REG - NatWest Group plc - Annual Financial Report - NatWest Markets NV
17/02/2023 07:00
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RNS Number : 2353Q NatWest Group plc 17 February 2023
NatWest Group plc 17 February 2023
NatWest Markets N.V. 2022 ARA
NatWest Markets N.V. today announces the publication of its 2022 Annual Report
and Accounts. This company is a wholly-owned subsidiary of NatWest Markets
Plc. The 2022 Annual Report and Accounts for NatWest Markets N.V. is available
on NatWest Group plc's website at
https://investors.natwestgroup.com/reports-archive
(https://investors.natwestgroup.com/reports-archive)
For further information, please contact
Investor Relations
Investor.relations@natwest.com
+44 207 672 1758
Media Relations
+44 131 523 4205(UK)
+31 20 464 1150 (NL)
17 February 2023
For the purpose of compliance with the Disclosure Guidance and Transparency
Rules, this announcement also contains risk factors extracted from the Annual
Report and Accounts 2022 in full unedited text. Page references in the text
refer to page numbers in the Annual Report and Accounts 2022.
Principal Risks and Uncertainties
Set out below are certain risk factors that could adversely affect NWM N.V.
Group's future results, its financial condition and/or prospects and cause
them to be materially different from what is forecast or expected, and
directly or indirectly impact the value of its securities. These risk factors
are broadly categorised and should be read in conjunction with other sections
of this annual report, including the forward-looking statements section, the
strategic report and the risk and capital management section. They should not
be regarded as a complete and comprehensive statement of all potential risks
and uncertainties facing NWM N.V. Group.
Economic and political risk
NWM N.V. Group, its customers and its counterparties face continued economic
and political risks and uncertainties in the UK, European and global markets,
including as a result of high inflation and rising interest rates, supply
chain disruption and the Russian invasion of Ukraine.
The value of NWM N.V. Group's own and other securities may be materially
affected by market risk, including as a result of market fluctuations. Market
volatility, illiquid market conditions and disruptions in the credit markets
may make it extremely difficult to value certain of NWM N.V. Group's own and
other securities, particularly during periods of market displacement. This
could cause a decline in the value of NWM N.V. Group's financial instruments.
This may adversely affect NWM N.V. Group's results of operations in future
periods, or inaccurate carrying values for certain securities. Similarly, NWM
N.V. Group trades a considerable amount of own and other securities (including
derivatives) and volatile market conditions could result in a significant
decline in NWM N.V. Group's net trading income or result in a trading loss.
In addition, financial markets are susceptible to severe events evidenced by
rapid depreciation in asset values, which may be accompanied by a reduction in
asset liquidity. Under these conditions, hedging and other risk management
strategies may not be as effective at mitigating losses as they would be under
more normal market conditions. Moreover, under these conditions, market
participants are particularly exposed to trading strategies employed by many
market participants simultaneously and on a large scale, increasing NWM N.V.
Group's counterparty risk. NWM N.V. Group's risk management and monitoring
processes seek to quantify and mitigate NWM N.V. Group's exposure to extreme
market moves. However, market events have historically been difficult to
predict and NWM N.V. Group, its customers and its counterparties could realise
significant losses if extreme market events were to occur.
NWM N.V. Group is affected by global economic and market conditions. Uncertain
and volatile economic conditions can create a challenging operating
environment for financial services companies such as NWM N.V. Group. The
outlook for the global economy remains uncertain including due to: falling
economic activity, high inflation, rising interest rates, elevated energy and
food prices, supply chain disruption, changes to monetary and fiscal policy,
and the impact of armed conflict (including the Russian invasion of
Ukraine).
These conditions, including the cost-of-living crisis, could be worsened by a
number of factors including: instability in the global financial system,
market volatility and change, fluctuations in the value of the pound sterling
and euro, new or extended economic sanctions, the COVID-19 pandemic, economic
volatility in emerging markets, volatility in commodity prices or concerns
regarding sovereign debt or sovereign credit ratings. Economic conditions
may also be affected by the changing demographics in the markets that NWM N.V.
Group serves, increasing social and other inequalities, or rapid changes to
the economic environment due to the adoption of technology, automation, and
artificial intelligence, or due to climate change, environmental degradation,
biodiversity loss and/or other sustainability risks. Any of the above
developments could adversely affect NWM N.V. Group directly (for example, as a
result of credit losses) or indirectly (for example, by impacting global
economic growth and financial markets and NWM N.V. Group's clients and their
banking needs).
NWM N.V. Group is also exposed to risks arising out of geopolitical events or
political developments, such as exchange controls and other measures taken by
sovereign governments that may hinder economic or financial activity levels.
Unfavourable political, military or diplomatic events, increasing geopolitical
tensions leading to armed conflict, protectionist policies or trade barriers,
secession movements or the exit of other member states from the EU, tax
changes, new and widespread public health crises (including any epidemics or
pandemics), state and privately sponsored cyber and terrorist acts or threats,
and the responses to each of the above economic, political or other scenarios
by various governments and markets, may adversely affect the business and
performance of NWM N.V. Group, including as a result of the indirect impact on
regional or global trade and/or NWM N.V. Group's customers and counterparties.
The COVID-19 pandemic prompted many changes that may prove to be permanent
shifts in customer behaviour and economic activity, such as changes in
spending patterns and significantly more people working in a more flexible
manner. These changes may affect asset prices, the economic environment, and
NatWest Group's customers' and counterparties' financial performance and
needs. In response the COVID-19 pandemic, central banks, governments,
regulators, and legislatures in the UK and elsewhere have offered
unprecedented levels of support and various schemes to assist businesses and
individuals, many of which have since been curtailed or withdrawn. However,
risks remain as to whether these loans will be repaid.
The UK experienced significant political uncertainty in 2022, which may
persist into the foreseeable future. This could lead to a loss of confidence
in the UK, which could in turn, negatively impact companies operating in the
UK. NatWest Group also faces political uncertainty in Scotland as a result of
a possible second Scottish independence referendum. Independence may adversely
affect NatWest Group both in relation to entities incorporated in Scotland and
in other jurisdictions. Any changes to Scotland's relationship with the UK or
the EU would adversely affect the environment in which NatWest Group and its
subsidiaries operate and may require further changes to NatWest Group
(including NWM Group's and NWM Group N.V.'s structure), independently or in
conjunction with other mandatory or strategic structural and organisational
changes, any of which could adversely affect NWM N.V. Group.
Any of the above may have a negative effect on NWM N.V. Group.
Continuing uncertainty regarding the effects and extent of the UK's post
Brexit divergence from EU laws and regulation, and NWM N.V.'s post Brexit EU
operating model may continue to adversely affect NWM Plc (NWM N.V.'s parent
company) and its operating environment and NatWest Group plc (NWM N.V.'s
ultimate parent company) and may have an indirect effect on NWM N.V. Group.
The UK ceased to be a member of the EU and the European Economic Area ('EEA')
on 31 January 2020 ('Brexit') and the 2020 EU-UK Trade and Cooperation
Agreement ('TCA') ended the transition period on 31 December 2020. The TCA was
accompanied by a Joint Declaration on financial services, which sets out an
intention for the EU and UK to cooperate on matters of financial regulation
and to agree a Memorandum of Understanding ('MoU'), which remains unsigned.
Certain aspects of the services provided by NatWest Group are therefore
subject to obtaining local licences or are subject to individual equivalence
decisions (temporary or otherwise) by relevant regulators. The EU's
equivalence regime does not cover most lending and deposit taking, and
determinations in respect of non-EU countries have not, to date, covered the
provision of most financial investment services. In addition, equivalence
determinations do not guarantee permanent access rights and can be withdrawn
with short notice. In late 2021 the European Commission proposed legislation
that would require non-EU firms to establish a branch or subsidiary in the EU
before providing 'banking services' in the EU. If these proposals become law
all 'banking services' will be licensable activities in each EU member state
and member states will not be permitted to offer bilateral permissions to
financial institutions outside the EU allowing them to provide 'banking
services' in the EU. Uncertainty remains as to whether 'banking services' will
also include investment products. Furthermore, failure to extend existing
equivalence determinations, exemptions and derogations in relation to
regulations such as margin and clearing regulations or capital regulations,
may adversely affect customer engagement and/or may adversely affect the
operating model and business operations of NWM N.V. Group.
NatWest Group continues to evaluate its post Brexit EU operating model, making
adaptations as necessary. NatWest Group also continues to assess where NatWest
Group companies can obtain bilateral regulatory permissions to facilitate
intragroup transactions and/or to permit business to continue from its UK
entities, transferring what cannot be continued to be rendered from the UK to
an EEA subsidiary or branch, where permitted or commercially reasonable to do
so. Where these regulatory permissions are temporary or are withdrawn, a
different approach may need to be taken or may result in a change in operating
model or some business being ceased. Not all NatWest Group entities have
applied for bilateral regulatory permissions and instead conduct EEA business
through an EEA licensed subsidiary or branch. Certain permissions are required
in order to maintain the ability to clear euro payments. Other permissions,
including the ability to have two intermediate EU parent undertakings, may
need to be obtained, and structural changes may need to be made to allow NWM
N.V. Group to continue to serve EEA customers from both the ring-fenced and
non-ring-fenced banking entities. Any failure to obtain such permissions or
make such structural changes, in a timely manner, or at all, could adversely
affect NWM N.V. Group and the customers that it serves. As described in 'NWM
Group (including NWM N.V. Group) has been in a period of significant
structural and other change, including as a result of NatWest Group's
purpose-led strategy and NatWest Group's recent creation of its C&I
business segment (of which NWM Group forms part) and may continue to be
subject to significant structural and other change', NWM Group expects that
NatWest Group's Western European corporate portfolio (principally consisting
of term funding and revolving credit facilities) ('Transfer Business') may be:
(i) transferred from the ring-fenced subgroup of NatWest Group to NWM Group,
and/or (ii) transferred to the ring-fenced subgroup of NatWest Group from NWM
Group, subject to regulatory and customer requirements. Furthermore,
transferring business to an EEA based subsidiary is a complex exercise and
involves legal, regulatory and execution risks, and could result in a loss of
business and/or customers or higher than anticipated costs. The changes to
NatWest Group's and NWM Group's operating model have been costly and failure
to receive the requested regulatory permissions and/or further changes to
their business operations, product offering and customer engagement could
result in further costs and/or regulatory sanction. Any of the above could, in
turn, negatively impact NWM N.V. Group.
The long-term effects of Brexit and the uncertainty regarding NatWest Group's
EU operating model may adversely affect NWM Group and NWM N.V. Group's
business. These may be exacerbated by wider UK and global macro-economic
trends and events which may significantly impact NWM N.V. Group and its
customers and counterparties who are themselves dependent on trading with the
EU or personnel from the EU. The long-term effects of Brexit may also be
exacerbated by wider UK and global macro-economic trends and events.
Uncertainties remain as to the extent to which EU/EEA laws will diverge from
UK law. For example, bank regulation in the UK may diverge from European bank
regulation if the Financial Services and Markets Bill ('FSM') is enacted into
law. The UK government has also proposed legislation to introduce automatic
'sunset' clauses for retained EU law by the end of 2023 (the Retained EU Law
(Revocation and Reform) Bill 2022), which if enacted could potentially cause
market disruption and require additional resources to manage the legal and
regulatory consequences. NWM N.V. Group may not be able to respond to these
changes effectively, in a timely manner, or at all. The actions taken by
regulators in response to any new or revised bank regulation and other rules
affecting financial services, may adversely affect NWM Group, including its
business, non-UK operations, group structure, compliance costs, intragroup
arrangements and capital requirements. The legal and political uncertainty,
and any actions taken as a result of this uncertainty, as well as the approach
taken by regulators and new or amended rules, could have a significant adverse
impact on NWM N.V. Group's businesses, non-UK operations and/or legal entity
structure, including NWM N.V. Group, including attendant operating, compliance
and restructuring costs, level of impairments, capital requirements, changes
to intragroup arrangements, increased complexity of the regulatory environment
and tax implications and as a result may adversely affect the profitability,
competitive position, business model and product offering of NWM Group and NWM
N.V. Group.
Significant uncertainties remain as to the extent to which EU/EEA laws will
diverge from UK law (including bank regulation), whether and what equivalence
determinations will be made by the various regulators, whether the proposed
EEA licenced subsidiary is granted a banking licence, whether banking services
will be harmonised across the EEA and, therefore, what the respective legal
and regulatory arrangements will be, under which NWM Group and its
subsidiaries (including NWM N.V. Group) will operate. This divergence could
lead to further market fragmentation. These risks and uncertainties may
require costly changes to NWM N.V. Group's EU operating model. The legal and
political uncertainty, and any actions taken as a result of this uncertainty,
as well as the approach taken by regulators and new or amended rules, could
have a significant adverse impact on NWM Group's businesses, non-UK operations
and/or legal entity structure, including NWM N.V. Group, including attendant
operating and compliance costs, level of impairments, capital requirements,
changes to intragroup arrangements, increased complexity of the regulatory
environment and tax implications and as a result may adversely affect the
profitability, competitive position, business model and product offering of
NWM Group and NWM N.V. Group.
Changes in interest rates have affected and will continue to affect NWM N.V.
Group's business and results.
NWM N.V. Group's performance is affected by changes in interest rates.
Benchmark overnight interest rates increased in 2022 and are expected to
continue to rise in the short-term accompanied by quantitative tightening.
However, forward rates at 31 December 2022 suggested interest rates may fall
again in the medium-term, albeit not to the low levels experienced during the
COVID-19 pandemic.
Stable interest rates support predictable income flow and less volatility in
asset and liability valuations, although persistently low and negative
interest rates, such as those experienced during the COVID-19 pandemic, are
generally expected to be less favourable for banks. For NWM N.V. Group,
persistently low interest rates may reduce the yield on its equity structural
hedge, for example.
Volatility in interest rates may also result in unexpected outcomes both for
interest income and asset and liability valuations which may adversely affect
NWM N.V. Group. For example, unexpected movements in spreads between key
benchmark rates such as sovereign and swap rates in turn affect liquidity
portfolio valuations. Finally, sharp unexpected rises in rates may also have
negative impacts on some asset and derivative valuations, for example. Any of
the above may adversely affect NWM N.V. Group's future results, financial
condition and/or prospects.
Movements in interest rates also influence and reflect the macro-economic
situation more broadly, affecting factors such as business and consumer
confidence, property prices, default rates on loans and other indicators that
may indirectly affect NWM N.V. Group and may adversely affect its future
results, financial condition and/or prospects.
HM Treasury (or UKGI on its behalf) could exercise a significant degree of
influence over NatWest Group and NWM N.V. Group is ultimately controlled by
NatWest Group.
In November 2019, NWM Plc acquired RBS Holdings N.V. ('RBSH'), NWM N.V.'s
immediate parent, from RFS Holdings B.V. ('RFSH'). All entities are wholly
owned by NatWest Group plc. As such, NatWest Group plc is the ultimate parent
company of NWM N.V.
In its March 2021 Budget, the UK Government announced its intention to carry
out a programme of sales of NatWest Group plc ordinary shares with the
objective of selling all of its remaining shares in NatWest Group plc by 2026.
NatWest Group plc has (i) carried out directed buybacks of NatWest Group plc
shares from UK Government Investments Limited ('UKGI') in March 2021 and in
March 2022, (ii) carried out sales of NatWest Group plc shares by UK
Government Investments Limited ('UKGI) by accelerated bookbuild in May 2021,
and (iii) made purchases under NatWest Group plc's directed and on-market
buyback programmes announced in July 2021 and in March 2022. As at 17 January
2023, the UK Government held 44.98% of the ordinary share capital with voting
rights of NatWest Group plc. NatWest Group may participate in similar directed
or on-market buybacks in the near-and medium-term future. The precise timing
and extent of further UKGI's sell-downs is uncertain, which could result in a
prolonged period of price volatility for NatWest Group plc's ordinary shares
and other securities.
HM Treasury has indicated that it intends to respect the commercial decisions
of NatWest Group and that NatWest Group entities (including NWM N.V. Group)
will continue to have their own independent board of directors and management
team determining their own strategy. However, for as long as HM Treasury
remains NatWest Group plc's largest single shareholder, HM Treasury and UKGI
(as manager of HM Treasury's shareholding) could exercise a significant degree
of influence over NatWest Group (including NWM N.V. Group) including: the
election of directors and appointment of senior management, NatWest Group's
(including NWM N.V. Group's) capital strategy, dividend policy, remuneration
policy or the conduct of NatWest Group's (including NWM N.V. Group's)
operations. HM Treasury or UKGI's approach depends on government policy, which
could change. The manner in which HM Treasury or UKGI exercises HM Treasury's
rights as NatWest Group plc's largest single shareholder could give rise to
conflicts between the interests of HM Treasury and the interests of other
shareholders, including as a result of a change in government policy, which
may in turn adversely affect NatWest Group (including NWM N.V. Group). The
exertion of such influence over NatWest Group could in turn adversely affect
the governance or business strategy of NWM N.V. Group.
In addition, as a wholly owned subsidiary of NWM Plc (and ultimately NatWest
Group plc), NWM plc and NatWest Group plc directly and indirectly control NWM
N.V. Group's corporate policies and strategic direction. The interests of
NatWest Group plc as an equity holder of NWM N.V. Group and as its ultimate
parent and the interests of the C&I business segment may differ from the
interests of NWM N.V. Group or of potential investors in NWM N.V. Group's
securities.
Strategic risk
NWM Group (including NWM N.V Group) has been in a period of significant
structural and other change, including as a result of NatWest Group's
purpose-led strategy and NatWest Group's recent creation of its C&I
business segment (of which NWM Group forms part) and may continue to be
subject to significant structural and other change.
In February 2020, NatWest Group announced its strategy to focus on becoming a
purpose-led business designed to champion potential, and to help individuals,
families and businesses to thrive. As part of NatWest Group's strategy, NWM
Group's own strategy has evolved to focus on serving NatWest Group's corporate
and institutional customer base, first via the 'NWM Refocusing' programme
(which required simplification of its operating model and technological
platform as well as reducing its cost base and capital requirements) and then
via the creation of NatWest Group's C&I business segment (which combined
NatWest Group's Commercial, NatWest Markets and RBS International
businesses). NatWest Group plc has been reporting its results under the
C&I operating segment structure since the quarter ended 30 March 2022,
although NWM Plc continues to also report on a standalone legal entity basis.
The C&I business segment is intended to allow closer operational and
strategic alignment to support NatWest Group growth, with increased levels of
services being provided between NatWest Group entities, with the potential
increased risk of breach of the UK ring-fencing regime without effective or
enhanced conflicts of interest policies. As a result of further focusing on
NatWest Group's core C&I customers, NWM Group's prospects have become
further dependent on the success and strategy of NatWest Group.
NWM Group's ability to serve its customers may be diminished by its changing
business strategy and customer reactions to the changing nature of NWM Group's
business model may be more adverse than expected. Previously anticipated
revenue and profitability levels may not be achieved (including in relation
to: income from the Rates business, the ability to support customer
transactions whilst meeting NWM Group capital targets, and changes to the
availability of risk capital, in the timescales envisaged, or at all. An
adverse macro-economic environment, political and regulatory uncertainty,
market volatility and change and/or strong market competition may require NWM
Group to adjust aspects of its strategy or the timeframe for its
implementation. It is anticipated that NWM Plc will continue to generate
operating losses in the short term and as a result its capital levels may
decline.
NWM Group's strategy requires it to meet cost-reduction targets. A significant
proportion of the cost savings are dependent on simplification of the IT
systems and therefore may not be realised if IT capabilities are not delivered
in line with assumptions. In addition, the scale of changes that have been
concurrently implemented require the implementation and application of robust
governance and controls frameworks and robust IT systems. There is a risk that
NWM Group (including NWM N.V. Group) may not be successful in maintaining such
governance and control frameworks and IT systems.
As part of NWM Group's strategy, NWM Group has set a number of financial,
capital and operational targets and expectations, which are expected to
require further reductions to its wider cost base. The financial, operational
and capital targets and expectations envisaged by NWM's strategy may not be
met or maintained in the timeframes expected or at all. In addition, targets
and expectations for NWM Group are based on management plans, projections and
models, and are subject to a number of key assumptions and judgments, any of
which may prove to be inaccurate.
In addition, to improve efficiencies and best serve customers following
Brexit, NWM Group expects that certain assets, liabilities, transactions and
activities of NatWest Group's Transfer Business may be: (i) transferred from
the ring-fenced subgroup of NatWest Group to NWM Group, and/or (ii)
transferred to the ring-fenced subgroup of NatWest Group from NWM Group,
subject to regulatory and customer requirements. The timing, success and
quantum of any of these transfers remain uncertain as is the impact of these
transactions on its go-forward results of operations. As a result, NatWest
Group's (including NWM N.V. Group's) future results, financial condition
and/or prospects may be adversely affected.
NWM Group has implemented a shared services model and entered into revenue
share agreements with some entities within NatWest Group's ring-fenced
sub-group (including NatWest Bank Plc and The Royal Bank of Scotland Plc). NWM
Group therefore relies directly or indirectly on NatWest Group entities to
provide services to itself and its clients. This reliance has recently
increased as a result of NWM Group joining NatWest Group's C&I business
segment. A failure of NWM Group to receive these services may result in
operational risk. See, 'Operational risks (including reliance on third party
suppliers and outsourcing of certain activities) are inherent in NWM Group's
businesses'. In addition, any change to the cost and/or scope of services
provided by NatWest Group may impact NWM Group's (including NWM N.V. Group's)
competitive position and its ability to meet its other targets.
NWM's strategy entails legal, execution, operational and regulatory (including
compliance with the UK ring fencing regime), conflicts, IT system, culture,
people, conduct, business and financial risks to NWM Group (including NWM N.V.
Group). As a result, NWM Group may not be able to successfully implement some
or all aspects of its strategy or may not meet any or all of the related
strategic targets or expectations. Each of the risks identified above,
individually or collectively, could adversely affect NWM Group's (including
NWM N.V. Group's) products and services offering or office locations,
competitive position, ability to meet targets and commitments, reputation with
customers or business model and may result in higher-than-expected costs, all
of which could adversely affect NWM Group (including NWM N.V. Group) and its
ability to deliver its strategy. There is a risk that the intended benefits
of NatWest Group's and NWM Group's strategies may not be realised in the
timelines or in the manner currently contemplated, or at all. Various aspects
of NWM Group's strategy may not be successful, may not be completed as
planned, or at all, or could be phased or could progress in a manner other
than currently expected. This could lead to additional management actions by
NWM Group (or NWM N.V. Group), regulatory action or reduced liquidity and/or
funding opportunities. Any of the above may lead to NWM Group (and NWM N.V.
Group) not being viable, competitive or profitable.
Financial resilience risk
NWM N.V. is NatWest Group's banking and trading entity located in the
Netherlands. NWM N.V. has repurposed its banking licence, and NWM N.V. Group
may be subject to further changes.
As part of NatWest Group's strategy, NWM N.V. is NatWest Group's banking and
trading entity located in the Netherlands, serves EEA customers, and became a
NWM Plc subsidiary in November 2019. The banking licence of NWM N.V. was
repurposed for which purpose a declaration of non-objection (DNO) was received
from the DNB. Approval from the DNB is required for material changes to NWM
N.V.'s operating model. In addition, although the head office for NWM N.V. is
located in Amsterdam, NWM N.V. Group also operates branches in France,
Germany, Ireland, Italy, Sweden and Spain (although the branch in Spain closed
in mid-2022). As a subsidiary of NWM Plc (and ultimately NatWest Group plc),
NWM N.V. utilises a number of NWM Group and NatWest Group systems, policies
and frameworks (via a shared services model) including in relation to:
technology (including innovation) and network infrastructure, marketing, risk
frameworks, financial accounting systems, reporting, on-boarding processes,
model development and validation, certain administrative and legal services
and governance. In addition, the products that NWM N.V. offers are based on
those offered by NWM Plc. See also, 'Operational risks (including reliance on
third party suppliers and outsourcing of certain activities) are inherent in
NWM N.V. Group's businesses'. As such, any changes made to systems, policies,
frameworks or products of NatWest Group or NWM Group may have a corresponding
adverse effect on NWM N.V.
A number of other factors described above are outside the control of NWM N.V.,
and should changes be made, there may be an adverse effect NWM N.V.'s
profitability.
NWM Group, including NWM N.V. Group, may not meet the targets it communicates,
generate returns or implement its strategy effectively.
NWM N.V. Group is subject to transfer pricing arrangements with NWM Plc (NWM
N.V.'s parent company). Arm's length transfer pricing legislation in both the
Netherlands and UK requires that, for transactions between related parties,
each entity is rewarded on the same basis as two independent parties
negotiating a contract covering the same activities. The transfer pricing
arrangements between NWM N.V. and NWM Plc require approval by both
counterparties and are subject to audit and/or assessment by Dutch and UK tax
authorities. A portion of NWM N.V. Group's income derives from transfer
pricing income received from NatWest Group entities. Should the level of such
income change as a result of regulatory intervention or otherwise, this may
have a material and adverse effect on NWM N.V. Group's profitability.
As part of NatWest Group's strategy, NWM N.V. Group has set a number of
financial, capital and operational targets including in respect of: balance
sheet and cost-reduction measures, CET1 ratio targets (for NWM Plc and NWM
N.V.), MREL targets, leverage ratio targets (for NWM Plc and NWM N.V.),
targets in relation to local regulation, funding plans and requirements,
employee engagement, diversity and inclusion as well as ESG (including climate
and sustainable funding and financing targets and customer satisfaction
targets.
NWM N.V. Group's ability to meet its targets, including its CET1 ratio target,
and make discretionary capital distributions and to successfully fulfil its
strategy is subject to various internal and external factors and risks. These
include but are not limited to: global macro-economic, political, market and
regulatory uncertainties, operational risks and risks relating to NWM N.V.
Group's business model and strategy (including risks associated with climate,
ESG and other sustainability-related issues). See also, 'NWM Group (including
NWM N.V. Group) has been in a period of significant structural and other
change, including as a result of NatWest Group's purpose-led strategy and
NatWest Group's recent creation of its C&I business segment (of which NWM
Group forms part) and may continue to be subject to significant structural and
other change'.
A number of factors, including macro-economic factors, may impact NWM Plc and
NWM N.V.'s ability to maintain their current CET1 ratio targets, including
impairments, the extent of organic capital generation or the reduction of RWA
and the receipt and payment of dividends. NWM N.V. may incur disposal losses
as part of the process of exiting positions to reduce RWAs. Some of these
losses may be recognised ahead of the actual disposals and the losses overall
may be higher than currently anticipated.
NWM N.V. Group's ability to meet its planned cost reductions in annual costs
may vary considerably from year to year. Furthermore, the focus on maintaining
balance sheet and cost-reduction targets may result in limited investment in
other areas which could affect NWM N.V. Group's long-term product offering or
competitive position and its ability to meet its other targets, including
those related to customer satisfaction.
In addition, challenging trading conditions may adversely affect NWM N.V.
Group's business and its ability to achieve its targets and execute its
strategy.
NWM N.V. Group's strategy may not be successfully executed, it may not meet
its targets and expectations, and it may not be a viable, competitive or
profitable banking business.
NWM N.V. may not meet the prudential regulatory requirements for capital and
liquidity.
NWM N.V. Group is required by the DNB to maintain adequate financial
resources. Adequate capital provides NWM N.V. Group with financial flexibility
in the face of turbulence and uncertainty in the global economy and
specifically in its core European operations.
NWM Plc's and NWM N.V.'s target CET1 ratios are based on regulatory
requirements, internal modelling and risk appetite (including under stress).
As at 31 December 2022, NWM N.V. Group's CET1 ratio (on a consolidated basis)
was 21%. NWM N.V.'s current capital strategy is based on the management of
RWAs and other capital management initiatives.
Other factors that could influence NWM N.V.'s CET1 ratios include:
- a depletion of NWM N.V.'s capital resources through reduced profits
(which would in turn impact retained earnings) and may result from revenue
attrition or increased liabilities, sustained periods of low interest rates,
reduced asset values resulting in write-downs or reserve adjustments,
impairments, changes in accounting policy, accounting charges or foreign
exchange movements;
- a change in the quantum of NWM N.V.'s RWAs, stemming from exceeding
target RWA levels, the NWM Refocusing, regulatory adjustments (for example,
from additional market risk back testing exceptions), foreign exchange
movements or a failure in internal controls or procedures to accurately
measure and report RWAs. An increase in RWAs would lead to a reduction in the
CET1 ratio;
- changes in prudential regulatory requirements including the Total
Capital Requirement for NWM N.V. (as regulated by the DNB), including Pillar 2
requirements and regulatory buffers as well as any applicable scalars;
- further developments of prudential regulation (for example,
finalisation of Basel 3 standards), which will impact various areas including
the approach to calculating credit risk, market risk, leverage ratio, capital
floors and operational risk RWAs, as well as continued regulatory uncertainty
on the details thereto;
- further losses (including as a result of extreme one-off incidents
such as cyberattack, fraud or conduct issues) would deplete capital resources
and place downward pressure on the CET1 ratio; or
- the timing of planned liquidation, disposal and/or capital
releases of capital optimisation activity or legacy entities owned by NWM Plc
and NWM N.V.
See also, 'NWM Group (including NWM N.V. Group) has been in a period of
significant structural and other change, including as a result of NatWest
Group's purpose-led strategy and NatWest Group's recent creation of its
C&I business segment (of which NWM Group forms part) and may continue to
be subject to significant structural and other change.'
Management actions taken under a stress scenario may affect, among other
things, NWM N.V. Group's product offering, its credit ratings, its ability to
operate its businesses and pursue its current strategies and strategic
opportunities, any of which may negatively impact investor confidence and the
value of NWM N.V. Group's securities. See also, '- NWM N.V. may not manage its
capital, liquidity or funding effectively which could trigger the execution of
certain management actions or recovery options', and '- NatWest Group
(including NWM N.V.) may become subject to the application of statutory
stabilisation or resolution powers which may result in, among other actions,
the write-down or conversion of certain Eligible Liabilities (including NWM
N.V.'s Eligible Liabilities).'
NWM N.V. Group may not be able to adequately access sources of liquidity and
funding.
NWM N.V. Group is required to access sources of liquidity and funding through
deposits and wholesale funding, including debt capital markets and trading
liabilities such as repurchase agreements. As at 31 December 2022, NWM N.V.
Group held €1,196 million in deposits from banks and customers. The level of
deposits and wholesale funding may fluctuate due to factors outside NWM N.V.
Group's control. These factors include: loss of clients, loss of investor
confidence (including in individual NWM N.V. Group entities or the European
banking sector or the banking sector as a whole), changes in interest rates,
government support, increasing competitive pressures for bank funding or the
reduction or cessation of deposits and other funding by counterparties, any of
which could result in a significant outflow of deposits or reduction in
wholesale funding within a short period of time. See also, '- NWM N.V. Group
has significant exposure to counterparty and borrower risk'.
An inability to grow, roll-over, or any material decrease in, NWM N.V. Group's
deposits, short-term wholesale funding and short-term liability financing
could, particularly if accompanied by one of the other factors described
above, materially affect NWM N.V. Group's ability to satisfy its liquidity
needs.
NWM N.V. Group engages from time to time in 'fee based borrow' transactions
whereby collateral (such as government bonds) is borrowed from counterparties
on an unsecured basis in return for a fee. This borrowed collateral may be
used by NWM N.V. Group to finance parts of its balance sheet, either in its
repo financing business, derivatives portfolio or more generally across its
balance sheet. If such 'fee based borrow' transactions are unwound whilst used
to support the financing of parts of NWM N.V. Group balance sheet, then
unsecured funding from other sources would be required to replace such
financing. There is a risk that NWM N.V. Group would be unable to replace such
financing on acceptable terms or at all, which could adversely affect its
liquidity position and may adversely affect NWM N.V. Group. In addition,
because 'fee base borrow' transactions are conducted off-balance sheet (due to
the collateral being borrowed) investors may find it more difficult to gauge
NWM N.V. Group's creditworthiness, which may be affected if these transactions
were to be unwound in a stress scenario. Any lack of, or perceived lack of,
creditworthiness may adversely affect NWM N.V. Group.
Current European, UK and global macro-economic and political uncertainties
and any significant market volatility and change could affect NWM N.V. Group's
ability to access sources of liquidity and funding, which may result in higher
funding costs and failure to comply with regulatory capital, funding and
leverage requirements. As a result, NWM N.V. Group and its subsidiaries could
be required to adapt their funding plans or change their operations. This
could exacerbate funding and liquidity risk, which could have a negative
effect on NWM N.V. Group.
As at 31 December 2022, NWM N.V. Group reported a liquidity coverage ratio of
230% on a solo basis. If its liquidity position were to come under stress and
if NWM N.V. Group is unable to raise funds through deposits or wholesale
funding sources on acceptable terms or at all, its liquidity position could be
adversely affected. This would mean that NWM N.V. Group might be unable to:
meet deposit withdrawals on demand or satisfy buy back requests, repay
borrowings as they mature, meet its obligations under committed financing
facilities, comply with regulatory funding requirements, undertake certain
capital and/or debt management activities, or fund new loans, investments and
businesses. NWM N.V. Group may need to liquidate assets to meet its
liabilities, including disposals of assets not previously identified for
disposal to reduce its funding or payment commitments or trigger the execution
of certain management actions or recovery options. This could also lead to
higher funding costs and/or changes to NWM N.V. Group's funding plans or its
operations. In a time of reduced liquidity or market stress, NWM N.V. Group
may be unable to sell some of its assets or may need to sell assets at
depressed prices, which in either case may adversely affect NWM N.V. Group's
future results, financial condition and/or prospects.
NWM N.V. Group independently manages liquidity risk on a stand-alone basis,
including through holding its own liquidity portfolio. It has restricted
access to liquidity or funding from other NatWest Group entities. As a result,
NWM N.V.'s liquidity position could be adversely affected, which may also
require assets to be liquidated or may result in higher funding costs which
may adversely affect NWM N.V. Group's margins and profitability. NWM N.V.'s
management of its own liquidity portfolio and the structure of capital support
are subject to operational and execution risk, as NWM N.V. is required to meet
its own liquidity and capital requirements.
Continuing market volatility described in the paragraphs above may have a
negative effect on NWM N.V. Group's access to liquidity and funding, which
could mean that NWM N.V. Group is required to adapt its funding plan or change
its operations and could adversely affect NWM N.V. Group.
NWM N.V. Group is reliant on access to the capital markets to meet its funding
requirements. The inability to do so may adversely affect NWM N.V. Group.
NWM N.V. Group is reliant on frequent access to the capital markets for
funding, at a cost that can be passed through to its customers. This access
entails execution risk, regulatory risk, risk of reduced commercial activity,
risk of loss of market confidence in NWM N.V. Group if it cannot finance its
activities and risk of a ratings downgrade, which could be impeded by a number
of internal or external factors, including, those summarised in 'NWM N.V.
Group, its customers and its counterparties face continued economic and
political risks and uncertainty in the UK, European and global markets,
including as a result of high inflation and rising interest rates, supply
chain disruption and the Russian invasion of Ukraine,' and 'Continuing
uncertainty regarding the effects and extent of the UK's post Brexit
divergence from EU laws and regulation, and NWM N.V.'s post Brexit EU
operating model may continue to adversely affect NWM Plc (NWM N.V.'s parent
company) and its operating environment and NatWest Group plc (NWM N.V.'s
ultimate parent company) and may have an indirect effect on NWM N.V. Group'.
In addition, NWM N.V. receives capital and funding from NatWest Group plc and
NWM N.V. is therefore reliant on the willingness of NatWest Group plc to fund
its internal capital targets. NWM N.V. Group has set target levels for
different tiers of capital as percentages of its RWAs. The level of capital
and funding required for NWM N.V. to meet its internal targets is therefore a
function of the level of RWAs and its leverage exposure in NWM N.V. and this
may vary over time.
Any inability of NWM N.V. Group to adequately access the capital markets, to
manage its balance sheet in line with assumptions in its funding plans, may
adversely affect NWM N.V. Group, such that NWM N.V. Group may not constitute a
viable banking business and/or NWM N.V. may fail to meet its regulatory
capital requirements (at present, NWM N.V. does not yet have its own MREL).
NWM N.V. may not manage its capital, liquidity or funding effectively which
could trigger the execution of certain management actions or recovery options.
Under the EU Bank Recovery and Resolution Directives I and II ('BRRD'), as
implemented in the Netherlands, NatWest N.V. Group must maintain a recovery
plan acceptable to its regulator, such that a breach of NWM N.V.'s applicable
capital or leverage, liquidity or funding requirements would trigger
consideration of NWM N.V.'s recovery plan, and in turn may prompt
consideration of NatWest Group's recovery plan. If, under stressed conditions,
the liquidity, capital or leverage ratio were to decline, there are a range of
recovery management actions (focused on risk reduction and mitigation) that
NWM N.V. could undertake that may or may not be sufficient to restore adequate
liquidity, capital and leverage ratios. Additional management options relating
to existing capital issuances, asset or business disposals, capital payments
and dividends from NWM Plc to its parent, could also be undertaken to support
NWM N.V.'s capital and leverage requirements.
NatWest Group may also address a shortage of capital in NWM N.V. by providing
parental support to NWM N.V., subject to evidence that the conditions set out
in Article 23 of the BRRD, as implemented into Dutch law article 3:301 and
3:305 of the FMSA have been met. NatWest Group's and/or NWM N.V.'s regulator
may also request that NWM N.V. Group carry out additional capital management
actions. The Bank of England has identified single point-of-entry at NatWest
Group plc, as the preferred resolution strategy for NatWest Group. However,
under certain conditions set forth in the BRRD, as implemented by the FMSA,
the Dutch resolution authority, the DNB, also has the power to execute the
'bail-in' of certain securities of NWM N.V. without further action at NatWest
Group level.
Any capital management actions taken under a stress scenario may, in turn
affect factors including: NWM N.V. Group's product offering, credit ratings,
ability to operate its businesses and pursue its current strategies and
strategic opportunities as well as negatively impacting investor confidence
and the value of NWM N.V. Group's securities. See also, '- NatWest Group
(including NWM N.V.) may become subject to the application of statutory
stabilisation or resolution powers which may result in, for example, the
write-down or conversion of certain Eligible Liabilities (including NWM N.V.'s
Eligible Liabilities)'. In addition, if NWM N.V.'s liquidity position was to
be adversely affected, this may require assets to be liquidated or may result
in higher funding costs, which may adversely affect NWM N.V. Group's operating
performance.
Any reduction in the credit rating and/or outlooks assigned to NatWest Group
plc, any of its subsidiaries (including NWM Plc or NWM N.V.) or any of their
respective debt securities could adversely affect the availability of funding
for NWM N.V. Group, reduce NWM N.V. Group's liquidity position and increase
the cost of funding.
Rating agencies regularly review NatWest Group plc, NWM Plc, NWM N.V. and
other NatWest Group entity credit ratings and outlooks. In September, Moody's
upgraded the credit rating of NWM Plc from A2 (positive outlook) to A1 (stable
outlook). NWM N.V. Group entity credit ratings and outlooks, could be
negatively affected (directly or indirectly) by a number of factors that can
change over time, including: credit rating agencies' assessment of NWM N.V.
Group's strategy and management's capability; its financial condition
including in respect of profitability, asset quality, capital, funding and
liquidity; the level of political support for the industries and regions in
which NWM N.V. Group operates; the implementation of structural reform; the
legal and regulatory frameworks applicable to NWM N.V. Group's legal
structure; business activities and the rights of its creditors; changes in
rating methodologies; changes in the relative size of the loss-absorbing
buffers protecting bondholders and depositors; the competitive environment,
political and economic conditions in NWM N.V. Group's key markets (including
rising interest rates and higher inflation, supply chain disruptions and the
outcome of any further Scottish independence referendum); any reduction of the
UK's sovereign credit rating (currently on negative outlook by Moody's,
S&P and Fitch) and market uncertainty.
In addition, credit ratings agencies are increasingly taking into account
sustainability-related factors, including climate, environmental, social and
governance related risk, as part of the credit ratings analysis, as are
investors in their investment decisions. See also 'A reduction in the ESG
ratings of NatWest Group or NWM Group (including NWM N.V. Group) could have a
negative impact on NatWest Group's or NWM Group (including NWM N.V. Group)'s
reputation and on investors' risk appetite and customers' willingness to deal
with NatWest Group, NWM Group or NWM N.V. Group.'
Any reductions in the credit ratings of NatWest Group plc, NWM Plc, NWM N.V.
or of certain other NatWest Group entities, including, in particular,
downgrades below investment grade, or a deterioration in the capital markets'
perception of NWM N.V. Group's financial resilience could significantly affect
NWM N.V. Group's access to capital markets, reduce the size of its deposit
base and trigger additional collateral or other requirements in its funding
arrangements or the need to amend such arrangements, which could adversely
affect NWM N.V. Group's (and, in particular, NWM N.V.'s) cost of funding and
its access to capital markets which could limit the range of counterparties
willing to enter into transactions with NWM N.V. Group (and, in particular,
with NWM N.V.). This may in turn adversely affect NWM N.V. Group's competitive
position and threaten its prospects in the short to medium-term.
NWM N.V. Group operates in markets that are highly competitive, with
increasing competitive pressures and technology disruption.
The markets within which NWM N.V. Group operates are highly competitive, and
NWM N.V. Group expects such competition to continue and intensify in response
to various changes. These include: evolving customer behaviour, technological
changes (including digital currencies and other instruments, stablecoins, and
the growth of digital banking, such as from fintech entrants), competitor
behaviour, new entrants to the market, industry trends resulting in increased
disaggregation or unbundling of financial services, the impact of regulatory
actions and other factors. Innovations such as biometrics, artificial
intelligence, automation, the cloud, blockchain, cryptocurrencies and quantum
computing may also rapidly facilitate industry transformation.
Increasingly, many of the products and services offered by NWM N.V. Group are,
and will become, more technology intensive, including through digitalisation,
automation and the use of artificial intelligence. NWM N.V. Group's ability to
develop or acquire such services (which also comply with applicable and
evolving regulations) has become increasingly important to retaining and
growing NWM N.V. Group's client businesses across its geographical footprint.
There can be no certainty that NWM N.V. Group's innovation strategy (which
includes investment in its IT capability intended to improve its core
infrastructure and client interface capabilities as well as investments and
partnerships with third party technology providers) will be successful or that
it will allow NWM N.V. Group to continue to maintain or grow such services in
the future.
Certain of NWM N.V. Group's current or future competitors may be more
successful in implementing innovative technologies for delivering products or
services to their clients.
These competitors may be better able to attract and retain clients and key
employees, may have more advanced IT systems, and may have access to lower
cost funding and/or be able to attract deposits or provide investment-banking
services on more favourable terms than NWM N.V. Group. As mentioned above, NWM
N.V. operates a shared services model in relation to technology and
innovation. Although NWM N.V. Group invests in new technologies and
participates in industry and research-led initiatives aimed at developing new
technologies, such investments may be insufficient or ineffective, especially
given NWM N.V. Group's focus on its cost savings targets. This may limit
additional investment in areas such as financial innovation and could affect
NWM N.V. Group's offering of innovative products or technologies for
delivering products or services to clients and its competitive position. NWM
Group and NWM N.V. Group may also fail to identify future opportunities or
derive benefits from disruptive technologies in the context of rapid
technological innovation, changing customer behaviour and growing regulatory
demands. Furthermore, the development of innovative products depends on NWM
Group and NWM N.V. Group's ability to produce underlying high-quality data,
failing which its ability to offer innovative products may be compromised.
If NWM N.V. Group is unable to offer competitive, attractive and innovative
products that are also profitable and timely, it will lose share, incur losses
on some or all of its initiatives and lose opportunities for growth. In this
context, NWM N.V. Group is investing in the automation of certain solutions
and interactions within its customer-facing businesses, including through
automation and artificial intelligence. Such initiatives may result in
operational, reputational and conduct risks if the technology used is
defective, inadequate or is not fully integrated into NWM N.V. Group's current
solutions. There can be no certainty that such initiatives will deliver the
expected cost savings and investment in automated processes will likely also
result in increased short-term costs for NWM N.V. Group.
In addition, NatWest Group's purpose-led strategy, as well as employee
remuneration constraints may also have an impact on NWM N.V. Group's ability
to compete effectively and intensified competition from incumbents,
challengers and new entrants could affect NWM N.V. Group's ability to maintain
satisfactory returns.
Moreover, activist investors have increasingly become engaged and
interventionist in recent years, which may pose a threat to NatWest Group's
strategic initiatives. Furthermore, continued consolidation or technological
or other developments in certain sectors of the financial services industry
could result in NWM N.V. Group's remaining competitors gaining greater capital
and other resources, including the ability to offer a broader range of
products and services and geographic diversity, or the emergence of new
competitors. Any of the above may adversely affect NWM N.V. Group's future
results, financial condition and/or prospects.
NWM N.V. Group may be adversely affected if NatWest Group fails to meet the
requirements of regulatory stress tests.
NatWest Group is subject to annual stress tests by its regulator in the UK.
Stress tests are designed to assess the resilience of banks to potential
adverse economic or financial developments and ensure that they have robust,
forward-looking capital planning processes that account for the risks
associated with their business profile. If the stress tests reveal that a
bank's existing regulatory capital buffers are not sufficient to absorb the
impact of the stress, then it is possible that NatWest Group and/or NWM Group
may need to take action to strengthen their capital positions.
Failure by NatWest Group to meet its quantitative and qualitative requirements
of the stress tests set forth by its UK regulators may result in: NatWest
Group's regulators requiring NatWest Group to generate additional capital,
reputational damage, increased supervision and/or regulatory sanctions and/or
loss of investor confidence, all of which may adversely affect NatWest Group's
(and NWM N.V. Group's) future results, financial condition and/or prospects.
NWM N.V. Group has significant exposure to counterparty and borrower risk.
NWM N.V., a subsidiary of NWM Plc, has a portfolio of loans and loan
commitments to Western European corporate customers. As a result, through the
NWM N.V. business and NWM Group's other activities, NWM Group has exposure to
many different industries, customers and counterparties, and risks arising
from actual or perceived changes in credit quality and the recoverability of
monies due from borrowers and other counterparties are inherent in a wide
range of NWM N.V. Group's businesses. These risks may be concentrated for
those businesses for which client income is heavily weighted towards a
specific geographic region, industry or client base.
Furthermore, these risks are likely to increase due to the expected transfer
of NatWest Group's Transfer Business: (i) from the ring-fenced subgroup of
NatWest Group to NWM Group, and/or (ii) to the ring-fenced subgroup of NatWest
Group from NWM Group. See 'NWM Group (including NWM N.V. Group) has been in a
period of significant structural and other change, including as a result of
NatWest Group's purpose-led strategy and NatWest Group's recent creation of
its C&I business segment (of which NWM Group forms part) and may continue
to be subject to significant structural and other change'.
Credit risk may arise from a variety of business activities, including, but
not limited to: extending credit to clients through various lending
commitments; entering into swap or other derivative contracts under which
counterparties have obligations to make payments to NWM N.V. Group (including
un-collateralised derivatives); providing short or long-term funding that is
secured by physical or financial collateral whose value may at times be
insufficient to fully cover the loan repayment amount; posting margin and/or
collateral and other commitments to clearing houses, clearing agencies,
exchanges, banks, securities firms and other financial counterparties; and
investing and trading in securities and loan pools, whereby the value of these
assets may fluctuate based on realised or expected defaults on the underlying
obligations or loans. See also, 'Risk and Capital Management - Credit Risk'.
Any negative developments in the activities listed above may negatively impact
NWM N.V. Group's clients and credit exposures, which may, in turn, adversely
affect NWM N.V. Group's profitability.
The credit quality of NWM N.V. Group's borrowers and other counterparties may
be affected by the recent global macro-economic and political uncertainties
and a further deterioration in prevailing economic and market conditions
(including a resurgence of the COVID-19 pandemic or other new health crises)
and by changes in the legal and regulatory landscape in countries where NWM
N.V. Group is exposed to credit risk (including the extent of the UK's
post-Brexit divergence from EU laws and regulation). Any further deterioration
in these conditions or changes to legal or regulatory landscapes could worsen
borrower and counterparty credit quality or impact the enforcement of
contractual rights over security, increasing credit risk.
Concerns about, or a default by, a financial institution could lead to
significant liquidity problems and losses or defaults by other financial
institutions, since the commercial and financial soundness of many financial
institutions is closely related and interdependent as a result of credit,
trading, clearing and other relationships. Any perceived lack of
creditworthiness of a counterparty or borrower may lead to market-wide
liquidity problems and losses for NWM N.V. Group. In addition, the value of
collateral may be correlated with the probability of default by the relevant
counterparty ('wrong way risk'), which would increase NWM N.V. Group's
potential loss. This systemic risk may also adversely affect financial
intermediaries, such as clearing agencies, clearing houses, banks, securities
firms and exchanges with which NWM N.V. Group interacts on a daily basis. See
also, '- NWM N.V. Group is reliant on access to the capital markets to meet
its funding requirements. The inability to do so may adversely affect NWM N.V.
Group'. As a result, adverse changes in borrower and counterparty credit risk
may cause accelerated impairment charges under IFRS 9, increased repurchase
demands, higher costs, additional write-downs and losses for NWM N.V. Group
and an inability to engage in routine funding transactions.
NWM N.V. Group has applied an internal analysis of multiple economic scenarios
(MES) together with the determination of specific overlay adjustments to
inform its IFRS 9 ECL (Expected Credit Loss). The recognition and measurement
of ECL is complex and involves the use of significant judgment and estimation.
This includes the formulation and incorporation of multiple forward-looking
economic scenarios into ECL to meet the measurement objective of IFRS 9. The
ECL provision is sensitive to the model inputs and economic assumptions
underlying the estimate. Going forward, NWM N.V. Group anticipates observable
credit deterioration of a proportion of assets resulting in a systematic
uplift in defaults, which is mitigated by those economic assumption scenarios
being reflected in the Stage 2 ECL across portfolios, along with a combination
of post model overlays in both wholesale and retail portfolios reflecting the
uncertainty of credit outcomes. See also, 'Risk and Capital Management -
Credit Risk'. A credit deterioration would also lead to RWA increases.
Furthermore, the assumptions and judgments used in the MES and ECL assessment
at 31 December 2022 may not prove to be adequate resulting in incremental ECL
provisions for NWM N.V. Group.
NWM N.V. Group is exposed to the financial industry, including sovereign debt
securities, banks, financial intermediation providers (including providing
facilities to financial sponsors and funds, backed by assets or investor
commitments) and securitised products (typically senior lending to special
purpose vehicles backed by pools of financial assets). Due to NWM N.V. Group's
exposure to the financial industry, it also has exposure to shadow banking
entities (i.e., entities which carry out activities of a similar nature to
banks but not regulated like banks). NWM N.V. Group is required to identify
and monitor its exposure to shadow banking entities, implement and maintain an
internal framework for the identification, management, control and mitigation
of the risks associated with exposure to shadow banking entities, and ensure
effective reporting and governance in respect of such exposure. If NWM N.V.
Group is unable to properly identify and monitor its shadow banking exposure,
maintain an adequate framework, or ensure effective reporting and governance
in respect of shadow banking exposure, this may adversely affect NWM N.V.
Group's future results, financial condition and/or prospects.
NWM N.V. Group could incur losses or be required to maintain higher levels of
capital as a result of limitations or failure of various models.
Given the complexity of NWM N.V. Group's business, strategy and capital
requirements, NWM N.V. Group relies on analytical and other models for a wide
range of purposes, including to manage its business, assess the value of its
assets and its risk exposure, as well as to anticipate capital and funding
requirements (including to facilitate NatWest Group's mandated stress
testing). Uncertainties relating to the COVID-19 pandemic have made reliance
on analytical models and planning and forecasting for NWM Group more complex,
and may result in uncertainty impacting the risk profile of NWM Group and/or
that of the wider banking industry. In addition, NWM N.V. Group utilises
models for valuations, credit approvals, calculation of loan impairment
charges on an IFRS 9 basis, financial reporting and for financial crime
(criminal activities in the form of money laundering, terrorist financing,
bribery and corruption, tax evasion and sanctions as well as fraud risk
management (collectively, 'financial crime')). NWM N.V. Group's models, and
the parameters and assumptions on which they are based, are periodically
reviewed.
As models analyse scenarios based on assumed inputs and a conceptual approach,
model outputs therefore remain uncertain. Failure of models (including due to
errors in model design) or new data inputs (including non-representative data
sets), for example, to accurately reflect changes in the micro and
macro-economic environment in which NWM N.V. Group operates (for example to
account for high inflation), to capture risks and exposures at the subsidiary
level, and to update for changes to NWM N.V. Group's current business model or
operations, or for findings of deficiencies by NatWest Group (and in
particular, NWM Group's) or NWM N.V. Group's regulators (including as part of
NatWest Group's mandated stress testing) may render some business lines
uneconomic, result in increased capital requirements, may require management
action or may subject NWM N.V. Group to regulatory sanction. NWM N.V. Group
may also face adverse consequences as a result of actions based on models that
are poorly developed, implemented or used, models that are based on inaccurate
or compromised data or as a result of the modelled outcome being
misunderstood, or by such information being used for purposes for which it was
not designed.
NWM N.V. Group's financial statements are sensitive to underlying accounting
policies, judgments, estimates and assumptions.
The preparation of financial statements requires management to make judgments,
estimates and assumptions that affect the reported amounts of assets,
liabilities, income, expenses, exposures and RWAs. While estimates, judgments
and assumptions take into account historical experience and other factors
(including market practice and expectations of future events that are believed
to be reasonable under the circumstances), actual results may differ due to
the inherent uncertainty in making estimates, judgments and assumptions
(particularly those involving the use of complex models). Further, accounting
policy and financial statement reporting requirements are likely to
increasingly require management to adjust existing judgments, estimates and
assumptions for the effects of climate-related, sustainability and other
matters that are inherently uncertain and for which there is little historical
experience which may affect the comparability of NWM N.V. Group's future
financial results with its historical results. Actual results may differ due
to the inherent uncertainty in making climate-related and sustainability
estimates, judgments and assumptions.
Accounting policies deemed critical to NWM N.V. Group's results and financial
position, based upon materiality and significant judgments and estimates,
involve a high degree of uncertainty and may have a material impact on its
results. For 2022, these include loan impairments, fair value, deferred tax
and conduct and litigation provisions. These are set out in the section
'Critical accounting policies and key sources of estimation uncertainty'.
Changes in accounting standards may materially impact NWM N.V. Group's
financial results.
NWM N.V. Group prepares its consolidated financial statements in accordance
with IFRS as issued by the International Accounting Standards Board. Changes
in accounting standards or guidance by accounting bodies or in the timing of
their implementation, whether immediate or foreseeable, could result in NWM
N.V. Group having to recognise additional liabilities on its balance sheet, or
in further write-downs or impairments to its assets and may also adversely
affect the future results, financial condition and/or prospects of NWM N.V.
Group.
NWM N.V. Group's trading assets amounted to €4,440 million as at 31 December
2022. The valuation of financial instruments, including derivatives, measured
at fair value can be subjective, in particular where models are used which
include unobservable inputs. Generally, to establish the fair value of these
instruments, NWM N.V. Group relies on quoted market prices or, where the
market for a financial instrument is not sufficiently credible, internal
valuation models that utilise observable market data. In certain
circumstances, the data for individual financial instruments or classes of
financial instruments utilised by such valuation models may not be available
or may become unavailable due to prevailing market conditions. In these
circumstances, NWM N.V. Group's internal valuation models require NWM N.V.
Group to make assumptions, judgments and estimates to establish fair value,
which are complex and often relate to matters that are inherently uncertain.
Any of these factors could require NWM N.V. Group to recognise fair value
losses which may adversely affect NWM N.V. Group's income generation and
financial position.
From time to time, the International Accounting Standards Board may issue new
accounting standards or interpretations that could materially impact how NWM
N.V. Group calculates, reports and discloses its financial results and
financial condition, and which may affect NWM N.V. Group capital ratios,
including the CET1 ratio. New accounting standards and interpretations that
have been issued by the International Accounting Standards Board but which
have not yet been adopted by NWM N.V. Group are discussed in 'Future
accounting developments'.
NatWest Group (including NWM N.V.) may become subject to the application of
statutory stabilisation or resolution powers which may result in, for example,
the write-down or conversion of certain Eligible Liabilities (including NWM
N.V.'s Eligible Liabilities).
The BRRD establishes a common approach within the EU for the recovery and
resolution of banks. In the UK and the Netherlands, the BRRD has been
implemented via national legislation which grants powers to a national
resolution authority (the 'NRA'). The UK implementation of the BRRD remains in
force now that the Brexit transition has ended. In Europe (which for the
avoidance of doubt excludes the UK) the BRRD is also (partly) implemented by a
directly binding regulation which established a Single Resolution Mechanism
('SRM') and a single EU Resolution Board ('SRB') with powers which exceed the
powers of the EU NRAs.
United Kingdom - NatWest Group plc and its UK affiliates
HM Treasury, the Bank of England and the Prudential Regulation Authority
('PRA') and FCA (together, the 'UK Authorities') are granted substantial
powers to resolve and stabilise UK-incorporated financial institutions. Five
stabilisation options exist: (i) transfer of all of the business of a relevant
entity or the shares of the relevant entity to a private sector purchaser;
(ii) transfer of all or part of the business of the relevant entity to a
'bridge bank' wholly-owned by the Bank of England; (iii) transfer of part of
the assets, rights or liabilities of the relevant entity to one or more asset
management vehicles for management of the transferor's assets, rights or
liabilities; (iv) the write-down, conversion, transfer, modification, or
suspension of the relevant entity's equity, capital instruments and
liabilities; and (v) temporary public ownership of the relevant entity. These
tools may be applied to NatWest Group plc as the parent company or to NWM
Group, as an affiliate, where certain conditions are met (such as, whether the
firm is failing or likely to fail, or whether it is reasonably likely that
action will be taken (outside of resolution) that will result in the firm no
longer failing or being likely to fail). Moreover, there are modified
insolvency and administration procedures for relevant entities, and the
Authorities have the power to modify or override certain contractual
arrangements in certain circumstances and amend the law for the purpose of
enabling their powers to be used effectively and may promulgate provisions
with retrospective applicability. Similar powers may also be exercised with
respect to NWM N.V. in the Netherlands by the relevant Dutch regulatory
authorities.
Under the UK Banking Act, the Authorities are generally required to have
regard to specified objectives in exercising the powers provided for by the
Banking Act. One of the objectives (which is required to be balanced as
appropriate with the other specified objectives) refers to the protection and
enhancement of the stability of the financial system of the UK. Moreover, the
'no creditor worse off' safeguard contained in the Banking Act may not apply
in relation to an application of the separate write-down and conversion power
relating to capital instruments under the Banking Act, in circumstances where
a stabilisation power is not also used. Holders of debt instruments which are
subject to the power may, however, have ordinary shares transferred to or
issued to them by way of compensation.
Uncertainty exists as to how the Authorities may exercise their powers
including the determination of actions undertaken in relation to the ordinary
shares and other securities issued by NatWest Group (including NWM Group),
which may depend on factors outside of NWM Group's control. Moreover, the
Banking Act provisions remain largely untested in practice, particularly in
respect of resolutions of large financial institutions and groups.
The Netherlands - NWM N.V.
The special resolution regime measures set out in the BRRD were implemented
into Dutch law in 2015. The BRRD, and the SRM, provide that the DNB and the
SRB are the resolution authorities responsible for a resolution in relation to
NWM N.V. (the 'N.V. Authorities', and together with the UK Authorities, the
'Authorities') with broad powers to implement resolution measures with respect
to banks incorporated in the Netherlands which meet the conditions for
resolution, which may include (without limitation) measures analogous to the
Resolution Stabilisation Tools (options set out at points (i) to (iv) above
under the Banking Act). These powers and tools are designed to be used prior
to the point at which any insolvency proceedings with respect to NWM N.V.
could have been initiated.
In addition to the resolution powers of the N.V. Authorities described above,
the Dutch Minister of Finance may, with immediate effect, take measures or
expropriate assets and liabilities of, claims against or securities issued by
or with the consent of NWM N.V., if in the Minister of Finance's opinion, the
stability of the financial systems is in serious and immediate danger as a
result of the situation in which the firm finds itself (the 'Minister of
Finance Powers').
There remains uncertainty regarding the ultimate nature and scope of these
powers, and any exercise of the resolution regime powers by the N.V.
Authorities or the Minister of Finance Powers may adversely affect holders of
NWM N.V.'s Eligible Liabilities that fall within the scope of such powers.
If NatWest Group is at or is approaching the point of non-viability such that
regulatory intervention is required, there may correspondingly be an adverse
effect on the future results, financial condition and/or prospects of NWM N.V.
Group.
NatWest Group is subject to Bank of England and PRA oversight in respect of
resolution, and NWM N.V. Group could be adversely affected should the Bank of
England in the future deem NatWest Group's preparations to be inadequate.
NatWest Group is subject to regulatory oversight by the Bank of England and
the PRA, and is required (under the PRA rulebook) to carry out an assessment
of its preparations for resolution, submit a report of the assessment to the
PRA, and disclose a summary of this report. The initial report was submitted
to the PRA on 30 September 2021 and, in June 2022 the Bank of England's
assessment of NatWest Group's preparations did not identify any shortcomings,
deficiencies or substantive impediments but did highlight two areas as
requiring further enhancements. NatWest Group could be adversely affected
should future Bank of England assessments deem NatWest Group's preparations to
be inadequate.
NatWest Group has dedicated significant resources towards the preparation of
NatWest Group for a potential resolution scenario. If any future Bank of
England assessment identifies a significant gap in NatWest Group's ability to
achieve the resolvability outcomes, or reveals that NatWest Group is not
adequately prepared to be resolved, or did not have adequate plans in place to
meet resolvability requirements, NatWest Group may be required to take action
to enhance its preparations to be resolvable, resulting in additional cost and
the dedication of additional resources. These actions may have an impact on
NatWest Group (and NWM N.V. Group) as, depending on the Bank of England's
assessment, potential action may include, but is not limited to, resulting in
restrictions on maximum individual and aggregate exposures, a requirement to
dispose of specified assets, a requirement to change legal or operational
structure, a requirement to cease carrying out certain activities and/or
maintaining a specified amount of MREL. This may also impact NatWest Group's
(and NWM N.V. Group's) strategic plans and may adversely affect NWM N.V.
Group's financial condition or may result in reputational damage and/or loss
of investor confidence. Additionally, DNB and SRB may exercise similar powers
if the recovery and resolution plans of NWM N.V. Group are not satisfactory.
Climate and sustainability-related risks
NWM N.V. Group and its customers, suppliers and counterparties face
significant climate and sustainability-related risks, which may adversely
affect NWM N.V. Group.
Climate-related risks represent a source of systemic risk in the global
financial system. The financial impacts of climate-related risks are expected
to be widespread, exacerbating already existing financial vulnerabilities and
may disrupt the proper functioning of financial markets and institutions,
including NWM N.V. Group.
Financial and non-financial risks from climate change and sustainability
related risks can arise through physical and transition risks. In addition,
physical and transition risks can trigger further losses, stemming directly or
indirectly from legal claims, litigation and conduct liability (referred to as
'liability risk'). See also, 'NWM N.V. Group may be subject to potential
climate, environmental, human rights and other sustainability-related
litigation, enforcement proceedings, investigations and conduct risk'.
There are significant uncertainties as to the location, extent and timing of
the manifestation of the physical risks of climate change, such as more severe
and frequent extreme weather events (storms, flooding, subsidence, heat waves,
droughts and wildfires), rising sea levels, nature and biodiversity loss,
declining food yields, destruction of critical infrastructure, supply chain
disruption and resource scarcity. Damage to NWM N.V. Group customers',
suppliers' and counterparties' properties and operations could disrupt
business, impair asset values and negatively impact the creditworthiness of
customers leading to increased default rates, delinquencies, write-offs and
impairment charges in NWM N.V. Group's portfolios. In addition, NWM N.V. Group
premises and operations, or those of its critical outsourced functions may
experience damage or disruption leading to increased costs and adversely
affect NWM N.V. Group's reputation, future results, financial condition and/or
prospects.
In October 2021, the UK Government published its Net Zero Strategy which sets
out how the UK will deliver on its commitment to reach net-zero emissions by
2050 (defined as the point at which greenhouse gas emissions from sources are
equal to removals by sinks as set out in Article 4 of the 2015 Paris
Agreement). An independent review of the government's approach to delivering
its net zero target to ensure it is pro-business and pro-growth was published
in January 2023. The timing, content and implementation of the specific
policies and proposals remain uncertain and are subject to continuous changes
and developments. The transition to a net-zero economy across all sectors of
the economy and markets in which NWM N.V. Group operates will be required to
meet the goals of the UN Framework Convention on Climate Change (1994), the
2015 Paris Agreement, the UK's Net Zero Strategy, the Dutch Government's
commitment to cutting The Netherlands' carbon emissions with 95% by 2050,
compared to 1990 levels, and the European Green Deal initiatives, the EU
Action Plan on Sustainable Finance and the European Climate Pact. The impacts
of the extensive social, commercial, technological, policy and regulatory
changes required to achieve transition remain uncertain but are expected to be
significant, subject to continuous changes and developments and may be
disruptive across the global economy and markets, especially if these changes
do not occur in an orderly or timely manner or are not effective in reducing
emissions sufficiently. Some sectors such as property, energy (including the
oil and gas industry), mobility (including land transport, aviation, and
shipping industries and the related manufacturing and infrastructure industry)
and food (including the agriculture industry) are expected to be particularly
impacted. The timing and pace of the transition to a net-zero economy is also
uncertain, will depend on many factors and uncertainties and may be near term,
gradual and orderly or delayed, rapid and disorderly, or a combination of
these. There is also growing attention on the need for a 'just transition' and
'energy justice' - in recognition that the transition to net zero should not
disproportionally affect the most disadvantaged members of society.
In addition, NWM N.V. Group and its customers, suppliers and counterparties
may face economic, financial and non-financial risks arising from broader
sustainability issues such as: (i) risks relating to degradation of the
environment, such as air, water and land pollution, water stress, nature and
biodiversity loss and deforestation which may include for instance loss and/or
decline of the state of nature (including the state of biodiversity); (ii)
social matter-related risks (including violent conflicts, geopolitical
implications, impacts on indigenous people, migration, human rights,
diversity, equality and inclusion, the living wage, fair taxation and value
chains); and (iii) governance-related risks (including board diversity,
ethics, executive compensation and management structure).
Financial institutions, including NWM N.V. Group, are directly and indirectly
exposed to multiple types of environmental risks (including nature and
biodiversity-related risks) through their activities, including through the
risk of default by clients. In addition to safeguards and interventions that
focus on reducing negative impacts on the environment (including nature and
biodiversity), there is also a growing need to implement solutions that focus
on increasing positive impacts on environment (including nature and
biodiversity) through nature-based solutions. In 2021, NatWest Group
(including NWM N.V. Group) classified 'Biodiversity and Nature Loss' as an
emerging risk for NatWest Group (including NWM N.V. Group) within its Risk
Management Framework.
The Taskforce on Nature-Related Financial Disclosures (TNFD) is a global,
market-led initiative with the mission to develop and deliver a risk
management and disclosure framework for organisations to report and act on
evolving nature-related risks and opportunities, with the ultimate aim of
supporting a shift in global financial flows away from nature-negative
outcomes and toward nature-positive outcomes. NatWest Group (including NWM
N.V. Group) is a member of the Informal Working Group 2020 of TNFD and is a
Forum Member since 2021.
Measuring the environmental related financial impacts (including impacts on
nature and biodiversity related financial impacts) as a result of funding and
financing activities as well as reporting on these is an evolving and complex
area for the financial services industry which requires collaborative
approaches with partners, stakeholders, peers and public sector bodies to help
measure and mitigate the negative impacts of the activities which NatWest
Group (including NWM N.V. Group) finances on the environment (including nature
and biodiversity), as well as supporting the growing sector of nature-based
solutions and habitat restoration and biodiversity markets. NatWest Group
(including NWM N.V. Group) is in the early stages of developing its approach
to assess, manage and mitigate environmental risks and by using emerging
industry guidance such as the TNFD beta framework, NatWest Group (including
NWM N.V. Group) is seeking to further its understanding of how NatWest Group's
(including NWM N.V. Group's) business activities impact nature, the
dependencies NWM N.V. Group and its customers have on nature, and the risks
and opportunities nature can generate.
There is also increased scrutiny from NWM N.V. Group's employees, investors,
customers, counterparties (including its suppliers), communities, regulators
and other stakeholders regarding how businesses address social issues,
including tackling inequality, working conditions, workplace health, safety
and wellbeing, diversity and inclusion, data protection and management,
workforce management, human rights and supply chain management which may
impact NWM N.V. Group's employees, suppliers, customers, and their business
activities or the communities in which they operate.
- These climate and sustainability-related risks may:
- adversely affect economic activity, asset pricing and valuations
of financial instruments and, in turn, the wider financial system;
- impact economic activities directly (for example through lower
corporate profitability or the devaluation of assets) or indirectly (for
example through macro-financial changes);
- also affect the viability or resilience of business models over
the medium to longer term, particularly those business models most vulnerable
to climate and sustainability-related risks;
- trigger further losses stemming directly or indirectly from legal
claims (liability risks) and reputational damage as a result of the public,
customers, counterparties, suppliers and/or investors associating NWM N.V.
Group or its customers with adverse climate and sustainability-related issues;
- intersect with and add further complexity and challenge to
contributing to achieving NatWest Group's purpose-led strategy including
climate ambitions and targets;
- be drivers of several different risk categories simultaneously and
may exacerbate existing risks, including credit risk, operational risk
(including business continuity), market risk (both traded and non-traded),
liquidity and funding risk (for example, net cash outflows or depletion of
liquidity buffers), pension risk and conduct risk; and
- if combined, may have a greater adverse effect on NWM N.V. Group's
reputation, future results, financial condition and/or prospects.
If NWM N.V. Group fails in a timely manner to identify and address climate and
sustainability-related risks and opportunities and changing regulatory and
market expectations, or to appropriately identify, measure, manage and
mitigate climate and sustainability-related physical, transition and liability
risks and opportunities that NWM N.V. Group, its customers, counterparties and
suppliers face, this may adversely affect NWM N.V. Group's reputation, future
results, financial condition and/or prospects.
NatWest Group's climate change related strategy, ambitions, targets and
transition plan entail significant execution and reputational risk and are
unlikely to be achieved without significant and timely government policy,
technology and customer behavioural changes.
In February 2020, NatWest Group announced its ambition to become a leading
bank in the UK helping to address the climate challenge. As part of the
implementation of its climate ambitions, at NatWest Group's Annual General
Meeting in April 2022, ordinary shareholders passed an advisory 'Say on
Climate' resolution endorsing NatWest Group's previously announced strategy to
address climate change, including its ambitions to at least halve the climate
impact of its financing activity by 2030, achieve alignment with the 2015
Paris Agreement and reach net zero by 2050 across its financed emissions,
assets under management and operational value chain.
Furthermore, as part of its efforts to support the transition to a net-zero
economy, NatWest Group has announced its plans to (i) stop lending and
underwriting to companies with more than 15% of activities related to thermal
and lignite coal, unless they had a Credible Transition Plan in line with the
2015 Paris Agreement in place by end of 2021; phase out of thermal and lignite
coal for UK and non-UK customers who have UK coal production, coal-fired
generation and coal-related infrastructure by 1 October 2024, with a full
global phase out by 1 January 2030; (ii) to stop lending and underwriting to
major oil and gas producers unless they had a Credible Transition Plan aligned
with the 2015 Paris Agreement in place by the end of 2021; (iii) from February
2023 stop providing reserve based lending specifically for the purpose of
financing oil and gas exploration, extraction and production for new
customers, and, after the 31 December 2025 not to renew, refinance or extend
existing reserve- based lending specifically for the purpose of financing oil
and gas exploration, extraction and production; and (iv) stop providing
reserve-based lending and borrowing base financing to upstream Oil and Gas
companies specifically for the purpose of financing upstream assets located in
Arctic or Antarctic Waters.
In December 2022, NatWest Group published its science-based targets validated
by Science Based Target Initiative (SBTi) for its own operational footprint
and for 79% of its loans and investments (debt securities and equity shares)
on its 2019 balance sheet, at sector level.
NatWest Group has also announced and in the future it may also announce other
climate ambitions and targets which support its overarching strategy to
address climate change.
Making the changes necessary to contribute to achieving NatWest Group's
strategy on addressing climate change, including achieving NatWest Group's
climate ambitions and targets and executing its transition plan may adversely
affect NWM N.V. Group's business and operations and will require reductions to
its financed emissions and to its exposure to customers that do not align with
a transition to net zero or do not have a credible transition plan in place.
Increases in lending and financing activities may wholly or partially offset
some or all these reductions, which may increase the extent of changes and
reductions necessary. It is anticipated that achieving these reductions,
together with the active management of climate and sustainability-related
risks and other regulatory, policy and market changes, is likely to
necessitate material and accelerated changes to NWM N.V. Group's business,
operating model, its existing exposures and the products and services NWM N.V.
Group provides to its customers (potentially on accelerated timescales) which
may adversely affect NWM N.V. Group's ability to achieve its financial targets
and generate sustainable returns.
NatWest Group (including NWM N.V. Group) also needs to ensure that its
strategy and business model adapt to changing national and international
standards, industry and scientific practices, regulatory requirements and
market expectations regarding climate change, which remain under continuous
development and are subject to different interpretations. There can be no
assurance that these standards, practices, requirements and expectations will
not be interpreted differently than what was the understanding of NatWest
Group (including NWM N.V. Group) when defining its climate-related ambitions
and targets or change in a manner that substantially increases the cost or
effort for NatWest Group (including NWM N.V. Group) to achieve such ambitions
and targets. In addition, NatWest Group's ambitions and targets may prove to
be considerably more difficult or even impossible to achieve under such
changing circumstances. This may be exacerbated if NatWest Group (including
NWM N.V. Group) chooses or is required to accelerate its climate-related
ambitions or targets as a result of (among other things) UK or international
regulatory developments or stakeholder expectations.
NWM N.V. Group's ability to contribute to achieving NatWest Group's strategy
to address climate change, including achieving its climate ambitions and
targets, will depend to a large extent on many factors and uncertainties
beyond NatWest Group's (including NWM N.V. Group's) control. These include the
extent and pace of climate change, including the timing and manifestation of
physical and transition risks, the macro-economic environment, the timely
implementation and integration of adequate government policies, the
effectiveness of actions of governments, legislators, regulators, businesses,
investors, customers and other stakeholders to mitigate the impact of climate
and sustainability-related risks, changes in customer behaviour and demand,
changes in the available technology for mitigation, the roll-out of low carbon
infrastructure and the availability of accurate, verifiable, reliable,
consistent and comparable data. See also, 'There are significant challenges in
accessing reliable, verifiable and comparable climate and other
sustainability-related data due to availability, quality and other
limitations, which contribute to the substantial uncertainties in accurately
modelling and reporting on climate and sustainability information, as well as
making appropriate important internal decisions'.
These external factors and other uncertainties will make it challenging for
NatWest Group to meet its climate ambitions and targets and for NWM N.V. Group
to contribute to them and there is a significant risk that all or some of
these will not be achieved.
Any delay or failure by NWM N.V. Group to contribute to setting, making
progress against or meeting NatWest Group's climate-related ambitions and
targets may adversely affect NWM N.V. Group, its reputation, future results,
financial condition and/or prospects and may increase the climate and
sustainability-related risks NWM N.V. Group faces.
There are significant limitations related to accessing reliable, verifiable
and comparable climate and other sustainability-related data, including as a
result of lack of standardisation, consistency and completeness which,
alongside other factors, contribute to substantial uncertainties in accurately
modelling and reporting on climate and sustainability information, as well as
making appropriate important internal decisions.
Meaningful reporting of climate and sustainability-related risks and
opportunities and their potential impacts and related metrics depends on
access to accurate, reliable, consistent and comparable climate and
sustainability-related data from counterparties or customers. Data may not be
generally available or, if available, may not be accurate, verifiable,
auditable, reliable, consistent, or comparable. Any failure of NWM N.V. Group
to incorporate climate and/or sustainability-related factors into its
counterparty and customer data sourcing and accompanying analytics, or to
collect or develop accurate, verifiable, auditable, reliable, consistent and
comparable counterparty and customer data, may adversely affect NWM N.V.
Group's ability to prepare meaningful reporting of climate and
sustainability-related risks and opportunities, and it may adversely affect
NWM N.V. Group's regulatory compliance, reputation, business and its
competitive position.
In the absence of other sources, reporting of financed emissions by financial
institutions, including NWM N.V. Group, is necessarily based on aggregated
information developed by third parties that may be prepared in an inconsistent
way using different methodologies, interpretations, or assumptions. NWM N.V.
Group's climate and sustainability-related disclosures use a greater number
and level of assumptions and estimates than many of its financial disclosures.
These assumptions and estimates are highly likely to change over time, and,
when coupled with the longer timeframes used in these climate and
sustainability-related disclosures, make any assessment of materiality
inherently uncertain.
In particular, in the absence of actual emissions monitoring and measurement,
emissions estimates are based on industry and other assumptions that may not
be accurate for a given counterparty or customer. There may also be data gaps
that are filled using proxy data, such as sectoral averages, again developed
in different ways. As a result, NWM N.V. Group's climate and
sustainability-related disclosures may be amended, updated or restated in the
future as the quality and completeness of NWM N.V. Group's data and
methodologies continue to improve. These data quality challenges, gaps and
limitations could have a material impact on NWM N.V. Group's ability to make
effective business decisions about climate risks and opportunities, including
risk management decisions, to comply with disclosure requirements and to
monitor and report progress in meeting ambitions and targets.
Significant risks, uncertainties and variables are inherent in the assessment,
measurement and mitigation of climate-related risks. These include data
quality gaps and limitations mentioned above, as well as the pace at which
climate science, greenhouse gas accounting standards and various emissions
reduction solutions develop. In addition, there is significant uncertainty
about how climate change and the transition to a net-zero economy will unfold
over the coming years and decades and how and when climate-related risks will
manifest. These timeframes are considerably longer than NWM N.V. Group's
historical strategic, financial, resilience and investment planning horizons.
As a result, it is very difficult to predict and model the impact of
climate-related risks into precise financial and economic outcomes and
impacts. Climate-related risks present significant methodological challenges
due to their forward-looking nature, the lack and/or quality of historical
testing capabilities, lack of standardisation and incompleteness of emissions
and other climate and sub-sector related data and the immature nature of risk
measurement and modelling methodologies. The evaluation of climate-related
risk exposure and the development of associated potential risk mitigation
techniques largely depend on the choice of climate scenario modelling
methodology and the assumptions made which involves a number of risks and
uncertainties, for example:
- climate scenarios are not predictions of what is likely to happen or
what NatWest Group would like to happen, rather they explore the possible
implications of different judgments and assumptions by considering a series of
scenarios;
- climate scenarios do not provide a comprehensive description of all
possible future outcomes;
- lack of specialist expertise in banks such that NWM N.V. Group needs
to rely on third party advice, modelling, and data which is also subject to
many limitations and uncertainties;
- immaturity of modelling of and data on climate-related risks on
financial assets which will evolve rapidly in the coming years;
- the number of variables and forward-looking nature of climate
scenarios which makes them challenging to back test and benchmark;
- the significant uncertainty as to how the climate will evolve over
time, how and when governments, regulators, businesses, investors and
customers respond and how those responses impact the economy, asset
valuations, land systems, energy systems, technology, policy and wider
society;
- the assumptions will be continually evolving with more
data/information which may affect the baselines for comparability across
reporting periods and impact internal and external verification processes; and
- the pace of the development of the methodologies across different
sectors may be different and therefore it may be challenging to report on the
whole balance sheet with regard to emissions.
Accordingly, these risks and uncertainties coupled with significantly longer
timeframes make the outputs of climate-related risk modelling, including
emission reduction targets and pathways, inherently more uncertain than
outputs modelled for traditional financial planning cycles based on historical
financial information. Furthermore, there is a lack of scientific, industry
and regulatory consensus regarding the appropriate metrics, methodologies,
modelling and standardised reporting to enable the assessment of the location,
acuteness, and severity of environmental risks (including nature and
biodiversity-related risks) and the monitoring and mitigation of these risks
in the economy and financial system.
Capabilities within NWM N.V. Group to appropriately assess, model, report and
manage climate and sustainability-related risks and impacts and the
suitability of the assumptions required to model and manage climate and
sustainability-related risks appropriately are developing. The development of
NWM N.V. Group's capabilities to assess, model, report and manage the impacts
of climate change and broader environmental risk (including nature and
biodiversity-related risks) is in its early stages. Even when those
capabilities are developed, the high level of uncertainty regarding any
assumptions modelled, the highly subjective nature of risk measurement and
mitigation techniques, incorrect or inadequate assumptions and judgments and
data quality gaps and limitations may lead to inadequate risk management
information and frameworks, or ineffective business adaptation or mitigation
strategies, which may adversely affect NWM N.V. Group's regulatory compliance,
reputation, future results, financial condition and/or prospects.
A failure to implement effective climate change resilient governance,
procedures, systems and controls in compliance with legal and regulatory
expectations to manage climate and sustainability-related risks and
opportunities could adversely affect NWM N.V. Group's ability to manage those
risks.
The prudential regulation of climate-related risks is an important driver in
how NWM N.V. Group develops its risk appetite for financing activities or
engaging with counterparties. Legislative and regulatory authorities are
publishing expectations as to how banks should prudently manage and
transparently disclose climate-related and environmental risks under
prudential rules.
European Union and the Netherlands
NWM N.V. Group is subject to regulatory developments in the EU and The
Netherlands. In this regard, legislative and regulatory authorities in the EU
and The Netherlands are publishing expectations as to how financial
institutions should prudently manage and transparently disclose
climate-related and environmental risks under prudential rules.
In November 2020, the European Central Bank ('ECB') published its 'Guide on
climate-related and environmental risks' ('ECB Guide') which laid down the
ECB's expectations for each supervised entity in relation to climate-related
and environmental risks. All banks under the ECB's supervision will need to
meet all supervisory expectations on climate and environmental risks outlined
in the ECB Guide, including full integration in the Internal Capital Adequacy
Assessment Process and stress testing, by the end of 2024. In June 2021, the
European Banking Authority ('EBA') published its Report on Environmental,
Social and Governance risk management and supervision and in December 2021 the
DNB published a paper titled 'Towards a sustainable balance' which aligns with
the ECB publication of November 2021 on 'The state of climate and
environmental risk management in the banking sector'. Both documents highlight
the prudential view and expectations towards financial institutions regarding
managing of climate, environmental and social risks as part of their strategy,
governance, risk management and reporting practices and are driving the
supervisory dialogue. In 2022, the ECB launched the thematic review, which
involved conducting deep dives into institutions' climate-related and
environmental risk strategies, as well as their governance and risks
management frameworks and processes. In November 2022, the ECB published the
results of its 'Good practices for climate-related and environmental risk
management' which shares observations and good practices illustrating the
different ways that significant institutions can align their practices with
the supervisory expectations set out in the ECB Guide.
In April 2020, the DNB published its 'Good Practices on Integration of Climate
Risks for Banks' document in which it sets out the supervisory expectation
that banks (including NWM N.V.) should incorporate climate-related risks into
their governance and risk management arrangements in line with the principle
of proportionality. In order to achieve this, the DNB provides several
non-binding 'good practices' that banks could adhere to, including:
- incorporating an organisation-wide strategic approach toward
climate-related risks, along with the integration of climate-related
considerations in policy framework;
- embedding the identification, assessment, mitigation and
monitoring of climate change related risks in banks' risk management
framework; and
- disclosing the carbon footprint of lending and investment
portfolio in the annual report.
In October 2022, the DNB published a consultation to improve and increase its
guidance on integration and management of climate risk. In addition, the DNB
has confirmed that it will perform more stress tests to assess the impact of
climate change on the financial sector. On 8 July 2022, the ECB published the
results of its supervisory stress test which show that banks do not yet
sufficiently incorporate climate risk into their stress-testing frameworks and
internal models, despite some progress, and banks must urgently step up
efforts to measure and manage climate risk, closing the current data gaps and
adopting good practices that are already present in the sector according to
the ECB.
In June 2020, the Dutch Authority for the Financial Markets in the Netherlands
(Stichting Autoriteit Financiële Markten ('AFM')) published its position
paper on sustainability. In this position paper the AFM describes what it
expects from market parties when it comes to sustainability and how the AFM
will be supervising this. The AFM confirms, amongst others, that:
- a sustainable economy and society is a supervisory priority of the
AFM and is increasingly becoming an integral part of its supervision strategy;
and
- it expects market participants to integrate sustainability aspects
in a responsible and careful manner in their financial products and services.
In order to ensure that the same high level of supervisory standards is
applied consistently among the institutions that DNB supervise, to raise
awareness of climate-related and environmental risks, and to better prepare
Less Significant Institutions (LSIs) - such as NWM N.V. - for the future, DNB
stated its intention to use the ECB Guide as a basis for its supervisory
engagements with LSIs from 2021 in a proportionate manner. On 2 February 2021,
the DNB requested the Dutch financial institutions to do a self-assessment on
climate-related, environmental and social risks, indicating that these risks
will feature in prudential supervision with increasing prominence going
forward. The results of the ECB stress test published on 8 July 2022 further
increased the focus on these risks.
In addition, NWM N.V. Group and its branches will continue to be, or will
potentially be, subject to an increasing array of EU/EEA climate and
sustainability-related legal and regulatory requirements, such as the EU
Taxonomy, the ECB Guide, the EU Corporate Sustainability Reporting Directive,
the EU Corporate Sustainability Due Diligence Directive, the EU Green Bond
Standard, the EBA's Pillar 3 disclosures on ESG risks and other legal and
regulatory requirements.
The UK
In April 2019, the PRA published a supervisory statement ('SS 3/19') with
particular focus on the management of financial risks from climate change with
respect to governance, risk management, scenario analysis and disclosures. In
response to the PRA's SS 3/19, following the submission of initial plans in
October 2019, on 8 October 2020 NatWest Group provided the PRA with an update
to its original plan, noting that the COVID-19 pandemic had disrupted some
elements of its original plan and, as a result, the updated plan would require
additional operating cycles reaching into 2022 and beyond to prove embedding.
Throughout 2022, NatWest Group provided the PRA with updates on how it had
addressed the commitments made in its October 2020 plan, noting the delivery
of a first generation, largely qualitative in nature, approach to the
supervisory requirements. In 2022, the PRA has also started actively
supervising firms against their supervisory expectations, and it issued
another 'Dear CEO letter' providing a summary of capabilities, which the PRA
would expect firms to be able to demonstrate, setting out thematic
observations on firms' levels of embeddedness, and providing examples of
effective practices identified.
In June 2021, the Bank of England launched its 2021 Biennial Exploratory
Scenario ('2021 CBES') to stress test the resilience of the current business
models of the largest banks, insurers and the financial system to the physical
and transition risks from climate change under three climate scenarios.
NatWest Group delivered its first 2021 CBES submission to the PRA in October
2021 and its submission to the second phase of the 2021 CBES exercise in the
first quarter of 2022. In May 2022, the PRA published the results of the 2021
CBES which has shown that UK banks, including NatWest Group (including NWM
N.V. Group), need to do more to understand and manage their exposure to
climate risks and that the lack of available data on corporates' current
emissions and future transition plans is a collective issue affecting all
participating firms. In July 2022, the participating banks in the 2021 CBES
exercise were invited to discuss methodologies and challenges with regards to
climate risk scenario analysis.
In October 2022, the Bank of England and the PRA held a conference to
facilitate discussion on the complex issues associated with adjusting the
capital framework to take account of climate-related financial risks with the
aim of providing more guidance on its approach to climate and capital by the
end of 2022. The Bank of England does not think capital frameworks should be
used to address the causes of climate change. However, as set out in the PRA's
Climate Change Adaptation Report 2021
(https://www.bankofengland.co.uk/events/2022/october/climate-and-capital-conference/note-to-support-the-boes-climate-and-capital-conference#footnote-1)
, and, as with any other risk, it does think the capital framework could be a
useful tool within the broader regulatory frameworks to ensure that
PRA-regulated firms are resilient to climate risks.
Any failure of NatWest Group (including NWM N.V. Group) to fully and timely
embed climate related risks into its risk management practices and framework
to appropriately identify, measure, manage and mitigate the various climate-
related physical and transition risks and apply the appropriate product
governance in line with applicable legal and regulatory requirements and
expectations, may adversely affect NWM N.V. Group's regulatory compliance,
prudential capital requirements, liquidity position, reputation, future
results, financial condition and/or prospects.
Climate and sustainability-related disclosures are a rapidly evolving area and
increasingly expose NWM N.V. Group to risk in the face of legal and regulatory
expectations, regulatory enforcement and class action risk. NatWest Group and
its subsidiaries (including NWM N.V. Group) currently are, and in the future
will, be subject to increasing entity-wide climate-related and other
non-financial disclosure requirements.
In the UK, as from February 2022, NatWest Group (the ultimate parent company
of NWM N.V. Group) is required to provide enhanced climate-related disclosures
consistent with the Task Force on Climate Related Financial Disclosures
('TCFD') recommendations to comply with the FCA Policy Statement on the
Listing Rules (PS 20/17) that require commercial companies with a UK premium
listing - such as NatWest Group to make climate-related disclosures,
consistent with TCFD, on a 'comply or explain' basis.
By its Policy Statement 'Enhancing climate-related disclosures by standard
listed companies' (PS 21/23), the FCA has confirmed its final policy position
set forth in PS 20/17, extended the scope of issuers that are subject to the
new Listing Rules and added guidance provisions on transition plan disclosure
(for issuers in scope of both the PS 20/17 and the new PS 21/23 rules). NWM
N.V. Group is currently not in scope of the FCA Policy Statement (PS 20/17) or
Policy Statement (PS21/23) and therefore, it is not required to publish
climate-related disclosures consistent with the TCFD at the company level. As
required by the FCA Policy Statement (PS 20/17) and Policy Statement (PS
21/23), NatWest Group publishes climate-related disclosures that it believes
are consistent with the TCFD for the consolidated group, including NWM N.V.
Group.
In addition, as of 5 April 2022, NatWest Group is also required to prepare
mandatory climate-related financial disclosures pursuant to The Companies
(Strategic Report) (Climate-related Financial Disclosure) Regulations 2022.
Furthermore, in October 2022, the FCA published a Consultation Paper on
'Sustainability Disclosure Requirements (SDR) and investment labels' (CP
22/20) which proposes that the FCA will require all regulated firms to ensure
that from June 2023 the naming and marketing of financial products and
services in the UK is clear, fair and not misleading, and consistent with the
sustainability profile of the products or services, i.e. proportionate and not
exaggerated.
Misrepresenting or over-emphasising the extent to which an investment,
strategy or other type of product takes into account environmentally friendly,
sustainable or ethical features and concerns, using misleading labels and
language in relation to such products and/or omitting material information
about NWM N.V. Group's contribution to the climate crisis (including its
direct or indirect contribution to greenhouse gas emissions), or other
sustainability related issues could potentially result in complaints,
regulatory intervention, claims and/or litigation and reputational damage.
Any failure of NWM N.V. Group to implement robust and effective climate and
sustainability-related disclosure governance and to embed appropriate product
governance policies, procedures and controls to make accurate public
statements and claims about how environmentally friendly, sustainable or
ethical NWM N.V. Group's products and services are and to apply these in line
with applicable legal and regulatory requirements and expectations, may
adversely affect NWM N.V. Group's regulatory compliance and reputation and
could give rise to litigation.
Increasing levels of climate, environmental, human rights and other
sustainability-related laws, regulation and oversight which are constantly
evolving may adversely affect NWM N.V. Group.
There are an increasing number of EU, UK, Dutch and other regulatory and
legislative initiatives to address issues around climate change (including
promoting the transition to a net-zero economy), environment (including nature
and biodiversity), human rights and other sustainability-related risks and
opportunities. The DNB and the AFM are also increasingly focused on climate
change and sustainability and have announced good practices and supervisory
expectations relating to these topics. As a result, an increasing number of
laws, regulations and legislative actions, including proposals, guidance,
policy and regulatory initiatives many of which have been introduced or
amended recently and are subject to further changes, is likely to affect the
financial sector and the wider economy.
Many of these initiatives are focused on developing standardised definitions
and criteria for green and sustainable criteria of assets and liabilities,
integrating climate change and sustainability into decision-making and
customers' access to green and sustainable financial products and services
which may have a significant impact on the services provided by NWM N.V. Group
and its subsidiaries, and its associated credit, market and financial risk
profile. They could also impact NWM N.V. Group's recognition of its climate
and sustainable funding and financing activity and may adversely affect NWM
N.V. Group's ability to achieve its strategy and climate and sustainable
funding and financing ambitions.
There is a growing divergence between UK, EU/EEA, Dutch and US climate and
sustainability-related legal and regulatory requirements which may result in
NWM N.V. Group becoming subject to legal and regulatory expectations different
from the ones applicable to NatWest Group (including NWM Group) and/or any of
its subsidiaries and/or NWM N.V. Group not meeting regulatory requirements,
investors' expectations and may increase the cost of doing business (including
increased operating costs) and contentious regulatory and litigation risk.
NatWest Group (including NWM N.V. Group) is also participating in various
voluntary carbon reporting and other standard setting initiatives for
disclosing climate and sustainability-related information, many of which have
differing objectives and methodologies and are at different stages of
development in terms of how they apply to financial institutions.
Compliance with these developing and evolving climate and
sustainability-related legal and regulatory requirements is likely to require
NWM N.V. Group to implement significant changes to its business models,
products and other governance, internal controls over financial reporting,
disclosure controls and procedures, modelling capability and risk management
systems, which may increase the cost of doing business, and entail additional
change risk and increased compliance, regulatory sanctions and litigation
(including settlements) costs.
Failure to implement and comply with these legal and regulatory requirements
or emerging best practice expectations may have a material adverse effect on
NWM N.V. Group's regulatory compliance and may result in regulatory sanctions,
reputational damage and investor disapproval each of which may adversely
affect NWM N.V. Group's future results, financial condition and/or prospects.
NWM N.V. Group may be subject to potential climate, environmental, human
rights and other sustainability-related litigation, enforcement proceedings,
investigations and conduct risk.
Due to increasing new climate and sustainability-related jurisprudence, laws
and regulations in the UK, European and other jurisdictions, growing demand
from investors and customers for environmentally sustainable products and
services, and regulatory scrutiny, financial institutions, including NWM N.V.
Group, may through their business activities face increasing litigation,
conduct, enforcement and contract liability risks related to climate change,
environmental degradation, human rights violations and other social,
governance and sustainability-related issues.
These risks may arise, for example, from claims pertaining to: (i) failure to
meet obligations, targets or commitments relating to, or to disclose
accurately, or provide updates on material climate and/or
sustainability-related risks, or otherwise provide fair, balanced and
appropriate disclosure to investors, customers, counterparties and other
stakeholders; (ii) conduct, mis-selling and customer protection claims,
including claims which may relate to alleged insufficient product
understanding, unsuitable product offering and /or reliance upon information
provided by NWM N.V. Group or claims alleging unfair pricing of
climate-related products, for example in relation to products where limited
liquidity or reliable market data exists for benchmarking purposes or which
may be impacted by future climate policy uncertainty or other factors; (iii)
marketing that portrays products, securities, activities or policies as having
positive climate, environmental or sustainable outcomes to an extent that may
not be the case, or may not adequately be qualified and/or omits material
information about NWM N.V. Group's contribution to the climate crisis and/or
its direct / indirect contribution to greenhouse gas emissions or other
sustainability-related issues; (iv) damages claims under various tort
theories, including common law public nuisance claims, or negligent
mismanagement of physical and/or transition risks; (v) alleged violations of
officers', directors' and other fiduciaries' duties, for example by financing
various carbon-intensive, environmentally harmful or otherwise highly exposed
assets, companies, and industries; (vi) changes in the understanding of what
constitutes positive climate, environmental or sustainable outcomes as a
result of developing climate science, leading to discrepancy between current
product offerings and investor and/or market and/or broader stakeholder
expectations; (vii) any weaknesses or failures in specific systems or
processes associated particularly with climate, environmental or
sustainability linked products, and/or human rights due diligence, including
any failure in the timely implementation, onboarding and/or updating of such
systems or processes; or (viii) counterparties, collaborators, customers to
whom NatWest Group (including NWM N.V. Group) provides services and third
parties in NWM N.V. Group's value chain who act, or fail to act, or undertake
due diligence, or apply appropriate risk management and product governance in
a manner that may adversely affect NatWest Group's (including NWM N.V. Group)
reputation or sustainability credentials.
Furthermore, there is a risk that shareholders, campaign groups, customers and
special interest groups could seek to take legal action against NWM N.V. Group
for financing or contributing to climate change, environmental degradation and
human rights violations and for not supporting the principles of 'just
transition' (i.e. maximising the social benefits of the transition, mitigating
the social risks of the transition, empowering those affected by the change,
anticipating future shifts to address issues up front and mobilising
investments from the public and private sectors).
There is a risk that as environmental and climate science develop and societal
understanding of these issues increases and deepens, courts, regulators and
enforcement authorities may apply the then current understandings of
environmental, climate and broader sustainability-related matters
retrospectively when assessing claims about historical conduct or dealings of
financial institutions, including NWM N.V. Group. See also, 'NWM N.V. Group
and NWM Plc are exposed to the risk of various litigation matters, regulatory
and governmental actions and investigations as well as remedial undertakings,
the outcomes of which are inherently difficult to predict, and which could
have an adverse effect on NWM N.V. Group'.
These potential litigation, conduct, enforcement and contract liability risks
may have a material adverse effect on NatWest Group's ability to achieve its
strategy, including its climate ambition, and may adversely affect NWM N.V.
Group's reputation, future results, financial condition and/or prospects.
A reduction in the ESG ratings of NatWest Group or NWM Group (including NWM
N.V. Group) could have a negative impact on NatWest Group's or NWM Group's
(including NWM N.V. Group's) reputation and on investors' risk appetite and
customers' willingness to deal with NatWest Group, NWM Group or NWM N.V.
Group.
ESG ratings from agencies and data providers which rate how NatWest Group or
NWM Group (including NWM N.V. Group) manage environmental, social and
governance risks are increasingly influencing investment decisions pertaining
to NatWest Group's, NWM Group's and/or NWM N.V. Group's and/or their
subsidiaries' securities or being used as a basis to label financial products
and services as environmentally friendly or sustainable. ESG ratings are (i)
unsolicited; (ii) subject to the assessment and interpretation by the ESG
rating agencies; (iii) provided without warranty; (iv) not a sponsorship,
endorsement, or promotion of NatWest Group (including NWM N.V. Group) by the
relevant rating agency; and (v) may depend on many factors some of which are
beyond NatWest Group's and NWM N.V. Group's control (e.g. any change in rating
methodology). In addition, NWM N.V. Group offers and sells products and
services to customers and counterparties based exclusively or largely on a
rating by an unregulated ESG rating agency. ESG rating agencies, at this
stage, are not subject to any specific regulatory or other regime or oversight
(although there are proposals by regulators in different jurisdictions to
regulate rating agencies and data providers). Regulators have expressed
concern that harm may arise from potential conflicts of interest within ESG
rating and review or opinion providers and there is a lack of transparency in
methodologies and data points, which renders ratings and reviews incomparable
between agencies or providers. There is currently no market consensus on what
precise attributes are required for a particular asset to be classified as
'ESG'. Any reduction in the ESG ratings of NatWest Group (including NWM N.V.
Group), or a regulatory sanction or enforcement action involving an ESG rating
agency used by a NWM N.V. Group entity, could have a negative impact on NWM
N.V. Group's reputation, could influence investors' risk appetite for NWM N.V.
Group's and/or its subsidiaries' securities, particularly ESG securities,
could increase the cost of issuing securities for NWM N.V. Group and/or its
subsidiaries and could affect a customer's willingness to deal with NWM N.V.
Group.
Operational and IT resilience risk
Operational risks (including reliance on third party suppliers and outsourcing
of certain activities) are inherent in NWM N.V. Group's businesses.
Operational risk is the risk of loss or disruption resulting from inadequate
or failed internal processes, procedures, people or systems, or from external
events, including legal and regulatory risks. NWM N.V. Group operates in a
number of countries, offering a diverse range of products and services
supported directly or indirectly by third party suppliers. As a result,
operational risks or losses can arise from a number of internal or external
factors (including, for example, payment errors or financial crime and
fraud), for which there is continued scrutiny by third parties on NWM Group's
compliance with financial crime requirements; see 'NWM N.V. Group and NWM Plc
are exposed to the risk of various litigation matters, regulatory and
governmental actions and investigations as well as remedial undertakings, the
outcomes of which are inherently difficult to predict, and which could have an
adverse effect on NWM N.V. Group'). These risks are also present when NWM N.V.
Group relies on NatWest Group, NWM Group, critical service providers
(suppliers) or vendors to provide services to it or its clients, as is
increasingly the case as NWM N.V. Group outsources certain activities,
including with respect to the implementation of new technologies, innovation
and responding to regulatory and market changes. Furthermore, NWM N.V. is
subject to the EBA guidelines on outsourcing arrangements. If the systems and
services provided by NatWest Group, NWM Group or any third party do not comply
with such EBA requirements, there is a risk of increase in operational and
compliance costs, which may negatively affect NWM N.V. Group's business
continuity and reputation.
Operational risks continue to be heightened as a result of the implementation
of NatWest Group's purpose-led strategy, and the organisational and
operational changes involved, including NatWest Group's phased withdrawal from
RoI, NatWest Group's current cost-controlling measures, the NWM Refocusing,
the creation of the C&I business segment of which NWM forms part, the
progression towards working as One Bank across NatWest Group to serve
customers and conditions affecting the financial services industry generally
(including macro-economic and other geo-political developments) as well as the
legal and regulatory uncertainty resulting therefrom. It is unclear as to how
the future ways of working may evolve, including in respect of how working
practices may develop, or how NWM N.V. Group will evolve to best serve its
customers. Any of the above may exacerbate operational risks including NWM
N.V. Group's ability to maintain effective internal controls and governance
frameworks.
In recent years, NWM Group (including NWM N.V. Group) has materially increased
its dependence on NatWest Bank Plc for numerous critical services and
operations, including without limitation, property, finance, accounting,
treasury, risk, regulatory compliance and reporting, human resources, and
certain other support and administrative functions. In addition, NWM N.V.
Group has materially increased its dependence on NWM Plc for numerous critical
services similar to those outlined above and for certain sales activities,
which due to their complexities could potentially trigger regulatory, tax,
reputational, financial crime and conduct risks. A failure by NatWest Bank Plc
or NWM Plc to adequately supply these services may expose NWM N.V. Group to
critical business failure risk, increased costs and other liabilities. These
and any increases in the cost of these services may adversely affect NWM N.V.
Group's future results, financial condition and/or prospects.
The effective management of operational risks is critical to meeting customer
service expectations and retaining and attracting client business. Although
NWM N.V. Group has implemented risk controls and mitigation actions, with
resources and planning having been devoted to mitigate operational risk, such
measures may not be effective in controlling each of the operational risks
faced by NWM N.V. Group. Ineffective management of such risks may adversely
affect NWM N.V. Group's future results, financial condition and/or prospects.
NWM N.V. Group is subject to increasingly sophisticated and frequent
cyberattacks.
NWM N.V. Group experiences a constant threat from cyberattacks across the
entire NatWest Group (including NWM N.V. Group) and against NatWest Group and
NWM N.V. Group's supply chain, reinforcing the importance of due diligence of
close working relationship with, the third parties on which NWM N.V. Group
relies. NWM N.V. Group is reliant on technology, against which there is a
constantly evolving series of attacks, that are increasing in terms of
frequency, sophistication, impact and severity. As cyberattacks evolve and
become more sophisticated, NWM N.V. Group is required to continue to invest in
additional capability designed to defend against emerging threats. In 2022,
NWM N.V. Group and its supply chain were subjected to a small number of
Distributed Denial of Service ('DDOS') and ransomware attacks, which are a
pervasive and significant threat to the financial services industry. The focus
is to manage the impact of the attacks and sustain availability of services
for NWM N.V. Group's customers. NWM N.V. Group continues to invest significant
resources in the development and evolution of cyber security controls that are
designed to minimise the potential effect of such attacks.
Hostile attempts are made by third parties to gain access to, introduce
malware (including ransomware) into and exploit vulnerabilities of NWM N.V.
Group's IT systems or NWM N.V.'s third party providers. NWM N.V. Group has
information and cyber security controls in place to seek to minimise the
impacts of any such attacks, which are subject to review on a continuing
basis, but given the nature of the threat, there can be no assurance that such
measures will prevent the potential negative impact of any such attacks from
occurring. See also, '- 'NWM N.V. Group's operations are highly dependent on
its complex IT systems, and any IT failure could adversely affect NWM N.V.
Group'.
Any failure in NWM Group's (and therefore NWM N.V. Group's) or third-party
providers cybersecurity policies, procedures or controls, may result in
significant financial losses, major business disruption, inability to deliver
customer services, or loss of data or systems or other sensitive information
(including as a result of an outage) and may cause associated reputational
damage. Any of these factors could increase costs (including costs relating to
notification of, or compensation for clients and credit monitoring), result in
regulatory investigations or sanctions being imposed or may affect NWM N.V.
Group's ability to retain and attract clients. Regulators in the UK, US,
Europe and Asia continue to recognise cybersecurity as an important systemic
risk to the financial sector and have highlighted the need for financial
institutions to improve their monitoring and control of, and resilience
(particularly of critical services) to cyberattacks, and to provide timely
reporting or notification of them, as appropriate. Cyberattacks on NWM N.V.
Group's counterparties may also damage NWM N.V. Group's operations.
Additionally, third parties may also fraudulently attempt to induce employees,
customers, third party providers or other users who have access to NWM N.V.
Group's systems to disclose sensitive information in order to gain access to
NWM N.V. Group's data or systems or that of NWM N.V. Group's clients or
employees. Cybersecurity and information security events can derive from
groups or factors such as: internal or external threat actors, human error,
fraud or malice on the part of NWM N.V. Group's employees or third parties,
including third party providers, or may result from technological failure. Any
of the above may have an adverse effect on NWM N.V. Group's reputation, future
results, financial condition and/or prospects.
NWM N.V. Group expects greater regulatory engagement, supervision and
enforcement to continue at a high level in relation to its overall resilience
to withstand IT and IT-related disruption, either through a cyberattack or
some other disruptive event. Such increased regulatory engagement, supervision
and enforcement is uncertain in relation to the scope, cost, consequence and
the pace of change, which may adversely affect NWM N.V. Group's future
results, financial condition and/or prospects. Due to NWM N.V. Group's
reliance on technology and the increasing sophistication, frequency and impact
of cyberattacks, such attacks may adversely affect NWM N.V. Group.
In accordance with the Data Protection Act 2018 and the European Union
Withdrawal Act 2018, the Data Protection, Privacy and Electronic
Communications (Amendments Etc.) (EU Exit) Regulations 2019, as amended by the
Data Protection, Privacy and Electronic Communications (Amendments Etc.) (EU
Exit) Regulations 2020 ('UK Data Protection Framework'), NWM N.V. Group is
required to ensure it implements timely appropriate and effective
organisational and technological safeguards against unauthorised or unlawful
access to the data of NWM N.V. Group, its clients and its employees. In order
to meet this requirement, NWM N.V. Group relies on the effectiveness of its
internal policies, controls and procedures to protect the confidentiality,
integrity and availability of information held on its IT systems, networks and
devices as well as with third parties with whom NWM N.V. Group interacts. A
failure to monitor and manage data in accordance with the UK Data Protection
Framework, the EU GDPR and EBA requirements of the applicable legislation may
result in financial losses, regulatory fines and investigations and associated
reputational damage. In addition, whilst NWM N.V. Group takes measures to
prevent, detect and minimize attacks, NWM N.V. Group's systems, and those
third-party providers, are subject to frequent cyberattacks.
NWM N.V. Group operations and strategy are highly dependent on the accuracy
and effective use of data.
NWM N.V. Group relies on the effective use of accurate data to support,
monitor, evaluate, manage and enhance its operations and deliver its strategy.
Investment is being made in data tools and analytics, including raising
awareness around data ethics usage and privacy across NWM N.V. Group. The
availability and accessibility of current, complete, detailed, accurate and,
wherever possible, machine-readable customer segment and sub-sector data,
together with appropriate governance and accountability for data, is fast
becoming a critical strategic asset, which is subject to increased regulatory
focus. Failure to have or be able to access that data or the ineffective use
or governance of that data could result in a failure to manage and report
important risks and opportunities or satisfy customers' expectations including
the inability to deliver products and services. This could also result in a
failure to deliver NWM N.V. Group's strategy and could place NWM N.V. Group at
a competitive disadvantage by increasing its costs, inhibiting its efforts to
reduce costs or its ability to improve its systems, controls and processes
which could result in a failure to deliver NWM N.V. Group's strategy. These
data weaknesses and limitations, or the unethical or inappropriate use of
data, and/or non-compliance with data protection laws could give rise to,
conduct and litigation risks and may increase the risk of operational
challenges, losses, reputational damage or other adverse consequences due to
inappropriate models, systems, processes, decisions or other actions. Any of
the above may lead to key business processes being negatively impacted by
inappropriately managed data, which could lead to material financial, customer
and regulatory impacts.
NWM N.V. Group relies on attracting, retaining, developing and remunerating
diverse senior management and skilled personnel (such as market trading
specialists), and is required to maintain good employee relations.
NWM N.V. Group's success depends on its ability to attract, retain, through
creating an inclusive environment, and develop and remunerate highly skilled
and qualified diverse personnel, including senior management, directors,
market trading specialists and key employees, especially for technology and
data focused roles, in a highly competitive market, in an era of strategic
change and under internal cost efficiency pressures.
The inability to compensate employees competitively and/or any reduction of
compensation, the perception that NWM Group may not be a viable or competitive
business, heightened regulatory oversight of banks and the increasing scrutiny
of, and (in some cases) restrictions placed upon, employee compensation
arrangements (in particular those of banks in receipt of government support
such as NatWest Group), negative economic developments or other factors, may
adversely affect NWM N.V. Group's ability to hire, retain and engage well
qualified employees, especially at a senior level, which could adversely
affect NWM N.V. Group's future results, financial condition and/or prospects.
This increases the cost of hiring, training and retaining diverse skilled
personnel. In addition, certain economic, market and regulatory conditions and
political developments may reduce the pool of candidates for key management
and non-executive roles, including non-executive directors with the right
skills, knowledge and experience, or increase the number of departures of
existing employees. Moreover, a failure to foster a diverse and inclusive
workforce may adversely affect NWM Group's employee engagement and the
formulation and execution of its strategy and could also have a negative
effect on its reputation with customers, investors and regulators.
Some of NWM N.V. Group's employees are represented by employee representative
bodies, including a works council. Engagement with its employees and such
bodies is important to NWM N.V. Group in maintaining good employee relations.
Any breakdown of these relationships may adversely affect NWM N.V. Group.
NWM N.V. Group's operations are highly dependent on its complex IT systems,
and any IT failure could adversely affect NWM N.V. Group.
NWM N.V. Group's operations are highly dependent on the ability to process a
very large number of transactions efficiently and accurately while complying
with applicable laws and regulations. The proper functioning of NatWest
Group's (including NWM N.V. Group's) transactional and payment systems,
financial crime, fraud systems and controls, risk management, credit analysis
and reporting, accounting, customer service and other IT systems (some of
which are owned and operated by other entities in NatWest Group or third
parties), is critical to NWM N.V. Group's operations.
Individually or collectively, any critical system failure, material loss of
service availability or material breach of data security could cause
significant damage to (i) important business services across NWM N.V. Group
and (ii) NWM N.V. Group's ability to provide services to its clients, which
could result in reputational damage, significant compensation costs and
regulatory sanctions (including fines resulting from regulatory
investigations) or a breach of applicable regulations and could affect NWM
N.V. Group's regulatory approvals, competitive position, business and brands,
which could undermine its ability to attract and retain customers. NWM N.V.
Group outsources certain functions as it innovates and offers new digital
solutions to its clients to meet the demand for online and mobile banking.
Outsourcing, alongside hybrid working patterns of NWM N.V. Group employees
heighten the above risks.
NWM N.V. Group uses IT systems that enable remote working interface with
third-party systems, and NWM N.V. Group could experience service denials or
disruptions if such systems exceed capacity or if a third-party system fails
or experiences any interruptions, all of which could result in business and
customer interruption and related reputational damage, significant
compensation costs, regulatory sanctions and/or a breach of applicable
regulations.
In 2022, NWM N.V. Group continued to make considerable investments to further
simplify, upgrade and improve its IT and technology capabilities (including
migration of certain services to cloud platforms). As part of the NWM
Refocusing, NWM Group, including NWM N.V. Group, also continues to develop and
enhance digital services for its customers and seeks to improve its
competitive position through enhancing controls and procedures and
strengthening the resilience of services including cyber security. Any failure
of these investment and rationalisation initiatives to achieve the expected
results, due to cost challenges or otherwise, may adversely affect NWM Group's
operations, its reputation and ability to retain or grow its client business
or adversely affect its competitive position, thereby negatively impacting NWM
N.V. Group. See also, '- NWM Group (including NWM N.V. Group) has been in a
period of significant structural and other change, including as a result of
NatWest Group's purpose-led strategy and NatWest Group's recent creation of
its C&I business segment (of which NWM Group forms part) and may continue
to be subject to significant structural and other change'.
A failure in NWM N.V. Group's risk management framework could adversely affect
NWM N.V. Group, including its ability to achieve its strategic objectives.
Risk management is an integral part of all of NWM N.V. Group's activities and
integral to the delivery of its long-term strategy. NatWest Group's
Enterprise-Wide Risk Management Framework sets out NWM Group's (including NWM
N.V. Group) approach for managing risk within NWM N.V. Group including in
relation to risk governance and risk appetite. A failure to adhere to this
framework, or any material weaknesses or deficiencies in the framework's
controls and procedures, may adversely affect NWM N.V. Group's financial
condition and strategic delivery including in relation to operating within
agreed risk appetite statements and accurate reporting on risk exposures.
Financial risk management is highly dependent on the use and effectiveness of
internal stress tests and models and ineffective risk management may arise
from a wide variety of factors, including lack of transparency or incomplete
risk reporting, manual processes and controls, inaccurate data, inadequate IT
systems, unidentified conflicts or misaligned incentives, lack of
accountability control and governance, incomplete risk monitoring (including
trade surveillance) and failures of systems to properly process all relevant
data, risks related to unanticipated behaviour or performance in algorithmic
trading and management or insufficient challenges or assurance processes or a
failure to timely complete risk remediation projects. Failure to manage risks
effectively, or within regulatory expectations, could adversely affect NWM
N.V. Group's reputation or its relationship with its regulators, clients,
shareholders or other stakeholders.
In addition, financial crime risk management is dependent on the use and
effectiveness of financial crime assessment, systems and controls. Weak or
ineffective financial crime processes and controls may risk NatWest Group
inadvertently facilitating financial crime which may result in regulatory
investigation, sanction, litigation, fines and reputational damage. Financial
crime continues to evolve, whether through fraud, scams, cyber-attacks or
other criminal activity. NatWest Group (and NWM N.V. Group) has made and
continues to make significant, multi-year investments to strengthen and
improve its overall financial crime control framework with prevention systems
and capabilities. As part of its ongoing programme of investment, there is
current and future investment planned to further strengthen financial crime
controls over the coming years, including investment in new technologies and
capabilities to further enhance customer due diligence, transaction
monitoring, sanctions and anti-bribery and corruption systems. A number of NWM
N.V. Group's financial crime controls are operated by NatWest Group on behalf
of NWM N.V. Group.
NWM N.V. Group's operations are inherently exposed to conduct risks, which
include business decisions, actions or reward mechanisms that are not
responsive to or aligned with NWM N.V. Group's regulatory obligations, client
needs or do not reflect NWM N.V. Group's customer-focused strategy,
ineffective product management, unethical or inappropriate use of data,
information asymmetry, implementation and utilisation of new technologies,
outsourcing of customer service and product delivery, the possibility of
mis-selling of financial products and mishandling of customer complaints. Some
of these risks have materialised in the past and ineffective management and
oversight of conduct risks may lead to further remediation and regulatory
intervention or enforcement.
NWM N.V. Group's businesses are also exposed to risks from employee misconduct
including non-compliance with policies and regulations, negligence or fraud
(including financial crimes and fraud), any of which could result in
regulatory fines or sanctions and serious reputational or financial harm to
NWM N.V. Group. Remote working arrangements for NWM N.V. Group employees
continues to place heavy reliance on the IT systems that enable remote working
and may place additional pressure on NWM N.V. Group's ability to maintain
effective internal controls and governance frameworks. Remote working
arrangements are also subject to regulatory scrutiny to ensure adequate
recording, surveillance and supervision of regulated activities and compliance
with regulatory requirements and expectations, including requirements to: meet
threshold conditions for regulated activities; ensure the ability to oversee
functions (including any outsourced functions); ensure no detriment is caused
to customers; and ensure no increased risk of financial crime.
NWM N.V. Group has been seeking to embed a strong risk culture across the
organisation and has implemented policies and allocated new resources across
all levels of the organisation to manage and mitigate conduct risk and expects
to continue to invest in risk management, including the ongoing development of
a NatWest Group risk management strategy in line with regulatory expectations
. However, such efforts may not insulate NWM N.V. Group from future instances
of misconduct and no assurance can be given that NWM N.V. Group's strategy and
control framework will be effective. See also, '- NWM Group (including NWM
N.V. Group) has been in a period of significant structural and other change,
including as a result of NatWest Group's purpose-led strategy and NatWest
Group's recent creation of its C&I business segment (of which NWM Group
forms part) and may continue to be subject to significant structural and other
change'. Any failure in NWM N.V. Group's risk management framework may
adversely affect NWM N.V. Group and its financial condition through
reputational and financial harm and may result in the inability to achieve its
strategic objectives for its clients, employees and wider stakeholders.
There is also the risk that the risk management frameworks, as developed by
NatWest Group and NWM Group, may not be properly adapted for NMW N.V.'s
specific circumstances. Ahead of a regulatory audit a self-identified
governance shortfall has been identified related to regulatory reporting
process management. Furthermore, NWM N.V. has policies and controls in place
to prevent and detect financial crime and has invested in technology and
capability to enhance financial crime controls. Although NWM N.V. head office
is located in Amsterdam (where NWM N.V. risk management function is based), it
also operates branches in France, Germany, Ireland, Italy, Sweden and Spain
(although the branch in Spain was closed in mid-2022). Should such risk
policies and controls be inadequate to combat financial crime, particularly in
NWM N.V., branches (where there is less direct supervision) there could be an
adverse impact on NWM N.V. One branch location, Germany, is currently under
audit of their regulator (Bafin), the outcome of this audit is difficult to
predict but may result in findings, impacting the current governance and
outsourcing structure of NWM N.V. Group.
NWM N.V. Group's operations are subject to inherent reputational risk.
Reputational risk relates to stakeholder and public perceptions of NWM N.V.
Group arising from an actual or perceived failure to meet stakeholder or the
public's expectations, including with respect to NatWest Group's purpose-led
strategy and related targets, NWM Group's strategy, the creation of the
C&I business segment, the progression towards working as One Bank across
the NatWest Group to serve customers, or due to any events, behaviour, action
or inaction by NWM N.V. Group, its employees or those with whom NWM N.V. Group
is associated. See also, 'NWM N.V. Group's businesses are subject to
substantial regulation and oversight, which are constantly evolving and may
adversely affect NWM N.V. Group.' This includes harm to its brand, which may
be detrimental to NWM N.V. Group's business, including its ability to build or
sustain business relationships with clients, and may cause low employee
morale, regulatory censure or reduced access to, or an increase in the cost
of, funding.
Reputational risk may arise whenever there is, or there is perceived to be, a
material lapse in standards of integrity, compliance, customer or operating
efficiency and may adversely affect NWM N.V. Group's ability to attract and
retain clients. In particular, NWM N.V. Group's ability to attract and retain
clients may be adversely affected by factors including: negative public
opinion resulting from the actual or perceived manner in which NWM N.V. Group
or any other member of NatWest Group conducts or modifies its business
activities and operations, media coverage (whether accurate or otherwise),
employee misconduct, NWM N.V. Group's financial performance, IT systems
failures or cyberattacks, data breaches, financial crime and fraud, the level
of direct and indirect government support for NatWest Group plc, or the actual
or perceived practices in the banking and financial industry in general, or a
wide variety of other factors.
Modern technologies, in particular online social networks and other broadcast
tools that facilitate communication with large audiences in short timeframes
and with minimal costs, may also significantly increase and accelerate the
impact of damaging information and allegations.
Although NWM N.V. Group has implemented a Reputational Risk Policy to monitor
the identification, assessment and management of customers and clients,
transactions, products and issues, which represent a reputational risk, NWM
N.V. Group cannot be certain that it will be successful in avoiding damage to
its business from reputational risk.
Legal, regulatory and conduct risk
NWM N.V. Group's businesses are subject to substantial regulation and
oversight, which are constantly evolving and may adversely affect NWM N.V.
Group.
NWM N.V. Group is subject to extensive laws, regulations, guidelines,
corporate governance practice and disclosure requirements, administrative
actions and policies in each jurisdiction in which it operates, which
represents ongoing compliance and conduct risks. Many of these have been
introduced or amended recently and are subject to further material changes,
which may increase compliance and conduct risks, particularly as EU/EEA and UK
laws diverge as a result of Brexit. NWM Group (NWM N.V. Group's parent)
expects government and regulatory intervention in the financial services
industry to remain high for the foreseeable future.
In particular, NWM N.V. Group is subject to (i) direct prudential supervision
by the DNB and indirect prudential supervision of the ECB; (ii) direct market
conduct supervision by the AFM and indirect market conduct supervision by the
European Securities and Markets Authority (ESMA); and (iii) supervision by the
DNB, as home state supervisor, in respect of NWM N.V. Group's branch offices
in France, Germany, Ireland, Italy, Sweden and Spain (although the branch in
Spain was closed in mid-2022), and to supervision by local regulators in these
jurisdictions, as host state supervisors, in respect of certain regulatory
aspects of NWM N.V. Group's branch offices' operations that are subject to
host state supervision (e.g. anti-money laundering laws). NWM N.V. Group
expects government and regulatory intervention in the financial services
industry to remain high for the foreseeable future.
Prudential regulatory requirements:
In recent years, regulators and governments have focused on reforming the
prudential regulation of the financial services industry and the manner in
which the business of financial services is conducted. Measures have included:
enhanced capital, liquidity and funding requirements, implementation of the UK
ring-fencing regime, implementation and strengthening of the recovery and
resolution framework applicable to financial institutions in the Netherlands,
the UK, the EU and the US, financial industry reforms (including in respect of
MiFID II), corporate governance requirements, restrictions on the compensation
of senior management and other employees, enhanced data protection and IT
resilience requirements, financial market infrastructure reforms (including
enhanced regulations in respect of the provision of 'investment services and
activities'), enhanced regulations in respect of the provision of 'investment
services and activities', and increased regulatory focus in certain areas,
including conduct, consumer protection, competition and disputes regimes,
anti-money laundering, anti-corruption, anti-bribery, anti-tax evasion,
payment systems, sanctions and anti-terrorism laws and regulations. This has
resulted in NWM N.V. Group facing greater regulation and scrutiny in the
Netherlands and the other countries in which it operates.
In addition, there is significant oversight by competition authorities of the
jurisdictions in which NWM N.V. Group operates. The competitive landscape for
banks and other financial institutions in Europe, the UK and the US is rapidly
changing. Recent regulatory and legal changes have and may continue to result
in new market participants and changed competitive dynamics in certain key
areas. Competition authorities, including the CMA, are currently also looking
at and focusing more on how they can support competition and innovation in
digital and other markets. Recent regulatory changes, proposed (such as US
proposals to increase regulation around cybersecurity) or future developments
and heightened levels of public and regulatory scrutiny in Europe, the UK,
Asia and the US have resulted in increased capital, funding and liquidity
requirements, changes in the competitive landscape, changes in other
regulatory requirements and increased operating costs, and have impacted, and
will continue to impact, product offerings and business models.
Regulatory requirements:
Recent regulatory changes, proposed or future developments and heightened
levels of public and regulatory scrutiny in the EU have resulted in increased
capital, funding and liquidity requirements, changes in the competitive
landscape, changes in other regulatory requirements and increased operating
costs, and have impacted, and will continue to impact, product offering and
business models. For example, NWM N.V. Group is required to ensure operational
continuity in resolution; the steps required to ensure such compliance entail
significant costs, and also impose significant operational, legal and
execution risk. Material consequences could arise should NWM N.V. Group be
found to be non-compliant with these regulatory requirements.
The ECB may replace the DNB as the regulator of NWM N.V. due to the growing
size of NWM N.V. If the ECB does become the regulator of NWM N.V. (and
therefore NWM N.V. becomes a 'significant institution' as defined by the ECB),
or if NWM N.V. becomes a 'large institution' (as defined under EU law
instruments), then it would be subject to additional or different regulatory
and/ or prudential requirements and disclosure requirements. Should NWM N.V.
not meet certain supervisory criteria, remedial action or changes to the
business may be required. Any such actions or changes may harm the reputation
of NWM Group N.V. and may also require additional resources and funds which
may need to be diverted from other parts of the business which may, in turn,
adversely affect NWM N.V. Group.
Such changes may also result in an increased number of regulatory
investigations and proceedings and have increased the risks relating to NWM
N.V. Group's ability to comply with the applicable body of rules and
regulations in the manner and within the timeframes required.
Other areas in which, and examples of where, governmental policies, regulatory
and accounting changes and increased public and regulatory scrutiny may
adversely affect (some of which could be material) on NWM N.V. Group include,
but are not limited to, the following:
- general changes in government, central bank, regulatory or
competition policy, or changes in regulatory regimes that may influence
investor decisions in the jurisdictions in which NWM N.V. Group operates;
- rules relating to foreign ownership, expropriation,
nationalisation and confiscation of assets;
- new or increased regulations relating to customer data protection
as well as IT controls and resilience, such as the proposed UK Data Protection
and Digital Information Bill and in India, the Digital Personal Data
Protection Bill;
- the introduction of, and changes to, taxes, levies or fees
applicable to NWM N.V. Group's operations, which may require increased
payments of tax, such as the Dutch Withholding Tax Act 2021 (Wet bronbelasting
2021), the imposition of a financial transaction tax, introduction of global
minimum tax rules, changes in the scope and administration of the Dutch Bank
Levy (bankenbelasting), changes in tax rates, increases in the bank
corporation tax surcharge in the UK, restrictions on the tax deductibility of
interest payments or further restrictions imposed on the treatment of
carry-forward tax losses that may reduce the value of deferred tax for certain
years; and
- the potential introduction by the Bank of England of a Central
Bank Digital Currency which could result in deposit outflows, higher funding
costs, and/or other implications for banks including NatWest Group (including
impact on NWM N.V. Group).
These and other recent regulatory changes, proposed or future developments and
heightened levels of public and regulatory scrutiny in the UK, the
Netherlands, the EU and the US have resulted in increased capital, funding and
liquidity requirements, changes in the competitive landscape, changes in other
regulatory requirements and increased operating costs, and have impacted, and
will continue to impact, product offerings and business models. Any of these
developments (including any failure to comply with new rules and regulations)
could also have a significant impact on NWM N.V. Group's authorisations and
licences, the products and services that NWM N.V. Group may offer, its
reputation and the value of its assets, NWM N.V. Group's operations or legal
entity structure, and the manner in which NWM N.V. Group conducts its
business. Material consequences could arise should NWM N.V. Group be found to
be non-compliant with these regulatory requirements. Regulatory developments
may also result in an increased number of regulatory investigations and
proceedings and have increased the risks relating to NWM N.V. Group's ability
to comply with the applicable body of rules and regulations in the manner and
within the timeframes required.
Changes in laws, rules or regulations, or in their interpretation or
enforcement, or the implementation of new laws, rules or regulations,
including contradictory or conflicting laws, rules or regulations by key
regulators or policymakers in different jurisdictions, or failure by NWM N.V.
Group to comply with such laws, rules and regulations, may adversely affect
NWM N.V. Group's business, results of operations and outlook. In addition,
uncertainty and insufficient international regulatory coordination as enhanced
supervisory standards are developed and implemented may adversely affect NWM
N.V. Group's ability to engage in effective business, capital and risk
management planning.
NWM N.V. Group and NWM Plc are exposed to the risk of various litigation
matters, regulatory and governmental actions and investigations as well as
remedial undertakings, the outcomes of which are inherently difficult to
predict, and which could have an adverse effect on NWM N.V. Group.
NWM N.V. Group's operations are diverse and complex and it operates in legal
and regulatory environments that expose it to potentially significant civil
actions (including those following on from regulatory sanction), as well as
criminal, regulatory and governmental proceedings. NWM N.V. Group and NWM Plc
have resolved a number of legal and regulatory actions over the past several
years but continues to be, and may in the future be, involved in such actions
in the US, the UK, Europe and other jurisdictions.
NWM N.V. Group and/or NWM Plc are currently, have recently been and will
likely be involved in a number of significant legal and regulatory actions,
including investigations, proceedings and ongoing reviews (both formal and
informal) by governmental law enforcement and other agencies and litigation
proceedings, including in relation to the offering of securities, conduct in
the foreign exchange market, the setting of benchmark rates such as LIBOR and
related derivatives trading, the issuance, underwriting, and sales and trading
of fixed-income securities (including government securities), product
mis-selling, customer mistreatment, anti-money laundering, antitrust, VAT
recovery and various other issues. There is also an increasing risk of new
class action claims being brought against NWM Group in the Competition Appeal
Tribunal for breaches of competition law. Legal and regulatory actions are
subject to many uncertainties, and their outcomes, including the timing,
amount of fines, damages or settlements or the form of any settlements, which
may be material and in excess of any related provisions, are often difficult
to predict, particularly in the early stages of a case or investigation. NWM
N.V. Group's expectation for resolution may change and substantial additional
provisions and costs may be recognised in respect of any matter.
The resolution of significant investigations include NWM Plc's December 2021
spoofing-related guilty plea in the United States, which involves a three-year
period of probation, an independent corporate monitor, and commitments to
compliance programme reviews and improvements and reporting obligations. For
additional information relating to this and other legal and regulatory
proceedings and matters to which NWM Group is currently exposed, see
'Litigation and regulatory matters' at Note 23 to the consolidated accounts.
The 2021 guilty plea, other recently resolved matters or adverse outcomes or
resolution of current or future legal or regulatory actions, could increase
the risk of greater regulatory and third-party scrutiny and could have
material collateral consequences for NWM Group's (including NWM N.V. Group's)
business and result in restrictions or limitations on NWM Group's (including
NWM N.V. Group's) operations.
These may include the effective or actual disqualification from carrying on
certain regulated activities and consequences resulting from the need to
reapply for various important licences or obtain waivers to conduct certain
existing activities of NWM N.V. Group, particularly but not solely in the US,
which may take a significant period of time and the results and implications
of which are uncertain. Disqualification from carrying on any activities,
whether automatically as a result of the resolution of a particular matter or
as a result of the failure to obtain such licences or waivers could adversely
affect NWM N.V. Group's business, in particular in the US. This in turn and/or
any fines, settlement payments or penalties may adversely affect NWM N.V.
Group's reputation, future results, financial condition and/or prospects.
Similar consequences could result from legal or regulatory actions relating to
other parts of NatWest Group.
Failure to comply with undertakings made by NWM N.V. Group to its regulators,
or the conditions of probation resulting from the spoofing-related guilty plea
may result in additional measures or penalties being taken against NWM N.V.
Group. In addition, any failure to administer conduct redress processes
adequately, or to handle individual complaints fairly or appropriately, could
result in further claims as well as the imposition of additional measures or
limitations on NWM N.V. Group's operations, additional supervision by NWM N.V.
Group's regulators, and loss of investor confidence.
NWM N.V. Group may not effectively manage the transition of LIBOR and other
IBOR rates to replacement risk-free rates.
UK, Dutch and other European and international regulators are driving the
transition from the use of interbank offer rates ('IBORs'), to replacement
rates generally referred to as 'risk-free rates' ('RFRs').
As of 31 December 2021, LIBOR, as currently determined, has ceased for all
tenors of GBP, JPY, CHF, EUR, and for the 1 week and 2-month tenors for USD.
The remaining USD LIBOR tenors, as currently determined, are due to cease
after 30 June 2023. The FCA has used its powers under the UK Benchmarks
Regulation ('UK BMR') to require, for a limited period of time after 31
December 2021, the ongoing publication of the 1-, 3-, and 6-month GBP and JPY
LIBOR tenors using a changed methodology (i.e., 'Art23A LIBOR' on a synthetic
basis). The UK has passed the Critical Benchmarks (References and
Administrators' Liability) Act 2021 ('Critical Benchmarks Act') which
establishes a framework that allows the ongoing use of Art23A LIBOR under
certain circumstances where contracts have not pro-actively transitioned onto
the replacement rates. These concessions provided under UK BMR and the
Critical Benchmarks Act are temporary. The FCA confirmed that Art23A will no
longer be available from: (i) the end of 2022 for JPY, (ii) March 2023 for 1-
and 6-month GBP LIBOR and (iii) March 2024 for 3-month GBP LIBOR. The
transition away from these temporary concessions may expose NatWest Group, its
customers and the financial services industry more widely to various risks,
including: (i) the FCA further restricting use of Art23A LIBOR resulting in
proactive transition of contracts; and (ii) mis-matches between positions in
cleared derivatives and the exposures they are hedging where those exposures
are permitted to make use of Art23A LIBOR. Although the formal cessation date
for the remaining USD LIBOR tenors (as currently determined) is not until the
end of June 2023, US and UK regulators have clarified that this is only to
support the rundown of existing USD LIBOR exposures. No new contracts should
reference these USD LIBOR tenors after 31 December 2021, other than in a very
limited range of circumstances. NatWest Group will continue to have ongoing
exposure to the remaining USD LIBOR tenors until cessation in June 2023.
Natwest Group has held significant exposures to various IBORs and has actively
sought to transition away from these during 2021 and 2022, in accordance with
regulatory expectations and milestones. Transition measures have included the
pro-active development of new products using the replacement rates,
restructuring existing LIBOR exposures to reference these replacement rates
and embedding RFR transition language into relevant contracts. Central
Counterparty Clearing houses (CCPs) conducted mass conversion exercises in
December 2021 covering GBP, JPY, CHF and EUR LIBOR, transitioning derivatives
to the relevant RFR, conversion exercises for USD are scheduled for May 2023,
NWG entities, along with many of their major counterparties, have adhered to
the ISDA IBOR fall-backs protocol which establishes a contractual process to
transition from IBORs to RFRs for bilateral derivative products.
These transition efforts have involved extensive engagement with customers,
industry working groups and regulators, to seek to deliver transition in a
transparent and economically appropriate manner. These changes coincide with
the recognition that market liquidity is lower than it has been and whilst it
will be dependent on various factors including: the establishment of deep and
liquid RFR markets, the establishment of clear and consistent market
conventions for all replacement products, as well as counterparties'
willingness to accept, and transition to, these conventions. Furthermore,
certain IBOR obligations may not be able to be pro-actively changed which
could, depending on any over-arching legislative transition frameworks,
potentially result in fundamentally different economic outcomes than
originally intended. The uncertainties around the manner of transition to
RFRs, and the ongoing broader acceptance and use of RFRs across the market,
expose NWM N.V. Group, its clients and the financial services industry more
widely to risks.
Examples of these risks include: (i) legal (including litigation) risks
relating to documentation for new and the majority of existing transactions
(including, changes, lack of changes, unclear contractual provisions, and
disputes in respect of these); (ii) financial risks from any changes in
valuation of financial instruments linked to relevant IBORs, including cost of
funds and relevant risk management related financial models; (iii) changes to
benchmark rates could impact pricing, interest rate or settlement mechanisms
for certain instruments; (iv) operational risks linked to the adaptation of IT
systems, trade reporting infrastructure and operational processes, as well as
ensuring compliance with restrictions on new USD LIBOR usage after December
2021; (v) conduct risks arising from communication of the potential impact on
customers, engagement with customers during and after the transition period,
or non-acceptance by customers of replacement rates; and (vi) different
legislative provisions in different jurisdictions, for example, unlike certain
US states and the EU, the UK has not provided a clear and robust safe harbour
to protect against litigation and potential liability arising out of the
switch to 'synthetic LIBOR'.
Notwithstanding all efforts to date, until the transition away from LIBOR onto
replacement rates has been fully completed, and there is greater experience of
how RFRs are adopted across different products and customer groups, there is
some uncertainty as to the impact of the transition, or the potential costs of
implementing any relevant remedial action, including in the event that the
transition is not completed in a timely manner, or at all. The implementation
of any replacement RFRs may be impossible or impracticable under the existing
terms of certain financial instruments and may have an adverse effect on their
value, or return and therefore on NWM N.V. Group's future results.
LEI: X3CZP3CK64YBHON1LE12 - NatWest Markets N.V.
2138005O9XJIJN4JPN90 - NatWest Group plc
RR3QWICWWIPCS8A4S074 - NatWest Markets Plc
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