Barclays 2007 Annual Report Download - page 81

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Business review
Barclays PLC Annual Report 2007 79
Capital risk
Capital risk is the risk that the Group has insufficient capital resources to:
– Meet minimum regulatory capital requirements in the UK and in
other jurisdictions such as the US and South Africa where regulated
activities are undertaken. The Group’s authority to operate as a bank
is dependent upon the maintenance of adequate capital resources.
– Support its strong credit rating. In addition to capital resources, the
Group’s rating is supported by a diverse portfolio of activities, an
increasingly international presence, consistent profit performance,
prudent risk management and a focus on value creation. A weaker
credit rating would increase the Group’s cost of funds.
– Support its growth and strategic options.
Liquidity risk
Liquidity risk is the risk that the Group is unable to meet its obligations
when they fall due and to replace funds when they are withdrawn, with
consequent failure to repay depositors and fulfil commitments to lend.
The risk that it will be unable to do so is inherent in all banking operations
and can be impacted by a range of institution-specific and market-wide
events including, but not limited to, credit events, merger and acquisition
activity, systemic shocks and natural disasters.
Business risk
Business risk is the risk of adverse outcomes resulting from a weak
competitive position or from poor choice of strategy, markets, products,
activities or structures. Major potential sources of business risk include
revenue volatility due to factors such as macroeconomic conditions,
inflexible cost structures, uncompetitive products or pricing and
structural inefficiencies.
Insurance risk
Insurance risk is the risk that the Group will have to make higher than
anticipated payments to settle claims arising from its long-term and
short-term insurance businesses.
Legal risk
The Group is subject to a comprehensive range of legal obligations in all
countries in which it operates. As a result, the Group is exposed to many
forms of legal risk, which may arise in a number of ways. Primarily:
– the Group’s business may not be conducted in accordance with
applicable laws around the world;
– contractual obligations may either not be enforceable as intended
or may be enforced against the Group in an adverse way;
– the intellectual property of the Group (such as its trade names) may
not be adequately protected; and
– the Group may be liable for damages to third parties harmed by the
conduct of its business.
The Group faces risk where legal proceedings are brought against it.
Regardless of whether such claims have merit, the outcome of legal
proceedings is inherently uncertain and could result in financial loss.
Defending legal proceedings can be expensive and time-consuming and
there is no guarantee that all costs incurred will be recovered even if the
Group is successful. Although the Group has processes and controls to
manage legal risks, failure to manage these risks could impact the Group
adversely, both financially and by reputation.
Tax risk
The Group is subject to the tax laws in all countries in which it operates.
A number of double taxation agreements entered between countries
also impact on the taxation of the Group. The Group is also subject to
European Union tax law. Tax risk is the risk associated with changes in tax
law or in the interpretation of tax law. It also includes the risk of changes
in tax rates and the risk of failure to comply with procedures required by
tax authorities. Failure to manage tax risks could lead to an additional tax
charge. It could also lead to a financial penalty for failure to comply with
required tax procedures or other aspects of tax law. If, as a result of a
particular tax risk materialising, the tax costs associated with particular
transactions are greater than anticipated, it could affect the profitability
of those transactions.
The Group takes a responsible and transparent approach to the
management and control of its tax affairs and related tax risk:
– tax risks are assessed as part of the Group’s formal governance
processes and are reviewed by the Executive Committee, Group
Finance Director and the Board Risk Committee;
– the tax charge is also reviewed by the Board Audit Committee;
– the tax risks of proposed transactions or new areas of business are fully
considered before proceeding;
– the Group takes appropriate advice from reputable professional firms;
– the Group employs high-quality tax professionals and provides
ongoing technical training;
– the tax professionals understand and work closely with the different
areas of the business;
– the Group uses effective, well-documented and controlled processes
to ensure compliance with tax disclosure and filing obligations;
– where disputes arise with tax authorities with regard to the
interpretation and application of tax law, the Group is committed to
addressing the matter promptly and resolving the matter with the tax
authority in an open and constructive manner.
Effect of governmental policy and regulation
The Group’s businesses and earnings can be affected by the fiscal or
other policies and other actions of various governmental and regulatory
authorities in the UK, the European Union, the US, South Africa
and elsewhere.
Areas where changes could have an impact include:
– the monetary, interest rate and other policies of central banks and
regulatory authorities;
– general changes in government or regulatory policy that may
significantly influence investor decisions in particular markets
in which the Group operates;
– general changes in the regulatory requirements, for example, prudential
rules relating to the capital adequacy framework (page 85) and rules
designed to promote financial stability and increase depositor protection;
– changes and rules in competition and pricing environments;
– further developments in the financial reporting environment;
– expropriation, nationalisation, confiscation of assets and changes
in legislation relating to foreign ownership; and
– other unfavourable political, military or diplomatic developments
producing social instability or legal uncertainty which in turn may
affect demand for the Group’s products and services.
Regulatory compliance risk
Regulatory compliance risk arises from a failure or inability to comply fully
with the laws, regulations or codes applicable specifically to the financial
services industry. Non compliance could lead to fines, public reprimands,
damage to reputation, enforced suspension of operations or, in extreme
cases, withdrawal of authorisations to operate.
Impact of strategic decisions taken by the Group
The Group devotes substantial management and planning resources to
the development of strategic plans for organic growth and identification
of possible acquisitions, supported by substantial expenditure to generate
growth in customer business. If these strategic plans do not deliver as
anticipated, the Group’s earnings could grow more slowly or decline.
Competition
The global financial services markets in which the Group operates are
highly competitive. Innovative competition for corporate, institutional
and retail clients and customers comes both from incumbent players
and a steady stream of new market entrants. The landscape is expected
to remain highly competitive in all areas, which could adversely affect
the Group’s profitability if the Group fails to retain and attract clients
and customers.