RBS 2012 Annual Report Download - page 113

RBS GROUP 2012
111
Impact on the Group
x If the UK experiences an unexpectedly severe economic downturn,
the Group is exposed to the risk of losses largely as a result of
increased impairments in its retail and commercial businesses in the
UK. Its investment banking activities in the UK could also be
adversely affected.
x A worsening of the already difficult economic environment in Ireland
could result in increased impairments in Ulster Bank. In addition, it
could make the sale or refinancing of related exposures in Non-Core
more difficult, slowing progress towards the elimination of these
exposures.
Mitigants
x To mitigate the risk, the Group actively monitors its risk positions
with respect to country, sector, counterparty and product relative to
risk appetite, placing exposures on Watch and subjecting them to
greater scrutiny. In addition, the Group reduces exposures when
appropriate and practicable.
(iv) An increase in the Group’s obligations to support pension schemes
The Group has established various pension schemes, thereby incurring
certain obligations as sponsor of these schemes. All of the Group’s
businesses are exposed to this risk.
x If the value of the pension scheme assets is not adequate to fund
pension scheme liabilities, the Group may be required to set aside
additional capital in support of the schemes. The amount of
additional capital that may be required depends on the size of the
shortfall when the assets are valued. However, as asset values are
lower and liabilities higher than they were when the fund was last
valued, an increase in capital required is a possibility.
x In addition, the Group may be required to increase its cash
contributions to the schemes. Similarly, the amount of additional
cash contributions that may be required depends on the size of the
shortfall when the assets are valued. If interest rates fall further, the
value of the schemes’ assets may decline as the value of their
liabilities increases, leading to the need to increase cash
contributions still further.
Mitigants
x In order to mitigate the risk, the Group has taken a number of steps,
including changing the terms of its pension schemes to reduce the
rate at which liabilities are increasing. These include: capping the
growth rate of pensionable salary at two percent, and changing the
retirement age to 65 with same contributions, with the option for
individuals to retire at age 60 and pay an extra five percent of their
salary to fund it.
Regulatory and legal risks
(i) A failure to demonstrate compliance with existing regulatory
requirements related to conduct
The Group is subject to regulation governing the conduct of its business
activities. For example, it must ensure that it sells its products and
services only to informed and suitable customers and handles complaints
efficiently and effectively. This risk affects all divisions.
Impact on the Group
x If the Group sells unsuitable products and services to customers or if
the sales process is flawed, it may incur regulatory censure,
including fines. In addition, it may suffer serious reputational
damage.
x If the Group fails to handle customer complaints appropriately, it
may incur regulatory censure, including fines. In addition, it may
incur increased costs as it investigates these complaints and
compensates customers. Further, it may suffer serious reputational
damage.
Mitigants
In order to mitigate these risks, the Group has taken a number of steps:
x In order to mitigate the risk of mis-selling, affected divisions are
exiting some businesses and improving staff training and controls in
others.
x In order to improve the handling of customer complaints, divisions
have detailed action plans in place to meet or exceed customer and
regulatory requirements and address known shortcomings.
(ii) A failure to demonstrate compliance with other existing regulatory
requirements
The Group is also subject to regulation governing its business activities
more broadly. For example, it is required to take the steps necessary to
ensure that it complies with rules in place to prevent money laundering,
bribery and other forms of unlawful activity. It is also required to comply
with certain regulations regarding the timely provision of banking services
to customers. This risk affects all divisions.
Impact on the Group
x If the Group sells products and services to sanctioned individuals or
groups, it may expose itself to the risk of litigation as well as
regulatory censure. Its reputation would also suffer materially.
x If the Group, as a result of a systems failure, is unable to provide
banking services to customers, it may incur regulatory fines and
censure as well as suffer significant reputational damage.