RBS 2012 Annual Report Download - page 514

Risk factors continued
The Group is subject to resolution procedures under current and
proposed resolution and recovery schemes which may result in various
actions being taken in relation to any securities of the Group, including
the write off, write-down or conversion of the Group’s securities
As a result of its status as a GSIFI and in accordance with current and
proposed resolution and recovery schemes, the Group was required to
meet certain resolution planning requirements by the end of 2012 and is
required to meet others in 2013 contemplating its possible failure. The
Group made the required submissions in 2012 to the FSA and its US
business will make its required submissions in 2013. Similar to other
major financial institutions, both the Group and its key subsidiaries
remain engaged in a constructive dialogue on resolution and recovery
planning with key national regulators and other authorities.
In addition to the powers provided by the Banking Act 2009, further
resolution powers are expected to be provided as part of the RRD and
the reforms implementing the recommendations of the ICB. Such
resolution powers are expected to include a bail-in mechanism, pursuant
to which losses would be imposed on shareholders and, as appropriate,
creditors of the Group (through write-down or conversion into equity of
liabilities including debt securities) in order to recapitalise and restore the
Group to solvency as well as other options, including those as set forth in
the Banking Act 2009. The implementation of any resolution and recovery
scheme is the subject of significant debate, particularly for GSIFIs with
complex cross border activities. Such debate includes whether resolution
and recovery powers may be exercised through a single point of entry at
the holding company or at various levels of the corporate structure of a
GSIFI.
The potential impacts of these resolution and recovery powers may
include the total loss of value of securities issued by the Group and, in
addition for debt holders, the possible conversion into equity securities,
and under certain circumstances the inability of the Group to perform its
obligations under its securities.
The Group is subject to a number of regulatory initiatives which may
adversely affect its business. The Independent Commission on Banking’s
final report on competition and possible structural reforms in the UK
banking industry has been adopted by the UK Government which intends
to implement the recommendations substantially as proposed. In addition
other proposals to ring fence certain business activities and the US
Federal Reserve’s proposal for applying US capital, liquidity and
enhanced prudential standards to certain of the Group’s US operations
together with the UK reforms could require structural changes to the
Group’s business. Any of these changes could have a material adverse
effect on the Group.
The UK Government published a White Paper on Banking Reform in
September 2012, outlining proposed structural reforms in the UK banking
industry. The measures proposed were drawn in large part from the
recommendations of the ICB, which was appointed by the UK
Government in June 2010, The ICB published its final report to the
Cabinet Committee on Banking Reform on 12 September 2011, which set
out the ICB’s views on possible reforms to improve stability and
competition in UK banking. The final report made a number of
recommendations, including in relation to (i) promotion of competition, (ii)
increased loss absorbency (including bail-in, i.e., the ability to write down
debt or convert it into an issuer’s ordinary shares in certain
circumstances) and (iii) the implementation of a ring-fence of retail
banking operations.
The measures in relation to the promotion of competition are already
largely in train, including the development of an industry mechanism to
make it easier for customers to switch their personal current accounts to
a different provider, which is due to be completed by September 2013.
Bail-in mechanisms continue to be discussed by the EU and the Group
continues to participate in the debate around such mechanisms, which
could affect the rights of creditors, including holders of senior and
subordinated bonds, and shareholders in the event of the implementation
of a resolution scheme or an insolvency and could thereby materially
affect the price of such securities.
The UK Government published in October 2012 a draft bill intended to
enable the implementation of these reforms. This draft bill is subject to
pre-legislative scrutiny by the UK Parliamentary Commission on
Standards in Banking (PCBS), which may recommend changes to the
bill. The UK Government published its response to the PCBS in February
2013 and agreed to amend the bill to include provisions giving the
regulator the power to enforce full separation between retail and
wholesale banking in a specified group. The Government is expected to
introduce the bill, which will provide primary enabling legislation in the
short term. This is with a view to completing the legislative framework by
May 2015, requiring compliance as soon as practicable thereafter and
setting a final deadline for full implementation of 2019.
The impact of any final legislation on the Group is impossible to estimate
with any precision at this stage. The introduction of bail-in mechanisms
may affect the Group’s cost of borrowing, its ability to access professional
markets’ funding and its funding and liquidity metrics. It is also likely that
ring-fencing certain of the Group’s operations would require significant
restructuring with the possible transfer of large numbers of customers
between legal entities. It is possible that such ring-fencing, by itself, or
taken together with the impact of other proposals contained in this
legislation and other EU legislation that will apply to the Group could have
a material adverse effect on the Group’s structure and on the viability of
certain businesses, in addition to the Group’s results of operations,
financial conditions and prospects.
It is also possible that the UK’s implementation of a ring-fence may
conflict with any EU legislation to implement the recommendations of the
High-level Expert Group on Reforming the Structure of the EU Banking
Sector, whose report, published in October 2012, proposed, inter alia,
ring-fencing the trading and market-making activities of major European
banks. This could affect the Group’s position relative to some
competitors. However, it is not yet clear whether the EU will implement
ring-fencing proposals and whether they will apply to UK banks, in
addition to the UK’s own ring-fencing measures.
512
Additional information continued