RBS 2013 Annual Report Download - page 182
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Business review Risk and balance sheet management
180
Risk governance* continued
Top and emerging risk scenarios continued
In addition, the Group may be required to increase its cash contributions
to the schemes. Similarly, the amount of additional cash contributions
that may be required depends on the size of the shortfall when the assets
are valued. If interest rates fall further, the value of the schemes’ assets
may decline while the value of their liabilities increases, leading to a need
to increase cash contributions.
Mitigants
The trustee is responsible for the investment of the main scheme’s
assets, which are held separately from the assets of the Group.
Conduct, regulatory and legal risks
(i) Increased conduct costs and reputational damage arising from a
failure to achieve fair customer outcomes.
In order to achieve its strategic objectives, the Group must put the
customer at the heart of its business.
Impact on the Group
Failure to do so would cause the Group to fail to achieve its strategic
objectives, which would affect earnings, liquidity, capital and shareholder
confidence adversely. The risk of failure affects all divisions.
Mitigants
In order to address this risk, during the year the Group continued to
embed good conduct at the heart of the business to ensure fair outcomes
for customers.
(ii) Losses or reputational damage arising from litigation
Given its diverse operations, the Group is exposed to the risk of litigation.
For example, during the course of 2013, it was subject to shareholder
litigation, securities related litigation, various class actions claims,
including those related to LIBOR and foreign exchange trading, and mass
consumer claims such as those related to Payment Protection Insurance
and interest rate hedging products. This risk affects all of the Group's
divisions.
Impact on the Group
As a result of litigation, the Group may incur fines, be ordered to pay
damages or other compensation, suffer reputational damage, or face
limitations on its ability to operate. For example, in the case of LIBOR, the
Group agreed to pay settlement penalties to resolve investigations by the
European Commission into Yen LIBOR competition infringements and
EURIBOR competition infringements.
Mitigants
The Group defends claims against it to the best of its ability and it co-
operates fully with various governmental and regulatory authorities.
(iii) Increased costs arising from a failure to demonstrate compliance with
existing regulatory requirements related to conduct, particularly with
respect to mis-selling
The Group is subject to regulation governing the conduct of its business
activities. For example, it must ensure that it sells its products and
services only to informed customers. This affects all divisions.
*unaudited
Impact on the Group
If the Group sells products to uninformed customers, or fails to handle
complaints well, it may be subject to fines, incur remediation costs or
even be subject to criminal charges. It may also suffer significant damage
to its reputation.
Mitigants
Although more work needs to be done to mitigate this risk, the Group has
simplified some products and stopped offering others. Where appropriate,
it has compensated purchasers of some products and services, such as
payment protection insurance and certain interest rate hedging products.
Future payments of such compensation would give rise to additional
costs.
Risks related to the Group’s operations
(i) Increased losses arising from cyber attacks
The Group has experienced cyber attacks, which are increasing in
frequency and severity across the industry. This risk affects all divisions.
Impact on the Group
A successful cyber attack could lead to fraudulent activity or the loss of
customer data. The Group could experience significant losses as a result
of the need to reimburse customers, pay fines or both. Furthermore, a
successful cyber attack could cause significant damage to the Group’s
reputation.
Mitigants
The Group has participated in an industry-wide cyber attack simulation. It
has also initiated a large scale programme to improve controls over user
access. In addition, it has reviewed its websites and taken steps to
rationalise them, put additional anti-virus protections in place and taken
steps to educate staff on information protection.
(ii) Increased losses arising from the failure of information technology
systems
The Group’s information technology systems are vulnerable to failure.
Because they are complex, recovering from failure is very challenging.
Impact on the Group
A failure of information technology systems could lead to the Group’s
inability to process transactions or provide services to its customers.
Should a failure not be rectified promptly, the Group might lose
customers, be subject to fines, incur remediation costs or face legal
action. Its reputation might also suffer.
Mitigants
The Group has launched a major investment programme to improve
resilience, which has already had an impact. The Group has also
enhanced its back up systems and created a ‘shadow bank’ capable of
providing basic services in the event of need. Finally, the Group is
improving the documentation of critical business functions.