RBS 2011 Annual Report Download - page 420

418 RBS Group 2011
41 Related parties
UK Government
On 1 December 2008, the UK Government through HM Treasury became
the ultimate controlling party of The Royal Bank of Scotland Group plc.
The UK Government's shareholding is managed by UK Financial
Investments Limited, a company wholly owned by the UK Government.
As a result, the UK Government and UK Government controlled bodies
became related parties of the Group.
The Group enters into transactions with many of these bodies on an
arm’s length basis. The principal transactions during 2011, 2010 and
2009 were: the Asset Protection Scheme, Bank of England facilities and
the issue of debt guaranteed by the UK Government discussed below.
In addition, the redemption of non-cumulative sterling preference shares
and the placing and open offer in April 2009 was underwritten by HM
Treasury and, in December 2009, B shares were issued to HM Treasury
and a contingent capital agreement concluded with HM Treasury (see
Note 27). Other transactions include the payment of: taxes principally UK
corporation tax (page 338) and value added tax; national insurance
contributions; local authority rates; and regulatory fees and levies
(including the bank levy (page 329) and FSCS levies (page 401));
together with banking transactions such as loans and deposits
undertaken in the normal course of banker-customer relationships.
Asset Protection Scheme
On 22 December 2009, the Group entered into an agreement (the Asset
Protection Scheme (APS), with HM Treasury, acting on behalf of the UK
Government, under which the Group purchased credit protection over a
portfolio of specified assets and exposures (covered assets) from HM
Treasury. The portfolio of covered assets has a par value of
approximately £282 billion. The protection is subject to a first loss of £60
billion and covers 90% of subsequent losses net of recoveries. Once the
first loss has been exhausted, losses and recoveries in respect of assets
for which a trigger event - failure to pay, bankruptcy or restructuring - has
occurred are included in the balance receivable under the APS. Receipts
from HM Treasury will, over time, amount to 90% of cumulative losses
(net of 90% of cumulative recoveries) on the portfolio of covered assets
less the first loss amount.
The Group has a right to terminate the APS at any time provided that the
Financial Services Authority has confirmed in writing to HM Treasury that
it has no objection. On termination the Group must pay HM Treasury the
higher of the regulatory capital relief received and £2.5 billion less
premiums paid plus the aggregate of amounts received from the UK
Government under the APS.
HM Treasury has the right to appoint step-in managers to carry out any
oversight, management or additional functions on behalf of HM Treasury
to ensure that the covered assets are managed and administered in
compliance with the agreed terms and conditions. This right is
exercisable if certain step-in triggers occur. These include:
xlosses on covered assets in total exceed 125% of the first loss
amount or losses on an individual covered asset class exceed
specified thresholds;
xabreach of specified obligations in the APS rules or the accession
agreement;
xthe Group has failed or is failing to comply with any of the conditions
in the APS rules in relation to asset management, monitoring and
reporting, and governance and oversight and such failure is
persistent and material or it is evidence of a systematic problem;
and
xmaterial or systematic data deficiencies in the information provided
to HM Treasury in accordance with the terms of APS.
HM Treasury may at any time elect to cease to exercise its step-in rights
in whole or part when it is satisfied that the step-in triggers have been
remedied.
The Group has paid APS premiums totalling £2,225 million (2011 - £125
million; 2010 - £700 million; 2009 - £1,400 million). From 31 December
2011, premiums of £125 million are payable quarterly until the earlier of
2099 and the date the Group leaves the Scheme.
The APS is a single contract providing credit protection in respect of a
portfolio of financial assets. Under IFRS, credit protection is treated either
as a financial guarantee contract or as a derivative financial instrument
depending on the terms of the agreement and the nature of the protected
assets and exposures. The Group has concluded, principally because the
covered portfolio includes significant exposure in the form of derivatives,
that the APS does not meet the criteria to be treated as a financial
guarantee contract. The contract has been accounted for as a derivative
financial instrument and is recognised as a fair value liability £231 million
(2010 - asset £550 million; 2009 - asset £1,400 million) and included
within the Derivative liability balance sheet caption. Changes in fair value
of £906 million (2010 - £1,550 million; 2009 - nil) were recognised in profit
or loss within Income from trading activities. Details of the valuation
methodology for the APS are set out in Note 11 Financial instruments on
pages 356 and 357.
There is no change in the recognition and measurement of the covered
assets as a result of the APS. Impairment provisions on covered assets
measured at amortised cost are assessed and charged in accordance
with the Group’s accounting policy; held-for-trading assets, assets
designated at fair value and available-for-sale assets within the APS
portfolio continue to be measured at fair value with no adjustments to
reflect the protection provided by the APS. There is no change in how
gains and losses on the covered assets are recognised in the income
statement or in other comprehensive income.
Notes on the consolidated accounts continued