RBS 2013 Annual Report Download - page 181
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Business review Risk and balance sheet management
179
Both before and after these findings were issued, management took
action to strengthen significantly the systems and controls governing its
LIBOR submissions: the Group created an independent and ring-fenced
rate-setting team; all relevant staff were obliged to undertake a
comprehensive training programme; and new preventative and detective
controls put in place, including monitoring and statistical checking of
submissions by independent personnel in the Group. A rate setting
review board was also created to oversee the submission process.
For more information on LIBOR related settlements, refer to page 477.
Payment Protection Insurance
Since the judicial review decision in 2011, the Group has worked closely
with both the Financial Conduct Authority and the Financial Ombudsman
Service. It has invested considerable resources in ensuring that all
Payment Protection Insurance (PPI) complaints are handled in a fair
manner in line with regulatory requirements. The Group stopped selling
PPI in 2010 and has since then made a number of changes to ensure fair
customer outcomes and to ensure that the appropriate lessons are
learned from PPI. These include substantially simplifying our retail
product offering and sales processes (including, but not limited to,
protection products), enhancing training for, and controls in relation to,
customer advisers and improving management information on products
sales. Our product design and approval processes are now also radically
different from the time when PPI products were available to customers.
UK Retail and the wider Group are engaged in a wide-ranging conduct
risk programme designed to ensure the focus of our culture is always on
the customer and delivering good customer outcomes. While this is a
long-term project, the Group is confident that it has already resulted in
material changes to the way it conducts business.
For more information on PPI refer to page 479. For information on other
litigation, investigations and reviews, refer to pages 474 to 482.
Top and emerging risk scenarios
As part of its risk management process, the Group identifies and monitors
its top and emerging risk scenarios. These are events that, should they
materialise, would lead to a significant unexpected negative outcome,
thereby causing the Group as a whole, or a particular division, to fail to
meet one or more strategic objectives. In assessing the potential impact
of risk materialisation, the Group takes into account both financial and
reputational considerations.
Management is concerned with a range of risk scenarios. However, a
small number attracted particular attention from senior management
during the past year. These were grouped into four broad categories:
• Macroeconomic risks;
• Conduct, regulatory and legal risks;
• Risks related to the Group’s operations; and
• Political risk.
Further information on these and other risks facing the Group is detailed
in Risk factors on pages 523 to 536.
*unaudited
The Group’s top and emerging risks are as follows:
Macroeconomic risks
(i) Increased impairments arising from defaults in sectors to which the
Group has concentrated exposures, particularly commercial real estate
and shipping
The Group has material exposure to borrowers in a number of sectors,
particularly shipping. This sector has experienced falling revenues and
declining asset values. If global economic growth remains subdued,
losses in these sectors may increase unexpectedly. Any such losses may
be exacerbated by issues related to controls.
Impact on the Group
If borrowers default, the value of the Group’s collateral may prove
inadequate to repay the associated debt, leading to increased
impairments. UK Corporate is likely to be most affected.
Mitigants
Optimisation of the Group’s shipping and a significant proportion of
commercial real estate portfolios is part of Capital Resolution Group
strategy.
(ii) Increased impairments arising from a more severe than expected
economic downturn
The Group’s return to profitability depends on the economic recovery of
its major markets. If their recovery is slower than expected, the Group’s
return to profitability and private ownership may also be deferred. All
divisions could be affected.
Impact on the Group
A slower than expected recovery would likely result in lower revenues
and income, and higher impairments. It could also result in higher
operational losses. If such a downturn were prolonged, capital might also
be negatively affected.
Mitigants
The Group develops business plans to take into account the possibility of
slow economic growth and implemented strategies, such as cost
reductions, to reduce its vulnerability.
(iii) An increase in the Group’s obligations to support pension schemes
The Group has established various pension schemes for its employees
as a result of which it has incurred certain obligations as sponsor of these
schemes. If economic growth stagnates and interest rates remain low as
a result, the value of pension scheme assets may not be adequate to
fund the pension schemes’ liabilities. All of the Group’s businesses are
exposed to this risk.
Impact on the Group
As asset values were lower and liabilities higher when valued most
recently, the Group may be required to set aside additional capital in
support of the schemes. The amount of additional capital required
depends on the size of the shortfall when the assets are valued as well
as the efficacy, and acceptability to the regulator, of management actions
undertaken to address it.