RBS 2010 Annual Report Download - page 423

The costs of the APS may be greater than the benefits received.
The costs of participating in the APS incurred by the Group to HM
Treasury include, among others, a fee of £700 million per annum,
payable in advance for each of the first three years of the APS and £500
million per annum thereafter until the earlier of (i) the date of termination
of the APS and (ii) 31 December 2099.
The amounts that may be received under the APS (which amounts are
difficult to quantify precisely) may be less than the costs of participation
which are themselves also difficult to quantify. The aggregate effect of the
joining, establishment, operational and exit costs and fees and expenses
of, and associated with, the APS may significantly reduce or even
eliminate the benefit to the Group of the APS.
Participation in the APS may result in greater tax liabilities for the Group
and the loss of potential tax benefits.
The Group can opt (with the consent of HM Treasury) to satisfy the
annual fee in respect of both the APS and the Contingent Subscription
and any APS exit fee by waiving certain United Kingdom tax reliefs that
are treated as deferred tax assets. The Group has not opted to do so to
date, but if the Group so opts in the future, it is difficult to value accurately
the cost to the Group, which depends on unascertainable factors
including the extent of future losses, the extent to which the Group
regains profitability and any changes in tax law.
In addition to suffering greater tax liabilities in future years as a result of
the waiver of the right to certain United Kingdom tax reliefs that are
treated as deferred tax assets (the “Tax Loss Waiver”), the Group may
also be subject to further tax liabilities in the United Kingdom and
overseas in connection with the APS and the associated intra-group
arrangements which would not otherwise have arisen. The Tax Loss
Waiver provides that the Group will not be permitted to enter into
arrangements which have a main purpose of reducing the net cost of the
Tax Loss Waiver. It is unclear precisely how these restrictions will apply,
but it is possible that they may limit the operations and future post-tax
profitability of the Group.
There are significant costs associated with termination of the Group’s
participation in the APS.
In order to terminate the Group’s participation in the APS, the Group must
have FSA approval and must pay an exit fee. The effect of the payment
of the exit fee and potentially the refund of the net pay-outs it has
received from HM Treasury under the APS may significantly reduce or
even eliminate the anticipated further regulatory capital benefits to the
Group of its participation in the APS and could have an adverse impact
on the Group’s results of operation or result in a loss of value in the
Securities. Alternatively, if the Group is unable to repay to HM Treasury in
full the exit fee and potentially the net pay-outs it has received under the
APS and, therefore, is unable to terminate its participation in the APS, the
Group will be required under the Scheme Conditions to continue to pay
the annual fee to HM Treasury until 31 December 2099, which could
have an adverse impact on the Group’s results of operation or result in a
loss of value in the Securities.
Under certain circumstances, the Group cannot be assured that assets of
RBS Holdings N.V. (and certain other entities) will continue to be covered
under the APS, either as a result of a withdrawal of such assets or as a
result of a breach of the relevant obligations.
If HM Treasury seeks to exercise its right to appoint one or more step-in
managers in relation to the management and administration of Covered
Assets held by RBS Holdings N.V. or its wholly-owned subsidiaries, RBS
Holdings N.V. will, in certain circumstances, need to seek consent from
the Dutch Central Bank to allow it to comply with such step-in. If this
consent is not obtained by the date (which will be no less than 10
business days after the notice from HM Treasury) on which the step-in
rights must be effective, and other options to effect compliance are not
possible (at all or because the costs involved prove prohibitive), those
assets would need to be withdrawn by the Group from the APS where
permissible under the Scheme Conditions or, otherwise, with HM
Treasury consent. If the Group cannot withdraw such Covered Assets
from the APS, it would be likely to lose protection in respect of these
assets under the APS and/or may be liable under its indemnity to HM
Treasury. If the Group loses cover under the APS in respect of any
Covered Asset held by RBS Holdings N.V. or its wholly-owned
subsidiaries, any losses incurred on such asset will continue to be borne
fully by the Group and may have a material adverse impact on its
financial condition, profitability and capital ratios. Similar issues apply in
certain other jurisdictions but the relevant Covered Assets are of a lower
quantum.
421RBS Group 2010
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