RBS 2013 Annual Report Download - page 527
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Additional information
525
In addition, certain of the Group’s employees in the UK, continental
Europe and other jurisdictions in which the Group operates are
represented by employee representative bodies, including trade unions.
Engagement with its employees and such bodies is important to the
Group and a breakdown of these relationships could adversely affect the
Group’s business, reputation and results.
Operational risks are inherent in the Group’s businesses
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events. The
Group has complex and geographically diverse operations and
operational risk and losses can result from internal and external fraud,
errors by employees or third parties, failure to document transactions
properly or to obtain proper authorisation, failure to comply with
applicable regulatory requirements and conduct of business rules
(including those arising out of anti-bribery, anti-money laundering and
anti-terrorism legislation, as well as the provisions of applicable sanctions
programmes), equipment failures, business continuity and data security
system failures, natural disasters or the inadequacy or failure of systems
and controls, including those of the Group’s suppliers or counterparties.
Although the Group has implemented risk controls and loss mitigation
actions, and substantial resources are devoted to developing efficient
procedures, to identify and rectify weaknesses in existing procedures and
to train staff, it is not possible to be certain that such actions have been or
will be effective in controlling each of the operational risks faced by the
Group. Ineffective management of operational risks could have a material
adverse effect on the Group’s business, financial condition and results of
operations.
The Group operates in markets that are highly competitive and its
business and results of operations may be adversely affected
The competitive landscape for banks and other financial institutions in the
UK, the US and throughout the rest of Europe is subject to rapid change
and recent regulatory and legal changes are likely to result in new market
participants and changed competitive dynamics in certain key areas,
such as in retail banking in the UK. The competitive landscape in the UK
will be particularly influenced by the UK government’s implementation of
the recommendations on competition included in the final report of the
Independent Commission on Banking (ICB), including ring-fencing and
other customer protection measures addressed in the Banking Reform
Act 2013 which became law in the United Kingdom on 18 December
2013 and will be implemented through secondary legislation due to be
completed by May 2015. In order to compete effectively, certain financial
institutions may seek to consolidate their businesses or assets with other
parties. This consolidation, in combination with the introduction of new
entrants into the markets in which the Group operates is likely to increase
competitive pressures on the Group.
In addition, certain competitors may have stronger and more efficient
operations, including better IT systems allowing them to implement
innovative technologies for delivering services to their customers, and
may have access to lower cost funding and/or be able to attract deposits
on more favourable terms than the Group. Furthermore, the Group’s
competitors may be better able to attract and retain clients and key
employees, which may have a negative impact on the Group’s relative
performance and future prospects. In addition, recent and future
disposals and restructurings by the Group and the compensation
structure and restrictions imposed on the Group may also have an impact
on its ability to compete effectively.
These and other changes to the competitive landscape could adversely
affect the Group’s business, margins, profitability, financial condition and
prospects.
The Group’s businesses and performance can be negatively affected by
actual or perceived global economic and financial market conditions
The Group’s businesses and performance are affected by local and
global economic conditions, perceptions of those conditions and future
economic prospects. The outlook for the global economy over the near to
medium-term is for steady growth. Prospects for the UK and the US in
2014 are the strongest among the G7. The outlook for Ireland is
improving but remains challenging. Risks to growth and stability stem
mainly from continued imbalances – among and within countries – and
from uncertainty about how economies will respond as the extraordinary
monetary policy measures implemented during the crisis are unwound.
The Group’s businesses and performance are also affected by financial
market conditions. Capital and credit markets around the world have
been relatively stable since 2012. Although the risk of sovereign default
relating to certain EU member states diminished during 2013, a number
of EU countries including the UK had their credit ratings downgraded, and
the lingering risk of a sovereign default continues to pose a threat to
capital and credit markets. In addition, in response to actions of central
banks, in particular the US Federal Reserve’s actions with respect to
tapering of its debt purchase program, there have been short periods of
rapid movements in interest rates and significant sharp falls on equity
markets and further market volatility is likely as tapering continues.
Challenging economic and market conditions create a difficult operating
environment for the Group’s businesses, which is characterised by:
• reduced activity levels, additional write-downs and impairment
charges and lower profitability, especially in combination with
regulatory changes or action of market participants, which either
alone or collectively may restrict the ability of the Group to access
funding and liquidity;
• central bank actions to engender economic growth which have
resulted in a prolonged period of low interest rates constraining,
through margin compression and low returns on assets, the interest
income earned on the Group’s interest earning assets; and
• the risk of increased volatility in yields and asset valuations as
central banks start/accelerate the process of tightening or unwinding
historically unprecedented loose monetary policy or extraordinary
measures. The resulting environment of uncertainty for the market
and consumers will lead to challenging trading and market
conditions.
In particular, should economic recovery stagnate, particularly in the
Group’s key markets, or the scope and severity of the adverse economic
conditions currently experienced by a number of EU member states and
elsewhere worsen, the risks faced by the Group would be exacerbated.
Developments relating to the current economic conditions and the risk of
a return to a volatile financial environment, including those discussed
above, could have a material adverse effect on the Group’s business,
financial condition, results of operations and prospects.