TIDM61ZU
RNS Number : 0310D
Natwest Markets PLC
14 February 2020
NatWest Markets Plc 14 February 2020
Annual Report and Accounts 2019
A copy of the Annual Report and Accounts 2019 for NatWest
Markets Plc has been submitted to the National Storage Mechanism
and will shortly be available for inspection at
http://www.morningstar.co.uk/uk/NSM. The document will be available
on The Royal Bank of Scotland Group plc's website at
www.investors.rbs.com/reports-archive
For further information, please contact:- RBS Media
Relations
+44 (0) 131 523 4205
Investor relations Amanda Hausler NatWest Markets Plc Investor
Relations
+44 (0) 207 085 6448
For the purpose of compliance with the Disclosure Guidance and
Transparency Rules, this announcement also contains risk factors
extracted from the Annual Report and Accounts 2019 in full unedited
text. Page references in the text refer to page numbers in the
Annual Report and Accounts 2019.
Risk Factors
Principal Risks and Uncertainties
Set out below are certain risk factors that could adversely
affect the NWM Group's future results, its financial condition and
prospects and cause them to be materially different from what is
forecast or expected and directly or indirectly impact the value of
its securities in issue. These risk factors are broadly categorised
and should be read in conjunction with other sections of this
annual report, including the forward looking statements section,
the strategic report and the capital and risk management section,
and should not be regarded as a complete and comprehensive
statement on its own of all potential risks and uncertainties
facing the NWM Group.
Strategic risk
The RBS Group has announced a new strategy that will require
changes in the NWM Group's business, including reductions in
capital allocated to the NWM Group, its cost base and complexity.
This entails material execution, commercial and operational risks
for the NWM Group.
On 14 February 2020, the RBS Group announced a new strategy,
focused on becoming a Purpose-led business. This new strategy will
require changes in the NWM Group's business, including an increased
focus on serving the RBS Group's corporate and institutional
customer base. Over the medium term, NWM Group intends to simplify
its operating model and technology platform, as well as reduce its
cost base and capital requirements. Together, these initiatives are
referred to as the 'NWM Refocusing'. The changes required are
substantial, will be implemented over several years, and may not
result in the expected outcome within the timeline and in the
manner contemplated.
A part of the NWM Refocusing is the intended reduction in NWM
Group's level of Risk weighted assets (RWAs). This includes an
expected reduction in NWM Plc's RWAs by GBP14-18 billion in the
medium term, through accelerating the exit of exposures and an
optimisation of inefficient capital across the NWM Group,
especially in relation to its Rates products. The NWM Refocusing
entails significant commercial, operational and execution risks and
is based on certain material assumptions that may prove to be
incorrect should, for example, RWAs take longer to exit or are more
costly to reduce than anticipated or not possible to exit at all.
In addition, it is anticipated that the NWM Group will generate
operating losses over the course of the transition plan period and
therefore the NWM Group's capital levels will also decline.
Moreover, it is anticipated that NWM Plc's capital ratios will be
maintained, as the level of RWAs is anticipated to fall more
quickly than capital levels. However, capital levels could decline
at a faster pace than expected (with a corresponding effect on the
capital ratios), should RWA exit costs or operating costs be higher
than anticipated, revenues reduce relatively faster than costs as a
result of execution issues or market conditions, or if NWM Plc
and/or NWM N.V. have difficulties accessing the funding market on
acceptable terms or at all (including if the legal entity credit
ratings are negatively impacted). Should any of the above arise,
additional management actions by the NWM Group or the RBS Group may
be triggered. The implementation of the NWM Refocusing is also
expected to result in material costs for the NWM Group and could be
materially higher than anticipated, including due to material
uncertainties and factors outside of the NWM Group's control, or
phased in a manner other than currently expected.
The NWM Refocusing is highly complex and the NWM Group may not
be able to successfully implement all aspects of it or reach any or
all of the related targets or expectations within the timeframes
contemplated, or at all. More generally, the targets and
expectations that accompany the NWM Refocusing are based on
management plans, projections and models, and are subject to a
number of key assumptions and judgments, any of which may prove to
be inaccurate. The scale and scope of the intended changes present
material and increased operational, IT system, culture, conduct,
business and financial risks to the NWM Group, especially during
the planning and implementation period. The NWM Refocusing is
resource-intensive and disruptive, and will divert management
resources, adding to the challenge for the new senior management
team of the NWM Group. In addition, the scale of changes being
concurrently implemented will require the implementation and
application of robust governance and controls frameworks and
further consolidation of IT systems and there is no guarantee that
the NWM Group will be successful in doing so.
The focus on meeting cost reduction targets will require
head-count reductions and may also result in limited investment in
other areas which could affect the NWM Group's long-term prospects,
product offering or competitive position and its ability to meet
its other targets. A significant proportion of the cost savings are
dependent on simplification of the IT systems and therefore may not
be realised in full if IT capabilities are not delivered in line
with assumptions. These risks will be present throughout the period
of refocusing and alignment which is expected to last for the
medium term.
Each of these risks could jeopardise the delivery and
implementation of the NWM Refocusing, result in higher than
expected costs, impact the NWM Group's products and services
offering, reputation with customers or business model and adversely
impact the NWM Group's ability to deliver its strategy and meet its
targets and guidance, any of which could in turn have a material
adverse impact on the NWM Group's results of operations, financial
condition and prospects. The NWM Refocusing envisages a smaller
scaled business and its successful implementation will result in
substantially lower revenues.
As a result, there can be no certainty that the NWM Refocusing
will be successfully executed, that the NWM Group will meet targets
and expectations, or that the refocused NWM Group will be a viable,
competitive business aligned to the RBS Group's corporate and
institutional customer offering.
T he NWM Group may not be able to successfully implement the NWM
Refocusing and it may not achieve its targets and the NWM Group may
not ultimately result in a viable, competitive business.
As part of the NWM Refocusing, the NWM Group has set a number of
financial, capital and operational targets and expectations. These
include (but are not limited to) expectations relating to
reductions in RWAs and the timing thereof, and CET1 ratio.
The successful implementation of the NWM Refocusing is highly
complex and the ability to meet associated targets and expectations
is subject to various internal and external factors and risks.
These include, but are not limited to, market, regulatory, economic
and political uncertainties, operational risks, insufficient cost
reduction plans, risks relating to the RBS Group's and NWM Group's
business models and strategies and delays or difficulties in
implementing the NWM Refocusing. The successful implementation of
the NWM Refocusing will also depend on how the NWM Refocusing is
perceived by its customers, regulators, rating agencies,
stakeholders and the wider market, how that impacts its business,
and the NWM Group's ability to retain employees required to deliver
the transition and its go-forward strategic priorities.
Revenues will be negatively impacted, and the implementation may
be more difficult or expensive than expected. Costs relating to the
NWM Refocusing may also be higher than anticipated. The orderly
run-down of certain of its portfolios and the targeted reduction of
its risk-weighted assets will be accompanied by the recognition of
disposal losses which may be higher than anticipated, including due
to future stresses which may place NWM Plc's capital ratios under
pressure. Furthermore, regulatory pressures or changes in the
economic and political and regulatory environment in which the NWM
Group operates or regulatory uncertainty or economic volatility,
including (but not limited to) as a result of the continued
uncertainty surrounding the terms of the UK's exit from the EU, or
changes in the scale and timing of policy responses on climate
change, may require the NWM Group to adjust aspects of the NWM
Refocusing or the timeframe for its implementation.
The NWM Group's ability to serve its customers may be diminished
by the implementation of the NWM Refocusing. In addition, customer
reactions to the changed nature of the NWM Group's business model
as a result may be more adverse than expected and previously
anticipated revenue and profitability levels may not be achieved in
the timescale envisaged or at all. An adverse macroeconomic
environment, including sustained low interest rates, continued
political and regulatory uncertainty and/or strong market
competition may also pose significant challenges to the successful
implementation of the NWM Refocusing and the achievement of its
targets. The prolonged period of implementation and changed nature
of the NWM Group's business may also adversely affect the credit
rating assigned to NWM Plc and certain of its subsidiaries
(including NWM N.V.) or any of their respective debt securities,
which could adversely affect the availability and cost of funding
for the NWM Group and negatively impact the NWM Group's liquidity
position.
Should the NWM Group not be able to implement or execute the NWM
Refocusing as contemplated, it may negatively impact revenues for
the NWM Group, its ability to meet targets and expectations and
could lead to revisions to the NWM Refocusing strategy, including
management actions by the RBS Group. Such changes and revisions
could have an adverse effect on the NWM Group, and may affect its
ability to be a viable and competitive business.
The RBS Group has announced a new Purpose-led Strategy which
will further influence the NWM Refocusing and the go-forward
strategy of the NWM Group.
On 14 February 2020 the RBS Group announced a new strategy,
focused on becoming a more purpose-led business, designed to
champion potential, and to help individuals, families and
businesses to thrive. The strategy has three areas of focus -
climate change, enterprise and learning - where the RBS Group
believes it can have the greatest positive impact. Together, these
strategic initiatives are referred to as the RBS Group's
'Purpose-led Strategy'. To deliver against this purpose and deliver
sustainable returns, the RBS Group intends to: focus on the
lifecycles of its customers using insights about customers to
evolve product and service offerings; re-engineer and simplify the
RBS Group by updating operational capability and technology and
strengthening governance and control frameworks to reduce costs and
improve customer journeys; focus on innovation and partnership to
drive change and achieve growth in new product areas and customer
segments; and have a sharper focus on capital allocation and deploy
it more effectively for customers, in particular through the NWM
Refocusing.
The implementation of the new Purpose-led Strategy is highly
complex and will require the NWM Group to set supporting targets
and implement a large number of concurrent and interdependent
actions and initiatives, including the NWM Refocusing, any of which
could fail to be implemented in the manner and to the extent
contemplated, due to operational, legal, execution or other issues.
The anticipated changes for NWM Group to support the RBS Group's
successful implementation of the Purpose-led Strategy are expected
to be substantial and some will take many years to fully embed and
may not result in the expected outcome on the timeline and in the
manner contemplated. See also 'The RBS Group's Purpose-led Strategy
includes one area of focus on climate change which entails
significant execution risk and is likely to require material
changes to the business model of the RBS Group (including the NWM
Group) over the next ten years'.
As part of its new Purpose-led Strategy, the RBS Group has set a
number of financial, capital and operational targets and
expectations, both for the short term and throughout the
implementation period. In addition to the NWM Refocusing, the RBS
Group will require significant reductions to its wider cost base.
In addition to requiring additional cost reductions within the NWM
Group, this could affect the cost and scope of the RBS Group's
provision of services to the NWM Group, which individually and
collectively may impact the NWM Group's competitive position and
its ability to meet its other targets. The implementation and
delivery of the Purpose-led Strategy by the RBS Group could have a
material adverse impact on the NWM Group's results of operations,
financial condition and prospects.
The RBS Group's Purpose-led Strategy includes one area of focus
on climate change which entails significant execution risk and is
likely to require material changes to the business model of the RBS
Group (including the NWM Group) over the next ten years.
The RBS Group's new strategy on climate change, together with
its commitments under the UN Principles on Responsible Banking to
align its strategy to the 2015 Paris Agreement will require the NWM
Group to dedicate resource to the RBS Group's efforts to develop
the capacity and methodology to understand, and measure the climate
impact of the emissions from its financing activity. The RBS Group
must identify its approach to this on a short time scale to meet
its target of setting and publishing sector-specific targets by
2021 and its goal of setting comprehensive climate impact
scenario-based reduction targets and plans for alignment to the
2015 Paris Agreement by 2022, and be able to adequately define and
benchmark its current climate impact to demonstrate its progress
against its ambition to reduce this by half over the next ten
years.
The NWM Group therefore expects to set targets for reductions to
the NWM Group's financed emissions which are currently unknown in
scope and nature but are expected to be significant. These targets,
together with the impact of embedding climate into its risk
framework and other regulatory, policy and market changes, is
likely to necessitate far reaching changes to the NWM Group's
operating model and existing exposures, and potentially on
timescales outside of risk appetite. Whilst the risks presented by
climate change are unprecedented, how the NWM Group implements the
RBS Group's strategy to respond to climate change may also have a
material adverse effect on the NWM Group's business and funding,
and its future profitability over the short, medium and long term.
Once established, there is no certainty that the NWM Group will be
able to meet its climate change targets and ambitions or that
seeking to do so will not have an adverse impact on the NWM Group,
including its competitive position. See also 'The NWM Group expects
to face significant risks in connection with climate change and the
transition to a low carbon economy'.
Financial resilience risk
The NWM Group may not meet the targets it communicates to the
market, generate returns or implement its strategy effectively.
As part of the RBS Group's Purpose-led Strategy and the NWM
Refocusing, the NWM Group has stated a number of internal and
external financial, capital and operational targets including in
respect of: balance sheet and cost reductions, CET1 ratio targets
(for NWM Plc and NWM N.V.), leverage ratio targets (for NWM Plc and
NWM N.V.), targets in relation to local regulation, funding plans
and requirements, management of RWAs and the timing thereof,
employee engagement, diversity and inclusion as well as
environmental, social and customer satisfaction targets.
The NWM Group's ability to meet its targets and to successfully
implement its strategy is subject to various internal and external
factors and risks. These include, but are not limited to, client
and staff behaviour and actions, market, regulatory, economic and
political factors, developments relating to litigation,
governmental actions, investigations and regulatory matters, and
operational risks and risks relating to the NWM Group's business
model and strategy (including risks associated with environmental,
social and governance issues) and the NWM Refocusing. See also 'The
NWM Group may not be able to successfully implement the NWM
Refocusing and it may not achieve its targets and the NWM Group may
not ultimately result in a viable, competitive, CIB-customer
focused banking business'.
A number of factors may impact NWM Plc and NWM N.V.'s ability to
maintain their current CET1 ratio targets, including impairments,
the extent of organic capital generation or the reduction of RWAs.
In addition, the exit of capital optimisation positions in NWM Plc
will give rise to disposal losses which may be partially recognised
prior to the disposal, and which may be higher than
anticipated.
The NWM Group's ability to meet its planned reductions in annual
costs may vary considerably from year to year. Furthermore, the
focus on meeting balance sheet and cost reduction targets may
result in limited investment in other areas which could affect the
NWM Group's long-term product offering or competitive position and
its ability to meet its other targets, including those related to
customer satisfaction.
In addition, challenging trading conditions may have an adverse
impact on the NWM Group's business (in particular, the income from
its Rates business) and may adversely affect its ability to achieve
its targets and execute its strategy. There is no certainty that
the NWM Group's strategy will be successfully executed, that it
will meet its targets and expectations, or that it will be a
viable, competitive or profitable banking business.
The NWM Group has recently undergone significant structural
change, as a result of the implementation of the UK ring-fencing
regime, and the acquisition of NatWest Markets N.V.
Prior to the implementation of the UK ring-fencing regime, NWM
Plc was the RBS Group's principal operating subsidiary. As a result
of the implementation of the UK ring-fencing regime and the
acquisition of NWM N.V., NWM Plc is now the principal operating
company for most of the RBS Group's operations outside the
ring-fence (excluding RBS International). As a result, the NWM
Group can no longer accept deposits from certain retail and small
business customers located in the EEA (and post-Brexit, in the EEA
and the UK) and the remaining operations of the NWM Group comprise
the businesses serving financial institutions and UK and European
corporate customers, providing them with risk management, trading
solutions and debt financing. These business operations are subject
to further potential changes as a result of the UK's departure from
the European Union.
The implementation of the UK ring-fencing regime has had a
significant impact on NWM Plc with a reduction in its operational
footprint, changes in Board composition, balance sheet composition,
its cost-to-income and CET1 ratios, risk profile, its funding
strategy, capital requirements and credit ratings. Accordingly, NWM
Plc has been required to adapt its strategy, structure and business
model and has adopted processes and structures for, among other
things, financial reporting, risk management and corporate
governance. It has also implemented a shared services model with
the ring-fenced entities for certain other services, the execution
of which is subject to various internal and external factors and
risks, including the implementation of the NWM Refocusing. See
also, 'The RBS Group has announced a new strategy that will require
changes in the NWM Group's business, including reductions in
capital allocated to the NWM Group, its cost base and complexity.
This entails material execution, commercial and operational risks
for the NWM Group' and 'The NWM Group may not be able to
successfully implement the NWM Refocusing and it may not achieve
its targets and the NWM Group may not ultimately result in a
viable, competitive business'. Moreover, the NWM Group has entered
into Revenue Share Agreements with some entities within the RBS
Group's ring-fenced sub-group (including NatWest Bank Plc, The
Royal Bank of Scotland Plc and Ulster Bank Ireland DAC) as well as
a non-ring-fenced entity (RBS International). It has also entered
into certain transfer pricing arrangements, a funded guarantee and
revenue sharing agreements with NWM N.V. in relation to certain EEA
customer transfers and Western European transfers.
Following the NWM Plc acquisition of RBS Holdings N.V. and its
wholly-owned subsidiary, NatWest Markets N.V., these entities are
now part of NWM Group, introducing additional risks, including in
respect of: foreign exchange exposure, counterparty and borrower
risk, Brexit risk (due to potential changes in regulatory approach
following Brexit), operational and business risk.
There can be no certainty that the NWM Group will be a viable,
competitive or profitable banking business. See also, 'The NWM
Group may not be able to successfully implement the NWM Refocusing
and it may not achieve its targets and the NWM Group may not
ultimately result in a viable, competitive business'.
The NWM Group is reliant on access to the global capital markets
to meet its funding requirements, both directly, and indirectly
through its parent for the subscription to its internal MREL.
The NWM Group's funding plan currently anticipates that in 2020
the NWM Group will issue GBP3-5 billion in senior unsecured funding
in order to meet its near-term debt re-financing and funding
requirements, based on its current and anticipated business
activities. The NWM Group is therefore reliant on frequent access
to the global capital markets for funding, and on terms that are
acceptable to it. Such access entails execution risk and could be
impeded by a number of internal or external factors, including,
those referred to below in 'The NWM Group faces market risk as a
result of increased political and economic risks and uncertainty in
the UK and global markets', 'Prevailing uncertainty regarding the
terms of the UK's withdrawal from the European Union has adversely
affected and will continue to affect the NWM Group' and 'Any
reduction in the credit rating assigned to RBSG plc, any of its
subsidiaries (including NWM Plc or NWM Group subsidiaries) or any
of their respective debt securities could adversely affect the
availability of funding for the NWM Group, reduce the NWM Group's
liquidity position and increase the cost of funding'.
In addition, NWM Plc receives capital and funding from the RBS
Group. NWM Plc has set target levels for different tiers of capital
and for the internal minimum requirements for own funds and
eligible liabilities ('MREL'), as percentages of its RWAs. The
level of capital and funding required for NWM Plc to meet its
internal targets is therefore a function of the level of RWAs and
its leverage exposure in NWM Plc and this may vary over time.
NWM Plc's internal MREL comprises the regulatory value of
capital instruments and loss-absorbing senior funding issued by NWM
Plc to its parent, RBSG plc, in all cases with a residual maturity
of at least one year. The Bank of England has identified that the
preferred resolution strategy for RBS Group is as a single point of
entry. As a result, only RBSG plc is able to issue Group MREL
eligible liabilities to third-party investors, using the proceeds
to fund the internal capital and MREL targets and/or requirements
of its operating entities, including NWM Plc. NWM Plc is therefore
dependent on RBSG plc to fund its internal capital targets and its
ability to source appropriate funding at an RBSG plc level to
support this. NWM Plc is also dependent on RBSG plc to continue to
fund NWM Plc's internal MREL target over time and its ability to
issue and maintain sufficient amounts of external MREL liabilities
to support this. In turn, NWM Plc is required to fund the internal
capital and MREL requirements of its subsidiaries.
Any inability of the NWM Group to adequately access the capital
markets, to manage its balance sheet in line with assumptions in
its funding plans, or to issue internal capital and MREL, may
adversely affect the NWM Group, such that the NWM Group may not
constitute a viable banking business and/or NWM Plc or NWM N.V. may
fail to meet their respective regulatory capital and/or MREL
requirements (at present, NWM N.V. does not yet have its own MREL
requirements).
NWM Plc and/or its regulated subsidiaries may not meet the
prudential regulatory requirements for capital and MREL.
The NWM Group is required by regulators in the UK, the EU and
other jurisdictions in which it undertakes regulated activities to
maintain adequate financial resources. Adequate capital also gives
the NWM Group financial flexibility in the face of turbulence and
uncertainty in the global economy and specifically in its core UK
and European markets.
NWM Plc's 2020 target CET1 ratio is above 15% (on a solo (i.e.
unconsolidated) basis). This target CET1 ratio is based on
regulatory requirements, internal modelling and risk appetite
(including under stress). NWM N.V.'s 2020 target CET1 ratio is
above 15% on a consolidated basis. This target CET1 ratio is based
on expected regulatory requirements, internal modelling and risk
appetite (including under stress), taking into account the
anticipated extent of transfers of EEA clients from NWM Plc and NWB
Plc to NWM N.V. due to Brexit.
As at 31 December 2019, NWM Plc's CET1 ratio was 17.3%. NWM
Plc's current capital strategy is based on the management of RWAs
and other capital management initiatives (including the reduction
of RWAs and the periodic payment of dividends to RBSG plc, NWM
Plc's parent company).
Other factors that could influence the NWM Plc and NWM N.V.'s
CET1 ratios include, amongst other things (see also, 'The RBS Group
has announced a new strategy that will require changes in the NWM
Group's business, including reductions in capital allocated to the
NWM Group, its cost base and complexity. This entails material
execution, commercial and operational risks for the NWM
Group'):
-- a depletion of NWM Plc or NWM N.V.'s capital resources
through losses (which would in turn impact retained earnings) and
may result from revenue attrition or increased liabilities,
sustained periods of low or lower interest rates, reduced asset
values resulting in write-downs or reserve adjustments,
impairments, changes in accounting policy, accounting charges or
foreign exchange movements;
-- a change in the quantum of NWM Plc's or NWM N.V.'s RWAs,
stemming from exceeding target RWA levels, the implementation of
the NWM Refocusing, regulatory adjustments (for example, from
additional market risk backtesting exceptions) or foreign exchange
movements. An increase in RWAs would lead to a reduction in the
CET1 ratio (and increase in the amount of internal MREL required
for NWM Plc);
-- changes in prudential regulatory requirements including the
Total Capital Requirement for NWM Plc (as regulated by the PRA) or
NWM N.V. (as regulated by the De Nederlandsche Bank ('DNB')),
including Pillar 2 requirements and regulatory buffers (including
the increased 2% countercyclical capital buffer for UK banks with
effect from 16 December 2020), as well as any applicable
scalars;
-- further developments of prudential regulation (for example,
the CCR2 and finalisation of Basel 3 standards), which will impact
various areas including the approach to calculating credit risk,
market risk, leverage ratio, capital floors and operational risk
RWAs, as well as continued regulatory uncertainty on the details
thereto;
-- further losses (including as a result of extreme one-off
incidents such as cyberattack, fraud or conduct issues) would
deplete capital resources and place downward pressure on the CET1
ratio;
-- the timing of planned liquidation, disposal and/or capital
releases of capital optimisation activity or legacy entities owned
by NWM Plc and NWM N.V.; or
-- the risk in relation to an adverse market movement impacting
the value of our SAR denominated shareholding in Saudi British Bank
(SABB). NWM Plc acquired a 4.1% equity non-significant investment
in SABB from NWM N.V. in June 2019 on completion of the merger of
Alawwal bank with SABB.
NWM Plc has a Capital Support Deed, which facilitates capital
support amongst the participating entities in the NWM Group.
Any capital management actions taken under a stress scenario may
affect, among other things, the NWM Group's product offering,
credit ratings, ability to operate its businesses and pursue its
current strategies and strategic opportunities as well as
negatively impacting investor confidence and the value of the NWM
Group's securities. See also, 'NWM Plc and/or its regulated
subsidiaries may not manage their capital, liquidity or funding
effectively which could trigger the execution of certain management
actions or recovery options.' and 'The RBS Group (including the NWM
Group entities) may become subject to the application of UK
statutory stabilisation or resolution powers which may result in,
among other actions, the write-down or conversion of the NWM Group
entities' Eligible Liabilities'.
NWM Plc may not be able to adequately access sources of
liquidity and funding.
The NWM Group is required to access sources of liquidity and
funding through deposits and wholesale funding, including debt
capital markets and trading liabilities such as repurchase
agreements. As at 31 December 2019, the NWM Group held GBP5.8
billion in deposits from banks and customers. The level of deposits
and wholesale funding may fluctuate due to factors outside the NWM
Group's control. These include loss of confidence (including in
individual NWM Group entities or the UK banking sector or the
banking sector as a whole) and increasing competitive pressures for
bank funding or the reduction or cessation of deposits and other
funding by foreign counterparties, which could result in a
significant outflow of deposits or reduction in wholesale funding
within a short period of time. See also, 'The NWM Group has
significant exposure to counterparty and borrower risk'. An
inability to grow, roll-over, or any material decrease in, the NWM
Group's deposits, short-term wholesale funding and short-term
liability financing could, particularly if accompanied by one of
the other factors described above, materially affect the NWM
Group's ability to satisfy its liquidity needs.
The NWM Group engages from time to time in "fee based borrow"
transactions whereby collateral (such as government bonds) is
borrowed from counterparties on an unsecured basis in return for a
fee. This borrowed collateral may be used by the NWM Group to
finance parts of its balance sheet, either in its repo financing
business, derivatives portfolio or more generally across its
balance sheet. If such "fee based borrow" transactions are unwound
whilst used to support the financing of parts of the NWM Group
balance sheet, then unsecured funding from other sources would be
required to replace such financing. There is a risk that the NWM
Group is unable to replace such financing on acceptable terms or at
all, which could adversely affect its liquidity position and have a
material adverse effect on the NWM Group's financial condition and
results of operations. In addition, because the "fee base borrow"
transactions are conducted off-balance sheet (due to the collateral
being borrowed) investors may find it more difficult to gauge the
NWM Group's creditworthiness, which may be affected if these
transactions were to be unwound in a stress scenario, and any lack
of or perceived lack of creditworthiness may adversely affect the
NWM Group.
As at 31 December 2019, the NWM Group reported a liquidity
coverage ratio of 254%. If its liquidity position were to come
under stress and if the NWM Group is unable to raise funds through
deposits or wholesale funding sources on acceptable terms or at
all, its liquidity position could be adversely affected and it
might be unable to meet deposit withdrawals on demand, buy back
requests, to repay borrowings as they mature, to meet its
obligations under committed financing facilities, to comply with
regulatory funding requirements, to undertake certain capital
and/or debt management activities, or to fund new loans,
investments and businesses. The NWM Group may need to liquidate
unencumbered assets to meet its liabilities, including disposals of
assets not previously identified for disposal to reduce its funding
commitments. This could also lead to higher funding costs. In a
time of reduced liquidity, or market stress, the NWM Group may be
unable to sell some of its assets, or may need to sell assets at
depressed prices, which in either case could negatively affect the
NWM Group's results.
The NWM Group independently manages liquidity risk on a
stand-alone basis, including through holding its own liquidity
portfolio. It has restricted access to liquidity or funding from
other RBS Group entities. As a result, NWM Plc's liquidity position
could be adversely affected, which may require unencumbered assets
to be liquidated or may result in higher funding costs which may
adversely impact the NWM Group's margins and profitability. NWM
Plc's management of its own liquidity portfolio and the new
structure of capital support are subject to operational and
execution risk, as NWM Plc is now required to meet its own
liquidity and capital requirements.
NWM Plc and/or its regulated subsidiaries may not manage their
capital, liquidity or funding effectively which could trigger the
execution of certain management actions or recovery options.
Under the EU Bank Recovery and Resolution Directive ('BRRD'), as
implemented in the UK, the NWM Group must maintain a recovery plan
acceptable to its regulator, such that a breach of NWM Plc's
applicable capital or leverage or liquidity requirements would
trigger consideration of NWM Plc's recovery plan, and in turn may
prompt consideration of the RBS Group's recovery plan. If, under
stressed conditions, the capital or leverage ratio were to decline,
there are a range of recovery management actions (focused on risk
reduction and mitigation) that NWM Plc could undertake that may or
may not be sufficient to restore adequate capital and leverage
ratios. Additional management options relating to existing capital
issuances, asset or business disposals, capital payments and
dividends from NWM Plc to its parent, could also be undertaken to
support NWM Plc's capital and leverage requirements. The RBS Group
may also address a shortage of capital in NWM Plc by providing
parental support to NWM Plc, subject to evidence that the
conditions set out in Article 23 of the BRRD have been met. The RBS
Group's (and NWM Plc's) regulator may also request that the NWM
Group carry out additional capital management actions. The Bank of
England has identified single point-of-entry as the preferred
resolution strategy for RBS Group. However, under certain
conditions set forth in the BRRD, as the UK resolution authority,
the Bank of England also has the power to execute the 'bail-in' of
certain securities of the NWM Group without further action at the
RBS Group level.
Any capital management actions taken under a stress scenario may
affect, among other things, the NWM Group's product offering,
credit ratings, ability to operate its businesses and pursue its
current strategies and strategic opportunities as well as
negatively impacting investor confidence and the value of the NWM
Group's securities. See also, 'The RBS Group (including the NWM
Group) may become subject to the application of UK statutory
stabilisation or resolution powers which may result in, among other
actions, the write-down or conversion of the NWM Group entities'
Eligible Liabilities'. In addition, if NWM Plc or NWM N.V.'s
liquidity position were to be adversely affected, this may require
unencumbered assets to be liquidated or may result in higher
funding costs which may adversely impact the NWM Group's operating
performance.
Any reduction in the credit rating assigned to RBSG plc, any of
its subsidiaries (including NWM Plc or NWM Group subsidiaries) or
any of their respective debt securities could adversely affect the
availability of funding for the NWM Group, reduce the NWM Group's
liquidity position and increase the cost of funding.
Rating agencies regularly review RBSG plc, NWM Plc and other RBS
Group entity credit ratings, which could be negatively affected by
a number of factors that can change over time including, the credit
rating agency's assessment of the NWM Group's strategy and
management's capability; its financial condition including in
respect of profitability, asset quality, capital, funding and
liquidity; the level of political support for the industries in
which the NWM Group operates; the implementation of structural
reform; the legal and regulatory frameworks applicable to the NWM
Group's legal structure; business activities and the rights of its
creditors; changes in rating methodologies; changes in the relative
size of the loss-absorbing buffers protecting bondholders and
depositors; the competitive environment, political and economic
conditions in the NWM Group's key markets (including the impact of
Brexit and any further Scottish independence referendum); any
reduction of the UK's sovereign credit rating and market
uncertainty. See also, 'The RBS Group has announced a new strategy
that will require changes in the NWM Group's business, including
reductions in capital allocated to the NWM Group, its cost base and
complexity. This entails material execution, commercial and
operational risks for the NWM Group'.
In addition, credit ratings agencies are increasingly taking
into account environmental, social and governance ("ESG") factors,
including climate risk, as part of the credit ratings analysis, as
are investors in their investment decisions.
Any reductions in the credit ratings of RBSG plc, NWM Plc or of
certain other RBS Group entities, including, in particular,
downgrades below investment grade, or a deterioration in the
capital markets' perception of NWM Group's financial resilience
could significantly affect the NWM Group's access to money markets,
reduce the size of its deposit base and trigger additional
collateral or other requirements in derivatives contracts and other
secured funding arrangements or the need to amend such
arrangements, which could adversely affect the NWM Group's (and, in
particular, NWM Plc's) cost of funding and its access to capital
markets and could limit the range of counterparties willing to
enter into transactions with the NWM Group (and, in particular, NWM
Plc). This could in turn adversely impact its competitive position
and threaten the prospects of the NWM Group in the short to
medium-term.
The NWM Group operates in markets that are highly competitive,
with increasing competitive pressures and technology
disruption.
The markets in which the NWM Group operates are highly
competitive, and competition may intensify in response to evolving
customer behaviour, technological changes, competitor behaviour,
new entrants to the market, industry trends resulting in increased
disaggregation or unbundling of financial services, the impact of
regulatory actions and other factors. Innovations such as
biometrics, artificial intelligence, the cloud, blockchain, and
quantum computing may also rapidly facilitate industry
transformation.
Increasingly many of the products and services offered by the
NWM Group are, and will become, technology intensive and the NWM
Group's ability to develop such services and comply with related
regulatory changes has become increasingly important to retaining
and growing the NWM Group's client businesses across its
geographical footprint. There can be no certainty that the NWM
Group's innovation strategy (which includes investment in its IT
capability intended to improve its core infrastructure and client
interface capabilities as well as investments and partnerships with
third party technology providers) will be successful or that it
will allow the NWM Group to continue to grow such services in the
future.
In addition, certain of the NWM Group's current or future
competitors may be more successful in implementing innovative
technologies for delivering products or services to their clients.
Furthermore, these competitors may be better able to attract and
retain clients and key employees and may have access to lower cost
funding and/or be able to attract deposits or provide investment
banking services on more favourable terms than the NWM Group.
Although the NWM Group invests in new technologies and participates
in industry and research-led initiatives aimed at developing new
technologies, such investments may be insufficient or ineffective,
especially given the NWM Group's focus on its cost savings targets.
This may limit additional investment in areas such as financial
innovation and therefore could affect the NWM Group's offering of
innovative products or technologies for delivering products or
services to clients and its competitive position. The NWM Group may
also fail to identify future opportunities or derive benefits from
disruptive technologies in the context of rapid technological
innovation, changing customer behaviour and growing regulatory
demands. The development of innovative products depends on the NWM
Group's ability to produce underlying high quality data, failing
which its ability to offer innovative products may be
compromised.
If the NWM Group is unable to offer competitive, attractive and
innovative products that are also profitable, it will lose market
share, incur losses on some or all of its activities and lose
opportunities for growth. In this context, the NWM Group is
investing in the automation of certain solutions and interactions
within its customer-facing businesses, including through artificial
intelligence. Such initiatives may result in operational,
reputational and conduct risks if the technology used is defective,
or is not fully integrated into the NWM Group's current solutions
or does not deliver expected cost savings. The investment in
automated processes will likely also result in increased short-term
costs for the NWM Group.
In addition, recent and future disposals and restructurings by
the NWM Group, the implementation of the NWM Refocusing and the RBS
Group's Purpose-led Strategy (including its climate ambition),
cost-reduction measures, as well as employee remuneration
constraints, may also have an impact on its ability to compete
effectively and intensified competition from incumbents,
challengers and new entrants in the NWM Group's core markets could
affect the NWM Group's ability to provide satisfactory returns. See
also, 'The NWM Group may not be able to successfully implement the
NWM Refocusing and it may not achieve its targets and the NWM Group
may not ultimately result in a viable, competitive business'.
Moreover, activist investors have increasingly become engaged and
interventionist in recent years, which may pose a threat to the RBS
Group's strategic initiatives. Furthermore, continued consolidation
in certain sectors of the financial services industry could result
in the NWM Group's remaining competitors gaining greater capital
and other resources, including the ability to offer a broader range
of products and services and geographic diversity, or the emergence
of new competitors.
The NWM Group may be adversely affected if the RBS Group fails
to meet the requirements of regulatory stress tests.
The RBS Group is subject to annual stress tests by its regulator
in the UK and is also subject to stress tests by European
regulators with respect to RBSG plc, NWM N.V. and Ulster Bank
Ireland DAC. Stress tests are designed to assess the resilience of
banks to potential adverse economic or financial developments and
ensure that they have robust, forward-looking capital planning
processes that account for the risks associated with their business
profile. If the stress tests reveal that a bank's existing
regulatory capital buffers are not sufficient to absorb the impact
of the stress, then it is possible that RBS Group and/or NWM Group
may need to take action to strengthen their capital positions.
Failure by the RBS Group to meet its quantitative and
qualitative requirements of the stress tests set forth by its UK
regulators or those elsewhere may result in: the RBS Group's
regulators requiring the RBS Group to generate additional capital,
reputational damage, increased supervision and/or regulatory
sanctions and/or loss of investor confidence.
The NWM Group has significant exposure to counterparty and
borrower risk.
NWM N.V., which NWM plc acquired in late 2019, has a portfolio
of loans and loan commitments to Western European corporate
customers. Through the NWM N.V. business and the NWM Group's other
activities, the NWM Group has exposure to many different
industries, customers and counterparties, and risks arising from
actual or perceived changes in credit quality and the
recoverability of monies due from borrowers and other
counterparties are inherent in a wide range of the NWM Group's
businesses. These are particularly relevant for those businesses
for which the concentration of client income is heavily weighted
towards a specific geographic region, industry or client base. The
NWM Group is exposed to credit risk if a customer, borrower or
counterparty defaults, or under IFRS 9, suffers a sufficiently
significant deterioration of credit quality such that, under SICR
('significant increases in credit risk') rules, it moves to Stage 2
for impairment calculation purposes. Credit risk may arise from a
variety of business activities, including, but not limited to:
extending credit to clients through various lending commitments;
entering into swap or other derivative contracts under which
counterparties have obligations to make payments to the NWM Group
(including un-collateralised derivatives); providing short or
long-term funding that is secured by physical or financial
collateral whose value may at times be insufficient to fully cover
the loan repayment amount; posting margin and/or collateral and
other commitments to clearing houses, clearing agencies, exchanges,
banks, securities firms and other financial counterparties; and
investing and trading in securities and loan pools, whereby the
value of these assets may fluctuate based on realised or expected
defaults on the underlying obligations or loans. See also, 'Capital
and risk management - Credit Risk'. Any negative developments in
the activities listed above may negatively impact the NWM Group's
clients and credit exposures, which may, in turn, adversely impact
the NWM Group's profitability.
The credit quality of the NWM Group's borrowers and other
counterparties is impacted by prevailing economic and market
conditions and by the legal and regulatory landscape in the UK and
Europe in general, and any deterioration in such conditions or
changes to legal or regulatory landscapes could worsen borrower and
counterparty credit quality and consequently adversely impact the
NWM Group's ability to enforce contractual security rights. See
also, 'The NWM Group faces market risk as a result of increased
political and economic risks and uncertainty in the UK and global
markets'.
Concerns about, or a default by, a financial institution could
lead to significant liquidity problems and losses or defaults by
other financial institutions, since the commercial and financial
soundness of many financial institutions is closely related and
inter-dependent as a result of credit, trading, clearing and other
relationships. Any perceived lack of creditworthiness of a
counterparty may lead to market-wide liquidity problems and losses
for the NWM Group. In addition, the value of collateral may be
correlated with the probability of default by the relevant
counterparty ('wrong way risk'), which would increase NWM Group's
potential loss. This systemic risk may also adversely affect
financial intermediaries, such as clearing agencies, clearing
houses, banks, securities firms and exchanges with which the NWM
Group interacts on a daily basis. See also, 'The NWM Group is
reliant on access to the global capital markets to meet its funding
requirements, both directly, and indirectly through its parent for
the subscription to its internal MREL'.
As a result of the above, borrower and counterparty credit
quality may cause accelerated impairment charges under IFRS 9,
increased repurchase demands, higher costs, additional write-downs
and losses for the NWM Group and an inability to engage in routine
funding transactions.
The NWM Group is exposed to the financial industry, including
sovereign debt securities, banks, financial intermediation
providers (including providing facilities to financial sponsors and
funds, backed by assets or investor commitments) and securitised
products (typically senior lending to special purpose vehicles
backed by pools of financial assets). Due to the NWM Group's
exposure to the financial industry, it also has exposure to shadow
banking entities (ie, entities which carry out banking activities
outside a regulated framework). Recently, there has been increasing
regulatory focus on shadow banking. In particular, the European
Banking Authority Guidelines (EBA/GL/2015/20) require NWM Group to
identify and monitor its exposure to shadow banking entities,
implement and maintain an internal framework for the
identification, management, control and mitigation of the risks
associated with exposure to shadow banking entities, and ensure
effective reporting and governance in respect such exposure. If the
NWM Group is unable to properly identify and monitor its shadow
banking exposure, maintain an adequate framework, or ensure
effective reporting and governance in respect of shadow banking
exposure, this may adversely affect the financial condition and
prospects of the NWM Group.
The NWM Group could incur losses or be required to maintain
higher levels of capital as a result of limitations or failure of
various models.
Given the complexity of the NWM Group's business, strategy and
capital requirements, the NWM Group relies on analytical models for
a wide range of purposes, including to manage its business, assess
the value of its assets and its risk exposure, as well as to
anticipate capital and funding requirements (including to
facilitate the RBS Group's mandated stress testing). In addition,
the NWM Group utilises models for valuations, credit approvals,
calculation of loan impairment charges on an IFRS 9 basis,
financial reporting and for financial crime and fraud risk
management. The NWM Group's models, and the parameters and
assumptions on which they are based, are periodically reviewed and
updated to maximise their accuracy.
Such models are inherently designed to be predictive in nature.
Failure of these models, including due to errors in model design or
inputs, to accurately reflect changes in the micro and
macroeconomic environment in which the NWM Group operates, to
capture risks and exposures at the subsidiary level, to be updated
in line with the NWM Group's current business model or operations,
or findings of deficiencies by the RBS Group (and in particular,
the NWM Group's) regulators (including as part of the RBS Group's
mandated stress testing) may result in increased capital
requirements or require management action. The NWM Group may also
face adverse consequences as a result of actions based on models
that are poorly developed, implemented or used, models that are
based on inaccurate or compromised data or as a result of the
modelled outcome being misunderstood, or by such information being
used for purposes for which it was not designed.
The NWM Group's financial statements are sensitive to underlying
accounting policies, judgments, estimates and assumptions.
The preparation of financial statements requires management to
make judgments, estimates and assumptions that affect the reported
amounts of assets, liabilities, income, expenses, exposures and
RWAs. Due to the inherent uncertainty in making estimates
(particularly those involving the use of complex models), future
results may differ from those estimates. Estimates, judgments,
assumptions and models take into account historical experience and
other factors, including market practice and expectations of future
events that are believed to be reasonable under the
circumstances.
The accounting policies deemed critical to the NWM Group's
results and financial position, based upon materiality and
significant judgments and estimates, which include loan impairment
provisions, are set out in 'Critical accounting policies and key
sources of estimation uncertainty' on page 87. New accounting
standards and interpretations that have been issued by the
International Accounting Standards Board but which have not yet
been adopted by the NWM Group are discussed in 'Accounting
developments' on page 87.
Changes in accounting standards may materially impact NWM
Group's financial results.
Changes in accounting standards or guidance by accounting bodies
or in the timing of their implementation, whether immediate or
foreseeable, could result in the NWM Group having to recognise
additional liabilities on its balance sheet, or in further
write-downs or impairments to its assets and could also
significantly impact the financial results, condition and prospects
of the NWM Group.
The NWM Group's trading assets amounted to GBP76.5 billion as at
31 December 2019. The valuation of financial instruments, including
derivatives, measured at fair value can be subjective, in
particular where models are used which include unobservable inputs.
Generally, to establish the fair value of these instruments, the
NWM Group relies on quoted market prices or, where the market for a
financial instrument is not sufficiently credible, internal
valuation models that utilise observable market data. In certain
circumstances, the data for individual financial instruments or
classes of financial instruments utilised by such valuation models
may not be available or may become unavailable due to prevailing
market conditions. In such circumstances, the NWM Group's internal
valuation models require the NWM Group to make assumptions,
judgments and estimates to establish fair value, which are complex
and often relate to matters that are inherently uncertain. Any of
these factors could require the NWM Group to recognise fair value
losses, which may have an adverse effect on the NWM Group's income
generation and financial position.
With effect from 1 January 2019, the NWM Group adopted IFRS 16
Leases, as disclosed in the Accounting Policies. This increased
Other assets by GBP56 million and Other liabilities by GBP62
million. While adoption of this standard has had no effect on the
NWM Group's cash flows, it has impacted financial ratios, which may
influence investors' perception of the financial condition of the
NWM Group.
The RBS Group (including the NWM Group) may become subject to
the application of UK statutory stabilisation or resolution powers
which may result in, among other actions, the write-down or
conversion of the NWM Group entities' Eligible Liabilities.
The Banking Act 2009, as amended ('Banking Act'), implemented
the BRRD in the UK and created a special resolution regime ('SRR').
Under the SRR, HM Treasury, the Bank of England and the PRA and FCA
(together 'Authorities') are granted substantial powers to resolve
and stabilise UK-incorporated financial institutions. Five
stabilisation options exist under the current SRR: (i) transfer of
all of the business of a relevant entity or the shares of the
relevant entity to a private sector purchaser; (ii) transfer of all
or part of the business of the relevant entity to a 'bridge bank'
wholly-owned by the Bank of England; (iii) transfer of part of the
assets, rights or liabilities of the relevant entity to one or more
asset management vehicles for management of the transferor's
assets, rights or liabilities; (iv) the write-down, conversion,
transfer, modification, or suspension of the relevant entity's
equity, capital instruments and liabilities ('Eligible
Liabilities'); and (v) temporary public ownership of the relevant
entity. These tools may be applied to RBSG plc as the parent
company or to the NWM Group, as an affiliate, where certain
conditions are met (such as, whether the firm is failing or likely
to fail, or whether it is reasonably likely that action will be
taken (outside of resolution) that will result in the firm no
longer failing or being likely to fail). Moreover, the SRR provides
for modified insolvency and administration procedures for relevant
entities, and confers ancillary powers on the Authorities,
including the power to modify or override certain contractual
arrangements in certain circumstances. The Authorities are also
empowered by order to amend the law for the purpose of enabling the
powers under the SRR to be used effectively. Such orders may
promulgate provisions with retrospective applicability. Similar
powers may also be exercised with respect to NWM N.V. in the
Netherlands by the relevant Dutch regulatory authorities.
Under the Banking Act, the Authorities are generally required to
have regard to specified objectives in exercising the powers
provided for by the Banking Act. One of the objectives (which is
required to be balanced as appropriate with the other specified
objectives) refers to the protection and enhancement of the
stability of the financial system of the UK. Moreover, the 'no
creditor worse off' safeguard contained in the Banking Act (which
provides that creditors' losses in resolution should not exceed
those that would have been realised in an insolvency of the
relevant institution) may not apply in relation to an application
of the separate write-down and conversion power relating to capital
instruments under the Banking Act, in circumstances where a
stabilisation power is not also used; holders of debt instruments
which are subject to the power may, however, have ordinary shares
transferred to or issued to them by way of compensation.
Uncertainty exists as to how the Authorities may exercise the
powers granted to them under the Banking Act including the
determination of actions undertaken in relation to the ordinary
shares and other securities issued by RBS Group (including the NWM
Group) and may depend on factors outside of the NWM Group's
control. Moreover, the relevant provisions of the Banking Act
remain untested in practice.
If the NWM Group (or any other RBS Group entity) is at or is
approaching the point of non-viability such that regulatory
intervention is required, any exercise of the resolution regime
powers by the Authorities may adversely affect holders of the NWM
Group's Eligible Liabilities that fall within the scope of
resolution regime powers. This may result in various actions being
undertaken in relation to the NWM Group and any Eligible
Liabilities of the NWM Group, including write-down, conversion,
transfer or modification which may adversely affect the financial
results, condition and prospects of the NWM Group.
The RBS Group is subject to Bank of England oversight in respect
of resolution, and the RBS Group could be adversely affected should
the Bank of England deem the RBS Group's preparations to be
inadequate.
The RBS Group is subject to regulatory oversight by the Bank of
England, and is required (under the PRA rulebook) to carry out an
assessment of its preparations for resolution, submit a report of
the assessment to the PRA, and disclose a summary of this report.
The initial report is due to be submitted to the PRA on 2 October
2020 and the Bank of England's assessment of RBS Group's
preparations is scheduled to be released on 11 June 2021.
The RBS Group has dedicated significant resources towards the
preparation of the RBS Group for a potential resolution scenario.
However, if the assessment reveals that the RBS Group is not
adequately prepared to be resolved, or does not have adequate plans
in place to meet resolvability requirements by 1 January 2022, the
RBS Group may be required to take action to enhance its
preparations to be resolvable, resulting in additional cost and the
dedication of additional resources. Such actions may adversely
affect the RBS Group and/or the NWM Group, resulting in
restrictions on maximum individual and aggregate exposures, a
requirement to dispose of specified assets, a requirement to cease
carrying out certain activities and/or maintaining a specified
amount of MREL. This may also result in reputational damage and/or
loss of investor confidence.
Operational and IT resilience risk
The NWM Group is subject to increasingly sophisticated and
frequent cyberattacks.
The NWM Group is experiencing an increase in cyberattacks across
both the entire NWM Group and against the NWM Group's supply chain,
reinforcing the importance of due diligence and close working with
the third parties on which the NWM Group relies. The NWM Group is
reliant on technology, against which there is a constantly evolving
series of attacks, that are increasing in terms of frequency,
sophistication, impact and severity. As cyberattacks evolve and
become more sophisticated, the NWM Group is required to continue to
invest in additional capability designed to defend against emerging
threats. In 2019, the NWM Group was subjected to a small number of
Distributed Denial of Service ('DDOS') attacks, which are a
pervasive and significant threat to the global financial services
industry. The focus is to mitigate the impact of the attacks and
sustain availability of services for NWM Group's customers. The NWM
Group continues to invest significant resources in the development
and evolution of cyber security controls that are designed to
minimise the potential effect of such attacks.
Hostile attempts are made by third parties to gain access to and
introduce malware (including ransomware) into the NWM Group's IT
systems, and to exploit vulnerabilities. The NWM Group has
information and cyber security controls in place, which are subject
to review on a continuing basis, but given the nature of the
threat, there can be no assurance that such measures will prevent
all attacks in the future. See also, 'The NWM Group's operations
are highly dependent on its complex IT systems, and any IT failure
could adversely affect the NWM Group '.
Any failure in the NWM Group's cybersecurity policies,
procedures or controls, may result in significant financial losses,
major business disruption, inability to deliver customer services,
or loss of data or other sensitive information (including as a
result of an outage) and may cause associated reputational damage.
Any of these factors could increase costs (including costs relating
to notification of, or compensation for clients and credit
monitoring), result in regulatory investigations or sanctions being
imposed or may affect the NWM Group's ability to retain and attract
clients. Regulators in the UK, US, Europe and Asia continue to
recognise cybersecurity as an increasing systemic risk to the
financial sector and have highlighted the need for financial
institutions to improve their monitoring and control of, and
resilience (particularly of critical services) to cyberattacks, and
to provide timely notification of them, as appropriate.
Additionally, third parties may also fraudulently attempt to
induce employees, customers, third party providers or other users
who have access to the NWM Group's systems to disclose sensitive
information in order to gain access to the NWM Group's data or that
of the NWM Group's clients or employees. Cybersecurity and
information security events can derive from groups or factors such
as: internal or external threat actors, human error, fraud or
malice on the part of the NWM Group's employees or third parties,
including third party providers, or may result from accidental
technological failure.
The NWM Group expects greater regulatory engagement, supervision
and enforcement in relation to its overall resilience to withstand
IT and related disruption, either through a cyberattack or some
other disruptive event. Such increased regulatory engagement,
supervision and enforcement is uncertain in relation to the scope,
cost, consequence and the pace of change, which could negatively
impact the NWM Group. Due to the NWM Group's reliance on technology
and the increasing sophistication, frequency and impact of
cyberattacks, it is likely that such attacks could have a material
adverse impact on the NWM Group.
In accordance with the General Data Protection Regulation
('GDPR'), the NWM Group is required to ensure it implements timely
appropriate and effective organisational and technological
safeguards against unauthorised or unlawful access to data of the
NWM Group, its clients and its employees. In order to meet this
requirement, the NWM Group relies on the effectiveness of its
internal policies, controls and procedures to protect the
confidentiality, integrity and availability of information held on
its IT systems, networks and devices as well as with third parties
with whom the NWM Group interacts. A failure to monitor and manage
data in accordance with the GDPR requirements of the applicable
legislation may result in financial losses, regulatory fines and
investigations and associated reputational damage. In addition,
whilst the NWM Group takes measures to prevent, detect and minimise
attacks, the NWM Group's systems, and those of third party
providers, are subject to frequent cyberattacks.
The NWM Group operations and strategy are highly dependent on
the effective use and accuracy of data.
The NWM Group relies on the effective use of accurate data to
support and improve its operations and deliver its strategy.
Failure to produce underlying high quality data and/or the
ineffective use of such data could result in a failure to satisfy
its customers' expectations including by delivering innovative
products and services. This could place NWM Group at a competitive
disadvantage, inhibit its efforts to reduce costs and improve its
systems, controls and processes, and result in a failure to deliver
the NWM Group's strategy. The use of unethical or inappropriate
data and/or non-compliance with customer data and privacy
protection could give rise to conduct and litigation risks and
could also increase the risk of an operational event or losses or
other adverse consequences due to inappropriate models, systems,
processes, decisions or other actions.
Operational risks are inherent in the NWM Group's
businesses.
Operational risk is the risk of loss resulting from inadequate
or failed internal processes, procedures, people or systems, or
from external events, including legal risks. The NWM Group operates
in many countries, offering a diverse range of products and
services supported by 5,000 employees as at 31 December 2019; it
therefore has complex and diverse operations. As a result,
operational risks or losses can arise from a number of internal or
external factors (including financial crime). These risks are also
present when the NWM Group relies on third-party suppliers or
vendors to provide services to it or its clients, as is
increasingly the case as the NWM Group outsources certain
functions, including with respect to the implementation of new
technologies, innovation and responding to regulatory and market
changes.
Operational risks continue to be heightened as a result of the
implementation of the NWM Refocusing and the RBS Group's
Purpose-led Strategy, the NWM Group's current cost-reduction
measures and conditions affecting the financial services industry
generally (including Brexit and other geo-political developments)
and in particular the legal and regulatory uncertainty resulting
therefrom. This may place significant pressure on the NWM Group's
ability to maintain effective internal controls and governance
frameworks. The NWM Group is also dependent on the RBS Group for
certain shared critical services, including property, financial
accounting, regulatory reporting and certain administrative and
legal services, the cost for which are determined by RBS Group and
which may increase from time to time. A failure to adequately
supply these services may result in increased costs or other
liabilities to the NWM Group should the NWM Group have to increase
its capacity to provide these services internally or by outsourcing
to third parties for these services. Because the NWM Group utilises
certain services provided by the RBS Group, changes in the cost of
these services may adversely impact the NWM Group's results of
operations. The effective management of operational risks is
critical to meeting customer service expectations and retaining and
attracting client business. Although the NWM Group has implemented
risk controls and mitigation actions, with resources and planning
having been devoted to mitigate operational risk, such measures may
not be effective in controlling each of the operational risks faced
by the NWM Group. Ineffective management of such risks could
adversely affect the NWM Group. See also, 'The RBS Group has
announced a new strategy that will require changes in the NWM
Group's business, including reductions in capital allocated to the
NWM Group, its cost base and complexity. This entails material
execution, commercial and operational risks for the NWM Group' and
'The RBS Group has announced a new Purpose-led Strategy which will
further influence the NWM Refocusing and the go-forward strategy of
the NWM Group'.
The NWM Group's operations are highly dependent on its complex
IT systems, and any IT failure could adversely affect the NWM
Group.
The NWM Group's operations are highly dependent on the ability
to process a very large number of transactions efficiently and
accurately while complying with applicable laws and regulations.
The proper functioning of the NWM Group's transactional and payment
systems, financial crime and sanctions controls, risk management,
credit analysis and reporting, accounting, customer service and
other IT systems (some of which are owned and operated by RBSG plc
or third parties), is critical to the NWM Group's operations.
Individually or collectively, any critical system failure,
material loss of service availability or material breach of data
security could cause serious damage to the NWM Group's ability to
provide services to its clients, which could result in reputational
damage, significant compensation costs or regulatory sanctions
(including fines resulting from regulatory investigations) or a
breach of applicable regulations. In particular, such issues could
cause long-term damage to the NWM Group's reputation and could
affect its regulatory approvals, competitive position, business and
brands, which could undermine its ability to attract and retain
clients. This risk is heightened as the NWM Group outsources
certain functions and continues to innovate and offer new digital
solutions to its clients as a result of the trend towards online
and digital product offerings.
In 2019, the NWM Group continued to make considerable
investments to further simplify, upgrade and improve its IT and
technology capabilities (including migration of certain services to
cloud platforms). As part of the NWM Refocusing, the NWM Group
continues to develop and enhance digital services for its customers
and seeks to improve its competitive position through enhancing
controls and procedures and strengthening the resilience of
services including cyber security. Should such investment and
rationalisation initiatives fail to achieve the expected results or
prove to be insufficient due to cost challenges or otherwise, this
could negatively affect the NWM Group's operations, its reputation
and ability to retain or grow its client business or adversely
impact its competitive position, thereby negatively impacting the
NWM Group's financial position. See also, ' The RBS Group has
announced a new strategy that will require changes in the NWM
Group's business, including reductions in capital allocated to the
NWM Group, its cost base and complexity. This entails material
execution, commercial and operational risks for the NWM Group'.
The NWM Group relies on attracting, retaining, developing and
remunerating senior management and skilled personnel (such as
market trading specialists), and is required to maintain good
employee relations.
The NWM Group's current and future success depends on its
ability to attract, retain, develop and remunerate highly skilled
and qualified personnel, including senior management, directors,
market trading specialists and key employees, in a highly
competitive labour market, in an era of strategic change (including
a recent change in executive management) and under internal cost
reduction pressures. This entails risk, particularly in light of
the implementation of the NWM Refocusing, heightened regulatory
oversight of banks and the increasing scrutiny of, and (in some
cases) restrictions placed upon, employee compensation
arrangements, in particular those of banks in receipt of government
support such as the RBS Group, which may have an adverse effect on
the NWM Group's ability to hire, retain and engage well-qualified
employees. The market for skilled personnel is increasingly
competitive, especially for technology-focussed roles, thereby
raising the cost of hiring, training and retaining skilled
personnel. In addition, certain economic, market and regulatory
conditions and political developments (including Brexit) may reduce
the pool of candidates for key management and non-executive roles,
including non-executive directors with the right skills, knowledge
and experience, or increase the number of departures of existing
employees.
Some of the NWM Group's employees are represented by employee
representative bodies, including trade unions. Engagement with its
employees and such bodies is important to the NWM Group in
maintaining good employee relations. Any breakdown of these
relationships could affect the NWM Group's business, reputation and
results of operations.
A failure in the NWM Group's risk management framework could
adversely affect the NWM Group, including its ability to achieve
its strategic objectives.
Risk management is an integral part of all of the NWM Group's
activities and includes the definition and monitoring of the NWM
Group's risk appetite and reporting on the NWM Group's risk
exposure and the potential impact thereof on the NWM Group's
financial condition. Financial risk management is highly dependent
on the use and effectiveness of internal stress tests and models
and ineffective risk management may arise from a wide variety of
factors, including lack of transparency or incomplete risk
reporting, unidentified conflicts or misaligned incentives, lack of
accountability control and governance, lack of consistency in risk
monitoring and management or insufficient challenges or assurance
processes. Failure to manage risks effectively could adversely
impact the NWM Group's reputation or its relationship with its
regulators, clients, shareholders or other stakeholders.
The NWM Group's operations are inherently exposed to conduct
risks. These include business decisions, actions or reward
mechanisms that are not responsive to or aligned with the NWM
Group's regulatory obligations, client needs or do not reflect the
NWM Group's customer-focussed strategy, ineffective product
management, unethical or inappropriate use of data, implementation
and utilisation of new technologies, outsourcing of customer
service and product delivery, the possibility of mis-selling of
financial products and mishandling of customer complaints. Some of
these risks have materialised in the past and ineffective
management and oversight of conduct risks may lead to further
remediation and regulatory intervention or enforcement. The NWM
Group's businesses are also exposed to risks from employee
misconduct including non-compliance with policies and regulations,
negligence or fraud (including financial crimes), any of which
could result in regulatory fines or sanctions and serious
reputational or financial harm to the NWM Group.
As part of the NWM Refocusing, the NWM Group is seeking to embed
a strong risk culture across the organisation and has implemented
policies and allocated new resources across all levels of the
organisation to manage and mitigate conduct risk and expects to
continue to invest in its risk management framework. However, such
efforts may not insulate the NWM Group from future instances of
misconduct and no assurance can be given that the NWM Group's
strategy and control framework will be effective. See also, 'The
RBS Group has announced a new strategy that will require changes in
the NWM Group's business, including reductions in capital allocated
to the NWM Group, its cost base and complexity. This entails
material execution, commercial and operational risks for the NWM
Group'. Any failure in the NWM Group's risk management framework
could negatively affect the NWM Group and its financial condition
through reputational and financial harm and may result in the
inability to achieve its strategic objectives for its clients,
employees and wider stakeholders.
The NWM Group's operations are subject to inherent reputational
risk.
Reputational risk relates to stakeholder and public perceptions
of the NWM Group arising from an actual or perceived failure to
meet stakeholder expectations, including with respect to the NWM
Refocusing and related targets, due to any events, behaviour,
action or inaction by the NWM Group, its employees or those with
whom the NWM Group is associated. This includes brand damage, which
may be detrimental to the NWM Group's business, including its
ability to build or sustain business relationships with clients,
and may cause low employee morale, regulatory censure or reduced
access to, or an increase in the cost of, funding. Reputational
risk may arise whenever there is a material lapse in standards of
integrity, compliance, customer or operating efficiency and may
adversely affect the NWM Group's ability to attract and retain
clients. In particular, the NWM Group's ability to attract and
retain clients may be adversely affected by, amongst others:
negative public opinion resulting from the actual or perceived
manner in which the NWM Group or any other member of the RBS Group
conducts or modifies its business activities and operations, media
coverage (whether accurate or otherwise), employee misconduct, the
NWM Group's financial performance, IT systems failures or
cyberattacks, data breaches, financial crime, the level of direct
and indirect government support for RBSG plc, or the actual or
perceived practices in the banking and financial industry in
general, or a wide variety of other factors. See also, 'The RBS
Group has announced a new strategy that will require changes in the
NWM Group's business, including reductions in capital allocated to
the NWM Group, its cost base and complexity. This entails material
execution, commercial and operational risks for the NWM Group'.
Modern technologies, in particular online social networks and
other broadcast tools which facilitate communication with large
audiences in short time frames and with minimal costs, may also
significantly increase and accelerate the impact of damaging
information and allegations.
Although the NWM Group has implemented a Reputational Risk
Policy to improve the identification, assessment and management of
customers and clients, transactions, products and issues which
represent a reputational risk, the NWM Group cannot be certain that
it will be successful in avoiding damage to its business from
reputational risk.
Economic and political risk
The NWM Group faces market risk as a result of increased
political and economic risks and uncertainty in the UK and global
markets.
In the UK, significant economic and political uncertainty
continues to surround the terms of Brexit and now also the future
relationship between the UK and the EU (See also, 'Prevailing
uncertainty regarding the terms of the UK's withdrawal from the
European Union has adversely affected and will continue to affect
the NWM Group.') and may adversely affect the NWM Group.
The RBS Group faces additional political uncertainty as to how
the Scottish parliamentary process (including, as a result of any
further Scottish independence referendum or the next Scottish
Parliament elections in May 2021) may impact the NWM Group. RBSG
plc and a number of other RBS Group entities (including NWM Plc)
are headquartered and/or incorporated in Scotland. Any changes to
Scotland's relationship with the UK or the EU (as an indirect
result of Brexit or other developments) would impact the
environment in which the RBS Group and its subsidiaries operate,
and may require further changes to the RBS Group (including the NWM
Group's structure), independently or in conjunction with other
mandatory or strategic structural and organisational changes which
could adversely impact the NWM Group.
Actual or perceived difficult global economic conditions can
create challenging economic and market conditions and a difficult
operating environment for the NWM Group's businesses and its
clients and counterparties, thereby affecting its financial
performance.
The value of the NWM Group's financial instruments may be
materially affected by market risk, including as a result of market
fluctuations. Market volatility, illiquid market conditions and
disruptions in the credit markets may make it extremely difficult
to value certain of the NWM Group's financial instruments,
particularly during periods of market displacement which could
cause a decline in the value of the NWM Group's financial
instruments. This may have an adverse effect on the NWM Group's
results of operations in future periods, or inaccurate carrying
values for certain financial instruments. Similarly, the NWM Group
trades a considerable amount of financial instruments (including
derivatives) and volatile market conditions could result in a
significant decline in the NWM Group's net trading income or result
in a trading loss.
In addition, financial markets are susceptible to severe events
evidenced by rapid depreciation in asset values, which may be
accompanied by a reduction in asset liquidity. Under these extreme
conditions, hedging and other risk management strategies may not be
as effective at mitigating trading losses as they would be under
more normal market conditions. Moreover, under these conditions,
market participants are particularly exposed to trading strategies
employed by many market participants simultaneously and on a large
scale, increasing the NWM Group's counterparty risk. The NWM
Group's risk management and monitoring processes seek to quantify
and mitigate the NWM Group's exposure to more extreme market moves.
However, severe market events have historically been difficult to
predict and the NWM Group could realise significant losses if
extreme market events were to occur.
The outlook for the global economy over the medium-term remains
uncertain due to a number of factors including: trade barriers and
the increased possibility of trade wars, widespread political
instability, an extended period of low inflation and low interest
rates, and global regional variations in the impact and responses
to these factors. Such conditions could be worsened by a number of
factors including political uncertainty or macro-economic
deterioration in the Eurozone, China or the US, the conflicts or
tensions in the Middle East or Asia, increased instability in the
global financial system and concerns relating to further financial
shocks or contagion (for example, due to economic concerns in
emerging markets), market volatility or fluctuations in the value
of the pound sterling, new or extended economic sanctions,
volatility in commodity prices or concerns regarding sovereign
debt. This may be compounded by the ageing demographics of the
populations in the markets that the NWM Group serves, or rapid
change to the economic environment due to the adoption of
technology and artificial intelligence. Any of the above
developments could adversely impact the NWM Group directly (for
example, as a result of credit losses) or indirectly (for example,
by impacting global economic growth and financial markets and the
NWM Group's clients and their banking needs).
In addition, the NWM Group is exposed to risks arising out of
geopolitical events or political developments, such as trade
barriers, exchange controls, sanctions and other measures taken by
sovereign governments that may hinder economic or financial
activity levels. Furthermore, unfavourable political, military or
diplomatic events, including secession movements or the exit of
other member states from the EU, armed conflict, pandemics and
widespread public health crises (including the recent coronavirus
outbreak, the impact of which will depend on future developments,
which are highly uncertain and cannot be predicted), state and
privately sponsored cyber and terrorist acts or threats, and the
responses to them by governments and markets, could negatively
affect the business and performance of the NWM Group, including as
a result of the indirect effect on regional or global trade and/or
the NWM Group's customers.
Prevailing uncertainty regarding the terms of the UK's
withdrawal from the European Union has adversely affected and will
continue to affect the NWM Group.
Following the EU Referendum in June 2016, and pursuant to the
exit process triggered under Article 50 of the Treaty on European
Union in March 2017 and the ratification of the withdrawal
agreement by the UK government and the EU (through the Council of
Ministers), the UK ceased to be a member of the EU and the European
Economic Area ('EEA') on 31 January 2020 ('Brexit') and entered a
transition period, currently due to expire on 31 December 2020.
During this transition period, the UK retains the benefits of
membership of the EU's internal market and the customs union, but
loses its representation in the EU's institutions and its role in
EU decision-making.
The UK and EU are currently seeking to determine the terms of
their future relationship by the end of the transition period, and
the resulting economic, trading and legal relationships with both
the EU and other counterparties currently remain unclear and
subject to significant uncertainty. If the UK and EU do not agree a
new comprehensive trade agreement by the end of the transition
period and the transition period is not extended, then, subject to
separate agreements being made with third countries, the UK would
be expected to operate on basic World Trade Organization terms, the
outcome of which for the RBS Group would be similar in certain
respects to a 'no-deal' Brexit and which may result in, amongst
others, loss of access to the EU single market for goods and
services, the imposition of import duties and controls on trade
between the UK and the EU and related trade disruption.
The direct and indirect effects of the UK's exit from the EU and
the EEA are expected to affect many aspects of the NWM Group's
business and operating environment, including as described
elsewhere in these risk factors, and may be material and/or cause a
near-term impact on impairments. See also 'The NWM Group faces
market risk as a result of increased political and economic risks
and uncertainty in the UK and global markets'. As a result of such
anticipated effects, the NWM Group and the RBS Group has engaged in
significant and costly Brexit planning and contingency planning and
expects to continue to do so. The direct and indirect effects of
the UK's exit from the EU and the EEA may also impede the NWM
Group's ability to deliver the NWM Refocusing. See also, 'The RBS
Group has announced a new strategy that will require changes in the
NWM Group's business, including reductions in capital allocated to
the NWM Group, its cost base and complexity. This entails material
execution, commercial and operational risks for the NWM Group' and
'The NWM Group may not be able to successfully implement the NWM
Refocusing and it may not achieve its targets and the NWM Group may
not ultimately result in a viable, competitive business'.
The longer term effects of Brexit on the NWM Group's operating
environment depend significantly on the terms of the ongoing
relationship between the UK and EU. They are difficult to predict,
and are subject to wider global macro-economic trends and events,
but may significantly impact the NWM Group and its customers and
counterparties who are themselves dependent on trading with the EU
or personnel from the EU. They may result in, or be exacerbated by,
periodic financial volatility and slower economic growth, in the UK
in particular, but also in the ROI, the rest of Europe and
potentially the global economy.
Significant uncertainty exists as to the respective legal and
regulatory arrangements under which the NWM Group and its
subsidiaries will operate once the transition period has ended. The
legal and political uncertainty and any actions taken as a result
of this uncertainty, as well as new or amended rules, could have a
significant impact on the NWM Group's non-UK operations and/or
legal entity structure, including attendant restructuring costs,
level of impairments, capital requirements, regulatory environment
and tax implications and as a result may adversely impact the NWM
Group's profitability, competitive position, business model and
product offering.
The RBS Group has obtained the requisite regulatory permissions
(including third country licence branch approvals and access to
TARGET2 clearing and settlement mechanisms) it currently considers
are required for continuity of business as a result of the UK's
departure from the EU. These are required in order to maintain the
ability to clear euro payments and to serve non-UK EEA customers if
there is a loss of access to the European Single Market. These
changes to the NWM Group's operating model have been costly and may
require further changes to its business operations, product
offering and customer engagement. The regulatory permissions from
the Dutch and German authorities are conditional in nature and will
require on-going compliance with certain conditions, including
maintaining minimum capital level and deposit balances as well as a
defined local physical presence going forward; such conditions may
be subject to change in the future. Maintaining these permissions
and the RBS Group's access to the euro payment infrastructure will
be fundamental to its business going forward and further changes to
NWM Group's business operations may be required.
The NWM Group expects to face significant risks in connection
with climate change and the transition to a low carbon economy.
The risks associated with climate change are subject to rapidly
increasing prudential and regulatory, political and societal focus
both in the UK, the Netherlands and internationally. Embedding
climate risk into the NWM Group's risk framework, and adapting the
NWM Group's operations and business strategy to address the
physical risks of climate change and the risk associated with a
transition to a low carbon economy in line with the RBS Group's
Purpose-led Strategy and ambition to reduce the climate impact of
its financing activities and evolving regulatory requirements and
market expectations is expected to have a significant impact on the
NWM Group.
Multilateral agreements, in particular the 2015 Paris Agreement,
and subsequent UK and Scottish Government commitments to achieving
net zero carbon emissions by 2050 and 2045, respectively, as well
as proposals stemming from the EU Sustainable Finance Action plan,
will require widespread levels of adjustment across all sectors of
the UK economy and markets in which the NWM Group operates
including the European Union. Some sectors such as property,
energy, infrastructure (including transport) and agriculture are
expected to be particularly impacted. The nature and timing of the
far-reaching commercial, technological, policy and regulatory
changes that this transition will entail remain uncertain. The UK
and Dutch Governments and regulators, including the PRA, NWM's UK
prudential regulator, have indicated it is a priority issue. The
impact of such regulatory, policy, commercial and technological
changes is expected to be highly significant and may be disruptive,
especially if such changes do not occur in an orderly or timely
manner or are not effective in reducing emissions sufficiently.
Furthermore, the nature and timing of the manifestation of the
physical risks of climate change (which include more extreme
specific weather events such as flooding and heat waves and longer
term shifts in climate) are also uncertain, and their impact on the
economy is predicted to be more acute if carbon emissions are not
reduced on a timely basis or to the requisite extent. Recent data
indicates that global carbon emissions are continuing to increase.
The potential impact on the economy includes, but is not limited
to, lower GDP growth, significant changes in asset prices and
profitability of industries, higher unemployment and the prevailing
level of interest rates.
See also, 'The RBS Group's Purpose-led Strategy includes one
area of focus on climate change which entails significant execution
risk and is likely to require material changes to the business
model of the RBS Group (including the NWM Group) over the next ten
years', 'The NWM Group's businesses are subject to substantial
regulation and oversight, which are constantly evolving and may
adversely affect the NWM Group' and 'Any reduction in the credit
rating assigned to RBSG plc, any of its subsidiaries (including NWM
Plc or NWM Group subsidiaries) or any of their respective debt
securities could adversely affect the availability of funding for
the NWM Group, reduce the NWM Group's liquidity position and
increase the cost of funding.'
If the NWM Group does not adequately embed climate risk into its
risk framework to appropriately measure, manage and disclose the
various financial, transition and physical risks it faces
associated with climate change, or if the RBS Group or the NWM
Group fail to implement the RBS Group's new strategy on climate
change and adapt its business model to the changing regulatory
requirements and market expectations on a timely basis, it may have
a material and adverse impact on the NWM Group's level of business
growth, its competitiveness, profitability, prudential capital
requirements, ESG ratings, credit ratings, cost of funding,
reputation, results of operation and financial condition.
Changes in interest rates have affected and will continue to
affect the NWM Group's business and results.
Interest rate risk exists for the NWM Group, as monetary policy
has been accommodative in recent years, including as a result of
certain policies implemented by the Bank of England and HM Treasury
such as the Term Funding Scheme, which have helped to support
demand at a time of pronounced fiscal tightening and balance sheet
repair. However, there remains considerable uncertainty as to the
direction of interest rates and pace of change (as set by the Bank
of England and other major central banks) as well as the general UK
political climate. Further decreases in interest rates and/or
continued sustained low or negative interest rates could adversely
affect the NWM Group's profitability and prospects. In addition, a
continued period of low interest rates and flat yield curves has
affected and may continue to affect the interest rate margin
realised between lending and borrowing costs.
Conversely, while increases in interest rates may support NWM
Group income, sharp increases in interest rates could lead to
generally weaker than expected growth, or even contracting GDP,
reduced business confidence, higher levels of unemployment or
underemployment and adverse changes to levels of inflation.
Changes in foreign currency exchange rates may affect the NWM
Group's results and financial position.
As part of the RBS Group's strategy, the NWM Group has become
the markets business for the RBS Group, and is engaged principally
in providing financing, risk management and trading solutions to
global customers across Europe, the USA and Asia. The NWM Group
entities issue instruments in foreign currencies that assist in
meeting their respective capital and/or MREL requirements. In
addition, NWM Plc's acquisition of NWM N.V. from RBS Group
increased NWM Plc's exposure to euro movements. NWM N.V. holds a
significant loan portfolio denominated in euros (see also, 'Capital
and risk management - Credit Risk'). In its day-to-day operations,
the NWM Group maintains policies and procedures designed to manage
the impact of exposures to fluctuations in currency rates.
Nevertheless, changes in currency rates, particularly in the
sterling-US dollar and euro-sterling exchange rates, can adversely
affect the value of assets, liabilities (including the total amount
of MREL-eligible instruments), income, RWAs, capital base and
expenses and the reported earnings of NWM Plc's UK and non-UK
subsidiaries and may affect the NWM Group's reported consolidated
financial condition, capital ratios or its income from foreign
exchange dealing.
Decisions of major central banks (including by the Bank of
England, the European Central Bank and the US Federal Reserve) and
political or market events (including in respect of Brexit and the
general UK political climate ), which are outside of the NWM
Group's control, may lead to sharp and sudden variations in foreign
exchange rates.
HM Treasury (or UKGI on its behalf) could exercise a significant
degree of influence over the RBS Group and the NWM Group is
controlled by the RBSG Group.
In its November 2018 Autumn Budget, the UK Government announced
its intention to continue the process of privatisation of RBSG plc
and to carry out a programme of sales of RBSG plc ordinary shares
with the objective of selling all of its remaining shares in RBSG
plc by 2023-2024. On 6 February 2019, RBSG plc obtained shareholder
approval to participate in certain directed share buyback
activities. As of 31 December 2019, the UK Government held 62.1% of
the issued ordinary share capital of RBSG plc. There can be no
certainty as to the continuation of the sell-down process or the
timing or extent of such sell-downs.
UK Government Investments Limited (' UKGI') manages HM
Treasury's shareholder relationship with the RBSG plc and, although
HM Treasury has indicated that it intends to respect the commercial
decisions of the RBS Group and that the RBS Group entities
(including the NWM Group) will continue to have its own independent
board of directors and management team determining their own
strategy, its position as a majority shareholder (and UKGI's
position as manager of this shareholding) means that HM Treasury or
UKGI could exercise a significant degree of influence over, among
other things, the election of directors and appointment of senior
management, the RBS Group's (including the NWM Group's) capital
strategy, dividend policy, remuneration policy or the conduct of
the RBS Group's (including the NWM Group's) operations, and HM
Treasury or UKGI's approach depends on government policy, which
could change, including as a result of a general election. The
exertion of such influence over RBS Group could in turn have an
adverse effect on the governance or business strategy of the NWM
Group.
In addition, as a wholly-owned subsidiary of RBSG plc, RBSG plc
controls the NWM Group's board of directors, corporate policies and
strategic direction. The interests of RBSG plc as an equity holder
and as the NWM Group's parent may differ from the interests of the
NWM Group or of potential investors in the NWM Group's
securities.
Legal, regulatory and conduct risk
The NWM Group's businesses are subject to substantial regulation
and oversight, which are constantly evolving and may adversely
affect the NWM Group.
The NWM Group is subject to extensive laws, regulations,
corporate governance practice and disclosure requirements,
administrative actions and policies in each jurisdiction in which
it operates. Many of these have been introduced or amended recently
and are subject to further material changes, which may increase
compliance and conduct risks. The NWM Group expects government and
regulatory intervention in the financial services industry to
remain high for the foreseeable future.
In recent years, regulators and governments have focussed on
reforming the prudential regulation of the financial services
industry and the manner in which the business of financial services
is conducted. Amongst others, measures have included: enhanced
capital, liquidity and funding requirements, implementation of the
UK ring-fencing regime, implementation and strengthening of the
recovery and resolution framework applicable to financial
institutions in the UK, the EU and the US, financial industry
reforms (including in respect of MiFID II), enhanced data privacy
and IT resilience requirements, enhanced regulations in respect of
the provision of 'investment services and activities', enhanced
regulations in respect of the provision of 'investment services and
activities', and increased regulatory focus in certain areas,
including conduct, consumer protection regimes, anti-money
laundering, anti-bribery, anti-tax evasion, payment systems,
sanctions and anti-terrorism laws and regulations. This has
resulted in the NWM Group facing greater regulation and scrutiny in
the UK, the US, the EU and other countries in which it
operates.
In addition, there is significant oversight by competition
authorities of the markets which the NWM Group operates in. The
competitive landscape for banks and other financial institutions in
the UK, the rest of Europe and the US is rapidly changing. Recent
regulatory and legal changes have and may continue to result in new
market participants and changed competitive dynamics in certain key
areas.
Recent regulatory changes, proposed or future developments and
heightened levels of public and regulatory scrutiny in the UK, the
EU and the US have resulted in increased capital, funding and
liquidity requirements, changes in the competitive landscape,
changes in other regulatory requirements and increased operating
costs, and have impacted, and will continue to impact, product
offerings and business models. In particular, the NWM Group is
required to ensure operational continuity in resolution; the steps
required to ensure such compliance entail significant costs, and
also impose significant operational, legal and execution risk.
Serious consequences could arise should the NWM Group be found to
be non-compliant with such regulatory requirements. Such changes
may also result in an increased number of regulatory investigations
and proceedings and have increased the risks relating to the NWM
Group's ability to comply with the applicable body of rules and
regulations in the manner and within the time frames required.
Any of these developments (including any failure to comply with
new rules and regulations) could have a significant impact on the
NWM Group's authorisations and licences, the products and services
that the NWM Group may offer, its reputation and the value of its
assets, the NWM Group's operations or legal entity structure, and
the manner in which the NWM Group conducts its business. Areas in
which, and examples of where, governmental policies, regulatory and
accounting changes and increased public and regulatory scrutiny
could have an adverse impact (some of which could be material) on
the NWM Group include, but are not limited to, those set out above
as well as the following:
-- general changes in government, central bank, regulatory or
competition policy, or changes in regulatory regimes that may
influence investor decisions in the markets in which the NWM Group
operates;
-- amendments to the framework or requirements relating to the
quality and quantity of regulatory capital to be held by the NWM
Group as well as liquidity and leverage requirements, either on a
solo, consolidated or subgroup level;
-- changes to the design and implementation of national or
supranational mandated recovery, resolution or insolvency regimes
or the implementation of additional or conflicting loss-absorption
requirements, including those mandated under UK rules, the BRRD, or
MREL;
-- rules and regulations relating to, and enforcement of,
anti-corruption, anti-bribery, anti-money laundering,
anti-terrorism, sanctions, anti-tax evasion or other similar
regimes;
-- the imposition of additional restrictions on the NWM Group's
ability to compensate its senior management and other employees and
increased responsibility and liability rules applicable to senior
and key employees;
-- rules relating to foreign ownership, expropriation,
nationalisation and confiscation of assets;
-- changes to corporate practice and disclosure governance
requirements, senior manager responsibility, corporate structures
and conduct of business rules;
-- financial market infrastructure reforms establishing new
rules applying to investment services, short selling, market abuse,
derivatives markets and investment funds;
-- new or increased regulations relating to customer data and
privacy protection as well as IT controls and resilience, including
the GDPR;
-- the introduction of, and changes to, taxes, levies or fees
applicable to the NWM Group's operations, such as the imposition of
a financial transaction tax, changes in the scope and
administration of the Bank Levy, changes in tax rates, increases in
the bank corporation tax surcharge in the UK, restrictions on the
tax deductibility of interest payments or further restrictions
imposed on the treatment of carry-forward tax losses that reduce
the value of deferred tax assets and require increased payments of
tax;
-- laws and regulations in respect of climate change and
sustainable finance (including ESG) considerations; and
-- other requirements or policies affecting the NWM Group and
its profitability or product offering, including through the
imposition of increased compliance obligations or obligations which
may lead to restrictions on business growth, product offerings, or
pricing.
To support the UK's goal of Net Zero by 2050, the UK and
Scottish governments and UK and international regulators, such as
the PRA and European Commission, are actively seeking to develop
new and existing regulations directly and indirectly focussed on
climate change and the associated financial risks. Regulatory and
policy developments, may have a significant impact on the markets
in which the NWM Group operates, and its associated credit, market
and financial risk profile.
In a Joint Declaration on Climate Change published in July 2019,
the PRA, FCA, Financial Reporting Council and The Pensions
Regulator set out their commitment to working collaboratively to
address the risks of climate change. In October 2019, the RBS Group
submitted its initial plan to meet the PRA's supervisory
expectations in its supervisory statement (SS 3/19) which sets
forth an expectation that regulated entities adopt a Board-level
strategic approach to managing and mitigating the financial risks
of climate change and embed the management of them into their
governance frameworks, subject to existing prudential regulatory
supervisory tools (including stress testing and individual and
systemic capital requirements). In addition, The Bank of England
announced in December 2019 that it will use the 2021 biennial
exploratory scenario (BES) to stress banks on certain climate
scenarios to test the resilience of the current business models of
the largest banks, insurers and the financial system to the
physical and transition risks from climate change. The prudential
regulation of climate risk will be an important driver in how the
RBS Group otherwise decides how it allocates capital and further
develop its risk appetite for financing certain types of activity
or engaging with counterparties that do not align to a transition
to a net zero economy.
The FCA have also announced that climate change and green
finance will be priorities with a focus on disclosure, integrating
climate change into decision-making and consumers' access to green
financial services. The NWM Group also recognises various
legislative actions and proposals by, among others, the European
Commission's Action Plan on Sustainable Finance which include a
taxonomy on sustainable finance. Many of these legislative and
regulatory initiatives, and especially the EU taxonomy, are focused
on developing standardised definitions for the green and
sustainable criteria of assets and liabilities, which could change
over time and impact the NWM Group's recognition of its climate
financing activity and lead to reputational and conduct risk on its
own sustainable financing activity.
Changes in laws, rules or regulations, or in their
interpretation or enforcement, or the implementation of new laws,
rules or regulations, including contradictory or conflicting laws,
rules or regulations by key regulators or policymakers in different
jurisdictions, or failure by the NWM Group to comply with such
laws, rules and regulations, may adversely affect the NWM Group's
business, financial condition and results. In addition, uncertainty
and insufficient international regulatory coordination as enhanced
supervisory standards are developed and implemented may adversely
affect the NWM Group's ability to engage in effective business,
capital and risk management planning.
The NWM Group is subject to a number of legal, regulatory and
governmental actions and investigations as well as associated
remedial undertakings, the outcomes of which are inherently
difficult to predict, and which could have an adverse effect on the
NWM Group.
The NWM Group's operations are diverse and complex and it
operates in legal and regulatory environments that expose it to
potentially significant legal proceedings, and civil and criminal
regulatory and governmental actions. The NWM Group has settled a
number of legal and regulatory actions over the past several years
but continues to be, and may in the future be, involved in such
actions in the US, the UK, Europe and other jurisdictions
The NWM Group is subject to a number of ongoing reviews,
investigations and proceedings (both formal and informal) by
governmental law enforcement and other agencies and litigation
proceedings, relating to, among other matters, the offering of
securities, conduct in the foreign exchange market, the setting of
benchmark rates such as LIBOR and related derivatives trading, the
issuance, underwriting, and sales and trading of fixed-income
securities (including government securities), product mis-selling,
customer mistreatment, anti-money laundering, antitrust and various
other compliance issues. See also, 'Litigation, investigations and
reviews' of Note 28 on the consolidated accounts on pages 133 to
136 for details of these matters. Legal and regulatory actions are
subject to many uncertainties, and their outcomes, including the
timing, amount of fines or settlements or the form of any
settlements, which may be material and in excess of any related
provisions, are often difficult to predict, particularly in the
early stages of a case or investigation, and the NWM Group's
expectations for resolution may change.
NWM Group companies are currently responding to a criminal
investigation by the United States Attorney for the District of
Connecticut (USAO) and the United States Department of Justice
(DoJ), concerning securities trading in 2018 by certain former
traders of NWM Plc, involving alleged spoofing. The trading
activity occurred during the term of the non-prosecution agreement
(NPA) that NWMSI entered into with the USAO in October 2017 in
connection with alleged misrepresentations to counterparties
relating to secondary trading in various forms of asset-backed
securities. Under the NPA, non-prosecution was conditioned on NWMSI
and affiliated companies not engaging in conduct during the NPA
that the USAO determines was a felony under federal or state law or
a violation of the anti-fraud provisions of the United States
securities law. See also, 'Litigation, investigations and reviews'
of Note 28 to the consolidated accounts for details of these
matters.
The duration and outcome of the criminal investigation into
alleged spoofing, which may include the extension, modification, or
deemed violation of the NPA, remain uncertain. No settlement may be
reached and further substantial additional provisions and costs may
be recognised. Any finding of criminal liability by US authorities
as to NWM Plc, NWMSI, or an affiliate (including as a result of
pleading guilty), as to either the alleged spoofing or the conduct
underlying the NPA, could have material collateral consequences for
NWM Group's business. These may include consequences resulting from
the need to reapply for various important licenses or obtain
waivers to conduct certain existing activities of the NWM Group,
particularly but not solely in the US, which may take a significant
period of time and the results of which are uncertain. Failure to
obtain such licenses or waivers could adversely impact the NWM
Group's business, in particular in the US, including if it results
in the NWM Group being precluded from carrying out certain
activities.
Adverse outcomes or resolution of current or future legal or
regulatory actions and associated remedial undertakings could
result in restrictions or limitations on the NWM Group's
operations, and could adversely impact the NWM Group's capital
position or its ability to meet regulatory capital adequacy
requirements. Failure to comply with undertakings made by the NWM
Group to its regulators may result in additional measures or
penalties being taken against the NWM Group.
The NWM Group may not effectively manage the transition of LIBOR
and other IBOR rates to alternative risk free rates.
UK and international regulators are driving a transition from
the use of interbank offer rates (IBORs), including LIBOR, to
alternative risk free rates (RFRs). In the UK, the FCA has asserted
that they will not compel LIBOR submissions beyond 2021, thereby
jeopardising its continued availability, and have strongly urged
market participants to transition to RFRs, as has the CFTC and
other regulators in the US. The NWM Group has a significant
exposure to IBORs, and continues to reference it in certain
products, primarily its derivatives and legacy securities .
Although the NWM Group is actively engaged with customers and
industry working groups to manage the risks relating to such
exposure, and is exploring ways to utilise RFRs to the extent
possible, the legal mechanisms to effect transition cannot be
confirmed, and the impact cannot be determined nor any associated
costs accounted for, until such time that RFRs are utilised
exclusively, and there is market acceptance on the form of
alternative RFRs for different products, and certain IBOR
obligations may not be able to be changed. The transition and
uncertainties around the timing and manner of transition to RFRs
represent a number of risks for the NWM Group, its clients and the
financial services industry more widely. Following an analysis of
the NWM Group's IBOR-linked financial products and instruments, the
NWM Group has identified the following risks: legal risks (as
changes will be required to documentation for new and the majority
of existing transactions); financial risks (which may arise from
any changes in valuation of financial instruments linked to
benchmarks rates and may impact the NWM Group's cost of funds and
its risk management related financial models); pricing risks (such
as changes to benchmark rates could impact pricing mechanisms on
certain instruments); operational risks (due to the requirement to
adapt IT systems, trade reporting infrastructure and operational
processes); and conduct risks (which include communication
regarding the potential impact on customers, and engagement with
customers during the
transition period).
It is therefore currently difficult to determine to what extent
the changes will affect the NWM Group, or the costs of implementing
any relevant remedial action. Uncertainty as to the nature and
extent of such potential changes, alternative reference rates or
other reforms including the potential continuation of the
publication of LIBOR may adversely affect financial instruments
using LIBOR as benchmarks. The implementation of any alternative
RFRs may be impossible or impracticable under the existing terms of
such financial instruments and could have an adverse effect on the
value of, return on and trading market for certain financial
instruments and on the NWM Group's profitability. There is also the
risk of an adverse effect to reported performance arising from the
transition rules established by accounting bodies, as certain rules
(as proposed by the IASB) are still to be finalised.
Changes in tax legislation or failure to generate future taxable
profits may impact the recoverability of certain deferred tax
assets recognised by the NWM Group.
In accordance with IFRS (as adopted by the European Union), the
NWM Group has recognised deferred tax assets on losses available to
relieve future profits from tax only to the extent it is probable
that they will be recovered. The deferred tax assets are quantified
on the basis of current tax legislation and accounting standards
and are subject to change in respect of the future rates of tax or
the rules for computing taxable profits and offsetting allowable
losses.
Failure to generate sufficient future taxable profits or further
changes in tax legislation (including with respect to rates of tax)
or accounting standards may reduce the recoverable amount of the
recognised tax loss deferred tax assets, amounting to GBP75 million
as at 31 December 2019. Changes to the treatment of certain
deferred tax assets may impact the NWM Group's capital position. In
addition, the NWM Group's interpretation or application of relevant
tax laws may differ from those of the relevant tax authorities and
provisions are made for potential tax liabilities that may arise on
the basis of the amounts expected to be paid to tax authorities.
The amounts ultimately paid may differ materially from the amounts
provided depending on the ultimate resolution of such matters.
Legal Entity Identifier: RR3QWICWWIPCS8A4S074
This information is provided by RNS, the news service of the
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Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
ACSKKQBNABKKFBD
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