RMG.L Regulatory News (RMG)

Principal risk

Status

Mitigation

Link to Strategy

Changes in customer preferences

The letter and parcel markets are becoming more competitive, customer behaviours are constantly evolving and our competitors are responding quickly to these changing demands:

Managing the decline in letters

Being a successful parcels business

Being customer focused

Managing the business successfully

Customer behaviour and Royal Mail's responsiveness to market: Changes in customer behaviour, and changes to the markets in which the Group sells its products and services, could result in reduced demand for the Group's products and services and impact our forecast rates of decline and growth of letter and parcel volumes respectively.

There is a risk that our product offerings, and the customer experience we provide, may not adequately meet evolving customer needs or that we are unable to innovate or adapt our commercial and operational activities fast enough to respond to changes in the market.

No change - as volumes are broadly consistent with expectations.

We are piloting Sunday afternoon opening at around 100 Delivery Offices later this summer, when we will also trial Sunday parcel deliveries to home addresses within the M25;

Parcelforce Worldwide will also launch a Sunday delivery service in June 2014 for online shoppers;

We launched Mailmark™ barcode technology for our large business mail customers. This increases our ability to track addressed letters through our network for these customers;

We continue to focus on our advertising mail offering, both on its own and in combination with other media, to ensure sustainable revenue streams through customer retention and acquisition;

We are working with the Keep Me Posted campaign to protect the rights of consumers to choose, without penalty, to receive communications such as bills and statements by post;

We continue to focus on meeting or exceeding our Quality of Service targets, and internal performance targets (such as composite parcel delivery performance);

Through our continued transformation programme, we are seeking to improve first time delivery rates. This includes an emphasis on consistency and standardisation of key initiatives like Delivery to Neighbour across our operations;

We continue to invest in technology to improve our service. In April 2013, we introduced our tracked returns service. We have also introduced enhanced delivery information for our Special Delivery and Tracked offerings and we have introduced Local Collect, our own click and collect service, in Post Offices; and

We have extended our network operating hours for parcels processing for some of our business customers.

Economic environment: Historically, there has been a correlation between economic conditions in the UK and Europe and the level of letter and parcel volumes. There is a risk that flat or adverse economic conditions could impact our ability to stay profitable, either by reducing letter and parcel volumes or by encouraging customers to adopt cheaper service options for sending letters and parcels.

No change - the economic environment is improving in line with expectations.

We have robust econometric models in place to

provide early warnings of changes to overall volumes

and the profile of letter and parcel volumes. We

continually review and upgrade these models to better

anticipate the impact of price rises and reflect the

increasingly deregulated market; and

We continually review our cost base to ensure we are as efficient as possible.

Cost management and business transformation

Royal Mail must continuously become more efficient and flexible in order to compete effectively in the letter and parcel markets:

Managing the business successfully

Cost management: The success of the business strategy relies on effective control of costs, and the delivery of efficiency and other benefits from our transformation programme, whilst maintaining Quality of Service, safety, and employee engagement.

No change - due to effective management of non-people costs.

People costs growth mitigated by productivity improvements.

Non-people costs reduced due to tight cost control.

The initial phase of our transformation programme, which included the modernisation of all of our Delivery Offices, the automation of letters sorting and a revision of all delivery walks, is now largely complete; and

We track progress and outcomes of all

transformational revisions to operational practice on a weekly basis to ensure completion to time and the sharing of good practice and lessons learned. Quality of Service is a fundamental consideration prior to any change.

Employee awareness and engagement: Lack of employee engagement in relation to transformation and understanding of the need for change could mean that we, or CWU, are unable to execute the efficiency changes enabled by the pay deal.

Reduced risk - due to the award of Free Shares and the new CWU agreement.

Our recent agreement with the CWU includes an Agenda for Growth to deliver change at the right pace and to ensure we are working together towards agreed goals.

Retaining and attracting senior management: Any failure by the Group to retain or attract Directors and highly skilled personnel could have a material adverse effect on its ability to manage its costs and transform the business.

Risk remains in place.

The Directors' remuneration report sets out the Group's overarching approach to remuneration in its policy (pages 59 to 63). The policy sets out that the overall remuneration package should be sufficiently competitive to attract, retain and motivate executives with the commercial experience to run a large, complex business in a highly challenging context. There is a risk if it is not.

IT transformation: Our current IT estate requires significant investment and the IT transformation programme is complex and will take several years to complete.

Failure to improve our IT systems or successfully implement the IT transformation programme would increase the risk of security breaches and attacks, a material adverse effect on the Group's operations, and the risk that the IT systems might not be able to support the business plan.

No change - as the programme is progressing as expected.

We are actively progressing and monitoring the IT

transformation programme. This remains high risk due

to the significant scale and complexity of change, and

the ongoing requirement for effective management of

the transition.

Regulatory and legislative environment, including direct delivery

The business operates in a regulated environment. Changes in legal and regulatory requirements could impact our ability to meet our targets and goals:

Managing the decline in letters

Direct delivery and the Universal Service:

In our liberalised postal market, other operators are able to offer direct delivery services by cherry picking easy-to-serve urban areas, without having to adhere to the same high delivery requirements and quality standards as Royal Mail.

The combination of mandated access, unfettered rollout of direct delivery and structural decline in letters, poses a serious risk to the economics of the USO in the UK.

Any failure or delay by Ofcom in undertaking a review of direct delivery in the future, or any failure or delay in introducing appropriate regulatory safeguards to protect the Universal Postal Service, would be likely to undermine the Group's future ability to earn revenue necessary to ensure the sustainable provision of the USO.

Increased risk - due to unfettered rollout of direct delivery competition and Ofcom not bringing forward a review of the impact of direct delivery on the USO.

We have proposed changes to our access contracts to

help secure the provision of the Universal Service. Certain of these proposed changes are subject to a Competition Act investigation by Ofcom. Under the terms of Royal Mail's access contracts, the price changes subject to the investigation are suspended pending the outcome of that investigation; and

We are preparing a regulatory submission calling for

Ofcom to bring forward its full review of direct delivery

competition in the UK and how it will protect the

Universal Service from the serious risk this presents.

VAT exemption: Mandated Network Access services provided by Royal Mail are currently exempt from Value Added Tax (VAT). This VAT exemption is currently the subject of judicial review proceedings. There is a risk that the VAT exemption on access services could be lost as a result of these proceedings, thus increasing the cost to those customers who cannot reclaim VAT. In this case, end-users that use such network access services for distribution of their letters may accelerate their adoption of e-substitution or alternative means of communicating with their customers or switch to competing third party direct delivery services.

No change - outcome of judicial review proceedings pending.

We consider that HM Revenue & Customs (HMRC) has

correctly implemented VAT legislation in compliance

with European law and we are continuing to support

HMRC in defending the claim.

Employment legislation: Changes to laws and regulations relating to employment (including the interpretation and enforcement of those laws and regulations) could, directly or indirectly, increase the Group's labour costs, which, given the size of the Group's workforce, could have an adverse effect on the Group. There is emerging European case law which may provide new guidance in relation to the interpretation of the Working Time Directive, which subsequently would need to be considered by the English courts in relation to the implementation of that directive through the Working Time Regulations 1998 and UK employers' compliance with it.

Increased risk - due to evolution of case law.

We have processes and controls to ensure that we pay all of our people correctly. If the law is changed or elements relevant to the particular circumstances of Royal Mail are reinterpreted by English courts, then we will need to adapt to these as appropriate.

Managing the business successfully

Industrial relations

There is extensive trade union recognition in respect of our workforce in the UK:

Managing the business successfully

Industrial action: There is a risk that one or more material disagreements or disputes between the Group and its trade unions could result in widespread localised or national industrial action.

Widespread localised or national industrial action would cause material disruption to our business in the UK and would be likely to result in an immediate and potentially ongoing significant loss of revenue for the Group.

Widespread localised or national industrial action may cause Royal Mail to fail to meet the Quality of Service targets prescribed by Ofcom, leading to enforcement action and fines.

Reduced risk - due to the new CWU agreement.

We have reached an agreement with the CWU on an

Agenda for Growth, including a new legally binding

agreement, to promote industrial stability and provide

employee protections. The agreement represents a

joint aspiration to radically improve industrial relations

and create a can-do culture in the interests of

customers, employees and the Company; and

We continue to engage with both Unite and the CWU

at all levels across the business, and there is constant

visibility of issues, action taken and potential risks.

 52 weeks2014

Reported

£000

 53 weeks2013

Reported

£000

Short-term employee benefits

(3,173)

(3,753)

Post-employment benefits

-

-

Other long-term benefits1

(2,654)

-

Total compensation earned by key management

(5,827)

(3,753)

Company

Principal activities

Country of incorporation

% equityinterest2014

% equityinterest2013

General Logistics Systems B.V.

Parcel services holding company

Netherlands

100

100

Royal Mail Estates Limited

Property holdings

United Kingdom

100

100

Royal Mail Investments Limited

Holding company

United Kingdom

100

100

Romec Limited

Facilities management

United Kingdom

51

51

Company

Principal activities

Country of incorporation

%ownership2014

%ownership2013

Quadrant Catering Limited

Catering services

United Kingdom

51

51

G3 Worldwide Mail N.V. (Spring)

Mail services

Netherlands

32.45

32.45

Royal Mail plc

MediaBeth Longcroft

Phone: 020 7449 8241

Email: beth.longcroft@royalmail.com

Royal Mail press office out of hours: 0203 338 1007

Investor relationsCatherine NashPhone: 020 7449 8183Email: investorrelations@royalmail.com