Barclays 2012 Annual Report Download - page 116

Conduct related issues
There are also a number of areas where Barclays conduct has not met
the expectations of regulators and other stakeholders and where the
Group has sustained financial and reputational damage in 2012, and
where the consequences are likely to endure into 2013 and beyond.
These include participation in benchmark rates and LIBOR and interest
rate hedging products, which are discussed in the Legal Risk section
above and PPI. Provisions totalling £850m have been raised in respect
of interest rate hedging products in 2012, and provisions of £2.6bn
have been raised against PPI in 2011-2012. To the extent that
experience is not in line with management estimates, additional
provisions may be required and further reputational damage may
be incurred. Note 27 details key provision assumptions and sensitivities
for these provisions.
Furthermore, the Group is from time to time subject to regulatory
investigations. The risk of these investigations to Barclays is that,
a number of or all of the authorities will conclude that Barclays has
been involved in some form of wrongdoing. It is not possible to foresee
the outcome or impact of such findings other than that fines or other
forms of regulatory censure would be possible. This includes the
investigation by the United States FERC into the Group’s conduct
(see Legal Risk above).
There is a risk that there may be other conduct issues, including in
business already written, that Barclays is not presently aware of.
Further details on PPI and interest rate hedging products, including a
description of management judgements and estimates and sensitivity
analysis on those estimates where available are provided in Note 27
to the financial statements. Further details on the FERC investigations
are provided in Note 30 to the financial statements.
In addition to the risks highlighted under Legal Risk, Barclays
participates in the setting of number of interest rate benchmarks.
The setting of benchmarks is subject to increased scrutiny and
additional regulation in a number of jurisdictions, with enhanced
sanctions – including potential criminal sanctions – and attendant
damage to Barclays reputation for violations. Barclays may also be
required to contribute to benchmarks due to its presence in certain
markets. The UK FSA is considering the use of such powers.
Further details on the LIBOR investigations are provided in Note 29
and Note 30 to the financial statements. For further information on
developments further to the Wheatley Review recommendations
related to the setting of LIBOR, see Supervision and Regulation
(page 194).
(iii) Implementation of Basel 3
The new capital requirements regulation and capital requirements
directive that implement Basel 3 within the EU (collectively known
as CRD IV) include significant developments in the regulatory capital
regime including: increased minimum capital ratios; changes to
the definition of capital and the calculation of risk weighted assets;
and the introduction of new measures relating to leverage, liquidity
and funding. The requirements are under consideration and are
expected to be finalised during 2013; however the implementation
date is uncertain.
The impact of the CRD IV rules, including with respect to the
calculation of capital and risk weighted assets, and the timing of
implementation including the application of transitional relief, have not
been finalised and remain subject to change by European legislators.
The FSA may also alter its stated approach to the adoption of CRD IV
in the United Kingdom. For example, the scope of application of the
volatility charge for credit value adjustments (CVA) may be different
from that expected and restrictions may be applied on the maturity
of hedges over to insignificant financial holdings, with the result
that individually and/or in aggregate such changes may materially
negatively affect Barclays CRD IV capital, leverage, liquidity and
funding ratios.
(iv) Recovery and resolution plans (RRP)
The strong regulatory focus on resolvability has continued in 2012,
from both UK and international regulators. The Group continues to
work with the authorities on RRP and the detailed practicalities of the
resolution process. This includes the provision of information that
would be required in the event of a resolution, in order to enhance
Barclays resolvability. The Group made its first formal RRP submissions
to the UK and US regulators in mid-2012 and has continued to
work with the authorities to identify and address any impediments
to resolvability.
Should the authorities decide that Barclays is not resolvable they have
the ability to demand that the Group is broken into sections that are
deemed resolvable. The impact of such structural changes could
impact capital, liquidity and leverage ratios, due to reduced benefits
of diversification, as well as the overall profitability, via duplicated
infrastructure costs, lost cross-rate revenues and additional funding costs.
Other operational risks
(v) Reputation risk
Reputation risk, meaning the risk of damage to the Barclays brand
arising from any association, action or inaction which is perceived by
stakeholders to be inappropriate or unethical, is inherent in our
business. Reputational damage can result from the actual or perceived
manner in which we conduct our business activities, from our financial
performance, or from actual or perceived practices in the banking and
financial industry. Such reputational damage reduces – directly or
indirectly – the attractiveness of Barclays to stakeholders and may lead
to negative publicity, loss of revenue, litigation, regulatory or legislative
action, loss of existing or potential client business, reduced workforce
morale, and difficulties in recruiting talent. Sustained reputational
damage could have a materially negative impact on our licence to
operate and destroy shareholder value.
(vi) Infrastructure resilience, Technology and CyberSecurity
Events across the industry during 2012 have reinforced the importance
of infrastructure resilience to the banking infrastructure to allow
customers to access their accounts and make payments in a timely
fashion. The Group recognises that this is an area of risk that continues
to change rapidly and so requires continued focus. It has invested
significant resources in building defences to counter these threats
for many years and will continue to do so in the future.
Any disruption in a customer’s access to their account information
or delays in making payments will have a significant impact on the
Group’s reputation and may also lead to potentially large costs to both
rectify the issue and reimburse losses incurred by customers. However,
given that it is not possible to predict the level or impact of such an
event, should it occur, it is not possible to accurately quantify either
the reputational damage or associated costs to the Group.
barclays.com/annualreport114 I Barclays PLC Annual Report 2012
Risk review
Risk factors continued