RBS 2013 Annual Report Download - page 192
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Business review Risk and balance sheet management
190
Risk appetite*: Risk coverage continued
Risk type Definition Features How the Group manages risk and the focus in 2013
Pension risk The risk to a firm caused by its
contractual or other liabilities to,
or with respect to, its pension
schemes, whether established
for its employees or for those of
a related company or
otherwise. It also means the
risk that the firm will make
payments or other contributions
to, or with respect to, a pension
scheme because of a moral
obligation, or because the firm
considers that it needs to do so
for some other reason.
Arises from: Variation in value of
pension scheme assets and liabilities
owing to changes to life expectancy,
interest rates, inflation, credit spreads,
and equity and property prices.
Character and impact: Pension
schemes’ funding positions can be
volatile due to the uncertainty of future
investment returns and the projected
value of schemes’ liabilities. The Group
might have to make financial
contributions to, or with respect to, its
pension schemes.
It has the potential to adversely affect
the Group’s funding and capital
requirements.
The Group’s Pension Risk Committee considers the
Group’s view of pension risk, mechanisms that could be
used for managing pension risk and the financial strategy
implications of the pension schemes as well as reviewing
fund performance. The Committee reports to the Group
Asset and Liability Committee on the material pension
schemes that the Group is obliged to support.
In 2013, various pension risk stress testing initiatives were
undertaken, focused both on internally defined scenarios
and on scenarios designed to meet integrated PRA stress
testing requirements.
Refer to the Pension risk section on pages 356 and 357 for
further information.
Operational risk The risk of loss resulting from
inadequate or failed processes,
people, systems or from
external events.
Arises from: The Group’s day-to-day
operations and is relevant to every
aspect of the Group’s business.
Character and impact: May be financial
in nature (characterised by either
frequent small losses or infrequent
material losses), or may lead to direct
customer and/or reputational impact
(for example, a major IT systems
failure or fraudulent activity).
It has the potential to affect the
Group’s profitability and capital
requirements directly, as well as
stakeholder confidence.
Operational risk is managed by the Operational Risk
Executive Committee. It is responsible for identifying and
managing emerging operational risks, and for reviewing
and monitoring operational risk profile strategies and
frameworks, ensuring they are in line with risk appetite.
In 2013, the focus was on continued implementation and
embedding of risk assessments across the Group,
including the strengthening of links between risk
assessments and other elements of the Group operational
risk framework. In addition, risk assessments were
increasingly used to identify single points of failure.
Refer to the Operational risk section on pages 358 to 360
for further information.
Regulatory risk The risk of material loss or
liability, legal or regulatory
sanctions, or reputational
damage, resulting from the
failure to comply with (or
adequately plan for changes to)
relevant official sector policy,
laws, regulations, or major
industry standards, in any
location in which the Group
operates.
Arises from: The Group’s regulatory,
business or operating environment,
and in how it responds to these.
Character and impact: The
crystallisation of regulatory risk can
result in adverse impacts on the
Group’s customers, strategy, business,
financial condition or reputation, for
instance, through the failure to provide
appropriate protections to customers,
or from regulatory enforcement or
other interventions.
It has the potential to adversely impact
the Group’s customers, strategy,
business, financial condition or
reputation.
The management of regulatory (as well as conduct) risk is
overseen by the Conduct and Regulatory Affairs function.
The Group’s existing Compliance and Regulatory Affairs
teams were brought together in the second half of 2013,
following the creation of the role of Group Head of Conduct
and Regulatory Affairs. The Conduct and Regulatory
Affairs function has responsibility for setting Group-wide
policy and standards, providing advice to the business and
ensuring controls are effective for managing regulatory
affairs, compliance and financial crime risks across all
businesses.
Other enhancements were also made during 2013
included the creation of a more centralised approach to
assurance activities and the introduction of a new ‘Centres
of Excellence’ model for the management of regulatory
developments, bringing together divisional and functional
resources to manage issues more effectively.
Refer to the Regulatory risk section on page 360 and 361
for further information.
*unaudited