REG - Royal Bk Scot.Grp. - Half Yearly Report - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 4
29/10/2014 09:17
- Part 4: For the preceding part double click ID:nRSA9699Nc
£m £m £m £m £m £m £m £m
Assets
FVTPL (4)
Loans and advances
- banks 310 (12) - - - - - (5) - 293 16 -
- customers 172 (1) - 13 (3) 48 (14) (10) (3) 202 (13) 8
Debt securities 906 77 - 77 (52) 238 (41) (225) (5) 975 55 10
Equity shares 286 83 - - (38) 40 (31) (46) (3) 291 (22) 2
Derivatives 3,493 (282) - 99 (55) 100 (212) (65) (14) 3,064 (297) (2)
FVTPL assets 5,167 (135) - 189 (148) 426 (298) (351) (25) 4,825 (261) 18
Of which ABS:
- FVTPL (4) 591 84 - 24 (29) 181 (17) (222) (3) 609 59 7
- AFS 1,108 8 (9) 3 - - (195) (111) 1 805 (3) 11
Available-for-sale (AFS)
Debt securities 1,194 8 (9) 3 - 1 (297) (53) 1 848 (3) 11
Equity shares 400 4 26 - (61) 5 (24) (61) (7) 282 4 1
AFS assets 1,594 12 17 3 (61) 6 (321) (114) (6) 1,130 1 12
6,761 (123) 17 192 (209) 432 (619) (465) (31) 5,955 (260) 30
Liabilities
Deposits 253 13 - 10 - - (2) - 1 275 13 -
Debt securities in issue 1,354 (60) - 236 (34) 36 (230) (5) (1) 1,296 (7) -
Short positions 17 (1) - - (11) 7 - (4) - 8 (4) -
Derivatives 3,007 (124) 3 79 (84) 53 (334) (69) (11) 2,520 (98) -
4,631 (172) 3 325 (129) 96 (566) (78) (11) 4,099 (96) -
Net gains/(losses) 49 14 (164) 30
Notes:
(1) Net losses on HFT instruments of £94 million (31 December 2013 - £143 million) were recorded in income from trading activities. Net gains on other instruments of £143 million (31 December 2013 - £11 million) were recorded in other operating income, interest income as appropriate.
(2) Consolidated statement of comprehensive income.
(3) Includes £36 million of debt securities in issue and £7 million derivative liabilities relating to issuances.
(4) Fair value through profit or loss comprises held-for-trading predominantly and designated at fair value through profit and loss.
Notes
11. Financial instruments (continued)
Fair value of financial instruments not carried at fair value
The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the
balance sheet.
30 June 2014 31 December 2013
Carrying Carrying
value Fair value value Fair value
£bn £bn £bn £bn
Financial assets
Loans and advances to banks 20.5 20.5 16.8 16.8
Loans and advances to customers 367.7 357.9 371.6 360.0
Debt securities 8.1 7.8 3.8 3.2
Financial liabilities
Deposits by banks 19.3 19.3 20.3 20.3
Customer accounts 140.8 141.0 133.8 134.0
Debt securities in issue 38.8 40.4 43.4 44.7
Subordinated liabilities 24.0 24.4 23.1 22.5
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
significantly affect estimated fair values. The fair values reported would not necessarily be realised in an immediate sale
or settlement.
For the following short-term financial instruments 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, customer demand
deposits and notes in circulation. These are excluded from the table above.
Notes
12. Provisions for liabilities and charges
Other Other
customer regulatory
PPI IRHP redress LIBOR provisions Litigation Property Other Total
£m £m £m £m £m £m £m £m £m
At 1 January 2014 926 1,077 337 416 150 2,018 379 186 5,489
Currency translation and other
movement - - - (2) - (15) - - (17)
Charge to income statement
- continuing operations - - 23 - - 34 2 81 140
Releases to income statement
- continuing operations - - (5) - - (4) (5) - (14)
Provisions utilised (218) (199) (26) (414) - (13) (59) (32) (961)
At 31 March 2014 708 878 329 - 150 2,020 317 235 4,637
Currency translation and other
movement - - - - (2) (46) (2) - (50)
Charge to income statement
- continuing operations 150 100 28 - - 34 149 93 554
Releases to income statement
- continuing operations - - (3) - - (31) (10) - (44)
Provisions utilised (272) (218) (53) - (5) (67) (70) (39) (724)
At 30 June 2014 586 760 301 - 143 1,910 384 289 4,373
13. Contingent liabilities and commitments
30 June 2014 31 March 2014 31 December 2013
RBS RBS RBS excl.
excl. RCR RCR Total excl. RCR RCR Total Non-Core Non-Core Total
£m £m £m £m £m £m £m £m £m
Contingent liabilities
Guarantees and assets pledged
as collateral security 19,542 220 19,762 19,634 270 19,904 19,563 616 20,179
Other 6,145 187 6,332 6,039 236 6,275 5,893 98 5,991
25,687 407 26,094 25,673 506 26,179 25,456 714 26,170
Commitments
Undrawn formal standby
facilities, credit lines and other
commitments to lend 208,299 2,076 210,375 208,550 2,482 211,032 210,766 2,280 213,046
Other 2,616 36 2,652 2,590 13 2,603 2,793 - 2,793
210,915 2,112 213,027 211,140 2,495 213,635 213,559 2,280 215,839
Contingent liabilities and
commitments 236,602 2,519 239,121 236,813 3,001 239,814 239,015 2,994 242,009
Additional contingent liabilities arise in the normal course of the Group's business. It is not anticipated that any
material loss will arise from these transactions.
Notes
14. Litigation, investigations and reviews
Arising out of their normal business operations, the Company and certain members of the Group are party to legal
proceedings and the subject of investigation and other regulatory and governmental action in the United Kingdom, the
European Union, the United States and other jurisdictions.
The Group 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 the legal proceedings, investigations and regulatory and governmental
matters in which the Group is involved is inherently uncertain, the directors believe that, based on the information
available to them, appropriate provisions have been made in respect of legal proceedings, investigations and regulatory and
governmental matters as at 30 June 2014 (see Note 12). 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 the Group has recognised.
In many proceedings, it is not possible to determine whether any loss is probable or to estimate the amount of any loss.
Numerous legal and factual issues may need to be resolved, including through potentially lengthy discovery and
determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the
proceedings in question, before a liability can be reasonably estimated for any claim. The Group cannot predict if, how, or
when such claims will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be,
particularly for claims that are at an early stage in their development or where claimants seek substantial or
indeterminate damages.
There are also situations where the Group may enter into a settlement agreement. This may occur in order to avoid the
expense, management distraction or reputational implications of continuing to contest liability, even for those matters for
which the Group 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.
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 material individually or in aggregate.
Litigation
Shareholder litigation
RBS and certain of its subsidiaries, together with certain current and former officers and directors were named as
defendants in a purported class action filed in the United States District Court for the Southern District of New York
involving holders of American Depositary Receipts (the ADR claims).
A consolidated amended complaint asserting claims under Sections 10 and 20 of the US Securities Exchange Act of 1934 and
Sections 11, 12 and 15 of the Securities Act was filed in November 2011 on behalf of all persons who purchased or otherwise
acquired the Group's American Depositary Receipts (ADRs) from issuance through 20 January 2009. In September 2012, the
Court dismissed the ADR claims with prejudice. On 5 August 2013, the Court denied the plaintiffs' motions for
reconsideration and for leave to re-plead their case. The plaintiffs appealed the dismissal of this case to the Second
Circuit Court of Appeals and that appeal was heard on 19 June 2014. A decision in respect of the appeal is awaited.
Notes
14. Litigation, investigations and reviews (continued)
Additionally, 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 the Group (and in one of those claims, also against certain former individual
officers and directors) alleging that untrue and misleading statements and/or improper omissions were made in connection
with the rights issue announced by the Group on 22 April 2008 in breach of the Financial Services and Markets Act 2000. On
30 July 2013 these and other similar threatened claims were consolidated by the Court via a Group Litigation Order. The
Group's defence to the claims was filed on 13 December 2013. Since then, further High Court claims have been issued against
the Group under the Group Litigation Order. There are likely to be further case management conferences which, in due
course, will lead to a trial date being set.
Other securitisation and securities related litigation in the United States
Group companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of
claims in the United States that relate to the securitisation and securities underwriting businesses. These cases include
actions by individual purchasers of securities and purported class action suits. Together, the pending individual and class
action cases involve the issuance of more than US$64 billion of mortgage-backed securities (MBS) issued primarily from 2005
to 2007. Although the allegations vary by claim, in general, plaintiffs in these actions claim that certain disclosures
made in connection with the relevant offerings contained materially false or misleading statements and/or omissions
regarding the underwriting standards pursuant to which the mortgage loans underlying the securities were issued. Group
companies remain as defendants in more than 40 lawsuits and arbitrations brought by purchasers of MBS, including the
purported class actions identified below.
Among these MBS lawsuits are two cases filed on 2 September 2011 by 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). The primary FHFA lawsuit remains pending in the United States District Court for the District of
Connecticut, and it relates to approximately US$32 billion of MBS for which Group entities acted as sponsor/depositor
and/or lead underwriter or co-lead underwriter. Of these approximately US$10 billion were outstanding at 30 June 2014 with
cumulative losses of approximately US$1.03 billion (being the loss of principal value suffered by security holders). On 30
September 2013, the Court denied the defendants' motion to dismiss FHFA's amended complaint in this case. Discovery is
ongoing.
The other remaining FHFA lawsuit that involves the Group (in which the primary defendant is Nomura) names RBS Securities
Inc. as a defendant by virtue of the fact that it was an underwriter of some of the securities at issue. This case is part
of a coordinated proceeding in the United States District Court for the Southern District of New York in which discovery is
underway. Three other FHFA lawsuits (against JP Morgan, Morgan Stanley and Countrywide) in which RBS Securities Inc. was an
underwriter defendant were settled without any contribution from RBS Securities Inc. On 19 June 2014, another FHFA lawsuit
in which RBS Securities Inc. was an underwriter defendant (against Ally Financial Group) was settled by RBS Securities Inc.
for US$99.5 million. This amount is fully provided for.
Other MBS lawsuits against Group companies include three cases filed by the National Credit Union Administration Board (on
behalf of US Central Federal Credit Union, Western Corporate Federal Credit Union, Southwest Corporate Federal Credit
Union, and Members United Corporate Federal Credit Union) and six cases filed by the Federal Home Loan Banks of Boston,
Chicago, Indianapolis, Seattle and San Francisco.
Notes
14. Litigation, investigations and reviews (continued)
The purported MBS class actions in which Group companies are defendants include New Jersey Carpenters Health Fund v.
Novastar Mortgage Inc. et al. and In re IndyMac Mortgage-Backed Securities Litigation, the latter of which has been settled
in principle subject to documentation and court approval. A third MBS class action, New Jersey Carpenters Vacation Fund et
al. v. The Royal Bank of Scotland plc et al., has been settled in principle for US$275 million subject to court approval.
There is a provision that fully covers this settlement amount. The case relates to more than US$15 billion of the issued
MBS that are the subject of MBS claims pending against Group companies. The outcome in this case should not be seen as
indicative of how other MBS lawsuits may be resolved.
RBS Securities Inc. was also a defendant in Luther v. Countrywide Financial Corp. et al. and related class action cases. On
5 December 2013, the court granted final approval of a US$500 million settlement of plaintiffs' claims to be paid by
Countrywide without contribution from RBS Securities Inc. Several members of the settlement class are appealing the
court-approved settlement to the United States Court of Appeals for the Ninth Circuit.
Certain other institutional investors have threatened to bring claims against the Group in connection with various
mortgage-related offerings. The Group cannot predict whether any of these individual investors will pursue these threatened
claims (or their outcome), but expects that several may. If such claims are asserted and were successful, the amounts
involved may be material.
In many of these actions, the Group has or will have contractual claims to indemnification from the issuers of the
securities (where a Group company is underwriter) and/or the underlying mortgage originator (where a Group 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.
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
14. Litigation, investigations and reviews (continued)
Most of the USD LIBOR-related actions in which Group companies are defendants, including all purported class actions
relating to USD LIBOR, have been 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. In orders dated 29 March 2013 and 23 June 2014, the Court dismissed plaintiffs' antitrust claims and claims
under RICO (Racketeer Influenced and Corrupt Organizations Act), but declined to dismiss (a) certain Commodities 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. Discovery is stayed. Over 35 other USD LIBOR-related actions involving RBS have been
stayed pending further order from the Court. On 30 June 2014, the U.S. Supreme Court announced that it would consider an
appeal by plaintiffs whose claims have been dismissed in their entirety to decide whether those plaintiffs have the
procedural right to appeal the dismissals to the U.S. Court of Appeals for the Second Circuit on an interlocutory basis
instead of waiting until there is a final judgment in the coordinated proceeding.
Certain members of the Group have also been named as defendants in class actions relating to (i) JPY LIBOR and Euroyen
TIBOR (the "Yen action") and (ii) Euribor (the "Euribor action"), both of which are pending in the United States District
Court for the Southern District of New York. On 28 March 2014, the Court in the Yen action dismissed the plaintiffs'
antitrust claims, but refused to dismiss their claims under the Commodity Exchange Act for price manipulation.
Details of LIBOR investigations and their outcomes affecting the Group are set out under 'Investigations and reviews' on
page 114.
Credit default swap antitrust litigation
Certain members of the Group, as well as a number of other financial institutions, are defendants in a consolidated
antitrust class action pending in the United States District Court for the Southern District of New York. The plaintiffs
generally allege that defendants violated the U.S. antitrust laws by restraining competition in the market for credit
default swaps through various means and thereby causing inflated bid-ask spreads for credit default swaps.
FX antitrust litigation
Certain members of the Group, as well as a number of other financial institutions, are defendants in a consolidated
antitrust class action on behalf of U.S.-based plaintiffs and two similar complaints on behalf of non-U.S. plaintiffs in
Norway and South Korea. The three cases are all pending in the United States District Court for the Southern District of
New York. The plaintiffs generally allege that the defendants violated the U.S. antitrust laws, state statutes, and the
common law by conspiring to manipulate the foreign exchange market by manipulating benchmark foreign exchange rates. On 30
May 2014, the defendants filed motions to dismiss the complaints in these actions.
Notes
14. Litigation, investigations and reviews (continued)
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 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. A further claim,
for US$21.8 million, was filed in October 2011. These matters remain at the motion to dismiss stage of litigation.
Thornburg adversary proceeding
RBS Securities Inc. and certain other Group companies, as well as several other financial institutions, are defendants in
an adversary proceeding filed in the U.S. 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.
Complex Systems
RBS N.V. is a defendant in an action being heard in the United States District Court for the Southern District of New York
filed by Complex Systems, Inc (CSI). The plaintiff alleges that RBS N.V. has since late 2007 been using the plaintiff's
back-office trade finance processing software without a valid licence, in violation of the US Copyright Act.
After granting summary judgment to CSI on the issue of liability, the Court on 9 May 2014 issued an injunction that
requires RBS N.V. to cease using the disputed software. RBS N.V. has appealed the injunction and the underlying liability
determination to the U.S. Court of Appeals for the Second Circuit. On 26 June 2014, that court denied RBS N.V.'s request
that the injunction be stayed pending the outcome of the appeal. RBS N.V. is currently in discussions with CSI to resolve
the dispute.
CPDO Litigation
CPDO claims have been 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). In November 2012, the Federal Court of
Australia issued a judgment against RBS N.V. and others in one such case. It held that RBS N.V. and others committed
certain wrongful acts in connection with the rating and sale of the CPDO. In March 2013, RBS N.V. was ordered to pay A$19.7
million. RBS N.V. appealed this decision and the appeal court found against RBS N.V. in May 2014. RBS N.V. has made the
required payment of A$19.7 million. The judgment may potentially have significance to the other claims served and to any
future similar claims.
Notes
14. Litigation, investigations and reviews (continued)
Investigations and reviews
The Group's businesses and financial condition can be affected by the fiscal or other policies and actions of various
governmental and regulatory authorities in the United Kingdom, the European Union, the United States and elsewhere. The
Group has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities,
including in the United Kingdom, the European Union, the United States and elsewhere, on an ongoing and regular basis
regarding operational, systems and control evaluations and issues including those related to compliance with applicable
regulatory, anti-bribery, anti-money laundering and sanctions regimes. It is possible that any matters discussed or
identified may result in investigatory or other action being taken by governmental and regulatory authorities, increased
costs being incurred by the Group, remediation of systems and controls, public or private censure, restriction of the
Group's business activities or fines. Any of the events or circumstances mentioned below could have a material adverse
effect on the Group, its business, authorisations and licences, reputation, results of operations or the price of
securities issued by it.
The Group is co-operating fully with the investigations and reviews described below.
LIBOR, other trading rates and foreign exchange trading
On 6 February 2013, the Group announced settlements with the Financial Services Authority in the United Kingdom, the United
States Commodity Futures Trading Commission and the United States Department of Justice (DOJ) in relation to investigations
into submissions, communications and procedures around the setting of the London Interbank Offered Rate (LIBOR). RBS agreed
to pay penalties of £87.5 million, US$325 million and US$150 million to these authorities respectively to resolve the
investigations. As part of the agreement with the DOJ, RBS plc entered into a Deferred Prosecution Agreement in relation to
one count of wire fraud relating to Swiss Franc LIBOR and one count for an antitrust violation relating to Yen LIBOR. In
addition, on 12 April 2013, RBS Securities Japan Limited entered a plea of guilty to one count of wire fraud relating to
Yen LIBOR and on 6 January 2014, the US District Court for the District of Connecticut entered a final judgment in relation
to the conviction of RBS Securities Japan Limited pursuant to the plea agreement. On 12 April 2013, RBS Securities Japan
Limited received a business improvement order from Japan's Financial Services Agency requiring RBS to take remedial steps
to address certain matters, including inappropriate conduct in relation to Yen LIBOR. Since such date, RBS Securities Japan
Limited has been taking steps to address the issues raised in compliance with that order. In June 2013, RBS was listed
amongst the 20 banks found by the Monetary Authority of Singapore (MAS) to have deficiencies in the governance, risk
management, internal controls and surveillance systems relating to benchmark submissions following a finding by the MAS
that certain traders made inappropriate attempts to influence benchmarks in the period 2007 - 2011. RBS was ordered at that
time to set aside additional statutory reserves with MAS of SGD1-1.2 billion and to comply with certain directives set by
MAS with oversight by an independent reviewer, including instituting proper benchmark rate governance, providing training
and ensuring robust surveillance systems and proper management of conflicts of interest. RBS complied with all directives
to the satisfaction of MAS and the statutory reserves amount has been repaid by MAS.
Notes
14. Litigation, investigations and reviews (continued)
In February 2014, the Group paid settlement penalties of approximately EUR 260 million and EUR 131 million to resolve
investigations by the European Commission into Yen LIBOR competition infringements and EURIBOR competition infringements
respectively.
In July 2014, RBS entered into an Enforceable Undertaking (EU) with the Australian Securities and Investments Commission
(ASIC) in relation to potential misconduct involving the Australian Bank Bill Swap Rate. RBS undertakes in the EU to (a)
comply with its existing undertakings arising out of the February 2013 settlement with the United States Commodity Futures
Trading Commission as they relate to Australian Benchmark Interest Rates, (b) implement remedial measures with respect to
its trading in Australian reference bank bills and (c) appoint an independent compliance expert to review and report on
RBS's implementation of such remedial measures. The remediation measures include ensuring appropriate records retention,
training, communications surveillance and trading reviews are in place. As part of the EU, RBS also agreed to make a
voluntary contribution of A$1.6 million to fund independent financial literacy projects in Australia.
The Group is co-operating with investigations and new and ongoing requests for information by various other governmental
and regulatory authorities, including in the UK, US and Asia, into its submissions, communications and procedures relating
to a number of trading rates, including LIBOR and other interest rate settings, ISDAFIX and non-deliverable forwards. The
Group is also under investigation by competition authorities in a number of jurisdictions stemming from the actions of
certain individuals in the setting of LIBOR and other trading rates, as well as interest rate-related trading.
In addition, various governmental and regulatory authorities have commenced investigations into foreign exchange trading
and sales activities apparently involving multiple financial institutions. The Group has received enquiries from certain of
these authorities including the FCA. The Group is reviewing communications and procedures relating to certain currency
exchange benchmark rates as well as foreign exchange trading and sales activity. It is not possible to estimate reliably
what effect the outcome of these investigations, any regulatory findings and any related developments may have on the
Group, including the timing and amount of fines or settlements, which may be material.
On 21 July 2014, the Serious Fraud Office announced that it was launching a criminal investigation into allegations of
fraudulent conduct in the foreign exchange market, apparently involving multiple financial institutions.
Technology incident in June 2012
On 19 June 2012, the Group was affected by a technology incident, as a result of which the processing of certain customer
accounts and payments were subject to considerable delay. The cause of the incident has been investigated by independent
external counsel with the assistance of third party advisors. The Group agreed to reimburse customers for any loss suffered
as a result of the incident and the Group made a provision of £175 million in 2012.
The incident, the Group's handling of the incident, and the systems and controls surrounding the processes affected, are
the subject of regulatory investigations in the UK and in the Republic of Ireland.
Notes
14. Litigation, investigations and reviews (continued)
On 9 April 2013, the UK Financial Conduct Authority (FCA) announced that it had commenced an enforcement investigation into
the incident. This is a joint investigation conducted by the FCA together with the UK Prudential Regulation Authority
(PRA). The FCA and PRA will reach their conclusions in due course and will decide whether or not to initiate enforcement
action following that investigation. While the outcomes of the FCA and PRA investigations will be separate, the regulators
have indicated that they will endeavour to co-ordinate the timescales of their respective investigations. Separately the
Central Bank of Ireland has initiated an investigation.
Interest rate hedging products
In June 2012, following an industry wide review, the FSA announced that the Group and other UK banks had agreed to a
redress exercise and past business review in relation to the sale of interest rate hedging products to some small and
medium sized businesses who were classified as retail clients or private customers under FSA rules. On 31 January 2013, the
FSA issued a report outlining the principles to which it wished the Group and other UK banks to adhere in conducting the
review and redress exercise. This exercise is being scrutinised by an independent reviewer, who is reviewing and approving
any redress, and the FCA is overseeing this.
As part of the redress exercise, the Group undertook to provide fair and reasonable redress to non-sophisticated customers
classified as retail clients or private customers, who were mis-sold interest rate hedging products. In relation to
non-sophisticated customers classified as retail clients or private customers who were sold interest rate products other
than interest rate caps on or after 1 December 2001 up to 29 June 2012, the Group was required to (i) make redress to
customers sold structured collars; and (ii) write to customers sold other interest rate hedging products offering a review
of their sale and, if it is appropriate in the individual circumstances, propose fair and reasonable redress on a case by
case basis. Furthermore, non-sophisticated customers classified as retail clients or private customers who purchased
interest rate caps during the period on or after 1 December 2001 to 29 June 2012 are entitled to approach the Group and
request a review. The Group has reached agreement with the independent reviewer in relation to redress outcomes for almost
all in scope customers. The Group and the independent reviewer are now focused on completing the few remaining review
outcomes, as well as assessing ancillary issues such as consequential loss claims.
In addition to the redress exercise that is being overseen by the FCA, the Group is also dealing with a large number of
active litigation claims by customers who are also being considered under the FCA redress programme as well as customers
who are outside of scope for the review due to their sophistication. The Group is encouraging those customers that are
eligible to seek redress under the FCA scheme. To the extent that claims are brought, the Group believes it has strong
grounds for defending these claims.
The Group is voluntarily undertaking a similar exercise and past business review in relation to the sale of interest rate
hedging products to retail designated small and medium sized businesses in the Republic of Ireland and to relevant
customers of RBS International. Current expectations are that these will be completed by 31 December 2014.
The Group has made provisions in relation to all of the above totalling £1.4 billion to date for this matter, including
£100 million in the six months ended 30 June 2014, of which £0.6 billion had been utilised at 30 June 2014.
Notes
14. Litigation, investigations and reviews (continued)
FSA mystery shopping review
On 13 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. The Group was one of the firms involved.
The action required included a review of the training provided to advisers, considering whether changes are necessary to
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 the Group 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 Financial Planning channel of the Personal and Business Banking division of the
Group, which includes The Royal Bank of Scotland plc and National Westminster Bank Plc, during the period from March 2012
until December 2012. This review is being conducted under section 166 of the Financial Services and Markets Act, under
which a skilled person has been appointed to monitor such exercise. Alongside this review, the Personal and Business
Banking business of the Group is also carrying out self-initiated reviews of certain parts of its advice back book and
discussions are taking place with the FCA in relation to a remediation exercise for a specific customer segment who may
have been mis-sold a structured product.
Card Protection Plan Limited
On 22 August 2013, the FCA announced that Card Protection Plan Limited ("CPP") and 13 banks and credit card issuers,
including the Group, had agreed to a compensation scheme in relation to the sale of card and/or identity protection
insurance to certain retail customers. The compensation scheme has now been approved by the requisite number of customers
and by the High Court of England and Wales. CPP has written to affected policyholders to ask those who believe they have
been mis-sold to submit their claims. Claims that have been submitted to date are currently being processed and payments
are now being made. Save for exceptional cases, all claims must be submitted before 31 August 2014. The Group has made
appropriate levels of provision based on its estimate of ultimate exposure.
Tomlinson Report
On 25 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 the Group's Global
Restructuring Group's treatment of SMEs. The Tomlinson Report was passed to the PRA and FCA. On 29 November 2013, the FCA
announced that an independent skilled person would be appointed under Section 166 of the Financial Services and Markets Act
to review the allegations in the Tomlinson Report. On 17 January 2014, Promontory Financial Group and Mazars were appointed
as the skilled person. The Group is fully cooperating with the FCA in its investigation.
Notes
14. Litigation, investigations and reviews (continued)
Separately, in November 2013 the Bank instructed the law firm Clifford Chance to conduct an independent review of the
principal allegation made in the Tomlinson Report: the Group's Global Restructuring Group 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 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, has been commenced in
the Republic of Ireland. The Group's current expectation is that this review will be completed by 30 September 2014.
Multilateral interchange fees
In 2007, the EC issued a decision that, while interchange is not illegal per se, 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 were in breach of competition law. MasterCard was required to withdraw (i.e. set to zero) the relevant
cross-border MIF by 21 June 2008. MasterCard appealed against the decision to the General Court in March 2008, with the
Group intervening in the appeal proceedings. The General Court heard MasterCard's appeal in July 2011 and issued its
judgment in May 2012, upholding the EC's original decision. MasterCard has appealed further to the Court of Justice and the
Group has intervened in these appeal proceedings. The appeal hearing took place on 4 July 2013 and the Advocate General's
(AG) opinion (which is a non binding opinion and provided to the Court in advance of its final decision) was published on
30 January 2014. The AG opinion proposes that the Court should dismiss MasterCard's appeal. The Court's decision is
currently expected on 11 September 2014. MasterCard negotiated interim cross border MIF levels to apply for the duration of
the General Court proceedings. These MIF levels remain in place during the appeal before the Court of Justice.
On 9 April 2013, the EC announced it was opening a new investigation into interbank fees payable in respect of payments
made in the EEA by MasterCard cardholders from non-EEA countries.
In March 2008, the EC opened a formal inquiry into Visa's MIF arrangements for cross border payment card transactions with
Visa branded debit and consumer credit cards in the EEA. In April 2009 the EC announced that it had issued Visa with a
formal Statement of Objections. In April 2010 Visa announced it had reached an agreement with the EC as regards immediate
cross border debit card MIF rates only and in December 2010 the commitments were finalised for a four year period
commencing December 2010 under Article 9 of Regulation 1/2003. In July 2012 Visa made a request to re-open the settlement
in order to modify the fee. The EC rejected the request and in October 2012 Visa filed an appeal to the General Court
seeking to have that decision annulled. That appeal is ongoing. The EC is continuing its investigations into Visa's cross
border MIF arrangements for deferred debit and credit transactions. On 31 July 2012 the EC announced that it had issued
Visa with a supplementary Statement of Objections regarding consumer credit cards in the EEA. On 14 May 2013, the EC
announced it had reached an agreement with Visa regarding immediate cross border credit card MIF rates. This agreement has
now been market tested and was made legally binding on 26 February 2014. The agreement is to last for four years.
Notes
14. Litigation, investigations and reviews (continued)
In addition, the EC has proposed a draft regulation on interchange fees for card payments. The draft regulation is subject
to a consultation process, prior to being finalised and enacted. It is currently expected that the regulation will be
enacted during early 2015 at the earliest. The draft regulation proposes the capping of both cross-border and domestic MIF
rates for debit and credit consumer cards. The draft regulation also sets out other proposals for reform including to the
Honour All Cards Rule so merchants will be required to accept all cards with the same level of MIF but not cards with
different MIF levels.
In the UK, the Office of Fair Trading (OFT) had previously opened investigations into domestic interchange fees applicable
in respect of Visa and MasterCard consumer and commercial credit and debit card transactions. The OFT has not made a
finding of an infringement of competition law and has not issued a Statement of Objections to any party in connection with
those investigations. In February 2013 the OFT confirmed that while reserving its right to do so, it did not expect to
issue Statements of Objections in respect of these investigations (if at all) prior to the handing down of the judgment of
the Court of Justice in the matter of MasterCard's appeal against the EC's 2007 infringement decision.
The outcomes of these ongoing investigations, proceedings and proposed regulation are not yet known, but they may have a
material adverse effect on the structure and operation of four party card payment schemes in general and, therefore, on the
Group's business in this sector.
Payment Protection Insurance
The FSA conducted a broad industry thematic review of Payment Protection Insurance (PPI) sales practices and in September
2008, the FSA announced an escalation of its level of regulatory intervention. Substantial numbers of customer complaints
alleging the mis-selling of PPI policies had been made to banks and to the Financial Ombudsman Service (FOS) and many of
these were being upheld by the FOS against the banks.
The FSA published a final policy statement in August 2010 imposing significant changes with respect to the handling of
complaints about the mis-selling of PPI. In October 2010, the British Bankers' Association (BBA) filed an application for
judicial review of the FSA's policy statement and of related guidance issued by the FOS. In April 2011 the High Court
issued judgment in favour of the FSA and the FOS and in May 2011 the BBA announced that it would not appeal that judgment.
The Group then reached agreement with the FSA on a process for implementation of its policy statement and for the future
handling of PPI complaints. Implementation of the agreed processes has been under way since 2011. The Group has made
provisions totalling £3.2 billion to date for this matter, including £150 million in the six months ended 30 June 2014, of
which £2.6 billion has been utilised at 30 June 2014.
Retail banking - EC
Since initiating an inquiry into retail banking in the European Union (EU) in 2005, the European Commission (EC) continues
to keep retail banking under review. In late 2010 the EC launched an initiative pressing for greater transparency of bank
fees and is currently proposing to legislate for increased harmonisation of terminology across Member States. The Group
cannot predict the outcome of these actions at this stage.
Notes
14. Litigation, investigations and reviews (continued)
UK personal current accounts/retail banking
In July 2008, the OFT published a market study report into Personal Current Accounts (PCAs) raising concerns as regards the
way the market was functioning. In October 2009 the OFT summarised initiatives agreed with industry to address these
concerns. In December 2009, the OFT published a further report in which it stated that it continued to have significant
concerns about the operation of the PCA market in the UK, in particular in relation to unarranged overdrafts, and that it
believed that fundamental changes were required for the market to work in the best interests of bank customers. In March
2010, the OFT announced that it had secured agreement from the banks on four industry-wide initiatives designed to address
its concerns, namely minimum standards on the operation of opt-outs from unarranged overdrafts, new working groups on
information sharing with customers, best practice for PCA customers in financial difficulties and incurring charges, and
PCA providers to publish their policies on dealing with PCA customers in financial difficulties. The OFT also announced
that it would conduct six-monthly reviews and would also review the market again fully in 2012 and undertake a brief
analysis on barriers to entry.
The first six-monthly review was completed in September 2010. The OFT noted progress in switching, transparency and
unarranged overdrafts for the period March to September 2010 and highlighted further changes it wanted to see in the
market. In March 2011, the OFT published the next update report in relation to PCAs. This noted further progress in
improving consumer control over the use of unarranged overdrafts. In particular, the Lending Standards Board had led on
producing standards and guidance to be included in a revised Lending Code. The OFT stated it would continue to monitor the
market and would consider the need for, and appropriate timing of, further update reports in light of other developments,
in particular the work of the UK Government's Independent Commission on Banking (ICB).
Additionally, in May 2010, the OFT announced its review of barriers to entry. The review concerned retail banking and
banking for small and medium sized enterprises (SMEs) (up to £25 million turnover). The OFT published its report in
November 2010. It advised that it expected its review to be relevant to the ICB, the FSA, HM Treasury and the Department
for Business, Innovation and Skills and to the devolved governments in the UK. The OFT did not indicate whether it would
undertake any further work. The report maintained that barriers to entry remain, in particular regarding switching, branch
networks and brands.
On 13 July 2012, the OFT launched its planned full review of the PCA market. The review was intended to consider whether
the initiatives agreed by the OFT with banks to date had been successful and whether the market should be referred to the
Competition Commission (CC) for a fuller market investigation.
The OFT's PCA report was published on 25 January 2013. The OFT acknowledged some specific improvements in the market since
its last review but concluded that further changes are required to tackle ongoing concerns, including a lack of switching,
the ability of consumers to compare products and the complexity of overdraft charges. However, the OFT
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