REG - Royal Bk Scot.Grp. - Annual Financial Report <Origin Href="QuoteRef">RBS.L</Origin> - Part 3

NatwestAnnouncement

24/02/2017 07:08

- Part 3: For the preceding part double click  ID:nRSX7683Xb 

which adversely affect its relationship with its customers and reputation and
may lead to regulatory investigations and redress. However, the Group's
current focus on cost-saving measures as part of its transformation programme
may impact the resources available to implement further improvements to the
Group IT infrastructure or limit the resources available for investments in
technological developments and innovations. Should such investment and
rationalisation initiatives fail to achieve the expected results, or prove to
be insufficient, it could have a material adverse impact on the Group's
operations, its ability to retain or grow its customer business or its
competitive position and could negatively impact the Group's financial
position. 
 
The Group's businesses are subject to substantial regulation and oversight.
Significant regulatory developments and increased scrutiny by the Group's key
regulators has had and is likely to continue to increase compliance and
conduct risks and could have a material adverse effect on how the Group
conducts its business and on its results of operations and financial
condition. 
 
The Group is subject to extensive laws, regulations, corporate governance
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. Among others, the implementation and
strengthening of the prudential and resolution framework applicable to
financial institutions in the UK, the EU and the US, and future amendments to
such rules, are considerably affecting the regulatory landscape in which the
Group operates and will operate in the future, including as a result of the
adoption of rules relating to the UK ring-fencing regime, prohibitions on
proprietary trading, CRD IV and the BRRD and certain other measures. Increased
regulatory focus in certain areas, including conduct, consumer protection
regimes, anti-money laundering, payment systems, and antiterrorism laws and
regulations, have resulted in the Group facing greater regulation and scrutiny
in the UK, the 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. 
 
Such changes may also result in an increased number of regulatory
investigations and proceedings and have increased the risks relating to the
Group's ability to comply with the applicable body of rules and regulations in
the manner and within the time frames required. 
 
Such risks are currently exacerbated by the outcome of the EU Referendum and
the UK's decision to leave the EU and the unprecedented degree of uncertainty
as to the respective legal and regulatory frameworks in which the Group and
its subsidiaries will operate when the UK is no longer a member of the EU. For
example, current proposed changes to the European prudential regulatory
framework for banks and investment banks may result in additional prudential
or structural requirements being imposed on financial institutions based
outside the EU wishing to provide financial services within the EU (which may
apply to the Group once the UK has formally exited the EU). See also "Changes
to the prudential regulatory framework for banks and investment banks within
the EU may require additional structural changes to the Group's operations
which may affect current restructuring plans and have a material adverse
effect Group". In addition, the Group and its counterparties may no longer be
able to rely on the European passporting framework for financial services and
could be required to apply for authorisation in multiple European
jurisdictions, the costs, timing and viability of which is uncertain. 
 
Any of these developments (including failures to comply with new rules and
regulations) could have a significant impact on how the Group conducts its
business, its authorisations and licences, the products and services it
offers, its reputation and the value of its assets, the Group's operations or
legal entity structure, including attendant restructuring costs and
consequently have a material adverse effect on its business, funding costs,
results of operations, financial condition and future prospects. 
 
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: 
 
·      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
(and taking into account the Group's new legal structure following the
implementation of the UK ring-fencing regime), including amendments to the
rules relating to the calculation of risk-weighted assets and reliance on
internal models and credit ratings as well as rules affecting the eligibility
of deferred tax assets; 
 
·      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
MREL or by the FSB's recommendations on TLAC; 
 
·      new or amended regulations or taxes that reduce profits attributable to
shareholders which may diminish, or restrict, the accumulation of the
distributable reserves or distributable items necessary to make distributions
or coupon payments or limit the circumstances in which such distributions may
be made or the extent thereof; 
 
·      the monetary, fiscal, interest rate and other policies of central banks
and other governmental or regulatory bodies; 
 
·      further investigations, proceedings or fines either against the Group
in isolation or together with other large financial institutions with respect
to market conduct wrongdoing; 
 
·      the imposition of government-imposed requirements and/or related fines
and sanctions with respect to lending to the UK SME market and larger
commercial and corporate entities; 
 
·      increased regulatory scrutiny with respect to mortgage lending,
including through the implementation of the UK mortgage market review and
other initiatives led by the Bank of England or European regulators; 
 
·      additional rules and regulatory initiatives and review relating to
customer protection, including the FCA's Treating Customers Fairly regime and
increased focus by regulators on how institutions conduct business,
particularly with regard to the delivery of fair outcomes for customers and
orderly/transparent markets; 
 
·      the imposition of additional restrictions on the Group's ability to
compensate its senior management and other employees and increased
responsibility and liability rules applicable to senior and key employees; 
 
·      regulations relating to, and enforcement of, anti-bribery, anti-money
laundering, anti-terrorism or other similar sanctions regimes; 
 
·      rules relating to foreign ownership, expropriation, nationalisation and
confiscation of assets; 
 
·      changes to financial reporting standards (including accounting
standards or guidance) and guidance or the timing of their implementation; 
 
·      changes to risk aggregation and reporting standards; 
 
·      changes to corporate governance requirements, senior manager
responsibility, corporate structures and conduct of business rules; 
 
·      competition reviews and investigations relating to the retail banking
sector in the UK, including with respect to SME banking and PCAs; 
 
·      financial market infrastructure reforms establishing new rules applying
to investment services, short selling, market abuse, derivatives markets and
investment funds, including the European Market Infrastructure Regulation and
the Markets in Financial Instruments Directive and Regulation in the EU and
the Dodd Frank Wall Street Reform Consumer Protection Act of 2010 in the US; 
 
·      increased attention to competition and innovation in UK payment systems
following the establishment of the new Payments Systems Regulator 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, including the EU General Data Protection Regulation; 
 
·      restrictions on proprietary trading and similar activities within a
commercial bank and/or a group; 
 
·      the introduction of, and changes to, taxes, levies or fees applicable
to the Group's operations, such as the imposition of a financial transaction
tax, changes in tax rates, 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; 
 
·      investigations into facilitation of tax evasion or avoidance or the
creation of new civil or criminal offences relating thereto; 
 
·      the regulation or endorsement of credit ratings used in the EU (whether
issued by agencies in European member states or in other countries, such as
the US); and 
 
·      other requirements or policies affecting the Group's 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. 
 
Changes in laws, rules or regulations, or in their interpretation or
enforcement, or the implementation of new laws, rules or regulations,
including contradictory laws, rules or regulations by key regulators in
different jurisdictions, or failure by the Group to comply with such laws,
rules and regulations, may have a material adverse effect on the Group's
business, financial condition and results of operations. In addition,
uncertainty and lack of international regulatory coordination as enhanced
supervisory standards are developed and implemented may adversely affect the
Group's ability to engage in effective business, capital and risk management
planning. 
 
The Group is subject to pension risks and may be required to make additional
contributions to cover pension funding deficits as a result of degraded
economic conditions or as a result of the restructuring of its pension schemes
in relation to the implementation of the UK ring-fencing regime. 
 
The Group maintains a number of defined benefit pension schemes for certain
former and current employees. Pension risk includes the risk that the assets
of the Group's various defined benefit pension schemes do not fully match the
timing and amount of the schemes' liabilities, as a result of which the Group
is required or chooses to make additional contributions to address deficits
that may emerge. Risk arises from the schemes because the value of the asset
portfolios may be less than expected and because there may be greater than
expected increases in the estimated value of the schemes' liabilities and
additional future contributions to the schemes may be required. 
 
The value of pension scheme liabilities varies with changes to long-term
interest rates (including prolonged periods of low interest rates as is
currently the case), inflation, monetary policy, pensionable salaries and the
longevity of scheme members, as well as changes in applicable legislation. In
particular, as life expectancies increase, so too will the pension scheme
liabilities; the impact on the pension scheme liabilities due to a one year
increase in longevity would have been expected to be £1.5 billion as at 31
December 2016. 
 
In addition, as the Group expects to continue to materially reduce the scope
of its operations as part of the implementation of its transformation
programme and of the UK ring-fencing regime, pension liabilities will
therefore increase relative to the size of the Group, which may impact the
Group's results of operations and capital position. 
 
Given economic and financial market difficulties and volatility, the low
interest rate environment and the risk that such conditions may occur again
over the near and medium term, some of the Group's pension schemes have
experienced increased pension deficits. 
 
The last triennial valuation of the Main Scheme, had an effective date of 31
December 2015. This valuation was concluded with the acceleration of the
nominal value of all committed contributions in respect of past service (£4.2
billion), which was paid in Q1 2016. 
 
The next triennial period valuation will take place in Q4 2018 and the Main
Scheme pension trustee has agreed that it would not seek a new valuation prior
to that date, except where a material change arises. The 2018 triennial
valuation is expected to result in a significant increase in the regular
annual contributions in respect of the ongoing accrual of benefits.
Notwithstanding the 2016 accelerated payment and any additional contributions
that may be required beforehand as a result of a material change, the Group
expects to have to agree to additional contributions, over and above the
existing committed past service contributions, as a result of the next
triennial valuation. Under current legislation, such agreement would need to
be reached no later than Q1 2020. The cost of such additional contributions
could be material and any additional contributions that are committed to the
Main Scheme following new actuarial valuations would trigger the recognition
of a significant additional liability on the Group's balance sheet and/or an
increase in any pension surplus derecognised, which in turn could have a
material adverse effect on the Group's results of operations, financial
position and prospects. 
 
In addition, the UK ring-fencing regime will require significant changes to
the structure of the Group's existing defined benefit pension schemes as RFB
entities may not be liable for debts to pension schemes that might arise as a
result of the failure of an entity that is not an RFB or wholly owned
subsidiary thereof after 1 January 2026. The restructuring of the Group and
its defined benefit pension plans to implement the UK ring-fencing regime
could affect assessments of the Group's pension scheme deficits or result in
the pension scheme trustees considering that the employer covenant has been
weakened and result in additional contributions being required. 
 
The Group is developing a strategy to meet these requirements, which has been
discussed with the PRA and is likely to require the agreement of the pension
scheme trustee. Discussions with the pension scheme trustee are ongoing and
will be influenced by the Group's overall ring-fence strategy and its pension
funding and investment strategies. 
 
If agreement is not reached with the pension trustee, alternative options less
favourable to the Group may need to be developed to meet the requirements of
the pension regulations. The costs associated with the restructuring of the
Group's existing defined benefit pension schemes could be material and could
result in higher levels of additional contributions than those described above
and currently agreed with the pension trustee which could have a material
adverse effect on the Group's results of operations, financial position and
prospects. 
 
Pension risk and changes to the Group's funding of its pension schemes may
have a significant impact on the Group's capital position. 
 
The Group's capital position is influenced by pension risk in several
respects: Pillar 1 capital is impacted by the requirement that net pension
assets are to be deduced from capital and that actuarial gains/losses impact
reserves and, by extension, CET1 capital; Pillar 2A requirements result in the
Group being required to carry a capital add-on to absorb stress on the pension
fund and finally the risk of additional contributions to the Group's pension
fund is taken into account in the Group's capital framework plan. 
 
The Group believes that the accelerated payment to the Group's Main Scheme
pension fund made in Q1 2016 improved the Group's capital planning and
resilience through the period to 2019 and provided the Main Scheme pension
trustee with more flexibility over its investment strategy. This payment has
resulted in a reduction in prevailing Pillar 2A add-on. However, subsequent
contributions required in connection with the 2018 triennial valuation may
adversely impact the Group's capital position. The Group's expectations as to
the impact on its capital position of this payment in the near and medium term
and of the accounting impact under its revised accounting policy are based on
a number of assumptions and estimates, including with respect to the
beneficial impact on its Pillar 2A requirements and confirmation of such
impact by the PRA and the timing thereof, any of which may prove to be
inaccurate (including with respect to the calculation of the CET1 ratio impact
on future periods), including as a result of factors outside of the Group's
control (which include the PRA's approval). 
 
As a result, if any of these assumptions proves inaccurate, the Group's
capital position may significantly deteriorate and fall below the minimum
capital requirements applicable to the Group or Group entities, and in turn
result in increased regulatory supervision or sanctions, restrictions on
discretionary distributions or loss of investor confidence, which could
individually or in aggregate have a material adverse effect on the Group's
results of operations, financial prospects or reputation. 
 
The impact of the Group's pension obligations on its results and operations
are also dependent on the regulatory environment in which it operates. There
is a risk that changes in prudential regulation, pension regulation and
accounting standards, or a lack of coordination between such sets of rules,
may make it more challenging for the Group to manage its pension obligations
resulting in an adverse impact on the Group's CET1 capital. 
 
The Group relies on valuation, capital and stress test models to conduct its
business, assess its risk exposure and anticipate capital and funding
requirements. Failure of these models to provide accurate results or
accurately reflect changes in the micro-and macroeconomic environment in which
the Group operates or findings of deficiencies by the Group's regulators
resulting in increased regulatory capital requirements could have a material
adverse effect on the Group's business, capital and results. 
 
Given the complexity of the Group's business, strategy and capital
requirements, the Group relies on analytical models to manage its business,
assess the value of its assets and its risk exposure and anticipate capital
and funding requirements, including with stress testing. The Group's
valuation, capital and stress test models and the parameters and assumptions
on which they are based, need to be periodically reviewed and updated to
maximise their accuracy. 
 
Failure of these models to accurately reflect changes in the environment in
which the Group operates or to be updated in line with the Group's business
model or operations, or the failure to properly input any such changes could
have an adverse impact on the modelled results or could fail to accurately
capture the Group's risk exposure or the risk profile of the Group's financial
instruments or result in the Group being required to hold additional capital
as a function of the PRA buffer. The Group also uses valuation models that
rely on market data inputs. If incorrect market data is input into a valuation
model, it may result in incorrect valuations or valuations different to those
which were predicted and used by the Group in its forecasts or decision
making. Internal stress test models may also rely on different, less severe,
assumptions or take into account different data points than those defined by
the Group's regulators. 
 
Some of the analytical models used by the Group are predictive in nature. In
addition, a number of internal models used by Group subsidiaries are designed,
managed and analysed by the Group and may not appropriately capture risks and
exposures at subsidiary level. Some of the Group's internal models are subject
to periodic review by its regulators and, if found deficient, the Group may be
required to make changes to such models or may be precluded from using any
such models, which could result in an additional capital requirement which
could have a material impact on the Group's capital position. 
 
The Group could face adverse consequences as a result of decisions which may
lead to actions by management based on models that are poorly developed,
implemented or used, or as a result of the modelled outcome being
misunderstood or 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 Group's business, financial condition and/or results of
operations, minimum capital requirements and reputation. 
 
The reported results of the Group are sensitive to the accounting policies,
assumptions and estimates that underlie the preparation of its financial
statements. Its results in future periods may be affected by changes to
applicable accounting rules and standards. 
 
The preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the reported amounts of
assets, liabilities, income and expenses. Due to the inherent uncertainty in
making estimates, results reported in future periods may reflect amounts which
differ from those estimates. Estimates, judgements and assumptions 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 Group's results and financial
position, based upon materiality and significant judgements and estimates,
include goodwill, provisions for liabilities, deferred tax, loan impairment
provisions, fair value of financial instruments, which are discussed in detail
in "Critical accounting policies and key sources of estimation uncertainty" on
pages 190, 308 and 310 . IFRS Standards and Interpretations that have been
issued by the International Accounting Standards Board (the IASB) but which
have not yet been adopted by the Group are discussed in "Accounting
developments" on pages 310 to 315. Changes in accounting standards or guidance
by internal accounting bodies or in the timing of their implementation,
whether mandatory or as a result of recommended disclosure relating to the
future implementation of such standards 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 July 2014, the IASB published a new accounting standard for financial
instruments (IFRS 9) effective for annual periods beginning on or after 1
January 2018. It introduces a new framework for the recognition and
measurement of credit impairment, based on expected credit losses, rather than
the incurred loss model currently applied under IAS 39. The inclusion of loss
allowances with respect to all financial assets that are not recorded at fair
value will tend to result in an increase in overall impairment balances when
compared with the existing basis of measurement under IAS 39. As a result of
ongoing regulatory consultation, there is currently uncertainty as to the
impact of the implementation of this standard on the Group's CET1 capital (and
therefore CET1 ratio), although it is expected that this will result in
increased earnings and capital volatility for the Group. 
 
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 active, 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 Group's 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. Resulting changes in the fair values of
the financial instruments has had and could continue to have a material
adverse effect on the Group's earnings, financial condition and capital
position. 
 
The Group's operations entail inherent reputational risk. 
 
Reputational risk, meaning the risk of brand damage and/or financial loss due
to a failure to meet stakeholders' expectations of the Group's conduct,
performance and business profile, is inherent in the Group's business.
Stakeholders include customers, investors, rating agencies, employees,
suppliers, governments, politicians, regulators, special interest groups,
consumer groups, media and the general public. 
 
Brand damage can be detrimental to the business of the Group in a number of
ways, including its ability to build or sustain business relationships with
customers, low staff morale, regulatory censure or reduced access to, or an
increase in the cost of, funding. In particular, negative public opinion
resulting from the actual or perceived manner in which the Group conducts its
business activities and operations, including as a result of speculative or
inaccurate media coverage, the Group's financial performance, ongoing
investigations and proceedings and the settlement of any such investigations
and proceedings, IT failures or cyber-attacks resulting in the loss or
publication of confidential customer data or other sensitive information, the
level of direct and indirect government support, or the actual or perceived
strength or practices in the banking and financial industry may adversely
affect the Group's ability to keep and attract customers and, in particular,
corporate and retail depositors. 
 
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. 
 
Reputational risks may also be increased as a result of the restructuring of
the Group to implement its transformation programme and the UK ring-fencing
regime. Although the Group has implemented a Reputational Risk Policy across
customer-facing businesses to improve the identification, assessment and
management of customers, transactions, products and issues which represent a
reputational risk, the Group cannot ensure that it will be successful in
avoiding damage to its business from reputational risk, which could result in
a material adverse effect on the Group's business, financial condition,
results of operations and prospects. 
 
The Group is exposed to conduct risk which may adversely impact the Group or
its employees and may result in conduct having a detrimental impact on the
Group's customers or counterparties. 
 
In recent years, the Group has sought to refocus its culture on serving the
needs of its customers and continues to redesign many of its systems and
processes to promote this focus and strategy. However, the Group is exposed to
various forms of conduct risk in its operations. These include business and
strategic planning that does not consider customers' needs, ineffective
management and monitoring of products and their distribution, a culture that
is not customer-centric, outsourcing of customer service and product delivery
via third parties that do not have appropriate levels of control, oversight
and culture, the possibility of alleged mis-selling of financial products or
the mishandling of complaints related to the sale of such product, or poor
governance of incentives and rewards. Some of these risks have materialised in
the past and ineffective management and oversight of conduct issues may result
in customers being poorly or unfairly treated and may in the future lead to
further remediation and regulatory intervention/enforcement. 
 
The Group's businesses are also exposed to risk from employee misconduct
including non-compliance with policies and regulatory rules, negligence or
fraud, any of which could result in regulatory sanctions and serious
reputational or financial harm to the Group. In recent years, a number of
multinational financial institutions, including the Group, have suffered
material losses due to the actions of employees, including, for example, in
connection with the foreign exchange and LIBOR investigations and the Group
may not succeed in protecting itself from such conduct in the future. It is
not always possible to deter employee misconduct and the precautions the Group
takes to prevent and detect this activity may not always be effective. 
 
The Group has implemented a number of policies and allocated new resources in
order to help mitigate against these risks. The Group has also prioritised
initiatives to reinforce good conduct in its engagement with the markets in
which it operates, together with the development of preventative and detective
controls in order to positively influence behaviour. 
 
The Group's transformation programme is also intended to improve the Group's
control environment. Nonetheless, no assurance can be given that the Group's
strategy and control framework will be effective and that conduct issues will
not have an adverse effect on the Group's results of operations, financial
condition or prospects. 
 
The Group may be adversely impacted if its risk management is not effective
and there may be significant challenges in maintaining the effectiveness of
the Group's risk management framework as a result of the number of strategic
and restructuring initiatives being carried out by the RBS Group
simultaneously. 
 
The management of risk is an integral part of all of the Group's activities.
Risk management includes the definition and monitoring of the Group's risk
appetite and reporting of the Group's exposure to uncertainty and the
consequent adverse effect on profitability or financial condition arising from
different sources of uncertainty and risks as described throughout these risk
factors. 
 
Ineffective risk management may arise from a wide variety of events and
behaviours, 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 Group's
reputation or its relationship with its customers, shareholders or other
stakeholders, which in turn could have a significant effect on the Group's
business prospects, financial condition and/or results of operations. 
 
Risk management is also strongly related to the use and effectiveness of
internal stress tests and models. See "The Group relies on valuation, capital
and stress test models to conduct its business, assess its risk exposure and
anticipate capital and funding requirements. Failure of these models to
provide accurate results or accurately reflect changes in the micro-and
macroeconomic environment in which the Group operates or findings of
deficiencies by the Group's regulators resulting in increased regulatory
capital requirements could have a material adverse effect on the Group's
business, capital and results." 
 
A failure by the Group to embed a strong risk culture across the organisation
could adversely affect the Group's ability to achieve its strategic
objective. 
 
In response to weaknesses identified in previous years, the Group is currently
seeking to embed a strong risk culture within the organisation based on a
robust risk appetite and governance framework. A key component of this
approach is the three lines of defence model designed to identify, manage and
mitigate risk across all levels of the organisation. This framework has been
implemented and improvements continue and will continue to be made to clarify
and improve the three lines of defence and internal risk responsibilities and
resources, including in response to feedback from regulators. Notwithstanding
the Group's efforts, changing an organisation's risk culture requires
significant time, investment and leadership, and such efforts may not insulate
the Group from future instances of misconduct. A failure by any of these three
lines to carry out their responsibilities or to effectively embed this culture
could have a material adverse effect on the Group through an inability to
achieve its strategic objectives for its customers, employees and wider
stakeholders. 
 
The Group's business and results of operations may be adversely affected by
increasing competitive pressures and technology disruption in the markets in
which it operates. 
 
The markets for UK financial services, and the other markets within which the
Group operates, are very competitive, and management 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), new lending models (such as
peer-to-peer lending), 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, in particular with respect to
payment services and products, and the introduction of disruptive technology
may impede the Group's 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 regulatory and competition policy
implemented by the UK government, particularly as a result of the Open Banking
initiative and remedies imposed by the Competition and Markets Authority (CMA)
designed to support the objectives of this initiative. 
 
Increasingly many of the products and services offered by the Group are, and
will become, technology intensive and the Group's ability to develop such
services has become increasingly important to retaining and growing the
Group's customer business in the UK. 
 
There can be no certainty that the Group's investment in its IT capability
intended to address the material increase in customer use of online and mobile
technology for banking will be successful or that it will allow the Group to
continue to grow such services in the future. Certain of the Group's current
or future competitors may have more efficient operations, including better IT
systems allowing them to implement innovative technologies for delivering
services to their customers. Furthermore, the Group's 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,
especially against a backdrop of cost savings targets for the Group, or the
Group may fail to identify future opportunities or derive benefits from
disruptive technologies. 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 addition, recent and future disposals and restructurings by the Group
relating to the implementation of non-customer facing elements of its
transformation programme and the UK ring-fencing regime, or required by the
Group's regulators, as well as constraints imposed on the Group's ability to
compensate its employees at the same level as its competitors, may also have
an impact on its ability to compete effectively. Intensified competition from
incumbents, challengers and new entrants in the Group's core markets could
lead to greater pressure on the Group to maintain returns and may lead to
unsustainable growth decisions. These and other changes in the Group's
competitive environment could have a material adverse effect on the Group's
business, margins, profitability, financial condition and prospects. 
 
The Group operates in markets that are subject to intense scrutiny by the
competition authorities and its business and results of operations could be
materially affected by competition rulings and other government measures. 
 
The competitive landscape for banks and other financial institutions in the
UK, the rest of Europe and the US is changing rapidly. Recent regulatory and
legal changes have and may continue to result in new market participants and
changed competitive dynamics in certain key areas, such as in retail and SME
banking in the UK where the introduction of new entrants is being actively
encouraged by the UK Government. The competitive landscape in the UK is also
likely to be affected by the UK Government's implementation of the UK
ring-fencing regime and other customer protection measures introduced by the
Banking Reform Act 2013. The implementation of these reforms may result in the
consolidation of newly separated businesses or assets of certain financial
institutions with those of other parties to realise new synergies or protect
their competitive position and is likely to increase competitive pressures on
the Group. 
 
The UK retail banking sector has been subjected to intense scrutiny by the UK
competition authorities and by other bodies, including the FCA, 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 Current Accounts (PCAs),
the Independent Commission on Banking and the Parliamentary Commission on
Banking Standards. These reviews raised significant concerns about the
effectiveness of competition in the banking sector. The CMA's Retail Banking
Market Investigation report sets out measures primarily intended to make it
easier for consumers and businesses to compare PCA and SME bank products,
increase the transparency of price comparison between banks and amend PCA
overdraft charging. The CMA is working with HM Treasury and other regulators
to implement these remedies which are likely to impose additional compliance
requirements on the Group and could, in aggregate, adversely impact the
Group's 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 UK financial sector. 
 
The impact of any such developments in the UK will become more significant as
the Group's business becomes increasingly concentrated in the UK retail
sector. These and other changes to the competitive framework in which the
Group operates could have a material adverse effect on the Group's business,
margins, profitability, financial condition and prospects. 
 
As a result of the commercial and regulatory environment in which it operates,
the Group may be unable to attract or retain senior management (including
members of the board) and other skilled personnel of the appropriate
qualification and competence. The Group may also suffer if it does not
maintain good employee relations. 
 
Implementation of the Group's transformation programme and its future success
depend on its ability to attract, retain and remunerate highly skilled and
qualified personnel, including senior management (which includes directors and
other key employees), in a highly competitive labour market. This cannot be
guaranteed, 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 place the Group at a
competitive disadvantage. In addition, the market for skilled personnel is
increasingly competitive, thereby raising the cost of hiring, training and
retaining skilled personnel. 
 
Certain of the Group's directors as well as members of its executive committee
and certain other senior managers and employees are also subject to the new
responsibility regime introduced under the Banking Reform Act 2013 which
introduces clearer accountability rules for those within the new regime. The
senior managers' regime and certification regime took effect on 7 March 2016,
whilst the conduct rules will apply to the wider employee population from 7
March 2017 onwards, with the exception of some transitional provisions. The
new regulatory regime may contribute to 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, given concerns over the allocation of responsibilities
and personal liability introduced by the new rules. 
 
In addition, in order to ensure the independence of the RFB, the Group will be
required to recruit new independent directors and senior members of management
to sit on the boards of directors and board committees of the RFB and other
Group entities, and there may be a limited pool of competent candidates from
which such appointments can be made. 
 
The Group's evolving strategy has led to the departure of a large number of
experienced and capable employees. The restructuring relating to the ongoing
implementation of the Group's transformation programme and related
cost-reduction targets may cause experienced staff members to leave and
prospective staff members not to join the Group. The lack of continuity of
senior management and the loss of important personnel coordinating certain or
several aspects of the Group's restructuring could have an adverse impact on
its implementation. 
 
The failure to attract or retain a sufficient number of appropriately skilled
personnel to manage the complex restructuring required to implement the
Group's strategy could prevent the Group from successfully implementing its
strategy and meeting regulatory commitments. This could have a material
adverse effect on the Group's business, financial condition and results of
operations. 
 
In addition, many of the Group's employees in the UK, continental Europe and
other jurisdictions in which the Group operates are represented by employee
representative bodies, including trade unions. Engagement with its employees
and such bodies is important to the Group and a breakdown of these
relationships could adversely affect the Group's business, reputation and
results. 
 
HM Treasury (or UKFI on its behalf) may be able to exercise a significant
degree of influence over the Group and any further offer or sale of its
interests may affect the price of securities issued by the Group. 
 
On 6 August 2015, the UK Government made its first sale of RBSG ordinary
shares since its original investment in 2009 and sold approximately 5.4% of
its stake in RBSG. Following this initial sale, the UK Government exercised
its conversion rights under the B Shares on 14 October 2015 which resulted in
HM Treasury holding 72.88% of the ordinary share capital of RBSG. The UK
Government, through HM Treasury, currently holds 71.3% of the issued ordinary
share capital of the Group. The UK Government has indicated its intention to
continue to sell down its shareholding in the Group. 
 
Any offers or sale, or expectations relating to the timing thereof, of a
substantial number of ordinary shares by HM Treasury, could negatively affect
prevailing market prices for the outstanding ordinary shares of RBSG and other
securities issued by the Group and lead to a period of increased price
volatility for the Group's securities. 
 
In addition, UKFI manages HM Treasury's shareholder relationship with the
Group 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 UKFI's position as
manager of this shareholding) means that HM Treasury or UKFI might be able to
exercise a significant degree of influence over, among other things, the
election of directors and appointment of senior management, the Group's
capital strategy, dividend policy, remuneration policy or the conduct of the
Group's operations. The manner in which HM Treasury or UKFI exercises HM
Treasury's rights as majority shareholder could give rise to conflicts between
the interests of HM Treasury and the interests of other shareholders. The
Board has a duty to promote the success of the Group for the benefit of its
members as a whole. 
 
The Group is committed to executing the run-down and sale of certain
businesses, portfolios and assets forming part of the businesses and
activities being exited by the Group. Failure by the Group to do so on
commercially favourable terms could have a material adverse effect on the
Group's operations, operating results, financial position and reputation. 
 
The Group's ability to dispose of the remaining businesses, portfolios and
assets forming part of the businesses and activities being exited by the Group
and the price achieved for such disposals will be dependent on prevailing
economic and market conditions, which remain volatile. 
 
As a result, there is no assurance that the Group will be able to sell, exit
or run down these businesses, portfolios or assets either on favourable
economic terms to the Group or at all or that it may do so within the intended
timetable. Material tax or other contingent liabilities could arise on the
disposal or run-down of assets or businesses and there is no assurance that
any conditions precedent agreed will be satisfied, or consents and approvals
required will be obtained in a timely manner or at all. The Group may be
exposed to deteriorations in the businesses, portfolios or assets being sold
between the announcement of the disposal and its completion, which period may
span many months. 
 
In addition, the Group may be exposed to certain risks, including risks
arising out of ongoing liabilities and obligations, breaches of covenants,
representations and warranties, indemnity claims, transitional services
arrangements and redundancy or other transaction-related costs, and
counterparty risk in respect of buyers of assets being sold. 
 
The occurrence of any of the risks described above could have a material
adverse effect on the Group's business, results of operations, financial
condition and capital position and consequently may have the potential to
impact the competitive position of part or all of the Group's business. 
 
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 Group's 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 impact
on the Group's financial condition and results of operations. 
 
The Group and its subsidiaries are subject to a new and evolving framework on
recovery and resolution, the impact of which remains uncertain, and which may
result in additional compliance challenges and costs. 
 
In the EU, the UK and the US, regulators have implemented or are in the
process of implementing recovery and resolution regimes designed to prevent
the failure of financial institutions and resolution tools to ensure the
timely and orderly resolution of financial institutions. These initiatives
have been complemented by a broader set of initiatives to improve the
resilience of financial institutions and reduce systemic risk, including the
UK ring-fencing regime, the introduction of certain prudential requirements
and powers under CRD IV, and certain other measures introduced under the BRRD,
including the requirements relating to loss absorbing capital. 
 
The BRRD which was implemented in the UK from January 2015, provides a
framework for the recovery and resolution of credit institutions and
investment firms, their subsidiaries and certain holding companies in the EU,
and the tools and powers introduced under the BRRD include preparatory and
preventive measures, early supervisory intervention powers and resolution
tools. 
 
Implementation of certain provisions of the BRRD remains subject to secondary
rulemaking as well as a review by the European Parliament and the European
Commission of certain topics mandated by the BRRD. In November 2016, as a
result of this review, the European Commission published a package of
proposals seeking to introduce certain amendments to CRD IV and the BRRD as
well as a new proposal seeking to harmonize creditor hierarchy. These
proposals are now subject to further discussions and negotiations among the
European institutions and it is not possible to anticipate their final
content. Further amendments to the BRRD or the implementing rules in the EU
may also be necessary to ensure continued consistency with the FSB
recommendations on resolution regimes and resolution planning for G-SIBs,
including with respect to TLAC requirements. 
 
In light of these potential developments as well as the impact of the UK's
decision to leave the EU following the result of the EU Referendum, there
remains uncertainty as to the rules which may apply to the Group going
forward. In addition, banks headquartered in countries which are members of
the Eurozone are now subject to the European banking union framework. In
November 2014, the ECB assumed direct supervisory responsibility for RBS NV
and Ulster Bank Ireland under the Single Supervisory Mechanism (SSM). As a
result of the above, there remains uncertainty as to how the relevant
resolution regimes in force in the UK, the Eurozone and other jurisdictions,
would interact in the event of a resolution of the Group. 
 
The BRRD requires national resolution funds to raise "ex ante" contributions
on banks and investment firms in proportion to their liabilities and risk
profiles and allow them to raise additional "ex post" funding contributions in
the event the ex-ante contributions do not cover the losses, costs or other
expenses incurred by use of the resolution fund. Although receipts from the UK
bank levy are currently being used to meet the ex-ante and ex post funding
requirements, the Group may be required to make additional contributions in
the future. In addition, Group entities in countries subject to the European
banking union are required to pay supervisory fees towards the funding of the
SSM as well as contributions to the single resolution fund. 
 
The new recovery and resolution regime implementing the BRRD in the UK
replaces the previous regime and has imposed and is expected to impose in the
near-to medium-term future, additional compliance and reporting obligations on
the Group which may result in increased costs, including as a result of the
Group's mandatory participation in resolution funds, and heightened compliance
risks and the Group may not be in a position to comply with all such
requirements within the prescribed deadlines or at all. 
 
In addition, the PRA has adopted a new framework requiring financial
institutions to ensure the continuity of critical shared services (provided by
entities within the group or external providers) to facilitate recovery
action, orderly resolution and post-resolution restructuring, which will apply
from 1 January 2019. 
 
The application of such rules to the Group may require the Group to
restructure certain of its activities or reorganise the legal structure of its
operations, may limit the Group's ability to outsource certain functions
and/or may result in increased costs resulting from the requirement to ensure
the financial and operational resilience and independent governance of such
critical services. 
 
In addition, compliance by the Group with this new recovery and resolution
framework has required and is expected to continue to require significant work
and engagement with the Group's regulators, including in order for the Group
to submit to the PRA credible recovery and resolution plans, the outcome of
which may impact the Group's operations or structure. Such rules will need to
be implemented consistently with the UK ring-fencing regime. 
 
The Group may become subject to the application of stabilisation or resolution
powers in certain significant stress situations, which may result in various
actions being taken in relation to the Group and any securities of the Group,
including the write-off, write-down or conversion of the Group's securities. 
 
The Banking Act 2009, as amended to implement the BRRD ("Banking Act") confers
substantial powers on relevant UK authorities designed to enable them to take
a range of actions in relation to UK banks or investment firms and certain of
their affiliates in the event a bank or investment firm in the same group is
considered to be failing or likely to fail. Under the Banking Act, wide powers
are granted to the relevant resolution authorities, as appropriate as part of
a special resolution regime (the "SRR"). These powers enable the relevant UK
resolution authority to implement resolution measures with respect to a UK
bank or investment firm and certain of its affiliates (including, for example,
RBSG) (each a "relevant entity") in circumstances in which the relevant UK
resolution authority is satisfied that the resolution conditions are met.
Under the applicable regulatory framework and pursuant to guidance issued by
the Bank of England, governmental capital support, if any is provided, would
only be used as a last resort measure where a serious threat to financial
stability cannot be avoided by other measures (such as the stabilisation
options described below, including the UK bail-in power) and subject to the
limitations set out in the Banking Act. 
 
Several stabilisation options and tools are available to the relevant UK
resolution authority under the SRR, where a resolution has been triggered. In
addition, the UK resolution authority may commence special administration or
liquidation procedures specifically applicable to banks. Where stabilisation
options are used which rely on the use of public funds, the option can only be
used once there has been a contribution to loss absorption and
recapitalisation of at least 8% of the total liabilities of the institution
under resolution. The Bank of England has indicated that among these options,
the UK bail-in tool (as described further below) would apply in the event a
resolution of the Group were triggered. 
 
Further, the Banking Act grants broad powers to the UK resolution authority,
the application of which may adversely affect contractual arrangements and
which include the ability to (i) modify or cancel contractual arrangements to
which an entity in resolution is party, in certain circumstances; (ii) suspend
or override the enforcement provisions or termination rights that might be
invoked by counterparties facing an entity in resolution, as a result of the
exercise of the resolution powers; and (iii) disapply or modify laws in the UK
(with possible retrospective effect) to enable the powers under the Banking
Act to be used effectively. 
 
The stabilisation options are intended to be applied prior to the point at
which any insolvency proceedings with respect to the relevant entity would
otherwise have been initiated. Accordingly, the stabilisation options may be
exercised if the relevant UK resolution authority: (i) is satisfied that a UK
bank or investment firm is failing, or is likely to fail; (ii) determines that
it is not reasonably likely that (ignoring the stabilisation powers) action
will be taken by or in respect of a UK bank or investment firm that will
result in condition (i) above ceasing to be met; (iii) considers the exercise
of the stabilisation powers to be necessary, having regard to certain public
interest considerations (such as the stability of the UK financial system,
public confidence in the UK banking system and the protection of depositors,
being some of the special resolution objectives) and (iv) considers that the
special resolution objectives would not be met to the same extent by the
winding-up of the UK bank or investment firm. 
 
In the event that the relevant UK resolution authority seeks to exercise its
powers in relation to a UK banking group company (such as RBSG), the relevant
UK resolution authority has to be satisfied that (A) the conditions set out in
(i) to (iv) above are met in respect of a UK bank or investment firm in the
same banking group (or, in respect of an EEA or third country credit
institution or investment firm in the same banking group, the relevant EEA or
third country resolution authority is satisfied that the conditions for
resolution applicable in its jurisdiction are met) and (B) certain criteria
are met, such as the exercise of the powers in relation to such UK banking
group 

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