RBS 2011 Annual Report Download - page 464

462 RBS Group 2011
Risk factors continued
HM Treasury (or UK Financial Investments Limited (UKFI) on its behalf)
may be able to exercise a significant degree of influence over the Group
and any proposed offer or sale of its interests may affect the price of
securities issued by the Group
The UK Government, through HM Treasury, currently holds 66.9% of the
issued ordinary share capital of the Group. On 22 December 2009, the
Group issued £25.5 billion of B Shares to the UK Government. The B
Shares are convertible, at the option of the holder at any time, into
ordinary shares. The UK Government has agreed that it shall not
exercise the rights of conversion in respect of the B Shares if and to the
extent that following any such conversion it would hold more than 75% of
the total issued shares in the Group. Any breach of this agreement could
result in the delisting of the Group from the Official List and potentially
other exchanges where its securities are currently listed and traded. HM
Treasury (or the UKFI on its behalf) may sell all or a part of the ordinary
shares that it owns at any time. Any offers or sale of a substantial number
of ordinary shares or securities convertible or exchangeable into ordinary
shares by or on behalf of HM Treasury, or an expectation that it may
undertake such an offer or sale, could negatively affect prevailing market
prices for the securities.
In addition, UKFI manages HM Treasury’s shareholder relationship with
the Group and, although HM Treasury has indicated that it intends to
respect the commercial decisions of the Group and that the Group will
continue to have its own independent board of directors and
management team determining its own strategy, should its current
intentions change, HM Treasury’s position as a majority shareholder (and
UKFI’s position as manager of this shareholding) means that HM
Treasury or UKFI may be able to exercise a significant degree of
influence over, among other things, the election of directors and the
appointment of senior management. In addition, as the provider of the
APS, HM Treasury has a range of rights that other shareholders do not
have. These include rights under the terms of the APS over the Group’s
remuneration policy and practice. The manner in which HM Treasury or
UKFI exercises HM Treasury’s rights as majority shareholder or in which
HM Treasury exercises its rights under the APS could give rise to conflict
between the interests of HM Treasury and the interests of other
shareholders. The Board has a duty to promote the success of the Group
for the benefit of its members as a whole.
The Group’s insurance businesses are subject to inherent risks involving
claims
Future claims in the Group’s insurance business may be higher than
expected as a result of changing trends in claims experience resulting
from catastrophic weather conditions, demographic developments,
changes in the nature and seriousness of claims made, changes in
mortality, changes in the legal and compensatory landscape and other
causes outside the Group’s control. These trends could affect the
profitability of current and future insurance products and services. The
Group reinsures some of the risks it has assumed and is accordingly
exposed to the risk of loss should its reinsurers become unable or
unwilling to pay claims made by the Group against them.
The Group’s operations have inherent reputational risk
Reputational risk, meaning the risk to earnings and capital from negative
public opinion, is inherent in the Group’s business. Negative public
opinion can result from the actual or perceived manner in which the
Group conducts its business activities, from the Group’s financial
performance, from the level of direct and indirect government support or
from actual or perceived practices in the banking and financial industry.
Negative public opinion may adversely affect the Group’s ability to keep
and attract customers and, in particular, corporate and retail depositors.
The Group cannot ensure that it will be successful in avoiding damage to
its business from reputational risk.
In the UK and in other jurisdictions, the Group is responsible for
contributing to compensation schemes in respect of banks and other
authorised financial services firms that are unable to meet their
obligations to customers
In the UK, the Financial Services Compensation Scheme (FSCS) was
established under the FSMA and is the UK’s statutory fund of last resort
for customers of authorised financial services firms. The FSCS can pay
compensation to customers if a firm is unable or likely to be unable, to
pay claims against it and may be required to make payments either in
connection with the exercise of a stabilisation power or in exercise of the
bank insolvency procedures under the Banking Act. The FSCS is funded
by levies on firms authorised by the FSA, including the Group. In the
event that the FSCS raises funds from the authorised firms, raises those
funds more frequently or significantly increases the levies to be paid by
such firms, the associated costs to the Group may have an adverse
impact on its results of operations and financial condition. At 31
December 2011, the Group had accrued £157 million for its share of
FSCS levies for the 2011/2012 and 2012/2013 FSCS years.
In addition, to the extent that other jurisdictions where the Group operates
have introduced or plan to introduce similar compensation, contributory or
reimbursement schemes (such as in the US with the Federal Deposit
Insurance Corporation), the Group may make further provisions and may
incur additional costs and liabilities, which may have an adverse impact
on its financial condition and results of operations or result in a loss of
value in its securities.
Additional information continued