RBS 2011 Annual Report Download - page 241

RBS Group 2011 239
Control environment certification
Control environment certification (CEC) is used by the Group Executive
management to review and assess its internal control framework, and
provide a self-certification of its current state. It demonstrates that the
Group is operating a robust control framework, with mechanisms in place
to understand and manage its risks, and to drive action to resolve areas
of weakness or concern.
CEC provides a twice-yearly assessment of the robustness of the
Group’s internal control environment including:
xcompliance with the GPF and key divisional/functional policy
standards;
xcompliance with the requirements of the UK Corporate Governance
Code; and
xeffectiveness of the risk frameworks, culture and governance
structures for each division or function.
CEC was enhanced during 2011 to improve the quality and depth of
certification, and to implement a risk-based approach to the analysis of
policy compliance. The enhancements have delivered a greater degree of
analysis of the key risk areas for each business and Group policy
standard owner. Improved alignment with Group Internal Audit has been
delivered through the implementation of a common rating system for the
assessment of the control environment, and CEC outcomes are reported
at both the divisional risk and audit committees and Group Audit
Committee.
Capital model development
At the end of 2011, the Group started to develop a statistical modelling
capability for operational risk based on the requirements set out under
the Basel II advanced measurement approach. The model is a hybrid
encompassing internal and external loss data as well as scenarios.
Business environment and internal control factors will be utilised when
constructing scenarios and allocating capital. Development activities in
2011 focused on building the standalone loss data and scenario
components within the model; integration activities, correlation and
allocation will continue in 2012. Final model validation is expected to take
place during 2012.
Compliance risk*
Compliance risk arises from non-compliance with national and
international laws, rules and regulations. The Group believes that being a
compliant organisation is fundamental to protecting sustainable growth,
rebuilding its reputation and maintaining stakeholder confidence.
The regulatory environment remained highly challenging during 2011, as
policymakers and regulators continued to strengthen regulation and
supervision in response to the events of 2007/2008 and subsequent
economic and financial stress.
The regulatory agenda - largely framed by the G20 but with many
instances of EU and national initiatives - constitutes the most sweeping
set of changes seen in many decades. At 31 December 2011, the Group
was managing some 140 major regulatory or legislative policy initiatives;
during the year as a whole, it had also reviewed over 300 consultations in
its core markets. In addition to these changes, many supervisory
authorities also continued to intensify their ongoing level of scrutiny and
intervention.
These trends have posed multiple challenges for banking groups,
including RBS, namely:
xtracking, analysing and engaging with policymakers on proposed
changes;
ximplementing change programmes to ensure compliance with new
requirements;
xrevisiting strategy, business and operating models in response to
the new environment; and
xdriving through cultural and other changes to minimise compliance
and enforcement risks.
Below is an outline of some of the key developments in the regulatory
environment that took place during 2011. An explanation of how the
Group manages compliance risk begins on page 242.
Global regulatory developments
The global agenda continues to be guided by the G20, drawing on the
original action plan for strengthening financial stability agreed by G20
leaders at the November 2008 Washington summit. During 2011, G20
countries continued to implement various elements of this action plan,
culminating in the G20 leaders’ summit held in Cannes in November
2011.