20-F 1 d808709d20f.htm 20-F 20-F
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to                         

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                          to                         

Commission file number 001-14928

 

 

Santander UK plc

(Exact name of Registrant as specified in its charter)

 

 

England

(Jurisdiction of incorporation or organization)

2 Triton Square, Regent’s Place, London NW1 3AN, England

(Address of principal executive offices)

Julian Curtis

2 Triton Square, Regent’s Place, London NW1 3AN, England

Tel: +44 (0) 20 7756 4272

E-mail: julian.curtis@santander.co.uk

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

2.375% Notes due March 16, 2020, issued by Abbey National Treasury Services plc *   SAN/20A   New York Stock Exchange
2.125% Notes due November 3, 2020, issued by Santander UK plc   SAN/20C   New York Stock Exchange
Floating Rate Notes due November 3, 2020, issued by Santander UK plc   SAN/20D   New York Stock Exchange
2.500% Notes due January 5, 2021, issued by Santander UK plc   SAN/21B   New York Stock Exchange
3.400% Notes due June 1, 2021, issued by Santander UK plc   SAN/21C   New York Stock Exchange
Floating Rate Notes due June 1, 2021, issued by Santander UK plc   SAN/21D   New York Stock Exchange
3.750% Notes due 2021 due November 15, 2021, issued by Santander UK plc   SAN/21F   New York Stock Exchange
Floating Rate Notes due November 15, 2021, issued by Santander UK plc   SAN/21G   New York Stock Exchange
4.000% Notes due March 13, 2024, issued by Abbey National Treasury Services plc *   SAN/24   New York Stock Exchange
2.875% Notes due June 18, 2024, issued by Santander UK plc   SAN/24D   New York Stock Exchange
2.100% Notes due January 13, 2023, issued by Santander UK plc   SAN/23B   New York Stock Exchange

 

*

From June 1, 2016 Santander UK plc became the issuer in respect of the outstanding notes issued by Abbey National Treasury Services plc under its US SEC registered debt shelf. All notes transferred to Santander UK plc by Abbey National Treasury Services plc under its US SEC registered debt shelf and all notes issued by Santander UK plc in the future under its US SEC registered debt shelf will be the sole liability of Santander UK plc and are not guaranteed by any other entity.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

7.95% Term Subordinated Securities due October 26, 2029

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

Ordinary shares of nominal value of £0.10 each*

     31,051,768,866  

10 3/8% Non-cumulative Preference Shares of nominal value of £1 each

     200,000,000  

8 5/8% Non-cumulative Preference Shares of nominal value of £1 each

     125,000,000  

 

*

All of the issued and outstanding ordinary shares of Santander UK plc are held by Santander UK Group Holdings plc.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer     Non-accelerated filer  
         Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐           International Financial Reporting Standards as issued         Other  ☐
          by the International Accounting Standards Board  ☒        

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

 

 


Table of Contents

 

 

2019 Annual Report

 

 

 

Santander UK plc

Part of the Banco Santander group


Table of Contents

Annual Report 2019 | Strategic report

    

 

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Table of Contents

Santander UK plc

Annual Report 2019

 

 

 

 

 

Important information for readers

None of the websites referred to in this Annual Report on Form 20-F for the year ended 31 December 2019 (the Form 20-F) including where a link is provided, nor any of the information contained on such websites is incorporated by reference in the Form 20-F.

Santander UK plc and its subsidiaries (collectively Santander UK or the Santander UK group) operate primarily in the UK, and are part of the Banco Santander group (comprising Banco Santander SA and its subsidiaries). Santander UK plc is regulated by the UK Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and certain other companies within the Santander UK group are regulated by the FCA and the PRA. This Annual Report contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See Forward-looking statements in the Shareholder information section.

Santander UK Group Holdings plc is the immediate parent company of Santander UK plc. The two companies operate on the basis of a unified business strategy, albeit the principal business activities of the Santander UK Group Holdings plc group are carried on by Santander UK plc and its subsidiaries.

The Santander UK Group Holdings plc Corporate Governance and Risk Frameworks have been adopted by the Company and its subsidiaries to ensure consistency of application.

 

          
    Contents   
 
    Strategic report    2
 
    Financial review    14
 
    Governance    24
 
    Board of Directors    25
 
    Corporate governance report    30
 
    Directors’ remuneration report    50
 
    Directors’ report    60
 
    Risk review    64
 
    Financial statements    151
 
    Auditor’s report    152
 
    Primary financial statements    159
 
    Notes to the financial statements    167
 
    Shareholder information    234
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 

 

Santander UK plc   1


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Annual Report 2019 | Strategic report

    

 

Strategic report

About this report

The Strategic Report outlines the key elements of the Annual Report and provides context for the related financial statements. It is also designed to help members of the company assess how the Directors have performed their duty under section 172 of the Companies Act 2006.

The report highlights key financial and non-financial metrics which help to explain the business’s performance over the past year. It also highlights the external environmental factors affecting the business along with Santander UK’s position in the UK banking market.

We try at all times to treat all of our stakeholders fairly and meet our environmental responsibilities. Sustainability and our strategic direction are inseparable, and we continue to embed sustainability across our business. We have included information to demonstrate this within our Strategic Report and further information is also available in our ESG Supplement.

By order of the Board.

Shriti Vadera

Chair

2019 highlights

 

14.4 million    1,700    £165.4bn    £1,012m    14.3%    100%
active customers
(2018: 14.7 million)
   new active mobile
users per day
(2018:1,400)
   UK mortgage loans
(2018: £158.0bn)
   Profit before tax
(2018: £1,545m)
   CET1 capital ratio
(2018: 13.2%)
  

renewable electricity
used

(2018: 100%)

 

5.8 million    60%    £22.3bn    £155m    1.15%    99.6%
digital customers
(2018: 5.5 million)
   mortgage loans
refinanced online
(2018: 55%)
   UK corporate loans
(2018 £24.1bn)
   Transformation
investment in 2019
   Stage 3 ratio
(2018: 1.29%)
   of waste recycled or
diverted from landfill
(2018: 99.8%

Strategy and key performance indicators

The directors of the Company’s immediate parent, Santander UK Group Holdings plc, manage the operations of the Santander UK Group Holdings plc group (which includes the Santander UK group) on a business division basis. Key performance indicators are not set, monitored or managed at the Santander UK group level. As a result, the Company’s Directors believe that analysis using key performance indicators for the Company is not necessary or appropriate for an understanding of the development, performance or position of the Company. The development performance and position of the business of the Santander UK group, mainly at a consolidated level, is set out in the Financial Review.

The key performance indicators of the Santander UK Group Holdings plc group can be found on pages 16 and 17 of its 2019 Annual Report, which does not form part of this report.

Santander UK at a glance

We are uniquely placed as a leading scale challenger bank. Our business model focuses on customer loyalty and our core business franchise. We are a large customer-focused bank and possess the scale and breadth of proposition to challenge the big four UK banks. We serve our customers through digital channels, alongside a network of branches and Corporate Business Centres.

We play an important role in the UK economy and in the communities in which we operate. We help people purchase their home, save for the future and support business growth. We employ 23,500 people and we paid £292m of corporation tax and £90m through the UK Bank Levy in 2019.

 

2   Santander UK plc


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2019 results

Our 2019 results, with 34% reduction in profit before tax, further reflect the ongoing income pressure on mortgages and PPI charges, alongside the important investment we are making in transforming our bank for the future. In recent years, we have purposefully operated a low risk strategy; making prudent investments in our core competencies, and embedding sustainable, long-term value across all our business activities. In doing this, we will enhance our standing as a responsible and resilient choice for our retail customers, and also position ourselves well to support the growth and trading strategies of our business customers.

Our cautious approach to risk has been affirmed by the Bank of England’s stress tests, which illustrate our bank’s resilience to a significant economic downturn. We remain focused on improving our return on tangible equity over the medium-term and our CET1 capital ratio has increased to 14.3% through capital accretion and strong capital discipline. This has been done without compromising dividend payments or our credit quality, while delivering our strategy of selective growth.

Business model

What we do

Provide financial products and services

Mortgages, consumer auto finance, unsecured loans, credit cards, banking and savings accounts, investment and insurance products for individuals and specialised services for companies

How we do it

Build strong customer relationships

Leveraging our experience and scale to drive customer loyalty

Offer a differentiated proposition

Anticipating customer needs and tailoring our products and services to be more meaningful and relevant

Take a prudent approach to risk

Making the right lending decisions. Identifying, assessing, managing and reporting the risks which could impact our business, results, reputation or sustainability

Do things The Santander Way

Living the Santander behaviours in how we interact with all our stakeholders ensuring everything we do is simple, personal and fair

Our competitive advantage

Leading scale challenger bank

An optimised footprint and scale in our core banking businesses combined with an innovative mindset

Resilient balance sheet and prudent approach

Strength of capital and liquidity demonstrated by the lowest CET1 drawdown in the annual Bank of England stress tests

International expertise for UK companies

Helping UK companies expand into overseas markets

 

Santander UK plc   3


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Annual Report 2019 | Strategic report

 

Strategic report continued

 

Market overview: five major forces continue to shape the UK banking market

Changing customer behaviour

What we have seen

As customer behaviours change, banks are re-evaluating their service and operating models. The move away from traditional in-branch banking towards online 24-hour service continues. Customers are demanding more customised products and, with more information to hand, are increasingly likely to shop around for products that meet a particular need, rather than relying on their main bank to provide everything. This in turn creates the need for banks to be competitive across all areas of their offering, ensuring they create a range of products that meet a variety of customer needs.

Our response and looking ahead

We aim to serve our customers through the most suitable channel, whether that be through mobile, online, branch or telephone.

The number of transactions carried out via Santander branches has fallen by 41% over the past three years, while transactions via digital channels have grown by 93% over the same period. In response to the changes in how customers are choosing to carry out their banking, this year we have re-shaped our branch network and closed 140 branches. We have also begun to refurbish 100 branches with a focus on personal service, convenience and community engagement.

For our corporate customers we have a network of Corporate Business Centres (CBCs) across the UK and have recently opened our first Work Café, offering an innovative space for clients and non-customers, which brings a bank, co-working area and coffee house together in a single place.

Strong market competition

What we have seen

The UK banking sector remains highly competitive with continuing pressure on margins experienced throughout the year. Competition in the mortgage market has continued to be intense with rates for fixed term products decreasing since the start of the year.

There have been new entrants into the banking market, challenging existing providers in areas such as current accounts and savings products. This has put pressure on non-interest generated income along with rates paid on savings accounts.

Our response and looking ahead

As a leading scale challenger we are well-positioned despite a competitive market. We are focusing on our core franchises and in mortgages delivered our best net mortgage lending for a decade. This year we launched an innovative advertising campaign featuring Ant and Dec, initially focused on mortgage lending and raising brand awareness.

We understand the importance of knowing our customers and responding to their changing needs through continuous innovation of products and services.

We have begun a multi-year transformation programme to reduce costs and improve returns. Decisive actions will translate into improved efficiency in the medium-term along with a better customer experience.

Rapid technological change

What we have seen

Technology continues to advance rapidly across the financial services sector. Offering digital platforms has become essential, not only for day-to-day banking but for all banking needs, including mortgage applications and investment advice and servicing.

Disruptors are challenging the way banks traditionally serve their customers. They are increasing digital interaction through the use of innovative technology and data from multiple sources such as Open Banking.

Cyber security remains a key priority as customers move towards more digital activity. The ability to adapt to new risks is essential to meet new challenges faced across the industry.

Our response and looking ahead

Recognising the changing behaviour of customers, we are focused on digitally transforming the business. By utilising innovative digital solutions allied with our customer-centric approach, we aim to deliver excellence in customer experience.

We collaborate with FinTech companies through open IT architecture to help bring greater personalisation to our services. We benefit from our relationships with a number of innovative technology companies which Banco Santander’s $200m Santander InnoVentures fund invests in.

 

4   Santander UK plc


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Demanding regulatory agenda

What we have seen

Regulation in the UK remains focused on promoting positive customer outcomes by raising awareness, encouraging the financial education of customers and promoting competition. By removing barriers to exit for customers they can more easily change products and services to suit their needs.

The changes in the UK banking sector bring both risks and opportunities to existing providers. Advances in technology enable both start-ups and established banks to better tailor their offerings to their customers.

In 2019, the FCA announced measures to change the way banks and building societies charge their customers for using overdrafts. They will no longer be able to charge higher fees for unarranged overdrafts than for arranged overdrafts. The new rules will come into force in 2020.

Our response and looking ahead

We expect the regulatory agenda to continue to evolve and encourage more competition in the banking sector, opening it up further to new entrants. We also expect increased regulatory compliance costs as new regulation is implemented.

In 2020 we announced changes to the way we charge our customers for using overdrafts. From 6 April 2020, we will introduce a single interest rate for an arranged overdraft on all adult accounts, making the cost of using an overdraft more proportionate to the amount borrowed.

Uncertain economic environment

What we have seen

The UK economy has experienced volatile activity due to pre-Brexit preparations with an average 0.2% quarterly growth in 2019, roughly half the pace seen in the previous two years. In January 2020, the UK left the EU and has entered a period of negotiation on a future trading relationship.

The Bank of England base rate remained flat in 2019 at 0.75%, due to slower global growth and Brexit uncertainties. The rate rose 25bps in both 2017 and 2018.

The Company is closely monitoring an outbreak of respiratory illness, known as COVID-19, which has spread from Asia into the UK and across the world. The situation remains complex and is evolving rapidly.

Our response and looking ahead

Prior to the COVID-19 outbreak, we expected UK growth to remain relatively subdued in 2020, with continued Brexit uncertainty and a weaker global economy. UK inflation is expected to remain below the 2% target in the near-term, with lower energy price inflation the main driver.

In early 2020 we announced changes to the 1I2I3 Current Account as a result of a number of factors, including a persistently low interest rate environment.

In our core lending markets we were anticipating modest growth, with the mortgage market continuing to grow at c3%, with weaker buyer demand and subdued house price growth likely to continue. The corporate borrowing market was also expected to grow by c4%, as uncertainty continued to dampen investment intentions.

While it is too early to accurately predict the financial and business impact of the COVID-19 outbreak, we expect a negative effect on UK economic growth and hence, our 2020 financial results.

Strategic review

Our refined priorities are aligned to Banco Santander’s European strategy announced in April 2019. We are focused on customer loyalty, simplification, improved efficiency and sustainable growth, while being the best bank for all our stakeholders. Our four strategic priorities are set out below.

Our strategic priorities

1. Grow customer loyalty by providing an outstanding customer experience

2. Simplify and digitise the business for improved efficiency and returns

3. Invest in our people and ensure they have the skills and knowledge to thrive

4. Further embed sustainability across our business

Becoming a more responsible bank

At Santander UK we understand that the decisions we take have an impact on society, the UK economy, and our environment. We continue to embed sustainability across our business, focusing on four pillars, which are explained below. To find out more, see our 2019 ESG Supplement.

1. Create a thriving workplace that attracts, retains and rewards the most talented and committed people

2. Drive sustainable economic growth, financial inclusion and positive socio-economic impact

3. Drive inclusive digitalisation and use technology in a way that creates value for all of our stakeholders

4. Uphold the highest ethical standards and fight financial crime

 

Santander UK plc   5


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Annual Report 2019 | Strategic report

 

Strategic report continued

 

Risk management overview

Information on our principal risks and uncertainties is set out in the Risk review by type of risk, with more detail by business segment. When reading the Risk review and the other sections of the Annual Report, you should refer to the ‘Forward-looking statements’ section in the Shareholder information.

Sound risk management is at the centre of our day-to-day activities. It benefits our business and our customers by helping to ensure balanced and responsible growth.

Top risks

We regularly review the top risks that could impact our customers and shareholders. Risks actively monitored over 2019 include:

Brexit

We continue to monitor Brexit as a top risk, following the UK’s exit from the EU on 31 January 2020. Our Brexit planning is now focused on the potential outcomes of the UK and EU negotiations in respect of a Free Trade Agreement (FTA) and equivalence in financial services, by the end of 2020. We are also maintaining and refining existing plans to address a number of areas requiring cross-divisional communication including financial markets infrastructure, data, payments, third-party services, cyber, and internal and external communications.

Ring-fencing implementation

We executed our ring-fencing plans, in order to meet the 1 January 2019 legislative deadline. The majority of customer assets and liabilities remain within the ring-fenced bank, providing longer-term flexibility with minimal disruption for our customers. Corporate and wholesale markets business, which is prohibited from inclusion in the ring-fenced bank, was transferred to Banco Santander London Branch. Ring-fencing resulted in significant change to our structure, people and operations, and we have retained it as a top risk to ensure continued focus on the ongoing embedding of ring-fencing culture throughout our governance and operations. This has included continued emphasis on related controls, procedures, reporting, and additional internal communications and staff training.

Building and maintaining capital strength

Regulatory uncertainty arising from decisions made by regulators on the implementation and interpretation of capital rules and on macro-prudential issues can impact upon our capital management. We continuously review our capital position on a forward looking basis, and it is also subject to the Bank of England’s stress testing regime. Publication of the 2019 stress test results showed that we passed the stress tests, and were not required to undertake any capital actions.

For the fourth year in a row, we had the lowest stressed CET1 capital ratio impact of all participating firms, demonstrating our resilient balance sheet and prudent approach to risk, in an extremely competitive and uncertain environment. On both IFRS 9 transitional and non-transitional bases, our lowest post-stress end-point CET1 capital ratio, before and after management actions, was in excess of the CET1 hurdle rates established by the Bank of England. On both IFRS 9 bases, but after management actions, our lowest post-stress end-point leverage ratio also exceeded the Bank of England hurdle rates. Given the composition of our balance sheet, the leverage ratio is growing in importance, in terms of the binding capital constraint for our business.

Pension risk

Over the course of the past two years a number of de-risking actions have been undertaken including execution of various hedging strategies and strategic asset reallocation which has reduced the fund’s exposure to pro-cyclical assets, and improved the fund’s resilience. Despite falls in long term interest rates, the funding deficit position (2016 valuation basis) was broadly stable over the year as long term inflation also fell and asset values increased. The IAS 19 accounting position did however worsen, as in addition to these factors credit spreads narrowed, increasing the value of the liabilities. During the year we completed and agreed the Triennial Valuation process with the Trustees, which resulted in a lower funding deficit on the updated valuation basis. We have also continued to take actions to improve risk management and control, along with the associated governance procedures.

Financial crime

We recognise that financial crime activities can have a significant impact on our customers. Criminals are also increasingly using the financial system to launder the profits of illegal activity such as human trafficking and terrorism. Significant investment in ongoing enhancement continues to be made to our financial crime control framework, and to key controls including anti-bribery and corruption measures, customer risk assessment, and screening and transaction monitoring.

Managing a complex change agenda

As part of our business planning strategy we have continued to invest in a project portfolio that supports risk, regulatory and growth requirements. In order to effectively manage our complex change agenda, we have established robust processes and controls that allow us to track any potential issues and mitigate implementation risk. In delivering key projects, we keep pace with developments in the regulatory environment and technological advances, whilst focusing on maintaining our market position and remaining competitive.

 

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Cyber-attacks

In 2019, threats from the external cyber environment continued to evolve, due to heightened geopolitical tension, and active well-established cyber-crime groups. We monitor a range of cyber threats including attacks on payment systems, ATM networks and customer data where insider threat and network intrusion are the most common attack methods; an emerging threat from a new method, aimed at breaching organisations’ on-line customer services, (such as internet banking) and causing denial of service. In addition, Data Security and General Data Protection Regulation (GDPR) compliance continue to be key areas of concern. We have taken mitigating actions against these various threats including deployment of a cyber threat intelligence platform, increased intelligence through chairing the Geopolitical Financial Services working group and robust online service access construction utilising anti Distributed Denial of Service (DDoS) techniques. The mitigants implemented in our Cyber Security Plans are proving effective and we have experienced no significant disruption to date.

Conduct risks

Like all UK banks we continue to see a demanding regulatory agenda focused on fair customer outcomes, avoiding customer harm (including from inertia), vulnerability and consumer protection in general. We aim to comply with all applicable regulatory requirements and we have no appetite to operate in a way that leads to unfair outcomes for our customers or that negatively impacts the market or breaches regulatory or legislative requirements. A major conduct issue that has impacted UK banks over the past few years related to Payment Protection Insurance (PPI). A deadline for customer complaints at the end of August 2019 was set by the FCA, and in the run up to this date we saw an uplift in the volume of claims to unprecedented levels, which resulted in us making an additional provision of £70m in Q2 2019 and £99m in Q3 2019 to cover this. When implementing regulatory change we are focused on ensuring that our strategy, leadership, governance arrangements, and approach to managing and rewarding staff does not lead to a detrimental impact on our customers, competition, or to market integrity. We expect all people in our organisation to take responsibility for managing risk through our I AM Risk programme.

Third party risks

Like other banks, we rely on a number of major suppliers, in order to continue to deliver products and services to our customers. The complexity and criticality of services provided by third-parties to the industry is a key operational risk that has been recognised by us, our peers, and the regulators. We carefully assess and monitor the degree of risk associated with our suppliers on an ongoing basis, supported by key operational risk indicators and monthly dashboards submitted by our business units. We place emphasis on a carefully controlled and managed Third Party Supplier Risk Framework, and we are enhancing resources in this area in order to manage this risk. This framework ensures that those with whom we intend to conduct business meet our risk and control standards throughout the life of our relationship with them. We monitor and manage our ongoing supplier relationships to ensure our standards and contracted service performance continues to be met.

Emerging risks in 2019

We regularly review emerging risks that could impact our business and our customers. We maintain an active dialogue with key Corporate customers to aid our overall understanding of the issues that could arise. As well as those risks identified below, we also consider the potential impacts of various economic scenarios that could arise from other factors, for example a global health emergency (such as the recent coronavirus outbreak), geopolitical conflicts or other significant global events. During the year we reviewed a range of risks associated with LIBOR transition, which are being actively managed at the Asset and Liability Committee (ALCO).

Changing customer behaviour

Customer loyalty is diluting across the Banking industry, as expectations are shifting and population demographics evolve. Increasingly customers require first class digital experiences when interacting with their banking services provider, as their expectations are increasingly defined by experiences outside of banking. This is causing disruption to the banking sector with higher demands for: digital product offerings and solutions to manage customer finances; data security and trustworthiness; immediacy and convenience; tailored value products in return for loyalty; price transparency and comparisons across providers. Santander’s customer-centric transformation is well underway, with further digital enhancements planned for deployment in 2020, truly designed around customer needs.

Rapid technological change

Successful financial service providers will be those that invest in platforms that satisfy customer expectations and at the same time deliver substantial cost reduction in order to sustain profitability. Santander UK continues to increase its number of digital customers, develop new digital channels, and improve existing digital services, as well as automating existing physical channels. We also place a high priority on technology risk management, especially cyber security, in order to protect our customers and our reputation.

Strong market competition

The UK banking market continues to be highly competitive, with an increasing concentration of revenues in mortgages. At present, our main competition comes from incumbent banks who have strengthened and restructured their activity, and also from building societies. Margins across the industry, particularly in mortgages, continue to come under pressure as a result of this competitive environment, and this trend is expected to continue for several years ahead. Competition for deposits also remains intense and may escalate as many challenger and specialist banks need to replace funding from Government schemes in the near future. In the longer term, there is also potential for new types of competitors, such as scale digital players, to gain market presence by leveraging their large customer bases and digital customer interfaces. Digital banks are emerging globally, with many targeting the UK, as London is seen as Europe’s FinTech hub. We are focused on delivering sustainable, predictable growth in a responsible manner, and achieving consistent profitability through balance sheet strength.

 

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Annual Report 2019 | Strategic report

 

Strategic report continued

 

 

 

Demanding regulatory agenda

We continue to face a complex regulatory change agenda. The FCA, PRA and other regulatory bodies have been progressing industry reviews across a number of areas during the year. Some key areas of focus include: PPI; High Cost of Credit Review involving the reform of overdraft charges and contingent reimbursement model for authorised push payment fraud. We are focused on managing our regulatory risks, coordinated and prioritised through specific project groups with both risk and regulatory oversight.

Uncertain economic and geopolitical environment

UK economic growth was lower in 2019, compared to 2018, as uncertainty over Brexit continued to subdue business confidence and investment. However, unemployment remains at historical lows and strong real wage growth has continued to support consumption. UK Housing market indicators have generally shown signs of improvement, in the early part of this year, including the level of transactions and price growth. The performance of the broader UK economy during the year, and the government’s housing policies, will likely have an impact upon the full extent and duration of these improvements.

Various global institutions have cited potential emerging risks to the global economic and financial system during the year, including: increasing levels of Corporate Sector Debt; a tightening of financial conditions in repo markets; China’s financial imbalances; and limited capacity of central banks going forward to prevent a fall in economic growth. Many of the risks regularly cited by these institutions may not have a direct impact on Santander UK, however they could result in an increase in the cost of funding generally in the wholesale markets.

Global institutions are now closely monitoring an outbreak of respiratory illness, known as COVID-19, which has spread from Asia into the UK and across the world. The situation remains complex and is evolving rapidly.

While it is too early to predict the financial and business impact of this crisis, we expect a negative effect on the UK and global economic environment as well as our 2020 financial results. As set out under ‘Building and maintaining capital strength’ on page 6 of this report, the 2019 Bank of England stress results demonstrated our resilient balance sheet and prudent approach to risk. We also maintain prudent and resilient Funding and Liquidity Policies to protect the bank and our customers.

LIBOR transition

In Q4 2018, we launched our LIBOR transition programme, which includes identified Senior Managers within the bank who oversee the implementation of our transition plans. The Project has the full support of the Board and Executive Management across the bank. We recognise that there are potential risks to our customers as we transition from LIBOR to risk free rates going forward. Our LIBOR transition programme is in place to ensure a smooth transition, and to anticipate and address any potential customer and conduct related issues that could arise from the change. There are also a number of other thematic risks involved including; legal and compliance; reputational; operational and financial accounting and control. There is also some uncertainty about the likely path of evolution for the set of non-LIBOR benchmarks and markets for non-LIBOR products (including liquidity or illiquidity related issues).

In January 2020, the Working Group on Sterling Risk-Free Reference Rates set targets for 2020, including ceasing the issuance of sterling LIBOR-based cash products maturing beyond 2021 by the end of Q3 2020. The FCA and Bank of England have stated their support for these targets. We have established detailed plan timelines and milestones, including a Project Governance structure, to enable the transition to alternative rates ahead of the end of 2021.

Climate change risk

Reflecting the significant potential risks posed by Climate Change to the economy and to the financial system, in April 2019, the PRA became the first regulator in the world to publish supervisory expectations setting out how banks need to develop an enhanced approach to managing the financial risks from Climate Change. In 2019, our programme of work focused on enhancing our understanding of the most material climate change related drivers of our business model, and producing an implementation plan to fully deliver the PRA’s expectations under Supervisory Statement (SS) 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’. We are addressing climate change related risk issues through ongoing engagement across our business and support functions, co-ordinated and led by the Risk Division. Our focus will be on implementation of the plan that we delivered to the PRA in October 2019.

Task Force on Climate-related Financial Disclosures

As a group, Banco Santander supports the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which were published with the aim of improving disclosure of climate financial risk and opportunities. As part of our strategy in the UK we have prioritised embedding sustainability in everything we do and welcome the developments of the PRA and FCA to improve management and disclosure of climate change related risks.

In October 2019, we submitted an initial UK implementation plan to the PRA to address the expectations set out in SS 3/19. Alongside this plan, responsibility for climate related financial risks was added to the Statement of Responsibility of the Chief Risk Officer (CRO) as Senior Management Function (SMF) holder. Delivering on our plan will be a multi-year programme. We are targeting the end of 2022 to achieve full adoption, aligned to the implementation path as set out in the TCFD recommendations. We are working alongside Banco Santander with a shared ambition of being a leading global bank for tackling climate change.

In 2019, we have developed a high-level analysis of our credit portfolios based on various climate scenarios: a business-as-usual (BAU) scenario (which trends towards 3.7°C of average global warming by 2100) and a low-carbon transition scenario (which trends towards 2°C of warming). This analysis is referred to as the ‘Climate Portfolio Screen’. The aim of the Climate Portfolio Screen was to identify sectors and segments of the Santander UK lending book where there could be greater potential opportunities and risks associated with both the transition to a lower carbon economy and changes in physical climatic conditions. According to this analysis, the sectors of most concern based on exposure and or potential risks are mortgages, real estate, consumer finance and automotives. For the mortgage portfolio, we are working on a project that will help us understand the physical and transition risks in our mortgage book under different climate scenarios.

 

8   Santander UK plc


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Sustainability review

We believe that the performance of our business cannot be considered separately from the prosperity of all our stakeholders and sustainability of the wider environment.

Customers

Inclusive digitalisation

We continue to innovate to make our digital offerings more customer-friendly, secure and accessible. In 2019, Santander became the first UK high street bank to introduce tailored fraud warnings on our mobile app. We’ve also introduced customer-friendly authentication, including the ability to authorise online shopping transactions using a fingerprint or facial recognition. We have extended these authentication capabilities to customers initiating payment requests via Online Banking.

In 2020, we’ll launch a quicker online banking logon experience. Following the launch of Voice ID in April 2019, 226,490 customers have registered with over 1.4m Voice ID verifications during 2019. Our mobile banking app scores highly with users, ranking 4.8 on iOS and 4.5 on Android, both out of 5.0. In Q4 2019 we completed the work to deliver card controls to our mobile app, including the ability for customers to temporarily block their card when lost or stolen. This was piloted in 2019 and will be fully rolled out in the first quarter of 2020. Customers can also apply blocks to online, contactless, international and gambling transactions.

In 2019, we launched Santander Chat to all Online Banking customers, made up of an automated virtual assistant ‘Bot’ and messaging via a live agent. This provides an authenticated platform for secure conversations and transactions. In 2020, we plan to bring this service to our mobile app, and increase the end-to-end transactions that the Bot can perform on behalf of customers.

Cyber security collaboration

We recognise that, in parallel with the increase in digital banking, we must continually improve our cyber defences and data protection. Our response to the cyber threat is to continue to implement a global, multilayered and agile resilience framework.

Improved awareness is the foundation of cyber defence so we engage with customers, regulators, partners and everyone across the organisation to enhance their understanding of cyber security. We hosted nine Cyber Awareness workshop sessions across our branch network in 2019 to help educate our customers on the threats they face online. We continued to invest in emerging cyber security talent, and the first cohort of our Digital Apprentices will graduate in 2020 with the skills to become the next generation of cyber experts.

Transforming our branch network

The way customers are choosing to bank with us is changing. With more people choosing to engage through our digital platforms, there’s been an impact on the use of our branch network. We conducted an extensive review of the network to reshape it to meet our customer needs. Our network is evolving, made up of a combination of larger branches offering community facilities to support local businesses and customers as well as smaller branches using the latest technology to offer customers more convenient access to banking services. As part of this, we’ve refurbished 87% of our network.

The introduction of Work Café demonstrates how we’re exploring different ways to use our branches to meet customer needs. Santander opened its first UK Work Café in Leeds in July 2019. Since launch we’ve had 30,000 customer visits to use the co-working and bookable rooms, attend an event, or talk to our specialists.

We’re a signatory to the Access to Banking Standard which ensures open and fair communication where banks close branches. In 2019, we closed 140 branches in line with this standard, following reviews to ensure our resources are targeted to meet the changing needs of customers. We’ve signed up to the Banking Framework 2, an agreement that allows customers to access 11,000 Post Office outlets to take out or pay in cash and cheques and obtain a balance. We’re also working with UK Finance and other banks to support communities’ access to cash.

Supporting our vulnerable customers

Building capability across the bank to better support vulnerable customers is a focus of our Vulnerable Customer Strategy. In 2019, we launched an award-winning internal training programme, ‘Perspectives’, featuring real customer stories. This covers dementia, autism, PTSD, financial abuse and confusion and aims to raise awareness, reduce stigma and equip colleagues to better identify and respond to those who need support. Since launch in May 2019 these films were viewed 46,755 times.

We have been working with Alzheimer’s Society to become a more dementia-friendly bank, auditing our branches and improving our products and services for people living with dementia.

We’ve also been working with charities and industry forums to respond to challenges such as harmful gambling and financial abuse. Our approach to tackling harmful gambling is informed by a bespoke social insights approach in collaboration with gambling charities, the gambling industry and people with first-hand experience. This allows us to better understand our role in this area and how we can be effective in the detection and prevention of gambling-related financial harm.

Throughout 2020 we will continue our work on the underlying initiatives that support our overall Vulnerable Customer Strategy, providing colleagues the tools and support they need to deliver for all our customers.

 

Santander UK plc   9


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Annual Report 2019 | Strategic report

    

 

Strategic report continued

Championing ambitious SMEs

SMEs are at the heart of our country’s economy, but starting and running a business presents a wide range of challenges. Santander Breakthrough is designed to provide support at every step through events, insights and partnerships. In 2019, we supported over 5,600 businesses from their light bulb moment through to starting up, scaling up and beyond. Our Growth Capital Team provided financial support with £24.3m of growth capital and £90.8m of senior debt to 27 companies. The launch of our Breakthrough online platform gives business owners better access to support and insights. It also provides the ability to find local Breakthrough business events, of which we ran 188 in 2019. We also launched our Trade Club Alliance, a new digital platform to help businesses boost global trade with market data on over 180 countries. We supported over 650 businesses in 2019 in trade events. We entered a three year partnership with the British Library’s Business and IP Centre network, aimed at supporting early stage businesses with key skills such as marketing and managing finances. We are a proud signatory to the Investing in Women Code and support female entrepreneurs with initiatives such as our national mentoring programme.

Supporting first time buyers

First time buyers (FTBs) are a key strategic focus for us, and in 2019 we were proud to win Your Mortgage’s Best First-Time Buyer lender. In 2019, we helped over 37,000 customers into their new home by lending £5.5bn, supporting 37% more customers than the year before. In 2019, Santander was the first lender to launch a free home condition report that helps FTBs identify any potential issues with the home before they buy, avoiding unexpected costs. We also continued to improve our online mortgage servicing hub, including the retention service, with 60% of customers choosing to change their deal online, an increase of 10% from 2018. The convenience of online mortgage services means over 50% of regular overpayments are now made online. Our ambition is for branches to become an integral part of the local community providing unbiased financial education. Since launch in September 2019, we’ve completed over 1,000 FTB events in our branches, providing unbiased advice for those interested in buying their first home.

Shareholders

Part of a global bank

We are a subsidiary of Banco Santander SA and part of the Banco Santander group, a leading retail and commercial bank headquartered in Spain. Our ordinary shares are all held by Banco Santander group companies and are not listed, although our preference shares are listed on the London Stock Exchange.

Under the subsidiary model operated by Banco Santander, autonomous subsidiaries are responsible for their own liquidity, capital management and funding. This not only mitigates the risk of difficulties in one subsidiary affecting another, it allows local market knowledge and expertise to be utilised and provides considerable operational flexibility. We benefit from the strong Santander brand along with experience and expertise from a global banking group. Systems development capacity can be shared along with common technology platforms and innovations, creating a significant competitive advantage.

People

Culture

Our culture of Simple, Personal and Fair is underpinned by our nine behaviours, enabling our colleagues to thrive. In 2019, we were again recognised as a Top Employer by the Top Employers Institute. Our goal to be a high-performing and responsible business is reflected in the 2019 Global Engagement Survey (GES) with 85% of colleagues feeling ‘We act responsibly and make a positive contribution to society’, 13% above the external benchmark(1). In 2020, we will focus on transformation through simplification, driving a learning culture and being an inclusive and responsible organisation.

Employee engagement

We foster an open dialogue between employees and our Executive Committee. In 2019, we held a series of internal roadshows and a virtual ‘Santander Conversation’, reaching over 2,800 employees. This gave the Executive Committee the opportunity to discuss our vision and roadmap and hear from colleagues. Colleague engagement levels remained relatively stable in a period of transformation and change. Additionally, 992 colleagues participated in virtual focus groups in 2019 to help better understand employee experience.

Building a bank for everyone

Our approach to Inclusion and Diversity is to be a workplace where anyone and everyone can learn, grow and succeed, while being themselves. In 2019, our employee survey results showed that 88% of employees felt positive that their line manager is open and inclusive, promoting diversity. We have seven employee-led diversity networks, which collectively have over 10,000 members across the bank. This year we launched our network for Social Mobility to help create a level playing field for all colleagues irrespective of their background. We are a signatory to the Social Mobility Pledge and benchmark as a top 20 employer in the Social Mobility Index (up from 49th in 2018).

We continued with a number of targeted actions to improve our gender diversity. Our progress is detailed in our latest Gender Pay Gap report. Women made up 32.1% of senior managers, 26.7% of our Executive Committee and 35.7% of our Board (including Executive and Non-Executive Directors) at 31 December 2019. For the Business in the Community (BiTC) ‘Race at Work Charter, One Year on’, we continue to make good progress, having achieved two actions. We also were the headline sponsor of Pride:MK, the first Pride event in Milton Keynes, and were classed as a Top Ten Employer at the British LGBT Awards.

 

(1)

Financial sector benchmark taken from the survey provider Mercer Sirota. The financial services sector norms are based on more than one million employees answering 114 surveys over the last five years.

 

10   Santander UK plc


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We support a range of apprenticeship schemes up to degree level and provide a graduate development programme ‘Accelerating Capability’. We have 421 apprentices, of which 46% are female, and recruited 97 graduates, of which 59% are female, through partnerships with 86 UK universities.

Learning

In 2019, our people undertook 144,703 training days and we invested £10.6m, equipping them with the skills they need for now and in the future, including digital skills. We launched a new learning platform, MIO, which is a key enabler of a continuous learning environment. MIO provides a variety of training styles, from 2-3 minute bursts to themed box set content to support colleagues. In 2019, 484 people managers completed our new ‘Leading our Future’ toolkit for building inclusive and resilient teams. Our Leadership Development focus was on digital knowledge and skills, leading change and transformation capability and driving collaboration, with initiatives including a Digital Leaders Academy for senior leaders.

Prioritising wellbeing

In a time of change at Santander and in financial services, we aim to help colleagues build personal resilience and feel supported. In 2019, we repositioned our wellbeing proposition to cover Physical, Mental, Financial and Social Wellbeing and held a number of wellbeing events. We supported Public Health England’s Every Mind Matters Campaign and signed the BiTC Mental Health at Work Commitment at launch. We’re building a Wellbeing Hub that brings all of our support into one place. This will help colleagues to proactively access support and information across diverse topics such as nutrition, sleep, stress, finances, body image and more. Our Mental Wellbeing colleague network now has over 2,190 members.

Working in partnership

During 2019, we consulted our recognised trade unions Advance and Communication Workers Union (CWU) on restructuring proposals as the bank simplifies to become more efficient. Our mutual focus is to minimise job losses by prioritising redeployment or re-training of colleagues affected. Outplacement support is offered to all colleagues affected by change.

Communities

Helping our communities prosper

We’re changing the way we partner with charities to ensure strategic collaborations which help us to become a more responsible bank. On top of employee fundraising and volunteering, we have developed joint strategic initiatives to address pressing challenges. For instance, in January 2019 we appointed Alzheimer’s Society as our new charity partner for 2019-2021. Our aim is to leverage the charity’s expertise to help us become a digitally dementia-friendly bank.

Financial inclusion and literacy

Financial inclusion and literacy are critical elements of our strategy. Santander colleagues supported over 25,000 students through our in-school mentoring programme focused on money management, digital skills and careers. We also reached almost 200,000 young people during My Money Week, helping 4 – 19 year olds to gain confidence in money matters.

We used our UEFA Champions League flagship sponsorship and partnered with National Numeracy to bring the power of football and education together and tackle the fact that 40% of people in the UK don’t feel ‘fully confident’ with everyday budgeting and money management. We created The Numbers Game: 13 UK-wide roadshows through which we engaged over 20,000 children, families and young adults, resulting in over 11,900 people completing the experience. Use of National Numeracy online learning materials increased 31% since we started our tour, doubling their engagement rate. Our on-site research showed that 85% of people gained a better understanding of the importance of numbers in everyday life, while 87% believed that being confident with numbers helped them to manage their money better.

Innovative fraud and scams education

In June 2019, Santander teamed up with Kurupt FM from BAFTA-winning BBC TV show People Just Do Nothing to create its latest fraud awareness campaign, ‘MC Grindah’s Deadliest Dupes’. Statistics show that Generation Z are among the most likely to fall victim to scams, and their behaviours online can make them vulnerable to fraudsters. In the last year, identity theft among people under 21 has risen by 26% while 50% of money mules are aged 26 or under and 27% are aged 21 or under.

We partnered with Barnardo’s to deliver the content we created with Kurupt FM to some of the most vulnerable young people, reaching approximately 220,000 in their network. We ran seven workshops with Barnardo’s, resulting in 83% of attendees saying they now felt more confident on how to avoid these scams.

In 2019, the Santander Foundation, a separate legal entity that operates independently from Santander UK, reviewed its strategy and explored how to deliver a greater positive impact within our communities. Following this, the Foundation will launch a new Grants Giving programme in 2020 to support digital and financial skills. During 2019, the Foundation continued to support local charities via the Matched Donations programme, approving 1,694 in employee-submitted requests.

 

Santander UK plc   11


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Annual Report 2019 | Strategic report

    

 

Strategic report continued

 

Ethics and Environment – we are committed to upholding the highest ethical standards

Responsible lending

As part of the Banco Santander group, we comply with the Equator Principles, factoring social, ethical and environmental impacts into our risk analysis and decision making process for financial transactions. These principles address climate change, prevention of pollution and toxic waste emissions, biodiversity, indigenous peoples and human rights.

Our policy on Aerospace and Defence, Energy, Mining & Metals and Soft Commodities and our Sensitive Social and Ethical Sectors policy continue to define our approach towards creating long-term value while managing reputational, social and environmental risks. In 2019, we further improved these policies by introducing prohibitions and strengthening restrictions on a range of activities. Prohibited activities now include the provision of products or services for new Coal Fired Power Plant (CFPP) projects and taking on new clients with existing CFPPs. Restricted activities include transactions specific to CFPPs for existing clients which do not significantly improve environmental impacts, such as a significant reduction of CO2. Our Reputational Risk Forum reviews and approves all restricted activities to ensure that they fall within our risk appetite. This forum reviews, monitors and escalates key decisions around financial and non-financial reputational risks to the Board.

Environmental performance

We strive to reduce our operational impact on the environment. In 2019, our offices and data centres successfully recertified for ISO 14001 and transitioned to the new ISO 50001 standard. Our energy data platforms allow us to accurately manage each of our properties that have a smart meter installed, and we reduced electricity use by 6.6% and gas usage by 10.7% in 2019. We also use lifecycle assessment to maximise energy saving opportunities when upgrading facilities. Our water use also reduced by 8.3% in 2019 with installation of efficient water fittings in three offices. We have a network of over 2,800 Green Champions to embed sustainability and green behaviour into site culture. These Champions ran 12 roadshows across our offices in 2019.

Ethical supply chain

We want to do business with companies who share our values. Our standard supplier contracts include specific requirements to respect human rights and ethical labour practice based on the principles of the UN Global Compact. In 2019 we improved our Third-Party Risk Management (TPRM) framework, processes and policies, including enhancements to meet new European Banking Authority outsourcing requirements. Our third-party policy reflects our Board-approved Risk Appetite Statements, including specific provisions on forced labour. Our Third-Party Code of Conduct was launched this year, with reference to Banco Santander group Human Rights Policy and International Labor Organization (ILO) standards. We completed a full review and update of our third-party supplier control assessment approach as part of improvements to third-party due diligence. The new framework was effective in August 2019 and with an external partner we completed 15 on-site suppliers assessments in 2019, with further assessments scheduled for 2020.

Anti-Financial Crime, Anti-Bribery and Corruption

Our Anti-Financial Crime (AFC) strategy is set around the three principles of ‘Deter, Detect and Disrupt’. In 2019, we continued to drive a culture of AFC across the business and with partners. We ran 10 events for the UK’s Regional Organised Crime Units to better work with law enforcement to protect customers. We also held 8 AFC Culture roadshows with 510 colleagues attending, of which 96% better understood the AFC Vision and 69% said they will change behaviour.

We enhanced our governance of AFC by launching a Strategy & Policy forum in September covering strategy, anti-money laundering, counter-terrorism financing and sanctions. We also engaged with government and law enforcement stakeholders to shape the reforms that are part of the government’s Economic Crime Plan, which aims to improve the resilience of the UK’s overall defences against financial crime.

Tackling modern slavery and human trafficking

This year we worked with non-profit ‘Stop the Traffik’ to raise awareness and expertise in Santander on modern slavery and human trafficking (MSHT). As a financial institution, we are uniquely placed to deter, detect and disrupt those profiting from this criminal industry. We ran a targeted campaign with Stop the Traffik to raise awareness and capability in branch staff in a location at high risk for MSHT. Stop the Traffik also held masterclasses at our AFC roadshows. We work closely with law enforcement and the Joint Money Laundering Intelligence Taskforce (JMLIT). In 2019 our Financial Crime team were actively involved in cases, including one which resulted in the arrest of suspects after migrants were found in the back of a lorry. Our Modern Slavery Statement is published online and subject to approval from the Board and Responsible Banking Committee.

 

12   Santander UK plc


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Annual Report 2019 | Financial review

    

 

Financial review

              

Critical factors affecting results

The preparation of the Consolidated Financial Statements requires management to make judgements and accounting estimates that affect the reported amount of assets and liabilities at the date of the Consolidated Financial Statements and the reported amount of income and expenses during the reporting period. Management evaluates its judgements and accounting estimates, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, on an ongoing basis. Actual results may differ from these accounting estimates under different assumptions or conditions.

 

Estimates and judgements that are considered important to the portrayal of our financial condition including, where applicable, quantification of the effects of reasonably possible ranges of such estimates are set out in ‘Critical Judgements and Accounting Estimates’ in Note 1 to the Consolidated Financial Statements.

 

       

 Contents

 

  
       

Income statement review

   15
       

 

Summarised Consolidated Income Statement

  

 

15

       

 

Profit before tax by segment

  

 

16

       

 

Balance sheet review

  

 

17

       

 

Summarised Consolidated
Balance Sheet

  

 

17

       

 

Customer balances

  

 

19

       

 

Cash flows

  

 

20

       

 

Summarised Consolidated Cash
Flow Statement

  

 

20

       

 

Capital and funding

  

 

21

       

 

Liquidity

  

 

21

       

 

Selected financial data

  

 

22

          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          

 

14   Santander UK plc

 


Table of Contents
                     
                     
                     
Strategic Report       Financial review       Governance       Risk review       Financial statements       Shareholder information
                               

 

 

Income statement review

SUMMARISED CONSOLIDATED INCOME STATEMENT

 

    

                  2019

£m

   

                  2018(2)

£m

 
Net interest income      3,292       3,603  
Non-interest income(1)      881       931  
Total operating income      4,173       4,534  
Operating expenses before credit impairment losses, provisions and charges      (2,499     (2,579
Credit impairment losses      (221     (153
Provisions for other liabilities and charges      (441     (257
Total operating credit impairment losses, provisions and charges      (662     (410
Profit before tax      1,012       1,545  
Tax on profit      (279     (399
Profit after tax      733       1,146  
Attributable to:     
Equity holders of the parent      714       1,124  
Non-controlling interests      19       22  
Profit after tax      733       1,146  

 

(1)

Comprised of Net fee and commission income and Net trading and other income.

(2)

Adjusted to reflect the amendment to IAS 12, as described in Note 1.

A more detailed Consolidated Income Statement is contained in the Consolidated Financial Statements.

2019 compared to 2018

Profit before tax was down 34% to £1,012m due to the factors outlined below. By income statement line item, the movements were:

 

Net interest income was down 9%, largely impacted by mortgage back book pressure and £3.9bn of SVR attrition (2018: £4.9bn).

Non-interest income was down 5%, largely due to £58m of ring-fencing perimeter changes in 2018 and the closure of trading businesses following ring-fencing implementation, partially offset by £15m additional Vocalink consideration received in Q2 2019.

Operating expenses before credit impairment losses, provisions and charges were down 3%, with the absence of £48m of ring-fencing perimeter changes, £40m of GMP equalisation costs and £38m of Banking Reform costs all incurred in 2018. This was partially offset by £50m(3) transformation costs in 2019 and £40m higher operating lease depreciation. Higher depreciation costs and inflationary pressures were offset by lower staff costs and efficiency savings.

Credit impairment losses were up 44% to £221m, largely due to lower mortgage releases as well as a few single name corporate exposures.

Provisions for other liabilities and charges were up £184m to £441m, largely due to additional PPI provisions of £169m and £105m of transformation programme charges(3) (predominantly restructuring costs) as well as an additional £10m other provision charge in 2019 pertaining to our retail credit business operations. Other adjustments to provisions amounted to £80m in 2018. The 2019 increase was also offset by £21m, which was the net effect of a number of items, most notably the release of property provisions.

 

The £169m charged in respect of PPI comprised:

 

In Q219 we reported an additional provision of £70m reflecting an increase in PPI claim volumes, additional industry activities and having considered guidance provided by the FCA and our specific approach to PPI claims, in advance of the PPI claims deadline on 29 August 2019.

 

In Q319, and in line with industry experience, we received unprecedented volumes of information requests in August 2019 and saw a significant spike in both these requests and complaints in the final days prior to the complaint deadline. Our best estimate of the additional provision required was £99m.

 

Tax on profit decreased £120m to £279m, as a result of lower taxable profits in 2019, partially offset by the tax effect of additional PPI remediation charges which are not tax deductible.

Please refer to the Financial review section of our Annual Report on Form 20-F for the year ended 31 December 2018 for a comparative discussion of 2018 financial results compared to 2017.

 

(3)

Transformation programme investment of £155m, of which £50m is operating expenses and £105m is provisions for other liabilities and charges.

 

Santander UK plc   15


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Annual Report 2019 | Financial review

 

PROFIT BEFORE TAX BY SEGMENT

The segmental information in this Annual Report reflects the reporting structure in place at the reporting date in accordance with which the segmental information in Note 2 to the Consolidated Financial Statements has been presented.

 

  2019   

Retail
        Banking

£m

   

Corporate &
        Commercial
Banking

£m

   

Corporate &
        Investment
Banking

£m

   

        Corporate
Centre

£m

            Total
£m
 

Net interest income/(expense)

     2,876       359       63       (6     3,292  

Non-interest income/(expense)(1)

     698       78       112       (7     881  

Total operating income/(expense)

     3,574       437       175       (13     4,173  

Operating expenses before credit impairment losses, provisions and charges

     (1,994     (264     (171     (70     (2,499

Credit impairment losses

     (160     (37     (22     (2     (221

Provisions for other liabilities and charges

     (292     (20     (17     (112     (441

Total operating credit impairment losses, provisions and charges

     (452     (57     (39     (114     (662

Profit/(loss) before tax

     1,128       116       (35     (197     1,012  
          
  2018(2)                               

Net interest income

     3,126       403       69       5       3,603  

Non-interest income(1)

     638       82       183       28       931  

Total operating income

     3,764       485       252       33       4,534  

Operating expenses before credit impairment losses, provisions and charges

     (1,929     (258     (250     (142     (2,579

Credit impairment (losses)/releases

     (124     (23     (14     8       (153

Provisions for other liabilities and charges

     (230     (14     (8     (5     (257

Total operating credit impairment losses, provisions and (charges)/releases

     (354     (37     (22     3       (410

Profit/(loss) before tax

     1,481       190       (20     (106     1,545  

 

(1)

Comprised of Net fee and commission income and Net trading and other income.

(2)

Restated to reflect the resegmentation of our short term markets business to Corporate Centre as described in Note 2 to the Consolidated Financial Statements.

2019 compared to 2018

For Retail Banking, profit before tax decreased, largely due to pressure from the mortgage back book, including £3.9bn of SVR attrition as well as additional PPI provision charges and lower credit impairment releases. Higher operating lease volumes and a change in accounting treatment(3) of residual value risk resulted in increased non-interest income, partially offset by higher depreciation in operating expenses.

For Corporate & Commercial Banking, profit before tax reduced 39%, largely due to lower net interest income following the 2018 and 2019 significant risk transfer (SRT) securitisations. Credit impairment losses increased as a result of single name exposures and lower write-backs.

For Corporate & Investment Banking, loss before tax increased to £35m driven by the 2018 changes in the statutory perimeter, following the transfers of activities to Banco Santander London Branch as part of ring-fencing implementation as well as higher credit impairment losses due to single name exposures.

For Corporate Centre, loss before tax increased. This was largely due to £155m transformation programme investment including £105m reported as provisions for other liabilities and charges and £50m reported as operating expenses. In addition, yields on non-core assets were lower in 2019 and non-interest income was impacted by the closure of trading businesses, while operating expenses related to Banking Reform and GMP equalisation in 2018 were not repeated.

 

(3)

In 2019, our accounting treatment for residual value (RV) risk changed. This resulted in a £24m reversal of RV provisions recognised in other income (of which £22m relates to charges taken in prior periods) which was partially offset by £7.5m accelerated depreciation of the underlying asset (prior periods: £2.3m).

 

16   Santander UK plc


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Balance sheet review

SUMMARISED CONSOLIDATED BALANCE SHEET

 

    

                         2019

£m

    

                         2018

£m

 

Assets

     

Cash and balances at central banks

     21,180        19,747  

Financial assets at fair value through profit or loss

     3,702        10,876  

Financial assets at amortised cost

     239,834        232,444  

Financial assets at fair value through other comprehensive income

     9,747        13,302  

Interest in other entities

     117        88  

Property, plant and equipment

     1,967        1,832  

Retirement benefit assets

     669        842  

Tax, intangibles and other assets

     4,486        4,241  

Total assets

     281,702        283,372  

Liabilities

     

Financial liabilities at fair value through profit or loss

     3,161        7,655  

Financial liabilities at amortised cost

     259,179        256,514  

Retirement benefit obligations

     280        114  

Tax, other liabilities and provisions

     3,065        3,180  

Total liabilities

     265,685        267,463  

Equity

     

Total shareholders’ equity

     15,857        15,758  

Non-controlling interests

     160        151  

Total equity

     16,017        15,909  

Total liabilities and equity

     281,702        283,372  

A more detailed Consolidated Balance Sheet is contained in the Consolidated Financial Statements.

2019 compared to 2018

Assets

Cash and balances at central banks

Cash and balances at central banks increased by 7% to £21,180m at 31 December 2019 (2018: £19,747m). This was driven by cash inflows generated from profits in the year, higher customer deposits and the net disposal of certain asset backed securities, offset by additional retail lending and net cash outflows relating to debt securities in issue.

Financial assets at fair value through profit or loss:

Financial assets at fair value through profit or loss decreased by 66% to £3,702m at 31 December 2019 (2018: £10,876m), mainly due to:

 

£2.1bn of senior tranches of credit linked notes, which were previously classified as other financial assets at fair value through profit or loss, are now presented on a net basis as a result of changes to legal agreements. For more information see Note 12 to the Consolidated Financial Statements.

The maturity of non-trading reverse repurchase agreements held at FVTPL, which totalled £2.3bn at 31 December 2018.

Financial assets at amortised cost:

Financial assets at amortised cost increased by 3% to £239,834m at 31 December 2019 (2018: £232,444m), mainly due to:

 

An increase in customer loans, with mortgage lending in Retail Banking up £7.4bn. This was partially offset by a reduction in corporate lending which included managed reductions in Commercial Real Estate of £1.1bn.

Reverse repurchase agreements – non trading increasing by £2.5bn, reflecting the classification of all new non-trading reverse repurchase agreements at amortised cost in line with our ring-fenced model and as part of normal liquidity risk management.

Financial assets at fair value through other comprehensive income

Financial assets at fair value through other comprehensive income decreased by 27% to £9,747m at 31 December 2019 (2018: £13,302m) mainly due to the disposal of certain asset backed securities as part of normal liquid asset portfolio management.

Property, plant and equipment

Property, plant and equipment increased by 7% to £1,967m at 31 December 2019 (2018: £1,832m) mainly due to an increase in operating lease assets and the recognition of right-of-use assets following the adoption of IFRS 16 on 1 January 2019.

Retirement benefit assets

Retirement benefit assets decreased by 21% to £669m at 31 December 2019 (2018: £842m), reflecting a decrease in the overall accounting surplus of the Santander (UK) Group Pension Scheme (the Scheme). This was mainly due to a decrease in corporate bond yields, resulting in a higher value being placed on the liabilities in the Scheme. This was partially offset by asset growth, mainly driven by the decrease in corporate bond yields.

Tax, intangibles and other assets

Tax, intangibles and other assets increased by 6% to £4,486m at 31 December 2019 (2018: £4,241m), mainly due to an increase in the carrying value of the macro hedge of interest rate risk.

 

Santander UK plc   17


Table of Contents

Annual Report 2019 | Financial review

    

 

Liabilities

Financial liabilities at fair value through profit or loss:

Financial liabilities at fair value through profit or loss decreased by 59% to £3,161m at 31 December 2019 (2018: £7,655m), mainly due to:

 

£2.1bn of cash deposits, which were previously classified as other financial liabilities at fair value through profit or loss, are now presented on a net basis as a result of changes to legal agreements. For more information see Note 21 to the Consolidated Financial Statements.

 

The maturity of non-trading repurchase agreements held at FVTPL, which totalled £2.1bn at 31 December 2018.

Financial liabilities at amortised cost

Financial liabilities at amortised cost increased by 1% to £259,179m at 31 December 2019 (2018: £256,514m). This was mainly due to:

 

Repurchase agreements – non trading increasing by £7.4bn reflecting the classification of all new non-trading repurchase agreements at amortised cost in line with our ring-fenced model and as part of normal liquidity risk management.

 

An increase in customer deposits, with £3.0bn growth in Retail Banking supported by a successful ISA campaign and 1I2I3 Business Current Account inflows. Corporate deposits also increased as we focused on building strong customer relationships.

 

Deposits by banks decreasing by £2.9bn due to a reduction in time deposits with other banks, including deposits placed with Banco Santander, and lower balances held as cash collateral.

 

Debt securities in issue decreasing by £5.6bn, reflecting maturities in the period, partially offset by covered bond issuances of £1bn in February 2019, 1bn in May 2019 and £1bn in November 2019, along with a senior unsecured issuance of $1bn in June 2019.

Retirement benefit obligations

Retirement benefit obligations increased by 146% to £280m at 31 December 2019 (2018: £114m), reflecting a decrease in the overall accounting surplus of the Scheme. This was mainly due to a decrease in corporate bond yields, resulting in a higher value being placed on the liabilities in the Scheme. This was partially offset by asset growth, mainly driven by the decrease in corporate bond yields.

Tax, other liabilities and provisions

Tax, other liabilities and provisions decreased by 4% to £3,065m at 31 December 2019 (2018: £3,180m) mainly due to changes in unsettled financial transactions as well as tax balances.

Equity

Total shareholders’ equity

Total shareholders’ equity increased by 1% to £15,857m at 31 December 2019 (2018: £15,758m). This was principally due to the profit after tax for the year and a net increase in other equity instruments being offset by downward defined benefit pension remeasurements and dividend payments.

 

18   Santander UK plc


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CUSTOMER BALANCES

Consolidated

 

    

                     2019

£bn

    

                     2018

£bn

 

Customer loans

     205.0        199.6  

Other assets

     76.7        83.8  

Total assets

     281.7        283.4  

Customer deposits

     171.7        167.3  

Total wholesale funding

     65.2        70.8  

Other liabilities

     28.7        29.3  

Total liabilities

     265.6        267.4  

Shareholders’ equity

     15.9        15.8  

Non-controlling interest

     0.2        0.2  

Total liabilities and equity

     281.7        283.4  

Further analyses of credit risk on customer loans, and on our funding strategy, are included in the Credit risk and Liquidity risk sections of the Risk review.

2019 compared to 2018

 

Customer loans increased £5.4bn, with mortgage lending in Retail Banking up £7.4bn. This was partially offset by a reduction in corporate lending which included managed reductions in CRE of £1.1bn.

Customer deposits increased £4.4bn, with £3.0bn growth in Retail Banking supported by a successful ISA campaign and 1I2I3 Business Current Account inflows. Corporate deposits also increased as we focused on building strong customer relationships.

Retail Banking

 

    

                     2019

£bn

    

                     2018

£bn

 

Mortgages

     165.4        158.0  

Business banking

     1.8        1.8  

Consumer (auto) finance

     7.7        7.3  

Other unsecured lending

     5.5        5.7  

Customer loans

     180.4        172.8  

Current accounts

     68.7        68.4  

Savings

     57.2        56.0  

Business banking accounts

     12.9        11.9  

Other retail products

     6.3        5.8  

Customer deposits

     145.1        142.1  

Corporate & Commercial Banking

 

    

                     2019

£bn

    

                     2018

£bn

 

Non-Commercial Real Estate trading businesses

     11.2        11.5  

Commercial Real Estate

     5.1        6.2  

Customer loans

     16.3        17.7  

Customer deposits

     18.2        17.6  

Corporate & Investment Banking

 

    

                     2019

£bn

    

                     2018

£bn

 

Customer loans

     4.1        4.6  

Customer deposits

     6.1        4.8  

Corporate Centre

 

    

                     2019

£bn

    

                     2018

£bn

 

Social Housing

     3.6        3.8  

Non-core

     0.6        0.7  

Customer loans

     4.2        4.5  
                   

Customer deposits

     2.3        2.8  

 

Santander UK plc   19


Table of Contents

Annual Report 2019 | Financial review

    

 

Cash flows

SUMMARISED CONSOLIDATED CASH FLOW STATEMENT

 

    

                     2019

£m

   

                     2018

£m

 

Net cash flows from operating activities

     3,077       (15,405

Net cash flows from investing activities

     2,890       (3,682

Net cash flows from financing activities

     (4,126     2,730  

Change in cash and cash equivalents

     1,841       (16,357

A more detailed Consolidated Cash Flow Statement is contained in the Consolidated Financial Statements.

The major activities and transactions that affected cash flows during 2019 and 2018 were as follows:

In 2019, the net cash inflows from operating activities of £3,077m resulted from net cash inflows generated from profits in the year and higher customer deposits, offset by additional retail lending. The net cash inflows from investing activities of £2,890m mainly reflected the net disposal of certain asset backed securities as part of normal liquid asset portfolio management. The net cash outflows from financing activities mainly reflected net cash outflows relating to debt securities in issue. These resulted in cash and cash equivalents increasing by £1,841m in the year.

In 2018, the net cash outflows from operating activities of £15,405m resulted from net cash outflows relating to trading and derivative assets and liabilities. The net cash outflows from investing activities of £3,682m mainly reflected purchases of financial investments in the year as part of normal liquidity management. The net cash inflows from financing activities of £2,730m reflected the net inflows from debt securities following the pre-funding of our 2019 requirements. This was offset by payments of dividends on ordinary shares, preference shares, other equity instruments and non-controlling interests. Cash and cash equivalents decreased by £16,357m principally from the decrease in cash held at central banks.

 

20   Santander UK plc


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Strategic Report       Financial review       Governance       Risk review       Financial statements       Shareholder information
                               

 

Capital and funding

 

                     2019
£bn
                     2018
£bn
 

Capital and leverage

     

CET1 capital

     10.4        10.4  

Total qualifying regulatory capital

     15.8        15.9  

CET1 capital ratio

     14.3%        13.2%  

Total capital ratio

     21.7%        20.3%  

RWAs

     72.6        78.5  

Funding

     

Total wholesale funding

     67.4        72.8  

– of which with a residual maturity of less than one year

     22.5        16.5  

Further analysis of capital and funding is included in the Capital risk and Liquidity risk sections of the Risk review.

2019 compared to 2018

CET1 capital was stable at £10.4bn, with ongoing capital accretion through profits retained after dividend payment, offset by market-driven pension movements.

RWAs reduced largely as a result of SRT securitisations and lower corporate lending as we continue to focus on risk-weighted returns. This was partially offset by increased RWAs in Retail Banking in line with mortgage lending growth.

CET1 capital ratio increased 110bps to 14.3%, through active RWA management.

Total wholesale funding decreased, reflecting maturities in the period, partially offset by covered bond issuances of £1bn in February 2019, 1bn in May 2019 and £1bn in November 2019, along with senior unsecured issuance of $1bn in June 2019. In August 2019, we increased our AT1 outstanding by £200m via the issuance of a new £500m 6.3% AT1 and the repurchase of the £300m 7.6% AT1.

Liquidity

 

                     2019
£bn
                     2018
£bn
 

Santander UK Domestic Liquidity Sub Group (RFB DoLSub)

     

Liquidity Coverage Ratio (LCR)

     142%        164%  

LCR eligible liquidity pool

     42.0        54.1  

Further analysis of liquidity is included in the Liquidity risk section of the Risk review.

2019 compared to 2018

While LCR remains high at 142%, it is lower than 2018 reflecting reduced uncertainty.

The RFB DoLSub LCR and LCR eligible liquidity pool both decreased following the transfer of our Isle of Man and Jersey businesses (Crown Dependencies) into SFS in 2018 as part of ring-fencing implementation.

 

Santander UK plc   21


Table of Contents

Annual Report 2019 | Financial review

    

 

Selected financial data

The financial information set forth below for the years ended 31 December 2019, 2018 and 2017 and at 31 December 2019 and 2018 has been derived from the audited Consolidated Financial Statements of Santander UK plc (the Company) and its subsidiaries (together, the Santander UK group) prepared in accordance with IFRS included elsewhere in this Annual Report. The information should be read in connection with, and is qualified in its entirety by reference to, the Santander UK group’s Consolidated Financial Statements and the Notes thereto.

BALANCE SHEETS

 

    

2019(1)

£m

    

2018(2,3)

£m

    

2017

£m

    

2016

£m

    

2015

£m

 

Assets

              

Cash and balances at central banks

     21,180        19,747        32,771        17,107        16,842  

Financial assets at fair value through profit or loss

     3,702        10,876        52,593        57,646        47,270  

Financial assets at amortised cost

     239,834        232,444        205,417        204,086        201,593  

Financial assets at fair value through other comprehensive income

     9,747        13,302           

Financial investments

           17,611        17,466        9,064  

Interests in other entities

     117        88        73        61        48  

Intangible assets

     1,766        1,808        1,742        1,685        1,600  

Property, plant and equipment

     1,967        1,832        1,598        1,491        1,597  

Current tax assets

     200        153                      49  

Retirement benefit assets

     669        842        449        398        556  

Other assets

     2,520        2,280        2,511        2,571        2,156  

Total assets

             281,702                283,372                314,765                302,511                280,775  

Liabilities

              

Financial liabilities at fair value through profit or loss

     3,161        7,655        51,037        41,103        36,246  

Financial liabilities at amortised cost

     259,179        256,514        243,858        241,590        225,852  

Other liabilities

     2,344        2,448        2,730        3,221        2,445  

Provisions

     572        509        558        700        870  

Current tax liabilities

                   3        54        1  

Deferred tax liabilities

     149        223        88        128        223  

Retirement benefit obligations

     280        114        286        262        110  

Total liabilities

     265,685        267,463        298,560        287,058        265,747  

Equity

              

Total shareholders’ equity

     15,857        15,758        16,053        15,303        14,893  

Non-controlling interests

     160        151        152        150        135  

Total equity

     16,017        15,909        16,205        15,453        15,028  

Total liabilities and equity

     281,702        283,372        314,765        302,511        280,775  

 

(1)

On 1 January 2019, the Santander UK group adopted IFRS 16 (2015-2018: IAS 17).

(2)

On 1 January 2018, the Santander UK group adopted IFRS 9 (2015-2017: IAS 39).

(3)

In 2018, the Santander UK group completed the implementation of its ring-fencing plans.

INCOME STATEMENTS

 

    

2019(1)

£m

    

2018(2,3,4)

£m

   

2017(2)

£m

   

2016

£m

   

2015

£m

 

Net interest income

                 3,292                    3,603                   3,803                   3,582                   3,575  

Net fee and commission income

     686        749       807       770       715  

Net trading and other income

     195        182       302       443       283  

Total operating income

     4,173        4,534       4,912       4,795       4,573  

Operating expenses before credit impairment losses, provisions and charges

     (2,499      (2,579     (2,499     (2,414     (2,400

Credit impairment losses

     (221      (153     (203     (67     (66

Provisions for other liabilities and charges

     (441      (257     (393     (397     (762

Total operating credit impairment losses, provisions and charges

     (662      (410     (596     (464     (828

Profit before tax

     1,012        1,545       1,817       1,917       1,345  

Tax on profit

     (279      (399     (515     (598     (381

Profit after tax

     733        1,146       1,302       1,319       964  

 

(1)

On 1 January 2019, the Santander UK group adopted IFRS 16 (2015-2018: IAS 17).

(2)

Adjusted to reflect amendment to IAS 12, as described in Note 1 to the Consolidated Financial Statements.

(3)

On 1 January 2018, the Santander UK group adopted IFRS 9 (2015-2017: IAS 39).

(4)

In 2018, the Santander UK group completed the implementation of its ring-fencing plans.

 

22   Santander UK plc


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Santander UK plc   23


Table of Contents

 

Annual Report 2019 | Governance

    

 

Governance

    

    

    

 

Our governance

The UK Corporate Governance Code 2018 (the Code) sets out the framework for premium listed companies in the UK. The Code is the corporate governance code applied by the Company, with appropriate amendments as a fully owned subsidiary, and the standard against which we measure ourselves.

This Governance section (including the Chair’s report on Corporate Governance, the Committee Chair Reports and the Remuneration Policy and Remuneration Implementation reports) detail how the Company has applied and complied with the principles and provisions of the Code.

Any principles and provisions of the Code that are not precisely followed are detailed in the Directors’ Report on page 62.

How our governance supports the delivery of our strategy

All Directors are collectively responsible for the success of the Company. The Non-Executive Directors exercise objective judgement in respect of Board decisions, and scrutinise and challenge management. They also have various responsibilities concerning the integrity of financial information, internal controls and risk management.

The Board is responsible for setting our strategy and policies, overseeing risk and corporate governance, and monitoring progress towards meeting our objectives and annual plans. It is accountable to our shareholder for the proper conduct of the business and our long-term success, and seeks to represent the interests of all stakeholders.

             
    Contents   
 
    Governance    24
 
    Board of Directors    25
 
    Corporate Governance report    30
 
    Chair’s report on corporate governance    30
 
    Board Nomination Committee Chair’s report    34
 
    Board Risk Committee Chair’s report    36
 
    Board Audit Committee Chair’s report    42
 
    Board Responsible Banking Committee Chair’s report    48
 
    Directors’ Remuneration report    50
 
    Board Remuneration Committee Chair’s report    50
 
    Remuneration policy report    52
 
    Remuneration
implementation report
   55
 
    Board and Committee membership and attendance    59
 
    Directors’ report    60
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
 

 

24   Santander UK plc

 


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Board of Directors

 

 

 

Shriti Vadera

Chair

Appointed as Chair in March 2015, previously Independent Non-Executive Director and Deputy Chair from 1 January 2015

Skills and experience

Shriti was an investment banker with SG Warburg/UBS from 1984 to 1999, on the Council of Economic Advisers, HM Treasury from 1999 to 2007, Minister in the UK Government from 2007 to 2009 (Cabinet Office, Business Department and International Development Department), G20 Adviser from 2009 to 2010, and advised governments, banks and investors on the Eurozone crisis, banking sector, debt restructuring and markets from 2010 to 2014. She was a Non-Executive Director of AstraZeneca plc between 2011 and 2018.

Other principal appointments

Chair of Santander UK Group Holdings plc*. Senior Independent Director of BHP.

Board Committee memberships

Board Nomination Committee

Garrett Curran

Independent Non-Executive Director

Appointed 7 May 2019

Skills and experience

Garrett has spent over 20 years in investment banking in a variety of positions, predominantly in global markets, capital markets and investment banking in London and New York. Most recently, he was CEO of Credit Suisse in the UK and the bank’s Chief Client Officer in EMEA. Since leaving Credit Suisse in 2016, Garrett has been an active advisor and investor specialising in financial services, technology and real estate. He brings extensive financial services experience, and knowledge of the UK regulatory environment and risk management.

Other principal appointments

Director of Les Trois Rocs SA, Senior Adviser to Quant Insight and Cambridge Machines Asset Management.

Board Committee memberships

Board Audit Committee

Board Responsible Banking Committee

Board Risk Committee

Annemarie Durbin

Independent Non-Executive Director Employee Designated Director

Appointed 13 January 2016

Skills and experience

Annemarie has 30 years’ international retail, commercial, corporate and institutional banking experience culminating in membership of Standard Chartered’s Group Executive Committee where she was Group Company Secretary. She was a member of the Listing Authority Advisory Panel from 2015, and Chair between 2016 and 2018.

Annemarie is an executive coach and mentor.

Other principal appointments

Chair of Cater Allen Limited*. Non-Executive Director of WH Smith PLC. Chair of Merryk & Co. EMEA, a global mentoring group.

Board Committee memberships

Board Remuneration Committee

Board Responsible Banking Committee

Board Risk Committee

 

 

Santander UK plc   25


Table of Contents

Annual Report 2019 | Governance

    

 

Board of Directors continued

 

 

 

Ed Giera

Independent Non-Executive Director

Appointed 19 August 2015

Skills and experience

Ed is currently Principal of EJ Giera LLC, providing corporate finance advisory and fiduciary services, and the Manager of Boscobel Place Capital LLC, a private investment partnership focused on the global financial services sector. Formerly, his executive career was with JP Morgan Securities, the investment banking affiliate of JP Morgan Chase & Co.

Ed also previously served as a Non-Executive Director at Pension Corporation Group Limited, ICBC Standard Bank plc, the Renshaw Bay Structured Finance Opportunity Fund, NovaTech LLC and the Life and Longevity Markets Association.

Other principal appointments

Independent Non-Executive Director of Santander UK Group Holdings plc*. Non-Executive Director of the Renshaw Bay Real Estate Finance Fund.

Board Committee memberships

Board Audit Committee

Board Responsible Banking Committee

Board Risk Committee

Chris Jones

Independent Non-Executive Director Santander UK’s Whistleblower’s Champion

Appointed 30 March 2015

Skills and experience

Chris was a partner at PwC from 1989 to 2014 and was a Senior Audit Partner specialising in the audit of banks and other financial services companies. He also led PwC’s EMEA Financial Services practice. He is a past president of the Association of Corporate Treasurers and a former Chairman of the Advisory Board of the Association of Corporate Treasurers.

Other principal appointments

Independent Non-Executive Director of Santander UK Group Holdings plc*. Audit and Risk Committee member of the Wellcome Trust. Non-Executive Director of Redburn (Europe) Limited. Board member of the Audit Committee Chairs’ Independent Forum.

Board Committee memberships

Board Audit Committee

Board Remuneration Committee

Board Risk Committee

Genevieve Shore

Independent Non-Executive Director

Appointed 18 May 2015

Skills and experience

Genevieve brings digital, technology and commercial expertise to Santander UK from a career in the media, publishing and technology sectors, most recently as Chief Product and Marketing Officer of Pearson plc, and previously as Director of Digital Strategy and CIO. Genevieve has also advised and invested in Education Technology start-ups. She was a member of the Advisory Board of Lego Education. She also works with female executives as a coach and mentor.

Genevieve has also served as a Non-Executive Director of Moneysupermarket.com Group plc, Next Fifteen Communications Group plc, Arup Group Limited and STV Group plc.

Other principal appointments

Independent Non-Executive Director of the Rugby Football Union.

Board Committee memberships

Board Audit Committee

Board Nomination Committee

Board Remuneration Committee

Board Responsible Banking Committee

Board Risk Committee

 

 

*

Part of the Banco Santander group.

 

 

26   Santander UK plc


Table of Contents
                     
                     
                     
Strategic Report       Financial review       Governance       Risk review       Financial statements       Shareholder information
                               

 

 

 

 

Scott Wheway

Independent Non-Executive Director

Senior Independent Director

Appointed 1 October 2013

Skills and experience

Scott brings extensive retail and consumer knowledge to the Board, having formerly held senior roles at Tesco plc, including Operations Director and CEO, Tesco Japan. He was then CEO of Best Buy Europe and Managing Director and Retail Director of The Boots Company plc and Managing Director of Boots the Chemist at Alliance Boots plc. Scott is also a former Non-Executive Director of Aviva plc and Chairman of Aviva Insurance Limited.

Other principal appointments

Independent Non-Executive Director of Santander UK Group Holdings plc*. Interim Chairman of Centrica plc. Chairman of AXA UK plc.

Board Committee memberships

Board Nomination Committee

Board Remuneration Committee

Board Responsible Banking Committee

Board Risk Committee

Ana Botín

Banco Santander Nominated

Non-Executive Director

Appointed 1 December 2010, NED from 29 September 2014

Skills and experience

Ana joined the Banco Santander group in 1988 and was appointed Executive Chair of Banco Santander SA in September 2014. She has been a member of Banco Santander SA’s Board and Executive Committee since 1989 and previously served as CEO of Santander UK plc between 2010 and 2014. Ana directed Banco Santander SA’s Latin American expansion in the 1990s.

Other principal appointments

Non-Executive Director of Santander UK Group Holdings plc*. Executive Chair of Banco Santander SA* and Director. Non-Executive Director of The Coca-Cola Company. Vice-Chair of the Empresa y Crecimiento Foundation. Vice-Chair of the World Business Council for Sustainable Development. Member of the MIT’s CEO Advisory Board.

Board Committee memberships

Board Nomination Committee

Bruce Carnegie-Brown

Banco Santander Nominated

Non-Executive Director

Appointed 16 September 2019

Skills and experience

Bruce is a Vice Chairman and Lead Independent Director of Banco Santander SA* and Chairman of Lloyd’s of London.

Bruce has served as Non-Executive Chairman of Moneysupermarket.com Group plc and a Non-Executive Director of JLT Group plc. He was also Non-Executive Chairman of Aon UK Ltd, and was Senior Independent Director at Close Brothers Group plc and Catlin Group Ltd. As an executive, he was co-founder and managing partner of the listed private equity division of 3i Group plc, President and CEO of Marsh Europe and a managing director of JP Morgan.

He was previously a Non-Executive Director of Santander UK plc* between 2012 and 2017, and a Non-Executive Director of Santander UK Group Holdings plc* between 2014 and 2017.

Other principal appointments

Non-Executive Director of Santander UK Group Holdings plc* since September 2019. Vice Chairman and Lead Independent Director of Banco Santander SA*. Chairman of Lloyd’s of London, and of Cuvva Limited.

 

 

*

Part of the Banco Santander group.

 

 

Santander UK plc   27


Table of Contents

Annual Report 2019 | Governance

    

 

Board of Directors continued

 

 

 

 

 

Gerry Byrne

Banco Santander Nominated

Non-Executive Director

Appointed 1 December 2017

Skills and experience

Gerry has been Chairman of the Supervisory Board of Santander Bank Polska SA* (SBP) since 2011 having joined the SBP Board as Deputy Chairman in 2001. He was appointed Head of Europe for the Banco Santander group in April 2019. Gerry held several senior management roles at AIB Group, both in Ireland and in Poland, latterly as Managing Director of the Central Eastern Europe Division in 2009-2010. He is a member of the Irish Institute of Bankers, Irish Management Institute and an alumnus of Harvard Business School.

Other principal appointments

Chairman of the Supervisory Board of SBP* since 2011. Head of Europe, Banco Santander Group.

Dirk Marzluf

Banco Santander Nominated

Non-Executive Director

Appointed 7 May 2019

Skills and experience

Dirk joined Banco Santander as Group Head of Technology and Operations in September 2018. He joined Banco Santander from AXA Group, where he served as Group Chief Information Officer leading the insurance group’s technology and information security transformation, its overall project portfolio and as co-sponsor of its digital strategy.

As Banco Santander Group Head of Technology and Operations, Dirk is responsible for leading the information technology and operations function and its strategic development.

Other principal appointments

Chairman of Santander Global Operations SA* and Santander Global Technology SL.*

 

 

 

 

*

Part of the Banco Santander group.

 

    

 

28   Santander UK plc


Table of Contents
                     
                     
                     
Strategic Report       Financial review       Governance       Risk review       Financial statements       Shareholder information
                               

 

 

 

 

 

Nathan Bostock

Executive Director

Chief Executive Officer

Appointed 19 August 2014

Skills and experience

Nathan joined Santander UK from RBS, where he was an Executive Director and Group Finance Director. He joined RBS in 2009 as Head of Restructuring and Risk, and Group Chief Risk Officer. He previously spent eight years with Abbey National plc (now Santander UK plc*) and served on the Board as an Executive Director from 2005. During his time with Abbey National plc, he held other senior positions including Chief Financial Officer.

He was also at RBS from 1991 to 2001 in a number of senior positions and spent seven years before that with Chase Manhattan Bank, having previously qualified as a Chartered Accountant at Coopers & Lybrand (now PwC).

Other principal appointments

Chief Executive Officer of Santander UK Group Holdings plc*. Member of the Financial Services Trade Investment Board.

Susan Allen

Executive Director

Head of Retail and Business Banking

Appointed 1 January 2019

Skills and experience

Susan has substantial experience in the banking sector following a career spanning over 25 years. She joined Santander UK in 2015 as MD, Retail Banking before being appointed as Chief Transformation Officer the same year. In March 2017 she was appointed as Head of Retail Distribution. Prior to joining Santander UK, she held a number of senior roles at RBS including CEO: Customer Solutions Group Corporate Banking and MD: UK Retail.

Other principal appointments

Director of Cater Allen Limited*. Director of UK Finance Limited.

Madhukar (Duke) Dayal

Executive Director

Chief Financial Officer

Appointed 16 September 2019

Skills and experience

Duke has extensive financial services experience in a wide range of areas. Before joining Santander UK*, he worked for Santander US* in Boston as CFO of Santander Holdings* between April 2016 and July 2019, and President and CEO of Santander Bank NA* between September 2017 and July 2019.

Prior to joining Santander, Duke was with BNP Paribas for six years, where he served as Chief Financial Officer for BNP Paribas USA Holdings, BancWest and Bank of the West. Before that he helped lead a private equity start-up for JP Morgan Chase & Co., Brysam Global Partners. Prior to that, he spent eight years with Citi.

Duke also served as a member of the Executive Committee on the Board of Trustees for the Institute of International Banking in New York as a Board member of the Federal Home Loan Bank of Pittsburgh.

Other principal appointments

Chief Financial Officer of Santander UK Group Holdings plc*.

 

 

*

Part of the Banco Santander group.

 

 

Santander UK plc   29


Table of Contents

Annual Report 2019 | Governance

    

 

Chair’s report on corporate governance

My report describes the roles, responsibilities

and activities of the Board and its Committees.

 

          

LOGO

 

The Board focuses on supporting and challenging management to achieve our strategy and transformation programme.

    

LOGO

    

Shriti Vadera

Chair

24 March 2020

 

LOGO

 

(1)  In addition, ad hoc Board Committee meetings were held to consider the Company’s application for the RBS Alternative Remedies Incentivised Switching Scheme and conduct matters.

    

     

    

Board activities

Read more on p33

 

Board and Committee

membership and attendance

Read more on p59

    

    

     

Our governance

Maintaining high standards of corporate governance is an essential element underpinning the long-term sustainable success of the Company.

In addition to the UK Corporate Governance Code 2018 (the standard against which we measure ourselves), our governance practices and rules are set out in a number of our key documents, principally:

The UK Group Framework, which defines clearly our responsibilities and relationship with Banco Santander SA, our shareholder, taking account of our fiduciary and regulatory responsibilities. This provides us with the autonomy to discharge our responsibilities in the UK in line with best practice as an independent board while providing Banco Santander SA with the oversight and controls it needs. Clarity of roles and responsibilities is key to ensuring proper accountability for decisions and outcomes; and

The Corporate Governance Framework, which is designed to assist the Board of Directors in discharging their responsibilities and ensuring an appropriate scheme of delegation throughout the Santander UK group.

The Board’s schedule and activities are planned to ensure that directors have regard to the matters necessary to promote the success of the Company, including the broader implications of their decisions for all the Company’s stakeholders including its shareholder.

Ring-fencing implementation

Following ring-fencing requirements which came into force on 1 January 2019, the Boards and Committees of Santander UK Group Holdings plc and Santander UK plc operated simultaneously with 100% common director membership because the substantive business of the Santander UK Group Holdings plc group was conducted by Santander UK plc, our ring-fenced bank. The Boards consisted of 7 Independent Non-Executive Directors (INEDs) including the Chair, 3 Executive Directors (EDs) and 4 Group-appointed Non-Executive Directors (GNEDs). These arrangements were agreed by our regulators, and ensured the efficient management of Board activities, promoting the effective oversight of the business, and

were enabled by means of compliance with various ring-fencing rule modifications granted by the PRA. Under the UK Group Framework, in light of the fact that Santander UK Group Holdings plc is fully owned by Banco Santander and that the Chair is independent of the shareholder, the Chair is counted as an INED. This does not comply with Code provisions.

During the year, we developed a revised strategy to optimise the business of Santander Financial Services plc (formerly Abbey National Treasury Services plc), in effect our non-ring-fenced bank, which will be completed in 2020. In order to comply with regulatory requirements to ensure the integrity of ring-fencing in Santander UK plc, our ring-fenced bank, we are required to make changes to the Santander UK Group Holdings plc Board, such that it will no longer have complete membership in common with Santander UK plc. Three INEDs stepped down from the Santander UK Group Holdings plc Board with effect from 31 December 2019 and will therefore be Directors of the ring-fenced bank only (Double INEDs). At the same time, in order to ensure that its Board continues to comprise 50:50 INEDs and non-independent directors, in accordance with the UK Group Framework, one ED and two GNEDs also stood down and serve only the ring-fenced bank. These changes are summarised opposite.

The Board and Committees of the two companies continue to be run substantially simultaneously to ensure efficiency and effectiveness whilst ensuring the independence and autonomy of our ring-fenced bank are appropriately protected. We shadow ran these arrangements in December 2019 to ensure efficient parallel running upon implementation in January 2020.

We appointed Annemarie Durbin (Double INED) as Senior Ring-fencing Director (SRD) of Santander UK plc in order to comply with additional ring-fencing requirements set by the PRA. These relate primarily to ensuring that processes to identify and manage any conflicts of interest between the ring-fenced bank group and other members of the Santander UK Group Holdings plc group are operating effectively.

 

 

30   Santander UK plc


Table of Contents
                     
                     
                     
Strategic Report       Financial review       Governance       Risk review       Financial statements       Shareholder information
                               

 

 

LOGO

 

*

Santander UK Group Holdings plc Directors stepped down on 31 December 2019.

 

Board membership

Through the Board Nomination Committee, we ensure we have the right composition of individuals on the Board, providing an appropriate balance of knowledge, skills, experience and perspectives. Our aim of ensuring orderly succession for Board positions is supported by continuous and proactive processes. We take into account our strategic priorities and the main trends and factors affecting the sustainability and success of the business. We oversee and regularly review the development of a diverse pipeline for succession.

Changes to Board membership are set out on page 59. These appointments maintain valuable skill and experience of financial services, digital and innovation, strategy development and execution and transformation. On behalf of the Board, I would like to thank Lindsey Argalas, Julie Chakraverty and Antonio Roman who stepped down during 2019 for their invaluable service to the Board and the Company.

As was announced on 30 January 2020, I will be stepping down before the end of the year as Chair after five years. A search has been initiated by Scott Wheway, as the Senior Independent Director, allowing for an orderly transition with my successor.

All aspects of diversity form part of our Board succession planning process, which is explained in the Board Nomination Committee Chair’s report. In 2016 we set

an aspirational target of having 33% women on the Board by 2020. As anticipated in last year’s report, the level we achieved at that time (54%) reduced during 2019 as a result of Julie Chakraverty and Lindsey Argalas stepping down from the Board, and we ended the year at 36%.

Board Committees

The Board delegates certain responsibilities to Board Committees to help discharge its duties, as set out later in this section. The Committees play an essential role in supporting the Board in these duties, providing focused oversight of key areas and aspects of the business. The role and responsibilities of the Board and Board Committees are set out in formal Terms of Reference. These are reviewed at least annually as part of the review of the Corporate Governance Framework. Except for the Board Nomination Committee which has one GNED, all Committees are composed of INEDs only.

Board activities

The Board considered a range of options for implementing the Code requirement that boards must engage with employees to ensure that the views of the workforce are appropriately represented in discussions and decision-making and appointed Annemarie Durbin as INED with this responsibility.

During 2019, in addition to extensive reporting on people issues to the Board, Annemarie Durbin participated in focus

groups, management fora and development workshops covering simplification, employee engagement and leadership.

The Chair, with the CEO and Company Secretary, supported by the Directors and senior management, ensure that the Board has an appropriate schedule, which is focused on the opportunities and risks to the future success of the business, business performance and risk mitigation, and ensuring that the Company’s culture is aligned with its purpose, values and strategy. The Board regularly monitors progress against the strategic priorities and performance targets of the business. In June we held an offsite meeting that focused on future retail business models in the context of the medium-term strategy, our longer-term plans and aspirations, recognising the internal and external challenges faced in light of our competitive and uncertain external operating environment.

To ensure the most effective use of the time at Board meetings, in addition to the delegation of certain responsibilities to the Board Committees, the Board holds Board dinners, lunches and external speaker workshops to consider important topics in depth and engage with key stakeholders. The Board ensures regular contact with management and colleagues through a number of means. These include inviting relevant business and function heads to present to the Board or its Committees on

 

 

Santander UK plc   31


Table of Contents

Annual Report 2019 | Governance

    

 

Chair’s report on corporate governance continued

 

       Board Committee responsibilities
             Key responsibilities
 

Board

Nomination Committee

Chair’s report

Read more on p34

    Board Nomination Committee  

–  Review the Board’s structure, size and composition, including skills, knowledge, experience and diversity.

–  Consider succession planning for Directors and Senior Executives.

–  Identify and nominate candidates to fill Board vacancies as and when they arise.

–  Assess the performance of the Board.

–  Review each year whether NEDs have dedicated enough time to their duties to have been effective.

–  Oversee governance arrangements.

 

Board Risk

Committee

Chair’s report

Read more on p36

    Board Risk Committee  

–  Advise the Board on the enterprise wide risk profile, Risk Appetite and strategy.

–  Review the enterprise wide risk profile through business updates from the First Line of Defence and regular reports and updates on each key risk type from the Second Line of Defence.

–  Provide advice, oversight and challenge to embed and maintain a supportive risk culture.

–  Review the Risk Framework and recommend it to the Board for approval.

–  Review and approve the key risk type and risk activity frameworks identified in the Risk Framework.

–  Review the capability to identify and manage new risks and risk types.

–  Oversee and challenge the day-to-day risk management actions and oversight arrangements and adherence to risk frameworks and policies.

 

Board Audit

Committee

Chair’s report

Read more on p42

    Board Audit Committee  

–  Monitor and review the integrity of the financial reporting.

–  Keep under review the adequacy and effectiveness of the internal financial controls.

–  Review the adequacy of Whistleblowing arrangements.

–  Monitor and review the effectiveness of the Internal Audit function.

–  Assess the performance of the External Auditors and oversight of their independence.

 

Board

Responsible

Banking

Committee

Chair’s report

Read more on p48

   

Board

Responsible Banking Committee

 

–  Oversee culture and operational risks relating to conduct, compliance, competition, financial crime and legal matters set within the Risk Appetites and Risk Framework.

–  Ensure adequate and effective control processes and policies for conduct and compliance risk, fair customer treatment and customer outcomes.

–  Monitor, challenge and support management in its efforts to evolve conduct, culture and ethical standards through sustained effectiveness of Santander UK’s values and nine behaviours.

–  Oversee the reputation of Santander UK and how it impacts its brand and market positioning, and the Corporate and Social Responsibility Programme.

 

Board

Remuneration Committee

Chair’s report

Read more on p50

   

Board

Remuneration

Committee

 

–  Approve and oversee the remuneration governance framework.

–  Oversee implementation of remuneration policies, ensuring they promote sound, effective risk management.

–  Consider and approve specific remuneration packages for EDs and other senior management.

–  Review and approve regulatory submissions in relation to remuneration.

–  Approve the variable pay pools for EDs and other senior management, including the application of risk adjustment as appropriate.

 

current developments; permitting observers as part of individual senior managers’ development plans; scheduling regular meetings for Committee Chairs to meet with relevant senior managers; site visits by one or more NEDs; and topical or technical workshops. In addition, senior leaders are available to the NEDs throughout the year.

Director inductions and training

The Company Secretary supports the Chair in designing individual inductions for NEDs, which include site visits and cover topics such as strategy, key risks and current issues including the legal and regulatory landscape. The delivery of our tailored NED induction programmes for our new appointments continued through 2019. Garrett Curran

and Dirk Marzluf benefited from tailored induction programmes phased over an initial period of 12 months, which includes meeting with senior management and a number of site visits. All other NEDs have ongoing development plans.

Throughout 2019, we continued to deliver workshops for all NEDs to further develop their knowledge and understanding of key business issues including model risks, regulatory challenges and stress testing; technological transformation opportunities and intervention; cyber risks; and recovery planning, strategies and tools.

Following a discussion arising from the publication of Slaughter and May’s report into

TSB’s April 2018 new IT platform migration, the Board will receive a detailed briefing on lessons that can be learned from TSB Board’s handling of that situation. These activities were supplemented with visits to corporate sites (including Banco Santander group headquarters) and branches. A summary of the Board’s activities in 2019 is set out above.

 

 

32   Santander UK plc


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Strategic Report       Financial review       Governance       Risk review       Financial statements       Shareholder information
                               

 

Summary of Board activities in 2019

The Board endeavoured to consider the views of all impacted stakeholders, whilst acting in the best interests of the Company and its members as a whole. The Board’s activities in 2019 included the following themes:

 

 Theme   Actions taken by the Board and outcomes
 

 Business and

 customer

 

–  Reviewed, challenged and remained apprised of the performance of the business divisions and functions, strategic business opportunities and developments with customer experience.

–  Reviewed, challenged and remained apprised of all aspects of the Company’s transformation programme.

–  Reviewed, challenged and approved the 3-year business plan (2020-2022) and the annual Budget, including cost efficiencies and associated risk assessments.

–  Conducted strategic reviews of loyalty products and digital developments, including approval of new strategies and monitoring of progress.

 
 Strategy  

–  Reviewed, challenged and approved a refined business strategy focusing on mortgages and core products.

–  Considered options and approved a refined strategy to develop the business of Santander Financial Services plc.

–  Received regular updates on the competitive landscape, the UK economy and banking sector including changes resulting from regulatory change requirements and digital developments.

–  Following an off site strategy meeting in June, considered an overview of the UK banking market including banking trends, competition and Santander UK’s position in the current banking market, the future of Banking in the UK market (including technological developments and simplification), an in depth review of Mortgages; and M&A market opportunities.

–  Regularly reviewed progress in delivering the strategic priorities of Santander UK including the future Retail business model and technological journey and associated investments required (for example, people skills required to achieve the technological journey).

–  Regularly reviewed organic and inorganic growth opportunities.

 

 Regulation,

 Balance Sheet

 and capital

 

–  Reviewed, challenged and approved the ICAAP, ILAAP, and the Recovery Plan; adequacy and effectiveness of stress-testing and capital management; Dividends and AT1 Payments.

–  Provided an attestion to the PRA on effective implementation of ring-fencing.

–  Received regular updates on capital planning.

–  Considered asset and liability management activities and was appraised of regulatory developments.

–  Approved policies including the Volcker Policy, Modern Slavery Statement, Money Laundering, climate change and ring-fencing related policies.

–  Agreed key assumptions and capabilities and approved the final 2019 BoE Concurrent Stress Test submission.

–  Approved the Annual Report and Accounts and other year-end related matters.

–  Received and discussed regular updates on ring-fencing implementation.

–  Approved the Surplus Capital Allocation Framework and Dividend Policy.

 

 Risk and

 control

 

–  Received regular enterprise wide risk updates from the CRO, together with updates on specific risks, such as pensions, cyber security, financial crime, climate change and Brexit.

 

 People and

 Culture

 

–  Received updates on issues including talent management and succession planning, gender pay, and diversity and inclusion.

–  Received updates on culture, considering our long-term strategic direction and assessment findings from the Banking Standards Board.

–  Considered Succession Planning across all key control and support functions.

 
 Governance  

–  Considered the impact of ring-fencing legislation on governance arrangements, and made consequential changes to Board and Board Committee composition.

–  Considered and approved revisions to the Corporate Governance Framework and UK Group Framework arising from implementation of ring-fencing.

–  Approved the appointment of new directors and the Company Secretary.

–  Reviewed, challenged and approved Santander UK’s Annual Report.

–  Received regular updates from Board Committees, via the Chairs.

–  Approved revised Board strategic priorities and terms of reference for the Board and its committees.

 

Santander UK plc   33


Table of Contents

Annual Report 2019 | Governance

    

 

Board Nomination Committee Chair’s report

The Committee has focused

on succession planning and

governance throughout the year

 

 

 

LOGO

 

We continue to ensure
that diversity of thinking
and skills remain
front of mind in our
succession planning.

 

LOGO

 

Shriti Vadera

Chair

24 March 2020

 

 

   

 

Responsibilities of the Committee

Read more on p32

 

Committee membership
and attendance

Read more on p59

   

 

    

 

   

Overview of the year

During 2019, the Committee’s work included: leading the process for several appointments to the Board and for orderly Board succession planning; continuing to develop our long-term Board and management succession planning; reviewing the collective skills and experience of the Board; Board Committee membership and the Board’s Diversity & Inclusion Policy and reviewing various governance arrangements as set out on page 30, including for ring-fencing rule modifications granted by the PRA resulting from changes to the business strategy. In addition, the Committee has ensured arrangements relating to Directors, such as Directors’ interests, terms of appointment and fee and time commitments remain appropriate and take account of good governance standards.

The Committee met on eight occasions in 2019. Detail’s of the Committee’s members and meeting attendance are set out on page 59.

Board changes and Succession planning

The Committee leads the process for Board appointments and ensures plans are in place for orderly succession to both the Board and senior management positions. Board appointments follow a structured, rigorous and transparent procedure designed to ensure they are based on merit and objective criteria and they promote broad diversity to complement and strengthen the Board’s and its Committees’ combination of skills, experience and knowledge. The Committee takes account of views of all the Company’s stakeholders in the recommendations it makes to the Board. The Board retains responsibility for and approves final decisions on these matters.

The Committee instructed Russell Reynolds(1) to lead a search for Julie Chakraverty’s replacement, resulting in its recommendation to the Board to appoint Garrett Curran as an INED.

As I will have completed five years as Chair in 2020, the Senior Independent Director commenced a planned search for my successor, assisted by Spencer Stuart(1), in order to ensure an orderly transition.

To support orderly succession planning for Board and senior management positions, the Committee assesses the challenges and opportunities facing the Company and evaluates the skills and expertise that will be needed in the future alongside internal capabilities, including board evaluation feedback. Increasing diversity in all respects in the boardroom and executive pipeline is a key factor we consider. Board appointments and succession planning during 2019 were conducted consistently with this approach, tailored as appropriate in each case.

The Committee reviewed executive succession planning, including a thorough assessment of the skill sets that would be required in light of the strategic direction of the business, together with development planning for identified talent, to ensure a strong and diverse leadership pipeline.

In order to ensure Santander UK plc’s continued compliance with ring-fencing requirements, the Committee reviewed and recommended changes to the Board and Committee memberships of Santander UK Group Holdings plc which took effect from 1 January 2020.

 

(1)

Russell Reynolds and Spencer Stuart do not have any connection with Santander UK.

 

 

34   Santander UK plc


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Strategic Report       Financial review       Governance       Risk review       Financial statements       Shareholder information
                               

 

 

It also considered and recommended designation of specific roles to Santander UK plc INEDs as required by the regulator. Full details are set out on page 30 of my report on corporate governance.

With effect from 1 January 2020, and following changes described on page 30, Genevieve Shore (Double INED) became a member of the Committee.

Board Effectiveness

During 2019, the Committee considered feedback gained from the 2018 performance evaluations, which concluded that the performance of the Board, its Committees, the Chair and each of the Directors continues to be effective. The Committee reviewed with the Board the areas identified for greater focus in 2019 (monitoring business performance, efficiency, in- depth strategic consideration of digital and technological disruption on business strategy, customers, people and wider engagement with management) and recommended a series of actions which were then led by the Board and its Committees in meeting agendas and activities arranged accordingly. Individual Directors’ assessments were also conducted, and the Senior Independent Director undertook his twice-yearly assessment of my performance as Chair.

Having just implemented the changes in Board membership, as described on page 31 in order to continue to comply with ring-fencing requirements, the Committee determined that an external evaluation of the operation of the Board and Board Committees towards the end of 2020, following the implementation of new governance arrangements in January 2020, would provide more meaningful observations for the ongoing operation effectiveness of the Board. As a consequence, an internal Board Effectiveness review during the first quarter of 2020 will provide the feedback mechanism for continuous improvement and to keep areas for development in focus.

Diversity, inclusion and engagement with stakeholders

In 2016, we set an aspirational target of having 33% women on the Board by 2020. As anticipated in last year’s report, the level we achieved at that time (54%) reduced during 2019 as a result of Julie Chakraverty and Lindsey Argalas stepping down from the Board, and we ended the year at 36%. Our Senior Manager female population (Executive Committee) is 26.7%. 30.1% of the Executive Committee’s direct reports are female as at 31 December 2019. We are a signatory to the Women in Finance Charter, setting a target of 50% (+\-10%) by 2021 for our wider senior manager female population of which this forms a part.

We will also continue to ensure that gender and all aspects of diversity remain front of mind in our succession planning. The Board has signed the Business in the Community ‘Race at Work’ Charter and made good progress, having achieved two of our five actions with good progress on the other three. In February 2019, the Board confirmed our ambition to increase senior manager representation of Black, Asian and Minority Ethnic (BAME) employees to 14% (+/-2%) across mid to senior manager roles by 2025.

Governance

During the year, the Committee focused on changes to ring-fencing arrangements described on page 30 and on ensuring that governance arrangements continued to be efficient and effective.

We also conducted our annual review of our Corporate Governance Framework and of the terms of reference for the Board and its Committees. On the Committee’s recommendation, the Board endorsed changes to these documents and to the UK Group Framework described in my report on Corporate Governance to ensure continued compliance with ring-fencing rules.

Annual review of director interests, fees and conflicts of interest

During the year, the Committee continued to review Directors’ interests and to ensure any conflicts are managed appropriately and in compliance with CRD IV and ring-fencing requirements. The Company’s Articles of Association contain provisions that allow the Board to consider and, if it sees fit, to authorise situational conflicts. The Board confirms that such powers have operated effectively and that a formal system for Directors to declare their interests and for the non-conflicted Directors to authorise situational conflicts continues to be in place. Any authorisations given are recorded by the Company Secretary.

The Chair, CEO and Group NED (who does not get paid a Board fee) reviewed the level of fees paid to INEDs for Board and Board Committee chairmanship and membership, together with the role of the SID. In doing so, they considered whether NED fees were at an appropriate level, having regard to a number of factors including the challenge of recruiting INEDs into the sector and the increasing regulatory and ring-fencing-related expectations and the associated time commitments for INEDs. In light of this, increases to the INED base fee, the Board Risk Committee Chair and member fee and an increase to the SID fee were approved. Further details are contained in the Remuneration Implementation Report on page 58.

Priorities for 2020

Over the next year we will continue to work on talent and succession planning, in particular on executive and senior management succession and NEDs’ continuing development and embedding revised governance arrangements in compliance with ring-fencing requirements. We will also undertake an external evaluation of the Board and Board Committees’ effectiveness.

 

 

Santander UK plc   35


Table of Contents

Annual Report 2019 | Governance

    

 

Board Risk Committee Chair’s report

The Committee supports the Board

in ensuring that the business operates

within agreed Risk Appetite while reviewing

the capability to identify and manage

new and emerging risks.

 

 

 

LOGO

 

We challenged management as to
whether the investment,
prioritisation and pace
of change relating
to digitisation and
systems improvement
was appropriate.

 

LOGO

 

Ed Giera

Board Risk Committee Chair

24 March 2020

 

 

   

 

Responsibilities of the Committee

Read more on p32

 

Committee membership
and attendance

Read more on p59

   

    

 

   

Overview of the year

The Committee considered a wide range of risks to our customers and our business in 2019, including:

Operational risks, resilience of systems to fraud and cyber risks, data integrity and security, and third party risks

Capital and liquidity

Credit, both retail and commercial

Embedding ring-fencing

Contingency planning in respect of Brexit.

We reviewed the top risks at each meeting and also received regular updates on specific matters such as stress testing, market risk, pension risk and business risk reviews.

The Board Risk Committee maintains a holistic view of Enterprise-Wide risks and, to help achieve this, there is appropriate cross-membership between this Committee and both the Board Responsible Banking Committee and the Board Audit Committee.

Whilst the Board Responsible Banking Committee has oversight of financial crime risk, the Board Risk Committee retains ultimate oversight of risk appetite with respect to conduct and regulatory, reputational and financial crime risks.

Membership

There have been two changes to the membership of the Committee during the year: Garrett Curran became a member in May and Julie Chakraverty left the Committee on her retirement from the Board in May. Julie had been a member of the Committee since June 2018. I would like to take this opportunity to thank Julie, on behalf of the Committee, for her contributions to our discussions. I would also like to welcome Garrett.

I believe that the Committee retains an appropriate balance of skills and expertise to carry out its role effectively. The Terms of Reference require the majority of the members to be Independent Non-Executive Directors. This criterion was met throughout the year.

 

 

LOGO

 

*

Reporting includes Enterprise-Wide Risk Management, Top Risks and Risk Disclosures.

 

 

36   Santander UK plc


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Meeting our key responsibilities in 2019

The Committee addressed our key responsibilities relating to Risk Appetite and the Risk Framework, our oversight of stress testing and liquidity, as well as a selection of challenges raised relating to certain risk categories. For more on our responsibilities relating to risk management and internal controls see page 41.

Significant areas of focus

 

 
Area of focus   Action taken by the Board Risk Committee   Outcome
 
Risk Appetite  

– Considered a number of changes proposed to the Board’s Risk Appetite Statement as part of the Annual Risk Appetite Review.

– Noted changes to certain concentration limits either as a consequence of asset migrations to the Banco Santander London Branch, as part of ring-fencing, or as a result of continued portfolio rebalancing.

– Challenged management in relation to making changes in single name management framework.

– Requested the introduction of metrics to improve the Committee’s oversight and monitoring of the capital planning risk associated with significant risk transfer (SRT) securitisations.

– Queried proposed revisions to operational risk appetite and asked for a clearer, more consistent recommendation for monitoring utilisation of risk appetite.

– Received management’s proposal for additional controls and limitations intended to mitigate financial crime risk relative to risk appetite and continued to monitor progress on addressing financial crime risk exposure relative to risk appetite.

– Discussed the PRA expectations for implementing the recommendations of the Task Force on Climate-related Financial Disclosures relating to managing financial and strategic risks from climate change.

 

– Noted and were satisfied that a more detailed single name exposure framework had been implemented.

– Management developed a metric to monitor the maximum potential fall in the CET1 capital ratio if regulatory or execution risks arose with current or planned SRTs.

– Following challenge, recommended management’s proposed changes to Risk Appetite to the Board for approval.

– Monitored and provided ongoing challenge to management in relation to financial crime risk exceeding tolerance, and received updates on management actions to return to within Risk Appetite.

– Received a recalibration of Operational and Financial Crime risk appetite after challenge to management.

– Continued to assess management’s progress relative to Risk Appetite in the context of the Financial Crime Transformation Programme.

 

For more, see ‘Risk Appetite’ in the ‘Risk governance’ section of the Risk review.

 

     
Risk Framework      

– Received an update following the annual certification process, and assessed the extent to which the Risk Framework had been effectively implemented and embedded across the business.

– Further to updates made to the Risk Framework in H2 2018, to reflect the implementation of ring-fencing, received management’s proposals for the introduction of new minimum standards intended to strengthen the controls around independence of decision making and management of conflicts of interest.

– Received management’s proposal for changes to the suite of Risk Type and Risk Activity Frameworks and their delineation between Santander UK Group Holdings plc and Santander UK plc.

 

– Received the Risk function’s confirmation that the Risk Framework had embedded the ring-fencing changes

– Noted there was transparency and ownership of areas for improved compliance.

– Recommended the proposed changes to the Board for approval.

 

For more, see ‘Risk Framework’ in the ‘Risk governance’ section of the Risk review.

 

 
Stress testing  

– Monitored the 2019 Bank of England Concurrent Stress Test exercise, and received updates throughout the process. We questioned the ability of our systems to process data seamlessly and discussed the additional complexity created by the IFRS 9 model implementation.

– Considered the results of the stress test both on an IFRS 9 transitional basis and on an IFRS 9 basis without transitional arrangements.

– Received a specific paper, produced by the Risk team, with details of risk management in stress testing.

– Noted that risks associated with Santander UK’s suite of stress testing models had generally improved across the last year.

– Questioned whether sufficient resource was planned and available for the ongoing multi-year effort to improve stress testing models.

 

– Recommended the governance, process, controls and stress test results to the Board for approval and onward submission to the PRA.

– Committee members were provided with greater insight to review the most significant models.

– Supported management on the allocation of resources for planned stress testing model enhancements and requested a holistic view of the resource requirements as part of the next update.

 

For more, see ‘Stress testing’ in the ‘Risk governance’ section of the Risk review.

 

 

Santander UK plc   37


Table of Contents

Annual Report 2019 | Governance

    

 

Board Risk Committee Chair’s report continued

 

 

 
Area of focus   Action taken by the Board Risk Committee   Outcome
 

Santander

Services

 

– Challenged management as to whether the investment, prioritisation and pace of change relating to digitisation and systems improvement was appropriate, and requested timely escalation of material changes and responses to material incidents.

– Sought management’s assurance that investment was aligned with trade-offs in commercial benefits and improvements in risk infrastructure.

– Requested further detail on management’s risk acceptance in respect of projects that were deferred or unfunded and the corresponding steps being taken to mitigate the risk.

– Received updates on cyber risk and the strategy and risk management relating to cloud usage.

– Continued discussions with management about the execution risks, and benefits, associated with a migration away from existing technology and risk infrastructure. Emphasised the need for Board-level involvement as well as alignment with Banco Santander group in the associated debate and decisions impacting data management and key systems architecture.

– Received updates from management and noted an increased number of escalated events and incidents, many of which were time sensitive or regulatory change driven.

– Considered reports on the strengthening of due diligence controls for new-to-bank high risk suppliers and the development of improved assessments for suppliers that required reviews or revalidation.

– Received updates on third party supplier risks, noted the additional governance and mandatory training programme, and supported management’s efforts to ensure successful embedding and awareness of third party risk management across the workforce.

– Received regular updates from the Chief Data Officer.

 

 

– Noted the progress made by management to improve risk management capability within Santander Services and the improved clarity of management’s reporting to the Committee more generally.

– Took comfort from the process by management to distribute ownership and accountability for data integrity and observed that data structure and legacy systems architecture were key areas of focus to improve data quality.

     
Brexit  

– Received regular updates on management’s contingency plans.

– Continued to monitor the risks and potential impact to Santander UK of the negotiation of terms for the Withdrawal Agreement setting out the basis for the UK’s departure from the EU.

– Noted management actions to enhance infrastructure, improve data and respond dynamically to reflect local regulations in overseas jurisdictions.

– Requested a report on controls over cross-border financial promotions.

– Discussed access to financial markets infrastructure, derivatives clearing and the significant risks in respect of the treatment of EEA back-book derivatives in the event that London-based clearing is not recognised by the European authorities.

– Emphasised the need for coordination with Banco Santander on any actions taken impacting customers and our employees working in the UK as EU nationals, in particular.

 

 

– We continue to monitor political developments, and to review and challenge management’s contingency plans for Brexit.

 

For more, see the ‘Operational risk’ section of the Risk Review.

 
Ring-fencing  

– Received frequent updates on the ring-fencing programme both as part of the Enterprise Wide Risk Management Reports and separately. These updates focused on the programme’s top risks and mitigating actions, including operational, legal, execution and regulatory risks related to completion of the programme.

– Considered further proposals for how both the Risk Framework and Risk Appetite would need to be updated to reflect ring-fencing.

– Received the annual Ring-Fenced Body Permitted Exceptions and Arm’s Length policies and associated reports from Internal Audit. We noted the governance and waterfall of attestation processes and management’s increasing awareness of ring-fencing related compliance obligations. We challenged the pace of implementing certain recommendations from the audit reports on the Arm’s Length Policy.

 

 

– In the course of monitoring progress on the execution of the ring-fencing programme, we:

– Recommended further the changes to the Risk Appetite and Risk Framework to the Board.

– Agreed for expediency to delegate to the Committee Chair certain out of cycle permitted exceptions

– Recommended the Ring-Fenced Body Permitted Exceptions Policy and the Arm’s Length Policy to the Board for approval.

 

38   Santander UK plc


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Oversight and advice to the Board on Santander UK’s current risk exposure and future risk strategy

In 2019, we reviewed Santander UK’s exposure to the risks outlined below and analysed emerging themes, including regulatory, macroeconomic and global risks, which could affect Santander UK’s ability to achieve its strategic goals.

 

 

Risk

  Action taken by the Board Risk Committee   Outcome
 
Credit risk  

– Received regular credit risk updates across Retail Banking, Corporate & Commercial Banking and Corporate Investment Banking businesses.

– Received updates on the retail mortgage book, including interest-only and buy-to-let mortgages.

– Monitored concentration risks, reviewed growth strategies and challenged management in relation to the Consumer Finance business.

– In relation to the construction and associated support sectors, we noted the progress made by management to implement risk management, including control enhancements, adjustments to limits and exposures, corporate credit monitoring and approval processes, and operational procedures for delivering supply chain financing and receivables purchase products.

– Continued to monitor utilisation of existing risk appetite and requested that the Committee has early and comprehensive assessments from Line 2 of any material adjustments to credit policy or risk limits recommended by management in connection with the update of the three year plan.

 

 

– Counselled management on the need for a comprehensive approach with the Banco Santander Risk function, and to recognise the broader credit risks, including concentrations, which might evolve from industry or market responses to emerging risks, including climate change.

 

For more, see the ‘Credit risk’ section of the Risk review.

     
Strategic risk  

– Considered strategic risk as part of risk reports on M&A opportunities, Data, Change and Operational Risk.

– Noted the critical importance of data and systems to ensuring the long term success of the Company and encouraged management to ensure appropriate prioritisation.

– Discussed the strategic threats to Santander UK’s capacity to defend and build further franchise value.

 

 

– Requested a substantive update on Strategic risk in Q1 2020.

 

For more, see the ‘Strategic risk’ section of the Risk review.

 
Pension risk  

– Considered papers on pension investment strategy and governance.

– Sought assurance around the continued effectiveness of the pension governance arrangements.

– Noted the company and the pension trustees had reached agreement on the triennial valuation, the approach to which was consistent with continuing to de-risk and appropriately fund the pension schemes.

– Received updates on the transition to new investment managers and improvements in the transparency of manager reporting for risk management purposes.

 

– Confirmed and supported the outcome of the triennial valuation, the continued development of the pension investment portfolio transition and risk management strategies, and ongoing enhancements of the governance arrangements with the trustees.

 

For more, see the ‘Pension risk’ section of the Risk review.

 

     
Liquidity risk  

– Reviewed the Internal Liquidity Adequacy Assessment Process (ILAAP) and noted material enhancements to the previous process made by management.

– Questioned management about material liquidity stress test assumptions, and the flexibility and timeliness of our liquidity reporting.

– Received half yearly updates on asset and liability management activities and confirmed the liquid asset buffer portfolio remained within risk appetite, and appropriately hedged against duration risks and LIBOR decommissioning risks, respectively.

 

 

– Agreed to recommend the 2019 ILAAP to the Board for approval following review and challenge.

 

For more, see the ‘Liquidity risk’ section of the Risk review.

 

Santander UK plc   39


Table of Contents

Annual Report 2019 | Governance

    

 

Board Risk Committee Chair’s report continued

 

 

 
Risk   Action taken by the Board Risk Committee   Outcome
 
Capital risk  

– Considered, from a capital risk perspective, dividends payable on AT1 securities, and the ordinary dividends proposed to be paid by Santander UK plc for the year-end.

– Requested management develop a framework to address and provide additional rigour to the consideration of and allocation of surplus available capital.

– Approved this Surplus Capital Allocation Framework.

– Reviewed the Internal Capital Adequacy Assessment Process (ICAAP) and noted material enhancements to the previous process made by management.

– Sought clarity on the key drivers to the CET1 capital and leverage ratios and considered management’s proposals for various risk and capital management initiatives.

– Received updates on model risk including the evolution of the approach to a new internal ratings based (IRB) regulatory capital model for the mortgage book, as well as the securitisation of certain assets.

– Received updates on progress in respect of the capital management initiatives proposed in the year, and challenged management on execution, operating, and regulatory risks.

 

 

– Recommended the payment of dividends to the Board for approval. Comments and challenges received from Committee members were considered by management and incorporated into the final draft ICAAP.

– Agreed to recommend the ICAAP to the Board for approval following review and challenge.

– Agreed to recommend the plans for potential risk and capital management actions to the Board for approval.

– Arranged a workshop on SRTs and sought clarity from management on the future SRT strategy.

 

For more, see the ‘Capital risk’ section of the Risk review.

     
Operational risk  

– Noted the design and implementation of the Operational Risk Framework, the downward trend of operational losses excluding PPI and management’s shift in focus toward business continuity as opposed to appetite for financial loss in respect of operational resiliency.

– Received Operational Risk updates within Enterprise-wide Risk Management as well as Operational Resiliency, Data Centre Resilience and Change Risk.

– Received regular updates on management’s strategies for mitigating cyber risk and third party risk.

– Considered crystallised operational risk incidents impacting other companies, and how these had impacted our own customers, as well as any lessons that could be learned.

– Noted the enhancements to programme management disciplines around change and considered third party risk and dependance on key suppliers.

– Highlighted the elevated risk presented by the confluence of regulatory change requirements, change risk more generally and organisational capacity and capability programme.

– Considered and noted good progress on the LIBOR transition.

 

 

– Monitored the impacts on operational risk and key controls associated with management’s execution of the high volume of significant transformation and remediation programmes.

 

For more, see the ‘Operational risk’ section of the Risk review.

 

For more on our LIBOR transition, see the ‘Managing LIBOR transition’ case study in the ‘Market risk’ section of the Risk review.

 
Model risk  

– Considered an update on the regular monitoring of capital adequacy models.

– Received an update on the regulatory review of key mortgage and corporate IRB models.

– Considered the implications of differing regulatory perspectives on through-the-cycle capital requirements of the Bank of England and the ECB, respectively.

 

– The Committee will continue to monitor progress in respect of regulatory initiatives for IRB models, and request evidence of appropriate model types, assumptions and calibration.

 

For more, see the ‘Model risk’ section of the Risk review.

 

 

40   Santander UK plc


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Strategic Report       Financial review       Governance       Risk review       Financial statements       Shareholder information
                               

 

 

Effectiveness of risk management system and internal controls

The Committee considered, as part of the Operational Risk Profile & Analysis update, the results of the 2018 year end Risk and Control Self Assessment (RCSA). This highlighted the risk and exposure issues reported through the RCSA processes. Based on our assessments of the risk and exposure issues reported, we considered that there had been an increase in critical and high risks versus the prior year’s assessment, however, overall critical and high risks were well managed via risk mitigation and reassessment process, respectively. The remaining high risks related mainly to IT risks, relating to legacy systems and data management, and new operational risks resulting from ring-fencing requirements. Whilst the self-assessment acknowledged a number of control weaknesses, in particular for Financial Crime, we were satisfied that appropriate actions were planned and being progressed by management to address these. We continue to monitor the position, including with respect to overall risk appetite. Notwithstanding these considerations, the Committee subsequently requested, and management implemented, additional controls and limitations on certain activities intended to further mitigate exposure to Financial Crime risk relative to risk appetite.

We noted an increase in reported risks, partly due to the result of a dynamic transformation and change risk profile, increased reporting across the business as a result of improved systems, and noted further the need for additional classification improvements. Management also advised the Committee that overall operational controls improved following system enhancements, however, the Committee highlighted the need to make further progress.

The Committee reaffirmed its view and concurred with the regulator’s expectation of a comprehensive approach reflecting appropriate prioritisation of investment in management’s strategic plan, particularly with reference to the plan for bank-wide risk infrastructure. The Committee will continue to review management’s reports on the execution of the overall bank-wide risk infrastructure investment programme, as well as the status of management’s regulatory dialogue, and will continue to request management to evidence the effectiveness of controls and improvements driven by the programme over the investment period.

Change Programme

The Committee maintained its oversight of the changing scale, scope and critical nature of the various change initiatives undertaken by Santander UK to meet regulatory and other requirements that continued to pose significant risk in 2019.

Reports from the Transformation Office and Operational Risk identified similar themes with respect to root cause issues underpinning the execution of change programmes. The Committee expressed concern at management’s capacity to effectively resource and execute the number of strategic transformation programmes in progress concurrently with the execution of regulatory change requirements including customer alerts and the high cost of credit review.

The Committee considered that improved management information would assist management to better plan and sequence the implementation of complex and often time critical and interdependent deliverables.

Effectiveness of the Committee

As noted above, the Committee membership saw one member leave and one member join during the year. I believe that the Committee has an appropriate mix of skills to enable it to operate effectively and to offer appropriate challenge and support to management.

In December 2019, we reviewed the Committee’s responsibilities as set out in the Terms of Reference and confirmed that the Committee had discharged its responsibilities in full in 2019.

An internal review of the Committee’s effectiveness during 2019 will take place during the first quarter of 2020 to provide the feedback mechanism for continuous improvement and to keep areas for development in focus.

Full terms of reference can be found on our website at www.aboutsantander.co.uk and a summary is given on page 32.

We continued to receive regular reports on enterprise wide risk and to call risk owners to our meetings to account for their progress.

We have benefited from the perspectives of each of the three lines of defence to gain assurance and confirm progress in respect of material initiatives intended to mitigate key risk exposures.

These actions are examples of how we have looked to inform our debate and decision making in the year and contribute to our effectiveness as a Committee.

Priorities for 2020

In 2020, we will monitor Santander UK’s capital and liquidity adequacy and assess credit risk in changing economic conditions and extremely competitive operating environment including the risks and uncertainties surrounding Brexit and the UK regulatory landscape.

Data, cyber, third party, operational resilience and other IT-related operational risks will continue to be a priority, including the adoption of cloud services.

We expect to review continuing developments in areas such as model risk, pension risk, enhancements to Santander UK’s risk infrastructure and management of transformation risks.

In accordance with the additional responsibilities of the CRO, we also will monitor and review Santander UK’s climate-related financial and strategy risks.

 

 

Santander UK plc   41


Table of Contents

Annual Report 2019 | Governance

    

 

Board Audit Committee Chair’s report

Our responsibilities include oversight of

the integrity of financial reporting and

controls, the effectiveness of our internal

audit function, the relationship with the

external auditors and the adequacy of

our whistleblowing arrangements.

 

 

        

LOGO

    

In 2019, we monitored our exposure to PPI in the context of the time bar, reviewed the provisions and disclosures for other conduct and operational matters, performed oversight of management’s responses to Internal Audit reviews and reviewed the weights of economic scenarios in respect of IFRS 9 ECL calculations given political and economic uncertainties, including Brexit.

    

LOGO

    

Chris Jones

Board Audit Committee Chair

24 March 2020

 

    

   

    

Responsibilities of the Committee

Read more on p32

 

Committee membership

and attendance

Read more on p59

   

Overview of the year

In 2019, the main activities of the Committee included:

Assessing the appropriateness of key management judgements and related reporting each quarter.

Considering our exposure to, provisioning for and disclosure of PPI related matters given a number of factors including claims volumes and the expiration of the PPI deadline.

Monitoring the embedding of IFRS 9, including operation of, and key changes to, models and methodologies, impacts and related controls with a particular focus on the weights applied to the economic scenarios given political and economic uncertainties, including Brexit, as well as Year 2 disclosure enhancements.

Reviewing our contingent liability disclosures, including those relating to conduct.

Considering the adequacy of comfort on our risk-weighted assets reporting.

Reviewing the actuarial assumptions of the pension scheme accounting valuation as well as the triennial valuation.

Monitoring management’s responses to various industry reviews of the UK statutory audit market and Financial Reporting Council.

Providing oversight on the adequacy and effectiveness of internal controls over financial reporting.

Overseeing the performance of the Internal Audit function.

Continuing oversight of interaction with our External Auditors.

Overseeing Santander UK’s whistleblowing arrangements, including further enhancements in line with FCA guidance and rules on whistleblowing.

Reviewing Santander UK’s Recovery Plan and management’s plans in respect of the incoming Resolvability Assessment Framework.

Monitoring the transition for the incoming CFO as well as changes to key management in the Finance function.

We also addressed other responsibilities delegated to the Committee by the Board.

Committee Membership

Julie Chakraverty retired on 7 May 2019 and I would like to thank her for her service on behalf of the Committee. We welcomed Garrett Curran, who joined the Committee in May 2019. Garrett brings extensive financial services experience and strong risk management credentials.

At 31 December 2019, all four members of the Committee were Independent Non-Executive Directors. The Committee also met the necessary requirements of independence throughout the year, in accordance with the requirements of Rule 10A-3 under the US Securities Exchange Act 1934.

 

LOGO

 

 

42   Santander UK plc


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Significant financial reporting issues and judgements

The use of assumptions or estimates and the application of management judgement is an essential part of financial reporting. In 2019, we focused on the following significant reporting matters in relation to financial accounting and disclosures:

 

   Financial reporting

   issue or judgement

  Action taken by the Board Audit Committee   Outcome

Conduct provisions

The provision for conduct remediation activities for PPI and other products continued to be highly judgemental and requires significant assumptions including claim volumes and Plevin in scope rates.

 

– Continued to scrutinise the level and adequacy of conduct provisions and challenged the reasonableness of management’s assumptions throughout the year.

– In respect of PPI including Plevin, the Committee:

– Reviewed the judgements and estimates in respect of the provision considering management’s assumptions around changes in claim volumes, uphold rates and average cost of redress. This was in the context of key developments in the year, taking into account the implementation of the FCA’s consumer deadline ‘time bar’ on PPI complaints of 29 August 2019, our specific approach to auto conversion and the appointment of Deloitte to assist the Official Receiver for certain individuals subject to bankruptcy court orders.

– Noted the very significant increase in the levels of customer information requests and complaints in the time leading up to the implementation of the time bar, and its impact on the provision.

– Inquired as to the methodology management had adopted in determining the top end of the range of their estimates of the additional charge that should be made for PPI as a result of the increase in complaints.

– Noted that the PPI model is an expert judgement model and therefore had not gone through the standard model governance process. Requested that management explain the governance and controls in place around the model to ensure the accuracy of its financial outputs, and invited the Head of Internal Audit to comment.

– In respect of other products, the Committee reviewed management’s judgements and estimates in respect of the provision.

 

– Endorsed management’s recommendation that additional charges of £70m in Q2 2019 and £99m in Q3 2019 should be made for PPI.

– Considered the classification and disclosure of provisions related to a specific PPI related portfolio which is the subject of litigation, together with an associated contingent liability.

– Received a report from management on the governance and controls in place around the PPI model, including controls that are tested as part of the Sarbanes-Oxley compliance process. Noted that Internal Audit had reviewed the PPI model but had not identified any significant concerns.

– Agreed with management’s judgement on the level of conduct provisions and disclosures, including PPI and other products.

– We continued to monitor the provisioning levels in light of any changes to claims volumes, inflows and average redress costs.

 

See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.

 

See Note 27 to the Consolidated Financial Statements.

Credit provisions

Ensuring appropriate application and embedding of IFRS 9 is a significant area of judgement given its technical complexity, the number of judgements needed, and their potential impact. Determining the appropriateness of credit provisions is also highly judgemental, requiring management to make a number of assumptions.

 

Embedding of IFRS 9

– Monitored the embedding of IFRS 9, including changes to the controls environment, throughout the year.

– Reviewed management decisions and challenged key assumptions.

– Reviewed the operation of, and key changes to, models and methodologies and their impacts. We placed particular focus on the weights applied to the economic scenarios given political and economic risks, including Brexit.

– Reviewed the proposed approach to year-end disclosures, including the Year 2 recommendations of the PRA’s Taskforce on Disclosures about ECL.

 

    

– Satisfied ourselves that management continued to have a robust methodology for evaluating the results of the models given their complexity and a clear trail of their workings, particularly due to the models’ key outputs.

– Obtained comfort on the adequacy of data in the context of the evolving control environment.

– Noted that model and methodology changes had been approved by the Model Risk Management Forum.

– Endorsed the proposed year-end disclosures.

 

See the ‘Credit risk’ section in the Risk review.

 

See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.

 

Santander UK plc   43


Table of Contents

Annual Report 2019 | Governance

    

 

Board Audit Committee Chair’s report continued

    

 

   Financial reporting

   issue or judgement

  Action taken by the Board Audit Committee   Outcome

Credit provisions continued

 

Retail credit provisions

– Reviewed detailed reports from management throughout the year analysing the proposed provisions by key product.

– Considered management’s proposals to apply Post Model Adjustments (PMAs) to the mortgage model to address interest-only maturity default risk, buy-to-let and long-term indeterminate arrears.

 

– Agreed with management’s judgement on the level of retail credit provisions, concluding that provisions remain robust and assumptions were appropriate.

– Agreed with management’s recommendations for the continued application of PMAs in relation to the mortgage model, including changes and updates to the PMA population.

– We will continue to monitor retail credit provisions.

 

See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.

 

See Note 13 to the Consolidated Financial Statements.

   

Corporate credit provisions

– Reviewed reports from management throughout the year, including consideration of individually assessed impairments and PMAs, to satisfy ourselves as to the completeness of the provision requirements.

– Noted that corporate credit provisions can be more volatile than retail credit provisions, and may be supported by more limited data.

– Considered reports on specific cases, as well as a review of the rest of the portfolio, to identify other cases or industry sectors that could potentially be at risk, including the retail sector.

– Discussed other exposures and satisfied ourselves that no material adjustments to provision levels were required.

 

    

– Agreed with management’s judgement on the level of corporate credit provisions, concluding that provisions remain robust and assumptions were appropriate.

– We will continue to monitor corporate credit provisions.

 

See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.

 

See Note 13 to the Consolidated Financial Statements.

Pension obligations

Significant judgement is required on the key assumptions underlying defined benefit pension obligation calculations. Outcomes remain inherently uncertain.

 

– Reviewed detailed reports throughout the year on key assumptions underlying the defined benefit pension obligation calculations. We recognised that, although some assumptions are based on observable data, others continue to require significant judgement.

– Considered the best estimate of our pension liabilities under IAS 19, recognising the inputs of external actuaries who generate financial assumptions and propose liabilities.

– Reviewed the results of the triennial funding valuation agreed in August 2019.

– Reviewed changes proposed as the result of a review of experience analysis by the Trustee, which informed the choice of demographic assumptions.

– Reviewed the regulatory capital impact of the changes.

– Monitored the continued appropriateness of the methodology and reviewed the inflation, discount and mortality rates applied at the year-end.

 

– Noted that the proposed changes to demographic assumptions had been reviewed at the Pension Risk Forum and reviewed by Independent Model Risk Review.

– Agreed with management’s approach to the assumptions applied, including changes made in 2019.

– Endorsed the proposed quantitative and qualitative year-end disclosures in respect of pension obligations.

 

See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.

 

See ‘Pension risk management’ in the Risk Review.

 

See Note 28 to the Consolidated Financial Statements.

Other areas

 

– Reviewed the appropriateness of the provision, and considered the disclosures required, in relation to i) a specific PPI portfolio of complaints and ii) our consumer credit business operations.

– Considered disclosures relating to the Cologne CPO and German FTO ongoing investigations of our historical involvement in German dividend tax arbitrage transactions.

– Reviewed the appropriateness of the accounting, and considered the disclosures required, relating to certain leases that are currently under review by HMRC in connection with claims for tax allowances.

 

– Endorsed management’s recommended provision and level of disclosure in these regards, including an additional provision of £10m for our consumer credit business operations.

– Endorsed the proposed year-end disclosures relating to German dividend tax arbitrage transactions.

– Endorsed management’s recommended accounting and level of disclosure relating to the leases under review by HMRC.

 

See Notes 27 and 29 to the Consolidated Financial Statements.

 

44   Santander UK plc


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Strategic Report       Financial review       Governance       Risk review       Financial statements       Shareholder information
                               

 

 

The Committee’s focus continues to be on areas of significant judgement which pose the greatest risk of a material financial statement misstatement. In addition to the areas set out in the preceding table, the Committee also considers other higher risk items. During the 2019 year-end process, these included the identification and assessment of risks of material misstatement due to fraud or error and the controls over calculation of risk-weighted assets. We also received regular reports on any material litigation cases and their progress, as part of our consideration of provisions and contingent liabilities.

External Auditor

We continued to develop and oversee the interaction with PwC and with Mr Holloway in his fourth year as the audit partner, following PwC’s appointment in 2016. The independence and objectivity of PwC was considered and monitored throughout the year.

Oversight of the relationship with our External Auditors

As part of our review of our relationship with PwC, our activities included:

 

Consideration of their work and opinion relating to management judgements.

Review of the summary of misstatements not corrected by management. The Committee was satisfied that they were not quantitatively or qualitatively material, either individually or in the aggregate.

Discussion on the level of disclosure in the Annual Report and Half Yearly Financial Report to satisfy ourselves that it is appropriate.

Discussion of developments in financial reporting including changes to accounting standards, statute and best practice.

A review of PwC’s reports on findings and recommendations on internal control and financial reporting matters identified during their audit and their view of management’s progress in resolving them.

Interactions, including meetings in private session during each Committee meeting, and at other times throughout the year.

Reviewed the latest results of the FRC’s

  quality inspections and our auditors’ response to the FRC’s challenge on the general quality of banking audits as well as enquired into the results of any audit quality reviews of Santander UK.

Based on the above inputs, which were captured in a formalised assessment, the Committee satisfied itself as to the rigour and quality of PwC’s audit process.

Non-audit fees

We have a robust policy on non-audit services provided by our External Auditors, which was updated in 2016 in the context of the Revised Ethical Standard issued by the FRC on auditor independence requirements resulting from the European Audit Regulation and Directive.

Non-audit services were under continuous review throughout 2019 to determine that they were permitted by reference to their nature, assessing potential threats and safeguards to auditor independence as well as the overall ratio of audit to non-audit fees.

All assignments require advance approval, either by the Chair (or in his absence his alternate), under delegated authority for amounts under £250,000 plus VAT or, if larger, by the full Committee. This process is in addition to the requirement for all non-audit fees to be approved by the Banco Santander Audit Committee.

The fees for non-audit work performed by PwC in the year, which are disclosed in Note 7 to the Consolidated Financial Statements, mainly comprised audit-related assurance services relating to the review of interim financial information of Santander UK, reporting in connection with the group’s regulators and support of various debt issuance programmes. We ensured that these met the external and internal tests for maintaining their independence.

In 2019, PwC’s non-audit related fees were 22% of their total audit fees, well within the internal cap of 70% approved by the Committee.

Fees for non-audit work performed by PwC in the year, other than those in relation to audit related assurance services, were approximately 2% of the average of the fees approved for Deloitte, EY and KPMG.

The Committee considered the findings of the Competition and Markets Authority (CMA) market study into the UK Statutory Audit market and subsequent Business Energy & Industrial Strategy (BEIS) consultation as well as the Kingman independent review of the Financial Reporting Council and noted management’s responses to the CMA and BEIS consultations.

Internal controls

The Board Risk Committee has overall responsibility for the effectiveness of the internal control systems. However, due to the nature of internal control matters, there is a degree of overlap in responsibilities with those of this Committee, particularly regarding financial reporting controls.

Section 404 of the Sarbanes-Oxley Act requires management to report on the design and effectiveness of its internal controls over financial reporting (ICFR) framework. During 2019, further enhancements have been introduced to the framework.

We considered the financial control environment in the year. Finance and our External and Internal Auditors provided regular reports to the Committee on ICFR, including key systems, and provided feedback on remediation and overall improvements required to ensure that the relevant controls were appropriately designed and operating effectively. This included access management, end user computing, controls over IFRS 9 and the Client Assets control environment.

 

 

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Table of Contents

Annual Report 2019 | Governance

    

 

Board Audit Committee Chair’s report continued

    

 

Disclosure in the Annual Report

We received regular reports from the Disclosure Committee, a senior executive committee chaired by the CFO. Its remit is to advise the Committee on the completeness and accuracy of disclosures in Santander UK’s external reporting. This, together with other reports received in the year, and a review of best practice and the approach of our peers, enabled us to conclude that we were satisfied with the disclosures in this Annual Report.

Management also engaged the Board and Committee early on concerning the approach to the report which enabled them to provide input into the overall tone and messaging in a timely manner.

Fair, balanced and understandable

The Disclosure Committee also reports on whether the Annual Report is fair, balanced, and understandable, aligns with the quarterly results and whether it provides the information necessary for readers to assess Santander UK’s position and performance, business model and strategy:

 

Key messages remained consistent throughout the document, relating both to financial performance and progress against strategic priorities.

All key judgements, significant risks and issues are reported and explained clearly and adequately.

There is a clear framework to the document with good signposting and a complete picture of performance and events.

In addition to the above review process, the Committee’s assessment of fair, balanced and understandable is underpinned by the understanding it gains through the reporting made to it throughout the year of management judgements, internal control matters, Internal Audit activities and the reports of the External Auditors.

The Committee’s assessment also considers the robustness and outcomes of the assurance, review and verification processes conducted by management and considers whether the key risks reflected those that were of a concern to the Committee and were consistent with those reported by management.

Following our assessment we concluded that the 2019 Annual Report is fair, balanced and understandable.

Financial Reporting Council (FRC) Annual Review of Corporate Reporting 2019/20

In October 2019, the FRC issued a report which sets out its perspective on key developments for 2019/20 annual reports. As part of our oversight of this area, we received and reviewed a report from management on its work in respect of the areas of interest to the FRC. We are satisfied that management addressed the areas identified by the FRC in the preparation of this Annual Report to the extent appropriate to our ownership structure.

Going Concern

We satisfied ourselves that it is appropriate to use the going concern basis of accounting in preparing the financial statements, supported by a detailed analysis provided to the Committee by senior finance management.

As part of the assessment, we considered whether there are sufficient financial resources, including liquidity and capital, available to continue the operations of Santander UK. We considered Santander UK’s resilience in the face of potential stress and prominent events. In making our assessment, we took into account all information of which we were aware about the future, which was at least, but not limited to, 12 months from the date that the balance sheet was signed.

Internal Audit

The Internal Audit plan, based on a comprehensive risk assessment, was presented in draft and then final form for challenge and approval by the Committee. The plan has been updated at regular intervals throughout the year in response to changes in the business and the regulatory environment and at the request of the Committee.

All unsatisfactory audit reports issued were subject to additional scrutiny by the Committee with the relevant business areas being required to present their action plans to the Committee.

We chose to invite management to present on progress with the implementation of Internal Audit’s recommendations, issues encountered, key milestones and key dependencies.

We received regular reports on audit recommendations from our Chief Internal Auditor (the Head of Internal Audit), quarterly Internal Audit reports and monitored findings as part of our oversight. We considered the total number of recommendations, the rationale for any of them becoming overdue, and broader root cause analyses. The Committee also requested that the Chief Internal Auditor highlight recommendations becoming due and any that were past due.

We noted a strong engagement between Internal Audit and the business in 2019.

We also oversaw the objective setting and performance evaluation of the Chief Internal Auditor.

Internal Audit External Quality Assessment

Throughout 2019, the Committee reviewed progress implementing the improvement opportunities identified in the External Quality Assessment of the Internal Audit function that was conducted in 2018. This review is conducted every five years and evaluates the Internal Audit function in respect of its conformance with the standards of the Chartered Institute of Internal Auditors (CIIA), as well as its performance and effectiveness in comparison to industry peers and good practice. The outcome of the review had been favourable with the function being compliant with the CIIA’s Guidance on Effective Internal Audit in Financial Services – Second Edition and also benchmarked well against peers.

Whistleblowing

Santander UK recognises the importance of a culture where colleagues feel able to speak up.

In 2019, management continued to make improvements to its whistleblowing framework and arrangements under our oversight. This included management changes within the whistleblowing teams as well as a change of management reporting line from legal to conduct and compliance within the Legal & Regulatory function, further embedding of operating procedures, expanded data analytics capability, targeted training and a reporting line more closely aligned to that used by the Banco Santander group in its whistleblowing programme. There has been significant senior management engagement and expanded staff whistleblowing communications and awareness events.

 

 

46   Santander UK plc


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Strategic Report       Financial review       Governance       Risk review       Financial statements       Shareholder information
                               

 

 

The Committee is responsible for reviewing and monitoring the effectiveness of Santander UK’s whistleblowing procedures. It received and considered bi-annual reports on Santander UK’s whistleblowing arrangements. The reporting included oversight and progress of concerns, outcomes, identifiable trends, observable risks, the regulatory environment, changes to proposed legislation and activities to promote and enhance the arrangements to support the culture of speaking up. The Committee also reviewed the annual Whistleblowing Report prepared for the Board to consider. The Committee is satisfied that Santander UK has complied with the FCA and PRA regulations on whistleblowing in the year.

I continued to act as the Whistleblowers’ Champion to oversee the integrity, independence, and effectiveness of the whistleblowing arrangements. I remained focused on procedures and governance to prevent victimisation of those employees raising a whistleblowing concern. I meet regularly with management and I have been involved in overseeing the implementation of suggested enhancements to continuously improve the arrangements.

Effectiveness of the Committee

The Board has determined that I have the necessary qualifications and skills to qualify as a Board Audit Committee financial expert as defined in Item 16A of Form 20-F and by reference to the NYSE listing standards.

In respect of the Revised Statutory Audit Directive, the Board satisfied itself that at least one member of the Committee had competence in accounting and auditing, and the members of the Committee as a whole had competence in the banking sector, in which we are operating.

In my capacity as Committee Chair, I meet with key members of the management team and the External Auditors in advance of each Committee meeting. I ensure that the Committee meets with management, the Internal Auditors and the External Auditors in private sessions. I also attend meetings with the PRA, the FCA and the FRC.

In line with an assessment of the Committee’s forward-looking agenda and the Board programme, it has been agreed that the number of scheduled meetings of the Committee will be ten in 2020.

Terms of Reference

The Committee reviews its Terms of Reference annually. Following the 2019 review, they were revised primarily to reflect the requirements of ring-fencing. The Committee’s Terms of Reference are available at www.aboutsantander.co.uk

Priorities for 2020

Areas of focus for the Committee for 2020 will include:

 

Monitoring any likely financial impact and disclosure consequences of conduct and litigation related issues.

The ongoing monitoring and reviewing of the operation of IFRS 9, including reviewing our enhanced disclosures in response to the recommendations of the PRA’s Taskforce on Disclosure about ECL.

The financial control and reporting implications of any change in the economy, including any arising from economic or political risks including Brexit.

Monitoring changes to the Resolvability Assessment Framework.

Assessing the impact of the Financial Reporting Council’s Revised Ethical Standard (due to take effect from March 2020) on the work that can be undertaken by PwC.

Monitoring the rotation of audit partners who have completed their term of service on the audit engagement team.

Succession planning in respect of the Chief Internal Auditor role.

    

 

 

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Table of Contents

Annual Report 2019 | Governance

    

 

Board Responsible Banking Committee Chair’s report

The Committee supports the Board with

oversight of culture, diversity and inclusion,

reputation, customer outcomes and the

wellbeing of our employees

 

 

LOGO

 

We have challenged management on delivering appropriate financial crime controls, managing regulatory change and maintaining focus on continuously improving our customers’ experiences.

 

LOGO

 

Scott Wheway

Responsible Banking Committee Chair

24 March 2020

 

 

 

 

   

 

Responsibilities of the Committee

Read more on p32

 

Committee membership
and attendance

Read more on p59

 

 

   

 

Role and responsibilities

The purpose of the Committee is to strengthen focus on culture, conduct and customer outcomes. It monitors, challenges and supports actions taken by management to ensure that the business is run in a responsible way, in the interests of all of our stakeholders including customers, our people and communities in order to promote Santander UK’s long-term success.

The Committee supports the Board with shaping Santander UK’s culture, reputation and customer propositions through oversight of matters related to conduct, compliance, culture, diversity and inclusion, sustainability, corporate social responsibility, reputation, brand and financial crime. The oversight of financial crime includes anti-money laundering, sanctions, terrorist financing, anti-bribery and corruption and a key transformation programme of our controls and systems. In December, the Committee’s Terms of Reference were updated to include oversight of reputational aspects of climate change.

The Committee Chairs collaborate to prevent any gaps in coverage and to ensure that any areas of overlap are addressed in the appropriate forum. Committee Chairs are members of other Board Committees to ensure breadth of visibility and open channels of communication.

Overview of the year

In 2019, the Committee considered, monitored and challenged a range of matters, including:

Customers and Customer Outcomes

The Committee focused on:

Vulnerable customers;

Fair customer treatment and outcomes;

Fraud prevention and detection;

Themes arising from customer complaints, whistleblowing and satisfaction metrics, including referrals to the FOS;

Changes to overdraft charges;

GDPR requirements;

Open Banking implementation;

Resourcing; and

Enhancing technology to support our customer contact colleagues.

Reputational risk

The Committee ensured that adequate and effective control processes were in place to identify and manage reputational risks.

It received and considered reports detailing ongoing and possible reputational, brand and franchise risks, including media and public policy issues. The reports also included any key decisions or key risk events that may give rise to reputational risk issues.

Financial crime

The Committee:

Received regular updates on Financial Crime from the Money Laundering Reporting Officer, including his annual report, and endorsed the proposed recommendations;

Monitored progress of Santander UK in developing and implementing effective systems, processes and controls to combat financial crime;

 

LOGO

 

 

48   Santander UK plc


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Strategic Report       Financial review       Governance       Risk review       Financial statements       Shareholder information
                               

 

 

Received regular updates on financial crime from the retail and corporate businesses; and

Reviewed potential financial crime risks and any actions required in response, including in respect of international sanctions compliance.

Conduct and Compliance

The Committee:

Ensured that adequate and effective control processes and policies were in place to manage and measure Conduct and Compliance risk;

Considered key emerging Conduct and Compliance risk issues, lessons learned and anticipated risks via horizon scanning and investigations;

Received first and second line reporting against Conduct and Compliance risk metrics and reports on conduct-related regulatory interaction matters;

Considered the FCA Firm-Wide Evaluation and appropriate response plans;

Considered the 2019 Compliance Programme, including resourcing in the 2019 Compliance Monitoring Plan; and

Considered any actions in response to regulatory developments, including individual and market developments, on Conduct and Compliance risk matters which may have a material impact on the business.

People and Culture

The Committee:

Received regular updates on culture, including risk culture, as part of an holistic culture update;

Considered thematic culture and conduct trends, including management-identified cultural drivers, changes in policy and working practices;

 

 

LOGO

Monitored the culture strategy and management efforts to embed and maintain the desired culture throughout the business in line with the Company’s purpose, vision, values and the nine Santander behaviours;

Reviewed programmes relating to the responsible treatment of employees, including diversity and inclusion and wellbeing;

Monitored the approach to diversity and inclusion, including progress against gender targets to support reducing the gender pay gap; and approved the approach to increasing senior level BAME representation; and

Reviewed key themes arising from employee surveys, focus groups and people metrics in order to evaluate the impact on conduct, brand and culture, including the external Banking Standards Board Assessment and the internal Global Engagement Survey results.

Brand, Sustainability and Corporate Social Responsibility

The Committee:

Considered and guided on brand purpose;

Considered the reputation of Santander UK and how reputational risk impacts its brand and market positioning;

Received updates on reputation tracker metrics; and

Monitors the embedding of Sustainability and Corporate Social Responsibility in our business strategy and helps the bank deliver value to all stakeholders, protecting its reputation and brand. It also oversees alignment to international frameworks, such as the Sustainable Development Goals and the UN Principles for Responsible Banking.

Committee membership

All five members of the Committee, including the Chair, are Independent Non-Executive Directors. A list of members, details of their experience, qualifications and attendance at Committee meetings during the year are shown in the Board of Directors section.

In addition to the Committee members, during 2019, regular attendees at Committee meetings included the Board Chair, Chief Executive Officer, Chief Legal and Regulatory Officer, Chief Risk Officer, Head of Retail and Business Banking, Chief HR Officer, Director of Corporate Communications and the Director of Conduct and Compliance.

Committee’s Effectiveness Review

An internal review of the Committee’s effectiveness during 2019 will take place during the first quarter of 2020 to provide the feedback mechanism for continuous improvement and to keep areas for development in focus.

Terms of Reference

In December 2019, the Committee adopted updated Terms of Reference following the annual review of its role and responsibilities. The Committee’s Terms of Reference are available at www.aboutsantander.co.uk.

Priorities for 2020

In 2020, the Committee will continue to take an holistic approach to gain greater understanding and oversight of all of the key areas that contribute to the experiences of our customers, our people and wider stakeholders.

Key priorities will be:

Enforcement of Financial Crime and Fraud prevention;

Monitoring the delivery of the Financial Crime Transformation Programme;

Oversight of the wide ranging programme of Regulatory change, including timelines, complexity, customer impact and outcomes;

Enhancement of fraud prevention;

Monitoring reputational risks;

Ensuring the highest standards of conduct and fair outcomes for our customers;

Oversight of the impact of digital transformation of the UK banking landscape on our people, customers and wider stakeholders;

Monitoring Sustainability initiatives, embedding, measurement and reporting progress; and

Oversight of management efforts to embed and maintain the desired culture through the cultural priorities of supporting transformation through simplification, driving a learning culture and being an inclusive and responsible organisation.

 

 

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Table of Contents

Annual Report 2019 | Governance

    

 

Board Remuneration Committee Chair’s Report

The objective is to ensure that remuneration

practices are aligned to Santander UK’s

strategic priorities and reinforce the right

culture and behaviours by our colleagues.

 

 

LOGO

 

Following ring-fencing, the Committee remains dynamic in its approach, as we continue to enhance remuneration governance to reflect our evolving strategy, control environment and the latest governance developments in the UK.

 

 

LOGO

 

Annemarie Durbin

Board Remuneration Committee Chair

24 March 2020

 

 

 

Responsibilities of the Committee

Read more on p32

 

Committee membership
and attendance

Read more on p59

 

 

I am pleased to present the Directors’ Remuneration Report for 2019. Santander UK continues to undergo significant transformational change, following ring-fencing and other strategic priorities. Against this backdrop, the role of the Committee evolved in 2019.

Role and responsibility

The purpose of the Committee is to maintain oversight of the application and implementation of remuneration policies and frameworks for the Santander UK group. The Committee is also responsible for the remuneration arrangements of employing entities within the Ring-Fenced Bank perimeter.

Overview of the year

Business Performance in 2019 and Impact on Remuneration

Taking into account financial and non-financial performance achieved in 2019 together with an assessment of current and future risks, the Committee approved the overall bonus pools for Santander UK, Santander Corporate & Investment Bank (for employees in the Ring-Fenced Bank only) and Santander Consumer UK. When determining reward outcomes the Committee was mindful of the overall performance of the bank. Details on remuneration received by the Executive Directors in 2019 are set out on page 56.

Governance

We have undertaken a review of our over- arching remuneration governance frameworks and policies in the context of ring-fencing requirements, whilst considering the wider obligations of the Banco Santander group. As part of this review, we approved a new set of remuneration principles which govern the operation of the Committee and the extent to which it interacts with Santander UK Group Holdings plc (which sits outside the Ring-fenced Bank) for 2020.

New Executive members

The Committee considered remuneration packages for two new Executive Directors who joined the Board in 2019. Susan Allen was appointed as Head of Retail and Business Banking with effect from 1 January 2019. Duke Dayal replaced Antonio Roman as Chief Financial Officer with effect from 16 September 2019. Antonio Roman stepped down from the Santander UK Board to return to Madrid as Head of Retail, Corporate and Commercial of Banco Santander SA. Details of Susan’s and Duke’s remuneration for 2019 are set out in this report.

 

LOGO

 

 

50   Santander UK plc


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Pension contributions

As reported last year, following developments in corporate governance and best practice, the Committee decided to align pension contributions for new Executive Director appointments to 9% of salary, being the average contribution available to the wider workforce. This pension level applied for both Susan Allen and Duke Dayal on their appointment to the Board. In 2019 we decided to extend this approach to existing Executive Directors, namely our Chief Executive Officer. This will result in a reduction of the Chief Executive Officer’s pension provision from 35% to 9% of salary. This will be phased over a two-year period, with an initial reduction to 22% of salary effective 1 January 2020.

Variable pay

We continuously evaluate the structure and metrics of our variable reward schemes to ensure continued alignment between metrics and strategic priorities, that performance targets are stretching and robust and that our framework reflects the evolving views of our various stakeholders.

For 2019, variable pay was based on a balanced scorecard of metrics across Customers, Shareholders and People. Communities, the fourth element of the Santander UK Compass, formed part of our risk adjustment and will form part of the scorecard for 2020, reflecting our goals on sustainability. Please see the Sustainability Review on pages 9 to 12 for more details on our sustainability goals.

Risk adjustment

Our risk adjustment procedures, which are applicable to all colleagues, are robust and well embedded within our remuneration policy. We used a series of risk adjustment mechanisms including in-year individual adjustments to performance rating/reward outcomes; individual adjustment as a result of accountability reviews; and collective adjustments at a bonus pool level. During 2019, the Committee further enhanced our risk adjustment process to ensure a more comprehensive review of relevant metrics.

Inclusion, Diversity and Gender Pay

Diversity in the workforce and a commitment to ensuring an inclusive culture remains a key strategic priority of our Bank. Our Gender Pay reporting for 2019 (published in December 2019) demonstrates our progress to date in this area, although it is recognised that change will take time. We recognise the contribution of a diverse workforce to the success of our organisation and look forward to building on progress made in 2019. For more information refer to the Sustainability Review on pages 9 to 12.

Wider workforce

Our objective is to ensure that all employees at Santander UK are treated fairly and that we provide competitive remuneration which is linked to performance. During the year, the Committee reviewed the broader remuneration policies and practices across the organisation, and considered these when determining remuneration for our senior population. The Committee has also continued its work on developing our employee value proposition and work in this area will continue in 2020.

This year, for the first time, we have chosen to voluntarily disclose the CEO pay ratio compared to the wider workforce. This can be found on page 57.

Committee membership

During 2019, there was no change to the Committee’s membership. The Committee met eight times during 2019, reflecting the level of strategic activity during the year. The Committee is satisfied that its composition and operation complies with our ring-fencing obligations.

Effectiveness of the Committee

The Committee has a process to solicit feedback at the end of each meeting in the spirit of continuous improvement. An internal review of the Committee’s effectiveness during 2019 will take place during the first quarter of 2020, to provide the feedback mechanism for continuous improvement and to keep areas for development in focus.

Terms of reference

The terms of reference were reviewed and revised during the year to reflect the scope of the Committee’s role with respect to colleagues within the Santander UK group. Full terms of reference are available at www. aboutsantander.co.uk.

Priorities for 2020

Review incentive measures to ensure they continue to align with our strategic aims and drive the right culture and behaviours; balancing the needs of our people, customers, communities and shareholders.

Continue to comply with ring-fencing obligations, ensuring adherence to the operational parameters in the terms of reference of the Committee and Santander UK Group Holdings plc’s Board Remuneration Committee.

Monitor the effectiveness of our overall remuneration framework, including the structure of our current variable pay plans and determine whether any changes should be made.

Continue to monitor developments in executive remuneration best practices within the industry, and broader market taking into account the regulatory landscape and corporate governance, both from a European and UK perspective, and consider whether any changes to the Policy are necessary.

Monitor and review the remuneration policies and trends across the Santander UK group, considering how executive pay relates to the broader employee remuneration arrangements.

Review our disclosures to ensure alignment with our commitment to be Simple, Personal and Fair.

Monitor and review any risks and mitigants in relation to remuneration.

Continue to enhance our employee value proposition with the view of attracting and retaining a new generation of colleagues to support the Company in its transformation journey.

 

 

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Table of Contents

Annual Report 2019 | Governance

    

 

Remuneration policy report

 

Basis of preparation

This report has been prepared on behalf of the Board by the Board Remuneration Committee. We comply with the statutory reporting obligations for large private companies. In addition, we follow the UK Corporate Governance Code 2018 (the Code) and other listed disclosure requirements to the extent considered appropriate given our

ownership structure, save for some factors. These relate to remuneration policy (see below with regard to post-employment shareholdings) and certain descriptions of the Committee’s work as provided under provision 41. Accordingly, several voluntary disclosures relating to remuneration have been presented in this report.

Forward-looking remuneration policy for Executive Directors

Our forward-looking remuneration policy is outlined below. Remuneration is structured into two main elements: fixed pay and variable pay. Fixed pay is set at market competitive levels appropriate for the role so that inappropriate risk taking is not encouraged. Variable pay rewards the delivery of financial targets, key strategic priorities and individual performance.

 

 

Executive Directors’ remuneration structure

 

 
Fixed Pay    Principle and description    Policy
 
Base salary   

– To attract and retain Executive Directors of sufficient calibre and with the requisite skills to deliver the strategy taking into account the demands and complexity of the role.

  

– Base salaries are normally reviewed annually. In reviewing base salaries the Committee considers a number of factors, including:

– The skills and responsibilities of the role alongside the market value of these attributes;

– Set at a level to avoid inappropriate risk taking;

– Base salary increases awarded across the wider employee population; and

– Prevailing market and economic conditions.

 

Pension

arrangements

  

– To provide a discrete element of the package to contribute towards retirement.

  

– All Executive Directors receive a cash allowance in lieu of pension.

– Unless determined otherwise, pension arrangements for new appointments to the Board will be in line with the average level of pension provision available to the broader workforce, currently 9% of salary.

– Our approach to current Executive Director pension allowances is set out on page 53.

 
Other benefits   

– Benefits are offered to Executive Directors as part of a competitive remuneration package and to support the wellbeing of employees.

  

– Including but not limited to: private medical insurance for Executive Directors and their dependants, life assurance, health screening, relocation allowances and expatriate allowances where relevant.

– Access to Santander UK’s all-employee share schemes on the same terms as all UK employees.

          
 
Variable Pay    Principle and description    Policy
 
Variable pay plan   

– To motivate Executive Directors to achieve and exceed annual financial and strategic targets within Santander UK’s Risk Appetite and in alignment with our business strategy and values.

– Multi-year deferral, further performance testing and delivery in Banco Santander SA shares aligns Executive Directors’ interests to the long-term interests of Santander UK.

– Deferral of part of the award is applied in accordance with the requirements of the PRA Remuneration Code.

  

– Awards are discretionary and determined by reference to performance against a scorecard of financial and strategic goals based on Company and individual performance.

– 40% of the bonus awarded is paid upfront after the performance year ends (year one), delivered half in cash and half in shares.

– 60% of the bonus awarded is deferred and delivered in equal tranches over years three to seven, with each tranche delivered half in cash and half in shares.

– For Executives, the first three of five deferred award tranches are subject to further performance testing, which may reduce the level of payout, but not increase the deferred award.

– Share based awards are subject to a minimum twelve-month retention period following the relevant vesting date.

– Malus and clawback provisions apply to variable pay for up to ten years following the grant of an award.

– The structure of variable pay awards ensures that Executives acquire a meaningful shareholding in Banco Santander SA which may extend for a significant period post-employment. As such, a formal post-employment shareholding requirement is not in place at this time.

 

52   Santander UK plc


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Our remuneration policy continues to meet regulatory requirements. Santander UK applies a 2:1 variable to fixed pay cap in line with approvals granted to Banco Santander SA. For control function colleagues, a lower operational ratio of 1:1 is applied, save for in exceptional circumstances.

Executive remuneration policies and principles

Our core values of Simple, Personal and Fair drive our remuneration policy. We focus on delivering a reward framework that is simple to understand, tailored to individual roles and competitive yet fair.

The key drivers of our Remuneration Policy

Alignment to culture

To design policies aligned to the long-term success of the business which support the delivery of our strategy and reinforce our values.

To base variable pay on a balanced scorecard of quantitative and qualitative metrics which reflect our KPIs across Customers, Shareholders and People. For 2020, Communities has been re-introduced into the bonus scorecard (previously considered as part of risk adjustment). This ensures that our day-to-day activities align with Santander UK’s over-arching strategy and our aim of being the best bank.

Simplicity

To ensure our approach to remuneration is transparent and easily understood.

To operate simple and clear structures for all Santander UK colleagues.

Risk

To apply a consistent approach to reward for all our employees which upholds our prudent approach to Risk Appetite set as part of a Santander UK-wide Risk Framework. Risk adjustment occurs at both an individual and bonus pool level.

To provide a balanced package between fixed and variable pay, and short-term and long-term pay horizons to align with our strategic goals whilst promoting prudent risk management.

To ensure remuneration is compliant with applicable regulations and legislation.

Fairness

To take into account an assessment of the Executive Director’s performance against a performance management framework set at the start of the year covering a range of financial, non-financial, quantitative and qualitative criteria.

To set robust and stretching targets which reward exceptional performance.

To attract, retain and motivate employees of the highest calibre by providing total remuneration which reflects individual and Company performance, is competitive, reflects the responsibilities of the role and drives the organisation’s growth.

To consider wider employee pay when determining pay of our Executives.

Clarity

The Committee reviews remuneration reporting on an annual basis against principles of best practice and developments in corporate governance, including the Code. Our reporting is designed to be transparent to promote effective stakeholder engagement but reflective of our subsidiary structure.

Predictability

The Committee reviews the variable pay opportunity for individuals annually and the basis of the pool calculation. However, due to commercial sensitivity , these are not disclosed as per the requirements of the Code. Directors’ remuneration is within the variable pay cap as approved by Banco Santander SA shareholders and set out above on this page.

Executive Director pension alignment

In 2018, following developments in corporate governance and best practice, the Committee took the decision to reduce pension allowances for new Executive Directors to 9% of salary, in line with the wider workforce average. This pension level applied on the appointment to the Board of Susan Allen, Head of Retail and Business Banking, on 1 January 2019 and Duke Dayal, Chief Financial Officer, on 16 September 2019.

In 2019, the Committee decided to extend this approach to existing Executive Directors, namely the Chief Executive Officer. This reduction shall be phased with the Chief Executive Officer’s allowance reducing from 35% to 22% of salary, effective 1 January 2020. From 1 January 2021, the Chief Executive Officer’s pension will be reduced further to the employee average of 9% of salary p.a.. No other changes to the Chief Executive Officer’s remuneration are proposed for 2020.

On recruitment

When appointing a new Executive Director, base salary is set at a market competitive level appropriate for the role, taking into

consideration a range of factors including scope and responsibilities of the role, internal relativities, the individual’s previous remuneration, relevant experience, and an assessment against relevant comparator groups and cost.

Unless determined otherwise, any new Executive Director will receive a pension allowance in line with the wider workforce average, being 9% of salary. Benefits available will typically be aligned to the wider employee population.

Other elements of remuneration will be established in line with the Remuneration Policy, set out in the Executive Directors’ remuneration structure table on page 52.

Relocation support and international mobility benefits may also be provided. Where provided, relocation assistance will normally be for a capped amount and/or limited time. For an overseas appointment, the Committee will have discretion to offer cost effective benefits and pension provisions which reflect local market practice and relevant legislation.

Buy-out awards

Compensation may be provided to Executive Directors recruited externally for the forfeiture of any award on leaving their previous employer. The Committee retains discretion to make such compensation as deemed appropriate to secure the relevant Executive Director’s employment and ensure any such payments align with the long-term interests of Santander UK and the prevailing regulatory framework.

Such payments will be in line with the benefits foregone from leaving the previous employer taking into account value, vesting dates and the extent to which performance conditions applied to the original awards.

Service agreements

Terms and conditions of employment are set out in individual service agreements which include a notice period of six months from both the Executive Director and the Company.

The agreements may be terminated immediately with payment of fixed pay in lieu of notice. In the event of termination for gross misconduct, neither notice nor payment in lieu of notice is required, and any deferred awards are forfeited.

 

 

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Remuneration policy report continued

    

 

Termination payments

The impact on remuneration of an Executive Director leaving the Company under various scenarios reflects the service agreements, the relevant scheme rules, and the Committee’s policy in this area.

With respect to outstanding variable pay awards, these generally lapse on termination, other than where an individual is considered a ‘good leaver’. The Committee determines whether an Executive Director is a good leaver under certain circumstances including but not limited to: injury, ill-health, disability, redundancy, retirement, death, or any other reason at the Committee’s discretion.

There is a framework in place which is intended to guide the Committee to determine the discretionary circumstances when good leaver status is appropriate. Other than a payment in the event of redundancy, there are generally no other payments upon termination of employment for Executive Directors.

In the event of a change in control, variable pay awards may continue to be paid in respect of the full financial year (pre and post change of control), or an award may be made in respect of the portion of the year that has elapsed at the point of change in control. Exceptionally the Committee may exercise its discretion to waive pro-rating. In the event of a change in control, outstanding share awards may lapse and be replaced with equivalent awards over shares in a new company, subject to Committee discretion. Alternatively, outstanding awards may vest on a change in control, subject to the assessment of performance and pro-rating of awards where appropriate.

Risk and Performance adjustment

We continue to ensure that the requirements of the Remuneration Code on risk and performance adjustment are met for our employees. All variable remuneration is subject to adjustment for current and future risks through our Additional Risk Adjustment Standard which is linked to our Board approved Risk Appetite.

Our Additional Risk Adjustment Standard (the Standard) provides both a formula-based assessment against Santander UK’s Risk Appetite and an additional qualitative risk event assessment overlay that can reduce the bonus pool or individual awards to nil at the Committee’s discretion. The Standard also

considers a range of factors deemed relevant by the Committee such as evolution of complaints, progress on remediation projects, ring-fencing compliance and people, culture and communities metrics. Given commercial sensitivity, the Committee does not provide annual detail on the application of discretion as required by the Code.

Our Individual Remuneration Adjustment Standard provides a framework for the process, governance and standards relevant for decisions in relation to individual performance adjustments following an incident, including the application of malus and clawback.

Performance adjustments may include, but are not limited to:

 

Reducing a bonus for the current year;

Reducing the amount of any unvested deferred variable remuneration;

Requiring a bonus which has been awarded (but not yet paid) to be forfeited; and

Requiring repayment on demand (on a net basis) of any cash and share awards received at any time for a period of up to ten years following the date of award.

The Committee has full discretion to prevent vesting of all or part of an amount of deferred remuneration and/or to freeze an award during an ongoing investigation in a number of circumstances, including:

 

Employee misbehaviour or material error;

Material downturn in the performance of Santander UK or a relevant business unit’s performance;

Santander UK or a relevant business unit suffers a material failure of risk management;

Significant changes in Santander UK’s economic or regulatory capital base and the qualitative assessment of risk; and

Material restatement of the Santander UK’s financial statements (except when required due to modification of the accounting rules).

When determining variable pay awards for individuals performing roles across Santander UK plc and Santander UK Group Holdings, the Holdings Remuneration Committee will apply any necessary discretion based on factors related to UK Group entities outside of Santander UK plc. This discretion is subject to validation by the Santander UK plc Remuneration Committee.

The Committee seeks input from the Chair of the Board Risk Committee, Chief Risk Officer, Chief Legal and Regulatory Officer, Chief HR Officer, Chair of the Board Audit Committee, Chair of the Board and Chief Internal Auditor when determining whether any performance or risk adjustments are required.

Policy for all employees

Our performance, reward and benefits approach across the Company supports and drives our business strategy, rewards strong performance and reinforces our values within the approved risk management framework. The general principles of the Remuneration Policy broadly apply across all colleagues where appropriate and are designed to facilitate recruitment, motivation and retention whilst driving performance.

The composition of remuneration packages for the Executive Directors is aligned with the broader colleague population, comprising salary, pensions and benefits and eligibility for discretionary variable pay dependent on role and responsibility. The level of pension allowance for newly appointed Executives is aligned with the average employer contribution for the wider workforce.

The Remuneration Committee annually approve the operation of all of our variable reward schemes for our customer-facing colleagues to ensure that all our plans reward appropriate behaviour and do not incentivise unnecessary risk taking.

 

 

54   Santander UK plc


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Remuneration implementation report

 

Introduction

This section of the report outlines how our Remuneration Policy was implemented for 2019.

Variable Pay Plan

To incentivise and reward Executive Directors for achieving superior and sustained performance, our Directors participate in a single variable incentive plan. A balance of financial and non-financial performance metrics are selected annually by the Committee and are aligned with our strategy as measured over the financial year. Multi-year deferral, further performance testing and delivery in Banco Santander SA shares ensures that Executive Directors’ interests are aligned to the long-term interests of the business. Both upfront and deferred awards are made half in cash and half in shares. The deferred element is delivered over seven years, with the first three deferred tranches of awards subject to further performance testing against long-term metrics which can reduce but not increase the level of awards. Awards delivered in shares are subject to an additional one-year retention period from the point of delivery.

The structure of the plan is illustrated below. The 2019 Variable Pay Plan pool was determined based on a range of metrics using a balanced scorecard approach as follows:

Quantitative assessment

A quantitative assessment is undertaken against a balanced scorecard of financial and non-financial metrics that are key to Santander UK’s 2019 strategy:

Customers (Net Promotor Score and loyal customers)

Shareholders

 

Risk (Cost of credit ratio and Stage 3 ratio)

 

Capital (Contribution to Banco Santander group capital)

 

Profitability (Net profit and RoTE)

Employees (Employee Engagement).

Performance metrics are reviewed annually to ensure continued alignment with KPIs and strategy.

Qualitative assessment

A qualitative assessment adds context to the quantitative assessment and ensures a balanced view of performance has been made.

Banco Santander Group Multiplier

The Committee has the discretion to adjust the pool upwards or downwards to reflect overall Banco Santander performance if appropriate.

Exceptional Adjustment

Intended to cover unexpected factors or additional targets not covered by the quantitative or qualitative assessments. This may also include adjustments not covered in the qualitative assessments, including major risk events. No exceptional metrics were applied to the 2019 variable pay awards.

UK-focused risk adjustment

Linked to Santander UK’s Risk Appetite, this provides both a formula-based assessment against Risk Appetite and an additional qualitative risk event assessment overlay (including consideration of people, culture, contribution to communities, conduct and other relevant factors) that can result in a downward risk adjustment of up to 100% of the bonus pool or individual awards at the discretion of the Committee.

The Committee has considered, reviewed and approved changes required to remuneration governance and frameworks in order to comply with the relevant regulatory rules, including for ring-fencing and these have applied from the 2019 performance year.

Deferred long-term awards

The payment of the first three deferred tranches of the 2019 awards (36% of the total award), payable in 2023, 2024 and 2025, is conditional on the achievement of long-term objectives measured over the three-year period 2020 to 2022. The performance measures for 2019 awards are EPS, relative TSR and compliance with the fully-loaded Common Equity Tier 1 (CET1) capital. Following performance assessment, the level of awards will be adjusted accordingly. The measures can reduce but not increase the value of the deferred awards. The payment of the final two deferred tranches (24% of the total award), payable in 2026 and 2027 are subject to continued employment only.

 

 

LOGO

 

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Remuneration implementation report continued

    

 

2019 Business Performance and Impact on Remuneration

Santander UK delivered a strong balance sheet in 2019 despite results being impacted by a challenging banking environment. Whilst competitive pressures on mortgages and PPI charges coupled with continued investment in our transformation programme impacted on profit, we are continuing to support customers whilst growing and operating a sustainable business. Santander UK achieved its strongest net mortgage growth in a decade, reinforcing its position as the UK’s third largest mortgage lender. Our drive to deliver tailored products and customer service with an enhanced digital offering was reflected in the growth of customer deposits.

The Committee approved payments to Executive Directors under the Santander UK Variable Pay Plan in the context of this performance.

In addition the Committee confirmed that the remuneration policy operated as intended, demonstrating pay for performance alignment.

Context for decision making

The Committee ensures that broader remuneration policies and practices for employees across the Santander UK group are taken into account when setting the policy for Executive Director remuneration. The Committee annually reviews remuneration trends across the Santander UK group including the relationship between Executive remuneration and the remuneration of other Santander UK group employees as well as remuneration in the wider UK market when making decisions on Executive pay.

The Committee oversees the broader workforce remuneration policies and practices, the implementation of remuneration and related employment policies across the Santander UK group and the salary and variable pay awards for all MRTs. It also approves the design of any material performance-related pay plans.

As part of the monitoring of pay, the following is considered:

 

Santander UK’s engagement with its recognised trade unions on matters relating to pay and benefits for all employees;

Annual pay reviews for the general employee population;

Santander UK group-wide pension and other benefit provisions;

The design of and overall spend on variable incentive arrangements; and

An assessment of conduct across the business.

The Committee is focused on ensuring that employees are not unduly stretched or inappropriately incentivised. This is monitored using existing employee engagement indicators via the Global Engagement Survey, and The Santander Way survey which provides an indication of our progress in performance against the nine Santander behaviours.

 

 

Executive Directors’ remuneration

Total remuneration of each Executive Director for the years ended 31 December 2019 and 2018.

 

  Executive rewards        Nathan Bostock(3)                      Susan Allen(4)                      Antonio Roman(5)(7)                      Duke Dayal(6)(8)                  Total  
     2019 
        £000 
     2018 
        £000 
         2019 
        £000 
     2018 
        £000 
         2019 
        £000 
     2018 
        £000 
         2019 
        £000 
     2018 
        £000 
         2019 
        £000 
     2018
        £000
 

Salary and fees

     1,680         1,680           800         –           367         629           268         –           3,115         2,309  

Taxable benefits (1)

     56         50                  –           21                  489         –           570         55  

Pension

     588         588             72         –             92         157             24         –             776         745  

Total fixed pay

     2,324         2,318             875         –             480         791             781         –             4,460         3,109  

Bonus (paid and deferred) (2)

     1,990         2,317             859         –             672         1,077             344         –             3,865         3,394  

Total remuneration

     4,314         4,635             1,734         –             1,152         1,868             1,125         –             8,325         6,503  

 

(1)

Taxable Benefits for the Executive Directors comprises a range of benefits including private health care, life and critical illness cover, health insurance, car allowance and relocation allowances where applicable. Included in the benefits figure for Duke Dayal is a relocation allowance of £500,000.

(2)

The bonus value shown is the total variable pay award made in respect of 2019. As set out in this report, a portion of this award (36% of the value shown) is subject to further performance testing which may reduce, but not increase, the value delivered.

(3)

As detailed in the Remuneration Policy report, the pension contribution received by Nathan Bostock will be reduced from 35% to 22% of salary, effective 1 January 2020 and to 9% of salary effective 1 January 2021.

(4)

Susan Allen was appointed as an Executive Director on 1 January 2019.

(5)

Antonio Roman left the Board on 15 September 2019 and returned to a Group role with Banco Santander. His remuneration is shown in respect of his service in the UK.

(6)

Duke Dayal was appointed as an Executive Director on 16 September 2019 and his remuneration is shown from this date.

(7)

This represents an allocation of 97% (2018: 97%) of Antonio Roman’s remuneration (for his time spent as a Director of the Company in the year) as he spent 97% of his time on Company business. The remaining 3% £35,621 (2018: 3% and £57,785) has been allocated to Santander Financial Services plc. This results in total remuneration of £1,187,359.

(8)

This represents an allocation of 97% of Duke Dayal’s remuneration for his time spent as a Director of the Company in the year, given he spends 97% of his time on Company business. The remaining 3% £34,803 has been allocated to Santander Financial Services plc. This results in total remuneration of £1,160,085.

Relative importance of spend on pay

 

                 2019 
£m 
    

            2018

£m

    

            Change  

%  

 

Profit before tax

     1,012         1,545        -34%    

Total employee costs