, regulatory risk
As a neat follow up to Dave Robson’s blog earlier this week (view here), which provided a succinct analysis on two key areas of the HSBC annual report, risk and legal proceedings, here’s my take on the RBS 2014 results released yesterday. Bearing in mind you and I (the UK taxpayer) own almost four-fifths of RBS; it’s an opportune time to find out how they are performing, particularly around risk.
2014 was a year of significant progress for the bank. To take you back, in early 2014 RBS announced the results of a strategic review, with a defined plan to shift the business mix towards the UK and the retail and commercial banking sectors. The aim was to lower their risk profile and the report suggests good progress was made towards achieving this, with results, in general, exceeding targets. Some of the highlights included:
- Implementing a new organisational design for a more UK-centred bank with focused international capabilities, built around its strongest customer franchises.
- Making products that are simpler and fairer for customers, ending zero per cent balance transfers, halting teaser rates on savings accounts that penalise existing customers and explaining all charges for personal and business customers on one side of A4 paper.
- Continuing to rationalise, simplify and strengthen operating systems and processes, with a more secure mobile banking platform, faster overnight processing and key services available to customers 99.96% of the time.
Conduct and Legal
Despite these achievements risk is still an area of ongoing concern. It’s probably widely known that the Group has settled a number of legal proceedings and regulatory investigations during 2014, some of the high profile ones include:
- £42m for IT failures in 2012 (jointly with NatWest and Ulster bank)
- £217m for failures allowing foreign exchange markets to be rigged
- £14.5m for failing to give customers suitable mortgage advice (with NatWest)
These followed hot on the heels of the £324m LIBOR fine received by RBS in December 2013.
The Group have stated that they expect an “exposure to litigation and regulatory proceedings [to continue] in the medium term”, although details of what these might be was not provided. Furthermore, “greater regulatory and governmental scrutiny” is expected for the foreseeable future.
RBS continue to remediate historic conduct issues and their report stated that the overall “impact of conduct issues resulted in litigation and conduct costs of £2.2 billion in 2014” (from £3.8 billion in 2013). The reduction in these costs is a clear indication that the RBS ship is sailing in the right direction as far as managing risk is concerned.
How does this impact on reputation?
Well, RBS have been the subject of investigations and reviews by a number of different regulators. A number of these investigations have resulted in fines and public censure, some of which are detailed above. The expectation is that this regulatory focus will continue, suggesting that reputation is still a significant concern.
The report recognises that the level of risk in this area remains high off the back of the continued escalation of regulation and supervision since 2007/8. A particular headache is the requirement to ring-fence retail banking operations by 2019, and RBS appears to accept that there is no certainty of them implementing this in time due to the significant restructuring of the Group and its businesses, and the possible transfer of a large number of customers between new or existing legal entities.
It will be interesting to see what happens should they fail to implement the ring-fence in time.
A New Era?
Be aware that what I’ve touched on above barely breaks the surface of what is contained within the RBS report. There’s a huge amount of additional detail available for you to review, and I would encourage you to take a look (here) as there’s some interesting stuff in there.
The RBS report suggests that they are moving down a road that could take them into a new era of banking. They say they are focused on building a stronger, safer and more sustainable business, a goal that I for one, would like to see them achieve… not least because I’m a part owner (of sorts..).