REG - Royal Bk Scot.Grp. - Annual Report and Accounts 2015 <Origin Href="QuoteRef">RBS.L</Origin> - Part 2

NatwestAnnouncement

26/02/2016 07:12

- Part 2: For the preceding part double click  ID:nRSZ2368Qa 

RBS's capital position remained
above the Pillar 1 minimum capital requirements of 4.5% and met the leverage
ratio of 3.0% in the hypothetical stress scenario. Although the PRA judged
that the Group did not meet its CET1 individual capital guidance after
management actions in this scenario, in light of past and future plans to
improve its capital position, the PRA did not require the Group to submit a
revised capital plan. In October 2015, the Bank of England published its
approach to stress testing for the UK banking system applicable until 2018.
The results of these tests will be used by the FPC and the PRA, alongside
other inputs, to set the level of a financial institution's capital buffers,
in particular the capital conservation buffer, countercyclical buffer and the
PRA buffer. 
 
The PRA will also use the stress test results to inform its determination of
whether individual banks' current capital positions are adequate or need
strengthening. For some banks, their individual stress-test results might
imply that the capital conservation buffer and countercyclical rates set for
all banks is not consistent with the impact of the stress on them. In that
case, the PRA can increase regulatory capital buffers for individual banks by
adjusting their PRA buffers. In addition, if the stress tests reveal that a
bank's existing regulatory capital buffers are not sufficient to absorb the
impact of the stress, it is possible that it will need to take action to
strengthen its capital position. There is a strong presumption that the PRA
would require a bank to take action if, at any point during the stress, a bank
were projected to breach any of its minimum CET1 capital or leverage ratio
requirements.  However, if a bank is projected to fail to meet its systemic
buffers, it will still be expected to strengthen its capital position over
time but the supervisory response is expected to be less intensive than if it
were projected to breach its minimum capital requirements. 
 
Failure by the Group to meet the thresholds set as part of the stress tests
carried out by its regulators in the UK and elsewhere may result in the
Group's regulators requiring the Group to hold additional capital, increased
supervision and/or regulatory sanctions, restrictions on capital distributions
and loss of investor confidence, which may impact the Group's financial
condition, results of operations and prospects. 
 
As a result of extensive reforms being implemented within the EU and the UK
relating to the resolution of financial institutions, additional requirements
will arise to ensure that financial institutions maintain sufficient
loss-absorbing capacity. Such changes to the funding and regulatory capital
framework may require the Group to meet higher funding levels than the Group
anticipated within its strategic plans and affect the Group's funding costs. 
 
In addition to the capital and leverage requirements under CRD IV, the EU Bank
Recovery and Resolution Directive ("BRRD") introduces, among other things, a
requirement for banks to maintain at all times a sufficient aggregate amount
of own funds and "eligible liabilities" (that is, liabilities that can absorb
loss and assist in recapitalising a firm in accordance with a predetermined
resolution strategy), known as the minimum requirements for eligible
liabilities ("MREL"), designed to ensure that the resolution of a financial
institution may be carried out, without public funds being exposed to the risk
of loss and in a way which ensures the continuity of critical economic
functions, maintains financial stability and protects depositors. MREL is
being implemented as part of the resolution planning process and not as a
separate or additional capital requirement under Basel III. Indeed, if a
bank's resolution plans are not deemed sufficient, the regulator can require
it to carry higher MREL over and above regulatory minima and potentially
higher than its peers. Certain capital resources required under CRD IV and
associated institution-specific capital requirements set by the PRA or FCA may
count toward meeting MREL, but the PRA has indicated its intention to prohibit
certain double-counting of existing capital resources. 
 
In particular, CET1 capital used to meeting a financial institution's
risk-weighted or leverage buffer requirements may not count towards meeting
MREL requirements. As a result, the Group may be required to issue additional
instruments in the form of CET1 capital or subordinated or senior unsecured
debt instruments and may result in an increased risk of a breach of the
Group's combined buffer requirement, triggering the restrictions relating to
the MDA described above. 
 
In addition to the requirements described above, the FSB published in November
2015 a final term sheet setting out its total loss-absorbing capacity ("TLAC")
standards for global systemically important banks ("G-SIBs"). Although the
Bank of England has indicated that it would use its powers to set MRELs for
G-SIBs to implement the FSB's TLAC standards, the TLAC and MREL requirements
differ in a number of ways. 
 
The EBA is mandated to assess the implementation of MREL in the European Union
and the consistency of MREL with the final TLAC standards in a report required
by October 2016. This may result in the European Commission making amendments
to the European regime on loss-absorbing requirements, which may in turn
impact the UK authorities' implementation of the MREL requirements under the
BRRD, and therefore may impact the quality or quantity of the capital required
to be held by the Group. 
 
The UK government is required to transpose the BRRD's provisions relating to
MREL into law through further secondary legislation with a requirement that
the Bank of England take into account the final draft regulatory technical
standards published by the EBA in July 2015. 
 
The Bank of England is responsible for setting the MREL requirements for each
UK bank, building society and certain investment firms in consultation with
the PRA and the FCA, and such requirement will be set depending on the
resolution strategy of the financial institution. 
 
The Bank of England is currently consulting on the approach to be adopted in
setting MREL, including, with respect to GSIBs, in line with the FSB's TLAC
standards. GSIBs will be expected to meet their MREL requirements from 1
January 2019 and other financial institutions by 1 January 2020, subject to
transitional arrangements. Until that time, MREL will be set equal to
applicable minimum capital requirements, unless the Bank of England has
particular concerns about a firm's resolvability. MREL requirements are
expected to be set on a consolidated and individual basis, including for the
holding entity of the banking group, at a level equivalent to two times the
current minimum Pillar 1 and Pillar 2A capital requirements for that financial
institution or, if higher, any applicable leverage ratio requirement, or the
minimum capital requirements under Basel III plus, if applicable, capital
buffer requirements: one for loss absorbency and one for recapitalisation. 
 
For institutions, including the Group, for which bail-in is the required
resolution strategy and which are structured to permit single point of entry
resolution due to their size and systemic importance, the Bank of England has
indicated that in order to qualify as MREL, eligible liabilities (i.e. total
loss-absorbing liabilities) will be expected to be issued from the resolution
entity (i.e. the holding company for the Group) and be structurally
subordinated to operating and excluded liabilities (which include insured
deposits, short-term debt, derivatives, structured notes and tax
liabilities). 
 
The capital raised through such issuances would then be transferred downstream
to material operating subsidiaries in the form of capital or another form of
subordinated claim. In this way, MREL resources will be structurally
subordinated to senior liabilities of operating companies, allowing losses
from operating companies to be transferred to the holding company and - if
necessary - for resolution to occur at the holding company level, without
placing the operating companies into a resolution process. In addition, the
instruments which may qualify towards MREL will be determined in the PRA's
final rules. In order to achieve structural subordination for MREL purposes,
senior unsecured issuances by RBSG will therefore need to be subordinated to
the excluded liabilities described above. The TLAC standard includes an
exemption from this requirement if the total amount of excluded liabilities on
RBSG's balance sheet does not exceed 5% of its external TLAC (i.e. the
eligible liabilities RBSG has issued to investors which meet the TLAC
requirements) and the Bank of England has indicated in its consultation on
MREL that it intends to adopt a similar approach. 
 
Compliance with these and other future changes to capital adequacy and
loss-absorbency requirements in the EU and the UK by the relevant deadline
will require the Group to restructure its balance sheet and issue additional
capital compliant with the rules. In particular, these changes will require
the Group to issue Tier 1 capital (potentially including ordinary shares and
additional Tier 1 instruments), Tier 2 capital and certain loss-absorbing debt
securities, including senior securities, which may be costly and will result
in certain existing Tier 1 and Tier 2 securities and other senior instruments
issued by the Group ceasing to count towards the Group's loss-absorbing
capital for the purposes of meeting MREL/TLAC requirements. 
 
There remains considerable uncertainty as to how these rules will be
implemented and the final requirements to which the Group will be subject, and
the Group may therefore need to revise its capital plan accordingly. The
requirement to increase the Group's levels of CET1 and Tier 2 capital, or
other debt securities which qualify for meeting MREL, could have a number of
negative consequences for the Group and its shareholders, including impairing
the Group's potential future ability to pay dividends on, or make other
distributions in respect of, ordinary shares and diluting the ownership of
existing shareholders of the Group. 
 
The Group's borrowing costs, its access to the debt capital markets and its
liquidity depend significantly on its credit ratings and, to a lesser extent,
on the rating of the UK Government. 
 
The credit ratings of RBSG, The Royal Bank of Scotland plc ("RBS plc") and
other Group members directly affect the cost of, access to and sources of
their financing and liquidity. A number of UK and other European financial
institutions, including RBSG, RBS plc and other Group members, have been
downgraded multiple times in recent years in connection with rating
methodology changes and credit rating agencies' revised outlook relating to
regulatory developments, macroeconomic trends and a financial institution's
capital position and financial prospects. 
 
During 2015, credit rating agencies completed their reviews and revisions of
their ratings of banks by country to address the agencies' perception of the
impact of ongoing regulatory changes designed to improve the resolvability of
banks in a manner that minimises systemic risk, such that the likelihood of
extraordinary support for failing banks is less predictable, as well as to
address the finalisation of revised capital and leverage rules under CRD IV
and firm-specific requirements. 
 
As a result, RBSG's long-term and short-term credit ratings were downgraded by
two notches by S&P and Fitch. S&P further downgraded the long-term credit
rating of RBSG as a result of a number of factors, including S&P's assessment
of the Group's financial flexibility to absorb losses while a going concern,
and the Group's underperformance relative to similar peers in terms of
profitability. The long-term deposit and senior unsecured ratings for RBS plc
and certain other subsidiaries of RBSG, however, were upgraded by one notch to
take into account the protection offered to senior unsecured creditors by
loss-absorbing capital. Moody's also finalised its review of RBS and
downgraded RBSG's long-term senior unsecured and issuer credit ratings by two
notches. As a result, the credit ratings of RBSG are below investment grade by
that credit agency. The outlook for RBSG by Moody's is currently positive and
is stable for S&P and Fitch. 
 
Rating agencies regularly review the RBSG and Group entity credit ratings and
their ratings of long-term debt are based on a number of factors, including
the Group's financial strength as well as factors not entirely within the
Group's control, including conditions affecting the financial services
industry generally. 
 
In particular, the rating agencies may further review the RBSG and Group
entity ratings as a result of the implementation of the UK ring-fencing
regime, pension and litigation/regulatory investigation risk and other
macroeconomic and political developments, including as a result of an outcome
in favour of an exit from the European Union. 
 
Any further reductions in the long-term or short-term credit ratings of RBSG
or of certain of its subsidiaries (particularly RBS plc), including further
downgrades below investment grade, could adversely affect the Group's issuance
capacity in the financial markets, increase its funding and borrowing costs,
require the Group to replace funding lost due to the downgrade, which may
include the loss of customer deposits and may limit the Group's access to
capital and money markets and trigger additional collateral or other
requirements in derivatives contracts and other secured funding arrangements
or the need to amend such arrangements, limit the range of counterparties
willing to enter into transactions with the Group and its subsidiaries and
adversely affect its competitive position, all of which could have a material
adverse impact on the Group's earnings, cash flow and financial condition. At
31 December 2015, a simultaneous one-notch long-term and associated short-term
downgrade in the credit ratings of RBSG and RBS plc by the three main ratings
agencies would have required the Group to post estimated additional collateral
of £3.7 billion, without taking account of mitigating action by management.
Individual credit ratings of RBSG, RBS plc, The Royal Bank of Scotland N.V.
("RBS N.V.") and Ulster Bank Ireland Limited are also important to the Group
when competing in certain markets such as over-the-counter derivatives. 
 
Any downgrade in the UK Government's credit ratings could also adversely
affect the credit ratings of Group companies and may result in the effects
noted above. In particular, political developments, including any exit, or
uncertainty relating to a potential exit, of the UK from the European Union or
the outcome of any further Scottish referendum could during a transitional
period negatively impact the credit ratings of the UK Government and result in
a downgrade of the credit ratings of RBSG and Group entities. 
 
The Group's ability to meet its obligations including its funding commitments
depends on the Group's ability to access sources of liquidity and funding. 
 
Liquidity risk is the risk that a bank will be unable to meet its obligations,
including funding commitments, as they fall due. This risk is inherent in
banking operations and can be heightened by a number of factors, including an
over-reliance on a particular source of wholesale funding (including, for
example, short-term and overnight funding), changes in credit ratings or
market-wide phenomena such as market dislocation and major disasters. Credit
markets worldwide, including interbank markets, have experienced severe
reductions in liquidity and term funding during prolonged periods in recent
years. In 2015, although the Group's overall liquidity position remained
strong, credit markets experienced increased volatility and certain European
banks, in particular in the peripheral countries of Spain, Portugal, Greece
and Italy, remained reliant on the ECB as one of their principal sources of
liquidity. 
 
The Group relies on retail and wholesale deposits to meet a considerable
portion of its funding. The level of deposits may fluctuate due to factors
outside the Group's control, such as a loss of confidence, increasing
competitive pressures for retail customer deposits or the repatriation of
deposits by foreign wholesale depositors, which could result in a significant
outflow of deposits within a short period of time. 
 
An inability to grow, or any material decrease in, the Group's deposits could,
particularly if accompanied by one of the other factors described above, have
a material adverse impact on the Group's ability to satisfy its liquidity
needs. Increases in the cost of retail deposit funding may impact the Group's
margins and profitability. 
 
The market view of bank credit risk has changed radically as a result of the
financial crisis and banks perceived by the market to be riskier have had to
issue debt at significantly higher costs. Although conditions have improved,
there have been recent periods where corporate and financial institution
counterparties have reduced their credit exposures to banks and other
financial institutions, limiting the availability of these sources of funding.
The ability of the Bank of England to resolve the Group in an orderly manner
may also increase investors' perception of risk and hence affect the
availability and cost of funding for the Group. Any uncertainty relating to
the credit risk of financial institutions may lead to reductions in levels of
interbank lending or may restrict the Group's access to traditional sources of
funding or increase the costs or collateral requirements for accessing such
funding. The Group has, at times, been required to rely on shorter-term and
overnight funding with a consequent reduction in overall liquidity, and to
increase its recourse to liquidity schemes provided by central banks. Such
schemes require assets to be pledged as collateral. Changes in asset values or
eligibility criteria can reduce available assets and consequently available
liquidity, particularly during periods of stress when access to the schemes
may be needed most. The implementation of the UK ring-fencing regime may also
impact the Group's funding strategy and the cost of funding may increase for
certain Group entities which will be required to manage their own funding and
liquidity strategy, in particular those entities outside the ring-fence which
will no longer be able to rely on retail deposit funding. 
 
If the Group is unable to raise funds through deposits and/or in the capital
markets, 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 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 Group's financial condition and results
of operations. 
 
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 financial services 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 adoption of rules relating to the UK ring-fencing regime, prohibitions on
proprietary trading, the entry into force of CRD IV and the BRRD and certain
other measures in the UK, the EU and the US are considerably affecting the
regulatory landscape in which the Group operates and will operate in the
future. Increased regulatory focus in certain areas, including conduct,
consumer protection regimes, anti-money laundering and antiterrorism laws and
regulations, as well as the provisions of applicable sanctions programmes and
ongoing and possible future changes in the financial services regulatory
landscape (including requirements imposed by virtue of the Group's
participation in government or regulator-led initiatives), have resulted in
the Group facing greater regulation and scrutiny in the UK, the US and other
countries in which it operates. 
 
Although it is difficult to predict with certainty the effect that the recent
regulatory changes, developments and heightened levels of public and
regulatory scrutiny will have on the Group, the enactment and implementation
of legislation and regulations in the UK and the EU, the other parts of Europe
in which the Group operates and the US has resulted in increased capital,
funding and liquidity requirements, changes in the competitive landscape,
changes in other regulatory requirements and increased operating costs, and
has 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. 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 also result in
the Group having to recognise additional liabilities on its balance sheet, or
in further write-downs or impairments. Any of these developments (including
failures to comply with new rules and regulations) could have an 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, and could
have a material adverse effect on its business, funding costs and results of
operations and financial condition. 
 
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 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, either on a solo,
consolidated or subgroup level, including amendments to the rules relating to
the calculation of risk-weighted assets and reliance on credit ratings as well
as tax rules affecting the eligibility of deferred tax assets; 
 
·      new or amended regulations or taxes that reduce profits attributable to
shareholders which may diminish, or restrict, the accumulation of the
distributable profits or distributable items necessary to make distributions
or coupon payments; 
 
·      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 Financial Stability Board's recommendations on TLAC; 
 
·      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 and residential mortgage lending; 
 
·      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) and guidance or the timing of their implementation; 
 
·      changes to risk aggregation and reporting standards; 
 
·      changes to corporate governance requirements, 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 in the EU establishing new
rules applying to investment services, short selling, market abuse and
investment funds; 
 
·      increased attention to competition and innovation in UK payment systems
following the establishment of the new Payments Systems Regulator; 
 
·      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, the introduction of the bank corporation surcharge
of 8% which came into effect on 1 January 2016 or changes to 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 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 EU member states or in other countries, such as the US);
and 
 
·      other requirements or policies affecting the Group's profitability,
such as the imposition of onerous compliance obligations, further restrictions
on business growth, product offering, 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 currently implementing a number of significant investment and
rationalisation initiatives as part of the Group's IT investment programme.
Should such investment and rationalisation initiatives fail to achieve the
expected results, it could have a material adverse impact on the Group's
operations and its ability to retain or grow its customer business and could
require the Group to recognise impairment charges. 
 
The Group's strategic programme to simplify and downsize the Group with an
increased focus on service to its customers involves significant investments
in technology and more efficient support functions intended to contribute to
delivering significant improvements in the Group's Return on Equity and
cost-to-income ratio in the longer term as well as improve the resilience,
control environment, accessibility and product offering of the Group. The
Group has an IT transformational budget of around £4 billion (which excludes
IT expenditure and costs relating to the implementation of the UK ring-fencing
regime and the Williams & Glyn separation) to be spent from 2015 to 2017. At
31 December 2015, £1.2 billion of this budget had already been spent, and the
budget for 2016 and 2017 is now higher than previously estimated as business
plans have developed. 
 
This investment in the Group's IT capability will be used to further simplify
and upgrade its IT systems and capabilities to make them more cost-effective
and improve controls and procedures, enhance the digital services provided to
its bank customers and address system failures which adversely affect its
relationship with its customers and reputation and may lead to regulatory
investigations and redress. 
 
As with any project of comparable size and complexity, there can be no
assurance that the Group will be able to implement all of the initiatives
forming part of its IT investment programme, on time or at all, and it may
experience unexpected cost increases and delays. This is especially true in
light of the separation of the Williams & Glyn business which requires the
delivery of a stand-alone IT platform for the separated business, and the
focus on meeting this requirement may limit the Group's capacity and resources
to implement the planned changes to the Group IT infrastructure while the
separation work is ongoing. Any failure by the Group to realise the benefits
of its IT investment programme, whether on time or at all, could have a
material adverse effect on the Group's business, results of operations and its
ability to retain or grow its customer business. 
 
The Group's operations are highly dependent on its IT systems. A failure of
the Group's IT systems could adversely affect its operations and investor and
customer confidence and expose the Group to regulatory sanctions. 
 
The Group's operations are dependent on the ability to process a very large
number of transactions efficiently and accurately while complying with
applicable laws and regulations where it does business. The proper functioning
of the Group's 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 Group's operations. 
 
The vulnerabilities of the Group's IT systems are due to their complexity,
attributable in part to overlapping multiple legacy systems resulting from the
Group's historical acquisitions and insufficient investment prior to 2013,
creating challenges in recovering from system breakdowns. IT failures
adversely affect the Group's relationship with its customers and reputation
and have lead, and may in the future, lead to regulatory investigations and
redress. The Group experienced system failures in 2012, as a result of which
the Group was required to set aside a provision for compensation to customers
who suffered losses as a result of the system failure and that resulted in the
Group reaching a settlement with the FCA, the PRA and the Central Bank of
Ireland and paying related fines. The Group experienced a limited number of IT
failures in 2015 affecting customers, although improvements introduced since
2012 allowed the Group to contain the impact of such failures. The Group's
regulators in the UK are actively surveying progress made by banks in the UK
to modernise, manage and secure their IT infrastructures, in order to prevent
future failures affecting customers. Any critical system failure, any
prolonged loss of service availability or any material breach of data security
could cause serious damage to the Group's ability to service its customers,
could result in significant compensation costs or fines resulting from
regulatory investigations and could breach regulations under which the Group
operates. 
 
In particular, failures or breaches resulting in the loss or publication of
confidential customer data could cause long-term damage to the Group's
reputation, business and brands, which could undermine its ability to attract
and keep customers. 
 
The Group is currently implementing a number of complex initiatives, including
its strategic programme, the UK ring-fencing regime, the separation of the
Williams & Glyn business, the restructuring of the CIB business and a
significant IT investment programme, all which may put further strains on the
Group's existing IT systems.  A failure to safely and timely implement one or
several of these initiatives could lead to disruptions of the Group's IT
infrastructure and in turn cause long-term damage to the Group's reputation,
brands, results of operations and financial position. See "The Group is
currently implementing a number of significant investment and rationalisation
initiatives as part of the Group's IT investment programme. Should such
investment and rationalisation initiatives fail to achieve the expected
results, it could have a material adverse impact on the Group's operations and
its ability to retain or grow its customer business." 
 
The Group is exposed to cyberattacks and a failure to prevent or defend
against such attacks could have a material adverse effect on the Group's
operations, results of operations or reputation. 
 
The Group is subject to cybersecurity threats which have regularly targeted
financial institutions as well as governments and other institutions and have
increased in frequency and severity in recent years. The Group relies on the
effectiveness of its internal policies and associated procedures,
infrastructure and capabilities to protect the confidentiality, integrity and
availability of information held on its computer systems, networks and mobile
devices, and on the computer systems, networks and mobile devices of third
parties on whom the Group relies. The Group also takes measures to protect
itself from attacks designed to prevent the delivery of critical business
processes to its customers. Despite these preventative measures, the Group's
computer systems, software, networks and mobile devices, and those of third
parties on whom the Group relies, are vulnerable to cyberattacks, sabotage,
unauthorised access, computer viruses, worms or other malicious code, and
other events that have a security impact. 
 
Failure to protect the Group's operations from cyberattacks or to continuously
review and update current processes in response to new threats could result in
the loss of customer data or other sensitive information as well as instances
of denial of service for the Group's customers. During 2015, the Group
experienced a number of distributed denial of service ("DDoS") attacks, one of
which had a temporary impact on some of NatWest's web services, as well as a
smaller number of malware attacks. The Bank of England, the FCA and HM
Treasury in the UK and regulators, in the US and in Europe have identified
cybersecurity as a systemic risk to the financial sector and highlighted the
need for financial institutions to improve resilience to cyberattacks and the
Group expects greater regulatory engagement, supervision and enforcement on
cybersecurity in the future. The Group participated in the Bank of England's
industry-wide exercise in 2015 to test how a major firm responds to
significant cyberattacks against its critical economic functions. 
 
The outputs of this exercise and other regulatory and industry-led initiatives
are being incorporated into the Group's on-going IT priorities and improvement
measures. The Group expects to be the target of continued attacks in the
future and there can be no assurance that the Group will be able to prevent
all threats. Any failure in the Group's cybersecurity policies, procedures or
capabilities, or cyber-related crime, could lead to the Group suffering
reputational damage and a loss of customers, regulatory investigations or
sanctions being imposed and could have a material adverse effect on the
Group's results of operations, financial condition or prospects. 
 
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, 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 actual or perceived
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
strategic 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. 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. 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 strategic 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. 
 
The management of risk is an integral part of all of the Group's activities.
Risk management comprises 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 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 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. 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 is subject to pension risks and may be required to make additional
contributions to cover pension funding deficits and to restructure its pension
schemes as a result of 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 is 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; as the impact on the pension scheme liabilities due to a one year
increase in longevity is expected to be £853 million. In addition, as the
Group expects to continue to materially reduce the scope of its operations as
part of the implementation of its strategic 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 recent 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, the Group has experienced increasing
pension deficits and was required to make further contributions following the
last triennial valuation of The Royal Bank of Scotland Group Pension Fund, the
Group's main defined benefit pension scheme (the "Main Scheme"), which showed
that the value of liabilities exceeded the value of assets by £5.6 billion at
31 March 2013, a ratio of 82%. Following the publication of the IASB's
exposure draft of amendments to IFRIC 14, the Group has revised its pension
accounting policy for determining whether or not it has an unconditional right
to a refund of any surpluses in its employee pension funds. This change has
resulted in the accelerated recognition of a £4.2 billion liability
corresponding to the nominal value of all committed contributions in respect
of past service pursuant to the May 2014 triennial valuation agreement with
the Main Scheme pension trustee. 
 
The Group has agreed in principle with the Main Scheme pension trustee to make
an accelerated cash payment of the outstanding committed future contributions
(£4.2 billion) to the Main Scheme (the majority of which payment has been
provided for as a result of the accounting policy change described above) and
to bring forward the next triennial valuation to be as of a date between 31
October 2015 and 31 December 2015. The single contribution of £4.2 billion is
expected to be paid by 31 March 2016 subject to the satisfactory conclusion of
discussions with the Main Scheme pension trustee. The 2015 triennial valuation
is expected to result in a significant increase in the regular annual
contributions in respect of the ongoing accrual of benefits. This will have
the effect of significantly decreasing the amount of any pension surplus that
the Group can recognise as a balance sheet asset. 
 
The next triennial period valuation will therefore 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.
Notwithstanding this accelerated payment and any additional contributions
which 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, from Q1 2020 as a result of the
next triennial valuation. The underlying assumptions used to calculate the
triennial valuation deficit as at 31 March 2013 are set out further in note 4
Pensions on page 286. 
 
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 in turn, under RBS's revised accounting policy, trigger the
recognition of a significant additional liability in the Group's accounts,
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
ring-fenced banks may not be liable for debts to pension schemes that might
arise as a result of the failure of another entity of the ring-fenced bank's
group after 1 January 2026, which could affect assessments of the Group's
schemes deficits, 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 will require the agreement of the pension scheme
trustee. Discussions with the pension scheme trustee 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 will 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 asset
pension balances 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
mitigate stress on the pension fund and finally the Group's target CET1 ratio
incorporates a management buffer over the combined buffer requirement which
assumes, amongst other risks, a buffer to mitigate a deterioration in the
Group's pension fund position. 
 
The Group believes that the accelerated payment to the Group's Main Scheme
pension fund will improve the Group's capital planning and resilience through
the period to 2019 and provide the Main Scheme pension trustee with more
flexibility over its investment strategy. The Group estimates that the
accelerated payment will adversely impact the Group's CET1 capital in 2016 by
30 to 40 basis points and reduce the Group's MDA level of CET1 capital or
management buffer capital required for pension risk which may trigger MDA
requirements and result in mandatory restrictions on discretionary
distributions. 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 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. 
 
As a result, if any of these assumptions proves inaccurate, the Group's
capital position may significantly deteriorate and fall below the Group's or
Group entities minimum capital requirements 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'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) and the impact of regulatory actions and other factors.
In particular, the emergence of disintermediation 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. 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. If the Group is unable to offer competitive,
attractive and innovative products that are also profitable, it could 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 its strategic 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 highly competitive 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 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 in recent years, including market
reviews conducted by the Competition & Markets Authority ("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. 
 
Although these reviews are ongoing, preliminary findings in the CMA's Retail
Banking Market Investigation contemplated proposing measures primarily
intended to make it easier for consumers and businesses to compare bank
products and increase the transparency of price comparison between banks,
which would, if implemented, impose additional compliance requirements on the
Group and could, in aggregate, adversely impact the Group's competitive
position, product offering and revenues. The wholesale banking sector has also
been the subject of recent scrutiny. In February 2015 the FCA announced that
it would be launching a market study to investigate competition in investment
and corporate banking services. The FCA is expected to publish its interim
report in early 2016 and its final report in spring 2016. 
 
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 strategic programme and its future success


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