Utilico Insights - Jacqueline Broers assesses why Vietnam could be the darling of Asia for investors. Watch the full video here.

Less Ads, More Data, More Tools Register for FREE

Pin to quick picksSant Uk.10te% Regulatory News (SAN)

Share Price Information for Sant Uk.10te% (SAN)

London Stock Exchange
Share Price is delayed by 15 minutes
Get Live Data
Share Price: 143.50
Bid: 141.00
Ask: 146.00
Change: 0.00 (0.00%)
Spread: 5.00 (3.546%)
Open: 0.00
High: 0.00
Low: 0.00
Prev. Close: 143.50
SAN Live PriceLast checked at -

Watchlists are a member only feature

Login to your account

Alerts are a premium feature

Login to your account

Annual Financial Report - Part 2

16 Mar 2012 07:30

RNS Number : 4702Z
Santander UK Plc
16 March 2012
 



Report of the Directors

 

Directors

 

BOARD OF DIRECTORS

At 31 December 2011

 

CHAIRMAN

 

Lord Burns

Lord Burns (age 68) was appointed Joint Deputy Chairman on 1 December 2001 and Chairman on 1 February 2002. He is also Chairman of Channel 4 Television Corporation and a Non-Executive Director of Banco Santander, S.A.. His current professional roles include President of the Society of Business Economists, a Non-Executive Member of the Office for Budget Responsibility and Chairman of the Governing Body of the Royal Academy of Music. He was formerly Permanent Secretary to the Treasury and chaired the Parliamentary Financial Services and Markets Bill Joint Committee in 1999. He was a Non-Executive Director of British Land plc (2000-2005), Pearson plc (1999-2010) and Legal & General Group plc (1991-2001). He was also Chairman of the National Lottery Commission (2000-2001), Marks and Spencer Group plc (2006-2008), Glas Cymru Cyfyngedig (Welsh Water) (2000-2010) and President of the National Institute of Economic and Social Research (2002-2011).

 

 

EXECUTIVE DIRECTORS

 

Ana Botín

Chief Executive Officer

Ana Botín (age 51) was appointed as Chief Executive Officer on 1 December 2010. She joined the Banco Santander, S.A. group in 1988, directed Banco Santander, S.A.'s Latin American international expansion in the 1990's and was responsible for the Latin American, Corporate Banking, Asset Management and Treasury areas. Ana was Chief Executive Officer of Banco Santander de Negocios and has been a member of Banco Santander, S.A.'s Board and Executive Committee since 1989 and of its Management Committee since 1994. From 2002 to 2010, Ana was Executive Chairman of Banco Español de Credito, S.A. in Spain.

 

José María NusChief Risk Officer

José María Nus (age 61) was appointed as an Executive Director and Chief Risk Officer on 17 March 2011 and is responsible for the Risk Division. Previously, José María was Chief Risk Officer at Banco Español de Credito, S.A., where he was a member of the Board and member of the Executive Committee. Prior to joining Banco Español de Credito, S.A. he held senior positions at Bankinter, S.A. and Banco de Negocios Argentaria, S.A. where he was Managing Director of Risk.

 

Steve PatemanExecutive Director

Steve Pateman (age 48) was appointed as an Executive Director on 1 June 2011 and is responsible for Corporate, Commercial and Business Banking. On 6 March 2012, he assumed additional responsibility for Retail Banking and Retail Products and Marketing in his capacity as Head of UK Banking. He joined the Company in June 2008 as Head of UK Corporate and Commercial Banking and an Executive Committee member. Previously with National Westminster Bank plc and the Royal Bank of Scotland plc where he was CEO of Business Banking, Managing Director of Commercial Banking and Managing Director of Corporate Banking, he has experience running businesses with revenues in excess of £1.0bn with over 5,000 staff. Steve has also worked on a variety of financings, restructurings, capital market and equity issues during his time in NatWest Markets where he specialised in the leisure and retail sectors.

 

 

APPOINTMENTS POST 31 DECEMBER 2011

 

EXECUTIVE DIRECTOR

 Stephen JonesChief Financial Officer

Stephen Jones (age 47) was appointed as an Executive Director and Chief Financial Officer on 6 March 2012. Stephen Jones joined Santander UK from Barclays where he was Managing Director, Head of Investor Relations, served on the Governance and Control Committee for its UK Retail and Business Banking and was a member of the Regulatory and Public Policy Group. Prior to this he was Managing Director, Head of Corporate Debt Capital Markets and Equity Capital Markets and Co-Head of Corporate Investment Banking, Barclays Capital EMEA. Before joining Barclays in 2002 he spent 14 years at Schroders (later Schroder Salomon Smith Barney). He qualified as a solicitor in 1988.

 

NON-EXECUTIVE DIRECTORS

 Juan Rodríguez Inciarte

Deputy Chairman

Juan Inciarte (age 59) was appointed Non-Executive Director on 1 December 2004. He joined Banco Santander, S.A. in 1985 and has served within Banco Santander, S.A. as Head of Retail Banking, Head of Wholesale, Corporate Banking and Head of Santander Consumer Finance. He has also headed up the Treasury and Markets area and the Risk Management division. He has been deeply involved in Banco Santander's global expansion in positions as Head of the Former International Division and of the European Alliances. He is currently a member of the Boards of Banco Banif, S.A., Santander Consumer Finance S.A., and Banco Santander's International Advisory Board. He was a Director of the Royal Bank of Scotland plc and National Westminster Bank plc (1998-2004) and has served on the Board of Directors of RFS Holdings, First Fidelity Bancorp and First Union Corporation (now part of Wells Fargo), San Paolo - IMI in Italy, Sovereign Bancorp in the US (2006-2008), NIBC Bank N.V. in The Netherlands (2005-2007), ABN AMRO Holding N.V. and Compañía Española de Petróleos, S.A. of Spain. Mr Inciarte is Chairman of the US-Spain Council, Member of the Spain-Japan Council Foundation, Member of the Board of Trustees of the Carlos V International Centre of the Autonomous University of Madrid and a Fellow of The Chartered Institute of Bankers in Scotland. Jane Barker (Resigned on 31 December 2011)Jane Barker (age 62) was appointed Non-Executive Director on 21 October 2008. She is Chief Executive Officer of Equitas Limited, the company set up to re-insure and run-off the 1992 and prior years' non-life liabilities of Lloyd's of London syndicates and a Non-Executive Director of Marsh Limited. She is Deputy Chairman of the Royal College of Music, an external member of the Appeal Panel for Scotland and Northern Ireland Banknote Regulation Regime and was previously a member of the council and chair of the Audit Committee of the Open University. Her other previous roles have included being Finance Director of the London Stock Exchange.

 

Roy Brown

Roy Brown (age 65) was appointed Non-Executive Director on 21 October 2008. He is a Chartered Engineer, Graduate of the Harvard Business School and is Chairman of GKN plc, Governor of Tonbridge School and Chairman of the Tonbridge School Foundation. Formerly, he was an Executive Director of Unilever plc and NV and a Non-Executive Director of Brambles Industries plc, the British United Provident Association Ltd (BUPA) and the Franchise Board of Lloyd's of London.

 

José María Carballo

José María Carballo (age 67) was appointed Non-Executive Director on 1 December 2004. He is Chairman of La Unión Resinera Española, Chairman of Vista Desarrollo, Director of Vista Capital Expansion S.A. S.G.E.C.R. and Director of Teleférico Pico del Teide S.A.. He is also Vice President and Honorary Treasurer of the Iberoamerican Benevolent Society (UK). He was Executive Vice President of Banco Santander, S.A. from 1989-2001 and Chief Executive Officer of Banco Santander de Negocios from 1989 to 1993. Until 1989 he was Executive Vice President responsible for Europe at Banco Bilbao Vizcaya. He was also Executive Vice President of Banco de Bilbao in New York until 1983.

 

José María Fuster

José María Fuster (age 53) was appointed Non-Executive Director on 1 December 2004. He is Executive Vice President of Operations and Technology, and Chief Information Officer of Banco Santander, S.A. and Non-Executive Director of Banco Español de Credito, S.A.. He joined Banco Español de Credito, S.A. in 1998 and was appointed as Chief Information Officer of Banco Santander, S.A. in 2003. He started his professional career with International Business Machines, S.A. and Arthur Andersen as a consultant. He has also worked for Citibank España, S.A. and National Westminster Bank plc.

 

Rosemary Thorne

Rosemary Thorne (age 60) was appointed Non-Executive Director on 1 July 2006. She is also a Non-Executive Director on the Board of Smurfit Kappa Group plc. She was Group Finance Director of Ladbrokes plc until April 2007, Non-Executive Director of Cadbury Schweppes plc until September 2007 and Senior Independent Director on the Board of Virgin Radio Holdings Limited until June 2008. Previously, she was Group Financial Controller of Grand Metropolitan Public Limited Company (prior to its merger with Guinness plc to become Diageo plc) and spent almost eight years as the Group Finance Director of J Sainsbury plc. She joined the Board of Bradford & Bingley plc in 1999 as Group Finance Director, initially working on its demutualisation and flotation, resulting in a place in the FTSE 100 Index in December 2000. She remained in this role for a further five years. She was a member of the Financial Reporting Council and Financial Reporting Review Panel for nine years and a member of The Hundred Group of Finance Directors Main Committee for 15 years.

 

Keith Woodley (Resigned on 31 December 2011)

Keith Woodley (age 72) was appointed Non-Executive Director on 5 August 1996. He was made Senior Independent Non-Executive Director in April 1999 and was Deputy Chairman from April 1999 until November 2004. He is a former Non-Executive Director of National & Provincial Building Society and a former partner of Deloitte Haskins & Sells. A past President of the Institute of Chartered Accountants in England and Wales, he is a Council Member and Pro-Chancellor of the University of Bath.

 

 

Report of the Directors

 

Directors' Report

 

CORPORATE STRUCTURE

 

Santander UK plc (the 'Company') is a subsidiary of Banco Santander, S.A.. The ordinary shares of the Company are not traded on the London Stock Exchange. Banco Santander, S.A. is incorporated in Spain and has its registered office at Paseo de Pereda 9-12, Santander, Spain. Note 24 to the Consolidated Financial Statements provides a list of the principal subsidiaries of the Company, the nature of each subsidiary's business and details of branches. Note 39 to the Consolidated Financial Statements provides details of the Company's share capital.

 

CORPORATE GOVERNANCE

 

The Company is subject to the Listing Rules and the Disclosure & Transparency Rules of the UK Financial Services Authority ('FSA'), because it has preference shares listed on the London Stock Exchange. As a result of having only preference shares listed, the Company is not required to make certain disclosures that are normally part of the continuing obligations of equity listed companies in the UK. However, a number of voluntary disclosures have been presented in this Directors' Report relating to remuneration (see pages 143 to 145). Additionally, the Company complies with the remuneration disclosure requirements in the FSA's Prudential Sourcebook for Banks, Building Societies and Investment Firms.

The Company's corporate governance model ensures that the Board and the management of the Company make their own decisions on liquidity, funding and capital, having regard to what is appropriate for the Company's business and strategy.

 

NYSE Corporate Governance - differences in UK/New York Stock Exchange corporate governance practice

 

Under the NYSE corporate governance listing standards the Company must disclose any significant ways in which its corporate governance practices differ from those followed by US companies under the NYSE listing standards. We believe the following to be the significant differences between our current corporate governance practices and those applicable to US companies under the NYSE listing standards.

Under the NYSE listing standards, independent directors must comprise a majority of the Board. Our Board is currently comprised of a Chairman (who is also a non-executive director), four executive directors (including the Chief Executive Officer) and five non-executive directors. Three of the non-executive directors are independent as defined in the NYSE listing standards. The other two non-executive directors are not independent as they are employees of our parent company, Banco Santander, S.A.

The NYSE listing standards require that non-management directors meet on a regular basis without management present and that, in certain circumstances, independent directors meet separately at least once a year. Neither applicable UK rules nor our internal policies require such meetings, and such meetings do not occur on a regular basis.

The NYSE listing standards require that US listed companies have a nominating or corporate governance committee composed entirely of independent directors and with a written charter addressing certain corporate governance matters. Applicable UK rules do not require companies without equity shares listed on the London Stock Exchange, such as the Company, to have a nominating committee. However, we established a Nomination Committee with effect from 27 September 2011, which leads the process for Board appointments. This committee has written terms of reference setting out its role to identify and nominate candidates for Board and committee appointments. The following directors make up the Nomination Committee: Terence Burns, Ana Botín, Roy Brown, Rosemary Thorne and Juan Inciarte. Of these directors, two are independent non-executive directors.

In addition, the Board is responsible for monitoring the effectiveness of the Company's governance practices and making changes as needed to ensure the alignment of the Company's governance system with current best practices. The Board monitors and manages potential conflicts of interest of management, Board members, shareholders, external advisors and other service providers, including misuse of corporate assets and abuse in related party transactions.

The NYSE listing standards require that US listed companies have a compensation committee composed entirely of independent directors and with a written charter addressing certain corporate governance matters. The Remuneration Oversight Committee was established with effect from 1 January 2010. Under its written terms of reference, this committee is primarily responsible for overseeing and supervising the Group's policies and frameworks covering remuneration and reward. The Remuneration Oversight Committee is made up of three independent non-executive directors: Roy Brown (Chairman), José María Carballo and Rosemary Thorne.

The NYSE listing standards require that US listed companies have an audit committee that satisfies the requirements of Rule 10A-3 under the US Exchange Act of 1934, as amended, with a written charter addressing certain corporate governance matters, and whose members are all independent. As a wholly-owned subsidiary of a parent that satisfies the requirements of Rule 10A-3(c)(2), the Company is exempt from the requirements of Rule 10A-3. The Company does have a Board Audit Committee composed of three independent non-executive directors: Rosemary Thorne (Chairperson), José María Carballo and Roy Brown, however the scope of the Board Audit Committee's terms of reference as well as the duties and responsibilities of such committee are more limited than that required of audit committees under the NYSE listing standards. For example, the Board Audit Committee does not provide an audit committee report as required by the NYSE listing standards to be included in the Company's annual proxy statement.

 

The NYSE listing standards require that US listed companies adopt and disclose corporate governance guidelines, including with respect to the qualification, training and evaluation of their directors. The NYSE listing standards also require that the Board conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively. The Board undertakes a review of Board effectiveness every two years through an internal process led by the Chairman. The most recent Board effectiveness review occurred in the fourth quarter of 2010.

A chief executive officer of a US company listed on the NYSE must annually certify that he or she is not aware of any violation by the company of NYSE corporate government standards. In accordance with NYSE listing rules applicable to foreign private issuers, our CEO is not required to provide the NYSE with such an annual compliance certification.

In addition, as a wholly-owned subsidiary of an NYSE-listed company, we are exempt from two NYSE listing standards otherwise applicable to foreign listed companies as well as US listed companies. The first requires the CEO of any NYSE-listed foreign company to notify promptly the NYSE in writing after any executive of the issuer becomes aware of any material non-compliance with any applicable NYSE corporate governance standards. The second requires NYSE-listed foreign companies to submit executed Written Affirmations annually to the NYSE.

 

PRINCIPAL ACTIVITIES AND BUSINESS REVIEW

 

The principal activity of Santander UK plc, company number 2294747, and its subsidiaries (together 'Santander UK' or the 'Group'), continues to be the provision of an extensive range of personal financial services. In addition, Santander UK provides a wide range of banking and financial services to business and public sector customers. The Company is authorised and regulated by the FSA.

The Company is required to set out in this report a fair review of the development and performance of the business of the Group during the year ended 31 December 2011 and of the position of the Group at the end of the year, as well as factors likely to affect its future development, performance and position. The information that fulfils this requirement can be found in the Chief Executive Officer's Review on pages 2 to 5 and the relevant sections of the Business and Financial Review referred to below, which are incorporated into and form part of this Directors' Report. When reading the Chief Executive Officer's Review and the Business and Financial Review, reference should be made to the Forward-looking Statements section on page 6.

 

Information on the development and performance of the business of the Group, both at a consolidated level and analysed by division can be found in the Chief Executive Officer's review and in the following sections:

 

An analysis of the Group's development and performance during the year is contained in the "Business Review - Summary" on pages 12 to 16.

Further detailed analysis of the development and performance of the business divisions is contained in the "Business Review - Divisional Results" on pages 19 to 29.

 

Information on the position of the Group at the end of the year can be found in the Chief Executive Officer's review and in the following sections:

 

Business volumes are discussed in the "Business Review - Divisional Results" on pages 20 to 21.

The Balance Sheet Business Review can be found on pages 32 to 61, including details of capital expenditure on page 49, contractual obligations and off-balance sheet arrangements on page 53, a review of capital management and resources on pages 54 to 56, and funding and liquidity on pages 57 to 59.

Key performance indicators are described in the "Business Review - Key Performance Indicators" on pages 17 to 18.

 

The Company is also required to describe the principal risks and uncertainties facing the Group. Financial risks are described in the Risk Management Report by type of risk, with further analysis by segment on pages 62 to 135, and material risk factors are described in the Risk Factors section on pages 278 to 290.

 

RESULTS AND DIVIDENDS

 

The results of the Group are discussed above. The Directors do not recommend the payment of a final dividend for 2011 (2010: £nil). An interim dividend of £425m was declared on 24 May 2011 on the Company's ordinary shares in issue and is expected to be paid later in 2012. An interim dividend of £375m was declared in 2010 and paid in 2011.

 

EVENTS AFTER THE BALANCE SHEET DATE

 

None.

 

GOING CONCERN

 

The Directors confirm that they are satisfied that the Group has adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt a going concern basis of accounting in preparing the financial statements.

As outlined above, the Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive Officer's Review on pages 2 to 5 and in the Business Review on pages 12 to 31. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Balance Sheet Business Review on pages 32 to 61. In addition, Note 48 to the Consolidated Financial Statements includes the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. As also outlined above, in respect of the principal risks and uncertainties facing the Group, financial risks are described in the Risk Management Report on pages 62 to 135, and material risk factors are described in the Risk Factors section on pages 278 to 290.

In assessing going concern, the Directors take account of all information of which they are aware about the future, which is at least, but is not limited to, 12 months from the date that the balance sheet is signed. This information includes the Group's results forecasts and projections, estimated capital, funding and liquidity requirements, contingent liabilities, and possible economic, market and product developments, taking account of reasonably possible changes in trading performance.

 

Budgets and forecasts

Since the acquisition of the Company by Banco Santander, S.A., the Group has a history of profitable operations. Management prepares a 3-year plan (the '3-Year Plan') that forecasts balance sheet, income and margin, by product, with a particular focus on the forthcoming year.

> 

Review and reforecast

The 3-Year Plan, its assumptions, forecast results and key sensitivities are reviewed by senior management and presented to the Executive Committee, the Board of Directors and to senior executives of Banco Santander, S.A.. The budget is reforecast frequently and reviewed by the Executive Committee and the Board of Directors. As part of the budget and planning process, a particular emphasis is placed on ensuring the sustainability of earnings, and achieving and maintaining a high level of operating efficiency in the Group (measured by the trading cost:income ratio) to enable competitive products to be developed for customers.

> 

Stress testing

To assess the Group's ability to adapt to various market challenges, the budgets are "stress tested" as part of the Group's internal capital adequacy assessment process ('ICAAP') under Basel II. Different scenarios are modelled, including a severe scenario, and senior management makes an assessment of how this would affect the Group's profit and funding plans.

 

> 

Borrowing requirements and liability management

The Group's financial plans are constructed to ensure that they allow the Group to meet its financial obligations as they fall due, both with respect to maturing existing liabilities and future borrowing requirements. On 3 August 2010, Banco Santander, S.A. through a Spanish based subsidiary Santusa Holding, S.L., injected £4,456m of equity capital into the Company. The capital was used to support the reorganisation of certain Banco Santander, S.A. group companies in the UK as described in Note 46 to the Consolidated Financial Statements and will be used to support further growth, including the transaction with the Royal Bank of Scotland Group also described in that Note.

The Group's funding requirements are met from a variety of sources, with a significant majority being sourced from customer deposits (i.e. retail and corporate deposits). At 31 December 2011, customer assets as a percentage of customer liabilities were 138% (2010: 132%). The balance of the Group's funding is sourced from the wholesale markets with reference to prevailing and expected market conditions and the desired balance sheet structure. The Board considers it appropriate to balance cost effective short-term financing with medium and long-term funds, which have less refinancing risk, within the context of maintaining a diverse range of sources of wholesale funding. At 31 December 2011, the ratio of customer assets to customer deposits plus medium-term funding was 99%, an increase from 95% at the end of 2010.

Asset and Liability Management produce strategic and tactical funding plans as part of the Group's planning process. These funding plans are approved by the Board and the Strategic Risk and Financial Management Committee and are controlled on a day-to-day basis by the Director, Funding and within the framework of the Liquidity Risk Manual. The plans are stressed to ensure adverse conditions can be accommodated via a range of management levers. Funding and liquidity management is the responsibility of the Finance Director who delegates day-to-day responsibility to the Director, Funding. Liquidity risk control and oversight are provided by the Chief Risk Officer, supported by the Risk Division. See the Risk Management Report for further details on liquidity risk management.

 

> 

Contingent liabilities

The Directors, via the Board Audit Committee, also consider the Group's exposure to contingent liabilities. This consideration addresses contingent liabilities experienced by the Group in the past, such as legal proceedings, guarantees, operating lease commitments, customer remediation liabilities, tax contingencies, and those arising in respect of the UK Financial Services Compensation Scheme, but also addresses whether there are any new contingencies. Contingent liabilities are captured on a timely basis for purposes of disclosure in the Annual Report and Accounts and the half-yearly financial report.

Non-trading guarantees require the approval of the Chief Executive Officer or the Chief Financial Officer or, in their absence, any two Company Executive Directors or one Company Executive Director and the Company Secretary. This provision forms part of the Company's Corporate Governance Framework (other Financial Delegated Authorities).

 

> 

Products and markets

The Directors review information about the major aspects of the economic environment within which the Group operates at monthly Board meetings. This information includes an economic update which contains data on key economic and market trends. In addition, the Group's Economic Analysis team monitors and provides information to the Board on current and prospective economic and market developments. Retail financial markets, such as the housing market, are a major focus for analysing current trends and potential developments. The Directors also receive regular briefings on market share for the Group's major products and six-monthly competitor analyses. Wholesale market conditions are reviewed daily by the Director, Funding and an update presented on a monthly basis to the Asset and Liability Management Committee and the Strategic Risk and Financial Management Committee. The tactical and strategic funding plans are updated, if necessary, with reference to current and expected market conditions.

 

> 

Financial risk management

The Group's risk management focuses on major areas of risk, namely credit risk, market risk, funding and liquidity risk, and operational risk. The Risk Management Report sets out in detail how the Group manages these risks.

 

> 

Financial adaptability

The Directors also consider the ability of the Group to take effective action to alter the amounts and timing of cash flows so that it can respond to unexpected needs or opportunities. Such financial adaptability mitigates the areas of financial risk above in considering the appropriateness of the going concern presumption in relation to the Group. In determining the financial adaptability of the Group, the Directors have considered the ability of the Group to:

Obtain new sources of finance

The Group minimises refinancing risk by sourcing funds from a variety of markets as appropriate and subject to consideration of the appropriate leverage ratio and funding mix for the Group, and in particular customer deposit levels and medium-term funding. The Group actively manages its relationships with existing providers of funding and considers new sources of funds as and when they arise.

Day-to-day sources of finance consist primarily of retail deposits. To the extent that wholesale funding is required, a variety of sources are usually available from a range of markets, including:

money markets: both unsecured (including interbank and customer deposits, and issuances of certificates of deposit and commercial paper) and secured (including repos in open market operations);

debt capital markets (including discrete bond issues and medium term notes);

mortgage-backed funding (including securitisation and covered bond issuance); and

capital instruments (although primarily issued to maintain capital ratios). 

In addition to day-to-day funding sources, the Group has access to contingent sources from central banks, including the Bank of England, the Swiss National Bank, and the US Federal Reserve. The Group ensures that it has access to these contingent facilities as part of its prudent liquidity risk management. See the Risk Management Report for further details on liquidity risk management. The Group minimises reliance on any one market by maintaining a diverse funding base, and avoiding concentrations by maturity, currency and institutional type.

 

> 

Obtain financial support from other Santander group companies

For capital, funding and liquidity purposes, the Group operates on a stand-alone basis. However, in case of stress conditions, it would consult with its ultimate parent company, Banco Santander, S.A. about financial support.

 

> 

Continue business by making limited reductions in the level of operations or by making use of alternative resources

The Group maintains and regularly updates a Contingency Funding Plan to cover potential extreme scenarios. In addition, the 3-Year Plan is stressed, as part of the ICAAP process, to ensure that the Group can accommodate extreme scenarios and the impact this would have on the 3-Year Plan and profits. In accommodating these extreme scenarios, various management actions would be utilised, including the encashment of certain liquid assets and a reduction in new business in Retail and Corporate Banking.

 

As part of their enquiries, the Directors have considered the fact that, as a subsidiary of a bank domiciled in the eurozone, the perception of Santander UK plc is affected by interest in and concerns over the eurozone. The Group's exposure to eurozone sovereign debt is insignificant, amounting to less than 0.1% of the Group's total assets. For further information on country risk exposures, consisting of sovereign debt exposures, other country risk exposures and balances with other Santander companies, see the 'Country Risk Exposure' section of the 'Balance Sheet Business Review'.

After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing the Annual Report and Accounts.

 

DIRECTORS

 

The members of the Company's board of directors (the 'Board') at 31 December 2011 are named on pages 136 to 137. For each Director, the date of appointment is shown. At 31 December 2011 the Board comprised a Chairman, four Executive Directors including the Chief Executive Officer, and seven Non-Executive Directors. At the date of publication of this report, the Board composition comprised a Chairman, four Executive Directors including the Chief Executive Officer and five Non-Executive Directors. The roles of Chairman and Chief Executive Officer are separated and clearly defined. The Chairman is primarily responsible for the working of the Board and the Chief Executive Officer for the running of the business and implementation of Board strategy and policy. During the year, the following directors resigned:

 

Director

Title

Date of resignation

Alison Brittain

Executive Director, Retail Distribution

22 March 2011

Jane Barker

Non-Executive Director

31 December 2011

Keith Woodley

Non-Executive Director

31 December 2011

 

Non-Executive Directors have been appointed for an indefinite term (other than Roy Brown and Rosemary Thorne who have been appointed for a three-year term, after which their appointments may be extended upon mutual agreement).

When they were appointed, the appointments of Ana Botín, Juan Rodríguez Inciarte, José María Fuster, José María Carballo and José María Nus were all proposed by Banco Santander, S.A.. The Company may pay an Executive Director instead of requiring them to work during their notice period.

Following the resignations of Jane Barker and Keith Woodley, the Company is conducting a search for a Deputy Chairman and additional Independent Non-Executive Directors.

 

COMMITTEES OF THE BOARD

 

The Board maintains four standing committees, which operate within written terms of reference.

 

Board Audit Committee

 

With effect from 1 January 2012, the Audit and Risk Committee was separated into standalone Board Audit and Board Risk committees, recognising the recommended position under the Walker Report. Membership of the Board Audit Committee is restricted to Independent Non-Executive Directors. The Board Audit Committee's primary tasks are to review the scope of external and internal audit, to receive reports from the external auditors (currently Deloitte LLP) and the Chief Internal Auditor, and to monitor and review the integrity of the financial statements of the Company including its annual and half-yearly reports before they are presented to the Board, focusing in particular on accounting policies, compliance and areas of management judgement and estimates. The Board Audit Committee's scope also includes the review of the procedures in place for employees to raise concerns about possible wrongdoing in financial reporting and other matters. For a further discussion of the risk-control responsibilities of the Board Audit Committee, see the Risk Management Report of the Annual Report and Accounts on page 68.

The Board Audit Committee also conducts a review of the remit and reports of the internal audit function (which is a Banco Santander S.A. group function) in so far as it relates to the Group as well as the internal audit function's effectiveness, authority, resources and standing within the Group and management's response to their findings and recommendations.

The Board Audit Committee monitors the Group's relationship with, and the experience and qualifications of the external auditors, and reviews the external auditor's audit plans and audit findings. A framework for ensuring auditor independence has been adopted, which defines unacceptable non-audit assignments, pre-approval of acceptable non-audit assignments and procedures for approval of acceptable non-audit assignments.

The Board Audit Committee may make any recommendations to the Board as it sees fit and the Chairperson of the Board Audit Committee reports formally to the Board after each meeting. The Chairperson, Rosemary Thorne, has over 15 years of experience as Finance Director of FTSE 100 Index companies and was a member of the Financial Reporting Council, The Financial Reporting Review Panel and The Hundred Group of Finance Directors Main Committee. The Board has determined that Rosemary Thorne has the necessary qualifications and experience to qualify as a board audit committee financial expert as defined in the rules promulgated under the US Securities Exchange Act of 1934, as amended, and the Board considers that she is independent in accordance with Section 303A.02 of the New York Stock Exchange Corporate Governance Rules.

The other members of the Board Audit Committee are José María Carballo and Roy Brown. During 2011 the members of the Audit and Risk Committee comprised Rosemary Thorne, Jane Barker, Roy Brown, José María Carballo and Keith Woodley. Pursuant to SEC Rule 10A-3(c)(2), which provides a general exemption from the requirement to have a board audit committee for subsidiaries that are listed on a national securities exchange or market where the parent satisfies the requirement of SEC Rule 10A-3, the Company is exempt from the requirements of SEC Rule 10A-3. According to SEC Rule 10A-3(c)(2), additional listings of an issuer's securities are exempt from the board audit committee requirements if the issuer is already subject to them as a result of listing any class of securities on any market subject to SEC Rule 10A-3. This exemption extends to listings of non-equity securities by a direct or indirect subsidiary that is consolidated or at least 50% beneficially owned by a parent company, if the parent is subject to the requirements as a result of the listing of a class of its equity securities.

 

Consequently, as applied to the current shareholding structure of the Company, (as a subsidiary of Banco Santander, S.A.), the Company is exempt from the board audit committee requirements of SEC Rule 10A-3 since: (i) the Company is a subsidiary of Banco Santander, S.A., (ii) Banco Santander, S.A. has equity securities listed on the New York Stock Exchange and is therefore subject to SEC Rule 10A-3, and (iii) the Company does not have any equity securities listed on the New York Stock Exchange or any other national securities exchange in the United States of America.

 

Board Risk Committee

 

The Board Risk Committee was established with effect from 1 January 2012. The Board Risk Committee is primarily responsible for advising the Board on the Company's overall risk appetite, tolerance and strategy, reviewing the risk framework and recommending it to the Board for approval, reviewing the effectiveness of the risk management systems and internal controls, overseeing and advising the Board on current risk exposures and future risk strategy, reviewing the Company's capability to identify and manage new risk types, and overseeing and challenging the design and execution of stress and scenario testing. Membership of the Board Risk Committee is restricted to Independent Non-Executive Directors, and comprises Rosemary Thorne (Chairperson), José María Carballo and Roy Brown. Prior to 1 January 2012, the functions of the Board Risk Committee were included in those of the Board Audit Committee which had been titled the Audit and Risk Committee.

 

Remuneration Oversight Committee

 

The Remuneration Oversight Committee was established with effect from 1 January 2010. The Remuneration Oversight Committee is primarily responsible for overseeing and supervising the Group's policies and frameworks covering remuneration and reward as applied in, or devolved to the UK. It provides governance and strategic input into the Company's executive and employee remuneration and reward activities. During 2011, the members of the Remuneration Oversight Committee were Roy Brown (Chairman), José María Carballo, Keith Woodley, Rosemary Thorne and Jane Barker. Keith Woodley and Jane Barker resigned on 31 December 2011.

 

Nomination Committee

 

The Nomination Committee was established with effect from 27 September 2011. The Nomination Committee's primary responsibility is to lead the process for Board appointments, including the identification, nomination and recommendation of candidates for appointment to the Board of the Company. The members of the Nomination Committee are Terence Burns (Chairman), Ana Botín, Roy Brown, Rosemary Thorne and Juan Inciarte.

 

DIRECTORS' REMUNERATION (audited)

 

The aggregate remuneration received by the Directors of the Company in 2011 was:

 

2011

£

2010

£

Salaries and fees

5,013,374

4,270,326

Performance-related payments (1)

3,744,619

500,000

Other taxable benefits

-

-

Total remuneration excluding pension contributions

8,757,993

4,770,326

Pension contributions

-

-

Compensation for loss of office

-

-

8,757,993

4,770,326

(1) In line with the FSA Remuneration Code, a proportion of the performance-related payment was deferred. Further details can be found in "FSA Remuneration Disclosures" and in Note 44 to the Consolidated Financial Statements.

 

FSA REMUNERATION CODE

 

In accordance with the FSA Revised Remuneration Code (the 'Code'), the Company operates a remuneration policy designed to promote effective risk management, applicable to all employees including a number of senior staff whose professional activities have a material impact on the Company's risk profile (known as 'Code Staff'). In accordance with the Code, an element of the 2011 and 2010 variable remuneration of Code Staff was deferred. For Code Staff earning more than £500,000 in variable remuneration (comprising the annual bonus and Long-Term Incentive Plan ('LTIP') in 2010 and annual bonus in 2011), at least 60% was deferred, and for Code Staff earning less than £500,000 in variable remuneration, at least 40% was deferred, both for a period of three years. Further details can be found in the additional FSA Remuneration Disclosures on pages 152 to 156, which do not form part of this Directors' Report.

 

The table below reports the remuneration of each Director for the year ended 31 December 2011:

 

 

Salary and

fees

Other

Benefits(1)

Performance related payments(2)

LTIP

 

Total

2010

Paid

Deferred

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

 

Executive Directors

 

Ana Botín

1,702

52

926

1,388

-

4,068

-

 

José María Nus (appointed 17 March 2011)

1,103

19

249

249

-

1,620

-

 

Steve Pateman (appointed 1 June 2011)

405

-

373

560

-

1,338

-

 

Alison Brittain (resigned 22 March 2011)

660

-

-

-

-

660

1,175

 

Juan Colombas (resigned 1 December 2010)

-

-

-

-

-

-

638

 

Antonio Horta-Osoria (resigned 1 December 2010)

-

-

-

-

-

-

1,462

 

Antonia Lorenzo (resigned 1 December 2010)

-

-

-

-

-

-

536

 

Sub total

3,870

71

1,548

2,197

-

7,686

3,811

 

 

Chairman

 

Terence Burns

520

-

-

-

-

 520

520

 

Non-Executive Directors

 

Jane Barker (resigned 31 December 2011)

100

-

-

-

-

 100

100

 

Roy Brown

120

-

-

-

-

 120

120

 

José María Carballo

100

-

-

-

-

 100

100

 

José María Fuster

-

-

-

-

-

-

-

 

Juan Rodriguez Inciarte

-

-

-

-

-

-

-

 

Rosemary Thorne

131

-

-

-

-

 131

130

 

Keith Woodley (resigned 31 December 2011)

100

-

-

-

-

 100

100

 

Sub total

1,071

-

-

-

-

1,071

1,070

 

Total

4,941

71

1,548

2,197

-

8,757

4,881

 

(1) Other benefits comprise cash and non-cash benefits.

(2) In line with the FSA Remuneration Code, a proportion of the performance-related payment was deferred. Further details can be found in "FSA Remuneration Disclosures" and in Note 44 to the Consolidated Financial Statements.

 

These totals exclude emoluments received by Directors in respect of their primary duties as Directors or Officers of Banco Santander, S.A. in respect of which no apportionment has been made.

 

SANTANDER LONG-TERM INCENTIVE PLAN (audited)

 

In 2011, no Directors (2010: Alison Brittain) were granted a conditional award of shares in Banco Santander, S.A. under the LTIP (2010: £110,706 based on a share price of euro 5.57).

Under the LTIPs granted on 1 July 2010, 1 July 2009, 21 June 2008 and 31 December 2007, certain Executive Directors, Key Management Personnel (as defined in Note 44 to the Consolidated Financial Statements) and other nominated individuals were granted conditional awards of shares in Banco Santander, S.A.. The number of shares participants receive depends on the performance of Banco Santander, S.A. during this period. All awards under the LTIP depend on Santander's Total Shareholder Return performance against a competitor benchmark group. Awards made prior to 2009 also depend on Santander's Earnings Per Share performance against a competitor benchmark group. Further details can be found in Note 44 to the Consolidated Financial Statements.

From 1 July 2011, the eligibility criteria of the LTIP changed. Under the LTIP granted on 1 July 2011, only Key Management Personnel (as defined in Note 44) and other nominated individuals who were not classified as Code Staff under the FSA's Remuneration Code were granted conditional awards of shares in Banco Santander, S.A.. Instead, for Code Staff, an amount equivalent to the target value of the LTIP for 2010 was included within the cash bonus target level for 2011 and as such is subject to financial, non-financial and risk based performance measures and deferral as determined by the Code. This arrangement was devised in response to discussions between Banco Santander, S.A. and the Bank of Spain.

 

REMUNERATION OF HIGHEST PAID DIRECTOR (audited)

 

In 2011, the remuneration, excluding pension contributions, of the highest paid Director, was £4,067,594 (2010: £1,462,066) of which £2,313,819 (2010: £nil) was performance related. There was no accrued pension benefit for the highest paid Director (2010: £nil), other than that accrued by, or treated to be accrued by a Spanish subsidiary of Banco Santander, S.A.. No conditional award of shares was made to the highest paid Director under the Long-Term Incentive Plan during 2011.

 

RETIREMENT BENEFITS (audited)

 

Defined benefit pension schemes are provided to certain of the Group's employees. See Note 37 to the Consolidated Financial Statements for a description of the schemes and the related costs and obligations. No retirement benefits are accruing for any directors under a defined benefit scheme (2010: nil) in respect of their qualifying services to the Group.

 

NON-EXECUTIVE DIRECTORS (audited)

 

Fees were paid to Non-Executive Directors in 2011 totalling £550,555 (2010: £550,360); this amount is included above in the table of Directors' remuneration.

 

DIRECTORS' INTERESTS AND RELATED PARTY TRANSACTIONS (audited)

 

In 2011, loans were made to three Directors (2010: no Directors), with a principal amount of £32,976 outstanding at 31 December 2011 (2010: £nil). In 2011, loans were made to seven members of the Group's Key Management Personnel (2010: three), with a principal amount of £3,855,781 outstanding at 31 December 2011 (2010: £677,823).

See Notes 43 and 44 to the Consolidated Financial Statements for disclosures of deposits and investments made and insurance policies entered into by the Directors, Key Management Personnel and their connected persons with the Group at 31 December 2011. Note 44 to the Consolidated Financial Statements also includes details of other related party transactions.

In 2011 and 2010, there were no other transactions, arrangements or agreements with the Group in which Directors or Key Management Personnel or persons connected with them had a material interest. No Director had a material interest in any contract of significance other than a service contract with the Group at any time during the year (2010: no Director).

No Director held any interest in the shares of any company within the Group at any time during the year (2010: no Director) and no Director exercised or was granted any rights to subscribe for shares in any company within the Group (2010: no Director). During 2011, no Directors exercised share options over shares in Banco Santander, S.A., the parent company of the Company (2010: no Director).

The Group engaged in certain transactions with its parent company, Banco Santander, S.A., and certain of its subsidiaries in the ordinary course of business. These transactions were made substantially on the same terms as for comparable transactions with third party counterparties. For a full description of these transactions in 2011, 2010 and 2009, see Note 44 to the Consolidated Financial Statements.

 

OTHER REMUNERATION DISCLOSURES (audited)

 

The remuneration of the eight highest paid senior executive officers is detailed below. Senior executive officers are defined as members of the Company's Executive Committee (excluding Executive Directors).

 

Individuals

1

2

3

4

5

6

7

8

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Fixed remuneration (including any non-cash and taxable benefits)

633

721

802

399

678

638

560

378

Variable remuneration (cash - paid)

331

297

176

250

190

166

181

286

Variable remuneration (cash - deferred)

497

198

117

375

127

111

121

190

2011 Remuneration

1,461

1,216

1,095

1,024

995

915

862

854

Sign-on award

-

-

-

-

-

-

-

-

Severance award

-

-

-

-

-

-

-

-

 

No members of the Company's Executive Committee were granted conditional awards of shares in Banco Santander, S.A..

 

THIRD PARTY INDEMNITIES

 

Enhanced indemnities are provided to the Directors of the Company, its subsidiaries and associated companies by Santander UK plc against liabilities and associated costs which they could incur in the course of their duties to the Company. All of the indemnities remain in force at the date of this Annual Report and Accounts. A copy of each of the indemnities is kept at the registered address shown on page 292.

 

FINANCIAL INSTRUMENTS

 

The financial risk management objectives and policies of the Group; the policy for hedging each major type of forecasted transaction for which hedge accounting is used; and the exposure of the Group to credit risk, market risk, and funding and liquidity risk are outlined in the Risk Management Report on pages 62 to 135.

 

PENSION SCHEMES

 

The assets of the pension schemes are held separately from those of the Group and are under the control of trustees.

Three of the Group's pension schemes have a common corporate trustee which, at 31 December 2011, had nine directors, comprising six Group-appointed directors (one of whom is an independent trustee director) and three member-elected directors. The National & Provincial Building Society Pension Fund has a different corporate trustee, the Board of which at 31 December 2011 comprised three Group-appointed directors (one of whom is an independent trustee director), and three member-elected directors. The above four pension schemes were, at 31 December 2011, invested in a Common Investment Fund which has a corporate trustee, comprising four Group-appointed directors and two scheme trustee-appointed directors.

At 31 December 2011 the Scottish Mutual Assurance plc Staff Pension Scheme had six trustees, of whom four are selected by the Group (two of whom are members and one of whom is an independent trustee) and two are elected by eligible members. In the case of the Scottish Provident Institution Staff Pension Fund, at 31 December 2011, there were eight trustees, of whom five (one of whom is a member and one of whom is an independent trustee) are selected by the Group and the remaining three are elected by eligible members.

 At 31 December 2011 the Alliance & Leicester Pension Scheme had eight trustees, of whom four are selected by the Group (one of whom is an independent trustee) and four are elected by eligible members.

Asset management of the schemes is delegated to a number of fund managers and the trustees receive independent professional advice on the performance of the managers. Legal advice to the trustees of the various schemes is provided by external firms of solicitors. The audits of the pension schemes are separate from that of the Group. The audits of the Amalgamated, Associated Bodies, Group and The National & Provincial Building Society Pension schemes are undertaken by Grant Thornton UK LLP. The audits of the Scottish Mutual Assurance plc Staff Pension Scheme, the Scottish Provident Institution Staff Pension Fund and the Alliance & Leicester Pension Scheme are undertaken by KPMG LLP.

In 2010, the Group and the trustees agreed a scheme-specific funding target, statement of funding principles, and a schedule of contributions for the principal pension schemes. This agreement forms the basis of the Group's commitment that the schemes have sufficient assets to make payments to members in respect of their accrued benefits as and when they fall due. Further information is provided in Note 37 to the Consolidated Financial Statements.

 

MARKET VALUE OF LAND AND BUILDINGS

 

On the basis of a periodic review process, the estimated aggregate market value of the Group's land and buildings was not significantly different from the fixed asset net book value of £957m (2010: £941m), as disclosed in Note 26 to the Consolidated Financial Statements. It is considered that, except where impairment losses have been recognised, the Group's land and buildings have a value in use that exceeds the estimated market value, and the net book value is not impaired.

 

DISABILITY

 

The Group is committed to equality of access and quality of service for disabled people and embraces the spirit of the UK Equality Act 2010 throughout its business operations. The Group has processes in place to help train, develop, retain and promote employees with disabilities. It is committed to giving full and fair consideration to applications for employment made by disabled persons, and for continuing the employment of employees who have become disabled by arranging appropriate training and making reasonable adjustments within the workplace.

 

GENDER DIVERSITY

 

Lord Davies' report, "Women on Boards", was published in 2011 and set an aspirational target of 25% female representation on Boards of FTSE 100 companies by 2015.

The Company strives to adhere to best practice and at 31 December 2011 (prior to the retirement of Jane Barker and Keith Woodley), 27% of the Board was female. At the date of this Directors' Report, 20% of the Board is female. This demonstrates the Company's commitment to ensuring that its Board of directors is sufficiently well balanced in terms of skill, experience and diversity, to run the Company successfully.

 

EMPLOYEE INVOLVEMENT

 

Employee share ownership

The Group currently operates three share schemes for eligible employees, which include the Sharesave Scheme, the Share Incentive Plan ('SIP'), which includes Free and Partnership shares, and the Long-Term Incentive Plan. In addition, arrangements remain outstanding under the closed Executive Share Option scheme and the closed Alliance & Leicester Share Incentive Plan. All the share options and awards relate to shares in Banco Santander, S.A.. See Note 42 to the Consolidated Financial Statements for a description of the plans and the related costs and obligations.

 

Communication

The Group wants to involve and inform employees on matters that affect them. The intranet is a focal point for communications with daily updates on what is happening across the Group, an online question and answer site and 'The Village' - a site for staff to share information, ideas and best practice. The Group also uses face-to-face communication, such as team meetings, regional roadshows and annual staff conventions for strategic updates, as well as a quarterly online and print staff magazine with in-depth business features. All these channels are designed to keep employees fully informed of news and developments which may have an impact on them, and also to keep them up to date on financial, economic and other factors which affect the Group's performance. The Group considers employees' opinions and asks for their views on a range of issues through regular company-wide surveys.

 

Consultation

The Group has a long history of trade union recognition governed by a partnership agreement with Advance, the independent trade union that it recognises to act as the voice of Santander UK employees. Within the former Alliance & Leicester parts of the business, the Group also works closely with its recognised independent trade union, the Communication Workers Union ('CWU'). Advance and CWU are affiliated to the Trades Union Congress. The Group consults senior trade union officials on significant proposals within the business at both national and local levels. The Group holds regular Joint Consultative and Negotiating Committee meetings to enable collaborative working and ensure that communication is open and two-way.

 

DONATIONS

 

Santander UK made total cash charitable donations during the year of £6,928,535 (2010: £5,030,907). This included cash donations of £2,194,099 (2010: £2,492,200) made by the Santander UK Foundation Limited (the 'Foundation') which supported disadvantaged people throughout the UK through the charitable priorities: education and financial capability. In addition, 1,656 staff donations to charities amounting to £1,844,000 (2010: £1,590,979) were matched during the year under the Staff Matched Donation Scheme through this Foundation. Other cash donations included further educational and enterprise charities of £1,951,462 (2010: £1,057,452), the British Heart Foundation of £225,472 (2010: £117,500) and Great Ormond Street Hospital of £80,000 (2010: £80,000).

In addition to its charitable donations, Santander UK made total cash contributions towards community projects during the year of £6,156,922 (2010:£4,462,192).

 

POLITICAL CONTRIBUTIONS

 

No contributions (2010: none) were made for political purposes and no political expenditure was incurred.

 

SUPPLIERS

 

The Group has a Cost Management & Procurement Policy and process that is enforced across all significant purchases from suppliers to provide a consistent approach. Checks are made that our suppliers act in an ethical and responsible way, as part of the supplier selection process and by requiring suppliers to adhere to the Group's Corporate Social Responsibility Protocol, unless it is not relevant to the type of work being undertaken. The protocol covers human rights, labour standards, environment and anti-corruption, in line with the principles in the UN Global Compact.

 

Policy and Practice on Payment of Creditors

It is the Group's policy to make payments in accordance with the terms and conditions agreed, except where the supplier fails to comply with those terms and conditions. The Group's practice on payment of creditors has been quantified under the terms of Schedule 7 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. Based on the ratio of the aggregate amounts owed to trade creditors at the end of the year to the aggregate amounts invoiced by suppliers during the year at 31 December 2011, trade creditor days for the Group were 28 days (2010: 27 days).

 

CODE OF CONDUCT

 

The Group is committed to maintaining high ethical standards - adhering to laws and regulations, conducting business in a responsible way and treating all stakeholders with honesty and integrity. These principles are further reflected in Banco Santander, S.A.'s General Code of Conduct applicable to the Group.

Under their terms and conditions of employment, staff are required to act at all times with the highest standards of business conduct in order to protect the Group's reputation and ensure a company culture which is free from any risk of corruption, compromise or conflicts of interest. Staff are also required to comply with all Company policies, including the recently-implemented Anti-Bribery and Corruption Policy.

These terms and conditions require that employees must:

 

Abide by all relevant laws and regulations;

Act with integrity in all their business actions on the Group's behalf;

Not use their authority or office for personal gain;

Conduct business relationships in a transparent manner; and

Reject all improper practices or dealings they may be exposed to.

 

The SEC requires companies to disclose whether they have a code of ethics that applies to the Chief Executive Officer and senior financial officers that promotes honest and ethical conduct, full, fair, accurate, timely and understandable disclosures, compliance with applicable governmental laws, rules and regulations, prompt internal reporting violations and accountability for adherence to such a code of ethics. The Group meets these requirements through the Banco Santander, S.A. General Code of Conduct, the Anti-Bribery and Corruption Policy, the Whistleblowing Policy, the FSA's Principles for Business, and the FSA's Principles and Code of Practice for Approved Persons, with which the Chief Executive Officer and senior financial officers must comply. These include requirements to manage conflicts of interest appropriately and to disclose any information the FSA may want to know about. The Group provides a copy of these documents to anyone, free of charge, on application to the address on page 292.

 

SUPERVISION AND REGULATION

 

As a firm authorised by the FSA, the Company is subject to UK financial services laws and regulations, which are discussed below. Recent significant regulatory developments which will affect the Group are also highlighted below.

 

UK

In the UK, the FSA is the single independent regulator for the regulation of deposit taking, investment business, mortgages and insurance. The FSA was set up by the government and exercises statutory powers under the Financial Services and Markets Act 2000 ('FSMA'). The Company, together with several of its subsidiaries, is authorised by the FSA to carry on a range of regulated activities in the UK, which include mortgages, banking, insurance and investment business. The FSA must adhere to four regulatory objectives, as prescribed in FSMA, which set out the parameters of regulation: market confidence; public awareness; the protection of consumers; and the reduction of financial crime. Based on these regulatory objectives, the FSA has formulated an extensive handbook of rules and guidance to which authorised firms are subject.

Banks, insurance companies and other financial institutions in the UK are subject to the UK Financial Services Compensation Scheme (the 'FSCS'). The FSCS covers claims made against authorised firms (or any participating EEA firms) where they are unable, or likely to be unable, to pay claims against them. In relation to both investments and mortgage advice and arranging, the FSCS provides cover for 100% of the first £50,000 of a claim, with £50,000 being the maximum amount payable per customer. In relation to deposits the FSCS provides cover for 100% of the first £85,000 of a claim, with £85,000 being the maximum amount payable per customer. The FSCS also extends (up to various amounts) to certain long-term and general insurance contracts, including general insurance advice and arranging.

The UK Government has announced a new regulatory framework which will take effect in 2012. The FSA will be replaced by two regulatory bodies, the Prudential Regulatory Authority ('PRA'), which will have responsibility for the capital and liquidity of banks and insurance companies, and the Financial Conduct Authority ('FCA'), which will supervise conduct of business and maintain orderly financial markets for consumers. The FSA began transition to the new structure on 4 April 2011.

 

European Union

The Group is directly affected by laws emanating from the European Union, primarily through directives that must be implemented by the UK as a Member State of the European Union.

 Basel II

Basel II is a supervisory framework for the risk and capital management of banks and is structured around three pillars. Pillar 1 specifies minimum capital requirements for banks and new methodologies for calculating risk weighted assets. Pillar 2 describes the supervisory review process and outlines the ICAAP required by banks applying Pillar 1 methodologies. Pillar 3 requires disclosure of risk and capital information. The Group's capital and risk management disclosures are set out in Note 48 to the Consolidated Financial Statements.

In the European Union, Basel II was implemented by the Capital Requirements Directive ('CRD') with effect from 1 January 2007. In the UK, the FSA implemented the CRD by including it in FSA rules. These new FSA rules took effect from 1 January 2007. Throughout 2011, the Group applied the Basel II framework to its capital calculations, its ICAAP and to its risk and capital disclosures to the market.

 

Liquidity

During 2009 Santander UK commenced a comprehensive programme of work to ensure compliance with the requirements of the FSA's new liquidity regime as laid out in PS09/16. As part of this, during 2011 Santander UK completed an Individual Liquidity Adequacy Assessment as part of the FSA's Supervisory Liquidity Review Process. This includes an assessment of liquidity requirements using the FSA prescribed stresses. The sources of liquidity risk that are currently analysed within the liquidity risk and control framework are covered by the FSA stresses.

 

Other Changes to Capital Adequacy and Liquidity Arrangements

A number of consultations are currently underway on proposals to change regulatory capital requirements in both a UK and international context. These include proposals from the Basel Committee on Banking Supervision, (commonly referred to as Basel III as described below) in respect of capital and liquidity as well as the proposition for recovery and resolution plans in the UK. Taken in aggregate, there is a potential for these reforms to have a significant effect. The Group is currently engaged in the assessment of their possible impact and any response that could be required.

 

Other Regulatory Developments

(i) Independent Commission on Banking ('ICB')

In June 2010, the UK Chancellor of the Exchequer announced the creation of the ICB. The ICB was asked to consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition, as well as conducting a review of a proposal to separate retail and investment banking (the 'retail ring fence'). The ICB published its final report in September 2011 which included a proposed retail ring fence (under which the UK and EEA retail banking activities of a UK bank or building society should be placed in a legally distinct, operationally separate and economically independent entity), increased capital requirements, a leverage requirement and improvements of competition and facilitation of easier account switching. In December 2011, the UK Government published their response to the ICB report, broadly endorsing the ICB recommendations and indicated that primary and secondary legislation relating to the proposed ring-fence will be completed by May 2015, with UK banks and building societies expected to be compliant as soon as practicable thereafter. The UK Government has indicated that it may modify the recommendations in the report and is proposing to undertake extensive consultation in two stages during 2012. The Group is currently engaged in the assessment of the possible impact of the ICB's recommendations and any response that could be required.

 

(ii) Basel III

Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to: (i) improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source (ii) improve risk management and governance, and (iii) strengthen banks' transparency and disclosures. The reforms target: (a) bank-level, or micro-prudential, regulation, with the aim of helping raise the resilience of individual banking institutions to periods of stress, and (b) macro-prudential, system-wide risks that can build up across the banking sector as well as the pro-cyclical amplification of these risks over time. These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system-wide shocks. The European Commission published its proposed legislation for the CRD and the Capital Requirements Regulation, which together form the CRD IV package, in July 2011. As well as reflecting the Basel III capital proposals, the CRD IV package also includes new proposals on sanctions for non-compliance with prudential rules, corporate governance and remuneration. These changes are due to be implemented beginning in January 2013. The Group is currently engaged in the assessment of the impact of the Basel III measures.

 

(iii) Other

There are a number of other regulatory developments going through a consultation and implementation process which may have some effect on the Group's business. These include the FSCS arrangements, consumer credit regulations, financial stability, and conduct of business arrangements such as those resulting from the Retail Distribution Review, and the Mortgage Market Review.

 

DISCLOSURE CONTROLS AND PROCEDURES

 

The Group has evaluated with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of the Group's disclosure controls and procedures as of 31 December 2011. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Based upon the Group's evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of 31 December 2011, the Group's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Group in the reports that the Group files and submits under the US Securities Exchange Act of 1934 is recorded, processed, summarised and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to the Group's management, including the Group's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

There has been no change in the Group's internal control over financial reporting during the Group's 2011 fiscal year that has materially affected, or is reasonably likely to materially affect the Group's internal controls over financial reporting.

 

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Internal control over financial reporting is a component of an overall system of internal control. The Group's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting, the preparation and fair presentation of financial statements for external purposes in accordance with International Financial Reporting Standards ('IFRS') as issued by the International Accounting Standards Board, and as endorsed by the European Union.

The Group's internal control over financial reporting includes:

 

Policies and procedures that relate to the maintenance of records that fairly and accurately reflect the transactions and disposition of assets.

Controls providing reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS, and that receipts and expenditures are being made only as authorised by management.

Controls providing reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.

Management is responsible for establishing and maintaining adequate internal control over the financial reporting of the Group. Management assessed the effectiveness of the Group's internal control over financial reporting as of 31 December 2011 based on the criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of 31 December 2011, the Group's internal control over financial reporting is effective.

 

RELEVANT AUDIT INFORMATION

 

Each of the Directors at the date of approval of this report confirms that:

 

So far as the Director is aware, there is no relevant audit information of which the Group's auditor is unaware; and

The Director has taken all steps that he/she ought to have taken as a Director to make himself/herself aware of any relevant audit information and to establish that the Group's auditors are aware of that information.

 

This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the UK Companies Act 2006.

 

BRITISH BANKERS' ASSOCIATION CODE FOR FINANCIAL REPORTING DISCLOSURE

 

In September 2010, the British Bankers' Association published a Code for Financial Reporting Disclosure. The Code sets out five disclosure principles together with supporting guidance. The principles are that UK banks will: provide high quality, meaningful and decision-useful disclosures; review and enhance their financial instrument disclosures for key areas of interest to market participants; assess the applicability and relevance of good practice recommendations to their disclosures acknowledging the importance of such guidance; seek to enhance the comparability of financial statement disclosures across the UK banking sector; and clearly differentiate in their annual reports between information that is audited and information that is unaudited.

The Group and other major UK banks voluntarily adopted the Code in their 2011 and 2010 financial statements. The Group's 2011 financial statements have therefore been prepared in compliance with the Code's principles.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The Directors are responsible for preparing the Annual Report and Accounts including the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. The Directors are required by the International Accounting Standards ('IAS') Regulation to prepare the group financial statements under IFRS, as adopted by the European Union, and have also elected to prepare the parent company financial statements in accordance with IFRS, as adopted by the European Union. The financial statements are also required by law to be properly prepared in accordance with the UK Companies Act 2006 and Article 4 of the IAS Regulation. In addition, in order to meet certain US requirements, the Directors are required to prepare the Group financial statements in accordance with IFRS, as issued by the International Accounting Standards Board.

The Directors acknowledge their responsibility to ensure the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss presented and that the management report, which is incorporated into this report, includes a fair review of the development and performance of the business and a description of the principal risks and uncertainties the business faces.

International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the preparation and presentation of financial statements'.

In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRS. However, the Directors are also required to:

 

Properly select and apply accounting policies;

Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

Provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

Make an assessment of the Company's ability to continue as a going concern.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the UK Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

AUDITOR

 

Deloitte LLP have expressed their willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the Company's forthcoming Annual General Meeting.

 

By Order of the Board

 

 

 

 

Karen M. Fortunato

Company Secretary

15 March 2012

2 Triton Square, Regent's Place, London NW1 3AN

 

Report of the Directors

 

FSA Remuneration Disclosures (audited)

 

 

The undernoted disclosures are prepared in accordance with the UK Financial Service Authority's handbook for banks, building societies and investment firms ("BIPRU") 11.5.18 (1) to (7). More detailed information on the Group's remuneration processes and policies is contained in the Directors' Report.

 

Role of the Remuneration Oversight Committee

 

The Santander UK Remuneration Oversight Committee (the "Committee") was established with effect from 1 January 2010. The Committee is primarily responsible for overseeing and supervising the Banco Santander, S.A. group's policies and frameworks covering remuneration and reward as applied in, or devolved to the UK. It provides governance and strategic input into the Company's executive and employee remuneration and reward activities.

The Committee operates according to formal terms of reference which are reviewed regularly in light of best practice and to take into account legal, regulatory and corporate governance developments. The Committee met formally seven times during 2011 (2010: three times).

 

Decision-making process for determining remuneration policy

 

Santander UK's remuneration policies are agreed locally by the Company's Executive Committee in conjunction with the Company's Central Reward team. Where such policies may have a material impact on the success of the business and/or require regulatory or compliance approval, decisions are then subject to formal approval by the Committee. For UK executive directors and first tier senior management, remuneration policies and practices are aligned to those of the Banco Santander, S.A. group generally.

Santander UK ensures that when determining remuneration policies and practices, the Company's risk appetite is taken into account as well as the economic capital consumption involved in order to generate sustainable target profits.

 

Composition of the Remuneration Oversight Committee

 

The members of the Committee throughout 2011 and 2010 were Roy Brown (Chairman), Jane Barker, José María Carballo, Rosemary Thorne and Keith Woodley. Jane Barker and Keith Woodley resigned on 31 December 2011. The members of the Remuneration Oversight Committee are all non-executive directors and considered by the Company to be independent and free from any business or other relationship that could materially affect the independence of their judgement.

 

External Consultants

 

Throughout 2011 and 2010, the Committee's work was not supported by any retained independent professional advice. In January 2012, PricewaterhouseCoopers LLP were appointed to provide independent professional advice to the Committee.

 

The Role of the Relevant Stakeholders

 

The Chairman, the Company Secretary, the Chief Risk Officer, the Human Resources Director and the Director of Compliance also advise the Committee. No Company employee is permitted to participate in the discussions or decisions of the Committee relating to his or her own remuneration.

 

Code Staff Criteria

 

The following groups of employees have been identified as meeting the FSA's criteria for Code Staff subject to the mandatory requirements of the FSA Remuneration Code. Code Staff broadly includes the following groups of employees:

 

members of the Company's Executive Committee (which includes the Company's Executive Directors);

senior managers of significant divisions and control functions such as legal, audit and risk;

other senior managers reporting to the Board and heads of major divisions;

employees whose total remuneration takes them into the same bracket as senior executives; and

risk takers, whose professional activities may have a material impact on the firm's risk profile.

 

The categories above include all senior level management across the Company as well as those responsible for the management of the main businesses and control function heads.

 

Link between pay and performance

 

Remuneration at Santander UK is made up of fixed and variable pay designed to reward performance. Performance related pay is designed to reflect actual achievement against the range of targets which are set for our employees, taking into account the context in which results were achieved. The Company operates a range of incentive structures, focussed to each particular business area, which are designed to reinforce each area's strategic objectives and how that links to what its employees are being asked to deliver and to reward increasing performance. There is a clear focus on achieving successful performance so that, individually and by business area, the best performers and the best performance will continue to be the best rewarded.

The key objective in determining bonus awards is to incentivise and motivate the desired performance whilst ensuring pay is justified given business and individual performance, which includes financial and non financial measures, risk performance and any other relevant factors. Dependent upon the nature of an individual's role, the size and weighting of the various elements may differ to ensure that the overall package is competitive, relevant and performance enhancing. However, overall, the remuneration package for each of our employees is designed to reflect market practice for their role.

Under the Banco Santander, S.A. group's deferral arrangements, a significant proportion of annual incentive awards for the more senior employees is deferred over a three year period. The purpose of deferred awards is to support a performance culture where employees recognise the importance of sustainable Group, Company, business and individual performance.

The Banco Santander, S.A. group's long-term incentive scheme, in which senior Company executives and employees not classified as Code Staff participate, is designed to link reward with the long-term success of the Banco Santander, S.A. group and recognise the responsibility participants have in driving its future success and delivering value for shareholders. Long-term incentive awards are conditional on the satisfaction of corporate performance measures.

 

Design and Structure of Remuneration

 

Santander UK remuneration policies are designed to encourage a high-performance culture where people are rewarded and recognised for their performance and ability, and the impact they have on the Company's success.

The individual elements of employees' remuneration packages comprise fixed pay (base salary, retirement and other benefits) and performance-related pay (consisting of annual incentives, deferred awards and long-term incentives). The size and weighting of the various reward elements will differ, dependent upon the nature of an individual's role, to ensure that the package is competitive, relevant and performance enhancing. Taking into account the expected value of long-term incentives, or bonus deferred in to shares as applicable, the performance-related elements of the package make up an appropriate and considerable proportion of the total remuneration of the Company's senior executives and senior employees, while maintaining an appropriate balance between fixed and variable elements.

Reward processes are underpinned by a robust performance management system which drives appropriate behaviours. The key aspects of the remuneration components are set out below:

 

a) Base Salary

 

Base salaries are set around market median levels, and with reference to the specific market for the business in which an individual works and the skills and competencies that the individual brings to their business area. The level of fixed pay aims to be sufficient so that inappropriate risk-taking is not encouraged.

 

b) Annual Bonus

 

Santander UK's policy in respect of short-term incentives is to reward good financial and non-financial performance, which supports the Company and relevant business area's business strategy, and takes into account the Company's risk appetite and personal contribution in a clear and transparent way. Specific and measurable targets are set at the beginning of the year and communicated to employees.

Robust design principles have been established, alongside strict governance procedures to that ensure that all existing and future annual bonus schemes support Santander UK's business strategy and risk appetite.

 

c) Long-term Incentives

 

Banco Santander, S.A. operates a Long-Term Incentive Plan ("LTIP") for its senior executives and other nominated employees not classified as Code Staff across the Banco Santander, S.A. group including participants from the Group. The LTIP is designed to reinforce the alignment of the Group's employees in achieving the common objectives of the Banco Santander, S.A. group, the creation of value over the long term and to align the reward of participants with the return to shareholders. The Banco Santander, S.A. group has in recent years introduced an annual cycle to the grant of conditional LTIP awards and, subject to shareholder approval, plans to continue that practice in future years. The performance measures and rules of the plan are reviewed on an annual basis and approved at Banco Santander, S.A.'s Annual General Meeting.

 

Participants in each annual cycle of the LTIP are granted conditional awards of shares in Banco Santander, S.A. against performance over a three year period. The number of unconditional shares a participant actually receives depends on the performance of Banco Santander, S.A. against the performance criteria measured after the completion of the performance period.

All unconditional awards under the LTIP vesting and actually transferred to participants in 2011 and 2010 were dependent on Banco Santander S.A.'s Total Shareholder Return and the growth of Earnings per Share performance against a competitor benchmark group. All conditional awards granted to participants in 2011 (for the performance period 1 January 2011 to 31 December 2013) and 2010 (for the performance period 1 January 2010 to 31 December 2012) depend on Banco Santander, S.A.'s Total Shareholder Return performance against a competitor benchmark group. Specific details of the conditional awards made in 2011 and 2010 to certain participants in the Company can be found in Note 44 to the Consolidated Financial Statements.

 

d) Deferral and vesting

 

To ensure the interests of the Company and its employees are aligned with those of the shareholders of Banco Santander, S.A., and the Company's approach to risk management supports the interests of all stakeholders, the vesting of deferred annual bonus awards and long-term incentive awards is subject to continued employment (which may be terminated in the event of gross or serious misconduct) and, in the case of deferred bonus awards, subject to the Company's rules on performance adjustment and claw-back.

Santander UK ensures that it is compliant in its mandatory deferral requirements for its Code Staff and the amount of bonus to be deferred is based on the total variable pay received. The FSA Remuneration Code prescribes that at least 40% of variable pay must be made over a period of at least three years and, for staff earning more than £500,000 in variable remuneration, at least 60% of a bonus must be deferred over the same period. Santander UK meets these requirements.

Following a review of the approach to deferral of bonus awards, it is proposed that all UK bonus awards will be subject to deferral principles that have been set at Banco Santander, S.A. group level. Such principles, as applied to the Company, are subject to ratification by the Committee and can be overridden by UK national requirements to meet any criteria set by the FSA or other regulator/law. However, the general deferral principles are as follows:

 

a proportion of an individual's bonus (on a sliding scale) will become subject to deferral if the bonus exceeds certain levels depending on the nature of the role;

any deferred amount will be issued in shares over a three year period (in three equal deferral tranches); and

deferrals are subject to continued employment with the Banco Santander, S.A. group in the UK and on the condition that none of the prescribed circumstances of forfeiture occur.

 

Following implementation of this approach, Santander UK will continue to ensure that the requirements of the FSA Remuneration Code are met for its employees and particularly for Code Staff.

Santander UK will prevent vesting of all or part of the amount of deferred remuneration in any of the following circumstances:

 

evidence of employee misbehaviour or material error;

material downturn in the Company or relevant business unit's performance; or

the Company or relevant business unit suffers a material failure of risk management.

 

In such circumstances, the Committee will have discretion to determine the amount of deferred remuneration that will not vest or extinguish an award altogether, following recommendations from Banco Santander, S.A.'s Committee for Evaluation of Risk & Remuneration.

 

e) Allocation into shares

 

The FSA Remuneration Code requires at least 50% of variable remuneration of Code Staff to be paid in shares or other specific instruments. This requirement applies to both deferred and non-deferred variable remuneration, such that no more than 30% of total remuneration, or 20% of variable remuneration, can be awarded up front in cash.

From 2011, Santander UK complied in full with the FSA Remuneration Code requirements in this regard for its Code Staff and pays the non deferred element of annual bonus as 50% in cash and 50% in shares or share-linked instruments, the necessary approvals from shareholders having been obtained.

For annual bonus awards for the 2010 bonus year, the FSA made allowance for Santander UK to complete a special one-off arrangement to align with the strict requirements of the revised FSA Remuneration Code: for the non-deferred bonus element, 50% was paid in the first quarter of 2011, and the remainder was retained for six months and paid in cash at the end of that period (i.e. in the third quarter of 2011). This was due to the timing of the introduction on the revised FSA Remuneration Code and the Articles of Association of Banco Santander, S.A. reserving the power to award shares by way of remuneration to the shareholders of Banco Santander, S.A. in general meeting.

 

f) Risk adjustments

 

Santander UK's remuneration policies are set to ensure the value and make up of remuneration scheme design is linked to the Company's risk appetite. For example, the allocation of an aggregate bonus pool for the Company's annual bonus awards is linked to the performance of the Company, measured against a balanced scorecard of performance metrics including in respect of its return on risk-adjusted capital. This measure encourages the Company to consider risks and therefore the economic capital consumption involved to generate profits and also ensures that inappropriate incentives are removed at a Company level.

Members of the Committee are also members of the Company's Board Audit Committee. In addition, the Company's Chief Risk Officer is an attendee at the Committee's meetings and it is supported by the Company's Risk Function as required. This framework ensures the Committee is engaged with the risk management of the business and is provided with risk information on an ongoing basis.

 

Quantitative Remuneration Disclosure

 

The Company is required to disclose aggregate quantitative remuneration information for its Code Staff in the years ended 31 December 2011 and 2010. At 31 December 2011, there were 22 Code Staff (2010: 14) who have been identified as Key Management Personnel and 33 other Code Staff (2010: 28).

 

Aggregate Remuneration Expenditure

 

Aggregate remuneration is made up of total fixed and variable remuneration awarded in respect of the 2011 and 2010 performance years as follows.

 

Business Area

2011

£'000

2010

£'000

Markets

5,240

7,929

Other

32,742

22,557

 

Amounts and form of fixed and variable remuneration

 

a) Fixed remuneration

 

Total fixed remuneration paid in 2011 and 2010 included all benefits and allowances, including pensions contributions by employer, pension cash allowance, housing and energy allowances, car allowances and miscellaneous benefits (net) was as follows.

 

2011

£'000

2010

£'000

Key Management Personnel

11,805

7,185

Other Code Staff

8,206

5,193

 

b) Variable remuneration

 

Variable remuneration payable in respect of 2011 and 2010 performance consisted of cash bonuses, share awards, long-term incentives and other discretionary one-off awards was as follows.

 

Variable remuneration awarded in respect of 2011 performance year

Key Management Personnel £'000

Other Code Staff £'000

Variable remuneration:

- Bonus in cash

5,094

4,023

- Bonus in shares(1)

5,094

3,756

- Long-term incentives in shares(2)

-

-

Total variable remuneration

10,188

7,779

Deferred remuneration:

Amount deferred in cash

2,533

1,937

Amount deferred in shares(3)

2,533

1,938

Total deferred remuneration

5,066

3,875

(1) Value of bonus in shares awarded for performance in 2011, based on share price at award.

(2) Value of long-term incentive shares awarded for performance in 2011, based on share price at grant.

(3) Value of bonus in deferred shares for performance in 2010, and long-term incentive shares for performance in 2011.

 

Variable remuneration awarded in respect of 2010 performance year

Key Management Personnel £'000

Other Code Staff £'000

Variable remuneration:

- Bonus in cash

3,465

8,612

- Bonus in shares(1)

308

2,354

- Long-term incentives in shares(2)

1,879

1,490

Total variable remuneration

5,652

12,456

Deferred remuneration:

Amount deferred in cash

828

2,898

Amount deferred in shares(3)

2,187

3,844

Total deferred remuneration

3,015

6,742

(1) Value of bonus in shares awarded for performance in 2010, based on share price at award.

(2) Value of long-term incentive shares awarded for performance in 2010, based on share price at grant.

(3) Value of bonus in deferred shares for performance in 2010, and long-term incentive shares for performance in 2010.

 

c) Outstanding deferred remuneration

 

This refers to deferred remuneration awarded in respect of the 2011 and 2010 performance years, as well as that paid out during the year in respect of previous years deferrals and all unvested remuneration on 31 December 2011 and 31 December 2010. This includes deferred bonus awards and long-term incentive plans contingent on multi-year performance. Deferred remuneration reduced during the year relates to long-term incentives lapsing when performance conditions are not met or deferred awards being reduced due to claw-back.

 

2011 Category of Deferred Remuneration

Key Management Personnel

£'000

Other Code Staff

£'000

Awarded in year(1)

5,066

3,875

Paid out from prior years(2)

1,590

4,402

Amount by which payouts from prior years were reduced by performance adjustments(3)

220

144

Unvested at year end(4)

5,162

9,441

(1) Value of deferred and long-term incentive shares granted in 2011, based on share price at award/grant, plus deferred cash from 2011 bonus

(2) Value of long-term incentive shares that vested in 2011, based on share price at vesting, plus deferred cash from 2008 bonus paid in 2011

(3) Value of long-term incentive shares or deferred cash delivered in 2011 that have either lapsed or been reduced as a result of performance conditions not being satisfied or claw back policy

(4) Value of both deferred and long-term incentive shares unvested at December 2011, based on a share price at 31 December 2011, plus deferred cash outstanding from previous bonuses. Does not include remuneration awarded in respect of 2011 performance.

 

2010 Category of Deferred Remuneration

Key Management Personnel

£'000

Other Code Staff

£'000

Awarded in year(1)

3,015

6,742

Paid out from prior years(2)

2,195

2,620

Amount by which payouts from prior years were reduced by performance adjustments(3)

215

101

Unvested at year end(4)

6,898

8,580

(1) Value of deferred and long-term incentive shares granted in 2010, based on share price at award/grant, plus deferred cash from 2010 bonus

(2) Value of long-term incentive shares that vested in 2010, based on share price at vesting, plus deferred cash from 2007 bonus paid in 2010

(3) Value of long-term incentive shares or deferred cash delivered in 2010 that have either lapsed or been reduced as a result of performance conditions not being satisfied or claw back policy

(4) Value of both deferred and long-term incentive shares unvested at December 2010, based on a share price at 31 December 2010, plus deferred cash outstanding from previous bonuses. Does not include remuneration awarded in respect of 2010 performance.

 

d) Sign-on and severance payments

 

No sign-on payments were made to Code Staff during the year, severance payments of £746,111 were made to Code Staff during the year (2010: no payments).

 

By Order of the Remuneration Oversight Committee

 

 

 

 

Roy Brown

Chairman

15 March 2012

2 Triton Square, Regent's Place, London NW1 3AN

 

Financial Statements

 

Contents to Financial Statements

   

Financial Statements

158

Independent Auditor's Report to the Members of Santander UK plc - UK opinion

160

Consolidated Income Statement for the years ended 31 December 2011, 2010 and 2009

160

Consolidated Statement of Comprehensive Income for the years ended 31 December 2011, 2010 and 2009

161

Consolidated Balance Sheet at 31 December 2011 and 2010

162

Consolidated Statement of Changes in Equity for the years ended 31 December 2011, 2010 and 2009

163

Consolidated Cash Flow Statement for the years ended 31 December 2011, 2010 and 2009

164

Company Balance Sheet at 31 December 2011 and 2010

165

Company Statement of Comprehensive Income for the years ended 31 December 2011, 2010 and 2009

165

Company Statement of Changes in Equity for the years ended 31 December 2011, 2010 and 2009

166

Company Cash Flow Statement for the years ended 31 December 2011, 2010 and 2009

167

Notes to the Financial Statements

 

Financial Statements

 

Auditor's Report

 

 

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF SANTANDER UK PLC

 

We have audited the financial statements of Santander UK plc (the "Company" and together with its subsidiaries the "Group") for the year ended 31 December 2011 which comprise the Consolidated Income Statement, the Consolidated and Company Statement of Comprehensive Income, the Consolidated and Company Balance Sheets, the Consolidated and Company Cash Flow Statements, the Consolidated and Company Statements of Changes in Equity, the related Notes 1 to 50, the audited information in the Risk Management report in the Business and Financial Review (pages 62 to 135) and the information in the Balance Sheet Business Review marked audited (pages 43 to 48). The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards ("IFRSs") as adopted by the European Union and, as regards the Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

 

Respective responsibilities of directors and auditor

As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

 

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's and the Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

 

Opinion on financial statements

In our opinion:

the financial statements give a true and fair view of the state of the Group's and of the Company's affairs as at 31 December 2011 and of the group's profit for the year then ended;

the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union (the "EU");

the Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and

the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements Article 4 of the IAS Regulation.

 

Separate opinion in relation to IFRSs as issued by the IASB

As explained in Note 1 to the group financial statements, the group in addition to applying IFRSs as adopted by the EU, has also applied IFRSs as issued by the International Accounting Standards Board ("IASB"). In our opinion the Group financial statements comply with IFRSs as issued by the IASB.

 

Opinion on other matter prescribed by the Companies Act 2006

In our opinion the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

 

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or

the Company financial statements are not in agreement with the accounting records and returns; or

certain disclosures of directors' remuneration specified by law are not made; or

we have not received all the information and explanations we require for our audit.

 

 

Caroline Britton (Senior statutory auditor)

for and on behalf of Deloitte LLP

Chartered Accountants and Statutory Auditor

London, United Kingdom

15 March 2012

 

This page is intentionally left blank

 

Financial Statements

 Primary Financial Statements

 

CONSOLIDATED INCOME STATEMENT

 

For the years ended 31 December 2011, 2010 and 2009

 

 

 

 

Notes

2011

£m

2010

£m

2009

£m

Interest and similar income

3

7,618

7,047

7,318

Interest expense and similar charges

3

(3,788)

(3,233)

(3,906)

Net interest income

3,830

3,814

3,412

Fee and commission income

4

1,138

902

986

Fee and commission expense

4

(220)

(203)

(162)

Net fee and commission income

918

699

824

Net trading and other income

5

437

521

460

Total operating income

5,185

5,034

4,696

Administration expenses

6

(1,995)

(1,793)

(1,848)

Depreciation, amortisation and impairment

7

(447)

(275)

(260)

Total operating expenses excluding provisions and charges

(2,442)

(2,068)

(2,108)

Impairment losses on loans and advances

9

(565)

(712)

(842)

Provisions for other liabilities and charges

9

(917)

(129)

(56)

Total operating provisions and charges

(1,482)

(841)

(898)

Profit before tax

1,261

2,125

1,690

Taxation charge

10

(358)

(542)

(445)

Profit for the year

903

1,583

1,245

Attributable to:

Equity holders of the parent

903

1,544

1,190

Non-controlling interest

-

39

55

 

All profits during the year were generated from continuing operations.

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

For the years ended 31 December 2011, 2010 and 2009

 

 

 

Notes

2011

£m

2010

£m

2009

£m

Profit for the year

903

1,583

1,245

Other comprehensive (expense)/income:

Actuarial (losses)/gains on retirement benefit obligations

37

(37)

25

(606)

Losses on available-for-sale securities

22

(3)

(1)

(6)

Exchange differences on translation of foreign operations

-

-

(4)

Tax on above items

10

11

(9)

171

Net (loss)/gain recognised directly in equity

(29)

15

(445)

Gains on available-for-sale securities transferred to profit or loss on sale

-

(2)

(2)

Tax on items transferred to profit or loss

10

-

1

1

Net transfers to profit

-

(1)

(1)

Total other comprehensive (expense)/income for the year before tax

(40)

22

(618)

Tax relating to components of other comprehensive (expense)/income

10

11

(8)

172

Total comprehensive income for the year

874

1,597

799

Attributable to:

Equity holders of the parent

874

1,558

 

744

Non-controlling interest

-

39

55

 

The accompanying Notes on pages 167 to 274 and the audited sections of the Risk Management Report on pages 62 to 135 and the information in the Balance Sheet Business Review marked audited (pages 44 to 48) form an integral part of these Consolidated Financial Statements.

 

CONSOLIDATED BALANCE SHEET

 

At 31 December 2011 and 2010

 

 

 

 

Notes

2011

£m

2010

£m

Assets

Cash and balances at central banks

12

25,980

26,502

Trading assets

14

21,891

35,461

Derivative financial instruments

15

30,780

24,377

Financial assets designated at fair value

16

5,005

6,777

Loans and advances to banks

17

4,487

3,852

Loans and advances to customers

18

201,069

195,132

Available-for-sale securities

22

46

175

Loans and receivables securities

23

1,771

3,610

Macro hedge of interest rate risk

1,221

1,091

Intangible assets

25

2,142

2,178

Property, plant and equipment

26

1,596

1,705

Current tax assets

-

277

Deferred tax assets

27

257

566

Retirement benefit assets

37

241

-

Other assets

28

1,088

1,157

Total assets

297,574

302,860

Liabilities

Deposits by banks

29

11,626

7,784

Deposits by customers

30

148,342

152,643

Derivative financial instruments

15

29,180

22,405

Trading liabilities

31

25,745

42,827

Financial liabilities designated at fair value

32

6,837

3,687

Debt securities in issue

33

52,651

51,783

Subordinated liabilities

34

6,499

6,372

Other liabilities

35

2,571

2,026

Provisions

36

970

185

Current tax liabilities

271

492

Deferred tax liabilities

27

-

209

Retirement benefit obligations

37

216

173

Total liabilities

284,908

290,586

Equity

Share capital and other equity instruments

39

3,999

3,999

Share premium

39

5,620

5,620

Retained earnings

3,021

2,628

Other reserves

26

27

Total shareholders' equity

12,666

12,274

Total liabilities and equity

297,574

302,860

 

The accompanying Notes on pages 167 to 274 and the audited sections of the Risk Management Report on pages 62 to 135 and the information in the Balance Sheet Business Review marked audited (pages 44 to 48) form an integral part of these Consolidated Financial Statements.

 

The Financial Statements on pages 160 to 274 were approved and authorised for issue by the Board on 15 March 2012 and signed on its behalf by:

 

 

 

Stephen Jones

Chief Financial Officer

 

Company Registered Number: 2294747

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

For the years ended 31 December 2011, 2010 and 2009

 

Other reserves

 

 

Notes

Share capital

£m

Share premium

£m

Available for sale reserve

£m

Foreign currency translation reserve

£m

Retained earnings

£m

Total

£m

Non-controlling interest

£m

Total

£m

 

1 January 2011

3,999

5,620

10

17

2,628

12,274

-

12,274

 

Total comprehensive income/(expense):

 

- Profit for the year

-

-

-

-

903

903

-

903

 

- Other comprehensive income/(expense) for the year

-

-

(3)

-

(37)

(40)

-

(40)

 

- Tax on other comprehensive income

-

-

2

-

9

11

-

11

 

-

-

(1)

-

875

874

-

874

 

Dividends and other distributions

13

-

-

-

-

(482)

(482)

-

(482)

 

31 December 2011

3,999

5,620

9

17

3,021

12,666

-

12,666

 

 

1 January 2010

2,709

1,857

12

17

1,911

6,506

716

7,222

 

Total comprehensive income/(expense):

 

- Profit for the year

-

-

-

-

1,544

1,544

39

1,583

 

- Other comprehensive income/(expense) for the year

-

-

(3)

-

25

22

-

22

 

- Tax on other comprehensive income/(expense)

-

-

1

-

(9)

(8)

-

(8)

 

-

-

(2)

-

1,560

1,558

39

1,597

 

Dividends and other distributions

13

-

-

-

-

(815)

(815)

(17)

(832)

 

Issue of preference shares

39

300

-

-

-

-

300

-

300

 

Redemption of A&L preference shares

-

-

-

-

-

-

(294)

(294)

 

Reclassification of Perpetual Preferreds

39

297

-

-

-

-

297

(297)

-

 

Issue of ordinary shares

39

693

3,763

-

-

-

4,456

-

4,456

 

Acquisition of non-controlling interest

46

-

-

-

-

(28)

(28)

(147)

(175)

 

31 December 2010

3,999

5,620

10

17

2,628

12,274

-

12,274

 

 

1 January 2009

1,148

3,121

18

21

1,678

5,986

711

6,697

 

Total comprehensive income/(expense):

 

- Profit for the year

-

-

-

-

1,190

1,190

55

1,245

 

- Other comprehensive income/(expense) for the year before tax

-

-

(8)

(4)

(606)

(618)

-

(618)

 

- Tax on other comprehensive income/(expense)

-

-

2

-

170

172

-

172

 

-

-

(6)

(4)

754

744

55

799

 

Dividends and other distributions

-

-

-

-

(521)

(521)

(50)

(571)

 

Reclassification of RCIs

297

-

-

-

-

297

-

297

 

Transfer to share capital

1,264

(1,264)

-

-

-

-

-

-

 

31 December 2009

2,709

1,857

12

17

1,911

6,506

716

7,222

 

The accompanying Notes on pages 167 to 274 and the audited sections of the Risk Management Report on pages 62 to 135 and the information in the Balance Sheet Business Review marked audited (pages 44 to 48) form an integral part of these Consolidated Financial Statements.

 

CONSOLIDATED CASH FLOW STATEMENT

 

For the years ended 31 December 2011, 2010 and 2009

 

 

 

 

Notes

2011

£m

2010

£m

2009

£m

Net cash flow (used in)/from operating activities

Profit for the year

903

1,583

1,245

Adjustments for:

Non cash items included in net profit

3,668

3,136

(24)

Change in operating assets

2,219

6,239

7,776

Change in operating liabilities

(12,015)

1,557

(2,351)

Income taxes (paid)/received

(165)

(131)

2

Effects of exchange rate differences

(1,662)

(1,000)

(3,719)

Net cash flow (used in)/from operating activities

40

(7,052)

11,384

2,929

Net cash flow (used in)/from investing activities

Acquisition of businesses, net of cash acquired

40,46

-

(1,418)

-

Investment in associates

-

-

(35)

Disposal of subsidiaries, net of cash disposed

40

76

250

-

Purchase of property, plant and equipment and intangible assets

25,26

(397)

(873)

(463)

Proceeds from sale of property, plant and equipment and intangible assets

93

91

60

Purchase of non-trading securities

-

(1,225)

(1,133)

Proceeds from sale of non-trading securities

124

1,851

3,004

Net cash flow (used in)/from investing activities

(104)

(1,324)

1,433

Net cash flow from/(used in) financing activities

Issue of ordinary share capital

39

-

4,456

-

Issue of loan capital

48,449

21,409

1,556

Repayment of loan capital

(43,070)

(15,973)

(5,895)

Dividends paid on ordinary shares

13

(375)

(900)

(225)

Dividends paid on preference shares classified in equity

13

(19)

(19)

-

Dividends paid on Reserve Capital Instruments

13

(21)

(21)

(21)

Interest paid on preference shares classified in non-controlling interest

-

-

(19)

Interest paid on Perpetual Preferred Securities classified in non-controlling interest

-

(17)

(17)

Dividends paid on Perpetual Preferred Securities

13

(17)

-

-

Net cash flow from/(used in) financing activities

4,947

8,935

(4,621)

Net (decrease)/increase in cash and cash equivalents

(2,209)

18,995

(259)

Cash and cash equivalents at beginning of the year

45,500

26,364

27,675

Effects of exchange rate changes on cash and cash equivalents

(345)

141

(1,052)

Cash and cash equivalents at the end of the year

40

42,946

45,500

26,364

 

The accompanying Notes on pages 167 to 274 and the audited sections of the Risk Management Report on pages 62 to 135 and the information in the Balance Sheet Business Review marked audited (pages 44 to 48) form an integral part of these Consolidated Financial Statements.

 

COMPANY BALANCE SHEET

 

At 31 December 2011 and 2010

 

 

 

 

Notes

2011

£m

2010

£m

Assets

Cash and balances at central banks

12

18,958

21,408

Derivative financial instruments

15

6,001

2,994

Financial assets designated at fair value

16

45

5,126

Loans and advances to banks

17

90,716

115,957

Loans and advances to customers

18

181,972

179,223

Available-for-sale securities

22

34

38

Loans and receivables securities

23

5,202

5,378

Macro hedge of interest rate risk

32

114

Investment in subsidiary undertakings

24

6,995

6,869

Intangible assets

25

1,458

1,407

Property, plant and equipment

26

1,182

1,204

Current tax assets

154

212

Deferred tax assets

27

275

379

Retirement benefit assets

37

237

-

Other assets

28

965

1,006

Total assets

314,226

341,315

Liabilities

Deposits by banks

29

112,278

146,240

Deposits by customers

30

175,067

170,579

Derivative financial instruments

15

1,207

1,099

Financial liabilities designated at fair value

32

1

30

Debt securities in issue

33

1,609

3,177

Subordinated liabilities

34

6,564

6,438

Other liabilities

35

2,121

1,796

Provisions

36

912

156

Current tax liabilities

-

14

Retirement benefit obligations

37

216

177

Total liabilities

299,975

329,706

Equity

Share capital and other equity instruments

39

3,999

3,999

Share premium

39

5,620

5,620

Retained earnings

4,625

1,983

Available for sale reserve

7

7

Total shareholders' equity

14,251

11,609

Total liabilities and equity

314,226

341,315

 

The accompanying Notes on pages 167 to 274 and the audited sections of the Risk Management Report on pages 62 to 135 and the information in the Balance Sheet Business Review marked audited (pages 44 to 48) form an integral part of these Financial Statements.

 

The Financial Statements on pages 160 to 274 were approved and authorised for issue by the Board on 15 March 2012 and signed on its behalf by:

 

 

 

Stephen Jones

Chief Financial Officer

 

Company Registered Number: 2294747

 

 

COMPANY STATEMENT OF COMPREHENSIVE INCOME

 

For the years ended 31 December 2011, 2010 and 2009

 

 

 

Notes

2011

£m

2010

£m

2009

£m

Profit for the year

3,153

1,391

747

Other comprehensive (expense)/income:

Actuarial (losses)/gains on retirement benefit obligations

37

(38)

67

(414)

Losses on available-for-sale securities

22

(2)

-

-

Tax on items taken directly to equity

11

(20)

116

Net (loss)/gain recognised directly in equity

(29)

47

(298)

Gains on available-for-sale securities transferred to profit or loss on sale

-

-

-

Tax on items transferred to profit

-

-

-

Net transfers to profit

-

-

-

Total other comprehensive (expense)/income for the year before tax

(40)

67

(414)

Tax relating to components of other comprehensive (expense)/income

11

(20)

116

Total comprehensive income for the year

3,124

1,438

449

Attributable to:

Equity holders of the parent

3,124

1,438

 

449

 

 

COMPANY STATEMENT OF CHANGES IN EQUITY

 

For the years ended 31 December 2011, 2010 and 2009

 

Notes

Share Capital

£m

Share Premium

£m

Available for sale reserve

£m

Retained earnings

£m

Total

£m

1 January 2011

3,999

5,620

7

1,983

11,609

Total comprehensive income/(expense):

- Profit for the year

-

-

-

3,153

3,153

- Other comprehensive income/(expense) for the year

-

-

(2)

(38)

(40)

- Tax on other comprehensive income/(expense)

-

-

2

9

11

-

-

-

3,124

3,124

Other movements

-

-

-

-

-

Dividends

13

-

-

-

(482)

(482)

31 December 2011

3,999

5,620

7

4,625

14,251

1 January 2010

2,709

1,857

7

1,350

5,923

Total comprehensive income/(expense):

- Profit for the year

-

-

-

1,391

1,391

- Other comprehensive income/(expense) for the year

-

-

-

67

67

- Tax on other comprehensive income/(expense)

-

-

-

(20)

(20)

-

-

-

1,438

1,438

Issue of preference shares

39

300

-

-

-

300

Reclassification of Perpetual Preferred Securities

39

297

-

-

-

297

Issue of ordinary shares

39

693

3,763

-

-

4,456

Other movements

-

-

-

10

10

Dividends

13

-

-

-

(815)

(815)

31 December 2010

3,999

5,620

7

1,983

11,609

1 January 2009

1,148

1,857

7

1,422

4,434

Total comprehensive income/(expense):

- Profit for the year

-

-

-

747

747

- Other comprehensive income/(expense) for the year

-

-

-

(414)

(414)

- Tax on other comprehensive income/(expense)

-

-

-

116

116

-

-

-

449

449

Capital contribution

1,264

-

-

-

1,264

Dividends

-

-

-

(521)

(521)

Reclassification of Reserve Capital Instruments

297

-

-

-

297

31 December 2009

2,709

1,857

7

1,350

5,923

 

The accompanying Notes on pages 167 to 274 and the audited sections of the Risk Management Report on pages 62 to 135 and the information in the Balance Sheet Business Review marked audited (pages 44 to 48) form an integral part of these Financial Statements.

 

COMPANY CASH FLOW STATEMENT

 

For the years ended 31 December 2011, 2010 and 2009

 

 

 

 

Notes

2011

£m

2010

£m

2009

£m

Net cash flow (used in)/from operating activities

Profit for the year

3,153

1,391

747

Adjustments for:

Non cash items included in net profit

1,760

2,580

(207)

Change in operating assets

5,712

(35,575)

1,103

Change in operating liabilities

(29,053)

43,708

(6,166)

Income taxes (paid)/received

(121)

(99)

21

Effects of exchange rate differences

(47)

(27)

(268)

Net cash flow (used in)/from operating activities

40

(18,596)

11,978

(4,770)

Net cash flow used in investing activities

Increase in investment in subsidiaries

24

-

(1,451)

-

Investment in associates

-

-

(35)

Disposal of subsidiaries, net of cash disposed

-

772

-

Purchase of property, plant and equipment and intangible assets

25,26

(340)

(783)

(209)

Proceeds from sale of property, plant and equipment and intangible assets

5

47

18

Purchase of non-trading securities

-

-

(9)

Proceeds from sale and redemption of non-dealing securities

-

-

3

Net cash flow used in investing activities

(335)

(1,415)

(232)

Net cash flow (used in)/from financing activities

Issue of ordinary share capital

39

-

4,456

-

Repayment of loan capital

(1,957)

(2,804)

(557)

Dividends paid on ordinary shares

13

(375)

(900)

(225)

Dividends paid on Perpetual Preferred Securities

13

(17)

-

-

Dividends paid on preference shares classified in equity

13

(19)

(19)

-

Dividends paid on Reserve Capital Instruments

13

(21)

(21)

(21)

Net cash flow (used in)/from financing activities

(2,389)

712

(803)

Net (decrease)/increase in cash and cash equivalents

(21,320)

11,275

(5,805)

Cash and cash equivalents at beginning of the year

66,673

55,398

61,203

Effects of exchange rate changes on cash and cash equivalents

-

-

-

Cash and cash equivalents at the end of the year

40

45,353

66,673

55,398

 

The accompanying Notes on pages 167 to 274 and the audited sections of the Risk Management Report on pages 62 to 135 and the information in the Balance Sheet Business Review marked audited (pages 44 to 48) form an integral part of these Financial Statements.

 

Financial Statements

 Notes to the Financial Statements

 

1. ACCOUNTING POLICIES 

These financial statements are prepared for Santander UK plc (the 'Company') and the Santander UK plc group (the 'Group') under the Companies Act 2006. The principal activity of the Group is the provision of an extensive range of personal financial services, and a wide range of banking and financial services to business and public sector customers.

Santander UK plc is a public limited company, incorporated in England and Wales, having a registered office in England and is the holding company of the Group.

 

BASIS OF PREPARATION

 

The Consolidated Financial Statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and financial liabilities held at fair value through profit or loss and all derivative contracts, and on the going concern basis of accounting as disclosed in the Directors' statement of going concern set out in the Directors' Report on pages 140 and 141. Compliance with International Financial Reporting Standards

The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') as issued by the International Accounting Standards Board ('IASB'), and interpretations issued by the IFRS Interpretations Committee ('IFRIC') of the IASB that, under European Union Regulations, are effective and available for adoption at the reporting date. The Company and the Group have complied with IFRS as issued by the IASB in addition to complying with its legal obligation to comply with IFRS as adopted for use in the European Union.

Disclosures required by IFRS 7 "Financial Instruments: Disclosure" relating to the nature and extent of risks arising from financial instruments can be found in the Risk Management Report on pages 62 to 135 which form an integral part of these Consolidated Financial Statements.

 

Recent accounting developments

In 2011, the Group adopted the following significant new or revised standards or amendments to standards:

 

a)

IAS 24 "Related Party Disclosures"- In November 2009, the IASB issued amendments to IAS 24 which clarified the definition of a related party, introduced a partial exemption from some disclosure requirements for government-related entities and included an explicit requirement to disclose commitments involving related parties. IAS 24 (2009) was adopted with effect from 1 January 2011. Retrospective application is required. The adoption of IAS 24 (2009) did not affect the Group's disclosures.

 

b)

There are a number of other changes to IFRS that were effective from 1 January 2011. Those changes did not have a significant impact on the Group's financial statements.

 

 

Future accounting developments

The Group has not yet adopted the following significant new or revised standards and interpretations, and amendments thereto, which have been issued but which are not yet effective for the Group:

 

a)

IAS 1 'Presentation of Financial Statements' - In June 2011, the IASB issued amendments to IAS 1 that retain the option to present profit or loss and other comprehensive income in either a single statement or in two separate but consecutive statements. However, the amendments to IAS 1 require additional disclosures to be made in the other comprehensive income section such that items of other comprehensive income are grouped into two categories: (i) items that will not be reclassified subsequently to profit or loss; and (ii) items that will be reclassified subsequently to profit or loss when specific conditions are met. Income tax on items of other comprehensive income is required to be allocated on the same basis. The amendments to IAS 1 are effective for annual periods beginning on or after 1 July 2012.

The Group anticipates that IAS 1 (2011) will be adopted in the Group's financial statements for the annual period beginning on 1 January 2013 and that the application of the new Standard will modify the presentation of items of other comprehensive income accordingly. Retrospective application is required. The Group does not anticipate that these amendments to IAS 1 will have a significant impact on the Group's disclosures.

 

b)

IFRS 10 'Consolidated Financial Statements', IFRS 11 'Joint Arrangements', IFRS 12 'Disclosure of Interests in Other Entities', IAS 27 'Separate Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures' - In May 2011, the IASB issued new and amended guidance on consolidated financial statements and joint arrangements. IFRS 10, IFRS 11 and IFRS 12 were new standards issued while IAS 27 and IAS 28 were amended. Each of the standards issued is effective for annual periods beginning on or after 1 January 2013 with earlier application permitted as long as each of the other standards is also applied earlier.

Under IFRS 10 'Consolidated Financial Statements', control is the single basis for consolidation, irrespective of the nature of the investee; this standard therefore eliminates the risks-and-rewards approach. IFRS 10 identifies the three elements of control as power over the investee, exposure, or rights, to variable returns from involvement with the investee and the ability to use power over the investee to affect the amount of the investor's returns. An investor must possess all three elements to conclude that it controls an investee. The assessment of control is based on all facts and circumstances, and the conclusion is reassessed if there are changes to at least one of the three elements. Retrospective application is required subject to certain transitional provisions.

IFRS 11 applies to all entities that are parties to a joint arrangement. A joint arrangement is an arrangement of which two or more parties have joint control. IFRS 11 establishes two types of joint arrangements, joint operations and joint ventures, which are distinguished by the rights and obligations of the parties to the arrangement. In a joint operation, the parties to the joint arrangement (referred to as 'joint operators') have rights to the assets and obligations for the liabilities of the arrangement. By contrast, in a joint venture, the parties to the arrangement (referred to as 'joint venturers') have rights to the net assets of the arrangement. IFRS 11 requires that a joint operator recognise its share of the assets, liabilities, revenues, and expenses in accordance with applicable IFRSs; however, a joint venturer would account for its interest by using the equity method of accounting under IAS 28 (2011). Transitional provisions vary depending on how an interest is accounted for under IAS 31 and what its nature is under IFRS 11.

IFRS 12 integrates the disclosure requirements on interests in other entities, currently included in several standards to make it easier to understand and apply the disclosure requirements for subsidiaries, joint arrangements, associates and unconsolidated structured entities. The standard also contains additional requirements on a number of topics. Under IFRS 12, an entity should disclose information about significant judgements and assumptions (and any changes to those assumptions) made in determining whether it has control, joint control, or significant influence over another entity and the type of joint arrangement. IFRS 12 also requires additional disclosures to make it easier to understand and evaluate the nature, extent, and financial effects of the Group's transactions with its subsidiaries, joint arrangements, associates and unconsolidated structured entities as well as any changes in and risks associated with these entities or arrangements. Disclosures shall be aggregated or disaggregated so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have different characteristics. The standard applies prospectively from the beginning of the annual period in which it is adopted.

The Group anticipates that IFRS 10, IFRS 11 and IFRS 12 will be adopted in the Group's financial statements for the annual period beginning on 1 January 2013 and that the application of the new standards may have a significant impact on the Group's disclosures and on amounts reported in respect of the Group's financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.

IAS 27 was amended for the issuance of IFRS 10 but retains the current guidance on separate financial statements.

IAS 28 was amended for conforming changes on the basis of the issuance of IFRS 10 and IFRS 11.

The Group anticipates that IAS 27 (2011) and IAS 28 (2011) will be adopted in the Group's financial statements for the annual period beginning on 1 January 2013. The Group does not anticipate that these amendments to IAS 27 and IAS 28 will have a significant impact on its disclosures and on amounts reported in respect of the Group's financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.

 

c)

IFRS 13 'Fair Value Measurement' - In May 2011, the IASB issued IFRS 13, which establishes a single source of guidance for fair value measurement. IFRS 13 defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. IFRS 13 applies to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except in specified circumstances. In general, the disclosure requirements in IFRS 13 are more extensive than those required in the current accounting standards. IFRS 13 is effective for annual periods beginning on or after 1 January 2013, with early adoption permitted, and applies prospectively from the beginning of the annual period in which it is adopted.

The Group anticipates that IFRS 13 will be adopted in the Group's financial statements for the annual period beginning on 1 January 2013 and that the application of the new standard may affect the amounts reported in the financial statements and result in more extensive disclosures in the financial statements. However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.

 

d)

IFRS 7 'Financial Instruments: Disclosures' - In October 2010, the IASB issued amendments to IFRS 7 that increase the disclosure requirements for transactions involving transfers of financial assets. The amendments are intended to provide greater transparency around risk exposures when a financial asset is transferred but the transferor retains some level of continuing exposure in the asset. The amendments also require disclosures where transfers of financial assets are not evenly distributed throughout the period. The amendments to IFRS 7 are effective for annual periods beginning on or after 1 July 2011, with earlier application permitted. Disclosures are not required for comparative periods before the date of initial application of the amendments.

The Group anticipates that IFRS 7 (2010) will be adopted in the Group's financial statements for the annual period beginning on 1 January 2012. The Group does not anticipate that these amendments to IFRS 7 will have a significant impact on its disclosures regarding transfers of financial assets (see Note 21). However, if the Group enters into other types of transfers of financial assets in the future, disclosures regarding those transfers may be affected.

 

e)

IFRS 9 'Financial Instruments' - In November 2009, the IASB issued IFRS 9 and in October 2010, issued an amendment to IFRS 9 which introduce new requirements for the classification and measurement of financial assets and financial liabilities and for derecognition. In November 2011, the Board reached a tentative agreement to change the mandatory effective date of IFRS 9 to annual periods beginning on or after 1 January 2015 rather than being required to apply them for annual periods beginning on or after 1 January 2013 as is currently the case. Early application would continue to be permitted.

 

IFRS 9 requires all recognised financial assets that are within the scope of IAS 39 'Financial Instruments: Recognition and Measurement' to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent accounting periods.

 

The most significant effect of IFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability. Specifically, under IFRS 9, for financial liabilities that are designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Previously, under IAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was presented in profit or loss.

 

The Group anticipates that IFRS 9 will be adopted in the Group's financial statements for the annual period beginning on 1 January 2015 and that the application of the new Standard may have a significant impact on amounts reported in respect of the Group's financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.

 

f)

IAS 19 'Employee Benefits' - In June 2011, the IASB issued amendments to IAS 19 that change the accounting for defined benefit plans and termination benefits. The most significant change relates to the accounting for changes in defined benefit obligations and plan assets. The amendments require the recognition of changes in defined benefit obligations and in fair value of plan assets when they occur, and hence eliminate the 'corridor approach' permitted under the previous version of IAS 19 and accelerate the recognition of past service costs. The amendments require all actuarial gains and losses to be recognised immediately through other comprehensive income in order for the net pension asset or liability recognised in the consolidated statement of financial position to reflect the full value of the plan deficit or surplus. The amendments to IAS 19 are effective for annual periods beginning on or after 1 January 2013 and require retrospective application with certain exceptions.

The Group anticipates that IAS 19 (2011) will be adopted in the Group's financial statements for the annual period beginning on 1 January 2013. The Group does not anticipate that these amendments to IAS 19 will have a significant impact on its profit or loss or financial position as the Group does not utilise the 'corridor approach'.

 

g)

There are a number of other standards which have been issued or amended that are expected to be effective in future periods. However, it is not practicable to provide a reasonable estimate of their effects on the Group's financial statements until a detailed review has been completed.

 

Comparative information

As required by US public company reporting requirements, these Consolidated Financial Statements include two years of comparative information for the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows and related Notes.

 

CONSOLIDATION

 

a) Subsidiaries

Subsidiaries, which are those companies and other entities (including Special Purpose Entities ('SPEs')) over which the Group, directly or indirectly, has power to govern the financial and operating policies, are consolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. The Company recognises investments in subsidiaries at cost less impairment.

 

Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition. Acquisition related costs are expensed as incurred. The excess of the cost of acquisition, as well as the fair value of any interest previously held, over the fair value of the Group's share of the identifiable net assets of the acquired subsidiary, associate or business at the date of acquisition is recorded as goodwill. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The accounting reference date of the Company and its subsidiary undertakings is 31 December, with the exception of those leasing, investment, insurance and funding companies which, because of commercial considerations, have various accounting reference dates. The financial statements of these subsidiaries have been consolidated on the basis of interim financial statements for the period to 31 December.

In the context of SPE's, the following circumstances may indicate a relationship in which, in substance, the Group controls and consequently consolidates an SPE:

 

the activities of the SPE are being conducted on behalf of the Group according to the Group's specific business needs so that it obtains benefits from the SPE's operation;

the Group has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by setting up an 'autopilot' mechanism, the Group has delegated those decision-making powers;

the Group has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks arising from the activities of the SPE; or

the Group retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities.

 

Assessments of control are made based on the initial arrangements in place, but are reconsidered if there are subsequent changes to the substance of the arrangements, such as the nature of the Group's involvement, the contractual arrangements or the governing rules of the SPE.

Transactions between entities under common control, i.e. fellow subsidiaries of Banco Santander S.A. (the "ultimate parent") are outside the scope of IFRS 3 - "Business Combinations", and there is no other guidance for such situations under IFRS. The Group elects to account for transactions between entities under common control for cash consideration in a manner consistent with the approach under IFRS 3R, except for the continued disclosure of those IBNO provisions for a portfolio that cannot easily be allocated to individual loans, unless the transaction represents a reorganisation of entities within the Group, in which case the transaction is accounted for at its historical cost. Business combinations between entities under common control transacted for non-cash consideration are accounted for by the Group in a manner consistent with group reconstruction relief under UK GAAP (merger accounting).

 

b) Associates

Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. Under this method, the Group's share of the post-acquisition profits or losses of associates is recognised in the income statement, and its share of post-acquisition movements in other comprehensive income and equity is recognised in other comprehensive income and equity, respectively. The cumulative post-acquisition movements are adjusted against the cost of the investment. The Company recognises investments in associates at cost less impairment.

Associates are entities over which the Group has significant influence, but which it does not control. A holding by the Group of between 20% and 50% of the voting rights is a usual indicator of this influence. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group has significant influence over another entity. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Group's investment in associates includes goodwill on acquisition. When the Group's share of losses in an associate equals or exceeds its interest in the associate the Group does not recognise further losses unless the Group has incurred obligations or made payments on behalf of the associates.

Following the Company's acquisition in 2010 of Santander Consumer (UK) plc (of which the Company already held 49.9%), the Company no longer has any significant investments in associates.

 

FOREIGN CURRENCY TRANSLATION

 

Items included in the financial statements of each entity (including foreign branch operations) in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the 'functional currency'). The Consolidated Financial Statements are presented in pounds sterling, which is the functional currency of the parent.

Income statements and cash flows of foreign entities are translated into the Group's reporting currency at average exchange rates for the year and their balance sheets are translated at the exchange rates ruling on 31 December. Exchange differences arising from the translation of the net investment in foreign entities are recognised in other comprehensive income. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

 

Foreign currency transactions are translated into the functional currency of the entity involved at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement unless recognised in other comprehensive income in connection with a cash flow hedge.

Exchange rate differences recognised in profit or loss on items not at fair value through profit and loss were £1,814m income (2010: £1,356m income, 2009: £2,570m income). This was offset by income/charges on items held at fair value.

 

REVENUE RECOGNITION

 

(a) Interest income and expense

Income on financial assets that are classified as loans and receivables or available-for-sale, and interest expense on financial liabilities other than those at fair value through profit and loss are determined using the effective interest method. The effective interest rate is the rate that discounts the estimated future cash payments or receipts over the expected life of the instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the future cash flows are estimated after considering all the contractual terms of the instrument excluding future credit losses. The calculation includes all amounts paid or received by the Group that are an integral part of the overall return, direct incremental transaction costs related to the acquisition, issue or disposal of the financial instrument and all other premiums or discounts. Interest income on assets classified as loans and receivables, available-for-sale, or income on investments in equity shares, interest expense on liabilities other than those at fair value through profit and loss, and interest income and expense on hedging derivatives are recognised in interest and similar income and interest expense and similar charges in the income statement. In accordance with IFRS, the Group recognises interest income on assets after they have been written down as a result of an impairment loss. Interest continues to be accrued on all loans and the element of interest that is not anticipated to be recovered is provided for.

 

(b) Fee and commission income and expense

Fees and commissions that are not an integral part of the effective interest rate are recognised when the service is provided. For retail products, fee and commission income consists principally of collection services fees, commission on foreign currencies, commission and other fees received from retailers for processing credit card transactions, fees received from other credit card issuers for providing cash advances for their customers through the Group's branch and ATM networks, annual fees payable by credit card holders and fees for non-banking financial products. Revenue from these income streams is recognised when the service is provided.

For insurance products, fee and commission income consists principally of commissions earned on the sale of building and contents insurance, life protection insurance and payment cover insurance. Revenue from these income streams is recognised when the service is provided.

Asset management fee and commission income comprises portfolio and other management advisory and service fees, investment fund management fees, and fees for private banking, financial planning and custody services. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts. Asset management fees related to investment funds are recognised rateably over the period the service is provided. The same principle is applied for private banking, financial planning and custody services that are continuously provided over an extended period of time.

Fee and commission income which forms an integral part of the effective interest rate of a financial instrument (e.g., certain loan commitment fees) is recognised as an adjustment to the effective interest rate and recorded in "Interest income".

 

(c) Dividend income

Except for equity securities classified as trading assets or financial assets held at fair value through profit or loss, described below, dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for equity securities.

 

(d) Net trading and other income

Net trading and other income comprises all gains and losses from changes in the fair value of financial assets and liabilities held at fair value through profit or loss (including financial assets and financial liabilities held for trading and designated as fair value through profit or loss), together with related interest income, expense and dividends. It also includes income from operating lease assets, and profits/(losses) on the sales of property, plant and equipment and subsidiary undertakings.

Changes in the fair value of financial assets and liabilities held for trading, including trading derivatives, are recognised in the income statement as net trading and other income together with dividends and interest receivable and payable. Changes in the fair value of assets and liabilities designated as fair value through profit or loss are recognised in net trading and other income together with dividends, interest receivable and payable and changes in fair value of derivatives managed in conjunction with these assets and liabilities. Changes in fair value of derivatives in a hedging relationship are recognised in net trading and other income along with the fair value of the hedged item if designated in a fair value hedge or macro hedging relationship.

 

BORROWING COSTS

 

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, including computer software, which are assets that necessarily take a substantial period of time to develop for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognised in profit or loss in the period in which they occur.

 PENSIONS AND OTHER POST RETIREMENT BENEFITS

 

The Group operates various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds as determined by periodic actuarial calculations. A defined benefit plan is a pension plan that guarantees an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service or compensation. A defined contribution plan is a pension plan under which the Group pays fixed contributions as they fall due into a separate entity (a fund). The pension paid to the member at retirement is based on the amount in the separate fund for each member. The Group has no legal or constructive obligations to pay further contributions into the fund to "top up" benefits to a certain guaranteed level. Pension costs are charged to the line item 'Administration expenses', with the interest cost on liabilities and the expected return on scheme assets included within 'Net interest income' in the income statement.

 

a) Defined benefit plans

The asset or liability recognised in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date, less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The assets of the schemes are measured at their fair values at the balance sheet date. Full actuarial valuations of the Group's principal defined benefit schemes are carried out on a triennial basis. Each scheme's Trustee is responsible for the actuarial valuations and in doing so considers or relies in part on a report of a third party expert.

The present value of the defined benefit obligation is estimated by projecting forward the growth in current accrued pension benefits to reflect inflation and salary growth to the date of pension payment, then discounted to present value using an interest rate applicable to high-quality AA rated corporate bonds of the same currency and which have terms to maturity closest to the terms of the scheme liabilities, adjusted where necessary to match those terms. In determining the value of scheme liabilities, demographic and financial assumptions are made by management about mortality, inflation, discount rates, pension increases, and earnings growth, based on past experience. Financial assumptions are based on market conditions at the balance sheet date and can generally be derived objectively. Demographic assumptions require a greater degree of estimation and judgement to be applied to externally derived data. Any surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). An asset is only recognised to the extent that the surplus can be recovered through reduced contributions in the future or through refunds from the scheme.

The income statement includes the current service cost of providing pension benefits, the expected return on schemes' assets net of expected administration costs, and the interest cost on the schemes' liabilities. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in other comprehensive income. Past-service costs are charged immediately to the income statement, unless the charges are conditional on the employees remaining in service for a specified period of time, known as the vesting period. In this case, the past-service costs are amortised on a straight-line basis over the average period until the benefits vest. Gains and losses on curtailments are recognised when the curtailment occurs. This is when there is a demonstrable commitment to make a significant reduction in the number of employees covered by the plan, or amendments have been made to the terms of the plan so that a significant element of future service will no longer qualify for benefits or will qualify only for reduced benefits. The gain or loss comprises any resulting change in the present value of the defined benefit obligation, any resulting change in the fair value of the plan assets and any related actuarial gain or loss. Curtailment gains and losses on sold businesses that meet the definition of discontinued operations are included in operating expenses in profit or loss for the year from discontinued operations.

 

b) Defined contribution plans

For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the contributions have been paid, the Group has no further payment obligation. The regular contributions constitute net periodic costs for the year in which they are due and are included in staff costs.

 

c) Post-retirement medical benefit plans

Post-retirement medical benefit liabilities are determined using the Projected Unit Credit Method, with actuarial valuations updated at each year-end. The expected benefit costs are accrued over the period of employment using an accounting methodology similar to that for the defined benefit pension scheme.

 SHARE-BASED PAYMENTS

 

The Group engages in cash-settled and equity-settled share-based payment transactions in respect of services received from certain of its employees. Shares of the Group's parent, Banco Santander, S.A. are purchased in the open market by the Group (for the Employee Sharesave scheme) or are purchased by Banco Santander, S.A. or another group company (for awards granted under the Long Term Incentive Plan and the Deferred Shares Bonus Plan) to satisfy share options as they vest.

Options granted under the Employee Sharesave scheme are accounted for as cash-settled share-based payment transactions. Awards granted under the Long Term Incentive Plan and Deferred Shares Bonus Plan are accounted for as equity-settled share-based payment transactions.

The fair value of the services received is measured by reference to the fair value of the shares or share options initially on the date of the grant for both the cash and equity settled share-based payments and then subsequently at each reporting date for the cash settled share-based payments. The cost of the employee services received in respect of the shares or share options granted is recognised in the income statement within administration expenses, over the period that the services are received, which is the vesting period.

 

A liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balance sheet date for cash-settled, share-based payments. A liability equal to the amount to be reimbursed to Banco Santander, S.A. is recognised at the current fair value determined at the grant date for equity-settled share based payments.

The fair value of the options granted under the Employee Sharesave scheme is determined using an option pricing model, which takes into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the Banco Santander, S.A. share price over the life of the option and the dividend growth rate. The fair value of the awards granted for the Long Term Incentive Plan was determined at the grant date using an option pricing model, which takes into account the share price at grant date, the risk free interest rate, the expected volatility of the Banco Santander, S.A. share price over the life of the award and the dividend growth rate. Vesting conditions included in the terms of the grant are not taken into account in estimating fair value, except for those that include terms related to market conditions. Non-market vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of employee service so that ultimately, the amount recognised in the income statement reflects the number of vested shares or share options.

Where an award has been modified, as a minimum, the expense of the original award continues to be recognised as if it had not been modified. Where the effect of a modification is to increase the fair value of an award or increase the number of equity instruments, the incremental fair value of the award or incremental fair value of the extra equity instruments is recognised in addition to the expense of the original grant, measured at the date of modification, over the modified vesting period.

A cancellation that occurs during the vesting period is treated as an acceleration of vesting, and recognised immediately for the amount that would otherwise have been recognised for services over the vesting period.

 GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill represents the excess of the cost of an acquisition, as well as the fair value of any interest previously held, over the fair value of the Group's share of the identifiable net assets of the acquired subsidiary, associate, or business at the date of acquisition. Goodwill on the acquisition of subsidiaries and businesses is included in Intangible assets. Goodwill on acquisitions of associates is included as part of Investment in associates. Goodwill is tested for impairment at each balance sheet date, or more frequently when events or changes in circumstances dictate, and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity or business include the carrying amount of goodwill relating to the entity or business sold.

Other intangible assets are recognised if they arise from contracted or other legal rights or if they are capable of being separated or divided from the Group and sold, transferred, licensed, rented or exchanged. The value of such intangible assets is amortised on a straight-line basis over the useful economic life of the assets in question, which ranges from 3 to 7 years. Other intangible assets are reviewed annually for impairment indicators and tested for impairment where indicators are present.

Marketing rights are capitalised when they are separately identifiable contractual agreements that are expected to provide future economic benefits and the costs are separately identifiable. The value of the marketing rights is classified in intangible assets on the balance sheet and amortised on a straight-line basis over their useful life of 5 to 7 years.

Software development costs are capitalised when they are direct costs associated with identifiable and unique software products that are expected to provide future economic benefits and the cost of these products can be measured reliably. These costs include payroll, the costs of materials and services, and directly attributable overheads. Internally developed software meeting these criteria and externally purchased software are classified in intangible assets on the balance sheet and amortised on a straight-line basis over their useful life of 3 to 7 years, unless the software is an integral part of the related computer hardware, in which case it is treated as property, plant and equipment as described below. Capitalisation of costs ceases when the software is capable of operating as intended. Costs associated with maintaining software programmes are expensed as incurred.

 PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment include owner-occupied properties (including leasehold properties), office fixtures and equipment and computer software. Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. A review for indications of impairment is carried out at each reporting date. Gains and losses on disposal are determined by reference to the carrying amount and are reported in net trading and other income. Repairs and renewals are charged to the income statement when the expenditure is incurred. Internally developed software meeting the criteria set out in "Goodwill and other intangible assets" above and externally purchased software are classified in property, plant and equipment on the balance sheet where the software is an integral part of the related computer hardware.

Classes of property, plant and equipment are depreciated on a straight-line basis over their useful life, as follows:

 

Owner-occupied properties

Not exceeding 50 years

Office fixtures and equipment

3 to 15 years

Computer software

3 to 7 years

 

Depreciation is not charged on freehold land and assets under construction.

 FINANCIAL ASSETS

 

The Group classifies its financial assets as: financial assets at fair value through profit or loss, loans and receivables, available-for-sale and held to maturity financial assets. Management determines the classification of its investments at initial recognition. Financial assets that are classified at fair value through profit or loss, which have not been designated as such or are not accounted for as derivatives, or assets classified as available-for-sale, may subsequently in rare circumstances, be reclassified from the fair value through profit or loss category to the loans and receivables, available-for-sale or held to maturity categories. In order to meet the criteria for reclassification, the asset must no longer be held for the purpose of selling or repurchasing in the near term and must also meet the definition of the category into which it is to be reclassified had it not been required to classify it at fair value through profit or loss at initial recognition. The reclassified value is the fair value of the asset at the date of reclassification. The Group has not utilised this option and therefore has not reclassified any assets from the fair value through profit or loss category that were classified as such at initial recognition.

 

(a) Financial assets at fair value through profit or loss

Financial assets are classified as fair value through profit or loss if they are either held for trading or otherwise designated at fair value through profit or loss on initial recognition. A financial asset is classified as held for trading if it is a derivative or it is acquired principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking.

In certain circumstances financial assets other than those that are held for trading are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or recognising the gains or losses on them on a different basis, where the assets are managed and their performance evaluated on a fair value basis, or where a financial asset contains one or more embedded derivatives which are not closely related to the host contract.

Trading assets, derivative financial instruments and financial assets designated at fair value are classified as fair value through profit or loss, except where in a hedging relationship. They are derecognised when the rights to receive cash flows from the asset have expired or when the Group has transferred substantially all the risks and rewards of ownership.

 

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments, that are not quoted in an active market and which are not classified as available-for-sale or fair value through profit or loss. They arise when the Group provides money or services directly to a customer with no intention of trading the loan. Loans and receivables are initially recognised at fair value including direct and incremental transaction costs. They are subsequently valued at amortised cost, using the effective interest method. They are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all of the risks and rewards of ownership. Loans and receivables consist of Loans and advances to banks, Loans and advances to customers and Loan and receivable securities.

 

(c) Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and are not categorised into any of the other categories described. They are initially recognised at fair value including direct and incremental transaction costs. They are subsequently held at fair value. Gains and losses arising from changes in fair value are recognised in other comprehensive income until sale when the cumulative gain or loss is transferred to the income statement. Where the financial asset is interest-bearing, interest is determined using the effective interest method.

Income on investments in equity shares, debt instruments and other similar interests is recognised in the income statement as and when dividends are declared and interest is accrued. Impairment losses and foreign exchange translation differences on monetary items are recognised in the income statement. The investments are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership.

 

(d) Held to maturity investments

Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity. Held to maturity investments are initially recognised at fair value including direct and incremental transaction costs. They are subsequently valued at amortised cost, using the effective interest method. They are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all of the risks and rewards of ownership. Were the Group to sell other than an insignificant amount of held to maturity assets, the entire category would be tainted and reclassified as available-for-sale.

The Group does not hold any held to maturity financial assets.

 

VALUATION OF FINANCIAL INSTRUMENTS

 

Financial instruments that are classified at fair value through profit or loss, including those held for trading purposes, or available-for-sale, and all derivatives, are stated at fair value. The fair value of such financial instruments is the estimated amount at which the instrument could be exchanged in a current transaction between willing, knowledgeable parties, other than in a forced or liquidation sale.

Changes in the valuation of such financial instruments, including derivatives, are included in the line item 'Net trading and other income' in the income statement.

 

a) Initial measurement

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price unless the valuation is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include significant data from observable markets. Any difference between the transaction price and the value based on a valuation technique where the inputs are not based on data from observable current markets is not recognised in profit or loss on initial recognition. Subsequent gains or losses are only recognised to the extent that they arise from a change in a factor that market participants would consider in setting a price.

 

b) Subsequent measurement

The Group applies the following fair value hierarchy that prioritises the inputs to valuation techniques used in measuring fair value. The hierarchy establishes three categories for valuing financial instruments, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three categories are: quoted prices in active markets (Level 1), internal models based on observable market data (Level 2) and internal models based on other than observable market data (Level 3). If the inputs used to measure an asset or a liability fall to different levels within the hierarchy, the classification of the entire asset or liability will be based on the lowest level input that is significant to the overall fair value measurement of the asset or liability.

The Group categorises assets and liabilities measured at fair value within the fair value hierarchy based on the inputs to the valuation techniques as follows:

 

Level 1:

Unadjusted quoted prices for identical assets or liabilities in an active market that the Group has the ability to access at the measurement date. Level 1 positions include debt securities, equity securities, exchange traded derivatives and short positions in securities.

Level 2:

Quoted prices in markets that are not active, quoted prices for similar assets or liabilities, recent market transactions, inputs other than quoted market prices for the asset or liability that are observable either directly or indirectly for substantially the full term, and inputs to valuation techniques that are derived principally from or corroborated by observable market data through correlation or other statistical means for substantially the full term of the asset or liability. Level 2 positions include loans and advances to banks, loans and advances to customers, equity securities, exchange rate derivatives, interest rate derivatives, equity and credit derivatives, debt securities, deposits by banks, deposits by customers and debt securities in issue.

Level 3:

Inputs to the pricing or valuation techniques that are significant to the overall fair value measurement of the asset or liability are unobservable. Level 3 positions include exchange rate derivatives, equity and credit derivatives, loans and advances to customers, debt securities, and debt securities in issue.

 

The Group assesses active markets for equity instruments based on the average daily trading volume both in absolute terms and relative to the market capitalisation for the instrument. The Group assesses active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity. The Group assesses active markets for exchange traded derivatives based on the average daily trading volume both in absolute terms and relative to the market capitalisation for the instrument.

Market activity and liquidity is discussed in the relevant monthly Risk Forum as well as being part of the daily update given by each business at the start of the trading day. This information, together with the observation of active trading and the magnitude of the bid-offer spreads allow consideration of the liquidity of a financial instrument.

Underlying assets and liabilities are reviewed to consider the appropriate adjustment to mark the mid price reported in the trading systems to a realisable value. This process takes into account the liquidity of the position in the size of the adjustment required. These liquidity adjustments are presented and discussed at the monthly Risk Forum.

In determining the appropriate measurement levels, the Group performs regular analyses on the assets and liabilities. Underlying assets and liabilities are regularly reviewed to determine whether a position should be regarded as illiquid; the most important practical consideration being the observability of trading. Where the bid-offer spread is observable, this is tested against actual trades. Changes in the observability of significant valuation inputs during the reporting period may result in a reclassification of assets and liabilities within the fair value hierarchy.

 

Financial instruments valued using observable market prices

If a quoted market price in an active market is available for an instrument, the fair value is calculated as the current bid price multiplied by the number of units of the instrument held.

 

Financial instruments valued using a valuation technique

In the absence of a quoted market price in an active market, management uses internal models to make its best estimate of the price that the market would set for that financial instrument. In order to make these estimations, various techniques are employed, including extrapolation from observable market data and observation of similar financial instruments with similar characteristics. Wherever possible, valuation parameters for each product are based on prices directly observable in active markets or that can be derived from directly observable market prices. Valuation parameters for each type of financial instrument are discussed in Note 47.

 

Unrecognised gains as a result of the use of valuation models using unobservable inputs ('Day One profits')

The timing of recognition of deferred day one profit and loss is determined individually. It is deferred until either the instrument's fair value can be determined using market observable inputs or is realised through settlement. The financial instrument is subsequently measured at fair value, adjusted for the deferred day one profit and loss. Subsequent changes in fair value are recognised immediately in the consolidated income statement without immediate reversal of deferred day one profits and losses.

 "REGULAR WAY" PURCHASES OF FINANCIAL ASSETS AND ISSUES OF FINANCIAL LIABILITIES

 

A regular way purchase is a purchase of a financial asset under a contract whose terms require delivery of the asset within the timeframe established generally by regulation or convention in the market place concerned.

Regular way purchases of financial assets classified as loans and receivables are recognised on settlement date; all other regular way purchases are recognised on trade date. The assets are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership.

Issues of equity or financial liabilities measured at amortised cost are recognised on settlement date; all other regular way issues are recognised on trade date. The liabilities are derecognised when extinguished.

 OFFSETTING FINANCIAL ASSETS AND LIABILITIES

 

Financial assets and liabilities including derivatives are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

The Group is party to a number of arrangements, including master netting arrangements under industry standard agreements which facilitate netting of transactions in jurisdictions where netting agreements are recognised and have legal force. The netting arrangements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis.

 

SALE AND REPURCHASE AGREEMENTS (INCLUDING STOCK BORROWING AND LENDING)

 

Securities sold subject to a commitment to repurchase them at a predetermined price ('repos') under which substantially all the risks and rewards of ownership are retained by the Group remain on the balance sheet as trading assets and a liability is recorded in trading liabilities in respect of the consideration received. Securities purchased under commitments to resell ('reverse repos') are not recognised on the balance sheet and the consideration paid is recorded in trading assets. The difference between the sale and repurchase price is treated as trading income in the income statement.

Securities lending and borrowing transactions are generally secured, with collateral taking the form of securities or cash advanced or received. Securities lent or borrowed are not reflected on the balance sheet. Collateral in the form of cash received or advanced is recorded as a deposit or a loan. Collateral in the form of securities is not recognised.

 

DERIVATIVE FINANCIAL INSTRUMENTS

 

Derivative financial instruments ('derivatives') are contracts or agreements whose value is derived from one or more underlying indices or asset values inherent in the contract or agreement, which require no or little initial net investment and are settled at a future date. Transactions are undertaken in interest rate, cross currency, equity, residential property and other index-related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest rate futures, and equity index options.

Derivatives are held for trading or for risk management purposes. Derivatives are classified as held for trading unless they are designated as being in a hedge relationship. The Group chooses to designate certain derivatives as in a hedging relationship if they meet specific criteria, as further described within 'hedge accounting' below.

Derivatives are recognised initially (on the date on which a derivative contract is entered into), and are subsequently remeasured, at their fair value. Fair values of exchange-traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are obtained using valuation techniques, including discounted cash flow and option pricing models.

Derivatives may be embedded in other financial instruments, such as the conversion option in a convertible bond. Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract; the terms of the embedded derivative would meet the definition of a stand-alone derivative if they were contained in a separate contract; and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Contracts containing embedded derivatives are not subsequently reassessed for separation unless either there has been a change in the terms of the contract which significantly modifies the cash flows (in which case the contract is reassessed at the time of modification) or the contract has been reclassified (in which case the contract is reassessed at the time of reclassification).

All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative, except where netting is permitted. The method of recognising fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments and, if the latter, the nature of the risks being hedged. All gains and losses from changes in the fair value of derivatives held for trading are recognised in the income statement, and included within net trading and other income.

 

HEDGE ACCOUNTING

 

In certain circumstances, derivatives may be designated as hedges and classified as: (i) hedges of the change in fair value of recognised assets or liabilities or firm commitments ('fair value hedges'); (ii) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction ('cash flow hedges'); or (iii) a hedge of a net investment in a foreign operation ('net investment hedges'). The Group enters into derivatives as fair value hedges, but not as cash flow hedges or net investment hedges. Hedge accounting is used for derivatives designated in this way provided certain criteria are met.

At the time a financial instrument is designated as a hedge (i.e., at the inception of the hedge), the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), its risk management objective and strategy for undertaking the hedge. The documentation includes the identification of each hedging instrument and respective hedged item, the nature of the risk being hedged (including the benchmark interest rate being hedged in a hedge of interest rate risk) and how the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value attributable to the hedged risk is to be assessed. Accordingly, the Group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives have been and will be highly effective in offsetting changes in the fair value attributable to the hedged risk during the period that the hedge is designated. A hedge is normally regarded as highly effective if, at inception and throughout its life, the Group can expect, and actual results indicate, that changes in the fair value (determined by discounting the contractual cash flows by the current forward benchmark interest rate) of the hedged items are effectively offset by changes in the fair value of the hedging instrument.

The main derivatives held for risk management purposes are interest rate and cross-currency swaps, which are used to hedge fixed-rate lending and structured savings products and medium-term note issuances, capital issuances and other capital markets funding.

The Group discontinues hedge accounting when it is determined that: a derivative is not, or has ceased to be, highly effective as a hedge; when the derivative expires, or is sold, terminated or exercised; or when the hedged item matures or is sold or repaid. On discontinuance of hedge accounting, amortisation of the adjustment to the hedged item is included in net trading and other income.

The hedge adjustment for fair value hedges is classified in the balance sheet in the same category as the hedged item, unless it relates to a macro hedging relationship where the hedge adjustment is recognised as a macro hedge on the face of the balance sheet. For fair value hedges, changes in the fair value of the hedging instrument and hedged item are recognised in net trading and other income. Hedge ineffectiveness represents the amount by which the changes in the fair value of the hedging derivative differ from changes in the fair value of the hedged item. Such gains and losses are recorded in current period earnings within net trading and other income.

Gains and losses on components of a hedging derivative that are not part of the hedging relationship and are therefore excluded from the hedge effectiveness assessment are also included in net trading and other income.

 SECURITISATION TRANSACTIONS

 

The Group has entered into certain arrangements where undertakings have issued mortgage-backed and other asset-backed securities or have entered into funding arrangements with lenders in order to finance specific loans and advances to customers. As the Group has retained substantially all the risks and rewards of the underlying assets, such financial instruments continue to be held on the Group balance sheet, and a liability recognised for the proceeds of the funding transaction.

 IMPAIRMENT OF FINANCIAL ASSETS

 

At each balance sheet date the Group assesses whether, as a result of one or more events occurring after initial recognition, there is objective evidence that a financial asset or group of financial assets classified as loans and receivables, available-for-sale or loan and receivable securities have become impaired. Evidence of impairment varies across different portfolios and may include indications that the borrower or group of borrowers have defaulted, are experiencing significant financial difficulty, or the debt has been restructured potentially reducing the burden to the borrower. Impairment losses are recorded as charges in the income statement and the carrying amount of the financial asset or group of financial assets is reduced by establishing an impairment loss allowance. Impairment loss allowances are maintained at the level that management deems sufficient to absorb probable incurred losses in the Group's loans. Losses expected from future events are not recognised.

Impairment losses are assessed individually for financial assets that are individually significant and individually or collectively for assets that are not individually significant. An impairment loss allowance for observed losses is established for all past due loans after a specified period of repayment default where it is probable that some of the capital or interest will not be repaid or recovered through enforcement of any applicable security. An allowance for inherent losses is established for loans for which no evidence of loss has been specifically identified on an individual basis because the loans are not yet past due (i.e. incurred but not observed ('IBNO')) but are known from past experience to have deteriorated since the initial decision to lend was made. An example of this situation is where a borrower has not yet missed a payment but is experiencing financial difficulties at the reporting date, e.g. due to loss of employment or divorce. In these circumstances, an inherent loss had been incurred at the reporting date.

 

Impairment loss allowances for loans and advances, less amounts released and recoveries of amounts written off are charged to the line item 'Impairment losses on loans and advances' in the income statement. The impairment loss allowances are deducted from the 'Loans and advances to banks', 'Loans and advances to customers' and 'Loans and receivables securities' line items on the balance sheet.

 

(a) Loans and receivables

 

(i) Retail assets

 

Retail assets are assessed either individually or collectively for impairment. An impairment loss is incurred if there is objective evidence that a loss event has occurred since initial recognition of the assets that has an impact on the estimated future cash flows of the assets.

 

Potential indicators of loss events

Potential indicators of loss events which may be evidence of financial difficulty for a retail borrower may include a request from a borrower to change contractual terms; the borrower notifying the Group of current or likely financial distress; contact from a debt management company; a change in payment source, lump sum payments and changes in activity or arrears on other accounts held by the borrower.

 

Individual assessment

For individually assessed assets, the Group measures the amount of the loss as the difference between the carrying amount of the asset and the present value of the estimated future cash flows from the asset discounted at the original effective interest rate of the asset.

 

Collective assessment

Impairment is assessed on a collective basis in two circumstances to cover losses which have been:

 

Incurred but have not yet been identified (i.e. IBNO losses); and

Observed.

 

In making a collective assessment for impairment, financial assets are grouped together according to their credit risk characteristics. These can include grouping by product, brand, geography and type of customer. For each such portfolio, future cash flows are estimated through the use of historical loss experience. The historical loss experience is adjusted for current observable data, including estimated current property prices, to reflect the effects of current conditions not affecting the period of historical experience. The loss is discounted at the effective interest rate, except where portfolios meet the criteria for short-term receivables. The unwind of the discount over time is reported through interest receivable within the income statement, with the impairment loss allowances on the balance sheet increasing.

For each portfolio, the impairment loss allowance is calculated as the product of the number of accounts in the portfolio, the estimated proportion of accounts that will be written off, or repossessed in the case of mortgage loans (the 'loss propensity'), the estimated proportion of such cases that will result in a loss (the 'loss factor') and the average loss incurred (the 'loss per case'). Separate assessments are performed with respect to observed losses and IBNO losses.

The loss propensity for the observed segment represents the percentage of cases that will ultimately be written off. For the IBNO segment (i.e. where the account is currently up to date), the loss propensity represents the percentage of such cases that are expected to miss a payment in the appropriate emergence period and which will ultimately be written off. The loss propensities are based on recent historical experience, typically covering a period of no more than the most recent six months in the year under review.

The loss per case is based on actual cases using the most recent six month average data of losses that have been incurred during the most recent month for which data is available in the year under review (typically December), and is then discounted using an appropriate rate. Based on historical experience, the gross loss per case is realised in cash several months after the customer first defaults, during which time interest and fees continue to accrue on the account. As a result, the future fees and interest included in the gross loss per case are removed and the balance discounted so as to calculate the present value of the loss per case. The discounted loss per case for accounts where a payment has already been missed (i.e. observed losses) is higher than for accounts that are up to date (i.e. IBNO losses) because the discounting effect is lower reflecting the fact that the process to recover the funds is further advanced.

 

Incurred but not observed impairment loss allowances

Individually assessed loans for which no evidence of loss has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for the purpose of calculating an estimated allowance for inherent losses. Such losses will only be individually identified in the future. As soon as information becomes available which identifies losses on individual loans within the group, those loans are removed from the group and assessed for observed losses.

The allowance for inherent losses is determined on a portfolio basis by applying the impairment loss allowances methodology outlined above to these accounts after taking into account:

 

historical loss experience in portfolios of similar credit risk characteristics (for example, by product);

the estimated period between impairment occurring and the loss being identified and evidenced by the establishment of an observed loss allowance against the individual loan (known as the emergence period, as discussed below); and

management's judgement as to whether current economic and credit conditions are such that the actual level of inherent losses at the balance sheet date is likely to be greater or less than that suggested by historical experience.

 

The emergence period

This is the period which the Group's statistical analysis shows to be the period in which losses that had been incurred but have not been separately identified at the balance sheet date, become evident as the loans turn into past due. Based on the Group's statistical analysis at 31 December 2011 and 2010, the emergence period was two to three months for unsecured lending and twelve months for secured lending. The longer emergence period for secured lending reflects the fact that a customer is more likely to default on unsecured debt before defaulting on secured lending. The factors considered in determining the length of the emergence period for unsecured lending are recent changes in customers' debit/credit payment profiles and credit scores. The factors considered for secured lending are the frequency and duration of exceptions from adherence to the contractual payment schedule.

 

Observed impairment loss allowances

An impairment loss allowance for observed losses is established for all past due loans after a specified period of repayment default where it is probable that some of the capital will not be repaid or recovered through enforcement of any applicable security. Loans for which evidence of loss has been specifically identified are grouped together according to their credit risk characteristics for the purpose of calculating an estimated allowance for observed losses.

The allowance for observed losses is determined on a portfolio basis by applying the impairment loss allowances methodology outlined above for IBNO to these accounts, with the exception that no consideration is given to an emergence period, as the losses are already observed.

Generally, the length of time before an asset is placed on default status for an impairment loss review is when at least one payment is missed. Repayment default periods vary depending on the nature of the collateral that secures the advances. On advances secured by residential or commercial property, the default period is three months. For advances secured by consumer goods such as cars or computers, the default period is less than three months, the exact period being dependent on the particular type of loan in this category. On unsecured advances, such as personal term loans, the default period is generally four missed payments (three months in arrears). Exceptions to the general rule exist with respect to revolving facilities, such as bank overdrafts, which are placed on default upon a breach of the contractual terms governing the applicable account, and on credit card accounts where the default period is three months.

 

Reversals of impairment

If in a subsequent period, the amount of an impairment loss reduces and the reduction can be related objectively to an event occurring after the impairment was recognised, the excess is written back by reducing the impairment loss allowance account accordingly. The write-back is recognised in the income statement.

 

Write-off

For secured loans, a write-off is only made when all collection procedures have been exhausted and the security has been sold or from claiming on any mortgage indemnity guarantee or other insurance. Security is realised in accordance with the Group's internal debt management programme. For unsecured loans, a write-off is only made when all internal avenues of collecting the debt have been exhausted and the debt is passed over to external collection agencies. Contact is made with customers with the aim to achieve a realistic and sustainable repayment arrangement. Litigation and/or enforcement of security is usually carried out only when the steps described above have been undertaken without success.

All write-offs are on a case by case basis, taking account of the exposure at the date of write-off, after accounting for the value from any collateral or insurance held against the loan. Except on fraud, where the exposure is written off once full investigations have been completed and the probability of recovery is minimal. The time span between discovery and write-off will be short and may not result in an impairment loss allowance being raised. The write-off policy is regularly reviewed. Write-offs are charged against previously established impairment loss allowances.

 

Recoveries

Recoveries of impairment losses are not included in the impairment loss allowance, but are taken to income and offset against impairment losses. Recoveries are classified in the income statement as 'Impairment losses on loans and advances'.

 

Impairment losses on restructured/renegotiated retail assets (forbearance)

To support retail customers that encounter actual or apparent financial difficulties, the Group may grant a concession, whether temporary or permanent, to amend contractual amounts or timings where a customer's financial distress indicates a potential that satisfactory repayment may not be made within the original terms and conditions of the contract. These arrangements are known as forbearance.

There are different risk characteristics associated with loans that are subject to forbearance as compared to loans that are not. A range of forbearance arrangements may be entered into by the Group, reflecting the different risk characteristics of such loans. The Group's forbearance programmes are described in the credit risk section in the Risk Management report.

 

Mortgages

On advances secured by residential property, the main types of forbearance offered are capitalisation, under the forms of payment arrangements, and refinancing (either a term extension or an interest only concession), subject to customer negotiation and vetting. Such accounts are classified in the "collections" category and continue to be reported in arrears until the arrears are capitalised.

The impairment loss allowances on these accounts are calculated in the same manner as on any other account, using the Group's collective assessment methodology. In making a collective assessment for impairment, loans that are subject to forbearance are grouped together according to their credit risk characteristics. Separate assessments are performed for loans in forbearance that are performing and non-performing, and for each type of forbearance applied to reflect their differing risk profiles. The loss propensities are based on recent historical experience, typically covering a period of no more than the most recent six months in the year under review. For each portfolio of loans in forbearance, the loss propensity factor applied in the collective assessment calculation is higher reflecting the higher risk of default attached to these accounts.

Where accounts undergoing forbearance are in arrears prior to entering forbearance they continue to be reported in their original delinquency cycle until any arrears are capitalised, at which point the accounts will be transferred to the "performing" category. The impairment provision on these accounts is based on the delinquency cycle in which the account was classified when it entered forbearance, unless the account's status has deteriorated further since then, in which case the impairment provision will be based on the current status.

It is not expected that all accounts in the collections category will default particularly as the Group's lending policies only permit a mortgage restructure, refinance or forbearance in circumstances where the customer is expected to be able to meet the related requirements and ultimately repay in full.

 

- Unsecured Personal Loans

For unsecured personal loans ('UPLs'), the main type of forbearance offered is term extension, subject to customer negotiation and vetting. UPL forbearance methodologies are consistent with those applied for mortgages.

 

- Credit Cards

For credit card lending, the main types of forbearance offered are reduced repayment arrangements and reduced settlement arrangements. Reduced settlement arrangements have no impact on the provisioning level as the agreed remaining balance is written off at the point of settlement.

 

(ii) Corporate assets

 

Corporate assets are assessed either individually or collectively for impairment. An impairment loss is incurred if there is objective evidence that a loss event has occurred since initial recognition of the assets that has an impact on the estimated future cash flows of the assets.

 

Potential indicators of loss events

Potential indicators of loss events which may be evidence of financial difficulty for a corporate borrower may include the borrower notifying the Group of current or likely financial distress; corporate results not meeting forecasts, missed repayments, requests for additional funding; breaches of covenants and changes in business plans.

 

Individual assessment

Impairment reviews are conducted monthly for those assets on the Group's 'Watchlist' of new, emerging and serious circumstances relating to the asset, with a particular focus on the following scenarios:

 

where an asset has a payment default which has been outstanding for 90 days or more;

where non-payment defaults have occurred and/or where it has become evident that a workout or rescheduling exercise is to be undertaken; or

where it has become evident that the value of any security is no longer considered adequate.

 

In such situations the asset is transferred to the Corporate Banking Workouts & Collections team. As part of their impairment reviews, an assessment is undertaken of the expected future cash flows (including a revaluation of collateral held) in relation to the relevant asset, appropriately discounted. The result is compared to the current net book value of the asset. Any shortfall evidenced as a result of such a review results in an observed impairment loss allowance.

 

Collective assessment

Collective impairment assessment is used for portfolios classified as 'performing assets' where it is believed that market events are likely to have determined that losses are already inherent in a portfolio (i.e. IBNO) notwithstanding that these events may not have manifested themselves in specific defaults or other triggers that would lead to an individual impairment assessment. The amount of any such collective impairment loss allowance, for each portfolio concerned represents management's best estimate of likely loss levels and takes into account, amongst other factors, the total exposure and anticipated stressed levels in the relevant industry sector, estimates of probability of default and loss given default rates.

The level of IBNO for each portfolio is calculated, based on these factors, and is applied to the total value of unimpaired assets within the portfolio (i.e. excluding any assets for which an observed impairment loss allowance already exists). The impairment loss allowance assessment is regularly reviewed for any material change in the dynamics of the portfolio (e.g. volume, mix, observed losses) and market conditions (including comparison of the current IBNO impairment loss allowance level to the range of IBNO impairment loss allowances across similar loans in the industry).

 

Reversals of impairment

If in a subsequent period, the amount of an impairment loss reduces and the reduction can be related objectively to an event occurring after the impairment was recognised, the excess is written back by reducing the impairment loss allowance account accordingly. The write-back is recognised in the income statement.

 

Write-off

For secured loans, a write-off is made when all collection procedures have been exhausted and the security has been sold. For unsecured loans, a write-off is made when all avenues for collecting the debt have been exhausted. There may be occasions where a write-off occurs for other reasons, for example, following a consensual restructure of the debt or where the debt is sold for strategic reasons into the secondary market at a value lower than the face value of the debt. Write-offs are charged against previously established impairment loss allowances.

 

Recoveries

Recoveries of impairment losses are not included in the impairment loss allowance, but are taken to income and offset against impairment losses. Recoveries are classified in the income statement as 'Impairment losses on loans and advances'.

 

Impairment losses on restructured/renegotiated corporate assets (forbearance)

To support corporate customers that encounter actual or apparent financial difficulties, the Group may grant a concession, whether temporary or permanent, to amend contractual amounts or timings where a customer's financial distress indicates the potential that satisfactory repayment may not be made within the original terms and conditions of the contract. These arrangements are known as forbearance.

There are different risk characteristics associated with loans that are subject to forbearance as compared to loans that are not. A range of forbearance arrangements may be entered into by the Group, reflecting the different risk characteristics of such loans. The Group's forbearance programmes are described in the credit risk section in the Risk Management report.

For corporate borrowers, the main types of forbearance offered are payment arrangements, refinancing (principally, either a term extension or an interest only concession) and in limited circumstances other forms of restructuring policies (principally a debt for equity swap), subject to customer negotiation and vetting.

If such accounts were classified in the "non-performing" loan category prior to the restructuring, they continue to be classified as non-performing until evidence of compliance with the new terms is demonstrated (typically over a period of at least three months) before being reclassified as "substandard". If the account was not categorised as non-performing at the time the revised arrangements were agreed, the case is considered to be a renegotiation and is reclassified to "substandard" upon completion of the restructuring agreement.

Once a substandard asset has demonstrated continued compliance with the new terms and the risk profile is deemed to have improved it may be reclassified as a "performing asset". When such accounts are reclassified as performing assets, they continue to be assessed for impairment collectively for inherent losses under the Group's normal collective assessment methodology. Until then, impairment loss allowances for such restructured loans are assessed individually, taking into account the value of collateral held as confirmed by third party professional valuations and the available cashflow to service debt over the period of the restructuring. These impairment loss allowances are assessed and reviewed regularly. In the case of a debt for equity conversion, the converted debt is written off against the existing impairment loss allowance upon completion of the restructuring. The value of the equity acquired is reassessed periodically in light of subsequent performance of the restructured company.

Where an account is in forbearance, its additional risk characteristics are reflected by way of management's best estimate as the only practical means of factoring recent conditions into impairment calculations until the Group's models can be recalibrated. As more comprehensive data on the performance of loans in forbearance is gathered, the Group's models will be recalibrated.

 

(iii) Loans and receivables securities

 

Loans and receivables securities are assessed individually for impairment. An impairment loss is incurred if there is objective evidence that a loss event has occurred since initial recognition of the assets that has an impact on the estimated future cash flows of the loans and receivables securities. Potential indicators of loss events include significant financial distress of the issuer and default or delinquency in interest and principal payments (breach of contractual terms).

 

Loans and receivables securities are monitored for potential impairment through a detailed expected cashflow analysis taking into account the structure and underlying assets of each individual security. Once specific events give rise to a reasonable expectation that future anticipated cash flows may not be received, the asset originating these doubtful cash flows will be deemed to be impaired.

 

(b) Available-for-sale financial assets

 

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In assessing whether assets are impaired, a significant or prolonged decline in the fair value of the security below its cost is considered evidence. The cumulative loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss previously reported in the income statement and is removed from other comprehensive income and recognised in the income statement.

If in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase is due to an event occurring after the impairment loss was recognised in the income statement (with objective evidence to support this), the impairment loss is reversed through the income statement.

If in a subsequent period, the fair value of an equity instrument classified as available-for-sale increases, all such increases in the fair value are treated as a revaluation, and are recognised in other comprehensive income. Impairment losses recognised on equity instruments are not reversed through the income statement.

 

IMPAIRMENT OF NON-FINANCIAL ASSETS

 

At each balance sheet date, or more frequently when events or changes in circumstances dictate, property plant and equipment (including operating lease assets) and intangible assets (including goodwill) are assessed for indicators of impairment. If indications are present, these assets are subject to an impairment review.

The impairment review comprises a comparison of the carrying amount of the asset or cash generating unit with its recoverable amount: the higher of the asset's or cash-generating unit's fair value less costs to sell and its value in use. The cash-generating unit represents the lowest level at which goodwill is monitored for internal management purposes and is not larger than an operating segment.

The net selling price is calculated by reference to the amount at which the asset could be disposed of in a binding sale agreement in an arm's length transaction evidenced by an active market or recent transactions for similar assets, less costs to sell. Value in use is calculated by discounting management's expected future cash flows obtainable as a result of the asset's continued use, including those resulting from its ultimate disposal, at a market based discount rate on a pre tax basis. The recoverable amounts of goodwill have been based on value in use calculations.

The carrying values of property, plant and equipment and goodwill are written down by the amount of any impairment and the loss is recognised in the income statement in the period in which it occurs. Impairment of a cash generating unit is allocated first to goodwill and then to other assets held within the unit on a pro-rata basis. An impairment loss recognised in an interim period is not reversed at the balance sheet date. A previously recognised impairment loss relating to property, plant and equipment may be reversed in part or in full when a change in circumstances leads to a change in the estimates used to determine the property, plant and equipment's recoverable amount. The carrying amount of the fixed asset will only be increased up to the amount that would have been had the original impairment not been recognised. Impairment losses on goodwill are not reversed. For conducting goodwill impairment reviews, cash generating units are the lowest level at which management monitors the return on investment on assets.

 

LEASES

 

The Group as lessor

Operating lease assets are recorded at deemed cost and depreciated over the life of the asset after taking into account anticipated residual values. Operating lease rental income and depreciation is recognised on a straight-line basis over the life of the asset. Amounts due from lessees under finance leases and hire purchase contracts are recorded as receivables at the amount of the Group's net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group's net investment outstanding in respect of the leases and hire purchase contracts.

 

The Group as lessee

The Group enters into operating leases for the rental of equipment or real estate. Payments made under such leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. If the lease agreement transfers the risk and rewards of the asset, the lease is recorded as a finance lease and the related asset is capitalised. At inception, the asset is recorded at the lower of the present value of the minimum lease payments or fair value and depreciated over the lower of the estimated useful life and the life of the lease. The corresponding rental obligations are recorded as borrowings. The aggregate benefit of incentives, if any, is recognised as a reduction of rental expense over the lease term on a straight-line basis.

 

INCOME TAXES, INCLUDING DEFERRED TAXES

 

The tax expense represents the sum of the income tax currently payable and deferred income tax.

Income tax payable on profits, based on the applicable tax law in each jurisdiction, is recognised as an expense in the period in which profits arise. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred income tax is the tax expected to be payable or recoverable on income tax losses available to carry forward and on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the assets may be utilised as they reverse. Such deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill. Deferred tax assets and liabilities are not recognised from the initial recognition of other assets (other than in a business combination) and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on rates enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Group is able to control reversal of the temporary difference and it is probable that it will not reverse in the foreseeable future. The Group reviews the carrying amount of deferred tax assets at each balance sheet date and reduces it to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where there is both the legal right and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

 CASH AND CASH EQUIVALENTS

 

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months' maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills, loans and advances to banks and short-term investments in securities.

 FINANCIAL LIABILITIES

 

Financial liabilities are initially recognised when the Group becomes contractually bound to the transfer of economic benefits in the future. Financial liabilities are derecognised when extinguished.

 

(a) Financial liabilities at fair value through profit or loss

Financial liabilities are classified as fair value through profit or loss if they are either held for trading or otherwise designated at fair value through profit or loss on initial recognition. A financial liability is classified as held for trading if it is a derivative or it is incurred principally for the purpose of repurchasing or being unwound in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking.

In certain circumstances financial liabilities other than those that are held for trading are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets and liabilities or recognising the gains or losses on them on a different basis, or where a financial liability contains one or more embedded derivatives which are not closely related to the host contract. These liabilities are initially recognised at fair value and transaction costs are taken directly to the income statement. Gains and losses arising from changes in fair value are included directly in the income statement. Derivative financial instruments, Trading liabilities and Financial liabilities designated at fair value are classified as fair value through profit or loss.

 

(b) Other financial liabilities

All other financial liabilities are initially recognised at fair value net of transaction costs incurred. They are subsequently stated at amortised cost and the redemption value recognised in the income statement over the period of the liability using the effective interest method. Deposits by banks, Deposits by customers, Debt securities in issue (unless designated at fair value) and Subordinated liabilities are classified as amortised cost.

 

Equity index-linked deposits

Contracts involving the receipt of cash on which customers receive an index-linked return are accounted for as equity index-linked deposits, and classified as deposits by customers within trading liabilities. Equity index-linked deposits are managed within the equity derivatives trading book as an integral part of the equity derivatives portfolio.

 

There are two principal product types.

(i) Capital at Risk

These products are designed to replicate the investment performance of an equity index, subject to a floor. In the event the index falls under a predetermined level, customers forfeit a predetermined percentage of principal up to a predetermined amount.

(ii) Capital Guaranteed/Protected

These products give the customers a limited participation in the upside growth of an equity index. In the event the index falls in price, a cash principal element is guaranteed/protected.

Equity index-linked deposits are remeasured at fair value at each reporting date with changes in fair values recognised in the income statement. The equity index-linked deposits contain embedded derivatives. These embedded derivatives, in combination with the principal cash deposit element, are designed to replicate the investment performance profile tailored to the return agreed in the contracts with customers. Other than new capital guaranteed products, which are treated as deposits by customers with any associated embedded derivatives bifurcated, embedded derivatives are not separated from the host instrument and are not separately accounted for as a derivative instrument, as the entire contract embodies both the embedded derivative and the host instrument and is remeasured at fair value at each reporting date. As such, there is no requirement to bifurcate the embedded derivatives in the equity index-linked deposits.

 BORROWINGS

 

Borrowings (which include deposits by banks, deposits by customers, debt securities in issue and subordinated liabilities) are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost or fair value dependent on designation at initial recognition.

Preference shares which carry a contractual obligation to transfer economic benefits are classified as financial liabilities and are presented in subordinated liabilities. The coupon on these preference shares is recognised in the income statement as interest expense on an amortised cost basis using the effective interest method.

 PROVISIONS 

Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefits will be necessary to settle the obligation, and it can be reliably estimated.

Provision is made for the estimated cost of making redress payments with respect to the past sales of products, based on conclusions regarding the number of claims that will be received, including the number of those that will be upheld, and the estimated average settlement per case. Provision is made for the anticipated cost of restructuring, including redundancy costs, when an obligation exists. An obligation exists when the Group has a detailed formal plan for restructuring a business, has raised valid expectations in those affected by the restructuring, and has started to implement the plan or announce its main features.

When a leasehold property ceases to be used in the business, provision is made where the unavoidable costs of the future obligations relating to the lease are expected to exceed anticipated rental income. The net costs are discounted using market rates of interest to reflect the long-term nature of the cash flows.

Provision is made for loan commitments, other than those classified as held for trading, within impairment loss allowances if it is probable that the facility will be drawn and the resulting loan will be recognised at a value less than the cash advanced. Contingent liabilities are possible obligations whose existence will be confirmed only by certain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote.

 FINANCIAL GUARANTEE CONTRACTS

 

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. The Group accounts for guarantees that meet the definition of a financial guarantee contract at fair value on initial recognition. In subsequent periods, these guarantees are measured at the higher of the initial fair value less cumulative amortisation and the amount that would be recognised as an impairment loss allowance as described in the accounting policies above.

 SHARE CAPITAL 

Incremental external costs directly attributable to the issue of new shares are deducted from equity net of related income taxes.

 

DIVIDENDS

 

Dividends on ordinary shares are recognised in equity in the period in which the right to receive payment is established.

 

CRITICAL ACCOUNTING POLICIES AND AREAS OF SIGNIFICANT MANAGEMENT JUDGEMENT

 

The preparation of the Group's Consolidated Financial Statements requires management to make estimates and judgements that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of income and expenses during the reporting period. Management evaluates its estimates and judgements on an ongoing basis. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The following accounting estimates and judgements are considered important to the portrayal of the Group's financial results and financial condition because: (i) they are highly susceptible to change from period to period as assumptions are made to calculate the estimates, and (ii) any significant difference between the Group's estimated amounts and actual amounts could have a material impact on the Group's future financial results and financial condition.

In calculating each estimate, a range of outcomes was calculated based principally on management's conclusions regarding the input assumptions relative to historic experience. The actual estimates were based on what management concluded to be the most probable assumptions within the range of reasonably possible assumptions.

 

(a) Impairment loss allowances for loans and advances

 

The Group estimates impairment losses for loans and advances to customers, loans and receivables securities, and loans and advances to banks as described in the accounting policy "Impairment of financial assets" on page 177. The Group's assumptions about estimated losses are based on past performance, past customer behaviour, the credit quality of recent underwritten business and general economic conditions, which are not necessarily an indication of future losses.

 

(i) Loans and advances to customers 

The net impairment loss (i.e. after recoveries) for loans and advances to customers in the Retail Banking segment recognised in 2011 was £339m (2010: £552m), and in the Corporate Banking segment was £226m (2010: £160m). In calculating the Retail Banking and Corporate Banking impairment loss allowances, a range of outcomes was calculated, either for each individual loan or by portfolio, based on management's conclusions regarding the estimated number of accounts that will be written off or repossessed (the 'loss propensity'), the estimated proportion of such cases that will result in a loss (the 'loss factor') and the average loss incurred (the 'loss per case') relative to historic experience.

Had management used different assumptions, a larger or smaller impairment loss allowance would have resulted that could have had a material impact on the Group's reported profit before tax. Specifically, if management's conclusions as to the loss propensity, the loss factor and the estimated loss per case were different, but within the range of what management deemed to be reasonably possible, the impairment loss for loans and advances in the Retail Banking segment could have decreased in 2011 from an actual impairment loss of £339m (2010: £552m, 2009: £680m) by up to £120m (2010: £99m, 2009: £122m), with a potential corresponding increase in the Group's profit before tax in 2011 of up to 10% (2010: 5%, 2009: 8%), or increased by up to £41m (2010: £49m, 2009: £110m), with a potential corresponding decrease in the Group's profit before tax in 2011 of up to 3% (2010: 3%, 2009: 7%). Similarly, the impairment loss for loans and advances in the Corporate Banking segment could have decreased in 2011 from an actual impairment loss of £226m (2010: £160m) by up to £53m (2010: £38m), with a potential corresponding increase in the Group's profit before tax in 2011 of up to 4% (2010: 1%), or increased by up to £50m (2010: £28m), with a potential corresponding decrease in the Group's profit before tax in 2011 of up to 4% (2010: 1%).

 

(ii) Loans and receivables securities

In 2011, the Group did not incur any impairment losses in respect of loans and receivables securities (2010: £nil, 2009: £69m) Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of its assumptions would not cause an impairment loss to be recognised.

 

(iii) Loans and advances to banks

In 2011, 2010 and 2009, the Group did not incur any impairment losses in respect of loans and advances to banks. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of its assumptions would not cause an impairment loss to be recognised.

 

(b) Valuation of financial instruments

 

The Group trades in a wide variety of financial instruments in the major financial markets. When estimating the value of its financial instruments, including derivatives where quoted market prices are not available, management therefore considers a range of interest rates, volatility, exchange rates, counterparty credit ratings, valuation adjustments and other similar inputs, all of which vary across maturity bands. These are chosen to best reflect the particular characteristics of each transaction.

Had management used different assumptions, a larger or smaller change in the valuation of financial instruments including derivatives where quoted market prices are not available would have resulted that could have had a material impact on the Group's reported profit before tax.

Detailed disclosures on financial instruments, including sensitivities, can be found in Note 47. Further information about sensitivities to market risk (including Value-at-Risk ('VaR')) arising from financial instrument trading activities can be found in the Risk Management Report on page 118.

 

(c) Goodwill impairment

 

A goodwill impairment loss of £60m was recognised in 2011 (2010: £nil, 2009: £nil). The carrying amount of goodwill was £1,834m at 31 December 2011 (2010: £1,894m). The Group evaluates whether the carrying value of goodwill is impaired and performs impairment testing annually or more frequently if there are impairment indicators present. Details of the Group's approach to identifying and quantifying impairment of goodwill are set out in Note 25. Assumptions about the measurement of the estimated recoverable amount of goodwill are based on management's estimates of future cash flows and growth rates of the cash-generating units. The Group's assumptions about estimated future cash flows and growth rates are based on management's view of future business prospects at the time of the assessment and are subject to a high degree of uncertainty.

Had management used different assumptions, a larger or smaller goodwill impairment loss would have resulted that could have had a material impact on the Group's reported profit before tax. Detailed disclosures on the assumptions used, including sensitivities, can be found in Note 25.

 

(d) Provision for customer remediation, principally payment protection insurance ('PPI')

 

The provision charge for customer remediation, principally PPI, relating to products sold recognised in 2011 was £751m (2010: £120m, 2009: £10m) before tax. The balance sheet provision amounted to £671m (2010: £185m, 2009: £43m). Detailed disclosures on the provision for customer remediation can be found in Note 36.

The provision represents management's best estimate of the anticipated costs of related customer contact and/or redress, including administration expenses. However, there are still a number of uncertainties as to the eventual costs from any such contact and/or redress given the inherent difficulties in assessing the impact of detailed implementation of the FSA Policy Statement of 10 August 2010 for all PPI complaints, uncertainties around the ultimate emergence period for complaints, the availability of supporting evidence and the activities of claims management companies, all of which will significantly affect complaints volumes, uphold rates and redress costs.

The provision requires significant judgement by management in determining appropriate assumptions, which include the level of complaints, of those, the number that will be upheld, as well as redress costs for each of the different populations of customers identified by the Group in its analyses used to determine the best estimate of the anticipated costs of redress.

Had management used different assumptions, a larger or smaller provision charge would have resulted that could have had a material impact on the Group's reported profit before tax. Specifically, if the level of complaints had been one percentage point higher/(lower) than estimated for all policies written then the provision at 31 December 2011 would have increased/(decreased) by approximately £36m. There are a large number of inter-dependent assumptions under-pinning the provision; this sensitivity assumes that all assumptions, other than the level of complaints, remain constant.

The Group will re-evaluate the assumptions underlying its analysis at each reporting date as more information becomes available. As noted above, there is inherent uncertainty in making estimates; actual results in future periods may differ from the amount provided.

 

(e) Pensions

 

The Group operates a number of defined benefit pension schemes as described in Note 37 and estimates their fair values as described in the accounting policy "Pensions and other post retirement benefits" on page 172.

The defined benefit service cost recognised in 2011 was £34m (2010: £35m, 2009: £44m). The defined benefit pension schemes which were in a net asset position had a surplus of £241m and the defined benefit pension schemes which were in a net liability position had a deficit of £216m (2010: deficit of £173m). The current year service cost was broadly unchanged from the previous year.

Accounting for defined benefit pension schemes requires management to make assumptions, principally about mortality, but also about price inflation, discount rates, pension increases, and earnings growth. Management's assumptions are based on past experience and current economic trends, which are not necessarily an indication of future experience.

Detailed disclosures on the current year service cost and surplus, including sensitivities and the date of the last formal actuarial valuations of the assets and liabilities of the schemes can be found in Note 37.

 

 

 

This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
FR GGUUPWUPPPGA
Date   Source Headline
2nd Apr 20206:22 pmRNSResult of AGM
23rd Mar 20207:00 amRNSExpiration of Tender Offer
17th Mar 20207:30 amRNSBOARD CHANGE
16th Mar 20205:06 pmRNSArticle 8
16th Mar 20208:36 amRNS1160 ISE Delisting Announcement
10th Mar 20207:00 amRNSSANTANDER UK APPOINTS TONY PRESTEDGE AS DEPUTY CEO
9th Mar 20203:50 pmRNSSantander UK plc - Pricing Announcement
9th Mar 20203:37 pmRNSTender Offer - Pricing
9th Mar 20202:26 pmRNSEarly results cash tender offer
9th Mar 20201:26 pmRNSResult of Tender Offer
3rd Mar 20202:38 pmRNSPublication of Supplementary Prospectus
3rd Mar 20202:34 pmRNSPublication of Supplementary Prospectus
3rd Mar 20207:15 amRNSAnnual Financial Report
28th Feb 20201:24 pmRNSEuro Medium Term Note Programme - Final Terms
24th Feb 20205:23 pmRNSSantander UK plc announces cash tender offer
24th Feb 20205:22 pmRNSTender Offer
12th Feb 20204:55 pmRNSGlobal Bond Programme Final Terms - Series 76
12th Feb 20204:35 pmRNSGlobal Bond Programme Series 75 - Final terms
30th Jan 20201:56 pmRNSGlobal Bond Programme - Supplementary Prospectus
30th Jan 20208:30 amRNSSANTANDER UK GROUP HOLDINGS PLC - BOARD CHANGE
29th Jan 20201:21 pmRNSPublication of Supplementary Prospectus
20th Jan 20208:38 amRNS1158 Notice of Delisting - XS2063664275
15th Jan 20203:39 pmRNSGlobal Bond Programme - Final Terms - Series 74
13th Jan 20205:19 pmRNSNotice of Delisting - Covered Bonds
18th Dec 20194:29 pmRNSNotice of Delisting Covered Bonds (Date Amendment)
17th Dec 20192:33 pmRNSNotice of Delisting - Covered Bond Programme
16th Dec 20196:02 pmRNSSantander UK Pass 2019 Bank of England Stress Test
9th Dec 20193:12 pmRNSArticle 8
9th Dec 20199:49 amRNSNotice of Delisting - series 1155 XS2035095459
12th Nov 20192:28 pmRNSGlobal Covered Bond Programme - Final Terms
30th Oct 201912:31 pmRNSPublication of Supplementary Prospectus
15th Oct 201910:00 amRNSNotice of De-Listing
7th Oct 20195:21 pmRNSArticle 8
7th Oct 20198:32 amRNSNotice Of Delisting - 1151
11th Sep 201912:46 pmRNSAmendments to Global Covered Bond Swap Agreement
3rd Sep 201910:15 amRNSNotice re Holmes Master Trust Libor Linked Notes
15th Aug 20199:00 amRNSBoard Changes
12th Aug 20192:37 pmRNSArticle 8
9th Aug 20194:54 pmRNSNotice of Delisting - XS1970465974
9th Aug 20193:58 pmRNSPublication of Suppl.Prospcts
9th Aug 20193:50 pmRNSPublication of Suppl.Prospcts
9th Aug 20197:37 amRNSHalf-year Report
23rd Jul 20195:03 pmRNSPublication of Suppl.Prospcts
23rd Jul 20194:59 pmRNSPublication of Suppl.Prospcts
23rd Jul 20197:15 amRNSQuarterly Management Statement - 30 June 2019
10th Jul 20192:00 pmRNSDirectorate Change
1st Jul 20194:30 pmRNSPublication of a Prospectus
10th Jun 20194:08 pmRNSArticle 8
10th Jun 20193:38 pmRNS1144 ISE Delisting Announcement
14th May 20193:53 pmRNSPublication of Final Terms

Due to London Stock Exchange licensing terms, we stipulate that you must be a private investor. We apologise for the inconvenience.

To access our Live RNS you must confirm you are a private investor by using the button below.

Login to your account

Don't have an account? Click here to register.

Quickpicks are a member only feature

Login to your account

Don't have an account? Click here to register.