RBS 2012 Annual Report Download - page 114

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Business review Risk and balance sheet management continued
Strategic risk objectives*: Top and emerging risk scenarios continued
Mitigants
x The Group is in the process of installing a new global client
screening program, the objective of which is to prevent the
inadvertent provision of products and services to sanctioned
individuals or groups.
x The Group has also established and is implementing a plan to
enhance the resilience of information technology and payment
processing systems.
(iii) Losses or reputational damage arising from litigation
Given its diverse operations, the Group is exposed to the risk of litigation.
For example, during the course of 2012, it was the subject of
investigations into its activities in respect of LIBOR as well as
securitisation. This risk affects all of the Group’s divisions.
Impact on the Group
x As a result of litigation, the Group may incur fines, suffer reputational
damage, or face limitations on its ability to operate. In the case of
LIBOR, the Group reached settlements with the Financial Services
Authority, the Commodity Futures Trading Association and the US
Department of Justice. It continues to cooperate with other
governmental and regulatory authorities in relation to LIBOR
investigations; the probable outcome is that the Group will incur
additional financial penalties at the conclusion of these
investigations.
Mitigants
x The Group defends claims against it to the best of its ability.
(iv) A failure to demonstrate compliance with new requirements arising
from structural reform
In addition to existing regulation, the Group will be subject to new
regulation arising from structural reform. For example, legislation creating
the Single European Payment Area (SEPA) will require the Group to
develop and implement the infrastructure necessary to effect domestic
and cross border payments. This risk affects Markets, International
Banking and Ulster Bank in particular.
Impact on the Group
x Compliance with the regulation will require substantial changes in
the Group’s systems. As a result, the Group may not be able to
meet the deadline for implementation, giving rise to the risk of
regulatory fines and censure. In addition, as such a failure would
affect customers, it could also have a material negative impact on
the Group’s reputation.
Mitigants
x The Group has a project in train to design, develop and deliver the
required systems changes.
Risks related to the Group’s operations
(i) A failure of information technology systems
The Group relies on information technology systems to service its
customers, giving rise to the risk of losses and significant reputational
damage should one or more of these systems fail. The risks of an
information technology system failure affects all of the Group’s
businesses.
Impact on the Group
x A failure could prevent the Group from making or receiving
payments, processing vouchers or providing other types of services
to its customers.
x A failure could also prevent the Group from managing its liquidity
position, giving rise to the risk of illiquidity.
x A lack of management information could lead to an inadvertent
breach of regulations governing capital or liquidity.
x A failure could also leave the Group vulnerable to cyber crime. The
Group is also exposed to this risk indirectly, through outsourcing
arrangements with third parties.
Mitigants
x The Group has developed a risk appetite framework to manage
these risks and is implementing a plan to bring its risk position within
risk appetite by improving batch processing through process
redesign and simplification. The Group expects these investments to
result in improvements over the course of 2013 and 2014.
(ii) A failure of operational controls
The Group is exposed to the risk of losses arising from a failure of
supervisory controls to prevent a deviation from procedures. An example
of such a deviation is an unauthorised trading event. Should existing
controls prove inadequate, one or more individuals may expose the
Group to risks far in excess of its approved risk appetite. While all
divisions are exposed to this risk to some degree, Markets is particularly
at risk.
Impact on the Group
x If one or more individuals deviate from procedures, the Group may
take excessively large positions. If market prices change adversely,
the Group may incur losses. Such losses may be substantial if the
positions themselves are very large relative to the relevant market.
Mitigants
x Markets has developed a plan for addressing identified weaknesses,
has benchmarked it against those of its peers and is implementing it.
*unaudited