Barclays 2014 Annual Report Download - page 122

120 I Barclays PLC Annual Report 2014 barclays.com/annualreport
Material existing and emerging risks
Material existing and emerging risks to the Group’s future performance
Risk review
v) Legal, competition and regulatory matters
Legal disputes, regulatory investigations, fines and other sanctions
relating to conduct of business and financial crime may negatively
affect the Group’s results, reputation and ability to conduct its business.
The Group conducts diverse activities in a highly regulated global
market and therefore is exposed to the risk of fines and other sanctions
relating to the conduct of its business. In recent years there has been
an increased willingness on the part of authorities to investigate past
practices, vigorously pursue alleged breaches and impose heavy
penalties on financial services firms; this trend is expected to continue.
In relation to financial crime, a breach of applicable legislation and/or
regulations could result in the Group or its staff being subject to
criminal prosecution, regulatory censure and other sanctions in the
jurisdictions in which it operates, particularly in the UK and US. Where
clients, customers or other third parties are harmed by the Group’s
conduct this may also give rise to legal proceedings, including class
actions, particularly in the US. Other legal disputes may also arise
between the Group and third parties relating to matters such as
breaches, enforcement of legal rights or obligations arising under
contracts, statutes or common law. Adverse findings in any such
matters may result in the Group being liable to third parties seeking
damages, or may result in the Group’s rights not being enforced as
intended.
Details of material legal, competition, and regulatory matters to which
the Group is currently exposed are set out in Note 29 Legal,
Competition and Regulatory Matters. In addition to those material
ongoing matters, the Group is engaged in numerous other legal
proceedings in various jurisdictions which arise in the ordinary course
of business, as well as being subject to requests for information,
investigations and other reviews by regulators and other authorities in
connection with business activities in which the Group is or has been
engaged. In light of the uncertainties involved in legal, competition and
regulatory matters, there can be no assurance that the outcome of a
particular matter or matters will not be material to the Group’s results
of operations or cash flow for a particular period, depending on, among
other things, the amount of the loss resulting from the matter(s) and
the amount of income otherwise reported for the period.
The outcome of material legal, competition and regulatory matters,
both those to which the Group is currently exposed and any others
which may arise in the future, is difficult to predict. However, it is likely
that in connection with any such matters the Group will incur
significant expense, regardless of the ultimate outcome, and one or
more of such matters could expose the Group to any of the following:
substantial monetary damages and/or fines; remediation of affected
customers and clients; other penalties and injunctive relief; additional
litigation; criminal prosecution in certain circumstances; the loss of any
existing agreed protection from prosecution; regulatory restrictions on
the Group’s business including the withdrawal of authorisations;
increased regulatory compliance requirements; suspension of
operations; public reprimands; loss of significant assets or business; a
negative effect on the Group’s reputation; loss of investor confidence;
and/or dismissal resignation of key individuals.
There is also a risk that the outcome of any legal, competition or
regulatory matters in which the Group is involved may give rise to
changes in law or regulation as part of a wider response by relevant law
makers and regulators. An adverse decision in any one matter, either
against the Group or another financial institution facing similar claims,
could lead to further claims against the Group.
vi) Risks arising from regulatory change and scrutiny
The financial services industry continues to be the focus of significant
regulatory change and scrutiny which may adversely affect the Group’s
business, financial performance, capital and risk management
strategies.
a) Regulatory change
The Group, in common with much of the financial services industry,
continues to be subject to significant levels of regulatory change and
increasing scrutiny in many of the countries in which it operates
(including, in particular, the UK and the US and in light of its significant
investment banking operations). This has led to a more intensive
approach to supervision and oversight, increased expectations and
enhanced requirements, including with regard to: (i) capital, liquidity
and leverage requirements (for example arising from Basel III and CRD
IV); (ii) structural reform and recovery and resolution planning; and (iii)
market infrastructure reforms such as the clearing of over-the-counter
derivatives. As a result, regulatory risk will continue to be a focus of
senior management attention and consume significant levels of
business resources. Furthermore, this more intensive approach and the
enhanced requirements, uncertainty and extent of international
regulatory coordination as enhanced supervisory standards are
developed and implemented may adversely affect the Group’s business,
capital and risk management strategies and/or may result in the Group
deciding to modify its legal entity structure, capital and funding
structures and business mix or to exit certain business activities
altogether or to determine not to expand in areas despite their
otherwise attractive potential.
For further information see Regulatory Developments in the section on
Supervision and Regulation.
b) Additional PRA supervisory expectations, including changes to CRD
IV (emerging risk)
The Group’s results and ability to conduct its business may be
negatively affected by changes to CRD IV or additional supervisory
expectations.
To protect financial stability the Financial Policy Committee of the Bank
of England (FPC) has legal powers to make recommendations about
the application of prudential requirements. In addition, it may, for
example, be given powers to direct the PRA and FCA to adjust capital
requirements through Sectoral Capital Requirements (SCR). Directions
would apply to all UK banks and building societies, rather than to the
Group specifically. The FPC issued its review of the leverage ratio in
October 2014 containing a requirement of a minimum leverage ratio of
3% to supersede the previous PRA expectation of a 3% leverage ratio.
That review also introduced a supplementary leverage ratio for G-SIBs
to be implemented from 2016 and countercyclical leverage ratio buffers
would be implemented at the same time as countercyclical buffers are
implemented for RWA purposes.
Changes to CRD IV requirements, UK regulators’ interpretations of
them, or additional supervisory expectations, either individually or in
aggregate, may lead to unexpected enhanced requirements in relation
to the Group’s capital, leverage, liquidity and funding ratios or alter the
way such ratios are calculated. This may result in a need for further
management actions to meet the changed requirements, such as:
increasing capital or liquidity resources, reducing leverage and risk
weighted assets; modifying legal entity structure (including with regard
to issuance and deployment of capital and funding for the Group);
changing the Group’s business mix or exiting other businesses; and/or
undertaking other actions to strengthen the Group’s position.
c) 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 2014 and still more will become effective in 2015.
EMIR requires EU-established 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
bilateral 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 (although this clearing obligation will only apply to certain
counterparties).
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 expected to be
implemented in 2016.