RBS 2013 Annual Report Download - page 526
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Additional information
524
Risk factors continued
The Group is subject to political risks
The Group and The Royal Bank of Scotland plc (“RBS” or the “Royal
Bank”), its principal operating subsidiary, are both headquartered and
incorporated in Scotland. The Scottish Government is holding a
referendum in September 2014 on the question of Scottish independence
from the UK. Although the outcome of such referendum is uncertain,
subject to any mitigating factors, the uncertainties resulting from an
affirmative vote in favour of independence would be likely to significantly
impact the Group’s credit ratings and could also impact the fiscal,
monetary, legal and regulatory landscape to which the Group is subject.
Were Scotland to become independent, it may also affect Scotland’s
status in the EU. The occurrence of any of the impacts above could
significantly impact the Group’s costs and would have a material adverse
effect on the Group’s business, financial condition, results of operations
and prospects.
The Group is subject to a number of legal, regulatory and governmental
actions and investigations. Unfavourable outcomes in such actions and
investigations could have a material adverse effect on the Group’s
operating results or reputation
The Group’s operations are diverse and complex, and it operates in legal
and regulatory environments that expose it to potentially significant
litigation, regulatory and governmental investigations and other regulatory
risk. As a result, the Group has recently settled a number of legal and
regulatory investigations and is, and may in the future be, involved in a
number of legal and regulatory proceedings and investigations in the UK,
the EU, the US and other jurisdictions.
The Group is involved in ongoing class action litigation, investigations into
foreign exchange trading and rate setting activities, continuing LIBOR
related litigation and investigations, securitisation and securities related
litigation, and anti-money laundering, sanctions, mis-selling and
compliance related investigations, in addition to a number of other
matters. In respect of the LIBOR and other trading rate-related
investigations, the Group reached settlements on 6 February 2013 with
the Financial Services Authority, the Commodity Futures Trading
Association and the United States Department of Justice and on 4
December 2013 with the EC. In addition, the Group and the Royal Bank
reached a settlement with the Board of Governors of the Federal Reserve
System, the New York State Department of Financial Services and the
Office of Foreign Assets Control with respect to the Royal Bank’s
historical compliance with US economic sanction regulations outside the
United States. The Group continues to cooperate with these and other
governmental and regulatory authorities in connection with ongoing
investigations and the probable outcome is that it will incur additional
financial penalties which may be material.
Legal, governmental and regulatory proceedings and investigations are
subject to many uncertainties, and their outcomes, including the timing
and amount of fines or settlements, which may be material, are often
difficult to predict, particularly in the early stages of a case or
investigation. Adverse regulatory proceedings or adverse judgments in
litigation could result in restrictions or limitations on the Group’s
operations or have a significant effect on the Group’s reputation, results
of operations and capital position. It is expected that the Group will
continue to have a material exposure to legacy litigation and regulatory
matter proceedings in the medium term. For more detail on certain of the
Group’s ongoing legal, governmental and regulatory proceedings, see
pages 474 to 482.
The Group may be required to increase provisions in relation to ongoing
legal proceedings, investigations and governmental and regulatory
matters. In Q4 2013, the Group booked a £1.9 billion provision to cover
various claims and conduct related matters affecting Group companies,
primarily those related to mortgage-backed securities and securities
related litigation, following recent third party litigation settlements and
regulatory decisions. It also increased its provision for Payment
Protection Insurance redress and related costs by an additional £465
million for a cumulative provision of £3.1 billion. The provision for Interest
Rate Hedging Products redress and administration costs was also
increased to be a cumulative provision of £1.25 billion at 31 December
2013. Significant increases in provisions may harm the Group’s
reputation and may have an adverse effect on the Group’s financial
condition and results of operations.
The Group, like many other financial institutions, has come under greater
regulatory scrutiny in recent years and expects that environment to
continue for the foreseeable future, particularly as it relates to compliance
with historical, new and existing corporate governance, employee
compensation, conduct of business, anti-money laundering and anti-
terrorism laws and regulations, as well as the provisions of applicable
sanctions programmes. Past or current failure to comply with any one or
more of these laws or regulations could have a significant adverse effect
on the Group’s reputation, financial condition and results of operations.
The Group could fail to attract or retain senior management, which may
include members of the Board, or other key employees, and it may suffer
if it does not maintain good employee relations
The Group’s ability to implement its strategy and its future success
depends on its ability to attract, retain and remunerate highly skilled and
qualified personnel, including its senior management, which include
directors and other key employees, competitively with its peers. This
cannot be guaranteed, particularly in light of heightened regulatory
oversight of banks and heightened scrutiny of, and (in some cases)
restrictions placed upon, management and employee compensation
arrangements, in particular those in receipt of Government support (such
as the Group).
In addition to the effects of such measures on the Group’s ability to retain
senior management and other key employees, the marketplace for skilled
personnel is more competitive, which means the cost of hiring, training
and retaining skilled personnel may continue to increase. The failure to
attract or retain a sufficient number of appropriately skilled personnel
could place the Group at a significant competitive disadvantage and
prevent the Group from successfully implementing its strategy, which
could have a material adverse effect on the Group’s financial condition
and results of operations.
During 2013 the Group replaced its Group Chief Executive, Group
Finance Director and Chief Risk Officer and its newly appointed Group
Finance Director (October 2013) resigned and a search for a new Group
Finance Director is continuing. The Group’s changing strategy,
particularly with respect to its Markets business and recently announced
disposition of RBS Citizens, has led to the exodus of talented staff. The
lack of continuity of senior management and the loss of important
personnel within the Group could have an adverse impact on the
implementation of the Group’s strategic objectives and regulatory
commitments.