RBS 2007 Annual Report Download - page 92

RBS Group • Annual Report and Accounts 2007
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Business review continued
Business review
•The third line of defence is audit. Group Internal Audit is
responsible for assessing compliance with the ORPP and for
providing independent evaluation of the adequacy and
effectiveness of the risk and control framework.
Basel II introduces for the first time, a specific capital charge
for operational risk. From launch in 2008, the Group will initially
apply the Standardised Approach.
Regulatory risk and supervision
The approach to regulatory risk has three distinct elements:
•Review of potential changes in regulation to ensure the
Group addresses the risks arising from such changes and
implement them appropriately.
•Monitoring of compliance with existing rules and regulations
and mitigating the consequences of any inadvertent non-
compliance.
•Management of effective relationships with regulators to
ensure open two-way communication.
The Group and its subsidiaries are fully engaged with
regulatory authorities in all the jurisdictions in which they
operate, in response to regulators’ on-going supervisory
requirements.
Under a Group-wide framework of high-level policies,
regulatory risk is managed by developing, maintaining and
implementing local policies and systems to ensure effective
compliance. The Group‘s operating processes are designed so
as to meet all regulatory and legal requirements in all
jurisdictions that the Group operates in.
The Group works with domestic and international trade
associations, and proactively engages with regulators,
especially the UK Financial Services Authority (FSA), as well as
with other influential stakeholders such as the Basel
Committee, the Committee of European Banking Supervisors
and the EU Commission, to gain an appropriate understanding
of planned changes and to contribute to regulatory policy
formulation.
Following the acquisition of ABN AMRO, the Group operates in
over 50 countries.
In the normal course of business the Group and its
subsidiaries co-operate with regulatory authorities in various
jurisdictions in their enquiries or investigations into alleged or
possible breaches of regulations.
The Group has co-operated fully with various regulatory
reviews of the operation of retail banking and consumer credit
industries in the UK and elsewhere.
These include the reviews by the Competition Commission and
the FSA into payment protection insurance, the OFT’s reviews
of undertakings given following the Competition Commission
inquiry in 2002 into the provision of banking services to SMEs.
The OFT is also inquiring into credit and debit card
interchange fees and has decided to undertake a fact find into
unauthorised overdraft fees. In the EU, the European
Commission is inquiring into MasterCard cross border
interchange fees and has announced that its inquiry into retail
banking has identified barriers to competition in certain areas
of retail banking, payment systems and cards.
As previously disclosed by ABN AMRO, the United States
Department of Justice has been conducting a criminal
investigation into ABN AMRO’s dollar clearing activities, Office
of Foreign Assets Control compliance procedures and other
Bank Secrecy Act compliance matters. ABN AMRO has
cooperated and continues to cooperate fully with the
investigation. Prior to the acquisition by the Group, ABN AMRO
had reached an agreement in principle with the Department of
Justice that would resolve all presently known aspects of the
ongoing investigation by way of a Deferred Prosecution
Agreement in return for a settlement payment by ABN AMRO
of US$500 million (which amount was accrued by ABN AMRO
in its interim financial statements for the six months ended 30
June 2007). Negotiations are continuing to enable a written
agreement to be concluded.
Certain of the Group’s subsidiaries have received requests for
information from various U.S. governmental agencies and self-
regulatory organisations including in connection with sub-prime
mortgages and securitisations, collateralised debt obligations
and synthetic products related to sub-prime mortgages. The
Group and its subsidiaries are cooperating with these various
requests for information and investigations.
The outcome of these reviews is outside the Group’s control
and it is not possible to predict the effect, if any, on the
Group’s operations of future changes in regulatory actions and
policies.