RBS 2010 Annual Report Download - page 419

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
management. In addition, as the provider of the APS, HM Treasury has a
range of rights that other shareholders do not have. These include rights
under the terms of the APS over the Group's remuneration policy and
practice. The manner in which HM Treasury or UKFI exercises HM
Treasury’s rights as majority shareholder or in which HM Treasury
exercises its rights under the APS could give rise to conflict between the
interests of HM Treasury and the interests of other shareholders. The
Board has a duty to promote the success of the company for the benefit
of its members as a whole.
The offer or sale by the UK Government of all or a portion of its stake in
the company could affect the market price of the Securities and related
securities.
The UK Government currently holds approximately 68 per cent. of the
issued ordinary share capital of the company. On 22 December 2009, the
company issued £25.5 billion of B shares to the UK Government. The B
shares are convertible, at the option of the holder at any time, into
ordinary shares. The UK Government has agreed that it shall not
exercise the rights of conversion in respect of the B shares if and to the
extent that following any such conversion it would hold more than 75 per
cent. of the total issued shares in the company. The UK Government may
sell all or a part of the ordinary shares that it owns at any time. Offers or
sales by the UK Government of a substantial number of ordinary shares
or securities convertible or exchangeable into ordinary shares, or an
expectation that it may undertake such an offer or sale, could affect
prevailing market prices for the Securities and related securities.
The Group’s insurance businesses are subject to inherent risks involving
claims.
Future claims in the Group’s insurance business may be higher than
expected as a result of changing trends in claims experience resulting
from catastrophic weather conditions, demographic developments,
changes in the nature and seriousness of claims made, changes in
mortality, changes in the legal and compensatory landscape and other
causes outside the Group’s control. These trends could affect the
profitability of current and future insurance products and services. The
Group reinsures some of the risks it has assumed and is accordingly
exposed to the risk of loss should its reinsurers become unable or
unwilling to pay claims made by the Group against them.
The Group’s operations have inherent reputational risk.
Reputational risk, meaning the risk to earnings and capital from negative
public opinion, is inherent in the Group’s business. Negative public
opinion can result from the actual or perceived manner in which the
Group conducts its business activities, from the Group’s financial
performance, from the level of direct and indirect government support or
from actual or perceived practices in the banking and financial industry.
Negative public opinion may adversely affect the Group’s ability to keep
and attract customers and, in particular, corporate and retail depositors.
The Group cannot ensure that it will be successful in avoiding damage to
its business from reputational risk.
In the UK and in other jurisdictions, the Group is responsible for
contributing to compensation schemes in respect of banks and other
authorised financial services firms that are unable to meet their
obligations to customers.
In the UK, the Financial Services Compensation Scheme (the
“Compensation Scheme”) was established under the FSMA and is the
UK’s statutory fund of last resort for customers of authorised financial
services firms. The Compensation Scheme can pay compensation to
customers if a firm is unable, or likely to be unable, to pay claims against
it and may be required to make payments either in connection with the
exercise of a stabilisation power or in exercise of the bank insolvency
procedures under the Banking Act. The Compensation Scheme is funded
by levies on firms authorised by the FSA, including the Group. In the
event that the Compensation Scheme raises funds from the authorised
firms, raises those funds more frequently or significantly increases the
levies to be paid by such firms, the associated costs to the Group may
have an adverse impact on its results of operations and financial
condition. As at 31 December 2010, the Group had accrued £144.4
million for its share of Compensation Scheme management expenses
levies for the 2010/2011 and 2011/2012 Compensation Scheme years.
In addition, to the extent that other jurisdictions where the Group operates
have introduced or plan to introduce similar compensation, contributory or
reimbursement schemes (such as in the United States with the Federal
Deposit Insurance Corporation), the Group may make further provisions
and may incur additional costs and liabilities, which may have an adverse
impact on its financial condition and results of operations or result in a
loss of value in the Securities.
The Group’s business and earnings may be adversely affected by
geopolitical conditions.
The performance of the Group is significantly influenced by the
geopolitical and economic conditions prevailing at any given time in the
countries in which it operates, particularly the UK, the US and other
countries in Europe and Asia. For example, the Group has a presence in
countries where businesses could be exposed to the risk of business
interruption and economic slowdown following the outbreak of a
pandemic, or the risk of sovereign default following the assumption by
governments of the obligations of private sector institutions. Similarly, the
Group faces the heightened risk of trade barriers, exchange controls and
other measures taken by sovereign governments which may impact a
borrower’s ability to repay. Terrorist acts and threats and the response to
them of governments in any of these countries could also adversely affect
levels of economic activity and have an adverse effect upon the Group’s
business.
417RBS Group 2010
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