RBS 2012 Annual Report Download - page 290

288
Business review Risk and balance sheet management continued
Other risks: Regulatory risk* continued
Retail conduct issues
In addition to EU retail initiatives, the UK authorities continued to pursue
additional issues during 2012. These included initiatives relating to
Universal Credit, a review into the personal current account market and
continuing work on the Retail Distribution Review ahead of its
implementation on 31 December 2012. Work also continues on the
Mortgage Market Review, Packaged Accounts and Simple Financial
Products. Preparation for the new Financial Conduct Authority (FCA)
stepped up, including papers on its powers, regulatory approach and the
desire for transparency in areas such as product intervention and
publication of Ombudsman decisions. The Group expects significant
implementation and ongoing costs to arise from changes to
documentation, structure and processes as well as increased regulatory
fees.
Furthermore, the Government proposed a transfer of consumer credit
regulation from the Office of Fair Trading to the FCA and it may also
replace current Consumer Credit Act legislation with an FCA rulebook,
changing rules in the process.
Supervisory developments
In line with other regulatory authorities, the FSA’s supervisory scrutiny
has continued to intensify 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 2012
totalled £311.6 million, compared with £66.1 million in 2011, and £5.3
million as the financial crisis began in 2007.
In addition, the FSA moved to a “twin peaks” organisational structure in
April 2012, with the creation of new conduct and prudential business units
which form separate teams supervising systemically important firms from
a conduct and prudential perspective. The FSA has continued to develop
new supervisory approaches to align to the new regulatory structure. The
prudential framework includes the 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. The conduct framework includes a
greater focus on business models and strategic analysis.
US regulatory developments
In the US, activity continued to be dominated by rulemaking following the
2010 Dodd-Frank Act.
Key final rules were issued on a range of issues, including prudential
standards for systemically important financial institutions, removal of
certain references to credit rating agencies, Basel 2.5 market risk
standards and final definitions of swap dealers, major swap participants
and swaps. Requirements for the registration of entities as swap dealers
took effect from 12 October 2012, with registration commencing from 31
December 2012 once firms reach certain activity thresholds. RBS plc was
one of 65 global entities which registered with effect from 31 December
2012.
Proposed rules issued in December 2012 included important changes to
the Federal Reserve Board’s approach to supervisory and prudential
requirements for foreign banking organizations (FBOs). These proposals
would require the Group and other FBOs to establish a single US-
incorporated intermediate holding company for all the Group’s US
subsidiaries (although not the US branches of RBS plc or RBS N.V.).
Enhanced prudential standards would also be required, including for the
US branches.
Other proposals included Basel III capital and leverage standards and
disclosures and other rules relating to mortgages. The Volcker Rule,
which restricts proprietary trading and investments in private
equity/hedge funds, was not finalised by its effective date of 21 July 2012
but in April 2012 the Federal Reserve Board issued an interpretation
which provided some guidance to the effect that banks should
demonstrate their ‘good faith’ planning efforts in the two-year
conformance period to July 2014.
Regulatory risk management
The Group manages its regulatory risk through a regulatory affairs
framework covering over 120 different regulatory bodies and central
banks, wherever the Group operates. This framework is managed by the
Group’s Regulatory Affairs function and includes: the tracking and
management of regulatory developments and regulatory relationship
management, together with ownership of the connected regulatory risk
policies; assurance and monitoring; and training and awareness.
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.
*unaudited