20-F 1 dp64322_20f.htm FORM 20-F

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

_______________________________________________

 

FORM 20-F

(Mark One)

 

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

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015

 

OR

 

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

 

OR

 

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

 

Commission file number: 001-10306

 

THE ROYAL BANK OF SCOTLAND GROUP plc

(Exact name of Registrant as specified in its charter)

 

United Kingdom 

(Jurisdiction of incorporation)

 

RBS Gogarburn, PO Box 1000, Edinburgh EH12 1HQ, United Kingdom

(Address of principal executive offices)

 

Aileen Taylor, Chief Governance Officer and Board Counsel, Tel: +44 (0) 131 626 4099, Fax: +44 (0) 131 626 3081

PO Box 1000, Gogarburn, Edinburgh EH12 1HQ

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

 

 
 

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

 

Title of each class 

Name of each exchange on which registered 

American Depositary Shares, each representing 2 ordinary shares, nominal value £1 per share New York Stock Exchange
Ordinary shares, nominal value £1 per share New York Stock Exchange*

American Depositary Shares Series F, H, L, R, S, T nd U each representing one

Non-Cumulative Dollar Preference Share, Series F, H, L, R, S, T and U respectively

New York Stock Exchange
Dollar Perpetual Regulatory Tier 1 Securities New York Stock Exchange
Floating Rate Senior Notes due 2017 New York Stock Exchange
1.875% Senior Notes due 2017 New York Stock Exchange
4.70% Subordinated Notes due 2018 New York Stock Exchange
5.625% Senior Notes due 2020 New York Stock Exchange
6.125% Senior Notes due 2021 New York Stock Exchange
6.125% Subordinated Tier 2 Notes due 2022 New York Stock Exchange
6.000% Subordinated Tier 2 Notes due 2023 New York Stock Exchange
6.100% Subordinated Tier 2 Notes due 2023 New York Stock Exchange
5.125% Subordinated Tier 2 Notes due 2024 New York Stock Exchange
Leveraged CPI Linked Securities due January 13, 2020 NYSE MKT

______________________________________

*Not for trading, but only in connection with the registration of American Depositary Shares representing such ordinary shares pursuant to the requirements of the Securities and Exchange Commission.

 

 
 

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

None

_____________

 

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

Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2020

Perpetual Subordinated Contingent Convertible Additional Tier 1 Capital Notes callable 2025

Irish Stock Exchange

Irish Stock Exchange

____________

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2015, the close of the period covered by the annual report:

 

(Title of each class) 

(Number of outstanding shares) 

Ordinary shares of £1 each 11,624,563,916
11% cumulative preference shares 500,000
5½% cumulative preference shares 400,000
Non-cumulative dollar preference shares, Series F, H, L and R to U 133,839,880
Non-cumulative convertible dollar preference shares, Series 1 64,772
Non-cumulative euro preference shares, Series 1 to 3 2,044,418
Non-cumulative convertible sterling preference shares, Series 1 14,866
Non-cumulative sterling preference shares, Series 1 54,442

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

  Yes        No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

  Yes        No

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

  Yes        No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

  Yes        No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   Accelerated filer   Non-Accelerated filer  

 

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

  U.S. GAAP

 

  International Financial Reporting Standards as issued by the International Accounting Standards Board

  Other

 

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

  Item 17         Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

  Yes        No

 

 

 

 

SEC Form 20-F cross reference guide

 

Item Item Caption Pages 
     
PART I    
1 Identity of Directors, Senior Management, Not applicable
  Advisers  
     
2 Offer Statistics and Expected Timetable Not applicable
     
3 Key Information  
  Selected financial data 103, 140-141, 263-269, 367-380
  Capitalisation and indebtedness Not applicable
  Reasons for the offer and use of proceeds Not applicable
  Risk factors 37-38, 384-408
     
4 Information on the Company  
  History and development of the Company 5, 93-96, 273, 318-319, 337, 429
  Business overview 5-33, 37-41, 93,101-102, 156, 158 160-162,
  Organisational structure 93,156, 158 160-162, Exhibit 8.1
  Property, plant and equipment 273-274, 318-319, 409
     
4A Unresolved Staff Comments Not applicable
     
5 Operating and Financial Review and Prospects  
  Operating results 5-18, 25, 28, 30, 32, 85-89, 103-141, 240-261, 284-288, 350
  Liquidity and capital resources 138-141,154-168, 169-179, 265, 269, 313-317, 326-327, 328-331, 335, 350-351, 367-372, 379
  Research and development, patents, licences etc Not applicable
  Trend information 5-18, 23,37-38, 102
  Off balance sheet arrangements 222, 333-334, 336-349   
  Contractual obligations 174-177, 332, 336-337
     
     
6 Directors, Senior Management and Employees  
  Directors and senior management 34-35, 43-48, 97
  Compensation 71-89, 286-294, 357
  Board practices 34-35, 43-69, 97  
  Employees 39, 89, 94, 286
  Share ownership 79-81, 87, 257, 287
     
7 Major Shareholders and Related Party Transactions  
  Major shareholders 98, 358, 381-382,409
  Related party transactions 357-358
  Interests of experts and counsel Not applicable
     
8 Financial Information  
  Consolidated statements and other financial information 103-141, 261-365, 367-368
  Significant changes  4, 98, 358
     
9 The Offer and Listing  
  Offer and listing details 328-331, 416-417
  Plan of distribution Not applicable
  Markets 92,415-417
  Selling shareholders Not applicable
  Dilution Not applicable
  Expenses of the issue Not applicable
     
10 Additional Information  
  Share capital Not applicable
  Memorandum and articles of association 422-429
  Material contracts 381-382
  Exchange controls 421
  Taxation 418-421
  Dividends and paying agents Not applicable
  Statement of experts Not applicable
  Documents on display 429
  Subsidiary information Not applicable
     
11 Quantitative and Qualitative Disclosure 143-153, 189-260, 297-313, 369-379    
  about Market Risk  
     
12 Description of Securities other than 383
  Equity Securities  

 

 

 

     
Item Item Caption Pages
     
PART II    
13 Defaults, Dividend Arrearages and Delinquencies Not applicable
     
14 Material Modifications to the Rights of Security  
  Holders and Use of Proceeds Not applicable
     
15  Controls and Procedures 55, 58, 90-92, 262, Exhibits 12.1, 12.2
     
16  [Reserved]  
     
16A Audit Committee financial expert 56
16B Code of ethics 39, 148, 409
16C Principal Accountant Fees and services 55, 60, 294
16D Exemptions from the Listing Standards Not applicable
  for Audit Committees  
16E Purchases of Equity Securities by the Not applicable
  Issuer and Affiliated Purchasers  
16F Change in Registrant’s Certifying Accountant 409
16G Corporate Governance 47-48, 92
16H Mine Safety Disclosure Not applicable
     
     
PART III    
17 Financial Statements Not applicable
     
18 Financial Statements 261-365
     
19 Exhibit Index 442-443
  Exhibits  (including certifications)  
     
     
Signature    

 

 

 

 

 

 

 

  Strategic report Page  
  Forward-looking statements 2  
  Presentation of information 3  
  Recent developments 4  
  2015 Performance 5  
  Our progress in 2015 12  
  Chairman’s statement 13  
  Chief Executive’s review 16  
  Business model and strategy 18  
    Our Structure 19  
    Our Strategy 20  
    Our Operating Model 21  
    Our Values 21  
    Our Customers 22  
  Key economic indicators 23  
  Business review 24  
    Personal & Business Banking 25  
    Commercial & Private Banking 27  
    Corporate & Institutional Banking 30  
    Capital Resolution 32  
  Governance at a glance 34  
  Risk overview 36  
  Sustainable banking 39  
  Detailed information    
  Governance 42  
  Business review 100  
  Capital and risk management 142  
  Financial statements 261  
  Risk factors 384  
  Shareholder information 412  
  Abbreviations and acronyms 430  
  Glossary of terms 431  
  Index 438  
  Important addresses 441  
1
 

 

Forward-looking statements

 

 

Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘believe’, ‘should’, ‘intend’, ‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’, ‘objective’, ‘may’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on these expressions.

 

In particular, this document includes forward-looking statements relating, but not limited to: The Royal Bank of Scotland Group’s (RBS) restructuring, which includes the separation and divestment of Williams & Glyn, the proposed restructuring of RBS’s CIB business, the implementation of the UK ring-fencing regime, the implementation of a major development program to update RBS’s IT infrastructure and the continuation of its balance sheet reduction programme, as well as capital and strategic plans, divestments, capitalisation, portfolios, net interest margin, capital and leverage ratios and requirements liquidity, risk-weighted assets (RWAs), RWA equivalents (RWAe), Pillar 2A, return on equity (ROE), profitability, cost:income ratios, loan:deposit ratios, AT1 and other funding plans, funding and credit risk profile; litigation, government and regulatory investigations RBS’s future financial performance; the level and extent of future impairments and write-downs; including with respect to goodwill; future pension contributions and RBS’s exposure to political risks, operational risk, conduct risk and credit rating risk and to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. These statements are based on current plans, estimates, targets and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. For example, certain market risk disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.

 

Other factors that could adversely affect our results and the accuracy of forward-looking statements in this document include the risk factors and other uncertainties discussed in this document. These include the significant risks for RBS presented by the outcomes of the legal, regulatory and governmental actions and investigations that RBS is subject to (including active civil and criminal investigations) and any resulting material adverse effect on RBS of unfavourable outcomes (including where resolved by settlement); the uncertainty relating to the referendum on the UK’s membership of the European Union and the consequences of it; the separation and divestment of Williams & Glyn; RBS’s ability to successfully implement the various initiatives that are comprised in its restructuring plan, particularly the proposed restructuring of its CIB business and the balance sheet reduction programme as well as the significant restructuring required to be undertaken by RBS in order to implement the UK ring fencing regime; the significant changes, complexity and costs relating to the implementation of its restructuring, the separation and divestment of Williams & Glyn and the UK ring-fencing regime; whether RBS will emerge from its restructuring and the UK ring-fencing regime as a viable, competitive, customer focused and profitable bank; RBS’s ability to achieve its capital and leverage requirements or targets which will depend on RBS’s success in reducing the size of its business and future profitability; ineffective management of capital or changes to regulatory requirements relating to capital adequacy and liquidity or failure to pass mandatory stress tests; the ability to access sufficient sources of capital, liquidity and funding when required; changes in the credit ratings of RBS or the UK government; declining revenues resulting from lower customer retention and revenue generation in light of RBS’s strategic refocus on the UK the impact of global economic and financial market conditions (including low or negative interest rates) as well as increasing competition.

 

In addition, there are other risks and uncertainties. These include operational risks that are inherent to RBS’s business and will increase as a result of RBS’s significant restructuring; the potential negative impact on RBS’s business of actual or perceived global economic and financial market conditions and other global risks; the impact of unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices, equity prices; basis, volatility and correlation risks; heightened regulatory and governmental scrutiny and the increasingly regulated environment in which RBS operates; the risk of failure to realise the benefit of RBS’s substantial investments in its information technology and systems, the risk of failing to prevent a failure of RBS’s IT systems or to protect itself and its customers against cyber threats, reputational risks; risks relating to the failure to embed and maintain a robust conduct and risk culture across the organisation or if its risk management framework is ineffective; risks relating to increased pension liabilities and the impact of pension risk on RBS’s capital position; increased competitive pressures resulting from new incumbents and disruptive technologies; RBS’s ability to attract and retain qualified personnel; HM Treasury exercising influence over the operations of RBS; limitations on, or additional requirements imposed on, RBS’s activities as a result of HM Treasury’s investment in RBS; the extent of future write-downs and impairment charges caused by depressed asset valuations; deteriorations in borrower and counterparty credit quality; the value and effectiveness of any credit protection purchased by RBS; risks relating to the reliance on valuation, capital and stress test models and any inaccuracies resulting therefrom or failure to accurately reflect changes in the micro and macroeconomic environment in which RBS operates, risks relating to changes in applicable accounting policies or rules which may impact the preparation of RBS’s financial statements; the impact of the recovery and resolution framework and other prudential rules to which RBS is subject the recoverability of deferred tax assets by the Group; and the success of RBS in managing the risks involved in the foregoing.

 

The forward-looking statements contained in this document speak only as at the date hereof, and RBS does not assume or undertake any obligation or responsibility to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicit of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instrument.

 

2
 

 

Presentation of information

 

 

Presentation of information 

In this document, and unless specified otherwise, the term ‘company’ or ‘RBSG’ means The Royal Bank of Scotland Group plc, ‘RBS’, ‘RBS Group’ or the ‘Group’ means the company and its subsidiaries, ‘the Royal Bank’ or ‘RBS plc’ means The Royal Bank of Scotland plc and ‘NatWest’ means National Westminster Bank Plc.

 

The company publishes its financial statements in pounds sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions and thousands of millions of pounds sterling, respectively, and references to ‘pence’ represent pence in the United Kingdom (‘UK’). Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and thousands of millions of dollars, respectively, and references to ‘cents’ represent cents in the US. The abbreviation ‘€’ represents the ‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively.

 

Non-GAAP financial information 

The directors manage RBS’s performance by class of business, showing certain items in separate lines, as is presented in the business review on pages 103 to 136 (the “non-statutory basis”).

 

The following items, which were previously reported separately after operating profit, are now reported within operating profit: Own credit adjustments; Gain/(loss) on redemption of own debt; Write-down of goodwill and Strategic disposals. RFS Holdings minority interest (RFS MI) was restated for periods up to and including 2014 only.

 

The non-statutory results continue to show: Own credit adjustments; Gain/(loss) on redemption of own debt; Write-down of goodwill; Strategic disposals; Restructuring costs; and Litigation and conduct costs as separate line items.

 

Discussion of RBS’s performance in this report presents RBS’s results on a non-statutory basis as management believes that such measures allow a more meaningful analysis of RBS’s financial condition and the results of its operations. These measures are non-GAAP financial measures. A body of generally accepted accounting principles such as IFRS is commonly referred to as ‘GAAP’. A non-GAAP financial measure is defined as one that measures historical or future financial performance, financial position or cash flows but which excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. Reconciliations of these non-GAAP measures to the closest equivalent GAAP measure are presented throughout this document and in the segment performance on pages 110 to 136. These non-GAAP financial measures are not a substitute for GAAP measures.

 

The presentation of operating profit, operating expenses, total income and other performance measures excluding the impact of: Own credit adjustments; Gain/(loss) on redemption of own debt; Write-down of goodwill; Strategic disposals; Restructuring costs; and Litigation and conduct costs are a non-GAAP financial measures and are not a substitute for the equivalent GAAP measure.

 

The presentation of Personal & Business Banking (PBB) combines the reportable segments of UK Personal & Business Banking and Ulster Bank RoI and is a non-GAAP financial measure. The presentation of Commercial and Private Banking (CPB) combines the reportable segments of Commercial Banking, Private Banking and RBS International (RBSI) and is also a non-GAAP financial measure.

 

The presentation of the cost savings against 2015 target as shown in the Strategic Report on pages 7, 17 and 20 which excludes litigation and conduct costs, restructuring costs, write down of goodwill and other intangible assets and other operating costs of William’s & Glyn is a non-GAAP financial measure.

 

Lastly, the liquidity coverage ratio, stressed outflow coverage, net stable funding ratio, RWAes and further metrics included in the Business review and Capital and risk management section represent non-GAAP financial measures and are being presented for informational purposes given they are metrics that are not yet required to be disclosed by a government, governmental authority or self-regulatory organisation.

 

3
 

 

Recent Developments

 

 

Dividend Access Share 

On 22 March 2016, the Royal Bank of Scotland Group plc paid the final dividend of £1.193 billion in respect of the Dividend Access Share to Her Majesty's Treasury ("HMT"). The dividend represents the final amount payable to HMT and effects the immediate retirement of the DAS.

 

This dividend payment will be reflected in our first quarter 2016 financial statements, reducing Tangible Net Asset Value per share by approximately 10 pence. The equivalent Common Equity Tier 1 impact as at FY 2015 would have been c.50bps.

 

On retirement, the DAS was re-designated as a single B share which will be subsequently cancelled. Following the conversion in 2015 of the B shares held by HMT into Ordinary Shares, the retirement of the DAS will complete the normalisation of RBS's capital structure.

 

Accelerated payments to the pension fund 

Subsequently and pursuant to the Memorandum of Understanding, the bank agreed with the Trustee a Statement of Funding Principles in relation to an actuarial valuation as at 31 December 2015.  The bank and Trustee also updated the existing Schedule of Contributions and Recovery Plan to reflect the £4.2 billion contribution, which was paid during March 2016.

 

Foreign exchange related investigations 

As previously disclosed, on 21 July 2014, the Serious Fraud Office in the UK (SFO) announced that it was launching a criminal investigation into allegations of fraudulent conduct in the foreign exchange market, apparently involving multiple financial institutions. On 15 March 2016, the SFO announced that it was closing its investigation, having concluded that, based on the information and material obtained, there was insufficient evidence for a realistic prospect of conviction.

 

 

4
 

2015 performance

 

 

Loss attributable to ordinary shareholders (£1,979m)   Operating profit on a non-statutory basis(1) £4,405m
Operating loss before tax (£2,703m)   Common Equity Tier 1 ratio (2) 15.5%
Risk-weighted assets (RWAs) £243bn   Loan:deposit ratio (3) 89%
Short-term wholesale funding (4) £17bn   Liquidity portfolio £156bn
Leverage ratio (5) 5.6%   Return on tangible equity (6) (4.7%)
Cost:income ratio 127%   Net interest margin 2.12%
Cost:income ratio – on a non-statutory basis (1) 72%    

 

(1)Income excludes gains on own credit adjustments of £309 million, loss on redemption of own debt £263 million and loss on strategic disposals of £157 million, and expenses excludes restructuring costs of £2,931 million, litigation and conduct costs of £3,568 million and write-down of goodwill of £498 million

(2)End-point CRR basis.

(3)Includes disposal groups.

(4)Excludes repurchase agreements and stock lending and derivative collateral.

(5)Based on end-point CRR Tier 1 capital and leverage exposure based on CRR Delegated Act.

(6)Tangible equity is equity attributable to ordinary shareholders less intangible assets.

 

The Royal Bank of Scotland Group (RBS) continues to deliver on its plan to build a strong simple and fair bank for both customers and shareholders. RBS delivered against its 2015 targets.

 

RBS reported a loss attributable to ordinary shareholders of £1,979 million, compared with a loss of £3,470 million in 2014. This included elevated restructuring costs (£2,931 million), as the bank’s repositioning accelerated, particularly in the Corporate & Institutional Banking (CIB) business. Litigation and conduct costs (£3,568 million) increased as further steps were taken to clear legacy obstacles from RBS’s path to normalisation.

 

RBS continues to strengthen and reshape the balance sheet, building on a strong track record of delivery. Risk-weighted assets (RWAs) reduced 32%, or £113 billion, including £109 billion from the disposal of Citizens Financial Group and the accelerated run-down of Capital Resolution.

 

RBS intends to pay a final dividend on the Dividend Access Share (DAS) during the first half of 2016 subject to final Board and PRA approval, further normalising the capital structure of the bank and removing a constraint on the resumption of capital distributions.

 

2015 results included a charge for goodwill impairment of £498 million attributed to Private Banking; a loss on redemption of own debt of £263 million; and a gain of £1,147 million on loss of control of Citizens largely arising from the reclassification of foreign exchange reserves (£962 million).

 

Operating loss was £2,703 million compared with an operating profit of £2,643 million in 2014, primarily due to increased restructuring costs of £2,931 million (2014 - £1,154 million) and litigation and conduct costs of £3,568 million (2014 - £2,194 million). Operating profit excluding these restructuring costs and litigation and conduct costs, together with write down of goodwill charges of £498 million (2014 - £130 million) totalled £4,405 million compared with an operating profit of £6,056 million in 2014, lower primarily due to income attrition and disposal losses in the Capital Resolution business.

 

UK PBB recorded an operating profit of £1,030 million in 2015, a reduction of 9% or £103 million from 2014. This was primarily driven by lower non-interest income combined with increased restructuring costs and litigation and conduct costs. This was partially offset by a small net impairment release compared with a prior year charge. Operating profit excluding litigation and conduct costs (2015 - £972 million; 2014 - £918 million) and restructuring costs (2015 - £167 million; 2014 - £111 million) was £2,169 million, broadly stable compared with the prior year. There was a good performance in mortgages with net new lending totaling £9.3 billion, RBS’s strongest performance since 2009, albeit at lower overall margins as customers shift from standard variable rate to fixed rate products. Operating expenses were £4,177 million, remaining broadly stable against 2014. Operating expense excluding litigation and conduct costs of £972 million (2014 - £918 million) and restructuring costs of £167 million (2014 - £111 million) were 3% lower, while credit quality remained good, with modest net impairment releases.

 

Commercial Banking recorded an operating profit of £1,264 million, compared with £1,256 million in 2014. Deposit and lending volumes (net new lending of £3.6 billion excluding business transfers, run-off and disposals), contributed to a 1% rise in net interest income. Operating profit excluding litigation and conduct costs of £51 million (2014 - £112 million) and restructuring costs of £69 million (2014 - £108 million) was down 6% at £1,384 million, driven by a marginal fall in income reflecting margin pressure and included a Q4 2015 loss

 

5
 

 

2015 performance

 

 

of £34 million on the sale of non-strategic asset portfolios.

 

Ulster Bank RoI recorded an operating profit of £262 million compared with an operating profit of £489 million in 2014; the decline was primarily due to considerably lower net impairment releases in 2015. Operating profit excluding litigation and conduct costs (2015 - £13 million credit; 2014 - £19 million credit) and restructuring costs (2015 - £15 million; 2014 - £13 million) declined 45% to £264 million as net impairment releases, though still substantial, were lower than in 2014. Private Banking operating loss was £470 million compared with a profit of £99 million in 2014, while RBS International (RBSI) recorded an operating profit of £207 million, down 13%.

 

CIB reported an operating loss of £837 million in 2015, compared with an operating loss of £710 million in 2014, driven by lower income in line with the business’s reduced scale and risk appetite. Operating loss excluding £120 million relating to own credit adjustments (2014 - £9 million charge), restructuring costs of £524 million (2014 - £102 million) and litigation and conduct costs of £378 million (2014 - £832 million) was £55 million, compared with a profit of £233 million in 2014. Operating expenses were down 11% as CIB continues to move towards a more sustainable cost base.

 

Capital Resolution made an operating loss of £3,687 million, compared with a profit of £602 million in 2014. Operating loss excluding £175 million relating to own credit adjustments (2014 - £36 million charge), a loss on strategic disposals of £38 million, restructuring costs of £1,307 million (2014 - £185 million), together with litigation and conduct costs of £2,105 million (2014 - £162 million) and write-down of goodwill in 2014 of £130 million, was £412 million in 2015, compared with a profit of £1,115 million in 2014, reflecting increased disposal losses of £367 million, as it accelerated the run-down of its portfolios, reducing RWAs by almost half to £49.0 billion.

 

Common Equity Tier 1 (CET1) ratio improved 430 basis points to 15.5% in 2015, as RWAs declined by £113 billion, partially offset by the attributable loss and the accelerated recognition of previously committed contributions in relation to the The Royal Bank of Scotland Group Pension Fund following a change in accounting policy.

 

6
 

 

Delivering against our 2015 targets

 

 

Delivery against our 2015 targets

 

In 2015, RBS set out targets across its five strategic priorities, and continued its track record of delivery.

 

Strategy Goal 2015 targets 2015

Strength & sustainabiliy

 

Reduce risk-weighted assets (RWAs) to <£300 billion £243 billion, a reduction of £113 billion.
RCR exit substantially completed

Funded assets down 88% since initial pool of assets identified. Residual £4.6 billion of assets within Capital Resolution.

 

Citizens deconsolidation Sold full stake a year ahead of schedule, allowing full deconsolidation.
£2 billion AT1 issuance

Successfully issued US$3.15 billion

AT1 capital notes (£2 billion equivalent). 

Customer experience

 

Improve NPS in every UK franchise Year-on-year significant improvement in NatWest Business Banking, RBS Business Banking and Ulster Bank Personal Banking (NI).
Simplifying the bank Reduce costs by £800 million, target exceeded and increased to >£900 million Achieved £983 (1) million of cost savings.

Supporting growth

 

Lending growth in strategic segments 

≥ nominal UK GDP growth

4.8% growth achieved in UK PBB and Commercial Banking in 2015, exceeding nominal UK GDP growth (2).

Employee engagement

 

Raise employee engagement index to within 8% of Global Financial Services (GFS) norm Surpassed employee engagement goal, up six points to within three points of GFS.

Notes:

(1) Excluding litigation and conduct costs (2015 - £3,568; 2014 - £2,194 million), restructuring costs (2015 - £2,931 million; 2014 - £1,154 million), write down of goodwill and other intangible assets (2105 - £573 million; 2014 - £276 million) and other operating costs of Williams & Glyn (2015 - £261 million; £232 million). 

(2) Preliminary estimate for nominal UK GDP growth in 2015 is 2.6% year-on-year.

 

Balance sheet progress 

RBS continued to improve its capital strength, with the CET1 ratio increasing to 15.5% at 31 December 2015, up 430 basis points from 11.2% at 31 December 2014 and up 690 basis points from 8.6% at 31 December 2013. CET1 ratio benefited from the disposal of Citizens and Capital Resolution’s performance in running off and disposing of capital intensive assets, partly offset by the attributable loss and the pension accounting policy change.

 

The leverage ratio rose to 5.6% at 31 December 2015, an improvement of 140 basis points from 4.2% at 31 December 2014 and 220 basis points from 3.4% at 31 December 2013, assisted by the successful issuance of Additional Tier 1 (AT1) capital notes in August 2015 and a substantial reduction in leverage exposure to £702 billion, down £237 billion from 31 December 2014 and £380 billion from 31 December 2013. Planned 2016 issuance of £2 billion AT1 capital notes, subject to market conditions, will provide further balance sheet resilience. In addition, issuance of £3-5 billion of senior debt, eligible to meet RBS’s Minimum Requirement for Own Funds and Eligible Liabilities (MREL), is targeted from the RBS Group plc holding company, again subject to market conditions.

 

Progress was made in de-risking the balance sheet as the bank continued the run-down or sale of certain businesses and higher risk or capital intensive assets. RWAs decreased from £356 billion at 31 December 2014 to £243 billion at 31 December 2015.

 

In 2015 RBS:

·Completed the exit from Citizens a year ahead of schedule, reducing RWAs by £63 billion in the process and underlining our commitment to a UK market focus.

·Delivered strong progress in the first year of CIB Capital Resolution, reducing RWAs by £32.6 billion to 40.5 billion, exceeding its target RWA reduction of £25 billion. The business substantially exited the North American and Asia-Pacific (APAC) portfolios, and a partnership for our international customers was agreed with BNP Paribas as an alternative to the Global Transaction Services business. Agreed the sale of our Russian subsidiary which is due to complete in Q2 2016.

 

7
 

Delivering against our 2015 targets

 

 

·Achieved the run-down target of RCR a year ahead of schedule, reducing funded assets by 88% since the original pool of assets was identified, exceeding the targeted 85%, to £4.6 billion at 31 December 2015.

·Completed the first tranche of the international private banking business sale, with the final tranche due to complete in the first half of 2016.

·Improved the quality of its core loan books, primarily through the sale of commercial real estate and infrastructure portfolios in Commercial Banking and a buy-to-let portfolio in Ulster Bank RoI.

·Continued to progress the Williams & Glyn (W&G) divestment, submitting a banking license application to UK regulatory authorities in September 2015 and work continues on separation (although this will not now be achieved until after the previously announced Q1 2017). The Group remains committed to full divestment by the end of 2017.

 

Credit quality remained strong, with risk elements in lending (REIL) decreasing to £12.2 billion (3.9% of gross customer loans) at 31 December 2015, from £28.2 billion (6.8%) at 31 December 2014 and £39.4 billion (9.4%) at 31 December 2013. This reduction was primarily driven by disposals in Capital Resolution coupled with the recovering Irish economy.

 

In line with the progress to de-risk the balance sheet, committed exposures to the natural resources sectors have more than halved, with oil and gas in particular substantially reducing by 70% during 2015 to £6.6 billion. The majority of our emerging market exposures have declined following action on non-strategic activities, reducing by 75% our exposure to China and Russia. Reductions primarily reflected corporate loan portfolio disposal activity and the strategic direction of CIB.

 

Our funding and liquidity position remains strong, aided by the accelerated reduction of the Capital Resolution balance sheet. The liquidity coverage ratio was 136%, compared with 112% at 31 December 2014, whilst the net stable funding ratio was121% compared with 112% at 31 December 2014, both well above regulatory minima at the end of 2015.

 

The 2015 Bank of England stress test results concluded that RBS did not need to alter its capital plan, as sufficient steps had already been taken by RBS to strengthen its capital position.

 

8
 

 

Delivering for our customers

 

 

Delivering for our customers

 

Product proposition enhanced

·Investing in building deeper customer engagement through the launch of a new current account, ‘Reward’, which enables customers to receive 3% cashback on household bills for a monthly account fee of £3.

·Launched an innovative new home insurance product offering customers a fixed premium for three years, which we believe is a positive departure from industry practice.

·Committed to fair banking through making overdrafts more accessible to one million customers who are now eligible for overdrafts of £100 and £250.

·One of the first UK banks to offer the Government-led Help to Buy: ISA as we continue to help first time buyers.

 

Continue to lead on collaboration and innovation: 

·Launched Royal National Institute of Blind People (RNIB) approved cards, becoming the first bank to achieve RNIB accreditation.

·Became the first UK bank to enable customers to use only their fingerprint to log into their phone banking app via Touch ID.

·Real time registration of our mobile banking app enabling customers to log in as they open their current account.

·One of the first UK banks to launch Apple Pay and subsequently created an Apple Watch app.

 

Supporting UK entrepreneurs and businesses: 

·Opened four Entrepreneur Hubs across the UK, increasing our involvement to seven, enabling entrepreneurs and small businesses to access free office space, mentoring and financial support, with a further five hubs to be opened in 2016.

·The Commercial Bank has issued 12,500 statements of appetite letters to our customers, offering up to £8 billion of new borrowing facilities.

 

Investing in our operational capabilities: 

·Enhanced our mortgage operations, including an online mortgage tracker application to improve customer experience, whilst increasing mortgage advisors by 21% from 803 to 974.

·Employed a new automated account- opening system to improve our onboarding process, accelerating end- to-end account opening times by 50% for business customers and 30% for commercial customers.

·Launched a new customer relationship management tool, enabling a single view of the customer.

·Planned £3.5 billion IT investment spend committed from 2015 to 2017 to improve core infrastructure and resilience whilst addressing innovation capabilities.

·Core technology platforms continued to be simplified with 370 applications and over 6,000 servers decommissioned.

 

Upgrading our points of presence: 

·Upgraded 322 branches and replaced 922 ATMs as the bank enhances customers’ experience.

·Customers in Ireland are benefiting from a joint venture with ‘An Post’, accessing 1,140 new points of presence.

·Continued to evolve the NatWest mobile app through Touch ID and the ability to apply for loans and savings products whilst enhancing the PAYM feature and ability to use Apple Pay. Active mobile users have increased 27% to 3.7 million in 2015.

·Broke with tradition to open 34 of the busiest branches in the UK during bank holidays.

·Launched an ‘online diary’ where customers can book an appointment with an advisor from the comfort of their own home.

 

Investing in our people: 

·Delivered leadership training to over 13,000 leaders through a comprehensive ‘Determined to Lead’ training programme.

·Around 5,500 front line staff completed certified banking skills programmes, with a further c.11,000 enrolled.

·Announced a target of having 30% female leaders in every business unit by 2020 and a further goal of a 50/50 spilt by 2030 across all levels of the business.

·Became the first bank to achieve Investing in Young People Accreditation.

 

Government shareholding 

On 4 August 2015, HM Treasury (HMT) sold 630 million RBS ordinary shares, its first sale since its initial investment in 2008.

 

On 8 October 2015, HMT converted the 51 billion B shares it held into 5.1 billion ordinary shares, further normalising the ownership structure of RBS. These new ordinary shares were admitted to the London Stock Exchange on 14 October 2015. HMT's economic interest was 72.6% at 31 December 2015.

 

Our current plan assumes that we will pay the final Dividend Access Share (DAS) dividend of £1,180 million, plus interest, during the first half of 2016, subject to final Board and PRA approval. This thereby effects the conversion of the DAS into a single ordinary share. This will further normalise the capital structure of the bank and remove a constraint on the resumption of capital distributions. The retirement of the DAS demonstrates the strategic progress of the bank and follows an initial payment of £320 million in 2014. The pro forma impact, at 31 December 2015, is approximately 50 basis points to the CET1 ratio.

 

9
 

 

2016 Targets

 

 

Pension Fund 

On 27 January 2016, the bank announced a change to its pensions accounting policy; in particular, the policy for determining whether or not it has an unconditional right to a refund of surpluses in its employee pension funds. As a result of this accounting change, a minimum funding requirement of £3.3 billion in respect of the Main scheme was recorded as a liability at 31 December 2015 representing the present value of deficit reduction contributions for 2016 to 2023 (£3.7 billion) less an asset ceiling of £400 million. The net post tax impact of the policy change, together with updated IAS 19 year-end scheme valuations, is approximately £1.6 billion or approximately 70 basis points on the CET1 ratio.

 

Separately, RBS has signed a memorandum of understanding with the RBS Group Pension Fund trustee to make a payment of £4.2 billion into the scheme. The pro-forma 2016 impact at point of payment is a further £400 million and approximately 30 basis points on the CET1 ratio.

 

The accelerated payment improves capital planning and resilience, bringing forward the valuation date not later than 31 December 2015. The next valuation date will take place between 31 October 2018 and 31 December 2018, with any future funding arrangements needed to be agreed with the Trustee no later than Q1 2020. This provides increased certainty on contribution commitments and the pension balance sheet position. Subject to PRA approval, the bank expects the adverse core capital impact to be partially offset by a reduction in RBS’s core capital requirements. Any such potential core capital offsets are likely to occur at the earliest 1 January 2017 and will depend on the PRA’s assessment of RBS’s core capital position at that time.

 

Current trading

PBB (consisting of the reportable segments UK PBB and Ulster Bank RoI) and CPB (consisting of the reportable segments Commercial Banking, Private Banking and RBSI), have traded in line with expectations in the first six weeks of 2016. CIB has had a difficult start to the year, given overall market conditions.

 

The net impact of lower long term yields and year to date sterling weakness have contributed to earnings volatility, reflected in certain line items such as IFRS volatility, own credit adjustments and foreign exchange gains/losses.

 

10
 

 

2016 Targets

 

 

 

Outlook 

In our core PBB (consisting of the reportable segments UK PBB and Ulster Bank RoI) and CPB (consisting of the reportable segments of Commercial Banking, Private Banking and RBSI), we expect income to stabilise in 2016 as headwinds from low interest rates and the uncertain macroeconomic environment are balanced by strong planned volume growth, particularly in mortgages but also in core commercial lending. CIB may see some modest further income erosion. Cost savings of £800 million are planned in 2016 (in addition to the £2 billion achieved in 2014 and 2015). Our expectation is for cost reduction to exceed any income erosion across our combined core businesses.

 

Legacy credit portfolios have now been substantially disposed of, so we do not expect the considerable recoveries seen in 2014 and 2015 to be repeated and some portfolios may see net impairment charges. However, impairments on core portfolios are expected to remain low in 2016, with a modest overall net impairment charge for the year, though we recognise that the risk of larger single name events has increased, given the uncertain macroeconomic environment.

 

Previous guidance has indicated restructuring costs of approximately £5 billion and disposal losses of approximately £1.5 billion in the period 2015-19. Consistent with this, restructuring costs are expected to remain high in 2016, totalling over £1 billion. Most of the remaining signalled disposal losses are expected to be incurred in 2016 (2015 - £367 million). Capital Resolution is expected to reduce RWAs to around £30 billion by the end of 2016, ahead of our original plan, despite a more difficult economic environment for disposals, given the momentum we created in 2015, and continued substantial run-off activity.

 

We continue to deal with a range of uncertainties in the external environment, including those caused by the referendum on the UK’s continuing membership of the European Union. We will also have to manage conduct-related investigations and litigation, including US RMBS, throughout 2016, and substantial incremental provisions may be recognised during the year.

 

Work continues on the separation of Williams & Glyn, but this will now not be achieved until after Q1 2017. The Group remains committed to full divestment by the end of 2017, although it continues to face significant challenges and risks in separating the Williams & Glyn business, some of which may only emerge as various separation process phases are progressed. The Williams & Glyn separation process is a high priority for the Group and involves the diversion of Group resources away from other key areas. The associated risks are discussed in more detail in the Risk Factors on pages 384 to 409.

 

RBS plans to return excess capital to shareholders through dividends or buybacks, subject to Board and PRA approval at the time. Key milestones before seeking such approval for capital distributions would include, among other considerations: passing the 2016 Bank of England stress test (including our Individual Capital Guidance hurdle); operating within our capital risk appetite; passing the peak of litigation and conduct costs including US RMBS; confidence in sustainable profitability; and an assured exit of Williams & Glyn. Given the challenges in separating Williams & Glyn and the potentially elongated period to resolve US RMBS- related litigation claims and regulatory investigations, we now consider it more likely that capital distributions will resume later than Q1 2017.

 

11
 

 

Our progress in 2015

 

 

Our progress in 2015

 

We have a clear ambition to become No.1 for customer service, trust and advocacy. In 2015, our focus has been on Cost, Capital, Restructuring and Resilience. We have also begun the process of making RBS a simpler place to work and an easier bank to do business with.

 

Reward Account 3% 

New banking proposition launched: ‘Reward’ offering customers 3% cashback on their household bills.

 

Fair Banking 

Launched an innovative new home product offering customers a fixed premium for three years, which we believe is a positive departure from industry practice.

 

Account opening efficiency 

New automated account opening process has increased our onboarding process efficiency, with end-to-end account opening times falling by 50% for business customers and 30% for Commercial customers.

 

Simple IT 

Core technology platforms continued to be simplified with 370 applications and over 6,000 servers decommissioned.

 

Financial inclusion 

Launched the fee-free Foundation account to better support unbanked individuals in the UK.

 

Innovation 

First UK bank to enable customers to login to their mobile banking app using only their fingerprint.

 

Determined to make a difference 

Comprehensive campaign started in October 2015 placing emphasis on personal determination and accountability. 13,000 leaders went through our Determined to Lead training programme to ensure a consistent approach to decision making.

 

Real time registration 

This enables customers to have access to mobile banking as they open their current account. Active mobile users have increased 27% to 3.7 million.

 

Branches refurbished 

Branch Transformation programme – 322 branches refurbished, 922 ATMs replaced.

 

Independent Lending Review (ILR) 

Progress is available on rbs.com

 

Supporting employment 

Increased the number of apprentices from 50 to over 300.

 

Online diary 

Launched an ‘online diary’ where customers can book an appointment with an advisor from the comfort of their own home.

 

Entrepreneurial Hubs 

In partnership with Entrepreneurial Spark, RBS has opened four Entrepreneurial Hubs across the UK, increasing our involvement to seven, enabling entrepreneurs and small businesses to access free office space, mentoring and financial support, with a further five hubs to be opened in 2016.

 

Accessible banking 

First banking product to be awarded ‘RNIB approved’ as RBS launched new cards specifically designed for blind and partially sighted customers.

 

12
 

 

Chairman’s statement

 

 

 

“The Board’s strategy for this bank is straightforward: a simpler bank focused on doing fewer things, and doing them well, built around a low risk UK and Irish retail and commercial bank.”

 

“Our brand franchises are strong and distinctive and there is much to build on as we refocus RBS on its core markets in the British Isles.”

 

I took over as Chairman in September 2015, so much of the business transacted by the Board during the year predated my arrival.

 

For most of the year the Board was chaired by my predecessor, Philip Hampton; it is right, therefore, to begin by thanking him for his service to the company since 2009.

 

Philip would be the first to acknowledge that the period was not an easy one for the bank or its shareholders. The recovery from the financial crisis has taken longer than foreseen and there is still much work to be done. However, Philip led the Board with calm authority through many challenging episodes and earned the respect and gratitude of his colleagues and successive teams of executives. We all wish him well in his new role as chair of the GSK Board.

 

Strategy 

The Board’s strategy for this bank is straightforward: a simpler bank focused on doing fewer things, and doing them well, built around a low risk UK and Irish retail and commercial bank; a stronger bank with a long term target of at least 13% CET1 ratio; and a fair bank that meets customers’ needs, with a target to be seen as the best UK bank for customer service, trust and advocacy by 2020.

 

I am therefore pleased to note the progress that management have made in delivering that strategy across all our businesses including the accelerated downsizing of the investment bank announced in February 2015. This reshaping exercise remains one of the foremost priorities for the Board, and while the disposal process is ahead of plan we continue to pay close attention to it. There are as many risks involved in exiting businesses as there are in entering them.

 

As part of the reshaping, RBS Capital Resolution (RCR) was established in 2013 to separate and wind down capital intensive assets. Rapid progress has continued during 2015, and the target of removing 85% of these assets from the balance sheet by the end of 2016 was achieved a year earlier than planned. The RCR Oversight Committee met for its final meeting in January 2016 to finalise the transfer of remaining assets and the closure of RCR.

 

Any company must have mixed feelings about a reduction of its activities on this scale but I note that a number of other banking groups, especially in Europe, have now reached similar conclusions about the need to cut back their investment banking activities faced with ever-increasing capital and leverage requirements and a challenging competitive environment.

 

I am pleased to report that one exit was successfully achieved during the year. The Board decided in 2013 that Citizens Financial Group (CFG) was not an integral part of the bank in the longer term and resolved to float it through an IPO, and eventually to sell all the equity. The sale was achieved in stages, with the final tranche sold at the end of October 2015. The outcome was a good one for the bank’s shareholders and we wish the Board of CFG success as they embark on life as a wholly independent entity.

 

There is one other major divestment programme under way on which important progress was made during the year. As a condition of the state aid made available to RBS in 2008 the European Commission required the bank to divest over 300 branches in the UK as a standalone banking entity to be known as Williams & Glyn.

 

The necessary application for a new banking licence was made in September 2015, a major step on the route to separation. While our planned separation will not now be achieved until after the previously announced Q1 2017, we remain committed to full divestment by the end of 2017. The Board exercises close oversight of this programme, which is uniquely challenging, especially from an IT perspective.

 

 

13
 

Chairman’s statement

 

 

The strategy for the remainder of the bank, including The Royal Bank of Scotland, NatWest, Coutts, Ulster Bank in Ireland, RBS International in Jersey and other linked entities, remained essentially unchanged through the year. The responsible executives make regular presentations to the Board on progress against their objectives, and a strategy offsite was held in June 2015, at which progress was reviewed in greater detail. While the strategic direction for the core businesses is clear, the bank continues to execute a major transformation programme, designed to reduce costs and enhance IT capability. That is an essential element of strategic delivery.

 

Conduct, regulation, and litigation 

Over the past seven years the global regulatory and supervisory environment for banks has changed beyond all recognition, a necessary reaction to the parlous state in which many in the industry, notably RBS, had found themselves in 2008.

 

Banks have responded to the changes, and capital levels and other loss absorbency tools have been transformed. The Board has provided detailed oversight of the bank’s capital management capacity, which involved reviewing the outputs of stress tests, recovery and resolution plans, and defining the bank’s continuing risk appetite. We are firmly committed to being a strongly capitalised entity, meeting the requirements imposed on us by our many regulators.

 

I would observe, however, that a period of stability and reflection on the new rules, alongside some assessment of their overall impact, will be welcome. That would also allow banks more opportunity to look at how we finance the rest of the economy and hence support growth.

 

As is the case for other major banks domiciled in the UK, our future operations will be materially affected by the requirement to ring-fence the retail and commercial banking activities, following the legislation to implement the recommendations of the Independent Commission on Banking. The restructuring will have an important impact on the way we serve our customers, so the Board has devoted considerable time to the oversight of the plans developed to erect the ring fence, which must be in place by the end of 2018.

 

Another key element of the Board’s role relates to the significant conduct issues which the bank has experienced, and continues to face. These costs have materially delayed our return to profitability. So a very high priority for the Board is to resolve legacy issues and oversee the implementation of strengthened control frameworks to guard against future misconduct.

 

Specifically, in May 2015 the Board authorised the bank’s settlements with the Department of Justice and the Federal Reserve in relation to investigations into its foreign exchange business. We regret the conduct which led to those settlements. Appropriate remediation policies have since been put in place.

 

Throughout the year the Board has received regular reports on other litigation, and a number of settlements have been reached on terms which the Board regarded as acceptable. Particular attention has been paid to the claims and investigations related to the origination and trading of US mortgage-backed securities, dating back to 2007, raised by the Department of Justice, the Federal Housing Finance Agency, the National Credit Union Administration, and several state Attorneys General. Although we have put aside substantial provisions for mortgage-backed securities litigation claims we have not provided for the Department of Justice and state Attorneys General investigations. It is not possible at this point to forecast when these claims and investigations will be resolved or at what ultimate cost but further substantial provisions may be required.

 

The Board has also overseen the response to the action raised by the 2008 rights issue Shareholders Action Groups. That case is unlikely to come to court before the end of 2016.

 

In 2015 a Board oversight committee was established in relation to the Financial Conduct Authority review of the treatment of SME customers referred to the bank’s Global Restructuring Group. As I write, that review is still under way.

 

The Future 

Shareholders, including of course the UK government through UK Financial Investments, are well aware that it is now seven years since RBS posted a profit or paid a dividend. It would be good to be able to promise both in the near future, but while potentially large US settlements remain outstanding it would be imprudent to do so.

 

What I can say is that the future shape of the bank is now far clearer than it was a year ago. We are well on the way to exiting the non-core elements of the business, and the divestments are proceeding well. We can also see signs of progress in the core business, especially in the mortgage market, though all retail and commercial banks find a very low interest rate environment one in which margins and profits are under pressure.

 

The bank’s ambition to be number one in our chosen markets for customer service, trust and advocacy is stretching, but it focuses the attention of all our staff on the right things, and there are promising signs that staff morale is responding positively to the challenge. Our brand franchises are strong and distinctive and there is much to build on as we refocus RBS on its core markets in the British Isles. At the same time, we need to reduce our cost base, and embed a new risk culture which will guard against a recurrence of the failings and bad behavior which have held us back in the past.

 

14
 

 

Chairman’s statement

 

 

The Board is firmly behind the strategy, and believes that we have the right management in place to deliver it. There are of course varying risks and uncertainties, which we set out in the accompanying company risk disclosures, so our role is to be supportive, while also exercising strong oversight of the risk appetite and control frameworks, to protect the long-term interests of shareholders.

 

I have been impressed by the focus on culture and diversity at RBS. To deliver on the strategy we need to have a culture that puts customers at the heart of the business and places a premium on integrity. This is a long-term journey but it is central to making RBS a bank that is growing and flourishing for its customers and shareholders. Central to culture is diversity, which drives innovation and improves decision making, and I am pleased to see the emphasis in the business on ensuring women take a significant number of roles throughout the bank and at all levels.

 

Looking forward into 2016 and beyond RBS, there are a number of macroeconomic and political risks and uncertainties which are set out in the accompanying risk disclosures. One key question for the UK electorate this year will be whether the UK should remain in the EU. We are a UK-focused bank, but we have good businesses operating in other EU countries such as Ulster Bank in Ireland and many of our business customers heavily depend on unfettered access to the European Single Market. Most economic forecasts therefore point to a slowdown in UK growth, at least in the short to medium term, which would be unwelcome. Therefore, like any prudent business we are preparing for various potential scenarios. However, our primary responsibility is to serve and support our customers, and we will continue to do this, whichever way the UK electorate ultimately decide to vote.

 

Our role in the Community 

RBS is a core part of the communities it serves and undertakes a number of initiatives to support them and help them succeed. In 2015 the bank’s MoneySense programme, which provides impartial financial education for young people, celebrated its 21s anniversary. To mark the occasion, MoneySense was redeveloped and relaunched on a new digital platform with brand new content.

 

In 2015, we also spent a great deal of effort and resource supporting small businesses and encouraging start-ups. In partnership with social enterprise Entrepreneurial Spark we opened four new entrepreneur hubs, with a further six to be launched throughout the UK in the next two years, including one in our HQ in Edinburgh opened in February. These business accelerators, which are based in our buildings, provide start-ups with free office space, mentoring and access to our networks. 7,000 entrepreneurs will be supported in this way over five years, helping to grow the economy and create jobs. In Scotland, we have also been supporting local charities and social enterprises through use of vacant space in our retained branch network.

 

I am also impressed with the zeal with which the staff of RBS got on their bikes to support our chosen charity, Sport Relief. Over 700 colleagues got involved, raising over £600,000 in just five days, making the event the largest corporate fundraising event in Sport Relief’s history.

 

Conclusion 

Apart from the departure of Philip Hampton, the composition of the Board has remained unchanged through the year, though we welcomed a new member early in 2016: Mike Rogers, the CEO of Liverpool Victoria, who brings valuable retail financial services experience to the Board.

 

The particular challenges of RBS impose heavy burdens on the Board of directors. Their time commitment is unusually high, even by the rising standards of European banking. I am very impressed by the dedication and skills which my colleagues bring to the role. They all serve on more than one committee, and their workloads are intense. I look forward to continuing to lead such a motivated and diligent team as we continue the recovery process through 2016.

 

Howard Davies 

Chairman

 

15
 

Chief Executive’s review

 

 

 

 

“RBS made progress again in 2015. We ended the year a simpler, stronger bank with a business anchored squarely in the UK and Ireland focused on retail and commercial markets.”

 

Year one of our plan in 2014 was about getting cost out and improving our capital position. This gave us the platform to go further, faster in 2015 by exiting more businesses that didn’t fit our strategy, and accelerating improvements in our core bank. We delivered on both.

 

Simpler and stronger 

Over the last few years, RBS has built a good track record in restructuring and we reinforced that record in 2015. The sale of Citizens was completed early following the largest US bank IPO ever. We are well through the sale of our international private banking business, and are winding down our non-UK transaction services business. Major loan portfolios have been divested, and the progress continues on the complex process to exit 25 of the 38 countries in our international network. We also marked the end of RBS Capital Resolution (RCR), having substantially completed its run down one year ahead of schedule.

 

Our progress on exits and disposals has supported a substantial uplift in capital strength, with our CET1 ratio up by 430 basis points over the year to 15.5%.

 

Like other banks, we continue to look for opportunities to resolve legacy conduct issues on terms we believe to be acceptable. We have recently added to our provisions in relation to residential mortgage-backed securities in the US (RMBS) and Payment Protection Insurance (PPI). We hope to conclude many of the remaining substantial conduct and litigation issues over the coming year, but the timing of many of these matters is not in our hands.

 

An improving core bank  

As well as exiting businesses that don’t fit our strategy, we have made strong progress in improving our core retail and commercial franchises. Mortgage and commercial lending showed healthy growth over the year as we played a key role in supporting the UK economy.

 

Focus continues around simplifying processes as the scale and footprint of the bank is reshaped. At an operational level, we have reduced our London property footprint, further rationalised and simplified our systems, and increased stability across our core platforms. Simplification across the bank has helped reduce our cost base by £983(1)million this year.

 

We have also improved our products and service for customers. Our new current account proposition – Reward – is a further step forward in terms of our offering, with our customers receiving 3% cashback on their household bills. This product is geared toward building stronger and deeper customer relationships.

 

Across our franchises we demonstrated further commitment to becoming a fair bank that earns the trust and loyalty of its customers. We launched a progressive three year fixed premium rate home insurance product, made £100 and £250 overdrafts automatically available to an additional one million customers, and launched new cards for visually impaired customers that secured approval from the Royal National Institute of Blind People (RNIB).

 

Our underlying performance over the year shows the strength - and further potential - of our core businesses, but the conduct and restructuring issues mentioned have taken their toll on our bottom line. While adjusted operating profit for the year totalled £4,405(2) million, we recorded a full year loss attributable to ordinary shareholders of £1,979 million.

 

We went further, faster against our targets in 2015 

We have consistently referred to five priorities, which have become a familiar framework for tracking performance. This management team is committed to a simple approach: we set out our priorities, we commit to targets against each of them, and then we deliver, as we have set out on page 7.

 

For the note refer to the following page

 

16
 

Chief Executive’s review

 

 

2016 Targets 

Each year, the bank moves toward delivering stronger returns from a lower risk profile; our strategic priorities are at the core of this. For 2016, we have a new set of targets which ultimately underpin achieving the long-term target of being number one for customer service, trust and advocacy:

 

Our long-term financial and customer targets remain unchanged, but we have stretched our employee engagement target further. The logic we are following is simple: more engaged employees have better customer conversations, which will drive better service and, as a result, higher returns.

 

Strength & sustainability: 

maintain bank CET1 ratio of 13%.

Customer experience: 

narrow the gap to No.1 for NPS in every primary UK brand. 

Simplifying the bank: 

reduce operating expenses by £800 million. 

Supporting growth: 

net 4% growth in PBB (consisting of UK PBB and Ulster Bank RoI) and CPB (consisting of Commercial Banking, Private Banking and RBSI) customer loans. 

Employee engagement: 

raise employee engagement to within two points of GFS norm. 

 

Focus for 2016 

We are looking to take another £800 million from our cost base. This is an area where we must continue to be disciplined given the uncertain macroeconomic and low interest rate environment our core businesses face. In two years, we have taken out £2 billion in costs and next year will see us move closer to a sustainable cost base that reflects the size and scale of this bank.

 

Our ‘Reward’ current account proposition and increasing share of the mortgage market give us a platform to be the main bank provider to more valuable customers.

 

In Commercial Banking, we will continue to shift capital toward business that delivers higher quality returns, and cement our position as the number one bank for UK business.

 

RBS International is another strong franchise. The solid returns in this business will become an increasing feature of our profit mix over the coming years.

 

We also have businesses that can and will do better.

 

Corporate & Institutional Banking (CIB) has plans through to 2020 to deliver acceptable returns and will now be focused on serving our largest and most valuable corporate clients.

 

We have repositioned Ulster Bank with Ulster Bank customers in Northern Ireland included in Personal & Business Banking and the Republic of Ireland (RoI) business separated into Ulster Bank RoI. The franchise is focused on improving returns by reducing its costs, given it is now a smaller but safer business.

 

The sale of our international private banking business in 2015 means we can accelerate the repositioning of our UK private bank so it delivers better returns.

 

The separation and eventual divestment of Williams & Glyn remains a top priority for us. We will not now achieve our planned separation until after the previously announced Q1 2017 but remain committed to full divestment by the end of 2017. Separation of this business is a complex process and we continue to invest sizeable resources.

 

Delivering for customers and shareholders 

The UK government’s decision to start disposing of its majority stake in RBS during 2015 was a significant step forward, and underlined the progress we have made over the last two years.

 

We have previously said that we are in phase two of our plan, working through as many of the remaining conduct and restructuring issues as we can. This is a tough but important part of our plan and we are determined to get through it as quickly as possible.

 

We will then move to the third phase as a strong, simple and fair bank that delivers solidly on the needs of its customers and shareholders.

 

Ross McEwan 

Chief Executive

Note: 

(1)Excluding litigation and conduct costs (2015 - £3,568; 2014 - £2,194 million), restructuring costs (2015 - £2,931 million; 2014 - £1,154 million), write down of goodwill and other intangible assets (2015 - £573 million; 2014 - £276 million) and other operating costs of Williams & Glyn (2015 - £261 million; 2014 - £232 million).

(2)Income excludes gains on own credit adjustments of £309 million, loss on redemption of own debt £263 million and loss on strategic disposals of £157 million, and expenses excludes restructuring costs of £2,931 million, litigation and conduct costs of £3,568 million and write-down of goodwill of £498 million

 

17
 

Business model and strategy

 

 

Business model and strategy 

Our major source of income in our retail and commercial banking businesses is net interest income. This is the difference between the income we earn from the loans and advances we have made to our personal, corporate and institutional customers and on our surplus funds and the interest we pay on deposits placed with us by our customers and on debt securities we have issued. We also earn fees from financial services and other products we provide to our customers as well as rental income from assets we lease to our customers.

 

Our Corporate & Institutional Banking business also earns income from trading activities supporting its provision of financing and risk management services to customers, particularly Rates, Currencies and Financing. We do business in competitive markets but we have strong franchises and good growth opportunities, and we aim to target our investment to maximise these opportunities.

 

Our Personal & Business Banking (consisting of reportable segments UK PBB and Ulster Bank RoI) and Commercial & Private Banking (consisting of reportable segments of Commercial Banking, Private Banking and RBSI) franchises provide services to over 17 million personal and business customers in the UK and to over 1 million personal and business customers in the Republic of Ireland. Our Corporate & Institutional Banking business focuses on large corporate clients operating in the UK and Western Europe, as well as serving global financial institutions.

 

18
 

Our Structure

 

 

Our Structure 

We are organised to provide products and services to personal, commercial and large corporate and institutional customers. Our principal customer-facing businesses are supported by a central Services function and other support and control functions.

 

 

  

19
 

 

Our Strategy

 

  

Note:

(1)Earliest possible timing is likely to be later than Q1 2017, subject to Board and PRA approval. Key milestones before seeking PRA approval for capital distributions would include, among other considerations, maintaining the 13% CET1 ratio target, passing regulatory capital requirements, pass 2016 Bank of England stress test (including Individual Capital Guidance hurdle) and operating within capital risk appetite, peak of litigation and conduct costs passed including US RMBS, confidence in sustainable profitability, and Williams & Glyn exit assured

 

Our Priorities

We have a long way to go to be the bank that our customers deserve. But we are in a period of very significant, positive change. We have millions of great customers, tens of thousands of outstanding employees. By building on this foundation, we can achieve our ambition to be number one for customer service, trust and advocacy in all our chosen markets.

 

Our Plan 

Our overarching ambition is to become the number one bank for customer service, trust and advocacy. We have set out how we track our progress towards this goal on page 22. We also track a number of other performance measures and have set long-term targets for these to keep us on track.

 

  Our long-term targets Our 2016 goals
Strength and sustainability

  CET1 ratio of 13% (1)

  RoTE ≥12%

Maintain bank CET1 ratio of 13%
Customer experience   No.1 for service, trust and advocacy

Narrow the gap to No.1 for NPS in every primary UK brand

Simplifying the bank Cost:income ratio <50% Reduce operating expenses by £800m (2)
Supporting growth Leading market positions in every franchise Net 4% growth in PBB and CPB customer loans
Employee engagement Employee engagement index in upper quartile of GFS norm Raise employee engagement to within two points of GFS norm

Notes: 

(1)During the period of restructuring.

(2)Excluding litigation and conduct costs (2015 - £3,568; 2014 - £2,194 million), restructuring costs (2015 - £2,931 million; 2014 - £1,154 million), write down of goodwill and other intangible assets (2015 - £573 million; 2014 - £276 million) and other operating costs of Williams & Glyn (2015 - £261 million; 2014 - £232 million).

 

20
 

 

Our Operating Model

 

 

We have a clear set of Organisation Design principles that underpin our operating model, structures and accountabilities.

 

 

Our Values 

Our Values are universal and guide our actions every day, in every part of our business. The values are the foundation of how we work at RBS.

 

Serving customers Doing the right thing

We exist to serve customers.

 

We do the right thing.

We earn their trust by focusing on their needs and delivering excellent service.

 

We take risk seriously and manage it prudently.

 

We prize fairness and diversity and exercise judgment with thought and integrity.

Working together

 

Thinking long term
We care for each other and work best as one team. We know we succeed only when our customers and communities succeed.

We bring the best of ourselves to work and support one another to realise our potential.

We do business in an open, direct and sustainable way.

 

21
 

 

Our customers

 

 

Our Customers

 

RBS remains committed to achieving its target of being number one bank for customer service, trust and advocacy by 2020. In recent years, RBS has launched a number of initiatives to make it a simple and fair bank to do business with, and it continues to deliver on the commitments that it made to its customers in 2014.

 

We use independent surveys to measure our customers’ experience and track our progress against our goal in each of our markets.

 

Net Promoter Score (NPS)

 

Customers are asked how likely they would be to recommend their bank to a friend or colleague, and respond based on a 0-10 scale with 10 indicating ‘extremely likely’ and 0 indicating ‘not at all likely’. Customers scoring 0 to 6 are termed detractors and customers scoring 9 to 10 are termed promoters. NPS is established by subtracting the proportion of detractors from the proportion of promoters.

 

The table below lists all of the businesses for which we have a NPS for Q4 2015. Year-on- year, NatWest Business Banking, RBS Business Banking and Ulster Bank Personal Banking (Northern Ireland) have seen significant improvements in NPS.

 

 

 

Customer trust 

We also use independent experts to measure our customers’ trust in the bank. Each quarter we ask customers to what extent they trust or distrust their bank to do the right thing. The score is a net measure of those customers that trust their bank (a lot or somewhat) minus those that distrust their bank (a lot or somewhat). Customer trust in RBS is at its highest in two years and NatWest has also improved.

 

 

 

Notes:

 

(1)Source: GfK FRS 6 month rolling data. Latest base sizes: NatWest (England & Wales) (3509) Royal Bank of Scotland (Scotland) (623). Based on the question: “How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?“

 

(2)Source: Coyne Research 12 MAT data. Latest base sizes: Ulster Bank NI (300) Ulster bank RoI (302) Question: “Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a scale of 0 to 10 where 0 is not at all likely and 10 is extremely likely”.

 

(3)Source: Charterhouse Research Business Banking Survey, based on interviews with businesses with an annual turnover up to £2 million. Quarterly rolling data. Latest base sizes: NatWest England & Wales (1352), RBS Scotland (432). Weighted by region and turnover to be representative of businesses in England & Wales/Scotland.

 

(4)Source: PWC Northern Ireland Business Banking Tracker and PWC Republic of Ireland Business Banking Tracker. Data collected annually. Latest base sizes: Ulster Bank NI (377), Ulster Bank RoI (222). Weighted by turnover to be representative of businesses in Northern Ireland and Republic of Ireland.

 

(5)Source: Charterhouse Research Business Banking Survey, based on interviews with businesses with annual turnover between £2 million and £1 billion. Latest base size: RBSG Great Britain (872). Weighted by region and turnover to be representative of businesses in Great Britain.

 

(6)Source: Populus. Latest quarter’s data. Measured as a net of those that trust RBS/NatWest to do the right thing, less those that do not. Latest base sizes: NatWest, England & Wales (974), RBS Scotland (187).

 

 

22
 

 

Key economic indicators

 

 

Key economic indicators 

The UK economy grew by 2.2% in 2015, its average of the last 40 years. In a healthy job market, the number of people in work rose by more than 500,000 and unemployment fell to 5.1%. For the first time in six years there was meaningful wage growth, averaging 2.0%. Businesses’ profits were as strong as at any point since the 1990s, at least outside the oil and gas sector, and business investment continued to rise. House prices grew by around 8%.

 

 

Summary 

Despite this generally positive environment, inflation hovered around 0% throughout the year. Most of the weakness in inflation was a consequence of falling commodity prices and the effects of the depreciation in sterling since 2013. However, some of it reflected spare capacity in firms and in the labour market that contained domestic cost growth. Low inflation was one important reason why Bank Rate remained unchanged throughout the year at 0.5%, where it has been since March 2009. During early 2016, the date at which markets expected Bank Rate to rise ranged from 2017 to 2020, materially later than expectations in mid-2015. During early 2016, the date at which markets expected Bank Rate to rise ranged from 2017 to 2020, materially later than expectations in mid-2015.

 

Driven by strong export performance, growth in Ireland accelerated sharply to around 7.0% in the first three quarters of 2015, its fastest rate since before the crisis. Unemployment fell to under 10%, which, while materially below the recession peak of 15% remains high by the standards of the past. House price inflation moderated from 16.3% in 2014 to 6.6%, reflecting a continuing imbalance between supply and demand.

 

Growth in the wider euro area accelerated modestly to more than 1.0%. However, with inflation close to zero and unemployment averaging more than 11%, the European Central Bank launched a programme of quantitative easing. That programme will continue until September 2016 at the earliest. In the US, growth was 2.4%, the same as in 2014, and unemployment fell to 5%. Inflation was close to zero throughout the year. In December, the Federal Open Market Committee voted to raise the Federal Funds Target Rate by 0.25% to a range of 0.25%-0.5%.

 

In emerging markets, notably China, growth slowed sharply during the year, although this was not always reflected in official data. During 2015 and again in early 2016, market volatility rose because of concerns about prospects in China and other emerging markets and the possible consequences of slower growth there for advanced economies. Weaker emerging market growth contributed to slow trade growth.

 

23
 

Business review

 

 

Business review 

RBS is structured around becoming number one for service, trust and advocacy as we meet the ambitions and needs of our retail, business, commercial and corporate customers. Organised under three customer-facing franchises, our core businesses are centred around the UK and Ireland markets with a focused international capability. 

·Personal & Business Banking (PBB) comprises two reportable segments: UK Personal & Business Banking (UK PBB) and Ulster Bank RoI.

·Commercial & Private Banking (CPB) comprises three reportable segments: Commercial Banking, Private Banking and RBS International (RBSI).

·Corporate & Institutional Banking (CIB) serving our largest corporate and institutional clients.

 

In addition, RBS will continue to manage and report Capital Resolution separately until disposal or wind down.

 

24
 

Personal & Business Banking

 

 

Personal & Business Banking (includes reportable segments UK PBB and Ulster Bank RoI) – contribution to income of 45%

Les Matheson 

CEO, Personal & Business Banking

 

Personal & Business Banking (PBB) serves individual and mass affluent customers together with small businesses (generally up to £2 million turnover). PBB’s principal brands are NatWest in England and Wales, Royal Bank of Scotland in Scotland, and Ulster Bank RoI in the island of Ireland. The operations of Ulster Bank in Northern Ireland have been combined with the main UK business.

 

Performance overview 

·PBB recorded an operating profit of £1,292 million in 2015, down 20% from 2014, (UK PBB £1,030 million, down 9% from 2014, Ulster Bank RoI £262, down 46% from 2014), with good asset growth offset by pressure on new business margins and higher costs for restructuring the business and remedying past conduct issues.

 

·Customer lending grew by 5% to £136.5 billion, with good growth also recorded in customer deposits, up 2% to £150.9 billion (In UK PBB customer lending grew by 7% to £119.8 billion, customer deposits, increased by 4% to £137.8 billion, Ulster Bank RoI customer lending declined 8% to £16.7 billion, customer deposits declined by 11% to £13.1 billion). While deposit margins widened, overall net interest margin was lower as competitive conditions and the increased proportion of lower margin mortgage lending reduced asset margins.

 

·Operating expenses of £4,606 million included £959 million of provisions for customer redress, principally in relation to Payment Protection Insurance, as well as £182 million of restructuring costs. Operating expenses excluding restructuring costs and litigation and conducts were £3,465 million, down 3% from 2014. (UKPBB operating expenses excluding restructuring costs of £167 million (2014 - £111 million) and litigation and conduct costs of £972 million (2014 - £918 million) were £3,038 million, down 3% from 2014, Ulster Bank RoI operating expenses excluding restructuring costs of £15 million (2014 - £13 million) and litigation and conduct recoveries of £13 million (2014 - £19 million) were £427 million, unchanged from 2014).

 

·Credit conditions remained benign, with modest net impairment releases in the UK and substantial releases in RoI, albeit lower than in 2014.

 

Building a better bank that serves customers well 

·In 2015 PBB moved to build deeper customer engagement through the launch of a new current account, ‘Reward’, which enables customers to receive 3% cashback on their household bills for a monthly account fee of £3.

 

·Committed to fair banking through making overdrafts more accessible to one million customers who are now eligible for overdrafts of £100 and £250.

 

·PBB continued to improve and develop the NatWest mobile banking app, becoming the first UK bank to enable customers to log in using their fingerprint with Touch ID and adding enhanced functionality on real time registration, Apple Pay and PAYM.

 

  2015   2014
Performance highlights UK PBB Ulster Bank RoI PBB   UK PBB Ulster Bank RoI PBB
Return on equity (%)  11.7 10.6 11.4    11.9 18.6 13.7
Net interest margin (%)    3.18 1.57 2.93      3.32 1.92 3.10
Cost:income ratio (%) 80 78 80   76 70 76
Operating profit (£m) 1,030 262 1,292   1,133 489 1,622
Operating expenses (£m) (4,177) (429) (4,606)   (4,157) (421) (4,578)
Restructuring costs (£m) (167) (15) (182)   (111) (13) (124)
Litigation and conduct costs (£m) (972) 13 (959)   (918) 19 (899)
Operating profit excluding restructuring and litigation and conduct costs (£m) 2,169 264 2,433   2,162 483 2,645
Operating expenses excluding restructuring and litigation and conduct costs (£m) (3,038) (427) (3,465)   (3,128) (427) (3,555)
Net loans and advances to customers (£bn)      119.8 16.7 136.5        111.6 18.1 129.7
Customer deposits (£bn)       137.8 13.1 150.9         132.6 14.7 147.3
Loan:deposit ratio (%)    87 127 90      84 124 88
Risk-weighted assets (£bn)     33.3 19.4 52.7        36.6 21.8 58.4

 

25
 

Case studies

 

 

A new way to pay 

With Apple Pay, customers can now shop using just their mobile phone. NatWest was one of the first banks to make the service available to UK customers, and thanks to this partnership between the bank and Apple, customers can now use their Apple devices to pay for goods in shops, make payments in apps and pay fares on the London transport system while travelling around the city.

 

Not only is Apple Pay convenient, but customers earn the same rewards they would get using their RBS or NatWest debit or credit cards.

 

So now if you leave your wallet at home, it need not ruin your day.

 

 

 

Very rewarding 

Customers want banking to be simple and straightforward – and to be rewarded for their loyalty. It’s never fair when new customers get all the best deals. Our new Reward account is benefiting customers old and new, who choose to do their everyday banking with us. There are no catches, or complicated terms and conditions. For a small fee all customers can earn 3% cashback on up to seven household bills paid by direct debit. That means anyone paying household bills of more than £100 a month will cover the monthly Reward fee, and the more you pay out for your bills, the more you earn. It really is that simple.

 

 

26
 

Commercial & Private Banking 

 

 

Commercial & Private Banking (includes reportable segments Commercial Banking, Private Banking and RBSI) contribution to income of 33%

 

Alison Rose

CEO, Commercial & Private Banking

 

Commercial & Private Banking (CPB) serves commercial and corporate customers, operating principally through the NatWest and Royal Bank of Scotland brands, and high net worth individuals, through Coutts and Adam & Co. In Jersey, Guernsey, the Isle of Man and Gibraltar, RBS International serves a range of retail, commercial, corporate and financial institution customers. CPB aims to support the UK and Western European economies through its provision of credit and banking services to help businesses grow.

 

Performance overview

·CPB recorded an operating profit of £1,001 million, down £592 million or 4% ( Commercial Banking – up £8 million, 1%, Private Banking – down £569 million, RBSI - down £31 million, 13%). Operating profit excluding restructuring, litigation and conduct costs and write down of goodwill was £1,708 million down 11%. (Commercial Banking – down £92 million, 6%, Private Banking – down £77 million, 41%, RBSI – down £34 million, 14%). CPB operating profit of £1,001 million was impacted by a goodwill impairment charge of £498 million attributed to Private Banking.

 

·In CPB total income declined by 3% to £4,265 million. In Commercial Banking total income declined by 2%, driven by a loss of £34 million from the sale of non-strategic asset portfolios and the transfer of the commercial cards business to UK PBB in 2014. In Private Banking total income declined by 7% to £644 million principally reflecting reduced fee income. In RBSI total income declined by 6% to £367 million principally reflecting lower deposit margins and lower return on free funds.

 

·Good growth was achieved in lending to UK businesses. Commercial Banking achieved net new lending of £1.4 billion, while continuing to run down some non-strategic portfolios. Pressure on new business lending margins was partially offset by deposit repricing.

 

·In CPB operating expenses of £3,182 million included £146 million of restructuring costs (up 26% from 2014), £63 million of conduct and litigation costs (down 69% from 2014) and write-down of goodwill of £498 million. This included restructuring costs of £69 million relating to Commercial Banking, down 36%, £73 million relating to Private Banking and £4 million relating to RBSI, down 43%, litigation and conduct costs of £51 million relating to Commercial Banking down 54% and £12 million relating to Private Banking down 87% and write-down of goodwill of £498 million, all relating to Private Banking. Operating expenses excluding restructuring, litigation and conduct costs and write down of goodwill increased by 3% to £2,475 million. (Commercial Banking increased by 3% to £1,801 million, Private Banking increased by 3% to £518 million and RBSI increased by 2% to £156 million).

 

·Impairment losses were £82 million, in line with the modest impairments experienced in 2014, (Commercial Banking £69 million, Private Banking £13 million and RBSI - nil).

 

Building a better bank that serves customers well 

·Commercial Banking made progress towards improving customer experience by becoming easier and simpler to do business with through operational investment and process simplifications.

 

·Continued enhancements within the business contributed to commercial lending growth in 2015.

 

·Opened four Entrepreneur Hubs across the UK, increasing our involvement to seven, enabling entrepreneurs and small businesses to access free office space, mentoring and fi support, with a further fi e hubs to be opened in 2016.

 

·Private Banking is being refocused on its UK connected customers, with a simpler operating model and new customer propositions for wealthy individuals and families. Closer links with Commercial Banking have driven an increase in client referrals.

 

27
 

Commercial & Private Banking

 

 

  2015   2014
Performance highlights Commercial Banking

Private

Banking

RBSI

 

CPB   Commercial Banking Private Banking

RBSI

 

CPB
Return on equity (%) 9.8 (27.7) 18.5 5.8   10.2 4.1 24.2 10.6
Net interest margin (%) 1.88 2.75 1.48 1.92   1.91 2.89 1.65 1.99
Cost:income ratio (%) 59 171 44 75   59 86 41 62
Net loans and advances to customers (£bn) 91.3 11.2 7.3 109.8   84.9 11.0 7.2 103.1

Customer deposits (£bn)

 

88.9 23.1 21.3 133.3   84.9 22.3 20.8 128.0
Loan:deposit ratio (%) 103 48 35 82   100 49 35 80
Risk-weighted assets (£bn) 72.3 8.7 8.3 89.3   63.2 8.7 7.5 79.4
Operating profit (£m) 1,264 (470) 207 1,001   1,256 99 238 1,593
Operating expenses (£m) (1,921) (1,101) (160) (3,182)   (1,964) (595) (160) (2,719)
Restructuring costs (£m) (69) (73) (4) (146)   (108) (1) (7) (116)
Litigation and conduct costs (£m) (51) (12) - (63)   (112) (90) - (202)
Write down of goodwill - (498) - (498)   - - - -

Operating profit excluding restructuring, litigation and conduct costs and write down of goodwill (£m)

 

1,384 113 211 1,708   1,476 190 245 1,911
Operating expenses excluding restructuring, litigation and conduct costs and write down of goodwill (£m) (1,801) (518) (156) (2,475)   (1,744) (504) (153) (2,401)

 

28
 

Case studies 

 

 

A campus fit for a king 

Established in 1829, King’s College London has an illustrious history, with alumni including John Keats and Florence Nightingale. The University wanted to raise £135 million to invest in its Strand campus, and returned to the private placement market to deliver. “Since our foundation we’ve banked with RBS, so we have a long and trusted relationship,” explains Stephen Large, Director of Finance at King’s College London. “I’m proud of the difference the redevelopment will make to the University, future generations of students and the local community.”This strong relationship helped the bank and the University work together to raise the funding to redevelop the campus and create a new business school.

 

 

 

Home sweet home 

Moving house can be stressful. Then, once you find the right home, you then need to switch energy supplier, set up your broadband and manage your home. Zoopla Property Group (ZPG) is a digital media and lead generation platform that owns and operates some of the UK’s most widely recognised and trusted digital brands including Zoopla, uSwitch and PrimeLocation. Its mission is to be the most useful resource for consumers and the most effective marketing channel for related business partners. Acquiring price comparison website uSwitch in June 2015 allowed ZPG to develop its combined services and become the consumer champion at the heart of the home. RBS supported the acquisition by acting as Mandated Lead Arranger in a £150 million four-bank arrangement. Thanks to the successful deal, ZPG can now help its consumers make smarter decisions when finding, moving or managing their home.

 

 

29
 

Corporate & Institutional Banking

 

 

Corporate & Institutional Banking contribution to income of 12%

 

Chris Marks

CEO, Corporate & Institutional Banking

 

The Corporate & Institutional Banking (CIB) business has a core focus on UK and Western Europe corporates and global financial institutions, shaped around three product lines: Rates, Currencies and Financing. The business is undergoing a multi- year transformation, which was launched in 2015.

 

Performance overview 

·CIB reported an operating loss of £837 million, compared with a loss of £710 million in 2014. Operating loss excluding restructuring costs of £524 million (2014 - £102 million), litigation and conduct costs of £378 million (2014 - £832 million) and own credit adjustments of £120 million (2014 - £9 million loss) was £55 million, compared with an operating profit of £233 million in 2014 as lower income was partially offset by a reduction in expenses, down 15%.

·Total income declined by £404 million, or 21%, to £1,527 million in 2015. Excluding £120 million relating to own credit adjustments (2014 - £9 million charge) and £98 million relating to the transfer of portfolio businesses to Commercial Banking, CIB income was £1,309 million, in line with previous guidance.

·Rates income declined, reflecting the reduced scale and risk appetite of the business. Currencies incurred losses when the Swiss Central Bank unexpectedly removed the Swiss Franc's peg to the Euro. Financing was impacted by the strategically reduced corporate footprint especially in the US and by lower levels of EMEA investment grade issuance.

·Operating expenses of £2,369 million (2014 - £2,650 million) included litigation and conduct costs of £378 million (2014 - £832 million) and restructuring costs of £524 million (2014 - £102 million). Operating expenses excluding litigation and conduct costs and restructuring costs were £249 million lower totalling £1,467 million (2014 - £1,716 million), principally due to considerable reduction in headcount as the business moves towards a more sustainable cost base.

·RWAs reduced by £8.8 billion to £33.1 billion compared with £41.9 billion, nearing the end-state target of c.£30 billion. The reduction was primarily driven by the transfer to Commercial Banking of the UK and Western European portfolio business.

 

Building a better bank that serves customers well 

·CIB managed the largest liability management exercise in Europe in 2015 whilst raising approximately £50 billion for customers in debt capital markets in 2015.

·Steady state target for CIB is c.£1.4 billion of income with c.£30bn RWAs. Operating expenses are targeted at c.£0.7-0.8bn to deliver 8-10% return of equity.

  

Performance highlights 2015     2014
Return on equity (%) 11.1     7.9
Cost:income ratio (%) 155     137
Loans and advances to customers (£bn) 16.1     26.5
Customer deposits (£bn) 5.7     11.8
Risk-weighted assets (£bn) 33.1     41.9

 

30
 

Case studies

 

 

Waste nothing 

Rotterdam-based AVR handles public and commercial waste from across the Netherlands and surrounding countries, including the UK and Ireland. The waste is transformed into green energy for the Dutch power grid and district heating. A consortium, Cheung Kong Infrastructure Holdings and Power Assets Holdings, bought the business in 2013 and we recently helped them refinance part of that acquisition through the capital markets. The deal means the company can now operate more cheaply. This is good for AVR, and for Dutch communities as the company is now able to bid more competitively for public authority waste contracts.

 

 

 

Silver Service for Whitbread 

RBS has a long-standing relationship with Whitbread, the UK’s largest hospitality company, which owns a number of well known brands including Premier Inn, Costa Coffee, Beefeater and Brewers Fayre. The company wanted to raise £450 million, so turned to the bank for help to raise the funds in the debt capital markets. RBS acted as joint lead manager, documentation bank as well as billing and delivery agent on the benchmark 10-year deal, which had a coupon of 3.375 per cent.

 

The deal marked Whitbread’s debut sterling bond issue and will help the hospitality company continue to grow its business.

 

 

31
 

Capital Resolution

 

 

Capital Resolution

 

Mark Bailie 

CEO, Capital Resolution

 

Capital Resolution consists of CIB Capital Resolution and RBS Capital Resolution (RCR). At 1 January 2015, CIB Capital Resolution comprised £101 billion of funded assets consisting of non-strategic portfolios from the CIB segment. RCR was created on 1 January 2014 to de-risk the bank’s balance sheet.

 

Performance overview 

·Capital Resolution funded assets fell by £62.2 billion to £53.4 billion, primarily due to run off of the repo financing book and loan portfolio disposals.

 

·Within this RCR reduced funded assets by 88% since its formation to £4.6 billion, exceeding the targeted reduction of 85% a year ahead of schedule.

 

·Capital Resolution RWAs reduced from £95.1 billion to £49.0 billion, driven by signifi ant reductions across CIB Capital Resolution and RCR, which primarily reflected disposals and repayment activity.

 

·CIB Capital Resolution delivered on its commitment to reduce RWAs by £25 billion in 2015, with a reduction of £32.6 billion.

 

·Capital Resolution made an operating loss of £3,687 million, including income related disposal losses of £367 million, restructuring costs of £1,307 million together with litigation and conduct costs of £2,105 million primarily relating to additional provisions for mortgage- backed securities litigation in the US. Operating expenses excluding restructuring costs of £1,307 million (2014 - £185 million), litigation and conduct costs of £2,105 million (2014 - £162 million) and write-down of goodwill of £130 million in 2014, were reduced by £481 million, or 24% to £1,539 million, principally reflecting a fall in headcount of approximately 1,100. Net impairment releases of £725 million were recorded, primarily in RCR driven by the disposal strategy and favourable market and economic conditions.

 

Building a better bank that serves customers well 

·CIB Capital Resolution consists of three regional businesses (Americas, EMEA and APAC), Shipping, Markets assets, Other legacy assets including Saudi Hollandi Bank and Global Transaction Services.

 

·RCR consisted of four asset groups: Ulster Bank (RCR Ireland), Real Estate Finance (ex. Ireland), Corporate and Markets. The remaining funded assets are included in Capital Resolution and RCR ceases to exist (following formal approval by the PRA).

 

Performance highlights     2015       2014
Risk-weighted assets (£bn)     49.0       95.1
Risk-weighted asset equivalent (£bn)     50.3       101.3
Total assets (£bn)     201.5       327.3
Funded asset (£bn)     53.4       115.6
                 

 

32
 

 

Case study

 

 

Pedalling ourselves proud

RBS became an official partner of Sport Relief in summer 2015, and September saw the first bank-wide fundraising event for the charity. Almost 750 colleagues from right across the business took part in the London to Edinburgh cycle challenge. Colleagues chose to cycle the full 500 miles, or 100 or 35 mile stretches, with hundreds more also taking part in static bike challenges, bake sales and other fundraising activities in our buildings across the UK. RBS employee Howard Fairclough shared his experience of the challenge: “Fantastic day, although my thighs might not agree. In terms of staff engagement this was the best event I’ve taken part in, in my 29 year career with the bank.”

 

 

33
 

 

Governance at a glance

 

 

 

 

Our Board

The Board has eleven directors comprising the Chairman, two executive directors and eight independent non-executive directors, one of whom is the Senior Independent Director. Biographies for each director can be found on pages 43 to 46.

 

In September 2015, Howard Davies was appointed Chairman of RBS, succeeding Philip Hampton. Mike Rogers was appointed to the Board on 26 January 2016.

 

The Board is collectively responsible for the long-term success of RBS and delivery of sustainable shareholder value. Its role is to provide leadership of RBS within a framework of prudent and effective controls which enables risks to be assessed and managed.

 

An external evaluation of the effectiveness of the Board and its committees was conducted in 2015, led by Condign Board Consulting Limited.

 

Governance at a glance 

Our Board committees 

In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. The work of the Board committees is discussed in their individual reports. The terms of reference for each of these committees is available on rbs.com.

 

The full Governance report is on pages 42 to 89.

 

Group Audit Committee 

Assists the Board in discharging its responsibilities for monitoring the quality of the financial statements of RBS. It reviews the accounting policies, financial reporting and regulatory compliance practices of RBS and RBS’s systems and standards of internal controls, and monitors the work of internal audit and external audit.

 

Board Risk Committee 

Provides oversight and advice to the Board on current and potential future risk exposures of RBS and future risk strategy. It reviews RBS’s compliance with approved risk appetite and oversees the operation of the RBS Policy Framework and submissions to regulators.

 

RBS Capital Resolution (RCR) Board Oversight Committee 

Provides oversight of RCR’s progress against, and compliance with, its primary objective and asset management principles. The RCR BOC met for the final time in January 2016 to finalise the closure of RCR.

 

Sustainable Banking Committee  

Provides support to the Board in overseeing actions being taken by management to run a sustainable long term business, with specific focus on culture, people, customer, brand and Environmental Social and Ethical issues.

 

34
 

Governance at a glance

 

 

Group Performance and Remuneration Committee 

Responsible for approving remuneration policy and reviewing the effectiveness of its implementation. It also considers senior executive remuneration and makes recommendations to the Board on the remuneration of executive directors.

 

Group Nominations Committee  

Assists the Board in the selection and appointment of directors. It reviews the structure, size and composition of the Board, and the membership and chairmanship of Board committees. It considers succession planning taking into account the skills and expertise which will be needed on the Board in future. In 2016, the Nominations Committee will be replaced by the Nominations and Governance Committee, which has an expanded remit including governance oversight.

 

Executive Committee 

The Board is supported by the Executive Committee comprising the executive directors and other senior executives. It supports the Chief Executive in managing RBS’s businesses. It reviews and debates relevant items before consideration by the Board. It is responsible for developing and delivering RBS’s strategy and it monitors and manages financial performance, capital allocation, risk strategy and policy, risk management, operational issues and customer issues.

 

UK Corporate Governance Code  

Throughout the year ended 31 December 2015, RBS has complied with all of the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated September 2014 except in relation to provision (D.2.2) that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors.

 

RBS considers that this is a matter which should rightly be reserved for the Board.

 

35
 

Risk overview

 

 

 

 

Risk overview

Progress in 2015 

·RBS made continued progress in 2015 on delivering its strategy to reduce risk and strengthen its balance sheet and capital position.

 

·Risk-weighted assets fell 32% in the year to £243 billion.

 

·The Common Equity Tier 1 (CET1) capital ratio increased by 430 bps to 15.5% and the leverage ratio increased by 140 bps to 5.6%.

 

·Risk elements in lending (REIL) fell to £12.2 billion, representing 3.9% of gross customer loans, down from 6.8% at 31 December 2014.

 

·RBS continued to reduce risk concentrations, notably in sectors such as Oil & Gas and Commercial Real Estate as well as in the Eurozone periphery countries.

 

·Good progress was made in de-risking the balance sheet as a result of the continued run-down or sale of certain businesses and higher-risk or capital- intensive assets.

 

·Citizens was fully divested resulting in a total RWA reduction of £63 billion.

 

·Capital Resolution reduced RWAs to £49 billion at 31 December 2015 from £95 billion at 31 December 2014, with substantial progress seen across exit portfolios. RCR reached its targeted run-down for 2015 with a total RWA reduction of £38 billion since launch and a £13.5 billion reduction in 2015.

 

·The first tranche of the international private banking business sale was completed with the second tranche due to be completed in the first half of 2016.

 

In the Bank of England (BoE) 2015 stress test, RBS’s transitional Common Equity Tier 1 (CET1) capital ratio under the hypothetical adverse scenario was 6.1% after the impact of management actions, above the 4.5% post-stress minimum CET1 capital ratio threshold set by the BoE. Taking into account the capital actions achieved in 2015 and those planned in the future, RBS did not need to alter its current capital plan as a result of the stress test, including the requirements relating to its Individual Capital Guidance (ICG). RBS’s Tier 1 leverage ratio under the hypothetical adverse scenario was 2.9%. After the impact of management actions, the ratio was 3.0%, which met the 3.0% post-stress minimum Tier 1 leverage ratio threshold set by the BoE.

 

RBS maintained a strong liquidity and funding risk profile in 2015. Its loan to deposit ratio was 89% at 31 December 2015, compared with 95% in 2014. The latest Individual Liquidity Adequacy Assessment (ILAA) showed that RBS is in a strong position to withstand liquidity stress scenarios. It suggested that RBS’s liquidity portfolio was large enough to cover more than double (227%) the expected outflows in the worst of three severe scenarios.

 

36
 

Risk overview

 

 

Top and emerging risks

RBS employs a robust process for identifying and managing its top and emerging risks. Top risks are defined as scenarios that, while unlikely, may materialise, and which, if they did, would have a significant negative impact, such that RBS as a whole, or a particular business, could potentially fail to meet one or more of its strategic objectives. A number of scenarios attracted particular attention in 2015:

 

Macro-economic and other external risks 

Risks related to the wider economy: 

Like most other businesses, RBS remains vulnerable to changes in the external economic environment. Among potential scenarios considered, the following could have a material negative impact: a UK recession including large house price falls; vulnerabilities in emerging market economies, including China, resulting in contagion in RBS’s core markets; global deflation; volatility in international markets linked to advanced economy interest rate increases or decreases; a resumption of the eurozone crisis, including a worsening of the situation in Greece; and major geopolitical instability. To mitigate these risks, RBS has strengthened its capital, liquidity and leverage positions. A number of higher-risk portfolios have been exited or reduced. Stress testing is used extensively to inform strategic planning and risk mitigation relating to these risks.

 

Risks related to the UK referendum on EU membership: 

The referendum on the UK’s membership of the EU during this parliament increases economic and operational uncertainty. The result may also give rise to further political uncertainty regarding Scottish independence. RBS actively monitors, and considers responses to, varying EU referendum outcomes to ensure that it is well prepared for all eventualities.

 

Risks related to the competitive environment: 

RBS’s target markets are highly competitive, which poses challenges in terms of achieving some strategic objectives. Moreover, changes in technology, customer behaviour and business models in these markets have accelerated. RBS monitors the competitive environment and associated technological and customer developments as part of its strategy development and makes adjustments as appropriate.

 

An increase in obligations to support pension schemes: 

If economic growth stagnates, and interest rates remain low, the value of pension scheme assets may not be adequate to fund pension scheme liabilities. The deficit in RBS pension schemes as determined by the most recent triennial valuations has increased, requiring RBS to increase its current and future cash contributions to the schemes. An acceleration of certain previously committed pension contributions in Q1 2016 will reduce this risk. Depending on the economic and monetary conditions and longevity of scheme members prevailing at that time, the deficit may increase at subsequent valuations.

 

Regulatory and legal risks 

The impacts of past business conduct: 

Future conduct and litigation charges could be substantial. RBS is involved in ongoing class action litigation, securitisation and mortgage-backed securities related litigation, investigations into foreign exchange trading and rate- setting activities, continuing LIBOR-related litigation and investigations, investigations into the treatment of small and medium- sized business customers in financial difficulty, anti-money laundering, sanctions, mis-selling (including mis-selling of payment protection insurance products), and other investigations. Settlements may result in additional financial penalties, non-monetary penalties or other consequences, which may be material. More detail on these issues can be found in the Litigation, Investigations and Reviews and Risk Factors sections. To prevent future conduct from resulting in similar impacts, RBS has embarked on a programme to embed a strong and comprehensive risk and compliance culture.

 

Risks to income, costs and business models arising from regulatory requirements: 

RBS is exposed to the risk of further increases in regulatory capital requirements as well as risks related to new regulations that could affect its business models. RBS considers the implications of proposed or potential regulatory activities in its strategic and financial plans.

 

Operational and execution risks 

Increased losses arising from a failure to execute major projects successfully: 

The successful execution of major projects, including the transformation plan, the restructuring of CIB, the divestment of Williams & Glyn and the embedding of a strong and pervasive organisational and risk culture, are essential to meet RBS’s strategic objectives. The separation and eventual divestment of Williams & Glyn is a complex process and as such entails significant operational and execution risk. The Group remains committed to full divestment of Williams & Glyn by the end of 2017. These projects cover organisational structure, business strategy, information technology systems, operational processes and product offerings. RBS is working to implement change in line with its project plans while assessing the risks to implementation and taking steps to mitigate those risks where possible.

 

37
 

Risk overview

 

 

Impact of cyber attacks: 

Cyber attacks are increasing in frequency and severity across the industry. RBS has participated in industry-wide cyber attack simulations in order to help test and develop defence planning. To mitigate the risks, a large-scale programme to improve user access controls is in progress, along with a number of other actions, including a reduction in the number of external websites, enhancement of anti-virus protections, and the implementation of a staff education programme on information protection.

 

Inability to recruit or retain suitable staff

RBS is undergoing significant organisational change, the result ofa need to implement new business strategies and respond to a changing external environment. The pace of change, coupled with the associated uncertainty, may cause experienced staff to leave and prospective staff not to join. Although these risks concern all customer businesses, they particularly affect CIB. RBS has communicated expected changes in its organisational structure to members of staff, implementing plans aimed at minimising unexpected staff losses. It is also working to implement an enhanced recruitment strategy.

 

Failure of information technology systems

RBS’s information technology systems may be subject to failure. As such systems are complex, recovering from failure is challenging. To mitigate these risks, a major investment programme has significantly improved the resilience of the systems and more benefits are expected. Back-up system sustainability has improved, and a ‘shadow bank’ system, to provide basic services, if needed, has been created.

 

Full risk factors are discussed on pages 384 to 409.

 

38
 

Sustainable banking

 

 

Sustainable banking

 

Sustainable banking means serving today’s customers in a way that also helps future generations. It requires us to put customers first, make RBS a great place to work, support our communities and be mindful of environmental impacts.

 

This section gives a short overview of our two main areas of focus: supporting enterprise and financial capability. It also provides details of our key disclosures on carbon emissions, inclusion and human rights. Our forthcoming Sustainable Banking Report, independently assured to AA1000 standards, provides a much more comprehensive overview of our approach to these areas and other material issues affecting the bank. Further information is available at rbs.com/sustainable.

 

Carbon emission disclosures 

RBS has a set of five year environmental targets running from 2015-2020, which sit alongside our pre-existing 2012-2020 targets for business travel and paper. At the end of year one, we can report that due to efficiency initiatives across our UK property portfolio, we’ve continued to reduce our combined Scope 1 and 2 emissions, putting us well on track to meet our global 2020 energy reduction targets. Similarly, our Scope 3 business travel reductions remain on track, as a result of our internal policies to reduce cost and promote more sustainable modes of travel.

 

We continue to strive to reduce the energy and associated emissions of our data centres, whilst also ensuring the delivery of reliable and innovative services to our customers remains a key priority. We’ve made changes in our waste reporting, by expanding our data collection streams and working closely with suppliers to find innovative ways to meet targets.

 

Our ambitious ‘Zero Waste to Landfill’ target remains challenging and if we are to meet it, will require us to find new approaches to collaboration. The 2015 reporting year has seen the removal of Citizens from our environmental footprint, and so to remain in line with best practice, we’ve applied our re-baselining strategy to remove CFG emissions and normalise our environmental footprint. In 2014, CFG combined Scope 1, 2 and 3 footprint totalled 101,240tCO2e.

 

Inclusion

Building a more inclusive bank is essential for our customers and colleagues. Our inclusion policy standard applies to all our people globally.

 

During 2015 we continued our roll out of unconscious bias learning for all employees. We have introduced a gender goal to have at least 30% of women in the bank’s top three leadership levels by 2020. Further, we aim to have 50/50 balance at all levels by 2030. This is supported by the launch of a female development proposition. An increased focus on disability has led to the development of a comprehensive plan to support our colleagues and customers with additional needs and will help RBS achieve its ambition of becoming a ‘disability smart’ organisation. From an LGBT perspective, we continue to deliver improvements to our people policies and customer operating procedures, including the introduction of guidance to support employees going through gender transition, introducing the ‘Mx’ honorific, and improving our customer gender change process. We are finalising plans to improve our ethnic representation within senior roles and are continuing to support our 15,000 strong employee-led networks.

 

RBS has been recognised for its work on Equality, Diversity and Inclusion by our Platinum ranking from Opportunity Now (gender); our Gold ranking for Race for Opportunity (race); retaining a position in the Times Top 50 Employers for Women; and improving upon our ranking in the Stonewall Workplace Equality Index (LGBT). As at 31 December 2015, of our global population of 90,158 employees (actual headcount excluding temporary workers), 42,892 (48%) were male and 47,266 (52%) female. There were 701 ‘senior managers’, which comprises our executive employee population and individuals who are directors of our subsidiaries. The RBS Board of directors has eleven members, consisting of eight male and three female directors.

 

 

 

Our approach to Human Rights 

RBS recognises its corporate responsibility to respect and uphold human rights. We regularly review our policies and procedures to ensure that we avoid infringing on the human rights of others throughout our sphere of influence.

 

The RBS Code of Conduct ‘Our Code’ sets out the standards we expect our people to work to, including a clear commitment to respecting human rights. We conduct regular consultations with employees on key aspects of their working environment, and operate a confidential helpline facility that allows employees to discuss any matter of concern with regards to their wellbeing. We are an accredited living wage employer.

 

39
 

Sustainable banking

 

 

Our Sustainable Procurement Code sets out our expectations of the companies that we work with. It states that our suppliers should not engage in breaches of human rights or labour rights, or in discrimination. We are also committed to equal opportunities for suppliers, and we recognise that diversity strengthens our supply chain. During 2015 we conducted introductory training on sustainability to members of our procurement team.

 

Our Environment, Social, Ethical (ESE) Risk policies include sector-specific human rights risk screenings and are regularly reviewed and updated to ensure best practice. We conduct due diligence on clients relating to human rights standards, and expect our clients to share our commitment to respecting human rights within their operations. In all sectors, we will not provide financial services to companies involved in harmful child labour or forced labour.

 

We also participate in projects with our peers through the Thun Group and UNEP FI to better understand and implement the human rights responsibilities of banks as defined by the UN Guiding Principles on Business and Human Rights. We have adopted and contributed to a number of internationally accepted codes, notably the Equator Principles and the UN Global Compact, which specifically address the management of human rights issues.

 

RBS welcomes new legislation – the Modern Slavery Act 2015 – to combat slavery and human trafficking. We are obliged to produce a public statement under this Act for the reporting year 2016, and we are identifying the steps necessary to ensure there is no modern slavery within our organisation and supply chain.

 

 

 

 

40
 

Our areas of focus

 

 

Support for enterprise 

RBS and NatWest support more businesses in the UK than any other bank, but we are determined to do more to get behind the entrepreneurs and businesses that power the UK economy. One of the ways we’re doing this is through our partnership with Entrepreneurial Spark, the free business accelerator programme. By the end of 2015 there were seven business accelerator hubs in Brighton, Birmingham, Bristol, Leeds, Glasgow, Edinburgh and Ayr and we will open six more around the UK by 2017. These hubs offer free workspace, hands-on mentoring, a start-up ‘bootcamp’ and a free programme of up to 18-months of advice, support and funding clinics for entrepreneurs and high growth businesses. 2015 also marked the successful conclusion of our Inspiring Enterprise initiative. In 2012 we began supporting and helping to fund organisations that work with young people, women and social enterprises to help them develop and progress their business ideas. By the end of the three year period, our support had directly contributed to the creation of 2,173 new businesses across the UK and we exceeded our initial targets by assisting 114,059 young people, 28,365 women and 5,349 social enterprises to develop their ideas and take their next steps on their enterprise journey.

 

 

Financial capability 

A cornerstone of our ambition to become No. 1 for customer service, trust and advocacy by 2020 is our commitment to help people manage their money better. This means supporting people’s financial capability both day-to-day and through significant life events. One of our most established initiatives is MoneySense, which is one of the longest running financial education programmes for young people in the UK and Ireland. Over 60% of secondary schools were registered to use MoneySense in 2015, gaining access to a range of resources and interactive materials for teachers, staff volunteers and young people to help them get to grips with money and how to manage it. To celebrate the programme’s 21st birthday, we re-launched MoneySense to open it up to primary schools for the first time and introduced new materials to make learning about money more real, relevant and fun for 5-18 year olds. The programme continues to empower young people to take control of their own financial journeys and build financial capability throughout their lives.

 

 

41

 

Governance report

 

  Governance Page  
  Our Board 43  
  Corporate governance 47  
  Report of the Group Nominations Committee 53  
  Report of the Group Audit Committee 55  
  Report of the Board Risk Committee 61  
  Report of the RBS Capital Resolution (RCR) Board Oversight Committee 67  
  Report of the Sustainable Banking Committee 68  
  Directors’ remuneration report 71  
  Other Remuneration Disclosures 87  
  Compliance report 90  
  Report of the directors 93  
  Statement of directors’ responsibilities 99  

 42

Our Board

 


Chairman    

Howard Davies (age 65)

Nationality: British

Date of appointment: 14 July 2015 (Board),

1 September 2015 (Chairman)

 

Experience: Howard was Deputy Governor of the Bank of England from 1995 to 1997 and Chairman of the UK Financial Services Authority from 1997 to 2003. Howard was Director of the London School of Economics and Political Science from 2003 until May 2011. He is also Professor of Practice at the Paris Institute of Political Science (Sciences Po).

 

Howard recently chaired the UK Airports Commission and is also the author of several books on financial subjects.

External appointment(s):

·     Independent director of Prudential plc and chair of the Risk Committee

·     Member of the Regulatory and Compliance Advisory Board of Millennium Management LLC

·     Chair of the International Advisory Council of the China Securities Regulatory Commission

·     Member of the International Advisory Council of the China Banking Regulatory Commission

Committee membership(s):

Group Nominations and Governance Committee (Chairman)

Executive directors    

Chief Executive

 

Ross McEwan (age 58)

Nationality: New Zealand

Date of appointment: 1 October 2013

 

Experience: Ross became Chief Executive of The Royal Bank of Scotland Group in October 2013.

Between August 2012 and September 2013, he was Chief Executive Officer for UK Retail, joining from Commonwealth Bank of Australia where he was Group Executive for Retail Banking Services for five years. Prior to this he was Executive General Manager with responsibility for the branch network, contact centres and third party mortgage brokers.

 

Ross has more than 25 years experience in the finance, insurance and investment industries. Prior to Commonwealth Bank of Australia, he was Managing Director of First NZ Capital Securities. He was also Chief Executive of National Mutual Life Association of Australasia Ltd/AXA New Zealand Ltd. Ross has an MBA from Harvard.

External appointment(s):

None

 

Committee membership(s):

·    Executive Committee (Chairman)

Chief Financial Officer

 

 

Ewen Stevenson (age 49)

Nationality: British/New Zealand

Date of appointment: 19 May 2014

 

Experience: Prior to his current role, Ewen was at Credit Suisse for 25 years where he was latterly co-Head of the EMEA Investment Banking Division and co-Head of the Global Financial Institutions Group. He has over 20 years of experience advising the banking sector while at Credit Suisse.

Ewen has a Bachelor of Commerce and Administration majoring in Accountancy and a Bachelor of Law from Victoria University of Wellington, New Zealand.

External appointment(s):

None

 

Committee membership(s):

·    Executive Committee

 43

Our Board

 

Independent non-executive directors  

 

Sandy Crombie (age 67)

Nationality: British

Date of appointment: 1 June 2009

(Senior Independent Director)

 

Experience: Sandy spent his entire full-time career with Standard Life plc, retiring as group chief executive. An actuary, he has served his profession in a variety of roles and has also served as a director of the Association of British Insurers.

Sandy has had a variety of cultural and community roles, and was previously Chairman of Creative Scotland, Chairman of the Edinburgh World City of Literature Trust and vice Chairman of the Royal Conservatoire of Scotland.

External appointment(s):

·    President of the Cockburn Association

 

Committee membership(s):

·    Group Performance and Remuneration Committee (Chairman)

·    Group Audit Committee

·    Group Nominations and Governance Committee

·    GRG Board Oversight Committee

 

 

Alison Davis (age 54)

Nationality: British/USA

Date of appointment: 1 August 2011

 

Experience: Previously, Alison served as a director of City National Bank, First Data Corporation and Xoom and as chair of the board of LECG Corporation. She has also worked at McKinsey & Company, AT Kearney, as Chief Financial Officer at Barclays Global Investors (now BlackRock) and as managing partner of Belvedere Capital, a private equity firm focused on buy-outs in the financial services sector.

External appointment(s):

·    Non-executive director and member of the compensation committee of Unisys Corporation

·    Non-executive director, chair of the compensation committee and member of the audit committee of Diamond Foods Inc.

·    Non-executive director, and member of the audit committee of Fiserv Inc

·    Non-executive director and chair of the audit committee of Ooma Inc.

·    Member of Advisory Board of Strategic Global Advisors, LLP

 

Committee membership(s):

·    Group Nominations and Governance Committee

·    Group Performance and Remuneration Committee

·    Sustainable Banking Committee

 

 

Morten Friis (age 63)

Nationality: Norwegian

Date of appointment: 10 April 2014

 

Experience: Prior to joining the RBS Board, Morten had a 34 year financial services career and held various roles at Royal Bank of Canada and its subsidiaries including Associate Director at Orion Royal Bank, Vice President, Business Banking and Vice President, Financial Institutions. In 1997, he was appointed as Senior Vice President, Group Risk Management and served as the Chief Credit Officer then Chief Risk Officer from 2004 to 2014. He was also previously a Director of RBC Bank (USA), Westbury Life Insurance Company, RBC Life Insurance Company and of RBC Dexia Investor Services Trust Company.

External appointment(s):

·    Member of the Board of Directors of The Canadian Institute for Advanced Research

·    Member of the Board of Directors of the Harvard Business School Club of Toronto

 

Committee membership(s):

·    Group Audit Committee

·    Board Risk Committee

·    CIB Board Oversight Committee

       

 44

Our Board

 


Independent non-executive directors
 

 

Robert Gillespie (age 60)

Nationality: British

Date of appointment: 2 December 2013

 

Experience: Robert began his career with Price Waterhouse (now PricewaterhouseCoopers) where he qualified as a chartered accountant. He then moved into banking joining SG Warburg, specialising in corporate finance, and was appointed as Co-Head and Managing Director of its US investment banking business in 1989. Following the acquisition in 1995 of Warburg by Swiss Bank Corporation (which subsequently merged with UBS), he then held the roles of Head of UK Corporate Finance, Head of European Corporate Finance and Co-Head of its global business and CEO of the EMEA region. He relinquished his management roles at the end of 2005, and was appointed Vice Chairman of UBS Investment Bank. Robert left UBS to join Evercore Partners, from where he was seconded to the UK Panel on Takeovers and Mergers, as Director General, from 2010 to 2013.

External appointment(s):

·    Independent board director at Ashurst LLP 

·    Chairman of Council at the University of Durham

·    Chairman of the Boat Race Company Limited 

·    Director of Social Finance Limited

 

Committee membership(s):

·    Group Nominations and Governance Committee 

·    Group Performance and Remuneration Committee

·    Board Risk Committee 

·    Sustainable Banking Committee

·    CIB Board Oversight Committee (Chairman) 

·    GRG Board Oversight Committee

Penny Hughes, CBE (age 56)

Nationality: British 

Date of appointment: 1 January 2010

 

Experience: Previously a non-executive director and chairman of the corporate compliance and responsibility committee of Wm Morrison Supermarkets plc, other former non-executive directorships include Skandinaviska Enskilda Banken AB, Home Retail Group plc, Vodafone Group plc, Reuters Group PLC, Cable & Wireless Worldwide plc and The Gap Inc. Penny spent the majority of her executive career at Coca-Cola where she held a number of leadership positions, latterly as President, Coca-Cola Great Britain and Ireland.

External appointment(s):

·    Non-executive Chairman of The Gym Group plc. Also chair of the nominations and member of the audit, risk and remuneration committees 

·    Non-executive director and member of the audit and nomination committees of SuperGroup plc

 

Committee membership(s):

·    Sustainable Banking Committee (Chairman) 

·    Board Risk Committee

·    GRG Board Oversight Committee

Brendan Nelson (age 66)

Nationality: British 

Date of appointment: 1 April 2010

 

Experience: Brendan was global chairman, financial services for KPMG. He previously held senior leadership roles within KPMG including as a member of the KPMG UK board from 1999 to 2006 and as vice-chairman from 2006. Chairman of the Audit Committee of the Institute of Chartered Accountants of Scotland from 2005 to 2008. President of the Institute of Chartered Accountants of Scotland 2013/14.

External appointment(s):

·     Non-executive director and chairman of the audit committee of BP plc 

·     Member of the Financial Reporting Review Panel

 

Committee membership(s):

·    Group Audit Committee (Chairman) 

·    Group Nominations and Governance Committee

·    Board Risk Committee 

·    GRG Board Oversight Committee (Chairman)

·    CIB Board Oversight Committee

 45

Our Board

 

Independent non-executive directors  

 

Baroness Noakes, DBE (age 66)

Nationality: British 

Date of appointment: 1 August 2011

 

Experience: An experienced director on UK listed company boards with extensive and varied political and public sector experience. A qualified chartered accountant, she previously headed KPMG’s European and International Government practices and has been President of the Institute of Chartered Accountants in England and Wales. She was appointed to the House of Lords in 2000 and has served on the Conservative front bench in various roles including as shadow treasury minister between 2003 and May 2010. Previously held non-executive roles on the Court of the Bank of England, Hanson, ICI, Severn Trent, Carpetright, John Laing and SThree.

External appointment(s):

·    Deputy chairman, Ofcom

 

Committee membership(s): 

·    Board Risk Committee (Chairman)

·    Group Audit Committee 

·    CIB Board Oversight Committee

·    GRG Board Oversight Committee

 

Mike Rogers (age 51)

Nationality: British 

Date of appointment: 26 January 2016

 

Experience: Has extensive experience in retail banking and financial services. Mike joined Barclays in 1986 where he undertook a variety of roles in the UK and overseas across business banking, wealth management and retail banking. Mike was Managing Director of Small Business, Premier Banking and UK Retail Banking. Mike is currently Chief Executive of Liverpool Victoria Group, a role he was appointed to in 2006.

External appointment(s):

·    Chief executive, Liverpool Victoria Group 

·    Non-executive director of the Association of British Insurers.

 

Committee membership(s):

·    Sustainable Banking Committee

Chief Governance Officer and Board Counsel  

Aileen Taylor (age 43)

Nationality: British 

Date of appointment: 1 May 2010

(Company Secretary)

 

Experience: A qualified solicitor, Aileen joined RBS in 2000. She was appointed Deputy Group Secretary and Head of Group Secretariat in 2007, and prior to that held various legal, secretariat and risk roles including Head of External Risk (Retail), Head of Regulatory Risk (Retail Direct) and Head of Legal and Compliance (Direct Line Financial Services).

Aileen is a fellow of the Chartered Institute of Bankers in Scotland and a member of the European Corporate Governance Council.

 

 

Executive Committee

 

The Board is supported by the Executive Committee comprising the executive directors and other senior executives. Details of the composition of the Executive Committee and biographies of its members can be found at rbs.com>about us>corporate governance>ce and board>executive committee.

 

 46

 

Corporate governance

 

 

Chairman’s introduction

I am pleased to introduce the Corporate Governance report, my first since being appointed Chairman of the Board. A brief review of the principal issues addressed by the Board during the year is included in my Chairman’s Statement on page 13. The following report provides an overview of key roles and responsibilities of the Board, and sets out in greater detail how the Board spent its time in 2015. Board effectiveness and performance evaluation are also covered, as well as an overview of how we communicate with shareholders.

 

I and my fellow directors are committed to observing high standards of corporate governance, integrity and professionalism. Our statement of compliance with the UK Corporate Governance Code (the Code) can be found on page 90.

 

Howard Davies, Chairman of the Board

 

The Board

The Board has eleven directors comprising the Chairman, two executive directors and eight independent non-executive directors, one of whom is the Senior Independent Director.

 

Biographies for each director and details of which Board committees they are members of can be found on pages 43 to 46. The Board considers that the Chairman was independent on appointment and that all non-executive directors are independent for the purposes of the Code.

 

Board changes

Philip Hampton stepped down from the Board on 31 August 2015.

 

Howard Davies was appointed as a non-executive director on 14 July 2015 and assumed the role of Chairman on 1 September 2015. Mike Rogers was appointed as a non-executive director and a member of the Sustainable Banking Committee on 26 January 2016.

 

Roles and responsibilities

The Board

The Board is collectively responsible for the long-term success of RBS and delivery of sustainable shareholder value. The Board’s terms of reference include a formal schedule of matters specifically reserved for the Board’s decision and are reviewed at least annually. The terms of reference are available at rbs.com>about us.

 

Chairman

The role of Chairman is distinct and separate from that of the Chief Executive and there is a clear division of responsibilities with the Chairman leading the Board and the Chief Executive managing RBS’s business day to day.

 

The Chairman’s key responsibilities are to:

·provide strong and effective leadership to the Board;

·ensure the Board is structured effectively, observes the highest standards of integrity and corporate governance, and sets the tone from the top in terms of culture and values;

·build an effective and complementary Board with an appropriate balance of skills and personalities, and as Chairman of the Group Nominations Committee consider succession planning for Board appointments;

·manage the business of the Board and set the agenda, style and tone of Board discussions to promote effective decision-making and constructive debate;

·facilitate the effective contribution and encourage active engagement by all members of the Board;

·in conjunction with the Chief Executive and Chief Governance Officer and Board Counsel, ensure that members of the Board receive accurate, timely and clear information, to enable the Board to lead RBS, take sound decisions and monitor effectively the performance of executive management;

·ensure that the performance of individual directors and of the Board as a whole and its committees is evaluated regularly; and

·ensure RBS maintains effective communication with shareholders and other stakeholders.

 

Chief Executive

The Chief Executive has responsibility for all of RBS’s business and acts in accordance with the authority delegated by the Board.

 

The Chief Executive’s key responsibilities are to:

·exercise executive accountability for the RBS businesses delivering operational management and oversee the full range of activities of the customer businesses and functions;

·develop, drive and deliver the strategy approved by the Board;

·drive and deliver performance against financial plans, acting in accordance with authority delegated by the Board;

·consult regularly with the Chairman and Board on matters which may have a material impact on RBS;

·act as champion of the culture and values of RBS, creating an environment where employees are engaged and committed to good customer outcomes;

·lead, manage and develop RBS’s senior leadership team, ensuring professional capability is developed and that succession coverage meets the needs of RBS;

·ensure RBS has effective frameworks and structures to identify, assess and mitigate risks; and

·in conjunction with the Chairman and Chief Governance Officer and Board Counsel, ensure the Board receives accurate, timely and clear information.

 

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Senior Independent Director 

Sandy Crombie, as Senior Independent Director, acts as a sounding board for the Chairman and as an intermediary for other directors when necessary. He is also available to shareholders to discuss any concerns they may have, as appropriate.

 

Non-executive directors

Along with the Chairman and executive directors, the non-executive directors are responsible for ensuring the Board fulfils its responsibilities under its terms of reference. The non-executive directors combine broad business and commercial experience with independent and objective judgement and they provide independent challenge to the executive directors and the leadership team. The balance between non-executive and executive directors enables the Board to provide clear and effective leadership across RBS’s business activities.

 

The standard terms and conditions of appointment of non-executive directors are available on rbs.com or from RBS Corporate Governance and Secretariat.

 

Board Committees 

In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. Please see page 34 of the Strategic Report for more details. The terms of reference are available on rbs.com.

 

During 2015, two additional temporary committees were established to support the Board’s oversight of Global Restructuring Group (‘GRG’) and CIB.

 

Chief Governance Officer and Board Counsel

Aileen Taylor is the Chief Governance Officer and Board Counsel and is also the Company Secretary. Reporting directly to both the Chairman and the Chief Executive, she provides support and advice to the Board on a broad range of strategic and governance issues. She acts as a trusted advisor in the effective functioning of the Board, ensuring appropriate alignment and information flows between the Board and its committees, including the Executive Committee. As Board Counsel, she is responsible for delivery of commercial corporate governance support and related legal advice to the Board and overseeing the provision of legal advice to the Board by the General Counsel.

 

The Chief Governance Officer and Board Counsel’s key responsibilities include: 

·advising on Board skills and composition including induction, ongoing training and professional development;

·executive responsibility for Chairman/non-executive director search and appointment process;

·delivery of a global corporate governance strategy across RBS;

·the provision of professional secretariat support to the Board and its committees; and

·leading on implementation of recommendations from the annual Board evaluation.

 

Conflicts of interests

RBS has procedures in place to ensure that the Board’s management of conflicts of interest and its powers for authorising certain conflicts are operating effectively. On appointment, each director is provided with RBS’s guidelines for referring conflicts of interest to the Board. Each director is required to notify the Board of any actual or potential situational or transactional conflicts of interest and to update the Board with any changes to the facts and circumstances surrounding such conflicts.

 

Situational conflicts can be authorised by the Board in accordance with the Companies Act 2006 and the company’s Articles of Association. The Board considers each request for authorisation on a case by case basis and has the power to impose conditions or limitations on any authorisation granted as part of the process.

 

Details of all directors’ conflicts of interest are recorded in a register which is maintained by the Chief Governance Officer and Board Counsel and reviewed annually by the Board.

 

Board meetings

In 2015, nine Board meetings were scheduled and individual attendance by directors at these meetings is shown in the table below.

 

In addition to the nine scheduled meetings, 25 additional meetings and committees of the Board were held, including meetings to consider and approve financial statements. The Chairman and the non-executive directors meet at least once per year without executive directors present.

 

 

Attended/

scheduled

Howard Davies (1)              4/4
Ross McEwan              9/9
Ewen Stevenson              9/9
Sandy Crombie              9/9
Alison Davis              9/9
Morten Friis             9/9
Robert Gillespie             9/9
Penny Hughes             9/9
Brendan Nelson             9/9
Baroness Noakes             9/9
Mike Rogers (2)             — 
   
Former director  
Philip Hampton (3)             6/6

 

Notes:

 

(1)Appointed to the Board on 14 July 2015.

(2)Appointed to the Board on 26 January 2016.

(3)Stepped down from the Board on 31 August 2015.

 

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Principal activities of the Board during 2015

In advance of each Board meeting, the directors are provided with comprehensive papers. During 2015 there has been an enhanced focus on organisational culture, including risk culture, and on continued enhancement of the risk appetite framework. These have been recurring themes underpinning Board discussions during the year. A revised approach to Board papers was adopted in 2015 in order to improve and enhance the quality, content and consistency of information presented to the Board which has been well received. An overview of the principal activities of the Board during 2015 is shown below.

 

Each meeting

·     Chairman’s report

·     Chief Executive’s report

·     Chief Financial Officer’s report including monthly results and update on capital, funding and liquidity

·     Franchise updates

·     Transactions update

·     Risk report (including updates on conduct matters)

·     Reports from Committee Chairmen

·     Governance and Company Secretary’s report (routine matters for approval/noting)

1st Quarter 2nd Quarter

·     Budget

·     Executive director remuneration proposals

·     Annual results and AGM notice

·     Board and committee evaluations

·     Internal Audit evaluation

·     External Auditor evaluation

·     ICB design

·     Risk appetite framework

·     Stress testing

·     RBS contingency funding plan

·     Restructuring update

·     Employee survey results

·     Litigation update

·     Technology update

·     Transformation Programme

·     Q1 results

·     Risk culture

·     Resolution plan

·     Recovery plan

·     Annual General Meeting preparations

·     Citizens divestment

·     Stress testing

·     Internal Capital Adequacy Assessment Process

·     Non-executive director’s training proposals

·     ICB update

·     Digital update

·     Technology update

·     Transformation Programme

·     Board strategy offsite

·     Executive talent session

3rd Quarter 4th Quarter

·    Interim results

·    Individual Liquidity Adequacy Assessment

·    Citizens divestment

·    Culture

·    Executive talent session

·    Brand hierarchy

·    Board evaluation update

·    Stress testing

·    Williams & Glyn capital plan

·    Litigation update

·    Technology update

·    Transformation Programme

·    Banking Standards Board session

·    Executive talent session

·    Board session with PRA

·     Q3 results

·     2016 budget and 2017-20 plan

·     ICB update

·     CIB strategy review

·     Dear Chairman Exercise II Feedback response

·     Ulster Bank strategic review

·     RBSI strategic review

·     Data and analytics session

·     Legal report

·     Technology update

·     Board and committee external evaluation

·     Pension funding

·     Senior Manager Regime responsibilities map

·     Transformation Programme

·     Williams & Glyn Programme

Executive Committee members attend part of each Board meeting to provide an update on the performance of each of the franchises and risk and conduct issues. Other relevant senior executives attend Board meetings to present reports to the Board as appropriate. This provides the Board with an opportunity to engage directly with management on key issues and supports the Board’s succession planning activity.

 

Board effectiveness

Skills and experience of the Board 

The Board is structured to ensure that the directors provide RBS with the appropriate balance of skills, experience and knowledge as well as independence. Given the nature of RBS’s businesses, experience of banking and financial services is clearly of benefit, and we have a number of directors with substantial experience in that area. The Board also benefits from directors with experience in other fields.

 

The table below illustrates the breadth of skills and experience on the Board.

 

·     Retail Banking

·     Other Financial Services

·     Markets/Investment Banking

·     Government & Regulatory

·     Mergers & Acquisitions

·     Corporate Restructuring

·     Stakeholder Management

·     Chief Executive experience

·     Finance & Accountancy

·     Risk

·     Technology/Digital

·     Operations

·     Change Management

·     Consumer Facing

Board committees also comprise directors with a variety of skills and experience so that no undue reliance is placed on any individual.

 

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Induction and professional development

Each new director receives a formal induction on joining the Board, which is co-ordinated by the Chief Governance Officer and Board Counsel. This includes visits to RBS’s major businesses and functions and meetings with directors and senior management. Meetings with external auditors, counsel and stakeholders are also arranged as appropriate. Each induction programme has a core element that the director is required to complete, with the remainder of the programme tailored to the new director’s specific requirements. A list of example meetings arranged during an induction programme for a new director is set out below:

 

Chairman

Chief Executive

Chief Financial Officer

Senior Independent Director

Other non-executive directors

Chief Governance Officer and Board Counsel

Chief Risk Officer

Chief Conduct & Regulatory Affairs Officer

Chief Marketing Officer

RBS Treasurer

RBS General Counsel

External Auditor

External Counsel

 

Franchise Chief Executives

Business visits (UK and overseas) 

Finance

Risk

Internal Audit

Tax

Chief Human Resources

Officer

Chief Administration

Officer

Investor Relations

Strategy & Corporate

Development

Regulators

Institutional Investors

 

The Chairman continues to progress his tailored and comprehensive induction programme, which includes all of the above, together with additional customer, employee, shareholder and governmental engagement sessions, to support the nature and scope of the Chairman’s role.

 

The directors have access to a wide range of briefing and training sessions and other professional development opportunities. Internal training relevant to the business of RBS is also provided. Business visits are arranged as part of the Group Audit Committee and Board Risk Committee schedule (details of which can be found on pages 56 and 62) and all non-executive directors are invited to attend. Directors undertake the training they consider necessary to assist them in carrying out their duties and responsibilities as directors.

 

During 2015, the directors received updates on a range of subjects to enhance their knowledge, including:

 

·ICB/ring-fencing.

·Client Money and Asset rules.

·Senior Managers’ Regime.

·Cyber security.

·The Banking Standards Board.

·Digital technology.

·PRA consultation on board responsibilities.

·PRA policy statement on the implementation of ring-fencing.

·EBA consultation on guidelines on sound remuneration policies.

·FRC discussion paper on UK board succession planning.

·New RBS leadership programme.

·Davies Report on gender balance on British boards.

·EU Market Abuse Regulations.

·The Investment Association Principles of Remuneration 2015.

·Institutional and Shareholder Services UK & Ireland Proxy Voting Guidelines.

·EBA report on the use of Role Based Allowances.

·European Commission consultation on the impact of the bonus cap, October 2015.

·Pensions.

·PRA/FCA Report into the failure of HBOS plc and report by Andrew Green QC assessing the FSA’s enforcement actions in relation to the failure of HBOS plc.

 

The Chief Governance Officer and Board Counsel maintains continuing professional development logs. These are reviewed regularly between the Chairman and each director individually, to assist in identifying future training and development opportunities that are specific to the individual director’s requirements.

 

Information

All directors receive accurate, timely and clear information on all relevant matters and have access to the advice and services of the Chief Governance Officer and Board Counsel. In addition, all directors are able, if necessary, to obtain independent professional advice at the company’s expense.

 

Time commitment

It is anticipated that non-executive directors will allocate sufficient time to RBS to discharge their responsibilities effectively and will devote such time as is necessary to fulfil their role. Directors have been briefed on the limits on the number of other directorships that they can hold under the requirements of the fourth Capital Requirements Directive (CRD IV). Each director is required to seek the agreement of the Chairman before accepting additional commitments that might affect the time the director is able to devote to his or her role as a non-executive director of RBS. The Board monitors the other commitments of the Chairman and directors and is satisfied that they are able to allocate sufficient time to enable them to discharge their duties and responsibilities effectively. The time commitment currently required of our non-executive directors continues to be significant.

 

Election and re-election of directors

In accordance with the provisions of the Code, all directors stand for election or re-election by shareholders at the company’s Annual General Meeting. In accordance with the UK Listing Rules, the election or re-election of independent directors also requires approval by a majority of independent shareholders.

 

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Performance evaluation

In accordance with the Code, an external evaluation of the Board takes place every three years. An internal evaluation takes place in the intervening years.

 

The 2013 and 2014 evaluations were conducted internally by the Chief Governance Officer and Board Counsel. In 2014, an evaluation of the Board’s effectiveness was also carried out by the PRA. Following the 2014 evaluations, a number of initiatives were implemented, aimed at improving the overall performance and effectiveness of the Board. These included improving the quality and volume of information provided to the Board, ensuring sufficient time on Board agendas for customer matters and RBS’s priorities, enhancing the professional development provided to directors and a focus on succession planning. Work continues to address these topics and will be kept under regular review as a matter of good practice.

 

In 2015, the Board and committee evaluation process was externally facilitated by Condign Board Consulting Limited, a specialist board evaluation consultancy which was selected following a competitive tender process. The Board is satisfied that Condign has no other connection with RBS.

 

Performance evaluation process

The external facilitator undertook a formal and rigorous evaluation by:

 

·using a tailored discussion guide to structure individual meetings held with each director, as well as the Chief Governance Officer and Board Counsel, the Chief Risk Officer and the Chief Conduct & Regulatory Affairs Officer;

·discussing outcomes and recommendations with the Chairman and Chief Governance Officer and Board Counsel; and

·outlining outcomes and suggesting areas for improvement through a written report and oral presentation to the Board.

 

Amongst the areas reviewed were Board dynamics, culture and engagement; Board and committee meetings and processes (including information quality and flows and the balance between Board and committee agendas); Board and committee composition and structuring, external relationships with regulators, shareholders and stakeholders; and overall Board effectiveness.

 

Outcomes of the 2015 performance evaluation

The 2015 performance evaluation concluded that the Board was strong and operated effectively and within its terms of reference.

 

Key strengths identified included the following:

·the Board was exceptionally hard-working, engaged, and appropriately composed throughout the year;

·the group dynamic between Board members was good and on the whole members continued to work well together, creating effective challenge, considerable debate and detailed oversight; and

·the Board’s committees also operated effectively within their terms of reference throughout the year providing a great deal of support to the Board.

 

A summary of the key themes arising from the 2015 performance evaluation is set out below, together with an overview of the key actions proposed:

 

Key themes

Board resourcing and succession planning

The need to plan for rotation in the Board’s membership was highlighted, as a number of directors reach or exceed the six year point in their tenure. The review highlighted the importance of regularly reviewing Board and Board Committee composition, according to business and staffing needs, with scope also identified to streamline Nominations Committee processes.

 

Agenda planning

The evaluation highlighted the continuing need to ensure the right preparations take place before a paper reaches the Board. It also highlighted the challenge of achieving an appropriate balance between Board and Committee agendas to ensure the best use of directors’ time and to support effective decision-making.

 

Tone from the top and ensuring Board/executive alignment

The evaluation also acknowledged the continuing importance of the Board’s role in developing the appropriate performance and behavioural culture which is shared with the organisation, and ensuring appropriate alignment between the Board and the executive as remediation issues reduce and the forward agenda develops.

 

Proposed actions

The full performance evaluation report set out a series of recommendations which have been carefully considered by the Board. An action plan has been agreed to progress these recommendations, as appropriate, during 2016. Key actions include:

 

·Creation of a Nominations and Governance Committee, adding a governance oversight function, and streamlining processes and membership.

 

In January 2016 the Board approved proposals to establish a Nominations and Governance Committee. The committee report on page 53 contains more detail on the remit of the new Committee and areas of focus for 2016.

 

·A focused review of Board and committee agendas and their supporting information and processes.

 

The priorities for this exercise are to minimise duplication, optimise the use of directors’ time, and to engage directors’ insights and experience fully. This in turn will allow sufficient space for focus on RBS’s onward priorities, particularly its customers.

 

·A number of actions to improve alignment between the board and executives which were identified in light of the review’s findings, and will be progressed during 2016 to ensure a consistent ‘tone from the top’.

 

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These actions include undertaking post-decision reviews to pinpoint learnings for future Board development and continuing to ensure appropriate Board involvement in executive succession planning. The forward agenda planner will also be discussed bi-annually to ensure that business needs, the Board’s expectations and executive support are aligned.

 

Individual director and Chairman effectiveness reviews

 

The Chairman met with each director individually to discuss their own performance and ongoing professional development and also shared peer feedback provided as part of the evaluation process. Separately, the Senior Independent Director sought feedback on the Chairman’s performance from the non-executive, executive directors and key external stakeholders and discussed it with the Chairman.

 

Relations with investors

 

The Chairman is responsible for ensuring effective communication with shareholders. The company communicates with shareholders through the Annual Report and Accounts and by providing information in advance of the Annual General Meeting. Individual shareholders can raise matters relating to their shareholdings and the business of RBS at any time throughout the year by letter, telephone or email via rbs.com/ir.

 

Shareholders are given the opportunity to ask questions at the Annual General Meeting and any General Meetings held or can submit written questions in advance. The Senior Independent Director and the chairmen of the Board committees are available to answer questions at the Annual General Meeting.

 

Communication with the company's largest institutional shareholders is undertaken as part of the Investor Relations programme:

 

·the Chief Executive and Chief Financial Officer meet regularly with UKFI, the organisation set up to manage the Government’s investments in financial institutions, to discuss the strategy and financial performance of the business. The Chief Executive and Chief Financial Officer also undertake an extensive annual programme of meetings with the company’s largest institutional shareholders;

·the Chairman independently meets with RBS’s largest institutional shareholders annually to hear their feedback on management, strategy, business performance and corporate governance. Additionally, the Chairman, Senior Independent Director and chairmen of the Board committees met with the governance representatives of a number of institutional shareholders during the year;

·the Senior Independent Director is available if any shareholder has concerns that they feel are not being addressed through the normal channels; and

·the Chairman of the Group Performance and Remuneration Committee consults extensively with major shareholders in respect of the Group’s remuneration policy.

 

Throughout the year, the Chairman, Chief Executive, Chief Financial Officer and Chairman of the Group Performance and Remuneration Committee communicate shareholder feedback to the Board. The directors also receive reports reviewing share price movements and performance against the sector. Detailed market and shareholder feedback is provided to the Board after major public announcements such as a results release. The arrangements in place are to ensure that directors develop an understanding of the views of major shareholders and that these are considered as part of the annual Board evaluation.

 

The Investor Relations programme also includes communications aimed specifically at its fixed income (debt) investors. The Chief Financial Officer and/or the RBS Treasurer give regular presentations to fixed income investors to discuss strategy and financial performance. There is also a separate section on the RBS website for fixed income investors which includes information on credit ratings, securitisation programmes and securities documentation. Further information is available at rbs.com/ir.

 

 52

 

Report of the Group Nominations Committee

 

 

Letter from Howard Davies

Chairman of the Group Nominations Committee

 

 

Dear Shareholder,

 

As Chairman of the Board and Chairman of the Group Nominations Committee I am pleased to present our report on the committee's activity during 2015.

 

Role and responsibilities

The Group Nominations Committee reviews the structure, size and composition of the Board, and membership and chairmanship of Board Committees. The Committee engages with external consultants, considers potential candidates and recommends appointments of new directors to the Board. The terms of reference of the Group Nominations Committee are reviewed annually, approved by the Board and are available at rbs.com.

 

Principal activity during 2015 

In 2015, discussions principally focused on the Chairman search and the search for new non-executive directors. The Committee also continued to monitor succession planning taking into account business requirements and industry developments.

 

Membership and meetings

All non-executive directors are members of the Group Nominations Committee which is chaired by the Chairman of the Board. The Chief Executive and the Chief Financial Officer are invited to attend meetings.

 

The Group Nominations Committee holds at least two scheduled meetings per year, and also meets on an ad hoc basis as required. In 2015, there were four Group Nominations Committee meetings, three of which were chaired by Philip Hampton, and individual attendance by directors at these meetings is shown in the table below. In addition a number of ad hoc meetings were held to discuss Chairman succession prior to my appointment.

 

 

Attended/

scheduled

Howard Davies (Chairman) (1) 2/2
Sandy Crombie 4/4
Alison Davis 4/4
Morten Friis 4/4
Robert Gillespie 4/4
Penny Hughes 4/4
Brendan Nelson 4/4
Baroness Noakes 4/4
Mike Rogers (2) — 
   
Former member  
Philip Hampton (3) 3/3

 

Notes: 

(1)Appointed to the Committee on 14 July 2015.

(2)Joined the Committee on 26 January 2016.

(3)Stepped down from the Committee on 31 August 2015.

 

Chairman search

In September 2014, it was announced that Philip Hampton would step down as Chairman in 2015 and Egon Zehnder International (EZ) was engaged to support the search process for his successor. EZ does not provide services to any other part of RBS. On 26 February 2015, it was announced that I would be appointed as Chairman with effect from 1 September 2015, and I joined the Board as a non-executive director on 14 July 2015.

 

Consideration of new non-executive directors 

EZ has continued to support the search for new non-executive directors during 2015 and to support the future Board succession planning. The Committee has considered the skills and experience required to complement the Board and these have been incorporated into the search process.

 

During 2015, the Committee considered a number of potential candidates and in December it was announced that Mike Rogers would join the Board as a non-executive director with effect from 26 January 2016. Mike’s extensive experience of retail banking and financial services will strengthen the Board.

 

In December 2015, following a rigorous tender process, JCA Group was appointed to support the search for further non-executive directors in future and the EZ engagement will come to an end. JCA Group does not provide search services to any other part of RBS.

 

Tenure of non-executive directors

The chart below sets out the tenure of non-executive directors.

 

 

 

Board and Committee membership 

My appointment as successor to Philip Hampton aside, there have been no other material changes made to the Board or its Committee membership during 2015. As previously mentioned Mike Rogers joined the Board and was appointed to the Sustainable Banking Committee in January 2016.

 

During 2015, two temporary Board oversight committees were formed in relation to CIB and the bank’s Global Restructuring Group (GRG).

 

The CIB Board Oversight Committee first met in March 2015 to oversee the strategic change programme for the Bank’s CIB business, including monitoring execution risk and external stakeholder management. Robert Gillespie chairs the Committee. Morten Friis, Brendan Nelson and Baroness Noakes are members. It is anticipated that the Committee will be stood down in the first half of 2016.

 

The GRG Board Oversight Committee first met in May 2015 to provide oversight in relation to matters related to GRG including the Group’s response to the FCA’s Section 166 Review.

 

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Report of the Group Nominations Committee

 

 

Brendan Nelson chairs the Committee. Sandy Crombie, Robert Gillespie, Penny Hughes and Baroness Noakes are members. It is anticipated that this Committee will be stood down once the FCA has confirmed the outcome of its Section 166 Review.

 

Following my appointment as Chairman and the output of the Board Evaluation, I intend to lead a review of the Board Committee membership during 2016.

 

Performance evaluation

The 2015 performance evaluation was independently facilitated by Condign Board Consulting Limited, a specialist board evaluation consultancy. The Committee has considered and discussed the outcomes of this evaluation.

 

Overall the evaluation concluded that the Group Nominations Committee continued to operate effectively although some areas for potential improvement were identified.

 

A summary of the key themes arising from the evaluation is set out below together with an overview of the key actions proposed:

 

Key themes 

·consideration should be given to expanding the Committee’s remit to include a governance oversight function;

·the search and nomination process for new non-executive directors should be reviewed and further streamlined as appropriate;

·non-executive director recruitment remains challenging for a number of reasons, including the significant time commitment expected of RBS non-executive directors;

·Group Nominations Committee membership should be reviewed, as part of a wider review of Board Committee composition; and

·succession planning should receive particular focus in the next few years, as a number of non-executive directors reach or exceed the six year point in their tenure.

 

Key Actions

In January 2016, the Board approved proposals to expand the Committee’s remit, adding a governance oversight function and changing its name to the Nominations and Governance Committee.

 

Areas of focus for the Committee during 2016 will include the key themes identified during the external evaluation process, as set out above.

 

The review included a small number of general recommendations which are relevant for both the Board and its senior committees. Key themes and actions arising from these general recommendations are set out in the Board report on pages 51 and 52 and will be considered, and addressed as appropriate, at Board level.

 

The review also recommended that all Committee chairmen should ensure continued focus on agenda planning and streamlined reporting to the Board, which will also be a priority for the Group Nominations and Governance Committee during 2016.

 

The outcomes of the evaluation have been reported to the Board and the Committee will track progress on its 2016 priorities during the year.

 

On 26 January 2016, the Board approved changes to the remit of the Group Nominations Committee which now includes responsibility for monitoring the Group’s governance arrangements, in order to ensure best corporate governance standards and practices are upheld.

 

As part of this extended remit, the Committee will consider developments relating to banking reform and analogous issues affecting the Group in the markets where it operates, and will make recommendations to the Group Board on any consequential changes to the Group’s governance model. In order to reflect the revised remit, the Group Nominations Committee has been renamed as the Group Nominations and Governance Committee. The Board also approved changes to the composition of the Committee, effective as at 26 January 2016. I continue in my role as chairman of the Committee with membership now comprising Sandy Crombie, Alison Davis, Robert Gillespie and Brendan Nelson. The Group Nominations and Governance Committee held its first meeting in February 2016.

 

Boardroom diversity 

The Board currently exceeds the target of 25 per cent female board representation as set out in Lord Davies’ 2011 report on women on Boards. We also acknowledge the additional recommendations that have recently been published and await with interest the next steps to be taken in this regard.

 

The chart below details the gender diversity of the Board.

 

 

 

The Board operates a boardroom diversity policy and a copy of the Board’s diversity statement is available on rbs.com>about us.

 

RBS understands the importance of diversity and, with regard to gender diversity, recognises the importance of women having greater representation at key decision making points in organisations. The search for Board candidates will continue to be conducted, and nominations/appointments made, with due regard to the benefits of diversity on the Board. However, all appointments to the Board are ultimately based on merit, measured against objective criteria, and the skills and experience the individual can bring to the Board.

 

The balance of skills, experience, independence, knowledge and diversity on the Board, and how the Board operates together as a unit is reviewed annually as part of the Board evaluation. Where appropriate, findings from the evaluation will be considered in the search, nomination and appointment process. If appropriate, additional targets on diversity will be developed in due course.

 

Further details on RBS’s approach to diversity can be found on page 95.

 

Howard Davies

Chairman of the Group Nominations Committee

25 February 2016

 

 54

 

 

Report of the Group Audit Committee

 

 

Letter from Brendan Nelson,

Chairman of the Group Audit Committee

 

 

 

Dear Shareholder,

 

2015 has been another significant year for the bank as it progresses on its journey to becoming number one for customer service, trust and advocacy. I am pleased to report that the Group Audit Committee has supported the bank in its ambitions and has carried out its responsibilities effectively in the period, as confirmed by the annual effectiveness review. A fuller summary of the outcomes of that review, and a description of the activity of the Committee during the year, is set out in the report that follows.

 

Accounting and financial reporting

A key role of the Group Audit Committee is to satisfy itself that the accounting policies, risks and significant management judgements which underpin the bank’s financial disclosures are reasonable and transparent. During 2015, the Committee reviewed and challenged management on material judgements, in particular those relating to accounting for provision for litigation and regulatory investigations and the treatment of committed pension obligations in light of accounting developments during 2015. Other key matters debated included: loan impairments; valuation of financial instruments; conduct provisions, including Payment Protection Insurance; goodwill; and deferred taxation. The Committee received independent views from the external auditor on these topics and was satisfied that the accounting judgements applied were appropriate.

 

Following consideration of these matters ahead of the 2015 results, it was determined that a public announcement was appropriate and the Group Audit Committee recommended that the Board release a trading statement to the market on 27 January 2016. The Committee also supported the proposal to change the bank’s reporting segments based on the six segments within the bank’s three core franchises, plus Capital Resolution and Williams & Glyn. This re-segmentation reflects the manner in which the bank is now managed.

 

As part of our overall assessment of the Annual Report and Accounts, we assisted the Board in determining that the disclosures taken as a whole were fair, balanced and understandable, and provided the information necessary for shareholders to assess RBS’s position and performance, business model and strategy.

 

Systems of internal control 

In line with the requirements of the Code and related FRC Guidance on Risk Management, Internal Control and Related Financial & Business Reporting, the Committee has reviewed and reported to the Board on the effectiveness of RBS’s internal controls. While there has been increased focus and attention during 2015 from management on addressing and closing identified deficiencies, some known issues continued to impact internal controls during 2015 as set out in the report that follows. Timely and sustainable remediation will remain a focus of the Committee in 2016.

 

While it is clear that execution of the bank’s simplification strategy will deliver benefits, the transformation programme is unprecedented in scale and the Committee has monitored the impact of such significant change upon the control environment of the organisation during the year. The Committee has reviewed reports from Internal Audit assessing progress of the bank’s major change programmes and where appropriate has challenged management regarding the associated impact on controls.

 

Embedding robust controls, driving the correct risk behaviours and ensuring the effectiveness of the three lines of defence remains a work in progress across RBS and, in conjunction with the Board Risk Committee, will continue to be priority areas for the Group Audit Committee during 2016.

 

External audit

While Deloitte continued as RBS’s external auditor throughout 2015, we supervised the transition period of the new auditors, Ernst & Young LLP (EY), who were selected in 2014 following a competitive tender process. The Committee reviewed the processes followed to ensure EY’s independence and extended our policy on non-audit services to the firm to ensure that there was no impact on the audit service or EY’s independence. EY shadowed the audit process in 2015 and I am confident that they will be well-positioned and appropriately informed to commence as the external auditor in 2016.

 

I would like to thank Deloitte for their work as auditor of RBS and its subsidiaries over the past 16 years and for their professionalism in securing an orderly handover to EY.

 

Key priorities for 2016 

2016 is set to be no less challenging for the bank and the Committee will continue to balance support to management with independent oversight and challenge. Focus will be placed on maintaining appropriate oversight over financial reporting, preparedness for accounting and regulatory changes including IFRS 9, monitoring systems of control and ongoing remediation programmes through a period of continued change and embedding the correct culture and behaviours across the bank.

 

More detailed information on the topics considered are set out in the report that follows. This demonstrates the breadth and scale of the matters considered and I would like to thank my fellow members for their continued support and focus during 2015.

 

Brendan Nelson

Chairman of the Group Audit Committee 

25 February 2016

 

 55

Report of the Group Audit Committee

 

 

 

Report of the Group Audit Committee

Membership 

The Group Audit Committee (GAC) is comprised of the following four independent non-executive directors.

 

   

Attended/

scheduled

Brendan Nelson (Chairman)   7/7
Sandy Crombie   7/7
Morten Friis   7/7
Baroness Noakes   7/7

 

Brendan Nelson, Morten Friis and Baroness Noakes are also members of the Board Risk Committee. Sandy Crombie is Chairman of the Group Performance and Remuneration Committee. This common membership helps facilitate effective governance across all finance and risk issues, including compensation decisions, and that agendas are aligned and overlap of responsibilities is avoided where possible.

 

The members of GAC are selected with a view to the expertise and experience of the Committee as a whole and with proper regard for the key issues and challenges facing RBS.

 

The Board is satisfied that all GAC members have recent and relevant financial experience and that each member of the Committee is independent as defined in the SEC rules under the US Securities Exchange Act of 1934 (the “Exchange Act”) and related guidance. The Board has further determined that Brendan Nelson, Committee Chairman, and Baroness Noakes are both ‘financial experts’ for the purposes of compliance with the Exchange Act Rules and the requirements of the New York Stock Exchange. Full biographical details of GAC members are set out on pages 43 to 46.

 

Meetings were attended by the Chief Executive and Chief Financial Officer; the Group Chairman; the Internal and External Auditors; and Finance, Legal and Risk Management executives. Other executives, subject matter experts and external advisers were also invited to attend, as required, to present and advise on reports commissioned by the Committee. The Committee also met privately with the external auditors and separately with Internal Audit management.

 

Purpose of the Group Audit Committee 

The Committee’s responsibilities are set out in more detail in its terms of reference which are reviewed annually by the Committee and approved by the Board. These are available on the Bank’s website: rbs.com.

 

Meetings and visits

The Committee held seven scheduled meetings during 2015, four of which were held immediately prior to the submission of the quarterly financial statements to the Board. The Committee also convened three ad hoc meetings to consider the outputs and required affirmations relating to the annual external audit of benchmark interest rate submissions, to finalise the H1 company announcement prior to publication and the selection and approval of the external auditor for Williams & Glyn.

 

During 2015, in conjunction with members of the Board Risk Committee, members of the Committee took part in an annual programme of visits to businesses and control functions in order to gain a deeper understanding of the risks and issues they face. This value-adding programme included two visits to Risk; C&RA and Internal Audit plus visits to: PBB; CPB; CIB; Services; Finance; and Restructuring.

 

In October 2015, the Committee, in conjunction with the Board Risk Committee, undertook a visit to India which has over 14,000 staff and contractors engaged in significant back office activities. During the week-long trip the Committee spent time in both Delhi and Chennai meeting with local management teams to discuss key risk and control matters in the country. Specific sessions were held with the following local teams: Internal and External Audit, Finance functions, Risk infrastructure, Services and Technology.

 

Allocation of Group Audit Committee agenda time:

 

 

Performance evaluation

The annual review of the effectiveness of the Board and its senior Committees, including the Group Audit Committee, was conducted by Condign Board Consulting Limited, an external consultant, in 2015. The Committee has considered and discussed the outcomes of this evaluation. Overall the review concluded that the Group Audit Committee continued to operate effectively.

 

A small number of general recommendations which are relevant for both the Board and its senior committees were made. Key themes and actions arising from these general recommendations are set out in the Board report on pages 51 and 52 and will be considered, and addressed as appropriate, at Board level.

 

The Committee also tracked progress on the implementation of the recommendations from the 2014 Committee effectiveness evaluation during the year to ensure successful delivery.

 

 56

Report of the Group Audit Committee

 

 

 

Matters considered by the Committee in 2015

 

  Key area   Matters considered and action taken by the GAC
  Accounting and financial reporting
 

Accounting judgments and reporting issues considered in the preparation of financial reports

 

The Group Audit Committee focused on a number of salient judgements and reporting issues in the preparation of the 2015 accounts, in particular, the Committee considered:

·     the capital impact and accounting treatment of committed pension obligations in light of accounting developments during 2015, including the issue of exposure draft amendments to IFRIC 14. In light of these changes, the Committee supported the decision to amend the accounting policy for pensions and to apply this retrospectively leading to the recognition of an additional liability in the 2015 year end accounts in relation to committed future pension payments;

·     provision and disclosure for ongoing regulatory and litigation actions: including foreign exchange trading; retail mortgage backed securities litigation in the US; UK shareholder actions; and Payment Protection Insurance (PPI). Following discussion, the Committee was satisfied that it would be appropriate to take further incremental provisions against both retail mortgage backed securities litigation and PPI in the 2015 year end accounts;

·     the going concern basis of accounting including considering evidence in relation to RBS’s capital, liquidity and funding position. The Committee supported the directors’ going concern conclusion. Further information is set out on page 96;

·     the adequacy of loan impairment provisions, focusing in particular on judgements and methodology applied to provisions. The Committee was satisfied that the overall  loan impairment provisions and underlying assumptions and methodologies were reasonable and applied consistently;

·     valuation methodologies and assumptions for financial instruments carried at fair value including RBS’s credit market exposures and own liabilities assessed at fair value;

·     the level of goodwill and other intangible assets to be carried. Following discussion and based on year end testing, the Committee supported recognition of an impairment in goodwill attributed to Private Banking driven primarily by weaker forecast future profitability for Private Banking;

·     the judgements that had been made by management in assessing the recoverability of deferred tax assets, in light of continued execution of the bank’s strategy and changes to the UK corporate tax system;

·     the assessment by management of the adequacy of internal controls over financial reporting, and assessment of identified deficiencies. Weaknesses had been identified in user access controls relating to certain IT applications within the bank; the Committee monitored remediation plans to address the issue; and

·     the quality and transparency of financial and risk disclosures contained within the Annual Report and Accounts.

       
      The Committee recommended the quarterly and interim results announcements and the Annual Report and Accounts to the Board for approval. Consideration was given to the comprehensive review process that supports both the Group Audit Committee and ultimately the Board in reaching the conclusion that the disclosures taken as a whole were fair, balanced and understandable and provided the information necessary for shareholders to assess the company’s position and performance, business model and strategy. The review process included: central co-ordination of the Annual Report and Accounts by the Director of Finance with guidance on requirements being provided to individual contributors; review of the Annual Report and Accounts by the Executive Disclosure Committee prior to consideration by the Audit Committee; and a management certification process which required members of the Executive Committee and other senior executives to provide confirmation following their review of the Annual Report and Accounts that they considered them to be fair, balanced and understandable. This process was also undertaken in respect of the half year and quarterly results announcements. In addition, the External Auditor considered the Board’s statement as part of its audit requirements.

 57

Report of the Group Audit Committee

 

 

  Key area   Matters considered and action taken by the GAC
  Systems of internal control
  FRC Guidance on Risk Management, Internal Control and Related Financial & Business Reporting  

The Committee reviewed the effectiveness of RBS’s internal controls at both Group-wide and business/functional levels. This was undertaken via scrutiny of the first line of defence’s actions and plans in respect of internal controls and consideration of reports from the second and third lines of defence.

 

Detailed consideration was also given to disclosure contained within the Annual Report and Accounts concerning relevant internal control matters.

  Control Environment Certification  

The Committee considered the outputs of bi-annual self-assessments of the robustness of the internal control environment for the bank's customer-facing businesses, and customer support and control functions.

 

In conjunction with the Board Risk Committee, the Committee also continued to monitor the remediation of the Markets Control Environment to address some of the deficiencies as set out in the report of the Board Risk Committee report. The Committee received separate reports from management on progress in this area.

 

Three Lines of Defence

  Reports on the work underway to fully embed the three lines of defence model within the organisation were considered by the Committee. Particular attention was given to the articulation of responsibilities and accountabilities of the first and second lines of defence. This will remain a focus of the Committee in 2016.
  Credit Risk Assurance   The Committee received quarterly updates on risk assurance activities and monitored the deliverables of the credit risk assurance team.
 

Whistleblowing

  The Committee received updates on whistleblowing activity including reports on incidents reported and investigated. It monitored the development by C&RA of an enhanced whistleblowing regime for employees, including the outputs of a benchmarking exercise.
  Ledger Transformation  Programme   The Committee considered the plan and approach to align data for Risk, Finance, and Treasury, under the Ledger Transformation Programme. Key dependencies and risks to delivery were debated and oversight of the programme will remain a key focus of the Committee in 2016.
 

Coutts Control Remediation

Programme

  The Committee monitored progress of the Coutts Control Remediation Programme, established to drive improvements to the control environment in Private Banking; progress was made on the delivery of the end-to-end credit process.
  Taxation   The Committee reviewed the bank’s tax position and the tax audits being conducted across various jurisdictions including an in-depth session on tax compliance in October 2015.
  Litigation and Regulation   The Committee considered regular reports on material litigation and regulatory investigations and on the work of the Sensitive Investigations Unit.
  Notifiable Event Process   The Committee received bi-annual reports on the bank’s notifiable event process. Each Board member was alerted to each major event.
 

Fraud

  In line with the Committee’s terms of reference, consideration was given to management’s processes for identifying and responding to the risk of fraud.
  Sarbanes-Oxley Act of 2002   The Committee considered RBS’s compliance with the requirements of the Sarbanes-Oxley Act of 2002, and was satisfied in this respect. Deficiencies were identified in the review processes over user-access to certain IT applications within the bank; these deficiencies did not lead to the identification of any errors in the financial statements.  Action is being taken by Management to improve these processes.

 

 58

Report of the Group Audit Committee

 

 

 
Internal audit
 

Reports and Opinions

 

  The Committee received quarterly reports and opinions from Internal Audit throughout 2015 on the overall effectiveness of the governance, risk management and internal control framework, its control environment ratings, details of emerging and iterative issues and the adequacy of remediation activity. Reports also included assessments of the bank’s management control approach (being a measure of how management ensures that risks are understood, assessed and mitigated in a transparent and efficient manner). The Committee requested an additional report from Internal Audit on matters which could potentially cause the bank’s overall control environment rating to deteriorate.
 

Annual Plan

 

  A refreshed audit plan for 2015 was approved in H2 following the bank’s extensive strategic changes to ensure appropriate focus on the highest risks and change initiatives. The Committee considered and approved Internal Audit’s plan for 2016. The Committee also challenged resourcing levels for the revised plan and approved budget and resource for 2016.
  Internal Audit Charter   Minor changes to Internal Audit’s charter were approved by the Committee and it confirmed the independence of Internal Audit.
 

Visits

 

  During two visits to Internal Audit in 2015, the Committee reviewed resourcing and recruitment, strategy and internal quality assurance.
 

Chief Audit Executive

 

  The Chief Audit Executive continued to report to the Chairman of the Audit Committee, with a secondary reporting line to the Chief Executive for administrative purposes. The Committee assessed the annual performance (including risk performance) of the Chief Audit Executive.
  Evaluation   The Committee received regular updates on the actions taken by Internal Audit following the external review by EY the previous year. The annual review of effectiveness of Internal Audit was undertaken internally in 2015. The evaluation concluded that Internal Audit had operated effectively during the year. Certain recommendations were made to enhance particular practices within the function. These will be implemented during 2016, with progress tracked by the Committee.
 
Relationship with regulators
  Regulatory investigations and enforcements   The Committee received regular reports on the status of ongoing regulatory investigations and the progress of mandatory and remediation projects. It challenged the management of individual business areas and functions on their ability to meet regulatory expectations and the level of resource required to do so.
 
External audit
  External audit summary reports   Considered reports from the External Auditor on its observations and conclusions from the year-end audit and half-year review of RBSG plc, RBS plc and NatWest Plc, work in connection with the first and third quarter financial results and any recommendations for enhancements to RBS’s reporting and controls.
  Audit Agreement and Plan and fees   Approval of Deloitte’s 2015 Audit Agreement, audit engagement plan and 2015 audit fees including its fee for the review of the 2015 interim results, as authorised by shareholders at the Annual General Meeting.
  Williams & Glyn   The Committee approved the appointment of both an auditor and a reporting accountant for Williams & Glyn.
 

Annual Evaluation

 

  The Committee conducted an internal evaluation to assess the independence and objectivity of the External Auditor during 2015 and the effectiveness of the audit process including seeking the views of Committee members and attendees and other key members of management. Regard was had to: experience of the audit engagement team; scope of audit work planned and executed; standards of communication and reporting; quality of insights on the internal control environment; and independence.
  Transition of auditors   The Committee made recommendations to the Board on the transition of external auditors and appointment of EY with effect for the financial year ending 31 December 2016. The Committee supervised the transition of the external auditor from Deloitte to EY during 2015 and reviewed EY’s initial Audit engagement plan for 2016. EY achieved the requisite independence from RBS in June 2015. The Board will recommend the appointment of EY as external auditor to shareholders for approval at the Annual General Meeting.

 

 59

Report of the Group Audit Committee

 

 

  Audit and non-audit services
 

Non-audit services policy

 

To help safeguard the objectivity and independence of the external auditor, the Committee maintains a policy that sets out the circumstances in which the external auditor is permitted to supply audit and non-audit services. The policy is reviewed annually and audit services and permitted non-audit services are approved in advance. As mentioned above, since the start of EY’s transition towards becoming the external auditor the firm has been subject to the policy in full.

 

Categories of permitted non-audit services not covered by the annual pre-approval, require ad-hoc approval in advance on a case-by-case basis. Engagements below £100,000 may be approved by the Committee Chairman. A competitive tender process is required for all proposed non-audit services engagements where the fees are expected to exceed £100,000 and approval of the full Committee is required. As an additional governance control all engagements have to be approved by the Director of Finance and Supply Chain Services. Where the engagement is tax related, approval must also be obtained from the Director of RBS Tax. Ad hoc approvals of non-audit services are ratified by the Group Audit Committee each quarter.

 

As EY transitions towards being appointed the bank’s external auditor, it has been subject to the full audit/non-audit services policy since reaching the point of independence from the bank in June 2015. Prior to that, all engagements of EY for non-audit services work were approved by either the Financial Controller or Committee Chairman.

 

During 2015, the current and incoming external auditors were approved to undertake the significant engagements set out below:

·     assurance testing in relation to RBS’s 2014 and 2015 Sustainability Report. The External Auditor was selected given its significant experience in specialist sustainability reporting (Deloitte and EY);

·     review of financial statements of certain defined benefit funds within RBS Americas. The External Auditor was selected as it was already responsible for reviewing the financial statements of the existing defined benefit funds, and there were clear synergies to ensuring continuity of service (Deloitte); and

·    as part of the preparations for a possible future sale of HM Treasury’s shareholding in RBS, it is possible that a prospectus would be prepared for which the Group and Directors would have statutory responsibility and uncapped liability. In order to comply with relevant UKLA rules on such activities, a working capital report from an independent reporting accountant on RBS’s financial projections was required to be included in a circular to shareholders. The appointment of the External Auditor offered significant synergies in undertaking the reporting accountant role and preparing the working capital report having undertaken audit procedures on the Group’s forecasts and budgets for the five years ending 31 December 2019 (Deloitte).

 

Further details of the non-audit services that are prohibited and permitted under the policy can be found on rbs.com. Information on fees paid in respect of audit and non-audit services carried out by the External Auditor can be found in Note 5 to the consolidated accounts on page 294.

 

Brendan Nelson

Chairman of the Group Audit Committee

 60

 

Report of the Board Risk Committee

 

 

Letter from Baroness Noakes

Chairman of the Board Risk Committee

 

 

Dear Shareholder,

 

I would like to begin by thanking my colleagues on the Board Risk Committee for their contribution and support during 2015. It has been another challenging year. The report which follows describes how the Committee discharged its responsibilities in 2015 and provides details of the key issues considered and debated during the year. I will also highlight some of the key themes below.

 

Transformation

The bank’s extensive programme of transformation has continued throughout 2015 in line with the strategy to be a smaller, simpler UK focused bank. The transformation programme has been a primary focus for the Board Risk Committee and we dedicated significant time to monitoring execution risk on behalf of the Board. During 2015, we received regular updates from the project team and considered the impact of the programme on the bank’s change risk profile and control environment. We made recommendations to management in relation to governance and prioritisation and requested focus sessions on the key work streams under the programme.

 

Another key deliverable is the planned separation and disposal of Williams & Glyn and we examined the risks and challenges to meeting the delivery target in some detail during the year. In September 2015, acting under delegated authority from the Board, we approved the main regulatory filings for the Williams & Glyn Banking Licence Application.

 

Remediation and Conduct 

Regrettably, customer experience was impacted again by an IT issue in June resulting in a delay in transactions being posted to customer accounts. We oversaw the exchange of correspondence with the regulator explaining how the matter had been resolved, considered the outputs of the post implementation review exercise and examined the residual risks following the incident. IT resilience and the stability of the bank’s payments infrastructure will remain a priority of the Board and the Committee during 2016.

 

The conduct issues that have impacted the bank’s recovery and reputation continued to be of concern in 2015. We oversaw the remaining internal and regulatory investigations into the manipulation of foreign exchange markets and were kept appraised of the negotiations that culminated in the announcement of settlements with two US regulators in May 2015.

 

We will continue to monitor discussions with regulators in other jurisdictions over the coming months and make recommendations to the Group Performance and Remuneration Committee on accountability matters as appropriate.

 

Risk Culture

A strong culture risk is fundamental to achieving our strategic objectives for our customers, employees and wider stakeholders and was a key focus of the Committee this year. We reviewed the outputs of benchmarking surveys by both McKinsey and PwC in this area and discussed and agreed the dimensions of the bank’s target risk culture prior to consideration by the full Board. Risk culture standards will ultimately be linked to the bank’s people and leadership standards and wider industry standards. We will keep this under close review and plan to examine the next steps to achieving our target risk culture state in the first quarter of 2016.

 

Other 

Other material areas of Committee focus during the year have included:

·internal and external stress testing exercises and capability;

·the risk appetite framework of RBS and individual risk appetite statements for material risks, franchises and functions;

·improvements to the Operational Risk Management Framework and preparedness for compliance with the Basel Risk Data Aggregation and Reporting (RDAR) Standards;

·the capital and liquidity position of RBS and related regulatory submissions;

·improvements to risk reporting; and

·oversight of the bank’s risk profile through monitoring the risks inherent in the bank’s operations and portfolios.

 

More detailed information on each of these areas is set out in the Board Risk Committee report that follows.

 

Key priorities for 2016

Management remains committed to the reduction of risk within the organisation and demonstrated real progress in many areas during 2015. The Committee will continue to oversee the work being undertaken to ensure that the bank progresses towards operating within risk appetite and that historic issues are fully and sustainably remediated. Oversight of the Williams & Glyn separation and disposal process will be a key focus for the Committee in 2016 and, as the bank advances its strategic ambitions, it will be essential that the heightened change agenda does not adversely impact on the control environment and this will be closely monitored. Other areas of focus will include continued supervision of the embedding of the three lines of defence model, data quality, cyber risk, further evolution and enhancement of the risk appetite framework and the implementation of the Senior Managers Regime across the organisation.

 

Baroness Noakes

Chairman of the Board Risk Committee,

25 February 2016

 

 61

Report of the Board Risk Committee

 

 

 

Report of the Board Risk Committee

The role and responsibilities of the Board Risk Committee

The Board Risk Committee assumes responsibility on behalf of the Board to provide oversight of current and potential risk exposures and future risk strategy, including the determination of risk appetite and tolerance, and to promote a culture of risk awareness within RBS.

 

The Committee’s responsibilities are set out in more detail in its terms of reference which are reviewed annually by the Committee and approved by the Board. These are available on the bank’s website: rbs.com.

 

Membership

The Board Risk Committee comprises independent non-executive directors. Details of the skills and experience of each of the Committee members are set out in their biographies on pages 43 to 46.

 

 

Attended/

scheduled

Baroness Noakes (Chairman) 9/9
Morten Friis 9/9
Robert Gillespie (1) 8/9
Penny Hughes 9/9
Brendan Nelson 9/9

 

Note:

(1)The BRC meeting in March 2015 had to be rescheduled at short notice, meaning Mr Gillespie was unable to attend owing to a clash with a Citizens Financial Group Inc. Board meeting.

 

Baroness Noakes, Morten Friis and Brendan Nelson are also members of the Group Audit Committee. Robert Gillespie is also a member of the Group Performance and Remuneration Committee and the Sustainable Banking Committee, and Penny Hughes chairs the Sustainable Banking Committee. This common membership across Committees ensures effective governance across all risk, finance, reputational and remuneration issues, that agendas are aligned and that overlap of responsibilities is avoided where possible.

 

Committee meetings are also attended by relevant executive directors, including the Chief Executive, Chief Financial Officer, Chief Risk Officer, Chief Conduct & Regulatory Affairs Officer, Chief Legal Officer and General Counsel and Chief Audit Executive. The lead partner of the External Auditor also became a regular attendee of all meetings from January 2015 onwards. External advice is sought by the Committee, where appropriate.

 

Meetings and visits

Five scheduled meetings and four ad hoc meetings were held in 2015. The ad hoc meetings were required to consider: the preliminary 2015 Bank of England regulatory stress test results; the final 2015 Bank of England regulatory stress test results; and the key elements of the Williams & Glyn Banking Licence Application and regulatory submissions.

 

In 2015, members of the Committee undertook a programme of visits to various businesses and control functions in conjunction with members of the Group Audit Committee. The purpose and scope of this programme is discussed in detail in the Report of the Group Audit Committee above.

 

The Committee also held in-depth sessions on risk reporting, risk appetite, economic capital and an education session on stress testing.

 

Performance Evaluation 

The annual review of the effectiveness of the Board and its senior Committees, including the Board Risk Committee, was conducted by Condign Board Consulting Limited, an external consultant, in 2015. The Committee has considered and discussed the outcomes of this evaluation. Overall the review concluded that the Board Risk Committee continued to operate effectively. However, it was recognised that the agenda of the Committee was substantial and complex, and that meetings were lengthy as a result. It was acknowledged that the situation would also be expected to improve as the bank’s simplification programme progressed.

 

A small number of general recommendations which are relevant for both the Board and its senior committees were made. Key themes and actions arising from these general recommendations are set out in the Board report on pages 51 and 52 and will be considered, and addressed as appropriate, at Board level.

 

The outcomes of the evaluation have been reported to the Board and the Committee will track progress on its 2016 priorities during the year.

 

Allocation of Board Risk Committee agenda time:

 

 

 62

Report of the Board Risk Committee

 

 

 

Matters considered by the Committee in 2015

 

  Key area   Matters considered and action taken by the BRC
  Risk strategy and policy
 

Transformation

  Consideration of execution risk of the bank-wide transformation programme and the impact of mandatory change programmes on the programme. The Committee requested regular updates from the transformation team on progress including independent opinions from Risk Management, Internal Audit, HR and C&RA.   Focus sessions were provided at the Committee’s request on the key workstreams under the transformation programme including: control; the RAG assessment framework; people risk; and technology.
 

Williams & Glyn

  Detailed examination of the risks and challenges to the timely separation of physical assets in advance of the planned divestment, confirming appropriate governance was in place to support the programme. The Committee will oversee delivery closely during 2016 and that appropriate contingency arrangements are in place. The Committee reviewed and approved the key documents for the Banking Licence and Consumer Credit Permission Applications (namely the Regulatory Business Plan, Business Strategy including five year financials, ILAAP, ICAAP and RRP) and oversaw the governance and assurance processes in place for the whole of the applications.
 

Change risk profile

  Consideration of the change risk profile of the bank’s transformation programme and recommendations from Risk regarding prioritisation and Board and management oversight. The Committee asked management to map transformation initiatives and in-flight programmes to the bank’s risk and control environment for use in future prioritisation considerations.
 

Recovery plan and resolution planning

  Review and recommendation of the 2015 Recovery Plan to the Board for approval prior to submission to the PRA in June 2015. The Committee considered feedback from the regulator in Q4 2015 and will oversee enhancement plans throughout 2016. The Committee also reviewed the major milestones and responsibilities aimed at improving the bank’s resolvability. The Committee considered the work already underway and further steps that may be required as regulatory expectations evolve over the coming years. The Committee also considered proposed enhancements to the management, governance and alignment of recovery and resolution planning. Regular updates on progress against plan will be provided to the Committee.  
  RBS Policy Framework   Consideration of the operation of the RBS Policy Framework, including plans to simplify the structure in line with the bank’s strategic aims. The Committee requested that management continue to improve the process for exceptions to policy.  
  Risk profile    
 

Macroeconomic and geopolitical developments

  Received updates on macroeconomic and geopolitical risks including developments in Russia, China, the removal of the Swiss Franc floor and the possible UK exit from the EU. The Committee also considered the implications of reduced secondary market liquidity, driven by changing market conditions, on the bank’s risk profile and control environment.
  Reporting  

The Committee dedicated considerable meeting time to providing oversight of the bank’s risk profile through the review of emerging risks and changes in the bank’s most significant portfolios and operations, presented within the monthly risk report. This was supplemented by oral updates, provided by the Chief Risk Officer and Chief Conduct and Regulatory Affairs Officer on current and material risks at each Committee meeting.

 

An in-depth session on risk reporting in July 2015 led to further recommendations for improvements to the monthly risk report. In response to a Committee request, the monthly MI pack will transition to a quarterly report during 2016, enabling more strategic insights to be highlighted. Management will continue to refine the data provided during 2016.

 

During 2015, the General Counsel was also invited to provide a report at each meeting on current and emerging legal and litigation risks facing the bank.

  Focus sessions on key risk types   Detailed overviews of key risk types were provided to the Committee on a rotational basis. Topics covered in 2015 included reputational risk, market risk, operational risk, credit risk and country risk.

 63

Report of the Board Risk Committee

 

 

  Key area   Matters considered and action taken by the BRC
  Enterprise wide risk
 

Risk appetite

  Considerable time was spent reviewing the bank’s risk appetite framework. The Committee recommended the proposed risk appetite for the bank’s strategic objectives (earnings volatility, capital adequacy, stakeholder confidence and liquidity) to the Board for approval. The Committee held two deep dive meetings to consider the risk appetite statements for material risks and for each of the franchises and Services, placing a particular focus on: how the statements aligned with business plans and how deeply risk appetite was embedded within each area. In 2016, the Committee will look at all of these areas in greater depth including in particular the coherence of top down strategic risk appetite statements with the lower level business and risk level statements.
 

Risk culture

  The Committee discussed and agreed the dimensions of the bank’s target risk culture before this was considered further by the full Board. A further report covering franchise and functional action plans will be presented to the Committee in Q1 2016.
 

Stress testing

  Considerable time was dedicated to stress testing throughout 2015. In Q1, the Committee considered the outputs of the 2014 reverse stress testing exercise and made recommendations to the Board. It has since recommended the reverse stress test thresholds that will underpin the 2015 exercise and will review outputs in the first quarter of 2016. The Committee discussed and agreed the underlying assumptions and scenario selection for both internal and external (Bank of England) stress tests (including Internal Audit’s opinion) and monitored the results. Recommendations were made to the Board where formal Board approvals were required for regulatory purposes. A key focus of the Committee has been overseeing enhancements to the bank’s stress testing capability as well as meeting internal and external regulatory milestones and requirements. Capability enhancement will remain a priority during 2016.
 

Three lines of defence

  Oversight of progress to fully embed the Three Lines of Defence model and checking the project had an appropriate plan to deliver targeted results. The Committee is aware of the importance of staff understanding their roles and accountability and in conjunction with the Group Audit Committee, will oversee that the model continues to be reinforced across the organisation, placing particular emphasis on management’s identification and control of risk within the first line of defence.  
  RDAR   Monitored ongoing preparations for the new Basel Principles on Effective Risk Data Aggregation and Reporting (RDAR), which come into effect in January 2016, and recommended to the Board approval of the bank’s RDAR programme scope and approach to compliance.
 

Model risk

  Continued to monitor model risk management and oversaw the redesign of the model governance structure.  The Committee requested the articulation of a model risk appetite statement and risk rating methodology and for a full inventory of models to be prepared. Progress will be reviewed by the Committee in Q1 2016.
  Risk assurance   The Committee received its first quarterly report on risk assurance which highlighted the emerging issues and any deteriorating trends in the control framework for Credit and Market Risk.
  Regulatory, conduct and remediation
  Regulatory reviews  

Oversaw ongoing investigations into foreign exchange manipulation. The Committee was kept appraised of the negotiations of settlements with the United States Department of Justice and US Federal Reserve System that were announced in May 2015.

 

Reviewed the progress of the Skilled Person’s review of the Global Restructuring Group (GRG) early in 2015. This is now being overseen by a temporary GRG Board Oversight Committee and the Committee has received updates on progress.

 

Also monitored the outcomes of the Skilled Person’s review into anti-money laundering compliance, the independent consultant’s report on the bank’s sanctions regime (following the December 2013 Cease & Desist Order issued by the Federal Reserve Bank of Boston) and the status of the investigation into the alleged mis-selling of Interest Rate Hedging Products.

 

IT Incident

remediation

 

The remediation programme established in response to the IT incident in June 2012 was closed in H1 2015 following completion of the major deliverables and based upon assurances from Risk, Internal Audit and also independent advice from PwC, that the work undertaken had been appropriate and sustainable. Residual issues will be monitored by Internal Audit and reported to the Committee by exception.

 

Considered the regulatory response to a systems incident in June 2015. A systems issue delayed a number of customer transactions over a two day period, as a result of software failure. Remedial actions have been taken following a post-incident review. The Committee considered its root causes and mitigation and will keep the residual risks under review.

 64

Report of the Board Risk Committee

 

 

  Key area   Matters considered and action taken by the BRC
  Regulatory, conduct and remediation
 

Conduct and regulatory issues

 

The Committee also received reports on other conduct and regulatory issues including:

·      the remediation of issues arising within the former Markets Division, as part of the Markets Standards Portfolio Programme, which draws together a number of work streams to remediate broader risk and control issues, including regulatory and conduct risk, to strengthen the control environment.

·      the remediation of identified trade and transaction reporting compliance and collateral management issues in CIB;

·      the implementation of the bank’s strategy to reduce the volume of customer complaints;

·      tax risk and European tax-related investigations; and

·      status reports on Americas remediation issues. In particular, the Committee considered section 12 of the US Bank Holding Company Act (BHCA) and its implementing rules (the ”Volcker” rule) and approved the bank’s Volcker compliance programme

 

FCA Firm Evaluation

  An FCA Presentation in June 2015 on its strategic approach to regulation, the evolving risk landscape for banking groups and the areas of focus for the next 12 months. The FCA also presented the outcome of its firm evaluation, covering cultural change at the bank, root cause analysis, the scale and complexity of the bank’s transformation programme and the challenges of simplification.
 

Representations to Regulators

 

The Committee requested a full inventory of key representations to regulators and sought assurances on the processes and governance in place to support submissions. This work is ongoing and will be kept under regular review.

  Senior Managers Regime   The Committee exercises oversight of implementation of the new Senior Managers Regime across the bank and received reports on preparation and progress.
  Market, credit and operational risk
  Credit, market and operational risk   Consideration of credit, market and operational risks formed an integral part of the agenda of each meeting, with detailed MI demonstrating the impact on risk profile, presented within the monthly risk report.
 

Operational risk management framework

  Monitored progress of plans to improve the bank’s Operational Risk Management Framework (ORMF) including the work underway to complete risk and control assessments across the businesses. The Committee noted that significant progress had been made and agreed that the programme could move to reporting only by exception if any major issues arise.  
  IT resilience and cyber risk   Received a bi-annual report on Security & Resilience risks and internal controls in place across the bank. The Committee also separately received a report on Information Security and insights from an external industry expert on cyber risk. It reviewed the responses to the PRA and FCA Dear Chairman II Exercises and the subsequent letters from the PRA and FCA and made recommendations to the Board for approval prior to submission.
  Payments   Examined the stability and operational risks inherent within the bank’s payments environment and considered resilience, the adequacy of resource and controls. The Committee received reports on the changing regulatory environment.
 

Data quality

  Exercised oversight of the bank’s data quality programme, which aims to measure the quality of the most important data in the bank and to remediate data quality issues. The Committee noted the progress made. A detailed plan will be presented to the Committee in Q1 2016.
  Capital and Liquidity
 

ICAAP and ILAA

 

  The Committee regularly reviewed the capital and liquidity position of the bank. This included reviewing the Internal Capital Adequacy Assessment Process (ICAAP) and Individual Liquidity Adequacy Assessment (ILAA) and Internal Audit’s assurance opinion on the adequacy of the processes supporting their preparation and recommending that the Board approve these submissions to the PRA.
  Contingency Funding Plan   Considered the bank’s contingency funding plan and recommended it to the Board for approval.  

 65

Report of the Board Risk Committee

 

 

  Risk and C&RA
     

Conducted visits to Risk and C&RA and considered people engagement, resources and budget, bench strength and succession planning and the control environment of both functions.

Assessed and made recommendations to the Group Performance and Remuneration Committee on the performance of the Chief Risk Officer and Chief Conduct & Regulatory Affairs Officer.

  Accountability and Remuneration
     

Continued to provide strategic risk oversight over performance and remuneration arrangements, working closely with the Group Performance and Remuneration Committee (RemCo). RemCo’s report on pages 70 to 89 includes further detail on how risk is taken into account in remuneration decisions. Key matters considered by the Committee included:

·      the risk and control objectives of members and attendees of the bank’s Executive Committee, with additional focus on underlying objectives for the Chief Risk Officer and the Chief Conduct & Regulatory Affairs Officer;

·      an assessment of the risk/conduct performance of members and attendees of the bank’s Executive Committee, with recommendations made to RemCo as appropriate to inform its decision on pay and awards;

·      an assessment of the risk/conduct performance of the bank and its businesses, with recommendations made to RemCo to inform its decision on adjustments to the annual bonus pools;

·      accountability recommendations in respect of significant material events and high earners, including those current and former employees identified as part of the investigation into the manipulation of foreign exchange markets; and

·      consideration of the performance conditions for the bank’s Long Term Incentive Plans and assessment of proposed vesting levels to ensure risk management/conduct performance is fairly reflected in vesting outcomes.

 

 

Baroness Noakes
Chairman of the Board Risk Committee

 

 66

 

Report of the RBS Capital Resolution (RCR) Board Oversight Committee

 

 

Letter from Baroness Noakes,

Chairman of the RCR Board Oversight Committee

 

 

Dear Shareholder,

 

The RBS Capital Resolution Board Oversight Committee was established following the creation of RBS Capital Resolution (RCR) on 1 January 2014.

 

RCR was established to separate and wind down RBS’s high capital intensive assets. Targets were set to remove 55-75% of these assets from the balance sheet by the end of 2015 and 85% by the end of 2016. 

 

Key principles are:

 

·removing risk from the balance sheet in an efficient, expedient and economic manner;

 

·reducing the volatile outcomes in stressed environments; and

 

·accelerating the release of capital through management and exit of the portfolio.

 

I was appointed Chairman of the Committee on 1 April 2014 and am pleased to present the report on the Committee’s activity during 2015.

 

The role and responsibilities of the RCR Board Oversight Committee

The Committee’s responsibilities are set out in its terms of reference which are reviewed annually by the Committee and approved by the Board. These are available on rbs.com.

 

The Committee’s role is to:

 

·oversee the actions of RCR’s management, including implementation of RCR’s strategy;

 

·review and report to the Board on RCR’s progress against and compliance with the primary objective (to eliminate the bank’s exposure to RCR assets) and the asset management principles (criteria for taking decisions on the reduction of capital and assets);

 

·agree in consultation with the Group Performance and Remuneration Committee specific incentives for RCR management, aligned to the objectives of RCR;

 

·consider financial disclosures in respect of RCR; and

 

·report to the Board on the Committee’s activities and recommend changes to RCR strategy.

 

Membership and meetings

The Chairman of the Committee is the Chairman of the Board Risk Committee. The Senior Independent Director, the Chairman of RBS and the Chairman of the Group Audit Committee are members. Attendance at meetings is shown below.

 

Attended/

scheduled

Baroness Noakes (Chairman)                            4/4
Sandy Crombie                            4/4
Howard Davies (1)                            0/1
Brendan Nelson                            4/4
     
Former member    
Philip Hampton (2)                             3/3

 

Notes: 

(1)Howard Davies joined the Committee on 1 September 2015 when he succeeded Philip Hampton as Group Chairman. He did not attend the meeting in October 2015 as he was on business in the US.

(2)Stepped down from the Committee on 31 August 2015.

 

Principal activities during 2015

At each meeting during the year the Committee considered RCR’s financial performance, outlook and delivery against the targets and asset management principles. There is a well established framework for quarterly reporting which includes impact on RBS‘s capital levels and impairment releases. Market conditions allowed for exits to be accelerated and the Committee received regular updates on progress and market conditions, as well as RCR's ability to execute and complete transactions efficiently. The Committee also received quarterly updates on key transactions and the exit strategy for assets deemed to pose higher operational risk. Customer, conduct and control environment considerations were also discussed regularly. The Committee also received reports on activities of the RBS Ireland Capital Resolution Board Oversight Committee.

 

In April 2015, the Committee discussed the RCR transfer/closure plan, noting requirements for the completion of RCR and how this would be evidenced to the relevant stakeholders. At the later meetings more detailed plans were considered, including regulatory expectations, internal audit approach and arrangements for reporting to the Board.

 

Committee meetings are attended by senior RCR managers and also representatives from the control functions, in particular from the Risk function.

 

RCR substantially completed its work by the end of 2015. The Committee met for its final meeting in January 2016 to finalise the transfer/closure of RCR. The RBS Board agreed closure of RCR on the recommendation of the Committee, which confirmed its satisfaction that RCR had met its 85% asset reduction target. This conclusion was supported by an external audit opinion from Deloitte on RCR’s statement of assets as at 31 December 2015 and an opinion from Internal Audit. The relevant confirmations and information were provided to the PRA at the end of January 2016.

 

Baroness Noakes, 

Chairman of the RCR Board Oversight Committee

25 February 2016

 

 67

 

Report of the Sustainable Banking Committee

 

 

Letter from Penny Hughes

Chairman of the Sustainable Banking Committee

 

 
 

Dear Shareholder,

 

Having now completed my first full year as Chairman of the Sustainable Banking Committee, I am pleased with the progress made under the Committee’s refocused strategic direction. There has been broader, strategic debate and ownership from the executive to drive forward sustainability in their businesses, aligned to customer priorities.

 

RBS continues to have a clear ambition to be number one for customer service, trust and advocacy in each of our chosen business areas. Delivery of this ambition depends in large part on our ability to demonstrate beyond question that we are a responsible company doing business in a sustainable way.

 

We will rebuild our reputation and earn our customers’ trust by putting customers first, making RBS a great place to work, supporting our communities, and being mindful of environmental impacts.

 

The Sustainable Banking Committee is primarily concerned with overseeing, supporting and challenging actions taken by management to run the bank as a sustainable business, capable of generating long term value for its shareholders.

 

Some good progress was made in 2015 under our core themes:

 

·considering what is being done to foster a sustainable business for customers and understanding the needs of particular customer groups;

·oversight of how management is embedding culture and standards including engagement, motivation, living the values and leadership;

·oversight of the brand strategy and building on our legacy as a bank of brands, developing our brands to build on the connection with our customers;

·development of the Sustainability agenda, meeting the needs of all our stakeholders whilst aligning with the Bank’s overall strategy;

·ongoing commitment to stakeholder engagement through face to face sessions with advocacy groups on key topics;

·considering sustainability positioning on environmental targets, climate change, sustainable energy and the social economy; and

·transparent reporting through the annual Sustainability Report which describes our performance and approach to making RBS a more sustainable business.

 

Although there is still much to be done to rebuild trust, it is pleasing that the efforts to build a responsible and sustainable business are being recognised through independent and external measures. We have successfully retained our place in the Dow Jones World Sustainability Index with a score of 80 and have also been included in the Carbon Disclosure Project’s FTSE 350 Climate Disclosure Leadership Index with a score of 99/100 for disclosure and ‘B’ for performance. RBS has also been reselected for inclusion in the FTSE4Good index which measures the performance of companies against globally recognised responsibility criteria.

 

The Committee will continue to operate at a strategic level, supporting and challenging the executive on their key priority of turning RBS into a customer centric bank. The work to strengthen our customer and employer brands will continue and culture will be a key focus, with the Committee reviewing actions being taken to deliver on the goals agreed by the Board.

 

My thanks go to the Committee members and attendees for their contribution and support in steering the work of the Committee through another challenging year.

 

Penny Hughes 

Chairman of the Sustainable Banking Committee

25 February 2016

 

 68

 

Report of the Sustainable Banking Committee

 

 

Report of the Sustainable Banking Committee

Meetings 

The Sustainable Banking Committee held six scheduled Committee meetings in 2015 which were attended by senior representatives from the customer-facing franchises as well as Human Resources, Sustainability, Risk, C&RA, Communications and Marketing, and Strategy.

 

Stakeholder engagement sessions

In addition to ongoing engagement which takes place across our business each day, the Sustainable Banking Committee runs a proactive engagement programme to which we invite external stakeholders to meet with, and challenge, the most senior decision makers in RBS. These discussions help shape future policies, influence strategic priorities and inform decision making across the Bank and will continue to play a key role. To date we have met with over 50 different groups of NGOs, civil society groups, government bodies, consumer groups and investors in this way. In particular, in 2015 we held four such stakeholder engagement sessions covering the following topics:

 

·financial inclusion including the issue of debt and access to affordable credit;

·the issues the Bank should prioritise to become number one for customer service, trust and advocacy;

·the disintermediation of the banking sector and the increasing availability of alternative sources of finance; and

·stakeholders’ views on RBS India’s sustainable development programs.

 

In addition, the programme of UK-based events aimed at individual shareholders continued in the first half of 2015 and provided an opportunity for shareholders to meet directors and senior management to learn more about the business.

 

Membership

The Sustainable Banking Committee comprises three independent non-executive directors. The Chairman and members of the Committee, together with their attendance at meetings, are shown below.

 

 

Attended/

scheduled

Penny Hughes (Chairman) 6/6
Alison Davis 6/6
Robert Gillespie (1) 5/6
Mike Rogers (2) — 

 

Notes:

(1)Required to attend Citizens Financial Group, Inc meeting.

(2)Appointment with effect from April 2016.

 

Performance evaluation

The annual review of the effectiveness of the Board and its senior committees, including the Sustainable Banking Committee, was conducted by Condign Board Consulting Limited. The Committee has considered the findings of the review. Overall the review concluded that the Sustainable Banking Committee continued to operate effectively. Whilst no specific recommendations were made in relation to the Committee, the review highlighted the importance of maintaining focus around the remit of the committee.

 

The review also included a small number of general recommendations which are relevant for both the Board and its senior committees. Key themes and actions arising from these general recommendations are set out in the Board report on pages 51 and 52 will be considered, and addressed as appropriate.

 

The review also recommended that all Committee Chairs should ensure continued focus on agenda planning and streamlined reporting to the Board, which will be a priority for the Committee during 2016.

 

The Committee recently conducted a review of its terms of reference to reflect the Committee’s strategic role of overseeing, supporting and challenging actions being taken by management to run the bank as a sustainable business.  During 2016, the Committee will structure its meetings around five key drivers: culture, people, customer, brand & communications and Environmental, Social & Ethical issues.

 

The outcomes of the evaluation have been reported to the Board and the Committee will track progress on its 2016 priorities during the year.

 

Role and responsibilities of the Sustainable Banking Committee 

Authority is delegated to the Sustainable Banking Committee by the Board and the Committee reports and makes recommendations to the Board as required. The terms of reference of the Committee are available on rbs.com and these are reviewed annually and approved by the Board. A report on the activities of the Committee in fulfilling its responsibilities is provided to the Board following each meeting. The principal responsibilities of the Committee are shown below and during 2015 were grouped under three core themes of work: Bank-wide Reputation and Trust; Serving Customers; and Sustainability/Emerging Issues.

 

Bank-wide reputation and trust led by the Chief Executive

Oversight of: 

·management of reputation and delivery of commitments on trust, advocacy and customer service;

·reputational challenges relating to people agenda including embedding values and cultural change activity;

·development of brand strategy in line with RBS’s purpose, vision and values;

·sustainable growth of business and measures taken to support economic development and how banks can better serve society;

·community programmes and employee engagement in charitable partnerships;

 

Serving customers 

·provide challenge on how well RBS is integrating sustainable banking into its business strategy and what is being done to foster a sustainable business for customers;

·oversee customer centricity priorities including receiving reports on key customer metrics;

·consider product sustainability, transparency and fairness;

·receive reports on how RBS is supporting SMEs and oversee the approach to responsible lending and financial inclusion;

 

Sustainability/emerging issues

·oversight of Environmental, Social and Ethical risk policies;

·engage with key internal and external stakeholder groups on emerging sustainability issues;

·approve the annual Sustainability Report and receive the external auditors’ assurance report; and

·oversee priorities, targets and reputational challenges on key emerging sustainable banking issues and consider best practice benchmarking.

 

 69

 

  Directors’ Remuneration Page  
  Annual statement from the Chairman of the Group Performance and Remuneration Committee 71  
  Remuneration and the business strategy 72  
  At a glance summary for executive directors 73  
  Summary of the Directors’ Remuneration Policy    
  Policy table for executive directors 74  
  Recruitment remuneration policy 76  
  Service contracts and termination 76  
  Consideration of employment conditions elsewhere in the company 76  
  Remuneration policy table for the Chairman and non-executive directors 77  
  Annual report on remuneration    
  Implementation of policy in 2016 78  
  Total remuneration paid to executive directors 78  
  Assessment of long-term incentive (LTI) awards 79  
  LTI awards granted during 2015 80  
  Performance conditions for 2016 LTI awards 81  
  Payments to past directors 82  
  Total remuneration paid to the Chairman and non-executive directors 82  
  Directors’ interests in shares and shareholding requirements 83  
  Total Shareholder Return (TSR) performance 84  
  Pay comparisons 84  
  The Committee and its activities during 2015 85  
  Shareholder voting and views on the remuneration policy 86  
  Other Remuneration Disclosures    
  Eight highest paid senior executives below Board 87  
  Remuneration process and adjustments for risk, malus and clawback 87  
  Remuneration policy for all employees 88  
  Remuneration of Material Risk Takers 89  

 70

 

Directors’ Remuneration Report

 

 

 

Annual statement from Sandy Crombie
Chairman of the Group Performance and Remuneration Committee

 

 

Dear Shareholder,

 

I am pleased to set out the Directors’ Remuneration Report for 2015. This report details the remuneration policy for the year ahead as well as our pay decisions for 2015 and the reasons behind them. The Committee’s aim is to make sure the remuneration policy supports RBS’ strategy, a key element of which is to deliver our ambition of becoming the number one bank in the UK for customer service, trust and advocacy.

 

Developments in 2015

It has been a year of continuing progress. On the one hand, good progress has been made against our strategic targets. We believe the focus on culture and encouraging good behaviours will, in time, make a significant contribution to driving sustainable returns for shareholders. On the other hand, while we continue to make progress in addressing and resolving legacy and conduct issues, these continue to drag on financial results and the Committee appreciates the impact this has on all our stakeholders.

 

In November, changes were announced to the pay arrangements for customer-facing employees in Personal & Business Banking. These changes are intended to reinforce the message that our employees should offer services and advice solely on the basis of what best meets the needs of the customer. Accordingly, we have removed incentives based on sales and other criteria from these employees, and instead have made a modest increase to their fixed pay. I believe this is a bold and significant step in our efforts to rebuild trust in RBS.

 

While pay remains an important and sensitive topic, an encouraging sign is that pay is not dominating discussions with shareholders in the way that it used to. I hope this reflects the efforts of the Committee in recent years to implement a remuneration policy that is simpler than before and strongly aligned to shareholders’ interests over the long term.

 

Market context 

Variable pay at RBS remains restrained in a market context, reflecting both our ownership structure and the transition to a smaller bank, centred in the UK and Ireland. Decisions by the Committee on variable pay are driven by a thorough step by step process with adjustments for performance, risk and conduct events in order to determine appropriate outcomes.

 

I know that bonuses remain an emotive issue, particularly when RBS is posting losses and continuing to deal with conduct and litigation issues from the past. Against this background, bonuses have fallen by over 72% across RBS and by over 90% in the investment bank since 2010. While the bonus pool has been coming down year on year, including a further reduction in 2015, it is important that RBS does not become too disconnected from industry norms. The Committee recognises the need to maintain a commercial approach to pay and reward the hard work by those employees who are helping to turn around RBS.

 

Pay decisions for 2015

I know that it is in the public interest to show restraint on remuneration while at the same time there is a need to deliver fair and reasonable pay outcomes for employees. Average annual salary increases are in line with the financial services market. There is a focus on paying the right wage to employees and our rates of pay exceed the Living Wage Foundation Benchmarks.

 

The bonus pool has fallen from £421 million in 2014 to £373 million in 2015, a reduction of 11%. In order to ensure there is a balanced distribution, over 90% of this pool will be directed to those below the most senior RBS employees. Where employees do receive a bonus, the average bonus amounts remain relatively modest with 52% of employees receiving £2,000 or less and a further 21% receiving less than £5,000.

 

No changes are being made to the remuneration structure for executive directors at this time. Executive directors are not eligible for annual bonuses. Instead, for them and their most senior colleagues, variable pay continues to be delivered in long-term incentives, aligning to shareholder value over the long term. One change to the performance measures for long-term incentive awards is a slight amendment to the comparator group for Total Shareholder Return performance to more accurately reflect RBS’ strategic direction. Further details are set out on page 81.

 

Considerations for the year ahead

In accordance with UK regulatory requirements, further amendments will be made to the variable pay awarded to individuals identified as Senior Managers under the PRA regime. Variable pay to Senior Managers for performance years starting on or after 1 January 2016 will be subject to deferral over seven years and the potential clawback period will be extended to ten years.

 

Further guidance on remuneration practices has been published by the European Banking Authority (EBA) which will also be considered by the Committee when reviewing policy in 2016. The Directors’ Remuneration Policy will then be presented to shareholders for approval at the 2017 AGM, at the end of its current three year cycle.

 

I would like to conclude by thanking my fellow Committee members and those who support the Committee for their commitment and guidance over the year. I am also grateful for the input received from shareholders which plays an important part in developing responsible pay practices.

 

Sandy Crombie 

Chairman of the Group Performance and Remuneration Committee

25 February 2016

 

 71

 

Directors’ Remuneration Report

 

 

 

Remuneration and the business strategy

 

To provide customers with the best possible service, RBS is building a strong, simple and fair bank. Performance and pay management is part of that process and good progress was made on all three fronts during 2015.

 

Strong

RBS needs to build an engaged and inclusive workforce, capable of providing excellent customer service.

·      Senior leaders have collective performance objectives that target financial strength as well as customer experience improvements through net promoter and trust scores.

·      Employee engagement is also targeted and 2015 results show an improvement of six points on 2014. RBS is now within three points of industry peers.

·      In 2015, RBS announced its intention to increase the proportion of women in the top three leadership layers to 30% by 2020 and to have an approximate 50/50 balance at all levels by 2030.

·      Pay is not the only lever and employees are supported by wider people initiatives with over 13,000 employees undertaking the ‘Determined to Lead’ programme in 2015. This programme is aimed at ensuring stronger and more consistent leadership.

·      Building on established processes and ways of working, new professional Standards Frameworks set out the relevant knowledge, skills, attitudes and behaviours expected of RBS employees in their role, to embed good conduct and an appropriate culture.

 

Simple

Simplifying RBS and the way it operates will reduce costs and our senior leaders are measured on this as part of their LTI performance targets.

·      RBS is simplifying how employees get paid. In PBB, pay is linked to supporting customers, rather than short-term incentive schemes.

·      Any variable pay for executive directors is delivered as an LTI award not bonus, with future looking performance measures linked to the strategic plan.

·      Shareholder support was strong for last year’s Directors’ Remuneration Report with over 99% voting in favour. No changes are being made to the remuneration policy, approved at the 2014 AGM, at this time.

 

Fair

The Committee must ensure that good behaviours are encouraged and that conduct issues are accounted for.

·      Being fair is grounded in paying people appropriately for their work and commitment to serve customers well.

·      2015 is the first full year that RBS has been operating as a fully accredited living wage employer.

·      If conduct falls short of the standard expected, the Committee can apply malus (reduction or cancellation of variable pay awards prior to payment) or clawback (recovering awards that have already been paid).

·      In 2015, malus has been applied to remuneration outcomes as part of the accountability review process.

·      The Committee aims to strike a fair balance between adjustments to variable pay as a targeted measure to change behaviour whilst not disproportionately penalising employees who are not directly responsible for events.

·      Bonuses have continued to shrink at RBS, aligned with the restructuring that has taken place and the actions taken by the Committee, but a certain level is considered necessary in order to run a commercial and sustainable business.

 

Bonus pool levels have been transformed since 2010

 

 

 72

 

Directors’ Remuneration Report

 

 

 

At a glance summary for executive directors

 

Remuneration outcomes for 2015

 

 

Ross

McEwan
£000s

 

Ewen

Stevenson
£000s

Salary 1,000    800 
Fixed share allowance 1,000    800 
Benefits (1) 88    26 
Pension allowance 350    280 
Bonus n/a    n/a 
Vesting of 2013 LTI award (2) 1,347    — 
Total 3,785    1,906

 

Notes: 

(1)Amount for Ross McEwan includes standard benefit funding and relocation benefits.

(2)Estimated value of the LTI award due to vest in March 2016. A summary of the performance assessment is set out below and full details can be found on page 79.

 

2013 LTI award 

Ross McEwan was granted an LTI award in March 2013 while CEO of UK Retail and became Chief Executive in October 2013. His change in role over the three year vesting period has resulted in 25% of the award being based on UK Retail measures and 75% based on RBS-wide measures.

 

Vesting outcome for UK Retail performance measures

 

 

 

Vesting outcome for RBS-wide performance measures

 

 

Combined vesting outcome for 2013 LTI award

 

Number of shares under award Final vesting outcome (weighted 25%:75%) Number of shares to vest in March 2016

Estimated value

before tax

696,152 62% 431,614 £1,346,636

 

Implementation of remuneration policy in 2016

 

 

The LTI shown above is the award to be granted in March 2016. The notional value at 48% of the grant reflects an estimate of the potential value in light of the stretching performance conditions and risk of forfeiture over the five year vesting period.

 

Linking remuneration to the business strategy

 

 

 

Further details on the performance measures for the LTI award to be granted in March 2016 are set out on page 81.

 

 73

 

Directors’ Remuneration Policy

 

 

Directors’ Remuneration Policy

The full Directors’ Remuneration Policy was approved by shareholders at the AGM on 25 June 2014 and is available at rbs.com/about/board-and-governance.html. No changes are being made that would require shareholder approval at the AGM in 2016. An extract of the policy, updated to ensure it is relevant for the current year, is set out below. In the event of any conflict, the approved policy (available on rbs.com) takes precedence over the information set out in this section.

 

Fixed pay elements for executive directors

 

Fixed pay elements are intended to provide a level of competitive remuneration for performing the role with less reliance on variable pay in order to discourage excessive risk-taking and with partial delivery in shares to align with long-term shareholder value.

 

 

Element of pay

Purpose and link

 

to strategy

 

Operation Maximum potential value
Base salary To aid recruitment and retention of high performing individuals whilst paying no more than is necessary. To provide a competitive level of fixed cash remuneration, reflecting the skills and experience required, and to discourage excessive risk-taking.

Paid monthly and reviewed annually.

 

The rates for 2016 are unchanged:

Chief Executive - £1,000,000

Chief Financial Officer - £800,000

 

Further details on remuneration arrangements for the year ahead are set out in the annual report on remuneration.

 

Determined annually.

 

Any future salary increases will be considered against peer companies and will not normally be greater than the average salary increase for RBS employees over the period of the policy.

 

Fixed share allowance

 

To provide fixed pay that reflects the skills and experience required for the role. This will be delivered in shares which must be retained for the long term.   A fixed allowance, paid entirely in shares. Individuals will receive shares that vest immediately subject to any deductions required for tax purposes and a retention period will apply. Shares will be released from the retention period in equal tranches over a five year period.  The fixed share allowance will broadly be paid in arrears, currently in two instalments per year.(1)

An award of shares with an annual value of up to 100% of salary at the time of award.

 

The fixed share allowance is not pensionable.

 

Benefits

To provide a range of flexible and market competitive benefits to further aid recruitment and retention of key individuals.

 

A set level of funding is provided and executive directors can select from a range of benefits including:

 

· company car

· private medical insurance 

· life assurance

· ill health income protection

 

Also entitled to the use of a car and driver on company business and standard benefits such as holiday and sick pay.

 

Further benefits including allowances when relocating from overseas may be provided to secure the most suitable candidate for the role.

 

Set level of funding for benefits (currently £26,250) which is subject to review.

 

Further benefits such as relocation allowances and other benefits (e.g. tax advice, housing and flight allowances and payment of legal fees) may be offered in line with market practice.

 

The value of benefits paid is disclosed each year in the annual report on remuneration.

 

Pension

To encourage planning for retirement and long-term savings.

 

Provision of a monthly cash pension allowance based on a percentage of salary. Opportunity to participate in a defined contribution pension scheme. Pension allowance of 35% of salary.

 

Note:

 

(1)The company believes that delivery in shares is the most appropriate construct for a fixed allowance to executive directors, qualifying as fixed remuneration for the requirements imposed under CRD IV. If regulatory requirements emerge that prohibit allowances being delivered in shares, or deem that such allowances will not qualify as fixed remuneration, then the company reserves the right to provide the value of the allowance in cash instead in order to comply with the requirements. In 2015 the shares were awarded in August and November, during open periods for directors’ share dealings.

 

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Directors’ Remuneration Policy

 

 

Variable pay

 

Variable pay is intended to incentivise superior long-term performance and promote the success of RBS, with rewards aligned with shareholders’ interests and adjusted for risk, based on the achievement of stretching performance measures.

 

Element of pay

Purpose and link

to strategy

Operation Maximum potential value

Performance metrics

and period

Variable pay award

(long-term incentive)

To support a culture where good performance against a full range of measures will be rewarded. To incentivise the delivery of stretching targets in line with the Strategic Plan. The selection of performance metrics will be closely aligned with key performance indicators.

 

Performance is assessed against a range of financial and non-financial measures to encourage superior long-term value creation for shareholders.

 

Delivery in shares with the ability to apply malus adjustments and clawback further supports longer-term alignment with shareholders’ interests.

 

Any variable pay award made will be delivered in the form of a long-term incentive, paid in shares (or in other instruments if required by regulators) and subject to a combination of time and performance-based vesting requirements.

 

A minimum three year performance period will apply. The award will have an overall five year vest period, vesting equally in years four and five.

 

As a minimum, shares will be subject to deferral and retention periods as required by UK regulators.

 

Provisions for malus adjustment of unvested awards and clawback of vested awards.

 

The long-term incentive award will be delivered under the RBS 2014 Employee Share Plan, as approved by shareholders at the 2014 AGM.

 

The maximum level of award is subject to any limit on the ratio of variable to fixed pay as required by regulators. This currently limits variable pay to the level of fixed pay (i.e. base salary, fixed share allowance, benefits and pension). A higher ratio, up to 200% of fixed pay, is possible with shareholder approval. RBS is not intending to seek any such approval at the 2016 AGM.

 

For these purposes, awards will be valued in line with the EBA rules, including any available discount for long-term deferral.

 

In addition to the regulatory ratio which currently limits variable pay to the level of fixed pay, awards for executive directors are subject to a maximum of 300% of base salary (1).

 

The vesting level of the award could vary between 0% and 100% dependent on the achievement of performance conditions.

 

Any award made will be subject to performance conditions measured over a minimum three year period.

 

Typical measures may fall under the following categories (weighted 25% each):

 

·      Economic Profit

·      Relative TSR

·      Safe & Secure Bank

·      Customers & People

 

An underpin gives the Committee discretion to reduce vesting amounts in light of underlying financial results, or conduct and risk management effectiveness.

 

These or similar measures and weightings will be applied to reflect the strategy going forward.

 

Details of the performance measures for awards to be granted in 2016 are set out as part of the implementation of remuneration policy on page 81.

 

Note:

 

(1)Adjustments will be made to award levels where necessary to ensure that executive directors remain within the variable to fixed limit.

 

Other pay elements

 

Element of pay

Purpose and link

to strategy

Operation Maximum potential value
Shareholding requirements To ensure executive directors build and continue to hold a significant shareholding to align interests with shareholders.

A period of five years is allowed in which to build up shareholdings to meet the required levels.

 

Any unvested share awards are excluded from the calculation.

 

Chief Executive - 250% of salary.

Chief Financial Officer - 125% of salary.

 

Requirements may be reviewed in future.

 

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Directors’ Remuneration Policy

 

 

Recruitment remuneration policy

·RBS considers both internal and external candidates and assesses the skills and experience required for each role. Pay is generally set at no more than is required to attract the most suitable candidate for the role.

 

·A buy-out policy exists to replace awards forfeited or payments foregone. The Committee will seek to minimise buy-outs wherever possible and will seek to ensure they are no more generous than, and on substantially similar terms to, the original awards or payments they are replacing. No sign-on awards or other payments will be offered.

 

·The maximum level of variable pay which may be granted to new executive directors is the same as that applicable to existing executive directors, excluding any buy-out arrangements.

 

·The Chairman and non-executive directors do not receive variable pay.

 

Service contracts and termination 

·RBS or the executive director is required to give 12 months’ notice to the other party to terminate the executive director’s employment.

 

·There are no pre-determined provisions for compensation on termination.

 

·There is discretion for RBS to make a payment in lieu of notice (based on salary only) which is released in monthly instalments. The executive director must take all reasonable steps to find alternative work and any remaining instalments will be reduced as appropriate to offset income from any such work.

 

·Any incentive awards will be treated in accordance with the relevant plan rules as approved by shareholders. Any outstanding share awards held by ‘good leavers’ will vest, normally on the original vesting dates, and shares from the fixed share allowance will continue to be released over the applicable five year retention period in order to ensure former executive directors maintain an appropriate interest in RBS shares.

 

·Non-executive directors do not have service contracts or notice periods although they have letters of appointment reflecting their responsibilities and time commitments. No compensation would be paid to any non-executive director in the event of termination of appointment.

 

Arrangements for the Chairman

Under his letter of appointment, Howard Davies or RBS can terminate his appointment by giving notice, such notice to take immediate effect. In the event that his election or re-election is not approved by shareholders, the appointment will terminate automatically with immediate effect. No compensation or payment in lieu of notice will be payable upon termination of his appointment.

 

Election or re-election of directors 

In accordance with the provisions of the UK Corporate Governance Code, all directors of the company stand for election or re-election annually by shareholders at the company’s AGM.

 

Neither of the current executive directors hold a non-executive director role at any other company.

 


Consideration of employment conditions elsewhere in the company

The Committee retains oversight of remuneration policy for all employees to ensure there is a fair and consistent approach throughout the organisation. The policy uses deferral, malus and clawback to promote effective risk management and alignment with shareholders’ interests.

 

Consultation on remuneration generally takes place with our social partners, including representatives from UNITE. RBS is a fully accredited Living Wage employer and we set our minimum pay (including benefit funding) higher than required for this.

 

An annual employee opinion survey takes place which includes a number of questions on pay and culture. This includes questions on how pay is determined and evaluated, including the need to consider both ‘what’ and ‘how’ outcomes have been achieved, and whether employees believe they are paid fairly for the work they do.

 

While employees are not directly consulted on the directors’ remuneration policy, around 28,000 of our employees are shareholders through our incentive and all-employee share plans and have the ability to express their views through voting on the Directors’ Remuneration Report.

 

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Directors’ Remuneration Policy

 

 

Remuneration policy for the Chairman and non-executive directors

 

Element of pay

Purpose and link

to strategy

Operation Maximum potential value Performance metrics and period
Fees

To provide a competitive level of fixed remuneration that reflects the skills, experience and time commitment required for the role.

 

No variable pay is provided so that the Chairman and non-executive directors can maintain appropriate independence, focus on long-term decision making and constructively challenge performance of the executive directors.

 

Fees are paid monthly.

 

The level of remuneration reflects their responsibility and time commitment and the level of fees paid to directors of comparable major UK companies.

 

The Chairman and non-executive directors do not participate in any incentive or performance plan.

 

Fees are reviewed regularly.

 

The rates for the year ahead are set out in the annual report on remuneration on the next page.

 

Any future increases to fees will be considered against fees paid to directors of comparable companies and will not normally be greater than the average inflation rate over the period under review, taking into account that any change in responsibilities, role or time commitment may merit a larger increase.

 

Additional fees may be paid for new Board Committees provided these are not greater than fees payable for the existing Board Committees as detailed in the annual report on remuneration.

 

n/a
Benefits

Any benefits offered would be in line with market practice.

 

Reimbursement of reasonable out-of-pocket expenses incurred in performance of duties.

 

The Chairman also receives private medical cover.

 

The value of the private medical cover provided to the Chairman will be in line with market rates and disclosed in the annual report on remuneration. n/a

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Annual report on remuneration

 

 

Annual report on remuneration

 

The sections audited by the company's auditors, Deloitte LLP, are as indicated.

 

Implementation of remuneration policy in 2016

 

No changes have been made to the underlying policy for 2016.

 

Executive directors

 

  Salary Benefits

Pension

35% of salary

Fixed share allowance

100% of salary (1)

Long-term incentive (LTI) award

calculated in line with regulatory cap (2)

Chief Executive £1,000,000     £26,250 (3) £350,000 £1,000,000 £2,680,000
Chief Financial Officer £800,000 £26,250 £280,000 £800,000 £2,150,000

 

Notes:

(1)Fixed share allowance will be payable broadly in arrears, currently in two instalments per year, and the shares will be released in equal tranches over a five year period.

(2)The LTI that can be awarded in 2016 is limited to the level of fixed remuneration. Before applying the discount factor for long-term deferral, calculated in line with EBA rules, the face value for the LTI is approximately 113% of fixed remuneration. The performance measures and targets are set out on page 81.

(3)Also entitled to a flight allowance as part of his relocation arrangements, the value of which will be disclosed in the total remuneration table.

 

Chairman and non-executive directors’ fees for 2016

Chairman (composite fee)   £750,000
Non-executive director basic fee   £72,500
Senior Independent Director   £30,000

Group Audit Committee (GAC), Group Performance and Remuneration Committee (RemCo),

Board Risk Committee (BRC) and Sustainable Banking Committee (SBC)

Member

Chairman

£30,000

£60,000

Board Oversight Committee (BOC) for RCR, CIB and GRG
US Risk Committee

Member

Chairman

£15,000

£30,000

Group Nominations Committee (until January 2016) Member £10,000
Group Nominations and Governance Committee (from February 2016) Member £15,000

 

Morten Friis is the RBS Board nominated member of the Steering Group to oversee compliance remediation activities in respect of RBS’ US businesses for which he receives fees of £15,000 per annum. In terms of changes for 2016, the RCR BOC held its final meeting in January 2016 and has been disbanded. The expectation is that the GRG BOC will be stood down during the course of 2016. A US Risk Committee has been established to comply with Enhanced Prudential Standards and to oversee risk management of our US operations. The first meeting of the US Risk Committee will take place during 2016. The Group Nominations Committee has been replaced by the Group Nominations and Governance Committee, with an expanded remit and a reduced number of members. This is to deliver a more streamlined nominations process and a stronger overall governance framework for the Board and its Committees.

 

Total remuneration paid to executive directors for 2015 (audited)
  Ross McEwan   Ewen Stevenson
 

2015

£000s

2014

£000s

 

2015

£000s

2014

£000s

Salary 1,000 1,000   800 497
Fixed share allowance 1,000   800 497
Benefits (1) 88 143   26 16
Pension 350 350   280 174
Total fixed remuneration 2,438 1,493   1,906 1,184
Annual bonus n/a n/a   n/a n/a
Long-term incentive award (2) 1,347 324  
Other awards (3)   1,911
Total remuneration 3,785 1,817   1,906 3,095

 

Notes: 

(1)Benefits figure includes standard benefit funding of £26,250 per annum with the remainder being relocation expenses provided to Ross McEwan.

(2)The value in 2015 for Ross McEwan relates to an LTI award granted in 2013. The performance conditions ended on 31 December 2015 and have been assessed as set out on the next page. The value for 2014 has been restated from the estimated value of £358,000 provided in the 2014 report to reflect the value on the vesting date in August 2015.

(3)The amount shown for Ewen Stevenson in 2014 relates to an award made on appointment to replace the value of awards forfeited on leaving Credit Suisse. The award was delivered entirely in shares and subject to deferral, on terms that are no more generous than the terms of the awards replaced.

 

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LTI vesting amount included in the total remuneration table (audited)

 

Ross McEwan was granted an LTI award in March 2013 while CEO of UK Retail, prior to becoming Chief Executive in October 2013. His change in role during the three year vesting period has resulted in a weighting of 25% based on performance of UK Retail and 75% based on RBS-wide measures. The performance conditions ended on 31 December 2015 and the award is due to vest in March 2016. The average share price over the last three months of the financial year has been used to estimate the vesting value.

 

Number of shares under award Vesting outcome for UK Retail measures (1) Vesting outcome for RBS-wide measures (2) Final vesting outcome (weighted 25%:75%) Number of shares to vest in March 2016

Average share price

October – December 2015

Value for total remuneration table
696,152 80% 56% 62% 431,614 £3.12 £1,346,636

Notes:

(1)The performance measures applicable for UK Retail were based on: Financial targets (weighted 50%) covering risk weighted assets, RWAe, nominal assets, loan:deposit ratio, return on equity, operating profit, cost:income ratio; Customer measures (weighted 10%); People measures (weighted 10%); and Risk measures (weighted 30%). All financial targets were deemed to have been met in full other than the cost:income ratio which was considered partially met at 54% versus a 51% target. The customer, people and risk measures were also ranked as partially met. The Committee also considered recommendations from the BRC in determining the final outcome.

(2)This element follows the performance conditions applicable to the overall RBS-wide measures for the 2013 LTI awards and the assessment is detailed below.

 

2013 LTI – final assessment of RBS-wide performance measures (audited)

 

An assessment of performance of each relevant element was provided by the control functions and PwC assessed relative TSR performance against a peer group of comparator banks. The Committee determined overall vesting based on these assessments including consideration of the drivers of performance and the context against which it was delivered.

 

Performance Measure Weighting Performance for minimum vesting Vesting at minimum Performance for maximum (100%) vesting Actual Performance Vesting outcome Weighted Vesting %
Economic Profit 25% (£3.5 billion) 25% £1 billion (£1.2 billion) 62% 16%
Relative TSR 25% TSR at median 20% TSR at upper quartile 31st percentile ranking 0% 0%
Balance Sheet & Risk 25% Half objectives met 25% Objectives met or exceeded in all material respects 10/11 targets met (1) 90% 22%
Strategic Scorecard 25% 25% 6/8 targets met (2) 72% 18%
Overall vesting outcome (3) 56%

 

Notes: 

(1)The following ten targets were all met or exceeded over the performance period to 31 December 2015: Core Tier 1 capital >10%; leverage ratio <18x; wholesale funding <10%; liquidity reserves >1.5x short-term wholesale funding; loan:deposit ratio c.100%; non-core run down and cumulative non-core loss before tax of c£3.6bn; Core Tier 1 capital on fully loaded Basel 3 basis >=10%; leverage ratio based on tangible equity <18x; liquidity coverage ratio >100%; net stable funding ratio >100%. Some improvement was still needed in the conduct risk target which was deemed not to have been met.

(2)The following six targets were met or exceeded: lending growth to be in line with market share and, for 2015, lending growth >= nominal UK GDP growth; retaining place in the Dow Jones Sustainability Index; leadership index to be within 5% of Global Financial Services (GFS) norm; engagement index to be within 5% of GFS norm; embedding the Group’s values; succession planning in place across the franchises and functions. The two targets that were not met were the cost:income ratio of 55% and customer targets where performance has improved but over the three year period the performance was not considered sufficient.

(3)In determining the outcome above, the Committee reviewed financial and operational performance against the Strategic Plan and risk performance with input from the BRC.

 

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2014 and 2015 LTI awards to executive directors – current assessment (audited)

 

The table represents an early indication of potential vesting outcomes only based on the position at 31 December 2015. The 2014 LTI award is due to vest in March 2017 and the 2015 LTI award will vest equally in March 2019 and March 2020. Details of performance against targets and any use of discretion will be disclosed once the awards vest.

 

Performance measure Weighting

Performance for

minimum vesting

Vesting at minimum Performance for maximum vesting Vesting at maximum 2014 current assessment

2015 current

assessment

 

Economic Profit 25% Minimum economic profit targets 25% Performance ahead of the Strategic Plan

100%

 

Good progress and broadly in line with target set Good progress and favourable to target set
Relative TSR 25% TSR at median of comparator group 20% TSR at upper quartile of comparator group 100% Between median and upper quartile vesting Below median performance for vesting
Safe & Secure Bank 25%

Target ranges set for:

 

CET1 ratio and Cost:income ratio

 

Vesting between 0% – 100% 

qualified by Committee discretion taking into account the margin by which targets have been missed or exceeded

 

CET1 ratio is in range for vesting. Cost:income ratio is broadly in line with target CET1 ratio is in range for vesting. Cost:income ratio is broadly in line with target
Customers & People 25%

Target ranges set for:

Net Promoter Score, Net Trust Score (for 2015 awards) and Employee Engagement

 

Customer measures behind target range with People measures on target Measures currently tracking behind target range

 

 

LTI awards granted during 2015 (audited)

 

  Grant date

Face value of

award (£000s)

Number of shares

awarded (1)

% vesting at minimum and maximum

Performance

requirements

Ross McEwan 6 March 2015 1,560 417,486 Between 0% - 100% with minimum vesting as set out above

Conditional share awards subject to performance conditions, as set out above, measured over the three year period from 

1 January 2015 to 31 December 2017 

Ewen Stevenson 6 March 2015 2,160 578,128

Note:

(1)The number of shares awarded is based on a multiple of salary, 156% for Ross McEwan and 270% for Ewen Stevenson, in line with the regulatory cap that limits variable pay to the level of fixed pay. The award price of £3.7362 was calculated based on the average share price over five business days prior to the grant date.

 

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LTI awards to be granted to executive directors in 2016

Performance criteria

The performance measures are designed to be stretching and to support delivery of the business strategy. A three year performance period will apply until 31 December 2018. Subject to the achievement of the performance conditions, shares will then vest in equal tranches in years four and five. Any awards that vest will be subject to a retention period in line with regulatory requirements.

 

Awards granted to executive directors in March 2016 will be subject to four equally weighted performance categories, each able to vest up to 100% of base salary, subject to the maximum award that is possible under the approved policy and the regulatory cap. Details of the performance measures and the Committee’s rationale for selecting them are set out below.

 

Economic Profit (25%)

Reason: Economic Profit, being a risk-adjusted financial measure, is consistent with regulatory requirements and provides a balance between measuring growth and the cost of capital employed in delivering that growth.

 

Measure: Economic Profit for the Group defined as profit after tax less preference share charges less tangible net asset value multiplied by the cost of equity.

 

Performance target and weightings

Weighting Performance target Vesting range
25% Target consistent with the achievement of RBS’ strategic long term return on equity target of 12%+ 25% - 100%

 

Details of the actual targets, and performance against these, will be disclosed retrospectively after any vesting has been determined, in the annual report on remuneration for 2018.

 

Relative Total Shareholder Return (25%)

Reason: Relative TSR provides a direct connection between executive directors’ awards and relative returns delivered to shareholders.

Measure: The measure compares performance against a group of comparator banks. The TSR comparator group has been updated for awards made in 2016 to more accurately reflect the business strategy with less focus on investment banking. This has resulted in Credit Suisse, Deutsche Bank and UBS being replaced by ING, Intesa San Paolo and Nordea. The weighting of Standard Chartered has been reduced to be in line with continental European banks given its international focus.

 

Relative TSR Comparator Group

 

Weighting
1 Barclays 200%
2 Lloyds Banking Group
3 HSBC 100%
4 to 13 BBVA, BNP Paribas, Credit Agricole, ING, Intesa San Paolo, Nordea, Santander, Societe Generale, Standard Chartered, Unicredit 50%

 

 

Performance target and weightings

 

Weighting Performance target Vesting range
25% TSR between median and upper quartile 20% - 100%



Safe & Secure Bank (25%)

Reason: The Safe & Secure Bank measures have a particular focus on risk reduction and the building of a safer, sustainable business.

Measure: The key measures in this category are the achievement of pre-determined Common Equity Tier 1 (CET1) and Cost:income (C:I) ratios.

 

Performance target and weightings

Category Metrics Performance target

Safe & Secure Bank

 

CET1 ratio

(12.5%)

Target consistent with RBS’ strategic long term CET1 ratio target of 13%

C:I ratio

(12.5%)

Target consistent with RBS’ strategic long term C:I ratio target of <50%

 

Details of the actual targets, and performance against these, will be disclosed retrospectively after any vesting has been determined, in the annual report on remuneration for 2018.

 

Customers & People (25%)

Reason: These measures reward management for building a customer-focused business with strength in terms of trust, reputation and the engagement of employees.

Measure: Net Promoter Scores (NPS) and Net Trust Scores (NTS) will be used, measured against a defined peer group. Employee engagement will be measured against the Global Financial Services (GFS) norm.

 

Performance target and weightings

 

Category Metrics Performance target

Customers & People

Advocacy

(7.5%)

NPS gap to #1 of 2.3  (1)

Trust

(5%)

NTS: NatWest 63, RBS 50

Engagement

(12.5%)

Employee Engagement Index one point above GFS norm

 

Note: 

(1)The NPS metric adopted is a bank-wide measure of the gap to #1 bank, which RBS plans to close to zero by 2020. It is calculated using the gap to #1 leading competitor in each customer segment, weighted by the revenue contribution of each segment.

 

The overall vesting under the above categories will be qualified by the Committee’s discretion taking into account changes in circumstances over the performance period, the margin by which individual targets have been missed or exceeded, and any other relevant factors.

 

Underpin

The Committee will also review financial and operational performance against the business strategy and the risk environment prior to agreeing vesting of awards. In assessing the risk considerations, the Committee will be advised independently by the BRC. If the Committee considers that the vesting outcome calibrated in line with the performance conditions outlined above does not reflect underlying financial results, or if the Committee is not satisfied that conduct and risk management during the performance period has been effective, then the terms of the awards allow for an underpin to be used to reduce vesting or lapse the award.

 

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Annual report on remuneration

 

 

Payments for loss of office (audited)

Philip Hampton stood down from the Board on 31 August 2015. No remuneration payment or payment for loss of office was made in connection with his departure.

 

Payments to past directors (audited)

Stephen Hester and Bruce Van Saun received shares on 9 March 2015 on the vesting of the LTI award granted in 2012 as set out below. The assessment of RBS-wide performance measures is detailed on page 85 of the 2014 Annual Report and Accounts.

 

Value of payments on vesting (audited)

 

    Stephen Hester Bruce Van Saun
Performance category % vesting Maximum RBS shares (2) Vested
 RBS shares
Value (3) Maximum CFG shares (2) Vested
 CFG shares
Value (3)
Economic Profit 53% 261,998 138,859   72,528 38,440  
Relative TSR 68% 261,998 178,158   72,528 49,319  
Balance Sheet & Risk 100% 261,998 261,998   72,528 72,528  
Strategic Scorecard 25% 261,998 65,499   72,528 18,132  

Initial vesting outcome based on above

Final outcome post application of underpin (1)

61.5%

55.25%

 

644,514

579,279

£2,131,747

 

178,419

160,360

$4,089,180

Check within maximum shares available to vest 785,995     217,586  

 

Notes: 

(1)The Committee also considered recommendations from the BRC and concluded it would be appropriate to apply the risk and financial performance underpin in respect of the above awards. This resulted in downward discretion being applied to reduce the final vesting outcome from 61.5% to 55.25%.

(2)The maximum number of shares is calculated in line with the underlying award structure where each of the four performance categories could give rise to shares worth 100% of salary at grant but with the overall maximum capped at 300% of salary. The number has been reduced on a pro rata basis to reflect time served by Stephen Hester. The interests for Bruce Van Saun’s award were converted to shares in Citizens Financial Group, Inc. as part of the IPO of that business.

(3)Based on a RBS share price of £3.68 and Citizens Financial Group, Inc. share price of $25.50 on the date of vesting.

 

Total pension entitlements – Bruce Van Saun (audited)

Bruce Van Saun's Unfunded Unapproved Retirement Benefit Scheme (UURBS) operated as a cash balance plan. Under the rules of his UURBS, the benefit paid out on 1 April 2015 and there is no further entitlement to benefits from the scheme. The current executive directors do not participate in RBS defined benefit pension arrangements but receive a cash allowance instead.

 

 

2015

£000s

2014

£000s

Balance at 1 January 1,071 1,030
Investment return 7 41
Paid to Bruce Van Saun on 1 April 2015 1,078  
Total value of fund at 31 December 1,071

 

Total remuneration paid to the Chairman and non-executive directors for 2015 (audited)

While no changes were made to the fee structure during 2015, two additional Board Oversight Committees (BOCs) were established and fees are payable in line with those for the RCR BOC. The CIB BOC was established in March 2015 with a mandate to oversee the implementation of the CIB strategy without placing additional burdens on the existing Committee framework. The GRG BOC was established in May 2015 in order to provide oversight of the work and findings of the expert panel engaged to conduct an independent review of customer files and to provide advice in relation to matters generally related to GRG. The total fees paid are set out below.

 

Chairman (composite fee)                  

Fees
2015

£000s

Benefits
2015

£000s

Total
2015

£000s

Fees
2014

£000s

Benefits
2014

£000s

Total
2014

£000s

Howard Davies (1) c                   260 262
Philip Hampton (2)                     500 501 750 1 751
                                 
Non-executive directors (3)

Board

Noms

GAC

RemCo

BRC

SBC

RCR BOC

CIB BOC

GRG BOC

Other

Fees
2015

£000s

Benefits
2015

£000s

Total
2015

£000s

Fees
2014

£000s

Benefits
2014

£000s

Total
2014

£000s

Sandy Crombie (4) 73 10 30 60     15   9 30 227 —  227 213 213
Alison Davis 73 10   30   30         143 —  143 141 141
Morten Friis (4) 73 10 30   30     11   15 169 —  169 112 112
Robert Gillespie (4) 73 10   30 30 30   23 9 100 305 —  305 184 184
Penny Hughes 73 10     30 60     9   182 —  182 178 178
Brendan Nelson 73 10 60   30   15 11 18   217 —  217 183 183
Baroness Noakes 73 10 30   60   30 11 9   223 —  223 186 186

 

Notes: 

(1)Howard Davies joined the Board on 14 July 2015 and became Chairman with effect from 1 September 2015. The Benefits column includes private medical cover.

(2)Philip Hampton stepped down from the Board on 31 August 2015. The Benefits column includes private medical cover.

(3)In line with market practice, non-executive directors are reimbursed expenses incurred in connection with their attendance at Board meetings. To the extent that HMRC determines that any amounts are taxable, RBS will settle the associated tax liability on behalf of the non-executive director.

(4)Under the ‘Other’ column, Sandy Crombie received fees as the Senior Independent Director and Morten Friis received fees for his work on the US steering group. Robert Gillespie was the RBS nominated director of Citizens Financial Group, Inc. (CFG) until 3 November 2015 for which he received fees, delivered in cash and in restricted stock units in CFG. The value shown has been converted using an average exchange rate during 2015 of $1.528:£1.

 

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Directors’ interests in shares and shareholding requirements (audited)
The target shareholding requirement is to hold shares to the value of 250% of salary for the Chief Executive and 125% of salary for the Chief Financial Officer and members of the Executive Committee, excluding any unvested share awards in the calculation. A period of five years is allowed in which to build up shareholdings to meet the required levels. Shareholding requirements will be considered when relevant individuals request permission to sell shares and the Committee receives annual updates on progress towards meeting these requirements.

 

 

 

Notes:

 

(1)Ross McEwan holds 159,393 shares from his 2015 fixed share allowance that are included in the total shares beneficially owned but these have been excluded from the shareholding requirements calculation as he will transfer these shares to charity at the end of the retention period.

(2)Value of shares held is based on the share price on 31 December 2015, which was £3.02. During the year ended 31 December 2015, the share price ranged from £2.83 to £4.04.