RBS 2012 Annual Report Download - page 293

RBS GROUP 2012
291
Reputational risk*
Reputational risk is the risk of brand damage and/or financial loss due to
a failure to meet stakeholders’ expectations of the Group’s conduct and
performance.
Stakeholders include customers, investors, rating agencies, employees,
suppliers, government, politicians, regulators, special interest groups,
consumer groups, media and the general public. Brand damage can be
detrimental to the business in a number of ways, including an inability to
build or sustain business relationships with customers, low staff morale,
regulatory censure or reduced access to funding sources.
One of the most fundamental stakeholder expectations is that a bank is
financially prudent, safe and sound. The Group has made significant
progress in meeting this expectation through the execution of its Strategic
Plan in restructuring its balance sheet and improving its capital and
funding position. Major reforms have also been made to strengthen its
risk identification, evaluation and management processes. Further work
remains, but the Group is now in a much stronger financial position to
face challenges and uncertainties in its economic and operating
environment.
Restoring the reputation of the Group and the wider banking sector is
built upon the role of banks as good companies that perform well for their
owners, regulators, employees and communities and, above all else,
serve their customers well.
The Group has put the focus on serving customers well at the heart of its
strategic objectives that, combined with a safe and sound bank, will build
a culture and reputation in line with our stakeholder expectations. There
are still legacy issues to work through, but dealing with them in an open
and direct manner is a necessary part of the ability to move forward.
The Group’s reputational risk management framework is aligned with its
strategic objectives and its risk appetite goal of maintaining stakeholder
confidence. It is designed to embed, at different points of decision-making
processes, a series of reputational filters and controls that examine
products, services and activities through the lenses of sustainability,
transparency and fairness.
This approach recognises that reputational risk can arise across a range
of actions taken (or not taken) by the Group, as well as its wider conduct,
policies and practices. Therefore, it is aligned with the management of a
range of risk types that have a high reputational sensitivity.
The Group Board risk report contains a ‘top slice’ view of key embedded
risks, including a reputational risk impact assessment of each key risk. In
addition, the divisions report to their own committees and Boards on
relevant barometers of reputational risk and actions to manage
reputational events according to the source.
For example, an Environmental, Social and Ethical (ESE) risk
management function assesses the ESE risks associated with business
engagements and business divisions, while the Group Policy Framework
includes a range of policies relating to conduct and reputational matters.
(For credit risk specific information on ESE risk policies, refer to Credit
risk management framework on page 160).
The Group Board has ultimate responsibility for managing the Group’s
reputation, though all parts of the Group have responsibility for any
reputational impact arising from their operations. The Board’s oversight of
reputational issues is supported by executive risk committees (including a
new Conduct Risk Committee) and by the Group Sustainability
Committee. Emerging reputational issues are pro-actively identified and
assessed by a dedicated working group, and escalated through the
appropriate governance channels where necessary.
Business risk*
Business risk is the risk that the Group suffers losses as a result of
adverse variance in its revenues and/or costs relative to its business plan
and strategy. Such variance may be caused by internal factors such as
volatility in pricing, sales volumes and input costs and/or by external
factors such as the Group’s exposure to macroeconomic, regulatory and
industry risks.
Business risk is impacted by other risks the Group faces that may
contribute to the adverse changes in the Group's revenues and/or costs,
were these risks to crystallise. Examples of such risks include funding
risk (through volatility in cost of funding), interest rate risk in the banking
book, operational risk, conduct risk and reputational risk.
The Group seeks to minimise its exposure to business risk, subject to its
wider strategic objectives. Business risk is identified, measured and
managed through the Group’s planning cycles and performance
management processes. Expected profiles for revenues and costs are
determined, on a bottom-up basis, through plans reflecting expectations
of the external environment and the Group’s strategic priorities. These
profiles are tested against a range of stress scenarios and factors to
identify the key risk drivers behind any potential volatility, along with
management actions to address and manage them.
The Group operates a rolling forecast process which identifies projected
changes in, or risks to operating profit and ensures appropriate actions
are taken.
The Group Board has ultimate responsibility for the impact of any
volatility in revenues and costs on the Group’s performance. Business
risk is incorporated within the Group’s risk appetite target for earnings
volatility, with an assessment of volatility in revenues and costs a key
component in determining whether the Group and its underlying
businesses are within risk appetite.
The management of business risk lies primarily with divisions, with
oversight at the Group level led by Finance. Divisions are responsible for
delivery of their business plans and management of such factors as
pricing, sales volumes, marketing spend and other factors that can
introduce volatility into earnings.
*unaudited