RBS 2010 Annual Report Download - page 422

Risk factors continued
The Group is subject to limitations on actions it can take in respect of the
Covered Assets and certain related assets and to extensive governance,
asset management, audit and reporting obligations under the Scheme
Conditions. The Group’s compliance with the Scheme Conditions is
dependent on its ability to (i) implement efficiently and accurately
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. Since the
Group’s operational systems were not originally designed to facilitate
compliance with these extensive continuing obligations, there is a risk
that the Group will fail to comply with a number of these obligations.
Where the Group is in breach of its continuing obligations under the
Scheme Conditions or otherwise unable to provide or verify information
as required under the APS, recovery of losses under the APS may be
adversely impacted, may lead to an indemnity claim and HM Treasury
may in addition have the right to exercise certain step-in rights, including
the right to require the Group to appoint a step-in manager who may
exercise oversight, direct management rights and certain other rights.
The occurrence of the risks or circumstances referred to above may
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, in which case 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.
The extensive governance, asset management and information
requirements under the Scheme Conditions and any changes or
modifications to the Scheme Conditions may have a negative impact on
the expected benefits of the Scheme and may have an adverse impact
on the Group.
There are extensive governance, asset management and information
requirements under the Scheme Conditions in relation to the Covered
Assets, other assets and the operations of the Group and HM Treasury
also has the right to require the appointment of one or more step-in
managers to exercise certain step-in rights in certain circumstances. The
step-in rights are extensive and include certain oversight, investigation,
approval and other rights, the right to require the modification or
replacement of any of the systems, controls, processes and practices of
the Group and extensive rights in relation to the direct management and
administration of the Covered Assets. Additionally pursuant to the
Accession Agreement, HM Treasury has the right to require RBS to
appoint one or more Special Advisers (“SOC Special Advisers”) to
exercise oversight functions over certain assets in the APS. On 18 June
2010, the Asset Protection Agency required that RBS appoint SOC
Special Advisers in relation to certain assets and business areas in order
to provide additional support to the Senior Oversight Committee of RBS
and there have been four such appointments to date granting certain
oversight rights in relation to certain specified assets. The obligations of
the Group and the rights of HM Treasury may, individually or in the
aggregate, impact the way the Group runs its business and may serve to
limit the Group’s operations with the result that the Group’s business,
results of operations and financial condition will suffer. In addition, the
market’s reaction to such controls and limitations may have an adverse
impact on the price of the Securities.
HM Treasury may, following consultation with the Group, modify or
replace certain of the Scheme Conditions in such a manner as it
considers necessary (acting reasonably) in certain circumstances. Such
modifications or replacements may be retrospective and may result in (i)
aloss of or reduction in the protection expected by the Group under the
APS, (ii) an increase in the risk weightings of the Covered Assets, (iii) a
material increase in the continuing reporting obligations or asset
management conditions applicable to the Group under the Scheme
Conditions, (iv) a material increase in the costs of the APS and/or (v)
restrictions or limitations on the Group’s operations. The consequences
of any such modifications by HM Treasury are impossible to quantify and
are difficult to predict and may have a material adverse effect on the
Group’s financial condition and results of operations.
Any changes to the expected regulatory capital treatment of the APS, the
BShares and the Contingent B Shares may negatively impact the
Group’s capital position.
One of the key objectives of the APS and the issuance of £25.5 billion of
BShares and, if required, the £8 billion Contingent B Shares was to
improve capital ratios at a consolidated level for the Group and at an
individual level for certain relevant Group members. The Group has
entered and may in the future enter into further back-to-back
arrangements with Group members holding assets or exposures to be
covered bythe APS in order to ensure the capital ratios of these entities
are also improved by virtue of the APS. There is a risk that the
interpretation of the relevant regulatory capital requirements by one or
more of the relevant regulatory authorities may differ from that assumed
by the Group, with the result that the anticipated improvement to the
Group’s capital ratios will not be fully achieved.
There is a further risk that, given that the current regulatory capital
requirements and the regulatory bodies governing these requirements
are subject to unprecedented levels of review and scrutiny both globally
and locally, the regulatory capital treatment may differ from that assumed
by the Group in respect of the APS, the treatment of the B Share
issuance or the back-to-back arrangement may also occur. If participation
in the APS and the issuance of £25.5 billion of B Shares and, if required,
the £8 billion Contingent B Shares are not sufficient to maintain the
Group’s capital ratios, this could cause the Group’s business, results of
operations and financial condition to suffer, its credit ratings to drop, its
ability to lend and access to funding to be further limited and its cost of
funding to 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.
RBS Group 2010420
Additional information continued