RBS 2013 Annual Report Download - page 179
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Business review Risk and balance sheet management
177
This involves ensuring:
• All activities undertaken by the individual divisions are consistent
with the Group’s risk appetite targets;
• Group policies and resulting operating frameworks, including
delegated authorities and limits, are complied with through effective
monitoring and exception reporting; and
• Operation of Group-wide risk processes such as the Group Policy
Framework and the New Product Risk Assessment Process are
effective.
Divisional CROs report directly to the Group Chief Risk Officer.
The Group Chief Risk Officer has direct involvement in the selection,
appointment or removal of divisional CROs and Group risk function
heads and also has responsibility for their ongoing performance
assessment and management.
Divisions mirror the Group risk management structure: divisional
executive committees are responsible for setting and managing their
exposures in line with their risk appetite and within Group constraints.
The divisional risk committees oversee risk exposures arising from
divisional business activities and focus on ensuring that the associated
risks are adequately monitored and controlled. The divisional CROs
provide independent oversight of this process, with support from the
Group Chief Risk Officer and Group risk function heads as appropriate.
Additional challenge and oversight is provided by Group risk function
heads on an ongoing basis and by divisional risk and audit committees
on a periodic review basis. For a summary of the main risk types faced by
the Group and how it manages each of them, refer to pages 187 to 191.
Conduct and Regulatory Affairs
Created in August 2013, by amalgamating Group Compliance (previously
part of RBS Risk Management) and RBS Regulatory Affairs (formerly part
of RBS Legal), Group Conduct and Regulatory Affairs is led by the Group
Head of Conduct and Regulatory Affairs, who reports directly to the
Group Chief Executive and the Board Risk Committee, with right of
access to the Chairman of the Board.
The following functional heads report directly to the Group Head of
Conduct and Regulatory Affairs, each of whom is responsible for the firm-
wide risk appetite and standards of their respective disciplines: the Global
Head of Compliance; the Global Head of Financial Crime; and the
Director, RBS Regulatory Affairs.
A Chief Compliance Officer in each division (reporting to the Global Head
of Compliance) provides advisory support to assist the divisions’
management of conduct, regulatory affairs and financial crime.
Three lines of defence
The three lines of defence is an industry-wide model for the management
of risk, understood as a clear set of principles by which to implement a
cohesive operating model across an organisation. The model’s main
purpose is to define accountabilities and responsibilities for managing risk
across the organisation.
*unaudited
1st line of defence - Business units including all business areas and
functions are accountable for owning and managing the risks which exist
in their area within a defined risk appetite and framework.
2nd line of defence - Independent monitoring and control functions, as
well as Group Policy Standard owners, are accountable for owning and
developing the risk and control frameworks and tools which the 1st line of
defence uses to discharge its responsibilities. The 2nd line of defence
must be appropriately independent from the business and accountable
for overseeing and challenging the 1st line of defence on the effective
management of its risks.
3rd line of defence - Group Internal Audit provides independent
assurance on the appropriateness of the design and operational
effectiveness of risk management and internal control processes that
mitigate the Group’s key risks.
Business model
The Group is a bank serving approximately 24 million retail and corporate
customers worldwide. UK Retail offers individuals a wide range of
traditional retail banking and insurance products, including residential
mortgages and credit cards, while UK Corporate provides both small
businesses and large corporations with an extensive range of loan
products and transactional services. Most of the customers of both
divisions are located in the UK. Wealth provides both banking and
investment services to high-net-worth individuals in the UK and overseas,
while International Banking offers loan products and transactional
services to corporations and financial institutions across a wide range of
countries. Markets provides corporations and financial institutions in both
the UK and overseas with investment banking products and services,
helping them to hedge exposures to interest rate and foreign exchange
risk. Markets also helps customers structure securitisation transactions
and issue debt.
In addition, Ulster Bank and Citizens Bank, offer loan and investment
products, as well as transactional services, to individuals and
corporations. The customers of Ulster Bank are in Ireland while those of
Citizens Bank are in the US. The Group delivers its products through a
diverse array of channels, including extensive branch networks, in-store
branches and call centres, in addition to online and mobile channels.
It is the aim of the Group to become a bank that customers, and all other
stakeholders, can depend on. It intends to do so by focusing on its core
retail and corporate customers in its main market of the UK. It plans to
simplify its products and services as well as the processes it uses to
deliver them, enhancing their appeal. Simplifying processes should also
lower costs, enabling the bank to provide customers with better products
and services at lower prices.
The Group’s main sources of earnings are interest income from lending
and deposits and fee income from transactional and other services.
Given the low interest rate environment in both the UK and the US, its net
interest margin, that is, the difference between the interest it earns from
lending and the interest it pays on deposits, has been under pressure. In
order to offset this pressure, the Group is working to reduce costs and
increase non-interest income.