Barclays 2015 Annual Report Download - page 127

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consistent cultural and behavioural change, the risk to Barclays’
reputation will remain. Barclays continues to work to rebuild customer
trust and market confidence impacted by legacy issues.
For further information in respect of such investigations and related
litigation and discussion of the associated uncertainties, please see the
Legal, competition and regulatory matters note on page 303.
iii) Market integrity
There are potential risks arising from conflicts of interest, including those
related to the benchmark submission process. While primarily relevant to
the Investment Bank, these potential risks may also impact the corporate
and retail customer base. The Group may be adversely affected if it fails
to mitigate the risk of individuals making such inappropriate judgement
by the enhancing of operating models, and effective identification and
management of conflicts of interest, controls and supervisory oversight.
iv) Financial crime
The Group, as a global financial services firm, is exposed to the risks
associated with money laundering, terrorist financing, bribery and
corruption and sanctions. As a result, the Group may be adversely
affected if it fails to effectively mitigate the risk that its employees or
third parties facilitate, or that its products and services are used to
facilitate financial crime.
Any one, or combination, of the above risks could have significant impact
on the Group’s reputation and may also lead to potentially large costs to
both rectify this issue and reimburse losses incurred by customers and
regulatory censure and penalties.
Material existing and emerging risks potentially
impacting more than one Principal Risk
i) Structural reform (emerging risk)
The UK Financial Services (Banking Reform) Act 2013 (the UK Banking
Reform Act) and associated secondary legislation and regulatory rules,
require the separation of the Group’s UK and EEA retail and SME deposit
taking activities into a legally, operationally and economically separate
and independent entity and restrict the types of activity such an entity
may conduct (so-called ‘ring fencing’).
The PRA issued a policy statement (PS10/15) in May 2015 setting up
legal structures and governance requirements that the UK regulator
considers as ‘near-final’. A PRA Consultation was issued in October 2015
relating to post ring fencing prudential requirements and intra-group
arrangements among other matters. PRA final rules are expected in
2016. UK ring fencing rules will become binding from January 2019 and
Barclays has an internal structural reform programme to implement the
changes required by these new regulations (alongside other group
structural requirements applicable to or in the course of development for
the Group both in the UK and other jurisdictions in which the Group has
operations – such as the proposed move towards a single point of entry
(Holding Company) resolution model under the BoE’s preferred
resolution strategy and the requirement under section 165 of the DFA to
create a US intermediate holding company (IHC) to hold the Group’s US
banking and non-banking subsidiaries) and to evaluate the Group’s
strategic options in light of all current and proposed global structural
reform initiatives. Changes resulting from this work will have a material
impact in the way the Group operates in the future through increased
cost and complexity associated with changes required by ring fencing
laws and regulations. Specifically, in order to comply with the UK
Banking Reform Act and the DFA, it is proposed that:
 Barclays will create a new UK banking entity which will serve as the
ring fenced bank (RFB). It is expected to serve retail and small
business customers as well as UK Wealth and credit card customers
 Barclays Bank PLC (BBPLC) is expected to serve corporate, institutional
and investment banking clients and will also serve international
Wealth and credit card customers; it is also expected to house both
the Corporate Banking payments and Barclaycard merchant acquiring
businesses
 many of the Group’s US businesses (including Barclays Bank Delaware
and Barclays Capital Inc., the Group’s US broker-dealer subsidiary) will
be organised under an IHC
 the Group will establish a number of service companies in order to
support its revised operating entity structure.
Implementation of these changes involves a number of risks related to
both the revised Group entity structure and also the process of
transition to that revised Group structure. Those risks include the
following:
 the establishment and ongoing management of the RFB and BBPLC
as separate entities will require the Group to evaluate and restructure
its intra-group and external capital, funding and liquidity
arrangements to ensure they continue to meet regulatory
requirements and support business needs. The changes required by
ring fencing will in particular impact the sources of funding available
to the different entities, including restricting BBPLC’s access to certain
categories of deposit funding
 while the Group will seek to manage the changes to business mix and
capital, funding and liquidity resources so as to maintain robust credit
ratings for each of its key operating entities, the restructuring required
by ring fencing is complex and untested, and there is a risk that the
changes may negatively impact the assessment made by credit rating
agencies, creditors and other stakeholders of the credit strength of
the different entities on a standalone basis. Adverse changes to the
credit assessment, including the potential for ratings downgrades,
could in turn make it more difficult and costly for the Group’s entities
to obtain certain sources of funding
 the Financial Services and Markets Act 2000 (Banking Reform)
(Pensions) Regulations 2015 provide that, after 1 January 2026, ring
fence banks cannot be or become liable for pension schemes outside
of the ring fence. To comply with the regulations, the Group will need
to decide which Group entities will participate in the Barclays Bank UK
Retirement Fund (UKRF) from 2026, and reach a mutually satisfactory
position with the UKRF Trustee regarding past service liabilities. The
Group is currently discussing a variety of options with the UKRF
Trustee, and engaging with the PRA and the UK Pensions Regulator
 execution risk associated with moving a material number of customer
accounts and contracts from one legal entity to another and in
particular the risk of legal challenge to the ring-fenced transfer
scheme that will be used in order to transfer certain assets and
liabilities from BBPLC to the RFB
 customer impacts derived from operational changes related to, for
example, the reorganisation of sort codes. In addition, uncertain and
potentially varying customer preference in terms of being served by
the RFB or BBPLC may increase the execution risk associated with ring
fencing; customers may also be impacted by reduced flexibility to
provide products through a single entity interface
 at the European level, the draft Bank Structural Reform Regulation
contains powers restricting proprietary trading and, if certain
conditions are met, for the mandated separation of core retail banking
activity from certain trading activities save where a bank is already
subject to a national regime which provides for the separation of such
activities in a manner compatible with the regulation. The regulation is
currently in draft form and no single version (including the scope of
any national derogation) has yet been agreed by the Council of
Ministers, the European Commission and the European Parliament.
The implementation date for these proposals will depend on the date
on which any final legislation is agreed. Accordingly, the potential
impact on the Group remains unclear.
These, and other regulatory changes and the resulting actions taken to
address such regulatory changes, may have an adverse impact on the
Group’s profitability, operating flexibility, flexibility of deployment of
capital and funding, return on equity, ability to pay dividends, credit
ratings, and/or financial condition.
ii) Business conditions, general economy and geopolitical issues
The Group’s performance could be adversely affected in relation to
more than one Principal Risk by a weak or deteriorating global
economy or political instability. These factors may also occur in one
or more of the Group’s main countries of operation.
The Group offers a broad range of services to retail, institutional and
government customers, in a large number of countries. The breadth of
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