RBS 2011 Annual Report Download - page 244

242 RBS Group 2011
Risk management: Compliance risk* continued
Payment Protection Insurance (PPI)
The Judicial Review requested by the British Bankers’ Association (BBA)
in respect of the FSA’s policy statement on PPI complaints and guidance
published by the Financial Ombudsman Service concluded in April 2011
with an adverse ruling. The BBA and the banks concerned decided not to
appeal and the UK banks including the Group have moved towards
settling claims in accordance with the FSA’s revised principles. Under the
terms of a waiver granted by the FSA, the Group, along with the rest of
the industry, has had to deal with the backlog of complaints within
specified timescales.
Retail conduct issues
In addition to EU retail initiatives, the UK authorities continued to pursue
additional issues during 2011. These included initiatives relating to
financial inclusion, where the Government is seeking to widen access to
bank accounts; the implementation of the recommendations of the Retail
Distribution Review relating to the provision of investment advice;
ongoing work on the Mortgage Market Review; the establishment of a
Steering Group by HM Treasury to devise a suite of simple financial
products; and a review of the insurance products that form part of
packaged current accounts.
Supervisory developments
In line with that of other regulatory authorities, the FSA’s supervisory
scrutiny has intensified in response to the financial crisis and ongoing
market stresses. Front-end supervisory resources have been increased
and existing tools have been used more frequently and robustly –
evidenced, for instance, in terms of the heightened number of information
requests, the increased deployment by the FSA of skilled person reports
as well as the increased fines charged against the industry. Across the
industry fines for 2011 totalled £66.1 million versus £5.3 million in 2007.
In addition, the FSA continued to develop new supervisory approaches,
notably its Core Prudential Programme for those major financial
institutions it oversees, which includes in-depth rolling thematic
assessments on governance, business models, risk management, capital
and liquidity.
US regulatory developments
In the US, activity was dominated by rulemaking following the 2010
Dodd-Frank Act. Although there was some slippage on, for example,
derivatives rules, output from the authorities has still been considerable.
Key final rules were issued on a range of issues, including living wills, the
Collins Amendment (which floors capital requirements at the level of
Basel II advanced approaches), rights for shareholders to have an
advisory “say on pay”, and limits on debit card interchange fees.
Meanwhile the new Consumer Financial Protection Bureau was
established on the Act’s first anniversary on 21 July 2011.
High-profile draft rules that were published included the Volcker Rule
(limiting proprietary trading and investments in private equity or hedge
funds), the securitisation risk retention rule and rules applicable to
Nationally Recognized Statistical Rating Organizations (credit rating
agencies).
Compliance risk management
The Group manages its compliance risk through a regulatory affairs and
compliance framework that seeks to ensure it complies with all banking,
securities, insurance and anti-money laundering regulations, defined by
over 120 different regulatory bodies and central banks, wherever the
Group operates. This framework is managed by the Group’s Regulatory
Affairs and Compliance functions and includes: the tracking and
management of regulatory developments; regulatory relationship
management; the implementation of global compliance risk policies;
assurance and monitoring; training and awareness; and mitigation
activity.
Against the backdrop of intensified regulatory pressure, Group
Regulatory Affairs has managed the increased levels of scrutiny and
legislation by increasing the capacity of its team, as well as improving
and refining its operating model, tools, systems and processes.
Simultaneously, in response to enforcement actions against the Group in
2010 and 2011, Group Compliance initiated and led large-scale
remediation and infrastructure changes, driving both the definition and
the proactive management of conduct risk.
Management of regulatory change
The early identification and effective management of changes in
legislative, regulatory and other requirements that may impact the Group
is critical to the successful mitigation of compliance risk.
Group Regulatory Affairs maintains a well-established policy and
supporting processes for the identification and management of such
changes across the Group. Group Board and Executive Committee
oversight is supported by a Prudential Regulatory Developments
Executive Steering Group, which was formed in early 2010 to provide a
specific focus on a range of key regulatory changes. Communication and
coordination were strengthened in 2011 with the formalisation of two
Group-wide forums, one focusing on prudential and wholesale market
issues, the other on retail conduct issues. In addition, a divisional Heads
of Regulatory Developments forum was established, and RBS Americas’
regional governance strengthened.
Reporting and internal communications activity expanded in 2011 in
response to the growing regulatory change agenda. This included:
xThe enhancement of quarterly reporting to the Group Audit
Committee, with a particular focus on tracking progress on
compliance readiness programmes implementing new requirements;
xSix-monthly reporting to the Board Risk Committee, in addition to
the standard monthly risk reports produced for the Board and other
governance committees; and
xIncreased communications, such as the development of a fortnightly
Regulatory Affairs Flash Report, circulated widely across the Group,
which captures key regulatory developments and relationship topics.
*unaudited
Business review Risk and balance sheet management continued