Blueprint
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For
February 14, 2020
Commission
File Number: 001-09266
National
Westminster Bank PLC
135
Bishopsgate
London
EC2M 3UR
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form
20-F X Form
40-F ____
Indicate
by check mark if the registrant is submitting the Form 6-K in paper
as permitted by Regulation S-T Rule 101(b)(1):_________
Indicate
by check mark if the registrant is submitting the Form 6-K in paper
as permitted by Regulation S-T Rule 101(b)(7):_________
National Westminster Bank Plc 14 February 2020
Annual Report and Accounts 2019
A copy of the Annual Report and Accounts 2019 for National
Westminster Bank Plc has
been submitted to the National Storage Mechanism and will shortly
be available for inspection at http://www.morningstar.co.uk/uk/NSM. The
document will be available on The Royal Bank of Scotland Group
plc's website at www.investors.rbs.com/reports-archive
For further information, please contact:- RBS Media
Relations
+44 (0) 131 523 4205
Investor relations Alexander Holcroft Investor
Relations
+44 (0) 207 672 1982
For the purpose of compliance with the Disclosure Guidance and
Transparency Rules, this announcement also contains risk factors
extracted from the Annual Report and Accounts 2019 in full unedited
text. Page references in the text refer to page numbers in the
Annual Report and Accounts 2019.
Risk factors
Principal Risks and Uncertainties
Set out below are certain risk factors that could adversely affect
the NWB Group's future results, its financial condition and
prospects and cause them to be materially different from what is
forecast or expected and directly or indirectly impact the value of
its securities in issue.
These risk factors are broadly categorised and should be read in
conjunction with other sections of this annual report, including
the forward looking statements section, the strategic report and
the capital and risk management section, and should not be regarded
as a complete and comprehensive statement of all potential risks
and uncertainties facing the NWB Group.
Strategic risk
The NWB Group's parent company has announced a new Purpose-led
strategy which will entail a period of transformation and require
an internal cultural shift across the NWB Group. It carries
significant execution and operational risks and it may not achieve
its stated aims and targeted outcomes.
On 14 February 2020, the RBS Group, the NWB's Group parent company
announced a new strategy, focused on becoming a Purpose-led
business, designed to champion potential and to help individuals,
families and businesses to thrive. This strategy is intended to
reflect the rapidly shifting environment and backdrop of
unprecedented disruption in society driven by technology and
changing customer expectations. The strategy has three areas of
focus - climate change, enterprise and learning - where the RBS
Group believes it can have the greatest positive impact. Together,
these strategic initiatives are referred to as the RBS Group's
'Purpose-led Strategy'. As a Purpose-led Strategy, it is intended
to balance the interests and changing needs of all stakeholders of
the RBS Group (including those of the NWB Group) and to focus on
building relationships that create mutual value across customers'
lives. It will require an internal cultural shift the NWB Group as
to how performance is perceived and how the NWB Group conduct its
business. The changes required are substantial and will take many
years to fully embed and may not result in the expected outcome
within the timeline and in the manner currently
contemplated.
To deliver against this purpose and deliver sustainable returns,
the RBS Group intends to: focus on the lifecycles of its customers
using insights about customers to evolve product and service
offerings; re-engineer and simplify the RBS Group by updating
operational and technological capabilities and strengthening
governance and control frameworks to reduce costs and improve
customer journeys; focus on innovation and partnership to drive
change and achieve growth in new product areas and customer
segments; and have a sharper focus on capital allocation and
deploying it more effectively for customers, in particular by
re-focusing the NWM franchise of the RBS Group ('NWM
Franchise').
As part of its new Purpose-led Strategy, the RBS Group has set a
number of financial, capital and operational targets and
expectations, both for the short term and throughout the
implementation period which could, in turn, affect the NWB Group.
Over the medium to long term, the RBS Group intends to achieve a
9-11% return on tangible equity, and a CET1 ratio of 13-14%, with a
sustained pay-out ratio of around 40% of attributable profit. In
addition to making significant reductions in RWAs, achieving these
targets will require further significant reductions to the RBS
Group's cost base, with c. £250 million of reductions targeted
in 2020. Realising these cost reductions will result in material
strategic costs, which may be more than currently expected. The
continued focus on meeting cost reduction targets may also mean
limited investment in other areas which could affect the NWB
Group's long-term prospects, product offering or competitive
position and its ability to meet its other targets, including those
related to customer satisfaction. Any of the above could
jeopardise the NWB Group's ability to achieve its associated
financial targets and generate sustainable returns.
The implementation of the new Purpose-led Strategy is highly
complex, will take many years to fully embed including within the
NWB Group. The NWB Group may not be able to successfully implement
all aspects of this strategy or reach any or all of the related
targets or expectations in the time frames contemplated or at all.
In addition, the NWB Group's ability to serve its target customers,
scale certain ventures, deliver growth in new markets may be
impacted or lower than expected and previously anticipated revenue,
profitability and cost reduction levels may not be achieved in the
timescale envisaged or at any time. In particular, the Purpose-led
Strategy entails a strategic cultural shift across the RBS Group
including the NWB Group which involves a large number of concurrent
and interdependent actions and initiatives, including re-focussing
of the NWM Franchise, any of which could fail to be implemented in
the manner and to the extent currently contemplated, due to
operational, legal, execution or other issues. In addition, the
successful implementation of the Purpose-led Strategy in part
depends on initiatives and growth in ventures that are new to the
RBS Group and the NWB Group, or to the market and therefore there
is a risk that some or all such initiatives will not succeed, or
may be limited in scope or scale, including due to its current
ownership structure.
The scale and scope of the intended changes present material
business, operational, IT system, internal culture, conduct and
people risks to the NWB Group, as the planning and implementation
of the transformation programme are resource-intensive and
disruptive, and will divert management resources. In addition,
changes being concurrently implemented will require the
implementation and application of robust governance and controls
frameworks, in particular with respect to any strategic
partnerships and acquisitions, and further consolidation of IT
systems and there is no guarantee that the NWB Group will be
successful in doing so. The implementation of the Purpose-led
Strategy could result in materially higher costs than currently
contemplated, (including due to material uncertainties and factors
outside of the NWB Group's control) or could be phased in a manner
other than currently expected. These risks will be present
throughout the period of implementation which is expected to last
during the medium term, and in some cases, materially
beyond.
Changes in the economic, political and regulatory environment in
which the NWB Group operates or regulatory uncertainty and changes,
strong market competition and industry disruption or economic
volatility, including as a result of the continued uncertainty
surrounding the terms of the UK's exit from the EU, or changes in
the scale and timing of policy responses on climate change, may
require the RBS Group (including the NWB Group) to adjust aspects
of the Purpose-led Strategy or the timeframe for its
implementation. In particular because some initiatives depend on
achieving growth in new ventures and markets for the NWB Group, the
Purpose-led Strategy is vulnerable to an economic downturn.
Furthermore, any new strategy requires ongoing confidence from
customers and the wider market, without which customer activity and
related income levels may fall or the NWB Group's reputation may be
adversely affected.
Each of
these risks, and others identified in these Risk Factors,
individually or collectively could jeopardise the implementation
and delivery of the Purpose-led Strategy, result in higher than
expected restructuring costs, impact the NWB Group's products and
services offering, reputation with customers or business model and
adversely impact the NWB Group's ability to deliver the Purpose-led
Strategy and meet its targets and guidance, each of which could in
turn have a material adverse impact on the NWB Group's results of
operations, financial condition and prospects.
The RBS Group's new Purpose-led Strategy includes one area of focus
on climate change which entails significant execution risk and is
likely to require material changes to the business model of the NWB
Group over the next ten years.
The RBS Group's new strategy on climate change, together with its
commitments under the UN Principles on Responsible Banking to align
its strategy to the 2015 Paris Agreement, will require the NWB
Group to dedicate resource to the RBS Group's efforts to develop
the capacity and methodology to understand, and measure the climate
impact of the emissions from its financing activity. The RBS Group
must identify its approach to this on a short time scale to meet
its target of setting and publishing sector-specific targets by
2021 and its goal of setting comprehensive climate impact
scenario-based reduction targets and plans for alignment with the
2015 Paris Agreement by 2022, and be able to adequately define and
benchmark its current climate impact to demonstrate its progress
against its ambition to reduce this by half over the next 10
years. Any delay to establishing such targets and developing
its plan for alignment with the 2015 Paris Agreement may entail
reputational and market risk, and increase the risks the RBS Group
(including NWB Group) faces as a result of climate
change.
It is expected that the targets and measures that the NWB Group
will need to adopt in line with the RBS Group's Purpose-led
Strategy on climate change will require significant reductions to
the NWB Group's financed emissions to be realised which, together
with the impact of embedding climate into its risk framework and
other regulatory, policy and market changes, is likely to
necessitate far reaching changes to the NWB Group's business model
and existing exposures, and potentially on timescales outside of
risk appetite. Whilst the risks presented by climate change are
unprecedented in magnitude and scale, how the NWB Group implements
RBS Group's Purpose-led Strategy to respond to climate
change may also have a material adverse effect on the NWB Group's
business growth, its competitiveness, and profitability over the
short, medium and long term. Once established, there is no
certainty that the NWB Group will be able to meet its climate
change targets and ambitions or that seeking to do so will not have
an adverse impact on the NWB Group, including its competition
position. See also, 'The NWB Group expects to face
significant risks in connection with climate change and the
transition to a low carbon economy, which may adversely impact the
NWB Group.
Operational and IT resilience risk
The NWB Group is subject to increasingly sophisticated and frequent
cyberattacks.
The NWB Group is experiencing an increase in cyberattacks
across both the entire NWB Group and against the NWB Group's supply
chain, reinforcing the importance of due diligence and close
working with the third parties on which the NWB Group relies. The
NWB Group is reliant on technology, against which there is a
constantly evolving series of attacks that are increasing in terms
of frequency, sophistication, impact and severity. As cyberattacks
evolve and become more sophisticated, the NWB Group is required to
continue to invest in additional capability designed to defend
against the emerging threats. In 2019, the NWB Group was subjected
to a small number of Distributed Denial of Service ('DDOS')
attacks, which are a pervasive and significant threat to the global
financial services industry. The focus is to mitigate the
impact of the attacks and sustain availability of services for NWB
Group's customers. The NWB Group continues to invest
significant resources in the development and evolution of cyber
security controls that are designed to minimise the potential
effect of such attacks.
Hostile attempts are made by third parties to gain access to and
introduce malware (including ransomware) into the NWB Group's IT
systems, and to exploit vulnerabilities. The NWB Group has
information and cyber security controls in place, which are subject
to review on a continuing basis, but given the nature of the
threat, there can be no assurance that such measures will prevent
all attacks in the future. See also, 'The NWB Group's
operations are highly dependent on its complex IT systems, and any
IT failure could adversely affect the NWB
Group'.
Any failure in the NWB Group's cybersecurity policies, procedures
or controls, may result in significant financial losses, major
business disruption, inability to deliver customer services, or
loss of data or other sensitive information (including as a result
of an outage) and may cause associated reputational damage. Any of
these factors could increase costs (including costs relating to
notification of, or compensation for customers, credit monitoring
or card reissuance), result in regulatory investigations or
sanctions being imposed, or may affect the NWB Group's ability to
retain and attract customers. Regulators in the UK, US and Europe
continue to recognise cybersecurity as an increasing systemic risk
to the financial sector and have highlighted the need for financial
institutions to improve their monitoring and control of, and
resilience (particularly of critical services) to cyberattacks, and
to provide timely notification of them, as
appropriate.
Additionally, third parties may also fraudulently attempt to induce
employees, customers, third party providers or other users who have
access to the NWB Group's systems to disclose sensitive information
in order to gain access to the NWB Group's data or that of the NWB
Group's customers or employees. Cybersecurity and information
security events can derive from groups or factors such as: internal
or external threat actors, human error, fraud or malice on the part
of the NWB Group's employees or third parties, including third
party providers, or may result from accidental technological
failure.
The NWB Group expects greater regulatory engagement, supervision
and enforcement in relation to its overall resilience to withstand
IT systems and related disruption, either through a cyberattack or
some other disruptive event. Such increased regulatory engagement,
supervision and enforcement is uncertain in relation to scope,
consequence and pace of change, which could negatively impact the
NWM Group. Due to the NWB Group's reliance on technology and
the increasing sophistication, frequency and impact of
cyberattacks, it is likely that such attacks could have a material
adverse impact on the NWB Group.
In accordance with the EU General Data Protection Regulation
('GDPR'), the NWB Group is required to ensure it implements timely,
appropriate and effective organisational and technological
safeguards against unauthorised or unlawful access to the data of
the NWB Group, its customers and its employees. In order to meet
this requirement, the NWB Group relies on the effectiveness of its
internal policies, controls and procedures to protect the
confidentiality, integrity and availability of information held on
its IT systems, networks and devices as well as with third parties
with whom the NWB Group interacts. A failure to monitor and
manage data in accordance with the GDPR requirements of the
applicable legislation may result in financial losses, regulatory
fines and investigations and associated reputational damage.
In addition, whilst the NWB Group takes measures to prevent, detect
and minimise attacks, the NWB Group's systems, and those of third
party providers, are subject to frequent cyberattacks.
The NWB Group operations and strategy are highly dependent on the
effective use and accuracy of data.
The NWB Group relies on the effective use of accurate data to
support and improve its operations and deliver its strategy.
Failure to produce underlying high quality data and/or the
ineffective use of such data could result in a failure to satisfy
its customers' expectations including by delivering innovative
products and services. This could place NWB Group at a competitive
disadvantage, inhibit its efforts to reduce costs and improve its
systems, controls and processes, and result in a failure to deliver
the NWB Group's strategy. The use of unethical or inappropriate
data and/or non-compliance with customer data and privacy
protection could give rise to conduct and litigation risks and
could also increase the risk of an operational event or losses or
other adverse consequences due to inappropriate models, systems,
processes, decisions or other actions.
Operational risks are inherent in the NWB Group's
businesses.
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, procedures, people or systems, or from
external events, including legal risks. As at 31 December 2019, the
NWB Group offered a diverse range of products and services
supported by 53,600 employees; it therefore has complex and diverse
operations. As a result, operational risks or losses can arise from
a number of internal or external factors. These risks are also
present when the NWB Group relies on third-party suppliers or
vendors to provide services to it or its customers, as is
increasingly the case as the NWB Group outsources certain
functions, including with respect to the implementation of new
technologies, innovation and responding to regulatory and market
changes.
Operational risks continue to be heightened as a result of the
implementation of the RBS Group's Purpose-led Strategy, the RBS
Group's current cost-reduction measures and conditions affecting
the financial services industry generally (including Brexit and
other geo-political developments) as well as the legal and
regulatory uncertainty resulting therefrom. This may place
significant pressure on the NWB Group's ability to maintain
effective internal controls and governance frameworks. The NWB
Group is also dependent on the RBS Group for certain shared
critical services, including property and financial accounting,
regulatory reporting and certain administrative and legal services,
the cost for which are determined by RBS Group and which may
increase from time to time. A failure to adequately supply these
services may result in increased costs or liabilities to the NWB
Group should the NWB Group have to increase its capacity to provide
these services internally or by outsourcing to third parties for
these services. Because the NWB Group utilises certain services
provided by the RBS Group, changes in the cost of these services
may adversely impact the NWB Group's results of operations.
The effective management of operational risks is critical to
meeting customer service expectations and retaining and attracting
customer business. Ineffective management of such
risks could adversely affect the NWB Group.
Although the NWB Group has implemented risk controls and mitigation
actions, with resources and planning having been devoted to
mitigate operational risk, such measures may not be effective in
controlling each of the operational risks faced by the NWB
Group.
See also, 'The NWB Group's parent company has announced a new
Purpose-led strategy which will entail a period of transformation
and require an internal cultural shift across the NWB Group. It
carries significant execution and operational risks and it may not
achieve its stated aims and targeted outcomes'.
The NWB Group's operations are highly dependent on its complex IT
systems, and any IT failure could adversely affect the NWB
Group.
The NWB Group's operations are highly dependent on the ability to
process a very large number of transactions efficiently and
accurately while complying with applicable laws and regulations.
The proper functioning of the NWB Group's payment systems,
financial crime and sanctions controls, risk management, credit
analysis and reporting, accounting, customer service and other IT
systems (some of which are owned and operated by RBSG plc or third
parties), as well as the communication networks between their
branches and main data processing centres, is critical to the NWB
Group's operations.
Individually or collectively, any critical system failure, material
loss of service availability or material breach of data security
could cause serious damage to the NWB Group's ability to provide
services to its customers, which could result in reputational
damage, significant compensation costs or regulatory sanctions
(including fines resulting from regulatory investigations), or a
breach of applicable regulations. In particular, such issues could
cause long-term damage to the NWB Group's reputation and could
affect its regulatory approvals, competitive position, business and
brands, which could undermine its ability to attract and retain
customers. This risk is heightened as the NWB Group outsources
certain functions and continues to innovate and offer new
digital solutions to its customers as a result of the trend towards
online and mobile banking.
In 2019, the NWB Group continued to make considerable investments
to further simplify, upgrade and improve its IT and technology
capabilities (including migration of certain services to cloud
platforms). The NWB Group continues to develop and enhance digital
services for its customers and seeks to improve its competitive
position through enhancing controls and procedures and
strengthening the resilience of services including cyber
security. Should such investment and rationalisation
initiatives fail to achieve the expected results or prove to be
insufficient due to cost challenges or otherwise, this could
negatively affect the NWB Group's operations, its reputation and
ability to retain or grow its customer business or adversely impact
its competitive position, thereby negatively impacting the NWB
Group's financial position.
The NWB Group relies on attracting, retaining and developing senior
management and skilled personnel, and is required to maintain good
employee relations.
The NWB Group's current and future success depends on its ability
to attract, retain and develop highly skilled and qualified
personnel, including senior management, directors and key
employees, in a highly competitive labour market and under internal
cost reduction pressures. This entails risk, particularly in light
of the implementation of the RBS Group's Purpose-led Strategy,
heightened regulatory oversight of banks and the increasing
scrutiny of, and (in some cases) restrictions placed upon, employee
compensation arrangements, in particular those of banks in receipt
of government support such as the RBS Group, all of which may have
an adverse effect on the NWB Group's ability to hire, retain and
engage well-qualified employees. The market for skilled personnel
is increasingly competitive, especially for technology-focussed
roles, thereby raising the cost of hiring, training and retaining
skilled personnel. In addition, certain economic, market and
regulatory conditions and political developments (including Brexit)
may reduce the pool of candidates for key management and
non-executive roles, including non-executive directors with the
right skills, knowledge and experience, or increase the number of
departures of existing employees.
Many of the NWB Group's employees in the UK, the ROI and
continental Europe are represented by employee representative
bodies, including trade unions. Engagement with its employees and
such bodies is important to the NWB Group in maintaining good
employee relations. Any failure to do so could impact the NWB
Group's ability to operate its business effectively.
A failure in the NWB Group's risk management framework could
adversely affect the NWB Group, including its ability to achieve
its strategic objectives.
Risk management is an integral part of all of the NWB Group's
activities and includes the definition and monitoring of the NWB
Group's risk appetite and reporting on its risk exposure and the
potential impact thereof on its financial condition. Financial risk
management is highly dependent on the use and effectiveness of
internal stress tests and models and ineffective risk management
may arise from a wide variety of factors, including lack of
transparency or incomplete risk reporting, unidentified conflicts
or misaligned incentives, lack of accountability control and
governance, lack of consistency in risk monitoring and management
or insufficient challenges or assurance processes. Failure to
manage risks effectively could adversely impact the NWB Group's
reputation or its relationship with its regulators, customers,
shareholders or other stakeholders.
The NWB Group's operations are inherently exposed to conduct risks.
These include business decisions, actions or reward mechanisms that
are not responsive to or aligned with the NWB Group's regulatory
obligations, customers' needs or do not reflect the NWB Group's
customer-focussed strategy, ineffective product management,
unethical or inappropriate use of data, implementation and
utilisation of new technologies, outsourcing of customer service
and product delivery, the possibility of mis-selling of financial
products and mishandling of customer complaints. Some of these
risks have materialised in the past and ineffective management and
oversight of conduct risks may lead to further remediation and
regulatory intervention or enforcement. The NWB Group's businesses
are also exposed to risks from employee -misconduct including
non-compliance with policies and regulations, negligence or fraud
(including financial crimes), any of which could result in
regulatory fines or sanctions and serious reputational or financial
harm to the NWB Group.
The NWB Group has been seeking to embed a strong risk culture
across the organisation and has implemented policies and allocated
new resources across all levels of the organisation to manage and
mitigate conduct risk and expects to continue to invest in its risk
management framework. However, such efforts may not insulate the
NWB Group from future instances of misconduct and no assurance can
be given that the NWB Group's strategy and control framework will
be effective. See also, the 'The NWB Group's parent company
has announced a new Purpose-led strategy which will entail a period
of transformation and require an internal cultural shift across the
NWB Group. It carries significant execution and operational risks
and it may not achieve its stated aims and targeted
outcomes'. Any failure in the NWB Group's risk management
framework could negatively affect the NWB Group and its financial
condition through reputational and financial harm and may result in
the inability to achieve its strategic objectives for their
customers, employees and wider stakeholders.
The NWB Group's operations are subject to inherent reputational
risk.
Reputational risk relates to stakeholder and public perceptions of
the NWB Group arising from an actual or perceived failure to meet
stakeholder expectations, including with respect to the RBS Group's
Purpose-led Strategy and related targets, due to any events,
behaviour, action or inaction by the NWB Group, its employees or
those with whom the NWB Group is associated. This includes brand
damage, which may be detrimental to the NWB Group's business,
including its ability to build or sustain business relationships
with customers, and may cause low employee morale, regulatory
censure or reduced access to, or an increase in the cost of,
funding. Reputational risk may arise whenever there is a material
lapse in standards of integrity, compliance, customer or operating
efficiency and may adversely affect the NWB Group's ability to
attract and retain customers. In particular, the NWB Group's
ability to attract and retain customers (and, in particular,
corporate and retail depositors) may be adversely affected by,
amongst others: negative public opinion resulting from the actual
or perceived manner in which the NWB Group or any other member of
the RBS Group conducts or modifies its business activities and
operations, media coverage (whether accurate or otherwise),
employee misconduct, the NWB Group's financial performance, IT
systems failures or cyberattacks, data breaches, the level of
direct and indirect government support, or the actual or perceived
practices in the banking and financial industry in general, or a
wide variety of other factors. See also, 'The NWB Group's
parent company has announced a new Purpose-led strategy which will
entail a period of transformation and require an internal cultural
shift across the NWB Group. It carries significant execution and
operational risks and it may not achieve its stated aims and
targeted outcomes'.
Modern technologies, in particular online social networks and other
broadcast tools which facilitate communication with large audiences
in short time frames and with minimal costs, may also significantly
increase and accelerate the impact of damaging information and
allegations.
Although the NWB Group has implemented a Reputational Risk Policy
to improve the identification, assessment and management of
customers, transactions, products and issues which represent a
reputational risk, the NWB Group cannot be certain that it will be
successful in avoiding damage to its business from reputational
risk.
Economic and political risk
Prevailing uncertainty regarding the terms of the UK's withdrawal
from the European Union has adversely affected and will continue to
affect the NWB Group.
Following the EU Referendum in June 2016, and pursuant to the exit
process triggered under Article 50 of the Treaty on European Union
in March 2017 and the ratification of the withdrawal agreement by
the UK government and the EU (through the Council of Ministers),
the UK ceased to be a member of the EU and the European Economic
Area ('EEA') on 31 January 2020 ('Brexit') and entered a transition
period, currently due to expire on 31 December 2020. During this
transition period, the UK retains the benefits of membership of the
EU's internal market and the customs union, but loses its
representation in the EU's institutions and its role in EU
decision-making.
The UK and EU are currently seeking to determine the terms of their
future relationship by the end of the transition period, and the
resulting economic, trading and legal relationships with both the
EU and other counterparties currently remain unclear and subject to
significant uncertainty. If the UK and EU do not agree a new
comprehensive trade agreement by the end of the transition period
and the transition period is not extended, then, subject to
separate agreements being made with third countries, the UK would
be expected to operate on basic World Trade Organization terms, the
outcome of which for RBS Group would be similar in certain respects
to a 'no-deal' Brexit, and which may result in, amongst others,
loss of access to the EU single market for goods and services, the
imposition of import duties and controls on trade between the UK
and the EU and related trade disruption.
The direct and indirect effects of the UK's exit from the EU and
the EEA are expected to affect many aspects of the NWB Group's
business and operating environment, including as described
elsewhere in these risk factors, and may be material and/or cause a
near-term impact on impairments. See also, 'The NWB Group faces
increased political and economic risks and uncertainty in the UK
and global markets'. As a result of such anticipated effects, the
RBS Group has engaged in significant and costly Brexit planning and
contingency planning and expects to continue to do so. The
direct and indirect effects of the UK's exit from the EU and the
EEA may also impede the RBS Group's ability to deliver its
Purpose-led Strategy. See also, 'The NWB Group's parent company has
announced a new Purpose-led strategy which will entail a period of
transformation and require an internal cultural shift across the
NWB Group. It carries significant execution and operational risks
and it may not achieve its stated aims and targeted
outcomes'.
The longer term effects of Brexit on the NWB Group's operating
environment depend significantly on the terms of the ongoing
relationship between the UK and EU. They are difficult to predict,
and are subject to wider global macro-economic trends and events,
but may significantly impact the NWB Group and its customers and
counterparties who are themselves dependent on trading with the EU
or personnel from the EU. They may result in, or be exacerbated by,
periodic financial volatility and slower economic growth, in the UK
in particular, but also in the ROI, the rest of Europe and
potentially the global economy.
Significant uncertainty exists as to the respective legal and
regulatory arrangements under which the NWB Group and its
subsidiaries will operate once the transition period has
ended. The legal and political uncertainty and any actions
taken as a result of this uncertainty, as well as new or amended
rules, could have a significant impact on the NWB Group's non-UK
operations and/or legal entity structure, including attendant
restructuring costs, level of impairments, capital requirements,
regulatory environment and tax implications and as a result may
adversely impact the NWB Group's profitability, competitive
position, business model and product offering.
The RBS Group has obtained the requisite regulatory permissions
(including third country licence branch approvals and access to
TARGET2 clearing and settlement mechanisms) it currently considers
are required for continuity of business as a result of the UK's
departure from the EU. These are required in order to
maintain the ability to clear euro payments and to serve non-UK EEA
customers if there is a loss of access to the European Single
Market. These changes to the NWB Group's operating model have
been costly and may require further changes to its business
operations, product offering and customer engagement. The
regulatory permissions from the Dutch and German authorities are
conditional in nature and will require on-going compliance with
certain conditions, including maintaining minimum capital level and
deposit balances as well as a defined local physical presence going
forward; such conditions may be subject to change in the future.
Maintaining these permissions and the RBS Group's access to the
euro payment infrastructure will be fundamental to its business
going forward and further changes to NWB Group's business
operations may be required.
The NWB Group faces increased political and economic risks and
uncertainty in the UK and global markets.
In the UK, significant economic and political uncertainty continues
to surround the terms of Brexit and now also the future
relationship between the UK and the EU and may adversely affect the
NWB Group. See also, 'Prevailing uncertainty regarding the terms of
the UK's withdrawal from the European Union has adversely affected
and will continue to affect the NWB Group'.
The NWB Group faces additional political uncertainty as to how the
Scottish parliamentary process (including, as a result of any
further Scottish independence referendum or the next Scottish
Parliament elections in May 2021) may impact the NWB Group. RBSG
plc and a number of other RBS Group entities are headquartered
and/or incorporated in Scotland. Any changes to Scotland's
relationship with the UK or the EU (as an indirect result of Brexit
or other developments) would impact the environment in which the
RBS Group and its subsidiaries operate, and may require further
changes to the RBS Group's (including the NWB Group's) structure,
independently or in conjunction with other mandatory or strategic
structural and organisational changes which could adversely impact
the NWB Group.
Actual or perceived difficult global economic conditions can create
challenging economic and market conditions and a difficult
operating environment for the NWB Group's businesses and its
customers and counterparties, thereby affecting its financial
performance.
The outlook for the global economy over the medium-term remains
uncertain due to a number of factors including: trade barriers and
the increased possibility of trade wars, widespread political
instability, an extended period of low inflation and low interest
rates, and global regional variations in the impact and responses
to these factors. Such conditions could be worsened by a number of
factors including political uncertainty or macro-economic
deterioration in the Eurozone, China or the US, the conflicts
or tensions in the Middle East or Asia, increased instability in
the global financial system and concerns relating to further
financial shocks or contagion (for example, due to economic
concerns in emerging markets), market volatility or fluctuations in
the value of the pound sterling, new or extended economic
sanctions, volatility in commodity prices or concerns regarding
sovereign debt. This may be compounded by the ageing demographics
of the populations in the markets that the NWB Group serves, or
rapid change to the economic environment due to the adoption of
technology and artificial intelligence. Any of the above
developments could adversely impact the NWB Group directly (for
example, as a result of credit losses) or indirectly (for example,
by impacting global economic growth and financial markets and the
NWB Group's customers and their banking needs).
In addition, the NWB Group is exposed to risks arising out of
geopolitical events or political developments, such as trade
barriers, exchange controls, sanctions and other measures taken by
sovereign governments that may hinder economic or financial
activity levels. Furthermore, unfavourable political, military or
diplomatic events, including secession movements or the exit of
other member states from the EU, armed conflict, pandemics and
widespread public health crises (including the recent coronavirus
outbreak, the impact of which will depend on future developments,
which are highly uncertain and cannot be predicted), state and
privately sponsored cyber and terrorist acts or threats, and the
responses to them by governments and markets, could negatively
affect the business and performance of the NWB Group, including as
a result of the indirect effect on regional or global trade and/or
the NWB Group's customers.
Changes in interest rates have significantly affected and will
continue to affect the NWB Group's business and
results.
Interest rate risk is significant for the NWB Group, as monetary
policy has been accommodative in recent years, including as a
result of certain policies implemented by the Bank of England and
HM Treasury such as the Term Funding Scheme, which have helped to
support demand at a time of pronounced fiscal tightening and
balance sheet repair. However, there remains considerable
uncertainty as to the direction of interest rates and pace of
change (as set by the Bank of England) as well as the general UK
political climate. Further decreases in interest rates and/or
continued sustained low or negative interest rates could put
pressure on the NWB Group's interest margins and adversely affect
the NWB Group's profitability and prospects. In addition, a
continued period of low interest rates and flat yield curves has
affected and may continue to affect the NWB Group's interest rate
margin realised between lending and borrowing costs.
Conversely, while increases in interest rates may support NWB Group
income, sharp increases in interest rates could lead to generally
weaker than expected growth, or even contracting GDP, reduced
business confidence, higher levels of unemployment or
underemployment, adverse changes to levels of inflation, and
falling property prices in the markets in which the NWB Group
operates.
The NWB Group expects to face significant risks in connection with
climate change and the transition to a low carbon economy, which
may adversely impact the NWB Group.
The risks associated with climate change are subject to rapidly
increasing prudential and regulatory, political and societal focus,
both in the UK and internationally. Embedding climate risk into the
NWB Group's risk framework, and adapting the NWB Group's operations
and business strategy to address the physical risks of climate
change and the risk associated with a transition to a low
carbon economy in line with the RBS Group's Purpose-led Strategy
and ambition to reduce the climate impact of its financing
activities and evolving regulatory requirements and market
expectations is expected to have a significant impact on the NWB
Group.
Multilateral agreements, in particular the 2015 Paris Agreement,
and subsequent UK and Scottish Government commitments to
achieving net zero carbon emissions by 2050 and 2045,
respectively, will require widespread levels of adjustment across
all sectors of the UK economy and markets in which the NWB Group
operates. Some sectors such as property, energy, infrastructure
(including transport) and agriculture are expected to be
particularly impacted. The nature and timing of the far-reaching
commercial, technological, policy and regulatory changes that this
transition will entail remain uncertain. The UK Government and UK
regulators, including the PRA, NWB's UK prudential regulator, have
indicated it is a priority issue. The impact of such regulatory,
policy, commercial and technological changes is expected to be
highly significant and may be disruptive, especially if such
changes do not occur in an orderly or timely manner or are not
effective in reducing emissions sufficiently.
Furthermore, the nature and timing of the manifestation of the
physical risks of climate change (which include more extreme
specific weather events such as flooding and heat waves and longer
term shifts in climate) are also uncertain, and their impact on the
economy is predicted to be more acute if carbon emissions are not
reduced on a timely basis or to the requisite extent. Recent data
indicates that global carbon emissions are continuing to increase.
The potential impact on the economy includes, but is not limited
to, lower GDP growth, significant changes in asset prices and
profitability of industries, higher unemployment and the prevailing
level of interest rates.
See also, 'The RBS Group's new Purpose-led Strategy includes one
area of focus on climate change which entails significant execution
risk and is likely to require material changes to the business
model of the NWB Group over the next ten years', 'The NWB Group's
businesses are subject to substantial regulation and oversight,
which are constantly evolving and may adversely affect the NWB
Group' and 'Any reduction in the credit rating assigned to RBSG
plc, any of its subsidiaries (including NWB Plc or other NWB Group
subsidiaries) or any of their respective debt securities could
adversely affect the availability of funding for the NWB Group,
reduce its liquidity position and increase the cost of
funding'.
If the NWB Group does not adequately embed climate risk into its
risk framework to appropriately measure, manage and disclose the
various financial, transition and physical risks it faces
associated with climate change, or if the RBS Group or the NWB
Group fail to implement the RBS Group's new strategy on
climate change and adapt its business model to the changing
regulatory requirements and market expectations on a timely basis,
it may have a material and adverse impact on the NWB Group's level
of business growth, its competitiveness, profitability, prudential
capital requirements, ESG ratings, credit ratings, cost of funding,
reputation, results of operation and financial
condition.
Changes in foreign currency exchange rates may affect the NWB
Group's results and financial position.
The NWB Group's foreign exchange exposure arises from structural
foreign exchange risk, including capital deployed in the NWB
Group's foreign subsidiaries, branches and joint arrangements, and
non-trading foreign exchange risk, including customer transactions
and profits and losses that are in a currency other than the
functional currency of the transaction entity. The NWB Group issues
instruments in foreign currencies that assist in meeting the NWB
Group's minimum requirements for own funds and eligible liabilities
('MREL'). The NWB Group maintains policies and procedures designed
to manage the impact of exposures to fluctuations in currency
rates. Nevertheless, changes in currency rates, particularly in the
sterling-US dollar and euro-sterling exchange rates, can adversely
affect the value of assets, liabilities (including the total amount
of regulatory capital and MREL eligible instruments), income, RWAs,
capital base and expenses and the reported earnings of NWB Plc's UK
and non-UK subsidiaries and may affect the NWB Group's reported
consolidated financial condition.
Decisions of major central banks (including by the Bank of England,
the European Central Bank and the US Federal Reserve) and political
or market events (including Brexit and the general UK political
climate), which are outside of the NWB Group's control, may lead to
sharp and sudden variations in foreign exchange
rates.
HM Treasury (or UKGI on its behalf) could exercise a significant
degree of influence over the RBS Group and the NWB Group is
controlled by the RBS Group.
In its November 2018 Autumn Budget, the UK Government announced its
intention to continue the process of privatisation of RBSG plc and
to carry out a programme of sales of RBSG plc ordinary shares with
the objective of selling all of its remaining shares in RBSG plc by
2023-2024. On 6 February 2019, RBSG plc obtained shareholder
approval to participate in certain directed share buyback
activities. As at 31 December 2019, the UK Government held
62.1% of the issued ordinary share capital of RBSG plc. There can
be no certainty as to the continuation of the sell-down process or
the timing or extent of such sell-downs.
UK Government Investments Limited ('UKGI') manages HM Treasury's
shareholder relationship with RBSG plc and, although HM Treasury
has indicated that it intends to respect the commercial decisions
of the RBS Group and that the RBS Group entities (including the NWB
Group) will continue to have their own independent board of
directors and management team determining their own strategy, its
position as a majority shareholder (and UKGI's position as manager
of this shareholding) means that HM Treasury or UKGI could exercise
a significant degree of influence over, among other things, the
election of directors and appointment of senior management, the RBS
Group's (including the NWB Group's) capital strategy, dividend
policy, remuneration policy or the conduct of the RBS Group's
(including the NWB Group's) operations, and HM Treasury or UKGI's
approach depends on government policy, which could change,
including as a result of a general election. The exertion of such
influence over RBS Group could in turn have an adverse effect on
the governance or business strategy of the NWB Group.
In addition, as a wholly-owned subsidiary of RBSG plc, RBSG plc
controls the NWB Group's board of directors, corporate policies and
strategic direction. The interests of RBSG plc as an equity holder
and as the NWB Group's parent may differ from the interests of the
NWB Group or of potential investors in the NWB Group's
securities.
Financial resilience risk
The NWB Group may not meet targets or generate sustainable
returns.
As part of the RBS Group's strategy, the NWB Group has principally
become a UK-focussed domestic banking group and is included in a
number of financial, capital and operational targets for the RBS
Group as part of its Purpose-led Strategy including in respect of:
leverage ratio targets, funding plans and requirements, reductions
in RWAs and the timing thereof, employee engagement, diversity and
inclusion as well as environmental, social and customer
satisfaction targets. See also, 'The NWB Group's parent
company has announced a new Purpose-led strategy which will entail
a period of transformation and require an internal cultural shift
across the NWB Group. It carries significant execution and
operational risks and it may not achieve its stated aims and
targeted outcomes'.
The NWB Group's ability to meet the RBS Group and the NWB Group's
respective targets and to successfully meet its strategy are
subject to various internal and external factors and risks. These
include, but are not limited to, market, regulatory, economic and
political factors, developments relating to litigation,
governmental actions, investigations and regulatory matters, and
operational risks and risks relating to the NWB Group's business
model and strategy (including risks associated with environmental,
social and governance issues). A number of factors may impact the
Bank's ability to maintain its current CET1 ratio, including
impairments, limited organic capital generation or unanticipated
increases in RWAs. In addition, the run-down of RWAs may be
accompanied by the recognition of disposal losses which may be
higher than anticipated.
The NWB Group's ability to meet its planned reductions in its
annual underlying costs may vary considerably from year to year.
Furthermore, the focus on meeting balance sheet and cost reduction
targets may result in limited investment in other areas which could
affect the NWB Group's long-term product offering or competitive
position and its ability to meet its other targets, including those
related to customer satisfaction.
There is no certainty that the RBS Group's Purpose-led Strategy
will be successfully executed, that the NWB Group will meet its
targets and expectations, or that the NWB Group will be a viable,
competitive or profitable banking business.
The NWB Group has significant exposure to counterparty and borrower
risk.
The NWB Group has exposure to many different industries, customers
and counterparties, and risks arising from actual or perceived
changes in credit quality and the recoverability of monies due from
borrowers and other counterparties are inherent in a wide range of
the NWB Group's businesses. The NWB Group is exposed to credit risk
if a customer, borrower or counterparty defaults, or under IFRS 9,
suffers a sufficiently significant deterioration of credit quality
such that, under SICR ('significant increases in credit risk')
rules, it moves to Stage 2 for impairment calculation purposes. The
NWB Group's lending strategy and associated processes may fail to
identify or anticipate weaknesses or risks in a particular sector,
market or borrower, or fail to adequately value physical or
financial collateral. This may result in increased default
rates or a higher loss given default for loans, which may, in turn,
impact the NWB Group's profitability. See 'Capital and risk
management - Credit Risk'.
The credit quality of the NWB Group's borrowers and other
counterparties is impacted by prevailing economic and market
conditions and by the legal and regulatory landscape in the UK and
any deterioration in such conditions or changes to legal or
regulatory landscapes could worsen borrower and counterparty credit
quality and consequently impact the NWB Group's ability to enforce
contractual security rights. See also, 'The NWB Group faces
increased political and economic risks and uncertainty in the UK
and global markets'. In particular, developments relating to Brexit
or the consequences thereof, may adversely impact credit quality in
the UK and the resulting negative economic outlook could drive an
increased level of credit impairments reflecting the more
forward-looking nature of IFRS 9. See also 'Prevailing uncertainty
regarding the terms of the UK's withdrawal from the European Union
has adversely affected and will continue to affect the NWB
Group'.
Within the UK, the level of household indebtedness remains high
although the pace of consumer credit growth has slowed during
2019. The ability of such households to service their
debts could be challenged by a period of high unemployment or
increased interest rates. In particular, the NWB Group may be
affected by volatility in property prices (including as a result of
Brexit and the general UK political climate) given that the NWB
Group's mortgage loan and wholesale property portfolio as at 31
December 2019, amounted to £124.1 billion,
representing 58.7% of the NWB Group's customer loan exposure.
If property prices were to weaken this could lead to higher
impairment charges, particularly if default rates also increase. In
addition, the NWB Group's credit risk may be exacerbated if the
collateral that it holds cannot be realised as a result of market
conditions or regulatory intervention or if it is liquidated at
prices not sufficient to recover the full amount of the loan or
derivative exposure that is due to the NWB Group. This is most
likely to occur during periods of illiquidity or depressed asset
valuations.
Concerns about, or a default by, a financial institution could lead
to significant liquidity problems and losses or defaults by other
financial institutions, since the commercial and financial
soundness of many financial institutions is closely related and
inter-dependent as a result of credit, trading, clearing and other
relationships. Any perceived lack of creditworthiness of a
counterparty may lead to market-wide liquidity problems and losses
for the NWB Group. This systemic risk may also adversely affect
financial intermediaries, such as clearing agencies, clearing
houses, banks, securities firms and exchanges with which the NWB
Group interacts on a daily basis. See also, 'The NWB Group may not
be able to adequately access sources of liquidity and
funding'.
As a result, borrower and counterparty credit quality may cause
accelerated impairment charges under IFRS 9, increased repurchase
demands, higher costs, additional write-downs and losses for the
NWB Group and an inability to engage in routine funding
transactions.
The NWB Group operates in markets that are highly competitive, with
increasing competitive pressures and technology
disruption.
The market for UK financial services is highly competitive.
The NWB Group expects such competition to continue or intensify in
response to evolving customer behaviour, technological changes
(including the growth of digital banking, including from fintech
entrants), competitor behaviour, new entrants to the market
(including non-traditional financial services providers such as
large retail or technology conglomerates, who may have competitive
advantages in scale, technology and customer engagement),
competitive foreign-exchange offerings, industry trends resulting
in increased disaggregation or unbundling of financial services or
conversely the re-intermediation of traditional banking services,
and the impact of regulatory actions and other factors. In
particular, developments in the financial sector resulting from new
banking, lending and payment solutions offered by rapidly evolving
incumbents, challengers and new entrants, notably with respect to
payment services and products, and the introduction of disruptive
technology may impede the NWB Group's ability to grow or retain its
market share and impact its revenues and profitability,
particularly in its key UK retail banking segment. Moreover,
innovations such as biometrics, artificial intelligence, the cloud,
blockchain, and quantum computing may rapidly facilitate industry
transformation. These trends may be catalysed by various
regulatory and competition policy interventions, particularly as a
result of the UK initiative on Open Banking and other remedies
imposed by the Competition and Markets Authority ('CMA') which are
designed to further promote competition within retail banking, as
well as the competition-enhancing measures under the RBS Group's
Alternative Remedies Package. See also, 'The cost of implementing
the Alternative Remedies Package could be more onerous than
anticipated'.
Increasingly many of the products and services offered by the NWB
Group are, and will become, technology intensive for example
Bό, Mettle, Esme, FreeAgent, Tyl, APtimise and
Path, some of the NWB Group's recent fintech ventures. The NWB
Group's ability to develop digital solutions that comply with
related regulatory changes has become increasingly important to
retaining and growing the NWB Group's customer business in the UK.
There can be no certainty that the NWB Group's innovation strategy
(which includes investment in its IT capability intended to address
the material increase in customer use of online and mobile
technology for banking as well as selective acquisitions, which
carry associated risks) will be successful or that it will allow
the NWB Group to continue to grow such services in the future.
Certain of the NWB Group's current or future competitors may be
more successful in implementing innovative technologies for
delivering products or services to their customers. The NWB Group
may also fail to identify future opportunities or derive benefits
from disruptive technologies in the context of rapid technological
innovation, changing customer behaviour and growing regulatory
demands, including the UK initiative on Open Banking (PSD2) and
Open Finance (for which the FCA announced a call for input in
December 2019), resulting in increased competition from both
traditional banking businesses as well as new providers of
financial services, including technology companies with strong
brand recognition, that may be able to develop financial services
at a lower cost base.
Furthermore, the NWB Group's competitors may be better able to
attract and retain customers and key employees and may have access
to lower cost funding and/or be able to attract deposits on more
favourable terms than the NWB Group. Although the NWB Group invests
in new technologies and participates in industry and research led
initiatives aimed at developing new technologies, such investments
may be insufficient or ineffective, especially given the NWB
Group's focus on its cost savings targets. This may limit
additional investment in areas such as financial innovation and
therefore could affect the NWB Group's offering of innovative
products or technologies for delivering products or services to
customers and its competitive position. Furthermore, the
development of innovative products depends on the NWB Group's
ability to produce underlying high quality data, failing which its
ability to offer innovative products may be
compromised.
If the NWB Group is unable to offer competitive, attractive and
innovative products that are also profitable, it will lose market
share, incur losses on some or all of its activities and lose
opportunities for growth. In this context, the NWB Group is
investing in the automation of certain solutions and interactions
within its customer-facing businesses, including through artificial
intelligence. Such initiatives may result in operational,
reputational and conduct risks if the technology used is defective,
or is not fully integrated into the NWB Group's current solutions
or does not deliver expected cost savings. The investment in
automated processes will likely also result in increased short-term
costs for the NWB Group.
In addition, recent and future disposals and restructurings by the
NWB Group, the implementation of the RBS Group's Purpose-led
Strategy and delivery on its climate ambition, cost-reduction
measures, as well as employee remuneration constraints, may also
have an impact on the NWB Group's ability to compete effectively
and intensified competition from incumbents, challengers and new
entrants in the NWB Group's core markets could affect the NWB
Group's ability to maintain satisfactory returns. See also,
'The NWB Group's parent company has announced a new Purpose-led
strategy which will entail a period of transformation and require
an internal cultural shift across the NWB Group. It carries
significant execution and operational risks and it may not achieve
its stated aims and targeted outcomes'. Moreover,
activist investors have increasingly become engaged and
interventionist in recent years, which may pose a threat to the RBS
Group's strategic initiatives. Furthermore, continued
consolidation in certain sectors of the financial services industry
could result in the NWB Group's remaining competitors gaining
greater capital and other resources, including the ability to offer
a broader range of products and services and geographic diversity,
or the emergence of new competitors.
The NWB Group may not meet the prudential regulatory requirements
for capital or manage its capital effectively, which could trigger
the execution of certain management actions or recovery
options.
The RBS Group and NWB Plc (on a standalone basis) are required by
regulators in the UK, the EU and other jurisdictions in which they
undertake regulated activities to maintain adequate financial
resources. Adequate capital also gives the RBS Group (including the
NWB Group) financial flexibility in the face of turbulence and
uncertainty in the global economy and specifically in their core UK
and European markets.
As at 31 December 2019, NWB Plc's CET1 ratio was 15.9%. The
RBS Group currently targets to maintain its CET1 ratio at 13-14%
over the medium to long term. The RBS Group's target capital ratio
is based on a combination of its expected regulatory requirements
and internal modelling, including stress scenarios and management's
and/or the PRA's views on appropriate buffers above minimum
operating levels.
The RBS Group's current capital strategy for NWB Plc is based on:
the expected accumulation of additional capital through the accrual
of profits over time; the receipt of RWAs from other RBS Group
entities; RWA growth in the form of regulatory uplifts and lending
growth and other capital management initiatives which focus on
improving capital efficiency through improved data and upstreaming
of dividends from NWB Plc to RBSG plc.
A number of factors may impact the NWB Group's ability to maintain
its current CET1 ratio target and achieve its capital strategy.
These include, amongst other things:
●
a
depletion of its capital resources through increased costs or
liabilities, reduced profits or losses (including as a result of
extreme one-off incidents such as cyber, fraud or conduct issues)
or, sustained periods of low or lower interest rates, reduced asset
values resulting in write-downs, impairments, changes in accounting
policy, accounting charges or foreign exchange
movements;
●
a
failure to reduce RWAs in accordance within the timeline
contemplated by the RBS Group's capital plan;
●
an
increase in the quantum of RWAs in excess of that expected,
including due to regulatory changes; and
●
changes
in prudential regulatory requirements including NWB Plc's Total
Capital Requirement set by the PRA, including Pillar 2 requirements
and regulatory buffers (including the increased 2% countercyclical
capital buffer for UK banks with effect from 16 December 2020), as
well as any applicable scalars.
In addition to regulatory capital, NWB Plc is required to maintain
a set quantum of internal MREL set as a percentage of its RWAs,
which comprises loss-absorbing senior funding and regulatory
capital instruments internally issued (indirectly) up to RBSG plc.
The Bank of England has identified single point-of-entry as the
preferred resolution strategy for RBS Group. As a result, RBSG plc
is the only RBS Group entity that is able to externally issue
securities that count towards the RBS Group's MREL requirements,
the proceeds of which can then be downstreamed to meet the internal
MREL issuance requirements of its operating entities, including NWB
Plc, as required. NWB Plc is therefore dependent on RBSG
plc's ability to raise external MREL securities in order to meet
the internal MREL requirements of NWB. See also, 'The NWB Group is
reliant on the RBS Group for capital and funding support, and is
substantially reliant on the RBSG plc's ability to issue sufficient
amounts of external MREL securities and downstream the proceeds to
the NWB Group'.
If, under a stress scenario, the level of capital or MREL falls
outside of risk appetite, there are a range of recovery management
actions (focussed on risk reduction and mitigation) that the NWB
Group could take to manage its capital levels, which may not be
sufficient to restore adequate capital levels. Under the EU Bank
Recovery and Resolution Directive ('BRRD'), as implemented in the
UK, the RBSG Group must maintain a recovery plan acceptable to its
regulator, such that a breach of the NWB Group's applicable capital
or leverage requirements may trigger the application of the RBS
Group's recovery plan to remediate a deficient capital position.
The RBS Group's regulator may request that the NWB Group carry out
certain capital management actions or, if the RBS Group's CET1
ratio falls below 7%, certain regulatory capital
instruments issued by the RBS Group will be written-down or
converted into equity and there may be an issue of additional
equity by the RBS Group, which could result in the dilution of the
RBS Group's existing shareholders. The success of such issuances
will also be dependent on favourable market conditions and the RBS
Group may not be able to raise the amount of capital required or on
acceptable terms or at all. Separately, the RBS Group may address a
shortage of capital by taking action to reduce leverage exposure
and/or RWAs via asset or business disposals. Such actions may, in
turn, affect, among other things, the NWB Group's product offering,
credit ratings, ability to operate its businesses, pursue its
current strategies and pursue strategic opportunities, any of which
may affect the underlying profitability of the NWB Group and future
growth potential. See also, 'The RBS Group (including the NWB Group) may
become subject to the application of UK statutory stabilisation or
resolution powers which may result in, among other actions, the
write-down or conversion of the NWB Group's Eligible
Liabilities'.
The NWB Group may not be able to adequately access sources of
liquidity and funding.
The NWB Group is required to access sources of liquidity and
funding through retail and wholesale deposits, as well as through
the debt capital markets. As at 31 December 2019, the NWB Group
held £39.7 billion in deposits and the level of deposits may
fluctuate due to factors outside the NWB Group's control, such as a
loss of confidence (including in other RBS Group entities),
increasing competitive pressures for retail customer deposits or
the reduction or cessation of deposits by foreign wholesale
depositors, which could result in a significant outflow of deposits
within a short period of time. An inability to grow, or any
material decrease in, the NWB Group's deposits could, particularly
if accompanied by one of the other factors described above,
materially affect the NWB Group's ability to satisfy its liquidity
or funding needs.
If the NWB Group's liquidity position were to come under stress,
and if the NWB Group were unable to raise funds through deposits or
in the debt capital markets on acceptable terms or at all, its
liquidity position could be adversely affected and it might be
unable to meet deposit withdrawals on demand or at their
contractual maturity, to repay borrowings as they mature, to meet
its obligations under committed financing facilities, to comply
with regulatory funding requirements, to undertake certain capital
and/or debt management activities, or to fund new loans,
investments and businesses. The NWB Group may need to liquidate
unencumbered assets to meet its liabilities, including disposals of
assets not previously identified for disposal to reduce its funding
commitments. In a time of reduced liquidity, the NWB Group may be
unable to sell some of its assets, or may need to sell assets at
depressed prices, which in either case could negatively affect the
NWB Group's results.
The NWB Group is reliant on the RBS Group for capital and funding
support, and is substantially reliant on RBSG plc's ability to
issue sufficient amounts of external MREL securities and downstream
the proceeds to the NWB Group.
NWB Plc receives capital and funding from the RBS Group. NWB Plc
has set target levels for different tiers of capital and for the
internal MREL, as percentages of its RWAs. The level of capital and
funding required for NWB Plc to meet its internal targets is
therefore a function of the level of RWAs and its leverage exposure
in NWB Plc and this may vary over time.
NWB Plc's internal MREL comprises the capital value of regulatory
capital instruments and loss-absorbing senior funding issued by NWB
Plc to its ultimate parent, RBSG plc. The Bank of England has
identified that the preferred resolution strategy for RBS Group is
as a single point of entry. As a result, only RBSG plc is able to
issue Group MREL eligible liabilities to third-party investors,
using the proceeds to fund the internal MREL targets and/or
requirements of its operating entities, including NWB Plc. NWB Plc
is therefore dependent on RBSG plc to fund its internal capital
targets and its ability to source appropriate funding at an RBSG
plc level to support this. NWB Plc is also dependent on RBSG plc to
fund its internal MREL target over time and its ability to raise
and maintain sufficient amounts of external MREL liabilities to
support this.
If RBSG plc is unable to issue adequate levels of MREL securities
such that it is unable to downstream sufficient amounts to the NWB
Plc, this could lead to a failure of the NWB Group to meet its own
individual internal MREL requirements as well as the internal MREL
requirements of subsidiaries within the NWB Group. See also, 'The
NWB Group may not meet the prudential regulatory requirements for
capital or manage its capital effectively, which could trigger the
execution of certain management actions or recovery
options'.
Any reduction in the credit rating assigned to RBSG plc, any of its
subsidiaries (including NWB Plc or other NWB Group subsidiaries) or
any of their respective debt securities could adversely affect the
availability of funding for the NWB Group, reduce its liquidity
position and increase the cost of funding.
Rating agencies regularly review RBSG plc, NWB Plc and other RBS
Group entity credit ratings, which could be negatively affected by
a number of factors that can change over time including, the credit
rating agency's assessment of the NWB Group's strategy and
management's capability; its financial condition including in
respect of profitability, asset quality, capital, funding and
liquidity; the level of political support for the industries in
which the NWB Group operates; the implementation of structural
reform; the legal and regulatory frameworks applicable to the NWB
Group's legal structure; business activities and the rights of its
creditors; changes in rating methodologies; changes in the relative
size of the loss-absorbing buffers protecting bondholders and
depositors; the competitive environment, political and economic
conditions in the NWB Group's key markets (including the impact of
Brexit and any further Scottish independence referendum); any
reduction of the UK's sovereign credit rating and market
uncertainty. See also, 'The NWB Group's parent company has
announced a new Purpose-led strategy which will entail a period of
transformation and require an internal cultural shift across the
NWB Group. It carries significant execution and operational risks
and it may not achieve its stated aims and targeted
outcomes'.
In addition, credit ratings agencies are increasingly taking into
account environmental, social and governance ("ESG") factors,
including climate risk, as part of the credit ratings analysis, as
are investors in their investment decisions.
Any reductions in the credit ratings of RBSG plc, NWB Plc or of
certain other RBS Group entities, including, in particular,
downgrades below investment grade, or a deterioration in the
capital markets' perception of the NWB Group's financial resilience
could significantly affect the NWB Group's access to money markets,
reduce the size of its deposit base and trigger additional
collateral or other requirements in derivatives contracts and other
secured funding arrangements or the need to amend such
arrangements, which could adversely affect the NWB Group's (and, in
particular, NWB Plc's) cost of funding and its access to capital
markets and could limit the range of counterparties willing to
enter into transactions with the NWB Group (and, in particular, NWB
Plc). This could in turn adversely impact its competitive
position and threaten the prospects of the NWB Group in the short
to medium-term.
The NWB Group may be adversely affected if the RBS Group fails to
meet the requirements of regulatory stress tests.
The RBS Group is subject to annual stress tests by its regulator in
the UK and is also subject to stress tests by European regulators
with respect to RBSG plc, NWM NV and Ulster Bank Ireland DAC.
Stress tests are designed to assess the resilience of banks to
potential adverse economic or financial developments and ensure
that they have robust, forward-looking capital planning processes
that account for the risks associated with their business profile.
If the stress tests reveal that a bank's existing regulatory
capital buffers are not sufficient to absorb the impact of the
stress, then it is possible that the bank will need to take action
to strengthen its capital position.
Failure by the RBS Group to meet the quantitative and qualitative
requirements of the stress tests as set forth by its UK regulator
or those elsewhere may result in: the RBS Group's regulators
requiring the RBS Group to generate additional capital,
reputational damage, increased supervision and/or regulatory
sanctions, restrictions on capital distributions and loss of
investor confidence. This may, in turn, negatively affect the NWB
Group.
The NWB Group could incur losses or be required to maintain higher
levels of capital as a result of limitations or failure of various
models.
Given the complexity of the NWB Group's business, strategy and
capital requirements, the NWB Group relies on analytical models for
a wide range of purposes, including to manage its business, assess
the value of its assets and its risk exposure, as well as to
anticipate capital and funding requirements (including to
facilitate the RBS Group's mandated stress testing). In addition,
the NWB Group utilises models for valuation, credit approvals,
calculation of loan impairment charges on an IFRS 9 basis,
financial reporting and for financial crime and fraud risk
management. The NWB Group's models, and the parameters and
assumptions on which they are based, are periodically reviewed and
updated to maximise their accuracy.
Such models are inherently designed to be predictive in nature.
Failure of these models, including due to errors in model design or
inputs, to accurately reflect changes in the micro and
macroeconomic environment in which the NWB Group operates, to
capture risks and exposures at the subsidiary level, to be updated
in line with the RBS Group's or the NWB Group's current business
model or operations, or findings of deficiencies by the RBS Group's
(and in particular, the NWB Group's) regulators (including as part
of the RBS Group's mandated stress testing) may result in increased
capital requirements or require management action. The NWB Group
may also face adverse consequences as a result of actions based on
models that are poorly developed, implemented or used, models that
are based on inaccurate or compromised data or as a result of the
modelled outcome being misunderstood, or by such information being
used for purposes for which it was not designed.
The NWB Group's financial statements are sensitive to the
underlying accounting policies, judgments, estimates and
assumptions.
The preparation of financial statements requires management to make
judgments, estimates and assumptions that affect the reported
amounts of assets, liabilities, income, expenses, exposures and
RWAs. Due to the inherent uncertainty in making estimates
(particularly those involving the use of complex models), future
results may differ from those estimates. Estimates, judgments,
assumptions and models take into account historical experience and
other factors, including market practice and expectations of future
events that are believed to be reasonable under the
circumstances.
The accounting policies deemed critical to the NWB Group's results
and financial position, based upon materiality and significant
judgments and estimates, which include loan impairment provisions,
are set out in 'Critical accounting policies and key sources of
estimation uncertainty' on page 91. New accounting standards
and interpretations that have been issued by the International
Accounting Standards Board but which have not yet been adopted by
the NWB Group are discussed in 'Accounting developments' on
page 91.
Changes in accounting standards may materially impact the NWB
Group's financial results.
Changes in accounting standards or guidance by accounting bodies or
in the timing of their implementation, whether immediate or
foreseeable, could result in the NWB Group having to recognise
additional liabilities on its balance sheet, or in further
write-downs or impairments to its assets and could also
significantly impact the financial results, condition and prospects
of the NWB Group.
The valuation of financial instruments, including derivatives,
measured at fair value can be subjective, in particular where
models are used which include unobservable inputs. Generally, to
establish the fair value of these instruments, the NWB Group relies
on quoted market prices or, where the market for a financial
instrument is not sufficiently credible, internal valuation models
that utilise observable market data. In certain circumstances, the
data for individual financial instruments or classes of financial
instruments utilised by such valuation models may not be available
or may become unavailable due to prevailing market conditions. In
such circumstances, the NWB Group's internal valuation models
require the NWB Group to make assumptions, judgments and estimates
to establish fair value, which are complex and often relate to
matters that are inherently uncertain.
With effect from 1 January 2019, the NWB Group adopted IFRS 16
Leases, as disclosed in the Accounting policies. This increased
Other assets by £1.0 billion and Other liabilities by
£1.4 billion. While adoption of this standard has no effect on
the NWB Group's cash flows, it has impacted financial ratios, which
may influence investors' perception of the financial condition of
the NWB Group.
The RBS Group (including the NWB Group) may become subject to the
application of UK statutory stabilisation or resolution powers
which may result in, among other actions, the write-down or
conversion of the NWB Group's Eligible Liabilities.
The Banking Act 2009, as amended ('Banking Act'), implemented the
BRRD in the UK and created a special resolution regime ('SRR').
Under the SRR, HM Treasury, the Bank of England and the PRA and FCA
(together 'Authorities') are granted substantial powers to resolve
and stabilise UK-incorporated financial institutions. Five
stabilisation options exist under the current SRR: (i) transfer of
all of the business of a relevant entity or the shares of the
relevant entity to a private sector purchaser; (ii) transfer of all
or part of the business of the relevant entity to a 'bridge bank'
wholly-owned by the Bank of England; (iii) transfer of part of the
assets, rights or liabilities of the relevant entity to one or more
asset management vehicles for management of the transferor's
assets, rights or liabilities; (iv) the write-down, conversion,
transfer, modification, or suspension of the relevant entity's
equity, capital instruments and liabilities ('Eligible
Liabilities'); and (v) temporary public ownership of the relevant
entity. These tools may be applied to RBSG plc as the parent
company or to the NWB Group, as an affiliate, where certain
conditions are met (such as, whether the firm is failing or likely
to fail, or whether it is reasonably likely that action will be
taken (outside of resolution) that will result in the firm no
longer failing or being likely to fail). Moreover, the SRR provides
for modified insolvency and administration procedures for relevant
entities, and confers ancillary powers on the Authorities,
including the power to modify or override certain contractual
arrangements in certain circumstances. The Authorities are also
empowered by order to amend the law for the purpose of enabling the
powers under the SRR to be used effectively. Such orders may
promulgate provisions with retrospective
applicability.
Under the Banking Act, the Authorities are generally required to
have regard to specified objectives in exercising the powers
provided for by the Banking Act. One of the objectives (which is
required to be balanced as appropriate with the other specified
objectives) refers to the protection and enhancement of the
stability of the financial system of the UK. Moreover, the 'no
creditor worse off' safeguard contained in the Banking Act may not
apply in relation to an application of the separate write-down and
conversion power relating to capital instruments under the Banking
Act, in circumstances where a stabilisation power is not also used;
holders of debt instruments which are subject to the power may,
however, have ordinary shares transferred to or issued to them by
way of compensation.
Uncertainty exists as to how the Authorities may exercise the
powers granted to them under the Banking Act including the
determination of actions undertaken in relation to the ordinary
shares and other securities issued by RBS Group (including the
NWB Group) and may depend on factors outside of the NWB Group's
control. Moreover, the relevant provisions of the Banking Act
remain untested in practice.
If the NWB Group (or any other RBS Group entity) is at or is
approaching the point of non-viability such that regulatory
intervention is required, any exercise of the resolution regime
powers by the Authorities may adversely affect holders of the NWB
Group's Eligible Liabilities that fall within the scope of
resolution regime powers. This may result in various actions
being undertaken in relation to the NWB Group and any Eligible
Liabilities of the NWB Group, including write-down, conversion,
transfer or modification which may adversely affect the financial
results, condition and prospects of the NWB Group.
The RBS Group is subject to Bank of England oversight in respect of
resolution, and the NWM Group could be adversely affected should
the Bank of England deem the RBS Group's preparations to be
inadequate.
The RBS Group is subject to regulatory oversight by the Bank of
England, and is required (under the PRA rulebook) to carry out an
assessment of its preparations for resolution, submit a report of
the assessment to the PRA, and disclose a summary of this
report. The initial report is due to be submitted to the PRA
on 2 October 2020 and the Bank of England's assessment of RBS
Group's preparations is scheduled to be released on 11 June
2021.
The RBS Group has dedicated significant resources towards the
preparation of the RBS Group for a potential resolution
scenario. However, if the assessment reveals that the RBS
Group is not adequately prepared to be resolved, or does not have
adequate plans in place to meet resolvability requirements by 1
January 2022, the RBS Group may be required to take action to
enhance its preparations to be resolvable, resulting in additional
cost and the dedication of additional resources. Such actions
may adversely affect the RBS Group and/or the NWB Group, resulting
in restrictions on maximum individual and aggregate exposures, a
requirement to dispose of specified assets, a requirement to cease
carrying out certain activities and/or maintaining a specified
amount of MREL. This may also result in reputational damage
and/or loss of investor confidence.
Legal, regulatory and conduct risk
The NWB Group's businesses are subject to substantial regulation
and oversight, which are constantly evolving and may adversely
affect the NWB Group.
The NWB Group is subject to extensive laws, regulations, corporate
governance practice and disclosure requirements, administrative
actions and policies in each jurisdiction in which it operates.
Many of these have been introduced or amended recently and are
subject to further material changes, which may increase compliance
and conduct risks. The NWB Group expects government and regulatory
intervention in the financial services industry to remain high for
the foreseeable future.
In recent years, regulators and governments have focussed on
reforming the prudential regulation of the financial services
industry and the manner in which the business of financial services
is conducted. Amongst others, measures have included: enhanced
capital, liquidity and funding requirements, implementation of the
UK ring-fencing regime, implementation and strengthening of the
recovery and resolution framework applicable to financial
institutions in the UK, the EU and the US, financial industry
reforms (including in respect of MiFID II), enhanced data privacy
and IT resilience requirements, enhanced regulations in respect of
the provision of 'investment services and activities', and
increased regulatory focus in certain areas, including conduct,
consumer protection regimes, anti-money laundering, anti-bribery,
anti-tax evasion, payment systems, sanctions and anti-terrorism
laws and regulations. This has resulted in the NWB Group
facing greater regulation and scrutiny in the UK and other
countries in which it operates.
Recent regulatory changes, proposed or future developments and
heightened levels of public and regulatory scrutiny in the UK, the
EU and the US have resulted in increased capital, funding and
liquidity requirements, changes in the competitive landscape,
changes in other regulatory requirements and increased operating
costs, and have impacted, and will continue to impact, product
offerings and business models. In particular, the NWB Group is
required to continue to comply with regulatory requirements in
respect of the implementation of the UK ring-fencing regime and to
ensure operational continuity in resolution; the steps required to
ensure such compliance entail significant costs, and also impose
significant operational, legal and execution risk. Serious
consequences could arise should the NWB Group be found to be
non-compliant with such regulatory requirements. Such changes may
also result in an increased number of regulatory investigations and
proceedings and have increased the risks relating to the NWB
Group's ability to comply with the applicable body of rules and
regulations in the manner and within the time frames
required.
Any of these developments (including any failure to comply with new
rules and regulations) could have a significant impact on the NWB
Group's authorisations and licences, the products and services that
the NWB Group may offer, its reputation and the value of its
assets, the NWB Group's operations or legal entity structure, and
the manner in which the NWB Group conducts its business. Areas in
which, and examples of where, governmental policies, regulatory and
accounting changes and increased public and regulatory scrutiny
could have an adverse impact (some of which could be material) on
the NWB Group include, but are not limited to, those set out above
as well as the following:
●
general
changes in government, central bank, regulatory or competition
policy, or changes in regulatory regimes that may influence
investor decisions in the markets in which the NWB Group
operates;
●
amendments
to the framework or requirements relating to the quality and
quantity of regulatory capital to be held by the NWB Group as well
as liquidity and leverage requirements, either on a solo,
consolidated or subgroup level;
●
changes
to the design and implementation of national or supranational
mandated recovery, resolution or insolvency regimes or the
implementation of additional or conflicting loss-absorption
requirements, including those mandated under UK rules, the BRRD or
MREL;
●
additional
rules and regulatory initiatives and review relating to customer
protection and resolution of disputes and complaints, including
increased focus by regulators (including the Financial Ombudsman
Service) on how institutions conduct business, particularly with
regard to the delivery of fair outcomes for customers and
orderly/transparent markets;
●
rules
and regulations relating to, and enforcement of, anti-corruption,
anti-bribery, anti-money laundering, anti-terrorism, sanctions,
anti-tax evasion or other similar regimes;
●
the
imposition of additional restrictions on the NWB Group's ability to
compensate its senior management and other employees and increased
responsibility and liability rules applicable to senior and key
employees;
●
rules
relating to foreign ownership, expropriation, nationalisation and
confiscation of assets;
●
changes
to corporate governance practice and disclosure requirements,
senior manager responsibility, corporate structures and conduct of
business rules;
●
financial
market infrastructure reforms establishing new rules applying to
investment services, short selling, market abuse, derivatives
markets and investment funds;
●
increased attention to the
protection and resilience of, and competition and innovation in, UK
payment systems and retail banking developments relating to the UK
initiative on Open Banking, Open Finance and
the European directive on payment services;
●
new
or increased regulations relating to customer data and privacy
protection as well as IT controls and resilience, including the
GDPR;
●
the
introduction of, and changes to, taxes, levies or fees applicable
to the NWB Group's operations, such as the imposition of a
financial transaction tax, changes in tax rates, changes in the
scope and administration of the Bank Levy, increases in the bank
corporation tax surcharge in the UK, restrictions on the tax
deductibility of interest payments or further restrictions imposed
on the treatment of carry-forward tax losses that reduce the value
of deferred tax assets and require increased payments of
tax;
●
laws
and regulations in respect of climate change and sustainable
finance (including ESG) considerations; and
●
other
requirements or policies affecting the NWB Group and its
profitability or product offering, including through the imposition
of increased compliance obligations or obligations which may lead
to restrictions on business growth, product offerings, or
pricing.
To support the UK's goal of Net Zero by 2050, the UK and Scottish
governments and UK and international regulators, such as the PRA
and European Commission, are actively seeking to develop new and
existing regulations directly and indirectly focussed on climate
change and the associated financial risks. Regulatory and policy
developments, such as the minimum energy efficient requirements for
residential and commercial real estate, may have a significant
impact on the markets in which the NWB Group operates, especially
mortgage lending, and its associated credit, market and financial risk
profile.
In a Joint Declaration on Climate Change published in July 2019,
the PRA, FCA, Financial Reporting Council and The Pensions
Regulator set out their commitment to working collaboratively to
address the risks of climate change. In October 2019, the RBS
Group submitted its initial plan to meet the PRA's supervisory
expectations in its supervisory statement (SS 3/19) which sets
forth an expectation that regulated entities adopt a Board-level
strategic approach to managing and mitigating the financial risks
of climate change and embed the management of them into their
governance frameworks, subject to existing prudential regulatory
supervisory tools (including stress testing and individual and
systemic capital requirements). In addition, The Bank of England
announced in December 2019 that it will use the 2021 biennial
exploratory scenario (BES) to stress banks on certain climate
scenarios to test the resilience of the current business models of
the largest banks, insurers and the financial system to the
physical and transition risks from climate change. The
prudential regulation of climate risk will be an important driver
in how the RBS Group otherwise decides how it allocates capital and
further develop its risk appetite for financing certain types of
activity or engaging with counterparties that do not align to a
transition to a net zero economy.
The FCA have also announced that climate change and green finance
will be priorities with a focus on disclosure, integrating climate
change into decision-making and consumers' access to green
financial services. The NWB Group also recognises various
legislative actions and proposals by, among others, the European
Commission's Action Plan on Sustainable Finance which include a
taxonomy on sustainable finance. Many of these legislative and
regulatory initiatives, and especially the EU taxonomy, are focused
on developing standardised definitions for the green and
sustainable criteria of assets and liabilities, which could change
over time and impact the NWB Group's recognition of its climate
financing activity and lead to reputational and conduct risk on its
own sustainable financing activity.
Changes in laws, rules or regulations, or in their interpretation
or enforcement, or the implementation of new laws, rules or
regulations, including contradictory or conflicting laws, rules or
regulations by key regulators or policymakers in different
jurisdictions, or failure by the NWB Group to comply with such
laws, rules and regulations, may adversely affect the NWB Group's
business, financial condition and results. In addition, uncertainty
and insufficient international regulatory coordination as enhanced
supervisory standards are developed and implemented may adversely
affect the NWB Group's ability to engage in effective business,
capital and risk management planning.
The NWB Group is subject to a number
of legal and regulatory actions and investigations including
conduct-related reviews, anti-money laundering and redress
projects, the outcomes of which are inherently difficult to
predict, and which could have an adverse effect on the NWB
Group.
The NWB Group's operations are diverse and complex and it operates
in legal and regulatory environments that expose it to potentially
significant legal proceedings, and civil and criminal regulatory
and governmental actions. The NWB Group has settled a number of
legal and regulatory actions over the past several years but
continues to be, and may in the future be, involved in such actions
in the UK, the US and other jurisdictions.
The legal and regulatory actions specifically referred to below
are, in the NWB Group's view, the most significant legal and
regulatory actions to which the NWB Group is currently exposed.
However, the NWB Group is also subject to a number of ongoing
reviews, investigations and litigation proceedings relating to,
among other matters, the setting of benchmark rates such as LIBOR
and related derivatives trading, product mis-selling, customer
mistreatment, anti-money laundering, antitrust and various other
compliance issues. Legal and regulatory actions are subject to many
uncertainties, and their outcomes, including the timing, amount of
fines or settlements or the form of any settlements, which may be
material and in excess of any related provisions, are often
difficult to predict, particularly in the early stages of a case or
investigation, and the NWB Group's expectations for resolution may
change.
In particular, the NWB Group has for a number of years been
involved in conduct-related reviews and redress projects, including
a review of certain historical customer connections in its former
Global Restructuring Group (GRG) and management of claims arising
from historical sales of payment protection insurance. In relation
to the GRG review, the NWB Group established a complaints process
in November 2016, overseen by an independent third party. The
complaints process is now closed to new complaints, although the
NWB Group continues to handle certain complaints that were made
before the deadline for new complaints passed. In addition,
the NWB Group continues to handle claims in relation to historical
sales of payment protection insurance and took an additional
provision of £604 million in third quarter of 2019, reflecting
greater than predicted complaints volumes in the lead up to the 29
August 2019 deadline for making new complaints. See 'Litigation,
investigations and reviews' of Note 28 on the consolidated accounts
for details of these matters. The NWB Group has dedicated resources
in place to manage claims and complaints relating to the above and
other conduct-related matters. Provisions taken in respect of such
matters include the costs involved in administering the various
complaints processes. Any failure to administer such processes
adequately, or to handle individual complaints fairly or
appropriately, could result in further claims as well as the
imposition of additional measures or limitations on the NWB Group's
operations, additional supervision by the NWB Group's regulators,
and loss of investor confidence.
Adverse outcomes or resolution of current or future legal or
regulatory actions, including conduct-related reviews or redress
projects, could result in restrictions or limitations on the NWB
Group's operations, and could adversely impact the NWB Group's
capital position or its ability to meet regulatory capital adequacy
requirements. Failure to comply with undertakings made by the NWB
Group to its regulators may result in additional measures or
penalties being taken against the NWB Group.
The NWB Group may not effectively manage the transition of LIBOR
and other IBOR rates to alternative risk free rates.
UK and international regulators are driving a transition from the
use of interbank offer rates (IBORs), including LIBOR, to
alternative risk free rates (RFRs). In the UK, the FCA has asserted
that they will not compel LIBOR submissions beyond 2021, thereby
jeopardising its continued availability, and have strongly urged
market participants to transition to RFRs, as the CFTC and other
regulators in the US. The NWB Group has a significant exposure to
IBORs, and continues to reference it in certain products, primarily
its commercial lending and legacy securities. Although the NWB
Group is actively engaged with customers and industry working
groups to manage the risks
relating to such exposure, and is
exploring ways to utilise RFRs to the extent possible, the legal
mechanisms to effect transition cannot be confirmed, and the impact
cannot be determined nor any associated costs accounted for, until
such time that RFRs are utilised exclusively, and there is market
acceptance on the form of alternative RFRs for different products,
and certain IBOR obligations may not be able to be changed. The
transition and uncertainties around the timing and manner of
transition to RFRs represent a number of risks for the NWB Group,
its customers and the financial services industry more widely.
Following an analysis of the NWB Group's IBOR-linked financial
products and instruments, the NWB Group has identified the
following risks: legal risks (as changes will be required to
documentation for new and the majority of existing transactions);
financial risks (which may arise from any changes in valuation of
financial instruments linked to benchmarks rates and may impact the
NWB Group's cost of funds and its risk management related financial
models); pricing risks (such as changes to benchmark rates could
impact pricing mechanisms on certain instruments); operational
risks (due to the requirement to adapt IT systems, trade reporting
infrastructure and operational processes); and conduct risks (which
include communication regarding the potential impact on customers,
and engagement with customers during the transition
period).
It is therefore currently difficult to determine to what extent the
changes will affect the NWB Group, or the costs of implementing any
relevant remedial action. Uncertainty as to the nature and extent
of such potential changes, alternative reference rates or other
reforms including the potential continuation of the publication of
LIBOR may adversely affect financial instruments using LIBOR as
benchmarks. The implementation of any alternative RFRs may be
impossible or impracticable under the existing terms of certain
financial instruments and could have an adverse effect on the value
of, return on and trading market for such financial instruments and
on the NWB Group's profitability. There is also the risk of an
adverse effect to reported performance arising from the transition
rules established by accounting bodies, as certain rules (as
proposed by the IASB) are still to be finalised.
The NWB Group operates in markets that are subject to intense
scrutiny by the competition authorities.
There is significant oversight by competition authorities of the
markets which the NWB Group operates in. The competitive landscape
for banks and other financial institutions in the UK and the rest
of Europe is rapidly changing. Recent regulatory and legal changes
have and may continue to result in new market participants and
changed competitive dynamics in certain key areas, such as in
retail and SME banking in the UK where the introduction of new
entrants is being actively encouraged by the UK
Government.
The UK retail banking sector has been subjected to intense scrutiny
by the UK competition authorities and by other bodies, including
the FCA and the Financial Ombudsman Service, in recent years,
including with a number of reviews/inquiries being carried out,
including market reviews conducted by the CMA and its predecessor
the Office of Fair Trading regarding SME banking and personal
banking products and services, the Independent Commission on
Banking and the Parliamentary Commission on Banking
Standards.
These reviews raised significant concerns about the effectiveness
of competition in the retail banking sector. The CMA's Retail
Banking Market Order 2017 imposes remedies primarily intended to
make it easier for consumers and businesses to compare personal
current account ('PCA') and SME bank products, increase the
transparency of price comparison between banks and amend PCA
overdraft charging. These remedies impose additional compliance
requirements on the RBS Group and the NWB Group and could, in
aggregate, adversely impact the NWB Group's competitive position,
product offering and revenues.
Adverse findings resulting from current or future competition
investigations may result in the imposition of reforms or remedies
which may impact the competitive landscape in which the NWB Group
operates or result in restrictions on mergers and consolidations
within the financial sector.
The cost of implementing the Alternative Remedies Package could be
more onerous than anticipated.
In connection with the implementation of the Alternative Remedies
Package (regarding the business previously described as Williams
& Glyn), an independent body ('Independent Body') has been
established to administer the Alternative Remedies Package. The
implementation of the Alternative Remedies Package has involved
costs for the NWB Group, including but not limited to the funding
commitments of £425 million for the Capability and Innovation
Fund and £350 million for the incentivised switching scheme,
both being administered by the Independent Body. Implementation of
the Alternative Remedies Package may involve additional costs for
the NWB Group and may also divert resources from the NWB Group's
operations and jeopardise the delivery and implementation of other
significant plans and initiatives. In addition, under the terms of
the Alternative Remedies Package, the Independent Body may require
the NWB Group to modify certain aspects of the NWB Group's
execution of the incentivised switching scheme, which could
increase the cost of implementation. Furthermore, should the uptake
within the incentivised switching scheme not be sufficient, the
Independent Body has the ability to extend the duration of the
scheme by up to twelve months, impose penalties of up to £50
million, and can compel the RBS Group to extend the customer base
to which the scheme applies which may result in prolonged periods
of disruption to a wider portion of the NWB Group's
business.
As a direct consequence of the incentivised switching scheme (which
comprises part of the Alternative Remedies Package), the NWB Group
will lose existing customers and deposits, which in turn will have
adverse impacts on the NWB Group's business and associated revenues
and margins. Furthermore, the capability and innovation fund (which
also comprises part of the Alternative Remedies Package) is
intended to benefit eligible competitors and negatively impact the
NWB Group's competitive position. To support the incentivised
switching initiative, upon request by an eligible bank, the RBS
Group has agreed to grant those customers which have switched to
eligible banks under the incentivised switching scheme access to
its branch network for cash and cheque handling services, which may
impact customer service quality for the NWB Group's own customers
with consequent competitive, financial and reputational
implications. The implementation of the incentivised switching
scheme is also dependent on the engagement of the eligible banks
with the incentivised switching scheme and the application of the
eligible banks to and approval by the Independent Body. The
incentivised transfer of SME customers to third party banks places
reliance on those third parties to achieve satisfactory customer
outcomes which could give rise to reputational damage to the NWB
Group if these are not forthcoming.
A failure to comply with the terms of the Alternative Remedies
Package could result in the imposition of additional measures or
limitations on the NWB Group's operations, additional supervision
by the NWB Group's regulators, and loss of investor
confidence.
Changes in tax legislation or failure to generate future taxable
profits may impact the recoverability of certain deferred tax
assets recognised by the NWB Group.
In accordance with IFRS (as adopted by the European Union), the NWB
Group has recognised deferred tax assets on losses available to
relieve future profits from tax only to the extent it is probable
that they will be recovered. The deferred tax assets are quantified
on the basis of current tax legislation and accounting standards
and are subject to change in respect of the future rates of tax or
the rules for computing taxable profits and offsetting allowable
losses.
Failure to generate sufficient future taxable profits or further
changes in tax legislation (including with respect to rates of tax)
or accounting standards may reduce the recoverable amount of the
recognised tax loss deferred tax assets, amounting to £75
million as at 31 December 2019. Changes to the treatment of
certain deferred tax assets may impact the NWB Group's capital
position. In addition, the NWB Group's interpretation or
application of relevant tax laws may differ from those of the
relevant tax authorities and provisions are made for potential tax
liabilities that may arise on the basis of the amounts expected to
be paid to tax authorities. The amounts ultimately paid may differ
materially from the amounts provided depending on the ultimate
resolution of such matters.
Legal Entity Identifier: 213800IBT39XQ9C4CP71
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date:
14 February 2020
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NATIONAL
WESTMINSTER BANK PLC (Registrant)
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By:
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/s/ Jan
Cargill
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Name:
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Jan
Cargill
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Title:
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Deputy
Secretary
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