1
RBS – Annual Results 2015
The Royal Bank of Scotland plc
Results for the year ended 31 December 2015
Contents
Page
Financial review 2
Consolidated income statement 7
Consolidated statement of comprehensive income 8
Consolidated balance sheet 9
Consolidated statement of changes in equity 11
Consolidated cash flow statement 13
Notes 14
Statement of directors’ responsibilities 50
Additional information 51
Forward-looking statements 52
Presentation of Information
The Royal Bank of Scotland plc (the ‘Bank’ or ‘RBS plc’) is a wholly-owned subsidiary of The Royal Bank of
Scotland Group plc (the ‘holding company’ or ‘RBSG’). The ‘Group’ comprises RBS plc and its subsidiary
and associated undertakings. ‘RBS Group’ comprises the holding company and its subsidiary and
associated undertakings.
Restatements
Pension accounting policy
As set out in Note 3, the Group has revised its accounting policy for determining whether or not it has an
unconditional right to a refund of surpluses in its employee pension funds. The change has been applied
retrospectively and comparatives restated.
2
RBS – Annual Results 2015
Financial review
Highlights and key developments
●
The loss attributable to ordinary shareholders for the year of £2.0 billion was p
rimarily driven by
litigation and conduct costs of £3.5 billion, principally relating to provisions for mortgage-
backed
securities litigation in the US (£2.1 billion), additional PPI provisions (£0.6 billion) and other conduct
redress charges of £0.8 billi
on. The loss also included £0.5 billion write down of goodwill in Private
Banking and write-off of other intangible assets (£0.8 billion), primarily in
Corporate & Institutional
Banking (CIB) and Capital Resolution. These charges overshadowed positive perf
ormance in the core
businesses. Despite a loss of £1.1 billion in RBS plc for the year, its CET1 ratio improved from 13.1%
to 16.0% driven by significant RWA reduction.
●
Segment performance:
o UK Personal & Business Banking (UK PBB) operating profit was
broadly stable compared with
2014. There was a good performance in mortgages with net new lending totalling £9.3 billion, the
strongest performance since 2009; albeit at lower overall margins as customers shift from
standard variable rate to fixed rate pro
ducts. Credit quality remained good, with modest net
impairment releases.
o Ulster Bank RoI recorded lower operating profit
as net impairment releases, though still
substantial, were lower than in 2014. The low yielding tracker mortgage portfolio reduced
from
£10.6 billion to £9.2 billion.
o Commercial Banking
operating profit was broadly in line with the prior year
reflecting margin
pressure and included a Q4 2015 loss of £34 million on the sale of non-
strategic asset portfolios,
partially offset by lower impairment losses. Deposit and lendin
g volumes (net new lending of
£3.6 billion excluding businesses transfers, run-off and disposals) contributed to a
rise in net
interest income.
o Private Banking and RBS International (RBSI) both recorded lower operating profit
primarily
reflecting lower income. Private Banking included a charge for goodwill impairment of £498
million.
o CIB
lower total income was
in line with the business’s reduced scale and risk appetite. CIB
continues to move towards a more sustainable cost base.
o Capital Resolution operating loss included increased disposal losses as it accelerated the run-
down of its portfolios.
●
On 27 January 2016, RBS Group 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 surplus in its
employee pension funds. As a result of this accounting
policy change, a minimum funding requirement
of £3.3 billion in respect of The Royal Bank of Scotland Group Pension Fund (the Main scheme) within
the Group 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.
●
Separately, RBS Group signed a memorandum of understanding with the Main scheme trustee to
make a payment of £4.2 billion into the scheme, relating to which a statement of funding principles was
signed and the £4.2 billion payment was made in March 2016.
The accelerated payment improves
capital planning and resilience and provides increased certainty on contribution commitments and the
pension balance sheet position of the Group.
3
RBS – Annual Results 2015
Financial review
Progress was made in de-risking the balance sheet as the Group continued the run-down or sale of certain
businesses and higher risk or capital intensive assets. Funded assets (total assets excluding derivatives)
decreased from £690.8 billion at 31 December 2014 to £549.1 billion at 31 December 2015. In 2015 the
Group:
●
Completed the exit from Citizens a year ahead of schedule, underlining the
commitment to a UK
market focus.
●
Delivered strong progress in the first year of CIB Capital Resolution.
The business substantially exited
the North American and Asia-
Pacific (APAC) portfolios, and a partnership for international customers
was agreed with BNP Paribas as an alternative to the Global Transaction Services business.
Agreed
the sale of the Russian subsidiary which is due to complete in Q2 2016.
●
The RBS Group achieved the run-down target of RBS Capital Resolution (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 the
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 licence application
to UK regulatory authorities in September 2015 and work continues on separat
ion (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 stable, with risk elements in lending (REIL) decreasing to £12.0 billion (3.9
% of
gross customer loans) at 31 December 2015, from £26.7 billion (7.7%) at 31 December 2014.
This
reduction was primarily driven by disposals in RCR 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.
●
Funding and liquidity position remains strong, aided by the
accelerated reduction of the Capital
Resolution balance sheet. The liquidity portfolio of £153 billion covered short-
term wholesale funding
excluding derivative collateral by more than nine times and the loan:deposit ratio was 89% compared
with 95% at the
end of 2014 reflecting the strategic run down of Capital Resolution loans and higher
retail and commercial deposits, being partially offset by UK PBB loan mortgage growth.
Performance review
The Group reports a loss for the year of £1,586 million compared with a loss of £3,116 million in 2014. This
included profit from discontinued operations of £1,538 million, compared with a loss of £3,486 million in
2014. Operating expenses increased by £2,589 million to £16,141 million compared with £13,552 million in
2014, primarily due to increased litigation and conduct costs and restructuring costs and a charge for
goodwill impairment of £498 million attributed to Private Banking. Loss on redemption of own debt was £263
million compared with a gain of £6 million in 2014.
4
RBS – Annual Results 2015
Financial review
Operating (loss)/profit
Operating loss before tax was £3,153 million compared with a profit of £2,403 million in 2014. The decrease
reflects lower income of £12,151 million, compared with £14,618 million in 2014, primarily due to income
attrition and disposal losses in the Capital Resolution business. Net impairment releases were lower at £837
million, compared with £1,337 million in 2014. Operating expenses were £16,141 million (2014 - £13,552
million) and included higher litigation and conduct costs of £3,507 million (2014 - £2,202 million) primarily
relating to additional provisions for mortgage backed securities litigation in the US (£2.1 billion) and PPI
costs of £600 million. Restructuring costs were £2,903 million (2014 - £1,154 million) as the transformation of
the Group accelerated, particularly in CIB.
Net interest income
Net interest income decreased by £458 million, or 5%, to £8,408 million, driven principally by a 52%
reduction in Capital Resolution, down £468 million to £440 million, in line with the planned shrinkage of the
balance sheet. UK PBB net interest income was £4,263 million compared with £4,277 million in 2014 as
competitive front book margin pressures impacted. Ulster Bank RoI net interest income fell by £102 million,
22%, to £365 million primarily due to the weakening of the euro relative to sterling and reduced income on
free funds.
Non-interest income
Non-interest income decreased by £2,009 million, 35%, to £3,743 million compared with £5,752 million in
2014. Own credit adjustments represented a gain of £329 million compared with a charge of £128 million in
2014. Net fees and commissions decreased by £591 million, 17%, to £2,887 million mainly due the reduced
scale of activity in CIB, run down of Capital Resolution and lower card interchange fees in UK PBB. Income
from trading activities was down £236 million to £954 million, compared with £1,190 million in 2014 due to
the reduced scale and resources in CIB and the continued planned reduction of the Capital Resolution
business.
A loss of £263 million was recognised on the redemption of own debt, from a liability management exercise
to repurchase certain US dollar, sterling and euro senior debt securities, compared with a gain of £6 million
in 2014. Other operating income reduced by £913 million, or 85%, to £165 million, principally due to the
reduced scale of CIB together with the run down of Capital Resolution and the impact of disposal losses.
Operating expenses
Operating expenses increased by £2,589 million, or 19%, to £16,141 million from £13,552 million in 2014
and included a charge for goodwill impairment of £498 million attributed to Private Banking (2014 - £130
million in Capital Resolution). Operating expenses, excluding restructuring costs and litigation and conduct
costs, decreased by £465 million, or 5%, to £9,731 million (2014 - £10,196 million) mainly reflecting the
benefits of cost savings initiatives.
Litigation and conduct costs were £3,507 million compared with £2,202 million in 2014, primarily relating to
mortgage backed securities litigation in the US of £2.1 billion. Other charges in 2015 include: provisions for
foreign exchange investigations in the US, £334 million, customer redress provisions primarily relating to PPI
of £600 million, Interest Rate Hedging Products redress of £81 million and other litigation and conduct
provisions of £392 million including provisions relating to packaged accounts and investment products.
Restructuring costs increased by £1,749 million to £2,903 million, compared with £1,154 million in 2014, as
the transformation of the Group accelerated, particularly re-engineering the CIB business.
5
RBS – Annual Results 2015
Financial review
Impairment releases/(losses)
Net impairment releases were £837 million in 2015 compared with net impairment releases of £1,337 million
in the prior year. Capital Resolution recorded net releases of £781 million, compared with £1,293 million in
2014, with disposal activity continuing. Ulster Bank RoI recorded net impairment releases of £141 million,
down from £306 million in 2014, as economic conditions in Ireland continue to improve. UK PBB recorded a
release of £7 million compared with a loss of £154 million, due to lower debt flows and increased releases
and recoveries. Net impairment releases were also reported in CIB, although at more modest levels.
Discontinued operations
Profit from discontinued operations was £1,538 million reflecting a gain on disposal in relation to Citizens of
£249 million and in respect of reserves of £1,001 million recycled to the income statement, together with a
gain of £318 million attributable to non-controlling interests. In 2014, the loss from discontinued operations
was £3,486 million, which reflected an accounting write down of £3,994 million in relation to Citizens.
Capital and leverage ratios
Capital resources, leverage and RWAs based on the relevant local regulatory capital transitional
arrangements for the significant legal entities within the Group are set out below.
2015 2014
RBS plc
NatWest
UBIL
RBS plc NatWest UBIL
Capital
£bn
£bn
£bn
£bn £bn £bn
CET 1
32.4
7.
2
5.7
34.5 9.5 4.2
Tier 1
34.7
7.2
5.7
36.7 9.6 4.2
Total
51.3 12.1 6.2
55.3 14.8 4.7
2015 2014
RBS plc
NatWest
UBIL
RBS plc NatWest UBIL
Risk
-
weight
ed a
ssets
£bn
£bn
£bn
£bn £bn £bn
Credit risk
- non-counterparty
146.4
54.4
17.8
200.1 61.7 22.5
- counterparty
21.8 0.4 0.3
27.7 0.6 0.4
Market risk
19.1 0.6 -
19.0 0.5 -
Operational risk
15.6 6.4 1.1
17.1 5.5 1.3
202.9 61.8 19.2
263.9 68.3 24.2
2015 2014
RBS plc
NatWest
UBIL
RBS plc NatWest UBIL
Risk asset ratios
%
%
%
% % %
CET 1
16.0
11.6
29.6
13.1 13.9 17.3
Tier 1
17.1
11.6
29.6
13.9 14.0 17.3
Total
25.3 19.6 32.1
20.9 21.7 19.5
2015
Leverage
RBS plc
NatWest
UBIL
Tier 1 capital (£bn)
34.7
7.
2
5.7
Exposure (£bn)
502.6
153.1 23.7
Leverage ratio (%)
6.9
4.7
24.0
Note:
(1) UBIL 2014 profit (unverified for regulatory reporting purposes in 2014) is excluded from 2014 but included in 2015.
6
RBS – Annual Results 2015
Financial review
RBS plc: The CET1 ratio improved from 13.1% to 16.0%. CET1 capital fell due to the loss of £1.1 billion in
2015. RWAs decreased by £61.0 billion, primarily reflecting Capital Resolution risk reduction strategy as well
as a move from risk weighting to capital deduction of significant investments in financial institutions, as part
of phased in move to end-point Capital Requirements Regulation (CRR). The 2015 CET1 ratio also reflected
the impairment of significant investments, mainly relating to Citizens.
National Westminster Bank Plc (NatWest): The CET1 ratio decreased from 13.9% to 11.6%, reflecting the
current year loss of £1.4 billion, which included PPI provisions (£0.4 billion) and the impairment of
investments in US subsidiaries (£1.6 billion), principally RBS Securities Inc. The loss on remeasurement of
the Main pension scheme resulted in a CET1 capital reduction of £1.4 billion. This was partially offset by a
capital injection of £0.8 billion from RBS plc. RWAs decreased by £6.5 billion, primarily reflecting a move
from risk weighting to capital deduction of significant investments in financial institutions, as part of phased in
implementation of end point CRR.
Ulster Bank Ireland Limited (UBIL): The CET1 ratio improved from 17.3% to 29.6% with the 2015 CET1 ratio
benefitting from the inclusion of £0.9 billion of 2014 profit. RWAs were £5.0 billion lower primarily reflecting
reductions in the tracker mortgage portfolio, lower Central Bank of Ireland add-on for corporate exposures
and exchange rate movements.
7
RBS – Annual Results 2015
Consolidated income statement for the year ended 31 December 2015
Year ended
31 December
31 December
2015
2014
£m
£m
Interest receivable
11,746
12,805
Interest payable
(3,338)
(3,939)
Net interest income 8,408
8,866
Fees and commissions receivable
3,692
4,320
Fees and commissions payable
(805)
(842)
Income from trading activities
954
1,190
(Loss)/gain on redemption of own debt
(263)
6
Other operating income
165
1,078
Non-interest income 3,743
5,752
Total income 12,151
14,618
Operating expenses
(16,141)
(13,552)
(Loss)/profit before impairment releases (3,990)
1,066
Impairment releases
837
1,337
Operating (loss)/profit before tax (3,153)
2,403
Tax credit/(charge)
29
(2,033)
(Loss)/profit from continuing operations (3,124)
370
Profit/(loss) from discontinued operations, net of tax
1,538
(3,486)
Loss for the year (1,586)
(3,116)
Non-controlling interests
(320)
(57)
Preference shareholders
(44)
(61)
Loss attributable to ordinary shareholders (1,950)
(3,234)
8
RBS – Annual Results 2015
Consolidated statement of comprehensive income for year ended 31 December 2015
Year ended
31 December
31 December
2015
2014*
£m
£m
Loss for the year (1,586)
(3,116)
Items that do not qualify for reclassification
Loss on remeasurement of retirement benefit schemes
(73)
(1,849)
Tax
306
314
233
(1,535)
Items that do qualify for reclassification
Available
-for-sale financial assets
13
132
Cash flow hedges
(740)
1,412
Currency translation
(1,123)
434
Tax
136
(401)
(1,714)
1,577
Other comprehensive (loss)/income after tax (1,481)
42
Total comprehensive loss for the year (3,067)
(3,074)
Attributable to:
Non-controlling interests
315
194
Preference shareholders
44
61
Ordinary shareholders
(3,426)
(3,329)
(3,067)
(3,074)
*Restated - refer to page 14 for further details
Note:
(1) A profit of £1,220 million (2014 – loss £3,538 million) from discontinued operations was attributable to ordinary shareholders.
Key points
● The loss on remeasurement of retirement benefit schemes reflects the chang
e of accounting policy for
pensions. For further details, refer to Note 3 on page 14.
● Cash flow hedging losses in the year
principally result from transfers from equity as hedged
transactions occurred; this is partially offset by cash flow hedging gains deferred in equity.
● Currency translation losses in the year predominantly relate
to the recycling of foreign exchange
reserves upon ceding control of Citizens and the strengthening of sterling against the euro, partially
offset by the weakening of sterling against the US dollar.
● The movement in available-for-sale financial assets in the year
reflects significant unrealised gains on
a holding of euro equity securities; this is partially offset by unrealised losses on available-for-
sale debt
securities.
9
RBS – Annual Results 2015
Consolidated balance sheet at 31 December 2015
31 December
31 December
2015
2014*
£m
£m
Assets
Cash and balances at central banks
78,999
73,983
Amounts due from fellow subsidiaries
1,557
2,333
Other loans and advances to banks
28,285
42,259
Loans and advances to banks
29,842
44,592
Amounts due from holding company and fellow subsidiaries
1,258
1,323
Other loans and advances to customers
333,699
375,615
Loans and advances to customers
334,957
376,938
Debt securities subject to repurchase agreements
20,224
22,923
Other debt securities
59,803
61,351
Debt securities
80,027
84,274
Equity shares
1,069
5,203
Settlement balances
4,108
4,710
Amounts due from holding company and fellow subsid
iaries
1,275
2,738
Other derivatives
261,808
351,844
Derivatives
263,083
354,582
Intangible assets
6,526
7,765
Property, plant and equipment
4,453
6,123
Deferred tax
2,622
1,881
Prepayments, accrued income and other assets
3,019
4,298
Assets of disposal groups
3,486
81,033
Total assets 812,191
1,045,382
Liabilities
Amounts due to fellow subsidiaries
3,999
4,208
Other deposits by banks
38,095
59,642
Deposits by banks
42,094
63,850
Amounts due to holding
company and fellow subsidiaries
5,021
5,843
Other customers accounts
369,053
389,156
Customer accounts
374,074
394,999
Debt securities in issue
25,804
41,996
Settlement balances
3,383
4,498
Short positions
20,808
23,028
Amounts due to ho
lding company and fellow subsidiaries
1,283
2,005
Other derivatives
254,265
348,778
Derivatives
255,548
350,783
Provisions, accruals, and other liabilities
14,070
12,262
Retirement benefit liabilities
3,764
4,289
Deferred tax
729
236
Amo
unts due to holding company
18,502
19,639
Other subordinated liabilities
8,528
10,830
Subordinated liabilities
27,030
30,469
Liabilities of disposal groups
2,980
71,284
Total liabilities 770,284
997,694
Equity
Non-controlling interests
54
2,385
Owners’ equity
41,853
45,303
Total equity
41,907
47,688
Total liabilities and equity 812,191
1,045,382
*Restated - refer to page 14 for further details
10
RBS – Annual Results 2015
Consolidated balance sheet at 31 December 2015
Total assets of £812.2 billion as at 31 December 2015 were down £233.2 billion, 22%, compared with 31
December 2014. This was driven by the disposal of Citizens, decreases in loans and advances to customers
and derivatives assets, reflecting the reshaping of CIB and Capital Resolution run-down.
Loans and advances to banks decreased by £14.8 billion, 33%, to £29.8 billion. Excluding reverse
repurchase agreements and stock borrowing (‘reverse repos’), down £9.6 billion, 46%, to £11.1 billion, bank
placings declined by £5.1 billion, 22%, to £18.7 billion.
Loans and advances to customers declined £42.0 billion, 11%, to £335.0 billion. Within this, reverse repos
were down £15.3 billion, 35%, to £28.7 billion. Customer lending decreased by £26.7 billion, 8%, to £306.2
billion, or £37.0 billion to £313.3 billion before impairments. This reflected reductions in CIB together with the
run down and disposals in Capital Resolution, partially offset by increases in UK PBB reflecting growth in
mortgages and in Commercial Banking which recorded strong new business volumes.
Debt securities were down £4.2 billion, 5%, to £80.0 billion driven mainly by reductions within CIB partially
offset by increases in Treasury in the liquidity portfolio.
Equity shares decreased by £4.1 billion, 79%, to £1.1 billion primarily due to the continuing risk reduction
and run-down in Capital Resolution.
Movements in the fair value of derivative assets, down £91.5 billion, 26%, to £263.1 billion, and liabilities
down, £95.2 billion, 27%, to £255.5 billion, were primarily driven by a reduction in interest rate swap
notionals as well as yield curve moves.
Intangible assets decreased by £1.2 billion, 16%, to £6.5 billion mainly due to the write down of £0.5 billion
goodwill in Private Banking and the write down of other intangible assets of £0.8 billion, mainly in relation to
the reorganisation of CIB.
Property, plant and equipment decreased by £1.7 billion, 27%, to £4.5 billion mainly reflecting disposals and
write downs.
The decrease in assets and liabilities of disposal groups down from £81.0 billion to £3.5 billion and £71.3
billion to £3.0 billion respectively, primarily reflects the disposal of Citizens, partially offset by the transfer of
the international private banking business to disposal groups.
Deposits by banks decreased by £21.8 billion, 34%, to £42.1 billion, with decreases in repos, down £14.5
billion, 59%, to £10.3 billion and decreases in bank deposits of £7.2 billion, 19%, to £31.8 billion, reflecting
the reshaping of CIB and Capital Resolution run-down.
Customer accounts decreased by £20.9 billion, 5%, to £374.1 billion. Within this, repos decreased by £10.2
billion, 27%, to £27.1 billion. Customer deposits were down £10.7 billion, 3%, at £347.0 billion, primarily
reflecting the reduction of corporate deposits in CIB and run-down in Capital Resolution offset by growth in
UK PBB and in Commercial Banking.
Debt securities in issue decreased by £16.2 billion, 39%, to £25.8 billion, due to decreases in CIB and in
Treasury given the lower funding requirements of a reduced balance sheet.
Subordinated liabilities decreased by £3.4 billion, 11% to £27.0 billion, primarily as a result of the net
decrease in dated loan capital with redemptions of £3.6 billion.
Non-controlling interests decreased £2.3 billion to £54 million, due to the disposal of Citizens.
Owner’s equity decreased by £3.5 billion, 8%, to £41.9 billion, primarily driven by the £2.0 billion attributable
loss for the year and movements in other reserves.
11
RBS – Annual Results 2015
Consolidated statement of changes in equity
for the year ended 31 December 2015
Year ended
31 December
31 December
2015
2014*
£m
£m
Called-up share capital
At beginning and end of year
6,609
6,609
Share premium account
At
beginning of year
26,807
26,290
Redemption of preference shares classified as debt (1)
-
517
At end of year
26,807
26,807
Merger reserve
At beginning of year
10,834
10,800
Unwind of merger reserve
31
34
At end of y
ear
10,865
10,834
Available-for-sale reserve
At beginning of year
400
359
Unrealised gains
88
504
Realised gains
(70)
(409)
Tax
(18)
(45)
Recycled to profit or loss on ceding control of Citizens (2)
9
-
Transfer to retained earnings
(43)
(9)
At end of year
366
400
Cash flow hedging reserve
At beginning of year
1,026
(86)
Amount recognised in equity
668
2,869
Amount transferred from equity to earnings
(1,350)
(1,457)
Tax
106
(334)
Recycled to profit or loss on ceding control of Citizens (3)
(36)
-
Transfer to retained earnings
9
34
At end of year
423
1,026
Foreign exchange reserve
At beginning of year
1,762
1,842
Retranslation of net assets
(79)
403
Foreign currency losses on hedges of net assets
(74)
(82)
Tax
11
(9)
Recycled to profit or loss on disposal of business
4
-
Recycled to profit or loss on ceding control of Citizens
(974)
-
Transfer to retained earnings
(642)
(392)
At end of year
8
1,762
Retained earnings
At beginning of year
(2,135)
2,888
(Loss)/profit attributable to ordinary and equity preference shareholders
- continuing operations
(3,126)
365
- discontinued operations
1,220
(3,538)
Equity preference dividends paid
(44)
(61)
Transfer from available-for-sale reserve
43
9
Transfer from cash flow hedging reserve
(9)
(34)
Transfer from foreign exchange reserve
642
392
Costs of placing Citizens equity
(29)
(45)
Loss on remeasurement of retirement benefit schemes (4)
- gross
(67)
(1,849)
- tax
306
314
Redemption of preference shares classified as debt (1)
-
(517)
Shares issued under employee share schemes
(58)
(91)
Share-based payments
- gross
36
29
- tax
(4)
3
At end of yea
r
(3,225)
(2,135)
Owners’ equity at end of year 41,853
45,303
For the notes to this table refer to the following page.
*Restated - refer to page 14 for further details
12
RBS – Annual Results 2015
Consolidated statement of changes in equity
for the year ended 31 December 2015
Year ended
31 December
31 December
2015
2014*
£m
£m
Non-controlling interests
At beginning of year
2,385
79
Currency translation adjustments and other movements
28
113
Profit attributable to non-controlling interests
- continuing operations
2
5
- discontinued operations
318
52
Dividends paid
(31)
(4)
Movements in available-for-sale securities
- unrealised gains
25
37
- tax
(5)
(13)
Movements in cash flow hedging reserve
- amount recognised in equity
32
18
- recycled to profit or loss on disposal of discontinued operations
-
(18)
- tax
(4)
-
Actuarial losses recognised in retirement benefit schemes
(6)
-
Equity raised (5)
2,491
2,117
Equity withdrawn and disposals
(24)
(1)
Loss of control of Citizens
(5,157)
-
At end of year
54
2,385
Total equity at end of year 41,907
47,688
Total equity is attributable to:
Non controlling interests
54
2,385
Preference shareholders
1,421
1,421
Ordinary shareholders
40,432
43,882
41,907
47,688
*Restated - refer to page 14 for further details
Notes:
(1) Issued by RBS plc to the holding company which was redeemed in June 2014.
(2) Net of tax - £6 million charge
(3) Net of tax - £16 million credit
(4) See Note 3 on page 14
(5) Includes £2,491 million relating to the secondary offering of Citizens in March 2015 (2014 - £2,117 million relating to IPO of Citizens).
13
RBS – Annual Results 2015
Consolidated cash flow statement for the year ended 31 December 2015
Year ended
31 December
31 December
2015
2014*
£m
£m
Operating activities
Operating (loss)/profit before tax on continuing operations
(3,153)
2,403
Operating profit/(loss) before tax on discontinued operations
1,750
(3,258)
Adjustments for non
-cash items
(8,031)
(1,346)
Net cash outflow from trading activities
(9,434)
(2,201)
Changes in operating assets and liabilities
10,787
(11,917)
Net cash flows from operating activities before tax 1,353
(14,118)
Income taxes paid
(231)
(302)
Net cash flows from operating activities 1,122
(14,420)
Net cash flows from investing activities (5,704)
(4,910)
Net cash flows from financing activities (1,176)
(2,000)
Effects of exchange rate changes on cash and cash equivalents
525
682
Net decrease in cash and cash equivalents (5,233)
(20,648)
Cash and cash equivalents at beginning of year
107,308
127,956
Cash and cash equivalents at end of year 102,075
107,308
*Restated - refer to page 14 for further details
14
RBS – Annual Results 2015
Notes
1. Basis of preparation
The Group’s consolidated financial statements should be read in conjunction with the 2015 Annual Report
and Accounts which were prepared in accordance with International Financial Reporting Standards issued
by the International Accounting Standards Board (IASB) and interpretations issued by the IFRS
Interpretations Committee of the IASB as adopted by the European Union (EU) (together IFRS).
Going concern
Having reviewed the Group’s forecasts, projections and other relevant evidence, the directors have a
reasonable expectation that the Group will continue in operational existence for the foreseeable future.
Accordingly, the results for the year ended 31 December 2015 have been prepared on a going concern
basis.
Business structure
The Group continues to deliver on its plan to build a strong, simple and fair bank for both customers and
shareholders. To support this and reflect the progress made the previously reported operating segments
have been realigned.
For further information on these changes see Note 9.
2. Citizens
On 31 December 2014, Citizens Financial Group Inc. was classified as a discontinued operation and a
disposal group: its aggregate assets were presented in Assets of disposal groups and its aggregate liabilities
in Liabilities of disposal groups. Prior period results were re-presented.
From 3 August 2015, when the Group’s interest in Citizens fell to 20.9%, Citizens was accounted for as an
associate classified as held for sale. The Group subsequently completed its divestment of Citizens when it
sold its final tranche on 30 October 2015. Citizens is no longer a reportable segment, therefore segment
disclosures for all periods have been restated.
3. Accounting policies
The Group’s principal accounting policies are set out on pages 176 to 184 of the 2014 Annual Report and
Accounts. Amendments to IFRSs effective for 2015 have not had a material effect on the Group’s 2015
results.
Pensions
The Group changed its accounting policy for the recognition of surpluses in its defined benefit pension
schemes: in particular, the policy for determining whether or not it has an unconditional right to a refund of
surpluses in its employee pension funds. Where the Group has a right to a refund, this is not deemed
unconditional if pension fund trustees can enhance benefits for plan members. The amended policy has
been applied retrospectively and prior periods restated.
15
RBS – Annual Results 2015
Notes
3. Accounting policies (continued)
The impact of the change in policy set out below
Consolidated income statement 2015
Under
previous policy
Adjustment
As published
£m
£m
£m
Staff costs
(5,604)
(64)
(5,668)
Operating expenses
(16,077)
(64)
(16,141)
Loss before impairment losses
(3,926)
(64)
(3,990)
Operating loss before tax
(3,089)
(64)
(3,153)
Tax charge
17
12 29
Loss from continuing operations
(3,072)
(52)
(3,124)
Loss for the year
(1,534)
(52)
(1,586)
Loss attributable to ordinary shareholders
(1,898)
(52)
(1,950)
Consolidated statement of comprehensive income
2015
2014
Under
As previously
previous policy
Adjustment As published
reported
Adjustment
Restated
£m
£m £m
£m
£m
£m
Loss for year
(1
,534)
(52) (1,586)
(3,116) -
(3,116)
Gain/(loss) on remeasurement
of retirement benefit schemes
1,139
(1,212) (73)
(100)
(1,749)
(1,849)
Tax
(147)
453 306
(36) 350
314
Total comprehensive loss after tax
(2,256)
(811) (3,067)
(1,675)
(1,399)
(3,074)
Consolidated balance sheet
2015
2014
Under
As previously
previous policy
Adjustment As published
reported Adjustment Restated
£m £m £m
£m £m £m
Deferred tax assets
1,786 836 2,622
1,510 371 1,881
Prepayments, accrued income
and other assets
3,168 (149) 3,019
4,413 (115) 4,298
Retirement benefit liabilities
783 2,981 3,764
2,550 1,739 4,289
Owners' equity
44,147 (2,294) 41,853
46,786 (1,483) 45,303
Consolidated statement of changes in equity
2015
2014
Under
As previously
previous policy
Adjustment
As published
reported
Adjustment
Restated
£m
£m
£m
£m
£m
£m
Retained earnings
At beginning of the year
(652)
(1,483)
(2,135)
2,972
(84)
2,888
(Loss)/profit attributable to ordinary
shareholders and other equity
owners - continuing operations
(3,074)
(52)
(3,126)
365 -
365
Gain/(loss) on remeasurement
of retirement benefit schemes
- gross
1,145
(1,212)
(67)
(100)
(1,749)
(1,849)
- tax
(147) 453
306
(36) 350
314
At end of the year
(931)
(2,294)
(3,225)
(652)
(1,483)
(2,135)
16
RBS – Annual Results 2015
Notes
3. Accounting policies (continued)
Critical accounting policies and key sources of estimation uncertainty
The judgements and assumptions that are considered to be the most important to the portrayal of the
Group’s financial condition are those relating to pensions, goodwill, provisions for liabilities, deferred tax,
loan impairment provisions and fair value of financial instruments. These critical accounting policies and
judgements are described on pages 184 to 186 of the 2014 Annual Report and Accounts.
Accounting developments - International Financial Reporting standards
A number of IFRSs and amendments to IFRS were in issue at 31 December 2015 that would affect the
Group from 1 January 2016 or later.
Effective for 2016
‘Accounting for Acquisitions of Interests in Joint Operations’ issued in May 2014 amends IFRS 11 ‘Joint
Arrangements. An acquirer of an interest in a joint operation that is a business applies the relevant principles
for business combinations in IFRS 3 and other standards and makes the relevant disclosures accordingly.
The effective date is 1 January 2016.
‘Clarification of Acceptable Methods of Depreciation and Amortisation’ issued in May 2014 amends IAS 16
‘Property, Plant and Equipment’ and IAS 38 ‘Intangible Assets’ requiring amortisation to be based on the
consumption of an asset, introducing a rebuttable presumption that this is not achieved by an amortisation
profile aligned to revenue. The effective date is 1 January 2016.
Annual Improvements to IFRS 2012 - 2014 cycle was issued in September 2014 making a number of minor
amendments to IFRS. Its effective date is 1 January 2016.
Amendments to IFRS 10 ‘Consolidated Financial Statements’, IFRS 12 ‘Disclosure of Interests in Other
Entities’ and IAS 28 ‘Investments in Associates and Joint Ventures’ were issued in September 2014 to clarify
the accounting for sales between an investor, its associate or joint ventures, and in December 2014 to clarify
the application of the investment entity consolidation exception. The September 2014 amendments will be
effective from a date to be determined by the IASB and the December 2014 amendments from 1 January
2016.
An amendment to IAS 1 ‘Presentation of Financial Statements’ was issued in December 2014 to clarify the
application of materiality to financial statements. Its effective date is 1 January 2016.
None of these amendments is expected to have a material effect on the Group’s financial statements.
Effective after 2016 - IFRS 9
In July 2014, the IASB published IFRS 9 ‘Financial Instruments’ with an effective date of 1 January 2018.
IFRS 9 replaces the current financial instruments standard IAS 39, setting out new accounting requirements
in a number of areas. The Group is continuing its assessment of the standard’s effect on its financial
statements.
The principle features of IFRS 9 are as follows:
Recognition and derecognition
The material in IAS 39 setting out the criteria for the recognition and derecognition of financial instruments
has been included unamended in IFRS 9.
17
RBS – Annual Results 2015
Notes
3. Accounting policies (continued)
Classification and measurement
Financial assets - There are three classifications for financial assets in IFRS 9: fair value through profit or
loss; fair value through other comprehensive income; and amortised cost.
• Financial assets with terms that give rise to interest and principal cash flows only and which are held in a
business model whose objective is to hold financial assets to collect their cash flow are measured at
amortised cost.
• Financial assets with terms that give rise to interest and principal cash flows only and which are held in a
business model whose objective is achieved by holding financial assets to collect their cash flow and
selling them are measured at fair value through other comprehensive income.
• Other financial assets are measured at fair value through profit and loss.
However, at initial recognition, any financial asset may be irrevocably designated as measured at fair value
through profit or loss if such designation eliminates a measurement or recognition inconsistency.
The Group continues to evaluate the overall effect, but expects that the measurement basis of the majority of
the Group’s financial assets will be unchanged on application of IFRS 9.
Financial liabilities - IFRS 9’s requirements on the classification and measurement of financial liabilities are
largely unchanged from those in IAS 39. However, there is a change to the treatment of changes in the fair
value attributable to own credit risk of financial liabilities designated as at fair value through profit or loss
which are recognised in other comprehensive income and not in profit or loss as required by IAS 39.
Hedge accounting
Hedge accounting requirements are designed to align accounting more closely to the risk management
framework; permit a greater variety of hedging instruments; and remove or simplify some of the rule-based
requirements in IAS 39. The basic mechanics of hedge accounting: fair value, cash flow and net investment
hedges are retained. There is an option in IFRS 9 for an accounting policy choice to continue with the IAS 39
hedge accounting framework. The Group is actively considering its implementation approach.
Credit impairment
IFRS 9’s credit impairment requirements apply to financial assets measured at amortised cost, to those
measured at fair value through other comprehensive income, to lease receivables and to certain loan
commitments and financial guarantee contracts. On initial recognition a loss allowance is established at an
amount equal to 12-month expected credit losses (‘ECL’) that is the portion of life-time expected losses
resulting from default events that are possible within the next 12 months. Where a significant increase in
credit risk since initial recognition is identified, the loss allowance increases so as to recognise all expected
default events over the expected life of the asset. The Group expects that financial assets where there is
objective evidence of impairment under IAS 39 will be credit impaired under IFRS 9, and carry loss
allowances based on all expected default events.
18
RBS – Annual Results 2015
Notes
3. Accounting policies (continued)
The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-
weighted: determined by evaluating at the reporting date for each customer or loan portfolio a range of
possible outcomes using reasonable and supportable information about past events, current conditions and
forecasts of future events and economic conditions. The estimation of ECL also takes into account the time
value of money. Recognition and measurement of credit impairments under IFRS 9 are more forward-looking
than under IAS 39.
A single bank-wide programme has been established to implement the necessary changes in the modelling
of credit loss parameters, and the underlying credit management and financial processes; this programme is
led jointly by Risk and Finance. The inclusion of loss allowances on all financial assets will tend to result in
an increase in overall impairment balances when compared with the existing basis of measurement under
IAS 39.
Transition
The classification and measurement and impairment requirements are applied retrospectively by adjusting
the opening balance sheet at the date of initial application, with no requirement to restate comparative
periods. Hedge accounting is generally applied prospectively from that date.
Effective after 2016 – other standards
In January 2016, the IASB amended IAS 7 ‘Cash Flow Statements’ to require disclosure of the movements
in financing liabilities. The amendment is effective from 1 January 2017.
In January 2016, the IASB amended IAS 12 ‘Income taxes’ to clarify the recognition of deferred tax assets in
respect of unrealised losses. The amendment is effective from 1 January 2017.
IFRS 15 ‘Revenue from Contracts with Customers’ was issued in May 2014. It will replace IAS 11
‘Construction Contracts’, IAS 18 ‘Revenue’ and several Interpretations. Contracts are bundled or unbundled
into distinct performance obligations with revenue recognised as the obligations are met. It is effective from 1
January 2018.
IFRS 16 ‘Leases’ was issued in January 2016 to replace IAS 17 ‘Leases’. Accounting for finance leases will
remain substantially the same. Operating leases will be brought on balance sheet through the recognition of
assets representing the contractual rights of use and liabilities will be recognised for the contractual
payments. The effective date is 1 January 2019.
The Group is assessing the effect of adopting these standards on its financial statements.
19
RBS – Annual Results 2015
Notes
4. Operating expenses
31 December
31 December
2015
2014
£m
£m
Staff costs
5,668
5,683
Premises and equipment
1,809
2,059
Other administrative expenses (1)
6,160
4,361
Depreciation and amortisation
1,173
926
Write down of goodwill and other intangible assets
1,331
523
16,141
13,552
Note:
(1) Other administrative expenses include Payment Protection Insurance costs, Interest Rate Hedging Products redress and related costs, mortgage-
backed securities
litigation and related costs, other litigation and conduct costs (see note 5) and UK Bank levy.
5. Provisions for liabilities and charges
Regulatory and legal actions
Other
FX
Other
customer
investigations/
regulatory
Property
PPI IRHP
redress (1)
litigation
provisions
Litigation
and other
Total
2015 £m £m
£m
£m
£m
£m £m £m
At beginning of year
799 424
568
320
183
1,772 696 4,762
Transfer
- -
-
(15)
(71)
86 - -
Currency translation and other movements
- -
-
16
2
105 24 147
Charge to income statement (2)
600 81
368
334
27
2,170 1,380 4,960
Releases to income statement (2)
(1) (13)
(34)
-
(7)
(18) (417) (490)
Provisions utilised
(402) (343)
(292)
(349)
(82)
(203) (488) (2,159)
At end of year 996 149
610
306
52
3,912 1,195 7,220
Notes:
(1) Closing provision primarily relates to investment advice and packaged accounts.
(2) Relates to continuing operations.
Payment Protection Insurance (PPI)
A charge for PPI of £600 million has been recognised in 2015 as a result of the developments detailed in
Note 12. The cumulative charge in respect of PPI is £4.3 billion, of which £3.3 billion (77%) in redress and
expenses had been utilised by 31 December 2015. Of the £4.3 billion cumulative charge, £3.9 billion relates
to redress and £0.4 billion to administrative expenses.
The table below shows the sensitivity of the provision to changes in the principal assumptions (all other
assumptions remaining the same).
Sensitivity
Actual to
date
Current
assumption
Change in
assumption
Consequential
change in
provision
Assumption
%
£m
Single premium book past business review take up rate
55%
56%
+/
-
5
+/
-
55
Uphold rate (1)
91%
89
%
+/
-
5
+/
-
35
Average redress
£1,677
£1,638
+/
-
5
+/
-
36
Note:
(1) Uphold rate excludes claims where no PPI policy was held.
20
RBS – Annual Results 2015
Notes
5. Provisions for liabilities and charges (continued)
Interest that will be payable on successful complaints has been included in the provision as has the
estimated cost of administration. There are uncertainties as to the eventual cost of redress which will depend
on actual complaint volumes, take up and uphold rates and average redress costs. Assumptions relating to
these are inherently uncertain and the ultimate financial impact may be different from the amount provided.
We continue to monitor the position closely and refresh the underlying assumptions. Background information
in relation to PPI claims is given in Note 12.
Interest Rate Hedging Products (IRHP) redress and related costs
Following an industry-wide review conducted in conjunction with the Financial Services Authority (now being
dealt with by the Financial Conduct Authority (FCA)), the Group agreed to provide redress to customers in
relation to certain interest rate hedging products sold to small and medium-sized businesses classified as
retail clients under FSA rules. A net charge of £68 million for 2015, principally reflects a marginal increase in
our redress experience compared to expectations and the cost of a small number of consequential loss
claims over and above interest offered as part of basic redress. We have now agreed outcomes with the
independent reviewer on all cases. A cumulative charge of £1.5 billion has been recognised, of which £1.1
billion relates to redress and £0.4 billion relates to administrative expenses. We continue to monitor the level
of provision given the remaining uncertainties over the eventual cost of redress, including the cost of
consequential loss claims.
Regulatory and legal actions
The Group is party to certain legal proceedings and regulatory and governmental investigations and
continues to co-operate with a number of regulators. All such matters are periodically reassessed with the
assistance of external professional advisers, where appropriate, to determine the likelihood of the Group
incurring a liability and to evaluate the extent to which a reliable estimate of any liability can be made.
Additional charges of £2.9 billion in 2015 include anticipated costs following investigations into the foreign
exchange market (£334 million), provisions in respect of mortgage-backed securities related litigation (£2.1
billion), provisions relating to packaged accounts (£157 million) and other litigation and conduct provisions
(£249 million).
21
RBS – Annual Results 2015
Notes
6. Pensions
The Group sponsors a number of pension schemes in the UK and overseas whose assets are independent
of the Group’s finances.
The Royal Bank of Scotland Group Pension Fund (the Main scheme), accounting for 88% (2014 – 87%) of
the Group’s retirement benefit obligations, was closed to new entrants in 2006. Since 2009, pensionable
salary increases in the Main scheme and certain other UK and Irish schemes have been limited to 2% per
annum or CPI inflation if lower. Also, with effect from 1 October 2012, the normal pension age for future
benefits was increased to 65 unless members elected to contribute to maintain a normal pension age of 60.
2015
2014
Pension costs £m
£m
Defined benefit schemes
521
459
Curtailment and settlement gains
(65)
-
Defined contribution schemes
71
83
Pension costs - continuing operations
527
542
All schemes
2015
2014*
Net pension deficit £m
£m
At begi
nning of the year
4,109
2,974
Change in accounting policy
-
105
Currency translation and other adjustments
(32)
(23)
Income statement
456
463
Return on plan assets above recognised interest income
457
(5,171)
Experience gains and losses
(258)
(18)
Effect of changes in actuarial financial assumptions
(1,386)
4,799
Effect of changes in actuarial demographic assumptions
48
490
Asset ceiling/minimum funding adjustments
1,212
1,749
Contributions by employer
(1,059)
(1,063)
Transfer to disposal groups
2
(196)
At end of year
3,549
4,109
Net assets of schemes in surplus
(215)
(180)
Net liabilities of schemes in deficit
3,764
4,289
*Restated - refer to page 14 for further details
Main scheme
2015
2014*
Fund assets at fair value
30,703
30,077
Present value of fund liabilities
30,966
31,776
Funded status
263
1,699
Asset ceiling/minimum funding
2,981
1,739
Retirement benefit liability
3,244
3,438
Minimum funding requirement
3,657
4,190
Ass
et ceiling
(413)
(752)
Retirement benefit liability
3,244
3,438
*Restated - refer to page 14 for further details
22
RBS – Annual Results 2015
Notes
6. Pensions (continued)
Interim valuations of the Main scheme under IAS 19 ‘Employee Benefits’ were prepared at 31 December
with the support of independent actuaries, using the following assumptions.
Principal IAS 19 actuarial assumptions
Main scheme
2015
2014
%
%
Discount rate
3.9
3.7
Expected return on plan assets
3.9
3.7
Rate of increase in salaries
1.8
1.8
Rate of increase in pensions in payment
2.8
2.8
Inflation assumption (RPI)
3.0
3.0
Main scheme
IAS 19 post-retirement mortality assumptions 2015
2014
Longevity at age 60 for current pensioners (years)
Males
27.8
28.0
Females
29.8
30.0
Longevity at age 60 for future pensioners currently aged 40 (years)
Males
29.1
29.3
Females
31.4
31.6
The Group discounts its defined benefit pension obligations at discount rates determined by reference to the
yield on high quality corporate bonds.
The sterling yield curve (applied to 93% of the Group’s defined benefit obligations) is constructed by
reference to yields on ‘AA’ corporate bonds. Significant judgement is required when setting the criteria for
bonds to be included in the population from which the yield curve is derived. The criteria include issue size,
quality of pricing and the exclusion of outliers.
The assets of the Main scheme which represent 88% of plan assets at 31 December 2015 (2014 - 88%), are
invested in a diversified portfolio of quoted and private equity, government and corporate fixed-interest and
index-linked bonds, and other assets including property and hedge funds.
The Main scheme employs derivative instruments, to achieve a desired asset class exposure or to match
assets more closely to liabilities.
The table below sets out the sensitivities of the present value of the defined benefit obligations at 31
December to a change in the principal actuarial assumptions:
Main scheme
(decrease)/increase in obligation
at 31 December
2015
2014
£m
£m
0.25% increase in the discount rate
(1,392)
(1,466)
0.25% increase in inflation
1,106
1,159
0.25% additional rate of increase pensions in payment
945
982
Longevity increase of one year
853
988
23
RBS – Annual Results 2015
Notes
6. Pensions (continued)
In 2015 the Group paid £1.1 billion (2014 - £1.1 billion) in employer contributions to the various pension
schemes. These cash contributions reflect the regular ongoing accrual of benefits and running costs of the
schemes based on the IAS 19 accounting valuations, and also reflect additional contributions agreed with
the trustees of those schemes which are in deficit, as part of the triennial actuarial funding valuation. £0.5
billion (2014 - £0.5 billion) of the employer contributions represented the P&L cost of the pension plans; the
remainder of the contribution served to reduce the net liabilities of the schemes which on an IAS 19 basis fell
from £4.3 billion in 2014 to £3.8 billion this year end (2014 - increased from £3.2 billion to £4.3 billion) as a
result of the employer contributions and £0.1 billion net actuarial and experience losses (2014 - £1.8 billion
net gain) which are not reflected in the income statement.
In May 2014, the triennial funding valuation of The Main scheme was agreed which showed that the value of
the liabilities exceeded the value of assets by £5.6 billion at 31 March 2013, a ratio of 82%. To eliminate this
deficit, the Group will pay annual contributions of £650 million from 2014 to 2016 and £450 million (indexed
in line with inflation) from 2017 to 2023. These contributions are in addition to regular annual contributions of
approximately £270 million in respect of the ongoing accrual of benefits as well as contributions to meet the
expenses of running the scheme.
In January 2016, RBS Group sought regulatory approval to accelerate the settlement of the outstanding
additional contributions of £4.2 billion and it entered into a Memorandum of Understanding with the trustee of
the Main scheme which, among other things, will bring forward the date of the next triennial funding valuation
to no later than 31 December 2015.
The trustee of the Main scheme is responsible for setting the actuarial assumptions used in the triennial
funding valuation having taken advice from the Scheme Actuary. These represent the trustee’s prudent
estimate of the future experience of the Main scheme taking into account the covenant provided by RBS
Group and investment strategy of the scheme. They are agreed with RBS Group and documented in the
Statement of Funding Principles.
24
RBS – Annual Results 2015
Notes
7. Loan impairment provisions and risk elements in lending
Loan impairments
Operating (loss)/profit is stated after net loan impairment releases from continuing operations of £834 million
(2014 - £1,326 million). The balance sheet loan impairment provisions decreased in the year ended 31
December 2015 from £17,404 million to £7,052 million and the movements thereon were:
Year ended
31 December
31 December
2015
2014
£m
£m
At beginning of year
17,404
25,045
Transfer to disposal groups
(20)
(553)
Currency translation and other adjustments
(576)
(657)
Amounts written
-off
(8,950)
(5,253)
Recoveries of amounts previously written-off
172
201
(Releases)/charges to income statement
- continuing operations
(834)
(1,326)
- discontinued operations
-
194
Unwind of discount (recognised in interest income)
(144)
(247)
At end of year
7,052
17,404
Provisions at 31 December 2015 include £1 million in respect of loans and advances to banks (2014 - £40
million).
Risk elements in lending
Risk elements in lending (REIL) comprises impaired loans and accruing loans past due 90 days or more as
to principal or interest. Impaired loans are all loans (including loans subject to forbearance) for which an
impairment provision has been established; for collectively assessed loans, impairment loss provisions are
not allocated to individual loans and the entire portfolio is included in impaired loans. Accruing loans past
due 90 days or more comprise loans past due 90 days where no impairment loss is expected.
REIL decreased from £26,722 million to £12,035 million in the year ended 31 December 2015 and the
movements thereon were:
Year ended
31 December
31 December
2015
2014
£m
£m
At beginning of year
26,722
39,126
Transfer to disposal groups
(20)
(1,347)
Currency translation and other adjustments
(865)
(1,092)
Additions
4,075
6,594
Transfers (1)
(222)
(256)
Transfer to performing book and repayments
(8,705)
(11,350)
Amounts written
-off
(8,950)
(4,953)
At end of year
12,035
26,722
Note:
(1) Represents transfers between REIL and potential problem loans.
Provision coverage of REIL was 59% at 31 December 2015 (2014 - 65%).
25
RBS – Annual Results 2015
Notes
8. Tax
The actual tax credit/(charge) differs from the expected tax credit/(charge) computed by applying the
standard rate of UK corporation tax of 20.25% (2014 - 21.50%) as analysed below:
Year ended
31 December
31 December
2015
2014
£m
£m
(Loss)/profit before tax
(3,153)
2,403
Expected tax credit/(charge)
638
(517)
Losses and temporary differences in period where no deferred tax asset recognised
(968)
(14)
Foreign profits taxed at other rates
486
100
UK tax rate change impact
94
-
Non-deductible goodwill impairment
(124)
(28)
Items not allowed for tax
- losses on disposals and write-downs
(15)
(19)
- UK bank levy
(50)
(54)
- regulatory and legal actions
(226)
(182)
- other disallowable items
(215)
(148)
Non-taxable items
90
37
Taxable foreign exchange movements
(22)
(23)
Losses brought forward and utilised
102
218
(Reduction)/increase in carrying value of deferred tax asset in respect of:
- UK losses
-
(850)
- US losses and temporary differences
-
(775)
- Ireland losses
-
153
Adjustments in respect of prior periods
239
69
Actual tax credit/(charge)
29
(2,033)
At 31 December 2015, the Group has recognised a deferred tax asset of £2,622 million (2014 - £1,881
million) and a deferred tax liability of £729 million (2014 - £236 million). These include amounts recognised in
respect of UK trading losses of £1,121 million (2014 - £1,257 million). Under UK tax legislation, these UK
losses can be carried forward indefinitely to be utilised against profits arising in the future. The Group has
considered the carrying value of this asset as at 31 December 2015 and concluded that it is recoverable
based on future profit projections.
In recent years, the UK government has steadily reduced the rate of UK corporation tax, with the latest
enacted rates standing at 20% with effect from 1 April 2015, 19% from 1 April 2017 and 18% from 1 April
2020. The Finance (No 2) Act 2015 restricts the rate at which tax losses are given credit in future periods to
the main rate of UK corporation tax, excluding the Banking Surcharge 8% rate introduced by this Act.
Deferred tax assets and liabilities at 31 December 2015 take into account the reduced rates in respect of tax
losses and non-banking temporary differences and where appropriate, the banking surcharge inclusive rate
in respect of other banking temporary differences.
Prior year tax adjustments include releases of tax provisions that reflect the reduction of exposures in
countries where RBS is ceasing operations in line with the strategy to become a smaller, simpler UK focused
bank. The prior year tax adjustment also reflects adjustments to reflect submitted tax computations in the UK
and overseas and a further prior year tax credit in respect of tax losses arising in the Belfast Branch of Ulster
Bank Ireland Limited reflecting UK tax law changes and European Court of Justice decisions on the
surrender of tax losses.
26
RBS – Annual Results 2015
Notes
9. Segmental analysis
In 2015, the reported operating segments were realigned as follows:
●
Personal & Business Banking (PBB), comprises two reportable segments, UK Personal & Business
Banking, (UK PBB) and Ulster Bank RoI. UK PBB includes Ulster Bank customers in Northern Ireland.
Ulster Bank RoI serves individuals and businesses in the Republic of Ireland (RoI).
●
Commercial & Private Banking (CPB), comprises three reportable segments Commercial Banking,
Private Banking and RBS International (RBSI).
● Corporate & Institutional Banking (CIB), a single reportable segment.
Capital Resolution includes CIB Capital Resolution and the remainder of RCR.
Williams & Glyn (W&G) comprises the RBS England and Wales branch-based businesses, along with certain
small and medium enterprises (SME) and corporate activities across the UK. During the period presented
W&G has not operated as a separate legal entity. The perimeter of the segment currently reported does not
include certain portfolios that are ultimately intended to be divested as part of W&G, for example, certain
NatWest branches in Scotland.
Reporting changes
A number of items (own credit adjustments, gain/(loss) on redemption of own debt, write-down of goodwill
and strategic disposals) previously reported separately after operating profit are now being reported within
operating profit.
Comparatives have been restated accordingly.
Year ended
31 December
31 December
Analysis of operating profit/(loss)
2015
2014*
£m
£m
UK Personal & Business Banking
1,628
1,663
Ulster Bank RoI
308
542
Personal & Business Banking
1,936
2,205
Commercial Banking
1,847
1,769
Private Banking
(413)
188
RBS International
247
281
Commercial & Private Banking
1,681
2,238
Corporate & Institutional Banking
(504)
(193)
Capital Resolution
(3,426)
1,466
Williams & Glyn
431
467
Central items & other
(3,271)
(3,780)
Total
(3,153)
2,403
*Re-presented to reflect the segmental reorganisation
27
RBS – Annual Results 2015
Notes
9. Segmental analysis (continued)
Year ended
31 December 2015
31 December 2014*
External
Inter
Total
External
Inter
Total
segment
segment
Total revenue £m
£m £m
£m
£m £m
UK Personal & Business Banking
6,195
50 6,245
6,351
39 6,390
Ulster Bank RoI
640
15 655
672
50 722
Personal & Business Banking
6,835
65 6,900
7,023
89 7,112
Commercial Banking
3,482
42 3,524
3,554
51 3,605
Private Banking
577
191 768
624
240 864
RBS International
275
177 452
287
208 495
Commercial & Private Banking
4,334
410 4,744
4,465
499 4,964
Corporate & Institutional Banking
1,872
1,199 3,071
2,541
1,212 3,753
Capital Resolution
746
1,455 2,201
2,597
2,611 5,208
Williams & Glyn
920
- 920
954
- 954
Central items & other
1,587
(3,129)
(1,542)
1,819
(4,411)
(2,592)
Total
16,294
- 16,294
19,399
- 19,399
*Re-presented to reflect the segmental reorganisation
31 December 2015
31 December 2014*
Assets
Liabilities
Assets
Liabilities
Total assets and liabilities £m
£m
£m
£m
UK Personal & Business Banking
127,067 140,585
119,763 136,823
Ulster Bank RoI
21,264 15,837
22,479 17,962
Personal & Business Banking
148,331 156,422
142,242 154,785
Commercial Banking
96,983 94,849
90,677 89,772
Private Banking
11,596 23,256
12,241 22,660
RBS International
7,854 21,399
7,779 20,995
Commercial & Private Banking
116,433 139,504
110,697 133,427
Corporate & Institutional Banking
213,790 194,238
281,910 261,472
Capital Resolution
187,833 186,458
314,449 277,858
Williams & Glyn
20,117 24,171
19,563 22,065
Central items & other
125,687 69,491
176,521 148,087
Total
812,191 770,284
1,045,382 997,694
*Restated - refer to page 14 for further details. Re-presented to reflect the segmental reorganisation.
28
RBS – Annual Results 2015
Notes
10. Discontinued operations and assets and liabilities of disposal groups
In accordance with a commitment to the European Commission to divest Citizens Financial Group, Inc.
(Citizens) by 31 December 2016, the Group disposed of 30% of its interest in Citizens during the second half
of 2014 primarily through an initial public offering in the USA and disposed of a further 28% in March 2015,
21% in August 2015 and the remaining 21% in October 2015 to complete the divestment. Consequently,
Citizens is classified as a disposal group and treated as a discontinued operation until October 2015. From 3
August 2015, Citizens was an associated undertaking.
(a) Profit from discontinued operat
ions, net of tax
31 December
31 December
2015
2014
£m
£m
Citizens
Interest receivable
1,433
2,204
Interest payable
(144)
(191)
Net interest income
1,289
2,013
Non-interest income
615
1,043
Total income
1,904
3,056
Operating expenses
(1,181)
(2,123)
Profit before impairment losses
723
933
Impairment losses
(103)
(197)
Operating profit before tax
620
736
Tax charge
(212)
(228)
Profit after tax
408
508
Provision for gain/(loss) on disposal of subsidiary
10
(3,994)
Gain on disposal of subsidiary
1,159
-
Provision for loss on disposal of interest in associate
(130)
-
Gain on disposal of interest in associate
91
-
Profit/(loss) from Citizens discontinued operations, net of tax
1,538
(3,486)
(b) Assets and liabilities of disposal groups
31 December
31 December
2015
2014
£m
£m
Assets of disposal groups
Cash and balances at central banks
535
622
Loans and advances to banks
709
1,745
Loans and advances to customers
1,639
59,606
Debt securities and equity shares
443
15,865
Derivatives
30
402
Intangible assets
-
555
Property, plant and equipment
19
549
Other assets
111
1,689
Discontinued operations and other disposal groups
3,486
81,033
Liabilities of disposal groups
Deposits by banks
32
6,794
Customer accounts
2,805
61,256
Debt securities in issue
-
1,625
Derivatives
28
144
Settlement balances
7
-
Subordinated liabilities
-
226
Other liabilities
108
1,239
Discontinued operations and other disposal groups
2,980
71,284
29
RBS – Annual Results 2015
Notes
10. Discontinued operations and assets and liabilities of disposal groups (continued)
Disposal groups at 31 December 2015 is primarily International Private Banking (fair value less costs to sell
reflects the agreed sale to Union Bancaire Priveé: fair value hierarchy level 3) (£3,344 million assets; £2,724
million liabilities).
Disposal groups at 31 December 2014 is predominantly Citizens.
11. Contingent liabilities and commitments
31 December
31 December
2015
2014
£m
£m
Guarantees and assets pledged as collateral security
5,894
11,694
Other contingent liabilities
6,789
9,221
Standby facilities, credit lines and other commitments
137,364
213,952
Contingent liabilities and commitments
150,047
234,867
Additional contingent liabilities arise in the normal course of the Group’s business. It is not anticipated that
any material loss will arise from these transactions.
12. Litigation, investigations and reviews
RBS plc and other members of the RBS Group are party to legal proceedings and the subject of
investigation and other regulatory and governmental action (“Matters”) in the United Kingdom (UK), the
United States (US), the European Union (EU) and other jurisdictions.
The RBS Group recognises a provision for a liability in relation to these Matters when it is probable that an
outflow of economic benefits will be required to settle an obligation resulting from past events, and a reliable
estimate can be made of the amount of the obligation. While the outcome of these Matters is inherently
uncertain, the directors believe that, based on the information available to them, appropriate provisions have
been made in respect of the Matters as at 31 December 2015 (see Note 5). The aggregate provisions for
regulatory and legal actions of £2.9 billion recognised during 2015 mainly included provisions in respect of
mortgage backed securities litigation (£2.1 billion).
In many proceedings and investigations, it is not possible to determine whether any loss is probable or to
estimate reliably the amount of any loss, either as a direct consequence of the relevant proceedings and
investigations or as a result of adverse impacts or restrictions on the RBS Group’s reputation, businesses
and operations. Numerous legal and factual issues may need to be resolved, including through potentially
lengthy discovery and document production exercises and determination of important factual matters, and by
addressing novel or unsettled legal questions relevant to the proceedings in question, before a liability can
reasonably be estimated for any claim. The RBS Group cannot predict if, how, or when such claims will be
resolved or what the eventual settlement, damages, fine, penalty or other relief, if any, may be, particularly
for claims that are at an early stage in their development or where claimants seek substantial or
indeterminate damages.
In respect of certain matters described below, we have established a provision and in certain of those
matters, we have indicated that we have established a provision.
30
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
There are situations where the RBS Group may pursue an approach that in some instances leads to a
settlement agreement. This may occur in order to avoid the expense, management distraction or reputational
implications of continuing to contest liability, or in order to take account of the risks inherent in defending
claims or investigations even for those matters for which the RBS Group believes it has credible defences
and should prevail on the merits. The uncertainties inherent in all such matters affect the amount and timing
of any potential outflows for both matters with respect to which provisions have been established and other
contingent liabilities.
The future outflow of resources in respect of any matter may ultimately prove to be substantially greater than
or less than the aggregate provision that the RBS Group has recognised. Where (and as far as) liability
cannot be reasonably estimated, no provision has been recognised.
Other than those discussed below, no member of the Group is or has been involved in governmental, legal
or regulatory proceedings (including those which are pending or threatened) that are expected to be
material, individually or in aggregate. The RBS Group expects that in future periods additional provisions,
settlement amounts, and customer redress payments will be necessary, in amounts that are expected to be
substantial in some instances.
Litigation
Shareholder litigation (UK)
Between March and July 2013, claims were issued in the High Court of Justice of England and Wales by
sets of current and former shareholders, against the RBS Group (and in one of those claims, also against
certain former individual officers and directors) alleging that untrue and misleading statements and/or
improper omissions, in breach of the Financial Services and Markets Act 2000, were made in connection
with the rights issue announced by the RBS Group on 22 April 2008. In July 2013 these and other similar
threatened claims were consolidated by the Court via a Group Litigation Order. The RBS Group’s defence to
the claims was filed on 13 December 2013. Since then, further High Court claims have been issued against
the RBS Group under the Group Litigation Order which is now closed to further claimants. The aggregate
value of the shares subscribed for at 200 pence per share by the claimant shareholders is approximately £4
billion although their damages claims are not yet quantified.
The court timetable provides that a trial of the preliminary issue of whether the rights issue prospectus
contained untrue and misleading statements and/or improper omissions will commence in March 2017. In
the event that the court makes such a finding, further trial(s) will be required to consider whether any such
statements and/or omissions caused loss and, if so, the quantum of that loss.
Other securitisation and securities related litigation in the US
RBS Group companies have been named as defendants in their various roles as issuer, depositor and/or
underwriter in a number of claims in the US that relate to the securitisation and securities underwriting
businesses. These cases include actions by individual purchasers of securities and a purported class action
suit. Together, the pending individual and class action cases (including those claims specifically described in
this note) involve the issuance of approximately US$42 billion of mortgage-backed securities (MBS) issued
primarily from 2005 to 2007.
In general, plaintiffs in these actions claim that certain disclosures made in connection with the relevant
offerings contained materially false or misleading statements and/or omissions regarding the underwriting
standards pursuant to which the mortgage loans underlying the securities were issued.
31
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
RBS Group companies remain as defendants in more than 20 lawsuits brought by or on behalf of purchasers
of MBS, including the purported class action identified below.
In the event of an adverse judgment in any of these cases, the amount of the RBS Group’s liability will
depend on numerous factors that are relevant to the calculation of damages, which may include the
recognised loss of principal value in the securities at the time of judgment (write-downs); the value of the
remaining unpaid principal balance of the securities at the time the case began, at the time of judgment (if
the plaintiff still owns the securities at the time of judgment), or at the time when the plaintiff disposed of the
securities (if plaintiff sold the securities); and a calculation of pre and post judgment interest that the plaintiff
could be awarded, which could be a material amount.
In September 2011, the US Federal Housing Finance Agency (FHFA) as conservator for the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac) filed MBS-related lawsuits against the RBS Group and a number of other financial institutions, all of
which, except for the two cases described below, have since settled for amounts that were publicly
disclosed.
The primary FHFA lawsuit against the RBS Group remains pending in the United States District Court for the
District of Connecticut, and it relates to approximately US$32 billion of MBS for which RBS Group entities
acted as sponsor/depositor and/or lead underwriter or co-lead underwriter. Of these US$32 billion,
approximately US$8.6 billion were outstanding at 31 December 2015 with cumulative write downs to date on
the securities of approximately US$1.1 billion (being the recognised loss of principal value suffered by
security holders). In September 2013, the Court denied the defendants’ motion to dismiss FHFA’s amended
complaint in this case. This matter continues in the discovery phase.
The other remaining FHFA lawsuit that involves the RBS Group relates to MBS issued by Nomura Holding
America Inc. (Nomura) and subsidiaries and is now the subject of an appeal. On 11 May 2015, following a
trial, the United States District Court for the Southern District of New York issued a written decision in favour
of FHFA on its claims against Nomura and RBS Securities Inc., finding, as relevant to the RBS Group, that
the offering documents for four Nomura-issued MBS for which RBS Securities Inc. served as an underwriter,
relating to US$1.4 billion in original principal balance, contained materially misleading statements about the
mortgage loans that backed the securitisations, in violation of the Securities Act and Virginia securities law.
RBS Securities Inc. estimates that its net exposure under the Court’s judgment is approximately US$383
million, which consists of the difference between the amount of the judgment against RBS Securities Inc.
(US$636 million) and the current estimated market value of the four MBS that FHFA would return to RBS
Securities Inc. pursuant to the judgment, plus the costs and attorney’s fees that will be due to FHFA if the
judgment is upheld.
The Court has stayed the judgment pending the result of the appeal that the defendants are taking to the
United States Court of Appeals for the Second Circuit, though post-judgment interest on the judgment
amount will accrue while the appeal is pending. RBS Securities Inc. intends to pursue a contractual claim for
indemnification against Nomura with respect to any losses it suffers as a result of this matter.
32
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
The National Credit Union Administration Board (NCUA) is litigating two MBS cases against RBS Group
companies (on behalf of US Central Federal Credit Union and Western Corporate Federal Credit Union). The
original principal balance of the MBS at issue in these two NCUA cases is US$3.25 billion. In September
2015, in a third case brought by NCUA (on behalf of Southwest Corporate Federal Credit Union and
Members United Corporate Federal Credit Union), the NCUA accepted RBS’s offer of judgment for
US$129.6 million, plus attorney’s fees, to resolve the matter, which concerned US$312 million in MBS. RBS
has paid to the plaintiff the agreed US$129.6 million plus attorney’s fees.
Other remaining MBS lawsuits against RBS Group companies include, among others, cases filed by the
Federal Home Loan Banks of Boston and Seattle. RBS has settled the MBS lawsuits filed by the Federal
Home Loan Bank of San Francisco and the Commonwealth of Virginia on behalf of the Virginia Retirement
System for amounts that have now been provided for or paid to the plaintiffs.
RBS Group companies are also defendants in a purported MBS class action entitled New Jersey Carpenters
Health Fund v. Novastar Mortgage Inc. et al., which remains pending in the United States District Court for
the Southern District of New York. Another MBS class action (Luther v. Countrywide Financial Corp. et al.
and related class action cases) was settled in 2013 without any contribution from the RBS Group, but several
members of the settlement class are appealing the court-approved settlement to the United States Court of
Appeals for the Ninth Circuit.
Certain other claims on behalf of public and private institutional investors have been threatened against the
RBS Group in connection with various mortgage-related offerings. The RBS Group cannot predict whether
any of these threatened claims will be pursued, but expects that several may.
The RBS Group has £3.8 billion in cumulative provisions relating to the MBS litigation described in this note,
including £2.1 billion added in 2015. Additional settlement costs or provisions related to the MBS litigation, as
well as the investigations into MBS-related conduct involving the RBS Group set out under ‘Investigations
and reviews’ on page 35 (for which no provisions have been made), may be necessary in future periods for
amounts that could be substantial in some instances and in aggregate could be substantially in excess of the
£3.8 billion in existing provisions.
In many of the securitisation and securities related cases in the US, the RBS Group has or will have
contractual claims to indemnification from the issuers of the securities (where an RBS Group company is
underwriter) and/or the underlying mortgage originator (where an RBS Group company is issuer). The
amount and extent of any recovery on an indemnification claim, however, is uncertain and subject to a
number of factors, including the ongoing creditworthiness of the indemnifying party a number of whom are or
may be insolvent.
London Interbank Offered Rate (LIBOR)
Certain members of the RBS Group have been named as defendants in a number of class actions and
individual claims filed in the US with respect to the setting of LIBOR and certain other benchmark interest
rates. The complaints are substantially similar and allege that certain members of the RBS Group and other
panel banks individually and collectively violated various federal laws, including the US commodities and
antitrust laws, and state statutory and common law, as well as contracts, by manipulating LIBOR and prices
of LIBOR-based derivatives in various markets through various means.
33
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
Most of the USD LIBOR-related actions in which RBS Group companies are defendants, including all
purported class actions relating to USD LIBOR, were transferred to a coordinated proceeding in the United
States District Court for the Southern District of New York.
In the coordinated proceeding, consolidated class action complaints were filed on behalf of (1) exchange-
based purchaser plaintiffs, (2) over-the-counter purchaser plaintiffs, and (3) corporate debt purchaser
plaintiffs. Over 35 other USD LIBOR-related actions naming RBS Group companies as defendants, including
purported class actions on behalf of lenders and mortgage borrowers, were also made part of the
coordinated proceeding.
In a series of orders issued in 2013 and 2014, the Court overseeing the coordinated USD proceeding
dismissed class plaintiffs' antitrust claims and claims under RICO (Racketeer Influenced and Corrupt
Organizations Act), but declined to dismiss (a) certain Commodity Exchange Act claims on behalf of persons
who transacted in Eurodollar futures contracts and options on futures contracts on the Chicago Mercantile
Exchange (on the theory that defendants' alleged persistent suppression of USD LIBOR caused loss to
plaintiffs), and (b) certain contract and unjust enrichment claims on behalf of over-the-counter purchaser
plaintiffs who transacted directly with a defendant. Since then, the Court has issued additional orders broadly
addressing other potential grounds for dismissal of various of plaintiffs’ claims, including dismissal for lack of
personal jurisdiction, and the Court is now in the process of applying these rulings across the cases in the
coordinated proceeding. The Court’s dismissal of plaintiffs’ antitrust claims is currently on appeal to the
United States Court of Appeals for the Second Circuit
.
Certain members of the RBS Group have also been named as defendants in class actions relating to (i) JPY
LIBOR and Euroyen TIBOR, (ii) Euribor, (iii) Swiss Franc LIBOR, and (iv) Pound sterling LIBOR, all of which
are pending before other judges in the United States District Court for the Southern District of New York. On
28 March 2014, the Court in the action relating to Euroyen TIBOR futures contracts dismissed the plaintiffs’
antitrust claims, but declined to dismiss their claims under the Commodity Exchange Act for price
manipulation.
Details of LIBOR investigations involving the RBS Group are set out under ‘Investigations and reviews’ on
page 35.
ISDAFIX antitrust litigation
Beginning in September 2014, RBS plc and a number of other financial institutions were named as
defendants in several purported class action complaints (now consolidated into one complaint) pending in
the United States District Court for the Southern District of New York) alleging manipulation of USD ISDAFIX
rates. RBS plc has reached an agreement to settle this matter, subject to final settlement documentation and
court approval. The settlement amount is covered by an existing provision.
Credit default swap antitrust litigation
Certain members of the RBS Group, as well as a number of other financial institutions, are defendants in a
consolidated antitrust class action pending in the United States District Court for the Southern District of New
York alleging an unlawful restraint of trade in the market for credit default swaps. The RBS Group
defendants have reached an agreement to settle this matter for US$33 million, and that settlement received
preliminary approval from the Court on 29 October 2015. The settlement amount has been paid into escrow
pending final court approval of the settlement.
34
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
FX antitrust litigation
RBS Group companies have settled all claims that are or could be asserted on behalf of the classes in a
consolidated action alleging an antitrust conspiracy in relation to foreign exchange transactions, which is
pending in the United States District Court for the Southern District of New York. Following the Court’s
preliminary approval of the settlement on 15 December 2015, the RBS Group paid the total settlement
amount (US$255 million) into escrow pending final court approval of the settlement. Other class action
complaints, including a complaint asserting Employee Retirement Income Security Act claims on behalf of
employee benefit plans that engaged in FX transactions, are pending in the same court and name certain
members of the RBS Group as defendants.
In September 2015, certain members of the RBS Group, as well as a number of other financial institutions,
were named as defendants in two purported class actions filed in Ontario and Quebec on behalf of persons
in Canada who entered into foreign exchange transactions or who invested in funds that entered into foreign
exchange transactions. The plaintiffs allege that the defendants violated the Canadian Competition Act by
conspiring to manipulate the prices of currency trades.
Certain other foreign exchange transaction related claims have been or may be threatened against the RBS
Group in other jurisdictions. The RBS Group cannot predict whether any of these claims will be pursued, but
expects that several may.
US Treasury securities antitrust litigation
Beginning in July 2015, numerous class action antitrust complaints were filed in US federal courts against a
number of primary dealers of US Treasury securities, including RBS Securities Inc. The complaints allege
that the defendants rigged the US Treasury securities auction bidding process to deflate prices at which they
bought such securities and colluded to increase the prices at which they sold such securities to plaintiffs. The
complaints assert claims under the US antitrust laws and the Commodity Exchange Act on behalf of persons
who transacted in US Treasury securities or derivatives based on such instruments, including futures and
options. On 8 December 2015, all pending matters were transferred to the United States District Court for the
Southern District of New York for coordinated or consolidated pretrial proceedings.
Interest rate swaps antitrust litigation
On 25 November 2015, RBS plc and other members of the RBS Group, as well as a number of other interest
rate swap dealers, were named as defendants in a class action antitrust complaint filed in the United States
District Court for the Southern District of New York. A similar complaint was filed in the United States District
Court for the Northern District of Illinois on 18 February 2016. The complaints allege that the defendants
violated the US antitrust laws by restraining competition in the market for interest rate swaps through various
means and thereby caused inflated bid-ask spreads for interest rate swaps, to the alleged detriment of the
plaintiff class. The RBS Group companies named as defendants anticipate moving to dismiss the claims
asserted in these matters.
Thornburg adversary proceeding
RBS Securities Inc. and certain other RBS Group companies, as well as several other financial institutions,
are defendants in an adversary proceeding filed in the US bankruptcy court in Maryland by the trustee for
TMST, Inc. (formerly known as Thornburg Mortgage, Inc.). The trustee seeks recovery of transfers made
under certain restructuring agreements as, among other things, avoidable fraudulent and preferential
conveyances and transfers. On 25 September 2014, the Court largely denied the defendants’ motion to
dismiss this matter and, as a result, discovery is ongoing
35
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
Interest rate hedging products litigation
The RBS Group is dealing with a large number of active litigation claims in relation to the sale of interest rate
hedging products (IRHPs). In general claimants allege that the relevant interest rate hedging products were
mis-sold to them, with some also alleging the RBS Group made misrepresentations in relation to LIBOR.
Claims have been brought by customers who were considered under the UK Financial Conduct Authority
(FCA) redress programme, as well as customers who were outside of the scope of that programme, which
was closed to new entrants on 31 March 2015. The RBS Group encouraged those customers that were
eligible to seek redress under the FCA redress programme to participate in that programme. The RBS Group
remains exposed to potential claims from customers who were either ineligible to be considered for redress
or who are dissatisfied with their redress offers.
In addition to claims alleging that IRHPs were mis-sold, the RBS Group has received a number of claims
involving allegations that it breached a legal duty of care in its conduct of the FCA redress programme.
These claims have been brought by customers who are dissatisfied with redress offers made to them
through the FCA redress programme. The claims followed a preliminary decision against another UK bank.
RBS has since been successful in opposing an application by a customer to amend its pleadings to include
similar claims against RBS, on the basis that the bank does not owe a legal duty of care to customers in
carrying out the FCA review. The customer was declined permission to appeal by the Mercantile Court and
has formally applied to the Court of Appeal for leave to appeal.
Weiss v. National Westminster Bank Plc
National Westminster Bank Plc (NatWest) is defending a lawsuit filed by a number of US nationals (or their
estates, survivors, or heirs) who were victims of terrorist attacks in Israel. The plaintiffs allege that NatWest is
liable for damages arising from those attacks pursuant to the US Anti-terrorism Act because NatWest
previously maintained bank accounts and transferred funds for the Palestine Relief & Development Fund, an
organisation which plaintiffs allege solicited funds for Hamas, the alleged perpetrator of the attacks. On 28
March 2013, the trial court (the United States District Court for the Eastern District of New York) granted
summary judgment in favour of NatWest on the issue of scienter, but on 22 September 2014, that summary
judgment ruling was vacated by the United States Court of Appeals for the Second Circuit. The appeals court
returned the case to the trial court for consideration of NatWest's other asserted grounds for summary
judgment and, if necessary, for trial.
Investigations and reviews
The Group’s businesses and financial condition can be affected by the actions of various governmental and
regulatory authorities in the UK, the EU, the US and elsewhere. The RBS Group has engaged, and will
continue to engage, in discussions with relevant governmental and regulatory authorities, including in the
UK, the US, the EU and elsewhere, on an ongoing and regular basis, and in response to informal and formal
inquiries or investigations, regarding operational, systems and control evaluations and issues including those
related to compliance with applicable laws and regulations, including consumer protection, business conduct,
competition, anti-trust, anti-bribery, anti-money laundering and sanctions regimes. The Corporate &
Institutional Banking (CIB) segment in particular has been providing information regarding a variety of
matters, including, for example, the setting of benchmark rates and related derivatives trading, conduct in the
foreign exchange market, and various issues relating to the issuance, underwriting, and sales and trading of
fixed-income securities, including structured products and government securities.
36
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
Any matters discussed or identified during such discussions and inquiries may result in, among other things,
further inquiry or investigation, other action being taken by governmental and regulatory authorities,
increased costs being incurred by the RBS Group, remediation of systems and controls, public or private
censure, restriction of the RBS Group’s business activities and/or fines. Any of the events or circumstances
mentioned in this paragraph or below could have a material adverse effect on the RBS Group, its business,
authorisations and licences, reputation, results of operations or the price of securities issued by it.
The RBS Group is co-operating fully with the investigations and reviews described below.
Loan securitisation business investigations
In the US, the RBS Group is involved in reviews, investigations and proceedings (both formal and informal)
by federal and state governmental law enforcement and other agencies and self-regulatory organisations,
including the DOJ and various other members of the RMBS Working Group of the Financial Fraud
Enforcement Task Force (including several state attorneys general), relating to, among other things,
issuance, underwriting and trading in mortgage-backed securities, collateralised debt obligations (CDOs),
collateralised loan obligations (CLOs) and synthetic products.
In connection with these inquiries, RBS Group companies have received requests for information and
subpoenas seeking information about, among other things, the structuring of CDOs, financing to loan
originators, purchase of whole loans, sponsorship and underwriting of securitisations, due diligence,
representations and warranties, communications with ratings agencies, disclosure to investors, document
deficiencies, trading activities and practices and repurchase requests.
These ongoing matters include, among others, active investigations by the civil and criminal divisions of the
DOJ and the office of the attorney general of Connecticut, on behalf of the Connecticut Department of
Banking, relating primarily to due diligence on and disclosure related to loans purchased for, or otherwise
included in, securitisations and related disclosures. On 31 August 2015, the Connecticut Department of
Banking issued two letters to RBS Securities Inc., indicating that it is has concluded that RBS Securities Inc.
may have violated the Connecticut Uniform Securities Act when underwriting MBS, noting RBS plc’s May
2015 FX-related guilty plea, and offering an opportunity for RBS Securities Inc. to demonstrate its
compliance with the law and why administrative proceedings seeking fines and other remedies should not be
commenced. RBS Securities Inc. submitted responses to these letters in October 2015, and related
discussions are ongoing.
The investigations also include civil and criminal investigations relating to alleged misrepresentations in the
trading of various forms of asset-backed securities, including residential mortgage-backed securities,
commercial mortgage-backed securities, CDOs, and CLOs. In March and December 2015, two former RBS
Securities Inc. traders entered guilty pleas in the United States District Court for the District of Connecticut,
each to one count of conspiracy to commit securities fraud while employed at RBS Securities Inc.
In 2007, the New York State Attorney General issued subpoenas to a wide array of participants in the
securitisation and securities industry, focusing on the information underwriters obtained from the
independent firms hired to perform due diligence on mortgages. The RBS Group completed its production of
documents requested by the New York State Attorney General in 2008, principally producing documents
related to loans that were pooled into one securitisation transaction.
37
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
In May 2011, the New York State Attorney General requested additional information about the RBS Group's
mortgage securitisation business and, following the formation of the RMBS Working Group, has focused on
the same or similar issues as the other state and federal RMBS Working Group investigations described
above. The investigation is ongoing and the RBS Group continues to respond to requests for information.
At this stage, as there remains considerable uncertainty around the outcome of MBS-related regulatory and
governmental investigations it is not practicable reliably to estimate the aggregate potential impact on the
RBS Group which is expected to be material.
US mortgages - loan repurchase matters
The RBS Group’s CIB business in North America has been a purchaser of non-agency US residential
mortgages in the secondary market, and an issuer and underwriter of non-agency residential mortgage-
backed securities (MBS). CIB did not originate or service any US residential mortgages and it was not a
significant seller of mortgage loans to government sponsored enterprises (GSEs) (e.g. the Federal National
Mortgage Association and the Federal Home Loan Mortgage Association).
In issuing MBS, CIB generally assigned certain representations and warranties regarding the characteristics
of the underlying loans made by the originator of the residential mortgages; however, in some
circumstances, CIB made such representations and warranties itself. Where CIB has given those or other
representations and warranties (whether relating to underlying loans or otherwise), CIB may be contractually
required to repurchase such loans or indemnify certain parties against losses for certain breaches of such
representations and warranties.
In certain instances where it is required to repurchase loans or related securities, CIB may be able to assert
claims against third parties who provided representations or warranties to CIB when selling loans to it,
although the ability to recover against such parties is uncertain. Between the start of 2009 and 31 December
2015, CIB received approximately US$753 million in repurchase demands in respect of loans made primarily
from 2005 to 2008 and related securities sold where obligations in respect of contractual representations or
warranties were undertaken by CIB. However, repurchase demands presented to CIB are subject to
challenge and rebuttal by CIB.
At this stage, as there remains considerable uncertainty around the outcome of loan repurchase related
claims it is not practicable reliably to estimate the aggregate potential impact, if any, on the RBS Group
which may be material.
LIBOR and other trading rates
In February 2013, the RBS Group announced settlements with the Financial Services Authority (FSA) in the
UK, the United States Commodity Futures Trading Commission (CFTC) and the United States Department of
Justice (DOJ) in relation to investigations into submissions, communications and procedures around the
setting of LIBOR. The RBS Group agreed to pay penalties of £87.5 million, US$325 million and US$150
million to these authorities respectively to resolve the investigations and also agreed to certain undertakings
in its settlement with the CFTC. As part of the agreement with the DOJ, RBS plc entered into a Deferred
Prosecution Agreement (DPA) in relation to one count of wire fraud relating to Swiss Franc LIBOR and one
count for an antitrust violation relating to Yen LIBOR. The DPA expired in April 2015 and is of no further
effect.
38
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
In April 2013, RBS Securities Japan Limited entered a plea of guilty to one count of wire fraud relating to Yen
LIBOR and in January 2014, the US District Court for the District of Connecticut entered a final judgment in
relation to the conviction of RBS Securities Japan Limited pursuant to the plea agreement.
In February 2014, the RBS Group paid settlement penalties of approximately €260 million and €131 million
to resolve investigations by the European Commission (EC) into Yen LIBOR competition infringements and
EURIBOR competition infringements respectively. This matter is now concluded.
In July 2014, RBS plc and RBS N.V. entered into an Enforceable Undertaking with the Australian Securities
and Investments Commission (ASIC) in relation to potential misconduct involving the Australian Bank Bill
Swap Rate. RBS plc and RBS N.V. made various undertakings and agreed to make a voluntary contribution
of A$1.6 million to fund independent financial literacy projects in Australia.
In October 2014, the EC announced its findings that (1) the RBS Group and one other financial institution
had participated in a bilateral cartel aimed at influencing the Swiss Franc LIBOR benchmark interest rate
between March 2008 and July 2009; and (2) the RBS Group and three other financial institutions had
participated in a related cartel on bid-ask spreads of Swiss Franc interest rate derivatives in the European
Economic Area (EEA). The RBS Group received full immunity from fines.
The RBS Group is co-operating with investigations and new and ongoing requests for information by various
other governmental and regulatory authorities, including in the UK, US and Asia, into its submissions,
communications and procedures relating to a number of trading rates, including LIBOR and other interest
rate settings, and non-deliverable forwards.
The RBS Group is providing information and documents to the CFTC as part of its investigation into the
setting of USD, EUR and GBP ISDAFIX and related trading activities. The RBS Group understands that the
CFTC investigation is at an advanced stage. The RBS Group is also under investigation by competition
authorities in a number of jurisdictions stemming from the actions of certain individuals in the setting of
LIBOR and other trading rates, as well as interest rate-related trading. At this stage, as there remains
considerable uncertainty around the outcome of these investigations, it is not practicable to estimate the
aggregate impact reliably, if any, on the RBS Group which may be material.
Foreign exchange related investigations
In November 2014, RBS plc reached a settlement with the FCA and the CFTC in relation to investigations
into failings in RBSG’s FX businesses within its Corporate & Institutional Banking (CIB) segment. RBS plc
agreed to pay penalties of £217 million to the FCA and US$290 million to the CFTC to resolve the
investigations. The fines were paid on 19 November 2014.
On 20 May 2015, RBS plc announced that it had reached settlements with the DOJ and the Board of
Governors of the Federal Reserve System (Federal Reserve) in relation to investigations into its FX business
within its CIB segment. RBS plc paid a penalty of US$274 million to the Federal Reserve and has agreed to
pay a penalty of US$395 million to the DOJ to resolve the investigations. The DOJ fine is fully covered by
existing provisions.
39
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
As part of its plea agreement with the DOJ, RBS plc pled guilty in the United States District Court for the
District of Connecticut to a one-count information charging an antitrust conspiracy. RBS plc admitted that it
knowingly, through one of its euro/US dollar currency traders, joined and participated in a conspiracy to
eliminate competition in the purchase and sale of the euro/US dollar currency pair exchanged in the FX spot
market.
The charged conspiracy occurred between as early as December 2007 to at least April 2010. Pursuant to the
plea agreement (which is publicly available), the DOJ and RBS plc have agreed jointly to recommend to the
Court that it impose a sentence consisting of a US$395 million criminal fine and a term of probation, which
among other things, would prohibit RBS plc from committing another crime in violation of US law or engaging
in the FX trading practices that form the basis for the charged crime and require RBS plc to implement a
compliance program designed to prevent and detect the unlawful conduct at issue and to strengthen its
compliance and internal controls as required by other regulators (including the FCA and the CFTC). If RBS
plc is sentenced to a term of probation, a violation of the terms of probation could lead to the imposition of
additional penalties.
RBS plc and RBS Securities Inc. have also entered into a cease and desist order with the Federal Reserve
relating to FX and other designated market activities (the FX Order). In the FX Order, which is publicly
available and will remain in effect until terminated by the Federal Reserve, RBS plc and RBS Securities Inc.
agreed to take certain remedial actions with respect to FX activities and certain other designated market
activities, including the creation of an enhanced written internal controls and compliance program, an
improved compliance risk management program, and an enhanced internal audit program. RBS plc and RBS
Securities Inc. are obligated to implement and comply with these programs after they are approved by the
Federal Reserve, and are also required to conduct, on an annual basis, a review of applicable compliance
policies and procedures and a risk-focused sampling of key controls.
The RBS Group is responding to investigations and inquiries from other governmental and regulatory
(including competition) authorities on similar issues relating to failings in its FX business within its CIB
segment, including with respect to potential collateral consequences of the RBS plc guilty plea described
above. The timing and amount of financial penalties with respect to any further settlements and related
litigation risks and collateral consequences remain uncertain and could be material.
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.
Interest rate hedging products (IRHP) redress programme
In June 2012, following an industry wide review, the FSA announced that the RBS Group and other UK
banks had agreed to a redress exercise and past business review in relation to the sale of interest rate
hedging products to some small and medium sized businesses classified as retail clients or private
customers under FSA rules.
40
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
In January 2013, the FSA issued a report outlining the principles to which it wished the RBS Group and other
UK banks to adhere in conducting the review and redress exercise. This exercise is being scrutinised by an
independent reviewer, KPMG (appointed as a Skilled Person under section 166 of the Financial Services
and Markets Act), who is reviewing and approving all outcomes, and the FCA is overseeing this. The RBS
Group has reached agreement with KPMG in relation to redress determinations for all in scope customers.
The review and redress exercise was closed to new entrants on 31 March 2015. RBS and KPMG are now
focussing on securing the few remaining acceptances of redress offers and assessing consequential loss
claims. In October 2015, RBS agreed with the FCA that its review was nearing completion, and on 31
October 2015 all customers who had received final redress offers but had not yet responded were informed
that the final date for acceptance of those offers was 31 January 2016.
Customers who have not yet received a final redress determination will be given three months to accept any
redress offer before that offer lapses. As at the end of February 2016, 95% of all review files had been
closed.
The Central Bank of Ireland also requested Ulster Bank Ireland Limited (UBIL), along with a number of Irish
banks, to undertake a similar exercise and past business review in relation to the sale of IRHP to retail
designated small and medium sized businesses in the Republic of Ireland. The RBS Group also agreed to
undertake a similar exercise and past business review in respect of relevant customers of RBS International.
The reviews undertaken in respect of both RBS International customers and UBIL customers are complete.
The RBS Group provisions
in relation to the above redress exercises total £1.5 billion to date for these
matters, of which £1.4 billion had been utilised at 31 December 2015.
Judicial Review of Skilled Person’s role in IRHP review
RBS plc and NatWest have been named as interested parties in a number of claims for judicial review of
KPMG’s decisions as Skilled Person in the RBS Group’s previously disclosed IRHP redress programme.
This follows a similar claim from a customer of another UK bank, also against KPMG.
All of these claims were stayed pending the outcome of the other bank’s case. The trial in that case was
heard on 25 January 2016. The court decided in favour of KPMG, finding that (1) KPMG is not a body
amenable to judicial review in respect of its role as Skilled Person in this matter; and (2) that there was no
unfairness by the other bank in the procedure adopted. The claimant has sought permission to appeal the
decision.
If permission to appeal is granted and the appeal court finds that a section 166-appointed Skilled Person is
susceptible to judicial review, the claims against RBS plc and NatWest may then proceed to full hearing to
assess the fairness of KPMG’s role in the redress programme in those particular cases. If deemed unfair,
this could have a consequential impact on the reasonableness of the methodology applied to reviewed and
settled IRHP files generally.
As there remains some uncertainty, it is not practicable reliably to estimate the impact of this matter, if any,
on the Group which may be material.
FSA mystery shopping review
In February 2013, the FSA announced the results of a mystery shopping review it undertook into the
investment advice offered by banks and building societies to retail clients. As a result of that review the FSA
announced that firms involved were cooperative and agreed to take immediate action. The RBS Group was
one of the firms involved.
41
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
The action required included a review of the training provided to advisers, considering whether changes are
necessary to advice processes and controls for new business, and undertaking a past business review to
identify any historic poor advice (and where breaches of regulatory requirements are identified, to put this
right for customers). Subsequent to the FSA announcing the results of its mystery shopping review, the FCA
has required the RBS Group to carry out a past business review and customer contact exercise on a sample
of historic customers that received investment advice on certain lump sum products through the UK Financial
Planning channel of the Personal & Business Banking (PBB) segment of the RBS Group, which includes
RBS plc and NatWest, during the period from March 2012 until December 2012.
This review was conducted under section 166 of the Financial Services and Markets Act, under which a
Skilled Person was appointed to carry out the exercise. Redress has been paid/offered to certain customers
in this sample group. Following discussions with the FCA after issue of the draft section 166 report, the RBS
Group agreed with the FCA that it would carry out a wider review/remediation exercise relating to certain
investment, insurance and pension sales from 1 January 2011 to present. The RBS Group will be writing to
the relevant customers during 2016. In addition, the RBS Group agreed with the FCA that it would carry out
a remediation exercise for a specific customer segment who were sold a particular structured product, in
response to concerns raised by the FCA with regard to (a) the target market for the product and (b) how the
product may have been described to customers by certain advisers. Redress has been paid / offered to
certain customers who took out the structured product.
The Group provisions in relation to investment advice total £187 million to date for these matters, of which
£72 million had been utilised at 31 December 2015.
Card Protection Plan Limited
In August 2013, the FCA announced that Card Protection Plan Limited and 13 banks and credit card issuers,
including the RBS Group, had agreed to a compensation scheme in relation to the sale of card and/or
identity protection insurance to certain retail customers. The closing date before which any claims under the
compensation scheme must have been submitted has now passed. All compensation payments have now
been made and all claims, whether through the courts or the Financial Ombudsman Service, are now barred.
The compensation payments were covered by existing provisions.
Packaged accounts
As a result of an uplift in packaged current account complaints, the Group proactively put in place dedicated
resources in 2013 to investigate and resolve complaints on an individual basis. The Group has made
provisions totalling £307 million to date for this matter.
FCA review of the RBS Group’s treatment of SMEs
In November 2013, a report by Lawrence Tomlinson, entrepreneur in residence at the UK Government’s
Department for Business Innovation and Skills, was published (“Tomlinson Report”). The Tomlinson Report
was critical of the RBS Group’s treatment of SMEs.
42
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
The Tomlinson Report was passed to the PRA and FCA. Shortly thereafter, the FCA announced that an
independent Skilled Person would be appointed under section 166 of the Financial Services and Markets Act
to review the allegations in the Tomlinson Report. On 17 January 2014, a Skilled Person was appointed. The
Skilled Person’s review is focused on the RBS Group’s UK small and medium sized business customers with
credit exposures of up to £20 million whose relationship was managed within the RBS Group’s Global
Restructuring Group or within similar units within the RBS Group’s Corporate Banking Division that were
focused on customers in financial difficulties. In the period 2008 to 2013 the RBS Group was one of the
leading providers of credit to the UK SME sector.
Separately, in November 2013 the RBS Group instructed the law firm Clifford Chance to conduct an
independent review of the principal allegation made in the Tomlinson Report: the RBS Group was alleged to
be culpable of systematic and institutional behaviour in artificially distressing otherwise viable businesses
and through that putting businesses into insolvency. Clifford Chance published its report on 17 April 2014
and, while they made certain recommendations to enhance customer experience and transparency of
pricing, they concluded that there was no evidence to support the principal allegation.
A separate independent review of the principal allegation, led by Mason Hayes & Curran, Solicitors, was
conducted in the Republic of Ireland. The report was published in December 2014 and found no evidence to
support the principal allegation.
RBS is co-operating full with the FCA in its review.
The Skilled Person review focuses on the allegations made in the Tomlinson Report and certain
observations made by Sir Andrew Large in his 2013 Independent Lending Review, and is broader in scope
than the reviews undertaken by Clifford Chance and Mason, Hayes & Curran which are referred to above.
The Skilled Person is expected to deliver the initial findings from its review to the RBS Group and the FCA
during the first half of 2016 but no final timescale has been determined. The RBS Group will have an
opportunity to respond to any such review findings before the Skilled Person delivers its final report. In the
event that the Skilled Person’s review concludes that there were material failings in the RBS Group’s
treatment of SME customers those conclusions could, depending on their nature, scale and type, result in
the commencement of regulatory enforcement action by the FCA, the imposition of redress requirements
and the commencement of litigation claims against the RBS Group, as well as potentially wider
investigations and litigation related to the RBS Group’s treatment of customers in financial difficulty. At this
stage, as there remains considerable uncertainty around the final conclusions of the Skilled Person’s review
and any collateral consequences thereof, it is not practicable reliably to estimate the potential impact on the
RBS Group.
Multilateral interchange fees
On 11 September 2014, the Court of Justice upheld earlier decisions by the EU Commission and the
General Court that MasterCard’s multilateral interchange fee (MIF) arrangements for cross border payment
card transactions with MasterCard and Maestro branded consumer credit and debit cards in the EEA are in
breach of competition law.
In April 2013, the EC announced it was opening a new investigation into interchange fees payable in respect
of payments made in the EEA by MasterCard cardholders from non-EEA countries.
43
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
In May 2013, the EC announced it had reached an agreement with Visa regarding immediate cross border
credit card MIF rates. This agreement has now been market tested and was made legally binding on 26
February 2014. The agreement is to last for four years.
In addition, on 8 June 2015, a regulation on interchange fees for card payments entered into force. The
regulation requires the capping of both cross-border and domestic MIF rates for debit and credit consumer
cards. The regulation also sets out other reforms including to the Honour All Cards Rule which require
merchants to accept all cards with the same level of MIF but not cards with different MIF levels.
In the UK, the Office of Fair Trading (OFT) had previously opened investigations into domestic interchange
fees applicable in respect of Visa and MasterCard consumer and commercial credit and debit card
transactions. On 6 May 2015, the successor body to the OFT, the Competition & Markets Authority (CMA),
announced that it had closed these investigations on the grounds of administrative priorities.
There remains uncertainty around the outcomes of the ongoing EC investigation, and regulation, but they
may have a material adverse effect on the structure and operation of four party card payment schemes in
general and, therefore, on the RBS Group’s business in this sector.
Payment Protection Insurance
Since 2011, the RBS Group has been implementing a policy statement agreed with the FCA for the handling
of complaints about the mis-selling of PPI. The RBS Group is also monitoring developments following the UK
Supreme Court’s decision in the case of Plevin v Paragon Personal Finance Ltd in November 2014. That
decision was that the sale of a single premium PPI policy could create an ‘unfair relationship’ under s.140A
of the Consumer Credit Act 1974 (the ‘Consumer Credit Act’) because the premium contained a particularly
high level of undisclosed commission.
The Financial Ombudsman Service (FOS) has confirmed on its website that unfair relationship provisions in
the Consumer Credit Act and the Plevin judgment are ’potentially relevant considerations’ in some of the PPI
complaints referred to FOS. On 27 May 2015, the FCA announced that it was considering whether additional
rules and/or guidance are required to deal with the impact of the Plevin decision on complaints about PPI
generally.
On 26 November 2015, the FCA issued Consultation Paper 15/39, in which it set out proposed rules and
guidance for how firms should handle PPI complaints fairly in light of the Plevin decision and how the FOS
should consider relevant PPI complaints. The Consultation Paper also contains proposals for the introduction
in 2018 on a date to be confirmed of a deadline for submission of PPI complaints. The RBS Group submitted
its response to the Consultation Paper on 26 February 2016.
The proposals in the Consultation Paper include an FCA-led communications campaign to raise awareness
of the deadline and to prompt those who intend to complain to act ahead of the deadline. If the proposals are
agreed and implemented, the RBS Group expects higher claims volumes, persisting longer than previously
modelled, and additional compensation payments in relation to PPI claims made as a result of the Plevin
judgment.
Complaints made after the proposed 2018 deadline would lose the right to be assessed by firms or by the
Financial Ombudsman Service, bringing an end to new PPI cases in 2018.
44
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
PPI complaint volumes during Q4 2015 were in line with previous trends. Actual payments made to settle
PPI claims during Q4 covered the four month period from 1 September until 31 December 2015. This is in
contrast to payments made during Q3, which covered the period from 1 June until 31 August 2015. This
change was due to enhanced operating processes introduced in Q4 2015.
The RBS Group has made provisions totalling £4.3 billion to date for PPI claims, including £0.6 billion for
2015, of which £3.3 billion had been utilised by 31 December.
UK retail banking
In March 2014, the CMA announced that it would be undertaking an update of the OFT’s 2013 personal
current account (PCA) market study, in parallel with its market study into small and medium-sized enterprise
(SME) banking which was announced in June 2013. In July 2014 the CMA published its preliminary findings
in respect of both the PCA and SME market studies. The CMA provisionally decided to make a market
investigation reference (MIR) into retail banking which would cover PCA and SME banking. On 6 November
2014, the CMA made its final decision to proceed with a MIR. On 22 October 2015 the CMA published a
summary of its provisional findings and notice of possible remedies.
The CMA has provisionally concluded there are a number of competition concerns in the provision of PCAs,
business current accounts and SME lending, particularly around low levels of customers searching and
switching, resulting in banks not being put under enough competitive pressure, and new products and new
banks not attracting customers quickly enough.
The notice of possible remedies sets out measures to address these concerns, including measures to make
it easier for customers to compare products, and requiring banks to help raise public awareness of, and
confidence in, switching bank accounts. On 7 March 2016, the CMA announced that it is extending the MIR
by 3 months with a revised statutory deadline of 12 August 2016. The CMA also published a supplemental
notice of possible remedies which sets out four additional remedies focussed on PCA overdrafts, in addition
to the remedies set out in the October 2015 notice of possible remedies. The provisional decision on
remedies will now be published in May 2016.
Alongside the MIR, the CMA is also reviewing the undertakings given by certain banks following the
Competition Commission’s 2002 investigation into SME banking as well as the 2008 Northern Ireland PCA
Banking Market Investigation Order 2008.
At this stage as there remains uncertainty around the final outcome of these reviews it is not practicable
reliably to estimate the potential impact on RBS, which may be material.
FCA Wholesale Sector Competition Review
On 9 July 2014, the FCA launched a review of competition in the wholesale sector to identify any areas
which may merit further investigation through an in-depth market study.
45
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
The initial review was an exploratory exercise and focused primarily on competition in wholesale securities
and investment markets, and related activities such as corporate banking. It commenced with a three month
consultation exercise, including a call for inputs from stakeholders. Following this consultation period, the
FCA published its feedback statement on 19 February 2015 which announced that the FCA is to undertake a
market study into investment and corporate banking and potentially into asset management. The terms of
reference for the investment and corporate banking market study were published on 22 May 2015. The FCA
is intending to publish an interim report in April 2016.
On 18 November 2015, the FCA also announced that a market study would be undertaken into asset
management. The FCA intends to publish an interim report in Summer 2016 with the final report expected in
early 2017.
At this stage, as there remains considerable uncertainty around the outcome of these reviews it is not
practicable reliably to estimate the aggregate impact, if any, on the RBS Group which may be material.
Credit default swaps (CDS) investigation
In April 2011 the EC opened an antitrust investigation into the CDS information market to which the RBS
Group was a party. In general terms, the EC raised concerns that a number of banks, Markit and ISDA may
have jointly prevented exchanges from entering the CDS market. On 4 December 2015 the EC decided to
close the case against the RBS Group and the other bank parties to the investigation. Markit and ISDA
remain party to the investigation.
Governance and risk management consent order
In July 2011, the RBS Group agreed with the Board of Governors of the Federal Reserve System, the New
York State Banking Department, the Connecticut Department of Banking, and the Illinois Department of
Financial and Professional Regulation to enter into a consent Cease and Desist Order (Governance Order)
(which is publicly available) to address deficiencies related to governance, risk management and compliance
systems and controls in the US branches of RBS plc and RBS N.V. branches (the US Branches).
In the Governance Order, the RBS Group agreed to create the following written plans or programmes.
●
a plan to strengthen board and senior management oversight of the corporate governance,
management, risk management, and operations of the RBS Group’s US operations on an enterprise-
wide and business line basis
;
● an enterprise-wide risk management programme for the RBS Group’s US operations;
●
a plan to oversee compliance by the RBS Group’s US operations with all applicable US laws, rules,
regulations, and supervisory guidance;
● a Bank Secrecy Act/anti-money laundering compliance programme for the US Br
anches on a
consolidated basis;
●
a plan to improve the US Branches’ compliance with all applicable provisions of the Bank Secrecy Act
and its rules and regulations as well as the requirements of Regulation K of the Federal Reserve;
● a customer due diligence programme designed to ensure
reasonably the identification and timely,
accurate, and complete reporting by the US Branches of all known or suspected violations of law or
suspicious transactions to law enforcement and supervisory authorities, as
required by applicable
suspicious activity reporting laws and regulations; and
● a plan designed to enhance the US Branches’ compliance with Office of Foreign Assets Control
(OFAC) requirements.
46
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
The Governance Order identified specific items to be addressed, considered, and included in each proposed
plan or programme. The RBS Group also agreed in the Governance Order to adopt and implement the plans
and programmes after approval by the regulators, to comply fully with the plans and programmes thereafter,
and to submit to the regulators periodic written progress reports regarding compliance with the Governance
Order. The RBS Group has created, submitted, and adopted plans and/or programmes to address each of
the areas identified above. In connection with the RBS Group's efforts to implement these plans and
programmes, it has, among other things, made investments in technology, hired and trained additional
personnel, and revised compliance, risk management, and other policies and procedures for the RBS
Group's US operations. The RBS Group continues to test the effectiveness of the remediation efforts it has
undertaken to ensure they are sustainable and meet regulators' expectations. Furthermore, the RBS Group
continues to work closely with the regulators in its efforts to fulfil its obligations under the Governance Order,
which will remain in effect until terminated by the regulators.
The RBS Group may be subject to formal and informal supervisory actions and may be required by its US
banking supervisors to take further actions and implement additional remedial measures with respect to
these and additional matters. The RBS Group's activities in the US may be subject to significant limitations
and/or conditions.
US dollar processing consent order
In December 2013 RBSG and RBS plc agreed a settlement with the Federal Reserve, the New York State
Department of Financial Services (DFS), and the Office of Foreign Assets Control (OFAC) with respect to
RBS plc’s historical compliance with US economic sanction regulations outside the US. As part of the
settlement, RBSG and RBS plc entered into a consent Cease and Desist Order with the Federal Reserve
(US Dollar Processing Order), which remains in effect until terminated by the Federal Reserve. The US
Dollar Processing Order (which is publicly available) indicated, among other things, that RBSG and RBS plc
lacked adequate risk management and legal review policies and procedures to ensure that activities
conducted outside the US comply with applicable OFAC regulations.
The RBS Group agreed to create an OFAC compliance programme to ensure compliance with OFAC
regulations by the RBS Group’s global business lines outside the US, and to adopt, implement, and comply
with the programme. Prior to and in connection with the US Dollar Processing Order, the RBS Group has
made investments in technology, hired and trained personnel, and revised compliance, risk management,
and other policies and procedures.
Under the US Dollar Processing Order (as part of the OFAC compliance programme) the RBS Group was
required to appoint an independent consultant to conduct an annual OFAC compliance review of compliance
policies and their implementation and an appropriate risk-focused sampling of US dollar payments. The RBS
Group appointed the independent consultant and their report was submitted to the authorities on 14 June
2015. The independent consultant review examined a significant number of sanctions alerts and no
reportable issues were identified.
Pursuant to the US Dollar Processing Order, the authorities have requested a second annual review to be
conducted by an independent consultant during the course of 2016 and the RBS Group is currently in
discussions to agree the scope and timing of such review. In addition, pursuant to requirements of the US
Dollar Processing Order, the RBS Group has provided the required written submissions, including quarterly
updates, in a timely manner, and RBS continues to participate in a constructive dialogue with the authorities.
47
RBS – Annual Results 2015
Notes
12. Litigation, investigations and reviews (continued)
US/Swiss tax programme
In August 2013, the DOJ announced a programme for Swiss banks (the Programme) which provides Swiss
banks with an opportunity to obtain resolution, through non-prosecution agreements or non-target letters, of
the DOJ’s investigations of the role that Swiss banks played in concealing the assets of US tax payers in
offshore accounts (US related accounts). In December 2013, Coutts & Co Ltd., a member of the RBS Group
incorporated in Switzerland, notified the DOJ that it intended to participate in the Programme.
As required by the Programme, Coutts & Co Ltd. subsequently conducted a review of its US related
accounts and presented the results of the review to the DOJ. On 23 December 2015, Coutts & Co Ltd.
entered into a non-prosecution agreement (the NPA) in which Coutts & Co Ltd. paid a US$78.5 million
penalty and acknowledged responsibility for certain conduct set forth in a statement of facts accompanying
the agreement. Under the NPA, which has a term of four years, Coutts & Co Ltd. is required, among other
things, to provide certain information, cooperate with DOJ’s investigations, and commit no U.S. federal
offenses. If Coutts & Co Ltd. abides by the NPA, the DOJ will not prosecute it for certain tax-related and
monetary transaction offenses in connection with US related accounts.
German prosecutor investigation into Coutts & Co Ltd
A prosecuting authority in Germany undertook an investigation into Coutts & Co Ltd in Switzerland, and
current and former employees, for alleged aiding and abetting of tax evasion by certain Coutts & Co Ltd
clients. Coutts & Co Ltd cooperated with the relevant authorities and on 4 December 2015 paid EUR 23.8
million to settle the investigation against it. The settlement amount was covered by an existing provision.
Review of suitability of advice provided by Coutts & Co
In 2013 the FCA conducted a thematic review of the advice processes across the UK wealth management
industry. As a result of this review, Coutts & Co undertook a past business review into the suitability of
investment advice provided to its clients. This review is well advanced, with the focus on Coutts & Co
contacting remaining clients and offering redress in appropriate cases. The RBS Group has made
appropriate provision based on its estimate of exposure arising from this review.
Enterprise Finance Guarantee Scheme
The Enterprise Finance Guarantee (EFG) scheme is a government lending initiative for small businesses
with viable business proposals that lack security for conventional lending. From 2009 until the end of 2015,
the RBS Group provided over £980 million of lending under the EFG scheme. The RBS Group has identified
a number of instances where it has not properly explained to customers how borrower and guarantor
liabilities work under the EFG scheme. There are also concerns around the eligibility of some customers to
participate in the EFG scheme and around potential over or under-payment of quarterly premiums paid by
customers. In January 2015, the RBS Group announced a review of all EFG loans where there is a
possibility that the customer may have been disadvantaged. The review has been completed and the RBS
Group is in the final stages of advising customers of their review outcome, which in some cases involves
payment of redress. The RBS Group has made appropriate provision based on its estimate of exposure
arising from this review.
48
RBS – Annual Results 2015
Notes
13. Related party transactions
UK Government
On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of
The Royal Bank of Scotland Group plc. The UK Government's shareholding is managed by UK Financial
Investments Limited, a company wholly owned by the UK Government. As a result, the UK Government and
UK Government controlled bodies became related parties of the Group. During 2015, all of the B shares held
by the UK Government were converted into ordinary shares of £1 each and the Dividend Access Share
Retirement Agreement was agreed between RBS and HM Treasury.
The Group enters into transactions with many of these bodies on an arm’s length basis. Transactions include
the payment of: taxes principally UK corporation tax and value added tax; national insurance contributions;
local authority rates; and regulatory fees and levies (including the bank levy and FSCS levies; together with
banking transactions such as loans and deposits undertaken in the normal course of banker-customer
relationships.
Bank of England facilities
The Group may participate in a number of schemes operated by the Bank of England in the normal course of
business.
Members of the Group that are UK authorised institutions are required to maintain non-interest bearing (cash
ratio) deposits with the Bank of England amounting to 0.18% of their average eligible liabilities in excess of
£600 million. They also have access to Bank of England reserve accounts: sterling current accounts that
earn interest at the Bank of England Rate.
Other related parties
(a) In their roles as providers of finance, Group companies provide development and other types of capital
support to businesses. These investments are made in the normal course of business and on arm's length
terms. In some instances, the investment may extend to ownership or control over 20% or more of the voting
rights of the investee company. However, these investments are not considered to give rise to transactions
of a materiality requiring disclosure under IAS 24.
(b) The Group recharges The Royal Bank of Scotland Group Pension Fund with the cost of administration
services incurred by it. The amounts involved are not material to the Group.
(c) In accordance with IAS 24, transactions or balances between Group entities that have been eliminated on
consolidation are not reported.
(d) The captions in the primary financial statements of the parent company include amounts attributable to
subsidiaries. These amounts have been disclosed in aggregate in the relevant notes to the financial
statements.
2015
2014
£m
£m
Income
Interest receivable
90
87
Interest payable
1,019
1,032
Fees and commissions receivable
7
7
Fees and commissions payable
2
3
Net (expense)/income from discontinued operations
(28)
(28)
49
RBS – Annual Results 2015
Notes
14. Date of approval
The Annual results for the year ended 31 December 2015 were approved by the Board of directors on 30
March 2016.
15. Post balance sheet events
Subsequently and pursuant to the Memorandum of Understanding, the RBS Group agreed with the Trustee
a Statement of Funding Principles in relation to an actuarial valuation as at 31 December 2015. The RBS
Group and Trustee also updated the existing Schedule of Contributions and Recovery Plan to reflect the
£4.2 billon contribution, which was paid during March 2016.
50
RBS – Annual Results 2015
Statement of directors' responsibilities
The responsibility statement below has been prepared in connection with the Group’s full Annual Report and
Accounts for the year ended 31 December 2015.
We, the directors listed below, confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with International Financial Reporting Standards, give
a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the
undertakings included in the consolidation taken as a whole; and
• the Strategic report (incorporating the Financial review) includes a fair review of the development and
performance of the business and the position of the company and the undertakings included in the
consolidation taken as a whole, together with a description of the principal risks and uncertainties that
they face.
By order of the Board
Howard Davies
Chairman
Ross McEwan
Chief Executive
Ewen Stevenson
Chief Financial Officer
30 March 2016
Board of directors
Chairman
Executive directors
Non
-
executive
directors
Howard Davies Ross McEwan
Ewen Stevenson
Sandy Crombie
Alison Davis
Morten Friis
Robert Gillespie
Penny Hughes
Brendan Nelson
Baroness Noakes
Mike Rogers
51
RBS – Annual Results 2015
Additional information
Statutory results
Financial information contained in this document does not constitute statutory accounts within the meaning
of section 434 of the Companies Act 2006 (“the Act”). The statutory accounts for the year ended 31
December 2014 have been filed with the Registrar of Companies and those for the year ended 31 December
2015 will be filed with the Register of companies following the company’s Annual General Meting. The report
of the auditor on those statutory accounts were unqualified, did not draw attention to any matters by way of
emphasis and did not contain a statement under section 498(2) or (3) of the Act.
Contact
Richard O’Connor Head of Investor Relations +44 (0) 20 7672 1758
52
RBS – Annual Results 2015
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: RBSG and the Group’s restructuring, which includes the
separation and divestment of Williams & Glyn, the proposed restructuring of RBSG’s CIB business, the implementation of the UK ring-fencing regime, the
implementation of a major development program to update RBSG and the Group’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; RBSG and the Group’s future financial
performance; the level and extent of future impairments and write-downs; including with respect to Goodwill; future pension contributions and RBSG and
the Group’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 the 2015 Annual Report and Accounts. These include the significant risks for RBSG and the Group presented by the outcomes of
the legal, regulatory and governmental actions and investigations that RBSG is subject to (including active civil and criminal investigations) and any
resulting material adverse effect on RBSG 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; RBSG and the Group’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 RBSG and the Group 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 the Group will emerge from its restructuring and the UK ring-fencing regime as a
viable, competitive, customer focused and profitable bank; RBSG’s ability to achieve its capital and leverage requirements or targets which will depend on
RBSG and the Group’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 RBSG, the Bank or the UK government; declining revenues resulting from lower customer
retention and revenue generation in light of RBSG and the Group ’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 the Group’s business and will increase as a result of
the Group’s significant restructuring; the potential negative impact on the Group’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 RBSG and The Group operate; the risk of failure to realise the benefit of the Group’s substantial investments in its
information technology and systems, the risk of failing to prevent a failure of RBSG or the Group’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 RBSG and the Group’s capital
position; increased competitive pressures resulting from new incumbents and disruptive technologies; the Group’s ability to attract and retain qualified
personnel; HM Treasury exercising influence over the operations of RBSG; limitations on, or additional requirements imposed on, the Group’s activities as a
result of HM Treasury’s investment in RBSG; 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 the Group; 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 the Group operates, risks relating to changes in applicable accounting policies or rules which may impact the
preparation of the Group’s financial statements; the impact of the recovery and resolution framework and other prudential rules to which the Group is
subject, the recoverability of deferred tax assets by the Group; and the success of RBSG and the Group in managing the risks involved in the foregoing.
The forward-looking statements contained in this document speak only as at the date hereof, and the Group 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
