REG - Royal Bk Scot.Grp. - Half-year Report <Origin Href="QuoteRef">RBS.L</Origin> - Part 8
04/08/2017 07:08
- Part 8: For the preceding part double click ID:nRSD0890Ng
not carried at fair value
The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the
balance sheet.
30 June 2017 31 December 2016
Carrying Carrying
value Fair value value Fair value
£bn £bn £bn £bn
Financial assets
Loans and advances to banks 14.7 14.7 11.4 11.5
Loans and advances to customers 309.4 306.3 307.8 306.0
Debt securities 8.4 8.6 8.7 8.8
Financial liabilities
Deposits by banks 20.5 20.2 9.4 9.5
Customer accounts 47.3 47.3 35.1 35.2
Debt securities in issue 26.7 28.0 21.0 21.6
Subordinated liabilities 13.8 14.5 18.5 18.5
The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Quoted market values are used where available; otherwise,
fair values have been estimated based on discounted expected future cash flows and other valuation techniques. These
techniques involve uncertainties and require assumptions and judgments covering prepayments, credit risk and discount
rates. Furthermore, there is a wide range of potential valuation techniques. Changes in these assumptions would affect
estimated fair values. The fair values reported would not necessarily be realised in an immediate sale or settlement.
The table above excludes short-term financial instruments for which fair value approximates to carrying value: cash and
balances at central banks, items in the course of collection from and transmission to other banks, settlement balances,
demand deposits and notes in circulation. These are excluded from the table above.
Notes
11. Contingent liabilities and commitments
30 June 31 December
2017 2016
£m £m
Guarantees and assets pledged as collateral security 7,490 7,867
Other contingent liabilities 3,398 4,179
Standby facilities, credit lines and other commitments 132,605 138,645
Contingent liabilities and commitments 143,493 150,691
Contingent liabilities arise in the normal course of RBS's business; credit exposure is subject to the bank's normal
controls. The amounts shown do not, and are not intended to, provide any indication of RBS's expectation of future losses.
12. Litigation, investigations and reviews
The Royal Bank of Scotland Group plc (the "company" or RBSG) and certain members of the Group are party to legal
proceedings and the subject of investigation and other regulatory and governmental action ("Matters") in the United Kingdom
(UK), the United States (US), the European Union (EU) and other jurisdictions.
RBS recognises a provision for a liability in relation to these Matters when it is probable that an outflow of economic
benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the
amount of the obligation. While the outcome of these Matters is inherently uncertain, the directors believe that, based on
the information available to them, appropriate provisions have been made in respect of the Matters as at 30 June 2017
(refer to Note 3).
In many proceedings and investigations, it is not possible to determine whether any loss is probable or to estimate
reliably the amount of any loss, either as a direct consequence of the relevant proceedings and investigations or as a
result of adverse impacts or restrictions on RBS's reputation, businesses and operations. Numerous legal and factual issues
may need to be resolved, including through potentially lengthy discovery and document production exercises and
determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the
proceedings in question, before a liability can reasonably be estimated for any claim. RBS cannot predict if, how, or when
such claims will be resolved or what the eventual settlement, damages, fine, penalty or other relief, if any, may be,
particularly for claims that are at an early stage in their development or where claimants seek substantial or
indeterminate damages.
In respect of certain matters described below, we have established a provision and in certain of those matters, we have
indicated that we have established a provision. RBS generally does not disclose information about the establishment or
existence of a provision for a particular matter where disclosure of the information can be expected to prejudice seriously
RBS's position in the matter.
There are situations where RBS may pursue an approach that in some instances leads to a settlement agreement. This may
occur in order to avoid the expense, management distraction or reputational implications of continuing to contest
liability, or in order to take account of the risks inherent in defending claims or investigations even for those matters
for which RBS believes it has credible defences and should prevail on the merits. The uncertainties inherent in all such
matters affect the amount and timing of any potential outflows for both matters with respect to which provisions have been
established and other contingent liabilities.
The future outflow of resources in respect of any matter may ultimately prove to be substantially greater than or less than
the aggregate provision that RBS has recognised. Where (and as far as) liability cannot be reasonably estimated, no
provision has been recognised.
Notes
12. Litigation, investigations and reviews (continued)
Other than those discussed below, no member of the Group is or has been involved in governmental, legal or regulatory
proceedings (including those which are pending or threatened) that are expected to be material, individually or in
aggregate. RBS expects that in future periods additional provisions, settlement amounts, and customer redress payments will
be necessary, in amounts that are expected to be substantial in some instances.
For a discussion of certain risks associated with the Group's litigation, investigations and reviews, see the Risk Factor
relating to legal, regulatory and governmental actions and investigations set out in RBS's 2016 Annual Report and Accounts
on page 432 and in RBS's 2016 Annual Report on Form 20-F on page 509.
Litigation
UK 2008 rights issue shareholder litigation
Between March and July 2013, claims were issued in the High Court of Justice of England and Wales by sets of current and
former shareholders, against RBSG (and in one of those claims, also against certain former individual officers and
directors) alleging that untrue and misleading statements and/or improper omissions, in breach of the Financial Services
and Markets Act 2000, were made in connection with the rights issue announced by RBS on 22 April 2008. In July 2013 these
and other similar threatened claims were consolidated by the Court via a Group Litigation Order. RBS's defence to the
claims was filed on 13 December 2013. Since then, further High Court claims have been issued against RBS under the Group
Litigation Order. Prior to the partial settlement described below, the aggregate value of the shares subscribed for at 200
pence per share by all of the then claimant shareholders was approximately £4 billion.
In December 2016 RBS concluded full and final settlements with four of the five shareholder groups representing 78 per cent
of the claims by value. Further full and final settlements, without any admission of liability, have since been reached and
RBS has now concluded the action with over 98 per cent of the claimants.
The aggregate settlement figure available is £900 million and is subject to validation of claims. RBS has increased its
total provision to £900 million in relation to this matter.
The Court directed that any claimant choosing not to enter the settlement should, by 28 July 2017, issue an application to
restore the proceedings. In the event that any claimant is subsequently permitted to continue with the proceedings, they
would be defended by RBS on the grounds previously set out. RBS is not aware of any such application having been made.
Residential mortgage-backed securities (RMBS) litigation in the US
RBS companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of
claims in the US that relate to the securitisation and securities underwriting businesses. These cases include actions by
individual purchasers of securities and a purported class action suit.
In general, plaintiffs in these actions claim that certain disclosures made in connection with the relevant offerings of
RMBS contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to
which the mortgage loans underlying the securities were issued.
In September 2011, the US Federal Housing Finance Agency (FHFA) as conservator for the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), filed a lawsuit against RBS in the
United States District Court for the District of Connecticut, relating to approximately US$32 billion of RMBS for which RBS
entities acted as sponsor/depositor and/or lead underwriter or co-lead underwriter. On 12 July 2017, RBS announced the
settlement of this matter. Pursuant to the settlement agreement, RBS has paid FHFA US$5.5 billion, and FHFA has withdrawn
its claims relating to the securities at issue in the case. Of that settlement amount, US$754 million has been reimbursed
to RBS under indemnification agreements with third parties. The net cost to RBS of the settlement was largely covered by
existing provisions. An incremental charge of US$196 million (£151 million) was recorded in relation to this matter.
Notes
12. Litigation, investigations and reviews (continued)
RBS Securities Inc. remains a defendant in a separate, unresolved FHFA lawsuit relating to RMBS issued by Nomura Holding
America Inc. (Nomura) and subsidiaries, which is the subject of an appeal. On 11 May 2015, following a trial, the United
States District Court for the Southern District of New York issued a written decision in favour of FHFA on its claims
against Nomura and RBS Securities Inc., finding, as relevant to RBS, that the offering documents for four Nomura-issued
RMBS for which RBS Securities Inc. served as an underwriter, relating to US$1.4 billion in original principal balance,
contained materially misleading statements about the mortgage loans that backed the securitisations, in violation of the
Securities Act and Virginia securities law.
RBS Securities Inc. estimates that its net exposure under the Court's judgment is approximately US$383 million, which
consists of the difference between the amount of the judgment against RBS Securities Inc. (US$636 million) and the
estimated market value of the four RMBS that FHFA would return to RBS Securities Inc. pursuant to the judgment, plus the
costs and attorney's fees that will be due to FHFA if the judgment is upheld. The estimated net exposure in this matter is
covered by an existing provision.
The Court has stayed the judgment pending the result of the appeal that the defendants are taking to the United States
Court of Appeals for the Second Circuit, though post-judgment interest on the judgment amount will accrue while the appeal
is pending. RBS Securities Inc. intends to pursue a contractual claim for indemnification against Nomura with respect to
any losses it suffers as a result of this matter.
RBS companies are also defendants in a purported RMBS class action entitled New Jersey Carpenters Health Fund v. Novastar
Mortgage Inc. et al., which remains pending in the United States District Court for the Southern District of New York. RBS
has settled this matter for US$55.3 million, which has been paid into escrow pending court approval of the settlement.
In addition to the above, the remaining RMBS lawsuits against RBS companies consist of cases filed by the Federal Home Loan
Banks of Boston and Seattle and the Federal Deposit Insurance Corporation that together involve the issuance of less than
US$1 billion of RMBS issued primarily from 2005 to 2007.
As at 30 June 2017, the total aggregate of provisions in relation to certain of the RMBS litigation matters (described
immediately above) and RMBS and other securitised products investigations (set out under "Investigations and reviews" on
page 82) was £6.6 billion ($8.5 billion), of which £3.7 billion ($4.75 billion) related to the FHFA case that has now been
resolved. The duration and outcome of these investigations and litigation matters remain uncertain, including in respect of
whether settlements for all or any of such matters may be reached.
Further substantial provisions and costs may be recognised and, depending on the final outcome, other adverse consequences
may occur.
With respect to certain of the RMBS claims described above, RBS has or will have contractual claims to indemnification from
the issuers of the securities (where an RBS company is underwriter) and/or the underlying mortgage originator (where an RBS
company is issuer). The amount and extent of any recovery on an indemnification claim, however, is uncertain and subject to
a number of factors, including the ongoing creditworthiness of the indemnifying party, a number of whom are or may be
insolvent.
London Interbank Offered Rate (LIBOR)
Certain members of the Group have been named as defendants in a number of class actions and individual claims filed in the
US with respect to the setting of LIBOR and certain other benchmark interest rates. The complaints are substantially
similar and allege that certain members of the Group and other panel banks individually and collectively violated various
federal laws, including the US commodities and antitrust laws, and state statutory and common law, as well as contracts, by
manipulating LIBOR and prices of LIBOR-based derivatives in various markets through various means.
Notes
12. Litigation, investigations and reviews (continued)
Most of the USD LIBOR-related actions in which RBS companies are defendants, including all purported class actions relating
to USD LIBOR, were transferred to a coordinated proceeding in the United States District Court for the Southern District of
New York.
In the coordinated proceeding, consolidated class action complaints were filed on behalf of (1) exchange-based purchaser
plaintiffs, (2) over-the-counter purchaser plaintiffs, and (3) corporate debt purchaser plaintiffs. Over 35 other USD
LIBOR-related actions naming RBS as a defendant, including purported class actions on behalf of lenders and mortgage
borrowers, were also made part of the coordinated proceeding.
In a series of orders issued in 2013 and 2014, the district court overseeing the coordinated USD proceeding dismissed class
plaintiffs' antitrust claims and claims under RICO (Racketeer Influenced and Corrupt Organizations Act), but declined to
dismiss (a) certain Commodity Exchange Act claims on behalf of persons who transacted in Eurodollar futures contracts and
options on futures contracts on the Chicago Mercantile Exchange (on the theory that defendants' alleged persistent
suppression of USD LIBOR caused loss to plaintiffs), and (b) certain contract and unjust enrichment claims on behalf of
over-the-counter purchaser plaintiffs who transacted directly with a defendant. On 23 May 2016, the district court's
dismissal of plaintiffs' antitrust claims was vacated by the United States Court of Appeals for the Second Circuit, which
held that plaintiffs have adequately pled antitrust injury and an antitrust conspiracy, but remanded to the lower court for
further consideration on the question of whether plaintiffs possess the requisite antitrust standing to proceed with
antitrust claims.
In a decision issued on 20 December 2016, the district court held that it lacks personal jurisdiction over RBS with respect
to certain claims asserted in the coordinated proceeding. Following that decision, RBS is dismissed from each of the USD
LIBOR-related class actions in the coordinated proceeding, subject to appeal, although certain non-class cases on behalf of
particular plaintiffs remain pending.
On 10 March 2017, the US Federal Deposit Insurance Corporation (FDIC), on behalf of 39 failed US banks, issued a claim in
the High Court of Justice of England and Wales against RBS, other LIBOR panel banks and the British Bankers' Association,
alleging collusion with respect to the setting of USD LIBOR. The action alleges that the defendants breached English and
European competition law as well as asserting common law claims of fraud under US law. The FDIC previously asserted many
of the same US law USD LIBOR-related claims against RBS and others in a lawsuit pending in the United States District Court
for the Southern District of New York, though most of the claims in that case have been dismissed as a result of a series
of rulings by that court.
Certain members of the Group have also been named as defendants in two class actions relating to JPY LIBOR and Euroyen
TIBOR, both pending before the same judge in the United States District Court for the Southern District of New York. In the
first case, relating to Euroyen TIBOR futures contracts, the court dismissed plaintiffs' antitrust claims on 28 March 2014,
but declined to dismiss their claims under the Commodity Exchange Act for price manipulation, which are proceeding in the
discovery phase. In the second case, relating to other derivatives allegedly tied to JPY LIBOR and Euroyen TIBOR, the court
dismissed the case on 10 March 2017 on the ground that the plaintiffs lack standing. Plaintiffs have commenced an appeal of
that decision.
Certain members of the Group have also been named as defendants in class actions relating to (i) Euribor, (ii) Swiss Franc
LIBOR (iii) Pound sterling LIBOR, (iv) the Singapore Interbank Offered Rate and Singapore Swap Offer Rate, and (v) the
Australian Bank Bill Swap Reference Rate, all of which are pending before other judges in the United States District Court
for the Southern District of New York. On 21 February 2017, the court in the action relating to Euribor dismissed all
claims alleged against RBS for lack of personal jurisdiction. The other matters described in this paragraph are subject to
motions to dismiss that are currently pending.
Details of LIBOR investigations involving RBS are set out under ''Investigations and reviews'' on page 83.
Notes
12. Litigation, investigations and reviews (continued)
ISDAFIX antitrust litigation
Beginning in September 2014, The Royal Bank of Scotland plc (RBS plc) and a number of other financial institutions were
named as defendants in several purported class action complaints (subsequently consolidated into one complaint) in the
United States District Court for the Southern District of New York alleging manipulation of USD ISDAFIX rates In 2015, RBS
plc reached an agreement to settle this matter for US$50 million, and that settlement received preliminary approval from
the Court on 11 May 2016. The settlement amount has been paid into escrow pending the final court approval of the
settlement.
FX antitrust litigation
In 2015, Group companies settled a consolidated antitrust class action (the "consolidated action"), pending in the United
States District Court for the Southern District of New York, asserting claims on behalf of persons who entered into (a)
over-the-counter foreign exchange (FX) spot transactions, forwards, swaps, futures, options or other FX transactions the
trading or settlement of which is related in any way to FX rates, or (b) exchange-traded FX instruments. Following the
Court's preliminary approval of the settlement on 15 December 2015, RBS paid the total settlement amount (US$255 million)
into escrow pending final court approval of the settlement.
On 24 March 2017, the court dismissed a second FX-related antitrust class action, holding that the alleged class of
"consumers and end-user businesses" lacked standing to pursue antitrust claims. The plaintiffs in that case have since
filed an amended complaint, which is subject to a renewed motion to dismiss.
A third FX-related class action, asserting Employee Retirement Income Security Act claims on behalf of employee benefit
plans that engaged in FX transactions, including claims based on alleged non-collusive FX-related conduct, was dismissed on
20 September 2016 on the ground that the plaintiffs failed to plead that the defendants had ERISA-based fiduciary duties to
the plaintiffs. The plaintiffs' appeal of this dismissal remains pending.
Beginning in September 2016, several class action complaints were filed in the United States District Court for the
Southern District of New York asserting claims on behalf of "indirect purchasers" of FX instruments. The plaintiffs define
"indirect purchasers" as persons who were indirectly affected by FX instruments that others entered into directly with
defendant banks or on exchanges. It is alleged that certain RBS companies and other defendant banks caused damages to the
"indirect purchasers" by conspiring to restrain trade in the FX spot market. The plaintiffs have asserted claims under
federal and state antitrust laws. RBS and the other defendants anticipate making a motion to dismiss the claims asserted in
these actions after the plaintiffs file a single, consolidated complaint.
On 12 July 2017, a class action complaint was filed against RBS companies in the United States District Court for the
Southern District of New York. The complaint alleges that RBS breached contracts with counterparties by rejecting FX
orders placed over electronic trading platforms through the application of a function referred to as "Last Look", and that
the rejected orders were later filled at prices less favourable to putative class members. The complaint contains claims
for breach of contract and unjust enrichment.
In September 2015, certain members of the Group, as well as a number of other financial institutions, were named as
defendants in two purported class actions filed in Ontario and Quebec on behalf of persons in Canada who entered into
foreign exchange transactions or who invested in funds that entered into foreign exchange transactions. The plaintiffs
allege that the defendants violated the Canadian Competition Act by conspiring to manipulate the prices of currency trades.
RBS has settled these matters for approximately CAD 13 million. The settlement amount has been paid into escrow pending
court approval of the settlement.
Certain other foreign exchange transaction related claims have been or may be threatened against RBS in other
jurisdictions. RBS cannot predict whether any of these claims will be pursued, but expects that several may.
Notes
12. Litigation, investigations and reviews (continued)
US Treasury securities antitrust litigation
Beginning in July 2015, numerous class action antitrust complaints were filed in US federal courts against a number of
primary dealers of US Treasury securities, including RBS Securities Inc. The complaints allege that the defendants rigged
the US Treasury securities auction bidding process to deflate prices at which they bought such securities and colluded to
increase the prices at which they sold such securities to plaintiffs. The complaints assert claims under the US antitrust
laws and the Commodity Exchange Act on behalf of persons who transacted in US Treasury securities or derivatives based on
such instruments, including futures and options. On 8 December 2015, all pending matters were transferred to the United
States District Court for the Southern District of New York for coordinated or consolidated pre-trial proceedings. RBS
anticipates making a motion to dismiss these claims.
Swaps antitrust litigation
Beginning in November 2015, RBS plc and other members of the Group, as well as a number of other interest rate swap
dealers, were named as defendants in a number of class action antitrust complaints filed in the United States District
Court for the Southern District of New York and the United States District Court for the Northern District of Illinois. The
complaints, filed on behalf of persons who entered into interest rate swaps with the defendants, allege that the defendants
violated the US antitrust laws by restraining competition in the market for interest rate swaps through various means and
thereby caused inflated bid-ask spreads for interest rate swaps, to the alleged detriment of the plaintiff class.
In addition, two complaints containing similar allegations of collusion were filed in United States District Court for the
Southern District of New York on behalf of TeraExchange and Javelin, who allege that they would have successfully
established exchange-like trading of interest rate swaps if the defendant dealers had not unlawfully conspired to prevent
that from happening through boycotts and other means, in violation of the U.S. antitrust laws. On 2 June 2016, all of these
matters were transferred to the United States District Court for the Southern District of New York for coordinated or
consolidated pretrial proceedings.
On 28 July 2017, the Court overseeing the above matters dismissed all claims against RBS companies relating to the 2008 -
2012 time period, but declined to dismiss certain antitrust and unjust enrichment claims covering the 2013 - 2016 time
period, which will now proceed to the discovery phase.
On 8 June 2017, TeraExchange filed another complaint against RBS and others in the United States District Court for the
Southern District of New York, this time relating to credit default swaps instead of interest rate swaps. TeraExchange
alleges it would have established exchange-like trading of credit default swap if the defendant dealers had not engaged in
an unlawful antitrust conspiracy. RBS anticipates making a motion to dismiss the complaint in this matter.
Madoff
In December 2010, Irving Picard, as trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff
Investment Securities LLC., filed a clawback claim against The Royal Bank of Scotland N.V. (RBS N.V.) in the New York
bankruptcy court. In the operative complaint, filed in August 2012, the trustee seeks to recover US$75.8 million in
redemptions that RBS N.V. allegedly received from certain Madoff feeder funds and US$162.1 million that RBS N.V. allegedly
received from its swap counterparties at a time when RBS N.V. allegedly 'knew or should have known of Madoff's possible
fraud'. The Trustee alleges that those transfers were preferences or fraudulent conveyances under the US bankruptcy code
and New York law and he asserts the purported right to claw them back for the benefit of Madoff's estate. RBS N.V. made a
motion to dismiss in this case on the ground that many of the transfers at issue were extraterritorial to the United States
and therefore not subject to the fraudulent conveyance statute upon which the trustee's claim is based, but the bankruptcy
court denied that motion on 22 November 2016. RBS N.V. is seeking to appeal that decision. A further claim by the trustee
against RBS N.V., for clawback of an additional US$21.8 million, was filed in October 2011. With respect to that claim, the
bankruptcy court granted RBS N.V.'s motion to dismiss on extraterritorial grounds, and the trustee has commenced an appeal
of that decision.
Thornburg adversary proceeding
RBS Securities Inc. and certain other RBS companies, as well as several other financial institutions, are defendants in an
adversary proceeding filed in the US bankruptcy court in Maryland by the trustee for TMST, Inc. (formerly known as
Thornburg Mortgage, Inc.). The trustee seeks recovery of transfers made under certain restructuring agreements as, among
other things, avoidable fraudulent and preferential conveyances and transfers. On 25 September 2014, the Court largely
denied the defendants' motion to dismiss this matter and, as a result, discovery is ongoing.
Notes
12. Litigation, investigations and reviews (continued)
CPDO litigation
Claims were served on RBS N.V. in England, the Netherlands and Australia, relating to the sale of a type of structured
financial product known as a constant proportion debt obligation (CPDO). The claims in England and the Netherlands have
been settled and in April 2017, the court approved settlement of the remaining claim in Australia.
Interest rate hedging products litigation
RBS is dealing with a large number of active litigation claims in relation to the sale of interest rate hedging products
(IRHPs). In general claimants allege that the relevant interest rate hedging products were mis-sold to them, with some also
alleging RBS made misrepresentations in relation to LIBOR. Claims have been brought by customers who were considered under
the UK Financial Conduct Authority (FCA) redress programme, as well as customers who were outside of the scope of that
programme, which was closed to new entrants on 31 March 2015. RBS encouraged those customers that were eligible to seek
redress under the FCA redress programme to participate in that programme. RBS remains exposed to potential claims from
customers who were either ineligible to be considered for redress or who are dissatisfied with their redress offers.
Property Alliance Group (PAG) v The Royal Bank of Scotland plc was the leading case before the English High Court involving
both IRHP mis-selling and LIBOR misconduct allegations. The amount claimed was approximately £33 million and the trial
ended in October 2016. On 21 December 2016 the Court dismissed all of PAG's claims. PAG has been granted leave to appeal
that decision by the Court of Appeal. The decision (subject to the appeal by PAG) may have significance to other similar
LIBOR-related cases currently pending in the English courts, some of which involve substantial amounts. The case of Wall v
RBS plc, which concerns certain similar allegations to those in PAG, is currently scheduled to go to trial in October 2017.
The sum claimed is between £114 million and £669 million.
In addition to claims alleging that IRHPs were mis-sold, RBS has received a number of claims involving allegations that it
breached a legal duty of care in its conduct of the FCA redress programme. These claims have been brought by customers who
are dissatisfied with redress offers made to them through the FCA redress programme. The claims followed a preliminary
decision against another UK bank. RBS has since been successful in opposing an application by a customer to amend its
pleadings to include similar claims against RBS, on the basis that the bank does not owe a legal duty of care to customers
in carrying out the FCA review. An appeal of that decision was dismissed in July 2017.
Tax dispute
HMRC issued a tax assessment in 2012 against RBS for approximately £86 million regarding a value-added-tax ("VAT") matter
in relation to the trading of European Union Allowances ("EUAs") by an RBS joint venture subsidiary in 2009. RBS has
commenced legal proceedings before the First-tier Tribunal (Tax), a specialist tax tribunal, challenging the assessment
(the "Tax Dispute"). In the event that the assessment is upheld, interest and costs would be payable, and a penalty of up
to 100 per cent of the VAT held to have been legitimately denied by HMRC could also be levied. Separately, RBS is a named
defendant in proceedings before the High Court brought in 2015 by ten companies (all in liquidation) (the "Liquidated
Companies") and their respective liquidators (together, "the Claimants"). The Liquidated Companies previously traded in
EUAs in 2009 and are alleged to be defaulting traders within (or otherwise connected to) the EUA supply chains forming the
subject of the Tax Dispute. The Claimants are claiming approximately £80 million plus interest and costs by alleging that
RBS dishonestly assisted the directors of the Liquidated Companies in the breach of their statutory duties and/or knowingly
participated in the carrying on of the business of the Liquidated Companies with intent to defraud creditors. The trial in
that matter is currently scheduled to start in June 2018.
Notes
12. Litigation, investigations and reviews (continued)
Weiss v. National Westminster Bank Plc (NatWest)
NatWest is defending a lawsuit filed by a number of US nationals (or their estates, survivors, or heirs) who were victims
of terrorist attacks in Israel. The plaintiffs allege that NatWest is liable for damages arising from those attacks
pursuant to the US Anti-terrorism Act because NatWest previously maintained bank accounts and transferred funds for the
Palestine Relief & Development Fund, an organisation which plaintiffs allege solicited funds for Hamas, the alleged
perpetrator of the attacks. On 28 March 2013, the trial court (the United States District Court for the Eastern District of
New York) granted summary judgment in favour of NatWest on the issue of scienter, but on 22 September 2014, that summary
judgment ruling was vacated by the United States Court of Appeals for the Second Circuit. The appeals court returned the
case to the trial court for consideration of NatWest's other asserted grounds for summary judgment and, if necessary, for
trial. On 31 March 2016, the trial court denied a motion by NatWest to dismiss the case in which NatWest had argued that
the court lacked personal jurisdiction over NatWest. NatWest has since asserted other grounds for summary judgment that the
trial court has not previously ruled upon.
Anti-Terrorism Act litigation against RBS N.V.
RBS N.V. and certain other financial institutions (HSBC, Barclays, Standard Chartered, Credit Suisse, Bank Saderat, and
Commerzbank) are defendants in an action first commenced in the United States District Court for the Eastern District of
New York in November 2014 by a number of US nationals (or their estates, survivors, or heirs), most of whom are or were US
military personnel, who were killed or injured in more than 90 attacks in Iraq between 2004 and 2011.
The attacks were allegedly perpetrated by Hezbollah and certain Iraqi terror cells allegedly funded by the Islamic Republic
of Iran. According to the plaintiffs' allegations, RBS N.V. and the other defendants are liable for damages arising from
the attacks because they allegedly conspired with Iran and certain Iranian banks to assist Iran in transferring money to
Hezbollah and the Iraqi terror cells, in violation of the US Anti- terrorism Act, by agreeing to engage in "stripping" of
transactions initiated by the Iranian banks so that the Iranian nexus to the transactions would not be detected. Since
commencing this matter, the plaintiffs have amended the complaint twice. The second amended complaint is subject to a
motion to dismiss that defendants filed on 14 September 2016.
On 2 November 2016, additional plaintiffs commenced a different action in the United States District Court for the Southern
District of Illinois against the same defendants (including RBS N.V.), as well as Deutsche Bank. The allegations are
substantially similar to the allegations contained in the complaint described above. The plaintiffs are a number of US
military personnel (or their estates, survivors, or heirs) who were killed or injured in 21 attacks in Iraq between 2006
and 2011. In April 2017, this case was transferred to the United States District Court for the Eastern District of New
York, where it has been stayed pending further order of the court.
Investigations and reviews
RBS's businesses and financial condition can be affected by the actions of various governmental and regulatory authorities
in the UK, the US, the EU and elsewhere. RBS has engaged, and will continue to engage, in discussions with relevant
governmental and regulatory authorities, including in the UK, the US, the EU and elsewhere, on an ongoing and regular
basis, and in response to informal and formal inquiries or investigations, regarding operational, systems and control
evaluations and issues including those related to compliance with applicable laws and regulations, including consumer
protection, business conduct, competition/anti-trust, anti-bribery, anti-money laundering and sanctions regimes.
The NatWest Markets (formerly CIB) segment in particular has been providing information regarding a variety of matters,
including, for example, the setting of benchmark rates and related derivatives trading, conduct in the foreign exchange
market, and various issues relating to the issuance, underwriting, and sales and trading of fixed-income securities,
including structured products and government securities.
Any matters discussed or identified during such discussions and inquiries may result in, among other things, further
inquiry or investigation, other action being taken by governmental and regulatory authorities, increased costs being
incurred by RBS, remediation of systems and controls, public or private censure, restriction of RBS's business activities
and/or fines. Any of the events or circumstances mentioned in this paragraph or below could have a material adverse effect
on RBS, its business, authorisations and licences, reputation, results of operations or the price of securities issued by
it.
Notes
12. Litigation, investigations and reviews (continued)
RBS is co-operating fully with the investigations and reviews described below.
RMBS and other securitised products investigations
In the US, RBS is involved in reviews, investigations and proceedings (both formal and informal) by federal and state
governmental law enforcement and other agencies and self-regulatory organisations, including the US Department of Justice
(DOJ) and various other members of the Residential Mortgage-Backed Securities Working Group (RMBS Working Group) of the
Financial Fraud Enforcement Task Force (including several state attorneys general, including those mentioned below),
relating to, among other things, issuance, underwriting and trading in RMBS and other mortgage-backed securities,
collateralised debt obligations (CDOs), collateralised loan obligations (CLOs) and synthetic products.
In connection with these inquiries, Group companies have received requests for information and subpoenas seeking
information about, among other things, the structuring of CDOs, financing to loan originators, purchase of whole loans,
sponsorship and underwriting of securitisations, due diligence, representations and warranties, communications with ratings
agencies, disclosure to investors, document deficiencies, trading activities and practices and repurchase requests.
These ongoing matters include, among others, active civil and criminal investigations by the DOJ, relating primarily to due
diligence on and disclosure related to loans purchased for, or otherwise included in, securitisations and related
disclosures.
Ongoing investigations into the same or similar issues by several state attorneys general are at various stages, with those
of the New York and California attorneys general being further progressed than the others.
As at 30 June 2017, the total aggregate of provisions in relation to certain of the RMBS investigations (described
immediately above) and RMBS litigation matters (set out under "Litigation" on page 75) was £6.6 billion ($8.5 billion), of
which £3.7 billion ($4.75 billion) related to the FHFA case that has now been resolved. RBS continues to cooperate with the
DOJ in its civil and criminal investigations of RMBS matters and with several state attorneys general in their
investigations. The duration and outcome of these investigations and RMBS litigation matters remain uncertain, including in
respect of whether settlements for all or any of such matters may be reached. Further substantial provisions and costs may
be recognised and, depending on the final outcome, other adverse consequences may occur as described above and in the Risk
Factor relating to legal, regulatory and governmental actions and investigations set out in RBS's 2016 Annual Report and
Accounts on page 432 and in RBS's 2016 Annual Report on Form 20-F on page 509.
RBSSI has also been responding to an ongoing criminal investigation by the United States Attorney for the District of
Connecticut relating to alleged misrepresentations in the trading of various forms of asset-backed securities, including
RMBS, commercial mortgage-backed securities, CDOs, and CLOs. In March and December 2015, two former RBSSI traders entered
guilty pleas in the United States District Court for the District of Connecticut, each to one count of conspiracy to commit
securities fraud while employed at RBSSI. RBSSI is in advanced discussions to resolve the matter.
US mortgages - loan repurchase matters
RBS's NatWest Markets business in North America was a purchaser of non-agency residential mortgages in the secondary
market, and an issuer and underwriter of non-agency RMBS.
In issuing RMBS, NatWest Markets in some circumstances made representations and warranties regarding the characteristics of
the underlying loans. As a result, NatWest Markets may be, or may have been, contractually required to repurchase such
loans or indemnify certain parties against losses for certain breaches of such representations and warranties. Depending on
the extent to which such loan repurchase related claims are pursued against and not rebutted by NatWest Markets on
timeliness or other grounds, the aggregate potential impact on RBS, if any, may be material.
Notes
12. Litigation, investigations and reviews (continued)
LIBOR and other trading rates
From February 2013 to December 2016, RBS entered into settlements with various governmental authorities in relation to
investigations into submissions, communications and procedures around the setting of LIBOR and other interest rates and
interest rate trading, which, among other things, required RBS to pay significant penalties. As part of these resolutions,
RBS made certain undertakings regarding benchmark interest rates, including the undertakings contained in its February 2013
resolution with the Commodity Futures Trading Commission. RBS continues to co-operate with investigations and requests for
information by various other governmental and regulatory authorities, including in the UK, US and APAC.
On 3 February 2017, it was announced that RBS and the CFTC entered into a civil settlement resolving the CFTC's
investigation of ISDAFIX and related trading activities. As part of the settlement, RBS has paid a penalty of US$85 million
and agreed to certain undertakings.
Foreign exchange related investigations
In November 2014, RBS plc reached a settlement with the FCA and the CFTC in relation to investigations into failings in
RBSG's FX businesses within its NatWest Markets segment. RBS plc agreed to pay penalties of £217 million to the FCA and
US$290 million to the CFTC to resolve the investigations. The fines were paid on 19 November 2014.
On 20 May 2015, RBS plc announced that it had reached settlements with the DOJ and the Board of Governors of the Federal
Reserve System (Federal Reserve) in relation to investigations into its FX business within its NatWest Markets segment. RBS
plc paid a penalty of US$274 million to the Federal Reserve and agreed to pay a penalty of US$395 million to the DOJ to
resolve the investigations.
As part of its plea agreement with the DOJ, RBS plc pled guilty in the United States District Court for the District of
Connecticut to a one-count information charging an antitrust conspiracy. RBS plc admitted that it knowingly, through one of
its euro/US dollar currency traders, joined and participated in a conspiracy to eliminate competition in the purchase and
sale of the euro/US dollar currency pair exchanged in the FX spot market.
The charged conspiracy occurred between as early as December 2007 to at least April 2010. On 5 January 2017, the United
States District Court for the District of Connecticut imposed a sentence on RBS plc consisting of the US$395 million
criminal fine previously agreed with the DOJ and a term of probation, which among other things, prohibits RBS plc from
committing another crime in violation of US law or engaging in the FX trading practices that form the basis for the charged
crime and requires RBS plc to implement a compliance program designed to prevent and detect the unlawful conduct at issue
and to strengthen its compliance and internal controls as required by other regulators (including the FCA and the CFTC). A
violation of the terms of probation could lead to the imposition of additional penalties. Subsequent to the sentencing, RBS
plc paid the criminal fine, which had been covered by an existing provision.
RBS plc and RBS Securities Inc. have also entered into a cease and desist order with the Federal Reserve relating to FX and
other designated market activities (the FX Order). In the FX Order, which is publicly available and will remain in effect
until terminated by the Federal Reserve, RBS plc and RBS Securities Inc. agreed to take certain remedial actions with
respect to FX activities and certain other designated market activities, including the creation of an enhanced written
internal controls and compliance program, an improved compliance risk management program, and an enhanced internal audit
program. RBS plc and RBS Securities Inc. are obligated to implement and comply with these programs as approved by the
Federal Reserve, and are also required to conduct, on an annual basis, a review of applicable compliance policies and
procedures and a risk-focused sampling of key controls.
RBS is co-operating with investigations and responding to inquiries from other governmental and regulatory (including
competition) authorities on similar issues relating to failings in its FX business within its NatWest Markets segment. The
timing and amount of financial penalties with respect to any further settlements and related litigation risks and
collateral consequences remain uncertain and may well be material.
Notes
12. Litigation, investigations and reviews (continued)
Interest rate hedging products (IRHP) redress programme
Since 2013, RBS and other banks have been undertaking a redress exercise and past business review in relation to the sale
of interest rate hedging products to some small and medium sized businesses classified as retail clients or private
customers under FSA rules. This exercise was scrutinised by an independent reviewer, KPMG (appointed as a Skilled Person
under section 166 of the Financial Services and Markets Act), and overseen by the FCA. RBS has reached agreement with KPMG
in relation to redress determinations for all in scope customers, as well as the majority of the consequential loss claims
received.
RBS provisions in relation to the above redress exercises total £1.5 billion to date for these matters, virtually all of
which had been utilised at 30 June 2017.
Judicial Review of Skilled Person's role in IRHP review
RBS has been named as an interested party in a number of claims for judicial review of KPMG's decisions as Skilled Person
in RBS's previously disclosed IRHP redress programme. This follows a similar claim from a customer of another UK bank, also
against KPMG.
All of these claims were stayed pending the outcome of the other bank's case. The trial in that case was heard on 25
January 2016. The court decided in favour of KPMG, finding that (1) KPMG is not a body amenable to judicial review in
respect of its role as Skilled Person in this matter; and (2) that there was no unfairness by the other bank in the
procedure adopted. The claimant has been granted permission to appeal that decision, and the appeal hearing is scheduled to
take place in December 2017.
The majority of the claims that name RBS as an interested party have been discontinued but there are still several cases
which remain stayed pending the outcome of the appeal in the other bank's case. If the appeal court finds that a section
166-appointed Skilled Person is susceptible to judicial review, these remaining claims against RBS may then proceed to full
hearing to assess the fairness of KPMG's role in the redress programme in those particular cases. If deemed unfair, this
could have a consequential impact on the reasonableness of the methodology applied to reviewed and settled IRHP files
generally. As there remains some uncertainty, it is not practicable reliably to estimate the impact of this matter, if any,
on RBS which may be material.
Investment advice review
In February 2013, the FSA announced the results of a mystery shopping review it undertook into the investment advice
offered by banks and building societies to retail clients. As a result of that review the FSA announced that firms involved
were cooperative and agreed to take immediate action. RBS was one of the firms involved.
The action required included a review of the training provided to advisers, considering whether changes are necessary to
both advice processes and controls for new business, and undertaking a past business review to identify any historic poor
advice (and where breaches of regulatory requirements are identified, to put this right for customers).
Subsequent to the FSA announcing the results of its mystery shopping review, the FCA has required RBS to carry out a past
business review and customer contact exercise on a sample of historic customers that received investment advice on certain
lump sum products through the UK Financial Planning channel of the UK Personal & Business Banking (UK PBB) segment of RBS,
which includes RBS plc and NatWest, during the period from March 2012 until December 2012.
This review was conducted under section 166 of the Financial Services and Markets Act, under which a Skilled Person was
appointed to carry out the exercise. Redress has been paid to certain customers in this sample group. Following discussions
with the FCA after issue of the draft section 166 report, RBS agreed with the FCA that it would carry out a wider
review/remediation exercise relating to certain investment, insurance and pension sales from 1 January 2011 to 1 April
2015. RBS started writing to the relevant customers during 2016 and redress payments have also commenced. The project is
due to finish in Q4 2017. In addition, RBS agreed with the FCA that it would carry out a remediation exercise, for a
specific customer segment who were sold a particular structured product, in response to concerns raised by the FCA with
regard to (a) the target market for the product and (b) how the product may have been described to customers by certain
advisers. Redress has been paid to certain customers who took out the structured product.
Notes
12. Litigation, investigations and reviews (continued)
RBS provisions in relation to investment advice total £201 million to date for these matters, of which £80 million had been
utilised at 30 June 2017.
Packaged accounts
As a result of an uplift in packaged current account complaints, RBS proactively put in place dedicated resources in 2013
to investigate and resolve complaints on an individual basis. RBS has made gross provisions totalling £409 million to date
for this matter.
The FCA conducted a thematic review of packaged bank accounts across the UK from October 2014 to April 2016, the results of
which were published in October 2016. RBS is taking into consideration and, where relevant, addressing the findings from
this review.
FCA review of RBS's treatment of SMEs
In November 2013, a report by Lawrence Tomlinson, entrepreneur in residence at the UK Government's Department for Business
Innovation and Skills, was published ("Tomlinson Report"). The Tomlinson Report was critical of RBS's treatment of SMEs.
The Tomlinson Report was passed to the PRA and FCA. Shortly thereafter, the FCA appointed an independent Skilled Person
under section 166 of the Financial Services and Markets Act to review the allegations in the Tomlinson Report. The Skilled
Person's review was focused on RBS's UK small and medium sized business customers with credit exposures of up to £20
million whose relationship was managed within RBS's Global Restructuring Group or within similar units within RBS's
Corporate Banking Division that were focused on customers in financial difficulties. In the period 2008 to 2013 RBS was one
of the leading providers of credit to the UK SME sector.
Separately, in November 2013, RBS instructed the law firm Clifford Chance to conduct an independent review of the principal
allegation made in the Tomlinson Report: RBS was alleged to be culpable of systematic and institutional behaviour in
artificially distressing otherwise viable businesses and, through that, putting businesses into insolvency. Clifford Chance
published its report on 17 April 2014 and, while it made certain recommendations to enhance customer experience and
transparency of pricing, it concluded that there was no evidence to support the principal allegation.
A separate independent review of the principal allegation, led by Mason Hayes & Curran, Solicitors, was conducted in the
Republic of Ireland. The report was published in December 2014 and found no evidence to support the principal allegation.
The Skilled Person review focused on the allegations made in the Tomlinson Report and certain observations made by Sir
Andrew Large in his 2013 Independent Lending Review, and was broader in scope than the reviews undertaken by Clifford
Chance and Mason, Hayes & Curran which are referred to above. The Skilled Person delivered the draft findings from its
review to the FCA in March 2016. RBS was then given the opportunity to consider and respond to those draft findings before
the Skilled Person delivered its final report to the FCA during September 2016.
On 8 November 2016, the FCA published an update on its review. In response, RBS announced steps that will impact SME
customers in the UK and the Republic of Ireland that were in GRG between 2008 and 2013. These steps are (i) an automatic
refund of certain complex fees; and (ii) a new complaints process, overseen by an Independent Third Party. These steps have
been developed with the involvement of the FCA which agreed that they are appropriate for RBS to take.
RBS estimates the costs associated with the new complaints review process and the automatic refund of complex fees to be
approximately £400 million, which was recognised as a provision in 2016. This includes operational costs together with the
cost of refunded complex fees and the additional estimated redress costs arising from the new complaints process.
Notes
12. Litigation, investigations and reviews (continued)
The FCA announced in November 2016 that its review is continuing. RBS continues to cooperate fully with the review.
FCA investigation into RBS plc's compliance with the Money Laundering Regulations 2007
On 21 July 2017, the FCA notified RBS that it is undertaking an investigation into RBS plc's compliance with the Money
Laundering Regulations 2007 in relation to certain customers. RBS is cooperating with the investigation.
Multilateral interchange fees
On 11 September 2014, the Court of Justice upheld earlier decisions by the EU Commission and the General Court that
MasterCard's multilateral interchange fee (MIF) arrangements for cross border payment card transactions with MasterCard and
Maestro branded consumer credit and debit cards in the EEA are in breach of competition law.
In April 2013, the EC announced it was opening a new investigation into interchange fees payable in respect of payments
made in the EEA by MasterCard cardholders from non-EEA countries. The EC's case is ongoing.
On 8 June 2015, a regulation on interchange fees for card payments entered into force. The regulation requires the capping
of both cross-border and domestic MIF rates for debit and credit consumer cards. The regulation also sets out other reforms
including to the Honour All Cards Rule which require merchants to accept all cards with the same level of MIF but not cards
with different MIF levels.
On 6 May 2015, the Competition & Markets Authority (CMA), announced that it had closed the investigations into domestic
interchange fees on the grounds of administrative priorities.
Whilst there are no recent developments on the above to report, there remains uncertainty around the outcomes of the
ongoing EC investigation, and the impact of the regulation, and they may have a material adverse effect on the structure
and operation of four party card payment schemes in general and, therefore, on RBS's business in this sector.
Payment Protection Insurance (PPI)
Since 2011, RBS has been implementing a policy statement agreed with the FCA for the handling of complaints about the
mis-selling of PPI. RBS is also monitoring developments following the UK Supreme Court's decision in the case of Plevin v
Paragon Personal Finance Ltd in November 2014. That decision was that the sale of a single premium PPI policy could create
an 'unfair relationship' under s.140A of the Consumer Credit Act 1974 (the 'Consumer Credit Act') because the premium
contained a particularly high level of undisclosed commission.
The Financial Ombudsman Service (FOS) has confirmed on its website that unfair relationship provisions in the Consumer
Credit Act and the Plevin judgment are 'potentially relevant considerations' in some of the PPI complaints referred to
FOS.
On 26 November 2015, the FCA issued Consultation Paper 15/39, in which it set out proposed rules and guidance for how firms
should handle PPI complaints fairly in light of the Plevin decision and how the FOS should consider relevant PPI
complaints. The Consultation Paper also contained proposals for the introduction in 2018 on a date to be confirmed of a
deadline for submission of PPI complaints. RBS submitted its response to
- More to follow, for following part double click ID:nRSD0890NiRecent news on Natwest
See all newsREG - NatWest Group plc - Transaction in Own Shares
AnnouncementREG - Stock Exch Notice - Admission to Trading - 18/12/2025
AnnouncementREG - NatWest Group plc - Transaction in Own Shares
AnnouncementREG - NatWest Group plc - Transaction in Own Shares
AnnouncementREG - Natwest Markets PLC - Publication of Final Terms
Announcement