionable service. It is calculated in the same way as the cash equivalent transfer value payable to longer serving early leavers, and is calculated at the date of leaving pensionable service. Deficit This is the funding target less the value of assets. If the value of assets is greater than the funding target, then the difference is called the surplus. Discount rate This is used to place a present value on a future payment. A risk-free discount rate is usually derived from the investment return achievable by investing in government gilt-edged stock. A discount rate higher than the risk-free rate is often used to allow for some of the extra investment return that is expected by investing in assets other than gilts. Funding ratio This is the ratio of the value of assets to the funding target. Funding target An assessment of the present value of the benefits that will be paid from the scheme in the future, normally based on pensionable service prior to the valuation date. Often, the funding target is equal to the technical provisions. Guaranteed Minimum Pensions (GMPs) Most schemes that were contracted out of the State Earnings Related Pension Scheme (SERPS) before April 1997 have to provide a pension for service before that date at least equal to the Guaranteed Minimum Pension (GMP). This is approximately equal to the SERPS pension that the member would have earned had the scheme not been contracted out. GMPs ceased to build up on 6 April 1997 when the legislation changed. Limited Price Indexation (LPI) The Pensions Act 1995 required schemes to provide a minimum level of annual increase to pensions in payment. The minimum level is the smaller of 5% and the increase in inflation* and applies to the pension earned from 6 April 1997 to 5 April 2005. With effect from 6 April 2005, the cap for statutorily required LPI for future service was reduced from 5% to 2.5%. *Until 2010, inflation for the purpose of this minimum was defined with reference to changes in the Retail Prices Index. From 2011, inflation was defined with reference to changes in the Consumer Prices Index.
Appendix 8: Glossary (continued) Pension Protection Fund (PPF) The PPF was established with effect from 6 April 2005. The PPF will normally take over the assets of a pension scheme in the event of its employer becoming insolvent and the scheme having insufficient assets to provide the PPF benefits. The PPF will not provide the scheme benefits in full. The PPF is financed by a levy on most defined benefit pension schemes. The PPF benefits are broadly 100% of benefits for pensioners over normal retirement age and 90% of benefits up to a cap for all other members. Pension increases granted on benefits are at lower levels than apply in many schemes, in particular, benefits earned before 6 April 1997 would not be given any pension increases within the PPF. Present value Actuarial valuations involve projections of pay, pensions and other benefits into the future. To express the value of the projected benefits in terms of a cash amount at the valuation date, the projected amounts are discounted back to the valuation date by a discount rate. This value is known as the present value. For example, if the discount rate was 6% a year and if we had to pay a lump sum of £1,060 in one years time the present value would be £1,000. Projected Unit Method One of the common methods used by actuaries to calculate a contribution rate to a scheme. This method calculates the present value of the benefits expected to accrue to members over a control period (often one year) following the valuation date. The present value is usually expressed as a percentage of the members pensionable pay. It allows for projected future increases to pay through to retirement or date of leaving service. Provided that the distribution of members remains stable with new members joining to take the place of older leavers, the contribution rate calculated can be expected to remain stable, if all the other assumptions are borne out. If there are no new members however, the average age will increase and the contribution rate can be expected to rise. Protected Rights Prior to April 2012, schemes could contract out of SERPS/S2P on a protected rights basis. The accumulated National Insurance rebates in respect of each member as a result of being contracted out (known as protected rights) must be applied as an underpin to the members benefits. Schemes that were contracted out on this basis before 6 April 1997 provided this underpin instead of GMPs. Prudent Prudent assumptions are assumptions that, if a scheme continues on an ongoing basis, are more likely to overstate than understate the amount of money actually required to meet the cost of the benefits. Recovery plan Where a valuation shows a funding shortfall against the technical provisions, trustees must prepare a recovery plan setting out how they plan to meet the statutory funding objective.
Appendix 8: Glossary (continued) Schedule of contributions Trustees of pension schemes must prepare and maintain a schedule of contributions. This shows the dates and amounts of contributions due from the employer and members. Under the Pensions Act 2004 the schedule must be put in place within 15 months of the valuation date. Solvency ratio This is the ratio of the market value of a schemes assets to the estimated cost of securing a schemes liabilities in the event of the discontinuance of the scheme. Statement of Funding Principles The Pensions Act 2004 requires trustees to prepare (and from time to time review and if necessary revise) a written statement of their policy for securing that the statutory funding objective is met. This is referred to as a statement of funding principles. Statutory estimate of solvency This is the difference between the market value of a schemes assets and the estimated cost of securing a schemes liabilities in the event of the discontinuance of the scheme. Statutory funding objective Under the Pensions Act 2004, every scheme is subject to the statutory funding objective, which is to have sufficient and appropriate assets to cover its technical provisions. Surplus This is the value of assets less the funding target. If the funding target is greater than the value of assets, then the difference is called a deficit. Technical provisions This is the present value of the benefits members are entitled to based on pensionable service to the valuation date, assessed using the assumptions agreed between a schemes trustees and the company. It generally allows for projected future increases to pay through to retirement or date of leaving service. Transfer value Members generally have a legal right to transfer their benefits to another pension arrangement before they retire. In taking a transfer, members give up their benefits in a scheme, and a sum of money (called the transfer value) is paid into another approved pension scheme; this is used to provide pension benefits on the terms offered in that scheme.
Report Framework This report has been prepared in accordance with the framework below TAS compliant This report, and the work relating to it, complies with Technical Actuarial Standard 100: Principles for Technical Actuarial Work (TAS 100) and Technical Actuarial Standard 300: Pensions (TAS 300).
THE ROYAL BANK OF SCOTLAND GROUP PENSION FUND MAIN FUND SECTION ACTUARIAL VALUATION AS AT 31 DECEMBER 2017 SCHEDULE OF CONTRIBUTIONS Introduction This Schedule of Contributions is required by Section 227 of the Pensions Act 2004, and updates the previous Schedule of Contributions dated 29 June 2017. It comes into effect on the date of certification of this schedule by the Scheme Actuary and covers the period from 1 October 2018 to the fifth anniversary of the date of certification of this schedule by the Scheme Actuary. The Directors of RBS Pension Trustee Limited (the Trustee) are responsible for preparing a revised schedule no later than 31 March 2022. Participating Employers This schedule covers contributions payable to the Main Fund Section by the employers which participate in the Main Fund Section from time to time (the Employers). The contributions due to the Main Fund Section under this schedule shall be paid by the Employers in such amounts or proportions as the Principal Employer shall determine. If any contributions are not paid within the time limits specified in this schedule the Trustee may demand payment of them by one or more of the Employers as the Trustee shall decide. Member Contributions All employees who are active members of the Main Fund Section and accruing DB benefits in the Main Fund Section will contribute to the Main Fund Section as follows: From 1 October 2018 to 30 November 2018 (inclusive): 1.5% of Contribution Salary From 1 December 2018: 2% of Contribution Salary In addition to the above amounts, further contributions are also payable to the Main Fund Section by employees who are active members of the Adam & Company Schedule of the Main Fund Section as follows: Period Amount From 1 October 2018 2.5% of pensionable salary at 1 January of the calendar year Employees who are active members of the NatWest Defined Contribution Schedule of the Main Fund Section are not required to contribute to the Main Fund Section. These amounts do not include members Additional Voluntary Contributions. The Employers will ensure that the Trustee receives the contributions payable by their employees within 19 days of the end of the calendar month in which the contributions were deducted from the employees salaries. The Royal Bank of Scotland Group Pension Fund Main Fund Section - Schedule of Contributions
Normal Employer Contributions The Employers will pay contributions to the Main Fund Section as follows: Period Amount Payable by From 1 October 2018 12% of Contribution Salary for employees who Normal Employer are active members of the NatWest Defined Contributions will be Contribution Schedule of the Main Fund Section. calculated and paid on a monthly basis. At least 41.5% of Contribution Salary for employees who are active members of the Contributions will be paid Retiring Age 65 Schedule of the Main Fund within three months of the Section, less any member contributions payable. end of the calendar month to which they relate. At least 48.5% of Contribution Salary for employees who are active members of all other schedules of the Main Fund Section, less any member contributions payable. Plus contributions in respect of pension elections made through RBSelect. Deficit repair contributions In respect of the shortfall in funding in accordance with the Recovery Plan dated October 2018, the Employers will pay additional lump sum cash contributions to the Main Fund Section as follows: Period Amount Payable by From 1 October 2018 £2,000 million 31 December 2018 Administration expenses and Pension Protection Fund levies The Employers will pay contributions to the Main Fund Section to meet estimated administration expenses, Pension Protection Fund levies and other levies collected by the Pensions Regulator. Period Amount Payable by From 1 October 2018 Expense Contributions - £2,667,000 per Expense Contributions will month, increased each subsequent 1 July by be paid monthly and by no the increase in the Retail Prices Index in the later than 90 days following 12 months to the previous 31 March, subject to the period to which they a minimum increase each year of 0%. The total payments for each monthly period from relate. 1 July will be rounded up to the next £1,000. Levy Contributions will be paid annually and by no Levy Contributions - Reimbursement of PPF later than 90 days following levies in excess of £2,000,000 in a levy year the payment of such levies (nil otherwise). from the Main Fund Section or, if later, 30 days following the Trustee notifying the Employers of such amounts which are due. These contributions exclude investment-related expenses which are paid from the Main Fund Section. The Royal Bank of Scotland Group Pension Fund Main Fund Section - Schedule of Contributions
Additional Employer Contributions In addition to the payments above, the Employers will pay to the Main Fund Section (or procure payment of) a proportion of any amounts to be distributed to Royal Bank of Scotland Group Plc shareholders (ordinary or special dividends or share buy-backs). Such amounts shall constitute additional Employer contributions and are potentially payable for a period of up to 20 years from 1 January 2020. These additional Employer contributions are subject to an annual cap in each calendar year of £500 million and an overall aggregate amount of £1,500 million. The agreed amount payable as additional Employer contributions is as follows: Period Amount Payable by From 1 January 2020 100% of distributions to shareholders paid after 1 January 2020, subject to the annual cap. No later than 90 days following the payments to shareholders The Employers may, from time to time, pay additional contributions to the Main Fund Section as advised to the Trustee in writing. Where the Employers pay any amount to the Main Fund Section at their discretion in excess of the contributions due as set out above, that amount shall count towards the overall aggregate amount of £1,500 million set out above. Payments to cover Augmentations Augmentations and the payment of unreduced pensions on retirements at the request of the Employers with a capital cost of up to £10M a year can be made without additional contributions being paid to the Main Fund Section by the Employers. The Trustee will monitor the position on an ongoing basis and any augmentations over this limit will not be granted without agreement from the Employers to provide additional contributions to meet the cost of such augmentations. Any augmentations which are funded by additional contributions to the Main Fund Section by the Employers will not count towards the £10M annual limit. Date of Schedule of Contributions: October 2018 Signed on behalf of the Employers Signature: Name: Capacity: Date: Signed on behalf of RBS Pension Trustee Limited Signature: Name: Capacity: Date: Note: This schedule comes into effect on the date it is certified by the Scheme Actuary, not on the date shown above. The Royal Bank of Scotland Group Pension Fund Main Fund Section - Schedule of Contributions
THE ROYAL BANK OF SCOTLAND GROUP PENSION FUND MAIN FUND SECTION ACTUARIAL VALUATION AS AT 31 DECEMBER 2017 RECOVERY PLAN Introduction This Recovery Plan has been prepared by the Directors of RBS Pension Trustee Limited (the Trustee) to satisfy the requirements of Section 226 of the Pensions Act 2004, after obtaining the advice of David Eteen, the Scheme Actuary and after obtaining the agreement of the Principal Employer and the Participating Employers of the Main Fund Section (collectively the Employers). It follows the actuarial valuation of the Main Fund Section as at 31 December 2017, which revealed a funding shortfall (Technical Provisions minus value of assets) of £1,798M. Steps to be taken to ensure that the Statutory Funding Objective is met To eliminate the funding shortfall, the Trustee and the Employers have agreed that additional contributions (i.e. contributions over and above those needed to cover expenses and the cost of benefits being earned in the future) will be paid by the Employers as lump sum cash contributions into the Main Fund Section as follows: Year Amount £M Payment Due Date 2018 2,000 no later than 31 December Period in which the Statutory Funding Objective should be met Under this Recovery Plan, if the assumptions made are borne out in practice the funding shortfall will be eliminated in one year from the actuarial valuation date as at 31 December 2017, which is by 31 December 2018. The assumptions are: Technical Provisions will continue to be calculated according to the method and assumptions set out in the Statement of Funding Principles dated October 2018, with financial conditions unchanged from those as at 31 December 2017 Experience will be in line with the assumptions underlying the Technical Provisions Signed on behalf of the Employers Signature: Name: Capacity: Date: Signed on behalf of RBS Pension Trustee Limited Signature: Name: Capacity: Date: ( October 2018 is the date the Recovery Plan was prepared for the purposes of Scheme Funding Regulation 8(6)). The Royal Bank of Scotland Group Pension Fund Main Fund Section Recovery Plan
SCHEDULE 5 AA SECTION MOU
MEMORANDUM OF UNDERSTANDING 2018 Between National Westminster Bank plc Royal Bank of Scotland plc (to be known as NatWest Markets plc) RBS Pension Trustee Limited In relation to various matters including the future funding of the Royal Bank of Scotland Group Pension Fund (AA Section) and a bulk transfer of members from the Main Section to another section of the Group Fund Allen & Overy LLP 0011398-0004743 CO:32103010.14
This MEMORANDUM OF UNDERSTANDING is made on 2018 BETWEEN: (1) NATIONAL WESTMINSTER BANK PLC registered in England with company number 929027 whose registered office is at 135 Bishopsgate, London, EC2M 3UR (the Principal Employer); (2) ROYAL BANK OF SCOTLAND PLC (to be known as NatWest Markets plc) registered in Scotland with company number SC090312 whose registered office is at 36 St Andrew Square, Edinburgh, EH2 2YB (RBS plc); and (3) RBS PENSION TRUSTEE LIMITED registered in England with company number 2726164 whose registered office as at 1 Princes Street, London, EC2R 8PB (Trustee). BACKGROUND: (A) The Trustee is the trustee of the Royal Bank of Scotland Group Pension Fund (the Group Fund) as governed by a definitive deed dated 5 April 2006 as amended from time to time. (B) The Principal Employer is the principal employer of the Group Fund. (C) The Principal Employer and the Trustee entered into a Memorandum of Understanding dated 26 January 2016 (the 2016 MoU) under which, among other things: (i) The Trustee acknowledged that the Royal Bank of Scotland Group must comply with the reforms proposed by the Independent Commission on Banking, including the changes made to the Financial Services and Markets Act 2000 (by the Banking Act 2013) and the Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulation 2015 (the Ring Fencing Requirements); and (ii) The Principal Employer agreed to act reasonably and in good faith (and procure that each participating employer also act reasonably and in good faith) towards the Group Fund in the implementation of these changes and the Trustee agreed to act reasonably and in good faith towards each participating employer when considering any proposal. (D) RBS plc is currently the sole participating employer in the RBS AA Section of the Group Fund (the AA Section) and a participating employer in the Main Section of the Group Fund (the Main Section). (E) The Principal Employer and RBS plc (together the Bank) and the Trustee wish to enter into this memorandum of understanding relating to the AA Section (the AA MoU). (F) To comply with the Ring Fencing Requirements the current intention is for RBS plc to cease to participate in the Main Section in 2020. Accordingly, RBS plc employees who are members of the Main Section will cease accrual in that section and accrue future benefits in a pension arrangement relating to RBS plc, such as the AA Section or a new segregated section of the Group Fund.
1. THE STATUS OF THIS MOU 1.1 The Trustee and the Bank enter into this AA MoU in good faith to document their current intention in relation to the matters hereunder but acknowledge that no provision of this AA MoU is legally binding or enforceable on either party. 2. TRUSTEE FIDUCIARY DUTIES AND PENSIONS REGULATOR 2.1 The Bank acknowledges that the Trustee cannot fetter the exercise of its powers and discretions in a way which would be inconsistent with its fiduciary duties and so the understanding of the Trustee recorded in this AA MoU must be read subject to that principle. The Bank also recognises that the Trustees fiduciary duties may include taking into account the views of the Pensions Regulator (including Pensions Regulator guidance and codes of practice) and so the understanding of the Trustee recorded in this AA MoU must be read subject to this. 2.2 The Trustee confirms that as at the date of this AA MoU (i) it is satisfied that entry into this AA MoU is consistent with its fiduciary duties and Pensions Regulator guidance and codes of practice and (ii) it is not aware of any views of the Pensions Regulator which would conflict with the terms of this AA MoU. 3. BANK AND TRUSTEE TO ACT REASONABLY AND IN GOOD FAITH By entering into this AA MoU and in carrying out their non-binding intentions hereunder the Principal Employer, RBS plc and the Trustee shall act reasonably and in good faith. 4. ACTUARIAL VALUATION 4.1 The Bank and the Trustee intend to complete a statutory actuarial valuation of the AA Section as at 31 December 2017 as soon as practicable with a view to entering into formal valuation documents by 30 June 2018. 4.2 The Bank and the Trustee intend that the assumptions for the statutory actuarial valuation will be the Financial Assumptions (Technical Provisions) and the Demographic Assumptions (Technical Provisions) as set out in the appendix to this AA MoU. 4.3 The Bank and the Trustee also intend to complete a statutory actuarial valuation of the AA Section as at 31 December 2018 (but only if the Main Section statutory actuarial valuation will also be as at 31 December 2018). That valuation, if required, will be carried out in a manner consistent with the Statement of Funding Principles agreed following the 31 December 2017 valuation, unless the Trustee and the Bank agree otherwise. 5. 2020 BULK TRANSFER TO THE AA SECTION 5.1 The parties acknowledge that the Banks current intention for compliance with the Ring Fencing Requirements in respect of the Main Section is for RBS plc to cease to participate in the Main Section in 2020. Accordingly, RBS plc employees who are members of the Main Section (Transfer Employees) will cease accrual in that section. The Bank intends for Transfer Employees to accrue future benefits which are the same as the current benefits of such Transfer Employees but in a pension arrangement relating to RBS plc, such as the AA Section or a new segregated section of the Group Fund (the Transferred Employees Section). The appropriate pension arrangement for Transfer Employees will be agreed with the Trustee on or before 31 March 2020. The Principal
Employer and the Trustee agree to act reasonably and in good faith to establish the Transferred Employees Section for Transfer Employees. 5.2 The initial future service contribution rate for the Transfer Employees in the Transferred Employees Section will be calculated to reflect (i) the demographic assumptions for active members in relation to early retirement and ill-health retirement under the Main Section, absent any advice of the actuary to the contrary and (ii) shall otherwise be calculated on actuarial assumptions consistent with those contained in the Statement of Funding Principles for the latest actuarial valuation of the AA Section (or if the Transferred Employees Section is not the AA Section, the actuarial valuation assumptions agreed between the Trustee and RBS plc). 5.3 The Principal Employer intends to either: (i) transfer the past service benefits of Transfer Employees in the Main Section to the Transferred Employees Section (whether that is the AA Section or a new segregated section); or (ii) leave past service benefits of Transfer Employees in the Main Section. The Bank and the Trustee agree to act reasonably and in good faith to facilitate any transfer of past service benefits of Transfer Employees in the Main Section to the Transferred Employees Section, including by entering into any documentation (including any deed of amendment) which may be required to give effect to that transfer. 5.4 In respect of any transfer of past service benefits of Transfer Employees in the Main Section to the Transferred Employees Section, the Bank and the Trustee intend for the following principles to apply: (a) the bulk transfer will be made without the consent of the Transfer Employees and will provide those Transfer Employees with the same past service benefits in the Transferred Employees Section as they had accrued under the Main Section, including through the adoption of the same discretionary practices; (b) the actuarial factors applicable to Transfer Employees in the Transferred Employees Section will be the same as applied (or would have applied) to the Transfer Employees under the Main Section except where: (i) if the transfer is to the AA Section, the equivalent factor under the AA Section, adjusted to reflect any relevant benefit differences, is more favourable to the Transfer Employee; (ii) the Trustee is obliged to adopt more favourable factors; or (iii) in consultation with the Bank, the Trustee considers it appropriate to adopt different factors; (c) the methodology used for the calculation of the bulk transfer payment in respect of the past service benefits of Transfer Employees will be a proportionate share of the assets in the Main Section calculated in accordance with the technical provision assumptions stated in the Statement of Funding Principles applicable to the Main Section in relation to the actuarial valuation as at 31 December 2017 or 2018 (depending on when the next Main Section valuation is carried out) or any subsequent valuation. The parties acknowledge that the Principal Employer intends to make a one-off contribution of £2bn to the Main Section before or about the date of the calculation of the bulk transfer payment. For the purpose of the calculation of the bulk transfer payment under this sub-clause, the assets of the Main Section shall be deemed to include the £2bn contribution (or any proportion of it which has
been paid), provided that such contribution is paid to the Main Section at least two weeks before the bulk transfer payment is made; (d) the form of the indemnity from the Principal Employer to the Trustee will be the same as that provided under the bulk transfer agreement dated 29 March 2018 relating to the transfer of past service benefits from the AA Section to the Main Section; (e) the transfer will be carried out as if it is made between two separate pension schemes; and (f) if the transfer is to the AA Section, the Statement of Funding Principles for future actuarial valuations of the AA Section will reflect the active member early retirement and ill-health retirement demographic assumptions which, absent any advice of the actuary to the contrary, may be set in line with those set out in the Statement of Funding Principles for the Main Section from time to time. 5.5 In the event that the Transferred Employees Section is the AA Section, RBS plc intends to provide a one-off additional contribution, or series of contributions, to the AA Section by no later than three months after the calculation of the contribution due under this paragraph. The contribution shall be equal to the lower of: (a) the amount required to fund the liabilities of the Transfer Employees to the same percentage level of funding as applies under the AA Section immediately before the transfer using the Trustees self-sufficiency basis as stated in part 3 of the appendix to this MoU, subject to this amount being no less than the amount required to fund liabilities of the Transfer Employees to 100% on the technical provisions basis as stated in the appendix; and (b) the amount required to fund the liabilities of the Transfer Employees to the level of 100% funding on that self-sufficiency basis. 5.6 In the event that the Transferred Employees Section is not the AA Section, RBS plc intends to provide a one-off contribution, or series of contributions, to the Transferred Employees Section by no later than three months after the calculation of the contribution due under this paragraph. The contribution shall be equal to the amount required to bring the Transferred Employees Section up to full funding as at the date of the transfer on the Trustees self-sufficiency funding basis as applies at that time under the AA Section. 6. ROYAL BANK OF SCOTLAND INTERNATIONAL LIMITED SEGREGATED SECTION The parties acknowledge that the Banks current intention for compliance with the Ring Fencing Requirements in respect of the Main Section is for the Royal Bank of Scotland International Limited (RBSI) to cease to participate in the Main Section on or before 31 March 2020. Accordingly, RBSI employees who are members of the Main Section (RBSI Transfer Employees) will cease accrual in that section. The Bank intends for RBSI Transfer Employees to accrue future benefits which are the same as the current benefits of such RBSI Transfer Employees but in a new segregated section of the Group Fund (the RBSI Transferred Employees Section). The Principal Employer and the Trustee agree to act reasonably and in good faith to establish the RBSI Transferred Employees Section for RBSI Transfer Employees.
7. COUNTERPARTS This AA MoU may be executed in any number of counterparts, all of which taken together will constitute one and the same document and any party may enter into this AA MoU by executing a counterpart.
Signed on behalf of NATIONAL WESTMINSTER BANK PLC by Signed on behalf of ROYAL BANK OF SCOTLAND PLC by Signed on behalf of RBS PENSION TRUSTEE LIMITED by (Director) and (Director/Secretary)
APPENDIX ACTUARIAL ASSUMPTIONS
AA Section 1. Financial assumptions (Technical Provisions) Discount rate: The liabilities shall be discounted using the spot gilt yield curve plus a spread of 0.4%. RPI inflation: In line with the gilt breakeven RPI inflation curve. CPI inflation: RPI inflation minus 1.1% LPI pension increases: Higher of (a) LPI derived using a Black Scholes model with 1.5% implied volatility (symmetric), and (b) CPI or RPI inflation as applicable for each pension tranche subject in all cases to the cap/floor applicable for each pension tranche Salary and pension increases Salary increases (pensionable/basic) 1.8% p.a. Increases to the earnings cap 1.8% p.a. Revaluations to deferred pensions in excess of GMP The CPI price inflation assumption Rate of GMP increases in active service before GMP age The RPI price inflation assumption plus 1.0% p.a. at all durations Fixed rate revaluation on GMPs GMP fixed rate revaluation according to date of leaving. For active members assumed to withdraw from service in future, a fixed revaluation rate of 3.5% p.a. is assumed to apply after the assumed date of withdrawal. Increases to pensions in payment The LPI pension increase assumption for the relevant tranche Promotional salary increases Nil Discretionary increases Nil
3. Demographic assumptions (Technical Provisions) Calculation method Actuarial method: Projected Unit Method Control Period: 10 years Pre-retirement mortality Males: 40% of AM92 Ultimate Females: 50% AF92 Ultimate Post-retirement mortality Base tables Males: standard table S2PMA Light Females: standard table S2PFA Light Current membership group Member sex Member base table Member equivalent single scaling factor Members dependant base table Members dependant equivalent single scaling factor Actives M F S2PMA Light S2PFA Light 97% 88% S2PFA Light S2PMA Light 85% 101% Deferreds M S2PMA Light 97% S2PFA Light 85% F S2PFA Light 88% S2PMA Light 101% Pensioners M S2PMA Light 95% S2PFA Light 86% F S2PFA Light 90% S2PMA Light 107% Dependants M S2PMA Light 95% - - F S2PFA Light 90% - - Post-retirement mortality Future improvements CMI 2017 Core Projections Model with smoothing parameter Sê = 8.0. Long term rate to the improvements of 1.5% p.a. for males and females Early retirements Allowance is made for active members to retire from service prior to age 60 (see table below) or otherwise retire at age 60. Pensions are assumed to be payable with an actuarial reduction for early payment of 3% p.a. simple in line with the AA Sections current practice. Age Percentage of active members retiring each year
Under 55 0% 55 30% 56 20% 57 20% 58 20% 59 20% 60 100% After future withdrawal, members are assumed to retire at 60. Pensions are assumed to be payable unreduced at age 60, except for pensions accrued under the Retiring Age 65 Schedule which are assumed to be payable with an actuarial reduction for early payment using the AA Sections early retirement factors. All current deferred members are assumed to retire at their Normal Retirement Age which is applicable to pension accrued outside the Retiring Age 65 Schedule. Pensions are assumed to be payable unreduced at this age, except for pensions accrued under the Retiring Age 65 Schedule which are assumed to be payable with an actuarial reduction for early payment using the RBS AA Sections early retirement factors. Ill-health retirements No allowance. Family Details A man is assumed to be three years older than his wife. 90% of male and 65% of female members are assumed to be married at retirement or earlier death. A childrens loading of 5% is applied to benefits payable on death before retirement. Transfer values Allowance made for transfers equivalent to £20M per annum over the period to 31 December 2021, based on the same demographic profile as those members transferring out of the AA Section over the three years to 31 December 2017. CETV assumptions are assumed to be as follows for this purpose: Discount rate: gilts +0.9% p.a. Post-retirement mortality: As above except with 1.25% p.a. long term rate of improvement RPI/CPI inflation and LPI pension increases: As above Commutation: No allowance made Notwithstanding the use of the above CETV assumptions for the purpose of the valuation, the Trustee shall review and amend CETVs from time to time in accordance with the Rules and legislation, as appropriate.
Expenses An addition of £1.2M pa increasing with RPI inflation, payable by the Bank in addition to the future service rate. The allowance for expenses excludes investment-related expenses (which are paid from the AA Section) and excludes PPF levies in excess of £0.2M in any year which are paid from the AA Section and reimbursed by the Bank. Decrements for withdrawal and death before retirement As well as death before retirement and allowance made for withdrawals from service Age Withdrawal from service Death before retirement - Males Death before retirement - Females 35 8.75 0.03 0.02 36 8.75 0.03 0.03 37 8.75 0.03 0.03 38 8.75 0.03 0.03 39 8.75 0.03 0.03 40 8.75 0.04 0.04 41 8.75 0.04 0.04 42 8.75 0.04 0.04 43 8.75 0.05 0.05 44 8.75 0.05 0.05 45 8.75 0.06 0.06 46 8.75 0.06 0.06 47 8.75 0.07 0.07 48 8.75 0.08 0.08 49 8.75 0.09 0.09 50 8.75 0.10 0.09 51 8.75 0.11 0.10 52 8.75 0.13 0.11 53 8.75 0.14 0.13 54 8.75 0.16 0.14 55 5 0.18 0.15 56 5 0.20 0.17 57 5 0.23 0.19 58 5 0.25 0.21 59 5 0.29 0.23 60 2 0.32 0.25 61 2 0.36 0.28
62 2 0.40 0.31 63 2 0.45 0.34 64 2 0.51 0.38 65 2 0.57 0.42 Factors Early and late retirement Where pensions are assumed to be payable before or after Normal Retirement Age for a particular tranche of benefits, they are adjusted for early or late payment using the AA Sections early and late retirement factors which came into force with effect from 1 February 2018, summarised below: Years retiring early/late Early retirement actives Early retirement deferreds * Late retirement 0 1.000 1.000 1.000 1 0.970 0.938 1.035 2 0.940 0.880 1.073 3 0.910 0.825 1.111 4 0.880 0.774 1.153 5 0.850 0.726 1.198 6 0.820 0.681 1.246 7 0.790 0.639 1.297 8 0.760 0.599 1.352 9 0.730 0.562 1.411 10 0.700 0.527 1.473 * applied to pension revalued to future Normal Retirement Age. An assumption of 1.75% p.a. is used to revalue CPI-linked deferred pensions (in excess of GMP) between date of early retirement and Normal Retirement Date Commutation Allowance for members to commute 15% of their pension under the following set of commutation factors: Age Unisex LPI pension increases Fixed 5% pa pension increases 55 24.55 31.67 56 24.02 30.84 57 23.49 30.01 58 22.95 29.18 59 22.40 28.35 60 21.85 27.51 61 21.29 26.67 62 20.73 25.83
63 20.15 25.00 64 19.58 24.16 65 19.00 23.33 3. Trustees self-sufficiency definition All assumptions in line with Technical Provisions except as follows. Discount rate: The better (higher) of spot gilt and swap yields at each yearly tenor plus a 0% spread. Inflation: The better (lower) of spot gilt RPI breakeven and swap RPI at each yearly tenor. Expense reserve: 3% of liabilities up to £50M, 2% of liabilities between £50M and £100M, and 1% of liabilities in excess of £100M Pensioners Age Expense allowance per member < 60 £900 60 70 £800 70 80 £600 > 80 £500 Non-pensioners: An allowance of £1,000 per member. (No ongoing contributions from the employers for expenses.) 4. Future service contributions In line with the Trustees self-sufficiency definition (as above) but with no allowance for the expense reserve.
SCHEDULE 6 CLEARANCE STATEMENT
The Pensions Regulator CLEARANCE STATEMENT made under sections 42 and 46 of the Pensions Act 2004 in respect of The Royal Bank of Scotland Group Pension Fund (Main Section) on 23 August 2018 The Pensions Regulator case reference: C81378310 1. DEFINITIONS Act means the Pensions Act 2004. Applicants means the following persons: The Royal Bank of Scotland Group PLC (SC045551) NatWest Markets plc (SC090312) National Westminster Bank PLC (00929027) The Royal Bank of Scotland plc (SC083026) Coutts & Company (00036695) The Royal Bank of Scotland International Limited Ulster Bank Limited (R0000733) Application means the application dated 9 August 2018 made by the Applicants for a clearance statement to be made by the Pensions Regulator under sections 42(2)(b) 46(2)(c) of the Act in respect of the Main Section and the circumstances described in the Application. Determination Notice means the determination notice issued by the Pensions Regulator in respect of the Applicants and the Main Section on 23 August 2018. Main Section means The Royal Bank of Scotland Group Pension Fund (Main Section) Warning Notice means the warning notice issued by the Pensions Regulator in respect of the Applicants and the Main Section on 20 August 2018. 2. CLEARANCE STATEMENT This Clearance Statement is issued in respect of the Application and pursuant to the Warning Notice and the Determination Notice issued by the Pensions Regulator. The Pensions Regulator is of the opinion that in relation to the circumstances described in the Application: it would not be reasonable to impose any liability on the Applicants under a contribution notice issued under section 38 of the Act; and it would not be reasonable to impose on the Applicants the requirements of a financial support direction issued under section 43 of the Act in relation to the Main Section. 3. IMPORTANT NOTICE The Pensions Regulator reserves the right to issue a contribution notice and/or a financial support direction under section 38 and/or section 43 of the Act on the Applicants in respect of the Main Section if:
the circumstances in relation to which the exercise of the powers under these sections arises are not the same as the circumstances described in the Application; and the difference in those circumstances is material to the exercise of these powers. 4. SEAL THE COMMON SEAL of the Pensions Regulator was affixed in the presence of: Name: Alice Hinton Position: Case Manager Signature: Date:
DATED 25 April 2018
THE COMMISSIONERS OF HER MAJESTYS TREASURY
and
BANKING COMPETITION REMEDIES LIMITED
and
THE ROYAL BANK OF SCOTLAND GROUP PLC
|
FRAMEWORK AND STATE AID DEED
|
|
Slaughter and May
One Bunhill Row
London, EC1Y 8YY
(NV/RZQB)
551232612
THIS FRAMEWORK DEED is made on 25 April 2018
BETWEEN:
(1) THE COMMISSIONERS OF HER MAJESTYS TREASURY of 1 Horse Guards Road, London SW1A 2HQ ( HMT );
(2) BANKING COMPETITION REMEDIES LIMITED , a company limited by guarantee incorporated in England with registered number 11001491 and whose registered office is at 1 Horse Guards Road, London SW1A 2HQ (the Independent Body ); and
(3) THE ROYAL BANK OF SCOTLAND GROUP PLC , a public company incorporated in Scotland with registered number 45551 and whose registered office is at 36 St Andrew Square, Edinburgh, Scotland EH2 2YB ( RBS ).
WHEREAS:
(A) On 14 December 2009, the European Commission, in its state aid decision in cases N422/2009 and N621/2009 addressed to Her Majestys Government of the United Kingdom (the Government ), approved a series of measures undertaken by HMT in respect of RBS (the Original State Aid Approvals ).
(B) In connection with the Original State Aid Approvals, HMT gave a set of commitments to the European Commission (the Original Commitments ) and RBS undertook in a State Aid Commitment Deed dated 26 November 2009 to do all acts and things necessary to ensure that HMT was able to comply with the Original State Aid Approvals.
(C) On 9 April 2014, the European Commission, in its state aid decision in case number SA.38304 addressed to the Government, approved a further series of measures undertaken by HMT in respect of RBS (the Revised State Aid Approvals ).
(D) In connection with the Revised State Aid Approvals, HMT gave a set of revised commitments to the European Commission (the Revised Commitments ), which replaced the Original Commitments, and RBS undertook in a State Aid Commitment Deed dated 9 April 2014 (the Revised Deed ) to do all acts and things necessary to ensure that HMT was able to comply with the Revised State Aid Approvals.
(E) HMT, taking into account input and feedback from RBS, the European Commission, the FCA and the PRA and responses from market testing, has designed a package of measures (comprising the Capability and Innovation Fund and Incentivised Switching) which is intended to promote competition in the market for banking services to SMEs in the United Kingdom and is designed to be compliant with Applicable Law, including the obligation in principle 6 of the Financial Conduct Authoritys Principles for Businesses of
treating customers fairly. This package of measures is reflected in the New Commitments.
(F) On 18 September 2017, the European Commission, in its state aid decision in case number SA.47702 addressed to the Government, approved the New Commitments to replace the Revised Commitments.
(G) HMT has agreed to give the New Commitments to the European Commission and RBS wishes to agree to do all acts and things necessary to ensure that HMT is able to comply with such New Commitments.
(H) Following the approval of the New Commitments, the Independent Body has been established as an unregulated body in order to facilitate and oversee the delivery of the proposals described in the New Commitments.
(I) The commitments and undertakings contained in this Deed incorporate commitments from RBS and the Independent Body to HMT that are designed to ensure that HMT is able to comply with the New Commitments.
(J) It is the intention of the parties to this Deed that the Capability and Innovation Fund Commencement Date shall fall on a date no later than 30 June 2018.
NOW THIS DEED WITNESSES AS FOLLOWS:
1. DEFINITIONS AND INTERPRETATION
1.1 In this Deed:
Additional Amount has the meaning given in Clause 7.11;
Additional Appeal has the meaning given in Clause 5.11;
Additional Request has the meaning given in Clause 5.8;
Amendment Notice has the meaning given in Clause 13.5(A);
Annual Budget has the meaning given in Clause 5.2;
Applicable Law means any and all law (whether civil, criminal or administrative), common law, statutes, statutory instruments, treaties, conventions, directives, regulations or rules made thereunder, by-laws, demands, decrees, injunctions, resolutions, orders or judgments in any applicable jurisdiction, including the PRA Rules, the FCA Rules and any related or similar rules of any other Authority, in each case which is binding on the relevant person or in respect of the relevant matter at the relevant time and as the context requires;
Application Period means the period of up to two months starting on the Capability and Innovation Fund Commencement Date;
Articles means the articles of association of the Independent Body;
Authority means (i) any government, (ii) any governmental or quasi-governmental authority, body, agency or association, (iii) any supranational, federal, state or local government, (iv) any statutory or regulatory body, agency or association, (v) any Tax Authority and (vi) any court, tribunal or other judicial body;
Bank means the agreed account holder in respect of the Trust Account(s), the Trust Income Account and the Escrow Account;
Bank Charge Tax Utilisation has the meaning given in Clause 15.6;
BCA Element means the component of a dowry payment that is designated as a BCA element under an Incentivised Switching Agreement;
BCA Switching means Incentivised Switching Eligible Customers and/or, if applicable, customers in the Wider Pool, switching their Business Current Account from RBS to an Incentivised Switching Eligible Body;
BCA Switching Shortfall Amount means the sum of £225 million less the aggregate of all payments made to Incentivised Switching Eligible Bodies under an Incentivised Switching Agreement in connection with BCA Switching;
BCA Switch Target *** ;
BCA Switch Target Date has the meaning given in Clause 8.30;
BCA Threshold means £225 million;
Beneficiary has the meaning given in the Trust Deed;
Branch Access means the proposal under which RBS or another member of the Group would offer to provide cash and cheque handling services in certain of its RBS and NatWest-branded branches in England, Scotland and Wales to Switched Customers on the terms and subject to the conditions set out in an Inter-Bank Agency Deed;
Budget Appeal has the meaning given in Clause 5.6;
Budget Request has the meaning given in Clause 5.3;
Business Case means a business case submitted by a Capability and Innovation Fund Eligible Body in support of an application for funding from the Capability and Innovation Fund;
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
Business Current Account means an account marketed to businesses rather than individuals, which provides the facility to hold deposits, receive and make payments by cheque and/or debit card, use automated teller machine facilities and make regular payments by direct debit and/or standing order, but does not include (i) an account in which money is held on deposit in a currency other than the official currency of the United Kingdom; or (ii) an account in which credit funds are held and offset against mortgage debt or a loan (other than an overdraft facility);
Business Day means any day (other than a Saturday or Sunday) on which clearing banks are open for business in London;
Capability and Innovation Fund means the fund to be held by the Independent Body (using the funds transferred to it by RBS to be held pursuant to the Trust Deed) to provide funding to Capability and Innovation Fund Eligible Bodies to: (i) develop the capability to compete with RBS in the provision of banking services to SMEs; and/or (ii) develop and improve the financial products and services which are available to SMEs;
Capability and Innovation Fund Agreement means an agreement substantially in the form set out in Schedule 5 to be entered into between the Independent Body and a Capability and Innovation Fund Eligible Body as the basis on which funds will be transferred to that Capability and Innovation Fund Eligible Body from the Capability and Innovation Fund;
Capability and Innovation Fund Commencement Date means the date on which the Independent Body first markets the Capability and Innovation Fund to any one of the Capability and Innovation Fund Eligible Bodies in accordance with Clause 7.2;
Capability and Innovation Fund Eligible Body means a Pool A Body, a Pool B Body, a Pool C Body or a Pool D Body;
Capability and Innovation Fund Termination Date has the meaning given in Clause 7.21;
CASS means the Current Account Switching Service;
Change has the meaning given in Clause 8.7(A);
Charity means any company, partnership, trust, foundation, establishment, association or other body established only for purposes regarded as charitable under the laws of England and Wales and/or Scotland;
CIF Fallback Date means the date falling 30 Business Days after the Incentivised Switching Termination Date;
CIN means a unique Customer Identification Number held by RBS in respect of each Incentivised Switching Eligible Customer or customer in the Wider Pool;
Collections and Recoveries means those accounts that have been placed in one of the following business teams by RBS, taking into account in each case factors including (without limitation) credit risk rating deterioration, account conduct and volume of unpaid items, loan arrears, actual or potential insolvency events, covenant breaches, deterioration in trading and cash absorption and defaults: (a) Collections and Recoveries in Customer Financial Support Services (Debt Management Operations), Business Banking; (b) Specialised Relationship Management Telephony, Commercial & Business Banking; (c) Recoveries and Litigation, Commercial & Business Banking; and/or (d) Strategic Relationship Management (Restructuring) and/or any Strategic Management Unit equivalent for lower exposures, Commercial & Business Banking, and in each case including any such equivalent business team to those set out in (a) to (d) above in respect of accounts of customers in the Wider Pool (if any) and/or any equivalent replacement categorisations and/or business teams;
Commencement Notice has the meaning given in Clause 8.4;
Confidential Information has the meaning given in Clause 18.1;
Contribution Date means: (i) the date falling ten Business Days after the date of this Deed; or (ii) if the Trust Account(s), the Escrow Account or the IB Current Account (as applicable) is not open on or before the date of this Deed, such later date as may be specified by the Independent Body to RBS on not less than ten Business Days notice and provided that such later date specified in such notice shall fall no later than 20 Business Days after the date on which the Trust Account(s), the Escrow Account or the IB Current Account (as applicable) was opened;
Data Controller has the meaning given in the Data Protection Legislation;
Data Protection Legislation means the following legislation to the extent applicable from time to time: (a) national laws implementing the Data Protection Directive (95/46/EC) and the Directive on Privacy and Electronic Communications (2002/58/EC); (b) the General Data Protection Regulation (2016/679); and (c) any other similar national privacy law (whether or not such national privacy law is implementing European Union law);
Data Security Breach has the meaning given in Clause 17.9;
Data Subjects has the meaning given in the Data Protection Legislation;
Data Transfer Agreement means the standard contractual clauses for the transfer of personal data (as such term is defined in the Data Protection Legislation) outside the United Kingdom or European Economic Area or such other agreement for the transfer of personal data as RBS may approve;
Decision has the meaning given in paragraph 2(B)(vi) of Part B of Schedule 8;
Deed of Priority means a deed substantially in the form set out in the Incentivised Switching Agreement to be entered into between RBS or another member of the Group
and an Incentivised Switching Eligible Body in respect of any sharing of security between the Group and such Incentivised Switching Eligible Body;
Director means a director of the Independent Body;
Dispute has the meaning given in Clause 10.4;
Dispute Notice has the meaning given in Clause 10.4(A);
Dormant Accounts means those accounts where there has been no activity for 5 years or more;
DP Audit has the meaning given in Clause 17.11;
Effective Date has the meaning given in Clause 2.1;
Escrow Account means an escrow account in the name of the Independent Body which is to be operated by the Monitor alone;
Excluded Taxes means: (a) Stamp Duty to the extent that such Stamp Duty falls within Clause 15.9 or would have fallen within Clause 15.9 were it not for a carve-out to Clause 15.9; (b) subject to Clause 15.8, VAT; (c) IHT arising as a result of funds being or having been held on trust by the Independent Body to the extent covered by income, profits or gains on the Trust Fund applied in accordance with Clause 5.19 (excluding any income, profits or gains deducted from the Trust Income Account by the Bank in accordance with the terms of the Mandate Agreement); (d) any income Taxes imposed on or by reference to income, profits or gains earned, accrued, received or otherwise recognised by the Independent Body in its capacity as trustee of the Trust Fund save if and only to the extent the Independent Body is unable to pay such income Taxes from the income, profits or other gains of the Trust Fund as a result of deductions having been made from the Trust Income Account by the Bank in accordance with the terms of the Mandate Agreement; (e) any corporation Taxes imposed on or by reference to actual income, profits or gains earned, accrued, received or otherwise recognised by the Independent Body in its own capacity to the extent that such income, profits or gains have been realised in, or are readily realisable or convertible into, cash or cash equivalents; and (f) any Taxes to the extent that they would not have arisen but for any breach by the Independent Body of, or any action taken by the Independent Body otherwise than in connection with, the Package Documents;
Extended Incentivised Switching Date has the meaning given in Clause 8.11;
Extended IS Period has the meaning given in Clause 8.11;
Extended Perimeter Applicant has the meaning given in Clause 8.16;
Extended Perimeter Application Period *** ;
Extended Perimeter Customer has the meaning given in Clause 8.24(B);
Extension Amendment ***;
Extension Notification *** ;
FCA means the United Kingdom Financial Conduct Authority or any successor regulatory body;
FCA Rules means any rules and guidance made by the FCA under FSMA and set out in the FCAs handbook of rules and guidance as amended from time to time, and includes any rules and guidance made by any successor regulatory body;
FOI Act has the meaning given in Clause 18.13;
FOI Request has the meaning given in Clause 18.13;
FSMA means the Financial Services and Markets Act 2000, including any regulations made pursuant thereto;
Government has the meaning given in recital (A) to this Deed;
Government Entity means: (i) any department, non-departmental public body, authority or agency of the Government or the Crown; (ii) any of Her Majestys Secretaries of State and any other Minister of the Crown; (iii) the Treasury Solicitor; (iv) any body corporate established by statute some or all of the members of which are appointed by a Secretary of State or Minister of the Crown; and (v) any other entity or person directly owned or established by any of the foregoing, including UK Financial Investments Limited;
Group means RBS, its subsidiaries and subsidiary undertakings, any holding company of RBS and all other subsidiaries and subsidiary undertakings of any such holding company from time to time;
Helpline has the meaning given in Clause 8.21;
HMRC means Her Majestys Revenue & Customs;
HMT Indemnified Persons means (i) HMT; (ii) any other Government Entity; and (iii) any Representative of any person specified in (i) and (ii), and HMT Indemnified Person shall be construed accordingly;
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
HMT Permitted Purposes means: (i) complying with HMTs responsibilities and obligations, and exercising its rights, powers and discretions, under or in connection with this Deed or the other Package Documents (including with respect to the Revised State Aid Approvals and New Commitments); (ii) providing or enabling the provision of financial support to RBS or protecting or enhancing the stability of the financial system of the United Kingdom; (iii) reporting on compliance with this Deed by RBS (including with respect to the Revised State Aid Approvals and New Commitments); and (iv) discharging HMTs responsibilities and functions;
IB Current Account has the meaning given in Clause 5.1(A);
IB Indemnified Persons means (i) the Independent Body; and (ii) any Representative of the Independent Body, and IB Indemnified Person shall be construed accordingly;
IB Termination Date has the meaning given in Clause 12.2;
IB Winding Up Date has the meaning given in Clause 12.1;
IHT means inheritance tax charged pursuant to the Inheritance Tax Act 1984;
Incentivised Switching means the proposal under which Incentivised Switching Eligible Bodies would be provided with funds, on the terms set out in an Incentivised Switching Agreement, to be used to encourage Incentivised Switching Eligible Customers and, if applicable, customers in the Wider Pool, to switch their Business Current Account (and borrowing) from RBS to an Incentivised Switching Eligible Body;
Incentivised Switching Agreement means an agreement substantially in the form set out in Schedule 4 to be entered into between the Independent Body and an Incentivised Switching Eligible Body as the basis on which funds will be transferred to that Incentivised Switching Eligible Body in respect of Incentivised Switching;
Incentivised Switching Breach has the meaning given in Clause 8.35;
Incentivised Switching Commencement Date means the date on which RBS first communicates the details of any Summary or Summaries to any Incentivised Switching Eligible Customer in accordance with Clauses 8.5 and 8.6;
Incentivised Switching Communication Framework means the communication framework set out in Schedule 6 to this Deed in respect of the communication of Incentivised Switching to Incentivised Switching Eligible Customers and, if applicable, customers in the Wider Pool, as may be amended from time to time by agreement in writing between RBS and the Independent Body;
Incentivised Switching Eligible Body means a deposit-taking entity with Business Current Account capabilities: (i) which has, or has publicly stated its intention to launch, a Business Current Account offering; (ii) which meets the criteria set out in items (ii) to (vi) (inclusive) of the definition of a Pool A Body; and (iii) which participates in CASS;
Incentivised Switching Eligible Customer means a customer of the division of RBS previously described as Williams and Glyn which is an SME;
Incentivised Switching Excess has the meaning given in Clause 8.39(D);
Incentivised Switching Excess Fund has the meaning given in the Trust Deed;
Incentivised Switching Fund has the meaning given in the Trust Deed;
Incentivised Switching Termination Date has the meaning given in Clause 8.38;
Indemnified Person means (i) any HMT Indemnified Person; and/or (ii) any IB Indemnified Person;
In-Flight Customer means an Incentivised Switching Eligible Customer and/or customer in the Wider Pool which has applied to an Incentivised Switching Eligible Body (which has entered into an Incentivised Switching Agreement) to participate in Incentivised Switching but has not yet become a Switched Customer;
Initial Budget has the meaning given in Clause 5.1(A);
Initial Expenditure means any amount paid or agreed to be paid by RBS to third parties on behalf of the Independent Body in respect of fees and expenses in connection with the negotiation, preparation, execution and carrying into effect of this Deed and each of the other Package Documents;
Initial Fee Amount means: (i) in the case of a Nominated Director, the aggregate value of such Nominated Directors remuneration package agreed between the Nominations Committee and such Nominated Director and included in such Nominated Directors letter of appointment or service contract (as applicable) as at the date of this Deed; (ii) in the case of a Replacement Director, the aggregate value of such Replacement Directors remuneration package agreed between the Nominations Committee and such Replacement Director and included in such Replacement Directors letter of appointment or service contract (as applicable) as at the date of his or her appointment; and (iii) in the case of any other Director, the aggregate value of such Directors remuneration package agreed between the Independent Body and such Director and included in such Directors letter of appointment or service contract (as applicable) as at the date of his or her appointment;
Initiative means each of the Capability and Innovation Fund and Incentivised Switching (together, the Initiatives );
Inter-Bank Agency Deed means a deed substantially in the form set out in Schedule 2 to be entered into between RBS or another member of the Group and an Incentivised Switching Eligible Body in respect of Branch Access;
Invoice has the meaning given in Clause 10.3(A);
Loan Element means the component of a dowry payment that is designated as a loan element under an Incentivised Switching Agreement;
Loan Product means a secured or unsecured sterling-denominated commercial loan between RBS and an Incentivised Switching Eligible Customer excluding overdrafts, invoice financing and asset financing arrangements;
Loan Threshold means £50 million;
Mandate Agreement means the agreement entered into between the Bank, the Monitor and the Independent Body on or around the date of this Deed regulating the basis on which the Independent Bodys accounts will be held at the Bank;
Monitor has the meaning given in Clause 13.1;
Monitor Decision has the meaning given in Clause 10.4(E);
Multiplier *** ;
New Commitments means the revised commitments contained in Schedule 1 to this Deed, each as supplemented, modified or replaced from time to time subject to and in accordance with this Deed (including, without limitation, Clause 27);
Nominated Director has the meaning given in the Articles;
Nominations Committee has the meaning given in the Articles;
OFAC means the Office of Foreign Assets Control of the US Department of the Treasury;
Option 1 Additional Grants has the meaning given in Clause 7.13;
Option 1 CIF Fund has the meaning given in the Trust Deed;
Option 1 Possible Recipients has the meaning given in Clause 7.13;
Option 2 Additional Grants has the meaning given in Clause 7.15;
Option 2 CIF Fund has the meaning given in the Trust Deed;
Option 2 Possible Recipients has the meaning given in Clause 7.15;
Opt Out has the meaning given in paragraph 2(J)(ii) of Schedule 6;
Package has the meaning given in paragraph 1(A) of Part A of Schedule 8;
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
Package Documents means any Incentivised Switching Agreement, any Inter-Bank Agency Deed, any Capability and Innovation Fund Agreement, the Trust Deed and this Deed, in each case including any schedules and appendices thereto;
Payment Date has the meaning given in Clause 5.3;
Perimeter Extension Proposal has the meaning given in Clause 8.14;
Permitted Fee Increase Amount means 5% of the Initial Fee Amount;
Permitted Government Recipient means:
(A) the FCA, the PRA, HMRC, the National Audit Office, the National Archive and the Cabinet Office; and
(B) any Government Entity other than (a) any person falling only within part (iv) of the definition of Government Entity (an Excluded Government Entity ) and (b) any entity or person directly or indirectly wholly-owned by, or held on trust for, any Excluded Government Entity;
Permitted Oral Statement has the meaning given in Clause 16.2(B);
Permitted Statement has the meaning given in Clause 16.2(A);
Pool A Body means a deposit-taking entity: (i) which has a Business Current Account offering; (ii) which is authorised by the PRA to take deposits; (iii) which is, at the relevant time, domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland; (iv) which has, at the relevant time, gross assets in the United Kingdom of less than £350 billion shown in its latest published consolidated accounts (or interim balance sheet); (v) whose income in the United Kingdom relates primarily to the provision of deposit-taking, lending or payments services to individuals and businesses in the United Kingdom; and (vi) which has expressed an intention to expand its business offering to SMEs in the United Kingdom through the development of new products, expansion into new geographical markets or new business segments and/or investing in its customer service levels;
Pool A Grants means the following grants available to Pool A Bodies from the Capability and Innovation Fund: (i) 1 x £120 million; (ii) 1 x £100 million; and (iii) 1 x £60 million;
Pool B Application Period means the period from the date on which the Independent Body first markets the Capability and Innovation Fund and Pool B Grants to Pool B Bodies in accordance with Clause 7.4 until the date falling up to 5 months after the Capability and Innovation Fund Commencement Date;
Pool B Body means a deposit-taking entity which meets the criteria set out in items (ii) to (vi) (inclusive) of the definition of a Pool A Body and has, or has publicly stated its
intention to launch, a Business Current Account offering (and shall include any Pool A Body);
Pool B Grants means the following grants available to Pool B Bodies from the Capability and Innovation Fund: (i) 1 x £50 million; and (ii) 2 x £15 million;
Pool C Application Period means the period from the date on which the Independent Body first markets the Capability and Innovation Fund and Pool C Grants to Pool C Bodies in accordance with Clause 7.6 until the date falling up to 8 months after the Capability and Innovation Fund Commencement Date;
Pool C Body means: (i) a Pool A Body; (ii) a Pool B Body; or (iii) an entity (not being a Pool A Body or a Pool B Body): (a) which is domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland; (b) which derives (or, if such body is part of a group, such group derives) the majority of its revenue from the provision of financial services to individuals and businesses; and (c) which offers, or has expressed an intention to expand its business offering to include, lending or payments services to SMEs in the United Kingdom or international payments services to SMEs in the United Kingdom;
Pool C Grants means the 4 x £10 million grants available to Pool C Bodies from the Capability and Innovation Fund;
Pool D Application Period means the period of up to six months starting on the Capability and Innovation Fund Commencement Date;
Pool D Body means an entity which: (i) is domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland; (ii) (a) provides or develops financial products or services predominantly to or for SMEs in the United Kingdom or (b) provides products or services to the businesses described in (a); and (iii) has raised capital of at least £1 million in the three years prior to the date of submission of its Business Case;
Pool D Grants means the 5 x £5 million grants available to Pool D Bodies from the Capability and Innovation Fund;
Potential Successful Applicant *** ;
PRA means the United Kingdom Prudential Regulation Authority (as defined by FSMA) or any successor regulatory body;
PRA Rules means any rules and guidance made by the PRA under FSMA and set out in the PRAs handbook of rules and guidance as amended from time to time, and includes any rules and guidance made by any successor regulatory body;
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
Privacy Shield means the Privacy Shield scheme and principles operated by the US Department of Commerce, and approved by the European Commission, or any replacement scheme and principles approved by the European Commission for that purpose from time to time;
Product has the meaning given in Clause 8.27(B);
Relevant Amount has the meaning given in Clause 15.7;
Relevant Customer has the meaning given in Clause 8.22;
Relevant IS Product has the meaning given in Clause 8.22;
Relevant Payment has the meaning given in Clause 15.3;
Relevant Period has the meaning given in Clause 8.33;
Relevant Personal Data means any personal data (as such term is defined in the Data Protection Legislation) that may be comprised in information that RBS: (i) is expressly required to provide to the Independent Body pursuant to this Deed; or (ii) reasonably provides in response to a request from the Independent Body from time to time;
Relevant Products has the meaning given in Clause 8.25;
Relief includes any right to repayment of Tax from a Tax Authority and any relief, loss, allowance, set-off or credit in respect of Tax and any deduction in computing or against profits for Tax purposes;
Replacement Director has the meaning given in the Articles;
Representatives means: (i) in the context of HMT, the Treasury Solicitor and any of Her Majestys Secretaries of State (and any other Minister of the Crown) and any and all directors, officers, officials, employees, agents, professional advisers and contractors of the foregoing (including the Monitor); (ii) in the context of RBS and its Group, the directors, officers, employees, agents, professional advisers and contractors of RBS and its Group; and (iii) in the context of the Independent Body, the directors, officers, employees, agents, professional advisers and contractors of the Independent Body;
Revised Deed has the meaning given in Recital (D) of this Deed;
Revised State Aid Approvals has the meaning given in Recital (C) of this Deed;
Sanctioned Country means, at any time, a country or territory that is subject to country- or territory-wide Sanctions;
Sanctioned Person means, at any time: (i) any person listed in any Sanctions-related list of designated persons maintained by the United Nations Security Council, HMT, the
European Union, OFAC or the US Department of State; (ii) any person operating, organised or resident in a Sanctioned Country; or (iii) any person owned or controlled by a person or persons included in paragraph (i);
Sanctions means any sanctions administered or enforced by the United Nations Security Council, HMT, the European Union or the United States Government (including, without limitation, OFAC);
Shortfall Amount has the meaning given in Clause 5.13;
Shortfall Request has the meaning given in Clause 5.13;
SME means a small or medium-sized enterprise, being a business (including incorporated legal entities, sole traders, partnerships, not-for-profit organisations and clubs, charities and societies) that, in respect of any given financial year applying to it, has annual revenues (exclusive of VAT and other turnover-related Taxes) not exceeding £25 million;
Stamp Duty means any stamp, documentary, registration or capital duty or tax (including stamp duty, stamp duty reserve tax and any other similar duty or similar tax) and any fine, penalty or interest relating thereto, and Stamp Duties shall be construed accordingly;
State Aid Statement has the meaning given in Clause 16.1;
Step-in Rights has the meaning given in Clause 13.3;
Substituted Rights and Obligations has the meaning given in Clause 19.2;
Summary has the meaning given in paragraph 2(C)(iii) of Schedule 6, and Summaries shall be construed accordingly;
Switched Customer means an Incentivised Switching Eligible Customer or, if applicable, customer in the Wider Pool, which has switched its Business Current Account from RBS to an Incentivised Switching Eligible Body in accordance with the terms of an Incentivised Switching Agreement;
Switching Proposal means the switching proposal submitted by any Incentivised Switching Eligible Body to the Independent Body together with its application to participate in Incentivised Switching;
Switching Shortfall Amount means the sum of £275 million less the aggregate of all payments made to Incentivised Switching Eligible Bodies under an Incentivised Switching Agreement;
Tax includes all forms of taxation and statutory, governmental, state, provincial, local governmental or municipal impositions, duties, contributions and levies (including Stamp Duty) and any charges, deductions or withholdings, in each case in the nature of
taxation, imposition, duty, contribution or levy, whether of the United Kingdom or elsewhere in the world, whenever imposed and whether chargeable directly or primarily against or attributable directly or primarily to the relevant person or any other person and all penalties, charges, costs and interest relating thereto;
Tax Authority means any government, state, municipal, local, federal or other fiscal, revenue, customs or excise authority, body or official anywhere in the world having the power to impose, collect or administer any Tax or exercising a fiscal, revenue, customs or excise function with respect to Tax (including, without limitation, HMRC);
TFEU means the Treaty on the Functioning of the European Union;
Treasury Solicitor has the meaning given in the Treasury Solicitor Act 1876;
Trigger Event has the meaning given in Clause 6.3;
Trust Account(s) has the meaning given in Clause 5.21;
Trust Deed means a trust deed substantially in the form set out in Schedule 3 to be entered into by The Royal Bank of Scotland plc and the Independent Body in order to establish trusts in respect of the Capability and Innovation Fund and the Incentivised Switching Fund;
Trust Document has the meaning given in the Trust Deed;
Trust Fund has the meaning given in the Trust Deed;
Trust Income Account has the meaning given in Clause 5.20(A);
Trust Period has the meaning given in the Trust Deed;
Turnover means annual aggregate credit turnover with Business Current Accounts held within the division of RBS previously described as Williams and Glyn or, if Incentivised Switching is extended to customers in the Wider Pool, the perimeter for the Wider Pool agreed pursuant to this Deed (excluding: (i) any turnover between those accounts of a customer with the same CIN; and (ii) any monies held by a customer on behalf of that customers clients or for the benefit of third parties);
Turnover Band has the meaning given in the Inventivised Switching Agreement;
VAT means: (i) value added tax as provided for in Directive 2006/112/EC and charged in accordance with the provisions of the VATA 1994; and (ii) any tax of a similar nature which is introduced in substitution for or in addition to the tax referred to in (i);
VATA 1994 means the Value Added Tax Act 1994;
Wider Pool means the group of customers of RBS agreed between RBS and the Independent Body in accordance with Clauses 8.14 and 8.15; and
Working Hours means 9.00 am to 5.00 pm on a Business Day.
1.2 In this Deed, unless otherwise specified:
(A) references to clauses, sub-clauses and schedules are to clauses and sub-clauses of, and schedules to, this Deed;
(B) references to a Pool A Body, Pool B Body, Pool C Body or Pool D Body shall be deemed to include, where applicable and where the context requires, the relevant entitys holding company (which is domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland) and wholly-owned subsidiaries and the wholly-owned subsidiaries of such holding company (in each case where such subsidiaries are domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland);
(C) the words include and including shall be deemed to be followed by the phrase without limitation;
(D) headings and sub-headings in this Deed are included for ease of reference only and shall not affect the interpretation of this Deed;
(E) any reference to a person shall be construed so as to include any individual, firm, company, corporation, body corporate, government, state or agency of a state, local or municipal authority or governmental body or any joint venture, association or partnership (whether or not having separate legal personality);
(F) any reference to a statute, statutory provision or rules or regulations made thereunder shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified, re-enacted or replaced;
(G) the expressions holding company, wholly-owned subsidiary subsidiary and subsidiary undertaking shall have the meaning given in the Companies Act 2006;
(H) any reference to any other document is a reference to that document as amended, varied or supplemented at any time;
(I) any reference to a day shall mean a period of 24 hours running from midnight to midnight;
(J) the rule known as the ejusdem generis rule shall not apply and accordingly general words introduced by the word other shall not be given a restrictive meaning by reason of the fact that they are preceded by words indicating a particular class of acts, matters or things; and
(K) general words shall not be given a restrictive meaning by reason of the fact that they are followed by particular examples intended to be embraced by the general words.
1.3 The schedules form part of this Deed and shall have the same force and effect as if expressly set out in the body of this Deed, and any reference to this Deed shall include the schedules.
1.4 This Deed is being entered into, amongst other things, in order to ensure that HMT is able to comply with the New Commitments. If there is any: (i) ambiguity or inconsistency in the provisions of this Deed or any of the other Package Documents; or (ii) dispute as to the interpretation or intended effect of this Deed or any of the other Package Documents or any provision contained therein, such ambiguity, inconsistency or dispute shall be resolved, to the extent possible, by reference to the terms of the New Commitments.
1.5 References in this Deed to RBS shall be read as including, where applicable, a reference to any relevant subsidiary of RBS undertaking the relevant activity within the Group and, in this context, any obligation on RBS shall be read as including, where applicable, an obligation on RBS to procure that the relevant subsidiary complies with the relevant obligation.
2. EFFECTIVENESS
2.1 All provisions of this Deed shall have full force and effect upon execution and delivery of this Deed by the parties to it (the Effective Date ).
2.2 RBS and HMT agree that the Revised Deed shall terminate and shall cease to have any further effect from the Effective Date.
3. NEW COMMITMENTS; CO-OPERATION
3.1 Save to the extent that the Revised State Aid Approvals have been annulled or suspended by the General Court of the European Union or the Court of Justice of the European Union, or revoked by the European Commission, RBS undertakes to do all acts and things necessary to ensure that HMT is able to comply with the New Commitments, including:
(A) complying (or procuring compliance) with RBSs obligations under the New Commitments; and
(B) promptly complying (or procuring compliance) with any and all requests from HMT for information, documentation or explanations, and doing all such other acts and things requested in writing by HMT, which are in HMTs opinion (acting reasonably):
(i) required in order to enable HMT or the European Commission to monitor compliance with the New Commitments or this Deed; or
(ii) required to respond to requests for information, documentation or explanations from the European Commission in relation to the Revised
State Aid Approvals or monitoring compliance with the Revised State Aid Approvals,
provided, in all cases, that RBS shall have no obligations in respect of those acts and things that are obligations of the Independent Body, as set out in this Deed or any other Package Document.
3.2 In implementing the provisions of, and performing its obligations under, this Deed (including in complying with the New Commitments), RBS shall at all times act in compliance with Applicable Law (including the FCA Rules and the PRA Rules) and shall pay due regard to the interests of its customers and treat them fairly .
3.3 The parties agree that they shall implement the provisions of, and perform their obligations under, this Deed and the other Package Documents notwithstanding the United Kingdom ceasing to be a member state of the European Union ( Brexit ) and notwithstanding the terms of any agreement reached between the United Kingdom and the European Union and/or the European Commission on the application of European Union legislation and decisions of the European Commission following Brexit.
3.4 The obligations of each party under this Deed are several. Failure by a party ( Party A ) to perform its obligations under this Deed does not affect the obligations of any other party ( Party B ) under this Deed, except to the extent that Party Bs obligations under this Deed are in any way contingent or dependent upon the performance by Party A of Party As obligations under this Deed. Save as expressly provided by this Deed, no party is responsible for the obligations of any other party under this Deed.
3.5 The rights of each party under or in connection with this Deed are separate and independent rights. Each party may separately enforce its rights under this Deed.
4. RECOVERY OF STATE AID
4.1 If the European Commission adopts a decision that the United Kingdom must recover any state aid (a Repayment Decision ) and the recovery order of the Repayment Decision has not been annulled or suspended by the General Court of the European Union or the Court of Justice of the European Union, then RBS shall repay to HMT any aid ordered to be recovered under the Repayment Decision.
4.2 The amount which RBS is obliged to repay to HMT under Clause 4.1 shall be calculated by HMT and shall be calculated in accordance with any direction given by the European Commission in its Repayment Decision, Council Regulation No 2015/1589 and Commission Regulation 794/2004 (including with respect to the calculation of payable interest).
5. CONTRIBUTION
5.1 On the Contribution Date, RBS shall, or shall procure that a member of the Group shall, pay:
(A) to the Independent Body by means of telegraphic transfer to such bank account(s) as the Independent Body may notify RBS in writing (the IB Current Account ), £8,059,000 in respect of the initial annual budget for the Independent Body (the Initial Budget ), less the Initial Expenditure; and
(B) to the Escrow Account, £20 million less the Initial Budget,
in each case as an up-front contribution to the fees and expenses (other than Excluded Taxes) to be reasonably and properly incurred by the Independent Body in connection with the negotiation, preparation, execution and carrying into effect of this Deed and each of the other Package Documents.
5.2 Subject to Clause 5.13, HMT, RBS and the Independent Body agree that the Independent Body shall receive:
(A) £4,919,000 on or around the first anniversary of the Contribution Date;
(B) £2,682,000 on or around the second anniversary of the Contribution Date;
(C) £2,157,000 on or around the third anniversary of the Contribution Date; and
(D) £1,986,000 on or around the fourth anniversary of the Contribution Date,
(in each case, the Annual Budget ) from the Escrow Account. The Independent Body agrees that the Monitor shall be irrevocably appointed as its agent in respect of the Escrow Account with sole power to issue all instructions in respect of the Escrow Account.
5.3 The Independent Body may request a change to the Annual Budget for some or all subsequent years (a Budget Request ) not less than 40 Business Days in advance of the date proposed for payment of the amount of that years agreed annual budget (the Payment Date ) and shall send any such request to the Monitor. Any Budget Request must be made in writing setting out, in reasonable detail, the reason(s) for such a request.
5.4 Upon receipt of a Budget Request, the Monitor, acting reasonably, shall consider the terms of the Budget Request and the amount of additional funding requested by the Independent Body and may request such further information from the Independent Body as the Monitor considers necessary or desirable for the purposes of assessing the Budget Request. The Independent Body shall provide such further information as may be requested by the Monitor.
5.5 The Monitor, acting reasonably, shall, by no later than 20 Business Days prior to the Payment Date, determine whether or not to approve the Budget Request (in whole or in part and for one year or for all subsequent years) and shall promptly inform the Independent Body of its determination.
5.6 The Monitor shall give the Independent Body not more than five Business Days in which to appeal in writing the decision of the Monitor (a Budget Appeal ). If the Independent Body makes a Budget Appeal, the Monitor, acting reasonably, shall: (i) consider the terms of the Budget Appeal; and (ii) by no later than five Business Days prior to the Payment Date, determine whether or not to approve the Budget Request which was subject to the Budget Appeal (in whole or in part and for one year or for all subsequent years), and shall promptly inform the Independent Body of its determination.
5.7 If the Monitor agrees to a Budget Request (including after a Budget Appeal), the Monitor shall inform the Bank of the revised amount of the Independent Bodys agreed annual budget (and whether this revised amount should apply for one year or for all subsequent years) by no later than five Business Days prior to the Payment Date and the Bank shall be instructed to pay such revised amount to the Independent Body.
5.8 The Independent Body may request an additional amount in excess of its agreed annual budget (an Additional Request ) and shall send any such request to the Monitor. Any Additional Request must be made in writing setting out, in reasonable detail, the reason(s) for such a request.
5.9 Upon receipt of an Additional Request, the Monitor, acting reasonably, shall consider the terms of the Additional Request and the amount of additional funding requested by the Independent Body and may request such further information from the Independent Body as the Monitor considers necessary or desirable for the purposes of assessing the Additional Request. The Independent Body shall provide such further information as may be requested by the Monitor.
5.10 The Monitor, acting reasonably, shall, by no later than ten Business Days after the date of the Additional Request, determine whether or not to approve the Additional Request (in whole or in part) and shall promptly inform the Independent Body of its determination.
5.11 The Monitor shall give the Independent Body not more than three Business Days in which to appeal in writing the decision of the Monitor in relation to an Additional Request (an Additional Appea l). If the Independent Body makes an Additional Appeal, the Monitor, acting reasonably, shall: (i) consider the terms of the Additional Appeal; and (ii) by no later than five Business Days after the date of the Additional Appeal, determine whether or not to approve the Additional Request which was subject to the Additional Appeal (in whole or in part), and shall promptly inform the Independent Body of its determination.
5.12 If the Monitor agrees to an Additional Request (including after an Additional Appeal), the Monitor shall inform the Bank of the additional amount to be paid to the Independent Body by no later than 20 Business Days after the date of the Additional Request and the Bank shall be instructed to pay such additional amount to the Independent Body.
5.13 If and to the extent that, at any point following the second anniversary of the date of this Deed, the Independent Body, acting reasonably, anticipates that the approval of any Budget Request or Additional Request or the payment of any Annual Budget will result
in the amount provided to it by RBS pursuant to Clause 5.1 being exceeded (the amount of any such excess being a Shortfall Amount ), the Independent Body shall:
(A) provide to the Monitor (with a copy to RBS) an explanation and/or evidence that its costs and expenses incurred from the end of the last financial year up to that time have been reasonably and properly incurred such that the amount provided to the Independent Body by RBS pursuant to Clause 5.1 will be insufficient to meet future costs and expenses;
(B) provide to RBS a copy of any Budget Requests and Additional Requests, and any correspondence with the Monitor in connection with any Budget Appeals or Additional Appeals, including, in each case, any determinations or decisions made by the Monitor or correspondence in connection with such requests or appeals; and
(C) notify the Monitor (with a copy to RBS), in reasonable detail, of:
(i) the Shortfall Amount;
(ii) an explanation and/or evidence of the Independent Bodys grounds for anticipating such costs and expenses; and
(iii) evidence that the Independent Body considers any Shortfall Amount to comprise costs and expenses which will be reasonably and properly incurred,
such notice constituting a Shortfall Request .
5.14 Upon receipt of a Shortfall Request, the Monitor, acting reasonably, shall consider the terms of the Shortfall Request and the Shortfall Amount and may request such further information from the Independent Body as the Monitor considers necessary or desirable for the purposes of assessing the Shortfall Request. The Independent Body shall provide to the Monitor (with a copy to RBS) such further information as may be reasonably requested by the Monitor.
5.15 The Monitor, acting reasonably, shall, by no later than ten Business Days after the date of the Shortfall Request, determine whether or not to approve the Shortfall Request (in whole or in part) and shall promptly inform the Independent Body and RBS of its determination.
5.16 RBS shall, within ten Business Days of receipt of notice from the Monitor of approval (in whole or in part) of a Shortfall Request pursuant to Clause 5.15, determine whether or not to approve the Shortfall Request (such approval not to be unreasonably withheld or delayed) and, if and to the extent that the Shortfall Request is approved, pay to the Independent Body the relevant amount within five Business Days.
5.17 The amount of RBSs aggregate liability to the Independent Body pursuant to Clause 11.3 shall be deemed to be reduced by the aggregate amount of any payments made by RBS to the Independent Body pursuant to Clause 5.16.
5.18 The parties acknowledge and agree that (i) the rights and obligations of the Monitor in connection with the Escrow Account, a Budget Request, an Additional Request and a Shortfall Request (as set out above) and the obligations of the Monitor under Clauses 12.6(A) and 12.7(C) shall be reflected in the agreement to be entered into between HMT and the Monitor on or around the date of this Deed; and (ii) the basis of operation of the Escrow Account shall be set out in the Mandate Agreement.
5.19 The Independent Body acknowledges and agrees that:
(A) subject to Clause 5.20(B), all income, profits or other gains on the Trust Fund shall be utilised in the following order of priority: (i) firstly, for the payment of any Taxes imposed on or by reference to income, profits or gains earned, accrued, received or otherwise recognised by the Independent Body in its capacity as trustee of the Trust Fund; (ii) secondly, for the payment of any Stamp Duty to the extent that such Stamp Duty would have fallen within Clause 15.10 were it not for a carve-out to Clause 15.10, (iii) thirdly, for the payment of any liabilities for or in respect of IHT arising as a result of such funds being, or having been, held on trust by the Independent Body; (iv) fourthly, to meet the fees and expenses (including any Tax relating to the Trust Fund to the extent not already paid pursuant to (i) to (iii) in this Clause 5.19(A) and to the extent permitted by Applicable Law) incurred or to be incurred by the Independent Body in connection with the negotiation, preparation, execution and carrying into effect of this Deed and each of the other Package Documents; and (v) fifthly, to be held on trust by the Independent Body for such Charity or Charities as it determines in its absolute discretion in accordance with the terms of the Trust Deed; and
(B) it shall use reasonable endeavours to meet the fees and expenses incurred or to be incurred by the Independent Body in connection with the negotiation, preparation, execution and carrying into effect of this Deed and each of the other Package Documents (including any liabilities for or in respect of IHT arising as a result of such funds being, or having been, held on trust by the Independent Body) in the following order of priority (i) firstly, from income, profits or other gains on the Trust Fund (net of any Taxes imposed on or by reference to such income, profits or other gains), and (ii) secondly, from the amounts contributed by RBS pursuant to Clause 5.1 (save to the extent such fees and expenses are otherwise excluded from being met from such amounts).
5.20 The parties acknowledge and agree that:
(A) the Independent Body shall hold (i) the Trust Fund in a sterling account with the Bank; and (ii) any income received and an amount equal to any profits or other gains arising in respect of the Trust Fund in a separate sterling account
with the Bank (the Trust Income Account ), in each case, at the applicable rate of interest from time to time;
(B) any charges which may arise in respect of:
(i) the Trust Account in accordance with the terms of the Mandate Agreement shall be deducted from either the Trust Income Account or the Escrow Account; and
(ii) the Trust Income Account in accordance with the terms of the Mandate Agreement shall be deducted from either the Trust Income Account or the Escrow Account,
and the Bank shall be entitled to exercise any set-off rights it may have against the Trust Income Account and the Escrow Account only in accordance with the Mandate Agreement;
(C) the Independent Body shall be under no obligation to maximise the income, profits or other gains on the Trust Fund; and
(D) to the extent that the fees and expenses incurred or to be incurred by the Independent Body in connection with the negotiation, preparation, execution and carrying into effect of this Deed and each of the other Package Documents (including any liabilities for or in respect of IHT arising as a result of such funds being, or having been, held on trust by the Independent Body but excluding any Excluded Taxes) exceed the amount (if any) of the income, profits or other gains on the Trust Fund (net of any Taxes imposed on or by reference to such income, profit or gains), such fees and expenses shall be borne by RBS in accordance with Clauses 5 and 10.
5.21 On the Contribution Date, RBS shall, or shall procure that a member of the Group shall, pay to the Independent Body to hold as trustee pursuant to the Trust Deed:
(A) £275 million in aggregate in respect of Incentivised Switching, which shall be held on trust for the Incentivised Switching Eligible Bodies (of which £225 million shall be allocated to payment of dowries in connection with BCA Switching and £50 million shall be allocated to payment of dowries in connection with transferring Loan Products); and
(B) £425 million in aggregate in respect of the Capability and Innovation Fund, comprising:
(i) £280 million to be held on trust for the Pool A Bodies;
(ii) £80 million to be held on trust for the Pool B Bodies;
(iii) £40 million to be held on trust for the Pool C Bodies; and
(iv) £25 million to be held on trust for the Pool D Bodies,
each in accordance with the terms of the Trust Deed, and in each case by means of telegraphic transfer to such bank account(s) as the Independent Body may notify RBS in writing (the Trust Account(s) ).
5.22 The parties acknowledge and agree that to the extent permitted by law:
(A) until such time as the funds referred to in Clause 5.21(A) are allocated as provided in Clauses 7.11 to 7.19, they shall be used solely for the purposes of making payments to Incentivised Switching Eligible Bodies under Incentivised Switching Agreements;
(B) the funds referred to in Clause 5.21(B), and if applicable, Clause 8.43 or 8.44, shall be used solely for the purposes of making payments to Capability and Innovation Fund Eligible Bodies under Capability and Innovation Fund Agreements;
(C) other than any income, profits or other gains on the Trust Fund (net of any Taxes imposed on or by reference to such income, profits or gains) (to be applied in accordance with Clause 5.19), save as required by law under no circumstances shall such funds be used to pay any IHT charges (in each case including any liabilities for or in respect of IHT arising as a result of such funds being, or having been, held on trust by the Independent Body); and
(D) income or profits or other gains on the Trust Fund (net of any Taxes imposed on or by reference to such income, profits or gains) not applied under Clause 5.19 shall be applied solely as provided in the Trust Deed.
5.23 RBS acknowledges and agrees that it has set aside up to £75 million to cover its costs in facilitating the delivery of Incentivised Switching (including the costs associated with waiving of break fees and reimbursement of certain other fees in accordance with Clause 8.22).
5.24 If and to the extent that:
(A) any trust constituted by the Trust Deed fails or determines for whatever reason during the Trust Period; and/or
(B) the Independent Body becomes the legal and beneficial owner of any of the funds in respect of the Capability and Innovation Fund and/or Incentivised Switching Fund,
the parties agree that the Independent Body shall assess any applications to participate in the Capability and Innovation Fund and/or Incentivised Switching Fund and distribute any relevant funds in accordance with the provisions and criteria set out in the Trust Deed (and the schedules thereto) as if such provisions formed part of this Deed.
6. OBLIGATIONS OF THE INDEPENDENT BODY
6.1 The Independent Body shall comply with all obligations imposed on it pursuant to the terms of this Deed and each other Package Document to which it is a party. In particular, the Independent Body shall carry out those functions and duties, and comply with those obligations and restrictions, set out in Schedule 8.
6.2 Save to the extent that the Revised State Aid Approvals have been annulled or suspended by the General Court of the European Union or the Court of Justice of the European Union, or revoked by the European Commission, the Independent Body undertakes to use reasonable endeavours to ensure that HMT is able to comply with the New Commitments, including:
(A) complying (or procuring compliance) with the Independent Bodys obligations under the New Commitments; and
(B) promptly complying (or procuring compliance) with any and all requests from HMT for information, documentation or explanations, and doing all such other acts and things requested in writing by HMT, which are in HMTs opinion (acting reasonably):
(i) required in order to enable HMT or the European Commission to monitor compliance with the New Commitments or this Deed; or
(ii) required to respond to requests for information, documentation or explanations from the European Commission in relation to the Revised State Aid Approvals or monitoring compliance with the Revised State Aid Approvals,
provided, in all cases, that the Independent Body shall have no obligations in respect of: (a) those acts and things that are obligations of RBS, as set out in this Deed or any other Package Document; or (b) the obligations set out in clauses 6 and 7 of the New Commitments.
6.3 The Independent Body acknowledges and agrees that, without prejudice and in addition to any other contractual or non-contractual rights or remedies which RBS and/or HMT may have (whether pursuant to a provision of this Deed or otherwise), if the Monitor determines that there has been any material or persistent breach of:
(A) the obligation of the Independent Body under Clause 6.1 to comply with all obligations imposed on it pursuant to the terms of this Deed and each other Package Document to which it is a party;
(B) any provision(s) of Schedule 8; or
(C) the undertaking given by the Independent Body in Clause 6.2 to use reasonable endeavours to ensure that HMT is able to comply with the New Commitments,
(such material or persistent breach being a Trigger Event ), the Monitor shall be entitled (but shall be under no obligation) to exercise the Step-in Rights.
7. CAPABILITY AND INNOVATION FUND
7.1 The parties acknowledge and agree that, on or around the date of this Deed, RBS and the Independent Body will enter into the Trust Deed in respect of, amongst other things, the Capability and Innovation Fund.
Distribution of Pool A Grants
7.2 As soon as reasonably practicable following the date of this Deed, the Independent Body shall market the Capability and Innovation Fund and the Pool A Grants to each Pool A Body, inform each Pool A Body of the terms and conditions of the Capability and Innovation Fund and provide each Pool A Body with a means of applying for one of the Pool A Grants from the Capability and Innovation Fund within the Application Period.
7.3 If any Pool A Body applies for a Pool A Grant, agrees to the terms and conditions of participation in the Capability and Innovation Fund and submits a Business Case within the Application Period, the Independent Body shall:
(A) assess the Business Case (including, where appropriate and requested by the Independent Body, any iterations of the Business Case) against the criteria for assessment set out in the Trust Deed; and
(B) if the Independent Body considers that the application complies with the terms and conditions of the Capability and Innovation Fund and, based on the criteria for assessment set out in the Trust Deed, considers in its sole discretion that it is appropriate for the Pool A Body to be awarded one of the Pool A Grants:
(i) enter into a Capability and Innovation Fund Agreement with the relevant Pool A Body; and
(ii) distribute funds to the relevant Pool A Body in accordance with the terms of the relevant Capability and Innovation Fund Agreement.
Distribution of Pool B Grants
7.4 On or around the date falling 3 months after the Capability and Innovation Fund Commencement Date, the Independent Body shall market the Capability and Innovation Fund and the Pool B Grants to each Pool B Body, inform each Pool B Body of the terms and conditions of the Capability and Innovation Fund and provide each Pool B Body with a means of applying for one of the Pool B Grants from the Capability and Innovation Fund within the Pool B Application Period.
7.5 If any Pool B Body applies for a Pool B Grant, agrees to the terms and conditions of participation in the Capability and Innovation Fund and submits a Business Case within the Pool B Application Period, the Independent Body shall:
(A) assess the Business Case (including, where appropriate and requested by the Independent Body, any iterations of the Business Case) against the criteria for assessment set out in the Trust Deed; and
(B) if the Independent Body considers that the application complies with the terms and conditions of the Capability and Innovation Fund and, based on the criteria for assessment set out in the Trust Deed, considers in its sole discretion that it is appropriate for the Pool B Body to be awarded one of the Pool B Grants:
(i) enter into a Capability and Innovation Fund Agreement with the relevant Pool B Body; and
(ii) distribute funds to the relevant Pool B Body in accordance with terms of the relevant Capability and Innovation Fund Agreement.
Distribution of Pool C Grants
7.6 On or around the date falling 6 months after the Capability and Innovation Fund Commencement Date, the Independent Body shall market the Capability and Innovation Fund and the Pool C Grants to each Pool C Body (of which it is aware), inform such Pool C Body of the terms and conditions of the Capability and Innovation Fund and provide such Pool C Body with a means of applying for one of the Pool C Grants from the Capability and Innovation Fund within the Pool C Application Period. In addition, the Independent Body shall advertise, as it considers appropriate, the availability of Pool C Grants.
7.7 If any Pool C Body applies for a Pool C Grant, agrees to the terms and conditions of participation in the Capability and Innovation Fund and submits a Business Case within the Pool C Application Period, the Independent Body shall:
(A) assess the Business Case (including, where appropriate and requested by the Independent Body, any iterations of the Business Case) against the criteria for assessment set out in the Trust Deed; and
(B) if the Independent Body considers that the application complies with the terms and conditions of the Capability and Innovation Fund and, based on the criteria for assessment set out in the Trust Deed, considers in its sole discretion that it is appropriate for the Pool C Body to be awarded one of the Pool C Grants:
(i) enter into a Capability and Innovation Fund Agreement with the relevant Pool C Body; and
(ii) distribute funds to the relevant Pool C Body in accordance with terms of the relevant Capability and Innovation Fund Agreement.
Distribution of Pool D Grants
7.8 As soon as reasonably practicable following the date of this Deed, the Independent Body shall market the Capability and Innovation Fund and the Pool D Grants to each Pool D Body (of which it is aware), inform such Pool D Body of the terms and conditions of the Capability and Innovation Fund and provide such Pool D Body with a means of applying for one of the Pool D Grants from the Capability and Innovation Fund within the Pool D Application Period. In addition, the Independent Body shall advertise, as it considers appropriate, the availability of Pool D Grants.
7.9 If any Pool D Body applies for a Pool D Grant, agrees to the terms and conditions of participation in the Capability and Innovation Fund and submits a Business Case within the Pool D Application Period, the Independent Body shall:
(A) assess the Business Case (including, where appropriate and requested by the Independent Body, any iterations of the Business Case) against the criteria for assessment set out in the Trust Deed; and
(B) if the Independent Body considers that the application complies with the terms and conditions of the Capability and Innovation Fund and, based on the criteria for assessment set out in the Trust Deed, considers in its sole discretion that it is appropriate for the Pool D Body to be awarded one of the Pool D Grants:
(i) enter into a Capability and Innovation Fund Agreement with the relevant Pool D Body; and
(ii) distribute funds to the relevant Pool D Body in accordance with the terms of the relevant Capability and Innovation Fund Agreement.
Capability and Innovation Fund Reporting
7.10 On an annual basis commencing at a minimum 12 months from the date hereof, the Independent Body shall publish on its website a report summarising how funding from the Capability and Innovation Fund has been applied (the Report ), the last such Report to be published by no later than three months after expiry of the last Capability and Innovation Fund Agreement in accordance with its terms. The Report shall include at least the following information:
(A) the amount distributed to each participating Capability and Innovation Fund Eligible Body in the previous year pursuant to a Capability and Innovation Fund Agreement;
(B) the total amount distributed to Capability and Innovation Fund Eligible Bodies in the previous year pursuant to Capability and Innovation Fund Agreements; and
(C) a high level summary of the annual report provided by each participating Capability and Innovation Fund Eligible Body pursuant to the terms of the Capability and Innovation Fund Agreement, including details of the actual or proposed developments of the SME banking capabilities of the relevant
Capability and Innovation Fund Eligible Body and (if applicable) details of any new product and service offerings for SMEs, new SME customer numbers and/or new SME customer capacity.
Additional funds
7.11 If, on the CIF Fallback Date, the sum of: (i) any undistributed amounts in respect of the Capability and Innovation Fund; (ii) any amounts under Clause 8.43; (iii) any amounts under Clause 8.44; (iv) any amounts clawed back by the Independent Body from any Incentivised Switching Eligible Body pursuant to the terms of an Incentivised Switching Agreement; and (v) any amounts clawed back by the Independent Body from any Capability and Innovation Fund Eligible Body pursuant to the terms of a Capability and Innovation Fund Agreement (together, the Additional Amount ) is less than £5 million, such amount shall be treated as undistributed capital and income of the Trust Fund in accordance with the terms of the Trust Deed, the Independent Body shall take no further action other than those in accordance with Clause 7.23 and the Capability and Innovation Fund shall cease automatically in accordance with Clause 7.21.
7.12 If, as at the CIF Fallback Date, the amount of the Additional Amount is £5 million or more and less than £50 million, any Additional Amount shall be allocated to the Capability and Innovation Fund and held on trust for the Option 1 Possible Recipients (as defined below) and the provisions of Clauses 7.13, 7.16 and 7.17 shall apply.
7.13 The Independent Body shall divide the Additional Amount under Clause 7.12 into such number of grants of an equal amount (being not less than £1 million per grant) as the Independent Body considers to be appropriate (the Option 1 Additional Grants ) for disbursement to Pool A Bodies, Pool B Bodies and/or Pool C Bodies (of which it is aware) ( Option 1 Possible Recipients ). In determining an appropriate number and value of Option 1 Additional Grants, the Independent Body shall:
(A) take into account the provisions of the New Commitments;
(B) consult with some or all of the Option 1 Possible Recipients in order to seek to determine the number of potential reasonable applicants out of the Option 1 Possible Recipients for such Option 1 Additional Grants; and
(C) seek to ensure that there are fewer Option 1 Additional Grants than there are potential reasonable applicants out of the Option 1 Possible Recipients for such Option 1 Additional Grants.
7.14 If, as at the CIF Fallback Date, the amount of the Additional Amount is £50 million or more, any Additional Amount shall be allocated to the Capability and Innovation Fund and held on trust for the Option 2 Possible Recipients (as defined below) and the provisions of Clauses 7.15 to 7.17 shall apply.
7.15 The Independent Body shall divide the Additional Amount under Clause 7.14 into such number of grants of any amount (being not less than £1 million per grant) as the Independent Body considers to be appropriate (the Option 2 Additional Grants ) for
disbursement to Pool A Bodies, Pool B Bodies, Pool C Bodies (of which it is aware) and/or (in respect of not more than 20% of the Additional Amount) Pool D Bodies (of which it is aware) ( Option 2 Possible Recipients ). In determining an appropriate number and value(s) of Option 2 Additional Grants, the Independent Body shall:
(A) take into account the provisions of the New Commitments;
(B) consult with some or all of the Option 2 Possible Recipients in order to seek to determine the number of potential reasonable applicants out of the Option 2 Possible Recipients for such Option 2 Additional Grants; and
(C) seek to ensure that there are fewer Option 2 Additional Grants than there are potential reasonable applicants out of the Option 2 Possible Recipients for such Option 2 Additional Grants.
7.16 As soon as reasonably practicable following the CIF Fallback Date, the Independent Body shall market the Capability and Innovation Fund to each Option 1 Possible Recipient or Option 2 Possible Recipient, as applicable, inform each Option 1 Possible Recipient or Option 2 Possible Recipient, as applicable, of the terms and conditions of the Capability and Innovation Fund and provide each Option 1 Possible Recipient or Option 2 Possible Recipient, as applicable, with a means of applying for funding from the Capability and Innovation Fund. The application period shall end as soon as reasonably practicable, and in any event no later than three months following the CIF Fallback Date.
7.17 If any Option 1 Possible Recipient or Option 2 Possible Recipient, as applicable, applies for funding from the Capability and Innovation Fund, agrees to the terms and conditions of participation in the Capability and Innovation Fund and submits a Business Case within the application period specified by the Independent Body, the Independent Body shall:
(A) assess the Business Case (including, where appropriate and requested by the Independent Body, any iterations of the Business Case) against the criteria for assessment set out in the Trust Deed; and
(B) if the Independent Body considers that the application complies with the terms and conditions of the Capability and Innovation Fund and, based on the criteria for assessment set out in the Trust Deed, it is appropriate for the Option 1 Possible Recipient or Option 2 Possible Recipient, as applicable, to participate in the Capability and Innovation Fund:
(i) enter into a Capability and Innovation Fund Agreement with the relevant Option 1 Possible Recipient or Option 2 Possible Recipient, as applicable, with a term of nine months; and
(ii) as soon as reasonably practicable, and in any event by no later than the date falling one month after the expiry of the relevant application period, distribute funds to the relevant Option 1 Possible Recipient or Option 2
Possible Recipient, as applicable, in accordance with terms of the relevant Capability and Innovation Fund Agreement.
Phasing of payments
7.18 If any Capability and Innovation Fund Eligible Body requests that any disbursement from the Capability and Innovation Fund to be made to such Capability and Innovation Fund Eligible Body be made in instalments over a period of time (not to exceed six months), the Independent Body shall consider such request(s) and, if the Independent Body determines at its sole discretion that it would be appropriate for such payment(s) to be made in instalments, provide for this in the relevant Capability and Innovation Fund Agreement (and RBS and HMT shall be deemed to have given their prior consent in writing to such amendment to the form of Capability and Innovation Fund Agreement, provided that the term of any Capability and Innovation Fund Agreement shall not thereby be extended).
Lack of take-up
7.19 If four months after the CIF Fallback Date the remaining amount of the Additional Amount is £5 million or more, the Independent Body will determine in its absolute discretion how best to distribute such amount amongst Capability and Innovation Fund Eligible Bodies, the timeframe for doing so and the basis on which any such distribution is made with the objective of reducing such amount below £5 million, provided that the Independent Body shall complete this process as soon as reasonably practicable, and in no event will any determination by the Independent Body have the effect of extending the commencement of the winding-up of the Independent Body beyond the later of:
(A) the date falling 3 months after the expiry of the last Capability and Innovation Fund Agreement in accordance with its terms; and
(B) the date falling 12 months after the CIF Fallback Date.
7.20 The parties acknowledge that the timeframes in Clauses 7.16, 7.17(B)(ii) and 7.19 are expressed as maximum periods. The Independent Body will use reasonable endeavours to maintain application periods and timeframes for distributions under Clauses 7.16, 7.17 and 7.19 as short as reasonably practicable, having regard to the Independent Bodys view of optimising the efficacy and success of the distribution of the relevant amounts.
Termination
7.21 The rights and obligations of the Independent Body and RBS pursuant to the foregoing provisions of this Clause 7 (other than the obligations of the Independent Body pursuant to Clause 7.10 and 7.23) shall automatically terminate on:
(A) if the Additional Amount is less than £5 million, the Business Day following the CIF Fallback Date;
(B) if the Additional Amount is £5 million or more, the date falling four months after the CIF Fallback Date assuming that by such date the remaining amount of the Additional Amount is less than £5 million; and
(C) if on the date falling four months after the CIF Fallback Date the remaining amount of the Additional Amount is £5 million or more, such other date as may be determined under Clause 7.19,
(the Capability and Innovation Fund Termination Date ).
Such termination shall in no way affect the rights and obligations of the Independent Body or any Capability and Innovation Fund Eligible Body pursuant to the terms of any Capability and Innovation Fund Agreement.
7.22 The obligations of the Independent Body pursuant to Clause 7.10 shall automatically terminate on the date falling three months after the expiry of the last Capability and Innovation Fund Agreement in accordance with its terms.
7.23 Before its winding-up under Clause 12, the Independent Body shall distribute any amount not otherwise distributed as part of the Capability and Innovation Fund pursuant to the terms of this Deed and any remaining accumulated income, profits or other gains on the Trust Fund (net of (a) any Taxes imposed by reference to such income, profits or gains, or (b) any amount distributed to RBS in accordance with Clause 12.6) to such Charity or Charities (and, if applicable, in such shares) as the Independent Body may, at its absolute discretion, select.
8. INCENTIVISED SWITCHING
8.1 The parties acknowledge and agree that, on or around the date of this Deed, RBS and the Independent Body will enter into the Trust Deed in respect of, amongst other things, Incentivised Switching.
8.2 As soon as reasonably practicable following the date of this Deed (and no later than 5 Business Days after the Capability and Innovation Fund Commencement Date):
(A) the Independent Body shall market Incentivised Switching to each Incentivised Switching Eligible Body, inform each Incentivised Switching Eligible Body of the terms and conditions of Incentivised Switching and the definition of Incentivised Switching Eligible Customers and provide each Incentivised Switching Eligible Body with a means of applying for Incentivised Switching; and
(B) RBS shall review its arrangements with CASS and take such other steps as shall be necessary to ensure that (provided that the relevant Incentivised Switching Eligible Body has in place appropriate arrangements with CASS) RBS shall be able to operate Incentivised Switching through CASS in respect of those Incentivised Switching Eligible Customers that are eligible to use CASS under the CASS rules.
8.3 If any Incentivised Switching Eligible Body applies for participation in Incentivised Switching, provides the Independent Body with its Switching Proposal and agrees to the terms and conditions of Incentivised Switching within the period specified by the Independent Body (such initial application period to end no later than the date falling one month following the Capability and Innovation Fund Commencement Date, such that communication of a Summary or Summaries to Incentivised Switching Eligible Customers in accordance with Clauses 8.5 and 8.6 will be able to commence on or around the date falling three months after the Capability and Innovation Fund Commencement Date), the Independent Body shall:
(A) promptly provide RBS with a copy of the Switching Proposal (redacted, if the Independent Body considers appropriate, to keep confidential information which the Incentivised Switching Eligible Body has informed the Independent Body is confidential or commercially sensitive information);
(B) consider the Switching Proposal; and
(C) if the Independent Body considers that the Switching Proposal complies with the terms and conditions of Incentivised Switching and is such that it is appropriate for the Incentivised Switching Eligible Body to participate in Incentivised Switching, the Independent Body shall, as soon as reasonably practicable, enter into an Incentivised Switching Agreement with such Incentivised Switching Eligible Body and distribute funds to such Incentivised Switching Eligible Body in accordance with the terms and subject to the conditions of that Incentivised Switching Agreement.
8.4 As soon as reasonably practicable following the date on which the Independent Body enters into one or more Incentivised Switching Agreements with one or more Incentivised Switching Eligible Bodies, the Independent Body shall notify RBS of that fact (the Commencement Notice ).
8.5 Subject to Clause 8.6, as soon as reasonably practicable following the delivery of the Commencement Notice, RBS shall, at its own cost, communicate Incentivised Switching to Incentivised Switching Eligible Customers, subject to and in accordance with the Incentivised Switching Communication Framework.
8.6 Prior to commencing the communication process set out in Clause 8.5, RBS shall provide the Independent Body with a substantially final draft of all proposed communication materials for approval. The Independent Body, acting in accordance with Applicable Law, may request that RBS makes amendments to the proposed communication materials and, in such event, RBS and the Independent Body shall discuss the proposed amendments in good faith and RBS shall incorporate the comments of the Independent Body, except in the event that RBS has provided the Independent Body with evidence that RBS has reasonable grounds for refusing to incorporate such comments, including as a result of RBSs obligations under the Data Protection Legislation or any requirement of the Information Commissioners Office. Upon finalisation of the communication materials (which may include any Summary or Summaries) RBS shall communicate such materials to Incentivised Switching Eligible
Customers as soon as reasonably practicable, provided that RBS shall not be required to communicate any such materials that contain any Summary to any Incentivised Switching Eligible Customers on a date falling before the latest of:
(A) the date falling six weeks after the date on which such materials are finalised; and
(B) such other date as the Independent Body and RBS may agree.
8.7 At any time after the Incentivised Switching Commencement Date:
(A) RBS may request that the Independent Body restructure the formula for making payments pursuant to Incentivised Switching Agreements or make amendments to the Incentivised Switching Communication Framework (a Change ); and
(B) as soon as reasonably practicable following the receipt of a request for a Change, the Independent Body shall consider the request for a Change, discuss such request with RBS in good faith and may, at its sole discretion, amend the terms of the Incentivised Switching Agreements or the Incentivised Switching Communication Framework to reflect the Change,
provided that RBS shall request no more than one Change in any calendar month and provided that, in the case of any amendment to the Incentivised Switching Communication Framework, the Independent Body shall not refuse to make any Change where RBS provides evidence that the Change is necessary in order to comply with Data Protection Legislation or any requirement of the Information Commissioners Office. In considering a Change to the formula for making payments pursuant to Incentivised Switching Agreements, the Independent Body shall only consider requests which could reasonably be expected to contribute towards meeting the BCA Switch Target and which continue to include some form of tiering based on Turnover.
8.8 The Independent Body agrees that any Change made pursuant to Clause 8.7 shall be communicated to the Incentivised Switching Eligible Bodies promptly and, in any event, reasonably in advance of such amendments taking effect. The parties acknowledge and agree that any Changes shall only take effect from the start of the following communication period as set out in the Incentivised Switching Communication Framework, as may be amended from time to time, unless the Change needs to take effect earlier in order to comply with Data Protection Legislation or any requirement of the Information Commissioners Office, in which case the Change shall take effect as soon as reasonably practicable.
8.9 The Independent Body shall, as soon as reasonably practicable following the dates falling *** after the Incentivised Switching Commencement Date, consider both the take
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
up of Incentivised Switching by Incentivised Switching Eligible Customers and the engagement of Incentivised Switching Eligible Bodies in Incentivised Switching.
8.10 If, on the date falling *** after the Incentivised Switching Commencement Date:
(A) ***
the Independent Body shall, subject to Clause 8.18, extend Incentivised Switching to the Wider Pool in accordance with Clauses 8.16 to 8.18.
8.11 ***
8.12 If, on the date falling *** after the Incentivised Switching Commencement Date, fewer than *** Incentivised Switching Eligible Customers have become Switched Customers or In-Flight Customers in aggregate, the Independent Body shall, subject to Clause 8.18, extend the period for which Incentivised Switching is available to end on a date falling up to *** after the Incentivised Switching Commencement Date in accordance with Clauses 8.16 to 8.18 (the date on which the Independent Body determines that Incentivised Switching shall end in accordance with this Clause 8.11 being the Extended Incentivised Switching Date , and the period between the date falling *** after the Incentivised Switching Commencement Date and the Extended Incentivised Switching Date being the Extended IS Period ).
8.13 ***
8.14 If the Independent Body extends Incentivised Switching to the Wider Pool pursuant to Clauses 8.10, 8.11 or 8.13, it shall request a proposal in relation to such Wider Pool from RBS and RBS shall, within twenty-five Business Days, make a proposal on the customers to be included in the Wider Pool ( Perimeter Extension Proposal ). Unless otherwise agreed between RBS and the Independent Body, RBS agrees that any Perimeter Extension Proposal shall:
(A) comprise at least ***;
8.15 Following provision by RBS of the Perimeter Extension Proposal, the Independent Body shall discuss the Perimeter Extension Proposal with RBS and RBS and the Independent Body shall agree in good faith the Wider Pool.
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
8.16 Upon deciding to extend Incentivised Switching to the Wider Pool and/or to have an Extended IS Period, the Independent Body shall invite each Incentivised Switching Eligible Body which has entered into an Incentivised Switching Agreement with the Independent Body (an Extended Perimeter Applicant ) to apply for access to the Wider Pool and/or to benefit from the Extended IS Period and provide those Incentivised Switching Eligible Bodies with a means of applying for access to the Wider Pool and/or to benefit from the Extended IS Period.
8.17 Subject to Clause 8.18, if any Extended Perimeter Applicant applies for access to the Wider Pool and/or to benefit from the Extended IS Period and agrees to the terms and conditions of Incentivised Switching (as may be amended to take account of the potential extension of the perimeter to the Wider Pool and/or the Extended IS Period) within the period specified by the Independent Body (an Extended Perimeter Application Period ), the Independent Body shall consider the application and, if the Independent Body considers that such Extended Perimeter Applicant has, since the date of commencement of its Incentivised Switching Agreement:
(A) fully engaged in the communication of Incentivised Switching to Incentivised Switching Eligible Customers;
(B) ***
(an Extended Perimeter Applicant who meets these requirements being a Potential Successful Applicant ), may amend the Incentivised Switching Agreement (including any schedules thereto) of any Potential Successful Applicant to strictly reflect the extension of Incentivised Switching to the Wider Pool and/or the Extended IS Period (an Extension Amendment ) and shall, as soon as reasonably practicable thereafter, notify RBS of each Extension Amendment (an Extension Notification ). RBS shall be deemed to have given its prior written consent to such Extension Amendments. The parties acknowledge and agree that the Independent Body may not otherwise amend the terms of any Incentivised Switching Agreement other than in accordance with Clause 13.5, and that under no circumstances shall the term of any Incentivised Switching Agreement exceed the Incentivised Switching Termination Date.
8.18 At the end of any Extended Perimeter Application Period, the Independent Body shall consider the applications received from Potential Successful Applicants and shall assess the impact that extending Incentivised Switching to the Wider Pool and/or having an Extended IS Period for such Potential Successful Applicants would have on the success of Incentivised Switching as a whole (including the anticipated number of additional Switched Customers), taking into account each Potential Successful Applicants share of Switched Customers (and dowries received), both in absolute terms and in the context of each Potential Successful Applicants share of the SME Business Current Account market. If the Independent Body considers (at its sole discretion) that the impact of extending Incentivised Switching to the Wider Pool and/or having an Extended IS Period for the Potential Successful Applicants would result in ***, the Independent Body shall not extend Incentivised Switching to the Wider Pool and/or
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
have an Extended IS Period and shall not enter into any Extension Amendment(s) and shall inform all Extended Perimeter Applicants of this fact.
8.19 Subject to Clause 8.20, as soon as reasonably practicable following the date of delivery of the Extension Notification, RBS shall, at its own cost, communicate Incentivised Switching to each customer in the Wider Pool, subject to and in accordance with the Incentivised Switching Communication Framework.
8.20 Prior to commencing the communication process referred to in Clause 8.19, RBS shall provide the Independent Body with a substantially final draft of all proposed communication materials for approval and the provisions of Clause 8.6 shall apply, mutatis mutandis .
8.21 RBS shall provide a dedicated helpline to support Incentivised Switching Eligible Customers and/or customers in the Wider Pool who are interested in transferring from RBS to an Incentivised Switching Eligible Body (the Helpline ). RBS shall provide the Independent Body with full details of, and information regarding, the Helpline. The Independent Body shall provide RBS with such information as may be provided to the Independent Body by an Incentivised Switching Eligible Body and as may be required by RBS in connection with the operation of the Helpline. RBS shall operate the Helpline in good faith and in accordance with Applicable Law and shall provide reasonable support to Incentivised Switching Eligible Customers and/or customers in the Wider Pool who call the Helpline. The parties acknowledge and agree that no advice or information on the Summary or any other product offering of any Incentivised Switching Eligible Body will be provided by the Helpline.
8.22 In connection with Incentivised Switching, RBS agrees to:
(A) waive or reimburse those fees set out in Schedule 9:
(i) which would otherwise be due to RBS from, or incurred by, a Switched Customer as a direct or indirect result of that customer electing to participate in Incentivised Switching and transfer to an Incentivised Switching Eligible Body, to the extent that:
(a) such customer has in fact become a Switched Customer (the Relevant Customer ); and
(b) such relevant financial product or products have in fact transferred to the relevant Incentivised Switching Eligible Body (the Relevant IS Product ); or
(ii) which would otherwise be incurred by an Incentivised Switching Eligible Customer who has made a bona fide application to switch a relevant product to an Incentivised Switching Eligible Body under Incentivised Switching and where such application has been denied, rejected or has otherwise failed,
up to a maximum aggregate amount of £75 million, provided that (x) RBS shall not be entitled to cease to waive or reimburse such fees on the basis that this maximum aggregate amount has been reached unless and until RBS has provided to HMT and the Independent Body evidence to the satisfaction of HMT and the Independent Body from an independent audit showing that this maximum aggregate amount has been reached, and (y) such maximum aggregate amount is not a target to be met by RBS and the fact that a lesser amount has been waived or reimbursed at any time shall not be interpreted or construed as a failure by RBS to perform or comply with any of its obligations set out in this Deed or any other Package Document, and HMT and the Independent Body agree that they will be mindful of this fact when reporting on any waiver of fees and where reasonably practicable will also consult with RBS, and before any such reporting; and
(B) release any claim over or security interest in any property relating to the Relevant IS Product (or, if RBS shall retain an existing secured credit exposure to the Relevant Customer, then RBS shall not be obliged to release such security and will enter into a Deed of Priority, whereby RBS will rank first in the order of priority, with the relevant Incentivised Switching Eligible Body substantially in the form set out in the Incentivised Switching Agreement).
8.23 Where applicable, RBS shall provide the Independent Body with reasonable details of the procedure by which any fees and/or costs to be reimbursed by RBS pursuant to Clause 8.22 will be reimbursed by RBS to the Relevant Customer or Incentivised Switching Eligible Customer.
Non-solicit
8.24 Subject to Clauses 8.26 and 8.27, from the date of this Deed until the Incentivised Switching Termination Date, RBS shall not, and shall procure that no member of its Group shall:
(A) take any action which could reasonably be regarded as being designed to have an adverse effect on:
(i) the integrity of the perimeter of Incentivised Switching Eligible Customers as at the Incentivised Switching Commencement Date; and
(ii) if the perimeter is extended to include customers in the Wider Pool, the integrity of such extended perimeter as at the date of such extension,
provided that RBS shall not be in breach of, or liable under, this Clause 8.24 for events, actions or circumstances that are (v) undertaken with the intention of furthering the aims of Incentivised Switching, (w) beyond the reasonable control of RBS or any member of the Group, (x) of a de minimis nature, (y) performed in order to correct any incorrect allocation of a customer to the relevant perimeter, or (z) agreed between the Independent Body and RBS; or
(B) communicate with or to Incentivised Switching Eligible Customers (or, if the perimeter for Incentivised Switching has been extended to include some or all of the customers in the Wider Pool, any customer in the Wider Pool who is within the perimeter for Incentivised Switching at the relevant time (an Extended Perimeter Customer )) in a manner which could reasonably be regarded as being designed to adversely affect the success of Incentivised Switching.
8.25 Subject to Clauses 8.26 and 8.27, RBS shall not and shall procure that no member of its Group shall:
(A) from the date of this Deed until the Incentivised Switching Termination Date, solicit or induce or otherwise encourage any Incentivised Switching Eligible Customer or Extended Perimeter Customer (or any group of such customers) to remain a customer of the Group in respect of any Business Current Account or Loan Product (together, Relevant Products ); or
(B) from the date of this Deed until the date falling 12 months after the Incentivised Switching Termination Date, solicit or induce or otherwise encourage any Switched Customer to transfer its Relevant Product(s) from an Incentivised Switching Eligible Body to any member of the Group,
including, without limitation, by marketing any Relevant Product(s) to Incentivised Switching Eligible Customers, Extended Perimeter Customers or Switched Customers (as applicable) or making favourable changes to the terms and conditions (including pricing) of Relevant Products, if the purpose of such marketing activity or change is to seek to retain an Incentivised Switching Eligible Customer or Extended Perimeter Customer (or any group of such customers) as customer(s) of the Group in respect of those Relevant Products or encourage any Switched Customer to transfer its Relevant Product(s) from an Incentivised Switching Eligible Body to any member of the Group.
8.26 Each undertaking contained in Clauses 8.24 and 8.25 shall be construed as a separate undertaking and if one or more of the undertakings is held to be against the public interest or unlawful or in any way an unreasonable restraint of trade, the remaining undertakings shall continue to bind RBS.
8.27 Clauses 8.24 and 8.25 shall not:
(A) apply to any Incentivised Switching Eligible Customer, Switched Customer or Extended Perimeter Customer who independently approaches any member of the Group without any prior inducement from a member of the Group;
(B) prevent or restrict any member of the Group from communicating in the ordinary course of business with any Incentivised Switching Eligible Customer, Switched Customer or Extended Perimeter Customer (or any group of such customers) who uses or has a particular product or service provided by any member of the Group (the Product ), the transfer of which (i) is not contemplated by or pursuant to the terms of this Deed; or (ii) is contemplated by or pursuant to the terms of this Deed but which has not in fact transferred to
an Incentivised Switching Eligible Body, in each case in relation to such Product only;
(C) prevent or restrict any member of the Group from informing any Incentivised Switching Eligible Customer, Switched Customer or Extended Perimeter Customer (or any group of such customers) who uses or has a Product which:
(i) is dependent on such customer having a Relevant Product with a member of the Group; or
(ii) consistent with past practice, reasonably requires such customer to have a Relevant Product with a member of the Group,
that, upon becoming a Switched Customer, they would no longer be eligible to use or have such Product unless they retain or open such a Relevant Product with a member of the Group;
(D) prevent or restrict any member of the Group from providing customers (including Incentivised Switching Eligible Customers and Extended Perimeter Customers) who use or have a Product with a replacement, upgrade or other change in terms (including pricing), conditions or functionality in respect of that Product on a general non-targeted basis and in the ordinary course of business (the Refresher ) and informing relevant customers of the Refresher;
(E) prevent or restrict any member of the Group from offering customers (including Incentivised Switching Eligible Customers and Extended Perimeter Customers) new products, where such products have been or are being offered to other customers of the Group and such products (i) provide an enhanced security or technological proposition, and (ii) are being offered with the purpose of harmonising the product offering across the Group; or
(F) prevent or restrict any member of the Group from undertaking general, bona fide marketing activities in respect of its products and services, provided that such activities are undertaken in the ordinary course of business and do not specifically target any Incentivised Switching Eligible Customer, Switched Customer or Extended Perimeter Customer (or any group of such customers).
8.28 Upon becoming aware that £180 million has been distributed to Incentivised Switching Eligible Bodies in connection with BCA Switching, the Independent Body shall review Incentivised Switching based on the speed at which Incentivised Switching Eligible Customers have switched to Incentivised Switching Eligible Bodies and the success of Incentivised Switching up to that point and shall discuss in good faith with RBS whether the communications regarding Incentivised Switching should cease or continue. Following such review and discussions, the Independent Body shall, at its sole discretion, determine whether the communications regarding Incentivised Switching should cease or continue, provided that the Independent Body shall not determine that the communications shall continue where such continuation would not be compliant with RBSs obligations under the Data Protection Legislation or any requirement of the
Information Commissioners Office and RBS notifies the Independent Body of that fact. If the Independent Body determines that the communications regarding Incentivised Switching should continue, the Independent Body shall keep Incentivised Switching under review (and shall periodically discuss in good faith with RBS whether the communications regarding Incentivised Switching should cease or continue) until such point as the Independent Body determines, based on the factors set out above, that the communications regarding Incentivised Switching should cease.
8.29 The Independent Body shall notify in writing RBS and each Incentivised Switching Eligible Body which has entered into an Incentivised Switching Agreement promptly upon determining that the communications regarding Incentivised Switching should cease. Immediately following receipt of such notification, each of RBS and the relevant Incentivised Switching Eligible Bodies shall: (i) cease to communicate Incentivised Switching; and (ii) inform all Incentivised Switching Eligible Customers and/or customers in the Wider Pool who have not yet elected to participate in Incentivised Switching of this fact.
8.30 If, at any time following the date falling *** after the Incentivised Switching Commencement Date, the ***:
(A) RBS shall make no further communications to Incentivised Switching Eligible Customers or customers in the Wider Pool regarding Incentivised Switching;
(B) the Independent Body shall notify each Incentivised Switching Eligible Body which has entered into an Incentivised Switching Agreement that, save in respect of In-Flight Customers which become Switched Customers (subject to Clause 8.30(D), the BCA Threshold and the Loan Threshold), no further dowries shall be paid to that Incentivised Switching Eligible Body from the Incentivised Switching Fund;
(C) the Independent Body shall make no further disbursements from the Incentivised Switching Fund (other than dowries in respect of In-Flight Customers which become Switched Customers, subject to the BCA Threshold and Loan Threshold); and
(D) Incentivised Switching shall terminate on the date falling one month after the notification in accordance with clause 8.30(B) is delivered to the Incentivised Switching Eligible Bodies which have entered into an Incentivised Switching Agreement (the BCA Switch Target Date ).
8.31 Within ten Business Days of the last Business Day of each calendar month, beginning with the first full calendar month occurring after the date calculated pursuant to Clause 8.6, RBS shall notify the Independent Body in writing, in respect of such calendar month, of:
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
(A) the frequency with which (and channels of communication through which) RBS has communicated Incentivised Switching to Incentivised Switching Eligible Customers and/or customers in the Wider Pool (if applicable);
(B) the total number of Incentivised Switching Eligible Customers and/or customers in the Wider Pool (if applicable) to which RBS has communicated Incentivised Switching; and
(C) the total number of Incentivised Switching Eligible Customers and/or customers in the Wider Pool (if applicable) which have expressed an interest in transferring to an Incentivised Switching Eligible Body in connection with Incentivised Switching and which have given consent to have their contact details passed on to an Incentivised Switching Eligible Body.
8.32 Within ten Business Days of the last Business Day of each calendar month, beginning with the first full calendar month occurring after the date calculated pursuant to Clause 8.6, RBS shall notify the Independent Body in writing of the aggregate number of Incentivised Switching Eligible Customers and/or customers in the Wider Pool (if applicable) which have become Switched Customers in respect of each Incentivised Switching Eligible Body to which such customers have transferred.
8.33 Within ten Business Days of the end of each quarter following the Incentivised Switching Commencement Date (each, a Relevant Period ), RBS shall provide the Independent Body with a dowry schedule which includes the following information:
(A) the total number of Switched Customers who have switched their Business Current Account or Business Current Account and Loan Product from RBS to the Incentivised Switching Eligible Bodies during the Relevant Period;
(B) in respect of each Incentivised Switching Eligible Body which has entered into an Incentivised Switching Agreement with the Independent Body, the total amount of BCA Element and Loan Element to be paid by the Independent Body to the Incentivised Switching Eligible Body for that Relevant Period (together with a breakdown of the amount in respect of each Switched Customer) based on RBSs calculations;
(C) in respect of each Switched Customer:
(i) a unique customer reference identifier;
(ii) its CASS switching number, if applicable;
(iii) the date on which such customer became a Switched Customer;
(iv) its Turnover Band; and
(v) the BCA Element and the Loan Element to be paid to the relevant Incentivised Switching Eligible Body based on RBSs calculations; and
(D) the aggregate amount of fees waived or reimbursed by RBS pursuant to Clause 8.22 during the Relevant Period.
8.34 Within seven Business Days of the end of each calendar month, beginning with the first full calendar month occurring after the date calculated pursuant to Clause 8.6, the Independent Body shall provide the following information to RBS in writing in relation to each Incentivised Switching Eligible Body with which the Independent Body has entered into an Incentivised Switching Agreement:
(A) the aggregate number of Incentivised Switching Eligible Customers and/or customers in the Wider Pool (if applicable) which have become Switched Customers;
(B) the aggregate number of In-Flight Customers;
(C) beginning with the first full calendar month occurring after the date on which the first dowry payment is made pursuant to any Incentivised Switching Agreement, the proportion of dowry payment made pursuant to the relevant Incentivised Switching Agreement that has been paid directly to Switched Customers during such calendar month and a brief explanation of how any remaining amounts of the dowry payment have been applied for the benefit of Switched Customers by such Incentivised Switching Eligible Body;
(D) if applicable, a list ( amalgamated by reason(s) for rejection and by Turnover Band ) of the Incentivised Switching Eligible Customers who have been rejected from becoming customers of any Incentivised Switching Eligible Body during such calendar month and the explanation from such body of the reason(s) for such rejection(s); and
(E) any additional information received by the Independent Body from any Incentivised Switching Eligible Body pursuant to an Incentivised Switching Agreement in relation to such Incentivised Switching Eligible Bodys compliance with the terms of the relevant Incentivised Switching Agreement, to the extent the Independent Body considers is relevant to RBS for the purposes of Incentivised Switching .
8.35 Subject to Clause 8.36, within the confines of the information available to the Independent Body under the Package Documents and any other information of which the Independent Body is in fact aware or which is otherwise in the possession of the Independent Body, the Independent Body shall oversee the implementation of Incentivised Switching and shall monitor the compliance by RBS with its obligations set out in this Clause 8 and the Incentivised Switching Communication Framework. If, in the opinion of the Independent Body, RBS is in breach of any of its obligations set out in this Clause 8 and/or the Incentivised Switching Communication Framework (in each case, an Incentivised Switching Breach ):
(A) the Independent Body shall notify RBS of the Incentivised Switching Breach, providing RBS with all details of the Incentivised Switching Breach as are
available to the Independent Body and necessary to enable RBS to propose a remedy;
(B) RBS shall propose a remedy to the Incentivised Switching Breach within ten Business Days of the date on which it received notification from the Independent Body of the Incentivised Switching Breach; and
(C) RBS and the Independent Body shall discuss in good faith such proposal, following which RBS shall, subject to RBSs obligations under Data Protection Legislation or any requirements of the Information Commissioners Office, take such steps as the Independent Body may consider necessary in the context of such Incentivised Switching Breach.
8.36 The Independent Body shall be under no obligation to monitor the compliance by RBS with its obligations set out in this Clause 8 and the Incentivised Switching Communication Framework if (but only to the extent that) the Independent Body: (i) does not have sufficient funds to do so in its Initial Budget or Annual Budget (as increased in accordance with any Budget Request or Additional Request); and (ii) has requested from the Monitor additional funds to cover the costs of such monitoring by means of an Additional Request, Budget Request or Shortfall Request and the Monitor has not approved such Additional Request, Budget Request or Shortfall Request (as applicable).
8.37 Any decision of the Independent Body as to whether there has or has not been an Incentivised Switching Breach shall be final and binding on RBS. In this regard, the Independent Body shall act as an expert and not an arbitrator and the provisions of the Arbitration Act 1996 shall not apply.
8.38 The rights and obligations of the Independent Body and RBS pursuant to Clauses 8.1 to 8.24 and Clauses 8.28 to 8.36 above shall automatically terminate on the earlier of:
(A) the date on which £225 million in aggregate has been distributed to Incentivised Switching Eligible Bodies in connection with BCA Switching (excluding any amounts distributed in respect of Loan Products which have been transferred); and
(B) the later of:
(i) the date falling 18 months after the Incentivised Switching Commencement Date; and
(ii) if the Independent Body extends the period for which Incentivised Switching is available in accordance with Clause 8.11, the earlier of (a) the Extended Incentivised Switching Date, and (b) the BCA Switch Target Date,
(the Incentivised Switching Termination Date ).
8.39 If, on the Incentivised Switching Termination Date, there is a Switching Shortfall Amount:
(A) the Independent Body shall promptly notify RBS of the amount of the Switching Shortfall Amount;
(B) the Independent Body shall, within five Business Days, notify RBS of any determination it has made pursuant to Clause 8.40 or Clause 8.41;
(C) ***
(D) the Switching Shortfall Amount and any amounts payable under Clause (C) shall be applied by the Independent Body in accordance with Clauses 8.42 to 8.45 (together, the Incentivised Switching Excess ).
8.40 If, on the Incentivised Switching Termination Date:
(A) the Independent Body has extended the perimeter for Incentivised Switching to include customers in the Wider Pool;
(B) there are fewer than *** Switched Customers; and
***
8.41 Notwithstanding RBSs compliance with its obligations under this Deed, if the Independent Body considers that the Switching Shortfall Amount arose as a result of factors beyond the reasonable control of RBS and/or any member of the Group, the Independent Body may, upon written notice to RBS, reduce the amount to be paid by RBS pursuant to Clause 8.39(C), provided that in such circumstances the Independent Body shall publish on its website a report justifying such reduction. If the Independent Body chooses not to extend Incentivised Switching in accordance with Clause 8.11, the parties acknowledge and agree that this may be a relevant factor to be taken into account by the Independent Body in favour of reducing the amount to be paid by RBS pursuant to Clause 8.39(C).
8.42 ***
8.43 If the Incentivised Switching Excess is less than *** the Independent Body shall deal with such amount in accordance with Clauses 7.11 to 7.19 and hold such amount on trust in accordance with the terms of clause 3.2 of the Trust Deed as an addition to the Option 1 CIF Fund, the Option 2 CIF Fund or the trust pursuant to clause 9 thereof, as applicable, in accordance with the terms of the Trust Deed.
8.44 The Independent Body shall deal with any amount not applied as grants under Clause 8.42 in accordance with Clauses 7.11 to 7.19 and hold such amount on trust in accordance with the terms of clause 3.2 of the Trust Deed as an addition to the Option 1
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
CIF Fund, the Option 2 CIF Fund or the trust pursuant to clause 9 thereof, as applicable, in accordance with the terms of the Trust Deed.
8.45 If the Independent Body claws back any amount in accordance with the terms of any agreement entered into pursuant to Clause 8.42, it shall deal with such clawed back amount in accordance with Clause 7.23.
9. BRANCH ACCESS
9.1 RBS (or one of its subsidiaries, being The Royal Bank of Scotland plc, National Westminster Bank plc or Adam & Company plc) shall, upon the request of the Independent Body at any time from and including the Incentivised Switching Commencement Date until at least the date falling three years after the Incentivised Switching Commencement Date (the Branch Access Termination Date ), enter into an Inter-Bank Agency Deed with any Incentivised Switching Eligible Body which has entered into an Incentivised Switching Agreement with the Independent Body and provide Branch Access to the Switched Customers of that Incentivised Switching Eligible Body until the Branch Access Termination Date on reasonable and non-discriminatory commercial terms and conditions and in accordance with the terms of that Inter-Bank Agency Deed. The parties acknowledge and agree that where RBS has existing arrangements in place with any Incentivised Switching Eligible Body, RBS shall continue to apply the existing pricing in respect of that Incentivised Switching Eligible Body, and in all other cases RBS shall apply its standard rates applied to all other bodies (and this will be considered non-discriminatory).
10. COSTS AND EXPENSES; INDEMNITY
10.1 Subject to Clauses 10.5 and 11.3, RBS shall indemnify the Independent Body in respect of all costs and expenses reasonably and properly incurred by the Independent Body in connection with the negotiation, preparation, execution and carrying into effect of this Deed and each of the other Package Documents, including (but not limited to):
(A) the fees of all external legal and other advisers and their disbursements and out-of-pocket expenses, in each case as are reasonably and properly incurred;
(B) any and all reasonable costs in relation to the set-up and ongoing administration of the Independent Body (including, without limitation, employees salaries and benefits, Directors fees, audit fees and/or any reasonable fees payable under third party service agreements); and
(C) any fees, costs and expenses reasonably and properly incurred by the Independent Body in establishing, running and/or monitoring the Capability and Innovation Fund, Incentivised Switching and/or Branch Access (including, without limitation, third party monitoring and/or audit fees including those of the Monitor) and any Tax due or payable by the Independent Body,
(i) except to the extent that such costs and expenses or Tax are proven to have arisen as a result of the fraud, gross negligence or wilful default of the Independent Body; (ii)
except to the extent such costs and expenses or Tax constitute amounts of or in respect of Excluded Taxes (and for this purpose, any Tax arising in respect of any sum payable by RBS pursuant to Clause 5.1 or Clause 5.2 shall not constitute Excluded Taxes); (iii) except to the extent such costs and expenses or Tax are paid out of income, profits or other gains of the Trust Fund in accordance with Clause 5.19; and (iv) only to the extent that such costs and expenses exceed the amount paid by RBS pursuant to Clauses 5.1 and 5.16. If and to the extent that a claim under this Clause 10.1 relates to any Tax arising to the Independent Body in respect of a sum payable by RBS pursuant to Clause 5.1 or Clause 5.2, the indemnified amount payable (the Indemnity Payment ) shall be the full amount of that Tax ignoring any Relief available in respect of the matter giving rise to the Indemnity Payment which shall be dealt with in accordance with Clause 15.4.
10.2 Subject to Clauses 10.5 and 11.3, RBS shall indemnify the Independent Body and its Representatives from and against all loss, payments, costs, expenses or damage which the Independent Body or its Representatives may incur in relation to or arising out of any action, claim or demand that may be brought by or against the Independent Body or its Representatives under or in connection with this Deed or any other Package Document against or by a person other than a Tax Authority, except to the extent that such action, claim or demand is proven to have arisen as a result of the fraud, gross negligence or wilful default of the Independent Body or its Representatives (as applicable).
10.3 The parties acknowledge and agree that the Independent Body may not have liquidity on an ongoing basis. As such, the parties acknowledge and agree that, subject to Clauses 10.4 and 10.5:
(A) the Independent Body may issue one invoice per calendar year in respect of any immediate and/or emergency costs and expenses (other than Excluded Taxes) in an amount of no more than £100,000 which the Independent Body anticipates will be reasonably and properly incurred (each, an Invoice ) (such Invoices to be accompanied by an explanation and/or evidence of the Independent Bodys grounds for anticipating such costs and expenses);
(B) RBS shall pay to the Independent Body the amounts set out on such Invoices within ten Business Days of the receipt of the relevant Invoice; and
(C) as soon as reasonably practicable after incurring such costs and expenses, the Independent Body shall provide to RBS evidence that such costs and expenses were reasonably and properly incurred.
10.4 If, following receipt of an Invoice, RBS, acting reasonably, disputes that any costs or expenses shown on such Invoice will be reasonably or properly incurred by the Independent Body (a Dispute ):
(A) RBS shall give notice of the Dispute (a Dispute Notice ) within five Business Days of receipt of the Invoice, specifying in reasonable detail the amount of the Invoice which is disputed and the reasons for such dispute;
(B) RBS shall pay to the Independent Body the amount of any Invoice in accordance with Clause 10.3;
(C) RBS and the Independent Body shall refer the Dispute to the Monitor;
(D) the Monitor shall be instructed to assess and determine whether the costs or expenses shown on the Invoice are reasonable and proper, taking into account: (i) the functions of the Independent Body under this Deed and the other Package Documents; and (ii) the need to ensure that HMT is able to comply with the New Commitments;
(E) the Monitor shall be instructed to deliver a final and binding decision (the Monitor Decision ) within ten Business Days following the date on which the Dispute is referred to it (or such other timeframe as may be agreed between RBS and the Independent Body and notified to the Monitor);
(F) the Independent Body shall repay to RBS any amount required pursuant to the Monitor Decision within three Business Days of the Monitor Decision; and
(G) the Monitor shall act as an expert (and not an arbitrator) and the provisions of the Arbitration Act 1996 shall not apply,
provided that RBS shall not be entitled to raise a Dispute or issue a Dispute Notice unless the disputed amount of costs and expenses in a particular Invoice exceeds £50,000.
10.5 Subject to Clause 12.7, the parties acknowledge and agree that RBSs obligations and liability pursuant to this Clause 10 shall only relate to:
(A) in relation to Clauses 10.1 and 10.3, those costs and expenses reasonably and properly incurred; and
(B) in relation to Clause 10.2, those actions, claims or demands brought relating to conduct or events occurring,
prior to the date falling six months after the IB Termination Date.
10.6 To the extent that any loss, payment, cost, expense or damage covered by this Clause 10 is or was borne out of the Trust Fund, any Indemnity Payment from RBS to the Independent Body pursuant to this Clause 10 shall be treated as a reimbursement of such amount and shall accordingly form part of the Trust Fund.
10.7 The Independent Body agrees that to the extent any claim under Clause 10.2 is covered by a policy of insurance, it will use reasonable endeavours to recover such amount from the relevant insurers before claiming against RBS under Clause 10.2 and any such recovery (net of the costs of recovery) will reduce pro tanto any claim that the Independent Body might otherwise have against RBS under Clause 10.2. The foregoing does not preclude the Independent Body from recovering costs on an ongoing basis
under Clause 10.3 from RBS to the extent these costs are incurred in seeking recovery from the relevant insurers, nor from recovering other amounts under Clause 10.3 from RBS which amounts are payable by the Independent Body to third parties where such amounts would be recoverable under Clause 10.2 in circumstances where the insurers have not yet provided payment. In these circumstances, the Independent Body shall reimburse RBS any amount subsequently recovered from the insurers (net of costs of recovery) up to the amount paid by RBS.
11. LIMITATION OF LIABILITY
11.1 Subject to Clause 11.2, the aggregate liability of the Independent Body under this Deed (including all legal and other costs and expenses), other than pursuant to Clause 12.6(B), Clause 12.7(D), Clause 15.2 and Clauses 15.4 to 15.7 (inclusive), shall not in any event exceed £5 million (the IB Liability Cap ).
11.2 If, in respect of any matter which would give rise to a claim against the Independent Body under this Deed or any claim brought against the Independent Body under this Deed, the Independent Body is entitled to claim under any policy of insurance and makes any recovery under such policy of insurance (a Recovery ), the IB Liability Cap shall be increased by the amount of each such Recovery (less any Tax payable by the Independent Body in respect of that Recovery taking into account any relief arising to the Independent Body in relation to the matter giving rise to the claim under the policy of insurance including payment of the relevant claim against the Independent Body).
11.3 The aggregate liability of RBS to the Independent Body and its Representatives under Clauses 10 and 5.16 shall not in any event exceed *** .
11.4 RBS and HMT shall not be entitled to, and agree that they shall not, bring any claim in damages against the Independent Body in respect of any breach of the provisions of this Deed or any other Package Document (other than any breach arising as a result of the fraud, gross negligence or wilful default of the Independent Body).
11.5 Notwithstanding Clause 11.4 but subject to Clause 11.6, RBS and HMT shall be entitled to bring a claim for equitable relief (including injunction and/or specific performance) against the Independent Body in respect of any breach of the provisions of this Deed or any other Package Document and the Independent Body agrees not to raise any objection to any application for equitable relief.
11.6 HMT shall not bring any claim for equitable relief (including injunction and/or specific performance) against the Independent Body in respect of any breach of the provisions of this Deed or any other Package Document without the prior consent in writing of RBS, such consent not to be unreasonably withheld or delayed.
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
12. WINDING-UP OF THE INDEPENDENT BODY
12.1 As soon as reasonably practicable after the date falling three years after the date of this Deed, the parties shall consider the status of the Capability and Innovation Fund and Incentivised Switching and shall discuss in good faith whether it would be appropriate to wind up the Independent Body (provided that the parties agree that in no circumstances would it be appropriate to agree to wind up the Independent Body pursuant to this Clause 12.1 if funds remain to be distributed in connection with the Capability and Innovation Fund or Incentivised Switching). If the parties agree that it would be appropriate to wind up the Independent Body, the parties shall agree a date following which the winding up process shall commence (the IB Winding Up Date ).
12.2 As soon as reasonably practicable after the earliest of:
(A) the latest of:
(i) the date falling three months after the expiry of the last Capability and Innovation Fund Agreement in accordance with its terms (or, if no Capability and Innovation Fund Agreement has been entered into after the CIF Fallback Date, the date falling 12 months after the CIF Fallback Date); and
(ii) the date falling six months after the cessation of Incentivised Switching (pursuant to Clause 8.38);
(B) the IB Winding Up Date; and
(C) the date falling five years after the date of this Deed,
(such date being the IB Termination Date ), the members and/or Directors of the Independent Body shall take such steps as may be necessary to wind up the Independent Body in such solvent manner as the members and/or Directors of the Independent Body consider appropriate.
12.3 The parties shall co-operate in good faith and shall take such steps as may be necessary to enable or facilitate the winding up of the Independent Body in accordance with Clause 12.2.
12.4 Notwithstanding the other provisions of this Deed, immediately following the winding up of the Independent Body, all rights and obligations of the Independent Body pursuant to this Deed shall automatically terminate.
12.5 Subject to Clause 12.6, any assets of the Independent Body on winding up shall be distributed to such Charity or Charities (and, if applicable, in such shares) as the Independent Body, at its absolute discretion, may select and shall not be distributed to the members of the Independent Body.
12.6 Subject to Clause 12.7:
(A) if and to the extent that any funds transferred by RBS pursuant to Clause 5.1 remain in the Escrow Account on the date falling six months after the IB Termination Date, the Monitor shall instruct the return of such amounts to RBS to such account as maybe specified by RBS in writing; and
(B) if and to the extent that: (i) the costs and expenses reasonably and properly incurred by the Independent Body prior to the date falling six months after the IB Termination Date; plus (ii) an amount agreed between the Independent Body and RBS to be a reasonable amount in respect of the costs and expenses to be reasonably and properly incurred in connection with the winding up of the Independent Body (together, the Actual Expenses ) are less than the amount (x) applied for the satisfaction of costs and expenses in accordance with Clause 5.19(A)(i), and (y) paid to the Independent Body pursuant to Clauses 5.1 to 5.18 (the Estimated Expenses ), the Independent Body shall, promptly following the date falling six months after the IB Termination Date, distribute an amount equal to the Estimated Expenses minus the Actual Expenses to RBS to such account as maybe specified by RBS in writing.
12.7 Notwithstanding the other provisions of this Clause 12 and subject to the Independent Bodys obligations under Clause 6 and Schedule 8, if on the IB Termination Date, the Independent Body has entered into any contract(s) and/or arrangement(s) with third parties in connection with matters other than those set out in or contemplated by this Deed, the New Commitments and/or any other Package Document:
(A) the obligations set out in Clauses 12.2 to 12.6 shall not apply;
(B) RBSs obligations and liability pursuant to Clause 10 shall only relate to:
(i) in relation to Clauses 10.1 and 10.3, those costs and expenses reasonably and properly incurred; and
(ii) in relation to Clause 10.2, those actions, claims or demands brought relating to conduct or events occurring,
prior to the IB Termination Date;
(C) if and to the extent that any funds transferred by RBS pursuant to Clause 5.1 remain in the Escrow Account on the IB Termination Date, the Monitor shall instruct the return of such amounts to RBS to such account as may be specified by RBS in writing;
(D) if and to the extent that: (i) the costs and expenses reasonably and properly incurred by the Independent Body prior to the IB Termination Date (together, the Termination Actual Expenses ) are less than the amount (i) applied for the satisfaction of costs and expenses in accordance with Clause 5.19(B)(i), and (ii) paid to the Independent Body pursuant to Clauses 5.1 to 5.18 (the Termination Estimated Expenses ) the Independent Body shall promptly
distribute an amount equal to the Termination Estimated Expenses minus the Termination Actual Expenses to RBS to such account as maybe specified by RBS in writing;
(E) promptly following the repayment of funds to RBS pursuant to Clause 12.7(D), the Independent Body shall:
(i) identify any amounts transferred to the Independent Body pursuant to the terms of this Deed or any other Package Document but not distributed pursuant to Clauses 7 and 8 of this Deed or used to cover the fees and expenses incurred by the Independent Body in connection with the negotiation, preparation, execution and carrying into effect of this Deed and the other Package Documents (together with any income, profits or other gains on such amounts); and
(ii) promptly distribute such amounts to such Charity or Charities (and, if applicable, in such shares) as the Independent Body, at its absolute discretion, may select; and
(F) immediately following the distribution of assets pursuant to Clause 12.7(E), all rights and obligations of the Independent Body pursuant to this Deed shall automatically terminate.
13. MONITORING AND STEP-IN RIGHTS
13.1 For the purposes of facilitating HMTs compliance with the New Commitments, at least once per quarter, the Independent Body shall report in reasonable detail to a third party (the Monitor ) appointed by HMT and notified in writing to the Independent Body on:
(A) how the Independent Body has complied with its obligations under Clause 6 (and shall provide evidence and such other information as the Monitor may require in this respect);
(B) each of the matters notified to the Independent Body by RBS pursuant to Clause 8.31 in respect of the previous quarter;
(C) how the Independent Body has applied the Capability and Innovation Fund assessment criteria, the total number (and identity) of Capability and Innovation Fund Eligible Bodies that have received distributions pursuant to Capability and Innovation Fund Agreements, the amount of each of those distributions and a summary of the Business Case of each such body;
(D) the total amount which has been distributed to Capability and Innovation Fund Eligible Bodies pursuant to Capability and Innovation Fund Agreements;
(E) if applicable, a summary of the terms of any annual report provided by a participating Capability and Innovation Fund Eligible Body to the Independent Body pursuant to the terms of the Capability and Innovation Fund Agreement;
(F) whether the Independent Body has exercised (or anticipates exercising or has grounds to exercise within the next quarter) any rights of the Independent Body pursuant to the terms of the Capability and Innovation Fund Agreements and/or Incentivised Switching Agreements to audit Capability and Innovation Fund Eligible Bodies and/or Incentivised Switching Eligible Bodies and/or reclaim any funds distributed to such bodies and, if so, the grounds for this and the identity of the relevant body;
(G) how the Independent Body has applied the Incentivised Switching assessment criteria, the total number (and identity) of Incentivised Switching Eligible Bodies with which the Independent Body has entered into an Incentivised Switching Agreement and a summary of the Switching Proposal of each such body;
(H) the total number of Incentivised Switching Eligible Customers and/or customers in the Wider Pool (if applicable) which have transferred to an Incentivised Switching Eligible Body in connection with Incentivised Switching;
(I) the total amount which has been distributed to Incentivised Switching Eligible Bodies pursuant to Incentivised Switching Agreements;
(J) whether the Independent Body considers that RBS is in compliance with all of its obligations under this Deed and the other Package Documents and, if not, the steps which have been or are proposed to be taken by the Independent Body in connection with such matter;
(K) if applicable, the amount of, and reasons for, any increase to the remuneration of a Director, together with an explanation of how such increase is funded; and
(L) such other matters as HMT or the Monitor may request in writing.
13.2 For the purposes of facilitating HMTs compliance with the New Commitments, during the period from the date of this Deed until the Capability and Innovation Fund Commencement Date, at least once per month, the Independent Body shall meet with the Monitor and RBS (in person or by telephone) to discuss the steps taken by the Independent Body in order to become operationally ready to deliver the Package with a view to the Capability and Innovation Fund Commencement Date occurring as soon as reasonably practicable.
13.3 For the purposes of facilitating HMTs compliance with the New Commitments, promptly after any Decision has been made, the Independent Body shall report in reasonable detail to the Monitor on how the Independent Body has complied with its obligations in paragraph 2 of Part B of Schedule 8, the terms of each Decision and how the Independent Body has reached such Decision (including the factors taken into account by the Independent Body in making such Decision) (the Process Report ) and shall provide evidence and such other information as the Monitor may require in this respect. The Independent Body shall not communicate any Decision to an applicant before the date falling 10 Business Days after the date on which the Independent Body makes the Process Report to the Monitor in respect of such Decision.
13.4 For the purposes of facilitating HMTs compliance with the New Commitments, if the Monitor determines that a Trigger Event has occurred (and notifies HMT of its determination that a Trigger Event has occurred), the Monitor may (but is under no obligation to) require the Nominations Committee to design, manage and implement a process to replace all of the members and Directors of the Independent Body (the Step-in Rights ).
13.5 Except as specifically contemplated by the terms of this Deed, the Independent Body shall not, other than to the extent purely administrative in nature, or of a formal, minor or technical nature, amend, vary, waive or agree to amend, vary or waive any provision of any Package Document to which it is a party without:
(A) first notifying such proposed amendment, variation, waiver to RBS (each an Amendment Notice );
(B) in relation to any Incentivised Switching Agreement (including any schedules thereto):
(i) providing RBS with five Business Days from delivery of an Amendment Notice to object to the proposed amendment, variation or waiver by providing information to the Independent Body that RBS has reasonable grounds for considering such proposed amendment, variation or waiver to be adverse to the interests of RBS; and
(ii) if RBS objects in accordance with sub-clause 13.5(B)(i), obtaining the prior consent in writing of RBS (such consent not to be unreasonably withheld or delayed); and
(C) in relation to any other Package Document (including any schedules thereto):
(i) providing RBS with five Business Days from delivery of an Amendment Notice to object to the proposed amendment, variation or waiver by providing information to the Independent Body that RBS has reasonable grounds for considering such proposed amendment, variation or waiver to be adverse to RBSs liability, including its liability pursuant to this Deed or any Package Document; and
(ii) if RBS objects in accordance with sub-clause 13.5(C)(i), obtaining the prior consent in writing of RBS (such consent not to be unreasonably withheld or delayed).
13.6 The parties acknowledge and agree that, subject to Clause 6.3 and the remaining provisions of this Clause 13, the Independent Body shall be operationally independent from HMT and RBS.
14. WARRANTIES
14.1 RBS represents and warrants to the Independent Body and HMT that:
(A) RBS and each relevant member of the Group has the requisite capacity, power and authority to enter into and perform its obligations under this Deed and each of the Package Documents to which it is or will be a party;
(B) this Deed constitutes a legal, valid and binding obligation of RBS and each relevant member of the Group, enforceable against it in accordance with its terms; and
(C) the execution and delivery of, and the performance by RBS and each relevant member of the Group of its obligations under, this Deed and each of the Package Documents to which it is a party will not:
(i) result in a material breach of any provision of its memorandum or articles of association or other constitutional documents; or
(ii) result in a material breach of, or constitute a default under, any instrument to which it is a party or by which it is bound.
14.2 The Independent Body represents and warrants to RBS and HMT that:
(A) the Independent Body has the requisite capacity, power and authority to enter into and perform its obligations under this Deed and each of the Package Documents to which it is a party;
(B) this Deed constitutes a legal, valid and binding obligation of the Independent Body, enforceable against it in accordance with its terms; and
(C) the execution and delivery of, and the performance by the Independent Body of its obligations under, this Deed and each of the Package Documents to which it is a party will not:
(i) result in a material breach of any provision of its memorandum or articles of association or other constitutional documents; or
(ii) result in a material breach of, or constitute a default under, any instrument to which it is a party or by which it is bound.
15. TAX MATTERS
Withholdings and Taxes on payments
15.1 All payments by RBS under, or in connection with a breach of, this Deed or any other Package Document shall be paid without any deduction or withholding, unless required by Applicable Law. If any Tax is required by Applicable Law to be deducted or withheld from or in connection with any such payment, the amount payable shall be increased so as to ensure that the amount received by the Independent Body, HMT or any other Indemnified Person (after such deduction or withholding, including for the avoidance of doubt any additional deduction or withholding required as a result of such increase) is
equal to the amount which the Independent Body, HMT or such other Indemnified Person would have received if no such deduction or withholding had been required.
15.2 To the extent that any deduction or withholding in respect of which a payment has been made by RBS under Clause 15.1 results in an Indemnified Person (or any member of the same group as the Indemnified Person for Tax purposes) obtaining a Relief and, other than in the case of a Relief that constitutes a repayment of Tax, the Indemnified Person (or any member of the same group as the Indemnified Person for Tax purposes) utilises that Relief to reduce or eliminate a Tax liability (or income, profits or gains which would otherwise give rise to a Tax liability), then the amount of the repayment of Tax or the amount by which the relevant Tax liability is so reduced or eliminated (as applicable) shall be dealt with in accordance with Clause 15.7.
15.3 If any Indemnified Person is subject to Tax in respect of any sum payable by RBS under, or in connection with a breach of, this Deed or any other Package Document (other than (i) any sum payable as part of any fees or similar remuneration payable to such Indemnified Person or (ii) any sum payable pursuant to Clause 5.1 or 5.2 in respect of which the provisions of Clause 10 shall apply ) (a Relevant Payment ), or if any such Relevant Payment is taken into account in computing the income, profits or gains of any Indemnified Person for Tax purposes, the sum payable by RBS shall be increased so as to ensure that the amount retained by such Indemnified Person (after the payment of such Tax, including for the avoidance of doubt any additional Tax payable as a result of such increase, and after giving credit for any Relief in respect of the matter giving rise to the Relevant Payment that will be obtained and, other than in the case of a Relief that constitutes a right to repayment of Tax, utilised by the Indemnified Person (or any member of the same group as such Indemnified Person for Tax purposes)) is equal to the amount which such Indemnified Person would have retained in the absence of such Tax.
15.4 Where an additional amount has been paid by RBS pursuant to Clause 15.3 in respect of Tax arising on a Relevant Payment or an indemnity amount has been paid by RBS pursuant to Clause 10.1 in respect of Tax arising on a payment under Clause 5.1 or 5.2, the Indemnified Person shall take such measures as are reasonable to claim from the appropriate Tax Authority and utilise any Relief available in respect of the matter giving rise to the Relevant Payment or indemnity payment or in respect of the Tax arising on such Relevant Payment or indemnity payment. Where the Indemnified Person (or any member of the same group as the Indemnified Person for Tax purposes) obtains such a Relief (in the case of a Relief which constitutes a repayment of Tax) or (in all other cases) obtains and utilises such a Relief to reduce or eliminate a Tax liability (or profits which would otherwise give rise to a Tax liability), the lesser of (i) the additional amount paid by RBS pursuant to Clause 15.3 or indemnity amount paid by RBS under Clause 10 (as applicable) and (ii) the amount of the relevant repayment of Tax so obtained or the amount by which the relevant Tax liability is so reduced or eliminated, as the case may be, shall (save to the extent that the amount payable by RBS pursuant to Clause 15.3 or Clause 10 (as applicable) has already been reduced to take account of that Relief) be dealt with in accordance with Clause 15.7.
15.5 Where any amount paid by RBS pursuant to Clauses 5.1, 5.2 or 10.1 is used by the Independent Body to discharge any Tax liability imposed on or by reference to actual income, profits or gains earned accrued, received or otherwise recognised by the Independent Body in its own capacity in circumstances where such income, profits or gains had not been realised in, and were not readily realisable or convertible into, cash or cash equivalents (the amount so utilised being the Cash-Flow Tax Payment ), if and to the extent that such income, profits or gains become realised, or readily realisable or convertible into, cash or cash equivalents, an amount equal to the lesser of (i) the Cash-Flow Tax Payment, and (ii) the amount of cash realised or the amount of cash that the income, profits, gains or cash equivalents can be realised or converted into, shall be dealt with in accordance with Clause 15.7.
15.6 Where any amount paid by RBS pursuant to Clauses 5.1, 5.2 or 10.1 is used by the Independent Body to discharge any income Tax liability imposed on or by reference to income, profits or gains earned, accrued, received or otherwise recognised by the Independent Body in its capacity as trustee of the Trust Fund (the amount so utilised being the Bank Charge Tax Utilisation ), the Independent Body shall take such measures as are reasonable to claim from the appropriate Tax Authority and utilise any Relief available in respect of the matter giving rise to any deduction from the Trust Income Account made by the Bank in accordance with the terms of the Mandate Agreement which has resulted in the Bank Charge Tax Utilisation. Where the Independent Body obtains and utilises such a Relief to reduce or eliminate a Tax liability (or profits which would otherwise give rise to a Tax liability), the lesser of (i) the Bank Charge Tax Utilisation and (ii) the amount by which the relevant Tax liability (or profits which would otherwise give rise to a Tax Liability) is (or are) so reduced or eliminated, shall be dealt with in accordance with Clause 15.7.
15.7 Where it is provided under Clause 15.2, 15.4, 15.5 or 15.6 that any amount (the Relevant Amount ) is to be dealt with in accordance with this Clause 15.7:
(A) the Relevant Amount shall first be set off against any payment then due from RBS to the relevant Indemnified Person under this Deed; and
(B) to the extent there is an excess, a refund shall be made to RBS of any previous payment or payments made to the relevant Indemnified Person under this Deed and not previously refunded under this Clause 15.7(B), up to the amount of such excess; and
(C) to the extent that the excess referred to in Clause 15.7(B) is not exhausted under that Clause, then the remainder of that excess shall be carried forward and set off against any future payment or payments which become due from RBS under this Deed.
Output VAT
15.8 Each sum payable by RBS under or in connection with this Deed or any other Package Document is expressed exclusive of any amount in respect of VAT however it arises. If any Indemnified Person makes (or is deemed to make) any supply for VAT purposes for
which such sum (or any part thereof) is in consideration and VAT is or becomes chargeable in respect of such supply, RBS shall pay to such Indemnified Person (within 14 days of the receipt of a valid VAT invoice) an additional sum equal to the amount of any VAT so chargeable for which the Indemnified Person is liable to account.
Input VAT
15.9 If RBS is obliged to pay any sum under or in connection with this Deed or any other Package Document by way of indemnity, reimbursement, damages or compensation for or in respect of any liability, damage, cost, demand, charge or expense (the Relevant Cost ), the calculation of such sum shall include an amount determined as follows:
(A) if the Relevant Cost is, for VAT purposes, the consideration for a supply of goods or services made to the relevant Indemnified Person or the representative member of any VAT group of which they form part (including where such supply is made to the relevant Indemnified Person as agent for RBS within the terms of section 47 of the VATA 1994), such additional amount shall be equal to any input VAT which was incurred by the relevant Indemnified Person or representative member in respect of that supply and which it is not able to recover from the relevant Tax Authority; and
(B) if the Relevant Cost is, for VAT purposes, a disbursement incurred by the relevant Indemnified Person as agent on behalf of RBS and the relevant supply is made to RBS for VAT purposes, such additional amount shall be equal to any amount in respect of VAT which was paid in respect of the Relevant Cost by the relevant Indemnified Person, and the relevant Indemnified Person shall use reasonable endeavours to procure that the relevant third party issues a valid VAT invoice in respect of the Relevant Cost to RBS.
Stamp Duties
15.10 RBS shall pay and bear, and shall indemnify each Indemnified Person on demand against, any Stamp Duty which is payable or paid by such Indemnified Person or is otherwise a cost to or borne by such Indemnified Person in connection with the execution, delivery, performance or enforcement of this Deed or any other Package Document other than:
(A) any Stamp Duty arising in connection with the execution, delivery, performance or enforcement of any Capability and Innovation Fund Agreement or any Incentivised Switching Agreement; and
(B) any Stamp Duty arising on or in connection with any investment(s) of the Trust Fund.
16. ANNOUNCEMENTS AND PUBLICITY
16.1 Subject to this Clause 16: (i) RBS shall ensure that no member of the Group nor any of its or the Groups respective Representatives; and (ii) the Independent Body shall ensure that neither it nor any of its Representatives, shall make, publish, issue or release any announcement or public statement in relation to, or which refers to:
(A) this Deed or any other Package Document;
(B) HMT in connection with this Deed; or
(C) the New Commitments;
including in any annual report and accounts or other documents issued or made available to holders of securities, whether in electronic or paper written form, or in any oral announcement or statement, but excluding any announcement or public statement which: (i) is contemplated or required by the terms of this Deed; (ii) is consistent in all respects with and otherwise reflects (and contains only information which has been contained in) any announcement or public statement which has previously been made by HMT; or (iii) has been previously notified to HMT pursuant to Clause 16.4(B), provided that there has been no material and relevant change in circumstances since the date of such previous notification (each a State Aid Statement ).
Exceptions
16.2 Notwithstanding Clause 16.1:
(A) each member of the Group and the Independent Body may (and each such persons Representatives may on its behalf) make, publish, issue or release any State Aid Statement if and to the extent required by (i) Applicable Law or (ii) the rules of the Bank of England or of any securities exchange, clearing system or Authority (including the FCA and the PRA) to which it is subject or submits (each, a Permitted Statement ) provided that any such Permitted Statement is made, published or issued in compliance with Clauses 16.4 to 16.7 (inclusive); and
(B) the Representatives of each member of the Group or the Independent Body may make on behalf of that person State Aid Statements which are unscripted oral statements (each, a Permitted Oral Statement ), provided that RBS and the Independent Body shall use all reasonable endeavours to ensure that processes are in place with a view to ensuring that any such unscripted oral statements are consistent with any other State Aid Statements made in accordance with this Clause 16 by or on behalf of the Independent Body, RBS or any other member of the Group.
16.3 Any State Aid Statement which does not constitute a Permitted Statement or a Permitted Oral Statement may be made, issued, published or released only if it is in form and substance satisfactory to HMT.
16.4 Any Permitted Statement:
(A) must be (in the honestly held opinion of any director or officer of the company making or authorising the Permitted Statement) accurate and not misleading;
(B) subject to Clause 16.6, must be made, published, issued or released only after RBS or the Independent Body (as applicable) has given as much prior notification as is reasonably practicable to, and has consulted to the extent reasonably practicable with, HMT with a view to giving HMT as much time as is reasonably practicable, in all the circumstances, to review and comment on such Permitted Statement; and
(C) subject to Clause 16.6, must reflect any amendments which HMT (acting reasonably) proposes be made, including in respect of references to HMT, this Deed, any other Package Document or the New Commitments, save to the extent that any such proposed amendment:
(i) is not permitted by Applicable Law;
(ii) conflicts with the fiduciary duties of any director or officer of the company making or authorising the Permitted Statement;
(iii) (in the honestly held opinion of any director or officer of the company making or authorising the Permitted Statement) is not accurate or is misleading; or
(iv) reflects a disagreement between RBS and/or the Independent Body, on the one hand, and HMT, on the other hand, as to the interpretation of this Deed, any other Package Document or the New Commitments or any other matters and RBSs interpretation of this Deed, any other Package Document or the New Commitments or other matters is honestly believed by the director(s) or officer(s) of the company making or authorising the Permitted Statement to be accurate and not misleading.
16.5 If, in respect of any Permitted Statement, the Independent Body, any member of the Group and/or any of their respective Representatives proposes, pursuant to Clause 16.4(C), not to adopt, or does not adopt, any amendment proposed by HMT, then RBS and/or the Independent Body shall (to the extent reasonably practicable, prior to the making, publication, issuance or release of the relevant Permitted Statement or, if not reasonably practicable, promptly thereafter) provide to HMT, in writing, reasons explaining why such amendments are not proposed to be, or were not, adopted.
16.6 If the Independent Body, any member of RBSs Group, or any of their respective Representatives, proposes to make a Permitted Statement and either:
(A) notification to, and consultation with, HMT prior to the making, publication, issuance or release of such Permitted Statement is not permissible under (i)
Applicable Law or (ii) the rules of any securities exchange, clearing system or Authority (including the FCA and the PRA) to which it is subject or submits; or
(B) the Permitted Statement must be made urgently such that prior notification to or consultation with HMT is not reasonably practicable,
then the Independent Body and/or RBS (as applicable) shall as soon as permissible under Applicable Law or the relevant rules (as applicable) and as soon as is reasonably practicable, provide a copy of such Permitted Statement to HMT, together with a notification providing reasonable details of the circumstances giving rise to the Permitted Statement, the nature of the relevant Permitted Statement and the basis upon which the Independent Body or that Group member or Representative (as applicable) was prevented from complying with Clause 16.4(B).
16.7 RBS and the Independent Body shall ensure that any State Aid Statement that is submitted to HMT pursuant to Clause 16.3 or 16.4 for HMTs review, comment or approval is identified as a State Aid Statement or a Permitted Statement to which Clause 16.3 or 16.4 (respectively) applies.
Announcements by HMT
16.8 HMT and its Representatives may make, publish, issue or release any announcement or statement in relation to this Deed, any other Package Document, the New Commitments, RBSs connection with the New Commitments or any other matter pertaining to the operation of this Deed, any other Package Document, the New Commitments or RBSs connection with the New Commitments that HMT considers to be necessary, desirable or appropriate (acting reasonably), provided that, if and to the extent that such announcement or statement contains any Confidential Information, the making, publication, issuance or release does not breach Clause 18.
17. DATA PROTECTION
17.1 RBS agrees that it shall not make any personal data (as defined in the Data Protection Legislation) available to the Independent Body other than Relevant Personal Data. RBS shall only provide Relevant Personal Data to the Independent Body that: (i) has been fairly and lawfully obtained; and (ii) subject to Clause 17.5, in respect of which RBS has the right and has notified each Data Subject of its intention as required in accordance with the Data Protection Legislation, to disclose to the Independent Body.
17.2 If and to the extent that Relevant Personal Data is made available to the Independent Body by or on behalf of RBS in accordance with this Deed, the provisions of Clauses 17.3 to 17.11 shall apply in respect of such Relevant Personal Data.
17.3 Each of RBS and the Independent Body:
(A) acknowledges that it, independently of the other, acts as Data Controller in respect of any Relevant Personal Data and that RBS and the Independent
Body shall not constitute joint Data Controllers of any Relevant Personal Data for the purposes of Data Protection Legislation; and
(B) shall use commercially reasonable endeavours to assist the other, on receipt of a reasonable request in writing setting out the nature of the assistance required, to enable it to comply with its obligations under Data Protection Legislation.
17.4 The Independent Body, RBS and HMT shall comply (and shall take reasonable steps to procure the compliance of each of their Representatives) with their respective obligations under the Data Protection Legislation in connection with the processing of the Relevant Personal Data.
17.5 The Independent Body shall acquire no rights or interest in the Relevant Personal Data and shall only use the Relevant Personal Data in order to exercise its rights and perform its obligations under this Deed, the Package Documents and Applicable Law. Each of RBS and the Independent Body shall not do anything which would place the other (or, in the case of the Independent Body, any member of the Group) in breach of the Data Protection Legislation. The Independent Body acknowledges that RBS, and RBS acknowledges that the Independent Body, is not responsible for any processing of the Relevant Personal Data carried out by the other.
17.6 The Independent Body will not transfer any Relevant Personal Data outside of the United Kingdom or the European Economic Area except with the prior written consent of RBS and in accordance with any terms RBS, acting reasonably, may impose on such transfer. As a condition of granting such consent, RBS may, among other requirements, require the Independent Body to:
(A) enter into an appropriate Data Transfer Agreement; or
(B) for transfers to the United States of America, ensure that the recipient has and continues to maintain a current, valid certification under the Privacy Shield program and complies with the Privacy Shield principles.
17.7 In the event that the data transfer mechanism entered into under Clause 17.6 ceases to be valid, the Independent Body shall use reasonable endeavours to enter into an appropriate alternative data transfer mechanism and/or procure that any relevant sub-contractor enters into a data transfer mechanism that complies with obligations set out in the Data Protection Legislation and, where applicable, that imposes obligations on the sub-contractor equivalent to those set out in the Independent Bodys alternative data transfer mechanism.
17.8 The Independent Body will identify and protect at all times the confidentiality, integrity and availability of the Relevant Personal Data or other information relating to customers of the Group, in accordance with Applicable Law.
17.9 Upon any known actual or reported suspected breach of Applicable Law or any obligations or duties owed by the Independent Body to RBS relating to the
confidentiality, integrity or availability of Relevant Personal Data or other information relating to customers of the Group (a Data Security Breach ), the Independent Body will, as soon as practicable: (a) investigate the Data Security Breach to seek to identify, prevent and mitigate the effects of the Data Security Breach and to carry out any recovery or other action reasonably necessary to remedy the Data Security Breach; (b) notify RBS without undue delay of the breach following the procedure set out in Schedule 7 (and provide such subsequent updates as may be reasonably requested by RBS, which may include a detailed description in writing, including (if known) the cause of the breach, remedial action taken and the potential consequences of the breach); (c) conduct or support RBS in conducting computer forensic investigations and analysis that RBS requires; (d) implement any additional actions or remedial measures which RBS reasonably considers necessary as a result of the breach; (e) support RBS in any notification of the breach to any Authority and/or Data Subjects; and (f) notify RBS of the type of data that was the subject of the Data Security Breach and the identity of each affected person as soon as such information can be collected or otherwise becomes available.
17.10 Except to the extent required by Applicable Law, the Independent Body will not issue any filings, communications, notices, press releases, or reports related to any Data Security Breach which would lead to the identification of RBS without prior written approval from RBS.
17.11 The Independent Body shall, as soon as reasonably practicable following receipt of a written request from RBS, provide to RBS all information reasonably necessary to demonstrate compliance with this Clause 17. Subject to the following sentence, the Independent Body shall allow RBS or a third party mandated by RBS, in each case after giving at least 10 Business Days written notice to the Independent Body, and not more than once during each calendar year of the term, to carry out enquiries in normal working hours to determine whether or not any Relevant Personal Data is being or has been processed in compliance with this Clause 17 (a DP Audit ). In carrying out any DP Audit, RBS shall, and shall procure that its authorised representative shall: (a) use all reasonable endeavours to minimise disruption to the operations of the Independent Body; and (b) ensure that all persons conducting that DP Audit shall comply with all reasonable health and safety and security requirements of the Independent Body, and confidentiality obligations at least to the standard of those set out in Clause 18.
17.12 The provisions of this Clause 17 shall survive the term of this Deed until the Independent Body has destroyed all Relevant Personal Data in its possession or control.
18. CONFIDENTIALITY; FREEDOM OF INFORMATION
18.1 Each party (the first party ) shall treat as confidential any information that (i) is covered by the obligation of professional secrecy as referred to in articles 30 and 31 of Council Regulation No 2015/1589; and (ii) any other party (or its Representatives) (the disclosing party ) has provided to the first party (or its Representatives) with respect to the matters referred to in this Deed ( Confidential Information ).
18.2 Each party shall:
(A) not disclose any Confidential Information to any person other than to its respective Representatives:
(i) in the case of disclosure by HMT, to enable or assist HMT to fulfil any of the HMT Permitted Purposes;
(ii) in the case of disclosure by the Independent Body, to the extent that such Representatives require the Confidential Information to enable or assist the Independent Body to comply with its responsibilities and obligations, or exercise its rights, powers or discretions, under or in connection with this Deed or the other Package Documents; and
(iii) in the case of disclosure by RBS, to the extent that such Representatives require the Confidential Information to enable or assist RBS to comply with its responsibilities and obligations, or exercise its rights, powers or discretions, under or in connection with this Deed or the other Package Documents;
(B) procure that any person to whom any Confidential Information is so disclosed by it complies with the restrictions contained in this Clause 18 as if such person were a party to this Deed; and
(C) have in place and maintain security measures and procedures to protect the confidentiality of Confidential Information.
18.3 HMT shall use (and shall ensure that its Representatives will use) Confidential Information only for HMT Permitted Purposes (or, in the case of any Permitted Government Recipient referred to in sub-clause 18.7(B), for the purposes of enabling or assisting such person to fulfil its functions). In particular, HMT shall (and shall ensure that its Representatives shall) not use the Confidential Information for the benefit of any third party, including any financial institution in which HMT has an ownership interest from time to time or in communications or discussions with such financial institutions or any of their group members or representatives.
18.4 The Independent Body shall use (and shall ensure that its Representatives will use) Confidential Information only to enable or assist the Independent Body to comply with its responsibilities and obligations, or exercise its rights, powers or discretions, under or in connection with this Deed or the other Package Documents.
18.5 RBS shall use (and shall ensure that its Representatives will use) Confidential Information only to enable or assist RBS to comply with its responsibilities and obligations, or exercise its rights, powers or discretions, under or in connection with this Deed or the other Package Documents.
18.6 The restrictions in Clauses 18.1 and 18.2 shall not prevent the Independent Body from disclosing Confidential Information:
(A) on a confidential basis, where the Independent Body considers that such disclosure is required to enable or assist the Independent Body to comply with its responsibilities and obligations, or exercise its rights, powers or discretions, under or in connection with this Deed or the other Package Documents;
(B) to HMT; or
(C) where RBS and HMT have agreed in advance to such disclosure.
18.7 The restrictions in Clauses 18.1 and 18.2 shall not prevent HMT from disclosing Confidential Information:
(A) to the European Commission, if and to the extent that HMT considers such disclosure is necessary in connection with (i) the application of the state aid rules of the TFEU, (ii) any European Commission decision relating to those rules or (iii) compliance with any of the United Kingdoms reporting requirements under the New Commitments;
(B) on a confidential basis, to any Permitted Government Recipient or any successor organisation of any Permitted Government Recipient to the extent that HMT considers (acting reasonably) that such disclosure is required to enable or assist: (i) HMT to fulfil any of the HMT Permitted Purposes; or (ii) any Permitted Government Recipient (or any of its successors) to fulfil its functions;
(C) to Parliament or to any Parliamentary committee (including the Public Accounts Committee, the House of Commons Treasury Select Committee and any Select Committee of the Parliament of the United Kingdom), in each case if and to the extent that HMT considers (acting reasonably) that such disclosure is required to enable or assist HMT to fulfil any HMT Permitted Purpose;
(D) on a confidential basis, where HMT considers (acting reasonably) that such disclosure is required to enable or assist it to fulfil any HMT Permitted Purpose; or
(E) where RBS and the Independent Body have agreed in advance to such disclosure.
18.8 The restrictions in Clauses 18.1 and 18.2 shall not prevent RBS from disclosing Confidential Information where HMT and the Independent Body have agreed in advance to such disclosure.
18.9 Prior to any disclosure of Confidential Information by HMT or any of its Representatives in reliance on the exception set out in sub-clause 18.7(C), HMT shall, so far as it is lawful and HMT considers it is reasonably practicable, and not inconsistent with Parliamentary convention, to do so in the circumstances, use reasonable endeavours to notify RBS and/or the Independent Body (as applicable) in writing of the Confidential Information to be disclosed. The notification obligation in this Clause 18.9 shall not
apply to the disclosure of Confidential Information comprised in any non-scripted oral statement.
18.10 Prior to any disclosure of Confidential Information by HMT or any of its Representatives in reliance on the exception set out in sub-clause 18.7(A) HMT shall, so far as it is lawful and HMT considers it is reasonably practicable to do so:
(A) consult with RBS and/or the Independent Body (as applicable) as soon as reasonably practicable as to the Confidential Information that HMT (or any of its Representatives) proposes to disclose and the reason for disclosure and, as part of any such consultation process, HMT shall take into account any representation from RBS and/or the Independent Body (as applicable) as to whether such information is commercially sensitive and/or subject to contractual, legal or regulatory restrictions on disclosure owed to third parties, and any other representations from RBS and/or the Independent Body (as applicable) as to whether or not (and the extent to which) such information is required to be disclosed and as to the timing and nature of such disclosure;
(B) if HMT determines that such disclosure is required and RBS and/or the Independent Body (as applicable) has objected to such disclosure, give RBS and/or the Independent Body (as applicable) as much prior notice as is reasonably practicable of the Confidential Information to be disclosed and the proposed timing and nature of such disclosure; and
(C) having regard to any representations received from RBS and/or the Independent Body (as applicable) pursuant to sub-clause (A), anonymise the relevant Confidential Information (whether by aggregation, redaction or otherwise) if and to the extent that HMT considers that the relevant requirement or need for disclosure can be satisfied by the disclosure of anonymised Confidential Information.
18.11 Each party shall comply (and shall take reasonable steps to procure the compliance of its Representatives) with its respective obligations under Applicable Law relating to market abuse and/or insider dealing with respect to the Confidential Information. Nothing in this Deed is intended to facilitate or permit HMT or the Independent Body to disclose Confidential Information if and to the extent that such disclosure is in contravention of or inconsistent with Applicable Law relating to market abuse and/or insider dealing.
18.12 The restrictions in Clauses 18.1, 18.2, 18.15, 18.16 and 18.18 shall not prevent any party from disclosing Confidential Information:
(A) which is required by: (i) Applicable Law, or (ii) the rules of any securities exchange, clearing system or Authority (including the PRA, the FCA and the European Commission) to which it is subject or submits;
(B) which is disclosed to a Tax Authority in connection with the Tax affairs of the disclosing party or a member of its group;
(C) if and to the extent such disclosure is required or contemplated by the terms of this Deed;
(D) if and to the extent required for the purpose of any judicial proceedings; and
(E) if and to the extent the information has come into the public domain other than as a result of a breach of confidence or contractual obligations.
18.13 If HMT is requested to disclose any Confidential Information pursuant to the provisions of the Freedom of Information Act 2000 (the FOI Act , such a request an FOI Request ), HMT shall (to the extent practicable and permissible under the FOI Act and consistent with the Code of Practice of the Secretary of State for Constitutional Affairs on discharge of public authorities functions under Part 1 of the FOI Act and the Secretary of States Code of Practice (datasets) on the discharge of public authorities functions under Part 1 of the FOI Act):
(A) notify RBS and the Independent Body in writing of the nature and content of such FOI Request as soon as practicable;
(B) prior to the making of a disclosure pursuant to an FOI Request, for a period of no less than 5 Business Days, consult with RBS and the Independent Body as to: (i) whether such FOI Request is valid; (ii) whether or not disclosure pursuant to the FOI Act is required; and (iii) (if HMT determines that disclosure pursuant to the FOI Act is required) the scope and content of any proposed disclosure, and, as part of such consultation process, HMT shall take into account any representation from RBS and the Independent Body as to whether the Confidential Information is commercially sensitive and any other representations from RBS or the Independent Body as to whether or not there is an obligation to disclose such Confidential Information and/or the extent of any such required disclosure; and
(C) (if HMT determines that disclosure pursuant to the FOI Act is required and RBS or the Independent Body has objected to such disclosure or the extent of the proposed disclosure) give RBS and the Independent Body as much prior notice as is reasonably practicable prior to such disclosure being made.
18.14 The provisions of Clause 18.13 shall apply, mutatis mutandis , to the Independent Body if the Independent Body becomes a public authority for the purposes of the FOI Act.
18.15 Notwithstanding the other terms of this Deed but subject to Clauses 18.12 and 18.17, the Independent Body may only disclose this Deed to a party other than the parties to this Deed if and to the extent: (i) specifically requested by a Beneficiary; and (ii) that the Independent Body (acting reasonably) considers the terms this Deed strictly relevant to such Beneficiarys present interest under the Trust Deed (if any).
18.16 Notwithstanding the other terms of this Deed but subject to Clause 18.12 and 18.18, the Independent Body may only disclose a Trust Document (other than the Trust Deed) to a party other than the parties to this Deed if and to the extent: (i) such Trust Document does not relate to any matter which is subject to redaction pursuant to Clauses 18.17 or
18.18; and (ii) that the Independent Body (acting reasonably) considers the terms of such Trust Document (other than the Trust Deed) strictly relevant to such Beneficiarys present interest under the Trust Deed (if any).
18.17 Unless otherwise ordered by a court of competent jurisdiction or with the consent of RBS, if the Independent Body discloses this Deed to a Beneficiary pursuant to Clause 18.15, it shall only be disclosed in the redacted form set out:
(A) where such disclosure is to be made before the Extended Incentivised Switching Date, in Part 1 of Schedule 10; and
(B) where such disclosure is to be made on or after the Extended Incentivised Switching Date, in Part 2 of Schedule 10.
18.18 Notwithstanding the other terms of this Deed but subject to Clause 18.12, the Independent Body may make the Trust Deed publicly available provided that, unless otherwise ordered by a court of competent jurisdiction or with the consent of RBS, where it is made available before the Extended Incentivised Switching Date, it is only made available in the redacted form set out in Schedule 11.
18.19 If the Independent Body discloses this Deed or any Trust Document (other than the Trust Deed) to any person, it shall promptly notify RBS of this in writing, specifying the document(s) disclosed, the date of the disclosure and the person or persons to whom disclosure was made.
18.20 Notwithstanding the other terms of this Deed, the Independent Body may disclose this Deed and/or the Trust Deed to the Bank in accordance with the terms of the Mandate Agreement.
19. ASSIGNMENT
19.1 HMT may effect a Transfer to any Government Entity on such terms as it considers appropriate.
19.2 HMT shall effect a Transfer by giving not less than 10 Business Days prior written notice to RBS and the Independent Body specifying the identity of the transferee and the rights, powers, discretions or obligations under this Deed that are to be the subject of the Transfer (the Substituted Rights and Obligations ).
19.3 If a notification is given by HMT pursuant to clause 19.2, RBS and the Independent Body shall enter into such further agreements as are necessary in order to substitute the relevant transferee for HMT in respect of the Substituted Rights and Obligations.
19.4 If HMT effects any Transfer pursuant to this clause 19, neither RBS nor the Independent Body shall incur any greater liability under this Deed than would have been the case but for such Transfer.
19.5 Neither RBS nor the Independent Body may assign, purport to assign, declare a trust in respect of, or enter into any arrangement whereby it agrees to hold in trust for any other person, all or any part of its rights or benefits under this Deed or any other Package Document.
19.6 Notwithstanding Clause 19.5, RBS may, without the consent of the other parties, assign the benefit of the whole or any part of this Deed within the Group, provided that if the assignee ceases to be a subsidiary or subsidiary undertaking of RBS, it shall before ceasing to be so assign the benefit, so far as assigned to it, back to a member of the Group.
19.7 Notwithstanding Clause 19.5, subject to its fiduciary duties and the requirements of the Trustee Act 2000, the Independent Body may:
(A) sub-contract or enter into any arrangement whereby another person is to perform any or all of its obligations under this Deed or any other Package Document provided that the Independent Body shall not be relieved of any of its obligations under this Deed or any other Package Document as a result of entering into any such sub-contract; and/or
(B) declare such trusts as are contemplated by the terms of the Trust Deed and this Deed.
19.8 For the purposes of this clause 19, Transfer means (i) the assignment of all or any part of HMTs rights and benefits of or under this Deed; (ii) the declaration of a trust in respect of or the entry into of any arrangement whereby HMT agrees to hold in trust for any person all or any part of the benefit of, or its rights or benefits under, this Deed; or (iii) the transfer (whether by way of novation, sub-contract, delegation or otherwise), or the entry into an arrangement whereby any person is to perform, any or all of HMTs obligations under this Deed.
20. REMEDIES
20.1 No delay or omission by any party to this Deed in exercising any right, power or remedy provided by law or under or pursuant to this Deed shall: (i) affect that right, power or remedy; or (ii) operate as a waiver of it.
20.2 The single or partial exercise by any party to this Deed of any right, power or remedy provided by law or under or pursuant to this Deed shall not, unless otherwise expressly stated, preclude any other or further exercise of it or the exercise of any other right, power or remedy.
20.3 The rights, powers and remedies provided in this Deed are cumulative and not exclusive of any other rights, powers and remedies (whether provided by law or otherwise).
20.4 Each party acknowledges and agrees that damages may not be an adequate remedy for any breach of this Deed, and further acknowledges and agrees that, without prejudice to any other rights or remedies which any party may have, whether pursuant to a provision of this Deed or otherwise, equitable relief (including specific performance and injunction) for any such breach (or potential breach) will normally be appropriate. RBS and the Independent Body agree not to raise any objection to any application for equitable relief.
21. FURTHER ASSURANCE
21.1 RBS shall at its own cost, and so far as it is able to do so in accordance with Applicable Law, from time to time on request, do or procure the doing of all acts and/or execute or procure the execution of all documents in a form satisfactory to HMT which HMT may (acting reasonably) consider necessary for giving full effect to this Deed and the other Package Documents and securing to HMT the full benefit of the rights, powers and remedies conferred upon HMT under or pursuant to this Deed and the other Package Documents.
21.2 The Independent Body shall, so far as it is able to do so in accordance with Applicable Law, from time to time on request, do or procure the doing of all acts and/or execute or procure the execution of all documents in a form satisfactory to HMT which HMT may (acting reasonably) consider necessary for giving full effect to this Deed and the other Package Documents and securing to HMT the full benefit of the rights, powers and remedies conferred upon HMT under or pursuant to this Deed and the other Package Documents.
22. INVALIDITY
If any provision of this Deed shall be held to be illegal, invalid or unenforceable, in whole or in part, under any enactment or rule of law, such provision or part shall to that extent be deemed not to form part of this Deed but the legality, validity and enforceability of the remainder of this Deed shall not be affected.
23. NOTICES
23.1 Except as otherwise provided in this Deed, a notice under this Deed shall only be effective if it is in writing. E-mail transmissions (where listed in or notified pursuant to Clause 23.2) are permitted.
23.2 Notices under this Deed shall be sent to a party to this Deed at its postal address, number or email address and for the attention of the individual set out below:
Party and title of
|
|
Address |
|
Email address |
|
|
|
|
|
|
|
RBS |
|
Secretariat
Attention: Company Secretary
|
|
None |
|
HMT |
|
1 Horse Guards Road
|
|
notifications@hmtreasury.gsi.gov.uk |
|
|
|
Attention: Director of the Financial Stability Group |
|
|
|
|
|
|
|
|
|
Independent Body |
|
Fleetside Legal Representative Services Limited
Attention: *** |
|
businessprotectionunit@allenovery.com |
|
provided that a party may change its notice details on giving notice to the other party of the change in accordance with this clause 23. That notice shall only be effective on the day falling five clear Business Days after the notification has been received or such later date as may be specified in the notice.
23.3 Any notice given under this Deed shall, in the absence of earlier receipt, be deemed to have been duly given as follows:
(A) if delivered personally, on delivery;
(B) if sent by first class post, two clear Business Days after the date of posting; and
(C) if sent by email, when despatched.
23.4 Any notice given under this Deed outside Working Hours in the place to which it is addressed shall be deemed not to have been given until the start of the next period of Working Hours in such place.
24. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
24.1 Clause 5, 6.3, 13 and Schedule 8 confer benefits on the Monitor, Clause 10 confers benefits on the Representatives of the Independent Body and Clause 15 confers benefits on Indemnified Persons and, subject to the remaining provisions of this Clause, such clauses are intended to be enforceable by the Monitor and such Representatives and Indemnified Persons, as applicable, by virtue of the Contracts (Rights of Third Parties) Act 1999.
24.2 Subject to Clause 24.1, the parties to this Deed do not intend that any term of this Deed should be enforceable, by virtue of the Contracts (Rights of Third Parties) Act 1999, by any person who is not a party to this Deed.
24.3 Notwithstanding the provisions of Clause 24.1, and save in respect of (i) Clause 5, Clause 6.3, Clause 13, Schedule 8 and this Clause 24 which in each case may not be rescinded or varied in a way which would be adverse to the rights of the Monitor without the prior written consent of the Monitor; (ii) Clause 10 and this Clause 24 which in each
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
case may not be rescinded or varied in a way which would be adverse to the rights of the Representatives of the Independent Body without the prior written consent of the Representatives of the Independent Body; and (iii) Clause 15 and this Clause 24 which in each case may not be rescinded or varied in a way which would be adverse to the rights of the Indemnified Persons without the prior written consent of the Indemnified Persons, this Deed may be rescinded or varied in any way and at any time by the parties to this Deed without the consent of any third party.
25. COUNTERPARTS
This Deed may be executed in any number of counterparts, and by the parties on separate counterparts, but shall not be effective until each party has executed at least one counterpart. Each counterpart shall constitute an original of this Deed, but all the counterparts together shall constitute one and the same instrument.
26. NO PARTNERSHIP
Nothing in this Deed and no action taken by the parties under this Deed shall constitute a partnership, association or other co-operative entity between any of the parties or constitute any party the agent of any other party for any purpose.
27. VARIATION
27.1 Subject to Clause 24 and Clauses 27.2 and 27.3, any term of this Deed may be amended, and the observance of any term of this Deed may be waived (either generally or in a particular instance and either retroactively or prospectively), only in writing and signed by or on behalf of each of the parties.
27.2 Subject to Clause 24, RBS and HMT shall be entitled to amend this Deed without the consent of the Independent Body, provided that no such amendment shall be made which would be adverse to the rights or obligations of the Independent Body without the consent of the Independent Body (such consent not to be unreasonably withheld or delayed).
27.3 Subject to Clause 24, the Independent Body shall be entitled to amend this Deed with the prior consent in writing of RBS and HMT (such consent not to be unreasonably withheld or delayed), provided that any such amendment(s) must be consistent in all respects with the New Commitments.
27.4 Subject to Clause 27.5, and except where the Revised State Aid Approvals have been annulled or suspended by the General Court of the European Union or the Court of Justice of the European Union, if HMT considers at any time that it is necessary to modify the New Commitments to reflect a change to the Revised State Aid Approvals, HMT may by notice to RBS and (to the extent that such changes affect it) the Independent Body supplement, modify, replace or delete any part of the New Commitments in such a manner as HMT considers necessary (acting reasonably), provided that HMT shall first consult with RBS and (to the extent that such changes
affect it) the Independent Body in good faith about such supplement, modification, replacement or deletion.
27.5 If HMT or the European Commission seeks to supplement, modify or replace any part of the New Commitments, the Revised State Aid Approvals, this Deed or any other Package Document then RBS, the Independent Body and HMT will each cooperate in good faith with a view to agreeing an appropriate response to such proposals. However, HMT will not:
(A) without the consent of RBS (acting reasonably) agree to any such supplement, modification or replacement that would have the general effect of making any of the New Commitments or Revised State Aid Approvals significantly more onerous to RBS; or
(B) without the consent of the Independent Body agree to any such supplement, modification or replacement that would have the general effect of making any of the New Commitments significantly more onerous to the Independent Body.
27.6 Without prejudice to Clause 27.5, HMT agrees that it will not propose to the European Commission any supplements, modifications or replacements to the New Commitments or the Revised State Aid Approvals without (where permitted by law) first informing RBS of such proposals and discussing such proposals in good faith with RBS.
28. GOVERNING LAW AND JURISDICTION
28.1 Any matter, claim or dispute arising out of or in connection with this Deed, whether such matter, claim or dispute is contractual or non-contractual, shall be governed by and determined in accordance with the laws of England.
28.2 The courts of England have exclusive jurisdiction to hear and decide any suit, action or proceedings, and to settle any disputes, arising out of or in connection with this Deed, and for these purposes, the parties irrevocably submit to the jurisdiction of the courts of England.
Schedule 1***
New Commitments
Dated |
|
2018 |
[THE ROYAL BANK OF SCOTLAND PLC / NATIONAL WESTMINSTER BANK PLC]
AND
[ INSERT ELIGIBLE BANK ]
INTER-BANK AGENCY DEED
Contents
|
Clause |
Page |
|
|
|
1 |
Definitions and interpretation |
1 |
2 |
Appointment of Agent |
6 |
3 |
Term |
7 |
4 |
Provision of Services |
7 |
5 |
Banks Obligations |
7 |
6 |
Agents Obligations |
7 |
7 |
Obligations of both Parties |
8 |
8 |
Banks representations and warranties |
8 |
9 |
Agents Warranties |
9 |
10 |
Banks Undertakings |
9 |
11 |
Liability and Indemnity |
9 |
12 |
Anti-money laundering |
11 |
13 |
Regulatory audit |
11 |
14 |
Business continuity and disaster recovery plan |
11 |
15 |
Intellectual Property |
11 |
16 |
Provision of Services |
12 |
17 |
Extension and Termination |
13 |
18 |
Consequences of Termination |
15 |
19 |
Data Protection |
16 |
20 |
Data Security |
17 |
21 |
Confidentiality |
17 |
22 |
General |
18 |
23 |
Complaints |
19 |
24 |
Entire agreement |
20 |
25 |
Notices |
20 |
26 |
Force Majeure |
20 |
Schedule 1 Agency Commission Terms
Schedule 2 Letter of Introduction
Schedule 3 Form of Open Credit Facility Form
Schedule 4 Counter Services
Schedule 5 Fee Schedule
Schedule 6 Deed of Novation
This Deed is made on |
|
2018 |
Between
(1) [The Royal Bank of Scotland plc a company incorporated in Scotland whose registered office is at 36 St Andrew Square, Edinburgh, United Kingdom, EH2 2YB / National Westminster Bank plc a company incorporated in England whose registered office is at 135 Bishopsgate, London, United Kingdom, EC2M 3UR] (the Agent ).
(2) [ Insert name of Eligible Bank ] whose registered office is at [ ] (the Bank ).
Background
(A) The Bank wishes to appoint the Agent as an agent of the Bank in order to provide from the Premises the Services to customers of the Bank.
(B) The Agent wishes to accept such appointment, subject to and on the terms set out below.
In this Deed it is agreed
1 Definitions and interpretation
1.1 In this Deed unless the context otherwise requires:
Accounts means the relevant accounts of the Customers with the Bank.
Agency means the arrangement between the Agent and the Bank created by and subject to the terms of this Deed.
Agents Group means the Agent and its holding companies and subsidiary undertakings and any subsidiary undertaking of any such holding company from time to time.
Agent Trade Marks means any trade marks, service marks, business, company or trade names, logos, get-up, or URLs or domain names ( Names ), in each case, owned or registered by any member of the Agents Group (including any Names that include (in whole or in part) any of the marks ROYAL BANK OF SCOTLAND, RBS, the daisy logo (as represented by EU trade mark registration no. 5617824), NATWEST, NATIONAL WESTMINSTER BANK and BANKLINE), and any marks which are confusingly similar to, or dilutive of, any such Names.
Applicable Laws means all applicable laws, statutes, rules and regulations, guidance and codes of practice including without limitation:
(a) the Privacy and Electronic Communications Regulations 2003, the Disability Discrimination Act 1995 and the Equality Act 2010;
(b) Anti-Money Laundering Regulations;
(c) Data Protection Legislation;
(d) Relevant Regulations; and
(e) FSMA.
Anti-Money Laundering Regulations means the Money Laundering Regulations 2007 (SI2007/2157) together with the Guidance Notes for the Financial Sector issued by the Joint Money Laundering Steering Group and any other relevant guidance issued by a regulatory authority or industry body.
Business Day means any day other than a Saturday or a Sunday, excluding any day that is a public holiday in England.
Business Hours means the normal business hours of the relevant Premises.
Change of Control means when any person, or group of persons acting in concert (as defined in the City Code on Takeovers and Mergers), gains Control over an entity in circumstances where they did not already exercise Control over such entity.
Control means, with respect to any entity:
(a) 50.1% or more of the beneficial or legal ownership of such entity; or
(b) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through the ownership of voting securities (or other ownership interest), by contract or otherwise.
Customer means any customer with an account at the Bank .
Data Controller has the meaning given to it in the Data Protection Legislation.
Data Processor has the meaning given to it in the Data Protection Legislation.
Data Protection Legislation means, as applicable from time to time (a) the Data Protection Act 1998, (b) the General Data Protection Regulation (2016/679), (c) the Privacy and Electronic Communications (EC Directive) Regulations 2003, and (d) other relevant data protection related legislation or regulations which govern the conduct of the Parties in relation to activities pursuant to this Deed.
Deed means this Inter-Bank Agency Deed.
Deed of Novation means the template deed of novation substantially in the form set out in Schedule 6 (Deed of Novation).
DISP Rules means the Dispute Resolution: Complaints Rules as set out in the FCA Handbook.
FCA means the Financial Conduct Authority or any replacement or successor regulator or regulators.
Fee Schedule means the schedule of fees set out in Schedule 5, as may be amended in writing between the Parties from time to time.
Fees means the fees, if any, payable by the Bank to the Agent pursuant to Schedule 1.
Force Majeure means any cause preventing the Agent from performing any or all of its obligations under this Deed which arises from or is attributable to acts, events, circumstances, omissions or accidents outside or beyond the reasonable control of the Party so prevented including (without limitation):
(a) market conditions affecting the execution or settlement of transactions, currency restrictions, devaluations and fluctuations;
(b) an act of terrorism or of God, war, riot, civil commotion;
(c) breakdown or failure in communications not reasonably within the control of the Party invoking Force Majeure;
(d) fire, flood, storm;
(e) any change to the law, order or regulation of a governmental, supranational or regulatory body; or
(f) failure of any relevant exchange, clearing house and/or broker for any reason to perform its obligations.
FSMA means the Financial Services and Markets Act 2000.
Group means the Bank and its holding companies and subsidiary undertakings and any subsidiary undertaking of any such holding company from time to time.
Initial Term means the period from the date of this Deed until [three years from IS Commencement Date] .
Insolvent means in respect of the Bank or the Agent, as applicable:
(a) it is unable to or admits inability to pay its debts as they fall due, defaults on making payments of any of its debts or by reason of actual or anticipated financial difficulties commences negotiations with one or more of its creditors with a view to rescheduling any of its indebtedness;
(b) a moratorium is declared in respect of any of its indebtedness;
(c) a composition, compromise, assignment or arrangement is executed with any creditor;
(d) the appointment of a liquidator, receiver, administrator, administrative receiver, compulsory manager or other similar officer over any of its assets; or
(e) the occurrence of any event in any jurisdiction to which it is subject having the same effect as any of the events referred to in paragraphs (a) to (d) above.
Intellectual Property Rights means trade marks, service marks, rights in trade names, business names, domain names and URLs, get-up, patents, rights in inventions, registered and unregistered design rights, copyrights, database rights, trade secrets, know-how, rights in information, and all other similar rights in any part of the world including, where such rights
are obtained or enhanced by registration, any registration of such rights and applications and rights to apply for such registrations.
IS Scheme means the proposal pursuant to which the Bank may be provided with funds, on the terms set out in an Incentivised Switching Agreement dated [.] between Banking Competition Remedies Limited and the Bank, to be used to encourage certain customers to switch products and services from the Agent to the Bank.
IS Scheme Customer means any Customer who has switched its account from the Agent to the Bank pursuant to the IS Scheme.
Key Person means at the relevant time a member of the board of directors of the Bank.
Letter of Introduction means the letter provided by the Bank to the Agent for each Customer in order to provide the Agent with all of the information that it requires in order to serve the Customer, a template for which is set out in Schedule 2 (Letter of Introduction) of this Deed.
Liabilities means any losses, damages, liabilities, fees, costs, claims, demands and/or expenses.
Losses includes but is not limited to losses, damages, costs, claims, liabilities, charges, demands and expenses.
Open Credit Facility Form means the form to be completed by a Customer and delivered to the Agent substantially in the form set out at Schedule 3 (Open Credit Facility Form) to this Deed.
Party/Parties means a party or both parties to this Deed.
Personal Data means any personal data (as such term is defined in the General Data Protection Regulation (2016/679)) processed by the Agent for the performance and management of the Services.
PRA means the Prudential Regulation Authority (as defined by FSMA) or any replacement or successor regulator or regulators.
Premises means all of the Agents [RBS / NatWest]-branded branches in England, Wales and Scotland or such other place or places as may be notified from time to time by the Agent to the Bank. For the avoidance of doubt, all Mobile banks, Ulster Bank, Coutts, Holts, Adam & Co, Drummonds and Child & Co branded branches are not included in this definition.
Regulator means either the PRA or the FCA when exercising, or proposing to exercise, a power given to it under FSMA or such other regulator as supervises the Bank or the Agent.
Relevant Regulations means the rules and regulations published, prescribed or applied by the FCA or PRA, including the FCA and PRA Handbooks and in particular the Banking Conduct of Business Sourcebook (BCOBS).
Reputational Risk Event means where any one of the following has occurred:
(a) a Key Person has been convicted of a criminal offence for a breach of any Applicable Law which is punishable by more than 2 years in prison;
(b) the Bank has paid a fine imposed by the Regulatory Authorities for a breach of the FCA Rules and/or PRA rules in excess of £1,000,000;
(c) the Bank has received a public censure by the FCA and/or PRA in relation to any one of the Principles for Business; or
(d) the FCA has used formal powers under sections 55J of or 55L of FSMA to reduce the scope of the Banks permission.
Restricted Information means information in any form which is disclosed or otherwise made available to the Agent or to the Bank pursuant to or in connection with this Deed.
Services means all or any of the following counter services undertaken by the Agent on behalf of the Bank pursuant to this Deed:
(a) undertaking Transactions on behalf of the Bank;
(b) such other related activities as the Bank and the Agent may agree in writing from time to time.
TCF means the FCA Initiative which requires an authorised firm to pay due regard to the interests of its clients and to treat them fairly.
Term means the term of this Deed subsisting at the relevant time.
Transaction means
(a) a cash withdrawal (credit open) from an Account by the presentation of a cheque in accordance with credit open arrangements;
(b) a cash deposit into an Account;
(c) a cash exchange for a different denomination in £GBP; or
(d) payment of a cheque into an Account,
and, for the avoidance of doubt, excludes the use of night safes and cash and deposit machines (CDMs).
1.2 Any reference in this Deed to writing or written includes a reference to electronic means of communication and any reference to document or to a particular document includes information held in a computer or in any other reproducible form.
1.3 Any reference in this Deed to an Act of Parliament includes any statutory instrument made under it and any replacement of or changes to them.
1.4 Where the Agent or Bank comprises more than one person, any obligations of the Agent or Bank set out in this Deed are joint and several obligations and any statement or notice given
by or to one person is deemed to be given by or to such party jointly and severally, as appropriate.
1.5 Where any act (including a right of entry to the Premises) is to be done by or on behalf of the Agent it may be done by an employee, agent or representative of the Agent, or of a member of the Agents Group, in each case authorised for the purpose.
1.6 The terms of this Deed and any obligations herein shall apply to all employees, agents, representatives or other persons under the control or direction of the Agent or otherwise providing the Services at the Premises, and the Agent shall procure their compliance with the same.
1.7 Any act or omission of an employee, agent or representative, or other person under the control or direction of the Agent, or who is otherwise providing the Services, will be treated as an act or omission of the Agent for the purposes of this Deed.
1.8 In this Deed, the words other, includes, including, for example, and in particular, do not limit the generality of any preceding words and any words which follow them shall not be construed as being limited in scope to the same class as the preceding words where a wider construction is possible.
1.9 This Deed incorporates the Schedules to it which shall be considered incorporated by reference. In the event of any conflict between any Schedule and the terms set out in the clauses of this Deed, the terms set out in such clauses shall prevail.
1.10 The remedies set out in this Deed are cumulative and not exclusive of each other.
1.11 Any reference to a liquidator or administrator includes a bank liquidator and a bank administrator appointed under the Banking Act 2009 and an investment bank special administrator appointed under the Investment Bank Special Administration Regulations 2011, as the context may require.
1.12 A stabilisation power is a reference to any or all of the powers specified in section 1(4) of the Banking Act 2009.
1.13 A crisis management measure shall have the meaning given to it in section 48Z of the Banking Act 2009.
1.14 The words holding company and subsidiary undertaking shall have the same meaning in this Deed as their respective definitions in the Companies Act 2006.
2 Appointment of Agent
2.1 The Bank appoints the Agent on a non-exclusive basis as its agent for the provision of the Services at the Premises during Business Hours.
2.2 The Agent is authorised as agent for the Bank to provide the Services from the Premises and accordingly the Agent is authorised to:
(a) process the Transactions for the Customers; and
(b) conduct such other related activities as the Bank and the Agent may agree in writing from time to time.
2.3 The Agent shall not be required to do anything other than such matters set out in this Deed, and in particular shall not be required to:
(a) conduct any know your customer or other similar checks required under the Anti-Money Laundering Regulations or other Applicable Laws in respect of any Customer; and
(b) conduct any credit checks or other similar checks in respect of any Customer.
3 Term
The Parties obligations under this Deed will commence from the date hereof and will continue for the Initial Term unless this Deed is (a) extended in accordance with clause 17.1, or (b) terminated earlier in accordance with the provisions of clause 17 (Extension and Termination).
4 Provision of Services
4.1 The Services are to be provided by the Agent during Business Hours in accordance with this Deed (including Schedule 4 (Counter Services)), and subject to compliance with any Applicable Law.
4.2 Subject to clause 16, the Agent will provide the Services to a Customer within 10 Business Days of the receipt of a Letter of Introduction and, in the case of encashment services, an Open Credit Facility Form in respect of that Customer. The Agent is under no obligation to provide the Services to any Customer for which it has not received a fully completed Open Credit Facility Form (in relation to encashment services) and Letter of Introduction.
4.3 The Agent may carry on the Services at any location other than (or in addition to) the Premises, by first notifying the Bank of its intention to relocate the provision of the Services.
4.4 The Agent may close any of its branches that are used for the provision of the Services in its sole discretion and doing so will not constitute a breach of this Deed or entitle the Bank to terminate this Deed under clause 17 (Extension and Termination).
5 Banks Obligations
5.1 The Bank undertakes and agrees to act dutifully and in good faith at all times in its relations with the Agent.
5.2 The Bank will pay the Agent commission in respect of the Services on the terms set out in Schedule 1 (Agency Commission Terms) of this Deed.
5.3 The Bank will carry out all obligations in relation to the Services that are required under this Deed.
6 Agents Obligations
6.1 The Agent will:
(a) exercise reasonable care and skill in the performance of the Agents obligations under this Deed;
(b) act in good faith and in a transparent manner in all dealings with the Bank; and
(c) deliver the Services in accordance with Applicable Laws.
7 Obligations of both Parties
The Bank and the Agent will promptly inform the other Party in writing:
(a) of any complaints received relating to the Services;
(b) of any material deterioration in the financial condition of the Bank which may have an adverse effect on the provision of the Services;
(c) of any of the matters set out at clause 17 (Extension and Termination); and
(d) any other matters likely to be relevant to the provision of the Services, including IT system down time.
8 Banks representations and warranties
8.1 The Bank hereby represents, warrants and confirms to the Agent pursuant to this Deed that:
(a) it has full capacity, authority and all necessary licences and consents to enter into this Deed and to perform its obligations hereunder;
(b) it is duly authorised and established and validly existing under the laws of its jurisdiction of incorporation;
(c) all information and documentation provided by the Bank (or its agents or employees) to the Agent pursuant to this Deed is accurate, complete, up-to-date and not misleading in any respect and the Bank has notified the Agent of all such information which is reasonably relevant to the performance of the Agents duties under this Deed;
(d) there is nothing in any contracts to which the Bank is party which will prevent or compromise the Agency from operating, or that may otherwise affect the ability of the Bank to enter into this Deed;
(e) there has been no material adverse change in the business, assets or financial condition, trading position or prospects of the Bank since the start of this Deed; and
(f) the entry into and performance of its obligations under this Deed, do not and will not conflict with:
(i) any law or regulation applicable to it;
(ii) the constitutional documents of the Bank;
(iii) any terms and conditions of the Bank; or
(iv) any agreement or instrument binding upon it or any member of the Group or any of its or any member of the Groups assets or constitute a default or termination event (however described) under any such agreement or instrument.
8.2 The Bank shall promptly notify the Agent if any representation ceases to be true, accurate or complete in any material respect during the Term.
8.3 The Bank shall promptly provide to the Agent all information or documents that are reasonably necessary for the Agent to receive with a view to the proper discharge of the Services under this Deed or which the Agent may reasonably request for such purpose or which are required by any competent authority.
8.4 If any of the representations, warranties and confirmations given pursuant to clause 8.1, or the undertaking given at clause 8.3, is breached, incorrect or misleading in any respect which the Agent considers to be material, then (without prejudice to any other rights and remedies which the Agent may have) the Agent may terminate this Deed pursuant to clause 17 (Extension and Termination).
9 Agents Warranties
9.1 The Agent hereby represents and warrants to the Bank pursuant to this Deed that:
(a) it has full capacity, authority and all necessary licences and consents to enter into this Deed and to perform its obligations hereunder;
(b) it is duly established and validly existing under the laws of its jurisdiction; and
(c) the entry into and performance of its obligations under this Deed, do not, to the best of its knowledge, conflict with any law or regulation applicable to it.
9.2 Save as provided for in this Deed, no other representation or warranty, express or implied, is made by the Agent.
10 Banks Undertakings
The Bank will not:
(a) make any unauthorised statement or representation in relation to the Services; or
(b) engage in any conduct which, in the Agents reasonable opinion, is or may be prejudicial to the business, reputation or goodwill of the Agent or the Agents Group.
11 Liability and Indemnity
11.1 The Agent shall be liable to the Bank only for Losses incurred by the Bank to the extent that such Losses arise as a direct result of any act or omission taken or omitted by the Agent during the term of, and under, this Deed which constitutes negligence, wilful default or fraud of the Agent. Subject to clause 11.6, the Agent shall not otherwise be liable for any Losses suffered by the Bank whether in contract, tort (including negligence), for breach of statutory duty, or otherwise, arising under or in connection with this Deed, including but not limited to Losses arising from:
(a) negligence, wilful default, fraud or insolvency of any other person;
(b) the Agent carrying out or relying on any instructions or on any information provided or made available to the Agent by the Bank, a Customer or any agent of the Bank;
(c) any delays due to market conditions or changes in market conditions;
(d) any disruptions or delays in the provision of the Services due to operational errors;
(e) any delayed receipt, non-receipt, loss or corruption of any information contained in email or for any breach of confidentiality resulting from email communication or any consequential loss arising from either of the foregoing; or
(f) the Agent closing or discontinuing the use of any of any of its branches for the provision of the Services.
11.2 The Agent shall not be liable in any circumstances for any Losses that constitute indirect, incidental, special or consequential loss, or loss of profits, opportunity, goodwill or reputation in connection with or arising out of this Deed, including but not limited to:
(a) indirect loss of sales or business;
(b) loss of agreements or contracts; and
(c) loss of anticipated savings.
11.3 The Agent shall not be responsible for any Losses incurred after the date of termination of this Deed.
11.4 The Bank will fully indemnify the Agent and the Agents directors, officers and employees against any and all Liabilities which the Agent or any of its directors, officers or employees incurs directly or indirectly as a result of:
(a) the performance by the Agent of its duties under this Deed;
(b) the performance of the Services;
(c) reliance on or the carrying out of, any instructions and any information provided or made available to the Agent by the Bank, a Customer or any agent of the Bank;
(d) any non-compliance with Anti-Money Laundering Regulations in relation to any Customer;
(e) any breach of Applicable Laws by the Bank or caused by the action or inaction of the Bank;
(f) any lack of funds in any Account or other form of default, fraud or negligence by any Customer; and
(g) any breach by the Bank of the provisions of this Deed,
provided that the Bank shall not be liable under this indemnity to the extent such Liabilities result from the negligence, wilful default or fraud of the Agent.
11.5 The provisions of clauses 11.1 to 11.4 will survive the termination of this Deed.
11.6 Nothing in this Deed shall limit or exclude the liability of either Party:
(a) for death or personal injury caused by its negligence, or the negligence of its employees, agents or subcontractors (as applicable);
(b) for fraud or fraudulent misrepresentation;
(c) under the indemnities contained in clause 11 (Liability and Indemnity);
(d) any matter in respect of which it would be unlawful to exclude or restrict liability.
12 Anti-money laundering
12.1 The Parties acknowledge that any Transaction or Services must be covered by and are subject to the Anti-Money Laundering Regulations.
12.2 The Bank will carry out and is solely responsible for all necessary know your customer or other similar checks required under the Anti-Money Laundering Regulations and all other Applicable Laws in relation to each Customer.
12.3 The Bank agrees to give such assistance and information to the Agent as may reasonably be required to ensure compliance with the Anti-Money Laundering Regulations.
13 Regulatory audit
The Agent will permit a Regulator or their respective authorised representatives to have access to the Premises during Business Hours:
(a) in order to inspect and to take copies of any documents relating to the Services for audits; and
(b) in order to comply with any matter under any Applicable Law or the requirements of a Regulator.
14 Business continuity and disaster recovery plan
The Agent shall during the term of this Deed maintain a business continuity and disaster recovery plan (and the capacity to execute such a plan) for the Services, which will set out the steps to be taken by the Agent in the event of a disaster to ensure, to the extent possible, the continued performance and operational resilience of the Services. The Agent shall be under no obligation to share this plan with the Bank.
15 Intellectual Property
15.1 The ownership of any Intellectual Property Rights is unchanged by this Deed.
15.2 The Bank acknowledges that it does not have any right, title or interest in or to any Intellectual Property Rights owned by any member of the Agents Group, including any Agent Trade Marks, and nothing in this Deed grants the Bank any right to use any Intellectual Property Rights owned by any member of the Agents Group, including any Agent Trade Marks.
15.3 The Agent acknowledges that the Bank may make use of the relevant Agent Trade Marks (excluding any logos, designs or stylised versions of the Agent Trade Marks) when accurately describing the Services provided at the Premises, and the Bank agrees that it shall not make any other use of any Agent Trade Mark without the prior written consent of the Agent.
16 Provision of Services
16.1 The Agent shall be entitled to act on the instruction from each Customer:
(a) in relation to the payment of a cheque into an Account or a cash withdrawal from an Account:
(i) at the initial instruction stage, following the presentation of such Customers photo identification, Letter of Introduction and, in the case of encashment services, Open Credit Facility Form; and
(ii) on each occasion: (A) in relation to payment of a cheque or cash into an Account, following the presentation of a completed pre-printed paying-in slip and the corresponding cheque or cash (as applicable); and (B) in relation to a cash withdrawal, following the presentation of a cheque drawn on the Account and signed in accordance with the Open Credit Facility Form and such Customers photo identification;
(b) in relation to any other Transactions not covered in (a) above:
(i) at the initial instruction stage, following the presentation of such Customers photo identification and Letter of Introduction; and
(ii) on each occasion, provision of the cash such Customer wishes to exchange; and
(c) where the Agent has agreed in writing to provide other Services not covered in (a) or (b) above, following the presentation of such Customers photo identification, Letter of Introduction and any other documentation as the Agent may require either at the initial instruction stage or on each occasion.
16.2 If the Bank or the Customer do not provide the Agent with the correct payment details for that Customer, the Bank accepts and agrees that the Agent will not be liable for failing to make a payment or making an incorrect payment. The Agent will make reasonable efforts to recover any funds which have been paid incorrectly and the Bank may (at the Agents discretion) incur a charge for this. A Customers account will be identified by its sort code and account number and not by the name of the account holder.
16.3 At any time, the Agent may delay provision of any of the Services, place restrictions or limits on the scope of the Services or refuse to provide the Services to any Customer (including an IS Scheme Customer) if:
(a) it reasonably believes that the Customer or the Bank did not give the instruction;
(b) in the Agents sole opinion, it is necessary to limit the Agents exposure to the Bank;
(c) it reasonably suspects fraud or it is prudent in the interests of crime prevention or compliance with sanctions laws not to act;
(d) the Bank or the Customers instructions are unclear, incomplete or not in the required form;
(e) complying with the Bank or the Customers instructions would be contrary to Applicable Laws or any other law, regulation or applicable code;
(f) it would cause the Customer to exceed any limit or restriction which applies to, or in relation to, the relevant Account;
(g) the Agent considers it necessary as a result of ethical or reputational reasons applied by the Agent in the ordinary course of business;
(h) such restrictions, limits or refusal is reasonably necessary as a result of capacity and/or volume restrictions at any of the Premises where Services are provided; or
(i) the Transaction is not in £GBP, unless the Agent otherwise agrees to accept payment in another currency.
16.4 For the avoidance of doubt, at any time during the term of this Deed, the Agent may delay provision of any of the Services, place restrictions or limits on the scope of the Services or refuse to provide the Services to any Customer, other than during the Initial Term and where that Customer is an IS Scheme Customer.
17 Extension and Termination
17.1 This Deed shall continue indefinitely following the Initial Term (the Continuing Term ) unless the Bank or the Agent, at any time during the Initial Term, gives (a) in the case of the Agent, not less than six (6) months written notice, and (b) in the case of the Bank, not less than 30 days written notice, to the other that it wishes this Deed to terminate at the end of the Initial Term.
17.2 During the Continuing Term, either Party may terminate this Deed at any time by giving (a) in the case of the Agent, not less than six (6) months written notice, and (b) in the case of the Bank, not less than 30 days written notice, to the other.
17.3 A Party may terminate this Deed ( Party A ) at any time with immediate effect by written notice to the other Party ( Party B ) if any of the following events occur:
(a) Party B becomes Insolvent;
(b) Party A is required by Applicable Law or a Regulatory Authority to terminate this Deed;
(c) Party B commits a material breach of any of the provisions of this Deed which is either not capable of remedy, or (if the breach is capable of remedy) fails to remedy it to the satisfaction of Party A within 30 days of being required to do so;
(d) Party B ceases or threatens to cease to carry on business; or
(e) upon the occurrence and continuation of a Force Majeure event for a continuous period of more than 30 consecutive calendar days; or
(f) Party B fails to pay any fees or payments due under the terms of this Deed by the due date and fails to remedy such failure within 30 days of being required to do so in writing by Party A.
17.4 The Agent may, at any time, by written notice to the Bank, terminate this Deed with immediate effect:
(a) if there is a Change of Control with respect to the Bank;
(b) if a Reputational Risk Event occurs;
(c) if the Bank ceases to be appropriately authorised by the FCA and/or PRA;
(d) if either:
(i) a Regulator imposes, or gives written notice to the Bank that it proposes to impose, an assets requirement (within the meaning of section 55P(4) of FSMA) on the Bank in respect of any assets of, or which are held (other than as security for obligations owed to the Bank) by or to the order of, the Bank; or
(ii) a Regulator gives written notice of the imposition of such an assets requirement referred to in sub-clause 17.4(d)(i) to any institution with whom the Bank keeps an account;
(e) upon the cancellation of the Banks Part 4A permission (within the meaning of section 55A(5) of FSMA) to carry on, or the removal from such Part 4A permission of, the regulated activity of accepting deposits in the United Kingdom or the Bank otherwise ceasing to be authorised under FSMA to carry on the regulated activity of accepting deposits in the United Kingdom (unless the Bank is an exempt person in relation to that regulated activity within the meaning of section 417(1) of the FSMA, save in either case as a result of the exercise by a Regulator of its own-initiative powers (within the meaning of section 55Q(9)(c) of FSMA) or its power of intervention under Part XIII of FSMA (which shall be governed by sub-clause 17.4(f) or, as the case may be, sub-clause 17.4(g));
(f) if a Regulator:
(i) varies or cancels, or gives written notice to the Bank that it proposes to vary or cancel, any Part 4A permission of the Bank under or pursuant to a
Regulators own-initiative variation power (within the meaning of section 55J (12) of FSMA);
(ii) imposes or varies a requirement, or gives written notice to the Bank that it proposes to impose or vary a requirement, on the Bank under a Regulators own-initiative requirement power in section 55L(3) or (as the case may be) 55M(3) of FSMA, save where such requirement is an assets requirement (in which event sub-clause 17.4(f) above shall apply); or
(iii) exercises, or gives written notice to the Bank that it proposes to exercise, its power of intervention under Part XIII of FSMA in respect of the Bank,
where in any such case in the Agents opinion the exercise of such power by a Regulator is or may be relevant and material to the Banks ability to perform its obligations under this Deed;
(g) upon the occurrence of any of the following events:
(i) the exercise of one or more of the stabilisation powers or the appointment of a resolution administrator (under section 62B of the Banking Act 2009) or the taking of any other crisis management measure in relation to the Bank;
(ii) the making of an application for a bank insolvency order in respect of the Bank under Part 2 of the Banking Act 2009 (or a corresponding order under the Investment Bank Special Administration Regulations 2011);
(iii) the making of an application for a bank administration order in respect of the Bank under Part 3 of the Banking Act 2009 (or a corresponding order under the Investment Bank Special Administration Regulations 2011); or
(iv) the exercise of any powers, the making of any order or the taking of any other measure under the laws of any jurisdiction outside England and Wales, which are or is analogous to, or have or has a substantially similar effect to, any of the events described in paragraph (i) to (iii) (each inclusive) above.
17.5 During the Initial Term, the Bank may terminate this Deed at any time by giving not less than 30 days written notice to the Agent.
18 Consequences of Termination
18.1 On termination of the Agency relationship for any reason, the Agent shall:
(a) cease to provide the Services and to hold itself out in any way as the Banks agent or as being associated with the Bank; and
(b) where necessary and at the Banks expense, remove all references to the Agency and the Bank from any advertisements, promotions, or stationery of the Agent relating to the Services.
18.2 On termination of the Agency relationship for any reason, the Bank shall:
(a) inform all of its Customers who have access to the Services of such termination; and
(b) remove all references to the Agency and the Agent from any advertisements, promotions, or stationery of the Bank in relation to the Services.
18.3 Termination of this Deed will not affect any accrued rights or Liabilities of any Party or the coming into or continuation in force of any provision which is, expressly or by implication, intended to come into or continue in force on or after termination.
19 Data Protection
19.1 Each Party shall comply with its respective obligations under Data Protection Legislation with respect to the exercise of its rights and performance of its obligations under this Deed.
19.2 The scope of the processing carried out pursuant to this Deed is as follows:
(a) scope, nature and purpose of processing: processing Personal Data in the course of carrying out the Services as further described in this Deed;
(b) duration: the Term; and
(c) types of Personal Data and categories of data subjects: Personal Data of individuals who are Customers or representatives of Customers, including names, account details and contact details.
19.3 The Bank acknowledges that the Agent is a Data Controller of any personal data collected in relation to its own customers (including any customers who have accounts with both the Bank and the Agent). However, the Agent acts as Data Processor in relation to the Personal Data made available to it by or on behalf of the Bank in order to facilitate the Agents provision of the Services.
19.4 The Agent confirms that, when acting as Data Processor for the Bank, the Agent shall:
(a) only process Personal Data on the documented instructions of the Bank (including the instructions set out in this Agreement and those instructions further communicated by or on behalf of the Bank throughout the term of this Agreement) and as required by Applicable Law;
(b) inform the Bank if, in its reasonable opinion, it is aware that the Banks instructions would be in breach of Data Protection Legislation;
(c) at the Banks sole cost and expense, provide reasonable assistance to the Bank to respond to requests from individuals exercising their rights under Data Protection Legislation; and
(d) at the Banks sole cost and expense, provide reasonable assistance to the Bank to conduct a privacy impact assessment (including with respect to the Banks security measures, to the extent that the Agent is aware of these) where required under Data Protection Legislation.
19.5 The Bank acknowledges and agrees that the Agent may engage sub-processors to process Personal Data. The Agent shall provide the Bank with information regarding any intended addition to or replacement of sub-processors, in each case prior to such change. If the Bank reasonably objects to that addition or replacement, the Agent may terminate that part of the Services affected by use of the relevant sub-processor.
19.6 The Bank acknowledges that the Agent may manage and/or provide the Services using suppliers and personnel located outside of the European Economic Area. When transferring Personal Data outside of the European Economic Area, the Agent shall put in place protections similar to those used by it to protect the personal data of its own customers in similar circumstances.
19.7 On termination of this Deed and at the option of the Bank, the Agent shall take reasonable steps to return or delete Personal Data held by the Agent solely in its capacity as Data Processor under this Deed. The Agent may retain a copy of Personal Data to the extent that it acts as Data Controller of the Personal Data or where it is obliged to do so by Applicable Law.
19.8 Each Party shall provide evidence of its compliance with this clause 19 at the request of the other Party.
20 Data Security
20.1 The Agent shall implement technical and organisational measures to protect the Personal Data against accidental or unlawful destruction or accidental loss, alteration, unauthorised disclosure or access that are no less stringent than those it adopts to protect the personal data of its own customers. In particular, it shall take reasonable steps to ensure that persons authorised to process the Personal Data are under an appropriate obligation of confidentiality.
20.2 The Agent shall notify the Bank without undue delay should it become aware of a security breach affecting Personal Data processed by the Agent in its capacity as Data Processor under this Deed.
21 Confidentiality
21.1 In providing its services under this Deed, neither the Agent nor any of its employees shall be obliged to disclose or to take into consideration (or to require any third party to disclose or take into consideration) any information:
(a) the disclosure or use of which might breach any prohibition, duty or confidence to any other person or arising under any applicable law; or
(b) which comes to the notice of an employee, officer or agent of the Agent but does not come to the actual notice of an individual delivering the Services.
21.2 Each Party shall keep all Restricted Information confidential and accordingly not use any Restricted Information for any purpose other than the performance of its obligations under this Deed except if:
(a) it is required to do so under the Applicable Laws;
(b) it, at the date of this Deed or subsequently, becomes public knowledge through no fault of the other Party;
(c) it is so requested by regulatory or fiscal authorities or a court or tribunal of competent jurisdiction;
(d) it is disclosed in confidence to its advisers, auditors or insurers where reasonably necessary for the performance of their professional services; or
(e) it is disclosed in confidence to its industry body for the purpose of compiling and publishing industry statistic or analysis,
subject in each case to the Parties using their best endeavours to ensure that the person in question keeps the same confidential and does not use the same except for the purposes for which the disclosure is made.
21.3 Notwithstanding clause 21.2, the Agent may disclose in confidence any Restricted Information to any person (including without limitation affiliates or any other persons) as may be reasonably required in order to perform the Services and enforce its obligations and rights under this Deed.
22 General
22.1 The Agent may assign this Deed and all or any of the rights and obligations under it to (a) any members of the Agents Group upon 14 days written notice to the Bank, or (b) any person with the prior written consent of the Bank, not to be unreasonably withheld, conditioned or delayed.
22.2 The Agent may novate this Deed and all or any of the rights, obligations and liabilities under it to any members of the Agents Group by providing at least 14 days written notice to the Bank. The Bank agrees that, upon receipt of the written notice from the Agent or its successors in title, this Deed may be novated (in whole or in part), and the Bank shall execute a Deed of Novation substantially in the form set out in Schedule 6 (Deed of Novation). If the Bank fails to execute any such Deed of Novation within the required time, the Agent may execute it on behalf of the Bank and for such purpose the Bank hereby irrevocably appoints the Agent as the Banks attorney for the purpose of executing any such Deed of Novation. The Bank agrees to ratify and confirm any action taken by the Agent by virtue of this power of attorney.
22.3 Nothing in this Deed shall create or be assumed to create a partnership or the relationship of employer and employee between the Parties, or constitute the Agent as an agent of the Deed for a purpose other than that set out in clause 2 (Appointment of Agent).
22.4 This Deed replaces all previous agreements or arrangements of a similar nature between the Parties and may not be modified except in writing signed by the Agent or an authorised representative of the Agent, and on behalf of the Bank by an authorised person. By entering into this Deed, the Parties agree this will not affect any accrued rights or liabilities of any Party under any previous agreements or the coming into or continuation in force of any provision which is, expressly or by implication, intended to come into or continue in force on or after termination of any previous agreements.
22.5 If any provision of this Deed is determined to be unlawful or unenforceable to any extent this Deed will continue to be valid as to its remaining provisions unless the object or effect of this Deed is thereby altered to any material extent, in which case either Party may terminate it on written notice.
22.6 Whenever any sum of money is agreed, or determined, as due and payable by one Party to the other under this Deed, such sum may be deducted from or applied to reduce the amount of any sum then due, or which at any time afterwards may become due, under this Deed.
22.7 This Deed, and any non-contractual obligations arising out of or in relation to this Deed, will be governed by and construed in accordance with English law and each Party submits to the non-exclusive jurisdiction of the English courts.
22.8 The Parties to this Deed do not intend that any term of this Deed should be enforceable, by virtue of the Contracts (Rights of Third Parties) Act 1999, by any person who is not a party to this Deed.
22.9 This Deed, including the Schedules, may not be amended without the prior written agreement of the Parties except that:
(a) the Agent may amend the Deed in order to comply with, or to make the Deed consistent with, any legal or regulatory requirements or changes to which the Agent may be subject by providing a written notice to the Bank of such amendment; and
(b) either Party may amend their contact details by providing a written notice to the other Party of such amendment.
22.10 In the event of any changes in Applicable Laws which may result in a material change to the Partys obligations, including a material increase or extension to either Partys financial exposure or liability (including but not limited to VAT) under this Deed ( Material Change ), the Parties agree that they will use all reasonable endeavours to reach agreement as to how the Material Change will be implemented under or reflected in this Deed, in such a manner as to be fair and equitable between the Parties. If the Parties are unable to reach agreement within 14 days of notice, the Agent shall be entitled to effect such change to the terms of this Deed as it considers appropriate, by written notice to the Bank.
23 Complaints
23.1 Where a complaint is received in writing by the Agent from a Customer and the complaint does not relate to the Agent or relates to both the Agent and the Bank, then the Agent will follow the complaint forwarding rules under the DISP Rules in the ordinary course of business.
23.2 Where a complaint is received in writing by the Bank that concerns the Agent (including where it concerns both the Agent and the Bank), then the Bank will follow the normal complaint handling process which includes the complaint forwarding rules under the DISP Rules to forward the complaint to the Agent in the ordinary course of business.
23.3 Where a complaint is made by a Customer at the Premises and the complaint does not relate to the Agent, the Agent may advise the Customer to contact the Bank directly.
23.4 Where a complaint is received in writing or at the Premises and the complaint relates to the Agent, then the Agent will deal with the complaint in accordance with its standard complaints policies and/or procedures.
23.5 If it appears that any legal or regulatory proceedings are to be taken by a third party against the Agent and/or the Bank in respect of the Services or other actions taken in accordance with this Deed, the Party receiving the notice will immediately inform the other Party.
24 Entire agreement
24.1 This Deed (including the Schedules) constitutes the whole and only agreement between the Parties and replaces all previous agreements between the parties relating to its subject matter. In entering into this Deed, each Party acknowledges that it is not relying upon any pre-contractual statement that is not expressly set out herein.
24.2 Save in the case of fraud, neither Party will have any right of action against the other arising out of or in connection with any draft, agreement, undertaking, representation, warranty, promise, assurance or arrangement of any nature whatsoever, whether or not in writing, relating to the subject matter of this Deed made or given by any person on behalf of that other Party at any time prior to the date of this Deed, except to the extent that it is repeated in this Deed.
25 Notices
25.1 Any notice to be given by either Party to the other may be given by hand or sent (by first class pre-paid post or facsimile transmission) to the other Party at the address listed in clause 25.3 below.
25.2 Notice shall be treated as received by the person to whom it is communicated (if sent by facsimile transmission) when sent, provided that the senders facsimile machine confirms transmission and (if sent by post) within 2 Business Days after being put in the post.
25.3 Notices shall be sent:
(a) in the case of the Bank to [ ] marked for the attention of [ ];
(b) in the case of the Agent to [ ] marked for the attention of [ ]; or
(c) to such other address as may from time to time be notified in writing by the Party concerned, for the purpose of this clause.
26 Force Majeure
26.1 Neither Party shall be liable to the other for any delay or non-performance of its obligations under this Deed arising from any event of Force Majeure.
26.2 Both Parties shall, in the event of their obligation under this Deed being delayed or prevented by an event of Force Majeure:
(a) promptly notify the other Party of the nature, extent, effect and likely duration of the circumstances constituting the event of Force Majeure;
(b) use all reasonable endeavours to minimise the effect of the event of Force Majeure on the performance of their obligations under this Deed; and
(c) promptly after the cessation of the event of Force Majeure notify the other Party and resume the full performance of their obligations under this Deed.
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Schedule 1
Agency Commission Terms
1 Fees During the Term
During the Term, the Agent may charge fees in accordance with the Fee Schedule [Fee schedule to be provided on a Bank-by-Bank basis consistent with current pricing applied in respect of relevant counter-party] in respect of all Customers to the extent it agrees or has agreed to provide Services to them.
2 Fee Schedule
The Parties acknowledge and agree that the Agent can amend and update the Fee Schedule from time to time, by providing the Bank with not less than 14 days written notice of such revised Fees Schedule.
Schedule 2
Letter of Introduction
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Name of Branch
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Your reference
Dear Sir
Request for Inter Bank Agency Arrangement
Customer name
Customer Account number and sort code
Our above customer wishes to make use of the counter facilities at your branch, and we would be pleased if you would extend to them this service in accordance with the existing Inter-Bank Agency Arrangements.
We expect our customer to use your counters to make deposits only*/make withdrawals only*/make both deposits and withdrawals* [*delete as applicable] and a suitable Credit Open is enclosed with this letter detailing the level, frequency and signatory arrangements for permissible encashments** [**only required for customers making withdrawals].
We expect our customer to visit your branch daily/weekly /other (specify if possible which day or days of the week as appropriate). On each occasion, we expect them on average to deposit £xxx notes/coin and xxx cheques and withdraw £xxx notes /coin (provide a summary of average activity).
Please note that for deposits, only cheques payable to the name(s) specified on our customers pre-printed bank giro credit slips are acceptable.
In return for providing this service to our customer, we agree to meet your claims for compensation in accordance with the terms of prevailing tariff arrangements as agreed between our respective banks from time to time.
Please confirm that you will be able to accommodate our customers requirements in this respect.
Thank you.
Yours faithfully
Schedule 3
Form of Open Credit Facility Form
Open Credit Facility Please note when filling out this form please use the tab and arrow keys to move between the relevant fields. Ensure you do not use the return or enter keys. Please complete in BLOCK CAPITALS. The Customer instructs the Bank to set up an Open Credit Facility to enable the Customer or an individual authorised by the Customer (an Authorised Person), to withdraw money over the counter at another bank. 1. Type of request New Facility Replacement of existing Facility 2. Customer details Account name (as shown on cheque book) Account number Sort Code 3. Encashing Bank details Encashing Bank Branch name Sort Code Sub branch ID (if applicable) Address line 1 Address line 2 Address line 3 Address line 4 OR Overseas country Postcode Maximum amount in any one: day OR week OR month £ Amount in words
4. Identification of Authorised Person(s) Cheques will be made payable to: EITHER Cash and annotated with the name of an individual i.e Cash (name) - and may be cashed by the named individual who must present the following ID (examples of acceptable ID include a driving licence, passport or staff ID card): ID to be presented OR Cash - and may be cashed by any of the following Authorised Persons (or an Authorised Signatory as specified in section 5 of this form) who must present the following ID (examples of acceptable ID include a driving licence, passport or staff ID card): Authorised Persons ID to be presented
5. Cheques presented under this Facility must be signed by (These signing requirements must reflect the Customers mandate) Any one signatory OR Any two signatories OR In accordance with the following signing rule Please provide details of signing rules in the box below e.g. one authorised signatory from group A and one authorised signatory from group B Specimen signatures of the cheque signing signatories Name (in full) Name (in full) Signing group Signing group (Required field if signing group specified above e.g. group A or group B) Name (in full) Name (in full) Signing group Signing group (Required field if signing group specified above e.g. group A or group B) Specimen signatures of the cheque signing signatories Name (in full) Name (in full) Signing group Signing group (Required field if signing group specified above e.g. group A or group B)
6. Customer Agreement By signing, the Customer agrees: (a) the Encashing Bank may cash a cheque even if it is crossed. (b) a cheque cannot be stopped once cash has been paid over the counter. (c) to pay the Banks charges as agreed and confirmed at opening or when providing the Facility. (d) the signing requirements set out in section 5 of this form will not be affected by any change to the mandate. (e) the Facility will continue until the Customer gives the Bank not less than 5 business days notice to cancel the Facility or gives the Bank a replacement form. (f) the Bank may cancel the Facility immediately if it suspects the Facility may be abused or give rise to fraud on the account. Otherwise the Bank will give the Customer not less than 30 days written notice. Signed in accordance with the authority held by the Bank Customer Signature(s) Name Name Date (DD/MM/YYYY) Date (DD/MM/YYYY) Return completed forms to your Relationship Manager for authorisation. For Bank use only Authorisation by Relationship Manager I confirm that I have reviewed this open credit request in accordance with the guidelines provided in the Product Toolkit, confirmed that the product and limit is suitable for the customer and that the form is signed in accordance with the mandate. Staff signature Name Team/Unit Date (DD/MM/YYYY) ISV number Contact number I would like to be copied in on the advice sent to the encashing bank
For Encashing Bank use only Open Credits Transaction Log Date (DD/MM/YY) Amount (£) Cashier initials Date (DD/MM/YY) Amount (£) Cashier initials £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £, £,
Schedule 4
Counter Services
This section provides details of the process and service standards applied in respect of counter services offered by the Agent to the Bank. The Parties acknowledge and agree that cash and cheques will, as far as practicable, be processed by the Agent in accordance with standard UK clearing cycle practices and Applicable Law from time to time.
1 Encashment
Subject to prior agreement, GBP encashment facilities will ONLY be established through a Credit Open facility at the specified Agent branch(es).
Standard stationery forms supplied by the Agent will also be used for amendments and cancellations.
2 Process
The branch providing Credit Open facility will require the Customers cheque (signed in accordance with their mandate and facility as reimbursement), together with suitable photo identification with the Customers signature (e.g. passport or driving licence).
At any time the Agent reserves the right to ask any questions that it considers necessary, to meet its requirements under Anti Money Laundering legislation.
3 Pay-ins
The Agent will accept pay-ins of GBP legal tender notes and coins and cheque and credit clearing items accompanied with one of the Customers pre-printed bank giro credit, at the Premises (subject to the counter service being offered at that location).
However, where pay-ins are substantial and/or regular arrangements, they will require prior agreement with the local branch concerned. Where alternative solutions to traditional pay-ins (e.g. direct submission to a clearing centre) are identified, the Bank will work with the Agent to migrate transactions to the most appropriate channel.
As such, all such requests should be directed to the relevant manager for the Customer who will contact the branch concerned.
In addition, the Agent reserves the right to ask any questions that it considers necessary, to meet its requirements under Anti Money Laundering legislation.
Schedule 5
Fee Schedule
[Note: Fee schedule to be provided on a Bank-by-Bank basis consistent with current pricing applied by RBS in respect of relevant counter-party]
Schedule 6
Deed of Novation
Dated [ · ]
[THE ROYAL BANK OF SCOTLAND PLC / NATIONAL WESTMINSTER BANK PLC]
and
[ INSERT ELIGIBLE BANK ]
and
[ INSERT AGENTS GROUP ENTITY ]
DEED OF NOVATION
relating to the Inter-Bank Agency Deed between
[The Royal Bank of Scotland plc / National Westminster Bank plc] and [ Insert Eligible Bank ]
This Deed of Novation (the Deed ) is made on [ · ] between :
(1) [The Royal Bank of Scotland plc, a company incorporated in Scotland whose registered office is at 36 St Andrew Square, Edinburgh, United Kingdom, EH2 2YB / National Westminster Bank plc a company incorporated in England whose registered office is at 135 Bishopsgate, London, United Kingdom, EC2M 3UR] (the Original Party );
(2) [ Insert name of Eligible Bank ], a company incorporated under the laws of [England and Wales] with registered number [ · ] and registered office at [ · ] (the Continuing Party ); and
(3) [ Insert Agents Group entity ], a company incorporated under the laws of [England and Wales] with registered number [ · ] and registered office at [ · ] (the New Party ).
Whereas :
(A) The Original Party and the Continuing Party are parties to an i nter-bank agency deed dated [ · ] (the Inter-Bank Agency Deed ).
(B) [The Original Party wishes to novate the Inter-Bank Agency Deed such that, with effect from the Effective Time, it shall be released from all of its obligations and liabilities under the Inter-Bank Agency Deed (including any pre-novation liabilities) and the New Party shall assume all of the Original Partys rights, obligations and liabilities under the Inter-Bank Agency Deed on the terms set out in this Deed.] [Note: TBC by Original Party depending on circumstances of the relevant novation.]
It is agreed as follows:
1 Definitions and interpretation
1.1 In this Deed:
Effective Time means [ · ] [am/pm] on [ · ] or such other time and date as may be agreed in writing by the Original Party and the New Party and duly notified to the Continuing Party;
[ Existing Claims means such breaches or alleged breaches of obligations under the Inter-Bank Agency Deed as are at the date of this Deed the subject of adjudication, arbitration or litigation between the Original Party and the Continuing Party, brief details of which are set out in the Schedule to this Deed; and]
Taxation means all forms of taxation, whether direct or indirect and whether levied by reference to income, profits, gains, net wealth, asset values, turnover, added value or other reference, and statutory, governmental, state, provincial, local governmental or municipal impositions, duties, contributions, rates and levies (including social security contributions and any other payroll taxes), whenever and wherever imposed (whether imposed by way of a withholding or deduction for or on account of tax or otherwise) and in respect of any person and all penalties, charges, costs and interest relating thereto.
1.2 In this Deed any reference to:
1.2.1 any statute or statutory provision includes a reference to that statute or statutory provision as amended, extended or re-enacted and to any regulation, order, instrument or subordinate legislation under the relevant statute or statutory provision;
1.2.2 the singular includes a reference to the plural and vice versa; and
1.2.3 any Clause or Schedule is to a Clause or Schedule (as the case may be) of or to this Deed.
1.3 Each reference in this Deed to this Deed or any other agreement, document or deed shall be construed as a reference to this Deed or such other agreement, document or deed as each of the same may be amended, varied, novated or supplemented from time to time.
2 Status of the Inter-Bank Agency Deed
2.1 Each of the Original Party and the Continuing Party severally warrants to the New Party that:
2.1.1 the document attached in the Annexure (and signed for identification by, or on behalf of, it) is a true and complete copy of the original of the Inter-Bank Agency Deed and has not been amended; and
2.1.2 the Inter-Bank Agency Deed is in full force and effect and no notice has been given by it to the other to terminate the Inter-Bank Agency Deed .
2.2 The Original Party warrants to the New Party that it has not assigned, granted any security interest over, or otherwise transferred, and does not hold on trust, the benefit of the whole or any part of the Inter-Bank Agency Deed .
2.3 [The Continuing Party warrants to the Original Party and to the New Party that at the date of this Deed it has no claims against the Original Party under or in connection with the Inter-Bank Agency Deed .]
3 Acknowledgement of payment and performance
3.1 The Continuing Party acknowledges that all fees and expenses properly due to the Continuing Party under the Inter-Bank Agency Deed up to [the date of this Deed] have been paid by the Original Party.
3.2 [The Continuing Party acknowledges that the obligations under clause [6 and 7] of the Inter-Bank Agency Deed have been fully performed by the Original Party prior to the date of this Deed.]
4 Mutual release and discharge
4.1 The Original Party releases and discharges the Continuing Party with effect from the Effective Time from further performance of the various covenants, undertakings, warranties and other obligations contained in the Inter-Bank Agency Deed which are enjoyed by the Original Party, and from all claims and demands whatsoever arising out of or in respect of the Inter-Bank Agency Deed , whether prior to, on or subsequent to the Effective Time.
4.2 The Continuing Party releases and discharges the Original Party with effect from the Effective Time from further performance of the various covenants, undertakings, warranties and other obligations contained in the Inter-Bank Agency Deed which are enjoyed by the Continuing Party, and from all claims and demands whatsoever arising out of or in respect of the Inter-Bank Agency Deed , whether prior to, on or subsequent to the Effective Time.
5 Novation of Inter-Bank Agency Deed as between New Party and Continuing Party
5.1 The New Party undertakes to the Original Party and the Continuing Party that it will, with effect from the Effective Time, perform all the duties and discharge all the obligations expressed to be obligations of the Original Party under the Inter-Bank Agency Deed and be bound by all the terms and conditions of the Inter-Bank Agency Deed in every way as if it had been named therein as a party to the Inter-Bank Agency Deed from the outset in place of the Original Party. Without limiting the generality of the foregoing, the New Party agrees that it will receive and accept
responsibility for all claims and demands against the Original Party arising out of or in respect of the Inter-Bank Agency Deed , whether arising prior to, on or subsequent to the Effective Time.
5.2 The Continuing Party consents to the novation of the Inter-Bank Agency Deed in accordance with this Deed and warrants and undertakes to the New Party that it has performed and will continue to perform all its duties and has discharged and will continue to discharge all its obligations under the Inter-Bank Agency Deed and that, with effect from the Effective Time, it will be bound by all the terms and conditions of the Inter-Bank Agency Deed in favour of the New Party in every way as if the New Party had been named therein as a party to the Inter-Bank Agency Deed from the outset in place of the Original Party. Without limiting the generality of the foregoing, the Continuing Party agrees that the New Party shall have the right to enforce the Inter-Bank Agency Deed and in its own right and interest to pursue all claims and demands whatsoever arising out of or in respect of the Inter-Bank Agency Deed , whether arising prior to, on or subsequent to the Effective Time.
6 [Existing Claims
6.1 Notwithstanding any other provision herein, this Deed shall not operate to release or discharge the Original Party or the Continuing Party in respect of the Existing Claims.
6.2 The Original Party hereby assigns to the New Party absolutely the exclusive right to pursue or defend the Existing Claims in the name of the Original Party.
6.3 The New Party shall indemnify the Original Party in respect of any costs, damages or expenses incurred by the Original Party in consequence of the New Party pursuing or defending the Existing Claims. [Where such indemnity is subject to a charge to Taxation in the hands of the Original Party, the sum payable shall be increased by such sum as will ensure that after payment of such Taxation (and after giving credit for any tax relief available to the Original Party in respect of the matter giving rise to the payment) the Original Party shall be left with a sum equal to the sum that it would have received in the absence of such a charge to Taxation.
6.4 The Original Party shall account to the New Party in respect of any sums which the Original Party receives from the Continuing Party in respect of the Existing Claims.] [TBC by Continuing Party in the relevant circumstances]
7 Period for bringing claims caused by breach of the Inter-Bank Agency Deed
The period of time permitted for bringing a claim for breach of this Deed, where that breach is caused by a partys alleged failure to perform its duties and/or discharge its obligations under the Inter-Bank Agency Deed , shall be the same period of time permitted for bringing a claim solely for breach of the Inter-Bank Agency Deed in respect of such alleged failure.
8 Notices to the New Party
A notice to the New Party under the Inter-Bank Agency Deed shall be sent to the following address, or such other person or address as the New Party may notify to the Continuing Party from time to time:
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9 Further assurances
Each of the parties to this Deed agrees to perform (or procure the performance of) all further acts and things and execute and deliver (or procure the execution and delivery of) such further documents as may be required by law or as any party may reasonably require to effect the release and discharge of the obligations referred to in Clause 4, the novation referred to in Clause 5 and the assignment of the right to pursue or defend the Existing Claims referred to in Clause 6 and to give any party the full benefit of this Deed.
10 Variation
No variation of this Deed shall be effective unless in writing and signed by or on behalf of each of the parties.
11 Invalidity
If any provision in this Deed shall be held to be illegal, invalid or unenforceable, in whole or in part, such provision or part shall to that extent be deemed not to form part of this Deed but the legality, validity or enforceability of the remainder of this Deed shall not be affected.
12 Contracts (Rights of Third Parties) Act 1999
A person who is not a party to this Deed shall have no rights under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of, or enjoy any benefit under, this Deed.
13 Counterparts
This Deed may be executed in any number of counterparts and by the parties to it on separate counterparts, each of which shall be an original but all of which together shall constitute one and the same instrument.
14 Governing law and jurisdiction
This Deed and any non-contractual obligations arising out of or in connection with it shall be governed by with the laws of England and Wales and each of the parties to this Deed hereby submits to the exclusive jurisdiction of the courts of England and Wales.
In witness whereof this Deed has been delivered on the date first stated above.
SIGNED as a DEED by
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Schedule 3 ***
Trust Deed
Dated [ · ] 2018
BANKING COMPETITION REMEDIES LIMITED
and
[COMPANY]
INCENTIVISED SWITCHING AGREEMENT
THIS AGREEMENT is made on |
2018 |
BETWEEN:
(1) Banking Competition Remedies Limited, a company limited by guarantee incorporated in England with registered number 11001491 and whose registered office is at [ · ] (the IB ); and
(2) [ COMPANY ] a [public / private] company incorporated in [ · ] with registered number [ · ] and whose registered office is at [ · ] (the Company ).
WHEREAS:
(A) The Company has applied for and been accepted by the IB for participation in the IS Scheme, subject to the terms set out in this Agreement.
(B) The IB has been established in order to facilitate and oversee the delivery of the IS Scheme in accordance with the terms set out in this Agreement.
(C) The Company has agreed to take such steps and comply with such obligations, undertakings, indemnities and commitments in favour of the IB and RBS relating to the IS Scheme as set out in this Agreement.
NOW THIS AGREEMENT WITNESSES AS FOLLOWS:
1. DEFINITIONS AND INTERPRETATION
1.1 In this Agreement:
Account means [ Company to insert details of relevant account ];
Anti-Money Laundering Regulations means the Money Laundering Regulations 2007 (SI2007/2157) together with the Guidance Notes for the Financial Sector issued by the Joint Money Laundering Steering Group and any other relevant guidance issued by a regulatory authority or industry body;
Applicable Law means any and all law (whether civil, criminal or administrative), common law, statutes, statutory instruments, treaties, conventions, directives, regulations or rules made thereunder, by-laws, demands, decrees, injunctions, resolutions, orders or judgments in any applicable jurisdiction, including the PRA Rules, the FCA Rules and any related or similar rules of any other Authority, in each case which is binding on the relevant person or in respect of the relevant matter as the context requires;
Application Documents means the application form and Switching Proposal submitted by the Company in support of an application to participate in the IS Scheme;
Assessment Information has the meaning given in Clause 3.19;
Assessment Period has the meaning given in Clause 3.18;
Authority means (i) any government, (ii) any governmental or quasi-governmental authority, body, agency or association, (iii) any supranational, federal, state or local government, (iv) any statutory or regulatory body, agency or association, (v) any Tax Authority and (vi) any court, tribunal or other judicial body;
BCA means an account marketed to businesses rather than individuals, which provides the facility to hold deposits, receive and make payments by cheque and/or debit card, use automated teller machine facilities and make regular payments by direct debit and/or standing order, but does not include an account in which money is held on deposit in a currency other than the official currency of the United Kingdom or an account in which credit funds are held and offset against mortgage debt or a loan (other than an overdraft facility);
BCA Element has the meaning given in the Dowry Calculation Schedule;
BCA Threshold has the meaning given in the Dowry Calculation Schedule;
Branch Access means the proposal under which RBS (or one of its subsidiaries, being The Royal Bank of Scotland plc, National Westminster Bank plc or Adam & Company plc) would offer to provide cash and cheque handling services in certain of its RBS and NatWest-branded branches in England, Scotland and Wales to Transferring Target Customers on the terms and subject to the conditions set out in an Inter-Bank Agency Deed;
Business Day means any day (other than a Saturday or Sunday) on which clearing banks are open for business in London;
CASS has the meaning given to it at Clause 3.2;
Company Offering has the meaning given to it at Clause 3.6(A);
Confidential Information has the meaning given to it at Clause 16.1;
Contact Details means any contact details of Target Customers which RBS provides to the Company pursuant to the IS Communication Framework;
Data Controller has the meaning given to it in the Data Protection Legislation;
Data Protection Legislation means: (i) the Data Protection Act 1998 and the Privacy and Electronic Communications (EC Directive) Regulations 2003; (ii) the General Data Protection Regulation (2016/679); and (iii) any other similar applicable national privacy law;
Data Security Breach has the meaning given to it at Clause 12.13;
Data Transfer Agreement means the standard contractual clauses for the transfer of Personal Data (or other information relating to Target Customers) outside of the United Kingdom or European Economic Area, or such other agreement for the transfer of Personal Data (or other information relating to Target Customers) as RBS may approve;
Deed of Priority means a deed substantially in the form set out in Schedule 5 to be entered into between RBS or another member of the Group and the Company in respect of any sharing of security between the Group and the Company;
Dowries has the meaning given in the Terms & Conditions, and Dowry shall be interpreted accordingly;
Dowry Calculation Schedule means Schedule 3 to this Agreement, as amended by the IB and communicated to the Company from time to time;
Eligibility Criteria has the meaning given in the Terms & Conditions;
FCA means the United Kingdom Financial Conduct Authority or any successor regulatory body;
FCA Rules means any rules and guidance made by the FCA under FSMA and set out in the FCAs handbook of rules and guidance as amended from time to time, and includes any rules and guidance made by any successor regulatory body;
Fees Waiver Schedule has the meaning given to it at Clause 3.12;
FSMA means the Financial Services and Markets Act 2000, including any regulations made pursuant thereto;
Group means RBS, its subsidiaries and subsidiary undertakings, any holding company of RBS and all other subsidiaries and subsidiary undertakings of any such holding company from time to time;
Helpline has the meaning given to it at Clause 3.22;
HMRC means Her Majestys Revenue & Customs;
In-Flight Customer means a Target Customer which has applied to the Company to participate in the IS Scheme but has not yet become a Transferring Target Customer;
Inter-Bank Agency Deed means a deed substantially in the form set out in Schedule 4 to be entered into between RBS (or one of its subsidiaries, being The Royal Bank of Scotland plc, National Westminster Bank plc or Adam & Company plc) and the Company in respect of Branch Access;
IS Commencement Date means the date on which RBS first markets the IS Scheme, together with the Company Offering or such similar offering of any other company, to any Target Customer;
IS Communication Framework means the communication framework set out in Schedule 2 to this Agreement in respect of the communication of the IS Scheme to Target Customers, as amended from time to time by agreement between RBS and the IB and as communicated by the IB to the Company;
IS Scheme means the proposal pursuant to which the Company may be provided with funds, on the terms set out in this Agreement, to be used to encourage Target Customers to switch products and services from RBS to the Company;
Loan Element has the meaning given in the Dowry Calculation Schedule;
Loan Threshold has the meaning given in the Dowry Calculation Schedule;
Material Breach has the meaning given to it at Clause 7.3;
Minimum Information Security Requirements means the Groups minimum information security requirements for the protection of confidential information and personal data, as notified to the Company from time to time;
Non-Compliance Notice has the meaning given to it at Clause 3.5;
Permitted Retention Period has the meaning given to it at Clause 12.10;
Personal Data means any personal data (as such term is defined in the Data Protection Legislation) as processed under this Agreement;
PRA means the United Kingdom Prudential Regulation Authority (as defined by FSMA), or any successor regulatory body;
PRA Rules means any rules and guidance made by the PRA under FSMA and set out in the PRAs handbook of rules and guidance as amended from time to time, and includes any rules and guidance made by any successor regulatory body;
Privacy Shield means the Privacy Shield scheme and principles operated by the US Department of Commerce, and approved by the European Commission, or any replacement scheme and principles approved by the European Commission for that purpose from time to time;
RBS means The Royal Bank of Scotland Group plc, a public company incorporated in Scotland with registered number 45551 and whose registered office is at 36 St Andrew Square, Edinburgh, Scotland EH2 2YB;
Relevant Communication Period has the meaning given to it at Clause 3.10(B);
Representatives means: (i) in the context of RBS and its Group, the directors, officers, employees, agents, professional advisers and third party contractors of RBS and its Group; (ii) in the context of the IB, the directors, officers, employees, agents, professional advisers and third party contractors of the IB; and (iii) in the context of the Company, the directors, officers, employees, agents and professional advisers of the Company;
Restrictions has the meaning given to it at Clause 5.1;
Review Meeting has the meaning given to it at Clause 6.2;
Revised Switching Proposal has the meaning given to it at Clause 6.1;
Switching Proposal means the switching proposal submitted by the Company in support of an application to participate in the IS Scheme and attached as Schedule 6 to this Agreement;
Target Customer has the meaning given in the Terms & Conditions;
Tax includes all forms of taxation and statutory, governmental, state, provincial, local governmental or municipal impositions, duties, contributions and levies and any charges, deductions or withholdings, in each case in the nature of taxation, imposition, duty, contribution or levy, whether of the United Kingdom or elsewhere in the world, whenever imposed and whether chargeable directly or primarily against or attributable directly or primarily to any person and all penalties, charges, costs and interest relating thereto;
Tax Authority means any government, state, municipal, local, federal or other fiscal, revenue, customs or excise authority, body or official anywhere in the world having the power to impose, collect or administer any Tax or exercising a fiscal, revenue, customs or excise function with respect to Tax (including, without limitation, HMRC);
Term means 18 months from the IS Commencement Date or such later date as may be communicated by the IB to the Company from time to time 1 ;
Terms & Conditions means the terms and conditions set out in Schedule 1 to this Agreement in respect of the IS Scheme, as amended from time to time by the IB and communicated by the IB to the Company;
Transferring Target Customer has the meaning given in the Terms & Conditions;
Turnover has the meaning given in the Dowry Calculation Schedule;
Turnover Band has the meaning given in the Dowry Calculation Schedule;
VAT means: (i) value added tax as provided for in Directive 2006/112/EC and charged in accordance with the provisions of the VATA 1994; and (ii) any tax of a similar nature which is introduced in substitution for or in addition to the tax referred to in (i);
VATA 1994 means the Value Added Tax Act 1994; and
Working Hours means 9.00 am to 5.00 pm on a Business Day.
1.2 In this Agreement, unless otherwise specified:
(A) references to clauses, sub-clauses and schedules are to clauses and sub-clauses of, and schedules to, this Agreement;
(B) the words include and including shall be deemed to be followed by the phrase without limitation;
1 [Note: Term at the time of entry to any IS Agreement must not extend beyond the anticipated termination date of the IS Scheme.]
(C) headings and sub-headings in this Agreement are included for ease of reference only and shall not affect the interpretation of this Agreement;
(D) any reference to a person shall be construed so as to include any individual, firm, company, corporation, body corporate, government, state or agency of a state, local or municipal authority or governmental body or any joint venture, association or partnership (whether or not having separate legal personality);
(E) any reference to a statute, statutory provision or rules or regulations made thereunder shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified, re-enacted or replaced;
(F) the expressions subsidiary and subsidiary undertaking shall have the meaning given in the Companies Act 2006;
(G) any reference to any other document is a reference to that document as amended, varied or supplemented at any time;
(H) any reference to a day shall mean a period of 24 hours running from midnight to midnight;
(I) the rule known as the ejusdem generis rule shall not apply and accordingly general words introduced by the word other shall not be given a restrictive meaning by reason of the fact that they are preceded by words indicating a particular class of acts, matters or things; and
(J) general words shall not be given a restrictive meaning by reason of the fact that they are followed by particular examples intended to be embraced by the general words.
1.3 The schedules form part of this Agreement and shall have the same force and effect as if expressly set out in the body of this Agreement, and any reference to this Agreement shall include the schedules
1.4 Reference in this Agreement to RBS shall be read as including, where applicable, a reference to any relevant subsidiary of RBS undertaking the relevant activity within the Group and, in this context, any obligation on RBS shall be read as including, where applicable, an obligation on RBS to procure that the relevant subsidiary complies with the relevant obligation.
2. EFFECTIVENESS
All provisions of this Agreement shall have full force and effect upon execution and delivery of this Agreement by the parties to it.
3. IS SCHEME
3.1 Subject to and in accordance with the provisions of this Agreement and the Terms & Conditions the IB shall make Dowry payments to the Company in accordance with the Dowry Calculation Schedule in respect of any Transferring Target Customer.
3.2 The transfer of Target Customers shall be performed, as far as reasonably practicable, in accordance with current business-as-usual customer switching propositions and, to the extent possible, through the Current Account Switch Service ( CASS ). The Company shall agree in good faith such switching propositions with RBS. Any failure of RBS and/or the Company to agree such procedures in good faith shall be referred to the IB which shall investigate such failure and take such action as it may deem necessary or desirable. Any decision of the IB shall be final and binding on the Company.
3.3 During the Term, the Company shall review its arrangements with respect to CASS and take such other steps as shall be necessary to ensure that it shall be able to operate the IS Scheme in respect of the transfer of BCAs through CASS.
3.4 If the IB at any time determines that the Company is failing to comply with the Eligibility Criteria, the Terms & Conditions or the IS Communication Framework, the obligations of the IB pursuant to this Agreement shall be suspended until such time as the IB determines the Company to be in full compliance.
3.5 The IB shall notify RBS and the Company promptly of any determination pursuant to Clause 3.4, setting out in reasonable detail the areas of non-compliance ( Non-Compliance Notice ).
3.6 The Company accepts and agrees that:
(A) all of the Companys communication materials in respect of the IS Scheme (the Company Offering ) shall be supplied by the Company to the IB prior to such Company Offering being made available to any Target Customers and in compliance with the specifications and timelines provided for in the IS Communication Framework from time to time;
(B) the Company is solely responsible for its Company Offering;
(C) the IB and RBS bear no responsibility for any material distributed and the IB or RBS may refuse the distribution of any materials in order to comply with ongoing obligations to RBSs customers, including RBSs internal policy considerations and/or Applicable Laws;
(D) RBS shall be entitled to: (i) use, distribute, publish, copy and otherwise reproduce (in each case, in whole or in part) any copyrights subsisting in, or otherwise protecting, the Switching Proposal and the Company Offering (each as may be updated by the Company from time to time); and (ii) use the Companys name, trade marks and logos used by the Company in connection with the Switching Proposal and the Company Offering, in each case, for the sole purpose of RBS making communications (in any medium,
including telephone calls, in-branch prompts, contact from relationship managers, email, microsites, post, text messages and digital capability) to relevant Target Customers in relation to the Companys products and incentives to be offered to relevant Target Customers by the Company in accordance with the IS Communication Framework;
(E) the Company Offering will at all times make switching offers to Target Customers which are materially better, taking into account the Dowries, than offers which are made by the Company to new customers or customers which might switch their banking products to the Company (other than through the IS Scheme);
(F) the IB and RBS shall have no liability in relation to a failure or refusal to communicate the Company Offering to Target Customers where the Company Offering does not comply with the IS Communication Framework or is otherwise not in compliance with Applicable Law; and
(G) if, following the transfer of any Target Customer products to the Company, RBS retains any existing secured credit exposure to such Target Customer, RBS shall not be obliged to release such security and the Company will enter into a Agreement of Priority with RBS, whereby RBS will rank first in the order of priority, substantially in the form set out in Schedule 5 .
3.7 The IB agrees to review the Company Offering and notify the Company within ten Business Days of any deficiency therewith prior to such Company Offering being made available to any Target Customers. The Company agrees to incorporate such comments into the Company Offering as the IB may request.
3.8 The IB agrees to monitor RBSs communication of the IS Scheme and the Company Offering to Target Customers in accordance with the IS Communication Framework.
3.9 The IB shall communicate the IS Communication Framework in respect of Target Customers to the Company from time to time. The Company accepts and agrees that, during the term of the IS Scheme, the IB may amend:
(A) the Dowry Calculation Schedule, including the formula for making any Dowry payments;
(B) the IS Communication Framework;
(C) the Eligibility Criteria;
(D) the Terms & Conditions; and/or
(E) the Term.
3.10 The IB agrees that any amendments made pursuant to Clause 3.9 shall:
(A) be communicated to the Company and RBS promptly and, in any event, reasonably in advance of such amendments taking effect; and
(B) only take effect from the start of the following communication period (the Relevant Communication Period ) as set out in the IS Communication Framework from time to time.
3.11 The Company agrees that, following any amendment made pursuant to Clause 3.9, it shall review its Company Offering and, if desired or necessary, shall submit a revised Company Offering to the IB for review in accordance with Clauses 3.6(A) and 3.7. The Company agrees that it shall submit such revised Company Offering to the IB for review within such timeframes as the IB may determine and communicate to the Company. The Company acknowledges and agrees that if it does not submit a revised Company Offering to the IB for review within such timeframes (and in any event by no later than the date falling fifteen Business Days prior to the start of the Relevant Communication Period), the IB shall be under no obligation to consider or approve such revised Company Offering for the purposes of the Relevant Communication Period.
3.12 The IB agrees that, from time to time, it shall communicate to the Company a schedule setting out: (i) those break fees or other costs in respect of loans or other financial products held by a Target Customer that will be waived or reimbursed by RBS in the event that the Target Customer chooses to transfer such loan or other financial product to the Company; and (ii) where applicable, the procedure by which such fees and/or costs will be reimbursed by RBS (the Fees Waiver Schedule ). No other fees and/or costs (other than those communicated by the IB to the Company in accordance with (i)) shall be waived or reimbursed by RBS as a direct or indirect result of a Target Customer transferring from RBS to the Company pursuant to the IS Scheme.
3.13 If and to the extent that it is necessary for a Target Customers Contact Details to be provided to the Company in connection with the operation of the IS Scheme:
(A) if a Target Customer has consented and its Contact Details have been provided to the Company, the Company shall use reasonable efforts to: (i) establish contact with such Target Customer(s); and (ii) discuss its Company Offering in good faith with a view to the transfer of that Target Customer to the Company; and
(B) the Company accepts and agrees that contact with a Target Customer shall be limited to such contact as is necessary in relation to the IS Scheme and the transfer of any other relevant banking relationship that such Target Customer may have with RBS.
3.14 The IB shall notify the Company in writing:
(A) of the aggregate amount of BCA Element and Loan Element distributed to all eligible bodies under the IS Scheme promptly following the end of each three calendar month period (beginning on [ date ] 2 );
(B) promptly upon becoming aware that the total aggregate amount of Loan Element paid by the IB to all eligible bodies under incentivised switching agreements between the IB and other eligible bodies, is equal to or exceeds 90% and 95% of the Loan Threshold; and
(C) promptly upon becoming aware that the total aggregate amount of BCA Element paid by the IB to all eligible bodies under incentivised switching agreements between the IB and other eligible bodies, is equal to or exceeds 90% and 95% of the BCA Threshold.
3.15 Upon notification by the IB to the Company, communication of the IS Scheme to Target Customers shall cease and the Company agrees to cease any independent communication of its Company Offering in connection with the IS Scheme.
3.16 The Company may at any time notify the IB in writing that it wishes for the Group to offer Branch Access to the Transferring Target Customers of the Company on reasonable commercial terms and conditions and in accordance with the terms of the Inter-Bank Agency Deed, to be provided on such terms for up to three years from IS Commencement Date and thereafter on such terms as may be agreed between the Company and the Group. Upon receipt of such notification, the IB shall use reasonable endeavours to procure that RBS (or one of its subsidiaries, being The Royal Bank of Scotland plc, National Westminster Bank plc or Adam & Company plc) enters into the Inter-Bank Agency Deed with the Company as soon as reasonably practicable.
3.17 Promptly following the end of each three calendar month period (beginning on [ date ] 3 ), the IB shall notify the Company in writing of:
(A) the aggregate number of Target Customers sent communication materials in respect of any participant Company in the IS Scheme; and
(B) the aggregate number of Target Customers who have consented to participation in the IS Scheme.
3.18 Within five Business Days of the end of each calendar month period (beginning with the first full first calendar month occurring after the date of this Agreement) (each an Assessment Period ) and at such other times as the IB may request (acting reasonably), the Company shall, at its own cost, provide to the IB in writing:
(A) the aggregate number of Target Customers who have become Transferring Target Customers;
3 [Note: insert the next quarter date following the date of this Agreement.]
2 [Note: insert the next quarter date following the date of this Agreement.]
(B) if applicable, a list ( amalgamated by reason(s) for rejection and by Turnover Band ) of Target Customers who have been rejected from becoming customers of the Company during the relevant calendar month and an explanation (in reasonable detail) of the reason(s) for such rejection(s); and
(C) the aggregate number of In-Flight Customers.
3.19 Within five Business Days of the end of each Assessment Period (beginning with the first Assessment Period occurring after the date on which the first Dowry payment is made pursuant to this Agreement) and at such other times as the IB may request (acting reasonably), the Company shall, at its own cost, provide to the IB in writing:
(A) the proportion of the relevant Dowry payment that has been paid directly to Transferring Target Customers during the relevant Assessment Period and a brief explanation of how any remaining amounts of the Dowry payment have been applied for the benefit of Transferring Target Customers; and
(B) any additional information requested by the IB which is, in the opinion of the IB, necessary or desirable in order for the IB to assess the Companys compliance with the terms of this Agreement,
((A) and (B), together with Clauses 3.18(A) to (C), being the Assessment Information ).
3.20 The Company shall provide to the IB evidence to the IBs satisfaction in support of the Assessment Information and such other information as the IB may reasonably request.
3.21 The Company represents and warrants (on the date of this Agreement and on each date on which any Assessment Information and/or supporting evidence is provided by the Company to the IB), that the Assessment Information and any evidence provided by the Company to the IB in support of the Assessment Information is true, accurate and complete and not misleading.
3.22 The IB shall use reasonable endeavours to procure that a dedicated helpline to support Target Customers who are interested in transferring to the Company will be provided by RBS (the Helpline ). The Company shall provide the IB with such details and information as may be requested by the IB in connection with the Helpline. The Company acknowledges and agrees that no advice or information on the Company Offering or any other product offering of the Company will be provided by the Helpline.
3.23 Save as expressly set out above, the rights and obligations of the IB, RBS and the Company pursuant to this Clause 3 shall automatically terminate at the end of the Term.
4. COMPANYS WARRANTIES, REPRESENTATIONS AND UNDERTAKINGS
4.1 The Company represents and warrants to the IB that:
(A) it has the requisite capacity, power and authority to enter into and perform this Agreement and that its obligations under this Agreement constitute valid
and binding obligations of the Company in accordance with their respective terms;
(B) the execution and delivery of, and the performance by the Company of its obligations under, this Agreement will not result in a breach of any order, judgment or decree of any court or governmental agency or regulatory body by which the Company is bound;
(C) all information provided in the Application Documents, Company Offering and all other information provided by the Company to the IB in connection with the IS Scheme is true, accurate and complete and not misleading and that there has been no material change in its circumstances since the date on which such information was provided to the IB;
(D) all expressions of opinion, intention and expectation contained in the Application Documents, Company Offering and any other information provided by the Company to the IB in connection with the IS Scheme are made on reasonable grounds after due and careful enquiry and consideration and are fairly based and honestly held;
(E) there are no other facts known to the Company the omission of which would: (i) make any statement or expression contained in the Application Documents, Company Offering or any other information provided by the Company to the IB in connection with the IS Scheme misleading in any material respect; or (ii) affect the decision of the IB to make any payments under this Agreement; and
(F) the Switching Proposal and Company Offering complies with Applicable Law.
4.2 The Company undertakes and agrees:
(A) to comply with Applicable Law in respect of any Target Customers which become Transferring Target Customers;
(B) not to make any unauthorised statement or representation in relation to the IS Scheme;
(C) not to engage in any conduct which, in the IBs opinion, is or may be prejudicial to the functioning of the IS Scheme.
5. USE OF DOWRIES
5.1 The Company agrees to and accepts the Terms & Conditions. In particular, the Company agrees that:
(A) it shall use Dowries for the benefit of the Transferring Target Customers and in the manner contemplated in its Switching Proposal and Company Offering and in accordance with the Terms & Conditions; and
(B) no more than 50% of any Dowry in respect of a Transferring Target Customer with a Turnover of more than £1 million may be paid in cash to such Transferring Target Customer during the first 12 months of it becoming a Transferring Target Customer,
(such requirements being the Restrictions ).
6. UPDATES TO THE SWITCHING PROPOSAL
6.1 If the Company considers that it is necessary or desirable to make a change to the Switching Proposal at any time, the Company shall notify the IB in writing of this fact and provide the IB with a copy of the updated switching proposal proposed by the Company (the Revised Switching Proposal ).
6.2 If the Company provides the IB with a Revised Switching Proposal pursuant to Clause 6.1, the IB may request a meeting with representatives of the Company in order to consider the Revised Switching Proposal (the Review Meeting ).
6.3 The Company will be treated as having represented and warranted at the time of provision of any Revised Switching Proposal that:
(A) all information provided in any Revised Switching Proposal and all other information provided by the Company to the IB in connection with any Revised Switching Proposal is true, accurate and complete and not misleading;
(B) all expressions of opinion, intention and expectation contained in any Revised Switching Proposal and any other information provided by the Company to the IB in connection with such Revised Switching Proposal are made on reasonable grounds after due and careful enquiry and consideration and are fairly based and honestly held;
(C) there are no other facts known to the Company the omission of which would make any statement or expression contained in any Revised Switching Proposal and all other information provided by the Company to the IB in connection with any Revised Switching Proposal misleading in any material respect;
(D) the Revised Switching Proposal does not omit any material information which would reasonably be required in order for the IB to appraise the Revised Switching Proposal; and
(E) the Revised Switching Proposal complies with Applicable Law.
6.4 The IB shall consider any Revised Switching Proposal and shall assess such Revised Switching Proposal (including against the requirements set out in the Terms & Conditions). The Company shall provide the IB with any additional information requested by the IB which is, in the opinion of the IB, necessary or desirable in order for the IB to assess the Revised Switching Proposal.
6.5 The IB may, at its sole discretion, approve or reject any Revised Switching Proposal and shall notify the Company of its decision within 10 Business Days of: (i) the date on which the Company submitted the Revised Switching Proposal if no Review Meeting is held; or (ii) the Review Meeting.
6.6 If the IB approves any Revised Switching Proposal:
(A) any reference in this Agreement to the Switching Proposal shall be read as referring to such Revised Switching Proposal; and
(B) the representations and warranties set out in Clause 6.3 shall be deemed to be repeated by the Company on the date on which the IB approves such Revised Switching Proposal.
6.7 If the IB does not approve any Revised Switching Proposal:
(A) the Company may continue to use the Dowries in accordance with the previous Switching Proposal; and
(B) if the Company is unable to continue to use the Dowries in accordance with the previous Switching Proposal, the Independent Body may request the repayment (in full or in part) of any Dowries paid pursuant to this Agreement (in which case the Company shall make such repayment (together with interest at an annual interest rate equal to the Bank of England base rate, compounded quarterly and accruing from the date on which the IB made the relevant payment to the Company until the date of repayment) within five Business Days of the date of the demand).
7. AUDIT RIGHTS AND CLAWBACK
7.1 Subject to Clause 7.2, at the IBs request upon reasonable notice to the Company during the Term, the Company shall grant, and shall procure that all relevant members of its group grant to the IB or its Representatives access during normal business hours to all premises, records, officers, employees, agents and Representatives of the Company, to the extent necessary or desirable for the purpose of:
(A) verifying whether any Dowries paid by the IB to the Company have been used in the manner contemplated in the Switching Proposal or Company Offering and in accordance with the Restrictions;
(B) assessing whether the Company has complied with its obligations under this Agreement; and/or
(C) verifying the Assessment Information.
7.2 The IB shall only request an audit pursuant to Clause 7.1 if it believes that:
(A) any Dowries paid by the IB to the Company have not been used in the manner contemplated in the Switching Proposal or Company Offering and in accordance with the Restrictions;
(B) the Company has not complied with its obligations under this Agreement; or
(C) the Assessment Information is not true, accurate and complete or is misleading.
7.3 If, in the opinion of the IB, any audit carried out by or on behalf of the IB pursuant to Clause 7.1 reveals any material breach of this Agreement (which shall include any failure to use any Dowries paid by the IB to the Company in accordance with the Restrictions and any breach of Clause 4.2) (a Material Breach ), the Company shall, on demand, reimburse the IB in full for any costs and expenses incurred in carrying out or having carried out such audit (including the costs of the IBs Representatives).
7.4 The IB shall procure that any person carrying out any inspection and/or audit pursuant to Clause 7.1 complies with all reasonable access and security regulations notified to such person at such time by or on behalf of the Company.
7.5 If the IB determines at its sole discretion (and whether or not an audit has been carried out in accordance with Clause 7.1) that there has been a Material Breach, the IB shall promptly notify the Company in reasonable detail of the Material Breach and may:
(A) if such Material Breach is capable of remedy, require the Company to: (i) remedy the breach within twenty Business Days of the date on which the IB notifies the Company of the Material Breach (or such shorter period as the IB may determine); and (ii) promptly and in any event within five Business Days of the date of remedy of such Material Breach provide evidence to the satisfaction of the IB demonstrating that the Material Breach has been remedied;
(B) if the Material Breach is not capable of remedy or the Company has not provided the IB with evidence to the IBs satisfaction that the Material Breach has been remedied within the period specified by the IB, request the repayment (in full or in part) of the relevant Dowries (in which case the Company shall make such repayment (together with interest at an annual interest rate of 8% above the Bank of England base rate, compounded quarterly and accruing from the date on which the IB paid such Dowries to the Company until the date of repayment) within five Business Days of the date of the demand); and
(C) require the Company to take such steps going forwards as the IB may consider necessary or desirable in the context of such Material Breach.
8. FINAL DETERMINATION
8.1 The Company accepts and agrees that any decision or determination of the IB under or in accordance with the terms of this Agreement (and the IS Communication Framework, the
Terms & Conditions, the Eligibility Criteria and/or the Dowry Calculation Schedule) shall be made at the absolute discretion of the IB and shall be final and binding on all parties. In this regard, the IB shall act as an expert and not an arbitrator and the provisions of the Arbitration Act 1996 shall not apply.
8.2 The Company accepts and agrees that it shall have no claims or right of recourse against the IB or RBS in respect of any determination or decision of the IB except as explicitly set out in this Agreement.
9. LIABILITY AND INDEMNITY
9.1 To the fullest extent permitted by law, the IB and RBS have no liability for any losses (including any loss of profit or indirect or consequential loss or any loss of goodwill or possible business after termination of this Agreement, whether actual or prospective), costs or expenses incurred by the Company and the Company shall have no claim against the IB or RBS except as expressly set out in this Agreement.
9.2 The Company shall indemnify RBS, the IB and their respective Representatives on demand and on an after-Tax basis from and against all loss, payments, costs, expenses, damage, actions, claims or demands (including any loss of profit or indirect or consequential loss or any loss of goodwill or possible business after termination of this Agreement, whether actual or prospective) which RBS, the IB and/or their respective Representatives may incur or suffer in relation to or arising out of:
(A) the performance of its obligations under or in connection with this Agreement;
(B) the content of (including any untrue statement contained in) the Company Offering or any other communication materials or conduct of the Company in relation to the IS Scheme;
(C) the Companys use of the Personal Data of the Target Customer whether obtained from RBS, the Target Customer or otherwise (including any breach by the Company of its obligations in Clause 12);
(D) any conduct of the Company in relation to a Target Customer;
(E) any failure by the Company to comply with Applicable Law (including Data Protection Legislation), the terms of this Agreement (including any breach or alleged breach by the Company of the representations, warranties or undertakings contained or referred to in this Agreement or any circumstances which constitute such a breach), the IS Communication Framework or the Terms & Conditions;
(F) any breach of, or failure by the Company to comply with, know your customer or other similar checks required under the Anti-Money Laundering Regulations and all other Applicable Laws in relation to any Target Customer that transfers to the Company;
(G) any matters relating to the treatment of a Target Customer after they have transferred any products or services to the Company; and/or
(H) the fraud, negligence or wilful default of the Company,
and, in each case, the Company shall reimburse RBS and/or the IB and/or their respective Representatives for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such action or claim as such expenses are incurred; provided that, in each case, the Company will not be liable to the extent that any such loss, payment, cost, expense, damage, action, claim or demand is proven to have arisen as a result of the fraud, gross negligence or wilful default of the person making the claim.
10. TERMINATION
10.1 Subject to Clause 10.2, the rights and obligations of the parties under this Agreement shall terminate automatically upon the expiry of the Term.
10.2 The rights and obligations of the Parties under Clause 9, 13 18, 20 and 22, together with any accrued rights and obligations, shall survive termination of this Agreement.
11. COSTS AND EXPENSES
11.1 Except as expressly set out in this Agreement, each of the IB and the Company shall pay their own costs and expenses in relation to the negotiation, preparation, execution and carrying into effect of this Agreement and the IS Scheme.
12. DATA PROTECTION
12.1 The Company acknowledges that it is a Data Controller in respect of any Personal Data (including Contact Details) made available to it by or on behalf of RBS. The Company acknowledges and agrees that it is not a joint controller with RBS for the purposes of the Data Protection Legislation and it and RBS do not determine the purposes and means of the processing jointly or carry out processing on behalf of one another.
12.2 The Company shall comply (and shall take reasonable steps to procure the compliance of its Representatives) with the Companys obligations under the Data Protection Legislation in connection with the processing of the Personal Data, including the obligations to provide fair processing notices, obtain any required marketing consent and respond to requests of data subjects.
12.3 The Company shall not do anything which would place RBS or any member of its Group in breach of the Data Protection Legislation and shall provide such reasonable assistance to RBS as RBS may reasonably require in order to comply with any inquiry of an Authority and/or to conduct privacy impact assessments. The Company acknowledges that RBS is not responsible for any processing of the Personal Data carried out by the Company or its Representatives.
12.4 The IB and the Company acknowledge that RBS is a Data Controller of any Personal Data collected in relation to its own customers (including any customers who have accounts with both the Company and RBS).
12.5 The Company shall not acquire any rights or interest in the Personal Data made available to it by RBS (including any Contact Details), and shall ensure that its employees, agents and sub-contractors shall only use such Personal Data for the purpose of contacting the applicable Target Customer about the IS Scheme.
12.6 The Company will not transfer any Personal Data (or other information relating to Target Customers) outside of the United Kingdom or the European Economic Area except with the prior written consent of RBS and in accordance with any terms RBS, acting reasonably, may impose on such transfer. As a condition of granting such consent, RBS may, among other requirements, require the Company to:
(A) enter into an appropriate Data Transfer Agreement; or
(B) for transfers to the United States of America, ensure that the recipient has and continues to maintain a current, valid certification under the Privacy Shield program and complies with the Privacy Shield principles.
The foregoing provisions of this Clause 12.6 shall also apply to any further transfer of the Personal Data or other information relating to Target Customers.
12.7 In the event that the data transfer mechanism entered into under Clause 12.6 ceases to be valid, the Company shall use reasonable endeavours to enter into an appropriate alternative data transfer mechanism and/or procure that any relevant sub-contractor enters into a data transfer mechanism that complies with obligations set out in the Data Protection Legislation and, where applicable, that imposes obligations on the sub-contractor equivalent to those set out in the Companys alternative data transfer mechanism. If the Company is unable to enter into and/or procure that any relevant sub-contractor enters into an appropriate alternative data transfer mechanism, the Company shall: (i) at the Companys discretion, either return to RBS or destroy any Personal Data in its possession; and (ii) use reasonable endeavours to procure that its sub-contractors return to RBS or destroy any Personal Data in their possession.
12.8 The Company will not engage any processor to process Contact Details without RBSs prior written consent.
12.9 If the relevant Target Customer informs the Company, or RBS who in turn informs the Company, that it withdraws its consent to be contacted by the Company, the Company shall immediately cease all contact with that Target Customer in relation to the IS Scheme and shall erase or destroy all Personal Data relating to that Target Customer within one week of being informed of the withdrawal of consent. The erasure and/or destruction processes must adhere to the Minimum Information Security Requirements.
12.10 The Company agrees that it shall implement automated processes to enforce strict retention periods in relation to Personal Data made available to it by RBS. In particular, the Company shall ensure that Contact Details for an individual Target Customer shall not be
used or retained after the end of the Term (the Permitted Retention Period ), if that Target Customer has not chosen to become a Transferring Target Customer Company before the end of the applicable Permitted Retention Period.
12.11 After the Permitted Retention Period, if the relevant Target Customer has not chosen to become a Transferring Target Customer Company, the Company shall erase or destroy all Personal Data relating to that Target Customer. The erasure and/or destruction processes must adhere to the Minimum Information Security Requirements.
12.12 The Company will implement and maintain appropriate technical and organisational measures to guard against unauthorised or unlawful processing of, and against accidental loss or destruction of or damage to, Personal Data or other information relating to customers of the Group. That shall include: (i) a level of security appropriate to the harm that might result from such unauthorised or unlawful processing or accidental loss, destruction or damage, and the nature of the Personal Data or other information relating to customers of the Group to be protected; and (ii) any other reasonable and proportionate measures requested by RBS. Without prejudice to the foregoing, the Company will identify and protect at all times the confidentiality, integrity and availability of the Personal Data or other information relating to customers of the Group in accordance with the Minimum Information Security Requirements.
12.13 Upon any known actual or reported suspected breach of the Minimum Information Security Requirements or any obligations or duties owed by the Company to RBS or the IB (including under this Clause 12) relating to the confidentiality, integrity or availability of Personal Data or other information relating to customers of the Group (a Data Security Breach ), the Company will, as soon as practicable, at its own expense:
(A) investigate the Data Security Breach to seek to identify, prevent and mitigate the effects of the Data Security Breach and carry out any recovery or other action reasonably necessary to remedy the Data Security Breach;
(B) within one Business Day, notify the IB and RBS of the breach (and follow-up with a detailed description in writing, including (if known) the cause of the breach, remedial action taken and the potential consequences of the breach);
(C) conduct or support RBS in conducting computer forensic investigations and analysis that RBS reasonably requires; and
(D) implement any additional actions or remedial measures which RBS reasonably considers necessary as a result of the breach.
12.14 In the event of a Data Security Breach involving an actual compromise of the security, confidentiality or integrity of Personal Data or other information relating to RBS or the Groups customers, including but not limited to any unauthorised access or use or any loss of Personal Data or such information:
(A) the Company shall notify RBS and the IB of the type of data that was the subject of the Data Security Breach and the identity of each affected person
as soon as such information can be collected or otherwise becomes available. Except to the extent required to do so by Applicable Law (in which case the Company shall provide RBS with as much prior notice as is possible), the Company will not issue any filings, communications, notices, press releases, or reports related to any Data Security Breach which would lead to the identification of the RBS or any member of the Group without prior written approval from RBS;
(B) the Company shall promptly return or delete all Personal Data and certify in writing that it has done so. Any deletion processes must adhere to the Minimum Information Security Requirements; and
(C) RBS shall not be obliged to provide further Personal Data to the Company until the IB is satisfied that the Company has carried out all its obligations under Clause 12.10.
12.15 The Company shall provide RBS with such information, cooperation, access and assistance as is reasonably requested by RBS from time to time to demonstrate the Companys compliance with this Clause 12.
12.16 The provisions of this Clause 12 shall survive the term of this Agreement.
13. TAX MATTERS
13.1 All payments by the Company under or in connection with this Agreement shall be paid without any deduction or withholding, unless required by Applicable Law. If any Tax is required by Applicable Law to be deducted or withheld from or in connection with any such payment, the amount payable shall be increased so as to ensure that the amount received by the IB (after such deduction or withholding, including for the avoidance of doubt any additional deduction or withholding required as a result of such increase) is equal to the amount which the IB would have received if no such deduction or withholding had been required.
13.2 If the IB is subject to Tax in respect of any sum payable by the Company under or in connection with this Agreement (other than any sum of interest payable in accordance with Clause 6.7(B) or 7.5(B)) (a Relevant Payment ), or if any such Relevant Payment is taken into account in computing the income, profits or gains of the IB for Tax purposes, the sum payable by the Company shall be increased so as to ensure that the amount retained by the IB (after the payment of such Tax, including for the avoidance of doubt any additional Tax payable as a result of such increase, and after giving credit for any Tax relief in respect of the matter giving rise to the Relevant Payment that will be obtained and utilised by the IB) is equal to the amount which the IB would have retained in the absence of such Tax.
13.3 Each sum payable by the Company under or in connection with this Agreement is expressed exclusive of any amount in respect of VAT however it arises. If the IB makes (or is deemed to make) any supply for VAT purposes for which such sum (or any part thereof) is in consideration and VAT is or becomes chargeable in respect of such supply, the Company shall pay to the IB (within 14 days of the receipt of a valid VAT invoice) an
additional sum equal to the amount of any VAT so chargeable for which the IB is liable to account.
14. NOTICES
14.1 Except as otherwise provided in this Agreement, a notice under this Agreement shall only be effective if it is in writing. E-mail transmissions are permitted.
14.2 Notices under this Agreement shall be sent to the postal address, number or email address and for the attention of the individual set out below:
Party |
Address |
Email address |
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IB |
[ address ]
Attention: [ position ] |
[ email ] |
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Company |
[address]
Attention: [position] |
[ email ] |
14.3 Any notice given under this Agreement shall, in the absence of earlier receipt, be deemed to have been duly given as follows:
(A) if delivered personally, on delivery;
(B) if sent by first class post, two clear Business Days after the date of posting; and
(C) if sent by email, when despatched.
14.4 Any notice given under this Agreement outside Working Hours in the place to which it is addressed shall be deemed not to have been given until the start of the next period of Working Hours in such place.
15. PUBLICITY
15.1 Subject to this Clause 15, the Company shall not (and shall procure that no member of its group shall) make, publish, issue or release any announcement or public statement in relation to, or which refers to, this Agreement, the IB in connection with this Agreement or the IS Scheme (including in any annual report and accounts or other documents issued or made available to the holders of securities, whether in electronic or paper written form, or in any oral announcement or statement).
15.2 Notwithstanding Clause 15.1, the Company (or any member of its group) may make, publish, issue or release such an announcement provided that:
(A) it is consistent in all respects with and otherwise reflects (and contains only information which has been contained in) any announcement or public statement which has previously been made by the IB or communication materials which have been publicly released by RBS; or
(B) it is in form and substance satisfactory to the IB.
16. CONFIDENTIALITY
16.1 The Company and the IB shall treat as confidential any information received or obtained by the Company as a result of entering into or performing this Agreement ( Confidential Information ).
16.2 The Company shall not:
(A) disclose any Confidential Information to any person other than to its Representatives who need to know such information in order to discharge their duties; or
(B) use any Confidential Information other than to exercise its rights or perform its obligations as set out in this Agreement.
16.3 The Company shall procure that any person to whom any such Confidential Information is disclosed by it complies with the restrictions contained in this clause as if such person were a party to this Agreement and have in place and maintain security measures and procedures to protect the confidentiality of Confidential Information.
16.4 The IB shall not:
(A) disclose any Confidential Information to any person other than to its Representatives; or
(B) use any Confidential Information other than to exercise or assist in exercising its rights or perform or assist in performing its obligations as set out in this Agreement.
16.5 The restrictions contained in Clauses 16.1 to 16.4 shall not prevent the IB from:
(A) announcing or otherwise disclosing: (i) the identity of the companies participating in the IS Scheme (including the Company); (ii) reasonable details of the offerings of such companies in connection with the IS Scheme (including the Company Offering); and/or (iii) any other information regarding the IS Scheme and the Company which the IB considers necessary or desirable in connection with the operation of the IS Scheme;
(B) disclosing Confidential Information to HMT (and/or any third party monitor appointed by HMT in connection with, amongst other things, Incentivised Switching) or RBS;
(C) announcing or otherwise disclosing that the Company has committed a Material Breach, together with reasonable details of such Material Breach and any steps required by the IB and taken (or to be taken) by the Company in remedying such Material Breach; or
(D) announcing or otherwise disclosing that any Dowry has been (or will be) clawed back in whole or in part from the Company pursuant to Clause 7 and the reasons for the IBs decision to claw back such funds.
16.6 The restrictions contained in Clauses 16.1 to 16.4 shall not prevent RBS from announcing or otherwise disclosing: (i) the identity of the companies participating in the IS Scheme (including the Company); (ii) reasonable details of the offerings of such companies in connection with the IS Scheme (including the Company Offering); and/or (iii) any other information regarding the IS Scheme and the Company which RBS reasonably considers necessary or desirable in connection with the operation of the IS Scheme.
16.7 The restrictions in Clauses 16.1 to 16.4 shall not prevent either party from disclosing Confidential Information:
(A) which is required by: (i) Applicable Law, or (ii) the rules of any securities exchange, clearing system or authority (including the PRA, the FCA and the European Commission) to which it is subject or submits;
(B) which is required by a Tax Authority in connection with the Tax affairs of the disclosing party;
(C) if and to the extent such disclosure is required or contemplated by the terms of this Agreement or strictly required in order to implement the Company Offering;
(D) if and to the extent required for the purpose of any judicial proceedings;
(E) if and to the extent the information has come into the public domain other than as a result of a breach of confidence or contractual obligations; and
(F) where the other party, and RBS, have agreed in advance to such disclosure.
16.8 The Company agrees that it will not (and will procure that members of its group and the respective Representatives of the Company and members of its group will not) make either orally or in writing, any disparaging or derogatory remarks concerning the Group, the IB, any of their Representatives or the IS Scheme. The Company further agrees that it will not (and will procure that members of its group and the respective Representatives of the Company and members of its group will not) take any action which could reasonably be expected to damage the reputation or be detrimental to or otherwise critical of the Group, the IB or any of their Representatives.
16.9 The restrictions contained in this clause shall continue to apply after the termination of this Agreement without limit in time.
17. CONTRACT (RIGHTS OF THIRD PARTIES) ACT 1999
17.1 Clauses 3, 8.2, 9, 12, 16 and 20 confer benefits on RBS and, subject to the remaining provisions of this clause, are intended to be enforceable by RBS by virtue of the Contracts (Rights of Third Parties) Act 1999.
17.2 Clause 9 confers benefits on the Representatives of the IB and, subject to the remaining provisions of this clause, is intended to be enforceable by such Representatives by virtue of the Contracts (Rights of Third Parties) Act 1999.
17.3 Subject to Clauses 17.1 and 17.2, the parties to this Agreement do not intend that any term of this Agreement should be enforceable, by virtue of the Contracts (Rights of Third Parties) Act 1999, by any person who is not a party to this Agreement.
17.4 Notwithstanding the provisions of sub-Clauses 17.1 and 17.2, and save in respect of (i) Clauses 3, 8.2, 9, 12, 16, 20 and this Clause 17 which in each case may not be rescinded or varied in a way which would be adverse to the rights of RBS without the prior written consent of RBS; and (ii) Clause 9 and this Clause 17 which in each case may not be rescinded or varied in a way which would be adverse to the rights of the IBs Representatives without the prior written consent of the IBs Representatives, this Agreement may be rescinded or varied in any way and at any time by the parties to this Agreement without the consent of any third party.
18. INVALIDITY
18.1 If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, that shall not affect or impair:
(A) the legality, validity or enforceability in that jurisdiction of any other provision of this Agreement; or
(B) the legality, validity or enforceability under the law of any other jurisdiction of that or any other provision of this Agreement.
19. NO PARTNERSHIP
19.1 Nothing in this Agreement and no action taken by the parties under this Agreement shall constitute a partnership, joint venture or agency relationship between any of the parties.
20. ASSIGNMENT
20.1 Neither party (and no person with the benefit of third party rights under this Agreement) shall assign, or purport to assign all or any part of the benefit of, or its rights or benefits under, this Agreement.
20.2 Notwithstanding Clause 20.1, the IB may sub-contract or enter into any arrangement whereby another person is to perform any or all of its obligations under this Agreement.
20.3 RBS may assign the benefit of the whole or any part of this Agreement within the Group, provided that if the assignee ceases to be a subsidiary or subsidiary undertaking of RBS, it shall before ceasing to be so assign the benefit, so far as assigned to it, back to a member of the Group.
21. GROUP MEMBERS
21.1 Where the Company has applied for participation in the IS Scheme in whole or in part for other eligible group members, the following provisions will apply:
(A) the representations, warranties and undertakings in Clauses 3.21, 4 and 6.3 are treated as given by the Company on its own part and separately on the part of all other members of the Companys group participating in the IS Scheme;
(B) the Company will procure that all other relevant members of its group provide all relevant Assessment Information under Clauses 3.18 and 3.19 and where appropriate the Company will consolidate all relevant information so as to facilitate the review by the IB of the Assessment Information;
(C) the provisions of Clauses 5, 6.7, 7.5, 12 and 13 will extend to relevant members of the Companys group and the Company will procure that all relevant members of its group comply with the requirements of Clauses 5, 6.7, 7.5, 12 and 13. Clause 10 will also be construed accordingly; and
(D) Confidential Information may be disclosed to relevant members of the Companys group under Clause 16, subject always to the requirements of Clause 16.3 and to the provisions of Clause 16.7.
22. COUNTERPARTS
22.1 This Agreement may be executed in any number of counterparts, and by the parties on separate counterparts, but shall not be effective until each party has executed at least one counterpart. Each counterpart shall constitute an original of this Agreement, but all the counterparts together shall constitute one and the same instrument.
23. CHOICE OF GOVERNING LAW
23.1 Any matter, claim or dispute arising out of or in connection with this Agreement, whether such matter, claim or dispute is contractual or non-contractual, shall be governed by and determined in accordance with the laws of England.
23.2 The courts of England have exclusive jurisdiction to hear and decide any suit, action or proceedings, and to settle any disputes, arising out of or in connection with this Agreement, and for these purposes, the parties irrevocably submit to the jurisdiction of the courts of England.
24. [AGENT FOR SERVICE
24.1 The Company irrevocably appoints [ ] of [ ] to be its agent for the receipt of Service Documents. It agrees that any Service Document may be effectively served on it in connection with proceedings in England by service on its agent effected in any manner permitted by the Civil Procedure Rules.
24.2 If the agent at any time ceases for any reason to act as such, the Company shall appoint a replacement agent having an address for service in England and shall notify the IB of the name and address of the replacement agent. Failing such appointment and notification, the IB shall be entitled by notice to the Company to appoint a replacement agent to act on behalf of the Company. The provisions of this clause applying to service on an agent apply equally to service on a replacement agent.
24.3 A copy of any Service Document served on an agent shall be sent by post to the Company. Failure or delay in so doing shall not prejudice the effectiveness of service of the Service Document.
24.4 Service Document means a claim form, application notice, order or judgment.] 4
IN WITNESS whereof this Agreement has been entered by the parties hereto on the date first herein written.
Signed by [
name of signatory
]
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Signed by [
name of signatory
]
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4 [Note: only required for Companies incorporated outside the UK]
INCENTIVISED SWITCHING: TERMS AND CONDITIONS
1. INTRODUCTION
1.1 These terms and conditions ( Terms and Conditions ) form part of the agreement between you (the Applicant Company ) and us, Banking Competition Remedies Limited (the Independent Body ) in relation to your application to participate in Incentivised Switching.
1.2 The Independent Body shall have absolute discretion on the interpretation and application of these Terms and Conditions and any determination or decision of the Independent Body in relation to any matter related to Incentivised Switching shall be conclusive.
1.3 The Independent Body may amend these Terms and Conditions from time to time and shall, upon such amendment, promptly provide each Applicant Company with a copy of the revised Terms and Conditions.
1.4 Any approval of an Applicant Companys application to participate in Incentivised Switching, and any subsequent distribution of funds to such Applicant Company in connection with Incentivised Switching, will be subject, amongst other things, to the Applicant Company and the Independent Body entering into a legally binding agreement on terms satisfactory to the Independent Body (the IS Agreement ).
1.5 If any provision of these Terms and Conditions is inconsistent with the IS Agreement, the IS Agreement will take priority.
2. ELIGIBILITY, APPLICATION AND SUPPORTING DOCUMENTS
2.1 In order to be eligible to participate in Incentivised Switching, the Applicant Company must be a deposit-taking entity with Business Current Account capabilities:
(A) which is authorised by the PRA to take deposits;
(B) which has (or has publicly stated its intention to launch) a Business Current Account offering;
(C) which is domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland;
(D) which has gross assets in the United Kingdom of less than £350 billion shown in its latest published consolidated accounts (or interim balance sheet);
(E) whose income in the United Kingdom relates primarily to the provision of deposit-taking, lending or payment services to individuals and businesses in the United Kingdom;
(F) which has expressed an intention to expand its business offering to SMEs in the United Kingdom through the development of new products, expansion into new
geographical markets or new business segments and/or investing in its customer service levels; and
(G) which participates in CASS,
2.2 Eligibility to participate in Incentivised Switching will be determined at the absolute discretion of the Independent Body and any determination of the Independent Body as to eligibility of an Applicant Company to participate in Incentivised Switching and/or receive any distribution of funds in connection with Incentivised Switching shall be conclusive.
2.3 In determining whether the Applicant Company should be eligible to participate in Incentivised Switching, the Independent Body shall:
(A) have regard to the amount of the Dowry that will be passed directly to a Transferring Target Customer and the amount of the Dowry that will be retained by the Applicant Company and applied for other purposes which benefit Transferring Target Customers, in each case in the context of the aims of Incentivised Switching;
(B) consider whether, and the extent to which, (in the opinion of the Independent Body) the Applicant Companys Switching Proposal will, if implemented, incentivise Target Customers to become Transferring Target Customers; and
(C) consider whether, and the extent to which, (in the opinion of the Independent Body) the Applicant Companys Switching Proposal makes switching offers to Target Customers across the full range of Turnovers of all Target Customers and which are materially better, taking into account the Dowries, than the offers which are made by them to new customers or customers (across the full range of Turnovers) which might switch their banking products to them (other than through Incentivised Switching), in each case provided that the Applicant Company shall not be required to make switching offers to particular Target Customers if it does not, at the time of its application, have a suitable Business Current Account and/or Loan Product offering for such Target Customers.
2.4 The Applicant Company must provide to the Independent Body on request such information as the Independent Body considers necessary or desirable in order to determine whether such applicant is eligible to participate in Incentivised Switching.
2.5 The Applicant Company must submit a switching proposal (the Switching Proposal ) along with its completed application form (the Application Documents ) by the date specified by the Independent Body in the relevant marketing materials or such later date as the Independent Body may specify (the Application Period ). If the Application Documents are not submitted within the Application Period, the Independent Body reserves the right not to consider the application.
2.6 The Switching Proposal must:
(H) outline the Applicant Companys proposal to incentivise some or all Target Customers to become Transferring Target Customers;
(I) outline how the Applicant Company proposes to apply any Dowries received in connection with Incentivised Switching, including in the form of incentives to be offered to relevant Target Customers and paid or applied to such customers after they become Transferring Target Customers (including (i) the formula to be used to determine any cash amounts to be paid in respect of each Transferring Target Customer, (ii) the minimum and maximum amount that each Transferring Target Customer may receive, and (iii) any phasing or conditions attached to any cash amounts to be paid to each Transferring Target Customer) and otherwise demonstrate how any Dowries will benefit Transferring Target Customers;
(J) set out how the incentives to be offered to relevant Target Customers and paid or applied to such customers after they become Transferring Target Customers are different to and materially better, taking into account the Dowries, than the offers which are made by them to new customers or customers which might switch their banking products to them (other than through Incentivised Switching);
(K) comply with all Applicable Law (including any rules and guidance made by the FCA and/or PRA); and
(L) set out the Applicant Companys proposal in respect of the communication materials to be used by RBS in relation to the products and incentives to be offered to relevant Target Customers by the Applicant Company (the Company Offering ).
2.7 The Application Documents must be approved by the board of directors (or equivalent body) of the Applicant Company and proof of such approval in certified form must be submitted to the Independent Body with the Application Documents.
2.8 The application form and any marketing materials in respect of Incentivised Switching have been prepared for information and discussion purposes only and should be treated as indicative only. No warranties or representations, express or implied, are being made as to the completeness or accuracy of any facts or information contained therein and no liability shall attach to the Independent Body, RBS or HMT as a result of making such materials available to Applicant Companies. Applicant Companies should seek their own independent legal, financial, tax, regulatory and/or accounting advice before making any decision to apply to participate in, or receive funding in connection with, Incentivised Switching.
2.9 The publication of an application form and/or any marketing materials by the Independent Body does not:
(A) constitute an offer for any Applicant Company to participate in Incentivised Switching or receive funding in connection with Incentivised Switching;
(B) oblige the Independent Body to provide any Dowries or any other funding in connection with Incentivised Switching; or
(C) create any commitment or obligation of the Independent Body to enter into any IS Agreement.
2.10 The Independent Body shall be free at its sole discretion to establish the process in connection with the participation in, and grant of funding in respect of, Incentivised Switching and to supplement or change this process from time to time. Without limiting the foregoing, the Independent Body expressly reserves the right, at its sole discretion, at any time and without specifying any reason, without any liability or obligation of any kind to:
(A) accept or reject any and all applications, not allow any Applicant Companies to participate in Incentivised Switching, not grant any funding or proceed with Incentivised Switching in whole or in part and/or cancel or withdraw funding at any stage;
(B) amend each Dowry Calculation Schedule; and/or
(C) alter this process in any manner (including any requirements in respect of the Switching Proposal as set out in these Terms and Conditions) or terminate this process entirely and decide not to proceed with Incentivised Switching or granting funding in respect of Incentivised Switching,
and the Applicant Company acknowledges that it is not relying on any express or implied representation of any kind concerning the manner in which such process will proceed.
2.11 The Applicant Company shall bear all its own costs and expenses in relation to: (i) any application to participate in, or receive funding in respect of Incentivised Switching and participation in Incentivised Switching; and (ii) any review of the information provided to the Applicant Company in connection with the Incentivised Switching. To the fullest extent permitted by law, neither the Independent Body, nor RBS, nor HMT have any liability for any losses, costs or expenses (including any loss of profit or indirect or consequential loss or any loss of goodwill or possible business, whether actual or prospective), incurred by any Applicant Company in connection with, or by reason of or arising out of Incentivised Switching.
2.12 In submitting an application for participation in Incentivised Switching, the Applicant Company agrees not to make any claim against the Independent Body, RBS or HMT with respect to the application process in the event that its application is not accepted by the Independent Body and the Independent Body does not enter into an IS Agreement with such Applicant Company or provide such Applicant Company with funding in respect of Incentivised Switching (whether or not the Independent Body accepts the application of, enters into an IS Agreement with, and/or provides Dowries and/or any other funding in connection with Incentivised Switching to, any other Applicant Company).
2.13 By submitting an application for participation in Incentivised Switching, the Applicant Company represents and warrants to the Independent Body that:
(A) it is not a Sanctioned Person; and
(B) none of its group members, or, to the best of its knowledge and belief, Substantial Shareholders are Sanctioned Persons.
2.14 Each Applicant Company is entitled to the benefit of, is bound by, and is deemed to have notice of, the provisions of the Trust Deed (to the extent that the provisions of such
document have been made available publicly or to such Applicant Company by the Independent Body).
2.15 The Independent Body is not authorised to carry out regulated activities so will not be able to consider applications where receipt or processing of those applications would require any form of regulatory authorisation or permission.
3. COMMUNICATION PROCESS, SWITCHING PROCESS AND CREDIT DECISIONS
3.1 The Applicant Company acknowledges and agrees that, if its application is successful, all directed communication of Incentivised Switching to Target Customers shall be undertaken by RBS in accordance with the Company Offering provided by the Applicant Company to the Independent Body (as updated from time to time with the approval of the Independent Body). The Applicant Company will, if its application is successful, be entitled to communicate Incentivised Switching to Target Customers through its usual general marketing, communication and advertising channels, but shall not be permitted to communicate directly with or to Target Customers without the prior consent of RBS.
3.2 The Applicant Company accepts and agrees that, if its application is successful, the transfer of Target Customers will be performed, as far as reasonably practicable, in accordance with current business-as-usual customer switching propositions. If its application is successful, the Applicant Company agrees that it will take all steps that may be reasonably necessary in order to facilitate customer switching proposals, including by reviewing its arrangements with respect to CASS.
3.3 The Applicant Company acknowledges and agrees that:
(M) any credit decisions taken by it in respect of a Target Customer shall be made entirely at its own risk;
(N) any credit decisions will be based on the information provided to the Applicant Company by the Target Customer which shall be subject to the Applicant Companys standard verification requirements;
(O) it will carry out, and will be solely responsible for, all necessary know your customer or other similar checks required under Applicable Laws;
(P) neither RBS nor the Independent Body shall have any obligation to verify information provided by the Target Customer to the Applicant Company, have any responsibility for the accuracy of any information provided by the Target Customer to the Applicant Company or otherwise be liable for any information provided by a Target Customer to the Applicant Company; and
(Q) all existing claims between RBS and any Target Customer will remain unaffected by their transfer to the Applicant Company.
3.4 The Applicant Company will have absolute discretion to accept or reject the transfer of a Target Customer and neither RBS nor the Independent Body shall be liable to the Target Customer and/or the Applicant Company in respect of such decision.
3.5 If the Applicant Companys application is successful, the Applicant Company may not contact any Target Customer which has withdrawn its consent to receiving further communications in relation to Incentivised Switching and will ensure that Target Customers are informed of their right to opt out of further communications in all promotional and communication activity provided by the Applicant Company (including the Company Offering).
4. USE OF FUNDS
4.1 By submitting an application to participate in, and receive Dowries in connection with, Incentivised Switching, the Applicant Company agrees that the use of any Dowries it receives in connection with Incentivised Switching must be in accordance with its Switching Proposal (as amended from time to time in accordance with the terms of the relevant IS Agreement) and will be restricted as set out in these Terms and Conditions and/or the relevant IS Agreement.
4.2 If an application is successful, the Applicant Company:
(R) may only use the Dowries it receives in connection with Incentivised Switching in accordance with its Switching Proposal (as amended from time to time in accordance with the terms of the relevant IS Agreement) and Company Offering;
(S) acknowledges and agrees that Dowries will accrue on a periodic basis after the date on which a Target Customer becomes a Transferring Target Customer (provided that the Applicant Company has provided the Independent Body with evidence to the Independent Bodys satisfaction to this effect) and not immediately upon the Target Customer becoming a Transferring Target Customer;
(T) shall pay no more than 50% of any Dowry payment made by the Independent Body to the Applicant Company in respect of a Transferring Target Customer with a Turnover of more than £1 million to such Transferring Target Customer in cash during the first 12 months after such Target Customer has become a Transferring Target Customer; and
(U) agrees that the Independent Body shall have discretion as to the applicability of the Dowry Calculation Schedule and payment of Dowries and that the determination by the Independent Body on any application of the Dowry Calculation Schedule and payment of Dowries shall be final and binding on the Applicant Company.
4.3 The Independent Body will have certain rights under the IS Agreement which it will be entitled to exercise if the Applicant Company breaches any of the requirements of conditions 4.1 or 4.2. The exercise of such rights may result in the Applicant Company being required to repay the Dowries it has received in connection with Incentivised Switching or a proportion of such Dowries.
5. INFORMATION, REPORTING AND AUDIT REQUIREMENTS
5.1 The Independent Body is entitled to request additional information and clarification of information and access to personnel, and make all enquiries it considers necessary or desirable in relation to the application and the Independent Bodys assessment of the application. Refusal to provide such information, grant and facilitate such meetings and/or respond to such enquiries may lead to an Applicant Companys application being rejected. If the Independent Body does not receive a response from any Applicant Company within ten Business Days, the Independent Body shall be entitled to assume that such Applicant Company has withdrawn its application
5.2 The Applicant Company will report to the Independent Body on a regular basis in accordance with the terms set out in the IS Agreement.
5.3 The Independent Body will have certain audit rights during the term of the IS Agreement and these audit rights will give the Independent Body the right to access the Applicant Companys records, premises, and employees.
6. CONFIDENTIALITY AND DISCLOSURE
6.1 Applicant Companies should note that information received by the Independent Body may be disclosed by the Independent Body to RBS. Applicant Companies should note that information received by the Independent Body may be published or disclosed in accordance with the access to information regimes (including under the Freedom of Information Act 2000, the Data Protection Act 1998 and the Environmental Information Regulations 2004). Applicant Companies should mark as confidential or commercially sensitive any information that they consider should be treated as such and explain why this is the case (automatic confidentiality disclaimers produced by IT systems will not, in themselves, be regarded as binding). The Independent Body will take account of such explanations, but no assurance can be given that confidentiality will be maintained in all circumstances.
6.2 No part of the application form or any other marketing materials in connection with Incentivised Switching should be published, reproduced or otherwise made available (in whole or in part) (i) to any other person without the prior written consent of the Independent Body; and (ii) in any jurisdiction where to do so would be unlawful.
6.3 The Applicant Company shall not (and shall procure that members of its group shall not) make any statement or representation about (or otherwise disclose any terms of or information regarding) Incentivised Switching, these Terms and Conditions, any Incentivised Switching marketing materials or any IS Agreement without the prior written consent of the Independent Body except if and to the extent: (i) required by Applicable Laws; or (ii) such information has come into the public domain other than as a result of a breach of confidence or contractual obligations.
7. DEFINITIONS AND INTERPRETATION
7.1 In these Terms and Conditions:
Applicable Laws |
means any and all law (whether civil, criminal or administrative), common law, statutes, statutory instruments, treaties, conventions, directives, regulations or rules made thereunder, by-laws, demands, decrees, injunctions, resolutions, orders or judgments in any applicable jurisdiction, including the PRA Rules, the FCA Rules and any related or similar rules of any other authority, in each case which is binding on the relevant person or in respect of the relevant matter as the context requires; |
Applicant Company |
has the meaning given to it in condition 1.1, 7.2(A) and 7.2(B); |
Application Documents |
has the meaning given to it in condition 2.5; |
Application Period |
has the meaning given to it in condition 2.5; |
Business Current Account |
means an account marketed to businesses rather than individuals, which provides the facility to hold deposits, receive and make payments by cheque and/or debit card, use automated teller machine facilities and make regular payments by direct debit and/or standing order, but does not include an account in which money is held on deposit in a currency other than the official currency of the United Kingdom or an account in which credit funds are held and offset against mortgage debt or a loan (other than an overdraft facility); |
Business Day |
means any day (other than a Saturday or Sunday) on which clearing banks are open for business in London; |
CASS |
means the current account switch service; |
CIN |
means a unique Customer Identification Number held by RBS in respect of each Target Customer; |
Collections and Recoveries |
means those accounts that have been placed in one of the following business teams by RBS, taking into account in each case factors including (without limitation) credit risk rating deterioration, account conduct and volume of unpaid items, loan arrears, actual or potential insolvency events, covenant breaches, deterioration in trading and cash absorption and defaults: (a) Collections and Recoveries in Customer Financial Support Services (Debt Management Operations), Business Banking; (b) Specialised Relationship Management Telephony, Commercial & Business Banking; (c) Recoveries and Litigation, Commercial & Business Banking; and/or (d) Strategic Relationship Management (Restructuring) and/or any Strategic Management Unit equivalent for lower exposures, Commercial & Business Banking, and in each case including any such equivalent business team to those set out in (a) to (d) above in respect of accounts of such other group of customers as the Independent Body may determine ( if any) and/or any equivalent replacement categorisations and/ or business teams ; |
Company Offering |
has the meaning given to it in condition 2.6(E); |
Dormant Account |
mean an account where there has been no activity for five years or more; |
Dowries |
means the amounts to be paid by the Independent Body to an Applicant Company whose application is successful in respect of any Transferring Target Customer in accordance with the Dowry Calculation Schedule; |
Dowry Calculation Schedule |
means the schedule to the IS Agreement (as amended by the Independent Body and communicated to the relevant body from time to time), setting out the method for calculation of the amount of Dowries and the procedure for payment of Dowries; |
FCA |
means the United Kingdom Financial Conduct Authority or any successor regulatory body; |
FCA Rules |
means any rules and guidance made by the FCA under FSMA and set out in the FCAs handbook of rules and guidance as amended from time to time, and includes any rules and guidance made by any successor regulatory body; |
FSMA |
means the Financial Services and Markets Act 2000, including any regulations made pursuant thereto; |
HMT |
means the Commissioners of Her Majestys Treasury of 1 Horse Guards Road, London, SW1A 2HQ; |
Incentivised Switching |
means the proposal under which eligible bodies would be provided with funds to be used to encourage certain RBS customers to switch from RBS to that eligible body; |
Independent Body |
has the meaning given to it in condition 1.1; |
IS Agreement |
has the meaning given to it in condition 25.4; |
OFAC |
means the Office of Foreign Assets Control of the US Department of the Treasury; |
Perimeter |
means the division of RBS previously described as Williams and Glyn or such other group of customers as the Independent Body may determine; |
PRA |
means the United Kingdom Prudential Regulation Authority (as defined by FSMA) or any successor regulatory body; |
PRA Rules |
means any rules and guidance made by the PRA under FSMA and set out in the PRAs handbook of rules and guidance as amended from time to time, and includes any rules and guidance made by any successor regulatory body; |
Primary Account(s) |
means: (i) where a Target Customer has only one Business Current Account within the Perimeter, that account; or (ii) where a Target Customer has more than one Business Current Account within the Perimeter, that account or accounts of a Target Customer through which an aggregate of 50% or more of the Turnover of that customer has been processed in the 12 months prior to their transfer to an Applicant Company, in each case, excluding any Dormant Account or any account in Collections and Recoveries; |
RBS |
means The Royal Bank of Scotland Group plc, a public company incorporated in Scotland with registered number 45551 and whose registered |
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office is at 36 St Andrew Square, Edinburgh, Scotland EH2 2YB; |
Sanctioned Country |
means, at any time, a country or territory that is subject to country-or territory-wide Sanctions; |
Sanctioned Person |
means, at any time: (i) any person listed in any Sanctions-related list of designated persons maintained by the United Nations Security Council, HMT, the European Union, OFAC or the US Department of State; (ii) any person operating, organised or resident in a Sanctioned Country; or (iii) any person owned or controlled by a person or persons included in paragraph (i); |
Sanctions |
means any sanctions administered or enforced by the United Nations Security Council, HMT, the European Union or the United States Government (including, without limitation, OFAC); |
SME |
means a small or medium-sized enterprise, being a business (including incorporated legal entities, sole traders, partnerships, not-for-profit organisations and clubs, charities and societies) that, in respect of any given financial year applying to it, has annual revenues (exclusive of VAT and other turnover-related taxes) not exceeding £25 million; |
Substantial Shareholder |
means any person who: (a) owns 10% or more of the shares in the Applicant Company or any member of the Applicant Companys group; or (b) is entitled to exercise, or control the exercise of, 10% or more of the votes able to be cast on all or substantially all matters at general meetings of the Applicant Company or any member of the Applicant Companys group; |
Switching Proposal |
has the meaning given to it in condition 2.5; |
Target Customer |
means a customer of RBS (or a subsidiary of RBS) within the Perimeter as at the date on which the Independent Body first marketed Incentivised Switching to any Applicant Company (or such later date as may be specified in the Dowry Calculation Schedule) which is an SME; |
Terms and Conditions |
has the meaning given to it in condition 1.1; |
Transferring Target Customers |
means a Target Customer that closes its Primary Account(s) with RBS and opens a BCA with an Applicant Company; |
Trust Deed |
means a trust deed entered into by RBS and the Independent Body in order to establish, amongst other things, the trust in respect of Incentivised Switching; and |
Turnover |
means the annual aggregate credit turnover with Business Current Accounts held within the Perimeter (excluding (i) any turnover between those accounts of a customer with the same CIN; and (ii) any monies held by a customer on behalf of that customers clients or for the benefit of third parties). |
7.2 In these Terms and Conditions:
(A) references to Applicant Company shall be deemed to include, where applicable and where the context requires, the Applicant Companys holding company (which
is domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland) and wholly-owned subsidiaries and the wholly-owned subsidiaries of such holding company (in each case where such subsidiaries are domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland);
(B) the expressions holding company, wholly-owned subsidiary subsidiary and subsidiary undertaking shall have the meaning given in the Companies Act 2006;
(C) any reference to a statute, statutory provision or rules or regulations made thereunder shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified, re-enacted or replaced; and
(D) references to RBS shall be read as including, where applicable, a reference to any relevant subsidiary of RBS undertaking the relevant activity within the Group and, in this context, any obligation on RBS shall be read as including, where applicable, an obligation on RBS to procure that the relevant subsidiary complies with the relevant obligation.
Schedule 3
Dowry Calculation Schedule
1. PAYMENT OF DOWRIES
1.1. Subject to Paragraphs 1.2 to 1.8 and 3 below, the IB shall within thirty Business Days of the end of each three calendar month period (beginning on [ date ]) (each, a Relevant Period ), pay the Company an aggregate amount (a Dowry ) in respect of each Transferring Target Customer for that Relevant Period, comprising:
(A) an amount determined in accordance with Paragraph 2.1 (the BCA Element ); and
(B) an additional amount calculated in accordance with Paragraph 2.3 if such Transferring Target Customer has transferred any of its Loan Products from RBS to the Company (the Loan Element ),
provided that, if a Transferring Target Customer transfers any of its Loan Products from RBS to the Company in a Relevant Period subsequent to the Relevant Period in respect of which the BCA Element is payable, the relevant Loan Element shall be payable in respect of the Relevant Period in which such Loan Product transfers.
1.2. At or around the date on which the IB makes the payment(s) in accordance with Paragraph 1.1 above, the IB shall also provide the Company and RBS with a quarterly statement which includes the following information:
(A) the aggregate amount paid by the IB to the Company during the Relevant Period comprising: (i) new Dowry payments; and (ii) any Additional Payment (as defined in Paragraph 1.4 below) arising from a successful Dowry Query (as defined in Paragraph 1.3 below) made by the Company;
(B) the total number of Transferring Target Customers in respect of which the Company is eligible to receive a Dowry during the Relevant Period;
(C) in respect of each Transferring Target Customer:
(i) a unique customer reference identifier;
(ii) its CASS switching number, if applicable;
(iii) the date on which the Target Customer became a Transferring Target Customer;
(iv) the date on which the IB accepted a Dowry Query made by the Company (if any);
(v) its Turnover Band; and
(vi) the amount of Dowry paid or to be paid,
(together, (A) to (C) being the Relevant Information ).
1.3. Within fifteen Business Days of receipt of the Relevant Information, the Company may dispute or challenge the amount of Dowry paid in respect of any Transferring Target Customer and, at the Companys own expense, provide any information and evidence relevant to the calculation of such Dowry to the IB (a Dowry Query ).
1.4. As soon as practicable following the receipt of a Dowry Query, the IB and the Company shall discuss in good faith the amount of Dowry with a view to resolving the Dowry Query. Following such discussion, the IB shall, at its sole discretion, make a final determination as to whether any additional Dowry payment should be made in respect of some or all of the Transferring Target Customer(s) (such additional amount being an Additional Payment ).
1.5. The IB shall be under no obligation to make any Additional Payment if it remains, in its sole discretion, dissatisfied with the information or evidence provided to it and/or the outcome of any good faith discussions and the Company acknowledges and agrees that all decisions made by the IB in respect of any Dowry Queries (including whether there will be an Additional Payment and the amount of such Additional Payment) are final and binding.
1.6. If the IBs final decision is that an Additional Payment should be made, such Additional Payment shall be paid by the IB to the Company following the end of the next Relevant Period after the date of the Dowry Query as if it formed part of the Dowry in respect of such Relevant Period. The IB shall also, as soon as reasonably practicable, inform RBS of its final decision in relation to any Dowry Query.
1.7. The IB shall pay the Dowry in respect of each Transferring Target Customer (including any Additional Payment) for the Relevant Period in one aggregate payment by telegraphic transfer to the Account.
1.8. No Dowry shall be paid in respect of a Transferring Target Customer which has more than one account with RBS (or any member of the Group) unless the account(s) transferred represent more than 50% of such Transferring Target Customers annual aggregate credit turnover with accounts held within the Perimeter (excluding turnover between those accounts of a customer with the same CIN).
2. CALCULATION OF A DOWRY
2.1. Subject to Paragraph 2.2, the BCA Element of a Transferring Target Customer is determined based on the Turnover Band of such Transferring Target Customer, the amount of which is set out in the following table:
Turnover
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BCA
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Less than 15,000 |
Band 1 |
750 |
15,000 to 100,000 |
Band 2 |
1,000 |
100,001 to 500,000 |
Band 3 |
3,000 |
2.2. The Turnover Band of a Target Customer holding only a Loan Product (but not a Business Current Account with RBS) at the Relevant Time which, after the Relevant Time, (i) opens a Business Current Account with RBS and (ii) subsequently becomes a Transferring Target Customer shall be deemed to be Band 1.
2.3. The Loan Element in respect of each Loan Product transferred by the Transferring Target Customer from RBS to the Company shall be calculated as follows:
Transferred Loan Amount x 0.025
3. RESTRICTIONS ON DOWRY PAYMENTS
3.1. Notwithstanding any other provision of this schedule, the IB shall not pay the Loan Element of any Dowry in a Relevant Period to the Company if:
(A) the total amount of Loan Element paid by the IB to the Company in respect of Transferring Target Customers in previous Relevant Periods, when aggregated with equivalent sums paid by the IB to other eligible bodies under incentivised switching agreements between the IB and other eligible bodies in respect of such previous Relevant Periods, is equal to or exceeds the Loan Threshold; or
(B) making payment of the Total Loan Element in respect of that Relevant Period, when aggregated with equivalent sums calculated under incentivised switching agreements between the IB and other eligible bodies and due in respect of the same Relevant Period (together, the Aggregate Loan Element and such eligible bodies, together with the Company, being the Loan Element Companies ) would result in the Loan Threshold being exceeded.
3.2. If the payment of the Aggregate Loan Element to the Company in respect of a Relevant Period would result in the Loan Threshold being exceeded, the IB shall calculate the Remaining Loan Element as follows:
A B
where
A = the Loan Threshold
B = the total amount of Loan Element paid by the IB to the Company in respect of Transferring Target Customers in previous Relevant Periods, plus the amount of any equivalent sums paid by the IB to other eligible bodies under incentivised switching agreements between the IB and other eligible bodies in respect of such previous Relevant Periods,
and shall distribute the Remaining Loan Element to the Loan Element Companies (including the Company) pro rata according to the amount of the Aggregate Loan Element due to such Loan Element Company.
3.3. Notwithstanding any other provision of this schedule, the IB shall not pay the BCA Element of any Dowry in a Relevant Period to the Company if:
(A) the total amount of BCA Element paid by the IB to the Company in respect of Transferring Target Customers in previous Relevant Periods, when aggregated with equivalent sums paid by the IB to other eligible bodies under incentivised switching agreements between the IB and other eligible bodies in respect of such previous Relevant Periods, is equal to or exceeds the BCA Threshold; or
(B) making payment of the Total BCA Element in respect of that Relevant Period, when aggregated with equivalent sums calculated under incentivised switching agreements between the IB and other eligible bodies and due in respect of the same Relevant Period (together, the Aggregate BCA Element and such eligible bodies, together with the Company, being the BCA Element Companies ) would result in the BCA Threshold being exceeded.
3.4. If the payment of the Aggregate BCA Element to the Company in respect of a Relevant Period would result in the BCA Threshold being exceeded, the IB shall calculate the Remaining BCA Element as follows:
C D
where
C = the BCA Threshold
D = the total amount of BCA Element paid by the IB to the Company in respect of Transferring Target Customers in previous Relevant Periods, plus the amount of any equivalent sums paid by the IB to other eligible bodies under incentivised switching agreements between the IB and other eligible bodies in respect of such previous Relevant Periods,
and shall distribute the Remaining BCA Element to the BCA Element Companies (including the Company) pro rata according to the amount of the Aggregate BCA Element due to such BCA Element Company.
3.5. The IB shall not pay any Dowry in respect of a Transferring Target Customer if:
(A) the Transferring Target Customers Primary Account is a Dormant Account or an account in Collections and Recoveries; or
(B) the only account(s) of such Transferring Target Customer which is (are) transferred to the Company are Dormant Account(s) and/or account(s) in Collections and Recoveries.
3.6. The relevant date for the purposes of the definition of Target Customer in the Terms & Conditions is [ date ].
For the purposes of this schedule:
Additional Payment has the meaning given to it in Paragraph 1.4;
Aggregate BCA Element has the meaning given to it in Paragraph 3.3(B);
Aggregate Loan Element has the meaning given to it in Paragraph 3.1(B);
Applicant Companies has the meaning set out in the Terms and Conditions;
BCA Element Companies has the meaning given to it in Paragraph 3.3(B);
BCA Threshold means £225,000,000;
Business Current Account has the meaning set out in the Terms & Conditions;
Collections and Recoveries has the meaning set out in the Terms & Conditions;
Dormant Account has the meaning set out in the Terms & Conditions;
Dowry has the meaning given to it in Paragraph 1.1;
Dowry Query has the meaning given to it in Paragraph 1.3;
Loan Element Companies has the meaning given to it in Paragraph 3.1(B);
Loan Threshold means £50,000,000;
Loan Product means a secured or unsecured sterling denominated commercial loan between RBS and a Target Customer excluding overdrafts, invoice financing and asset financing arrangements;
Perimeter means the division of RBS previously described as Williams and Glyn or such other group of customers as the IB may determine;
Primary Account has the meaning set out in the Terms & Conditions;
RBS means The Royal Bank of Scotland Group plc, a public company incorporated in Scotland with registered number 45551 and whose registered office is at 36 St Andrew Square, Edinburgh, Scotland EH2 2YB;
Relevant Information has the meaning given to it in Paragraph 1.2;
Relevant Period has the meaning given to it in Paragraph 1.1;
Relevant Time means the time at which the IB first markets Incentivised Switching to Applicant Companies or such other time(s) as may be agreed between the IB and RBS and notified by the IB to the Company;
Remaining BCA Element has the meaning given to it in Paragraph 3.4
Remaining Loan Element has the meaning given to it in Paragraph 3.2;
Total Loan Element means the aggregate Loan Element in respect of each Relevant Period;
Total BCA Element means the aggregate BCA Element in respect of each Relevant Period;
Transferred Loan Amount means the outstanding balance owed to the Group of any Loan Product as at the relevant transfer date;
Turnover means the annual aggregate credit turnover with Business Current Accounts held within the Perimeter (excluding (i) any turnover between those accounts of a customer with the same CIN; and (ii) any monies held by a customer on behalf of that customers clients or for the benefit of third parties); and
Turnover Band means the classification of a Transferring Target Customer based on its Turnover (at the Relevant Time) grouped in accordance with the ranges set out in Paragraph 2.1.
Reference in this schedule to RBS shall be read as including, where applicable, a reference to any relevant subsidiary of RBS undertaking the relevant activity within the Group and, in this context, any obligation on RBS shall be read as including, where applicable, an obligation on RBS to procure that the relevant subsidiary complies with the relevant obligation.
Schedule 5
Deed of Priority
THIS IS AN IMPORTANT DOCUMENT. YOU SHOULD TAKE LEGAL ADVICE BEFORE SIGNING.
Owner: |
Registered No: |
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Lender:
Charged Property:
Banks Address:
1 Security
1.1 The Banks Security is a [fixed charge on the Charged Property and associated assets dated __ [and a Debenture (to the extent only that it creates a security on the same property) dated __ both ]] [Debenture dated __ creating fixed and floating charges] granted by the Owner (and includes any substituted or further security taken in the future).
1.2 The Lenders Security is a [fixed charge on the Charged Property and associated assets dated __ [and a Debenture (to the extent only that it creates a security on the same property) dated __ both]] [Debenture dated __ creating fixed and floating charges] granted by the Owner (and includes any substituted or further security taken in the future).
2 Priority Agreement
2.1 The Banks Priority is £___ [and the Lenders Priority is £___] (or any other Priority amount as agreed in writing between the Bank and the Lender) and, in addition, interest on that amount and expenses as secured by the Banks or the Lenders Security.
2.2 The Banks Security will rank first in priority as a continuing security up to the Banks Priority.
2.3 [The Lenders Security will rank second in priority as a continuing security without limit.] [The Lenders Security will rank second in priority as a continuing security up to the Lenders Priority.]
2.4 [The Banks Security will rank third in priority as a continuing security without limit.]
2.5 [If either the Bank or the Lender holds an effective fixed charge and the other a floating charge over the same asset or class of assets then the fixed charge will rank in priority to the floating charge without limit.]
2.6 The Bank and the Lender will hold on trust any net receipts from the enforcement of their Security or from an administrator or liquidator of the Owner in respect of their Security to give effect to the priorities under this deed.
2.7 The priorities above will not be affected by:
2.7.1 any fluctuations in the amounts secured by the Security, or any advances being made after the date of this deed;
2.7.2 the existence at any time of a credit balance on any account; or
2.7.3 the crystallisation of the Banks or Lenders floating charge before the others.
3 Transfer
3.1 The Bank or the Lender will ensure when transferring their Security that the transferee enters into a deed with the other party on the same terms as this deed.
3.2 References to the Bank and the Lender include their respective successors.
4 Registration
4.1 The Owner agrees to the registration of this deed at the Land Registry.
4.2 [The Bank and the Lender each consent to the registration of the others Security at the Land Registry.] [The Bank consents to the registration of the Lenders Security at the Land Registry [,on condition that the Lender registers this deed at the same time] 5 and the Lender consents to the registration of the Banks Security at the Land Registry.]
5 Debts and Deposits
5.1 The Owner will not be in breach of any terms concerning debts in the Lenders Security if it pays those debts into an account with the Bank, and the Bank may apply them in reduction of any liability of the Owner to the Bank.
5.2 If a credit balance exists at any time on an account of the Owner with the Bank, regardless of whether the Lender has any charge over that credit balance, the Bank may:
5.2.1 prior to the Lender enforcing its security, permit the Owner to draw on the credit balance; and
5.2.2 at any time, set off any amount due to it from the Owner against the credit balance.
6 Enforcement
6.1 Unless urgent independent action is considered necessary by either party to protect their security interests, the Bank and the Lender will:
6.1.1 give notice to the other of their intention to enforce their Security before any enforcement takes place; and
6.1.2 consult with each other over the appointment of a suitable receiver or administrator.
6.2 If independent action is considered urgent without notice or consultation, then written notice must be given immediately to the other party and in any event:
6.2.1 the Lender will not, without the Banks consent, apply to the court for an administration order; and
6.2.2 the Lender will not, without giving the Bank two business days notice:
(i) take steps to appoint an administrator of the Owner or a receiver of any charged property; or
5 Include where Lenders Charge is being granted at same time as sharing arrangement formalised.
(ii) issue a petition for the winding up of the Owner.
A business day is a weekday other than a national holiday.
6.3 Any receiver appointed by the Bank has a prior right to possession of the charged property.
7 Waiver of Confidentiality
The Owner agrees that the Bank and the Lender can disclose to each other any confidential information concerning the Owners business affairs and accounts.
8 Title Deeds and Documents
The Bank is entitled to hold all title deeds and documents relating to any charged property.
9 Notices
9.1 All notices must be in writing.
9.2 Any notice by the Bank may be sent by post, fax or delivered to the Lenders registered office or to the contact details last known to the Bank.
9.3 Any notice by the Lender may be sent by post or delivered to the Banks Address.
9.4 A notice signed by an official of the Bank or the Lender will be effective at the time of personal delivery; on the second business day after posting; or, if by fax, at the time of sending, if sent before 6.00 p.m. on a business day or otherwise on the next business day. A business day is a weekday other than a national holiday
10 Pre-enforcement Receipts
Only net receipts from the enforcement of the Banks or the Lenders Security will reduce or count towards the Banks or the Lenders Priority. A receipt is from the enforcement of a Security if the Bank or the Lender has exercised a power in the Security to realise any of its security. Repayments or receipts in return for the release of any of the property charged or other rights, or the proceeds of set-off, are not receipts from enforcement and will not reduce or count towards the Banks or the Lenders Priority.
11 Companies House Registration
If either the Banks or the Lenders Security is required to be registered at Companies House but is not registered (either within the required time or later by Court order) this deed will not have effect and the party whose Security is unregistered will not be entitled to any priority over the other.
12 Governing Law
12.1 This deed is governed by English law and the English courts have exclusive jurisdiction.
12.2 The Bank, the Lender and the Owner irrevocably submit to the jurisdiction of the English courts and irrevocably agree that a judgment or ruling in any proceedings in connection with this deed in those courts will be conclusive and binding on all parties and may be enforced against any party in the courts of any other jurisdiction.
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[Single Signature option
A witness is required if only one Director/Member signs
Signed by the Director/Member in the presence of:
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Bank ref:
DATED [ ] 2018
[COMPANY]
and
BANKING COMPETITION REMEDIES LIMITED
__________________________________________
CAPABILITY AND INNOVATION FUND AGREEMENT
__________________________________________
THIS AGREEMENT is made the [ ] day of [ ], 2018
PARTIES:
1. [ · ] whose registered office is at [ · ] (registered in England No. [ · ]) (the Company );
AND
2. Banking Competition Remedies Limited whose registered office is at [ · ] (registered in England No. 11001491) (the Independent Body ).
1. Interpretation
1.1 In this Agreement:
Account |
[Company to insert details of relevant account]; |
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Additional Review Meeting |
has the meaning given to it in Clause 5.4; |
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Applicable Law |
means any and all law (whether civil, criminal or administrative), common law, statutes, statutory instruments, treaties, conventions, directives, regulations or rules made thereunder, by-laws, demands, decrees, injunctions, resolutions, orders or judgments in any applicable jurisdiction, including the PRA Rules, the FCA Rules and any related or similar rules of any other Authority, in each case which is binding on the relevant person or in respect of the relevant matter as the context requires; |
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Application Documents |
means the application form and Business Case submitted by the Company in support of an application for funding from the Capability and Innovation Fund; |
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Assessment Information |
has the meaning given to it in Clause 4.1; |
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Assessment Period |
has the meaning given to it in Clause 4.1; |
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Authority |
means (i) any government, (ii) any governmental or quasi-governmental authority, body, agency or association, (iii) any supranational, federal, state or local government, (iv) any statutory or regulatory body, agency or association, (v) any Tax Authority and (vi) any court, tribunal or other judicial body; |
Business Case |
means the business case submitted by the Company in support of an application for funding from the Capability and Innovation Fund and attached as Schedule 2 to this Agreement; |
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[Business Current Account |
means an account marketed to businesses rather than individuals, which provides the facility to hold deposits, receive and make payments by cheque and/or debit card, use automated teller machine facilities and make regular payments by direct debit and/or standing order, but does not include an account in which money is held on deposit in a currency other than the official currency of the United Kingdom or an account in which credit funds are held and offset against mortgage debt or a loan (other than an overdraft facility);] 1 |
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Business Day |
means any day (other than a Saturday or Sunday) on which clearing banks are open for a range of banking transactions in London; |
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Capability and Innovation Fund |
has the meaning given to it in the Terms and Conditions; |
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Change of Control |
shall occur for the purposes of this agreement where:
i. a person acquires Control of the Company where no person previously had Control of the Company; or
ii. the parent undertaking of the Company ceases to have Control of the Company; or
iii. a person acquires Control of the parent undertaking of the Company; or
iv. a person who is not under the Control of the parent undertaking of the Company acquires control of the Company; |
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Confidential Information |
has the meaning given to in Clause 14.1; |
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Control |
in relation to a body corporate means the ability of a person to ensure that the activities and business of that body corporate are conducted in |
1 [Note: Only relevant for Pool A or B Bodies]
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accordance with the wishes of that person and a person shall be deemed to have control of a body corporate if that person possesses or is entitled to acquire the majority of the issued share capital or the voting rights in that body corporate or the right to receive the majority of the income of that body corporate on any distribution by it of all of its income or the majority of its assets on a winding up; |
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[Fintech Product or Service |
has the meaning given to it in the Terms and Conditions;] 2 |
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FCA |
has the meaning given to it in the Terms and Conditions; |
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FCA Rules |
has the meaning given to it in the Terms and Conditions; |
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Funding Amount |
has the meaning given to in Clause 2; |
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HMRC |
means Her Majestys Revenue & Customs; |
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Material Breach |
has the meaning given to it in Clause 6.3; |
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[Overarching Principles |
has the meaning given to it in the Terms and Conditions;] 3 |
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Periodic Confirmation |
has the meaning given to it in Clause 7.2; |
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Permitted Purposes |
means those purposes set out in [condition 3.2(B)] 4 [condition 3.3(A)] 5 of the Terms and Conditions; |
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PRA |
has the meaning given to it in the Terms and Conditions; |
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PRA Rules |
has the meaning given to it in the Terms and Conditions; |
2 [Note: Only include for Pool D Bodies]
3 [Note: Only include for Pool A Bodies, Pool B Bodies and Pool C Bodies]
4 [Note: Only include for Pool A Bodies, Pool B Bodies and Pool C Bodies]
5 [Note: Only include for Pool D Bodies]
Prohibited Purposes |
means those purposes set out in [condition 3.2(C)] 6 [condition 3.3(B)] 7 of the Terms and Conditions; |
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RBS |
means The Royal Bank of Scotland Group plc, a public company incorporated in Scotland with registered number 45551 and whose registered office is at 36 St Andrew Square, Edinburgh, Scotland EH2 2YB; |
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[Relevant Business(es) |
has the meaning given to it in the Terms and Conditions;] 8 |
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Representatives |
means in relation to each of the Company and the Independent Body, its directors, officers, employees, agents and professional advisers and, in the case of the Independent Body, also includes its third party contractors; |
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Review Meeting |
has the meaning given to it in Clause 5.1; |
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Revised Business Case |
has the meaning given to it in Clause 5.3; |
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SME |
has the meaning given to it in the Terms and Conditions; |
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Tax |
includes all forms of taxation and statutory, governmental, state, provincial, local governmental or municipal impositions, duties, contributions and levies (including stamp duty) and any charges, deductions or withholdings, in each case in the nature of taxation, imposition, duty, contribution or levy, whether of the United Kingdom or elsewhere in the world, whenever imposed and whether chargeable directly or primarily against or attributable directly or primarily to the relevant person or any other person and all penalties, charges, costs and interest relating thereto; |
|
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Tax Authority |
means any government, state, municipal, local, federal or other fiscal, revenue, customs or excise authority, body or official anywhere in the world |
6 [Note: Only include for Pool A Bodies, Pool B Bodies and Pool C Bodies]
7 [Note: Only include for Pool D Bodies]
8 [Note: Only include for Pool A Bodies, Pool B Bodies and Pool C Bodies]
|
having the power to impose, collect or administer any Tax or exercising a fiscal, revenue, customs or excise function with respect to Tax (including, without limitation, HMRC); |
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Terms and Conditions |
means the terms and conditions of the Capability and Innovation Fund attached as Schedule 1 to this Agreement, as amended from time to time by the Independent Body and provided by the Independent Body to the Company; |
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Updated Business Case |
has the meaning given to it in Clause 5.2; |
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VAT |
means (i) value added tax as provided for in Directive 2006/112/EC and charged in accordance with the provisions of the Value Added Tax Act 1994; and (ii) any tax of a similar nature which is introduced in substitution for or in addition to the tax referred to in (i); and |
|
|
Working Hours |
means 9.00 am to 5.00 pm on a Business Day. |
1.2 In this Agreement, unless otherwise specified:
(A) references to clauses, sub-clauses and schedules are to clauses and sub-clauses of, and schedules to, this Agreement;
(B) the words include and including shall be deemed to be followed by the phrase without limitation;
(C) headings and sub-headings in this Agreement are included for ease of reference only and shall not affect the interpretation of this Agreement;
(D) any reference to a person shall be construed so as to include any individual, firm, company, corporation, body corporate, government, state or agency of a state, local or municipal authority or governmental body or any joint venture, association or partnership (whether or not having separate legal personality);
(E) any reference to a statute, statutory provision or rules or regulations made thereunder shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified, re-enacted or replaced;
(F) the expressions subsidiary, subsidiary undertaking and parent undertaking shall have the meaning given in the Companies Act 2006;
(G) any reference to any other document is a reference to that document as amended, varied or supplemented at any time;
(H) any reference to a day shall mean a period of 24 hours running from midnight to midnight;
(I) the rule known as the ejusdem generis rule shall not apply and accordingly general words introduced by the word other shall not be given a restrictive meaning by reason of the fact that they are preceded by words indicating a particular class of acts, matters or things;
(J) references to costs and/or expenses incurred by a person shall not include any amount in respect of VAT comprised in such costs or expenses for which either that person or, if relevant, any other member of the VAT group to which that person belongs is entitled to credit as input tax; and
(K) general words shall not be given a restrictive meaning by reason of the fact that they are followed by particular examples intended to be embraced by the general words.
2. FUNDING AMOUNT
As soon as reasonably practicable and in any event no later than forty Business Days immediately following the date of this Agreement, the Independent Body shall transfer [ · ] (the Funding Amount ) to the Account. 9
3. COMPANYS WARRANTIES AND UNDERTAKINGS
3.1 The Company represents, warrants and undertakes to the Independent Body (on the date of this Agreement and on the date on which the Funding Amount is transferred, in whole or in part, to the Account) that:
(A) it has the requisite capacity, power and authority to enter into and perform this Agreement and that its obligations under this Agreement constitute valid and binding obligations of the Company in accordance with their respective terms;
(B) the execution and delivery of, and the performance by the Company of its obligations under, this Agreement will not result in a breach of any order, judgment or decree of any court or governmental agency or regulatory body by which the Company is bound;
(C) all information provided in the Application Documents and all other information provided by the Company to the Independent Body in connection with the Capability and Innovation Fund and any Funding Amount is true, accurate and complete and not misleading and that there has been no material change in its circumstances or the Business Case since the date on which the Application Documents were submitted to the Independent Body;
9 [ Note: The default position is that the Funding Amount will be paid as a lump sum unless phased payments are requested by the Company. If requested, clause 2 will need to be amended to reflect the agreement between the Company and the Independent Body.]
(D) all expressions of opinion, intention and expectation contained in the Application Documents and any other information provided by the Company to the Independent Body in connection with the Capability and Innovation Fund and any Funding Amount are made on reasonable grounds after due and careful enquiry and consideration and are fairly based and honestly held;
(E) there are no other facts known to the Company the omission of which would: (i) make any statement or expression contained in the Application Documents or any other information provided by the Company to the Independent Body in connection with the Capability and Innovation Fund and any Funding Amount misleading in any material respect; or (ii) affect the decision of the Independent Body to pay the Funding Amount to the Company;
(F) the Application Documents do not omit any material information which would reasonably be required in order for the Independent Body to appraise the Business Case and/or determine whether or not the Funding Amount should be paid to the Company;
(G) the Business Case complies with Applicable Law; and
(H) to the extent applicable, the Business Case has been shared and discussed with the PRA and/or FCA.
3.2 The Company agrees to and accepts the Terms and Conditions and undertakes to use the Funding Amount for Permitted Purposes only (and not for Prohibited Purposes) and in the manner contemplated in its Business Case.
4. REPORTING OBLIGATIONS
4.1 Within ten Business Days of the end of each three calendar month period (beginning three calendar months immediately following the date of this Agreement) (each, an Assessment Period ) and at such other times as the Independent Body may request, the Company shall, at its own cost, provide to the Independent Body in writing:
(A) details of how the Funding Amount has been utilised during the Assessment Period, including the total amount spent from the Funding Amount during the relevant Assessment Period;
(B) [a brief account of the developments in its Relevant Business(es) during the relevant Assessment Period and how such developments relate to its Business Case;
(C) an overview and quantification of investments made in the Relevant Business(es) during the relevant Assessment Period;
(D) details of its SME business volumes, including, but not limited to, customer numbers[, Business Current Account numbers] 10 and lending and deposit balances;] 11
(E) [an account of the developments relating to its Fintech Product or Service during the relevant Assessment Period and how such developments relate to its Business Case;] 12
(F) confirmation that spending of the Funding Amount during the relevant Assessment Period has been used for Permitted Purposes only [and in accordance with the Overarching Principles] 13 ; and
(G) any additional information requested by the Independent Body which is, in the opinion of the Independent Body, necessary or desirable in order for the Independent Body to assess the Companys compliance with the terms of this Agreement,
(together, (A) to [( · )] being Assessment Information ).
4.2 The Company shall provide to the Independent Body evidence to the Independent Bodys satisfaction, and such other information as the Independent Body may reasonably request, in support of the Assessment Information.
4.3 The Company represents and warrants (on the date of this Agreement and on each date on which any Assessment Information and/or supporting evidence is provided by the Company to the Independent Body), that the Assessment Information and any evidence provided by the Company to the Independent Body in support of the Assessment Information is true, accurate and complete and not misleading and does not omit any material information which would reasonably be required in order for the Independent Body to consider and assess such information.
4.4 The Company shall, upon the request of the Independent Body, meet with representatives of the Independent Body to report on and discuss the performance of the Companys obligations under this Agreement and/or any of the Assessment Information provided by the Company to the Independent Body in respect of any Assessment Period.
4.5 The Independent Body shall have the right to:
(A) retain, copy and use the Assessment Information for the purposes of exercising its rights under this Agreement or performing its obligations (under this
10 [Note: Only include for Pool A Bodies or Pool B Bodies]
11 [Note: Include for Pool A Bodies, Pool B Bodies and Pool C Bodies]
12 [Note: Include for Pool D Bodies]
13 [Note: Include for Pool A Bodies, Pool B Bodies and Pool C Bodies]
Agreement or otherwise) in connection with the Capability and Innovation Fund; and
(B) use and/or disclose the Assessment Information and any evidence provided in support of the Assessment Information on its website or otherwise in order to publish its annual report summarising how funding from the Capability and Innovation Fund has been used.
4.6 The Company shall notify the Independent Body in writing as soon as reasonably practicable in the event of any change in the Companys circumstances which may reasonably affect the Business Case or the feasibility of the Business Case or which might otherwise reasonably require any change to the Business Case.
5. UPDATES TO THE BUSINESS CASE
5.1 As soon as reasonably practicable after the date falling six months after the date of this Agreement (or at such earlier time as may be agreed between the Independent Body and the Company), representatives of the Independent Body shall meet with representatives of the Company in order to report on and discuss the Business Case and in order to consider any changes to the Business Case which may be necessary or desirable (the Review Meeting ).
5.2 If the Company wishes to propose and discuss a change to the Business Case at the Review Meeting, the Company shall provide the Independent Body with a copy of the updated business case proposed by the Company (the Updated Business Case ) at least ten Business Days prior to the date of the Review Meeting.
5.3 If the Company considers that it is necessary or desirable to make a change to the Business Case at any other time, the Company shall notify the Independent Body in writing of this fact and provide the Independent Body with a copy of the updated business case proposed by the Company (the Revised Business Case ).
5.4 If the Company provides the Independent Body with a Revised Business Case pursuant to Clause 5.3, the Independent Body may request a meeting with representatives of the Company in order to consider the proposed changes to the Business Case (the Additional Review Meeting ).
5.5 The Company represents and warrants at the time of provision of any Updated Business Case or Revised Business Case that:
(A) all information provided in any Updated Business Case or Revised Business Case and all other information provided by the Company to the Independent Body in connection with any Updated Business Case or Revised Business Case is true, accurate and complete and not misleading;
(B) all expressions of opinion, intention and expectation contained in any Updated Business Case or Revised Business Case and any other information provided by the Company to the Independent Body in connection with such Updated Business Case or Revised Business Case are made on reasonable grounds
after due and careful enquiry and consideration and are fairly based and honestly held;
(C) there are no other facts known to the Company the omission of which would make any statement or expression contained in any Updated Business Case or Revised Business Case and all other information provided by the Company to the Independent Body in connection with any Updated Business Case or Revised Business Case misleading in any material respect;
(D) the Updated Business Case or Revised Business Case does not omit any material information which would reasonably be required in order for the Independent Body to appraise the Updated Business Case or Revised Business Case; and
(E) the Updated Business Case or Revised Business Case complies with Applicable Law.
5.6 The Independent Body shall consider any Updated Business Case or Revised Business Case and shall assess such Updated Business Case or Revised Business Case (including against the requirements set out in the Terms and Conditions). The Company shall provide the Independent Body with any additional information requested by the Independent Body which is, in the opinion of the Independent Body, necessary or desirable in order for the Independent Body to assess the Updated Business Case or Revised Business Case.
5.7 The Independent Body may, at its sole discretion, approve or reject any Updated Business Case or Revised Business Case and shall notify the Company of its decision:
(A) in the case of an Updated Business Case, within 10 Business Days of the Review Meeting; or
(B) in the case of a Revised Business Case, within 10 Business Days of: (i) the date on which the Company submitted the Revised Business Case if no Additional Review Meeting is held; or (ii) the Additional Review Meeting.
5.8 If the Independent Body approves any Updated Business Case or Revised Business Case:
(A) any reference in this Agreement to the Business Case shall be read as referring to such Updated Business Case or Revised Business Case; and
(B) the representations and warranties set out in Clause 5.5 shall be deemed to be repeated by the Company on the date on which the Independent Body approves such Updated Business Case or Revised Business Case.
5.9 If the Independent Body does not approve any Updated Business Case or Revised Business Case:
(A) the Company may continue to use the Funding Amount in accordance with the previous Business Case; or
(B) if the Company is unable to continue to use the Funding Amount in accordance with the previous Business Case, the Independent Body may request the repayment (in full or in part) of the Funding Amount (in which case the Company shall make such repayment (together with interest at an annual interest rate equal to the Bank of England base rate, compounded quarterly and accruing from the date on which the Independent Body paid the Funding Amount to the Company until the date of repayment) within five Business Days of the date of the demand).
6. AUDIT RIGHTS
6.1 Subject to Clause 6.2, at the Independent Bodys request upon reasonable notice to the Company during the term of this Agreement, the Company shall grant, and shall procure that all relevant members of its group grant, to the Independent Body or its Representatives access during Working Hours to all premises, records, officers, employees, agents and Representatives of the Company, to the extent necessary or desirable for the purpose of:
(A) verifying whether the Funding Amount has been used for Permitted Purposes (and not for Prohibited Purposes) and in accordance with the Business Case;
(B) assessing whether the Company has complied with its obligations under this Agreement; and/or
(C) verifying the Assessment Information.
6.2 The Independent Body shall only request an audit pursuant to Clause 6.1 if it believes that:
(A) the Funding Amount has not been used for Permitted Purposes or in accordance with the Business Case or has been used for Prohibited Purposes;
(B) the Company has not complied with its obligations under this Agreement; or
(C) the Assessment Information is not true, accurate and complete or is misleading.
6.3 If, in the opinion of the Independent Body, any audit carried out by or on behalf of the Independent Body pursuant to Clause 6.1 reveals any material breach of this Agreement (which shall include: (i) any failure to use the Funding Amount for Permitted Purposes or in accordance with the Business Case; or (ii) use of the Funding Amount for Prohibited Purposes) (a Material Breach ), the Company shall, on demand, reimburse the Independent Body in full for all costs and expenses incurred in carrying out or having carried out such audit (including the costs of the Independent Bodys Representatives).
6.4 The Independent Body shall procure that any person carrying out any inspection and/or audit pursuant to Clause 6.1 complies with all reasonable access and security regulations notified to such person at such time by or on behalf of the Company.
7. CLAWBACK
7.1 Subject to Clauses 7.2 and 7.3, if the Independent Body determines at its sole discretion (and whether or not an audit has been carried out in accordance with Clause 6) that there has been a Material Breach, the Independent Body shall notify the Company in reasonable detail of the Material Breach and may:
(A) if such Material Breach is capable of remedy, require the Company to: (i) remedy the breach within three months of the date on which the Independent Body notifies the Company of the Material Breach (or such shorter period as the Independent Body may determine); and (ii) promptly, and in any event within ten Business Days of the date of remedy of such Material Breach, provide evidence to the satisfaction of the Independent Body demonstrating that the Material Breach has been remedied;
(B) if the Material Breach is not capable of remedy or the Company has not provided the Independent Body with evidence to the Independent Bodys satisfaction that the Material Breach has been remedied within the period specified by the Independent Body, request the repayment (in full or in part) of the Funding Amount (in which case the Company shall make such repayment (together with interest at an annual interest rate of 8% above the Bank of England base rate, compounded quarterly and accruing from the date on which the Independent Body paid the Funding Amount to the Company until the date of repayment) within five Business Days of the date of the demand); and
(C) require the Company to take such steps going forward as the Independent Body may consider necessary or desirable in the context of such Material Breach.
7.2 [At the same time as it provides the Assessment Information to the Independent Body, the Company may request that the Independent Body give confirmation to the Company that amounts of the Funding Amount spent in the relevant Assessment Period have been used for Permitted Purposes (and not for Prohibited Purposes) and in accordance with the Business Case (a Periodic Confirmation ).
7.3 If the Company requests a Periodic Confirmation, the Independent Body shall consider the Assessment Information (and any additional information which it may request from the Company and the Company may provide). If, on the basis of such information, the Independent Body is satisfied that amounts of the Funding Amount spent in the relevant Assessment Period have been used for Permitted Purposes (and not for Prohibited Purposes) and in accordance with the Business Case, the Independent Body shall issue a Periodic Confirmation and no amount of the Funding Amount spent during the
Assessment Period subject to the Periodic Confirmation shall be capable of Clawback by the Independent Body pursuant to Clause 7.1.] 14
7.4 If there is a Change of Control of the Company such that the Companys parent undertaking or another subsidiary undertaking of such parent undertaking is a bank with an SME market share in the United Kingdom of more than 14%, the Company shall within 10 Business Days of such Change of Control return to the Independent Body any part of the Funding Amount which it is has not spent as at the date that the transaction which would give rise to the Change of Control is announced.
8. LIABILITY AND INDEMNITY
8.1 To the fullest extent permitted by law, the Independent Body has no liability for any losses (including any loss of profit or indirect or consequential loss or any loss of goodwill or possible business after termination of this Agreement, whether actual or prospective), costs or expenses incurred by the Company.
8.2 The Company shall indemnify the Independent Body and its Representatives on demand from and against all loss, payments, costs, expenses, damage, actions, claims or demands (including any loss of profit or indirect or consequential loss or any loss of goodwill or possible business after termination of this Agreement, whether actual or prospective) which the Independent Body and/or its Representatives may incur or suffer in relation to or arising out of:
(A) the performance of its obligations under or in connection with this Agreement;
(B) the content of (including any untrue statement contained in) the Application Documents;
(C) the use of the Funding Amount by the Company;
(D) any failure by the Company to comply with Applicable Law or the terms of this Agreement (including any breach or alleged breach by the Company of the representations, warranties or undertakings contained or referred to in this Agreement or any circumstances which constitute such a breach) or the Terms and Conditions; or
(E) the fraud, negligence or wilful default of the Company,
and, in each case, the Company shall reimburse the Independent Body and/or its Representatives for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such action or claim as such expenses are incurred; provided that, in each case, the Company will not be liable to the extent that any such loss, payment, cost, expense, damage, action, claim or demand is proven to have arisen as a result of the fraud, gross negligence or wilful default of: (i) in the event of a claim brought by the Independent Body, the Independent Body; or (ii) in the
14 [ Note: Clauses 7.2 and 7.3 are only relevant where the Funding Amount is material to the Company.]
event of a claim brought by a Representative, such Representative as is making the claim.
8.3 The total aggregate liability of the Company under Clause 8.2 shall not in any event exceed the Funding Amount.
8.4 The Company accepts and agrees that any decision or determination of the Independent Body under or in accordance with the terms of this Agreement (and the Terms and Conditions) or otherwise in relation to any matter related to the Capability and Innovation Fund shall be made at the absolute discretion of the Independent Body and shall be conclusive.
8.5 The Company accepts and agrees that it shall have no claims or right of recourse against the Independent Body in respect of any determination or decision of the Independent Body except as explicitly set out in this Deed.
9. TAX MATTERS
9.1 All payments by the Company under or in connection with this Agreement shall be paid without any deduction or withholding, unless required by Applicable Law. If any Tax is required by Applicable Law to be deducted or withheld from or in connection with any such payment, the amount payable shall be increased so as to ensure that the amount received by the Independent Body (after such deduction or withholding, including for the avoidance of doubt any additional deduction or withholding required as a result of such increase) is equal to the amount which the Independent Body would have received if no such deduction or withholding had been required.
9.2 If the Independent Body is subject to Tax in respect of any sum payable by the Company under or in connection with this Agreement (other than any sum of interest payable in accordance with Clause 5.9(B) or 7.1(B)) (a Relevant Payment ), or if any such Relevant Payment is taken into account in computing the income, profits or gains of the Independent Body for Tax purposes, the sum payable by the Company shall be increased so as to ensure that the amount retained by the Independent Body (after the payment of such Tax, including for the avoidance of doubt any additional Tax payable as a result of such increase, and after giving credit for any Tax relief in respect of the matter giving rise to the Relevant Payment that will be obtained and utilised by the Independent Body) is equal to the amount which the Independent Body would have retained in the absence of such Tax.
9.3 Each sum payable by the Company under or in connection with this Agreement is expressed exclusive of any amount in respect of VAT however it arises. If the Independent Body makes (or is deemed to make) any supply for VAT purposes for which such sum (or any part thereof) is in consideration and VAT is or becomes chargeable in respect of such supply, the Company shall pay to the Independent Body (within 14 days of the receipt of a valid VAT invoice) an additional sum equal to the amount of any VAT so chargeable for which the Independent Body is liable to account.
10. TERMINATION
10.1 Subject to Clause 10.2, this Agreement shall terminate on the earlier of:
(A) the date falling [eighteen/nine] 15 months after the date of this Agreement;
(B) the date on which the Company repays the Funding Amount in full pursuant to Clause 7.1(B); and
(C) the date on which the Company repays any Funding Amount pursuant to Clause 7.4.
10.2 The rights and obligations of the parties under Clauses 8, 9, 13 - 16, 18 and 21, together with any accrued rights and obligations, shall survive termination of this Agreement.
11. COSTS AND EXPENSES
Except as expressly set out in this Agreement, the Independent Body and the Company shall each pay their own costs and expenses in relation to the negotiation, preparation, execution and carrying into effect of this Agreement and the use of the Funding Amount.
12. NOTICES
12.1 Except as otherwise provided in this Agreement, a notice under this Agreement shall only be effective if it is in writing. E-mail transmissions are permitted.
12.2 Notices under this Agreement shall be sent to a party to this Agreement at its postal address, number or email address and for the attention of the individual set out below:
Party |
Address |
[Email address] |
|
|
|
Independent Body |
[ address ]
Attention: [ position ] |
[ email ] |
|
|
|
Company |
[address]
Attention: [position] |
[ email ] |
12.3 Any notice given under this Agreement shall, in the absence of earlier receipt, be deemed to have been duly given as follows:
15 [Note: initial phase Capability and Innovation Fund Agreements (Pools A-D) should have terms of 18 months and subsequent Capability and Innovation Fund Agreements (in respect of any additional amount) should have terms of 9 months.]
(A) if delivered personally, on delivery;
(B) if sent by first class post, two clear Business Days after the date of posting; and
(C) if sent by email, when despatched.
12.4 Any notice given under this Agreement outside Working Hours in the place to which it is addressed shall be deemed not to have been given until the start of the next period of Working Hours in such place.
13. PUBLICITY
13.1 Subject to this Clause 13, the Company shall not (and shall procure that no member of its group shall) make, publish, issue or release any announcement or public statement in relation to, or which refers to, this Agreement, the Independent Body in connection with this Agreement or the Capability and Innovation Fund (including in any annual report and accounts or other documents issued or made available to the holders of securities, whether in electronic or paper written form, or in any oral announcement or statement).
13.2 Notwithstanding Clause 13.1, the Company (or any member of its group) may make, publish, issue or release such an announcement provided that:
(A) it is consistent in all respects with and otherwise reflects (and contains only information which has been contained in) any announcement or public statement which has previously been made by the Independent Body; or
(B) it is in form and substance satisfactory to the Independent Body.
14. CONFIDENTIALITY
14.1 Each party shall treat as confidential any information received or obtained as a result of entering into or performing this Agreement ( Confidential Information ).
14.2 The Company shall not:
(A) disclose any Confidential Information to any person other than to its Representatives; or
(B) use any Confidential Information other than to exercise its rights or perform its obligations as set out in this Agreement.
14.3 The Company shall procure that any person to whom any such Confidential Information is disclosed by it complies with the restrictions contained in this clause as if such person were a party to this Agreement and has security measures and procedures in place to protect the confidentiality of Confidential Information.
14.4 The Independent Body shall not:
(A) disclose any Confidential Information to any person other than to its Representatives; or
(B) use any Confidential Information other than to exercise or assist in exercising its rights or perform or assist in performing its obligations as set out in this Agreement.
14.5 The restrictions contained in Clauses 14.1 to 14.4 shall not prevent the Independent Body from:
(A) announcing or otherwise disclosing: (i) the identity of the companies to which funding has been given from the Capability and Innovation Fund (including the Company); (ii) reasonable details of the business plans of and other information provided by such companies (including the Application Documents); and/or (iii) any other information regarding the Capability and Innovation Fund and the Company which the Independent Body considers necessary or desirable in connection with the operation of the Capability and Innovation Fund;
(B) disclosing Confidential Information to HMT and/or any third party monitor appointed by HMT in connection with, amongst other things, the Capability and Innovation Fund;
(C) using and/or disclosing the Assessment Information and any evidence provided in support of the Assessment Information in order to publish its annual report summarising how funding from the Capability and Innovation Fund has been used;
(D) announcing or otherwise disclosing that the Company has committed a Material Breach, together with reasonable details of such Material Breach and any steps required by the Independent Body and taken (or to be taken) by the Company in remedying such Material Breach;
(E) announcing or otherwise disclosing that the Funding Amount has been (or will be) clawed back in whole or in part from the Company pursuant to Clause 7 and the reasons for the Independent Bodys decision to claw back such funds; or
(F) using Confidential Information in the production or publication of aggregated or anonymised data.
14.6 The Company will be entitled to discuss with the Independent Body any disclosure to be made under Clause 14.5(A) or 14.5(C) and to make representations as to the extent of any disclosure. The Independent Body shall give consideration to any reasonable requests made by the Company.
14.7 The restrictions in Clauses 14.1 to 14.4 shall not prevent either party from disclosing Confidential Information:
(A) which is required by: (i) Applicable Law, or (ii) the rules of any securities exchange, clearing system or Authority (including the PRA, the FCA and the European Commission) to which it is subject or submits;
(B) which is disclosed to a Tax Authority in connection with the Tax affairs of the disclosing party;
(C) if and to the extent such disclosure is required or contemplated by the terms of this Agreement or strictly required in order to implement the Companys Business Case;
(D) if and to the extent required for the purpose of any judicial proceedings;
(E) if and to the extent the information has come into the public domain other than as a result of a breach of confidence or contractual obligations; and
(F) where the other party has agreed in advance to such disclosure.
14.8 The Company agrees that it will not (and will procure that members of its group and the respective Representatives of the Company and members of its group will not) make either orally or in writing, any disparaging or derogatory remarks concerning the Independent Body, its Representatives or the Capability and Innovation Fund. The Company further agrees that it will not (and will procure that members of its group and the respective Representatives of the Company and members of its group will not) take any action which could reasonably be expected to damage the reputation or be detrimental to or otherwise critical of the Independent Body or any of its Representatives.
14.9 The restrictions contained in this clause shall continue to apply after the termination of this Agreement without limit in time.
15. CONTRACT (RIGHTS OF THIRD PARTIES) ACT 1999
15.1 Clause 8 of this Agreement confers benefits on the Representatives of the Independent Body and, subject to the remaining provisions of this clause, is intended to be enforceable by such Representatives by virtue of the Contracts (Rights of Third Parties) Act 1999.
15.2 Subject to Clause 15.1, the parties to this Agreement do not intend that any term of this Agreement should be enforceable, by virtue of the Contracts (Rights of Third Parties) Act 1999, by any person who is not a party to this Agreement.
15.3 Notwithstanding the provisions of Clause 15.1, and save in respect of Clause 8 which may not be rescinded or varied in a way which would be adverse to the rights of the Representatives of the Independent Body without the prior written consent of the Representatives of the Independent Body, this Agreement may be rescinded or varied in any way and at any time by the parties to this Agreement without the consent of any third party.
16. INVALIDITY
16.1 If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, that shall not affect or impair:
(A) the legality, validity or enforceability in that jurisdiction of any other provision of this Agreement; or
(B) the legality, validity or enforceability under the law of any other jurisdiction of that or any other provision of this Agreement.
17. NO PARTNERSHIP
Nothing in this Agreement and no action taken by the parties under this Agreement shall constitute a partnership, joint venture or agency relationship between any of the parties.
18. ASSIGNMENT
18.1 Neither party (and no person with the benefit of third party rights under this Agreement) shall assign, or purport to assign all or any part of the benefit of, or its rights or benefits under, this Agreement.
18.2 Notwithstanding Clause 18.1 above, the Independent Body may sub-contract or enter into any arrangement whereby another person is to perform any or all of its obligations under this Agreement.
19. GROUP MEMBERS
19.1 Where the Company has applied for the Funding Amount in whole or in part for other eligible members of its group, the following provisions will apply:
(A) the representations, warranties and undertakings in Clauses 3 and 4.3 are treated as given by the Company on its own part and separately on the part of all other members of the Companys group participating in the Funding Amount;
(B) the Company will procure that all other relevant members of its group provide all relevant Assessment Information under Clause 4 and, where appropriate, the Company will consolidate relevant information so as to facilitate the review by the Independent Body of the Assessment Information;
(C) the notification requirements on the part of the Company under Clause 4.6 will extend to all relevant members of the Companys group;
(D) the provisions of Clauses 5.9, 7 and 9 will extend to relevant members of the Companys group and the Company will procure that all relevant members of its group comply with the requirements of Clauses 5.9, 7 and 9. Clause 10 will be construed accordingly; and
(E) Confidential Information may be disclosed to relevant members of the Companys group under Clause 14, subject always to the requirements of Clause 14.3 and to the provisions of Clause 14.7.
20. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and by the parties on separate counterparts, but shall not be effective until each party has executed at least one counterpart. Each counterpart shall constitute an original of this Agreement, but all the counterparts together shall constitute one and the same instrument.
21. CHOICE OF GOVERNING LAW
21.1 Any matter, claim or dispute arising out of or in connection with this Agreement, whether such matter, claim or dispute is contractual or non-contractual, shall be governed by and determined in accordance with the laws of England.
21.2 The courts of England have exclusive jurisdiction to hear and decide any suit, action or proceedings, and to settle any disputes, arising out of or in connection with this Agreement, and for these purposes, the parties irrevocably submit to the jurisdiction of the courts of England.
22. AGENT FOR SERVICE
22.1 The Company irrevocably appoints [ ] of [ ] to be its agent for the receipt of Service Documents. It agrees that any Service Document may be effectively served on it in connection with proceedings in England by service on its agent effected in any manner permitted by the Civil Procedure Rules.
22.2 If the agent at any time ceases for any reason to act as such, the Company shall appoint a replacement agent having an address for service in England and shall notify the Independent Body of the name and address of the replacement agent. Failing such appointment and notification, the Independent Body shall be entitled by notice to the Company to appoint a replacement agent to act on behalf of the Company. The provisions of this clause applying to service on an agent apply equally to service on a replacement agent.
22.3 A copy of any Service Document served on an agent shall be sent by post to the Company . Failure or delay in so doing shall not prejudice the effectiveness of service of the Service Document.
22.4 Service Document means a claim form, application notice, order or judgment.] 16
IN WITNESS whereof this Agreement has been entered by the parties hereto on the date first herein written.
16 [Note: only required for Companies incorporated outside the UK]
Signed by [ name of signatory ] |
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for and on behalf of |
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Banking Competition Remedies Limited |
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Signed by [ name of signatory ] |
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for and on behalf of |
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[ name of Company ] |
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CAPABILITY AND INNOVATION FUND: TERMS AND CONDITIONS
1. INTRODUCTION
1.1 These terms and conditions ( Terms and Conditions ) form part of the agreement between you (the Applicant Company ) and us, Banking Competition Remedies Limited (the Independent Body ) in relation to your application for, and (if successful) receipt of, funding from the Capability and Innovation Fund.
1.2 The Independent Body shall have absolute discretion on the interpretation and application of these Terms and Conditions and any determination or decision of the Independent Body in relation to any matter related to the Capability and Innovation Fund shall be conclusive.
1.3 The Independent Body may amend these Terms and Conditions from time to time and shall, upon such amendment, promptly provide each Applicant Company with a copy of the revised Terms and Conditions.
1.4 Any award of funding from the Capability and Innovation Fund will be subject, amongst other things, to the Applicant Company and the Independent Body entering into a legally binding agreement on terms satisfactory to the Independent Body (the Capability and Innovation Fund Agreement ).
1.5 If any provision of these Terms and Conditions is inconsistent with the Capability and Innovation Fund Agreement, the Capability and Innovation Fund Agreement will take priority.
2. ELIGIBILITY, APPLICATION AND SUPPORTING DOCUMENTS
2.1 In order to be eligible to receive funding from the Capability and Innovation Fund, the Applicant Company must:
(A) be a deposit-taking entity:
which has a Business Current Account offering;
which is authorised by the PRA to take deposits;
which is an entity domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland;
which has gross assets in the United Kingdom of less than £350 billion shown in its latest published consolidated accounts (or interim balance sheet);
whose income in the United Kingdom relates primarily to the provision of deposit-taking, lending or payment services to individuals and businesses in the United Kingdom; and
which has expressed an intention to expand its business offering to SMEs in the United Kingdom through the development of new products, expansion into new geographical markets or new business segments and/or investing in its customer service levels ( Pool A Body );
(B) be a deposit-taking entity which meets the criteria set out in items (ii) to (vi) (inclusive) of condition 2.1(A) above and has, or has publicly stated its intention to launch, a Business Current Account offering (and shall include any Pool A Body) ( Pool B Body );
(C) be: (i) a Pool A Body; (ii) a Pool B Body; or (iii) an entity (not being a Pool A Body or a Pool B Body): which (a) is domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland; (b) derives (or, if such entity is part of a group, such group derives) the majority of its revenue from the provision of financial services to individuals and businesses; and (c) offers, or has expressed an intention to expand its business offering to include, lending or payment services to SMEs in the United Kingdom or international payments services to SMEs in the United Kingdom ( Pool C Body ); or
(D) be an entity: (i) which is domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland; (ii) which (a) provides or develops financial products or services predominantly to or for SMEs in the United Kingdom or (b) provides products or services to the businesses described in (a); and (iii) which has raised capital of at least £1,000,000 in the three years prior to the date of submission of its Business Case ( Pool D Body ).
2.2 Eligibility to receive funding from the Capability and Innovation Fund will be determined at the absolute discretion of the Independent Body and any determination of the Independent Body as to eligibility of an Applicant Company to receive funding from the Capability and Innovation Fund shall be conclusive.
2.3 The Applicant Company must provide to the Independent Body on request such information as the Independent Body considers necessary or desirable in order to determine whether such applicant is eligible to receive funding from the Capability and Innovation Fund.
2.4 The Applicant Company must submit a business plan in a form acceptable to the Independent Body (the Business Case ) along with its completed application form (the Application Documents ) by the date specified by the Independent Body in the relevant marketing materials or such later date as the Independent Body may specify (the Application Period ). If the Application Documents are not submitted within the Application Period, the Independent Body reserves the right not to consider the application.
2.5 If the Applicant Company is either a Pool A Body, Pool B Body or a Pool C Body, the Business Case must:
(A) set out the amount of funding which the Applicant Company is seeking from the Capability and Innovation Fund;
(B) outline how the Applicant Company intends to develop the Relevant Business(es) and how funding from the Capability and Innovation Fund would assist the Applicant Company in doing this;
(C) provide details of the way in which, and the purposes for which, any funding received from the Capability and Innovation Fund would be used;
(D) demonstrate how the proposals set out in the Business Case seek to improve (i) customer outcomes for SMEs and/or mid-corporates in the United Kingdom; and/or (ii) the current products or services offered to SMEs and/or mid-corporates in the United Kingdom;
(E) comply with any relevant legal or regulatory requirement (including any rules and guidance made by the FCA and/or PRA);
(F) set out the amount (if any) of its own funds that the Applicant Company is proposing to invest in relation to the proposals outlined in its Business Case; and
(G) set out whether such Applicant Company commits to purchasing innovative financial services or software from SMEs in the United Kingdom and, if so, how such purchases would contribute to the commercialisation of such services.
2.6 If the Applicant Company is a Pool D Body, the Business Case must:
(A) set out the amount of funding which the Applicant Company is seeking from the Capability and Innovation Fund;
(B) describe the product or service ( Fintech Product or Service ) that it intends to develop using any funds received from the Capability and Innovation Fund;
(C) provide details of the way in which, and the purposes for which, any funding received from the Capability and Innovation Fund would be used;
(D) comply with any relevant legal or regulatory requirement (including any rules and guidance made by the FCA and/or PRA); and
(E) set out the amount (if any) of its own funds that the Applicant Company is proposing to invest in relation to the proposals outlined in its Business Case.
2.7 The Application Documents must be approved by the board of directors (or equivalent body) of the Applicant Company and proof of such approval in certified form must be submitted to the Independent Body with the Application Documents.
2.8 The application form and any marketing materials in respect of the Capability and Innovation Fund have been prepared for information and discussion purposes only and should be treated as indicative only. No warranties or representations, express or implied, are being made as to the completeness or accuracy of any facts or information contained therein and no liability shall attach to the Independent Body, RBS or HMT as
a result of making such materials available to Applicant Companies. Applicant Companies should seek their own independent legal, financial, tax, regulatory and/or accounting advice before making any decision to apply for funding from, or participate in, the Capability and Innovation Fund.
2.9 The publication of an application form and/or any marketing materials by the Independent Body does not:
(A) constitute an offer for funding;
(B) oblige the Independent Body to provide any funding; or
(C) create any commitment or obligation of the Independent Body to enter into any Capability and Innovation Fund Agreement.
2.10 The Independent Body shall be free at its sole discretion to establish the process in connection with the grant of funding from the Capability and Innovation Fund and to supplement or change this process from time to time. Without limiting the foregoing, the Independent Body expressly reserves the right, at its sole discretion, at any time and without specifying any reason, without any liability or obligation of any kind to:
(A) accept or reject any and all applications, not grant any funding or proceed with the Capability and Innovation Fund in whole or in part and/or cancel or withdraw funding at any stage; and/or
(B) alter this process in any manner (including any requirements in respect of the Business Case as set out in these Terms and Conditions) or terminate this process entirely and decide not to proceed with granting funding from the Capability and Innovation Fund,
and the Applicant Company acknowledges that it is not relying on any express or implied representation of any kind concerning the manner in which such process will proceed.
2.11 The Applicant Company shall bear all its own costs and expenses in relation to: (i) any application for funding from the Capability and Innovation Fund and participation in the Capability and Innovation Fund; and (ii) any review of the information provided to the Applicant Company in connection with the Capability and Innovation Fund. To the fullest extent permitted by law, neither the Independent Body, nor RBS, nor HMT have any liability for any losses, costs or expenses (including any loss of profit or indirect or consequential loss or any loss of goodwill or possible business, whether actual or prospective), incurred by any Applicant Company in connection with, by reason of or arising out of any participation in the Capability and Innovation Fund.
2.12 In submitting an application for funding from the Capability and Innovation Fund, the Applicant Company agrees not to make any claim against the Independent Body, RBS or HMT with respect to the application process in the event that its application is not accepted by the Independent Body and the Independent Body does not enter into a Capability and Innovation Fund Agreement with such Applicant Company or provide
such Applicant Company with funding from the Capability and Innovation Fund (whether or not the Independent Body accepts the application of, enters into a Capability and Innovation Fund Agreement with, and/or provides funding from the Capability and Innovation Fund to, any other Applicant Company).
2.13 By submitting an application for funding from the Capability and Innovation Fund, the Applicant Company represents and warrants to the Independent Body that:
(A) it is not a Sanctioned Person; and
(B) none of its group members, or, to the best of its knowledge and belief, Substantial Shareholders are Sanctioned Persons.
2.14 Each Applicant Company is entitled to the benefit of, is bound by, and is deemed to have notice of, the provisions of the Trust Deed (to the extent that the provisions of such document have been made available publicly or to such Applicant Company by the Independent Body).
2.15 The Independent Body is not authorised to carry out regulated activities and so will not be able to consider applications where receipt or processing of those applications would require any form of regulatory authorisation or permission.
3. USE OF FUNDS
3.1 By submitting an application for funding from the Capability and Innovation Fund, the Applicant Company agrees that the use of the Funding Amount must be in accordance with its Business Case and will be restricted to the purposes set out in: (i) conditions 3.2(A) and 3.2(B) if the Applicant Company is a Pool A Body, Pool B Body or Pool C Body; or (ii) condition 3.3(A) if the Applicant Company is a Pool D Body; and (iii) the relevant Capability and Innovation Fund Agreement.
3.2 If an Applicant Company is either a Pool A Body, Pool B Body or Pool C Body and its application is successful:
(A) The Applicant Company shall use the Funding Amount for purposes which have a demonstrable link to (i) improving customer outcomes for SMEs in the United Kingdom; and/or (ii) expanding the Applicant Companys business capacity, product offering and/or target markets in order to improve its offering to SMEs in the United Kingdom (the Overarching Principles ).
(B) Subject to condition 3.2(A), the Funding Amount may be used by the Applicant Company to cover its capital expenditure or operating expenses in relation to the following purposes:
the development of systems and/or infrastructure required to expand its Relevant Business(es);
the recruitment and payment of employees in order to expand and/or operate its Relevant Business(es);
the marketing of products related to its Relevant Business(es);
the acquisition or leasing of premises required to expand its Relevant Business(es); or
any other purpose which is (in the opinion of the Independent Body) consistent with the Overarching Principles.
(C) The Applicant Company shall not use the Funding Amount for the following purposes:
to subsidise temporary price cuts for banking products and/or services;
to repay any existing liability;
to provide financing directly to customers;
(iv) to finance capital expenditure and/or operating expenses which the Applicant Company had specifically planned to incur or which had been specifically committed prior to the date of the application and: (a) that the Applicant Company would make regardless of whether or not any amount from the Capability and Innovation Fund is received; or (b) that had been included in the Applicant Companys business plan prior to the date of the application;
(v) to return capital by any means to existing shareholders of the Applicant Company; or
for a purpose which is inconsistent with the Overarching Principles and/or its Business Case.
3.3 If the Applicant Company is a Pool D Body and its application is successful:
(A) The Applicant Company shall use the Funding Amount to develop improve, operate, expand and/or commercialise (or support the development, improvement, operation, expansion and/or commercialisation of) its Fintech Product or Service and the Funding Amount may be used by the Applicant Company to cover its capital expenditure and operating expenses in relation to the following purposes:
the development of systems and/or infrastructure required to develop, improve, operate, expand and/or commercialise the Fintech Product or Service in the United Kingdom;
the recruitment and payment of employees in order to develop improve, operate, expand and/or commercialise the Fintech Product or Service in the United Kingdom;
the marketing of the Fintech Product or Service; or
any other purpose which (in the opinion of the Independent Body) furthers the development, improvement, operation, expansion and/or commercialisation of the Fintech Product or Service in the United Kingdom.
(B) The Applicant Company shall not use the Funding Amount for the following purposes:
to repay any existing liability;
to provide financing directly to customers;
to return capital by any means to existing shareholders of the Applicant Company; or
for a purpose which is inconsistent with its Business Case.
3.4 The Independent Body will have certain rights under the Capability and Innovation Fund Agreement which it will be entitled to exercise if the Applicant Company breaches any of the requirements of conditions 3.1 to 3.3. The exercise of such rights may result in the Applicant Company being required to repay the Funding Amount or a proportion of it.
4. INFORMATION, REPORTING AND AUDIT RIGHTS
4.1 The Independent Body is entitled to request additional information and clarification of information, request one further iteration of the Business Case submitted by an Applicant Company, request face-to-face meetings and access to personnel, and make all enquiries it considers necessary or desirable in relation to the application and the Independent Bodys assessment of the application. Refusal to provide such information, grant and facilitate such meetings and/or respond to such enquiries may lead to an Applicant Companys application being rejected. If the Independent Body does not receive a response from any Applicant Company within ten Business Days, the Independent Body shall be entitled to assume that such Applicant Company has withdrawn its application.
4.2 The Applicant Company will report to the Independent Body on a regular basis in accordance with the terms set out in the Capability and Innovation Fund Agreement.
4.3 The Independent Body will have certain audit rights during the term of the Capability and Innovation Fund Agreement and these audit rights will give the Independent Body the right to access the Applicant Companys records, premises, and employees.
5. CONFIDENTIALITY AND DISCLOSURE
5.1 Applicant Companies should note that information received by the Independent Body may be published or disclosed in accordance with the access to information regimes (including under the Freedom of Information Act 2000, the Data Protection Act 1998 and the Environmental Information Regulations 2004). Applicant Companies should mark as confidential or commercially sensitive any information that they consider should be
treated as such and explain why this is the case (automatic confidentiality disclaimers produced by IT systems will not, in themselves, be regarded as binding). The Independent Body will take account of such explanations, but no assurance can be given that confidentiality will be maintained in all circumstances.
5.2 No part of the application form or any other marketing materials in connection with the Capability and Innovation Fund should be published, reproduced or otherwise made available (in whole or in part): (i) to any other person without the prior written consent of the Independent Body; and (ii) in any jurisdiction where to do so would be unlawful.
5.3 The Applicant Company shall not (and shall procure that members of its group shall not) make any statement or representation about (or otherwise disclose any terms of or information regarding) the Capability and Innovation Fund, these Terms and Conditions, any Capability and Innovation Fund marketing materials or any Capability and Innovation Fund Agreement without the prior written consent of the Independent Body except if and to the extent: (i) required by Applicable Laws; or (ii) such information has come into the public domain other than as a result of a breach of confidence or contractual obligations.
6. DEFINITIONS AND INTERPRETATION
6.1 In these Terms and Conditions:
Applicable Laws |
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means any and all law (whether civil, criminal or administrative), common law, statutes, statutory instruments, treaties, conventions, directives, regulations or rules made thereunder, by-laws, demands, decrees, injunctions, resolutions, orders or judgments in any applicable jurisdiction, including the PRA Rules, the FCA Rules and any related or similar rules of any other authority, in each case which is binding on the relevant person or in respect of the relevant matter as the context requires; |
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Applicant Company |
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has the meaning given to it in condition 1.1, 6.2(A) and 6.2(B); |
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Application Documents |
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has the meaning given to it in condition 2.4; |
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Application Period |
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has the meaning given to it in condition 2.4; |
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Business Case |
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has the meaning given to it in condition 2.4; |
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Business Current Account |
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means an account marketed to businesses rather than individuals, which provides the facility to hold deposits, receive and make payments by cheque and/or debit card, use automated teller machine facilities and make regular payments by direct debit and/or standing order, but does not include an account in which money is |
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held on deposit in a currency other than the official currency of the United Kingdom or an account in which credit funds are held and offset against mortgage debt or a loan (other than an overdraft facility); |
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Business Day |
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means any day (other than a Saturday or Sunday) on which clearing banks are open for business in London; |
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Capability and Innovation Fund |
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means the fund to be established by the Independent Body to provide funding to eligible businesses to: (i) develop the capability to compete with RBS (and any relevant subsidiaries of RBS) in the provision of banking services to SMEs; and/or (ii) develop and improve the financial products and services which are available to SMEs; |
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Capability and Innovation Fund Agreement |
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has the meaning given to it in condition 1.4; |
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FCA |
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means the United Kingdom Financial Conduct Authority or any successor regulatory body; |
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FCA Rules |
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means any rules and guidance made by the FCA under FSMA and set out in the FCAs handbook of rules and guidance as amended from time to time, and includes any rules and guidance made by any successor regulatory body; |
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Fintech Product or Service |
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has the meaning given to it in condition 2.6(B); |
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FSMA |
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means the Financial Services and Markets Act 2000 (as amended, modified, re-enacted or replaced from time to time), including any regulations made pursuant thereto; |
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Funding Amount |
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means any funds that an Applicant Company, if its application is successful, receives from the Capability and Innovation Fund; |
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HMT |
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means the Commissioners of Her Majestys Treasury of 1 Horse Guards Road, London SW1A 2HQ; |
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Independent Body |
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has the meaning given to it in condition 1.1; |
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OFAC |
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means the Office of Foreign Assets Control of the US Department of the Treasury; |
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Overarching Principles |
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has the meaning given to it in condition 3.2(A); |
Pool A Body |
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has the meaning given to it in condition 2.1(A); |
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Pool B Body |
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has the meaning given to it in condition 2.1(B); |
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Pool C Body |
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has the meaning given to it in condition 2.1(C); |
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Pool D Body |
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has the meaning given to it in condition 2.1(D); |
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PRA |
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means the United Kingdom Prudential Regulation Authority (as defined by FSMA) or any successor regulatory body; |
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PRA Rules |
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means any rules and guidance made by the PRA under FSMA and set out in the PRAs handbook of rules and guidance as amended from time to time, and includes any rules and guidance made by any successor regulatory body; |
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RBS |
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means The Royal Bank of Scotland Group plc, a public company incorporated in Scotland with registered number 45551 and whose registered office is at 36 St Andrew Square, Edinburgh, Scotland EH2 2YB; |
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Relevant Business(es) |
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means: (i) in the case of a Pool A Body or Pool B Body, its SME banking business in the United Kingdom; or (ii) in the case of a Pool C Body, its SME lending business and/or SME payments business in the United Kingdom; |
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Sanctioned Country |
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means, at any time, a country or territory that is subject to country- or territory-wide Sanctions; |
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Sanctioned Person |
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means, at any time: (i) any person listed in any Sanctions-related list of designated persons maintained by the United Nations Security Council, HMT, the European Union, OFAC or the US Department of State; (ii) any person operating, organised or resident in a Sanctioned Country; or (iii) any person owned or controlled by a person or persons included in paragraph (i); |
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Sanctions |
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means any sanctions administered or enforced by the United Nations Security Council, HMT, the European Union or the United States Government (including, without limitation, OFAC); |
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SME |
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means a small or medium-sized enterprise, being a business (including incorporated legal entities, sole traders, partnerships, not-for-profit organisations and |
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clubs, charities and societies) that, in respect of any given financial year applying to it, has annual revenues (exclusive of VAT and other turnover-related taxes) not exceeding £25 million; |
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Substantial Shareholder |
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means any person who: (a) owns 10% or more of the shares in the Applicant Company or any member of the Applicant Companys group; or (b) is entitled to exercise, or control the exercise of, 10% or more of the votes able to be cast on all or substantially all matters at general meetings of the Applicant Company or any member of the Applicant Companys group; |
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Terms and Conditions |
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has the meaning given to it in condition 1.1; and |
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Trust Deed |
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means a trust deed entered into by RBS and the Independent Body in order to establish, amongst other things, the trust in respect of the Capability and Innovation Fund. |
6.2 In these Terms and Conditions:
(A) references to Applicant Company shall be deemed to include, where applicable and where the context requires, the Applicant Companys holding company (which is domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland) and wholly-owned subsidiaries and the wholly-owned subsidiaries of such holding company (in each case where such subsidiaries are domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland);
(B) the expressions holding company, wholly-owned subsidiary subsidiary and subsidiary undertaking shall have the meaning given in the Companies Act 2006;
(C) any reference to a statute, statutory provision or rules or regulations made thereunder shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified, re-enacted or replaced; and
(D) references to RBS shall be read as including, where applicable, a reference to any relevant subsidiary of RBS undertaking the relevant activity within the Group and, in this context, any obligation on RBS shall be read as including, where applicable, an obligation on RBS to procure that the relevant subsidiary complies with the relevant obligation.
Schedule 6
Incentivised Switching Communication Framework
General Principles
1. If applicable, the principles and provisions set out below shall apply to communications by RBS to customers in the Wider Pool, with such amendments as RBS, HMT and the Independent Body may agree, each acting reasonably.
2. The following principles shall (subject to RBSs obligations under the Data Protection Legislation, any requirements of the Information Commissioners Office or any views and feedback received from the FCA) apply in connection with the communication by RBS of Incentivised Switching to Incentivised Switching Eligible Customers:
(A) RBS shall communicate Incentivised Switching to Incentivised Switching Eligible Customers in accordance with:
(i) all requirements imposed upon RBS by an Authority;
(ii) all requirements of Applicable Law (including the FCA Rules, the PRA Rules and the Data Protection Legislation) and all applicable guidance issued by the Information Commissioners Office; and
(iii) subject to paragraphs (i) and (ii) above, taking into account the proposals of each participating Incentivised Switching Eligible Body.
(B) RBS shall consider (i) the Direct Marketing Code of Practice issued by the Direct Marketing Association, and (ii) any feedback or complaints received from customers, when it communicates Incentivised Switching to Incentivised Switching Eligible Customers;
(C) prior to the Incentivised Switching Commencement Date:
(i) RBS shall consult with the FCA, the PRA and the Information Commissioners Office regarding the communication of Incentivised Switching and shall take into account the views and feedback of the FCA, the PRA and the Information Commissioners Office as to the communication of Incentivised Switching;
(ii) RBS shall establish a relationship team to liaise with any relevant Incentivised Switching Eligible Bodies regarding the nature and contents of the communication materials and the manner in which (and Incentivised Switching Eligible Customers) RBS shall communicate Incentivised Switching; and
(iii) each participating Incentivised Switching Eligible Body shall be entitled to provide RBS with a one-page document setting out its SME offering and any incentives that will be available to customers that switch (each
a Summary ) and RBS may (subject to RBSs obligations under the Data Protection Legislation or any requirements of the Information Commissioners Office) include each Summary with any communication materials sent by RBS to Incentivised Switching Eligible Customers;
(D) subject to Clause 3.2, prior to commencing the communication of Incentivised Switching to any Incentivised Switching Eligible Customer, RBS shall put in place such arrangements to motivate relevant employees in respect of such customers as RBS and the Independent Body agree to be reasonably necessary or desirable in order to encourage such relevant employees to raise awareness and promote the success of Incentivised Switching;
(E) RBS shall use all reasonable endeavours to communicate with all Incentivised Switching Eligible Customers in relation to Incentivised Switching at least once (subject to RBSs obligations under the Data Protection Legislation, any requirements of the Information Commissioners Office or any views and feedback received from the FCA);
(F) RBS shall (subject to RBSs obligations under the Data Protection Legislation, any requirements of the Information Commissioners Office or any views and feedback received from the FCA) communicate to any Incentivised Switching Eligible Customer the proposals of each participating Incentivised Switching Eligible Body with appropriate weight and resources, proportional to the customer population to which such Incentivised Switching Eligible Body wishes to market its proposal and such Incentivised Switching Eligible Bodys SME offering, as discussed and agreed between RBS and the Independent Body;
(G) RBS shall contact Incentivised Switching Eligible Customers using such broad range of communication channels (including telephone calls, in-branch prompts, contact from relationship managers, email, microsites, post, text messages and digital capability) as RBS, in consultation with the Independent Body (taking into account RBSs obligations under the Data Protection Legislation, any requirements of the Information Commissioners Office or any views and feedback received from the FCA), shall reasonably consider to be appropriate;
(H) during the three months immediately following the Incentivised Switching Commencement Date, RBS shall be under no obligation to communicate Incentivised Switching to all Incentivised Switching Eligible Customers, but shall be free to communicate Incentivised Switching to such sub-set of Incentivised Switching Eligible Customers as RBS, acting reasonably, may deem appropriate;
(I) notwithstanding any other provision of this Schedule or this Deed, RBS shall be under no obligation to communicate Incentivised Switching to Incentivised Switching Eligible Customers if all of such customers accounts are Dormant Accounts and/or in Collections and Recoveries;
(J) when communicating Incentivised Switching to Incentivised Switching Eligible Customers, RBS shall in each case:
(i) inform Incentivised Switching Eligible Customers that the Incentivised Switching Eligible Bodies will have absolute discretion to accept or refuse such Incentivised Switching Eligible Customer as a customer in accordance with such Incentivised Switching Eligible Bodys usual criteria and processes and that neither RBS, nor HMT, nor the Independent Body shall have any liability as a result of or in connection with the decision of an Incentivised Switching Eligible Body to accept or refuse an Incentivised Switching Eligible Customer; and
(ii) provide such customers with the ability to opt-out of further communications of any Incentivised Switching Eligible Bodies offers in connection with Incentivised Switching ( Opt Out ), including providing details of RBSs identity and a valid contact address for customers to use to Opt Out;
(K) RBS shall (subject to RBSs obligations under the Data Protection Legislation, any requirements of the Information Commissioners Office or any views and feedback received from the FCA) repeat the communication of Incentivised Switching to Incentivised Switching Eligible Customers (who have not elected to Opt Out) on a frequency to be discussed and agreed between RBS and the Independent Body; and
(L) subject to RBSs obligations under the Data Protection Legislation, any requirements of the Information Commissioners Office, any views and feedback received from the FCA and RBSs ongoing obligations to treat its customers fairly, the Independent Body may, acting reasonably, following consultation with RBS and taking account of the principles set out in paragraphs 2(A) (C) above, require RBS to increase the frequency with which it communicates Incentivised Switching to Incentivised Switching Eligible Customers (to the extent such customers have not elected to Opt Out).
Schedule 7
Template Breach Notification Form
Data Security Breach notifications in accordance with Clause 17.9 must be made by telephone to Security, First Response: 08456039322 (Option 2) and shall describe at least the following minimum details regarding the Data Security Breach:
1. Nature of the Breach
[Independent Body to describe the breach, including the categories and approximate number of affected data subjects.]
2. Likely Consequences
[Independent Body to describe the likely consequences of the breach, e.g., risk of identity theft, media coverage, etc.]
3. Mitigating Measures
[Independent Body to describe the measures taken/to be taken to address the breach and mitigate its effects.]
Schedule 8
Functions and duties of the Independent Body
Part A
The provisions of this Part A of Schedule 8 shall apply to the Independent Body from the date of this Deed.
1. Purpose of the Independent Body
(A) The Independent Body shall facilitate, monitor and oversee the delivery of the proposals described in the New Commitments and set out in the Package Documents (the Package ) and make determinations and decisions in connection with the Package.
(B) The Independent Body shall not carry out any business or conduct any activities that could reasonably be expected to conflict with its obligations in relation to the Package.
2. General obligations
(A) The Independent Body shall keep adequate records of all costs and expenses incurred by it (including without limitation, employees salaries and benefits, directors fees, audit fees, investment management fees and third party monitoring fees).
(B) The Independent Body shall take all reasonable steps to enforce its rights under each of the Package Documents to the extent necessary to comply with the other obligations set out in this Schedule.
(C) The Independent Body acknowledges that it has a number of rights and/or discretions pursuant to the terms of the Package Documents. The Independent Body shall:
(i) consider on a periodic basis whether: (i) such rights and/or discretions are capable of exercise; and (ii) it is necessary or desirable for the Independent Body to exercise such rights and/or discretions; and
(ii) exercise such rights and/or discretions if it considers that it is necessary or desirable to do so.
(D) The Independent Body shall use reasonable endeavours to put in place and maintain in force insurance policies (including in relation to third party liability) for amounts and with deductibles and excesses which it reasonably considers to be appropriate (taking into account any professional advice obtained by the Independent Body in this regard), taking into account the operations of the Independent Body and covering the Package and all of the Independent Bodys activities thereunder.
(E) The Independent Body shall put in place, as soon as reasonably practicable, best practice policies reasonably expected to address, amongst other things, (i) travel and entertainment expenses, gifts and hospitality; (ii) the approach which should be taken to conflicts of interest; and (iii) any other matters which would promote good governance (the Governance Policy Guidelines ). The Independent Body shall make the Governance Policy Guidelines available on its website.
(F) The Independent Body shall not use the assets of the Trust Fund or any amount transferred to it pursuant to the terms of this Deed or any other Package Document or any income, profit or other gains on such amounts for any purpose other than in connection with the negotiation, preparation, execution and carrying into effect of this Deed and the other Package Documents.
(G) The Independent Body shall consider the reputation of the Government in relation to any public statement made by the Independent Body outside the purposes of the Independent Body as described in this Deed.
3. Use of funds and administration of Independent Body
The Independent Body shall use the funds provided to it by RBS and any income, profits or gains on the Trust Fund in accordance with the terms of the Package Documents only.
4. Ongoing obligations
(A) On a periodic basis and in any event at least once per calendar year, the Independent Body shall review and consider the eligibility criteria, marketing process and terms and conditions in respect of the Initiatives. If the Independent Body considers that it is necessary or desirable to amend any of the eligibility criteria, marketing process and/or terms and conditions in respect of the Initiatives, it shall notify HMT in writing of this fact, request consent, if applicable, from RBS to the relevant amendments to the Package Documents in accordance with Clause 13.5 and, following receipt of any such consent, make such amendments and notify the eligible bodies of such amendments in accordance with the terms of the relevant Package Documents.
(B) The Independent Body shall report publicly on a regular basis (and at least once per calendar year) on the implementation of the Package, commencing 12 months from the date hereof and ending three months after expiry of the last Capability and Innovation Fund Agreement in accordance with its terms.
5. Appointment of Directors and Directors remuneration
(A) The Independent Body shall require any person proposed to be appointed as a Director to enter into (i) a service contract or letter of appointment (as applicable) with the Independent Body on substantially the same terms
(including as to remuneration) as the service contracts or letters of appointment entered into between the Directors and the Independent Body as at the date of this Deed; and (ii) a deed of undertaking in favour of the Monitor which governs, amongst other things, amendments to the Articles. The Independent Body agrees that before entering into any service contract or letter of appointment with the proposed Director, the Independent Body shall send a copy of the service contract or letter of appointment to the Monitor and shall make any amendments to the service contract or letter of appointment that the Monitor may reasonably request.
(B) The Independent Body shall not increase the aggregate value of the remuneration package of any Director by more than the Permitted Fee Increase Amount in any period of 12 months beginning from the date of this Deed, without the prior written consent of the Monitor (which consent will be provided by the Monitor only if, in its reasonable opinion, the increase is reasonable and proportionate). For these purposes, increases to:
(i) the salaries and fees (as applicable) of the Directors which are (a) proportionate to increases in the consumer price index; or (b) proportionate to an increase in the number of hours that a Director works; and/or
(ii) the benefits of the Directors which are proportionate to increases in the costs of such benefits,
should be considered reasonable and proportionate.
(C) The restriction in (A) above shall not apply to any increase which is funded entirely out of income or revenue that the Independent Body receives pursuant to any business or activity which is carried on by the Independent Body which is not connected to the Package.
(D) When determining whether or not to increase the aggregate value of the remuneration package of any Director, the Independent Body shall have regard to the impact that such an increase may have on the reputation of HMT.
6. Actual or Potential breaches
The Independent Body acknowledges and accepts that, if the Monitor, acting reasonably, considers that the Independent Body is (or is reasonably likely to become) in breach of any of its obligations under this Deed, the Monitor may notify the Independent Body in writing of this fact, specifying in reasonable detail the nature of the breach or anticipated breach and require the Independent Body to follow the procedures set out in paragraphs 7 or 8 below (as applicable).
7. Potential breaches
(A) In the case of a potential breach of the Independent Bodys obligations under this Deed, the Independent Body shall comply with any reasonable written instruction of the Monitor, which may include:
(i) taking steps to avoid a breach;
(ii) following recommendations as to how the Independent Body might avoid the breach;
(iii) providing as soon as reasonably practicable such further information regarding such anticipated breach as the Monitor may request; and
(iv) taking steps to avoid the breach within the time period required or agreed with the Monitor and providing evidence to the Monitor of the fact that such steps have been taken.
(B) If the Monitor has required the Independent Body to take steps to avoid a potential breach, the Independent Body shall also, if required by the Monitor to do so:
(i) report to the Monitor on a regular basis on its progress in resolving the issue; and/or
(ii) provide further information as the Monitor may reasonably request.
(C) The Independent Body may, at any time, submit written requests to the Monitor regarding resolution of the issue (including, if appropriate, requests for any extension to the period referred to in paragraph 7(A)(iv) above and/or proposals for an alternative method of resolving the issue).
(D) At the end of the period referred to in paragraph 7(A)(iv) above (including as may have been extended by the Monitor), the Monitor may notify the Independent Body that:
(i) the Monitor no longer considers that the Independent Body is reasonably likely to become in breach;
(ii) the Monitor has agreed to an extension in the period referred to in paragraph 7(A)(iv) above; or
(iii) the Monitor considers that the Independent Body is now in actual breach.
8. Actual breaches
(A) In the case of a breach of the Independent Bodys obligations under this Deed, the Independent Body shall comply with any reasonable written instruction of the Monitor, which may include:
(i) a requirement to remedy the breach;
(ii) following recommendations as to how the Independent Body might remedy the breach;
(iii) providing as soon as reasonably practicable such further information regarding such breach as the Monitor may request; and
(iv) remedying the breach within the timeframe required or agreed with the Monitor and providing evidence (if any) to the Monitor of the fact that the breach has been remedied.
(B) If the Monitor has required the Independent Body to remedy a breach, the Independent Body shall also, if required by the Monitor to do so:
(i) report to the Monitor on a regular basis on its progress in remedying the breach; and/or
(ii) provide further information as the Monitor may reasonably request.
(C) The Independent Body may, at any time, submit written requests to the Monitor regarding remedy of the breach (including, if appropriate, requests for any extension to the period referred to in paragraph 8(A)(iv) above and/or proposals for an alternative method of resolving the issue).
(D) At the end of the period specified in paragraph 8(A)(iv) above (including as may have been extended by the Monitor), the Monitor may notify the Independent Body that:
(i) the Independent Body is no longer in breach;
(ii) the Monitor has agreed to an extension in the period referred to in paragraph 8(A)(iv) above; or
(iii) the Monitor has decided to exercise the Step-in Rights.
9. Consequences of breach
As set out in Clause 6.3 and at paragraph 8(D)(iii) above, without prejudice and in addition to any other contractual or non-contractual rights or remedies which RBS and/or HMT may have, if the Independent Body is in persistent or material breach of any of its duties or obligations as set out in Clause 6 and this Schedule, the Monitor shall be entitled (but shall be under no obligation) to exercise the Step-in Rights.
Part B
The provisions of this Part B of Schedule 8 shall apply to the Independent Body, in addition to the provisions of Part A of this Schedule 8, from the Capability and Innovation Fund Commencement Date.
1. Use of funds and administration of Independent Body
The Independent Body shall exercise any rights and/or discretions it may have as to the use of any surplus or remaining funds after the expiry of a prescribed period and/or determination that there has been insufficient take-up by eligible bodies and/or failure to meet a prescribed threshold as soon as reasonably practicable after such rights and/or discretions become capable of exercise.
2. Marketing and application process
(A) The Independent Body shall market the Initiatives and shall make available terms and conditions for participation in the Initiatives and a means of applying to participate in the Initiatives.
(B) The Independent Body shall, in relation to all applications for participation in the Initiatives:
(i) act impartially and without any bias against or in favour of any applicant;
(ii) review and consider each application submitted;
(iii) assess the eligibility of each applicant against the criteria set out in the relevant terms and conditions and/or Package Document;
(iv) consider and take into account whether any applicant (or any member of such applicants group) is a Sanctioned Person;
(v) consider and take into account (at its sole discretion) any material and adverse impact that the participation of such applicant in the relevant Initiative would have on the reputation of the Independent Body and/or the Package;
(vi) determine, as soon as reasonably practicable after the deadline for submission of the relevant application, whether or not each applicant shall participate in the relevant Initiative (and the extent of such applicants participation and/or award of any funding) (the Decision ); and
(vii) subject to Clause 13.3, communicate the Decision to the relevant applicant promptly after the Decision has been made.
(C) The Independent Body shall, as soon as reasonably practicable after communicating the Decision to any successful applicant, use reasonable endeavours to:
(i) enter into a Capability and Innovation Fund Agreement substantially (subject always to the terms of Clause 13.5) in the form set out in Schedule 5 with each applicant whose application to participate in the Capability and Innovation Fund is successful; or
(ii) enter into an Incentivised Switching Agreement substantially (subject always to the terms of Clause 13.5) in the form set out in Schedule 4 with each applicant whose application to participate in Incentivised Switching is successful.
3. Ongoing obligations
(A) The Independent Body shall:
(i) assess and review any periodic information provided to it under the relevant Package Documents and comply with its reporting requirements under this Deed;
(ii) monitor and assess on a periodic basis the compliance by participants in the Initiatives with the relevant terms and conditions and the terms of any Package Document that such party has entered into with the Independent Body and consider whether any party is or is likely to become in material breach of such terms;
(iii) request such further information and evidence from, and meetings with representatives of, participants in the Initiatives as it considers necessary or desirable in connection with the enforcement of its rights and performance of its obligations under the Package Documents;
(iv) consider on a periodic basis whether the Independent Body has any grounds to exercise its audit rights under any Package Document and, if so, consider exercising those rights in accordance with the terms of the relevant Package Document; and
(v) if the Independent Body considers that any party is in material breach of a relevant Package Document, require the relevant party to remedy such breach and, if considered by the Independent Body to be appropriate, exercise any clawback rights it may have under the terms of such Package Document.
(B) On a periodic basis and in any event at least once per quarter, the Independent Body shall consider the communications from RBS to Incentivised Switching Eligible Customers (and, if applicable, customers in the Wider Pool) and the frequency of such communications and, if the
Independent Body considers it appropriate to do so, may require RBS to increase the frequency with which RBS communicates Incentivised Switching to such customers in accordance with the Incentivised Switching Communication Framework.
(C) The Independent Body shall commission an independent board evaluation on each anniversary of the date of this Deed up until the Independent Bodys winding-up under Clause 12. The Independent Body agrees to act on any findings of such evaluation as soon as practicable. In addition, the Independent Body shall share a copy of each board evaluation with the Monitor promptly after its publication.
Schedule 9
Fees Waiver Schedule
1 Waiver
In accordance with Clause 8.22, RBS shall waive:
(A) any early repayment charges or early settlement costs due to RBS, and in each case in relation to Loan Products repaid in whole or in part to RBS out of new lending from an Incentivised Switching Eligible Body (excluding, for the avoidance of doubt, (x) any accrued, but as yet unapplied, interest and charges, (y) any costs or losses incurred by a Switched Customer as a result of breaking, terminating or amending an Interest Rate Derivative or a Foreign Exchange Arrangement, and (z) any exit fees due on the full repayment of any Property Development Loan);
(B) any fees, costs or charges incurred by RBS in releasing security;
(C) any penalty interest charges relating to deposit accounts with RBS and transferred before the end of the fixed or tie-in period of such accounts; and
(D) any other fees, costs or expenses that RBS may agree to waive from time to time.
2 Reimbursement
2.1 In accordance with Clause 8.22, RBS shall reimburse Switched Customers for the following expenses, fees or charges on confirmation that the relevant products have successfully switched to an Incentivised Switching Eligible Body and any balance or obligation associated with such products is closed with, settled, extinguished, or repaid to, RBS:
(A) in relation to, and to the extent of, any Secured Obligations, the cost of valuations up to £1,200 per valuation and a maximum of ten valuations per Switched Customer (any costs in excess of such amounts are to be met by the relevant Incentivised Switching Eligible Body and/or the Switched Customer, as agreed between those parties);
(B) in relation to, and to the extent of, any Secured Obligations, any legal fees incurred by a Switched Customer in respect of the release of any related security over land, up to a maximum amount of £600 per property;
(C) in relation to, and to the extent of, any Secured Obligations, any legal fees properly incurred by a Switched Customer in respect of the taking of security for such Secured Obligation and/or negotiating the documentation in relation to such Secured Obligation, up to a maximum amount of £10,000 per Switched Customer;
(D) in relation to any credit card and/or charge card annual fees that have been charged in advance to any Switched Customer, an amount equal to the pro-rata of such fee paid based on the number of whole months remaining on the relevant term; and
(E) any other fees, costs or expenses that RBS may agree to reimburse from time to time.
2.2 In accordance with Clause 8.22, RBS shall reimburse Incentivised Switching Eligible Customers who have made bona fide applications to switch a relevant product to an
Incentivised Switching Eligible Body under Incentivised Switching and where such application has been denied, rejected or has otherwise failed, in relation to, and to the extent of, any Secured Obligations, in relation to the matters set out in paragraphs 2.1(A) to (D) (any costs in excess of such amounts are to be met by the relevant Incentivised Switching Eligible Body and/or the Incentivised Switching Eligible Customers, as agreed between those parties).
2.3 For the avoidance of doubt, the cost limits set out in paragraphs 2.1and 2.2 above are inclusive of all Taxes, and payment will only be made against formal invoices (and in the case of paragraph 2.2, in addition, written evidence of such denial, rejection or failure from the relevant Incentivised Switching Eligible Body), submitted in accordance with the process agreed between the Independent Body and RBS.
3 Definitions
For the purposes of this schedule:
Foreign Exchange Arrangements means any arrangement entered into by a Switched Customer to document transactions in connection with obtaining protection against or benefitting from fluctuations in currency exchange rates, including, without limitation, forward foreign exchange transactions ;
Interest Rate Derivative means any OTC or other derivative transaction entered into by a Switched Customer, whether as a stand-alone arrangement or as may be incorporated within any Secured Obligation, in connection with obtaining protection against or benefitting from fluctuations in interest rates, including, without limitation, interest rate swaps, collars, floors and caps;
Property Development Loan means any Loan Product entered into by a Switched Customer in connection with the acquisition and/or development of real properties where exit fees are payable whether or not the loan is repaid early; and
Secured Obligations means any actual or contingent obligations due or to become due from a Switched Customer to RBS or, following becoming a Switched Customer, to the relevant Incentivised Switching Eligible Body (in each case, only to the extent of such Secured Obligation immediately prior to such relevant product being switched to an Incentivised Switching Eligible Body).
IN WITNESS WHEREOF this document has been executed and delivered as a deed the day and year first before written.
Dated 25 April 2018
TRUST DEED
relating to
THE ALTERNATIVE REMEDIES PACKAGE TRUST
Linklaters LLP
One Silk Street
London EC2Y 8HQ
Telephone (+44) 20 7456 2000
Facsimile (+44) 20 7456 2222
Ref L-242961
DATE 25 APRIL 2018
PARTIES
(1) THE ROYAL BANK OF SCOTLAND PLC , a public company incorporated in Scotland with registered number SC090312 and whose registered office is at 36 St Andrew Square, Edinburgh EH2 2YB ( RBS ); and
(2) BANKING COMPETITION REMEDIES LIMITED , a company limited by guarantee incorporated in England and Wales with registered number 11001491 and whose registered office is at 1 Horse Guards Road, London, SW1A 2HQ (the Independent Body ).
RECITALS
(A) RBS wishes to make this Trust in accordance with the terms of a framework and state aid deed (the Framework and State Aid Deed ) between The Royal Bank of Scotland Group plc, the Independent Body and The Commissioners of Her Majestys Treasury ( HMT ) dated 2018 and has transferred or delivered to the Independent Body or otherwise placed under its control the money specified in Schedule 1 (the Initial Amount ). Further money may be paid or transferred to the Independent Body by way of addition in accordance with the terms of the Framework and State Aid Deed.
(B) It is intended that this Trust shall be irrevocable.
PART 1
1 Definitions and construction
In this Deed, where the context admits, the following definitions and rules of construction shall apply.
1.1 Terms used and not defined in this Deed shall, unless the context otherwise requires, have the meaning given to them in the Framework and State Aid Deed.
1.2 Beneficiary means any of the Pool A Beneficiaries, Pool B Beneficiaries, Pool C Beneficiaries and Pool D Beneficiaries, the Incentivised Switching Beneficiaries, the Option 1 Beneficiaries, the Option 2 Beneficiaries, the Longstop CIF Beneficiaries and any Charity or Charities.
1.3 Capability and Innovation Fund means the Pool A Capability and Innovation Fund, the Pool B Capability and Innovation Fund, the Pool C Capability and Innovation Fund, the Pool D Capability and Innovation Fund, the Option 1 CIF Fund, the Option 2 CIF Fund and the Longstop CIF Fund as the case may be.
1.4 Capability and Innovation Fund Rules means the rules set out in Schedule 3.
1.5 Deed of Addition means a deed substantially in the form set out in Annex 1 to this Deed.
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1.6 Deed of Removal means a deed substantially in the form set out in Annex 2 to this Deed.
1.7 Entity means any company, partnership, trust, foundation, establishment, association or other body established or resident in any part of the world and whether or not it has separate legal personality or corporate identity.
1.8 Fund has the meaning given in the definition of Trust Fund;
1.9 Incentivised Switching Beneficiaries means each Incentivised Switching Eligible Body and any person added to the class of Incentivised Switching Beneficiaries as a beneficiary of the Incentivised Switching Fund pursuant to Clause 6, provided always that they have not been removed pursuant to Clause 7.
1.10 Incentivised Switching Excess Fund ***
1.11 Incentivised Switching Fund has the meaning given in Clause 2.5.
1.12 IS Excess Agreement ***
1.13 IS Rules means the rules set out in Schedule 2.
1.14 Liability means any loss, damage, cost, fee, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever (including, without limitation, in respect of taxes, duties, levies, imposts and other charges) and including any value added tax or similar tax charged or chargeable in respect thereof and legal fees and expenses.
1.15 Longstop CIF Beneficiaries means the Capability and Innovation Fund Eligible Bodies and any person added to the class of Longstop CIF Beneficiaries as a beneficiary of the Longstop CIF Fund pursuant to Clause 6, provided always that they have not been removed pursuant to Clause 7.
1.16 Longstop CIF Fund has the meaning given in Clause 3.3.
1.17 Option 1 Beneficiaries shall mean the Option 1 Possible Recipients and any person added to the class of Option 1 Beneficiaries as a beneficiary of the Option 1 CIF Fund pursuant to Clause 6, provided always that they have not been removed pursuant to Clause 7.
1.18 Option 2 Beneficiaries shall mean the Option 2 Possible Recipients and any person added to the class of Option 2 Beneficiaries as a beneficiary of the Option 2 CIF Fund pursuant to Clause 6, provided always that they have not been removed pursuant to Clause 7.
1.19 Option 1 CIF Fund has the meaning given in Clause 3.2.
1.20 Option 2 CIF Fund has the meaning given in Clause 3.2.
1.21 Pool A Beneficiaries means each Pool A Body and any person added to the class of Pool A Beneficiaries as a beneficiary of the Pool A Capability and Innovation Fund
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
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pursuant to Clause 6, provided always that they have not been removed pursuant to Clause 7.
1.22 Pool A Capability and Innovation Fund has the meaning given in Clause 2.1.
1.23 Pool B Beneficiaries means each Pool B Body and any person added to the class of Pool B Beneficiaries as a beneficiary of the Pool B Capability and Innovation Fund pursuant to Clause 6, provided always that they have not been removed pursuant to Clause 7.
1.24 Pool B Capability and Innovation Fund has the meaning given in Clause 2.2.
1.25 Pool C Beneficiaries means each Pool C Body and any person added to the class of Pool C Beneficiaries as a beneficiary of the Pool C Capability and Innovation Fund pursuant to Clause 6, provided always that they have not been removed pursuant to Clause 7.
1.26 Pool C Capability and Innovation Fund has the meaning given in Clause 2.3.
1.27 Pool D Beneficiaries means each Pool D Body and any person added to the class of Pool D Beneficiaries as a beneficiary of the Pool D Capability and Innovation Fund pursuant to Clause 6, provided always that they have not been removed pursuant to Clause 7.
1.28 Pool D Capability and Innovation Fund has the meaning given in Clause 2.4.
1.29 Relevant Documents means any Incentivised Switching Agreement, this Deed and any Capability and Innovation Fund Agreement, in each case, including any schedules and appendices thereto.
1.30 Trust Accounts means the bank account for the Funds and the bank account for the income, profits, or other gains of the Trust Fund, as described in Clause 13 and Schedule 4 .
1.31 Trust Document has the meaning given to it in Clause 22.1.
1.32 Trust Fund means the Pool A Capability and Innovation Fund, the Pool B Capability and Innovation Fund, the Pool C Capability and Innovation Fund, the Pool D Capability and Innovation Fund, the Incentivised Switching Excess Fund, the Incentivised Switching Fund, the Option 1 CIF Fund, the Option 2 CIF Fund and the Longstop CIF Fund (each a Fund ) and any income, profits or other gains of the Trust Fund.
1.33 Trust Period means the period starting with the date of this Deed and ending on the earlier of (1) the fifth anniversary of the date of this Deed and (2):
1.33.1 in the case of the Incentivised Switching Fund and the Incentivised Switching Excess Fund, the date falling nine months after the Incentivised Switching Termination Date;
1.33.2 in the case of the Capability and Innovation Fund, the later of the Capability and Innovation Fund Termination Date and the last date on which any
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Capability and Innovation Fund Agreement entered into by the Independent Body expires; or
1.33.3 in the case of any amounts held on trust pursuant to Clause 4, the later of the date determined in accordance with Clause 1.33.1 and the date determined in accordance with Clause 1.33.2, above.
1.34 Trust Taxes has the meaning given in Clause 16.1.
1.35 Trustee Acts means the Trustee Act 1925 and the Trustee Act 2000.
1.36 The expression the Independent Body shall include the trustee or trustees for the time being of this Trust.
1.37 Words denoting the singular shall include the plural and vice versa.
1.38 Words denoting any gender shall include the other gender.
1.39 References to any statutory provision shall include any statutory modification to or re-enactment of such provision.
1.40 Reference to any document shall include a reference to that document as amended, varied or supplemented at any time.
1.41 Clause headings are included for reference only and shall not affect the interpretation of this Deed.
2 Declaration of main trusts
Subject to Clauses 3 and 4, the Independent Body shall hold:
2.1 the Initial Amount and such amounts it receives pursuant to Clause 5.21(B)(i) of the Framework and State Aid Deed and any money, investments or other property from time to time representing the same (the Pool A Capability and Innovation Fund ) on trust for such of the Pool A Beneficiaries in such amounts and at such times as it shall determine, taking into account the Capability and Innovation Fund Rules and any relevant Capability and Innovation Fund Agreement (to the extent relevant);
2.2 such amounts it receives pursuant to Clause 5.21(B)(ii) of the Framework and State Aid Deed and any money, investments or other property from time to time representing the same (the Pool B Capability and Innovation Fund ) on trust for such of the Pool B Beneficiaries in such amounts and at such times as it shall determine, taking into account the Capability and Innovation Fund Rules and any relevant Capability and Innovation Fund Agreement (to the extent relevant);
2.3 such amounts it receives pursuant to Clause 5.21(B)(iii) of the Framework and State Aid Deed and any money, investments or other property from time to time representing the same (the Pool C Capability and Innovation Fund ) on trust for such of the Pool C Beneficiaries in such amounts and at such times as it shall determine, taking into account the Capability and Innovation Fund Rules and any relevant Capability and Innovation Fund Agreement (to the extent relevant);
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2.4 such amounts it receives pursuant to Clause 5.21(B)(iv) of the Framework and State Aid Deed and any money, investments or other property from time to time representing the same (the Pool D Capability and Innovation Fund ) on trust for such of the Pool D Beneficiaries in such amounts and at such times as it shall determine, taking into account the Capability and Innovation Fund Rules and any relevant Capability and Innovation Fund Agreement (to the extent relevant);
2.5 such amounts it receives pursuant to Clause 5.21(A) of the Framework and State Aid Deed and any money, investments or other property from time to time representing the same (the Incentivised Switching Fund ) on trust for such of the Incentivised Switching Beneficiaries in such amounts and at such times as it shall determine, taking into account the IS Rules and any relevant Incentivised Switching Agreement (to the extent relevant),
in each case, subject to the terms of this Deed.
3 Declaration of fall-back trusts
3.1
***
3.2 Subject to Clauses 3.3 and 4, the Independent Body shall hold such amount (if any) which as at the CIF Fallback Date constitutes the Additional Amount as follows:
3.2.1 if the amount of the Additional Amount is less than £5 million, the Additional Amount will be treated as undistributed capital and income of the Trust Fund and the provisions of Clause 9 will apply;
3.2.2 if the amount of the Additional Amount is £5 million or more, but less than £50 million (the Option 1 CIF Fund ), on trust for such of the Option 1 Beneficiaries in such amounts and at such times as it shall determine, taking into account the Capability and Innovation Fund Rules and any relevant Capability and Innovation Fund Agreement (to the extent relevant); or
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
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3.2.3 if the amount of the Additional Amount is £50 million or more, (the Option 2 CIF Fund ), on trust for such of the Option 2 Beneficiaries in such amounts and at such times as it shall determine, taking into account the Capability and Innovation Fund Rules and any relevant Capability and Innovation Fund Agreement (to the extent relevant),
in each case, subject to the terms of this Deed.
3.3 Subject to Clause 4 and the terms of this Deed, if four months after the CIF Fallback Date the amount of the Option 1 CIF Fund or the Option 2 CIF Fund, as applicable, is £5 million or more, the Independent Body shall hold such amount (the Longstop CIF Fund ) on trust for such of the Longstop CIF Beneficiaries as the Independent Body shall in its absolute discretion determine, taking into account the Capability and Innovation Fund Rules (to the extent relevant).
4 Declaration of income, profits and gains trust
To the extent any income, profits or other gains are not paid or applied in meeting any Liabilities in accordance with Clause 16, the Independent Body shall accumulate any income until the end of the Trust Period and at the end of the Trust Period shall hold the accumulated income and any other profits or gains of the Trust Fund on trust for such Charity or Charities as the Independent Body shall in its absolute discretion select subject to the terms of this Deed. For the avoidance of doubt, no Beneficiaries other than such Charity or Charities shall have any interest in or entitlement to the income, profit or other gains of the Trust Fund.
5 Power to receive additional property
The Independent Body may, at any time during the Trust Period, accept additional money paid or transferred to it by RBS to be applied on the terms of this Deed as an addition to such Fund as RBS designates.
6 Power to add beneficiaries
6.1 The Independent Body may at any time during the Trust Period add any person to the class of Incentivised Switching Beneficiaries, Option 1 Beneficiaries, Option 2 Beneficiaries, Pool A Beneficiaries, Pool B Beneficiaries, Pool C Beneficiaries or Pool D Beneficiaries or Longstop CIF Beneficiaries as a beneficiary of the relevant Fund and this Deed shall be construed and take effect accordingly.
6.2 Any such addition shall be made by Deed of Addition and such addition shall take effect no earlier than the date of execution of the Deed of Addition and shall only take effect provided the Trust Period in respect of the relevant Fund or Funds has not expired.
6.3 The powers conferred by these Clauses shall not be exercised so as to add RBS, HMT or any Entity who shall previously have added property to the Trust Fund.
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7 Power to remove beneficiaries
7.1 The Independent Body may at any time during the Trust Period declare that any one or more of the Beneficiaries shall cease to be a beneficiary of the Trust Fund or any Fund and this Deed shall be construed and take effect accordingly.
7.2 Any such removal shall be made by Deed of Removal and such removal shall take effect no earlier than the date on which the deed is executed and shall only take effect provided the Trust Period in respect of the relevant Fund or Funds has not expired.
7.3 In deciding whether to exercise its power under this Clause 7 to remove a Beneficiary, the Independent Body shall take account of any conduct of which it is aware in which the Beneficiary has engaged which in the Independent Bodys opinion is or may be prejudicial to the functioning of Incentivised Switching or the Capability and Innovation Fund.
8 Clawback
8.1 Any amounts clawed back by the Independent Body pursuant to the terms of an Incentivised Switching Agreement or a Capability and Innovation Fund Agreement shall form part of the Fund from which such amounts were originally distributed.
8.2 Any amounts clawed back by the Independent Body pursuant to the terms of an IS Excess Agreement shall form part of the Longstop CIF Fund (if such Fund exists), and failing which shall be dealt with in accordance with Clause 9.
9 Ultimate default trusts
Subject to the provisions of Clauses 2, 3 and 4, and if and so far as not wholly distributed for any reason whatever pursuant to the above provisions by the end of the Trust Period the capital and income of the Trust Fund shall be held upon trust for such Charity or Charities as the Independent Body shall in its absolute discretion select.
10 Exercise of powers
10.1 Every power, duty, obligation and discretion conferred by the provisions of Part 1 of this Deed shall (except for Clauses 4, 9 and 11) be exercisable only during and so as to take effect during the Trust Period. No power of revocation shall be exercisable except during the Trust Period.
10.2 The Independent Body shall, in addition and without prejudice to all statutory powers, have the powers, rights, authorities, protections and immunities specified in Part 2 of this Deed.
10.3 Any written consents required under the terms of this Deed may be given either specifically in relation to any particular matter or by a general written consent referring to one or more matters.
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11 Appointment of new trustee
11.1 The power of appointing a new trustee shall be vested in the Independent Body.
11.2 An Entity may be appointed to be a trustee notwithstanding that such Entity is not resident in the jurisdiction, the law of which is the proper law of this Trust for the time being, and remaining out of such jurisdiction for more than 12 months shall not be a ground for the removal of a trustee.
11.3 An outgoing trustee shall execute and do all such transfers or other acts or things as may be necessary for vesting the Trust Fund in the new or continuing trustees.
12 Proper law, forum and place of administration
12.1 The proper law of this Trust shall be that of England and Wales. All rights under this Deed shall be construed, and its construction and effect shall be determined, according to the laws of England and Wales.
12.2 The courts of England shall be the forum for the administration of this Trust.
12.3 The Independent Body shall have power, subject to the application, if any, of the rule against perpetuities, to carry on the general administration of this Trust in any jurisdiction in the world. This power shall be exercisable whether or not the law of such jurisdiction is for the time being the proper law of this Trust or the courts of such jurisdiction are for the time being the forum for the administration of this Trust, and whether or not the Independent Body is for the time being resident or domiciled in, or otherwise connected with, such jurisdiction.
PART 2
13 Trust Accounts and record keeping
13.1 All monies representing any of the Funds shall be deposited in the Trust Account for the Funds described in paragraph 1.1 of Schedule 4 (the Fund Account ) and retained in the Fund Account until applied or distributed subject to the terms of this Deed.
13.2 Any income received and an amount equal to any profits or other gains arising in respect of the Trust Fund shall be deposited in a separate Trust Account described in paragraph 1.2 of Schedule 4 (the Income Account ) and retained in the Income Account until applied or distributed subject to the terms of this Deed.
13.3 The Independent Body shall not be obliged to make any payment that would result in any Trust Account being overdrawn.
13.4 The Trust Accounts shall be denominated in pounds sterling and shall be operated subject to the terms and conditions of the bank in which they are held.
13.5 The Independent Body shall maintain segregated up-to-date records showing the amount in the Fund Account held in respect of each Fund from time to time and showing any amounts distributed or clawed back in respect of each Fund. Provided
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it does so, the fact that monies representing more than one Fund are deposited in the Fund Account shall not constitute a breach of the Independent Bodys fiduciary or other duties to any Beneficiary.
14 No requirement to diversify assets
The Independent Body shall not be required to diversify the investment of the Trust Fund, nor be liable for the consequences of investing, or keeping the Trust Fund invested, in, or in the shares or obligations of, a single business, or a single Entity, or in one asset or one type of asset.
15 No requirement to invest in income producing investments
No Beneficiary shall be entitled:
15.1 to compel the sale or other realisation of any assets which do not produce income;
15.2 to require the payment of any dividend or other income distribution by any Entity, an interest in which is, or some or all of the shares, stock, securities, debenture stock or loan capital of which are, comprised in the Trust Fund;
15.3 to require the Independent Body to exercise any powers it may have of compelling such distribution; or
15.4 to insist on the investment of any part of the Trust Fund in any asset or account other than the Trust Accounts.
16 Payment of expenses and taxes
16.1 The Independent Body shall have power to pay out any income, profits or other gains of the Trust Fund, as it may in its discretion determine, to meet:
16.1.1 any Tax imposed on or by reference to income, profits or other gains of the Trust Fund;
16.1.2 any Stamp Duty arising in connection with the execution, delivery, performance or enforcement of any Capability and Innovation Fund Agreement or any Incentivised Switching Agreement, or this Deed or arising on or in connection with any investment forming part of the Trust Fund;
16.1.3 any IHT payable in respect of the Trust Fund; or
16.1.4 any Liabilities relating to the Trust Fund (or any assets comprised within it) or its administration (including any Tax relating to the Trust Fund ( Trust Taxes ) to the extent not already paid pursuant to Clauses 16.1.1 to 16.1.3 and to the extent permitted by law). The power to pay Trust Taxes conferred by this clause shall extend to any related interest and penalties.
16.2 To the extent permitted by law, the Independent Body shall use reasonable endeavours to calculate and pay any Trust Taxes in such ways as to minimise the amount of such Trust Taxes, including by calculating any charge to IHT under
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section 65 of the Inheritance Tax Act 1984 on a first in, first out (rather than last in, first out) basis if such a basis gives rise to a smaller charge.
17 Supplement to Trustee Acts
17.1 Section 1 of the Trustee Act 2000 shall not apply to the duties of the Independent Body in relation to this Trust. Where there are any inconsistencies between the Trustee Acts and the provisions of the Relevant Documents, the provisions of the Relevant Documents shall, to the extent allowed by law, prevail and, in the case of any such inconsistency with the Trustee Act 2000, the provisions of the Relevant Documents shall constitute a restriction or exclusion for the purposes of that Act. The Independent Body shall have all the powers conferred upon trustees by the Trustee Acts and by way of supplement thereto it is expressly declared as follows:
17.2 The Independent Body may in relation to the Relevant Documents act on the advice or opinion of or any information, in each case which is addressed to the Independent Body or on which the Independent Body is expressly stated to be able to rely, obtained from any lawyer, valuer, accountant, surveyor, banker, broker, auctioneer or other expert of appropriate qualification and standing whether obtained by RBS, the Independent Body or otherwise and shall not be responsible for any Liability occasioned by so acting.
17.3 Any such advice, opinion or information may be sent or obtained by letter, telex, telegram, facsimile transmission, electronic mail or cable and the Independent Body shall not be liable for acting on any advice, opinion or information purporting to be conveyed by any such letter, telex, telegram, facsimile transmission, electronic mail or cable although the same shall contain some error or shall not be authentic.
17.4 The Independent Body shall not be responsible for the receipt or application of the Fund monies by any Beneficiary.
17.5 Save as expressly otherwise provided in the Relevant Documents, the Independent Body shall not be bound to give notice to any person of the execution of any documents comprised or referred to in the Relevant Documents.
17.6 Save as expressly otherwise provided in the Relevant Documents, the Independent Body shall have absolute and uncontrolled discretion as to the exercise or non-exercise of its trusts, powers, authorities and discretions under the Relevant Documents (the exercise or non-exercise of which as between the Independent Body and the Beneficiaries shall be conclusive and binding on the Beneficiaries) and shall not be responsible for any Liability (arising to any person other than the Independent Body) which may result from their exercise or non-exercise and in particular the Independent Body shall not in any event be bound to act at the request or direction of any Beneficiaries or any possible or potential Beneficiaries.
17.7 The Independent Body shall not be liable to any person by reason of having accepted as valid or not having rejected any form, application, switching proposal or supporting business case (or equivalent) purporting to be such and subsequently
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found to be forged or not authentic or untrue or false or fraudulent and shall not be under any obligation to verify the same.
17.8 Any consent or approval given by the Independent Body for the purposes of the Relevant Documents may be given on such terms and subject to such conditions (if any) as the Independent Body thinks fit. The Independent Body may give any consent or approval, exercise any power, authority or discretion or take any similar action (whether or not such consent, approval, power, authority, discretion or action is specifically referred to in the Relevant Documents). In respect of any Beneficiary, prior to such Beneficiary entering into a Capability and Innovation Fund Agreement or Incentivised Switching Agreement, the Independent Body shall only be obliged to consider applications, switching proposals and supporting business cases but shall have no other obligation to such Beneficiary or possible or potential Beneficiaries and in particular but without prejudice to the generality of the foregoing shall not owe any duty to any Entity to seek or identify potential or possible Beneficiaries. For the avoidance of doubt, save as otherwise required by law, prior to Beneficiaries entering into a Capability and Innovation Fund Agreement or Incentivised Switching Agreement the Independent Body shall not have any duty to the Beneficiaries in relation to such matters other than that which is contained in the preceding sentence.
17.9 The Independent Body as between itself and the Beneficiaries may determine all questions and doubts arising in relation to any of the provisions of the Relevant Documents. Every such determination, whether or not relating in whole or in part to the acts or proceedings of the Independent Body, shall be conclusive and shall bind the Independent Body and the Beneficiaries.
17.10 Any Director being a lawyer, accountant, broker or other person engaged in any profession or business shall be entitled to charge and be paid all usual professional and other charges for business transacted and acts done by him or his firm in connection the Relevant Documents and also his proper charges in addition to disbursements for all other work and business done and all time spent by him or his firm in connection with matters arising in connection with the Relevant Documents.
17.11 The Independent Body may whenever it thinks fit delegate by power of attorney or otherwise to any person or persons or fluctuating body of persons all or any of its trusts, powers, authorities and discretions under the Relevant Documents. Such delegation may be made upon such terms (but excluding power to sub-delegate) and subject to such conditions and regulations as the Independent Body may in its absolute discretion but subject to its fiduciary duties think fit. If the Independent Body exercises reasonable care in selecting the delegate, the Independent Body shall not be under any obligation to supervise the proceedings or acts of any such delegate or be in any way responsible for any Liability incurred by reason of any misconduct or default on the part of any such delegate. The Independent Body shall within a reasonable time after any such delegation or any renewal, extension or termination thereof give notice thereof to RBS.
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17.12 The Independent Body may in the conduct of this Trust, instead of acting personally, employ and pay an agent (whether being a lawyer or other professional person) to transact or conduct, or concur in transacting or conducting, any business and to do, or concur in doing, all acts required to be done in connection with the Relevant Documents (including the receipt and payment of money). If the Independent Body exercises reasonable care in selecting the agent, the Independent Body shall not be in any way responsible for any Liability incurred by reason of any misconduct or default on the part of any such agent or be bound to supervise the proceedings or acts of any such agent.
17.13 The Independent Body may appoint and pay any person to act as a custodian or nominee on any terms in relation to such assets forming part of the Trust Fund as the Independent Body may determine, including for the purpose of depositing with a custodian the Relevant Documents or any document relating to this Trust. If the Independent Body exercises reasonable care in selecting the custodian or nominee, the Independent Body shall not be responsible for any Liability incurred by reason of the misconduct, omission or default on the part of any person appointed by it hereunder or be bound to supervise the proceedings or acts of such person.
17.14 The Independent Body shall not be responsible to any person for failing to request, require or receive any legal opinion relating to the Funds or any of the Relevant Documents or for checking or commenting upon the content of any such legal opinion and shall not be responsible for any Liability incurred thereby.
17.15 The Independent Body shall not be bound to take any action in connection with the Relevant Documents or any obligations arising pursuant thereto, including, without prejudice to the generality of the foregoing, forming any opinion or employing any financial adviser, where it is not satisfied that it will be indemnified against all Liabilities which may be incurred in connection with such action and may demand prior to taking any such action that there be paid to it in advance such sums as it considers (without prejudice to any further demand) shall be sufficient so to indemnify it.
17.16 No provision of the Relevant Documents shall require the Independent Body to do anything which may (i) be illegal or contrary to Applicable Law; or (ii) cause it to expend or risk its own funds or otherwise incur any Liability in the performance of any of its duties or in the exercise of any of its rights, powers or discretions (including obtaining any advice which it might otherwise have thought appropriate or desirable to obtain), if it shall believe that repayment of such funds or adequate indemnity against such risk or Liability is not assured to it.
17.17 Any certificate, advice, opinion or report of RBS or any Beneficiary or any other expert or professional adviser called for by or provided to the Independent Body (whether or not addressed to the Independent Body) in accordance with or for the purposes of the Relevant Documents may be relied upon by the Independent Body as sufficient evidence of the facts stated therein notwithstanding that such certificate, advice, opinion or report and/or any engagement letter or other document entered into by the Independent Body in connection therewith contains a monetary
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or other limit on the liability of the auditors of RBS or any Beneficiary or such other expert or professional adviser in respect thereof and notwithstanding that the scope and/or basis of such certificate, advice, opinion or report may be limited by any engagement or similar letter or by the terms of the certificate, advice, opinion or report itself.
17.18 The Independent Body shall not be responsible for, or for investigating any matter which is the subject of, any recital, statement, representation, warranty or covenant of any person other than the Independent Body contained in the Relevant Documents, or any other agreement or document relating to the transactions contemplated in the Relevant Documents or under such other agreement or document.
17.19 The Independent Body shall not be liable or responsible for any Liabilities which may result from anything done or omitted to be done by it in accordance with the provisions of the Relevant Documents.
17.20 When determining whether an indemnity or any security or pre-funding in respect of any Liability is satisfactory to it, the Independent Body shall be entitled to evaluate its risk in any given circumstance by considering the worst-case scenario and, for this purpose, it may take into account, without limitation, the potential costs of defending or commencing proceedings in England or elsewhere and the risk, however remote, of any award of damages against it in England or elsewhere but in doing so shall not require an indemnity or any security or pre-funding in respect of any Liability to the extent that the Independent Body would be precluded (whether by way of a carve-out, an exclusion, a limitation of liability or otherwise) from being indemnified, compensated or reimbursed for such Liability when applying the terms of any indemnity, compensation or reimbursement provision in any other agreement or instrument to which it and RBS are a party.
17.21 The Independent Body shall be entitled to require that any indemnity or security given to it be supported by evidence satisfactory to it as to the financial standing and creditworthiness of the provider and/or as to the value of the security and an opinion as to the capacity, power and authority of each counterparty and/or the validity and effectiveness of the security.
17.22 The Independent Body may refrain from taking any action in any jurisdiction if the taking of such action in that jurisdiction would, in its opinion based upon legal advice in the relevant jurisdiction, be contrary to any law of that jurisdiction. Furthermore, the Independent Body may also refrain from taking such action if, in its opinion based upon such legal advice, it would not have the power to take the relevant action in that jurisdiction by virtue of any Applicable Law in that jurisdiction or if it is determined by any court or other competent authority in that jurisdiction that it does not have such power.
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18 Independent Body contracting with RBS
18.1 Neither the Independent Body nor any of its directors or officers shall by reason of its or his fiduciary position be in any way precluded from:
18.1.1 entering into or being interested in any contract or financial or other transaction or arrangement with RBS or HMT or any person or body corporate associated with RBS (including without limitation any contract, transaction or arrangement of a banking or insurance nature or any contract, transaction or arrangement in relation to the making of loans or the provision of financial facilities or financial advice to, or the purchase, placing or underwriting of or the subscribing or procuring subscriptions for or otherwise acquiring, holding or dealing with, or acting as paying agent in respect of, the funds or any notes, bonds, stocks, shares, debenture stock, debentures or other securities of, RBS, HMT or any person or body corporate associated as aforesaid); or
18.1.2 accepting or holding the trusteeship of any other trust deed constituting or securing any other securities issued by or relating to RBS, HMT or any such person or body corporate so associated or any other office of profit under RBS, HMT or any such person or body corporate so associated,
and shall be entitled to exercise and enforce its rights, comply with its obligations and perform its duties under or in relation to any such contract, transaction or arrangement as is referred to in Clause 18.1.1 above or, as the case may be, any such trusteeship or office of profit as is referred to in Clause 18.1.2 above without regard to the interests of the Beneficiaries and notwithstanding that the same may be contrary or prejudicial to the interests of the Beneficiaries and shall not be responsible for any Liability occasioned to the Beneficiaries thereby and shall be entitled to retain and shall not be in any way liable to account for any profit made or share of brokerage or commission or remuneration or other amount or benefit received thereby or in connection therewith.
18.2 Where any Director or other officer of the Independent Body acting other than in his capacity as such a director or officer has any information, the Independent Body shall not thereby be deemed also to have knowledge of such information and, unless it shall have actual knowledge of such information, shall not be responsible for any loss suffered by Beneficiaries resulting from the Independent Bodys failing to take such information into account in acting or refraining from acting under or in relation to the Relevant Documents.
19 Modification
Subject always to any express term to the contrary in any agreement or instrument to which it is a party, the Independent Body shall not require the consent of any Beneficiary to amend, vary, waive or agree to amend, vary or waive any provision of any document to which it is a party and any such amendment, variation or waiver shall be binding upon the Beneficiaries.
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20 Power to vary administrative provisions
When in the management or administration of the Trust Fund any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, is, in the opinion of the Independent Body, expedient, but the same cannot be effected by reason of the absence of any power for that purpose conferred on the Independent Body by this Deed or by law, the Independent Body may by deed confer on itself, either generally or in any particular instance, the necessary power for the purpose, and on the execution of such deed the Independent Body shall have such power as if it had been expressly conferred on it by this Deed.
21 Release of powers
The Independent Body may by deed (and so as to bind successive trustees of this Trust) release or restrict the future exercise of all or any of the powers conferred on it by this Deed (including any power of appointment so conferred on it) or by law, either wholly or to the extent specified in the relevant deed, notwithstanding the fiduciary nature of any such power.
22 Confidentiality and disclosure of documents
22.1 Without prejudice to any right of the Independent Body under the proper law of this Trust for the Independent Body to refuse disclosure of any document, the Independent Body shall not be bound to disclose to any person any of the following (each a Trust Document ):
22.1.1 documents disclosing deliberations of the Independent Body as to the manner in which the Independent Body performs any of its obligations or should exercise powers, authorities, rights or discretions conferred upon it by this Deed or by law or disclosing the reasons for any particular exercise of such powers, authorities, rights or discretions or the material upon which such reasons shall or might have been based or any advice sought or obtained by the Independent Body;
22.1.2 other documents relating to the proposed exercise of any power, authorities, rights or discretion conferred on the Independent Body by this Deed or by law;
22.1.3 letters or memoranda of wishes issued by or on behalf of RBS or any other person to the Independent Body or other documents recording the wishes of RBS; and
22.1.4 this Deed or, supplemental deeds unless, in relation to this Clause 22.1.4 only, the person requesting disclosure is a Beneficiary who has a present interest in the Trust Fund and then only if and to the extent that the Independent Body determines the terms of this Deed are strictly relevant to that interest, and provided further that the Independent Body shall be entitled to redact those provisions that it determines are not strictly relevant to that interest.
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22.2 Subject to Clause 22.3 each Beneficiary shall treat as strictly confidential and not disclose to any person (whether or not a Beneficiary) or use any information received or obtained as a result of being a Beneficiary which relates to:
22.2.1 the provisions of any Trust Document (other than this Deed); or
22.2.2 the business, financial or other affairs (including future plans and targets) of RBS or the Independent Body.
22.3 Clause 22.2 shall not prohibit disclosure or use of any information if and to the extent:
22.3.1 the information is or becomes publicly available (other than by breach of Clause 22.2);
22.3.2 RBS has given prior written approval to the disclosure or use;
22.3.3 the disclosure or use is required by Applicable Law, any Authority or any stock exchange on which the shares of the Beneficiary or its holding company are listed or are to be listed;
22.3.4 the disclosure or use is required for the purpose of any judicial or arbitral proceedings arising out of the Relevant Documents;
22.3.5 the disclosure is made to a Tax Authority in connection with the Tax affairs of the disclosing party;
22.3.6 the disclosure is made to professional advisers of the Beneficiary on terms that such professional advisers undertake to comply with the provisions of Clause 22.2 in respect of such information as if they were a Beneficiary;
provided that prior to disclosure or use of any information pursuant to Clause 22.3.3 or 22.3.4, the Beneficiary shall promptly notify the Independent Body of such requirement with a view to providing the Independent Body with the opportunity to contest such disclosure or use or otherwise agreeing the timing and content of such disclosure or use.
23 Protection of the trustee
23.1 Nothing shall exempt the Independent Body from or indemnify it against any Liability which would otherwise attach to it in respect of any gross negligence, wilful default or fraud of which it may be guilty in relation to its trusts, powers, duties, authorities or discretions under the Relevant Documents where the Independent Body has failed to show the degree of care and diligence required of it as trustee having regard to the provisions of the Relevant Documents conferring on it any trusts, powers, duties, authorities or discretions.
23.2 Notwithstanding any provision of the Relevant Documents to the contrary, the Independent Body shall not in any event be liable for: (a) loss of profit, loss of business, loss of goodwill, loss of opportunity, whether direct or indirect; and (b) special, indirect, punitive or consequential loss or damage of any kind whatsoever,
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whether or not the Independent Body can reasonably be regarded as having assumed responsibility at the time this Deed is entered into.
23.3 The Independent Body shall not be liable for any loss to the Trust Fund caused directly or indirectly by the bank or other financial institution at which any Trust Account is held on account of (and without limitation) the default, insolvency or bankruptcy of the bank or other financial institution
24 Duration of powers
Every power, authority, right or discretion conferred on the Independent Body, or on any other person, by this Deed shall (notwithstanding anything to the contrary expressed or implied in this Deed) only be exercisable during such period (whether definite or indefinite) as in the case of the particular power, authority or discretion the law may allow.
25 Independent Bodys powers to be additional
The powers conferred upon the Independent Body by the Relevant Documents shall be in addition to any powers which may from time to time be vested in the Independent Body by the general law.
26 Trustees powers, authorities and discretions exercisable without liability
Every power, authority, right or discretion conferred on the Independent Body by this Deed, or by law, shall be an absolute and uncontrolled power, right, authority or discretion, and, subject to Clause 24, no trustee shall be liable for any loss or damage occurring as a result of that trustees agreement, or refusal or failure to agree, to any exercise of such power, right, authority or discretion.
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Schedule 2
IS Rules
1. INTRODUCTION
1.1 The Independent Body shall have regard to these rules (the IS Rules ) when distributing any of the Incentivised Switching Fund to Incentivised Switching Beneficiaries.
1.2 The Independent Body shall have absolute discretion on the interpretation and application of the IS Rules
2. USE OF THE INCENTIVISED SWITCHING FUND
2.1 Subject to Paragraph 2.2 below, the Independent Body may distribute any of the Incentivised Switching Fund to the Incentivised Switching Beneficiaries in accordance with Paragraph 3 below.
2.2 Before any distribution of any part of the Incentivised Switching Fund is made to an Incentivised Switching Beneficiary, the Incentivised Switching Beneficiary must have:
(A) submitted to the Independent Body by the date specified by the Independent Body:
(i) an application form applying for funding from the Incentivised Switching Fund; and
(ii) a switching proposal (the Switching Proposal) which complies with all Applicable Laws and outlines, to the satisfaction of the Independent Body:
(a) the Incentivised Switching Beneficiarys proposal to incentivise some or all Target Customers to become Transferring Target Customers;
(b) how the Incentivised Switching Beneficiary proposes to apply any Dowries received from the Incentivised Switching Fund including in the form of incentives to be offered to relevant Target Customers and paid or applied to such customers after they become Transferring Target Customers (including (i) the formula to be used to determine any cash amounts to be paid in respect of each Transferring Target Customer, (ii) the minimum and maximum amount that each Transferring Target Customer may receive, and (iii) any phasing or conditions attached to any cash amounts to be paid to each Transferring Target Customer) and otherwise demonstrates how any
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Dowries received from the Incentivised Switching Fund will benefit Transferring Target Customers; and
(c) the Incentivised Switching Beneficiarys proposal in respect of the communication materials to be used by RBS in relation to the products and incentives to be offered to relevant Target Customers by the Incentivised Switching Beneficiary,
(B) provided the Independent Body with such information and documentation and access to such relevant personnel as the Independent Body may require in order to assess the Switching Proposal and the eligibility of the relevant Incentivised Switching Beneficiary; and
(C) entered into an Incentivised Switching Agreement with the Independent Body.
3. PAYMENT OF DOWRIES
3.1 In determining whether an Incentivised Switching Beneficiary should receive a share of the Incentivised Switching Fund, the Independent Body shall:
(A) have regard to the amount of the Dowry that will be passed directly to a Transferring Target Customer and the amount of the Dowry that will be retained by the Incentivised Switching Beneficiary and applied for other purposes which benefit Transferring Target Customers, in each case in the context of the aims of the Incentivised Switching Fund; and
(B) consider whether, and the extent to which, (in the opinion of the Independent Body) the Incentivised Switching Beneficiarys Switching Proposal will, if implemented, incentivise Target Customers to become Transferring Target Customers.
3.2 The Independent Body may at such frequency as may be specified in the relevant Incentivised Switching Agreement or Dowry Calculation Schedule, distribute to an Incentivised Switching Beneficiary a Dowry as determined by reference to the Dowry Calculation Schedule.
3.3 Before any Dowry is distributed to any Incentivised Switching Beneficiary, the Independent Body must be satisfied that:
(A) a Target Customer has become a Transferring Target Customer (on the basis of evidence to this effect); and
(B) no Dowry has previously been paid in respect of that Transferring Target Customer (as determined by reference to its unique customer reference identifier provided by RBS to the Independent Body).
3.4 The Independent Body may distribute:
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(A) up to £225 million of the Incentivised Switching Fund to the Incentivised Switching Beneficiaries as Dowries in respect of the transfer of Transferring Target Customers Business Current Accounts; and
(B) up to £50 million of the Incentivised Switching Fund to the Incentivised Switching Beneficiaries as Dowries in respect of the transfer of Transferring Target Customers loan products,
in each case in accordance with the Dowry Calculation Schedule.
3.5 ***
4. DECISIONS OF THE INDEPENDENT BODY
Any decision or determination of the Independent Body in respect of the distribution of any part of the Incentivised Switching Fund (including any determination as to the amount or distribution of any Dowry or interpretation or applicability of the Dowry Calculation Schedule) shall be made at the absolute discretion of the Independent Body and shall be conclusive.
5. EXERCISE OF THE POWER TO REMOVE A BENEFICIARY
3.6 The Independent Body may exercise its power to remove any of the Incentivised Switching Beneficiaries as beneficiaries of the Incentivised Switching Fund if the Independent Body:
(A) considers that the Incentivised Switching Beneficiary is in material or persistent breach of the terms of a relevant Incentivised Switching Agreement; or
(B) has exercised its right of clawback pursuant to the terms of the relevant Incentivised Switching Agreement in respect of such Incentivised Switching Beneficiary.
6. DEFINITIONS
Applicable Laws |
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means any and all law (whether civil, criminal or administrative), common law, statutes, statutory instruments, treaties, conventions, directives, regulations or rules made thereunder, by-laws, demands, decrees, injunctions, resolutions, orders or judgments in any applicable jurisdiction, including the PRA Rules, the FCA Rules and any related or similar rules of any other authority, in each case which is binding on the relevant person or in respect of the relevant matter as the context requires; |
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
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CIN |
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means a unique Customer Identification Number held by RBS in respect of each Target Customer; |
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Dowry |
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means an amount of the Incentivised Switching Fund which may be distributed by the Independent Body to an Incentivised Switching Beneficiary who has entered into an Incentivised Switching Agreement in respect of any Transferring Target Customers in accordance with the Dowry Calculation Schedule; |
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Dowry Calculation Schedule |
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means the schedule to the Incentivised Switching Agreement (as amended by the Independent Body and communicated to the relevant Incentivised Switching Beneficiary from time to time), setting out the method for calculation of the amount of Dowries and the procedure for payment of Dowries; |
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Perimeter |
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means the division of RBS previously described as Williams and Glyn and/or such other perimeter as the Independent Body may determine; |
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Primary Account(s) |
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means:
(i) where a Target Customer has only one Business Current Account within the Perimeter, that account; or
(ii) where a Target Customer has more than one Business Current Account within the Perimeter, that account or accounts of a Target Customer through which an aggregate of 50% or more of the Turnover of that customer has been processed in the twelve months prior to their transfer to an Incentivised Switching Beneficiary,
in each case, excluding any Dormant Account or any account in Collections and Recoveries; |
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Target Customer |
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means a customer of RBS (or a subsidiary of RBS) within the Perimeter as at the date specified in the Dowry Calculation Schedule which is an SME (including incorporated legal entities, sole traders, partnerships, not-for-profit organisations and clubs, charities and societies); |
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Transferring Target Customers |
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means a Target Customer that closes its Primary Account(s) with RBS and opens a Business Current Account with an Incentivised Switching Beneficiary; and |
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Turnover |
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means the annual aggregate credit turnover with Business Current Accounts held within the Perimeter |
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(excluding (i) any turnover between those accounts of a customer with the same CIN; and (ii) any monies held by a customer on behalf of that customers clients or for the benefit of third parties). |
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Schedule 3
Capability and Innovation Fund Rules
1. INTRODUCTION
1.1 The Independent Body shall have regard to these rules (the Capability and Innovation Fund Rules ) when distributing any of the Capability and Innovation Fund to the Capability and Innovation Fund Beneficiaries.
1.2 The Independent Body shall have absolute discretion on the interpretation and application of the Capability and Innovation Fund Rules.
2. USE OF THE CAPABILITY AND INNOVATION FUND
2.1 Subject to Paragraphs 2.3 to 2.6, the Independent Body may distribute any amount from the Capability and Innovation Fund up to a maximum of:
(A) the amount of the Pool A Capability and Innovation Fund to Pool A Beneficiaries in accordance with Paragraphs 3 and 5;
(B) the amount of the Pool B Capability and Innovation Fund to Pool B Beneficiaries in accordance with Paragraphs 4 and 5;
(C) the amount of the Pool C Capability and Innovation Fund to Pool C Beneficiaries in accordance with Paragraph 6; and
(D) the amount of the Pool D Capability and Innovation Fund to Pool D Beneficiaries in accordance with Paragraph 7.
2.2 Subject to Paragraphs 2.3 and 8, the Independent Body may distribute any part of the Option 1 CIF Fund or the Option 2 CIF Fund (the Additional Funds ) to Option 1 Beneficiaries or Option 2 Beneficiaries, respectively, at its sole discretion.
2.3 Before any distribution of any part of the Capability and Innovation Fund is made to a Capability and Innovation Fund Beneficiary, the Capability and Innovation Fund Beneficiary must have:
(A) submitted the documents listed in (i) and (ii) below (the Application Documents ) to the Independent Body by the date specified by the Independent Body in the relevant marketing materials, being:
(i) a completed application form applying for funding from the Capability and Innovation Fund; and
(ii) a business case in a form acceptable to the Independent Body (the Business Case ) which:
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(a) in the case of a Pool ABC Beneficiary:
(1) sets out the amount of funding which the Pool ABC Beneficiary is seeking from the Capability and Innovation Fund;
(2) outlines to the satisfaction of the Independent Body how such Pool ABC Beneficiary intends to develop the Relevant Business(es) and how funding from the Capability and Innovation Fund would assist the Pool ABC Beneficiary in doing this;
(3) provides details of the way in which, and the purposes for which, any funding received from the Capability and Innovation Fund would be used;
(4) demonstrates to the satisfaction of the Independent Body how the proposals set out in the Business Case seek to improve (1) customer outcomes for SMEs in the United Kingdom and/or (2) the current products or services offered to SMEs in the United Kingdom;
(5) complies with any relevant legal or regulatory requirement (including any rules and guidance made by the FCA and/or PRA);
(6) sets out the amount (if any) of its own funds that such Pool ABC Beneficiary is proposing to invest in relation to the proposals outlined in the Business Case; and
(7) sets out whether such Pool ABC Beneficiary commits to purchasing innovative financial services or software from SMEs in the United Kingdom and, if so, how such purchases would contribute to the commercialisation of such services;
(b) in the case of a Pool D Beneficiary:
(1) sets out the amount of funding which the Pool D Beneficiary is seeking from the Capability and Innovation Fund;
(2) describes to the satisfaction of the Independent Body the product or service ( Fintech Product or Service ) that the Pool D Beneficiary intends to develop using any funds received from the Capability and Innovation Fund;
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(3) provides details of the way in which, and the purposes for which, any funding received from the Capability and Innovation Fund would be used;
(4) complies with any relevant legal or regulatory requirement (including any rules and guidance made by the FCA and/or PRA); and
(5) sets out the amount (if any) of its own funds that such Pool D Beneficiary is proposing to invest in relation to the proposals outlined in the Business Case;
(B) provided the Independent Body with such information and documentation and access to such relevant personnel as the Independent Body may require in order to assess the Business Case and the eligibility of the relevant Capability and Innovation Fund Beneficiary; and
(C) entered into a Capability and Innovation Fund Agreement with the Independent Body.
2.4 Before any distribution of part of the Pool A Capability and Innovation Fund, Pool B Capability and Innovation Fund or Pool C Capability and Innovation Fund is made to a Pool ABC Beneficiary, the Independent Body must be satisfied that any amount that such Pool ABC Beneficiary receives from the Capability and Innovation Fund:
(A) will be used by such Pool ABC Beneficiary for purposes which have a demonstrable link to (i) improving customer outcomes for SMEs in the United Kingdom; and/or (ii) expanding such Pool ABC Beneficiarys business capacity, product offering and/or target markets in order to improve its offering to SMEs in the United Kingdom (the Overarching Principles );
(B) will be used by such Pool ABC Beneficiary to cover capital expenditure or operating expenses in relation to the following purposes:
(i) the development of systems and/or infrastructure required to expand its Relevant Business(es);
(ii) the recruitment and payment of employees in order to expand and/or operate the Relevant Business(es);
(iii) the marketing of products relating to the Relevant Business(es);
(iv) the acquisition or leasing of premises required to expand its Relevant Business(es); or
(v) any other purpose which is (in the opinion of the Independent Body) consistent with the Overarching Principles; and
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(C) will not be used by such Pool ABC Beneficiary for any of the following purposes:
(i) to subsidise temporary price cuts for banking products and/or services;
(ii) to repay any existing liability;
(iii) to provide financing directly to customers;
(iv) to finance capital expenditure and/or operating expenses which the Pool ABC Beneficiary had specifically planned to incur or which had been specifically committed prior to the date of the application and: (a) that the Pool ABC Beneficiary would make regardless of whether or not any amount from the Capability and Innovation Fund is received; or (b) that had been included in the Pool ABC Beneficiarys business plan prior to the date of the application;
(v) to return capital by any means to existing shareholders of the Pool ABC Beneficiary; or
(vi) for a purpose which is inconsistent with the Overarching Principles and/or its Business Case.
2.5 Before any distribution of any part of the Pool D Capability and Innovation Fund is made to a Pool D Beneficiary, the Independent Body must be satisfied that any amount that such Pool D Beneficiary receives from the Pool D Capability and Innovation Fund:
(A) will be used by such Pool D Beneficiary to develop, improve, operate, expand and/or commercialise (or support the development, improvement, operation, expansion and/or commercialisation of) its Fintech Product or Service;
(B) will be used by such Pool D Beneficiary to cover its capital expenditure and operating expenses in relation to the following purposes:
(i) the development of systems and/or infrastructure required to develop, improve, operate, expand and/or commercialise the Fintech Product or Service;
(ii) the recruitment and payment of employees in order to develop, improve, operate, expand and/or commercialise the Fintech Product or Service;
(iii) the marketing of the Fintech Product or Service; or
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(iv) any other purpose which (in the opinion of the Independent Body) furthers the development, improvement, operation, expansion and/or commercialisation of the Fintech Product or Service; and
(C) will not be used by such Pool D Beneficiary for any of the following purposes:
(i) to repay any existing liability;
(ii) to provide financing directly to customers; or
(iii) to return capital by any means to existing shareholders of the Pool D Beneficiary; or
(iv) for a purpose which is inconsistent with its Business Case.
2.6 Subject always to Paragraph 8 and the right of the Independent Body to determine the eligibility or otherwise of any Capability and Innovation Fund Beneficiary and subject always to the Independent Body being satisfied that the requirements set out in this Paragraph 2 are satisfied, a Capability and Innovation Fund Beneficiary shall not be entitled to receive more than one share from the Capability and Innovation Fund.
2.7 If any Capability and Innovation Fund Beneficiary requests that any distribution from the Capability and Innovation Fund to be made to such Capability and Innovation Fund Beneficiary be made in instalments over a period of time (not to exceed six months), the Independent Body shall consider such request(s) and, if the Independent Body determines at its sole discretion that it would be appropriate for such payment(s) to be made in instalments, provide for this in the relevant Capability and Innovation Fund Agreement.
3. POOL A CAPABILITY AND INNOVATION FUND
3.1 The Independent Body may pay or apply the Pool A Capability and Innovation Fund in the following shares:
(A) one share of £120,000,000;
(B) one share of £100,000,000; and
(C) one share of £60,000,000.
3.2 The Independent Body may only pay or apply the Pool A Capability and Innovation Fund to a Pool A Beneficiary who has submitted Application Documents to the Independent Body during the Pool A Application Period.
3.3 The Independent Body shall consider the Application Documents of each Pool A Beneficiary who has submitted Application Documents to the Independent Body during the Pool A Application Period and shall determine whether or not to pay or apply the Pool A Capability and Innovation Fund to a Pool A Beneficiary in
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accordance with the provisions of this schedule by not later than the date falling one calendar month after the end of the Pool A Application Period and enter into a Capability and Innovation Fund Agreement with such Pool A Beneficiary as soon as practicable thereafter.
4. POOL B CAPABILITY AND INNOVATION FUND
4.1 The Independent Body may pay or apply the Pool B Capability and Innovation Fund in the following shares:
(A) one share of £50,000,000; and
(B) two shares of £15,000,000.
4.2 The Independent Body may only pay or apply the Pool B Capability and Innovation Fund to a Pool B Beneficiary who has submitted Application Documents to the Independent Body during the Pool B Application Period.
4.3 The Independent Body shall consider the Application Documents of each Pool B Beneficiary who has submitted Application Documents to the Independent Body during the Pool B Application Period and shall determine whether or not to pay or apply the Pool B Capability and Innovation Fund to a Pool B Beneficiary in accordance with the provisions of this schedule by not later than the date falling one calendar month after the end of the Pool B Application Period and enter into a Capability and Innovation Fund Agreement with such Pool B Beneficiary as soon as practicable thereafter.
5. POOL A CAPABILITY AND INNOVATION FUND AND POOL B CAPABILITY AND INNOVATION FUND
5.1 In determining whether a Pool A Beneficiary should receive a share of the Pool A Capability and Innovation Fund, the Independent Body shall: (i) assess the nature of the Pool A Beneficiarys Business Current Account offerings (if any); (ii) have regard to the extent to which the proposal set out in the Pool A Beneficiarys Business Case facilitates the development of more advanced offerings of Business Current Accounts and ancillary products for SMEs and/or mid-corporates in the United Kingdom; and (iii) give preference to a Pool A Beneficiary with an established Business Current Account offering.
5.2 In determining whether a Pool B Beneficiary should receive a share of the Pool B Capability and Innovation Fund, the Independent Body shall have regard to the extent to which the proposal set out in the Pool B Beneficiarys Business Case facilitates the modernisation of that Pool B Beneficiarys Business Current Account Offering (if any) for SMEs in the United Kingdom or the development of new Business Current Account or ancillary product propositions for SMEs in the United Kingdom.
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5.3 In determining whether a Pool A Beneficiary or a Pool B Beneficiary should receive a share of the Pool A Capability and Innovation Fund or Pool B Capability and Innovation Fund (as applicable), the Independent Body shall have regard to:
(A) the current capacity of the Pool A Beneficiary or Pool B Beneficiary and the quality of its Business Case;
(B) the likely impact that the Pool A Beneficiary or Pool B Beneficiary will have on competition in the SME and/or mid-corporate banking markets in the United Kingdom;
(C) the ability of the Pool A Beneficiary or Pool B Beneficiary, in the Independent Bodys opinion, to deliver the proposals contained in its Business Case;
(D) the amount (if any) of its own funds that such Pool A Beneficiary or Pool B Beneficiary is proposing to invest in relation to the proposals outlined in its Business Case;
(E) the extent to which such Pool A Beneficiary or Pool B Beneficiary commits to purchasing innovative financial services or software from SMEs in the United Kingdom;
(F) the likely extension in the Pool A Beneficiarys or Pool B Beneficiarys addressable market in the SME and/or mid-corporate banking markets in the United Kingdom;
(G) in the case of a Pool A Beneficiary only, the projected development of the Pool A Beneficiarys range of products and services applicable to SME and/or mid-corporate customers in the United Kingdom; and
(H) subject to the terms of, and the obligations of the Independent Body under, the Framework and State Aid Deed, any other factors which the Independent Body considers appropriate, provided that the Independent Body has made such factors known to each Pool A Beneficiary or Pool B Beneficiary before the date that it submits its Application Documents.
6. POOL C CAPABILITY AND INNOVATION FUND
6.1 The Independent Body may pay or apply the Pool C Capability and Innovation Fund in four shares of £10,000,000.
6.2 The Independent Body may only pay or apply the Pool C Capability and Innovation Fund to a Pool C Beneficiary who has submitted Application Documents to the Independent Body during the Pool C Application Period.
6.3 The Independent Body shall consider the Application Documents of each Pool C Beneficiary who has submitted Application Documents to the Independent Body during the Pool C Application Period and shall determine whether or not to pay or apply the Pool C Capability and Innovation Fund to a Pool C Beneficiary in
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accordance with the provisions of this schedule by not later than the date falling one calendar month after the end of the Pool C Application Period and enter into a Capability and Innovation Fund Agreement with such Pool C Beneficiary as soon as practicable thereafter.
6.4 In determining whether a Pool C Beneficiary should receive a share of the Pool C Capability and Innovation Fund, the Independent Body shall have regard to:
(A) the extent to which the proposal set out in the Pool C Beneficiarys Business Case facilitates the development of new and existing Relevant Business(es) and/or facilitates the deployment of new technology to relevant markets;
(B) the current capacity of the Pool C Beneficiary and the quality of its Business Case;
(C) the likely impact that the Pool C Beneficiary will have on competition in the SME lending market and/or SME payments market in the United Kingdom (as applicable);
(D) the ability of the Pool C Beneficiary, in the Independent Bodys opinion, to deliver the proposals contained in its Business Case;
(E) the amount (if any) of its own funds that such Pool C Beneficiary is proposing to invest in relation to the proposals outlined in its Business Case;
(F) the extent to which such Pool C Beneficiary commits to purchasing innovative financial services or software from SMEs in the United Kingdom;
(G) the extent to which the proposal set out in the Pool C Beneficiarys Business Case is innovative and different from its existing offerings (or those of other providers), in terms of product design, service level and/or means of delivery or distribution; and
(H) subject to the terms of, and the Independent Bodys obligations under, the Framework and State Aid Deed, any other factors which the Independent Body considers appropriate, provided that the Independent Body has made such factors known to each Pool C Beneficiary before the date that it submits its Application Documents.
7. POOL D CAPABILITY AND INNOVATION FUND
7.1 The Independent Body may pay or apply the Pool D Capability and Innovation Fund in five shares of £5,000,000.
7.2 The Independent Body may only pay or apply the Pool D Capability and Innovation Fund to a Pool D Beneficiary who has submitted Application Documents to the Independent Body during the Pool D Application Period.
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7.3 The Independent Body shall consider the Application Documents of each Pool D Beneficiary who has submitted Application Documents to the Independent Body during the Pool D Application Period and shall determine whether or not to pay or apply the Pool D Capability and Innovation Fund to a Pool D Beneficiary in accordance with the provisions of this schedule by not later than the date falling one calendar month after the end of the Pool D Application Period and enter into a Capability and Innovation Fund Agreement with such Pool D Beneficiary as soon as practicable thereafter.
7.4 In determining whether a Pool D Beneficiary should receive a share of the Pool D Capability and Innovation Fund, the Independent Body shall have regard to:
(A) the extent to which the proposal set out in the Pool D Beneficiarys Business Case facilitates the commercialisation of financial technology that is relevant to SMEs in the United Kingdom;
(B) the quality of the Pool D Beneficiarys Business Case;
(C) the amount (if any) of its own funds that such Pool D Beneficiary is proposing to invest in relation to the proposals outlined in its Business Case;
(D) the extent to which the Pool D Beneficiarys Fintech Product or Service:
(i) is a useable alternative to traditional banking products or facilitates the provision of a useable alternative to traditional banking products;
(ii) is likely to benefit SMEs in the United Kingdom either directly or indirectly;
(iii) is easy for its end customer(s) to use;
(iv) is already used by SMEs in the United Kingdom, or offered to SMEs by alternative providers, and (if so) whether the Business Case provides an improvement to an existing product or service;
(v) uses breakthrough technology;
(vi) purports to fill a gap in the current offering available to SMEs in the United Kingdom (in which case the Applicant Company should have demonstrated its knowledge of the relevant gap in the market); and/or
(vii) is, or is likely to be, in demand by SMEs;
(E) the extent to which the Pool D Beneficiary:
(i) is committed to ensuring security standards for end-users of its products or services in accordance with (or to a higher standard than) good industry practice;
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(ii) is able to scale-up and/or reach new end-users; and/or
(iii) has been able to generate demand for its products or services whether in relation to the Business case or in previous offerings;
(F) the extent to which the Pool D Beneficiary has demonstrated to the satisfaction of the Independent Body the credibility of its business model; and
(G) subject to the terms of, and the Independent Bodys obligations under, the Framework and State Aid Deed, any other factors which the Independent Body considers appropriate, provided that the Independent Body has made such factors known to each Pool D Beneficiary before the date that it submits its Application Documents.
8. ADDITIONAL FUNDS
8.1 If the amount of the Additional Funds is less than £5 million, the Independent Body shall not make any further distributions to any Capability and Innovation Fund Beneficiaries.
8.2 The Independent Body may distribute the Option 1 CIF Fund to Option 1 Beneficiaries in equal shares as it may consider appropriate provided that no share may be less than £1 million.
8.3 The Independent Body may distribute the Option 2 CIF Fund to Option 2 Beneficiaries provided that no share may be less than £1 million, and provided that no more than 20% of the Option 2 CIF Fund may be paid or applied for the benefit of Pool D Beneficiaries.
8.4 The Independent Body shall consider the Application Documents of each Option 1 Beneficiary or Option 2 Beneficiary (as applicable) who has submitted Application Documents to the Independent Body in respect of funding from the Additional Funds during the application period specified by the Independent Body in respect of such Additional Funds. The Independent Body shall determine whether or not to pay or apply the Additional Funds to any Option 1 Beneficiary or Option 2 Beneficiary (as applicable) in accordance with the provisions of this schedule by not later than the date falling one calendar month after the end of the application period in respect of such Additional Funds and shall enter into a Capability and Innovation Fund Agreement with such Option 1 Beneficiary or Option 2 Beneficiary (as applicable) as soon as practicable thereafter.
8.5 In determining whether an Option 1 Beneficiary or Option 2 Beneficiary (as applicable) should receive a share of the Additional Funds, the Independent Body shall have regard to:
(A) in the case of an application by a Pool A Beneficiary or a Pool B Beneficiary, the criteria set out in Paragraphs 2.4 and 5.3;
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(B) in the case of an application by a Pool C Beneficiary, the criteria set out in Paragraphs 2.4 and 6.4; and
(C) in the case of an application by a Pool D Beneficiary, the criteria set out in Paragraphs 2.5 and 7.4,
and in each case the Independent Body may give preference to any Option 1 Beneficiary or Option 2 Beneficiary (as applicable) whose Business Case is in respect of the development of Business Current Account propositions over an Option 1 Beneficiary or Option 2 Beneficiary (as applicable) whose Business Case is in respect of the development of lending propositions.
8.6 In exercising its discretion under Clause 2.7 of the Trust Deed, the Independent Body shall consider how best to distribute the Additional Amount amongst the Capability and Innovation Fund Eligible Bodies, the timeframe for doing so and the basis on which any such distribution is made with the objective of reducing the Additional Amount below £5 million.
9. DECISIONS OF THE INDEPENDENT BODY
9.1 Any decision or determination of the Independent Body in respect of the payment and/or application of any amount of the Capability and Innovation Fund shall be made at the absolute discretion of the Independent Body and shall be conclusive.
10. EXERCISE OF THE POWER TO REMOVE A BENEFICIARY
10.1 The Independent Body may exercise its power to remove any of the Capability and Innovation Fund Beneficiaries if the Independent Body:
(A) considers that the relevant Capability and Innovation Fund Beneficiary is in material or persistent breach of the terms of a relevant Capability and Innovation Fund Agreement; or
(B) has exercised its right of clawback pursuant to the terms of the relevant Capability and Innovation Fund Agreement in respect of such Capability and Innovation Fund Beneficiary.
11. DEFINITIONS
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Pool ABC Beneficiary |
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means a Pool A Beneficiary, a Pool B Beneficiary or a Pool C Beneficiary; and |
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Relevant Business(es) |
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means: (i) in the case of a Pool A Beneficiary or a Pool B Beneficiary, its SME banking business in the United Kingdom; or (ii) in the case of a Pool C Beneficiary, its SME lending business and/or SME payments business in the United Kingdom. |
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Schedule 4
Trust Accounts
1.1 Fund Account
***
1.2 Income Account
***
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
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Annex 1
FORM OF DEED OF ADDITION
DATE [ ]
BY
Banking Competition Remedies Limited of [address of Independent Body] (the Independent Body )
RECITALS
(A) This Deed is supplemental to the Trust Deed dated [ · ] 2018 between The Royal Bank of Scotland plc and the Independent Body and known as the Alternative Remedies Package Trust (the Trust Deed ).
(B) The Independent Body is the present trustee of the trusts constituted by the Trust Deed (the Trust ).
(C) Clause 6 of the Trust Deed gives the Independent Body the power to add any person to the class of Incentivised Switching Beneficiaries, Option 1 Beneficiaries, Option 2 Beneficiaries, Pool A Beneficiaries, Pool B Beneficiaries, Pool C Beneficiaries, Pool D Beneficiaries or Longstop CIF Beneficiaries (the Power of Addition ).
(D) The Independent Body wishes to add [ Insert name of new beneficiary or description of new beneficiary ] of [ Insert address of new beneficiary ] (the Additional Beneficiary ) to the class of [ Insert class(es) of beneficiaries ] as a beneficiary of the [ Insert name of relevant Fund(s) ].
OPERATIVE PROVISIONS
1. Terms used and not defined in this Deed shall, unless the context otherwise requires, have the meaning give to them in the Trust Deed.
2. In exercise of the Power of Addition, the Independent Body hereby declares that the Additional Beneficiary shall be added to the class of [ Insert class(es) of beneficiaries ] as a beneficiary of the [ Insert name of relevant Fund(s) ] for all purposes of the Trust with effect from [ Insert date or event ].
3. This Deed and any non-contractual obligations arising out of or in connection with it shall be governed by English law.
4. The courts of England are to have exclusive jurisdiction to settle any dispute which may arise out of or in connection with this Deed and that accordingly any proceedings arising out of or in connection with this Deed shall be brought in such courts.
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Annex 2
FORM OF DEED OF REMOVAL
DATE [ ]
BY
Banking Competition Remedies Limited of [address of Independent Body] (the Independent Body )
RECITALS
(A) This Deed is supplemental to the Trust Deed dated [ · ] 2018 between The Royal Bank of Scotland plc and the Independent Body and known as the Alternative Remedies Package Trust (the Trust Deed ).
(B) The Independent Body is the present trustee of the trusts constituted by the Trust Deed (the Trust ).
(C) Clause 7 of the Trust Deed gives the Independent Body the power to declare that any one or more of the beneficiaries shall cease to be a beneficiary of the Trust Fund or any Fund (the Power of Removal ).
(D) The Independent Body wishes to remove [ Insert name or description of removed beneficiary ] of [ Insert address of removed beneficiary ] (the Removed Beneficiary ) from the class of [ Insert class(es) of beneficiaries ] as a beneficiary of the [ Insert name of relevant Fund(s) ].
OPERATIVE PROVISIONS
1. Terms used and not defined in this Deed shall, unless the context otherwise requires, have the meaning give to them in the Trust Deed.
2. In exercise of the Power of Removal, the Independent Body hereby declares that the Removed Beneficiary shall be removed from the class of [ Insert class(es) of beneficiaries ] as a beneficiary of the [ Insert name of relevant Fund(s) ] for all purposes of the Trust with effect from [ Insert date or event ].
3. This Deed and any non-contractual obligations arising out of or in connection with it shall be governed by English law.
4. The courts of England are to have exclusive jurisdiction to settle any dispute which may arise out of or in connection with this Deed and that accordingly any proceedings arising out of or in connection with this Deed shall be brought in such courts.
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IN WITNESS WHEREOF this document has been executed and delivered as a deed the day and year first before written.
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DATED 25 APRIL 2018
THE COMMISSIONERS OF HER MAJESTYS TREASURY
and
THE ROYAL BANK OF SCOTLAND GROUP PLC
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DEED OF INDEMNITY
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THIS DEED is made on 25 April 2018
BETWEEN:
(1) THE COMMISSIONERS OF HER MAJESTYS TREASURY of 1 Horse Guards Road, London SW1A 2HQ ( HMT ); and
(2) THE ROYAL BANK OF SCOTLAND GROUP PLC , a public company incorporated in Scotland with registered number 45551 and whose registered office is at 36 St Andrew Square, Edinburgh, Scotland EH2 2YB ( RBS ).
WHEREAS:
(A) On 14 December 2009, the European Commission, in its state aid decision in cases N422/2009 and N621/2009 addressed to Her Majestys Government of the United Kingdom (the Government ), approved a series of measures undertaken by HMT in respect of RBS (the Original State Aid Approvals ).
(B) In connection with the Original State Aid Approvals, HMT gave a set of commitments to the European Commission (the Original Commitments ) and RBS undertook in a State Aid Commitment Deed dated 26 November 2009 (the Original Deed ) to do all acts and things necessary to ensure that HMT was able to comply with the Original State Aid Approvals.
(C) On 23 November 2009 RBS entered into a State Aid Costs Reimbursement Deed with HMT (the Costs Deed ), and undertook to reimburse HMT for certain fees, costs and expenses relating to, inter alia, the Original State Aid Approvals (as may be supplemented, modified or replaced).
(D) On 9 April 2014, the European Commission, in its state aid decision in case number SA.38304 addressed to the Government, approved a further series of measures undertaken by HMT in respect of RBS (the Revised State Aid Approvals ).
(E) In connection with the Revised State Aid Approvals, HMT gave a set of revised commitments to the European Commission (the Revised Commitments ), which replaced the Original Commitments, and RBS undertook in a State Aid Commitment Deed dated 9 April 2014 (the Revised Deed ) to do all acts and things necessary to ensure that HMT was able to comply with the Revised State Aid Approvals.
(F) On 18 September 2017, the European Commission, in its state aid decision in case number SA.47702 addressed to the Government, approved a set of new commitments given by HMT to replace the Revised Commitments (the New Commitments ).
(G) HMT is bound by the New Commitments and RBS has agreed to do all acts and things necessary to ensure that HMT is able to comply with the New Commitments.
(H) RBS and HMT, amongst others, have entered into a framework and state aid deed dated on or about the date of this Deed to replace the Revised Deed (the Framework and State Aid Deed ).
(I) In connection with the Commitments and its obligations under the Framework and State Aid Deed, RBS has agreed to indemnify HMT on the terms of this Deed.
NOW THIS DEED WITNESSES AS FOLLOWS:
1. DEFINITIONS AND INTERPRETATION
1.1 Capitalised terms used but not defined in this Deed shall have the respective meanings given to them in the Framework and State Aid Deed.
1.2 In this Deed, unless otherwise specified:
(A) references to clauses and sub-clauses are to clauses and sub-clauses of this Deed;
(B) the words include and including shall be deemed to be followed by the phrase without limitation;
(C) headings and sub-headings in this Deed are included for ease of reference only and shall not affect the interpretation of this Deed;
(D) any reference to a person shall be construed so as to include any individual, firm, company, corporation, body corporate, government, state or agency of a state, local or municipal authority or governmental body or any joint venture, association or partnership (whether or not having separate legal personality);
(E) any reference to a statute, statutory provision or rules or regulations made thereunder shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified, re-enacted or replaced;
(F) the expressions subsidiary and subsidiary undertaking shall have the meaning given in the Companies Act 2006;
(G) any reference to any other document is a reference to that document as amended, varied or supplemented at any time;
(H) any reference to a day shall mean a period of 24 hours running from midnight to midnight;
(I) the rule known as the ejusdem generis rule shall not apply and accordingly general words introduced by the word other shall not be given a restrictive meaning by reason of the fact that they are preceded by words indicating a particular class of acts, matters or things; and
(J) general words shall not be given a restrictive meaning by reason of the fact that they are followed by particular examples intended to be embraced by the general words.
1.3 References in this Deed to RBS shall be read as including, where applicable, a reference to any relevant subsidiary of RBS undertaking the relevant activity within the Group and, in this context, any obligation on RBS shall be read as including, where applicable, an obligation on RBS to procure that the relevant subsidiary complies with the relevant obligation.
2. EFFECTIVENESS
All provisions of this Deed shall have full force and effect upon execution and delivery of this Deed by the parties to it.
3. COSTS AND EXPENSES; INDEMNITY
3.1 Subject to Clauses 3.3 and 4, RBS shall indemnify HMT in respect of all costs and expenses reasonably and properly incurred by HMT in connection with the negotiation, preparation, execution and carrying into effect of this Deed, the Framework and State Aid Deed and each of the other Package Documents, including (but not limited to):
(A) the fees of all external legal and other advisers and their disbursements and out-of-pocket expenses, in each case as are reasonably and properly incurred; and
(B) any and all reasonable costs in relation to the set-up and ongoing administration of the Independent Body (including, without limitation, employees salaries and benefits, directors fees, audit fees and/or any reasonable fees payable under third party service agreements),
(i) except to the extent that such costs and expenses are proven to have arisen as a result of the fraud, gross negligence or wilful default of HMT; (ii) except to the extent such costs and expenses constitute amounts of or in respect of Excluded Taxes; (iii) except to the extent such costs and expenses are to be paid out of income, profits or other gains of the Trust Fund in accordance with clause 5.2 of the Framework and State Aid Deed; and (iv) in respect of any and all reasonable costs in relation to the set up and ongoing administration of the Independent Body, only to the extent that such costs and expenses exceed the amount paid by RBS pursuant to clause 5.1 of the Framework and State Aid Deed.
3.2 Subject to Clauses 3.3 and 4, RBS shall indemnify HMT and its Representatives from and against all loss, payments, costs, expenses or damage which HMT or its Representatives may incur in relation to or arising out of any action, claim or demand that may be brought against HMT or its Representatives under or in connection with this Deed, the Framework and State Aid Deed or any other Package Document by a person (other than a Tax Authority) who is not a party to this Deed or the Framework and State Aid Deed, except to the extent that such action, claim or demand is proven to have arisen as a result of the fraud, gross negligence or wilful default of the person making the claim against RBS.
3.3 The parties acknowledge and agree that RBSs obligations and liability pursuant to this Clause 3 shall only relate to:
(A) in relation to Clause 3.1, those costs and expenses reasonably and properly incurred; and
(B) in relation to Clause 3.2, those actions, claims or demands brought relating to conduct or events occurring,
prior to the date falling six months after the IB Termination Date.
4. LIMITATION OF LIABILITY; COSTS DEED
4.1 The total aggregate liability of RBS to HMT and its Representatives under Clause 3 shall not in any event exceed ***.
4.2 HMT acknowledges and agrees that, from the date of this Deed, it shall make no claims for costs and expenses from RBS pursuant to clause 2.2(B) of the Costs Deed in relation to any costs or expenses incurred in connection with the negotiation, preparation, execution and carrying into effect of this Deed, the Framework and State Aid Deed or any other Package Document other than in respect of any costs and expenses of Slaughter and May, N M Rothschild & Sons Limited and PA Consulting Services Limited incurred in connection therewith on or prior to the date of the Framework and State Aid Deed. For the avoidance of doubt, this Clause 4.2 will not prevent HMT from making any claims for costs and expenses from RBS pursuant to clause 2.2(B) of the Costs Deed in relation to any costs or expenses incurred in connection with the Original State Aid Approval, the Original Commitments, the Original Deed, the Revised State Aid Approval, the Revised Commitments or the Revised Deed.
4.3 HMT may not recover under this Deed, or otherwise, more than once in respect of the same losses, payments, costs, expenses or damages suffered, with the intent that there will be no double counting under this Deed or otherwise.
5. WARRANTIES
RBS represents and warrants to HMT that:
(A) RBS has the requisite capacity, power and authority to enter into and perform its obligations under this Deed;
(B) this Deed constitutes a legal, valid and binding obligation of RBS, enforceable against it in accordance with its terms; and
(C) the execution and delivery of, and the performance by RBS of its obligations under, this Deed will not:
(i) result in a material breach of any provision of its memorandum or articles of association or other constitutional documents; or
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
(ii) result in a material breach of, or constitute a default under, any instrument to which it is a party or by which it is bound.
6. TAX MATTERS
Clause 15 of the Framework and State Aid Deed shall apply in relation to this Deed, with any necessary modifications, as they would apply if any reference therein to the Framework and State Aid Deed were instead a reference to this Deed.
7. ASSIGNMENT
Clause 19 of the Framework and State Aid Deed shall apply in relation to this Deed, with any necessary modifications, as they would apply if any reference therein to the Framework and State Aid Deed were instead a reference to this Deed.
8. REMEDIES
Clause 20 of the Framework and State Aid Deed shall apply in relation to this Deed, with any necessary modifications, as they would apply if any reference therein to the Framework and State Aid Deed were instead a reference to this Deed.
9. INVALIDITY
If any provision of this Deed shall be held to be illegal, invalid or unenforceable, in whole or in part, under any enactment or rule of law, such provision or part shall to that extent be deemed not to form part of this Deed but the legality, validity and enforceability of the remainder of this Deed shall not be affected.
10. NOTICES
10.1 Except as otherwise provided in this Deed, a notice under this Deed shall only be effective if it is in writing. E-mail transmissions are permitted.
10.2 Notices under this Deed shall be sent to a party to this Deed at its postal address, number or email address and for the attention of the individual set out below:
Party and title |
Address |
Email address |
|
of individual |
|
|
|
|
|
|
|
RBS |
Secretariat |
None |
|
|
RBS |
|
|
|
Gogarburn, PO Box 1000, |
|
|
|
Edinburgh EH12 1HQ |
|
|
|
|
|
|
|
Attention: Company Secretary |
|
|
HMT |
1 Horse Guards Road |
*** |
|
|
London SW1A 2HQ |
|
|
|
|
|
|
|
Attention: Director of the |
|
|
|
Financial Stability Group |
|
|
provided that a party may change its notice details on giving notice to the other party of the change in accordance with this Clause 10. That notice shall only be effective on the day falling five clear Business Days after the notification has been received or such later date as may be specified in the notice.
10.3 Any notice given under this Deed shall, in the absence of earlier receipt, be deemed to have been duly given as follows:
(A) if delivered personally, on delivery;
(B) if sent by first class post, two clear Business Days after the date of posting; and
(C) if sent by email, when despatched.
10.4 Any notice given under this Deed outside Working Hours in the place to which it is addressed shall be deemed not to have been given until the start of the next period of Working Hours in such place.
11. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
11.1 Clause 3 confers benefits on the Representatives of HMT and Clause 5 confers benefits on Indemnified Persons and, subject to the remaining provisions of this Clause, such clauses are intended to be enforceable by such Representatives and Indemnified Persons, as applicable, by virtue of the Contracts (Rights of Third Parties) Act 1999.
11.2 Subject to Clause 11.1, the parties to this Deed do not intend that any term of this Deed should be enforceable, by virtue of the Contracts (Rights of Third Parties) Act 1999, by any person who is not a party to this Deed.
11.3 Notwithstanding the provisions of Clause 11.1, and save in respect of (i) Clause 3 and this Clause 11 which in each case may not be rescinded or varied in a way which would be adverse to the rights of the Representatives of HMT without the prior written consent of the Representatives of HMT; and (ii) Clause 5 and this Clause 11 which in each case may not be rescinded or varied in a way which would be adverse to the rights of the Indemnified Persons without the prior written consent of the Indemnified Persons, this Deed may be rescinded or varied in any way and at any time by the parties to this Deed without the consent of any third party.
12. COUNTERPARTS
This Deed may be executed in any number of counterparts, and by the parties on separate counterparts, but shall not be effective until each party has executed at least
*** Material has been omitted pursuant to a request for confidential treatment and has been filed separately.
one counterpart. Each counterpart shall constitute an original of this Deed, but all the counterparts together shall constitute one and the same instrument.
13. VARIATION
Subject to Clause 11, any term of this Deed may be amended, and the observance of any term of this Deed may be waived (either generally or in a particular instance and either retroactively or prospectively), only in writing and signed by or on behalf of each of the parties.
14. GOVERNING LAW AND JURISDICTION
14.1 Any matter, claim or dispute arising out of or in connection with this Deed, whether such matter, claim or dispute is contractual or non-contractual, shall be governed by and determined in accordance with the laws of England.
14.2 The courts of England have exclusive jurisdiction to hear and decide any suit, action or proceedings, and to settle any disputes, arising out of or in connection with this Deed, and for these purposes, the parties irrevocably submit to the jurisdiction of the courts of England.
IN WITNESS WHEREOF this document has been executed and delivered as a deed the day and year first before written.
EXECUTION VERSION
Dated 7 February 2019
The Royal Bank of Scotland Group plc
and
The Commissioners of Her Majestys Treasury
SHARE PURCHASE DEED
Linklaters LLP
One Silk Street
London EC2Y 8HQ
Telephone: (44-20) 7456 2000
Facsimile: (44-20) 7456 2222
Ref: L-257105
Share Purchase Deed
This Deed is made on 7 February 2019 between:
(1) The Royal Bank of Scotland Group plc , a company incorporated in Scotland with company number SC045551 whose registered office is at 36 St Andrew Square, Edinburgh, EH2 2YB (the Company ); and
(2) The Commissioners of Her Majestys Treasury of 1 Horse Guards Road, London SW1A 2HQ ( HM Treasury ) .
Whereas :
(A) HM Treasury beneficially holds Ordinary Shares (as defined below) and has publicly announced its intention to sell such shares over a period of time.
(B) The Company and HM Treasury have agreed that the Company may, with HM Treasurys agreement, make off-market purchases of Ordinary Shares from HM Treasury (or its nominee).
(C) Such off-market purchases of Ordinary Shares may be made at such times and on such number of occasions as the Company and HM Treasury may agree, including through a Directed Trading Programme or in conjunction with a Share Offering (each as described below).
(D) This Deed sets out the terms and conditions of any such off-market purchase referred to in Recital (B) and constitutes the contract required by section 694 of the Companies Act 2006 for such off-market purchases of its own shares by the Company.
It is agreed as follows:
1 Interpretation
In this Deed, unless the context otherwise requires, the provisions in this Clause 1 apply:
1.1 Definitions
Approved Price Range means a price per Ordinary Share (exclusive of expenses) that is:
(a) greater than or equal to the nominal value of an Ordinary Share at the relevant time (being £1.00 at the date of this Deed); and
(b) less than or equal to the higher of:
(i) 105 per cent. of the average of the midmarket quotations for an Ordinary Share as derived from The Daily Official List of The London Stock Exchange for the five Trading Days immediately preceding the day on which the Ordinary Share is contracted to be purchased; and
(ii) that stipulated by Commissionadopted Regulatory Technical Standards pursuant to Article 5(6) of the Market Abuse Regulation (2014/596/EU);
Business Day means any day (other than a Saturday or Sunday) on which clearing banks are open for a full range of banking transactions in London;
Company Nominated Broker(s) has the meaning set out in Clause 3.2.2(i);
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Directed Trading Programme means an arrangement under which one or more Company Nominated Brokers and one or more HM Treasury Nominated Brokers may (in their sole discretion and acting on behalf of the Company or HM Treasury, as the case may be) agree purchases and sales of Ordinary Shares at the Relevant Market Price on any Trading Day during a Directed Trading Programme Period;
Directed Trading Programme Period has the meaning set out in Clause 3.2.1;
Encumbrance means any pledge, mortgage, charge, lien or encumbrance or other claim;
FSMA means the Financial Services and Markets Act 2000, including any regulations made pursuant thereto;
HM Treasury Nominated Broker(s) has the meaning set out in Clause 3.2.2(ii);
Listing Rules means the Listing Rules made by the Financial Conduct Authority pursuant to section 73A of FSMA, as amended from time to time;
Main Market means the main market for listed securities of London Stock Exchange plc;
Off-Market Purchase Completion means completion of any off-market purchase of Ordinary Shares from HM Treasury (or its nominee) by the Company in accordance with Clause 4;
Ordinary Share means an ordinary share of £1.00 in the capital of the Company;
Relevant Market Price means the price per Ordinary Share prevailing as at the relevant Time of Sale as appearing on, or derived from, Bloomberg page (quote/RBS:LN) (or any successor page) in respect of the Ordinary Shares or, when the Time of Sale is outside of trading hours on the Main Market, such price as at the most recent close of trading on the Main Market;
Share Offering means any offer or sale of Ordinary Shares by HM Treasury (or its nominee) by way of or including an institutional placement, whether to persons located in the United Kingdom and/or in any other jurisdiction excluding, for the avoidance of doubt, any sale of Ordinary Shares to the Company pursuant to this Deed;
Share Offering Price means, in respect of any Share Offering, the price at which each Ordinary Share is to be sold in such Share Offering (as determined through a bookbuilding process) or, if different, the price at which each Ordinary Share is to be sold in the institutional placement that forms part of that Share Offering (as determined through a bookbuilding process);
Shareholder Approval means a special resolution of the Companys members approving the terms of this Deed pursuant to section 694 of the Companies Act 2006 and authorising the Company to make off-market purchases from HM Treasury (or its nominee);
Time of Sale means the time and date on which the Company (or the Company Nominated Broker(s) acting on its behalf) agrees to make an off-market purchase other than an off-market purchase in conjunction with a Share Offering;
Trading Day means any day during which the Ordinary Shares are traded on the Main Market; and
Wholly Owned Entity has the meaning set out in Clause 11.2.
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1.2 Interpretation
1.2.1 The Interpretation Act 1978 shall apply to this Deed in the same way as it applies to an enactment.
1.2.2 References to a statutory provision include any subordinated legislation made from time to time under that provision.
1.2.3 References to a statutory provision include that provision as from time to time modified, supplemented, replaced or re-enacted so far as such modification, supplement, replacement or re-enactment applies or is capable of applying to any transactions entered into in accordance with this Deed.
1.2.4 References in this Deed to clauses are to Clauses of this Deed.
1.2.5 Headings shall be ignored in construing this Deed.
2 Right to make off-market purchases of Ordinary Shares
2.1 Subject to the agreement of HM Treasury, the Company shall be entitled to make an off-market purchase of Ordinary Shares from HM Treasury (or its nominee), provided that:
2.1.1 Shareholder Approval has been obtained;
2.1.2 the proposed off-market purchase will, when aggregated with any other related party transactions (as such term is defined in the Listing Rules) entered into between the Company or any member of its corporate group and HM Treasury (or an associate (as such term is defined in the Listing Rules) of HM Treasury) within the previous 12 months and which has not been approved by the Companys members be treated as a smaller related party transaction under Listing Rule 11.1.10R;
2.1.3 without prejudice to Clause 2.2.2, the proposed off-market purchase will not result in more than the lower of 4.99 per cent. of:
(i) the Companys issued ordinary share capital as at the date of this Deed; and
(ii) the Companys issued ordinary share capital as at the date of the relevant off-market purchase,
having been purchased within the previous 12 months;
2.1.4 subject to Clause 2.2.1, the price payable by the Company to HM Treasury (or its nominee) for any off-market purchase of an Ordinary Share shall be the Relevant Market Price provided that such price is within the Approved Price Range;
2.1.5 the consideration payable by the Company to HM Treasury (or its nominee) for any off-market purchase pursuant to this Deed expressed as a percentage of the Companys market capitalisation at the date of such off-market purchase (the Consideration Percentage ) will not (when aggregated with the Consideration Percentage for any other purchases by the Company from HM Treasury (or its nominee) within the previous 12 months) exceed 4.99 per cent.;
2.1.6 written confirmation has been received from a sponsor in accordance with Listing Rule 11.1.10R(2)(b); and
2.1.7 the Prudential Regulation Authority has approved the relevant off-market purchase.
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2.2 If an off-market purchase is made in conjunction with a Share Offering pursuant to Clause 3.2 , then the following additional conditions shall apply:
2.2.1 the price payable by the Company to HM Treasury (or its nominee) for such off-market purchase of an Ordinary Share shall be the relevant Share Offering Price (and, for the avoidance of doubt, Clause 2.1.4 shall not apply); and
2.2.2 the number of Ordinary Shares which the Company may elect to purchase off-market at the time of such Share Offering shall not exceed 50 per cent. of the number of Ordinary Shares, which are the subject of the relevant Share Offering.
3 Procedure for off-market purchases
3.1 In respect of any off-market purchase other than an off-market purchase conducted through a Directed Trading Programme or in conjunction with a Share Offering:
3.1.1 the Company or HM Treasury may notify the other party in accordance with Clause 7 of the number of Ordinary Shares it offers to purchase or sell, as the case may be, off-market at the Relevant Market Price and the proposed Time of Sale and completion date for such off-market purchase and the time by which such offer must be accepted;
3.1.2 on receipt of any notification pursuant to Clause 3.1.1, HM Treasury or the Company, as the case may be, may notify the other party in accordance with Clause 7 of its decision to accept the Companys offer to purchase or HM Treasurys offer to sell, as the case may be, off-market such number of Ordinary Shares on the terms specified in the notification. Any notification pursuant to this Clause 3.1.2 must be given to the other party by the time specified in the notification of the offer. If HM Treasury or the Company does not so notify the other party pursuant to this Clause 3.1.2 then it shall be deemed to have declined the relevant offer; and
3.1.3 on giving notice of the acceptance of an offer pursuant to Clause 3.1.2, HM Treasury shall be bound to sell and the Company shall be bound to purchase the number of Ordinary Shares specified in the relevant notice at the Relevant Market Price at the relevant Off-Market Purchase Completion.
3.2 In respect of any off-market purchase conducted through a Directed Trading Programme:
3.2.1 the Company and HM Treasury shall agree to commence a Directed Trading Programme for a specified period of time which shall end no later than the date of termination of this Deed (the Directed Trading Programme Period);
3.2.2 on or prior to the commencement of the Directed Trading Programme Period:
(i) the Company shall appoint one or more broker(s) (the Company Nominated Broker(s)) to purchase on behalf of the Company (at the sole discretion of such Company Nominated Broker(s)) Ordinary Shares from HM Treasury or its nominee (or the HM Treasury Nominated Broker(s) acting on behalf of HM Treasury) at the Relevant Market Price (subject to a maximum price) on any Trading Day for the duration of the Directed Trading Programme Period (up to a maximum aggregate number of Ordinary Shares); and
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(ii) HM Treasury shall appoint one or more broker(s) (the HM Treasury Nominated Broker(s) ) to sell on behalf of HM Treasury (at the sole discretion of such HM Treasury Nominated Broker(s)) Ordinary Shares to the Company (or the Company Nominated Broker(s)) at the Relevant Market Price on any Trading Day for the duration of the Directed Trading Programme Period (up to a maximum aggregate number of Ordinary Shares); and
3.2.3 the Company Nominated Broker(s) and the HM Treasury Nominated Broker(s) may (in their sole discretion and acting on behalf of the Company or HM Treasury, as the case may be) agree purchases and sales of Ordinary Shares in accordance with any instructions given to them by the Company and HM Treasury as the case may be (including those referred to in Clause 3.2.2) and subject to the conditions in Clause 2.1.
3.3 In respect of any off-market purchase in conjunction with a Share Offering:
3.3.1 subject to applicable laws and HM Treasury agreeing to sell Ordinary Shares to the Company, HM Treasury shall notify the Company in accordance with Clause 7 of a proposed Share Offering prior to the announcement of such Share Offering;
3.3.2 on receipt of any notification pursuant to Clause 3.3.1 and subject to applicable laws, the Company shall notify HM Treasury in accordance with Clause 7 of any decision to make an off-market purchase in conjunction with the proposed Share Offering referred to in Clause 3.3.1. Any such notice shall specify the number of Ordinary Shares to be purchased off-market and may not be given following the announcement of such Share Offering; and
3.3.3 on giving notice pursuant to Clause 3.3.2, the Company shall be bound to purchase and, if it agrees to sell, HM Treasury shall be bound to sell the number of Ordinary Shares specified in the relevant notice at the relevant Share Offering Price at the relevant Off-Market Purchase Completion.
3.4 Subject to applicable law, each party shall provide the other party with a reasonable opportunity to comment on any references to any proposed off-market purchase in any announcement relating to such an off-market purchase or, if applicable, a Share Offering.
4 Off-Market Purchase Completion
4.1 On any Off-Market Purchase Completion:
4.1.1 the Company (or the Company Nominated Broker(s) acting on its behalf) shall pay to HM Treasury (or the HM Treasury Nominated Broker(s) acting on its behalf) an amount equal to the product of (i) the number of Ordinary Shares the subject of the relevant off-market purchase; and (ii) the price payable for each Ordinary Share in accordance with Clause 2.1.4 or 2.2.1, as applicable; and
4.1.2 HM Treasury (or the HM Treasury Nominated Broker(s) acting on its behalf) shall procure the transfer to the Company (or the Company Nominated Broker(s) acting on its behalf) of Ordinary Shares the subject of the relevant off-market purchase.
4.2 An Off-Market Purchase Completion shall take place at such time as the Company (or the Company Nominated Broker(s) acting on its behalf) and HM Treasury (or the HM Treasury Nominated Broker(s) acting on its behalf) may agree in writing, provided that if an off-
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market purchase is made in conjunction with a Share Offering it shall take place at the same time as, or immediately following and on the same business day as, settlement of the relevant Share Offering.
4.3 If any condition in Clause 2 is not satisfied or, in the case of an off-market purchase in conjunction with a Share Offering, the relevant Share Offering does not proceed to settlement, neither the Company (or the Company Nominated Broker(s) acting on its behalf) nor HM Treasury (or the HM Treasury Nominated Broker(s) acting on its behalf) shall have any obligations in respect of the relevant proposed off-market purchase or any claim against the other in respect of it.
4.4 Ordinary Shares sold in an off-market purchase pursuant to this Deed shall be sold free from Encumbrances.
5 Termination
5.1 Subject to Clause 5.2, this Deed shall terminate with immediate effect and all rights and obligations of the parties under this Deed shall cease forthwith upon the earlier of:
5.1.1 the date that the Shareholder Approval expires; and
5.1.2 agreement in writing between the parties to terminate this Deed, provided that, if either party requests that this Deed be terminated, the other party shall not unreasonably withhold or delay its agreement.
5.2 Termination of this Deed shall be without prejudice to the rights of either party that may have arisen prior to termination. The whole of this Clause 5 and Clauses 6 to 15 shall survive termination of this Deed.
6 Warranties/Undertakings
6.1 HM Treasury warrants and undertakes to the Company that the following warranties will be true and not misleading (i) as at the date of each notification by the Company or HM Treasury pursuant to Clause 3, (ii) on each Trading Day during a Directed Trading Programme Period on which a Company Nominated Broker agrees to purchase Ordinary Shares from HM Treasury or its nominee (or the HM Treasury Nominated Broker(s) acting on behalf of HM Treasury), and (iii) as at the date of each Off-Market Purchase Completion:
6.1.1 each of the Ordinary Shares the subject of the relevant off-market purchase is beneficially owned by the Crown and HM Treasury (or its nominee) has the power to sell or procure the sale of the Ordinary Shares the subject of the relevant off-market purchase, in each case free from all Encumbrances; and
6.1.2 the Ordinary Shares the subject of the relevant off-market purchase are all fully paid.
7 Notices
7.1 Any notice or other communication in connection with this Deed shall be in writing and shall be sufficiently given or served if delivered or sent:
7.1.1 in the case of the Company to:
Corporate Governance & Regulatory Affairs
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RBS Gogarburn
PO BOX 1000
Edinburgh
EH12 1HQ
Attention: The Company Secretary
with a copy to:
Head of Investor Relations
The Royal Bank of Scotland Group plc
280 Bishopsgate
London
EC2M 4RB
Email address: Matthew.Waymark@rbs.co.uk
7.1.2 in the case of HM Treasury to:
1 Horse Guards Road
London SW1A 2HQ
Attention: Director, Financial Stability
Email address: FinancialStabilityGMS@HMTreasury.gov.uk
7.2 A copy of each notice delivered by email shall be sent by hand or post to the recipient in accordance with Clause 7.1, but failure to send such a copy shall not render any notice ineffective.
7.3 Any such notice or other communication shall be delivered by hand, post or email. In the absence of evidence of earlier receipt, a notice or other communication is deemed given:
7.3.1 if sent by email, when sent (provided that an email shall be deemed not to have been sent if the sender receives a delivery failure notification); or
7.3.2 if delivered by hand or post, at the time of actual delivery.
7.4 A party may change its notice details for the purposes of Clause 7.1 by notifying the other party of such change, provided that such notification shall only be effective on:
7.4.1 the date specified in the notification as the date on which the change is to take place, being not less than five Business Days after the date of such notice; or
7.4.2 if no date is specified or the date specified is less than five Business Days after the date on which notice is given, the date falling five Business Days after notice of any such change has been given.
8 Entire agreement
The Deed contains the whole agreement between the parties in relation to the subject matter of this Deed to the exclusion of any terms implied by law which may be excluded by contract and supersedes any previous written or oral agreement between the parties in relation to the matters dealt with in this Deed.
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9 Stamp Duty
The Company shall pay (or, if applicable, reimburse HM Treasury, its nominee and/or any HM Treasury Nominated Broker for) all stamp duty or stamp duty reserve tax (and associated fines, penalties and interest) arising as a result of:
9.1.1 the execution and delivery of this Deed;
9.1.2 the purchase or repurchase of (or agreement to purchase or repurchase) Ordinary Shares by, or the transfer (or agreement to transfer) Ordinary Shares to, the Company, a Company Nominated Broker or any other agent or nominee of the Company as contemplated in this Deed (whether pursuant to a Directed Trading Programme, in conjunction with a Share Offering or otherwise); and/or
9.1.3 the transfer (or agreement to transfer) Ordinary Shares to any HM Treasury Nominated Broker acting as agent for HM Treasury (and not, for the avoidance of doubt, as principal) as contemplated in this Deed,
in each case other than:
(i) fines, penalties or interest payable as a result of any unreasonable delay or wilful default by HM Treasury or a HM Treasury Nominated Broker in accounting for the relevant stamp duty or stamp duty reserve tax; and
(ii) for the avoidance of doubt, stamp duty or stamp duty reserve tax (and associated fines, interest and penalties) arising in respect of: (x) transfers of, or agreements to transfer, Ordinary Shares to persons other than the Company, any HM Treasury Nominated Broker, any Company Nominated Broker or another agent or nominee of the Company; or (y) transfers of, or agreements to transfer, Ordinary Shares to an HM Treasury Nominated Broker where the Ordinary Shares are to be purchased from such broker by a person other than the Company or a Company Nominated Broker or any other agent or nominee of the Company.
10 Further Assurances
Each party agrees to do all things and execute all deeds, instruments, transfers or other documents as may be necessary or desirable to give full effect to the provisions of this Deed and the transactions contemplated by it.
11 Assignment
11.1 Subject to Clause 11.2, neither party to this Deed shall be permitted to assign, transfer or novate, or purport to assign, transfer or novate, all or any of its rights, benefits or obligations under this Deed to any other person without the prior written consent of the other party.
11.2 HM Treasury shall be permitted to transfer, assign or novate its rights and obligations under this Deed to any entity which is wholly owned, directly or indirectly, by HM Treasury (a Wholly Owned Entity). In the event of any such assignment, transfer or novation of rights or obligations, HM Treasury shall procure that, immediately prior to any such Wholly Owned Entity ceasing to be wholly owned directly or indirectly by HM Treasury, such rights or obligations (as appropriate) shall be novated, assigned or transferred to HM Treasury or to any other Wholly Owned Entity.
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12 Counterparts
This Deed may be executed in any number of counterparts. All counterparts together will be taken to constitute one instrument.
13 Variation
No variation of this Deed shall be effective unless in writing and signed by or on behalf of each party.
14 Third Party Rights
A person who is not a party to this Deed has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of, or enjoy any benefit under, this Deed.
15 Governing Law and Jurisdiction
This Deed and any non-contractual obligations arising out of or in connection with it shall be governed by and construed in accordance with English law. Each party submits to the exclusive jurisdiction of the English courts to settle any dispute which may arise out of or in connection with this Deed.
A38229890
In witness whereof this Deed has been duly executed and delivered as a Deed by the Parties on the day and year first before written.
A38229890
A38229890
Principal subsidiaries of The Royal Bank of Scotland Group plc
|
Nature of business |
Country of incorporation and
|
Group interest |
National Westminster Bank Plc (1,3) |
Banking |
Great Britain |
100% |
The Royal Bank of Scotland plc (3) |
Banking |
Great Britain |
100% |
Coutts & Company (2, 3) |
Private banking |
Great Britain |
100% |
Ulster Bank Ireland Designated Activity Company (3) |
Banking |
Republic of Ireland |
100% |
Ulster Bank Limited (3) |
Banking |
Northern Ireland |
100% |
NatWest Markets Plc |
Banking |
Great Britain |
100% |
NatWest Markets Securities Inc. (4) |
Broker dealer |
US |
100% |
The Royal Bank of Scotland International Limited (5) |
Financial Institution |
Jersey |
100% |
Notes:
(1) The company does not hold any of the preference shares in issue.
(2) Coutts & Company is incorporated with unlimited liability.
(3) Owned via NatWest Holdings Limited
(4) Owned via NatWest Markets Plc
(5) Owned via The Royal Bank of Scotland International (Holdings) Limited
The above information is provided only in relation to subsidiary companies which would be deemed to be a significant subsidiary in accordance with rule 1-02(w) of Regulation S-X as at 31 December 2018.
302 CERTIFICATION
I, Ross McEwan, certify that:
1. I have reviewed this annual report on Form 20-F of The Royal Bank of Scotland Group plc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and
5. The companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting.
February 28, 2019
/s/ Ross McEwan
Ross McEwan
Chief Executive
302 CERTIFICATION
I, Katie Murray, certify that:
1. I have reviewed this annual report on Form 20-F of The Royal Bank of Scotland Group plc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and
5. The companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting.
February 28, 2019
/s/ Katie Murray
Katie Murray
Chief Financial Officer
906 CERTIFICATION
The certification set forth below is being submitted in connection with the annual report on Form 20-F for the year ended December 31, 2018 (the Report) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the Securities Exchange Act of 1934) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
Ross McEwan, the Chief Executive, and Katie Murray, the Chief Financial Officer, of The Royal Bank of Scotland Group plc, each certify that, to the best of his knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of The Royal Bank of Scotland Group plc.
February 28, 2019
/s/ Ross McEwan
Name: Ross McEwan
Chief Executive
/s/ Katie Murray
Name: Katie Murray
Chief Financial Officer
Consent of Independent Registered Public Accounting Firm |
We consent to the incorporation by reference of our reports dated 14 February 2019, relating to the consolidated financial statements of The Royal Bank of Scotland Group plc and the effectiveness of The Royal Bank of Scotland Group plcs internal control over financial reporting, included in the Annual Report on Form 20-F of The Royal Bank of Scotland Group plc for the year ended 31 December 2018, in the following Registration Statements:
F-3 333-222022
S-8 333-160220
S-8 333-85208
S-8 333-115726
S-8 333-120980
S-8 333-130558
S-8 333-153673
S-8 333-171227
S-8 333-174641
S-8 333-179967
/s/ Ernst & Young LLP
Ernst & Young LLP
London, United Kingdom
28 February 2019