RBS 2009 Annual Report Download - page 69

67RBS Group Annual Report and Accounts 2009
Business review
in intervention by the Authorities or other regulatory bodies in the other
jurisdictions in which the company and its subsidiaries operate, which
could include full nationalisation, other resolution procedures under the
Banking Act or revocation of permits and licences necessary to conduct
the Group’s businesses. Any compensation payable to holders of
securities would be subject to the provisions of the Banking Act, and
investors may receive no value for their securities (see the risk factor
headed “the company and its UK bank subsidiaries may face the risk of
full nationalisation or other resolution procedures under the Banking Act
above).
The Group may have included Covered Assets that are ineligible (or that
later become ineligible) for protection under the APS. Protection under
the APS may be limited or may cease to be available where Covered
Assets are not correctly or sufficiently logged or described, where a
Covered Asset is disposed of (in whole or in part) prior to a Trigger,
where the terms of the APS do not apply or are uncertain in their
application, where the terms of the protection itself potentially give rise
to legal uncertainty, where certain criminal conduct has or may have
occurred or where a breach of bank secrecy, confidentiality, data
protection or similar laws may occur. In addition, certain assets included
in the APS do not satisfy the eligibility requirements of the Scheme
Documents. In each case this would reduce the anticipated benefits to
the Group of the APS.
The Covered Assets comprise a wide variety and a very large number
of complex assets and exposures. As a result of the significant volume,
variety and complexity of assets and exposures and the resulting
complexity of the Scheme Documents, there is a risk that the Group
may have included assets or exposures within the Covered Assets that
are not eligible for protection under the APS, with the result that such
assets or exposures may not be protected by the APS. Furthermore, if
Covered Assets are not correctly or sufficiently logged or described for
the purposes of the APS, protection under the APS may, in certain
circumstances and subject to certain conditions, not be available or
may be limited, including by potentially being limited to the terms of the
assets “as logged”. If a Covered Asset is disposed of prior to the
occurrence of a Trigger in respect of that Covered Asset, the Group will
also lose protection under the APS in respect of that disposed asset or,
if the Covered Asset is disposed of in part, in respect of that disposed
part of the Covered Asset or in some circumstances all of the Covered
Asset, in each case with no rebate of the fee payable to HM Treasury,
unless an agreement otherwise is reached with HM Treasury at the
relevant time. Moreover, since the terms of the credit protection
available under the APS are broad and general (given the scale and
purpose of the APS and the wide variety and very large number of
complex assets and exposures intended to be included as Covered
Assets) and also very complex and in some instances operationally
restrictive, certain Scheme Conditions may not apply to particular
assets, exposures or operational scenarios or their applicability may be
uncertain (for example, in respect of overdrafts). In addition, many of
these provisions apply from 31 December 2008 and therefore may not
have been complied with between this date and the date of the
company’s accession to the APS. In each case this may result in a loss
or reduction of protection. There are certain limited terms and
conditions of the Scheme Conditions which are framed in such a way
that may give rise to lack of legal certainty. Furthermore, if a member of
the Group becomes aware after due and reasonable enquiry that there
has been any material or systemic criminal conduct on the part of the
Group (including its directors, officers and employees) relating to or
affecting any of the Covered Assets, some or all of those assets may
cease to be protected by the APS. HM Treasury may also require the
withdrawal or the company may itself consider it necessary to withdraw
Covered Assets held in certain jurisdictions where disclosure of certain
information to HM Treasury may result in a breach of banking secrecy,
confidentiality, data protection or similar laws. In addition, £3 billion of
derivative and structured finance assets have been included in the APS
which, for technical reasons, do not currently, or are anticipated at some
stage not to, satisfy the eligibility requirements specified in the Scheme
Documents. HM Treasury and the Royal Bank have agreed to negotiate
in good faith to establish as soon as practicable whether (and if so, to
what extent) coverage should extend to certain derivative assets. In
addition, the Group has issued a withdrawal notice in respect of
approximately £1.2 billion of Covered Assets across a broad range of
asset classes in order to take them out of the APS. The effect of
(i) failures to be eligible and/or to log or correctly describe Covered
Assets, (ii) disposals of Covered Assets prior to a Trigger, (iii) the
uncertainty of certain Scheme Conditions and the exclusion of certain
assets and exposures from the APS and potential lack of legal certainty,
(iv) the occurrence of material or systemic criminal conduct on the part
of the company or its representatives relating to or affecting Covered
Assets or breach of banking secrecy, confidentiality, data protection or
similar laws and (v) failure or potential failure of HM Treasury and the
Royal Bank to reach agreement in respect of whether (and if so, to what
extent) cover should extend to certain ineligible assets, may (or, in
respect of assets which HM Treasury and the company have agreed are
ineligible, will) impact the enforceability and/or level of protection
available to the Group and may materially reduce the protection
anticipated by the Group for its stressed losses. Further, there is no
ability to nominate additional or alternative assets or exposures in place
of those which turn out not to be covered under the APS. If the Group is
then unable to find alternative methods for improving and maintaining its
capital ratios, its business, results of operations and financial condition
will suffer, its credit ratings may drop, its ability to lend and access
funding will be further limited and its cost of funding may increase. The
occurrence of any or all of such events may cause the price of the
securities to decline substantially and may result in intervention by the
Authorities, which could include full nationalisation or other resolution
procedures under the Banking Act. Any compensation payable to
holders of securities would be subject to the provisions of the Banking
Act, and investors may receive no value for their securities.
During the life of the APS, certain or all of the Covered Assets may
cease to be protected due to a failure to comply with continuing
obligations under the APS, reducing the benefit of the APS to the Group.
The Group is subject to limitations on actions it can take in respect of
the Covered Assets and certain related assets and to extensive
continuing obligations under the Scheme Conditions relating to
governance, asset management, audit and reporting. The Group’s
compliance with the Scheme Conditions is dependent on its ability to
(i) implement efficiently and accurately new approval processes and
reporting, governance and management systems in accordance with
the Scheme Conditions and (ii) comply with applicable laws and
regulations where it does business. The Group has complex and
geographically diverse operations, and operational risk in the context of
the APS may result from errors by employees or third-parties, failure to
document transactions or procedures properly or to obtain proper
authorisations in accordance with the Scheme Conditions, equipment
failures or the inadequacy or failure of systems and controls. Although
the Group has devoted substantial financial and operational resources,
and intends to devote further substantial resources, to developing