REG - Royal Bk Scot.Grp. - Annual Financial Report <Origin Href="QuoteRef">RBS.L</Origin> - Part 4

NatwestAnnouncement

24/02/2017 07:08

- Part 4: For the preceding part double click  ID:nRSX7683Xc 

company being necessary having regard to public interest considerations.
The use of different stabilisation powers is also subject to further "specific
conditions" that vary according to the relevant stabilisation power being
used. Although the SRR sets out the pre-conditions for determining whether an
institution is failing or likely to fail, it is uncertain how the Bank of
England would assess such conditions in any particular pre-insolvency scenario
affecting RBSG and/or other members of the Group and in deciding whether to
exercise a resolution power. Further regulatory developments, including
proposals by the FSB on cross-border recognition of resolution actions, could
also influence the conditions for the exercise of the stabilisation powers.
There has been no application of the SRR powers in the UK to a large financial
institution, such as RBSG, to date, which could provide an indication of the
relevant UK resolution authority's approach to the exercise of the resolution
powers, and even if such examples existed, they may not be indicative of how
such powers would be applied to RBSG. Therefore, holders of shares and other
securities issued by the Group may not be able to anticipate a potential
exercise of any such powers. 
 
The UK bail-in tool is one of the powers available to the UK resolution
authority under the SRR and was introduced under the Banking Reform Act 2013.
The UK government amended the provisions of the Banking Act to ensure the
consistency of these provisions with the bail-in provisions under the BRRD,
which amendments came into effect on 1 January 2015. The UK bail-in tool
includes both a power to write-down or convert capital instruments and
triggered at the point of non-viability of a financial institution and a
bail-in tool applicable to eligible liabilities (including senior unsecured
debt securities issued by the Group) and available in resolution. 
 
The capital instruments write-down and conversion power may be exercised
independently of, or in combination with, the exercise of a resolution tool,
and it allows resolution authorities to cancel all or a portion of the
principal amount of capital instruments and/or convert such capital
instruments into common equity Tier 1 instruments when an institution is no
longer viable. The point of non-viability for such purposes is the point at
which the Bank of England or the PRA determines that the institution meets the
conditions for entry into the Special Resolution Regime as defined under the
Banking Act or will no longer be viable unless the relevant capital
instruments are written down or extraordinary public support is provided, and
without such support the appropriate authority determines that the institution
would no longer be viable. 
 
Where the conditions for resolution exist and it is determined that a
stabilisation power may be exercised, the Bank of England may use the bail-in
tool (in combination with other resolution tools under the Banking Act ) to,
among other things, cancel or reduce all or a portion of the principal amount
of, or interest on, certain unsecured liabilities of a failing financial
institution and/or convert certain debt claims into another security,
including ordinary shares of the surviving entity. 
 
In addition, the Bank of England may use the bail-in tool to, among other
things, replace or substitute the issuer as obligor in respect of debt
instruments, modify the terms of debt instruments (including altering the
maturity (if any) and/or the amount of interest payable and/or imposing a
temporary suspension on payments) and discontinue the listing and admission to
trading of financial instruments. The exercise of the bail-in tool will be
determined by the Bank of England which will have discretion to determine
whether the institution has reached a point of non-viability or whether the
conditions for resolution are met, by application of the relevant provisions
of the Banking Act, and involves decisions being taken by the PRA and the Bank
of England, in consultation with the FCA and HM Treasury. As a result, it will
be difficult to predict when, if at all, the exercise of the bail-in power may
occur. 
 
The potential impact of these powers and their prospective use may include
increased volatility in the market price of shares and other securities issued
by the Group, as well as increased difficulties in issuing securities in the
capital markets and increased costs of raising such funds. 
 
If these powers were to be exercised (or there is an increased risk of
exercise) in respect of the Group or any entity within the Group such exercise
could result in a material adverse effect on the rights or interests of
shareholders which would likely be extinguished or very heavily diluted.
Holders of debt securities (which may include holders of senior unsecured
debt), would see the conversion of part (or all) of their claims into equity
or written down in part or written off entirely. In accordance with the rules
of the Special Resolution Regime, the losses imposed on holders of equity and
debt instruments through the exercise of bail-in powers would be subject to
the "no creditor worse off" safeguard, which requires losses not to exceed
those which would be realised in insolvency. 
 
Although the above represents the risks associated with the UK bail-in power
currently in force in the UK and applicable to the Group's securities, changes
to the scope of, or conditions for the exercise of the UK bail-in power may be
introduced as a result of further political or regulatory developments. In
addition, further political, legal or strategic developments may lead to
structural changes to the Group, including at the holding company level.
Notwithstanding any such changes, the Group expects that its securities would
remain subject to the exercise of a form of bail-in power, either pursuant to
the provisions of the Banking Act, the BRRD or otherwise. 
 
In the UK and in other jurisdictions, the Group is responsible for
contributing to compensation schemes in respect of banks and other authorised
financial services firms that are unable to meet their obligations to
customers. 
 
In the UK, the Financial Services Compensation Scheme (FSCS) was established
under the Financial Services and Markets Act 2000 and is the UK's statutory
fund of last resort for customers of authorised financial services firms. The
FSCS pays compensation if a firm is unable to meet its obligations. The FSCS
funds compensation for customers by raising levies on the industry, including
the Group. In relation to protected deposits, each deposit-taking institution
contributes towards these levies in proportion to their share of total
protected deposits. 
 
In the event that the FSCS needs to raise additional and unexpected funding,
is required to raise funds more frequently or significantly increases the
levies to be paid by authorised firms, the associated costs to the Group may
have an adverse impact on its results of operations and financial condition.
For example the deposit protection limit increased by £10,000 to £85,000
effective from 30 January 2017, which will result in an increase to the
Group's FSCS levies. 
 
To the extent that other jurisdictions where the Group operates have
introduced or plan to introduce similar compensation, contributory or
reimbursement schemes, the Group may make further provisions and may incur
additional costs and liabilities, which may have an adverse impact on its
financial condition and results of operations. 
 
The Group's results could be adversely affected in the event of 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 initially at cost and subsequently at cost less any accumulated
impairment losses. As required by IFRS Standards, the Group tests goodwill for
impairment annually, or more frequently when events or circumstances indicate
that it might be impaired. An impairment test involves comparing 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 2016, the Group carried goodwill of £5.6 billion on its balance
sheet. The value in use and fair value of the Group's cash-generating units
are affected by market conditions and the performance of the economies in
which the Group operates. 
 
Where the Group is required to recognise a goodwill impairment, it is recorded
in the Group's income statement, but it has no effect on the Group's
regulatory capital position. Further impairments of the Group's goodwill could
have an adverse effect on the Group's results and financial condition. 
 
Recent and anticipated changes in the tax legislation in the UK are likely to
result in increased tax payments by the Group and may impact the
recoverability of certain deferred tax assets recognised by the Group. 
 
In accordance with IFRS Standards, 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. 
 
In the UK, legislation has been introduced over the past few years which seeks
to impose restrictions on the use of certain brought forward tax losses of
banking companies.. This has impacted and will continue to impact the extent
to which the Group is able to recognise deferred tax assets. Failure to
generate sufficient future taxable profits or further changes in tax
legislation (including rates of tax) or accounting standards may reduce the
recoverable amount of the recognised deferred tax assets. Further changes to
the treatment of deferred tax assets may impact the Group's capital, for
example by reducing further the Group's ability to recognise deferred tax
assets. The implementation of the rules relating to the UK ring-fencing regime
and the resulting restructuring of the Group may further restrict the Group's
ability to recognise tax deferred tax assets in respect of brought forward
losses. 
 
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 Government's
shareholding is managed by UK Financial 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. During 2015, all of the
B shares held by the UK Government were converted into ordinary shares of £1
each (see Note 24). 
 
The Group enters into transactions with many of these bodies on an arm's
length basis. Transactions include the payment of: taxes principally UK
corporation tax (see Note 6) and value added tax; national insurance
contributions; local authority rates; and regulatory fees and levies
(including the bank levy (see Note 3) and FSCS levies (see Note 30) 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 0.18% 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 arm's length terms. In some instances,
the investment may extend to ownership or control over 20% or more of the
voting rights of the investee company. However, these investments are not
considered to give rise to transactions of a materiality requiring disclosure
under IAS 24. 
 
(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. 
 
Legal Entity Identifier: 2138005O9XJIJN4JPN90 
 
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