RBS 2009 Annual Report Download - page 66

RBS Group Annual Report and Accounts 200964
dates, when events or circumstances indicate that it might be impaired.
An impairment test involves comparing the recoverable amount (the
higher of value in use and fair value less cost to sell) of an individual
cash generating unit with its carrying value. The value in use and fair
value of the Group’s cash generating units are affected by market
conditions and the performance of the economies in which the Group
operates. Where the Group is required to recognise a goodwill
impairment, it is recorded in the Group’s income statement, although it
has no effect on the Group’s regulatory capital position. For the year
ended 31 December 2009, the Group recorded a £363 million
accounting write down of goodwill and other intangibles relating to prior
year acquisitions (see page 301).
The Group may be required to make further contributions to its pension
schemes if the value of pension fund assets is not sufficient to cover
potential obligations.
The Group maintains a number of defined benefit pension schemes for
past and a number of current employees. Pensions risk is the risk that
the liabilities of the Group’s various defined benefit pension schemes
which are long term in nature will exceed the schemes’ assets, as a
result of which the Group is required or chooses to make additional
contributions to the schemes. The schemes’ assets comprise investment
portfolios that are held to meet projected liabilities to the scheme
members. Risk arises from the schemes because the value of these
asset portfolios and returns from them may be less than expected and
because there may be greater than expected increases in the estimated
value of the schemes’ liabilities. In these circumstances, the Group
could be obliged, or may choose, to make additional contributions to the
schemes, and during recent periods, the Group has voluntarily made
such contributions. Given the current economic and financial market
difficulties and the prospects that they may continue over the near and
medium term, the Group may experience increasing pension deficits or
be required or elect to make further contributions to its pension
schemes and such deficits and contributions could be significant and
have a negative impact on the Group’s capital position, results of
operations or financial condition or result in a loss of value in its
securities. The next funding valuation of the Group’s major defined
benefit pension plan, The Royal Bank of Scotland Group Pension Fund,
will take place with an effective date of 31 March 2010.
The Group is and may be subject to litigation and regulatory
investigations that may impact its business.
The Group’s operations are diverse and complex, and it operates in
legal and regulatory environments that expose it to potentially significant
litigation, regulatory investigation and other regulatory risk. As a result,
the Group is, and may in the future be, involved in various disputes,
legal proceedings and regulatory investigations in the United Kingdom,
the EU, the United States and other jurisdictions, including class action
litigation and review by the European Commission under State aid rules.
Furthermore, the Group, like many other financial institutions, has come
under greater regulatory scrutiny over the last year and expects that
environment to continue for the foreseeable future, particularly as it
relates to compliance with new and existing corporate governance,
employee compensation, conduct of business, anti-money laundering
and anti-terrorism laws and regulations, as well as the provisions of
applicable sanctions programmes. Disputes, legal proceedings and
regulatory investigations are subject to many uncertainties, and their
outcomes are often difficult to predict, particularly in the earlier stages
of a case or investigation. Adverse regulatory action or adverse
judgments in litigation could result in restrictions or limitations on the
Group’s operations or result in a material adverse effect on the Group’s
reputation or results of operations or result in a loss of value in the
securities. For details about certain litigation and regulatory
investigations in which the Group is involved, see Note 32 on the
Financial statements.
Operational risks are inherent in the Group’s operations.
The Group’s operations are dependent on the ability to process a very
large number of transactions efficiently and accurately while complying
with applicable laws and regulations where it does business. The Group
has complex and geographically diverse operations and operational risk
and losses can result from internal and external fraud, errors by
employees or third parties, failure to document transactions properly or
to obtain proper authorisation, failure to comply with applicable
regulatory requirements and conduct of business rules (including those
arising out of anti-money laundering and anti-terrorism legislation, as
well as the provisions of applicable sanctions programmes), equipment
failures, natural disasters or the inadequacy or failure of systems and
controls, including those of the Group’s suppliers or counterparties.
Although the Group has implemented risk controls and loss mitigation
actions, and substantial resources are devoted to developing efficient
procedures, to identify and rectify weaknesses in existing procedures
and to train staff, it is not possible to be certain that such actions have
been or will be effective in controlling each of the operational risks
faced by the Group. Any weakness in these systems or controls, or any
breaches or alleged breaches of applicable laws or regulations, could
have a materially negative impact on the Group’s business, reputation
and results of operations and share price. Notwithstanding anything
contained in this risk factor, it should not be taken as implying that the
company will be unable to comply with its obligations as a company
with securities admitted to the Official List of the UKLA or as a
supervised firm regulated by the FSA.
The Group is exposed to the risk of changes in tax legislation and its
interpretation and to increases in the rate of corporate and other taxes in
the jurisdictions in which it operates.
The Group’s activities are subject to tax at various rates around the
world computed in accordance with local legislation and practice.
Action by governments to increase tax rates or to impose additional
taxes or to restrict the tax reliefs currently available to the Group would
reduce the Group’s profitability. Revisions to tax legislation or to its
interpretation might also affect the Group’s results in the future.
HM Treasury (or UKFI on its behalf) may be able to exercise a significant
degree of influence over the Group.
UKFI manages HM Treasury’s shareholder relationship with the
company. Although HM Treasury has indicated that it intends to respect
the commercial decisions of the Group and that the Group will continue
to have its own independent board of directors and management team
determining its own strategy, should its current intentions change,
HM Treasury’s position as a majority shareholder (and UKFI’s position as
manager of this shareholding) means that HM Treasury or UKFI may be
able to exercise a significant degree of influence over, among other
things, the election of directors and the appointment of senior
Business review continued