RBS 2011 Annual Report Download - page 111

RBS Group 2011 109
Risk type Definition Features How the Group managed risk and the focus in 2011
Compliance risk The risk arising from non-
compliance with national and
international laws, rules and
regulations.
Adverse impacts on strategy,
capital structure, business
models and operational
effectiveness.
Financial cost of adapting to
changes in laws, rules or
regulations or of penalties for
non-compliance.
Management of compliance risk entails early identification and
effective management of changes in legislative, regulatory and
other requirements that may affect the Group.
It also requires active engagement with regulators, close
analysis of emerging regulatory themes, and interaction with
rule-makers and legislators.
Within the GPF, compliance risk policies define minimum
standards to which all businesses must adhere. GPF policies
are supplemented, where appropriate, by divisional policies to
meet local product or market requirements.
During 2011, the Group managed the increased levels of
scrutiny and legislation by enlarging the capacity of its
compliance, anti-money laundering and regulatory affairs
teams and taking steps to improve its operating models, tools,
systems and processes. Refer to pages 239 to 244.
Reputational risk The risk of brand damage
arising from financial and non-
financial events arising from the
failure to meet stakeholders’
expectations of the Group’s
performance and behaviour.
Potential to put the entire
business at risk. Otherwise,
could lead to negative publicity,
loss of revenue, costly litigation
or a decline in customer base.
Can arise from actions taken by
the Group or a failure to take
action.
The Group Sustainability Committee and risk committees
continue to assess reputational risk issues. In 2011, an
Environmental, Social and Ethical (ESE) Risk Policy was
developed with sector ESE risk appetite positions drawn up to
assess the Group’s appetite to support customers in sensitive
sectors including defence, oil and gas. This also included the
establishment of divisional reputational risk committees.
Stakeholder engagement was broadened with the
implementation of formal sessions between the Group
Sustainability Committee and relevant advocacy groups and
non-governmental organisations. Refer to page 244.
Business risk The risk of lower-than-expected
revenues and/or higher-than-
expected operating costs.
Influenced by many factors such
as pricing, sales volume, input
costs, regulations and market
and economic conditions.
Forecasts of revenues and costs are tested against a range of
stress scenarios to identify key risk drivers and the appropriate
actions to address and manage them.
Business risk is incorporated within the Group's risk appetite
target for earnings volatility that was set in 2011. Refer to page
244.
Pension risk The risk that the Group will
have to make additional
contributions to its defined
benefit pension schemes.
Funding position can be volatile
due to the uncertainty of future
investment returns and the
projected value of schemes’
liabilities.
The Group manages pension risk from a sponsor perspective
using a framework that encompasses risk reporting and
monitoring, stress testing, modelling and an associated
governance structure that helps ensure the Group is able to
fulfil its obligation to support the defined benefit pension
schemes to which it has exposure.
In 2011, the Group focused on improved stress testing and risk
governance mechanisms. This included the establishment of
the Pension Risk Committee and the articulation of its view of
risk appetite for the various Group pension schemes. Refer to
pages 245 and 246.
Each risk type maps into the Group’s risk appetite framework and contributes to the overall achievement of its strategic objectives with underlying
frameworks and limits. The key frameworks and developments over the past year are described in the relevant sections of the following pages.