RBS 2013 Annual Report Download - page 64
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Report of the Board Risk Committee
62
A number of other internal and regulatory investigations arose or
continued throughout 2013. During the period, the Committee received
reports on;
• the investigation of the alleged mis-selling of interest rate hedging
products to small and medium sized enterprises and considered the
appropriateness of remediation activity;
• the investigation of allegations of inappropriate rate setting activity
in particular foreign exchange rates;
• anti-money laundering remediation including divisional remediation
plans, prioritisation and resource requirements;
• the sale of complex products and the quality of investment advice to
customers. In particular, it received reports on required
enhancements to the mortgage sales process. The sales and
product design and approvals process were also reviewed;
• the status of key litigation cases, in particular the US residential
mortgage-backed securities litigation claims; and
• the remediation of known regulatory issues in the RBS Americas
region.
Where appropriate, the Committee oversaw liaison with regulators;
made recommendations regarding required remediation, training and
process controls and enhancements; and made recommendations to the
Group Performance and Remuneration Committee in relation to
accountability. Progress to address identified weaknesses will be closely
monitored throughout 2014.
In 2013, the Balcony Oversight Committee was established in
acknowledgment of the volume of ongoing conduct issues, particularly in
the Markets division. The aim of the Balcony Oversight Committee
chaired by the Head of Conduct and Regulatory Affairs, is to provide
independent oversight, identify common themes and to share lessons
learned. The Balcony Oversight Committee reports to the Board Risk
Committee and regular updates were provided on the status of ongoing
investigations and emerging themes.
Capital and liquidity
The Committee reviewed the capital and liquidity position of the business
regularly in light of external conditions.
The Committee made recommendations to the Board concerning the
Individual Liquidity Adequacy Assessment, the Internal Capital
Adequacy Assessment Process (ICAAP) and the Contingency Funding
Plan, in line with the Group’s commitments to its regulators.
Risk appetite framework and limits
The risk appetite framework for the Group was reviewed in 2013 to
ensure it remained fit for purpose in light of internal restructuring, market
positioning and changes to regulation. Consideration was given to how
risk appetite linked to strategic objectives and how quantitative risk
appetite targets had been set. The Committee discussed earnings
volatility, including the impact of diversification benefit on the targets.
Following detailed discussion, the Committee recommended the
framework to the Board for approval and noted its support to
management as the framework was embedded across the Group at
divisional level. The Board Risk Committee separately reviewed the
country risk appetite and Group Market Risk Control Framework and
noted new market risk caps and changes to the existing limits.
In the second half of 2013 the Committee reviewed proposed changes to
the Single Name Concentration framework for Banks and a new Single
Name Concentration grid for Large Corporates.
The Committee also considered the Economic Capital model, which had
been under delivery since 2010. It was noted that the model was now
being transitioned to business as usual activity and had been used to
assess credit concentration risk for Pillar 2 capital as part of the 2011
ICAAP, resulting in a more accurate capital calculation. The Committee
is confident that the model will provide management with a clearer
understanding of risk.
The Committee continued to review the output of stress testing and
discussed the stress scenarios and underlying assumptions. In the
second half of 2013, the Committee noted the output of a reverse stress
testing exercise and recommended it for approval to the Board.
Risk management operating model
During the course of two separate visits to Risk Management, the
Committee reviewed the risk management operating model to ensure
the function had the appropriate structure and resources in place to
deliver its strategic plan. Bench-strength of the risk function was
reviewed and consideration was give to succession-planning, resource
and budget.
The strengthening of the Conduct and Regulatory Affairs function during
the second half of the year resulted in various changes to the risk
management operating model which were discussed in detail with the
Committee. Further developments to Risk Management, Conduct and
Regulatory Affairs and the risk committee framework that underpins the
Board Risk Committee will continue to be progressed in 2014 and the
Committee will remain involved in the discussions and changes as
appropriate.
As referenced in the Group Audit Committee report on pages 52 to 57, a
framework of Divisional Risk and Audit Committees is responsible for
reviewing the business of each division and reporting to the Group Audit
Committee and Board Risk Committee. During 2013, the Committee
reviewed the operation of the committees and requested that
management consider alternative mechanisms that could more
effectively provide a line of sight into divisional risk issues and activity.
The output of that review, will be more fully discussed in Q1 2014.