Sant Uk.10te% Regulatory News (SAN)

Governance

Directors 

BOARD OF DIRECTORS

CHAIRMAN

Lord Burns

Lord Terence Burns (age 69) was appointed a Non-Executive Director and 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 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 (1991-1998) 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), Deputy Chairman and subsequently Chairman of Marks and Spencer Group plc (2006-2008), Chairman of Glas Cymru Cyfyngedig (Welsh Water) (2000-2010), Governor and subsequently President of the National Institute of Economic and Social Research (1998-2011), and Vice-President and subsequently President of the Society of Business Economists (1985-2012) Since the year end he has been appointed as a member of the Whistleblowing Commission.

EXECUTIVE DIRECTORS

Ana Botín

Chief Executive Officer

Ana Botín (age 52) was appointed as Chief Executive Officer on 1 December 2010. She joined the Banco Santander 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. Ana is a member of Mayor's Fund for London, Founder and Vice-Chairman of Empresa y Crecimiento Foundation, which finances small and medium sized companies in Latin America, and Founder and Chairman of the Conocimiento y Desarrollo Foundation, a not-for-profit organisation which promotes the contribution of universities to economic and social development. She is also the Founder and Chairman of Empieza Por Educar Foundation, the Spanish member of the global Teach For All network.

Stephen Jones (age 48) was appointed as an Executive Director and Chief Financial Officer on 6 March 2012. Stephen joined Santander UK in 2011 from Barclays Bank plc where he was a 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 was Managing Director, Derivatives Origination & Structuring at Schroders (later Schroder Salomon Smith Barney) where he spent 14 years in a number of different roles. He qualified as a solicitor in 1988.

Steve Pateman (age 49) was appointed as an Executive Director on 1 June 2011 responsible for Corporate, Commercial and Business Banking. On 6 March 2012, Steve was appointed Head of UK Banking and assumed additional responsibility for Retail Banking and Retail Products and Marketing. Steve joined the Company in June 2008 as Head of UK Corporate and Commercial Banking and an Executive Committee member. Previously he worked at 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. 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.

José María Nus (age 62) 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. José María is also a Member of the Board of Catalana di Economia, a Barcelona based academic think tank.

NON-EXECUTIVE DIRECTORS

Deputy Chairman

Roy Brown

Roy Brown (age 66) was appointed Non-Executive Director on 21 October 2008. He was previously a Non-Executive Director and Deputy Chairman (2007-2008) and subsequently acting Chairman (2008) of Alliance & Leicester plc. Formerly, he was an Executive Director of Unilever plc and NV (1992-2001) where he held a variety of executive roles, managing businesses in Europe, Africa, and the Middle East; Chairman and a Non-Executive Director of GKN plc (1996-2012), Senior Independent Non-Executive Director of HMV Group (2002-2009) and Chairman and Non-Executive Director Thus Group plc (2001-2004). He was also a Non-Executive Director of Brambles Industries plc (2001-2006), the British United Provident Association Ltd (BUPA) (2001-2006) and the Franchise Board of Lloyd's of London (2003-2008). Roy is a Chartered Engineer, Graduate of the Harvard Business School and has been a Member of the CBI International Advisory Board, the DTI Industrial Development Advisory Board and Director of UK South Africa Business Association.

José María Carballo

José María Carballo (age 68) 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., Director Santander Real Estate S.A. 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. (1989-2001) and Chief Executive Officer of Banco Santander de Negocios (1989-1993) and Star Capital Partners Limited (2001-2005). 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.

Bruce Carnegie-Brown

Bruce Carnegie-Brown (age 53) was appointed Non-Executive Director on 1 October 2012. He is also Chairman of Aon UK Limited, Senior Independent Director of Close Brothers Group plc, Senior Independent Director of Catlin Group Limited, and a Non-Executive Director of Moneysupermarket.com Group plc. Previously, Bruce was Managing Partner of 3i Group (2007-2009), CEO of Marsh Limited and President and CEO of March Europe (2003-2006); Managing Director of JP Morgan (1985-2003), including roles as Senior Credit Officer EMEA (1995-1997), Chairman and CEO of JP Morgan Securities Asia (1998-2000) and Head of European and Asian Debt Capital Markets (2000-2003). He is also Trustee of the Shakespeare's Globe Trust and a past Chairman of the Institute of Financial Services School of Finance.

Antonio Escámez

Antonio Escámez (age 61) was appointed Non-Executive Director on 1 October 2012. He is also Chairman of Fundación Banco Santander, a Member of the Banco Santander International Advisory Board, Chairman of Santander Consumer Finance S.A., Chairman of Openbank S.A., Chairman of Arena Media Communications, Vice Chairman of Grupo Konnectanet S.L., Chairman of the Spain-India Council Foundation and Vice Chairman of Attijariwafa Bank. Antonio was formerly a Banco Santander, S.A. Director and Executive Committee member (2001-2012). He was also a member of the Group Risk Committee and Group Technology Committee.

José María Fuster

José María Fuster (age 54) was appointed Non-Executive Director on 1 December 2004. He is the Banco Santander Group Technology and Operations Managing Director and a Group Executive Committee member. He was appointed as Chief Information Officer of Banco Santander, S.A. in 2003 and is responsible for providing the technological and operational systems that support the Banco Santander group's accounting and risk functions. José Maria is a Non-Executive Director of Banco Español de Credito, S.A., Santander Holding USA Inc., Santander Consumer Holding GmBh and a Director of Ingeniería de Software Bancario (ISBAN). 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 61) was appointed Non-Executive Director on 1 July 2006. She is also a Non-Executive Director on the Board of Smurfit Kappa Group plc. Rosemary 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.

CORPORATE GOVERNANCE STATEMENT

The narrative reporting in these financial statements has been enhanced from prior years to bring its disclosures more in line with those required of a premium listed company. The Company will continue to enhance its reporting in the coming years in order to report fully as if it were a premium listed company, in readiness for any IPO.

Santander UK plc (the 'Company') is a UK subsidiary of Banco Santander, S.A., a Spanish company which has its registered office at Paseo de Pereda 9-12, Santander, Spain. Although the Company's ordinary shares are not listed on the London Stock Exchange ('LSE') the Company is subject to the Listing Rules and the Disclosure & Transparency Rules of the FSA because it has preference shares listed on the LSE. 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 premium listed companies in the UK. However, the Company is committed to achieving high standards of corporate governance and, whilst not obliged to do so, seeks to comply with the UK Corporate Governance Code as updated in 2012 and issued by the Financial Reporting Council (the 'Code') in a manner appropriate for its ownership structure.

Whilst the Company is a subsidiary of Banco Santander, S.A. 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.

Statement of compliance with the UK Corporate Governance Code

The Board confirms that, for the financial year ended 31 December 2012, the Company has applied the majority of the Main Principles and relevant provisions of the Code appropriate to its ownership structure. The Chairman's Statement on page 6 together with this Report and the reports of the Board Committees on pages 168 to 180 describe how the Company has applied its corporate governance model during the year.

The Board

On 14 March 2013, the Board comprised the Chairman, four Executive Directors, four Independent Non-Executive Directors and three group Non-Executive Directors representing the parent company, Banco Santander, S.A.. Stephen Jones, the Company's Chief Financial Officer, was appointed to the Board on 6 March 2012. Bruce Carnegie-Brown and Antonio Escámez were appointed to the Board as Non-Executive Directors on 1 October 2012. Short biographies of each Director, which illustrate the range of their experience and qualifications, are set out on pages 163 and 164. The Board is satisfied that the Chairman and those Directors who have external directorships have sufficient time available to discharge their responsibilities and to be effective members of the Board.

Lord Burns (Chairman), who was independent on appointment, leads the Board and Ana Botín (Chief Executive Officer) is responsible for implementing corporate strategy and overall management of the business. The division of responsibilities between the Chairman and Chief Executive Officer have been set out in writing and agreed by the Board. The Board considers that, at the current time, it is of an appropriate size to oversee the Company's business, with a structure that ensures that no individual or group dominates the decision-making process.

The Board has determined that Roy Brown, Jose Maria Carballo and Rosemary Thorne, who served as Non-Executive Directors throughout the year and up to the date of this report, together with Bruce Carnegie-Brown who was appointed on 1 October 2012, meet the independence criteria set out in the Code.

The Board's role

The Board is collectively responsible to the shareholders for the long-term success of the Company. The Board manages the Company through a formal schedule of matters reserved for its decision. Such matters include setting corporate strategy; agreeing risk appetite and policies; approving major capital expenditure, acquisitions and disposals; and agreeing the annual budget and business plans. The Company has a schedule of matters delegated to the Chief Executive Officer. Such matters include implementation of strategy and risk appetite, approval of new business in accordance with the overall strategy, approval of capital expenditure, capital management and credit risk and approval of contracts and agreements.

Directors

All Directors have access to the advice and services of the Company Secretary and General Counsel and may take independent professional advice at the Company's expense where necessary. All new Directors receive induction training on joining the Board, which is tailored to meet the needs of the individual. The induction programme is supplemented by ongoing training and development.

The Company does not require the Directors to offer themselves for re-election every year nor that new Directors appointed by the Board offer themselves for election at the next Annual General Meeting following their appointment.

Details of the Directors' remuneration, long-term incentives and the interests of their immediate families in the Company are shown in the Remuneration Report on pages 179 to 180.

Attendance at Board meetings

* Roy Brown, Jose Maria Carballo and Rosemary Thorne did not attend a meeting relating to Non-Executive Directors' fees in order to avoid a conflict of interest.

The Board had 11 scheduled and seven additional meetings during the year. The Directors' attendance at Board meetings is set out in the table above. The attendance of Directors at meetings of committees of which they are members is shown within the relevant committee report below. Directors have also attended regular Board briefing and training sessions during the year.

Directors' conflicts of interest

The Companies Act 2006 provides that a Director must avoid situations where he can have a direct or indirect interest that conflicts or might conflict with the interests of the Company ('situational conflicts'). The Company's Articles of Association contain provisions that allow the Board to consider and, if it sees fit, to authorise situational conflicts.

The Board confirms that such powers have been operated effectively and that a formal system for Directors to declare their interests and for the non-conflicted Directors to authorise situational conflicts continues to be in place. Any authorisations given are recorded by the Secretariat Department.

Board Committees

The Board delegates specific responsibilities to Board Committees, the activities of which are set out in the reports of each Board Committee below. The role and responsibilities of each Board Committee are set out in formal Terms of Reference, which are reviewed at least annually. The Committees' full Terms of Reference will be made available on the Company's website www.aboutsantander.co.uk during 2013, and are available from the Company Secretary and General Counsel on request. The Board Committees make recommendations to the Board as they see fit, as contemplated by their Terms of Reference. The Chairman of each Committee reports to the Board after each meeting on the matters discussed and the minutes of each meeting are provided to the Board for information.

Board effectiveness and evaluation

The Board composition and the experience of the Directors contribute greatly to the effectiveness of the Board. In order to maintain its effectiveness, the composition of the Board and its committees is kept under review, together with succession planning. The Company is currently identifying a suitable firm to conduct an external evaluation of Board effectiveness. As part of this process, it is expected that a formal evaluation of the Board will be conducted during 2013.

New York Stock Exchange ('NYSE') Corporate Governance - differences in UK and NYSE corporate governance practice

The Company has fully and unconditionally guaranteed the debt securities of its wholly owned subsidiary Abbey National Treasury Services plc ('ANTS'). As this guarantee includes NYSE-listed debt securities, the Company is required to comply with NYSE corporate governance listing standards. 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 seven Non-Executive Directors. Four of the Non-Executive Directors are independent as defined in the NYSE listing standards. The other three Non-Executive Directors are not independent as they are representatives of the parent company, Banco Santander, S.A..

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, the Company has a Board Nomination Committee, established on 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 Board Committee appointments. The following Directors make up the Board Nomination Committee: Lord Burns, Ana Botín, Roy Brown, Rosemary Thorne and Juan Inciarte. Of these Directors, Roy Brown and Rosemary Thorne 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 Board 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 Santander UK's policies and frameworks covering remuneration and reward. The Board Remuneration Oversight Committee is made up of four Independent Non-Executive Directors: Roy Brown (Chairman), José María Carballo, Bruce Carnegie-Brown 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 four Independent Non-Executive Directors: Rosemary Thorne (Chairman), José María Carballo, Bruce Carnegie-Brown 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 conducts a self-evaluation at least annually to determine whether it and its committees are functioning effectively. The Board has undertaken regular reviews of Board effectiveness primarily through an internal process led by the Chairman. The most recent Board effectiveness review occurred in the first quarter of 2012 and an external evaluation is contemplated for 2013.

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, the Company is 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.

Approval

This report was approved by the Board and signed on its behalf by:

Karen M. Fortunato

Company Secretary and General Counsel

14 March 2013

REPORT OF THE BOARD NOMINATION COMMITTEE

Membership and attendance

The Board Nomination Committee meets as required and met five times during the year. The members of the Board Nomination Committee and attendance at meetings held during the year are shown in the table above.

Key responsibilities

The Board Nomination Committee has been delegated the following key responsibilities by the Board:

The Board Nomination Committee's full Terms of Reference will be made available on the Company's website www.aboutsantander.co.uk during 2013.

Overview of 2012

During the year, the Board Nomination Committee reviewed the structure, size and composition of the Board and Board Committees, looking at the need to refresh the Board, the balance and diversity of skills and experience on the Board and planning ahead for any retirements.

The Board Nomination Committee undertook a skills analysis to identify the skills likely to be required in the future, in line with the Company's overall structure. Following this, it considered and recommended changes to the Board composition during the year. Bruce Carnegie-Brown and Antonio Escámez were appointed as Non-Executive Directors with effect from 1 October 2012. The Board Nomination Committee utilised Egon Zehnder asindependent external search consultants in respect of the appointment of the most recent Independent Non-Executive Director and will do so in the future, as appropriate.

The Board Nomination Committee reviewed the senior leadership needs of Santander UK to enable it to compete effectively in the marketplace. The Board Nomination Committee also reviewed the processes and methodology in place for succession planning for both Board and senior management.

Whilst reviewing the skill sets and composition of the Board the Board Nomination Committee has remained mindful of Lord Davies' report, "Women on Boards", published in 2011 which set an inspirational target of 25% female representation on Boards of FTSE 100 companies by 2015. At 31 December 2012 (and at the date of this report), 17% of the Board was female. This demonstrates the Company's commitment to ensuring that its Board is sufficiently well balanced in terms of skill, experience and diversity, to run the Company successfully.

Planned activities for 2013

For 2013, the Board Nomination Committee will continue to review and monitor the composition of the Board and Board Committees against the Company's skills and experience requirements and overall strategic direction. The Board Nomination Committee will also consider a shortlist of external evaluators of Board effectiveness, with a view to appointing a firm to undertake a review during 2013. The scope of the review is yet to be finalised.

REPORT OF THE BOARD AUDIT COMMITTEE

Membership and attendance

During the year, the Committee had nine scheduled meetings and two additional meetings. The members of the Board Audit Committee and attendance at meetings held during the year are shown in the table above. As required by the Committee's Terms of Reference the Board considers all members of the Committee to be independent. The Board has determined that Rosemary Thorne has the necessary qualifications and experience to qualify as a Board Audit Committee financial expert. The Board has made this determination based in part on Rosemary Thorne's experience; with 15 years of experience as a Finance Director of FTSE 350 Index Companies, and membership on the Financial Reporting Review Panel and the Hundred Group of Finance Directors Main Committee. There is common membership with the Board Risk Committee, which ensures that there is an ongoing exchange of information on internal controls and risk management between the two committees given the overlap in areas of responsibility.

Key responsibilities

The Board Audit Committee has been delegated the following key responsibilities by the Board:

The Board Audit Committee's full Terms of Reference will be made available on the Company's website www.aboutsantander.co.uk during 2013.

Overview of 2012

2012 was the Board Audit Committee's first year as a standalone audit committee separate from the Board Risk Committee, which allowed it to focus its activities, the details of which are set out below.

The Board Audit Committee's main area of activity was the Company's financial reporting cycle, primarily the annual report, the half-yearly financial report, and the quarterly management statements and related management representation letters. The Board Audit Committee also considered all changes to accounting treatments and significant management judgements.

In conjunction with the Board Risk Committee, the Board Audit Committee had oversight of the internal audit function to ensure its independence and effectiveness in the context of the Company's overall risk management framework. The Board Audit Committee discharged its responsibilities by reviewing and challenging the Internal Audit Plan and Audit Reports provided to it. In addition, an independent review of the effectiveness of the internal audit function and its activities was carried out during the year.

The Board Audit Committee oversees the work and retention of the Company's external auditor and pre-approves the payment of fees for all audit and non-audit work. The Board Audit Committee ensures the independence of the external auditor through maintaining and keeping under review a robust non-audit services policy, to limit the scope of services the external auditors may provide. The Committee also meets with the external auditors in private session at each meeting.

The Board Audit Committee received regular reports from Legal and Secretariat and Compliance on such matters as litigation cases, internal fraud, the key conduct and non-financial regulatory risks and Whistleblowing matters. During the year, the Committee oversaw an evaluation of the Whistleblowing procedure and as a result changes will be made, including the selection of a new service provider.

Planned activities for 2013

For 2013, the Board Audit Committee will continue to focus on the financial reporting cycle to ensure the robustness of the financial reporting process. In addition, the Board Audit Committee will continue to consider the impact of general industry conditions and the regulatory environment on its remit.

REPORT OF THE BOARD RISK COMMITTEE

Membership and attendance

(1) Joined the Board and Committee on 1 October 2012 and became Chairman of the Committee on 1 January 2013.

(2) Chairman of the Committee for the year ended 31 December 2012.

During the year, the Board Risk Committee held ten scheduled meetings and two additional meetings. The members of the Committee and attendance at meetings held during the year are shown in the table above. All members are Independent Non-Executive Directors as required by the Terms of Reference. In addition, there is common membership with the Board Audit Committee, which ensures that there is an ongoing exchange of information on internal controls and risk management between the two Committees given the overlap in areas of responsibility.

Key responsibilities

The Board Risk Committee has been delegated the following key responsibilities by the Board:

The Board Risk Committee's full Terms of Reference will be made available on the Company's website www.aboutsantander.co.uk during 2013.

Overview of 2012

2012 was the first year of operation for the standalone Board Risk Committee following its separation from the Board Audit Committee. This separation has enabled dedicated focus on risk issues and has further enhanced the oversight of the Company's risk management and internal controls.

The Board approved an enhanced Risk Management Framework (the "Risk Framework") for the Company in 2012 following detailed review and recommendation by the Board Risk Committee. There were a number of work streams involved in the implementation of the Risk Framework and progress has been overseen by the Board Risk Committee on behalf of the Board. Further information on risk management and the Risk Framework is given in the Risk Management Report on pages 63 to 70.

The Board Risk Committee also considered and recommended to the Board a revised risk appetite, together with risk appetite principles and statements, and a new liquidity risk appetite.

As part of implementing the new Risk Framework, reporting to the Committee was strengthened and enhanced in 2012. The Committee received monthly reports from the Risk Oversight Function which enabled it to oversee the performance of the Company's financial and non-financial risks against risk appetite, monitor key risk issues and keep under review emerging themes which may impact on the Company's strategy. The Board Risk Committee reviews and challenges the risk management information provided to it, seeking further reports from the Risk Oversight Function, others responsible for control of risk, and business functions, as necessary. Where any material transactions were considered, the Committee assessed and challenged the risk aspects and reported to the Board on its findings.

The Board Risk Committee has kept under review the effectiveness of the Company's internal controls and risk management systems during the course of the year and has reviewed and approved the statements included in the annual report concerning internal controls and risk management.

Planned activities for 2013

During 2013, the Board Risk Committee will continue to review and monitor the Company's Risk Framework and ensure that risk awareness continues to be fully embedded into the culture of the Company. In addition, the Board Risk Committee will keep under review the Company's financial and non-financial risk performance against the new risk appetite and ensure that it continues to challenge management on risk-related issues and to receive appropriate management information to enable it to discharge its duties.

Director's Remuneration Report

Introduction and Summary Statement

On behalf of the Board, I am pleased to present the Remuneration Report for the year ended 31 December 2012. The Company's approach to remuneration in 2012 was set against its performance (encouraging divisions to achieve better results than budget) and took into account the qualitative assessments of results and enterprise risks. During 2012, the Company delivered an increase in profit after tax of 4% to £939m, whilst further strengthening the balance sheet with a Core Tier 1 capital ratio of 12.2%. This was a sound financial and business performance in the context of the economic and regulatory backdrop of the UK. Despite these continuing headwinds, we believe Santander UK is well positioned for the year ahead.

TRANSPARENCY

The Company has always sought to be transparent in remuneration reporting and has constructively engaged with recent initiatives in this respect, e.g. the 'Project Merlin' voluntary reporting disclosures and HM Treasury's recommendations on Bank Executive Remuneration Disclosures. Considering the UK Government's proposed regulations in respect of executive remuneration reporting generally, the report includes certain additional disclosures to ensure the continued transparency of the Company's approach to remuneration.

We welcome proposals for increased transparency and continue to take best practice guidelines into account in preparing this report. Although the Department for Business, Innovation and Skills ('BIS') has not yet finalised its proposals, we believe that the approach taken by the Company this year will leave us well placed to address any changes.

HIGHLIGHTS

The Board Remuneration Oversight Committee ('the Committee'), together with input from the Board, has continued to focus on ensuring that Santander UK's remuneration policies and practices remain compliant, aligned to best-practice and competitive with our peers.

Throughout 2012, the Committee was engaged in constructive debate and discussion with the Company to challenge the Company's senior management to provide assurance and comfort that the Company was delivering on its stated remuneration policies and practices whilst meeting the expectations and challenges of its stakeholders, including its lead regulator. In particular, the Committee:

OUR CHALLENGES

Throughout 2012, the Committee was mindful of the regulatory environment and the context in which the Company conducts its business. We have monitored closely the pronouncements from the Company's lead regulator and the UK Government in respect of remuneration, particularly those applicable to the financial services industry and those relevant to executive pay more generally. We continue to support remuneration practices that encourage financial stability as well as, strong risk management processes and behaviors. We have also met the more extensive disclosure requirements imposed by the European Union, the Bank of Spain and the UK Financial Services Authority ('FSA'). In this regard, the Committee received regular updates from its independent adviser, PricewaterhouseCoopers LLP, on the domestic and international regulatory agenda applicable to remuneration related matters and particular regulatory areas of focus.

Banco Santander S.A. is reviewing its use of a global group long-term incentive plan ('LTIP') and no new LTIP awards were granted to UK employees during 2012. Otherwise, for all other bonus and incentive schemes in operation in the UK, there were no material changes to the basic operation of any schemes. For the 2012 performance year, we introduced an Enterprise Wide Risk Review to take place as part of the bonus pool calculations for all schemes. This took the form of a holistic review of all financial and non-financial risks considered by the Committee after the initial bonus pool calculations had taken place, with the ability for the Committee to reduce all bonus pools by up to 100%. There could not have been any upside adjustment.

There were no changes to the composition of the Board as regards Executive Directors other than the appointment of Stephen Jones, Chief Financial Officer.

PRIORITIES FOR 2013

As the remuneration regulatory market continues to introduce more detailed and prescriptive rules, it is key that the Committee devotes appropriate time to ensuring that these regulations are met and that they have the relevant understanding of the business to ensure that this is done in a way that continues to support the Company's objectives. In addition, the Committee expects important remuneration issues to continue to be brought before them for approval. The Committee looks forward to continuing to:

The Committee expects to review appropriate options for future long-term incentive arrangements in 2013. We are not proposing any other changes to Executive Director remuneration arrangements in 2013. However, we will continue to monitor our approach to pay against the backdrop of evolving regulation and the wider climate on executive pay, to ensure that remuneration remains simple, and aligned with our strategy.

ENGAGEMENT

The Committee will continue to be mindful of the interests of the Company's stakeholders. In particular, the Committee pays close attention to the pay and conditions of all our employees. The Committee is kept informed on a regular basis on:

Whilst the Company does not directly consult with employees as part of the process of reviewing executive pay, the Committee does receive updates and feedback from the Company's annual employee opinion surveys and takes that into account.

Despite 2012 being a challenging year for the banking industry generally, the Company continued to invest in the business and its people. The pay agreement reached in the first quarter of 2012 with the Company's recognised trade unions was an award worth a maximum of 2.7% for a successful performer, which was over 17% higher than the most competitive 2012 pay settlement across the other main UK banks. In addition, the 2012 pay matrix was designed to reinforce the link between performance and reward, and benefit colleagues who were lower in the salary range.

In 2012, the salaries of the Executive Directors were reviewed, but no increase was awarded, save for an out-of-cycle review of Steve Pateman's salary as a result of a significant change in his role.

I hope you will find this summary clear and informative.

Roy Brown

Chairman of the Board Remuneration Oversight Committee

DIRECTORS' REMUNERATION REPORT

This Report has been prepared on behalf of the Board by the Board Remuneration Oversight Committee ('the Committee') in accordance with Schedule 8 of the Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008. Furthermore, as a result of only having preference shares listed on the London Stock Exchange, the Company is not required to make certain disclosures that are normally part of the continuing obligations of an equity listed company in the UK. However, a number of voluntary disclosures have been presented in this Directors' Remuneration Report relating to remuneration. In addition, the Company complies with the remuneration disclosure requirements in the FSA's Prudential Sourcebook for Banks, Building Societies and Investment Firms (see pages 194 to 198).

The Company has also chosen to adopt as many as practicable of the proposed provisions under the draft Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 ahead of the legislation becoming effective. Because the Company is not fully quoted (as defined by the Companies Act 2006) some of the expected requirements have no practical relevance or benefit to increasing pay transparency and have not been included.

As required by the Companies Act 2006, a resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the financial statements will be approved.

REMUNERATION POLICY

Role of the Board Remuneration Oversight Committee

The Committee was established with effect from 1 January 2010. 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 is primarily responsible for overseeing and supervising the Banco Santander 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. No Director plays a part in any discussion about his or her own remuneration. The Committee's full Terms of Reference will be made available on the Company's website www.aboutsantander.co.uk during 2013.

External consultants

In January 2012, PricewaterhouseCoopers LLP ('PwC') were appointed by the Committee to provide independent professional advice to the Committee and throughout 2012, the Committee's work was supported by them. During 2012, PwC provided additional professional services to the Company. The Committee was not involved in the recommendation of their appointment and is satisfied there is no conflict with their role as independent advisers to the Committee.

Remuneration principles

The Company's success depends upon the performance and commitment of talented employees. Our remuneration policies are designed to attract, retain and motivate high calibre individuals to deliver our business strategy and reinforce our values in the context of a clearly articulated risk appetite and a Company-wide framework, under which we apply a consistent approach to reward for all employees. The Committee will want to ensure that individual remuneration packages are structured to align rewards with the performance of the Company. In this regard, our approach:

We aim to set base salaries at the median for our comparator group, while setting stretching goals for the annual bonus. A significant proportion of the total remuneration package is therefore variable and linked to corporate, business unit and individual performance as well as the Company's risk appetite. The Committee reviews the performance targets regularly to ensure that they are both challenging and closely linked to the Company's strategic priorities.

The Company operates remuneration principles that ensure:

The Committee continues to keep under review the relationship of risk to remuneration. When determining remuneration practices, the Company ensures that the value and elements of remuneration are aligned to the Company's risk appetite. The performance of the Company (for variable remuneration purposes) is measured by its Return on Risk Adjusted Capital ('RORAC'). This risk-adjusted measure ensures that inappropriate incentives are removed at a Company level. This encourages the Company to consider the risks and therefore the economic capital consumption involved in order to generate target profits. Further to this, for 2012, the Committee also considered outcomes of the Company's Enterprise Wide Risk Review.

Remuneration strategy

We seek to provide incentives for improving the underlying drivers of performance, delivering sustainable value for all our stakeholders, including our staff, customers, fixed income investors, shareholders and the communities in which we serve. We operate in a very competitive and dynamic environment. Our success is highly dependent on the talents of all our employees, but particularly the senior management team, to deliver our ambitious objectives.

Our success is predicated on the abilities of a strong management team across all levels and locations of the business. Motivating and incentivising this team to deliver sustainable long-term performance is fundamental to our ongoing success. During 2012 we continued to make significant investments in our business to ensure a strong platform for future sustained growth. We continued our efforts to build a corporate culture based around the customer and customer service. Investments in recruitment and training programmes as well as our complaints handling model in branches and contact centres, were reflected in improvements in both external and internal measures of customer satisfaction.

Our transformation into a market-leading retail and corporate bank continues, with progress evident in all key areas. The strategy is based upon the four financial objectives set out on page 7. Delivering on our objectives will mean our people are proud to work for Santander UK, our customers are satisfied and our financial results are better, with an increased contribution to the economic growth of the UK. We strongly believe that our incentives should support the continued growth and strengthening of our returns from across our customer-facing businesses and that all our staff should share in the success of the business.

Remuneration structure

The Company has established remuneration policies 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.

Our reward package is made up of a number of elements, built around fixed and variable pay as well as a comprehensive benefits package. Reward processes are underpinned by a robust performance management system which drives appropriate behaviours in line with the Company's values: Commitment, Innovation, Teamwork and Excellence. The Company's performance management process forms the basis of measuring the performance of individuals, which impacts in turn the extent to which variable pay awards are made.

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.

Remuneration for the Executive Directors

Remuneration policy

Executive Director remuneration is designed to attract, retain and motivate executives of the calibre needed to deliver business strategy. Individual remuneration packages are structured to align rewards with the performance of the Company and the interests of the stakeholders. The remuneration arrangements incorporate performance measures which link to the business strategy and the key performance indicators (as described in the Business Review), which are directed towards building sustainable value for all our stakeholders. The Committee considers pay and employment conditions of employees of the Company when determining directors' remuneration for the relevant financial year.

The Committee also reviews the pay policy and levels for executives below the Board which are considered when determining Executive Directors' remuneration. No Director is involved in setting his/her own remuneration.

 Executive Director remuneration is based on our remuneration principles generally and particularly:

Elements of package

The individual elements of the Executive Director's remuneration packages comprise fixed pay (base salary, pension and other benefits) and performance-related pay (consisting of annual incentives, deferred awards and long-term incentives).

The key elements of the remuneration package are:

Base salary

Annual bonus

Long-term incentives

Pension or cash allowance

Benefits

Additional Risk Adjustments

Deferral and vesting

Allocation into shares

The Company recognises that Executive Directors may be invited to become Non-Executive Directors of other companies and that this can help broaden the skills and experience of a Director. Executive Directors are permitted to accept external appointments with the approval of the Board.

Executive Directors' remuneration packages

In 2012, the Committee approved an increase in Steve Pateman's salary from £525,000 to £625,000 (effective from 1 April 2012) to recognise his increased responsibilities upon assuming his post as Head of UK Banking. No other Executive Director received a salary increase in 2012.

Executive Directors' service terms

The Executive Directors have served on the Board for the periods shown below at 31 December 2012:

Shareholding requirements

The Company's Executive Directors and other senior managers are not required to build a significant shareholding in the shares of Banco Santander, S.A. as a result of their employment by the Company.

Relative importance of spend on pay

The following tables set out the amounts and percentage change in profit and total employee costs for the years ended 31 December 2012 and 31 December 2011.

REMUNERATION IMPLEMENTATION

Membership of the Board Remuneration Oversight Committee

During the year the Committee comprised the following Non-Executive Directors: Roy Brown (Chairman), José María Carballo, Rosemary Thorne and Bruce Carnegie-Brown (from 1 October 2012) 

The members of the Committee are all considered by the Company to be independent, as defined in the Code, and free from any business or other relationship that could materially affect the independence of their judgement. None of the Committee has any personal financial interest in the Company (other than as shareholders of Banco Santander, S.A.), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business.

The Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, the Financial Controller, the Chief Risk Officer, the Company Secretary & General Counsel and the HR Director are invited to attend meetings except in instances where their own remuneration and/or reward arrangements are discussed, or other circumstances where their attendance would not be appropriate.

There were eleven meetings of the Committee during 2012. The table below gives details of Directors' attendance at these meetings:

Aggregate Directors' remuneration

The total remuneration received by the Directors of the Company in 2012 was:

(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

Directors' emoluments

The table below sets out the remuneration of each Director for the year ended 31 December 2012.

(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.

(3) The remuneration disclosures in respect of Stephen Jones have been apportioned to reflect his date of appointment as a Director. In addition to the remuneration disclosures detailed in the above table, £1,567,425 was received by Stephen Jones in connection with a buy-out of deferred performance related payments in connection with his previous employment. As this payment is not in relation to his qualifying services as a director of the Company, it has been excluded from the Directors' emoluments, detailed above. This payment together with the remaining elements of the remuneration not apportioned in the above table are disclosed in Note 44.

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.

Exit payments

No Executive Directors left the Company during the year ended 31 December 2012 and therefore no payments for compensation for loss of office were paid to, or receivable by, any Director.

The Chairman and Non-Executive Directors

All Non-Executive Directors, including the Chairman, serve under letters of appointment and either party can terminate on three months' written notice, except in the case of the Chairman where 12 months' written notice is required. Their remuneration is determined by the Board within the limits set by the Articles of Association and is based on information on fees paid in similar companies and the skills and expected time commitment of the individual concerned. Neither the Chairman nor the Non-Executive Directors have the right to compensation on the early termination of their appointment beyond payment in lieu of notice at the option of the Company.

In addition to the basic fees, fees are paid for additional committee duties to reflect the extra responsibilities attached to these roles. The fees are reviewed annually and fees for 2012 are shown the table below:

C= Chairman

(1) Comparatives have not been presented as Non-Executive Directors' fees were not apportioned per committee prior to 2012.

(2) Before the appointment of Bruce Carnegie-Brown, Rosemary Thorne was paid a fee of £60,000 for acting as Chairman of the Board Risk Committee.

(3) Fees for 2011 can be found in the table on page 179.

Chairman

The fee for the Chairman is reviewed by the Board. During 2012, the Chairman's fee was increased from £520,000 per annum to £600,000 per annum with effect from 1 May 2012 after a review of comparative benchmark data, the first such review since 2008.

The Chairman has a letter of engagement. Following his initial term of office, it was mutually agreed that his term of office be extended indefinitely going forward. Instead, his appointment is terminable without compensation on twelve months' notice from either side. The Chairman is not eligible for pension scheme membership, bonus or incentive arrangements. He is entitled to the provision of an office, secretary and chauffeur-driven car.

Non-Executive Directors

The fees for the Non-Executive Directors are reviewed and determined by the Board. The current level of fees were increased with effect from 1 May 2012 after a review of comparator benchmark data with appropriate changes made recognising the increased time commitments of Non-Executive Directors, in part attributable to the separation of the Board Audit and Risk Committee. Non-Executive Directors are not eligible for pension scheme membership, bonus or incentive arrangements.

Long-Term Incentive Plan

In 2012 and 2011, no Directors were granted conditional awards of shares in Banco Santander, S.A. under the LTIP. Under the LTIPs granted in previous years, 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.. Further details can be found in Note 44 to the Consolidated Financial Statements.

OTHER REMUNERATION DISCLOSURES

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).

(1) Buy-out of deferred performance related payments in connection with previous employment.

By Order of the Board Remuneration Oversight Committee

Roy Brown

Chairman

14 March 2013

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

CORPORATE STRUCTURE

Santander UK plc is a wholly owned subsidiary of Banco Santander, S.A.. The ordinary shares of the Company are not traded on the London Stock Exchange. 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.

PRINCIPAL ACTIVITIES AND BUSINESS REVIEW

The principal activity of the Santander UK group continues to be the provision of an extensive range of personal financial services. In addition, the Santander UK group 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 Santander UK during the year ended 31 December 2012 and of the position of Santander UK 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 7 to 8, the Chief Financial Officer's Review on pages 9 to 11 and the relevant sections of the Business Review referred to below, which are incorporated into and form part of this Directors' Report. When reading the Chief Executive Officer's Review, the Chief Financial Officer's Review and the Business Review, reference should be made to the Forward-looking Statements section on page 336.

Information on the development and performance of the business of Santander UK, both at a consolidated level and analysed by division can be found in the Chief Executive Officer's Review, the Chief Financial Officer's Review and in the following section:

Information on the position of Santander UK at the end of the year can be found in the Chief Executive Officer's Review, the Chief Financial Officer's Review and in the following sections:

The Company is also required to describe the principal risks and uncertainties facing Santander UK. All risks are described in the Risk Management Report by type of risk, with further analysis by segment on pages 62 to 162, and material risk factors are described in the Risk Factors section on pages 310 to 325.

RESULTS AND DIVIDENDS

The results of Santander UK are discussed above. The Directors do not recommend the payment of a final dividend for 2012 (2011: £nil). An interim dividend of £450m was declared on 30 October 2012 on the Company's ordinary shares in issue and is expected to be paid later in 2013. An interim dividend of £425m was declared in 2011 and paid in 2012.

EVENTS AFTER THE BALANCE SHEET DATE

None.

GOING CONCERN

The Directors confirm that they are satisfied that Santander UK 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, Santander UK'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 7 to 8, the Chief Financial Officer's Review on pages 9 to 11 and in the Divisional Results on pages 19 to 35. The financial position of Santander UK, its cash flows, liquidity position and borrowing facilities are described in the Balance Sheet Review on pages 36 to 61. In addition, Note 47 to the Consolidated Financial Statements includes Santander UK's objectives, policies and processes for managing its capital. As also outlined above, in respect of the principal risks and uncertainties facing Santander UK, financial risks are described in the Risk Management Report on pages 62 to 162, and material risk factors are described in the Risk Factors section on pages 310 to 325.

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 Santander UK'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.

After making enquiries, the Directors have a reasonable expectation that the Company and Santander UK have adequate resources to continue in operational existence for the foreseeable future.

DIRECTORS

The members of the Company's Board at 31 December 2012 are named on pages 163 to 164. For each Director, the date of appointment is shown. At 31 December 2012 and the date of this report, the Board comprised a Chairman, four Executive Directors including the Chief Executive Officer, and seven Non-Executive Directors.

All Non-Executive Directors, including the Chairman, serve under letters of appointment and either party can terminate on three months' written notice, except in the case of the Chairman where 12 months' written notice is required. When they were appointed, the appointments of Ana Botín, Juan Rodríguez Inciarte, José María Fuster, José María Carballo, José María Nus and Antonio Escámez 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.

DIRECTORS' REMUNERATION (audited)

The aggregate remuneration received by the Directors of the Company in 2012 was:

(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.

REMUNERATION OF HIGHEST PAID DIRECTOR (audited)

In 2012, the remuneration, excluding pension contributions, of the highest paid Director, was £3,956,774 (2011: £4,067,594) of which £1,821,209 (2011: £2,313,819) was performance related. There was no accrued pension benefit for the highest paid Director (2011: £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 2012.

RETIREMENT BENEFITS (audited)

Defined benefit pension schemes are provided to certain of Santander UK'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 (2011: £nil) in respect of their qualifying services to Santander UK.

NON-EXECUTIVE DIRECTORS (audited)

Details of the fees paid to Non-Executive Directors in 2012 are contained in the Directors' Remuneration Report.

DIRECTORS' INTERESTS AND RELATED PARTY TRANSACTIONS (audited)

In 2012, loans were made to five Directors (2011: three Directors), with a principal amount of £304,286 outstanding at 31 December 2012 (2011: £32,976). In 2012, loans were made to 11 members of Santander UK's Key Management Personnel (2011: seven), with a principal amount of £3,528,962 outstanding at 31 December 2012 (2011: £3,855,781).

See Notes 43 and 44 to the Consolidated Financial Statements for disclosures of deposits and investments made by the Directors, Key Management Personnel and their connected persons with Santander UK at 31 December 2012. Note 44 to the Consolidated Financial Statements also includes details of other related party transactions.

In 2012 and 2011, there were no other transactions, arrangements or agreements with Santander UK 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 Santander UK at any time during the year (2011: no Director).

In 2012 and 2011, no Director held any interest in the shares of any company within Santander UK at any time and no Director exercised or was granted any rights to subscribe for shares in any company within Santander UK. In addition, in 2012 and 2011, no Directors exercised share options over shares in Banco Santander, S.A., the parent company of the Company.

Santander UK 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 description of these transactions in 2012, 2011 and 2010, see Note 44 to the Consolidated Financial Statements.

THIRD PARTY INDEMNITIES

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. A copy of each of the indemnities is kept at the registered address shown on page 326.

FINANCIAL INSTRUMENTS

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

PENSION SCHEMES

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

Defined Contribution Pension schemes

Santander UK operates a number of defined contribution pension schemes. Since December 2009 the Santander Retirement Plan, an occupational defined contribution scheme has been the principal plan into which eligible employees have been enrolled automatically. The assets of the Santander Retirement Plan are held in a separate trustee-administered fund. At 31 December 2012, there were 14,896 members in the Santander Retirement Plan comprising 13,395 active members and 1,501 preserved members.

Defined Benefit Pension schemes

Santander UK also operates a number of defined benefit pension schemes, which are closed to new members. The principal pension scheme is the Santander (UK) Group Pension Scheme, formerly the Abbey National Group Pension Scheme. The Santander (UK) Group Pension Scheme has a corporate trustee, Santander (UK) Group Pension Scheme Trustees Limited which, at 31 December 2012, had fourteen Directors, comprising seven Santander UK-appointed Directors and seven member-elected Directors.

On 1 July 2012, the assets and liabilities of the Abbey National Amalgamated Pension Fund, the Abbey National (Associated Bodies) Pension Fund, the National & Provincial Building Society Pension Fund, the Alliance & Leicester Pension Scheme, the Scottish Mutual Assurance plc Staff Pension Scheme and the Scottish Provident Institution Staff Pension Fund were transferred to the Abbey National Group Pension Scheme to form one merged scheme. The Scheme was renamed the Santander (UK) Group Pension Scheme and now consists of seven separate actuarially-segregated sections.

At 31 December 2012, the assets of the Santander (UK) Group Pension Scheme were invested in the Santander (UK) Common Investment Fund which has a corporate trustee, Santander (CF Trustee) Limited comprising four Santander UK-appointed Directors and three Directors appointed by the Santander (UK) Group Pension Scheme Trustees Limited. Asset management of the Santander (UK) Common Investment Fund 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 is provided by external firms of solicitors. The audits of the pension schemes are separate from that of Santander UK.

Formal actuarial valuations of assets and liabilities of the defined benefit schemes are carried out on at least a triennial basis by independent professional qualified actuaries and valued for accounting purposes at each balance sheet date. In 2010, Santander UK and the trustees agreed scheme-specific funding targets, statement of funding principles, and schedule of contributions for the principal pension schemes. These agreements form the basis of Santander UK's commitment that the schemes (from 1 July 2012 "sections") have sufficient assets to make payments to members in respect of their accrued benefits as and when they fall due. The next actuarial valuations are scheduled as at 31 March 2013. 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 Santander UK's land and buildings was not significantly different from the fixed asset net book value of £1,013m (2011: £957m), as disclosed in Note 26 to the Consolidated Financial Statements.

DISABILITY

Santander UK 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. Santander UK 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.

EMPLOYEE INVOLVEMENT

Employee share ownership

Santander UK currently operates two all-employee HMRC-approved share schemes: a Save-As-You-Earn ('Sharesave') Scheme and a Share Incentive Plan ('SIP'), the latter of which allows employees to purchase Banco Santander, S.A. shares from gross salary. In addition, for certain eligible employees, arrangements remain outstanding under previous years' grants under the Long-Term Incentive Plan, the closed Executive Share Option Scheme and the closed Alliance & Leicester SIP. Shares have also been granted to eligible employees in receipt of vested deferred bonus awards. 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

Santander UK 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 Santander UK, an online question and answer site and 'The Village' a site for staff to share information, ideas and best practice. On 1 November 2012, a new site was launched which connects staff to all the information they need about working for Santander UK in one easy to navigate place that is accessible from work and home. Santander UK 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 Santander UK's performance. Santander UK considers employees' opinions and asks for their views on a range of issues through regular Company-wide surveys.

Consultation

Santander UK 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, Santander UK also works closely with its recognised independent trade union, the Communication Workers Union ('CWU'). Advance and CWU are affiliated to the Trades Union Congress. Santander UK consults senior trade union officials on significant proposals within the business at both national and local levels. Santander UK 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 contributions to society during the year of £19,465,444 (2011: £14,020,427) predominantly supporting projects related to education and financial capability. £6,494,224 (2011: £4,993,952) was contributed through the Santander Universities programme and £1,336,149 (2011: £1,083,233) to support secondary and further education. Support for small businesses and social enterprises equated to £5,729,370 (2011: £2,109,658). Donations of £4,099,489 (2011: £4,038,099) were made by the Santander Foundation to UK registered charities, including 1,663 (2011: 1,656) donations through the Staff Matched Donation Scheme. A further £1,806,212 (2011: £1,795,485) supported other employment, environment and community projects.

POLITICAL CONTRIBUTIONS

In 2012 and 2011, no contributions were made for political purposes and no political expenditure was incurred.

SUPPLIERS

Santander UK 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 Santander UK'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 and bribery, in line with the principles in the UN Global Compact.

Policy and practice on payment of creditors

It is Santander UK'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. Santander UK'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 2012, trade creditor days for Santander UK were 38 days (2011: 38 days).

CODE OF CONDUCT

Santander UK 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 Santander UK.

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 Santander UK'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 Anti-Bribery and Corruption Policy.

These terms and conditions require that employees must:

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. Santander UK 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. Santander UK provides a copy of these documents to anyone, free of charge, on application to the address on page 326.

As a firm authorised by the FSA, the Company is subject to UK financial services laws and regulations. The key UK requirements to which the Company is subject are discussed below. While Santander UK operates primarily in the UK, it is also subject to the laws and regulations of the other jurisdictions in which it operates, such as the requirements of the SEC for its activities in the US.

Recent significant regulatory developments expected to have the greatest impact on the Santander UK group's operations are highlighted below.

Material risk factors (including supervision and regulatory risks and risks relating to taxation) are described in the Risk Factors section on pages 310 to 325.

The FSA

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.

The UK Government has announced a new regulatory framework which will take effect in 2013 under the Financial Services Act (the 'Act'). Under the Act, the FSA will be replaced by two regulatory bodies, the Prudential Regulatory Authority (the 'PRA'), which will have responsibility for the prudential regulation of deposit takers and insurance companies, and the Financial Conduct Authority (the '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.

Financial Services Compensation Scheme (the 'FSCS')

Banks, insurance companies and other financial institutions in the UK are subject to 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 FSCS is funded by levies on firms authorised by the FSA, including the Company and other members of Santander UK.

The FSA announced in October 2011 that it was recommencing its review of the funding of the FSCS and on 25 July 2012 it announced a consultation on proposed changes to the funding of the FSCS, with comments due by 25 October 2012. Following this consultation, whilst most of the proposals will be taken forward and will come into effect from 1 April 2013, other proposals relating to intermediaries and investment providers were revised and a consultation on these revised proposals closed on 18 February 2013. As a result of the structural reorganisation and reform of the UK financial regulatory authorities, it is proposed that the FSCS levies will be collected by the FCA under the new regime.

Liquidity

The FSA's liquidity regime for banks was established in 2009. It specifies the maintenance of a minimum level of liquid assets that are required to be held as a buffer against a defined liquidity stress. Additionally, banks are required to perform an annual assessment of the adequacy of liquidity risk measurement, management and control processes that they have in place. This review is subject to supervisory review. Santander UK maintains a liquidity risk appetite and framework that is complimentary and more extensive than the FSA requirements.

UK Bank Levy

HM Treasury introduced an annual UK bank levy (the 'UK Bank Levy') via legislation in the Finance Act 2011. The UK Bank Levy is imposed on (amongst other entities) UK banking groups and subsidiaries, and therefore applies to Santander UK. The amount of the UK Bank Levy is based on a bank's total liabilities, excluding (amongst other things) Tier 1 Capital, insured retail deposits and repos secured on sovereign debt. A reduced rate is applied to longer-term liabilities. The UK Government intends that the UK Bank Levy should raise at least £2.5bn each year. To offset the shortfall in UK Bank Levy receipts, and also to take account of the benefit to the banking sector of reductions in the rate of corporation tax, there was an increase in the rates of UK Bank Levy from 1 January 2012 with a further increase from 1 January 2013. For further information refer to Note 36 to the Consolidated Financial Statements.

European Union

Santander UK 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 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. Santander UK's capital and risk management disclosures are set out in Note 47 to the Consolidated Financial Statements.

In the European Union, Basel II was implemented by the Capital Requirements Directive (the '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 2012, Santander UK applied the Basel II framework to its capital calculations, its ICAAP and to its risk and capital disclosures to the market.

Regulatory Developments

UK

Independent Commission on Banking ('ICB')

The Government has appointed an ICB to review possible measures to reform the banking system and promote stability and competition. The ICB published its final report on the 12 September 2011 putting forward recommendations to require ring-fencing of the retail activities of banks from their investment banking activities and additional capital requirements beyond those required under current drafts of CRD IV. The report also makes recommendations in relation to the competitiveness of the UK banking market, including enhancing the competition remit of the new FCA, implementing a new industry-wide switching solution by September 2013, and improving transparency.

The ICB recommended that ring-fenced banks should hold a common equity capital base of at least 10% and primary loss-absorbing capacity of at least 17% to absorb the impact of potential losses or financial crises. The ICB, which following the final report completed its mandate, had the authority only to make recommendations, which the Government could choose to accept or reject.

The Government published its response to the ICB recommendations on 19 December 2011 and, following an extensive first consultation, it published a White Paper on 14 June 2012, setting out its more detailed proposals for implementing the ICB's recommendations. The content of the White Paper was broadly in line with expectations following the response, with ring-fencing to be implemented as set out in the ICB recommendations and loss-absorbency requirements also largely consistent. A further period of consultation was established, which ran until 6 September 2012.

The Parliamentary Commission on Banking Standards (the 'PCBS') conducted pre-legislative scrutiny on the draft bill to implement the ICB recommendations, which was published in October 2012. Following publication of the PCBS's first report in December 2012, the Financial Services (Banking Reform) Bill was introduced to Parliament on 4 February 2013, in the form of framework legislation to put in place the architecture to effect the reforms with detailed policy being provided for through secondary legislation. The Government intends to complete primary and secondary legislation before the end of the current Parliamentary term in May 2015 and for banks to comply with all the measures proposed in the paper by 2019, as the ICB recommended. The Government also reaffirmed its determination that changes to the account switching process should be completed by September 2013, as already scheduled.

Given that Santander UK is predominantly a retail and commercial bank, it would expect to be less affected by the implementation of a retail ring fence, but believes it will be important for any transition period to be flexible in order to minimise any impact on economic growth, and for banks to implement the required structural changes.

Other

There are a number of other regulatory developments going through a consultation and implementation process which may have some effect on Santander UK'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.

The Retail Distribution Review ('RDR'): The RDR, which took effect as from 1 January 2013, has resulted in new rules relevant to the retail investment market, including investment insurance contracts, to provide, amongst other things, a more transparent and fair charging system for advice provided in respect of the investment products, This includes restrictions on commission structures currently used in the sale of investment productsso that advisers can no longer be receive commission from a product provider for the sale of that provider's product. There are also new additional training requirements for advisers under the RDR including specific education to ensure proper suitability standards and process and specified levels of qualifications held.

The Mortgage Market Review('MMR'): In response to the Turner Review published in March 2009 "A regulatory response to the global banking crisis" the FSA published a discussion paper outlining proposals for reform of the mortgage market. Subsequently the FSA commenced a wide ranging consultation on mortgage lending - the MMR. The consultation proposed various potential reforms to the conduct rules applicable to mortgage lenders and mortgage intermediaries. The MMR concluded with the publication of final rules by the FSA on 25 October 2012 that will amend existing conduct rules for mortgage lending in the FSA Handbook. The new rules will come into effect on 26 April 2014.

Principal changes centre upon responsible lending and include: (i) more thorough verification of borrowers income (no self-certification of income, mandatory third party evidence of income required); (ii) assessment of affordability of interest-only loans on a capital and interest basis unless there is a clearly understood and believable alternative source of capital repayment; (iii) application of interest rate stress tests - lenders must consider likely interest rate movements over a minimum period of five years from the start of the mortgage term; (iv) when making underwriting assessments lenders must take account of future changes to income and expenditure that a lender knows of or should have been aware of from information gathered in the application process; and (v) lenders may base their assessment of customers' income on actual expected retirement age rather than state pension age. Lenders will be expected to assess income into retirement to judge whether the affordability tests can be met.

There are also significant changes to mortgage distribution and advice requirements in sales, arrears management and requirements on contract variations such as when additional borrowing is requested.

Regulation of Lending: Separately, throughout 2012, HM Treasury announced a number of measures with the aim of enhancing consumer protection in unsecured and secured credit lending. The measures provide for the transfer of responsibility for consumer credit control and supervision from the OFT to the new FCA. The intention of HM Treasury is that transfer of control will take place in April 2014. It is expected that HM Treasury will publish results of a Regulatory Impact Assessment together with a consultation on legislative change and the details of the high level regime in early 2013. The FSA will also commence a consultation on the new FCA consumer credit regime and high level conduct of business rules in 2013.  

Financial Policy Committee ('FPC'): In January 2012, legislation was introduced to parliament that created the FPC with specific powers for regulation from December 2012. The FPC is charged with identifying, monitoring and taking action to remove or reduce systemic risks to the stability of the financial system and has a secondary objective to support the economic policy of the Government. In the interim, the FPC made a number of recommendations that have been implemented through the FSA. This included recommendations on year end 2012 disclosure of pro-forma CRD IV capital and leverage disclosures and specific FSA studies upon fair value, provisions, expected losses and risk-weighted assets. The FPC is expected in 2013 to be granted powers to set the UK counter-cyclical capital buffer under CRD IV and may be granted additional powers to set sectoral capital buffers.

European Union

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 expected to be implemented beginning in January 2014. Santander UK is currently engaged in the assessment of the impact of the Basel III measures.

In addition to the changes to the capital adequacy framework published in December 2010, the Basel Committee also published its global quantitative liquidity framework, comprising the Liquidity Coverage Ratio ('LCR') and Net Stable Funding Ratio ('NSFR') metrics, with objectives to (1) promote the short-term resilience of banks' liquidity risk profiles by ensuring they have sufficient high-quality liquid assets to survive a significant stress scenario; and (2) promote resilience over a longer time horizon by creating incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. The LCR was subsequently revised by the Basel Committee in January 2013 which amended the definition of high-quality liquid assets and agreed a revised timetable for phase-in of the standard from 2015 to 2019, as well as making some technical changes to some of the stress scenario assumptions.

As with the Basel Committee's proposed changes to the capital adequacy framework, the draft liquidity framework remains under discussion within the EU and the final framework to be established could differ from Basel III in certain areas. The implementation date is still subject to uncertainty.

Crisis Management Directive and European Banking Union

On 6 June 2012, the European Commission published a legislative proposal known as the Crisis Management Directive for the recovery and resolutionof credit institutions and investment firms (the 'CMD'). The CMD framework set out necessary steps and powers to ensure that bank failures across the EU are managed in a way which avoids financial instability and minimises costs for the taxpayer. The CMD lays out proposals under three themes. These are: (i) preparation and prevention, which includes a requirement for the completion by banks of recovery and resolution plans that restore the long term viability of a firm or can ensure that failing entities are resolvable; (ii) early intervention, which proposes powers for supervisory authorities to intervene when a firm ceases to or is unlikely to meet regulatory capital requirements; and (iii) resolution tools which summarise the options that will be available to resolution authorities to deal with a failing entity including a 'bail-in' tool whereby specific unsecured liabilities of a firm are convertible to equity. The proposals are expected to come into force from 1 January 2015, although the 'bail-in' regime will be delayed until 1 January 2018. Santander UK maintains its own recovery and resolution plans which have been communicated to the FSA.

In June 2012, the European Commission published ideas for a European Banking Union for eurozone banks to help pave the way towards deeper economic integration. The Commission proposed (i) an integrated system for the supervision of cross-border banks, (ii) a single deposit guarantee scheme and (iii) an EU resolution fund. Later that month the President of the European Council published a report on establishing a stable economic and monetary union.

The report proposed a vision for a stable and prosperous union based on a number of essential building blocks: (i) an integrated financial framework; (ii) an integrated budgetary framework; and (iii) an integrated economic policy framework. In December 2012, eurozone countries agreed the framework for the European Central Bank to become a common bank supervisor for eurozone banks with assets in excess of euro 30bn. Consultations with member states and EU institutions regarding the implementation of the proposals continue.

DISCLOSURE CONTROLS AND PROCEDURES

Santander UK has evaluated with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of Santander UK's disclosure controls and procedures as at 31 December 2012. 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 Santander UK's evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as at 31 December 2012, Santander UK disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by Santander UK in the reports that Santander UK 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 Santander UK's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

There has been no change in Santander UK's internal control over financial reporting during Santander UK's 2012 fiscal year that has materially affected, or is reasonably likely to materially affect Santander UK'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. Santander UK'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.

Santander UK's internal control over financial reporting includes:

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 Santander UK. Management assessed the effectiveness of Santander UK's internal control over financial reporting at 31 December 2012 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, at 31 December 2012, Santander UK'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:

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.

Santander UK and other major UK banks voluntarily adopted the Code in their 2012 and 2011 financial statements. Santander UK's 2012 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 Santander UK's 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:

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 and General Counsel

14 March 2013

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

DIRECTORS' RESPONSIBILITY STATEMENT

We confirm to the best of our knowledge that:

By Order of the Board

Ana Botín

Chief Executive Officer

14 March 2013

FSA REMUNERATION DISCLOSURES

The following disclosures are prepared in accordance with the FSA's handbook for banks, building societies and investment firms ('BIPRU') sections 11.5.18 (1) to (7). More detailed information on Santander UK's remuneration processes and policies, together with the role and composition of the Board Remuneration Oversight Committee is contained in the Directors' Remuneration Report on pages 171 to 180.

Role of the Board Remuneration Oversight Committee

The Board 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 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. In January 2012, PricewaterhouseCoopers LLP ('PwC') were appointed by the Committee to provide independent professional advice to the Committee and throughout 2012, the Committee's work was supported by them. The Committee's full Terms of Reference will be made available on the Company's website www.aboutsantander.co.uk during 2013.

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 group generally. The Committee continues to keep under review the relationship of risk to remuneration. When determining remuneration practices, the Company ensures that the value and make up of the remuneration policy is aligned to the Company's risk appetite. The performance of the Company (for variable remuneration purposes) is measured in respect of its RORAC. This risk-adjusted measure ensures that inappropriate incentives are removed at a Company level. This encourages the Company to consider the risks and therefore the economic capital consumption involved in order to generate target profits.

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:

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 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 performance of both the Banco Santander group generally and the Santander UK group.

From 1 July 2011, the eligibility criteria of the Banco Santander Long-term Incentive Plan ('LTIP') changed. Under the LTIP granted on 1 July 2011, only Key Management Personnel (as defined in Note 44 to the Consolidated Financial Statements) 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 2011 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. No new awards were granted under the LTIP in 2012 as a result of a review by Banco Santander, S.A. as to how it rewards and retains the senior management across all its operating companies globally.

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 in line with the Company's values: Commitment, Innovation, Teamwork and Excellence. The Company's performance management process forms the basis of measuring the performance of individuals, which impacts in turn the extent to which variable pay awards are made. The key aspects of the remuneration components are set out below:

a) Base salary

Base salaries are reviewed annually, appropriately benchmarked and 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. Pay awards take account of prevailing market and economic conditions, governance trends and the approach to employee pay throughout the organisation.

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 across the Banco Santander group. No new awards were granted in 2012 and those employees classified as Code Staff did not receive any awards in 2011 either. Future awards will depend on the outcome of a review by Banco Santander, S.A. as to how it rewards and retains the senior management across all its operating companies globally. The LTIP was designed to reinforce the alignment of Santander UK's employees in achieving the common objectives of the Banco Santander group, the creation of value over the long term and to align the reward of participants with the return to shareholders. The performance measures and rules of the plan were reviewed on an annual basis and approved at Banco Santander, S.A.'s Annual General Meeting. Participants in each annual cycle of the LTIP were 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 received depended 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 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 comparator benchmark group. All conditional awards granted to participants in 2011 (for the performance period 1 April 2011 to 1 April 2014) and 2010 (for the performance period 1 April 2010 to 1 April 2013), and those awards vested and transferred to participants in 2012 depend on Banco Santander, S.A.'s Total Shareholder Return performance against a comparator 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 Banco Santander group's and 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.

All UK bonus awards in 2012 are subject to deferral principles that have been set at the Banco Santander 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:

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:

In such circumstances, the Committee will have final 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.

For 2012, 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.

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. The Committee continues to keep under review the relationship of risk to remuneration. When determining remuneration practices, the Company ensures that the value and make up of the remuneration policy is aligned to the Company's risk appetite. The performance of the Company (for variable remuneration purposes) is measured in respect of its RORAC. This risk-adjusted measure ensures that inappropriate incentives are removed at a Company level. This encourages the Company to consider the risks and therefore the economic capital consumption involved in order to generate target profits. Further to this, for 2012, the Committee also considered outcomes of the Company's Enterprise Wide Risk Review.

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 2012 and 2011. At 31 December 2012, there were 25 Code Staff (2011: 22) who have been identified as Key Management Personnel and 30 other Code Staff (2011: 33).

Aggregate remuneration expenditure

Aggregate remuneration is made up of total fixed and variable remuneration awarded in respect of the 2012 and 2011 performance years as follows.

Amounts and form of fixed and variable remuneration

a) Fixed remuneration

Total fixed remuneration paid in 2012 and 2011 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.

b) Variable remuneration

Variable remuneration payable in respect of 2012 and 2011 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 2012 performance year

(1) Value of bonus in shares awarded for performance in 2012, based on share price at award.

(2) Value of bonus in deferred shares for performance in 2012, and long-term incentive shares for performance in 2012.

Variable remuneration awarded in respect of 2011 performance year

(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 2011, and long-term incentive shares for performance in 2011.

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 2012 and 31 December 2011. 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.

2012 category of deferred remuneration

(1) Value of deferred and long-term incentive shares granted in 2012, based on share price at award/grant, plus deferred cash from 2012 bonus.

(2) Value of long-term incentive shares that vested in 2012, based on share price at vesting, plus deferred cash from 2009 and 2010 bonus paid in 2012.

(3) Value of long-term incentive shares or deferred cash delivered in 2012 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 2012, based on a share price at 31 December 2012, plus deferred cash outstanding from previous bonuses. Does not include remuneration awarded in respect of 2012 performance.

2011 category of deferred remuneration

(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.

d) Sign-on (buy-out) and severance payments

Payments totalling £2,818,800 were made to four Code Staff employees during the year (2011: Nil) in respect of buying-out deferred compensation from previous employers. A severance payment of £321,957 was made to one Code Staff employee during the year (2011: £746,111).