Barclays 2013 Annual Report Download - page 142

Risk review
Risk factors continued
If these powers were to be exercised (or there is an increased risk of
exercise) in respect of the Group or any entity within the Group could
result in a material adverse effect on the rights or interests of
shareholders and creditors including holders of debt securities and/or
could have a material adverse effect on the market price of Barclays
shares and other securities.
Market infrastructure reforms
The European Market Infrastructure Regulation (EMIR) introduces
requirements to improve transparency and reduce the risks associated
with the derivatives market. Certain of these requirements came into
force in 2013 and others will enter into force in 2014. EMIR requires
entities that enter into any form of derivative contract to: report every
derivative contract entered into to a trade repository; implement new
risk management standards for all bi-lateral over-the-counter derivative
trades that are not cleared by a central counterparty; and clear, through
a central counterparty, over-the-counter derivatives that are subject to
a mandatory clearing obligation. CRD IV aims to complement EMIR by
applying higher capital requirements for bilateral, over-the-counter
derivative trades. Lower capital requirements for cleared trades are only
available if the central counterparty is recognised as a ‘qualifying
central counterparty ‘, which has been authorised or recognised under
EMIR (in accordance with related binding technical standards). Further
significant market infrastructure reforms will be introduced by
amendments to the EU Markets in Financial Instruments Directive that
are being finalised by the EU legislative institutions and are expected to
be implemented in 2016.
In the US, the Dodd-Frank Act also mandates that many types of
derivatives now traded in the over-the- counter markets must be
traded on an exchange or swap execution facility and must be centrally
cleared through a regulated clearing house. In addition, participants in
these markets are now made subject to CFTC and SEC regulation and
oversight. Entities required to register with the CFTC as ‘swap dealers ‘
or ‘major swap participants ‘ and/or with the SEC as ‘security-based
swap dealers ‘ or ‘major security- based swap dealers ‘ are or will be
subject to business conduct, capital, margin, record keeping and
reporting requirements. Barclays Bank PLC has registered with the
CFTC as a swap dealer.
It is possible that other additional regulations, and the related expenses
and requirements, will increase the cost of and restrict participation in
the derivative markets, thereby increasing the costs of engaging in
hedging or other transactions and reducing liquidity and the use of the
derivative markets.
The new regulation of the derivative markets could adversely affect the
business of Barclays Bank PLC and its affiliates in these markets and
could make it more difficult and expensive to conduct hedging and
trading activities, which could in turn reduce the demand for swap
dealer and similar services of Barclays Bank PLC and its subsidiaries.
In addition, as a result of these increased costs, the new regulation of
the derivative markets may also result in the Group deciding to reduce
its activity in these markets.
vii) Losses due to additional tax charges
The Group is subject to the tax laws in all countries in which it
operates, including tax laws adopted at the EU level, and is impacted by
a number of double taxation agreements between countries.
There is risk that the Group could suffer losses due to additional tax
charges, other financial costs or reputational damage due to: failure to
comply with, or correctly assess the application of, relevant tax law;
failure to deal with tax authorities in a timely, transparent and effective
manner (including in relation to historical transactions which might
have been perceived as aggressive in tax terms); incorrect calculation
of tax estimates for reported and forecast tax numbers; or provision of
incorrect tax advice. Such charges, or conducting any challenge to a
relevant tax authority, could lead to adverse publicity, reputational
damage and potentially to costs materially exceeding current
provisions, in each case to an extent which could have an adverse
effect on the Group’s operations, financial conditions and prospects.
In addition, any changes to the tax regimes applicable to the Group
could have a material adverse effect on it. For example, depending on
the terms of the final form of legislation as implemented, the
introduction of the proposed EU Financial Transaction Tax could
adversely affect certain of the Group’s businesses and have a material
adverse effect on the Group’s operations, financial conditions and
prospects.
viii) Implementation of the Transform programme and
other strategic plans
The ‘Transform programme’ represents the current strategy of the
Group, both for improved financial performance and cultural change,
and the Group expects to incur significant restructuring charges and
costs associated with implementing this strategic plan. The successful
development and implementation of such strategic plans requires
difficult, subjective and complex judgements, including forecasts of
economic conditions in various parts of the world, and is subject to
significant execution risks. For example, the Group’s ability to
implement successfully the Transform programme and other such
strategic plans may be adversely impacted by a significant global
macroeconomic downturn, legacy issues, limitations in the Group’s
management or operational capacity or significant and unexpected
regulatory change in countries in which the Group operates. Moreover,
progress on the various components of Transform (including reduction
in costs relative to net operating income) is unlikely to be uniform or
linear, and certain targets may be achieved slower than others, if at all.
Failure to implement successfully the Transform programme could
have a material adverse effect on the Group’s ability to achieve the
stated targets, estimates (including with respect to future capital and
leverage ratios and dividends payout ratios) and other expected
benefits of the Transform programme and there is also a risk that the
costs associated with implementing the scheme may be higher than
the financial benefits expected to be achieved through the programme.
In addition, the goals of embedding a culture and set of values across
the Group and achieving lasting and meaningful change to the Group’s
culture may not succeed, which could negatively impact the Group’s
operations, financial condition and prospects.
Conduct risk
Conduct risk: detriment is caused to our customers, clients,
counterparties or Barclays and its employees because of
inappropriate judgement in the execution of our business activities
Ineffective management of conduct risk may lead to poor outcomes for
our customers, clients and counterparties or damage to market
integrity. It may also lead to detriment to Barclays and its employees.
Such outcomes are inconsistent with Barclays’ purpose and values and
may negatively impact the Group’s results of operations, financial
condition and prospects. They may lead to negative publicity, loss of
revenue, litigation, higher scrutiny and/or intervention from regulators,
regulatory or legislative action, loss of existing or potential client
business, reduced workforce morale, and difficulties in recruiting and
retaining talent. This could reduce – directly or indirectly – the
attractiveness of the Group to stakeholders, including customers.
There are 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 2013, and where
the consequences are likely to endure into 2014 and beyond. These
include participation in London interbank offered rates (LIBOR) and
interest rate hedging products, and Payment Protection Insurance
(PPI). Provisions totalling £650m have been raised in respect of interest
rate hedging products in 2013, bringing cumulative provisions to
£1.5bn. Provisions of £1.35bn have been raised against PPI in 2013,
bringing cumulative provisions to £3.95bn. To the extent that future
experience is not in line with management’s current estimates,
additional provisions may be required and further reputational damage
may be incurred.
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140 Barclays PLC Annual Report 2013