REG - Royal Bk Scot.Grp. - Half Yearly Report - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 5
29/10/2014 09:17
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recognised at the
time it published the report that a number of major developments were expected over the coming months including divestment
of branches, improvements in account switching and assistance to customers to compare products and services. Therefore the
OFT decided not to refer the market to the CC but said that it expected to return to the question of a referral to the CC
in 2015, or before. The OFT also announced that it would be carrying out behavioural economic research on the way consumers
make decisions and engage with retail banking service, and would study the operation of payment systems as well as the SME
banking market.
Notes
14. Litigation, investigations and reviews (continued)
On 11 March 2014, the successor body to the OFT and CC, the Competition & Markets Authority (CMA), announced that in
addition to its pending SME review (see below), it would be undertaking an update of the OFT's 2013 PCA review. On 18 July
2014 the CMA published its preliminary findings in respect of both the PCA and SME market studies. The CMA provisionally
decided to make a market investigation reference (MIR) for both the PCA and SME market studies. The provisional decision on
both PCAs and SMEs is now subject to a consultation period which runs until 17 September 2014. Following this period of
consultation the CMA will make its final decision on a MIR in late autumn 2014. Should the CMA decide to proceed with a MIR
this would result in a wide-ranging 18-24 month Phase 2 inquiry. At this stage it is not possible to estimate potential
impacts on the Group.
SME banking market study
The OFT announced its market study on competition in banking for SMEs in England and Wales, Scotland and Northern Ireland
on 19 June 2013. Following a consultation on the scope of the market study, the OFT published an update paper on 27
September 2013 setting out its proposed scope. On 11 March 2014, the OFT set out some competition concerns on SME banking
and also announced that its successor body, the CMA, would continue the review. As discussed above, the CMA has
provisionally decided to make a MIR for the SME market study in addition to the PCA study. As regards SMEs, the CMA is
consulting on both the provisional decision and its provisional conclusion that it would be more appropriate to make a MIR
than accept a set of undertakings in lieu put forward by RBS, Barclays, HSBC and Lloyds. The CMA is also consulting on
whether a review is required of the previous undertakings given following the CC's investigation into SME banking in 2002
and has asked for comments on whether these undertakings need to be varied. At this stage it is not possible to estimate
potential impacts on the Group.
FCA Wholesale Sector Competition Review
On 9 July 2014, the FCA launched a review of competition in the wholesale sector to identify any areas which may merit
further investigation through an in-depth market study.
The initial review is an exploratory exercise and will focus primarily on competition in wholesale securities and
investment markets, and related activities such as corporate banking. It will commence with a three month consultation
exercise, including a call for inputs from stakeholders. Following this consultation period, the FCA intends to publish a
feedback statement later in 2014 and any market study is expected to be launched in early 2015.
Credit default swaps (CDS) investigation
The Group is a party to the EC's antitrust investigation into the CDS information market. The Group has received and
responded to a Statement of Objections from the EC and continues to co-operate fully with the EC's ongoing investigation.
In general terms, the EC has raised concerns that a number of banks, Markit and ISDA may have jointly prevented exchanges
from entering the CDS market. At this stage, the Group cannot estimate reliably what effect the outcome of the
investigation may have on the Group, which may be material.
Notes
14. Litigation, investigations and reviews (continued)
Securitisation and collateralised debt obligation business
In the United States, the Group 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 among others
various members of the RMBS Working Group of the Financial Fraud Enforcement Task Force relating to, among other things,
issuance, underwriting and trading in mortgage-backed securities, collateralised debt obligations (CDOs), 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 repurchase requests.
On 7 November 2013, the Group announced that it had settled with the US Securities and Exchange Commission ('the SEC') over
its investigation of RBS Securities Inc. relating to due diligence conducted in connection with a 2007 offering of
residential mortgage-backed securities and corresponding disclosures. Pursuant to the settlement, RBS Securities Inc.,
without admitting or denying the SEC's allegations, consented to the entry of a final judgment ordering certain relief,
including an injunction and the payment of approximately US$153 million in disgorgement, penalties, and interest. The
settlement was subsequently approved by the United States District Court for the District of Connecticut. The Group
co-operated fully with the SEC throughout the investigation.
In 2007, the New York State Attorney General issued subpoenas to a wide array of participants in the securitisation and
securities industry, focusing on the information underwriters obtained from the independent firms hired to perform due
diligence on mortgages. The Group completed its production of documents requested by the New York State Attorney General in
2008, principally producing documents related to loans that were pooled into one securitisation transaction. In May 2011,
the New York State Attorney General requested additional information about the Group's mortgage securitisation business
and, following the formation of the RMBS Working Group, has focused on the same or similar issues as the other state and
federal RMBS Working Group investigations described above. The investigation is ongoing and the Group continues to respond
to requests for information.
US mortgages - loan repurchase matters
The Group's Markets business in North America has been a purchaser of non-agency US residential mortgages in the secondary
market, and an issuer and underwriter of non-agency residential mortgage-backed securities (RMBS). Markets did not
originate or service any US residential mortgages and it was not a significant seller of mortgage loans to government
sponsored enterprises (GSEs) (e.g. the Federal National Mortgage Association and the Federal Home Loan Mortgage
Association).
Notes
14. Litigation, investigations and reviews (continued)
In issuing RMBS, Markets generally assigned certain representations and warranties regarding the characteristics of the
underlying loans made by the originator of the residential mortgages; however, in some circumstances, Markets made such
representations and warranties itself. Where Markets has given those or other representations and warranties (whether
relating to underlying loans or otherwise), Markets may be contractually required to repurchase such loans or indemnify
certain parties against losses for certain breaches of such representations and warranties. In certain instances where it
is required to repurchase loans or related securities, Markets may be able to assert claims against third parties who
provided representations or warranties to Markets when selling loans to it, although the ability to recover against such
parties is uncertain. Between the start of 2009 and 30 June 2014, Markets received approximately US$741 million in
repurchase demands in respect of loans made primarily from 2005 to 2008 and related securities sold where obligations in
respect of contractual representations or warranties were undertaken by Markets. However, repurchase demands presented to
Markets are subject to challenge and rebuttal by Markets.
Citizens Financial Group, Inc (Citizens) has not been an issuer or underwriter of non-agency RMBS. However, Citizens is an
originator and servicer of residential mortgages, and it routinely sells such mortgage loans in the secondary market and to
GSEs. In the context of such sales, Citizens makes certain representations and warranties regarding the characteristics of
the underlying loans and, as a result, may be contractually required to repurchase such loans or indemnify certain parties
against losses for certain breaches of the representations and warranties concerning the underlying loans. Between the
start of 2009 and 30 June 2014, Citizens received US$243 million in repurchase demands in respect of loans originated
primarily since 2003. However, repurchase demands presented to Citizens are subject to challenge and rebuttal by Citizens.
Although there has in recent times been disruption in the ability of certain financial institutions operating in the United
States to complete foreclosure proceedings in respect of US mortgage loans in a timely manner or at all (including as a
result of interventions by certain states and local governments), to date, Citizens has not been materially impacted by
such disruptions and the Group has not ceased making foreclosures.
The Group cannot currently estimate what the ultimate exposure may be with respect to repurchase demands. Furthermore, the
Group is unable to estimate the extent to which the matters described above will impact it, and future developments may
have an adverse impact on the Group's net assets, operating results or cash flows in any particular period.
Citizens consent orders
The activities of Citizens' two US bank subsidiaries - Citizens Bank, N.A. and Citizens Bank of Pennsylvania - are subject
to extensive US laws and regulations concerning unfair or deceptive acts or practices in connection with customer products.
Certain of the bank subsidiaries' practices with respect to overdraft protection and other consumer products have not met
applicable standards. The bank subsidiaries have implemented and are continuing to implement changes to bring their
practices in conformity with applicable laws and regulations. In April 2013, the bank subsidiaries consented to the
issuance of orders by their respective primary federal banking regulators, the Office of the Comptroller of the Currency
(OCC) and the Federal Deposit Insurance Corporation (FDIC) (the Consent Orders). In the Consent Orders (which are publicly
available and will remain in effect until terminated by the regulators), the bank subsidiaries neither admitted nor denied
the regulators' findings that they had engaged in deceptive marketing and implementation of the bank's overdraft protection
programme, checking rewards programmes, and stop-payment process for pre-authorised recurring electronic fund transfers.
Notes
14. Litigation, investigations and reviews (continued)
In connection with the Consent Orders, the bank subsidiaries paid a total of US$10 million in civil monetary penalties. The
Consent Orders also require the bank subsidiaries to develop plans to provide restitution to affected customers (the amount
of which is anticipated to be approximately US$8 million), to cease and desist any operations in violation of Section 5 of
the Federal Trade Commission Act, and to submit to the regulators periodic written progress reports regarding compliance
with the Consent Orders.
In addition, Citizens Bank, N.A. agreed to take certain remedial actions to improve its compliance risk management systems
and to create a comprehensive action plan designed to achieve compliance with the Consent Order. Restitution plans have
been prepared and submitted for approval, and Citizens Bank, N.A. has submitted for approval and is in the process of
implementing its action plan for compliance with the Consent Order, as well as updated policies, procedures and programmes
related to its compliance risk management systems. In addition to the above, the bank subsidiaries could face further
formal administrative enforcement actions from their federal supervisory agencies, including the assessment of civil
monetary penalties and restitution, relating to issues arising from other consumer products.
Governance and risk management consent order
On 27 July 2011, the Group agreed with the Board of Governors of the Federal Reserve System, the New York State Banking
Department, the Connecticut Department of Banking, and the Illinois Department of Financial and Professional Regulation to
enter into a consent Cease and Desist Order (the Order) to address deficiencies related to governance, risk management and
compliance systems and controls in RBS plc and RBS N.V. branches. In the Order, the Group agreed to create the following
written plans or programmes:
● a plan to strengthen board and senior management oversight of the corporate governance, management, risk management, and operations of the Group's U.S. operations on an enterprise-wide and business line basis,
● an enterprise-wide risk management programme for the Group's U.S. operations,
● a plan to oversee compliance by the Group's U.S. operations with all applicable U.S. laws, rules, regulations, and supervisory guidance,
● a Bank Secrecy Act/anti-money laundering compliance programme for the RBS plc and RBS N.V. branches in the U.S. (the U.S. Branches) on a consolidated basis,
● a plan to improve the U.S. Branches' compliance with all applicable provisions of the Bank Secrecy Act and its rules and regulations as well as the requirements of Regulation K of the Federal Reserve,
● a customer due diligence programme designed to reasonably ensure the identification and timely, accurate, and complete reporting by the U.S. Branches of all known or suspected violations of law or suspicious transactions to law enforcement and supervisory authorities, as required by applicable suspicious activity reporting laws and regulations, and
● a plan designed to enhance the U.S. Branches' compliance with OFAC requirements.
Notes
14. Litigation, investigations and reviews (continued)
The Order (which is publicly available) identified specific items to be addressed, considered, and included in each
proposed plan or programme. The Group also agreed in the Order to adopt and implement the plans and programmes after
approval by the regulators, to fully comply with the plans and programmes thereafter, and to submit to the regulators
periodic written progress reports regarding compliance with the Order. The Group has created, submitted, and adopted plans
and/or programmes to address each of the areas identified above. In connection with the Group's efforts to implement these
plans and programmes, it has, among other things, made investments in technology, hired and trained additional personnel,
and revised compliance, risk management, and other policies and procedures for the Group's U.S. operations. The Group
continues to test the effectiveness of the remediation efforts undertaken by the Group to ensure they are sustainable and
meet regulators' expectations. Furthermore, the Group continues to work closely with the regulators in its efforts to
fulfil its obligations under the Order, which will remain in effect until terminated by the regulators.
The Group may be subject to formal and informal supervisory actions and may be required by its US banking supervisors to
take further actions and implement additional remedial measures with respect to these and additional matters. The Group's
activities in the United States may be subject to significant limitations and/or conditions.
US dollar processing consent order
The Group's operations include businesses outside the United States that are responsible for processing US dollar payments.
On 11 December 2013 the Group and The Royal Bank of Scotland plc announced that they had reached a settlement with the
Board of Governors of the Federal Reserve System (Fed), the New York State Department of Financial Services (DFS), and the
Office of Foreign Assets Control (OFAC) with respect to The Royal Bank of Scotland plc's historical compliance with US
economic sanction regulations outside the US. In settlement with the above authorities, The Royal Bank of Scotland plc
agreed to pay US$100 million in total, including US$50 million to the Fed, of which US$33 million was deemed to satisfy the
OFAC penalty, and US$50 million to DFS.
As part of the settlement, the Group and The Royal Bank of Scotland plc entered into a consent Cease and Desist Order with
the Fed (the Order) indicating, among other things, that: (a) the Group and The Royal Bank of Scotland plc lacked adequate
risk management and legal review policies and procedures to ensure that activities conducted outside the United States
comply with applicable OFAC regulations; (b) from at least 2005 to 2008, certain business lines within The Royal Bank of
Scotland plc developed and implemented policies and procedures for processing U.S. dollar-denominated funds transfers
through unaffiliated U.S. financial institutions involving parties subject to OFAC Regulations that omitted relevant
information from payment messages necessary for the U.S. financial institutions to determine whether these transactions
were carried out in a manner consistent with U.S. law; and (c) the Group continues to implement improvements in its
oversight and compliance programme for activities involving offices outside the United States that impact the ability of
U.S. financial institutions to comply with applicable OFAC sanctions. In the Order (which is publicly available), the Group
agreed to create an OFAC compliance programme to ensure compliance with OFAC regulations by the Group's global business
lines outside of the United States, and to adopt, implement, and comply with the programme. The programme has now been
submitted to the Federal Reserve Bank of Boston (Reserve Bank) for approval.
Notes
14. Litigation, investigations and reviews (continued)
Sixty days after the programme submitted to the Federal Reserve Bank of Boston (Reserve Bank) is approved, the Group is to
complete a global OFAC risk assessment and submit it to the Reserve Bank and the FCA. The Group also agreed in the Order to
hire an independent consultant (subject to approval by the Reserve Bank and the FCA) to conduct an annual OFAC compliance
review involving a review of compliance policies and their implementation and an appropriate risk-focused sampling of U.S.
dollar payments. The Order further requires the Group to submit quarterly written progress reports to the Reserve Bank
detailing the form and manner of all actions taken to secure compliance with the Order. It was also announced that the US
Department of Justice and the New York County District Attorney's Office had concluded their parallel criminal
investigations and do not intend to take any action against The Royal Bank of Scotland plc.
US/Swiss tax programme
In August 2013, the DOJ announced a programme for Swiss banks (the Programme), to settle the long-running dispute between
the US tax authorities and Switzerland regarding the role of Swiss banks in concealing the assets of US tax payers in
offshore accounts. The Programme provides Swiss banks with an opportunity to obtain resolution, through non-prosecution
agreements or non-target letters, concerning their status in connection with the DOJ's investigations.
Coutts & Co Ltd, a member of the Group incorporated in Switzerland, notified the DOJ that it intended to participate in the
Programme based on the possibility that some of its clients may not have declared their assets in compliance with US tax
laws. The Programme required a detailed review of all US related accounts. The results of Coutts & Co Ltd's review were
presented to the DOJ in June 2014. The DOJ has extended, until 31 July 2014, the deadline for Programme participants to
complete the collection of evidence of the tax status of their US related account holders. The DOJ has also extended, until
15 September 2014, the deadline to collect evidence of those US related account holders also participating in an offshore
voluntary disclosure programme.
Review of suitability of advice provided by Coutts & Co
In 2013 the FCA conducted a thematic review of the advice processes across the UK wealth management industry. As a result
of this review, Coutts & Co, a member of the Group incorporated in England and Wales, decided to undertake a past business
review into the suitability of investment advice provided to its clients. This review is ongoing. Coutts & Co is in the
process of contacting clients and redress will be offered in appropriate cases. A provision has been taken to cover any
potential liability arising from this review.
Notes
15. Other developments
Completion of sale of remaining interest in Direct Line Insurance Group (DLG)
RBS completed the sale of its remaining interest of 423.2 million ordinary shares in DLG on 27 February 2014 at a price of
£2.63 pence per share, raising gross proceeds of £1,113 million and realising a gain of £191 million.
RBS has now sold all its ordinary shares in DLG except for 4.2 million shares held to satisfy long term incentive plan
awards granted by RBS to DLG management. The sale marks the completion of RBS's EC-mandated disposal of its interest in
DLG.
Dividend Access Share and revised State Aid terms
RBS announced on 9 April 2014 that it had entered into an agreement ('DAS Retirement Agreement') with Her Majesty's
Treasury ('HMT') to provide for the future retirement of the Dividend Access Share ('DAS') subject to approval by the
Company's independent shareholders, which was received at a General Meeting of the Company on 25 June 2014. The DAS
Retirement Agreement sets out the process for removal of the DAS - a key element of the Government's 2009 capital injection
into RBS and the associated European Commission ("EC") approval of the state aid package for the bank. Among other
benefits, the retirement of the DAS will in future allow the Board to state more clearly a dividend policy to existing and
potential investors.
The DAS was an important factor in the EC's assessment of the state aid RBS received and was part of the basis for its
approval of that support in 2009. It was therefore necessary for the proposal for the eventual retirement of the DAS to be
notified to the EC by HMT and this was done by HMT.
The EC concluded that the new arrangements for the eventual retirement of the DAS did not constitute new state aid and
approved the changes to RBS's restructuring plan in its State Aid Amendment Decision of 9 April 2014. In addition, this
decision included two further key commitments made by HMT to the EC as follows:
● The deadline for RBS's divestment of the Williams & Glyn business (by Initial Public Offering (IPO), whole business sale or tendering procedure for its entire interest) has been extended. In the expected event of divestment by IPO, RBS must carry out this
IPO before 31 December 2016 and complete the disposal of its entire interest in the Williams & Glyn business by 31 December 2017.
● Citizens Financial Group, Inc. ('Citizens') will be disposed of by 31 December 2016, with an automatic 12 month extension if market metrics indicate that an IPO or subsequent tranches of disposal cannot be completed in an orderly fashion or at a fair
value. On 1 November 2013, RBS announced that it would accelerate the divestment of Citizens with a partial IPO and that it planned to fully divest the business by the end of 2016. The obligation under the State Aid Amendment Decision to dispose of
Citizens is therefore in line with RBS's planned and publicly stated divestment timetable and already reflected in its capital and strategic planning.
RBS has entered into a Revised State Aid Commitment Deed under which it undertakes to do all acts and things necessary to
ensure that HMT is able to comply with the revised state aid commitments made by HMT to the EC.
Notes
15. Other developments (continued)
Board changes
On 27 February 2014, RBS announced that Philip Scott, a non-executive director, will step down from the Board by 31 October
2014.
Morten Friis was appointed as a non-executive director with effect from 10 April 2014.
Anthony Di Iorio, a non-executive director, stepped down from the Board on 26 March 2014.
Ewen Stevenson was appointed as an executive director and RBS Chief Financial Officer with effect from 19 May 2014.
Cap on variable remuneration
The fourth EU Capital Requirements Directive (CRD IV), implemented for banks in the UK by the Prudential Regulation
Authority, imposes a 1:1 cap on the ratio of variable remuneration to fixed remuneration; however, with shareholder
approval it is possible to award variable remuneration up to 200% of fixed remuneration (a 2:1 ratio).
On 25 April 2014, the Board announced it was not seeking approval from shareholders at the 2014 Annual General Meeting for
the 2:1 ratio. Instead, the Company has taken steps to work within the constraints of the 1:1 ratio (of variable to fixed
remuneration) for employees subject to the Prudential Regulation Authority's Remuneration Code to deliver a remuneration
structure that is aligned with shareholders' interests and compliant with the requirements of CRD IV.
EU financial transaction tax
On 30 April 2014, the European Court rejected a challenge from the UK Government of the initial proposal for the EU
financial transaction tax on procedural grounds. A further challenge on substantive grounds may follow, depending on the
nature of any subsequent Directive enacted in the future. RBS continues to monitor developments.
Citizens Financial Group (CFG)
On 13 May 2014, CFG filed an S-1 registration statement with the Securities and Exchange Commission in the United States to
undertake an initial public offering. The intention to fully divest CFG was announced in November 2013.
The filing of an S-1 Registration Statement is a regulatory requirement in the United States as part of the IPO process.
This draft submission will initiate a 12-14 week process where the SEC can provide their comments. A formal prospectus will
then be published which will include a price range and offering size range.
The submission of this statement is in line with the stated plan to launch an IPO of CFG by Q4 2014 - and complete RBS's
selldown of CFG in 2016 - as part of the RBS Capital Plan.
Notes
15. Other developments (continued)
Rating agencies
Moody's Investors Service
On 13 March 2014, Moody's Investors Service ('Moody's') lowered its credit ratings of RBS Group plc and certain
subsidiaries by one notch. The long term ratings of RBS Group plc were lowered to 'Baa2' from 'Baa1' whilst the long term
ratings of RBS plc and National Westminster Bank Plc were lowered to 'Baa1' from 'A3'. Short term ratings were affirmed as
unchanged. Post the review, a negative ratings outlook was assigned.
The ratings of Ulster Bank Ltd and Ulster Bank Ireland Ltd were also impacted by the rating action on the RBS Group. The
long term and short term ratings of these entities were lowered by one notch to 'Baa3' (long term)/'P-3' (short term) from
'Baa2'/'P-2'. A negative outlook was assigned to ratings, in line with the ratings outlook on the RBS Group.
Moody's rating actions were prompted by its concerns over the execution risks relating to the effective roll-out of the
Group's strategic plans, its concerns over the impact of restructuring costs on profitability and its concern that the
Group's capitalisation is vulnerable to short-term shocks. Despite these short to medium term concerns, Moody's expects RBS
Group's capitalisation to improve in the medium to long term as the recovery plan is progressed. The agency also considers
that, if executed according to plan, the intended restructuring will ultimately be positive for creditors as it will
deliver a more efficient UK-focused bank with lower risk operations.
The long-term ratings of subsidiaries, Citizens Bank NA and Citizens Bank of Pennsylvania were not impacted by the rating
action on the RBS Group and the long-term ratings of these entities were affirmed as unchanged by Moody's. Ratings are on a
negative outlook.
Fitch Ratings
On 24 March 2014 Fitch Ratings ('Fitch') affirmed as unchanged the long term ratings of RBS Group plc and subsidiaries, RBS
plc and National Westminster Bank Plc, retaining the rating outlooks of these entities at negative.
On 25 March 2014 Fitch affirmed the ratings of Ulster Bank Ltd. At the same time, the long-term rating of Ulster Bank
Ireland Ltd was revised down one notch to 'BBB+' from 'A-' and the short-term rating was revised to 'F2' from 'F1'. The
outlooks on the ratings of both Ulster Bank Ltd and Ulster Bank Ireland Ltd remain negative.
The decision to downgrade the rating of Ulster Bank Ireland Ltd was based on the view that this entity's role within RBS
Group may become less important over the next three to five years. Fitch also believe that the potential for disposal of
Ulster Bank Ireland Ltd is higher than that of Ulster Bank Ltd, a Northern Irish business. These opinions caused Fitch to
reduce the amount of support uplift in the ratings of Ulster Bank Ireland Ltd by one notch.
Notes
15. Other developments (continued)
Rating agencies (continued)
Standard & Poor's
During the quarter, Standard & Poor's affirmed as unchanged its ratings on the Group and notable subsidiaries. Negative
rating outlooks were maintained.
Current RBS Group plc and subsidiary ratings are shown in the table below:
Moody's S&P Fitch
Long term Short term Long term Short term Long term Short term
RBS Group plc Baa2 P-2 BBB+ A-2 A F1
The Royal Bank of Scotland plc Baa1 P-2 A- A-2 A F1
National Westminster Bank Plc Baa1 P-2 A- A-2 A F1
RBS N.V. Baa1 P-2 A- A-2 A F1
Citizens Bank, NA/ A3 P-2 A- A-2 BBB+ F2
Citizens Bank of Pennsylvania
Ulster Bank Ireland Ltd Baa3 P-3 BBB+ A-2 BBB+ F2
Ulster Bank Ltd Baa3 P-3 BBB+ A-2 A- F1
16. Related party transactions
UK Government
The UK Government and bodies controlled or jointly controlled by the UK Government and bodies over which it has significant
influence are related parties of the Group. The Group enters into transactions with many of these bodies on an arm's length
basis.
Bank of England facilities
In the ordinary course of business, the Group may from time to time access market-wide facilities provided by the Bank of
England.
The Group's other transactions with the UK Government include the payment of taxes, principally UK corporation tax and
value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the
bank levy and FSCS levies).
Other related parties
(a) In their roles as providers of finance, Group companies provide development and other types of capital support to
businesses. These investments are made in the normal course of business and on arm's length terms. In some instances, the
investment may extend to ownership or control over 20% or more of the voting rights of the investee company. However, these
investments are not considered to give rise to transactions of a materiality requiring disclosure under IAS 24.
(b) The Group recharges The Royal Bank of Scotland Group Pension Fund with the cost of administration services incurred by
it. The amounts involved are not material to the Group.
Full details of the Group's related party transactions for the year ended 31 December 2013 are included in the 2013 Annual
Report and Accounts.
Notes
17. Date of approval
This announcement was approved by the Board of directors on 31 July 2014.
18. Post balance sheet events
There have been no significant events between 30 June 2014 and the date of approval of this announcement which would
require a change to or additional disclosure in the announcement.
Independent review report to The Royal Bank of Scotland Group plc
We have been engaged by The Royal Bank of Scotland Group plc ("the Company") to review the condensed consolidated financial
statements in the half-yearly financial report for the six months ended 30 June 2014 which comprise the condensed
consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated
balance sheet, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement,
related Notes 1 to 18, the financial information in the segment results on pages 24 to 68, and the Capital and risk
management disclosures set out in Appendix 1 except for those indicated as not reviewed (together "the condensed
consolidated financial statements"). We have read the other information contained in the half-yearly financial report and
considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed
financial statements.
This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland)
2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing
Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state
to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we
have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are
responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by
the European Union. The condensed consolidated financial statements included in this half-yearly financial report have been
prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European
Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed consolidated financial statements in the
half-yearly financial report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of
Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board
for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland)
and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
Independent review report to The Royal Bank of Scotland Group plc (continued)
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial
statements in the half-yearly financial report for the six months ended 30 June 2014 are not prepared, in all material
respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
31 July 2014
Disposal of Direct Line Group
In November 2009, the Group entered into a state aid commitment deed with the Commissioners of Her Majesty's Treasury
requiring the Group to: (1) divest its interest in Direct Line Group (DLG) to a level below that at which it would be
considered to exercise control by 31 December 2013 and (2) dispose of its entire interest by 31 December 2014. Pursuant to
its obligations, the Group sold 34.7% of DLG in an initial public offering (IPO) in October 2012 and subsequently sold
16.8% in March 2013, 20.0% in September 2013, and 28.5% in February 2014 through institutional placings.
The Group ceased to consolidate DLG after the second share sale in March 2013 when its shareholding fell to 48.5%
thereafter treating it as an associate until the final share sale in February 2014. The Group has been in discussions with
the Conduct Committee of the UK Financial Reporting Council (the Conduct Committee) about when DLG should have been
deconsolidated. Based on full consideration of the facts and circumstances, the Group's assessment is that it no longer
controlled DLG after the second share sale in March 2013. The Conduct Committee considers that the Group retained control
owing to its dominant voting interest, notwithstanding the reduction of its shareholding to below 50%, the relationship
agreement and the state aid commitment deed; therefore, in accordance with the provisions in IFRS 10 Consolidated Financial
Statements regarding de facto control, DLG should have been consolidated by the Group in its interim accounts for the six
months ended 30 June 2013.
At the request of the Conduct Committee, the effect on the Group's financial statements for 30 June 2013 and 31 December
2013 of consolidating DLG up until September 2013 is set out below:
Half year ended Year ended
30 June 2013 31 December 2013
As published DLG consolidated to September 2013 As published DLG consolidated to September 2013
£m £m £m £m
Income statement
Other operating income 1,332 1,286 1,398 1,331
Operating profit/(loss) before tax 1,374 1,328 (8,243) (8,310)
Discontinued operations 138 161 148 346
Profit/(loss) for the period 834 811 (8,477) (8,346)
Total comprehensive income/(loss) 601 649 (10,189) (10,051)
30 June 2013 31 December 2013
As published DLG consolidated to September 2013 As published DLG consolidated to September 2013
£m £m £m £m
Balance sheet
Prepayments, accrued income and other assets: 9,063 7,565 7,614 7,614
Interests in associates 2,500 1,002 902 902
Assets of disposal groups 1,313 13,621 3,017 3,071
Total assets 1,216,229 1,227,039 1,027,878 1,027,932
Liabilities of disposal groups 306 9,477 3,378 3,378
Non-controlling interests 475 2,121 473 473
Owners' equity 69,183 69,176 58,742 58,796
The Conduct Committee is not pursuing the matter further given the amounts involved and the subsequent loss of control.
Risk factors
Set out below is a summary of the principal risks which could adversely affect the Group; it should be read in conjunction
with the Risk and Balance Sheet management section on pages 174 to 364 of the 2013 Annual Report and Accounts (2013 R&A).
This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. A
fuller description of these and other risk factors is included in the 2013 R&A on pages 523 to 536.
● The Group is implementing a new strategic plan and direction which will result in a significant downsizing of the Group, including simplifying the Group by replacing the previous divisional structure with three customer franchises. The Group is also taking
steps to strengthen its capital position and has established medium term goals.
● The Group's ability to implement its new strategic plan and achieve its capital goals depends on the success of its efforts to refocus on its core strengths and the timely divestment of Citizens Financial Group (CFG). Since 2009, the Group has undertaken
an extensive restructuring, including the disposal of non-core assets and businesses, such as the full divestment of Direct Line Group in March 2014, as part of the State Aid restructuring plan approved by the EC and supplemented by the agreements with HM
Treasury and the EC on 9 April 2014. The Group created RBS Capital Resolution in the fourth quarter of 2013 to manage the run-down of problem assets with the clear aspiration of removing such assets from the balance sheet by the end of 2016.
● The level of structural change required to implement the Group's strategic and capital goals together with other regulatory requirements such as ring fencing are likely to be disruptive and increase operational and people risks for the Group. There is no
assurance that the Group will be able to successfully implement its new strategy on which its capital plan depends or achieve its goals within the time frames contemplated or at all.
● Operational and reputational risks are inherent in the Group's businesses, and heightened as a result of the implementation of the new strategic plan.
● The Scottish government is holding a referendum on 18 September 2014 on the question of Scottish independence from the UK. Although the outcome of the referendum is uncertain, subject to any mitigating factors, uncertainties resulting from an affirmative
vote in favour of independence would be likely to significantly impact the Group's credit ratings and could also impact the fiscal, monetary, legal and regulatory landscape to which the Group is subject. Were Scotland to become independent, it may also
affect Scotland's status in the EU. The occurrence of any of the impacts above could significantly impact the Group's costs and would have a material adverse effect on the Group's business, financial condition, results of operations and prospects.
● Despite the improved outlook for the global and UK economy over the near to medium-term, actual or perceived difficult global economic conditions, potential volatility in the UK housing market and restrictions on mortgage lending as well as increased
competition, particularly in the UK, create challenging economic and market conditions and a difficult operating environment for the Group's businesses. These factors, together with additional uncertainty relating to the recovery of the Eurozone economy
where the Group has significant exposure and the risk of a return of volatile financial markets, in part due to the monetary policies and measures carried out by central banks, have adversely affected and will continue to adversely affect the Group's
businesses, earnings, financial condition and prospects.
Risk factors
● The Group is subject to substantial regulation and oversight, and any further significant regulatory developments such as those which have occurred over the past several years could have an adverse effect on how the Group conducts its business and on its
results of operations and financial condition. Certain regulatory measures introduced in the UK and in Europe relating to ring-fencing of certain bank activities could result in additional costs and increased operational risks which may impact the
viability of certain business models and require significant restructuring with the possible transfer of a large number of customers between legal entities.
· The Group's ability to implement its strategy and its future success depends on its ability to attract and retain qualified personnel. The Group could fail to attract or retain senior management, which may include members of the Group Board, or other key
employees, and it may suffer if it does not maintain good employee relations. The Group's changing strategy has led to the departure of many talented staff. Following the implementation of CRD IV and the Government's views on variable compensation, there
is now a restriction on the Group's ability to pay individual bonuses greater than salary, which may put the Group at a competitive disadvantage. An inability to attract and retain qualified personnel could have an adverse impact on the implementation of
the Group's strategy and regulatory commitments.
● The Group is subject to a number of regulatory initiatives which may adversely affect its business, including the UK Government's adoption of the Financial Services (Banking Reform) Act 2013, the US Federal Reserve's new rules for applying US capital,
liquidity and enhanced prudential standards to certain of the Group's US operations and ongoing reforms in the European Union with respect to capital requirements, stability and resolution of financial institutions, including CRD IV and the Resolution and
Recovery Directive.
· The Group's ability to meet its obligations including its funding commitments depends on the Group's ability to access sources of liquidity and funding. The inability to access liquidity and funding due to market conditions or otherwise or to do so at a
reasonable cost, could adversely affect the Group's financial condition and results of operations. Furthermore, the Group's borrowing costs and its access to the debt capital markets and other sources of liquidity depend significantly on its and the UK
Government's credit ratings. The Group's credit ratings would be likely to be negatively impacted by political events, such as an affirmative vote in favour of Scottish independence.
● The Group's business performance, financial condition and capital and liquidity ratios could be adversely affected if its capital is not managed effectively or as a result of changes to capital adequacy and liquidity requirements, including those arising
out of Basel III implementation (globally or by European, UK or US authorities) as well as structural changes that may result from the implementation of ring-fencing under the Financial Services (Banking Reform) Act 2013 or changes of the US Federal
Reserve with respect to the Group's US operations. The Group's ability to reach its target capital ratios in the medium term will turn on a number of factors including a significant downsizing of the Group in part through the sale of CFG.
● The Group is, and may be, subject to litigation and regulatory and governmental investigations that may impact its business, reputation, results of operations and financial condition. Although the Group settled a number of legal proceedings and regulatory
investigations during 2013 and 2014, the Group is expected to continue to have material exposure to legacy litigation and regulatory proceedings in the medium term. The Group also expects greater regulatory and governmental scrutiny for the foreseeable
future particularly as it relates to compliance with historical, new and existing laws and regulations such as anti-money laundering and anti-terrorism laws.
Risk factors
● The Group is highly dependent on its information technology systems, which are currently subject to significant investment and rationalisation as part of the Group's new strategic plan and associated transformation programme. The Group has been and expects
to continue to be subject to cyber attacks which expose the Group to loss of customer data or other sensitive information and which, combined with other failures of the Group's information technology systems, may hinder its ability to service its clients
which could result in long-term damage to the Group's businesses and brands.
● The Group or any of its UK bank subsidiaries may face the risk of full nationalisation or other resolution procedures, including recapitalisation of the Group or any of its UK bank subsidiaries, through bail-in which has been introduced by the Financial
Services (Banking Reform) Act 2013 and will come into force on a date stipulated by HM Treasury. Various actions could be taken by or on behalf of the UK Government, including actions in relation to any securities issued, new or existing contractual
arrangements and transfers of part or all of the Group's businesses.
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