Santander UK and ANTS ring-fencing transfer scheme

Transcription

1 Santander UK and ANTS ring-fencing transfer scheme Report under s109a of the Financial Services and Markets Act January 2018 Prepared by John Cole FCA, MCSI

2 Contents Contents Part 1 Introduction, conclusions and background to the report Introduction Summary of my conclusions Introduction to ring-fencing Introduction to the Banco Santander Group The Santander UK Group s Ring-Fencing Programme The Scheme Report and types of persons covered Approach Part 2 Findings and conclusions: All persons Introduction to findings and conclusions: All groups of persons Communications Finance Business Model Viability, Capital and Liquidity Guarantees and Contingent Liabilities Governance Risk Management Operations, Infrastructure and Shared Services Recovery and Resolution, Operational Continuity and Creditor Hierarchy Part 3 Findings and conclusions: Groups of customers Introduction to findings and conclusions: groups of customers Findings and conclusions: Santander UK Group Retail Banking Customers Findings and conclusions: Santander UK Group SME Customers Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted products only Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted products only Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Findings and conclusions: ANTS Exempt Financial Institutions Findings and conclusions: Other customer groups Part 4 Findings and conclusions: All other groups of persons Findings and conclusions: Employees Findings and conclusions: Pension scheme members Findings and conclusions: Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) Findings and conclusions: Bondholders and debtholders Findings and conclusions: Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS Findings and conclusions: Market counterparties Findings and conclusions: Shareholders Findings and conclusions: Government and other fiscal persons Part 5 Other changes identified and not considered in the report EY i

3 Contents 35. Other changes identified and not considered in this Scheme Report Part 6 Skilled Person duty to the High Court Skilled Person duty to the High Court Part 7 Appendices Appendix 1 Glossary and definitions Appendix 2 Hyperlinks to regulatory and professional guidance Appendix 3 Legislative and regulatory background Appendix 4 Comparison of UK and Spanish regulations Appendix 5 Interpretation of credit ratings Appendix 6 Banco Santander Group permitted and prohibited products and services Appendix 7 The Skilled Person Appendix 8 Regulatory and professional guidance considered by the Skilled Person Appendix 9 Information and analysis process EY ii

4 Contents This page is intentionally left blank. EY iii

5 Part 1 Introduction, conclusions and background to the report EY 1

6 Introduction 1. Introduction Introduction of the Skilled Person I am John Cole and, as the Skilled Person, I am responsible for authoring this Scheme Report, required under section 109A of the Financial Services and Markets Act 2000 (FSMA) in relation to the ringfencing transfer scheme (RFTS) of Santander UK plc (Santander UK) and Abbey National Treasury Services plc (ANTS). Santander UK has nominated me to act as the Skilled Person to provide the Scheme Report and has funded the costs of my nomination and the production of this Scheme Report. Santander s Ring-Fencing Plan, including the Scheme Since 2014, the Santander UK Group has designed and been running a Ring-Fencing Programme. This is a programme of change to implement the Ring-Fencing Plan. A summary of the Ring-Fencing Programme is set out in section 5.3 of this Scheme Report. The Ring-Fencing Plan outlines all changes to enable the Santander UK Group to comply with the requirements of the ring-fencing legislation by 1 January 2019 (the implementation date for ringfencing). One aspect of the Ring-Fencing Programme is that Santander UK and ANTS will undertake a Ring- Fencing Transfer Scheme (the Scheme) to transfer certain business, including customer and counterparty relationships and transactions, and the corresponding assets and liabilities, as set out below. Further details as to the background of a RFTS are set out in section 3.2 of this Scheme Report. The primary purpose of the Scheme is to enable Santander UK to carry on core activities as a ringfenced body in compliance with ring-fencing legislation. Under the Scheme, certain business will be transferred: From ANTS to Santander UK; From ANTS to Banco Santander S.A. London Branch (SLB); and From Santander UK to SLB. The business to be transferred does not include any Retail or Small and Medium Enterprise (SME) business (other than 1 ANTS SME customer, which will be transferred from ANTS to Santander UK under the Scheme). Further details regarding the scope of the Scheme can be found in section 5.5 of this Scheme Report. Santander UK and ANTS will apply to the UK High Court of Justice in England and Wales (High Court) for the sanction of the Scheme in line with the ring-fencing legislation. EY 2

7 Introduction The role of the skilled person and the scheme report FSMA requires that an application to the High Court in respect of a RFTS must be accompanied by a report on the terms of the RFTS (a scheme report) by a skilled person. Under this section of FSMA, the scheme report must state: 1. Whether persons other than the transferor concerned are likely to be adversely affected by the RFTS; and 2. If so, whether the adverse effect is likely to be greater than is reasonably necessary in order to achieve whichever of the purposes mentioned in Section 106B(3) of FSMA is relevant. I have setout in section 5.5 further information on the purposes of the Scheme. This is referred to as the Statutory Question. The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have each issued guidance, which informs the approach that I, as the Skilled Person, should adopt when addressing the Statutory Question (see Appendix 8 for further details of these materials, and also other materials that I have referred to). Skilled Person statement of truth I confirm that I have made clear which facts and matters referred to in this Scheme Report are within my own knowledge and which are not. Those that are within my own knowledge I confirm to be true. The opinions I have expressed represent my true and complete professional opinions on the matters to which they refer. Skilled Person duty to the High Court I confirm that I am aware of the requirements of Part 35 of the Civil Procedure Rules and the relevant Practice Direction, and the Guidance for the Instruction of Experts in Civil Claims In reporting on the Scheme as the Skilled Person, I recognise that I owe a duty to the High Court to assist on matters within my expertise. This duty overrides any obligation to Santander UK or the PRA and the FCA. I confirm that I have complied with this duty. Skilled person s reliance on partners and employees of Ernst & Young LLP (EY) I confirm that in preparing this Scheme Report, I have relied on relevant subject matter resources who are partners and employees of EY, appropriately qualified in their respective fields, and under my supervision. EY 3

8 Introduction Using this Scheme Report Table 1 provides readers with my recommendation of which parts of this Scheme Report groups of persons should read in order to fully understand the changes being made and potential effects of the Scheme. Table 1: Navigation of this Scheme Report Report component Recommendation of who should read the report component and what is covered Part 1 Introduction, conclusions and background to the report All readers. Part 1 provides context to the work undertaken, parties involved and details of the Scheme, conclusion on the Statutory Question, conclusion on the assessment of Scheme Documents and a summary of findings. Part 2 Findings and conclusions: All persons All readers. The findings and conclusions in Part 2 are likely to be relevant to all readers of my Scheme Report, and cover the key assessment areas of: Communications; Finance Business Model Viability, Capital and Liquidity; Guarantees and Contingent Liabilities; Governance; Risk Management; Operations, Infrastructure and Shared Services; and Recovery and Resolution, Operational Continuity and Creditor Hierarchy. Part 3 Findings and conclusions: Groups of customers Santander UK Group and SLB customers. Part 3 is focused on customers of the Santander UK Group and SLB. To understand the changes being made and potential effect of the Scheme on customers specifically, I have split this part into customer types. The introduction to Part 3 provides guidance to help customers determine which type of customer they are. Part 4 Findings and conclusions: All other groups of persons Other groups of persons (not customers). Part 4 covers all other groups of persons that interact with the Santander UK Group or SLB. To understand the changes being made and potential effect of the Scheme, other groups of persons should read the section(s) that apply to them. Part 5 Other changes identified and not considered in the report All readers. A non-exhaustive list of other changes being made by the Ring- Fencing Programme, to meet ring-fencing legislative requirements, identified during the course of my work. These provide context, but are not a consequence of the Scheme. Part 6 Skilled Person duty to the High Court All readers. The Skilled Person s recognition of his duty to the High Court. Part 7 Appendices Optional for all readers. The appendices provide additional information, context and/or supporting analysis for Parts 1-6 of this Scheme Report. EY 4

9 Introduction A summary and full version of this Scheme Report will be available to view or download from A printed copy of this Scheme Report, and a summary of it, can be obtained by calling, ing or writing to Santander UK whose details can be found by visiting their dedicated ring-fencing website (given above). This Scheme Report and any statements arising from it are intended to be in plain English, concise and sufficiently detailed to allow the reader to understand how the Scheme is likely to affect them. This Scheme Report is also designed to allow the reader to consider why and whether there were reasonable alternatives available to the Santander UK Group, which could reduce any adverse effect of the changes being implemented by it to meet the ring-fencing legislation. I assume no responsibility whatsoever in respect of, or arising out of or in connection with the contents of this Scheme Report to parties other than the High Court, the PRA and the FCA. If other parties choose to rely in any way on the contents of this Scheme Report, they do so entirely at their own risk and neither I, nor EY, its partners and staff will owe or accept any duty to any other party and shall not be liable for any loss, damage or expense (including interest) of whatever nature caused by any other party s reliance on this report. No liability will be accepted under the terms of the Contract (Rights of Third Parties) Act Each part of this Scheme Report addresses different aspects of the assessment I have undertaken, but the entire Scheme Report should be read for a full understanding of my analysis, findings and conclusions. Reading only parts of this Scheme Report in isolation may lead the reader to draw misleading conclusions. EY 5

10 Summary of my conclusions 2. Summary of my conclusions Introduction In assessing the Statutory Question, I have considered the effect of changes as a consequence of the Scheme. In some assessment areas, I have had to consider the effect of changes as a consequence of the Ring- Fencing Plan, which includes changes made because of the Scheme as well as those changes made under the wider scope of the Ring-Fencing Plan. I have done so where it has not been possible to separate the cause of the change between the Ring-Fencing Plan and the Scheme. Where this is the case, I have clearly referenced it in each section of this Scheme Report. When assessing the effect of changes as a consequence of the Scheme, I have considered the effect of changes on groups of persons with similar characteristics, covering Santander UK Group and SLB customers (Part 3 of this Scheme Report) and a broad range of other groups of persons connected to the Santander UK Group and SLB (Part 4 of this Scheme Report). I have also assessed the effect of changes as a consequence of the Scheme across a range of areas where changes will affect all groups of persons. Part 2 of this Scheme Report covers those assessment areas. In analysing the effects of changes that I have identified which are a consequence of the Scheme, I have taken into account the guidance published by the PRA and the FCA, together with my own experience and professional judgement. I have assessed these changes using my approach to answer the Statutory Question, as set out in section 7 of this Scheme Report, and have formed an independent view. I have not made further reference to groups of persons connected to the wider Banco Santander Group, other than those connected to the Santander UK Group, Banco Santander and SLB, as there are no changes being made that will affect the wider Banco Santander Group or persons or groups of persons connected to the wider Banco Santander Group (see section 6.4 of this Scheme Report). My assessment has been carried with knowledge and consideration of other changes being made under the wider Ring-Fencing Plan, but outside of the Scheme; some which have already happened and some that will occur before the final effective date of the Scheme, proposed to be 13 August In this conclusion, I set out my response to the Statutory Question followed by my summary of the effect of the Scheme. Customers and other persons connected to Santander UK s Jersey and Isle of Man branches I have been advised of a change to the transfer date of the Jersey and Isle of Man (IoM) branches under the Crown Dependency Schemes, as described in more detail in section 35. The change will result in the effective date of the Crown Dependency Schemes being after the effective date of the UK Scheme. The consequence of this is that customers and other persons connected to the Jersey and IoM branches of Santander UK will now come under the scope of this Scheme Report, given they will still be connected to Santander UK as at the effective date of the UK Scheme. The proposed change is too late for me to complete my assessment of the effect of the UK Scheme on these specific groups of customers and other persons connected to the Jersey and IoM branches of Santander UK in time for the Directions Hearing. My assessment of the effect of the UK Scheme on Jersey and IoM customers and other persons will be carried out during the period between the Directions and Sanctions Hearings and I will report my conclusions to the High Court for the Sanctions Hearing in a Supplementary Report. Notwithstanding the above, Part 2 of this Scheme Report is relevant to Jersey and IoM customers and other persons, as it is to all other persons considered in this Scheme Report. I am satisfied that the changes to the transfer date of the Crown Dependency Schemes does not affect any of the conclusions I have reached in this Scheme Report. EY 6

11 Summary of my conclusions My conclusion on the Statutory Question My assessment has identified a number of changes that are likely to adversely affect a number of corporate customer groups as well as groups of other persons, as summarised in sections 2.4 and 2.5. These adverse effects are as a result of the Scheme and concluded on below. Having completed my work, I have concluded that there are groups of customers and other persons who are likely to be adversely affected by the Scheme. However, I am satisfied that the adverse effects identified are not likely to be greater than reasonably necessary in order to achieve the Scheme s purposes. No adverse effects Having undertaken my assessments, I have identified changes as a consequence of the Scheme that do not result in adverse effects on several groups of customers and other persons. These are set out below. Further information on the effects of the Scheme on these groups of customers are set-out in Part 3 of this Scheme Report, and on groups of other persons in Part 4 of this Scheme Report. Table 2: Summary groups of customers and persons where there are no adverse effects Summary groups of customers and persons where there are no adverse effects Groups of customers Santander UK Group Retail Banking customers Santander UK Group SME customers Santander UK Corporate Customers (non-sme) holding permitted products only SLB customers Banco Santander customers Other groups of persons Santander UK Group retail and small business banking branche employees Members of Santander defined contribution pension schemes Santander UK Group landlords Santander UK Group suppliers (including direct and indirect Payments and Clearing Infrastructure) Bondholders of Santander UK Debtholders of Santander UK and ANTS Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS Santander UK and ANTS shareholders Tax authorities Bank and FSCS Levy In addition, as set out in Section 6.4 of this Scheme Report, I have concluded that there are no changes being made as a consequence of the Scheme that will affect the wider Banco Santander Group, outside the Santander UK Group, Banco Santander and SLB, or persons or groups of persons connected to it. EY 7

12 Summary of my conclusions Summary of adverse effects of the Scheme on groups of customers Having undertaken my assessments, I have identified a number of changes that may have adverse effects on groups of customers as a consequence of the Scheme. I have summarised my assessment and conclusions for each adverse effect, as a consequence of the Scheme, against the groups of customers affected. Guidance on which parts of this Scheme Report provide further information on my assessment, specific to groups of customers, is set out in Part 3, section Table 3: Summary of adverse effects identified by the Skilled Person on groups of customers Summary of adverse effects identified groups of customers ANTS Corporate Customers (non-sme) holding permitted products only (i.e. permitted products being those which may be provided by a RFB after 1 January For more information, please refer to Appendix 6): adverse effect identified as a consequence of the ANTS to Santander UK business transfer under the Scheme. Changes to rights of set-off: Santander UK (the RFB) will obtain the ability to set-off outstanding unsecured loan amounts against deposits that the customer holds with Santander UK (the RFB). This change will only affect customers who default on an unsecured loan. No mitigations or reasonable alternatives are available. However, given the nature of the change and the default event required to trigger the adverse effect, I am satisfied that any adverse effect is not likely to be greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. Santander UK Corporate Customers (non-sme) holding permitted and prohibited products (i.e. prohibited products being those which may not be offered by a RFB after 1 January For more information, please refer to Appendix 6): adverse effects identified as a consequence of the Santander UK to SLB business transfer under the Scheme. Changes to netting sets: Santander UK corporate customers will no longer be able to net any Early Termination Amount (ETA) arising from prohibited derivatives held in SLB against ETA arising from permitted derivatives held in Santander UK (the RFB). This change will only result in an adverse effect on customers in the event of a default by either SLB or Santander UK. Changes to rights of set-off: Santander UK corporate customers will no longer be able to set-off any ETA arising from prohibited derivatives owed by SLB against the unsecured loans that have been retained in Santander UK. This change will only result in an adverse effect on customers in the event that SLB or Santander UK defaults. Credit Valuation Adjustment (CVA): possible adverse (or positive) effects on the CVA calculations as a consequence of a lower credit rating of Banco Santander (and therefore SLB) to Santander UK. It is not possible to assess the effect of the change in credit rating on actual calculations, given that calculation methods are determined by each customer and are likely to be based on a range of variables of which the credit rating is but one. Whilst the Ring-Fencing Programme is carrying out proactive communications with customers to inform them of the changes and possible effects, this action in itself is not a mitigation to the adverse effects identified above. No mitigations or reasonable alternatives are available. However, given the nature of the changes, I am satisfied that any adverse effects are not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 8

13 Summary of my conclusions ANTS Corporate Customers (non-sme) holding permitted and prohibited products: adverse effects identified as a consequence of both the ANTS to SLB and the ANTS to Santander UK business transfers respectively, under the Scheme. Changes to rights of set-off: Santander UK (the RFB) will obtain the ability to set-off outstanding unsecured loan amounts against deposits that the customer holds with Santander UK (the RFB). However this will only adversely affect customers should the customer themselves default on their unsecured loan(s). Further, corporate customers will no longer be able to set-off any ETA arising from prohibited derivatives held in SLB against the unsecured loans that have been transferred to Santander UK (the RFB). This change will only result in an adverse effect on customers in the event of a default by either SLB or Santander UK. Changes to netting sets: corporate customers will no longer be able to net any ETA arising from prohibited derivatives held in SLB against ETA arising from permitted derivatives held in Santander UK (the RFB) (including those transferred from ANTS). This will only result in an adverse effect on customers in the event of a default by either SLB or Santander UK. CVA: possible adverse (or positive) effects on the CVA calculations as a consequence of a lower credit rating of Banco Santander (and therefore SLB) to ANTS. It is not possible to assess the effect of the change in credit rating on actual calculations, given that calculation methods are determined by each customer and are likely to be based on a range of variables of which the credit rating is but one. Whilst the Ring-Fencing Programme is carrying out proactive communications with customers to inform them of the changes and possible effects, this action in itself is not a mitigation to the possible adverse effects identified above. No mitigations or reasonable alternatives are available. However, given the nature of the changes, I am satisfied that any adverse effects are not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. Santander UK and ANTS Specified Corporate Customers: adverse effects identified as a consequence of both the ANTS to SLB and the Santander UK to SLB business transfers respectively, under the Scheme. Changes rights of set-off: specified corporate customers will no longer be able to set-off any ETA arising from permitted and/or prohibited derivatives held in SLB against unsecured loans held in, or transferred to, Santander UK (the RFB). This change will only result in an adverse effect on customers in the event of a default by either SLB or Santander UK. Santander UK and ANTS derivative valuations service: SLB uses a different discount curve to value derivatives in its valuation service compared to that used by ANTS and Santander UK. This may have a negative (or positive) effect on the valuation of derivative positions. However, as with the CVA and Capital Valuation Assessement (KVA) effects, it is not possible to validate the actual effect until the point of legal transfer. CVA: possible adverse (or positive) effects on the CVA calculations as a consequence of a lower credit rating of Banco Santander (and therefore SLB) to Santander UK and ANTS. It is not possible to assess the effect of the change in credit rating on actual calculations, given that calculation methods are determined by each customer and are likely to be based on a range of variables of which the credit rating is but one. Whilst the Ring-Fencing Programme is carrying out proactive communications with customers to inform them of the changes and possible effects, this action in itself is not a mitigation to the possible adverse effects identified above. No mitigations or reasonable alternatives are available. However, given the nature of the changes, I am satisfied that any adverse effects are not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 9

14 Summary of my conclusions Santander UK and ANTS Relevant Financial Institutions: adverse effects identified as a consequence of both the ANTS to SLB and the Santander UK to SLB business transfers respectively, under the Scheme. ANTS derivative valuations service: SLB uses a different discount curve to value derivatives in its valuation service compared to that used by ANTS and Santander UK. This may have a negative (or positive) effect on the valuation of derivative positions.however, as with the CVA and KVA effects, it is not possible to validate the actual effect until the point of legal transfer. Santander UK is undertaking proactive communications with customers to explain the changes. Although no mitigation is being made available, I am satisfied that the change is a necessary consequence of the Scheme. KVA: possible adverse (or positive) effects on the KVA calculations as a consequence of a lower credit rating of Banco Santander (and therefore SLB) to Santander UK and ANTS. It is not possible to assess the effect of the change in credit rating on actual calculations, given that calculation methods are determined by each customer and likely based on a range of variables of which the credit rating is but one. Whilst the Ring-Fencing Programme is carrying out proactive communications with customers to inform them of the changes and possible effects, this action in itself is not a mitigation to the possible adverse effects identified above. No mitigations or reasonable alternatives are available. However, given the nature of the changes, I am satisfied that any adverse effects are not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. Ratings Triggers: customers with swaps that have ratings triggers embedded in their swap documentation will be adversely affected as a result of the lower credit rating of Banco Santander (and therefore SLB), when compared to ANTS and Santander UK. This lower credit rating may trigger a requirement for the RFI customer to apply additional capital or, in extremis, having to terminate the agreement. As a mitigation, SLB is planning to provide any additional collateral required by the contracts and will override any events of default clauses in contracts that might cause early termination triggering through the Scheme. I have therefore concluded that as a consequence of the mitigations offered, the adverse effect identified will be adequately mitigated for the affected customers. Exempt Financial Institutions of ANTS: adverse effect identified as a consequence of the ANTS to SLB business transfer, under the Scheme. KVA: possible adverse (or positive) effects on the KVA calculations as a consequence of a lower credit rating of Banco Santander (and therefore SLB) to ANTS. It is not possible to assess the effect of the change in credit rating on actual calculations, given that calculation methods are determined by each customer and are likely to be based on a range of variables of which the credit rating is but one. Whilst the Ring-Fencing Programme is carrying out proactive communications with customers to inform them of the changes and possible effects, this action in itself is not a mitigation to the possible adverse effects above. No mitigations or reasonable alternatives are available. However, given the nature of the change, I am satisfied that the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. ANTS: adverse effect on one customer who remains connected to ANTS in run-off as a consequence of the unwinding of the cross-guarantee between ANTS and Santander UK under the Scheme. The loss of downstream-guarantees from Santander UK and ANTS no longer having a credit rating: customers and counterparties who remain in ANTS after 1 January 2019 will no longer have recourse to the downstream-guarantee from Santander UK in the event of ANTS not being able to meet its liabilities. One affected customer has agreed through bilateral discussions an acceptable mitigation to address the adverse effect and maintain the transaction in run-off within ANTS. EY 10

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16 Summary of my conclusions Summary of adverse effects of the Scheme on other groups of persons Having undertaken my assessment, I have identified a number of changes as a consequence of the Scheme that are likely to have an adverse effect on groups of persons (other than customers). I have summarised my assessment and conclusions for each adverse effect for groups of other persons included within this Scheme Report. Further information on the effects of the Scheme on groups of other persons is set-out in Part 4 of this Scheme Report. Table 4: Summary of adverse effects identified by the Skilled Person on other groups of persons Summary of adverse effects identified other groups of persons Santander UK Group non-branch employees in the UK: adverse effect identified as a consequence of the overall Ring-Fencing Plan, including the Scheme. A total of 3 UK based employees were initially identified as being at risk of redundancy and went through the standard Santander UK consultation process, where Santander UK looks for alternative roles within the Banco Santander Group on their behalf. Of those, 2 have identified other roles within the UK that they have moved to. The third employee has been made redundant following the consultation process. A role was identified which matched the employee s specialist skillset. However the role was turned down because it was based in Madrid. Following completion of the Santander UK consultation process, the 1 employee has been made redundant on standard Santander UK redundancy terms and conditions. Despite the consultation process, no reasonable alternatives were available, from the perspective of the employee made redundant and the employee has been compensated through the standard Santander UK redundancy package. Given the nature of the changes, and the efforts made to identify alternative employment options, I am satisfied that it was mitigated as much as possible and is a necessary consequence of the Scheme. Santander UK Group defined benefit pension scheme members: adverse effect identified as a consequence of the overall Ring-Fencing Plan, including the Scheme. 11 members of the Santander UK Group Pension Scheme (SUKGPS): 11 active members of the SUKGPS will be transferring under TUPE to Banco Santander (including SLB), which is not a sponsoring and/or participating member of the SUKGPS. As a result, these 11 employees will become deferred members of the SUKGPS, who no longer have the benefit of ongoing entitlements/contribution. The Santander UK Group will be replacing these defined benefit contributions with membership and participation in a defined contribution scheme, with an additional contribution of 20% of their salary for a period of three years. This is forecast to result in a net positive financial outcome for these members through to their estimated retirement age when compared to the continued receipt of defined benefit contributions. I have therefore concluded that the adverse effect will be mitigated in full and the adverse effect is no more than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 12

17 Summary of my conclusions Market counterparties transferring from ANTS to Santander UK (the RFB): adverse effect identified as a consequence of the ANTS to Santander UK business transfer under the Scheme. Changes to netting sets: market counterparties will no longer be able to net any ETA arising from prohibited derivatives with SLB against any ETA arising from permitted derivatives with Santander UK (to the extent that their permitted transactions transfer to Santander UK and their prohibited transactions transfer to SLB). This will only result in an adverse effect on market counterparties in the event that SLB or Santander UK defaults. Whilst the Ring-Fencing Programme is carrying out proactive communications with market counterparties to inform them of the changes and possible effects, this action in itself is not a mitigation to the possible adverse effects above. No mitigations or reasonable alternatives are available. However, given the nature of the changes and the default event required to trigger the adverse effect, I am satisfied that they are necessary consequences of the Scheme. Market counterparties transferring from ANTS to SLB: adverse effects identified as a consequence of the ANTS to SLB business transfer under the Scheme. Changes to netting sets: market counterparties will no longer be able to net any ETA arising from prohibited derivatives with SLB against any ETA arising from permitted derivatives with Santander UK (where their prohibited transactions are migrated to SLB and permitted derivatives are migrated to, or remain in Santander UK). This will only result in an effect on market counterparties in the event that SLB or Santander UK defaults, and is being mitigated through early and proactive communications with counterparties and is without reasonable alternatives. KVA: possible adverse (or positive) effects on the KVA calculations as a consequence of a lower credit rating of Banco Santander (and therefore SLB) to ANTS. It is not possible to assess the effect of the change in credit rating on actual calculations, given that calculation methods are determined by each counterparty and are likely to be based on a range of variables of which the credit rating is but one. Whilst the Ring-Fencing Programme is carrying out proactive communications with market counterparties to inform them of the changes and possible effects, this action in itself is not a mitigation to the possible adverse effects above. No mitigations or reasonable alternatives are available. However, given the nature of the changes, I am satisfied that the adverse effects are not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 13

18 Summary of my conclusions Assessment of the Scheme documents I have assessed the summary documents produced by the Ring-Fencing Programme to assess whether they are clear, fair and not misleading as summaries of the full Scheme document and this Scheme Report. As a result of my review of the final versions of the Summary of the Scheme and the Summary of this Scheme Report, both made available to me on 26 January 2018, I can confirm the following: I am satisfied that the Summary of the Scheme is clear and a fair representation of the Santander UK and ANTS Ring-Fencing Transfer Scheme in a summary form. I am satisfied that the Summary of my Scheme Report, as produced by the Santander UK Ring- Fencing Programme, is clear and a fair representation of the full Scheme Report. The Summary of the Scheme Report is not intended to be a substitute for the full version and should be read alongside my full Scheme Report, which will be made available through the dedicated website shortly following the Directions Hearing. Supplementary Report I will produce a further report shortly before the Sanction Hearing, currently scheduled for 11 and 12 June 2018, which will be my Supplementary Report. The Supplementary Report will take account of: Any significant changes to the Scheme since the date of this Scheme Report; Any adverse effects that I may identify after the publication of this Scheme Report, that reflect matters that have not been taken into consideration in this Scheme Report; The effect of the UK Scheme on customers and other persons connected to the Jersey and IoM branches of Santander UK; Contacts, queries or objections to the Scheme received by the Santander UK Group from persons; and Any actions identified but not completed at the date of this Scheme Report. EY 14

19 Introduction to ring-fencing 3. Introduction to ring-fencing Independent Commission on Banking Following the global financial crisis ( ), which resulted in the failure of a number of banks and necessitated large scale government intervention and support, the UK Government prioritised more rigorous regulation in the financial sector. One such measure was to establish the Independent Commission on Banking (ICB) in June In 2011, the ICB published their final report (the ICB Report), in which one of their recommendations proposed that qualifying UK banks separate (or ring-fence) their retail and small and medium sized enterprise (SME) deposit-taking activities (together referred to as a ring-fenced bank), from their wholesale banking activities. This recommendation was aimed at protecting retail and small corporate customers from unrelated risks in a wider banking group and the overall financial system, for example, from investment banking activities. The ICB Report recommended that these ring-fenced banks should be financially independent legal entities, subject to higher prudential standards and should have their own independent governance systems. Ring-fenced banks should also be independent from activities carried out by non-ring-fenced banks in the same group which involve increased risk and exposure to vulnerabilities within the global financial system. Financial Services (Banking Reform) Act 2013 Ring-Fencing Transfer Scheme The UK Government issued a plan to implement the ICB s recommendations in December 2011, beginning with a Banking Reform Bill, which was passed as the Financial Services (Banking Reform) Act 2013 (BRA) in December 2013, and which introduced amendments to FSMA. Larger UK banks or banking groups, which hold an average of more than 25bn of core deposits 1 (generally those from individuals and small businesses), are required to have a fully operational ringfenced structure by 1 January The ring-fencing legislation provides for a RFTS, which is designed, among other things, to enable qualifying banks to transfer business so as to create the ring-fenced banks with the permission of the High Court or Court of Session in Scotland. The High Court or the Court of Session of Scotland will only sanction an RFTS where, in the circumstances of the case, it is appropriate to sanction the relevant RFTS, and where certain conditions are met, including that appropriate certificates have been obtained. 1 The Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014 EY 15

20 Introduction to ring-fencing Prohibited and Permitted business Ring-fencing requires affected UK banks to separate prohibited business and products from permitted retail and corporate banking activities. Ring-fencing legislation mandates that certain products and services can only be provided by a ringfenced bank. These are broadly deposit solutions for retail and/or SME customers e.g. Sterling current accounts, deposit accounts, currency accounts, overdrafts and money market deposits and loans. Other prohibited services and products must be provided outside of the ring-fenced bank for example certain derivatives and other investments, irrespective of customer type. The ring-fencing legislation allows a level of discretion for certain products and services, as to whether they are provided within or outside of a ring-fenced bank (RFB). Some decisions are therefore at the Santander UK Group s own discretion, based on their strategic plans and the need to ensure ongoing viability of all of their businesses. Figure 1 shows a high-level summary of the products and services that are permitted and those that are prohibited for a ring-fenced bank to offer to certain customer types in accordance with ring-fencing legislation. Please see Appendix 6 for a more detailed list of permitted and prohibited products and services. Figure 1: Customer types and products/services accessible or not accessible from a RFB Product or Service Deposits Cash management Lending Trade Finance Simple Derivatives Complex Derivatives Debt Capital Markets Retail/SME Customer Type Corporates Exempt financial institutions Relevant financial institutions Key Mandated inside RFB May be permitted inside RFB (subject to conditions) Prohibited from being inside RFB Banks that fall within the ring-fencing legislation may carry out any required reorganisation in a number of different ways. One way (alone or combined with others) is to transfer banking business between legal entities using a High Court authorised RFTS described below. EY 16

21 Introduction to ring-fencing Ring-fencing transfer scheme Under FSMA, a UK authorised person (such as Santander UK) that is transferring the whole or part of its business in the UK in order to meet the ring-fencing legislative requirements may use a RFTS. FSMA sets out a statutory process that banks must follow before a RFTS becomes effective. Under the statutory process, a bank must obtain (amongst other things): A scheme report from a skilled person in relation to the RFTS; The consent of the PRA to the bank s application for an order to sanction the RFTS being made to the High Court or the Court of Session of Scotland; and The sanction of the High Court or the Court of Session of Scotland in respect of the RFTS. My appointment as skilled person and this scheme report Santander UK has nominated me to act as the Skilled Person to provide the Scheme Report in respect of the Scheme, and has funded the costs of my appointment and the production of the Scheme Report. The PRA has approved my appointment after consultation with the FCA. I am a Partner in the Financial Services practice of Ernst & Young LLP (EY) having been admitted to the partnership in I am a Fellow of the Institute of Chartered Accountants in England & Wales and a Member of the Chartered Institute for Securities & Investment. As part of my approval as Skilled Person, a detailed exercise was undertaken to ensure my independence and ability to prepare the Scheme Report. Procedures were put in place by me and the Banco Santander Group following my appointment to ensure that independence was maintained between me, my team from EY and the Banco Santander Group. I was formally appointed and approved as Skilled Person originally in 2016 and reconfirmed in February I have supplied a copy of my CV, a summary of my experience and detailed information in respect of my independence at Appendix 7. The Scheme Report addresses the Statutory Question in relation to the Scheme. The Scheme Report also contains a description of the Santander UK Group s wider Ring-Fencing Programme. For context, it explains the Scheme and its effect in the wider reorganisation that the Santander UK Group is undertaking in order to comply with requirements under the ring-fencing legislation. It is important to understand that my Scheme Report does not consider wider changes being made under the Santander UK Group s overall Ring-Fencing Programme because that is not my role under FSMA. However, I believe it is necessary to describe, broadly, the Ring-Fencing Programme and, where appropriate, to consider the effect of the Ring-Fencing Programme insofar as it affects my objective to provide a clear and unambiguous Scheme Report to inform the reader. I have set out later in this Scheme Report, in section 6, the exact scope of my Scheme Report, the matters to which I have had regard and those enquires I made in answering the Statutory Question. EY 17

22 Introduction to the Banco Santander Group 4. Introduction to the Banco Santander Group Banco Santander Banco Santander S.A. (Banco Santander) is headquartered in Spain and provides a range of banking and financial products and services globally to a range of customers (including retail, high net worth and all sizes of corporate businesses). Figure 2 depicts the core countries in Europe and the Americas in which it operates 2. The Banco Santander Group held total customer deposits and mutual funds of 892bn, total loans to customers of 857bn and has 13,704 branches worldwide 3 as at September Figure 2: Banco Santander information and market shares Source: Adapted from the Banco Santander Institutional Presentation 9M 17 and Banco Santander Financial Report (January-September 2017) 2 Banco Santander S.A. Annual Report Banco Santander Financial Report (January-September 2017) 4 Banco Santander Institutional Presentation 9M 17 EY 18

23 Introduction to the Banco Santander Group Santander in the UK Figure 3: Santander in the UK infographic Source: Adapted from the Santander UK Group Holdings plc Quarterly Management Statement for the nine months ended 30 September and Santander UK plc 2017 Half Yearly Financial Report 6 5 Santander UK Group Holdings plc Quarterly Management Statement for the nine months ended 30 September Santander UK plc Half Yearly Financial Report EY 19

24 Introduction to the Banco Santander Group Legal entity structure of the Santander UK Group The legal entity structure relevant to the key trading entities in the UK, and to the Scheme, is set out in the figure 4. It depicts the principal impacted entities in the UK and their relationships with the Santander UK Group s ultimate parent company, Banco Santander, prior to the submission of the Ring-Fencing Plan. This structure is changing as a consequence of the Ring-Fencing Programme, to enable compliance with the ring-fencing legislation by 1 January These changes, including the target legal entity structure after implementation of the Ring-Fencing Plan, are set out in section 5.4. Figure 4: Legal entity structure prior to the submission of the Ring-Fencing Plan Source: The Ring-Fencing Plan EY 20

25 Introduction to the Banco Santander Group This page is intentionally left blank. EY 21

26 Introduction to the Banco Santander Group Main entities relevant to the Scheme The Banco Santander Group operates in the UK through the Santander UK Group. Services and products are currently provided from Santander UK and its main subsidiaries, ANTS and Cater Allen Limited (CAL). These three entities all possess PRA permissions to carry on the regulated activity of accepting deposits and acting as a credit institution (but not serving as a credit union, friendly society or building society). These permissions allow them to bank and service different types of customer through dedicated brands. Table 5 summarises the key entities in the structure. Table 5: Descriptions of main entities relevant to the Scheme Entity Name Description 1 Banco Santander S.A. (Banco Santander) Banco Santander is the ultimate parent company of the Banco Santander Group globally. It is a European authorised financial institution registered with the Bank of Spain (Banco de Espana) under number 0049 and registered at the Santander Mercantile Registry, Sheet 286, Pg. 64, 5 th Book of Companies, 1 st Inscription and headquartered at Santander Group City, Av. De Cantabria s/n Boadilla del Monte, Madrid. Banco Santander is regulated by the European Central Bank (ECB) as a result of its status as significant under the Single Supervisory Mechanism (SSM) regulations. 2 Banco Santander S.A. London Branch (SLB) SLB is a European Economic Area (EEA) authorised UK Branch of Banco Santander. Its financial services registration number is and it is the sole UK establishment of Banco Santander registered at Companies House, BR001085, under Banco Santander FC It is regulated in Spain through the ECB and can offer certain products and services in the UK through EEA Passporting. 3 Santander UK Group Holdings plc (Santander UK HoldCo) Santander UK HoldCo is an intermediate holding company and a wholly owned subsidiary of Banco Santander. Santander UK HoldCo, currently has one subsidiary, Santander UK, which is 100% owned. No customer business is contracted with or serviced from Santander UK HoldCo. 4 Santander UK plc (Santander UK) Santander UK is an authorised deposit taking entity. Its financial services registration number is , and it is registered as a public limited company in England & Wales ( ) under the Companies Act Its permissions are granted by the PRA, and it is regulated by the PRA and the FCA. It is the entity through which the majority of retail and corporate and commercial banking customers are serviced. Banco Santander acquired Abbey National plc (2004) and Alliance & Leicester plc (2008), with the latter being transferred to Santander UK plc in Those acquisitions, alongside Bradford & Bingley s deposit taking business (acquired by Santander UK plc in 2008), were rebranded as Santander UK plc in Note: Santander UK will be the primary RFB of the Santander UK Group. EY 22

27 Introduction to the Banco Santander Group Entity Name Description 5 Abbey National Treasury Services plc (ANTS) ANTS is an authorised deposit taking entity. Its financial services registration number is , and it is registered as a public limited company in England & Wales ( ) under the Companies Act Its permissions are granted by the PRA, and it is regulated by the PRA and the FCA. Santander UK holds all of the voting shares in ANTS, except for one ordinary share held by Abbey National Nominees Limited. Abbey National Nominees Limited is a wholly owned subsidiary of Santander UK. ANTS holds and undertakes the majority of the wholesale banking and markets business of the Santander UK Group. It does not have any employees. It is currently the parent company of Santander Equity Investments Limited (SEIL) and Santander Secretariat Services Limited. Santander Secretariat Services Limited is a dormant company that acts as Corporate Secretary to Santander UK HoldCo and certain Banco Santander Group companies domiciled in the UK. Under the Ring-Fencing Plan, it will move in the entity structure to become a direct subsidiary of Santander UK HoldCo. SEIL is an investment company whose primary source of income is currently interest due from other entities in the Santander UK Group. Under the Ring- Fencing Plan, it will become a direct subsidiary of Santander UK HoldCo and have a number of subsidiaries (including all Non-core Santander UK subsidiaries) moved under it. 6 Santander Asset Finance plc (SAF) SAF provides leasing and financial services for the corporate sector. Its financial services registration number is It is registered as a public limited company in England & Wales ( ) under the Companies Act Cater Allen Limited (CAL) CAL is an authorised deposit taking entity. Its financial services registration number is , and it is registered as a company in England & Wales ( ) under the Companies Act Its permissions are granted by the PRA, and it is regulated by the PRA and the FCA. It predominately engages with high net worth and private banking customers through intermediaries. Note: CAL will be a RFB in the Santander UK Group. EY 23

28 Introduction to the Banco Santander Group Credit ratings A bank s credit rating is a measure of its creditworthiness, which can impact the bank s ability to borrow funds externally and the rate of interest at which it can borrow funds. This impacts the bank s cost of capital and cost of funding which will in turn impact how the bank prices its products for customers. If a bank s credit rating declines, the cost of holding capital, liquidity and cost of funding generally increases and if the bank expects to retain the same margins based on the returns metrics or required rates of return (hurdle rates) that it uses, then the increased cost may need to be passed on to the customer. The Banco Santander rating reflects its wide geographic and business diversification, significant market share in many of the markets where it operates, its focus on stable retail banking activities and strong management, together with the fact that it operates in jurisdictions with higher-than-average economic risks. Credit ratings for banks are based on due diligence conducted by rating agencies, the most recognised being Standard & Poor s (S&P), Moody s and Fitch. Appendix 5 provides more information on interpreting credit ratings. All three rating agencies have provided preliminary assessments to Santander UK and Banco Santander suggesting no change to current ratings (below) as a consequence of the implementation of the Ring-Fencing Plan. The ratings agencies will not complete full assessments and issue a re-statement of ratings until after implementation of the Ring-Fencing Plan. Given that, I have relied on these initial assessments from the rating agencies of no change in my analysis and in reaching my conclusions. EY 24

29 Introduction to the Banco Santander Group Banco Santander 7 including SLB Table 6: Banco Santander credit ratings Source: Ratings provided by each agency S&P Moody s Fitch Date of rating report 9 June February December 2017 Long-term rating A- A3 A- Long-term rating outlook Stable Stable Stable Short-term rating A-2 P-2 F2 SLB does not have a separate credit rating. As a branch of Banco Santander, it has the same credit rating as Banco Santander. Santander UK HoldCo 8 Table 7: Santander UK HoldCo credit ratings Source: Ratings provided by each agency S&P Moody s Fitch Date of rating report 15 November August October 2017 Long-term rating BBB Baa1 A Long-term rating outlook Stable Stable Stable Short-term rating A-2 P-2 F1 Santander UK 9 including ANTS Table 8: Santander UK credit ratings Source: Ratings provided by each agency S&P Moody s Fitch Date of rating report 15 November August October 2017 Long-term rating A Aa3 A Long-term rating outlook Stable Stable RWP Short-term rating A-1 P-1 F1 Currently ANTS has the same credit rating as Santander UK as a result of the cross-guarantees in place (the deed poll guarantees of Santander UK and ANTS under which each bank has guaranteed the obligations and liabilities of the other bank). 7 Banco Santander Shareholders and Investors Ratings 8 Santander UK Investor Relations credit ratings 9 Santander UK Investor Relations credit ratings EY 25

30 Introduction to the Banco Santander Group Employees and locations In total, Santander in the UK (excluding those employees who provide services to the Santander UK Group and are employed by legal entities outside of the Santander UK Group) employs over 21,000 permanent staff across a network of c.850 branches and c.70 corporate offices, call centres and corporate business centres as at the date of this Scheme Report. ANTS is not the employer of any existing employees of the Santander UK Group. Table 9 covers how those employees are grouped by business and function. The maps and data below provide a breakdown of how those employees are distributed across major employment centres. Table 9: Distribution of permanent and fixed term employees in the UK as at 4 July 2017 Source: Santander Ring-Fencing Programme Team Function Employee numbers Non-branch employees (London and Milton Keynes) Management and Control Functions (incl. Executives, Strategy, Finance, Legal, Compliance, Audit, Risk Management) 1,650 Other Support Functions (incl. HR, Communications, Marketing, Product Innovation, Property Management) 750 Technology and Operations 995 Retail Banking 3,400 Corporate Banking 830 Global Corporate Banking 530 Consumer Finance 620 Retail and Small Business Banking employees (across the UK) Branch Network 8,868 Call Centres 4,030 Total 21,673 EY 26

31 Introduction to the Banco Santander Group Figure 5: Branch banking employee numbers and locations for Santander in the UK as at 4 July 2017 Source: Santander Ring-Fencing Programme Team EY 27

32 Introduction to the Banco Santander Group Servicing model The Banco Santander Group makes extensive use of shared services, from which a Banco Santander Group company receives or provides services to another under a commercial contract. Both Santander UK and Banco Santander have a range of shared services that they receive from and provide to other entities within the group structure. Some services, such as payroll and Human Resources (HR), are leveraged from Santander UK. Operations (including support for customer services), IT software development/maintenance and infrastructure management, are provided by Shared Service Companies (SSCs). Through the benefit of scale and experience, SSCs aim to centralise common expertise and processes under a single leadership team to provide a high quality, cost efficient and responsive service. Some SSCs are based locally in the UK (e.g. Geoban UK Limited), whereas others are global in nature (e.g. Santander Back Office Global Mayorista S.A. (SBGM)). Services are managed through Service Level Agreements (SLAs) and commercially agreed contracts where services are provided between Banco Santander Group entities, or through normal supplier contracts if external/third party suppliers are used. Responsibility for the delivery of services and products, including the performance of any shared services providing part of an overall service or product to a customer or other group of persons, remains with the entity providing that service or product. There are regulations and requirements on Santander UK and Banco Santander to ensure this responsibility is fulfilled through the management controls, oversight and contracts in place with the suppliers of these shared services. Figure 6 outlines the current service model. Figure 6: Santander current service model Source: Santander Ring-Fencing Programme Team EY 28

33 The Santander UK Group s Ring-Fencing Programme 5. The Santander UK Group s Ring-Fencing Programme Timeline of alternatives considered and approval under Santander UK s Banking Reform Programme In reaching a final decision on the most appropriate legal entity and operating structure to achieve the objectives of ring-fencing, the Santander UK Board has considered a number of options and alternatives, in consultation with the UK and European regulators and the Banco Santander Board. Figure 7 summarises the key dates in that process, including Santander UK Board level approvals during the period 16 December 2014 to 28 February 2017, at which point the proposed Ring- Fencing Plan was submitted to the PRA and FCA for consideration. This includes the key dates when alternative structures were considered. Figure 7: Timeline of decisions leading to the Chosen Model Source: Santander Ring-Fencing Programme Team 16/12/ /01/ /05/ /06/2016 Preliminary ring-fencing plan tabled to the Santander UK Board, with the business model options narrowed to: 1. Wide RFB ; and 2. Narrow RFB. The wide RFB option presented as the likely preferred option. Preliminary ring-fencing plan submitted to the PRA and FCA. The plan outlined the model for a wide RFB, but also included material on the narrow RFB and indicated that Santander UK continues to pursue this alternative option. Revised ring-fencing plan is ratified by the Board on 5 May 2015 and submitted to the PRA and FCA on 8 May Two papers provided to the Board: 1. Risk Framework and Appetite; and 2. Detailed paper on the Corporate Bank Strategy, including market positioning, financials and also noted the further work required as a consequence of the Brexit vote 15/08/2016 PRA and FCA provide feedback on the near final ring-fencing plan highlighting (amongst others) execution risks and NRFB business model and viability. Outcome of the EU referendum highlighted as a factor that may increase the risk that the NRFB may not be viable. 28/02/2017 Ring-Fencing Plan (Chosen Model) submitted to PRA and FCA on 28 February /06/2016 EU Referendum Vote Q Q Q Q Q Q Q Q Q Q Q /02/ /03/ /01/ /11/ /12/2016 Update briefing provided to the Santander UK Board, focusing on analysis of NRFB viability, rating and competitive position under the wide RFB and narrow RFB option. Further to interim meeting(s) with the PRA/FCA, three options were presented to the Board with the aim to determine a preferred model to take forward: 1. Wide RFB, narrow NRFB, all under UK Holdco. 2. Narrow RFB, wide NRFB, all under UK Holdco. 3. Narrow RFB, NRFB plus Santander London Branch. Only RFB under UK Holdco. The Board resolved to adopt option 2 as its preferred model and that a revised ringfencing plan should be submitted to the PRA by the end of April based on this model. The near final ring-fencing plan is approved by the Board and submitted to the PRA and FCA on 29 January The plan is supported by financial modelling. A contingency model based on a wide RFB model using SLB as the NRFB is also included. CEO informs the Board that the analysis and assumptions which underpinned the decision that the Board took in March 2015 to pursue a structural reform model predicated on a narrow RFB are being re-visited in light of Regulator feedback and EU referendum result. Board approves the adoption of the wide RFB model (the Chosen Model) and delegates authority to Management to submit the final proposal to the PRA/FCA/ECB in February EY 29

34 The Santander UK Group s Ring-Fencing Programme Skilled Person s observations on the timeline Following my nomination to be the Skilled Person on the Scheme in March 2016, I was provided with the original Ring-Fencing Plan (submitted to the PRA in January 2016) together with supporting papers and analysis to enable me and my team to plan our work, determine detailed areas for assessment and devise appropriate information requests. During this period I was also kept informed of the discussions that were being held on the January 2016 submission. The following summarises my key observations, highlighting points in the timeline above: Following my review, I was satisfied that the January 2016 submission was a coherent and logical solution to meet the requirements of ring-fencing and the Santander UK Group s strategic objectives. I was satisfied that the alternative options considered at that time, including the contingency option presented, were extensive and represented a sufficient range of alternatives that I would reasonably expect the Santander UK Group to have considered. It became increasingly apparent to both the Santander UK Group and me during the second half of 2016 (as expanded on below) that, in light of changes in the market and to macroeconomic expectations, a number of the planning assumptions underpinning the January 2016 submission were now overly optimistic. This called into question the sustainability of the proposed non-ring fenced bank (NRFB) proposed in the January 2016 submission. As a consequence, at the September 2016 Santander UK Board meeting, it was decided that a detailed analysis to validate whether it was appropriate to invoke the contingency plan (as outlined in the January 2016 submission) would be undertaken. Over a three month period, that contingency plan was considered and I am satisfied that the decision to move to the current Ring-Fencing Plan, which was submitted to the PRA in February 2017, was reached following evaluations against a range of appropriate business and financial criteria. These included whether adopting the Ring-Fencing Plan would achieve the following critical objectives: To be in the best interests of the Santander UK Group, its shareholders, customers and other stakeholders; To meet the regulatory requirements in order to comply with ring-fencing legislation by 1 January 2019; and That it could be implemented in time with an acceptable level of execution risk. Since February 2017, I have engaged in a number of discussions with senior executives of the Banco Santander Group around the decision and alternatives and in particular the position of ANTS, which is considered in more detail in section I am satisfied that the decision taken in December 2016 resulting in the Scheme that this Scheme Report considers, provides the Santander UK Group with the most appropriate solution to achieve its objectives. Accordingly, having concluded my due diligence on the analysis completed by the Santander UK Group in adopting the Ring-Fencing Plan, the focus of my work has been to consider the effect of the Scheme on groups of persons. EY 30

35 The Santander UK Group s Ring-Fencing Programme Key assumption: EU referendum vote (Brexit) Central to the proposed structure of Banco Santander s presence in the UK and the design of the Ring- Fencing Plan, including the Scheme, is the ongoing permission to operate SLB as a branch of Banco Santander in the UK, which will be the receiving entity for transferring prohibited and certain permitted business out of ANTS and Santander UK under the Scheme. Banco Santander is a European Economic Area (EEA) authorised credit institution, and SLB is currently a UK Branch of Banco Santander established pursuant to the exercise of single market Passporting rights under the EU CRD IV and MiFID II Directives. On 29 March 2017, the UK formally gave notice under Article 50(2) of the Treaty on European Union of the United Kingdom's intention to withdraw from the European Union such that, unless otherwise agreed, the UK will cease to be a member of the European Union (and, it is envisaged, of the EEA) by no later than 29 March As a consequence, those firms such as Banco Santander currently exercising EU Directive rights to establish a branch or provide financial services into the UK ( inbound firms ) are expected to need to seek PRA authorisation to carry on PRA regulated activities in the UK. On 20 December 2017, Sam Woods, Deputy Governor, Prudential Regulation and CEO PRA wrote a Dear CEO letter to those firms that would potentially be impacted by a loss of single market Passporting rights, including inbound firms. Paragraph 10 of that letter set out the basis on which inbound firms carrying on banking business in the UK should approach seeking PRA-authorisation: The outcome of the negotiations between the UK and EU is of course relevant in this context. It is therefore premature for the PRA to reach a final view in these areas, particularly for the most systemically important firms. However, given progress to date in the Brexit negotiations, for the present firms may plan on the assumption that these requirements 10 will be met, and therefore that they may apply for authorisation as branches unless they are conducting material retail business. This assumption may be revisited as Brexit negotiations proceed. Paragraph 11 highlights that: In seeking authorisation to carry on PRA-regulated activities, firms will need to meet the Threshold Conditions for authorisation, and we will consider the extent and nature of a firm s presence in the UK, including in relation to mind and management and premises, in determining whether these conditions are met. Authorisation is expected to take 12 months and firms are invited to submit applications from January The PRA also issued a consultation paper on 20 December 2017 which sets out the PRA s approach to branch authorisation and supervision (CP29/17) which provides further details of the proposed approach, as outlined above. SLB does not and, under the proposed Ring Fencing Plan, is not planning to undertake retail business and accordingly is eligible to seek, and will seek, to continue to operate as a UK branch of Banco Santander notwithstanding the UK s withdrawal from the European Union. Furthermore, as part of the Ring Fencing Plan, SLB is planning to maintain levels of local governance and control in line with those of Santander UK. My work has included a comparison of the proposed levels of governance and control of SLB and Santander UK and given the PRA s approach summarised above, I am satisfied that the use of SLB does not create an additional execution risk over and above any existing risks and that the option chosen by the Ring-Fencing Plan continues to be the best option available. 10 As set out in Paragraph 9 of the Dear CEO letter, the requirements to which this refers relate to the PRA s assessment of the degree of equivalence of the relevant credit institution s home state regime in meeting international standards and delivering appropriate outcomes consistent with PRA objectives and to the level of cooperation with the home state regulator. EY 31

36 The Santander UK Group s Ring-Fencing Programme Skilled Person s considerations of alternative designs to the Ring-Fencing Plan In evaluating adverse effects on groups of persons, I have considered whether there were alternatives, other than that set out in the January 2016 submission, whilst recognising that it is not my role to identify a preferred way for Santander UK to structure its business to meet the ring-fencing legislation. As noted above, the work undertaken on the 2016 submission indicated that ANTS, as the proposed NRFB, would not be viable or sustainable, given its proposed size, the loss of the Santander UK crossguarantee and the impact on its credit rating. I have been provided with papers which set out the analysis undertaken by the Ring-Fencing Programme in assessing the structural alternatives given the position of the proposed NRFB. I have had the opportunity to raise and discuss other options (not explicitly included in the papers) with the Santander UK executives responsible for delivering a sustainable solution to meet the ring-fencing legislative requirements, in order to understand their viability, ability to execute and the level of changes to customers. Alternatives have included changes to the business perimeter between Santander UK, as the proposed RFB, and a NRFB together with the financial support that would be required from the Banco Santander Group to provide to a viable and sustainable NRFB. Outside of the Santander UK Group, the only Banco Santander Group operation in the UK is through SLB, the London Branch of Banco Santander. SLB s current activities are limited, particularly in regard to taking deposits or making loans, and it currently does not have the necessary infrastructure, operations or systems in place to support such activities. Accordingly, in considering alternatives, I have had regard to the scale of additional change required to accommodate a much wider range of activities than SLB currently undertakes or is envisaged to undertake under the current Ring-Fencing Plan, and the associated changes to infrastructure and systems together with the consequential execution risk. Objectives of the Santander UK Group Ring-Fencing Programme Since 2014, the Santander UK Group has been designing and running a Ring-Fencing Programme of work that will: Enable the Santander UK Group to meet the legislative requirement and stop carrying out activities that would constitute or give rise to prohibited business within the ring-fenced bank sub-group by 1 January 2019; Ensure that activities that would constitute or give rise to prohibited business are transferred to an entity outside of the UK ring-fenced bank sub-group that has a viable and sustainable business, with adequate financial resources; and Ensure Santander UK and ANTS cease to have any residual liability under the existing intra-group cross-guarantees between them, in order to protect the integrity of the ring-fenced bank. EY 32

37 The Santander UK Group s Ring-Fencing Programme Scope of the Santander UK Group Ring-Fencing Programme In order to meet the legal requirements of the ring-fencing legislation, Santander UK and ANTS are proposing a number of changes, including the Scheme, being implemented under an overall Ring- Fencing Programme. The key changes are outlined below. The Scheme The Scheme to effect business transfers as follows: Permitted business from ANTS to Santander UK (this is defined as ANTS Permitted Business in the Scheme); Prohibited and certain, specified permitted business from ANTS to SLB (this is defined as ANTS Prohibited Business in the Scheme); and Prohibited and certain, specified permitted business from Santander UK to SLB (this is defined as Santander UK Prohibited Business in the Scheme). In addition, the Scheme will effect the unwinding of the existing cross-guarantees between Santander UK and ANTS. The wider Ring-Fencing Plan (outside the Scheme) Define and implement future state operating models for Santander UK, SLB and ANTS; The closure of ANTS to new business and the transfer out, so far as possible, of all existing business in ANTS with a view to closing ANTS or ANTS holding only transactions or positions in run-off. Further detail on ANTS is set out in section 26.1; Transfer of capital from Santander UK and ANTS to Banco Santander to reflect the transfers of business under the Ring-Fencing Programme; Change of ownership, by share transfer, of ANTS from Santander UK to Santander UK HoldCo; Novation or assignment of contracts for certain persons where novation or assignment is considered more appropriate than transfer under the Scheme, given the nature of the contractual relationship (e.g. large corporate clients and third party suppliers) or to mitigate the impact of regulatory changes; The closure of the ANTS Cayman Islands branch and the transfer of business from the ANTS US branch to Banco Santander New York and subsequent closure of the ANTS US branch; The transfer of the business of Santander UK s Jersey and IoM branches under local transfer schemes (together the Crown Dependency Schemes) under the rules and laws applicable to business transfers in Jersey (Banking Business (Jersey) Law 1991) and the Isle of Man (Financial Services Act 2008), which are under the jurisdiction of the local courts in those islands. The Santander UK Crown Dependencies business will be moving to newly authorised branches or new or existing subsidiaries within the wider Banco Santander Group in Jersey and the Isle of Man; Transfer of a number of non-core subsidiaries and transactions, which will be held under SEIL, which in turn will become a direct subsidiary of Santander UK HoldCo (as shown in Figure 8); and Implement changes to the Operating Models, Governance and Risk Frameworks and Referral Models of Santander UK, Banco Santander and SLB to enable the transfers. EY 33

38 The Santander UK Group s Ring-Fencing Programme Changes to the legal entity structure of the Santander UK Group In order to comply with the ring-fencing requirements, and accommodate the Santander UK Group s target business and operating model post ring-fencing, there will be some changes to the legal entity structure of the current Santander UK Group. The current legal entity structure, target legal entity structure and relevant transfers of business under the Scheme are depicted in Figure 8. The result, after implementation of the Ring-Fencing Plan, is that Santander UK and its subsidiaries will form a ring-fenced bank sub-group, through which only permitted products and services will be available. Figure 8: Transfers of business as a result of the Scheme The diagram below outlines the changes to the legal entity structure, following on from completion of the Ring-Fencing Plan. Overlaid onto the structural changes, are the transfers of business under the Scheme, and removal of the cross-guarantees. Source: Adapted from the February 2017 Submission EY 34

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40 The Santander UK Group s Ring-Fencing Programme Scope of the Scheme This section covers the scope of the Scheme only. It is intended as a summary. The Santander UK Group has confirmed that the Scheme s purposes under FSMA S106B(3) are: Enabling Santander UK to carry on core activities as a ring-fenced body in compliance with the ringfencing provisions; Enabling Santander UK, as the transferee, to carry on core activities as a ring-fenced body in compliance with the ring-fencing provisions; Making provision in connection with the implementation of proposals that would involve a body corporate (being, in the case of the Scheme, ANTS) whose group includes: a. The body corporate to whose business the scheme relates becoming a ring-fenced body (being Santander UK as a transferor under the Scheme) while one or more other members of its group are not ring-fenced bodies; and b. The transferee becoming a ring-fenced body (being Santander UK as a transferee under the Scheme) while one or more other members of the transferee s group are not ring-fenced bodies. 11 Further details of the Scheme are available from Santander UK, as set out in section 1.7. Table 10: Description of business transferred under the Scheme Source: Santander UK and ANTS Scheme Document, Migrations summary Business transferred under the Scheme Description 1. Specified permitted business from ANTS to Santander UK, where the business can be held and supported out of the Santander UK Group as the ring-fenced bank sub-group (RFB Sub-Group) Transfer from ANTS to Santander UK of a specified portion of its business, assets and liabilities in relation to activities which are permitted to be carried out by a ring-fenced bank after 1 January Prohibited business and specific permitted business from ANTS to SLB Transfer from ANTS to SLB of a specified part of its business, assets and liabilities in relation to activities which are prohibited from being undertaken within a ring-fenced bank from 1 January Specified permitted business. 3. Prohibited business and specific permitted business from Santander UK to SLB Transfer from Santander UK to SLB of all its business, assets and liabilities in relation to: Organisations that would constitute or would give rise to an excluded activity or a prohibited financial institution exposure under the EAPO 12 ; Specified investments held by Santander UK where dealing in such investments would constitute an excluded activity under the EAPO; and Specified permitted business. 11 Section 106B(3)(a)-(d) of FSMA 12 The Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 EY 36

41 The Santander UK Group s Ring-Fencing Programme Other Changes Description 4. Cross-guarantees The Scheme will effect the unwinding of the existing crossguarantees between Santander UK and ANTS. EY 37

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43 The Santander UK Group s Ring-Fencing Programme The Santander UK Group Ring-Fencing Programme plan Implementation plan and key milestones Figure 9 summarises the implementation plan for the Santander UK Group s Ring-Fencing Programme, as at 31 December Figure 9: High Level Programme Roadmap as at 31 December 2017 Source: Santander UK Group Ring-Fencing Programme Roadmap Summary There are a number of key dates which will mark the readiness of the main entities to conduct business aligned to the business transfers, alongside legal entity changes being made to meet ring-fencing requirements. These are outlined in Table 11. EY 39

44 The Santander UK Group s Ring-Fencing Programme Table 11: Milestones for the Scheme Milestone Date Description Santander UK (the RFB) Operating Model Readiness Wholesale 31/12/2017 Santander UK (the RFB) fully enabled. Completion of all activities to enable Santander UK to support the business transferring from ANTS. This includes enhancement to systems and processes to enable full volumes and reporting. Santander UK (the RFB) CFO (Chief Financial Officer) & Treasury enablement 31/12/2017 Treasury system build complete. Readiness for the Operational Liquidity Management (OLM) function transfer into the direct control of Santander UK from ANTS. SLB Infrastructure & Operating Model readiness 02/01/2018 SLB starts new business. At this time, SLB will have the infrastructure and staffing in place to enable it to book new business and migrate transferring business from within Santander UK and ANTS. Directions Hearing 05/02/2018 High Court Hearing. The High Court will review the proposed Scheme and Scheme Report and direct Santander UK and ANTS to start legal notification in line with the agreed communications plan. Period between Court Hearings Following Directions Hearing up to Sanction Hearing Individual Scheme notifications to transferring persons and persons remaining in ANTS. Scheme notices in gazettes, newspapers and other publications. Period between Court Dates for formal legal notification to persons, opportunity for relevant persons to seek additional information and make objections. Supplementary Report 21/05/2018 Supplementary Report by the Skilled Person. A Supplementary Report will be provided by the Skilled Person to the High Court for the Sanction Hearing to address, amongst other things, any open questions and outstanding work not completed under this Scheme Report. Sanction Hearing 11/06/2018 & 12/06/2018 High Court Hearing. The High Court will consider the Scheme, the additional Scheme Report and to sanction or authorise the Scheme to proceed. EY 40

45 The Santander UK Group s Ring-Fencing Programme Milestone Date Description SLB Operating Model Readiness 30/06/2018 SLB fully enabled. Completion of all activity to enable SLB to support the business transferring from Santander UK and ANTS. This includes enhancement to all controls, governance, systems and processes to enable full volumes and reporting. Effective dates 09/07/2018, 16/07/2018, 23/07/2018, 30/07/2018 & 13/08/ effective dates are proposed. The first 4 effective dates are for the transfer of market counterparty and customer transactions and business, with a final effective date of 13 August 2018 being for any business not falling into the previous effective dates. The Ring-Fencing Programme expect to effect the business transfers for all market counterparties and customers under the Scheme on the 4 effective dates. Each effective date is for a separate type of business being transferred under the Scheme (see Table 13 below for further information). The relevant effective date for each market counterparty or customer will be communicated to those market counterparties or customers as part of the communications plan and the Scheme notifications following the Directions Hearing. Date of unwinding of the cross-guarantees 31/12/2018 Unwinding of the cross-guarantees. The date on which the cross-guarantees will be unwound. EY 41

46 The Santander UK Group s Ring-Fencing Programme Migration plan When considering how best to execute the migration or transfer of customers and other persons together with their underlying transactions, positions and facilities under the Scheme, the Ring-Fencing Programme has carried out a detailed planning exercise with the objective of minimising execution and operational risk. Early planning identified capacity issues within a number of operational functions that would not allow all the underlying transactions, positions and facilities that fall under the Scheme to be migrated as a single transfer on one single date. As a consequence, the Ring-Fencing Programme agreed to a number of actions as follows: Operational and IT enhancements to allow an increased number of transactions to be migrated with adequate controls on a single date; Detailed testing and contingency planning to be carried out to minimise execution risk; Risk management to identify and manage risks inherent in migrations or transfers of business, covering risk of error or failure in the actual migration process together with risk of an adverse effect on customers or counterparties over the period; and Multiple effective dates to be built into the plan (see Table 11 above). These actions have been considered and are being carried out as part of the migration plan detailed in below Approach undertaken by the Ring-Fencing Programme The following summarises the actions being taken and current status of those actions. Table 12: Activities undertaken by the Ring-Fencing Programme in preparation for migration Action Description and current status (as at date of this Scheme Report) Operational and IT enhancements to increase capacity for migrations on a single date A number of system enhancements identified to automate manual processes to increase migration capacity. System enhancements to automate the reconciliation processes. Migration processes and controls designed and operational reviews by teams to maximise efficiency of processes and controls to minumise risk of error and ensure quality of migration. All development of system enhancements complete, including system testing. Operational processes and controls designed and signed off, including by Risk Management team. Testing and contingency planning Testing of system enhancements and operational processes. Full operational dry run tests planned to check that end-to-end processes and systems operate as planned and that capacity is in the systems and processes. Contingency planning designed to ensure that, in the event of issues on a migration date, clear decision making exists and that the migration can be stopped and rescheduled to a contingency date without any loss or effect on persons being transferred. System enhancements and migration processes tested and signed off. Full migration testing, to cover operational processes and controls planned for Q EY 42

47 The Santander UK Group s Ring-Fencing Programme Action Description and current status (as at date of this Scheme Report) Risk management As part of the planning process, the identification and management of risk has been an ongoing activity, as it has across the overall Ring-Fencing Programme. The following highlight the key activities that have been carried out and that continue to take place as part of the goverance processes in the Ring-Fencing Programme: Initial risk assessment, including mitigating actions, was performed and presented to the Ring-Fencing Steering Committee in July 2017, as part of signing off the migration approach. This included the capacity issues, risks in managing the migration processes and risks to customers and counterparties. A risk management leader, part of the Ring-Fencing Programme leadership team, has independently reviewed actions and mitigations as they have been implemented since July Specific risk management reporting is provided to the Steering Committee on a monthly basis. An independent risk assessment has been carried out on the wider Ring- Fencing Plan by an external firm, to provide their assessment and recommendations for any additional actions to further reduce execution risk. Multiple effective dates As a consequence of the migration planning, and specifically to reduce execution risk, the Ring-Fencing Programme has decided that 5 effective dates is currently the best way of effecting the transfer of business under the Scheme. These dates, and the business to be transferred on each of them, are as follows: 1. 9 July 2018: transfer of prohibited and certain permitted business for market counterparties from ANTS to SLB July 2018: transfer of prohibited and certain permitted business for customers from ANTS to SLB July 2018: transfer of prohibited and certain permitted business for customers from Santander UK to SLB July 2018: transfer of permitted business for customers from ANTS to Santander UK August 2018: final effective date for business transferring under the Scheme not falling within one of the dates above. As part of the communication approach and plan being carried out and proposed by the Ring-Fencing Programme, any person with transactions or positions being transferred under the Scheme (and therefore on one of the above dates) will receive specific communications to that effect. In many cases, and as part of the overall communications approach and plan, many of the persons affected will already have been in discussion about the migration plans under the Scheme. Should these effective dates change, either as a result of the customer or market counterparty requesting it, or by the Ring-Fencing Programme, those affected customers and market counterparties will be notified. This will be explained in the notifaction letters that will be sent following the Directions Hearing. For further information regarding the communications approach and plan see section 9. EY 43

48 The Santander UK Group s Ring-Fencing Programme Multiple effective dates for the transfer of market counterparties and customers under the Scheme The table below summarises the market counterparties and customers who will be included in each of the following effective dates. Table 13: Migration plan for the transfer of market counterparties and customers under the Scheme Scheme effective date Migration grouping Market counterparties and customers proposed to migrate under the Scheme 09/07/2018 Transfer of prohibited and certain permitted business for market counterparties from ANTS to SLB. ANTS market counterparties. 16/07/2018 Transfer of prohibited and certain permitted business for customers from ANTS to SLB. ANTS Corporate Customers (non-sme) holding both permitted and prohibited products will have their prohibited products transferred to SLB. ANTS Specified Corporate Customers will have all permitted and prohibited products transferred to SLB. ANTS EFI customers will have their prohibited products transferred to SLB. ANTS RFI customers will have their prohibited products transferred to SLB. 23/07/2018 Transfer of prohibited and certain permitted business for customers from Santander UK to SLB. Santander UK Corporate Customers (non-sme) holding both permitted and prohibited products will have their prohibited products transferred. Santander UK Specified Corporate Customers will have their permitted and prohibited products transferred to SLB. Santander UK RFI customers will have their prohibited products transferred to SLB. 30/07/2018 Transfer of permitted business for customers from ANTS to Santander UK. ANTS Corporate Customers, including 1 SME customer, holding permitted products only will transfer to Santander UK. ANTS Corporate Customers (non-sme) holding both permitted and prohibited products will have their permitted products transferred to Santander UK. Note: Any business transferring under the Scheme that does not fall within one of the effective dates given above in Table 13, will be transferred on a the effective date, 13 August EY 44

49 The Santander UK Group s Ring-Fencing Programme Other migration activity As previously outlined in section 5.3 above, the wider Ring-Fencing Plan is novating or assigning contracts for certain persons held with ANTS and Santander UK to Banco Santander and SLB, where it has been decided that the use of novation or assignment is more appropriate than transferring under the Scheme, given the nature of the contractual relationship or to mitigate the impact of regulatory changes. By definition, novating or assigning a contract requires the consent of both parties to the contract, including the effective date of the novation or assignment. For completeness, the following table sets outs the persons or groups of persons who are being novated or assigned outside of the Scheme. For all of these persons, either ANTS or Santander UK will be in contact or have been in contact directly to discuss the novation or assignment, including who will be the new contracting entity and agreeing an effective date for the novation or assignment. Table 14: Migration by novation or assignment (outside the Scheme) Person or group of persons Details of migration plan or description of approach Employees Employees are not transferring under the Scheme. Those employees who are affected by the Ring-Fencing Plan, including the Scheme, and are being transferred to new employing entities will do so under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). For further details of the employees who are affected by the Ring-Fencing Plan, including the Scheme, and the transfer plans for them see section 27. Landlords and Suppliers Landlords and suppliers are not transferring under the Scheme. In order to comply with the ring-fencing legislation, supplier contracts are being transferred under a separate project. These contracts are novated in consultation with the suppliers outside of the Scheme. The date of novation is specific to each of the suppliers. Debtholders of ANTS Debtholders of ANTS are not transferring under the Scheme. The transfer of debtholders of ANTS will be by novation of contract, in consultation with the debtholder, with an objective of completing the transfer of the contracts by the end of Q EY 45

50 The Santander UK Group s Ring-Fencing Programme Skilled Person s assessment of current execution risk Findings and conclusions In conducting my assessment of the Scheme, I have considered whether the Ring-Fencing Programme has put in place appropriate plans, resourcing and governance to ensure that the changes necessary to effect the Scheme will be successfully implemented within the agreed timescales and on the effective dates proposed under the Scheme. The changes required, particularly with regard to SLB, are significant and so the implementation plans are complex with many interconnected activities, all of which will need to be delivered as part of the implementation of the Ring-Fencing Plan, including the Scheme. Consequently, as with all large business change projects there is some execution risk inherent in the delivery of the Scheme. As at the date of this Scheme Report, the implementation is delivering to the key dates and milestones set out. This includes the set up of SLB and ensuring it is operational, which has largely been completed to time, including the enhancements to governance, operations, systems and controls. I am satisfied that SLB is and will be fully operational, able to receive transferring business on the migration dates outlined above in Based on the documentation I have reviewed and the governance in place to ensure visibility of issues to senior management to enable corrective action, I have concluded that execution risk is being managed adequately by the Ring-Fencing Programme s leadership. I have considered the multiple effective dates proposed by the Scheme (detailed above in 5.6.3). I am satisfied that the rationale to reduce execution risk and address capacity constraints through splitting the migration of business over multiple effective dates is sound and well considered. I am satisfied that the plans are well-made, detailed and targeted to the customer type with adequate contingency in the event of any issues. I have also considered whether the multiple effective dates would create an adverse effect on a market counterparty or customer, depending whether they are included in an earlier or later transfer date. I have concluded that they would not. The extensive nature of the testing together with the fact that the receiving entities are fully operational, including business transferred by novation under the wider Ring- Fencing Plan, has enabled me to conclude that there are no adverse effects that will affect a market counterparty or customer, based on the current migration plans. Inherently, completing a complex migrations of different types of persons with complex transactions and positions between multiple entities over a number of dates will reduce the overall implementation risk typically associated with a big bang approach, where it either works or fails for all. It will also enable the the Ring-Fencing Programme to focus on successfully completing specific customer group migrations. Notwithstanding that there remains residual risk relating to a number of external dependencies (e.g. PRA and ECB approvals that are out of the Ring-Fencing Programme s control) the level of execution risk at this stage in the implementation is consistent with any large restructuring programme of this scale and complexity. EY 46

51 The Santander UK Group s Ring-Fencing Programme My approach My approach has been carried out through discussions with the Santander UK Group senior management and senior programme leadership, reviewing the Terms of Reference and papers associated with key governance committees and meetings held throughout the lifetime of the Ring- Fencing Programme together with document review (below) and with reference to my experience of other large scale restructuring and transformation programmes. I have assessed the plans and approaches outlined above against good practice methods, tools and delivery standards used to achieve successful delivery of complex programmes with fixed deadlines, suppliemented by discussions with specialist transformation programme managers. In completing my assessment I have reviewed the following documentation: The Ring-Fencing Plan; The Dependency matrix, which includes external dependencies beyond the Ring-Fencing Programme s control (e.g. regulatory approvals); The Design Integrity Document, produced by the Santander UK Group to outline the full extent of changes required as a result of the ring-fencing legislation; Implementation and migration plans, where implementation activity to deliver changes is set out; Resourcing plans; and The governance processes in place to ensure that any issues will be escalated to senior management to enable action to be taken covering design governance, the change process (and governance) for any missed milestones and the level of contingency inherent in the plans. EY 47

52 The Scheme Report and types of persons covered 6. The Scheme Report and types of persons covered Scope of the Scheme Report This Scheme Report details the methodology I have used to assess the Statutory Question in respect of the Scheme, understand other changes being made by the Santander UK Group in order to meet the requirements of the ring-fencing legislation and present my findings and conclusions. In developing my approach to answering the Statutory Question in respect of the Scheme, I have reviewed regulatory guidance from both the PRA and FCA (see Appendix 8 for details of regulatory and professional guidance). In line with that guidance and my statutory functions, I have: Reviewed the Ring-Fencing Programme to understand the Scheme design, approach, rationale and changes required to meet the ring-fencing legislation; Categorised persons into groups with homogenous characteristics. I would have formed and assessed a group of persons comprising of a single individual, if they had unique characteristics, however I have not found that to be necessary. I have referred to groups of persons and further information in respect of persons has been provided in Table 15; Reviewed the changes on groups of persons as a consequence of the Scheme, together with other changes required to meet the ring-fencing legislation, including all necessary preparatory steps undertaken by the Santander UK Group, as proposed in the Ring-Fencing Plan. This included both changes that have already occurred, as well as changes planned to take place in the future; Where not practical to establish whether changes or their effects are as a consequence of the Scheme or the wider Ring-Fencing Plan, I have included my assessment of the changes within my report and have highlighted that the assessment has been carried out against the Ring-Fencing Plan, including the Scheme. Considered any likely adverse effect on groups of persons other than Santander UK and ANTS (as the transferors) created by the Scheme; In determining whether an effect is likely to be adverse, I have considered any effect that would put that group of persons in a worse position than if the Scheme were not to take place; In considering whether the likely adverse effect is created or caused by the Scheme, I have considered the terms of the Scheme and also any change that is required or is being completed as a result of the Scheme; Except where it is appropriate and is noted in specific sections of this Scheme Report, I have not limited my examination of effects to a point in time, but have considered all effects up to the final legal effective date and beyond up to the end of the P20 Annual Operating Plan planning horizon (see for more information); and I have considered whether an effect is adverse in the context of the future financial regulatory requirements as they will stand at 1 January 2019 and onwards, insofar as they are known. Considered whether there were any mitigations the Santander UK Group could take to restrict or alleviate the adverse effect as a result of a change that the Santander UK Group has made under the Ring-Fencing Plan. Further, I considered whether there were any alternative arrangements to the change being made by the Santander UK Group that would meet the ring-fencing requirement and, if so, whether such arrangements could reduce or alleviate any adverse effects; In considering any mitigations of adverse effects made by the Santander UK Group under the Ring-Fencing Plan, or alternative arrangements that the Santander UK Group could have made, I have done so in the frame of the existing Ring-Fencing Plan and not considered alternative legal entity structures outside of the Ring-Fencing Plan; and EY 48

53 The Scheme Report and types of persons covered Further, in assessing possible mitigations and alternative solutions, within the frame of the existing Ring-Fencing Plan, that may reduce the adverse effect, I have considered the additional change and disruption to the Santander UK Group or Banco Santander (e.g. IT system modifications required to replicate services exactly between entities). Where this is relevant and has been considered, it has been referenced in my findings. Having applied my professional judgement, concluded on whether any adverse effect on any group of persons is likely to be greater than reasonably necessary in order to achieve the statutory purposes of the Scheme, as set-out under s106b(3) of FSMA. A copy of this Scheme Report will be made available to regulatory authorities, the High Court and any other person entitled to receive a copy under FSMA. This Scheme Report has been written and prepared for the High Court, for the purposes of assisting the High Court to determine whether to sanction the proposed Scheme, and to address the Statutory Question (see section 1.3). It may not be used for any other purpose and may not be relied upon by any other party for any purpose. Except as required by law, neither I nor EY, its partners and staff, owe any other duty or assume any responsibility whatsoever in respect of, or arising out of in connection with the contents of this Scheme Report to any other parties, and shall not be liable for any loss, damage or expense incurred by any other party s reliance on this Scheme Report. No other person may rely on this Scheme Report without EY s express written consent, which may be withheld at our absolute discretion. If other parties choose to rely in any way on the contents of this Scheme Report they do so entirely at their own risk. Exclusions from the Scheme Report I have not covered the following matters which fall outside the scope of my role: I have not considered the impact of the Scheme upon the wider financial services market or the Santander UK Group s competitors; and During the course of my work, I have identified changes that are taking place under the wider Ring- Fencing Plan but are not a consequence of the Scheme itself. I have not considered these changes against the Statutory Question unless I have been unable to differentiate the effects of changes caused by the Ring-Fencing Plan and those caused by the Scheme. As these changes may be of interest to particular persons or groups of persons, I have included them for context in this Scheme Report. Please refer to Part 5 for the non-exhaustive list of changes that I have identified during the course of my work that are a consequence of the wider Ring-Fencing Plan. EY 49

54 The Scheme Report and types of persons covered Groups of persons covered, coverage and date of inclusion The groups of persons that I have considered are not restricted to customers of the Santander UK Group. I have used regulatory guidance together with my own experience of insurance transfer Part Vll independent expert reports and other due diligence exercises to identify a full list of groups of persons. I have then identified a specific list persons who are relevant to the Santander UK Group and who I believe represent all potentially affected classes of person who may be adversely affected by the Scheme. The groups of persons include both transferring and non-transferring persons of Santander UK and ANTS (the transferees), the wider Santander UK Group (including e.g. CAL) and SLB. This ensures that my work has not been restricted to those groups of persons transferring from one legal entity to another, but also considers the effect on those who remain in an entity who may be affected by the movement of others. I have reconciled groups of persons to the balance sheets of Santander UK and ANTS as at 30 June 2017 as a way of validating that all groups of persons with assets or liabilities have been considered in this Scheme Report. I have also considered other groups of persons who may have other contractual relationships with the transferors or groups of persons, as well as those who are not identifiable through the balance sheet review (e.g. third party suppliers, guarantors and fiscal stakeholders). I have done this through reference to my experience of relevant due diligence and insurance Part VII transfers, discussion with the Ring- Fencing Programme leadership team and their legal advisors regarding their own analysis of groups of persons to be considered, and review of documents supporting the Ring-Fencing Programme s own adverse effects analysis of groups of persons. EY 50

55 The Scheme Report and types of persons covered Groups of persons considered, but not covered in this Scheme Report The Banco Santander Group The Banco Santander Group comprises a number of subsidiaries that are, on a country-by-country level, autonomous in terms of capital and liquidity. As a consequence, customers and other persons connected to the wider Banco Santander Group (which includes stakeholders of Banco Santander) are customers of entities that are separate to the Santander UK Group, and the entities and branches that form the Santander UK Group. These subsidiaries of the Banco Santander Group are subject to their own regulatory arrangements outside of the UK and have no linkage to the Santander UK Group (other than as a consequence of being ultimately owned by Banco Santander). With reference to the Ring-Fencing Plan, there are no changes being made that will affect the Banco Santander Group or any person or group of persons connected to the wider Banco Santander Group. Accordingly, I have not made any further reference to groups of persons connected to the Banco Santander Group other than those connected to entities listed in section Banco Santander The Ring-Fencing Plan does not propose any changes to the following areas of the Banco Santander business and operating model: governance structures, risk management, operations, service model, IT architecture, infrastructure, recovery and resolution planning, and operational continuity arising from the Ring-Fencing Plan, including the Scheme. This has been validated through assessments carried out specifically focused on SLB in those areas. Further, having completed the financial analysis of Banco Santander as covered in section 10.4 and 15.5, I am satisfied that there are only minor changes to the financial position of Banco Santander as a consequence of the Ring-Fencing Plan, including the Scheme. Therefore I have concluded that there are no changes that affect any person or group of persons connected to Banco Santander, other than those persons currently connected to SLB or who will be transferred to SLB as a consequence of the Scheme. These are covered in section 26.2 of this Scheme Report. Therefore I have not made any further reference to groups of persons connected to Banco Santander, other than those connected to SLB. Customers and other persons connected to Santander UK s Jersey and Isle of Man branches I have been advised of a change to the transfer date of the Jersey and Isle of Man (IoM) branches under the Crown Dependency Schemes, as described in more detail in section 35. The change will result in the effective date of the Crown Dependency Schemes being after the effective date of the UK Scheme. The consequence of this is that customers and other persons connected to the Jersey and IoM branches of Santander UK will now come under the scope of this Scheme Report, given they will still be connected to Santander UK as at the effective date of the UK Scheme. The proposed change is too late for me to complete my assessment of the effect of the UK Scheme on these specific groups of customers and other persons connected to the Jersey and IoM branches of Santander UK in time for the Directions Hearing. My assessment of the effect of the UK Scheme on Jersey and IoM customers and other persons will be carried out during the period between the Directions and Sanctions Hearings and I will report my conclusions to the High Court for the Sanctions Hearing in a Supplementary Report. Notwithstanding the above, Part 2 of this Scheme Report is relevant to Jersey and IoM customers and other persons, as it is to all other persons considered in this Scheme Report. EY 51

56 The Scheme Report and types of persons covered Mapping of groups of persons to report sections Table 15 column B, below provides the reader with the full list of persons considered. Persons are grouped together with those having similar characteristics, in column A. Column C sets out the section of the report the reader should refer to for specific conclusions. Table 15 has been provided to enable readers of the Scheme Report to identify which group of persons they belong to and whether there are any changes to an entity which they are connected with, or have an arrangement with, or claim against, as a consequence of the Scheme. The introduction in Part 3 provides customers of the Santander UK Group with additional guidance, to enable navigation to sections of this Scheme Report that are relevant to specific groups of customers. Table 15: Groups of persons considered Type of Person Customer group Report section for specific conclusions Customers Santander UK Group Retail Banking customers 17 Santander UK Group SME customers (including ANTS SME customers) Santander UK Corporate Customers (non-sme) holding permitted products only ANTS Corporate Customers (non-sme) holding permitted products only Santander UK Corporate Customers (non-sme) holding permitted and prohibited products ANTS Corporate Customers (non-sme) holding permitted and prohibited products Santander UK and ANTS Specified Corporate Customers* 23 Santander UK and ANTS Relevant Financial Institutions 24 ANTS Exempt Financial Institutions 25 Customers with transactions or positions remaining in ANTS 26.1 SLB existing customers 26.2 EY 52

57 The Scheme Report and types of persons covered Type of Persons Group of Persons Report section for specific conclusions Employees Santander employees in the UK 27 Pension scheme members Pension scheme members 28 Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) Bondholders and Debtholders Landlords 29 Suppliers (including direct and indirect payments and clearing infrastructure) Bondholders of Santander UK 30 Debtholders of Santander UK Debtholders of ANTS Beneficiaries of guarantees, letters of credit or performance bonds Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK Beneficiaries of guarantees, letters of credit or performance bonds of ANTS 31 Market counterparties Market counterparties 32 Shareholders Santander UK Shareholders 33 ANTS Shareholders Government and other fiscal persons Government Tax authorities 34 Bank Levy FSCS Levy * Note: Customers who are a Specified Corporate in Santander UK or ANTS will have been contacted by their relationship director already and will be aware that they are a Specified Corporate Customer. Refer to section 23 for more details. EY 53

58 Approach 7. Approach Section 109A(4) of FSMA sets out the Statutory Question for me to answer throughout my work in respect of the Scheme and in this Scheme Report. My approach has therefore been designed to answer on that question. My findings and conclusions are based on an analysis of changes that the Ring-Fencing Programme is making as a consequence of the Scheme, followed by more detailed work on the groups of persons likely to be adversely affected by the Scheme. My objective has been to: Understand these effects and whether they are adverse; and If these effects are adverse, whether they are being mitigated or whether there are alternatives. Where adverse effects are not being entirely mitigated, and alternatives are not available, I have analysed whether the adverse effect is likely to be greater than is reasonably necessary in order to achieve the Scheme s purposes. As part of my work, where I have come across changes that are being made as a consequence of complying with the broader ring-fencing legislation but not as a consequence of the Scheme, I have noted these and included them in Part 5. Information and data Given the scope and the scale of the information I have considered, I established an information and data protocol with the Ring-Fencing Programme covering written and verbal information provided throughout the period of my assessment. In determining the reliability of the information provided, I have considered it against a number of criteria, notably: Source: to what extent is it provided as part of a normal reporting system or to what extent has it had to be created specifically for this exercise? Governance: to what review process has the information been subject and what levels of authorisation have been applied? Audit: to what extent is the information subject to audit procedures as either part of the year end exercise or other? Review: to what extent has it been subject to other review procedures, either internal or external? Consistency: to what extent is the information consistent with, or reconcilable to, other sources, particularly external or those which are subject to audit? Information requests and areas for detailed work were provided to the Ring-Fencing Programme and a virtual data room (VDR) was created and maintained by the Ring-Fencing Programme to support the information requests. The VDR has allowed the Ring-Fencing Programme to provide documentation in response to information requested. It provides a formal record of documents provided and version control of latest documents as they have been developed and produced. I understand that any documents uploaded to the VDR have complied with an agreed authorisation process within the Banco Santander Group to ensure they have been appropriately reviewed and approved for release. This process has been described above and further detail can be found in Appendix 9. As at the date of this Scheme Report, all information that I had requested to enable me to perform my assessment and conclude on the Statutory Question has been provided by the Ring-Fencing Programme. EY 54

59 Approach Assessment approach I have described my assessment approach in figure 10 below. In identifying and assessing changes, as part of my approach (step 1 of figure 10), I have looked to identify a complete list of changes as a consequence of the Scheme, and in some cases as a consequence of the wider Ring-Fencing Plan, from which I have assessed their effect on persons or groups of persons to answer the Statutory Question. As part of assessing the effect of each change on a person or group of persons, I have considered how likely it is that a change will affect a person or group of persons as well as the likelihood that that effect will be adverse to a person or group of persons. In doing so, I have applied terms such as likely and, in a few cases, may. Given there is no single statutory or legal definition of likely I have augmented the general understanding of the term with my professional experience and recent legal judgement. I consider my definitions and their use to be reasonable and clear in this Scheme Report. For my definitions of these terms, together with others used in this Scheme Report, please see section 7.3. I developed an initial set of test areas based on my own and my team s professional experience. These highlighted key areas of focus and information required to complete any assessments. Regulatory and professional guidance was used to refine and supplement my assessments and information requested (for a list of the regulatory and professional guidance used as reference, see Appendix 8). My findings are presented in this Scheme Report in the following order: Changes with adverse effects (mitigated and not mitigated); Changes with no adverse effects; and No changes (these are only presented if no changes are identified in a given assessment area). EY 55

60 Approach Figure 10: Assessment approach EY 56

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62 Approach Table 16 below outlines the areas of assessment covered by my approach with the rationale for why I consider these to be important in answering the Statutory Question. Table 16: Areas of assessment Area of assessment Explanation Communications Santander UK and ANTS (through the Ring-Fencing Programme) are required to identify all persons likely to be affected by the Scheme, or who may reasonably allege that they would be adversely affected. Santander UK and ANTS must notify these persons for the purpose of planned communications and provide those persons with access to the necessary information that will enable them to consider any likely adverse effects of the Scheme on them. The information provided must be clear, fair and not misleading. Finance Business Model Viability, Capital and Liquidity A bank should have sufficient capital and liquid assets to meet its obligations when they fall due. It should also generate and/or maintain an appropriate level of funding as backing for its products and services. This Scheme Report addresses any effects of changes to the three key financial assessment areas of capital adequacy, liquidity and business model viability. Together, these areas assess whether a bank is viable in the short-term and sustainable over the long-term and whether it can continue to offer its products and services, meet its obligations and generate future profit. Guarantees and Contingent Liabilities Assessment of the consequences of releasing the cross-guarantees under the Scheme between Santander UK and ANTS, with effect from 31 December The crossguarantees ensure that Santander UK and ANTS would meet the obligations of the other, in the event that the other was unable to meet their obligations. Contingent liabilities are liabilities that depend on an uncertain future event occurring, for example redress or compensation payments that may/may not arise. Governance Corporate governance is the system by which a bank is directed, controlled and manages risk. Effective director and senior manager oversight is crucial to ensuring a safe and well managed bank. This includes adherence to applicable UK and EU Regulations and specific policies and procedures. Changes in corporate governance could result in stakeholders being exposed to unnecessary risk. Risk Management The risk appetite of a business sets out how much risk it is prepared to take in order to meet its strategic objectives. Changes in the risk appetite could result in stakeholders being exposed to more risk than they envisaged. Risk management, in all its different parts, is a key component of the bank s governance structure and is in place to protect the bank, its customers and other relevant persons (such as shareholders and market counterparties) from being exposed to unmanaged risk and ultimately loss. Product Types and Customer Services Maintain the performance, access and availability of products and services in a way which is compliant with conduct rules and treats customers fairly. Any changes to existing products and services as a consequence of the Scheme could affect customers of the Santander UK Group. Operations, Infrastructure and Shared Services An operating model delivers a bank s strategic goals into operational capabilities. Components of an operating model include people, infrastructure, SSCs, processes and controls, to enable a business to deliver its objectives and goals. The operating model supports the ability of the bank to execute the services it provides to its customers such as processing payments and supporting online banking. Any deterioration to any aspect of the operating model could result in the bank not meeting the expectations of its customers. EY 58

63 Approach Area of assessment Explanation Recovery and Resolution, Operational Continuity and Creditor Hierarchy During stress situations, recovery plans provide options for a bank to return to financial strength, whereas resolution plans serve as preparation for potential failure. Without sufficient planning, a bank could fail when stressed, interrupting the product/service offerings to customers and meaning that creditors may not receive the payments that are due. Operational continuity plans are designed to ensure a bank can ensure the continuity of services and facilities. The creditor hierarchy refers to the order in which different classes of creditor receive funds were insolvency to occur. If a creditor s position in the hierarchy falls, they may not be certain to receive the payments and assets that they are due. My assessment and the information requested was further refined following the submission of the Ring- Fencing Plan by Santander UK to the PRA and FCA. This was supplemented with interviews and presentations from Santander UK Group s management on their plans. EY 59

64 Approach Key definitions A number of terms used throughout this Scheme Report are explained in Table 17. Table 17: Definition of assessment criteria and terminology Term Description Change Change is not a term that is defined within the ring-fencing legislation or the PRA and FCA guidance. I have applied the term change to mean any difference from the current state business or operating model of Banco Santander, SLB and the Santander UK Group, brought about as a result of the implementation of the Scheme. When identifying the changes that arise, I have maintained a deliberately broad scope of changes and have not limited this in any way by applying thresholds or values. Effect With regard to the term effect, I defined this to mean the impact of any change that results from the implementation of the Scheme that affects a person in some way. When identifying the effects that would arise, I kept the scope of what constituted an effect deliberately broad and did not limit this in any way by applying thresholds or values. Adverse effect I have defined adverse effect on a person to mean an effect that puts such a person in a worse position when compared to their position had the Scheme not taken place. When identifying the adverse effects that arise, I have maintained a deliberately broad scope of what constitutes an adverse effect and have not limited this in any way by applying thresholds or values. In considering whether an effect would be an adverse effect on a person or group of persons, I have taken into account whether any actions required to be taken by those persons to accommodate the change are such that could be reasonably regarded as part of normal business activity (e.g. an administrative update to a business address, that happens from time to time). In doing so, I have had regard to the relative size and sophistication of the affected persons when considering the nature of change that they would need to undertake. Where I have determined, based on my professional judgement, that the actions are reasonable for the affected group of persons without incremental costs, I have concluded that the effect of the change is not adverse. EY 60

65 Approach Term Description Likelihood or possibility of a change causing an effect (adverse or otherwise) I have made the following definitions to describe the possibility of a change causing an effect on a person or group of persons (adverse or otherwise). All are used in my conclusions and assessing the change and the effect of the change on a person or group of persons. I note that there is no single statutory or legal definition of likely, although likely is used in the Statutory Question. Therefore, in defining the terms below, I have referred to my professional experience and in particular, given the circumstances of the Scheme Report, recent judicial case law (Da Vinci (2015) EWHC, 2401 (Ch)) 13 to define the term likely. I have also considered their use in this Scheme Report and the nature and possible significance of the effects on persons or groups of persons that I am assessing and concluding on. The terms used are as follows: Likely the effect is a realistic possibility which could not be disregarded in the Scheme Report and includes effects which are almost certain to happen or are expected to happen; May a chance of occurring under certain described circumstances, or the chance of the effect identified occurring and being adverse is unknown to the Ring-Fencing Programme and Skilled Person at the time of writing this Scheme Report; and Unlikely the effect is not probable or is not expected to happen and does not otherwise fall within my definition of likely as set out above. Necessity Necessity of a change that affects a group of persons is a key part of assessing whether the effect is reasonably necessary, which is central to the Statutory Question. It is referred to in both PS10/16 and FCA FG16/1 guidance papers. As part of assessing whether the effect could be considered as reasonably necessary, I assessed the necessity for the change, considering each effect against one of the following types: From legislation, with no choice or discretion allowed; From legislation but with the ability for the Ring-Fencing Programme to apply some degree of influence or choice as to how it is implemented; and Not required by legislation specifically, hence is a feature of the Ring-Fencing Plan s design EY 61

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67 Part 2 Findings and conclusions: All persons EY 63

68 Introduction to findings and conclusions: All groups of persons 8. Introduction to findings and conclusions: All groups of persons Introduction This section covers changes at an entity level, which will affect all groups of persons who are, or will become, connected to that entity at the proposed legal effective dates of the Scheme. The changes identified have been linked to the assessment areas, per my approach set out in section 7. In this section, I cover the following assessment areas: Section 9 Communications; Section 10 Finance Business Model Viability, Capital and Liquidity; Section 11 Guarantees and Contingent Liabilities; Section 12 Governance; Section 13 Risk Management; Section 14 Operations, Infrastructure and Shared Services; and Section 15 Recovery and Resolution, Operational Continuity and Creditor Hierarchy. For each assessment area in this section, I have provided: A high level introduction to the area, why it was important to consider changes in the assessment area, and the approach I have taken in carrying out my assessment (over and above that which is set out in the approach section of this Scheme Report); The changes identified and the effect of the changes on the respective entity; What effects these changes will have on groups of persons who become or remain connected to that entity, including those who receive services from it, are owed obligations by the entity or have any liabilities to it; and My conclusions as to whether any adverse effects on groups of persons are greater than reasonably necessary to achieve the purposes of ring-fencing, whether there are alternatives that could have been considered and what mitigations are being taken by the entity to reduce any adverse effects. Please also refer to section 7 for the assessment approach and definitions relevant to how my findings are presented. EY 64

69 Communications 9. Communications Introduction The communications approach and plan that the Ring-Fencing Programme has developed is aimed at providing relevant groups of persons with the information needed to understand what changes the Santander UK Group is making under the Ring-Fencing Plan, how they might be adversely affected by the changes being made (including by the Scheme) and how they can make their views known. All employees (including client facing staff e.g. corporate customer relationship directors (RDs)) should also be provided with sufficient information to engage with their customers and counterparties. This should ensure that all groups of persons can understand what changes are taking place, consider the effect of the Scheme on themselves, and understand their right to make their views known (including to the High Court at the Directions Hearing on 5 February 2018). Under the Ring-Fencing Programme, a communications team is executing an overall ring-fencing communication plan across a number of groups of persons, including: Customers, shareholders, bondholders, debtholders and counterparties of the Santander UK Group; Santander UK Group employees; and Santander UK Group market counterparties, market infrastructure providers, central clearing houses, service providers, suppliers and landlords. Communication of information to these groups of persons relating to the Ring-Fencing Plan, including the Scheme, should be clear, fair and not misleading. They should be made available to persons through a range of media, including: letters and presentations, direct mailing, online ring-fencing specific websites, branch posters, ATM notices and specified gazettes and publications. For the Scheme, Santander UK and ANTS are under an obligation to provide access to information that will enable relevant groups of persons to assess the effect of the Scheme on themselves. On 27 October 2017, the High Court issued an Order approving the Ring-Fencing Programme s communication plans, specific to the Scheme Report covering: Who will be communicated with; What information will be made available to enable persons to consider their positions, covering: Notifications; Advertising; and Availability of Scheme documents (including this Scheme Report); Which media that notices and advertising will be made through; Which media will be used to make Scheme information available; and How contact points will be provided for persons to communicate with the Santander UK Group, including to register complaints and objections. Customers and other persons connected to Santander UK s Jersey and IoM branches As at the date of this Scheme Report, the Ring-Fencing Programme is considering what specific communications it will put in place for Jersey and IoM branch customers specifically covering the UK Scheme as a consequence of the changes to the effective date of the Crown Dependency Schemes. At the date of this Scheme Report, that plan and those communications have not been made available to me and I have therefore not been able to consider those communications in this Scheme Report. EY 65

70 Communications Approach to assessing communications activity In setting the scope of my assessment, I have recognised that the Ring-Fencing Programme s communications plan includes a series of communications targeted at different groups of persons, covering the wider Ring-Fencing Plan (which includes information about the Scheme). Communications have already started across some groups of persons (e.g. face-to-face meetings between RDs and Santander bankers and their customers and counterparties and statement, ATM and online banking messaging) and information is already available through the Santander UK Group s websites. In addition, there are further communications proposed to take place after the Directions Hearing, and two key Scheme documents that need to be made available to all groups of persons. Clear, effective and complete communications targeted at specific groups of persons should inform them of the potential changes and effects, plus create a dialogue with affected persons to address any issues and concerns raised. However it is my view that communications themselves cannot mitigate adverse effects as a consequence of changes under the Scheme. Ring-fencing communications performed to date The approach adopted by the Ring-Fencing Programme is to educate different groups of persons, through a series of communications across different media, of the changes that are going to take place under the Ring-Fencing Plan, including the Scheme. For communications that have already occurred, I have considered whether any communication that include references to the Scheme are clear, fairly represent what is going to take place under the Scheme, and are not considered to be misleading (or provide information relating to the Scheme that Santander UK or ANTS may have to correct at a later date). Scheme Statement and Summary As the Skilled Person, I am required to consider whether specific documents, for each group of persons likely to be adversely affected by the proposed Scheme are; Clear, fair and not misleading; and Provide adequate information to enable them to consider the likely adverse effects of the Scheme on themselves. Specifically I have reviewed: Summary of the Scheme Santander UK and ANTS own description of the Scheme that is presented before the High Court; and Summary of the SP Report a summary produced by Santander UK and ANTS of the conclusions contained in this Scheme Report. In addition, I am required to consider whether Santander UK and ANTS have a complete set of contact details for all groups of persons that they will contact and that every reasonable effort has been made to find contact details where they may be missing. EY 66

71 Communications Assessment areas My findings and conclusions are grouped into the following assessment areas: Table 18: Communications assessment areas Assessment area Description Ring-fencing communications performed to date Online information and notifications: The Santander UK Group has a dedicated website for ring-fencing with sections dedicated to different types of persons who may be interested in ring-fencing or need to be informed about ring-fencing. I have reviewed the content of the site as it has developed to assess whether it is clear, fair, and not misleading in regards to the Scheme. The site enables users to access key information on the Scheme in line with the Scheme communications plan. It is accessed via the front page of the main website or directly through the following link Individual communications: I have reviewed individual notices and communications to groups of persons relevant to the Scheme. There was an opportunity for me to provide feedback on whether drafts are clear, accurate and not misleading. Scheme specific communications: I have reviewed Scheme specific notices and notifications covering, for example: customer statement pages, online banking messages, ATM messages, branch posters, customer factsheets, notices of variation letters, letters to consumer and business bodies, supplier notices, formal notifications and gazette and publication notices following Directions Hearing. Scheme specific communications plan and approach Review of the approach to the identification of groups of persons to be communicated with. Scheme documents Assessment of specific key Scheme documents: Summary of the Scheme; and Summary of the Skilled Person Scheme Report, as drafted by Santander UK and ANTS. Information and Data Provided Against each of the areas of assessment above, I have reviewed a range of documents, including: Central database of customer and market counterparty details; Steering Committee and Regulator briefing papers; Ring-fencing and Scheme Communications Plans, including those submitted to the Pre-Directions Hearing held on 27 October 2017; Employee briefing papers and communications covering both the effect of the Scheme on them and information for those employees engaging with the Santander UK Group s clients (e.g. relationship managers and branch employees); Individual communications (internal and external); Drafts and designs for the micro-site, including content; and Draft management information (MI) and reporting templates that support the capture of queries and objections from customers and other groups of persons. EY 67

72 Communications My review is based on my assessment of these documents, together with periodic meetings with the Communications team (the part of the Ring-Fencing Programme tasked with managing the overall communications plan). Findings and conclusions Ring-fencing communications performed to date Having reviewed all communications provided to me to date, alongside the micro-site (available through the links earlier in this section), I have concluded that that all communications to date are clear and fairly represent the Ring-Fencing Programme s communications plans. References specific to the Scheme in any of the communications are clear, fair and are not misleading. This includes internal information provided to RDs to support those corporate clients with products which are transferring under the Scheme. The following sets out the communications that I have reviewed to date, the target audience and a brief description of the intent of the communication. Table 19: Communications as at 8 January 2018 Source: Santander Corporate Communications Team Communications title Audience Purpose Industry and other consumer bodies The Federation of Small Business The Confederation of British Industry The British Chamber of Commerce The Institute of Directors EEF The manufacturers organisation The Which? Group Letters sent to each of the corporate or other consumer bodies listed on 27 September 2017 advising of the ring-fencing plans and directing the recipients to the santanderringfencing.co.uk site for further information. Audience was selected based on size, levels of membership and their target membership relative to the Santander UK Group customer base. Customer communications Non-transferring customers of the Santander UK Group: Retail SME Corporate customers General communication to educate and reassure customers about ring-fencing and how the Santander UK Group will keep them informed. Factsheets (periodically updated) including content summarising the Scheme, the Court dates and how customers may have the right to object. They also direct the recipients to the santanderringfencing.co.uk site for further information. Customer communications Transferring customers across Santander Corporate and Commercial Banking (SCCB) and Santander Global Corporate Bank (SGCB). Customers with transactions or positions remaining in ANTS. General communication to educate and reassure customers about ring-fencing and how the Santander UK Group will keep them informed with additional content to outline the approach to the transfer specific to their circumstances. Communication delivered individually through customer s RD. Communications packs produced individually tailored to customers to help them understand the changes and proactively highlight effects on them for discussion and to address any issues. Initial meetings held between May and August EY 68

73 Communications Communications title Audience Purpose Factsheets, periodically updated, including content summarising the Scheme, the Court dates and how customers may have the right to object. Also directing the recipients to the santanderringfencing.co.uk site for further information. Ring-fencing dedicated website Dedicated customer pages: Personal and Business SCCB Santander International SGCB CAL Online communication to educate and reassure customers about ring-fencing and how Santander will keep them informed with dedicated pages for different customer groups. Cited on the main Santander UK Group website with links to customer specific areas with tailored content. Launched on 26 April 2017, periodically updated with additional information together with updates based on feedback from users. Updates reviewed include those that will be made following the Directions Hearing. Online Banking All customers using online banking sites: Personal online banking Business online banking CAL online banking Dedicated ring-fencing messages presented to customers when customers log off from the Santander Online Banking service, which will continue to be presented until end of November The Ring-Fencing Programme estimates that this will reach up to 5 million personal online customers and 470,000 business online customers. Includes CAL customers, covering approximately 38,000 customers, who will receive messages until the end of January Statements All customers receiving statements covering: Santander UK personal and business customers, Cahoot customers and Cater Allen customers. From September 2017, messages prominently displayed on the statement sign-posting ringfencing plans and directing the recipients to the santanderringfencing.co.uk site for further information. Branch and ATM All users of branches and ATMs. From 1 September 2017, all Santander ATMs (c.2,300) have featured a message referring to ring-fencing, before and after a transaction is completed. Each branch has been provided with a three stands to display on counters from 11 September EY 69

74 Communications Communications title Audience Purpose Introducers All intermediaries ed communication to all intermediary introducers sent on 4 September 2017 advising of ring-fencing plans and providing them with details of the santanderringfencing.co.uk site for further information and to pass on to the customers. Santander employee intranet and newsletter All employees Various communications through the employee intranet site and sections within the employee newsletter(s) to inform employees about ringfencing and the Santander UK Group s plan. Information has been included to help employees answer customer questions, if asked. Specific information on any effect(s) of ringfencing on employees themselves is not provided. Proposed Scheme communications following the Directions Hearing I have reviewed a number of specific communications relating to the Scheme that will be issued or made available following the Directions Hearing. All communications reviewed and listed below are clear and meet the requirements and expectations for communications to transferring and non-transferring persons: Notification letters to transferring customers and market counterparties under the Scheme; One-to-one meeting information packs for RDs; Website pages and content, on the dedicated santanderringfencing.co.uk site; Summary of the Scheme; and Summary of the Scheme Report. I will continue to assess any additional communications or amendments made to existing communications platforms (for example web sites, ATM messaging, Bank Statement messages). This will include responses to the notification letters and how objections are addressed and call volumes managed during the period between the Directions Hearing and the Sanction Hearing. I will review and consider the effectiveness of the communications process to ensure that notifications reach all persons required to be notified as a result of the Directions Hearing, scheduled to take place on 5 February In addition, I will review and consider any communications made to Jersey and IoM branch customers and other persons specifically covering the UK Scheme, given the changes to the effective date of the Crown Dependency Schemes. These will be covered in a Supplementary Report to this Scheme Report, which will be completed during May 2018 for the Sanctions Hearing, scheduled for the 11th June Table 20 summarises the proposed communications to be issued following the Directions Hearing that I have reviewed to date. EY 70

75 Communications Table 20: Information and notifications following the Directions Hearing (currently scheduled for 5 February 2018) Source: Santander Corporate Communications Team Communications title Audience Purpose Scheme notification letters All transferring customers under the Scheme I have reviewed draft notification letters, as provided to the Pre-Directions Hearing on 27 October 2017 and updated since and prior to the publication of this Scheme Report, up to and including the 26 th January Letters are anticipated to be sent by mail or , depending on the contact details available. Note: subject to no changes arising as a result of the Directions Hearing, no letters will be issued to nontransferring customers. Communication will continue through ongoing channels described in above. Draft newspaper and gazette notices All readers/subscribers to the identified newspapers and gazettes I have reviewed draft notices that will be published in the following print editions (and where applicable, digital tablet editions) of newspapers and gazettes following the Directions Hearing on 5 February 2018: Daily Mail, Sunday Times, Sun, City A.M., Guardian and Financial Times; and London Gazette, Edinburgh Gazette and the Belfast Gazette. Summary of the Scheme Available to all persons, which will be made available through the dedicated website shortly following the Directions Hearing. I have reviewed the Summary of the Scheme, produced by the Santander UK Ring-Fencing Programme, intended to summarise the fill Scheme document. I am satisfied that the Summary of the Scheme is clear and a fair representation of the Santander UK and ANTS Ring-Fencing Transfer Scheme. Summary of the Scheme Report Available to all persons, which will be made available through the dedicated website shortly following the Directions Hearing. I have reviewed the Summary of this Scheme Report, produced by the Santander UK Ring- Fencing Programme, intended to summarise the full Scheme Report. I am satisfied that the Summary of the Scheme Report is clear and a fair representation of the full Scheme Report. As recognised in the introduction, the Summary of the Scheme Report is not intended to be a substitute for the full version and should be read alongside my full Scheme Report. EY 71

76 Finance Business Model Viability, Capital and Liquidity 10. Finance Business Model Viability, Capital and Liquidity Introduction The proposed transfers of business between entities under the Ring-Fencing Plan, including the Scheme, will impact the financial positions of Santander UK, ANTS and Banco Santander (including SLB) because of the changes to the size and composition of their balance sheets, profit and loss (P&L) expectations, and underlying risk profiles. For the purposes of this section, which is assessing impacts at an entity level, it has not been practical to separate the impact of business transferred through the Scheme from that transferred by novation or assignment under the Ring-Fencing Plan. Therefore, my assessments in this section have considered all changes to business model viability, capital adequacy, liquidity and funding as a consequence of the Ring-Fencing Plan, including the Scheme. The financial assessment is key in answering the Statutory Question due to the importance of the financial position of the entities to persons connected with them. The PRA Statement of Policy (PS10/16, paragraph 5.8) is explicit in this regard: the PRA would expect the skilled person to consider at least the prudential conditions of the transferee relative to the transferor. This is to assess whether those groups of persons being transferred are affected adversely as a result of becoming connected to a riskier entity than they were connected to prior to the transfer. In making this judgement, the skilled person may consider whether the transfer results in a material deterioration in: the capital position of the entities to which those persons are exposed or connected on a risk weighted and leveraged basis; the liquidity and funding position of the entities and the business model viability and sustainability of the entities to which those persons are exposed or connected. This section addresses any changes to the three key financial assessment areas and how each will be impacted by the Ring-Fencing Plan, including the Scheme, across these three key areas. It explains whether changes will affect any groups of persons covered by this Scheme Report and includes the conclusions resulting from my assessment. See Appendix 3 for some additional background information. The following summarises the relevance of each of the assessment areas and why it is relevant for all groups of persons to understand the effects of the Ring-Fencing Plan, including the Scheme, on the long-term viability of Santander UK, ANTS and Banco Santander (including SLB). Business Model Viability and Sustainability Business model viability is a bank s ability to operate as a going concern for at least 12 months, including the capacity to withstand short-term shocks to the business and continue to meet the minimum regulatory requirements. Business model sustainability refers to the capacity of the underlying strategy to generate future profitability and to withstand adverse scenarios over the longer term (12+ months). Capital Adequacy Regulatory capital is the amount of capital that a bank has agreed with its regulators that it must hold to absorb potential losses after all other claims and obligations on the business are met so as to ensure solvency. This is based on a risk assessment performed and agreed with the regulator; in the case of Santander UK and ANTS this is the PRA, and in the case of Banco Santander this is the ECB. Liquidity and Funding Funding represents a bank s liabilities, including deposits and other borrowings, which are used to finance customer loans, banking-related services and operations. If a bank cannot generate or maintain an appropriate level of funding, it may not be able to finance its products and services. Liquidity measures a bank s ability to meet its short-term obligations to creditors, including depositors and the holders of debt instruments issued by the bank. Banks are required under regulation to hold a buffer of high-quality liquid assets (HQLAs) that can be readily converted into cash to meet potential net cash outflows during a period of liquidity stress. EY 72

77 Finance Business Model Viability, Capital and Liquidity Approach to assessing Business Model Viability, Capital and Liquidity Assessment areas In assessing the effect of the Ring-Fencing Plan, including the Scheme, on the financial positions of the entities impacted, and therefore on groups of persons who have exposure to those entities, I have: Analysed the effect of changes on business model viability, capital adequacy, and liquidity and funding over the forecast period. Considered a point in time effect of the changes to the balance sheet, P&L, capital, liquidity and funding position of Santander UK (the RFB) and Banco Santander. I have assessed that the business model of Santander UK (the RFB) will remain the same as it is today, albeit the transfers of business from Santander UK (the RFB) to Banco Santander (including SLB) and from ANTS to Santander UK (the RFB). Based on my point in time analysis, I have assessed the size of the business being transferred to be small as a percentage of Santander UK s net equity and have therefore concluded that this will not adversely affect the financial position of Santander UK (the RFB) or Banco Santander (including SLB). I have assessed the reasonableness of the assumptions provided in the P20 by comparing the business and macroeconomic forecasts against the projections set out in the EY ITEM Club macroeconomic forecasts. This was supported by analysis that I conducted comparing Santander UK to industry benchmarks and ratios, from publically available information for industry peers as at 31 December I have assessed the robustness of the P20 by compiling the raw data into analytical tools I have developed and a set of performance metrics using different calculation methodologies. I consider the P20 assumptions to be in line with current macroeconomic forecasts and industry peers. To support my conclusions, financial information and data provided by Santander UK and Banco Santander has been reviewed and compiled into analytical tools against a series of prudential, risk and business-specific tests and measures. The results have been used to inform my assessment as to whether the Ring-Fencing Plan, including the Scheme, will result in any significant deterioration in Capital, Liquidity or Business Model Viability for each of Santander UK, Banco Santander (including SLB) and ANTS, using recognised financial measures as follows: Table 21: Finance assessment areas Assessment area Description Business Model Viability and Sustainability Business Model Viability and Sustainability measures are determined by the balance sheet growth assumptions, profitability forecasts, and changes to key asset and liability product/service lines. Business model viability assessments have been carried out for Santander UK, Banco Santander (including SLB) and ANTS. Capital Adequacy Capital adequacy metrics forecast the capital position of each entity, taking into consideration each entity s capital plans, including capital resources, Pillar 1, Pillar 2 and regulatory capital buffer requirements and risk appetite. Capital adequacy assessments have been carried out for Santander UK HoldCo, Banco Santander (including SLB) and ANTS. Liquidity and Funding Liquidity and funding position based on forecast liquidity plans including regulatory ratio requirements, liquidity and funding risk and appetite settings, the assumptions around liquidity asset holdings, and transfer pricing data. Liquidity and funding assessments have been carried out for Santander UK, Banco Santander (including SLB) and ANTS. EY 73

78 Finance Business Model Viability, Capital and Liquidity Information and data provided In reaching my conclusions, I have reviewed the following (amongst other) key documents and information: Santander UK audited annual accounts as at 31 December 2016 and half year accounts as at 30 June 2017 to assess the financial position, business model and strategy of Santander UK prior to the implementation of the Ring-Fencing Plan, including the Scheme Moody s, S&P and Fitch Ratings Credit Rating assessment of Santander UK HoldCo and Santander UK s credit rating, having taken into account the impact of the Ring-Fencing Plan, including the Scheme. P20 Annual Operating Plan 2017 to 2020 (P20) The P20 is the Santander UK Group s draft annual operating plan, 2017 to 2020 as at 30 June 2017 which takes into account the impact of the Ring-Fencing plan, including the Scheme. The P20 has been through the appropriate senior management governance for review, challenge and sign-off and was approved by the Santander UK Board on 24 July It has also been submitted to the PRA. The starting point of the P20 is the 31 December 2016 financial accounts, which are subject to external audit. I have used the following as the basis of my assessment: Balance Sheet A breakdown of the assets and liabilities by product line, growth assumptions and margins (which comprise customer rates, core funding rates and transfer pricing rates). This is used to inform my analysis of the composition and growth of the balance sheet moving forward. P&L A breakdown of the revenue by product line (split by Interest and non-interest Income) and costs. This is used to inform my analysis of the drivers of overall performance including income, expenses and margins from the growth assumptions in the balance sheet. Santander UK Group specific business and macroeconomic growth assumptions in the P20. The key assumptions identified in my assessment as the basis on which the P20 has been prepared are as follows: Macroeconomic assumptions in the P20 are based on low for longer interest rates, lower gross domestic product (GDP) growth, reduced business investment spending and reduced lending volumes and customer growth. The assumptions used are in line with the projections set out by the EY ITEM Club (macroeconomic forecasts) in its autumn forecast (October 2017). Growth in Retail and Corporate Banking business remaining within Santander UK (the RFB), i.e. retail and corporate lending and associated customer deposits in comparison to the position as at 31 December The business model of Santander UK (the RFB) will remain broadly comparable to the position as at 31 December 2016, with the exception of the transfers of business under the Ring-Fencing Plan, including the Scheme. There will be no changes to the products and services provided or significant changes to the operating model. Analytical tools The P20 data provided by the Santander UK Group was compiled and reviewed using analytical tools that I developed, to enable a full assessment of the financial data made available to me and to: Identify and assess key drivers of balance sheet and P&L growth over the forecast period; and Calculate selected performance metrics, such as: return on equity, return on tangible equity, return on common equity tier 1, return on risk weighted assets (RWAs), return on assets, dividend cover and growth in margins. Using the data provided, outputs of the analytical tools and analysis I completed, I compared the growth assumptions, margins and performance metrics of Santander UK (the RFB) to the equivalent metrics of Santander UK and industry peers as at 31 December Whilst all projections of themselves are EY 74

79 Finance Business Model Viability, Capital and Liquidity uncertain in nature and future performance may well turn out to be different, this analysis did not identify any reason why the P20 should not be used as a basis for my assessment. Balance Sheet and P&L assessment The balance sheet and P&L assessment were prepared on the basis of the P20 which takes into account the impact of the Ring-Fencing Plan, including the Scheme. I have assessed whether the changes from the Ring-Fencing Plan, including the Scheme, impact the viability and sustainability of Santander UK (the RFB) both in the year of transfer (2018) and over the forecast period ( ). To assess whether groups of persons, remaining within or being transferred to Santander UK, will still be connected to an entity that is viable and sustainable, relative to the position they were in prior to the implementation of the Scheme. Capital Adequacy assessment I have been provided capital data at a consolidated Santander UK HoldCo level which has been adjusted for the impact of the Ring-Fencing Plan, including the Scheme, which has enabled me to perform my assessment to my satisfaction. My capital assessment was carried out based on a review of the following: Consolidated 31 December 2016 Santander UK HoldCo Internal Capital Adequacy Assessment Process (ICAAP) document which was based on the P19 14 to assess the current capital position of Santander UK HoldCo. This document has been approved by the Board and submitted to the PRA. Base case P20 capital data comprising of the capital resources, capital requirements and capital issuance plan to assess the capital position of Santander UK HoldCo over the forecast period and the impact of the Ring-Fencing Plan, including the Scheme. The P20 capital data has been approved by the Santander UK Board. June 2017 Bank of England stress test results including the scenarios, assumptions and impact on balance sheet, P&L and capital position. The ICAAP, P20 capital data and June 2017 Bank of England stress testing have been prepared at the consolidated Santander UK HoldCo level which owns 100% of Santander UK (the RFB) and includes all the entities that are within the Santander UK Group. A solo entity ICAAP or capital plan for Santander UK (the RFB) has not been prepared and has therefore not been assessed in this report, but this has not precluded me from carrying out my analysis. Minimum Requirement for Funds and Eligible Liabilities (MREL) plan which comprise a monthly breakdown of Santander UK s resources and requirements to meet the requirements from Note: a separate capital assessment for Santander UK s ICAAP and stress testing on P20 will only be completed by Santander UK in Q and it has therefore not been possible to use in my assessment for this Scheme Report. 14 Santander UK s Annual Operating Plan EY 75

80 Finance Business Model Viability, Capital and Liquidity Liquidity and Funding assessment The liquidity and funding assessment was carried out based on a review of the Santander UK Group s planning assumptions for liquidity and funding. These are based on the September 2016 Internal Liquidity Adequacy Assessment Processes (ILAAP) for Santander UK HoldCo and the Santander UK March 2017 ILAAP updated specifically for Santander UK (the RFB), which in turn were based on the P19. The ILAAP documents are have been reviewed in conjunction with Santander UK s P20. All of these documents have been approved by the Santander UK Board and submitted to the PRA. Both ILAAPs have been prepared on the basis of low interest rates, GDP growth, business investment, lending volumes and customer growth. The ILAAP stress testing also considers the risk that UK corporates will lose access to the single market and rating agencies may downgrade the UK s credit rating as a consequence of Brexit. Santander UK has carried out a high level analysis to understand the impact of Ring-Fencing Plan on its legal entity funding and liquidity profiles, which is captured under the Santander UK ILAAP. Specific Banco Santander assessment The financial assessment of Banco Santander was based on a review of Banco Santander s annual accounts (audited) as at 31 December 2016, ICAAP as at 31 December 2016, ILAAP as at 2017, SLB P20 and the Ring-Fencing Plan. Banco Santander s 2016 ICAAP and 2017 ILAAP do not factor the changes to the balance sheet, P&L, capital and liquidity as the result of the Ring-Fencing Plan. I have therefore assessed the potential impact of the transfers to Banco Santander on its financials based on the quantum of business being transferred as a percentage of the current Banco Santander financial position as at December EY 76

81 Finance Business Model Viability, Capital and Liquidity Santander UK (the RFB) conclusions Having completed my financial assessment, I have concluded that groups of persons who remain contracted or connected to, or are transferred to Santander UK (the RFB) as a consequence of the Ring- Fencing Plan, including the Scheme, will not be adversely affected. The following summarises my assessment to date, of the impact of the proposed changes on Santander UK, as the proposed RFB. The financial assessment of the Santander UK (the RFB) examined the effect of ring-fencing on the business model viability and sustainability of Santander UK (the RFB), capital adequacy and liquidity and funding based on the P20, Santander UK HoldCo December 2016 ICAAP and March 2017 ILAAP. Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have adverse effects on groups of persons covered by this Scheme Report. Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, which do not result in an adverse effect on any group of persons covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that all groups of persons will be affected, but not adversely affected, as a consequence of the Ring-Fencing Plan, including the Scheme. EY 77

82 Finance Business Model Viability, Capital and Liquidity Business Model Viability Table 22: Changes with no adverse effects Balance Sheet Balance Sheet Description of the change Overall, total assets and liabilities will decrease over the forecast period due to the transfer of business which results in a decrease in SGCB Trading Assets and SGCB Trading Liabilities. Balance sheet growth is driven by the Retail and Corporate Banking business remaining within Santander UK (the RFB), as shown in the P20. The Santander UK balance sheet will predominantly comprise retail assets and retail liabilities. Retail assets are mostly made up of retail mortgage lending. Retail liabilities are mostly made up of savings and banking current accounts. Why is the change not adverse? I have reviewed the Santander UK Balance Sheet projections provided in the P20 and the growth assumptions to assess the composition of the Balance Sheet and the business remaining in Santander UK (the RFB) over the forecast period. Retail assets are anticipated to continue growing over the forecast period and will not be impacted by the Ring-Fencing Plan, including the Scheme. This is mainly driven by increases in mortgage lending and credit cards. Corporate lending is also anticipated to continue growing over the forecast period. Santander UK (the RFB) is expected to be profitable over the forecast period and remain viable and sustainable as balance sheet growth is driven by the Retail and Corporate Banking business remaining within Santander UK (the RFB) and this will not be impacted by the Ring-Fencing Plan, including the Scheme. My conclusion I have considered the impact and I am satisfied that the transfers of business under the Ring-Fencing Plan, including the Scheme, will not have an effect on the balance sheet of Santander UK (the RFB). My point-in-time analysis shows that there will be a reduction in assets, liabilities, RWAs and Common Equity Tier 1 (CET1) in Santander UK (the RFB) as a result of the transfers. Overall, the reduction in net equity only impacts the ultimate shareholder of Santander UK (i.e. Santander UK HoldCo), who is not adversely affected as the recipient of the transfers in question. Furthermore, the amounts are not sufficient to adversely impact the viability and sustainability of the business model of Santander UK (the RFB) which, based on P20, is able to continue to grow its Retail and Corporate Banking. I have therefore concluded that the changes to the Balance sheet are not adverse for groups of persons who will remain connected with, or transfer into, Santander UK (the RFB) as a consequence of the Ring-Fencing Plan, including the Scheme. EY 78

83 Finance Business Model Viability, Capital and Liquidity Table 23: Changes with no adverse effects Profit & Loss Profit & Loss Description of the change Total income will be lower in the year of transfer as a result of the transfers of business under the Ring-Fencing Plan, including the Scheme. Total income of the business remaining in Santander UK (the RFB) is also expected to decrease over the forecast period driven mainly by declines in other net-interest income/non-interest income, and not as a consequence of the Ring- Fencing Plan, including the Scheme. Why is the change not adverse? I have reviewed the P&L projections of Santander UK (the RFB), provided in the P20, to assess the drivers of revenue and costs. Santander UK (the RFB) is expected to remain profitable over the forecast period. Although there is a decline in income in the year of transfer, total income is expected to increase in 2020, which is driven by the growth in Retail and Corporate Banking business. The decrease in other Net Interest Income is driven by a decrease in the Corporate Centre due to declines in Transfer Pricing incomes, as interest rates decrease the transfer pricing incomes will decrease. This is offset by the lower cost of funds by Santander UK (the RFB) as business is transferred out. Overall, this impact will net off within the Santander UK Group. The decline in Other Non-Interest Income is driven by a decrease in the Corporate Centre due to mark-to-market (MTM) movement of medium term funding (MTF), social housing and a one off sale of Visa shares in Net Interest Income comprises mostly of incomes from mortgages, banking products and savings. There is a small decrease in Net Interest Income over the forecast period, which is due to declining retail savings and mortgage incomes on the back of lower interest rate assumptions, lower margins and lower balances. Non-Interest Income comprises mostly of incomes from banking products and SGCB assets. Non-Interest Income is anticipated to decrease over the forecast period, this is driven by lower incomes from SGCB assets. The projected decline in total income is further impacted by a decline in savings products across the plan period. This is driven by a decrease in total instant access savings and in tax free savings across the forecast period. The majority of business remaining within Santander UK (the RFB) in 2019 and 2020 is Retail Banking Business which accounts for a large proportion of total income and will not be impacted by the Ring-Fencing Plan, including the Scheme. There will be an increase in incomes for banking product liabilities driven by an assumption of significant growth in the current account balances over the forecast period. Santander UK (the RFB) is expected to remain profitable over the forecast period. If Santander UK (the RFB) is not able to meet its growth forecasts, then there will be lower profits after tax (post Additional Tier 1 Capital (AT1) distributions) available for the dividend payment up to Banco Santander, as its parent. My conclusion The point-in-time analysis shows there will be a small reduction in the operating income of Santander UK (the RFB). However, Santander UK (the RFB) remains profitable. Consequently, this reduction only impacts the shareholder, Banco Santander as the ultimate shareholder of Santander UK, who is not adversely affected as it is the recipient of the transferred income. Furthermore, based on P20 the amount is not sufficiently large to adversely impact the viability and sustainability of Santander UK (the RFB). I have therefore concluded that the changes to the Profit & Loss are not adverse for groups of persons who will remain in Santander UK (the RFB) or for those groups of persons who transfer into Santander UK (the RFB) as a consequence of the Ring-Fencing Plan, including the Scheme. EY 79

84 Finance Business Model Viability, Capital and Liquidity Table 24: Changes with no adverse effects Performance metrics Performance metrics Description of the change In the year of transfer, Return on Equity, Return on Tangible Equity, and Return on Common Equity Tier 1, dividend payout ratio and AT1 dividend cover will decrease. This is driven by the loss of income from the transfer of business, declines in other net-interest income/non-interest income, and the increased cost of servicing the AT1 securities from the increase in AT1 securities outstanding following the 2017 issuance. Return on RWAs and Return on Assets will remain constant over the forecast period. These changes reflect the reduction in assets, liabilities and equity as a consequence of the Ring-Fencing Plan, including the Scheme. Why is the change not adverse? I have reviewed the P20 data provided by the Santander UK Group which was compiled into analytical tools to calculate the changes to the following performance metrics. Return on Equity, Return on Tangible Equity and Return on Common Equity Tier 1 decrease between 2017 and 2018 as a result of the transfer of business and the associated profits, declines in other net-interest income/non-interest income and the increased cost of AT1 issuance in However, they increase in the years after the transfer and are driven by the P20 growth assumptions of the assets and liabilities remaining within Santander UK (the RFB) and the profits generated from these. Return on RWAs remains constant throughout the forecast period, which is supported by the transfer of higher RWAs associated with the transfer of business. Return on assets is forecast to increase due to increased profits after tax generated from assets remaining in Santander UK (the RFB) as a proportion of the declining total asset balances. The dividend payout ratio continues to decrease in the years following the transfer. However, all the shareholders of Santander UK (the RFB) are wholly owned subsidiaries of Banco Santander which will continue to receive the incomes from the transfer of business into Banco Santander (including SLB). There is a decrease in the AT1 dividend cover in the year of transfer and the year following the transfer, which is driven by the loss of income from the transfer of business, declines in other net-interest income/non-interest income and the increased cost of AT1 issuance in However, the dividend cover is sufficient to meet the AT1 dividend payments. My conclusion The reduction in Return on Equity, Return on Tangible Equity, and Return on Common Equity Tier 1 will only impact the ultimate parent, Banco Santander, which is not adversely affected as the beneficiary of the transfers. The impact on the external AT1 holders is covered in section 30. Based on P20 the reduction in the key metrics will not have an adverse effect on the profitability of Santander UK (the RFB) and as such, it will remain viable and sustainable over the forecast period. I have therefore concluded that the changes to the performance metrics are not adverse for groups of persons who will remain in Santander UK (the RFB) or for those groups of persons who will transfer into Santander UK (the RFB) as a consequence of the Ring-Fencing Plan, including the Scheme. EY 80

85 Finance Business Model Viability, Capital and Liquidity Table 25: Changes with no adverse effects - Margins Margins Description of the change Santander UK (the RFB) margins are expected to see minimal changes and remain stable over the forecast period. The Net Interest Margin (NIM) remains the same and the Cost-Income Ratio remains stable as a result of the Ring-Fencing Plan, including the Scheme. Why is the change not adverse? I have reviewed the P20 data provided by the Santander UK Group which was compiled into analytical tools to assess the movements and identify key drivers of margins across the forecast period. The changes to the Santander UK (the RFB) margins across the forecast period as a result of the Scheme are less than 1% over the period, which means that Santander UK will maintain effectively the same level of profitability and efficiency as it currently does at 31 December NIM is constant across the forecast period. This is supported by a stable costincome ratio, which demonstrates the operational efficiency and low cost environment of Santander UK (the RFB). Santander UK (the RFB) will be predominantly comprised of retail assets and retail liabilities, which typically have lower margins than corporate lending. Additionally, the lower margins are driven by the P20 assumptions of the current macroeconomic environment, which reflect low for longer interest rates, potential for lower GDP growth, reduced business investment spending and reduced lending volumes and customer growth. The current macroeconomic environment and increased competition present limited opportunities for a retail bank to increase margins and growth at the same time. My conclusion I have considered the impact and I am satisfied that the changes to the margins of Santander UK (the RFB) will be too small to affect Santander UK s (the RFB) continued profitability and it will remain viable and sustainable. I have therefore concluded that the changes to the margins are not adverse for groups of persons who will remain in Santander UK (the RFB) or for those groups of persons who will transfer into Santander UK (the RFB) as a consequence of the Ring-Fencing Plan, including the Scheme. Based on P20, the changes will not impact the viability and sustainability of the RFB. EY 81

86 Finance Business Model Viability, Capital and Liquidity My conclusions are supported by analysis summarised below: Balance sheet I have reviewed the Santander UK (the RFB) Balance Sheet projections provided in the P20 and the supporting Board papers to assess the changes to the balance sheet. I have assessed that Santander UK (the RFB) will predominantly comprise Retail and Corporate Banking business, which is expected to grow over the forecast period. Overall, total assets and liabilities will decrease as a result of the transfer of business out of Santander UK (the RFB). However, Santander UK (the RFB) is forecast to remain viable and sustainable, as balance sheet growth is driven by the Retail and Corporate Banking business remaining within Santander UK (the RFB) and this will not be impacted by the Ring-Fencing Plan, including the Scheme. P&L I have reviewed P&L projections of Santander UK (the RFB) provided in the P20 and the supporting Board paper to assess the changes to P&L. I have assessed that the total income will be lower in the year of transfer as a result of the transfer of business out of Santander UK (the RFB). Total income of the business remaining within Santander UK (the RFB) is also expected to decrease over the forecast period. These declines will not be related to the Scheme and will be mainly driven by declines in other net-interest income/non-interest income. This is expected to be partially offset by improved incomes and growth in certain retail products. Overall, although there is a decline in total income, Santander UK (the RFB) is expected to remain profitable, viable and sustainable over the forecast period. Performance metrics I have calculated a set of performance metrics which include Return on Equity, Return on Tangible Equity, Return on Common Equity Tier 1 and Return on RWAs based on the balance sheet and P&L projections provided in the P20. Overall, the performance metrics are expected to decrease in the years following the transfer (2018 and 2019). The decrease is due to the loss of incomes from the transfer of business. However, the performance metrics increase again in 2020 and this is driven by the growth forecast in the P20 of the business remaining within Santander UK (the RFB). Margins I have reviewed the data on the margins projected for the assets and liabilities remaining in Santander UK (the RFB), including the Net Interest Margin and Cost-Income Ratio provided in the P20 to assess the profitability of Santander UK (the RFB). I have assessed that there are minimal changes to the margins of Santander UK (the RFB) across the forecast period as a result of the Ring- Fencing Plan, including the Scheme. This means that Santander UK (the RFB) will maintain similar levels of profitability and efficiency to its current position. Credit rating I have reviewed Moody s, S&P and Fitch Ratings assessments of Santander UK HoldCo and Santander UK s credit ratings having considered the impact of the Ring-Fencing Plan, including the Scheme. Moody s, S&P and Fitch Ratings have confirmed that their proposed credit ratings for Santander UK (the RFB) are expected to remain unchanged as a result of the Ring-Fencing Plan, including the Scheme. Therefore, there is expected to be no impact on the cost of capital and funding and on counterparties and clients who are impacted by the credit rating of Santander UK (the RFB). EY 82

87 Finance Business Model Viability, Capital and Liquidity Capital Adequacy Table 26: Changes with no adverse effects Capital ratios, resources and requirements Capital ratios, resources and requirements Description of the change Capital ratios, resources and requirements are projected to increase over the forecast period, driven by the implementation of new capital regulation (i.e. CRD IV (Capital Requirements Directive IV) buffers) and not as a result of the Ring- Fencing Plan, including the Scheme. Pillar 1 capital requirements have decreased and Pillar 2A capital requirements have increased over the forecast period. The changes to the Pillar 1 and Pillar 2A capital requirements are driven by the P20 growth assumptions of the assets that remain within Santander UK HoldCo and the transfer of business under the Ring- Fencing Plan, including the Scheme. The Common Equity Tier 1 capital requirements increase due to the implementation of the Countercyclical Capital Buffer (1%), Systemic Risk Buffer (1%) and Capital Conservation Buffer (2.5%). This reduces the capital surplus over the minimum regulatory requirements in 2019 and There is expected to be a transfer of capital resources from Santander UK HoldCo to Banco Santander in 2018, corresponding to the RWAs that will be transferred to Banco Santander (including SLB) under the Ring-Fencing Plan, including the Scheme. Why is the change not adverse? I have reviewed the consolidated 31 December 2016 Santander UK HoldCo ICAAP document and the P20 Capital Plan. The increase in capital ratios, resources and requirements are expected to strengthen the resilience and loss absorbency of Santander UK HoldCo and are projected to remain within Santander UK HoldCo s risk appetite and meet the minimum regulatory capital requirements. The P20 capital plan has assumed planned issuances of AT1 and Tier 2 securities to ensure that Santander UK HoldCo has sufficient capital resources to meet its minimum regulatory capital requirements. Santander UK HoldCo has a record of having issued AT1 of 500mn in April 2017, 750mn in June 2015, 300mn in December 2014 and 500mn in June Santander UK has also issued Tier 2 of $1.5bn in The changes from the Ring-Fencing Plan, including the Scheme, will not impact the planned AT1 and T2 issuances assumed in the P20 capital plan. I have reviewed the June 2017 PRA stress testing results. Stress testing has been carried out as part of the June 2017 PRA stress testing exercise on a consolidated basis for Santander UK HoldCo using the PRA base case scenario. The June 2017 PRA stress testing results show that Santander UK HoldCo is forecasted to remain over the PRA s minimum thresholds for Common Equity Tier 1 over the five year stress ( ). Management actions have been identified by Santander UK HoldCo to ensure that the Santander UK Group maintains its Common Equity Tier 1 ratio above the PRA s minimum thresholds. My conclusion I am satisfied that, based on the P20, Santander UK HoldCo is forecast to meet its minimum regulatory capital requirements over the forecast period. I have therefore concluded that the changes to the capital position are not adverse for groups of persons who will remain in Santander UK (the RFB) or for those groups of persons who will transfer into Santander UK (the RFB) as a consequence of the Ring-Fencing Plan, including the Scheme. EY 83

88 Finance Business Model Viability, Capital and Liquidity Table 27: Changes with no adverse effects Leverage ratios Leverage ratios Description of the change Leverage ratios and requirements are projected to increase over the forecast period. Why is the change not adverse? I have reviewed changes to the leverage ratio provided in the P20 Capital plan. Leverage ratios are projected to remain within Santander UK HoldCo s risk appetite and meet the minimum regulatory requirements. My conclusion I am satisfied that, based on the P20, Santander UK HoldCo is forecast to meet its minimum regulatory leverage ratio requirements over the forecast period. I have therefore concluded that the changes to the leverage ratios are not adverse for groups of persons who will remain in Santander UK (the RFB) or for those groups of persons who will transfer into Santander UK (the RFB) as a consequence of the Ring-Fencing Plan, including the Scheme. My conclusions are supported by analysis summarised below: I have reviewed the P20 Capital Plan and have assessed that Santander UK HoldCo is forecasted to meet its minimum regulatory capital requirements over the forecast period. Capital and leverage ratios, resources and requirements are projected to increase over the forecast period post ringfencing, which is expected to strengthen the resilience and loss absorbency of Santander UK HoldCo. Stress Testing Stress testing on the P20 will not be completed until Q and therefore has not been assessed in this report. Without this information it is not possible for me to assess the capital adequacy of the RFB Sub-Group under a stress based on the P20 and whether there are impacts arising on the stress testing scenarios as a result of the Ring-Fencing Plan, including the Scheme, which could have an adverse effect on groups of persons. However, this has not precluded me from carrying out my analysis. I have reviewed the June 2017 PRA stress testing results to assess the impact of a stress on Santander UK HoldCo. Stress testing has been carried out as part of the June 2017 PRA stress testing exercise on a consolidated basis for Santander UK HoldCo using the PRA base case scenario. The June 2017 PRA stress testing results show that Santander UK HoldCo is forecasted to remain over the PRA s minimum thresholds for Common Equity Tier 1 over the five year stress ( ). Management actions have been identified by Santander UK HoldCo to ensure that the Santander UK Group maintains its Common Equity Tier 1 ratio above the PRA s minimum thresholds. The PRA stress testing results were considered by Santander UK, who adjusted their stress testing submission to assess the impact of the stress on Santander UK (the RFB) and the results showed that it would perform better under a stress. As a result of the transfer of business (which mostly comprises of SGCB trading assets and liabilities), the largest impact in the worst year of stress related to the business that will transfer from Santander UK to SLB. I have reviewed the P20 MREL plan to comply with the non-binding indicative entity-specific MREL issued by the Bank of England (20 March 2017). I have assessed that Santander UK HoldCo is expected to maintain sufficient eligible MREL resources to meet the MREL between 2019 and I have assessed the reasonableness of Santander UK HoldCo s capital plan based on its current credit rating and ability to raise capital in the markets. Santander UK HoldCo is an investment grade entity which provides it with access to capital markets. Santander UK HoldCo currently has 55bn of debt securities in issue. It has issued debt securities of 9bn in 2016, 14bn in 2015 and 20bn in Santander UK is also an investment grade entity which provides it access to capital markets. It has issued debt securities of 5.5bn in 2016, 13.3bn in 2015 and 19.9bn in EY 84

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90 Finance Business Model Viability, Capital and Liquidity Liquidity and Funding Table 28: Changes with no adverse effects Liquidity and funding profile Liquidity and funding profile Description of the change The liquidity and funding profile of Santander UK (the RFB) is expected to change due to the transfer of assets and liabilities, which will result in a different composition of liabilities and, therefore, different liquidity holdings. The Santander UK Group has carried out a high level analysis to understand the impact of the Ring-Fencing Plan, including the Scheme on its legal entity funding and liquidity profiles, which is captured under the Santander UK (the RFB) ILAAP. This identifies the following key liabilities that will be either prohibited or excluded from the liquidity profile of Santander UK (the RFB): Certain Crown Dependencies liabilities will be transferred to newly authrorised branches or new or existing subsidiaries within the wider Banco Santander Group; Short-term funding from US Dollar (USD) counterparties via the US Branch of ANTS (which will be closed); SGCB liabilities will be transferred into either SLB or directly booked into Banco Santander. The funding and liquidity profile for Santander UK will be impacted by the loss of access to the prohibited non-eea deposits sourced from Crown Dependencies. Certain liabilities associated with prohibited activities will need to be replaced with other sources of funding during the period of the transfer of business. This will impact the liquidity profile of Santander UK (the RFB). In particular: The Crown Dependencies deposits will need to be replaced with MTF, most of which will be in the form of funding from Banco Santander. Key liquidity ratios will remain above regulatory expectations and appetite after these deposits are replaced; Short-term funding (including Commercial Paper & Certificates of Deposits) originated from USD counterparties via the ANTS US Branch will be prohibited from Santander UK (the RFB) and will be replaced with UK short-term funding (including USD). Short-term funding will be accessed through money market instruments, including time deposits, certificates of deposit and commercial paper. This will have no net impact on key liquidity ratios; and SGCB liabilities relating to prohibited activities will be transferred to SLB, which is reflected in reduced SGCB customer deposits and trading liabilities for Santander UK. This will have little net impact on key liquidity ratios. Why is the change not adverse? I reviewed the Santander UK HoldCo 2016 ILAAP, Santander UK March 2017 ILAAP updated with the RFB assumptions and the P20. I reviewed the underlying assumptions in the ILAAP considering the amount of funding that will need to be replaced as a result of the transfer of business, and have reviewed the underlying liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) assumptions. Santander UK is forecast to maintain diversified sources of funding and sufficient liquidity resources to meet regulatory requirements. This assessment accounts for replacement funding for liabilities that must be transferred under the Ring- Fencing Plan, including the Scheme. EY 86

91 Finance Business Model Viability, Capital and Liquidity Liquidity and funding profile The ILAAP of Santander UK (the RFB) incorporates funding considerations including the customer funding gap, stable funding requirements, loan-to-deposit and structural funding ratios, encumbrance levels and plausible stress impacts. This proposes that: Santander UK (the RFB) will remain primarily funded by relatively static retail liability balances, and more than 80% of retail customer lending will be financed by retail deposits; and Wholesale funding will remain diversified across product types, instruments, investor segments, maturity buckets, currencies and geographies, and with a blend of secured/collateralised and unsecured sources. Santander UK (the RFB) funding will also comprise covered bonds, securitisations and other secured medium term funds. P20 also forecasts a composition of funding that is broadly consistent with the existing pre ring-fencing plans, involving: An increasing deposits to total funding ratio between 2016 and 2020 due to the assumed growth in deposits and limited reliance on wholesale funding. A long-term wholesale funding ratio that is expected to decrease in 2018 due to increased short-term funding. However, this ratio will increase marginally over the planning period to 2020, indicating limited planned reliance on shortterm sources. An increasing Loan to Deposit Ratio (LTD) due to the replacement of Crown Dependencies deposits with medium-term funding. LTD will increase for Santander UK (the RFB) due to the lower intensity of customer deposits in relation to funded assets due to the replacement of Crown Dependencies deposits with medium-term funding. I have assessed the reasonableness of Santander UK s (the RFB) funding plan based on its current credit rating and ability to raise capital in the markets. Santander UK is an investment grade entity which provides it access to funding in the markets. Santander UK HoldCo issued 8.4bn of MTF in 2016, 10.3bn in 2015 and 12.1bn in My conclusion I am satisfied that, based on P20, the changes will not adversely affect Santander UK s liquidity and funding profile. I have therefore concluded that the changes to the liquidity and funding profile are not adverse for groups of persons who will remain in Santander UK (the RFB) or for those groups of persons who transfer into Santander UK (the RFB) as a consequence of the Ring-Fencing Plan, including the Scheme. EY 87

92 Finance Business Model Viability, Capital and Liquidity Table 29: Changes with no adverse effects Liquidity Coverage Ratio Liquidity Coverage Ratio Description of the change The Liquidity Coverage Ratio (LCR) is expected to change due to the different composition of liabilities and the impact that this is expected to have on liquidity outflows under regulatory stress conditions. Why is the change not adverse? The proposed changes to the balance sheet, for example liabilities from prohibited activities or counterparties, would reduce the LCR and Liquidity Risk Appetite (LRA) ratio. However, funding actions will restore these ratios such that they will remain above regulatory requirements and appetite settings. The lower LCR eligible liquidity pool also reflects the lower level of HQLAs needed for Santander UK (the RFB), based on balance sheet projections. LCR is forecast to remain above the regulatory minimum requirements after accounting for the replacement of existing Santander UK liabilities that must be held outside the ring-fence perimeter, including access to deposit funding from Crown Dependencies. My conclusion I am satisfied, that based on P20, Santander UK will meet its regulatory LCR requirements after accounting for the different composition of liabilities. I have therefore concluded that the changes to the LCR are not adverse for groups of persons who will remain in Santander UK (the RFB) or for those groups of persons who will transfer into Santander UK (the RFB) as a consequence of the Ring-Fencing Plan, including the Scheme. Table 30: Changes with no adverse effects Net Stable Funding Ratio Net Stable Funding Ratio Description of the change The Net Stable Funding Ratio (NSFR) measure of funding risk, as determined by the forecast level of stable funding, and is expected to see minimal changes as a result of the changing composition of liabilities. Why is the change not adverse? The NSFR of Santander UK (the RFB) is expected to be above regulatory requirements and appetite. This will be supported by a high proportion of loans to be funded by customer deposits, alongside limited reliance on wholesale funding. My conclusion I am satisfied that based on P20, Santander UK will meet the regulatory NSFR requirements. I have therefore concluded that the changes to the NSFR are not adverse for groups of persons who will remain in Santander UK (the RFB) or for those groups of persons who will transfer into Santander UK (the RFB) as a consequence of the Ring-Fencing Plan, including the Scheme. EY 88

93 Finance Business Model Viability, Capital and Liquidity My conclusions are supported by analysis summarised below: I reviewed the Santander UK HoldCo 2016 ILAAP, Santander UK March 2017 ILAAP (updated with the RFB assumptions) and the P20, and completed the following assessments: The funding and liquidity profile for Santander UK will be impacted by the loss of access to the prohibited non-eea deposits sourced from the Crown Dependencies. However these will be replaced with MTF. Some corporate deposits that are being transferred out of Santander UK will also be replaced with other UK funding. After accounting for forecast funding plans, and the replacement of liabilities that must be held outside the ring-fence perimeter, the LCR 15 is forecast to remain above regulatory requirements and appetite. Changes to the composition of liabilities, will result in a different regulatory outcome for minimum liquid asset holdings. I assess that this will have a minor impact on liquidity transfer pricing. My conclusion is based on the Santander UK Group s own planning assumptions detailed in the ILAAP of Santander UK, P20 balance sheet planning assumptions and latest Moody s, S&P and Fitch Ratings assessments of Santander UK HoldCo and Santander UK s credit ratings, which have considered the impact of the Ring-Fencing Plan, including the Scheme. Moody s, S&P and Fitch Ratings have confirmed that their proposed credit ratings for Santander UK (the RFB) are expected to remain unchanged as a result of the Ring-Fencing Plan, including the Scheme. Given that Santander UK will maintain the same credit rating, the Ring-Fencing Plan, including the Scheme, is not expected to impact its costs or its ability to raise funding, and so I am assuming there will be no impact on the cost of funds premium. My assessment of the impact on liquidity transfer pricing for the cost of holding HQLA is determined by the cost of funding for each product, which will change along with different composition of liabilities and LCR run-off assumptions. The NSFR 16 of Santander UK (the RFB) is expected to be above regulatory requirements and appetite, and this will be supported by a high proportion of loans to be funded by customer deposits and limited reliance on wholesale funding. Santander UK credit ratings have been provisionally assessed by all three ratings agencies as unaffected by the Ring-Fencing Plan, including the Scheme. Therefore, I expect no adverse effect on the cost of funds used for transfer pricing. 15 European Commission Delegated Regulation (EU) 2015/61 16 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 EY 89

94 Finance Business Model Viability, Capital and Liquidity Banco Santander (including SLB) conclusions Having completed my financial assessment, I have concluded that groups of persons who remain connected to or are transferred to Banco Santander or SLB as a consequence of the Ring-Fencing Plan, including the Scheme, will not be adversely affected. The following summarises my assessment to date of the impact of the proposed changes on Banco Santander and SLB. My financial analysis undertaken in this section and any conclusions derived from it are based on Banco Santander s annual report, ICAAP and ILAAP as at 31 December 2016, which have been through the appropriate governance and approved by the Banco Santander Board, SLB P20 and the Ring-Fencing Plan. I have assessed the potential impact of the transfers to Banco Santander (including SLB) on its financials based on the quantum of business being transferred as a percentage of the current Banco Santander financial position as at December The business being transferred into Banco Santander will not have significant impact on the overall financial position of Banco Santander when compared to the size of its current balance sheet, P&L and RWAs as at 31 December Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have adverse effects on groups of persons covered by this Scheme Report. Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, which do not result in an adverse effect on any group of persons covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that all group of persons will be affected, but not adversely affected, as a consequence of the Ring-Fencing Plan, including the Scheme. EY 90

95 Finance Business Model Viability, Capital and Liquidity Business Model Viability Table 31: Changes with no adverse effects Balance sheet transfers into Banco Santander (including SLB) Balance sheet transfers into Banco Santander (including SLB) Description of the change Santander UK and ANTS corporate business will be transferred to SLB or directly into Banco Santander under the Ring-Fencing Plan, including the Scheme. Further, the Crown Dependencies business will be transferred to newly authroised branches or new or existing subsidiaries of the wider Banco Santander Group. This predominantly relates to prohibited business and excluded activities. These transfers will change the composition of SLB s balance sheets. Whilst there will be a change to the composition and size of the balance sheet of SLB, the transfers will not have a significant impact on Banco Santander s overall balance sheet, of which SLB represents a small part. Santander UK s Crown Dependencies business will also be transferred to newly authorised branches or new or existing subsidiaries of the wider Banco Santander Group (under the wider Ring-Fencing Programme, separate from the Scheme). Whilst theses transfers will cause a change to its balance sheet, should the newly authorised branches consolidate into the Banco Santander balance sheet, these will not have a significant impact on its size overall. Why is the change not adverse? I reviewed Banco Santander s annual report, ICAAP and ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan to assess the changes to SLB and Banco s balance sheet in the year of transfer. I assessed the impact of the amount of assets and liabilities transferring from Santander UK and ANTS. At a consolidated level there will be no change. Furthermore, Banco Santander will receive additional net assets and an increase in CET1 as a consequence of business transferring under the Ring-Fencing Plan. Thereafter the assets and liabilities being transferred to SLB or Banco Santander are expected to grow across the forecast period. SLB and Banco Santander will remain viable and sustainable over the forecast period. My conclusion I have considered the impact and am satisfied that there will be no adverse effects as a consequence of the Ring-Fencing Plan, including the Scheme, because overall the business transfers will not have a significant impact on Banco Santander s balance sheet. I have therefore concluded that the changes are not adverse for groups of persons who will remain in Banco Santander (including SLB), or for those groups of persons who will transfer into Banco Santander (including SLB) as a consequence of the Ring-Fencing Plan, including the Scheme. EY 91

96 Finance Business Model Viability, Capital and Liquidity Table 32: Changes with no adverse effects Profit & Loss impact of business transfers into Banco Santander (including SLB) Profit & Loss impact of business transfers into Banco Santander (including SLB) Description of the change There will be a significant increase to the Profit & Loss of SLB, from the transfer of business and their corresponding incomes and costs. However, overall, the size of the business being transferred either to SLB or Banco Santander will not have a significant impact on Banco Santander s Profit & Loss. Why is the change not adverse? I reviewed Banco Santander s annual report, ICAAP and ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan to assess the changes to SLB and Banco Santander s Profit & Loss in the year of transfer. I assessed the impact of the amount of revenue and associated costs transferring from Santander UK and ANTS. At a consolidated level there will be no change. Furthermore for Banco Santander on its own, it receives an increase, albeit minimal, in operating income. SLB and Banco Santander will receive additional revenues from the business that is transferred into these entities and are expected to remain profitable, viable and sustainable over the forecast period. My conclusion The business transfers as a consequence of the Ring-Fencing Plan, including the Scheme, will not adversely affect Banco Santander s Profit & Loss, and will, therefore, not adversely affect its viability or sustainability. Hence, I have concluded that the changes are not adverse for groups of persons who will remain in Banco Santander (including SLB) or for those groups of persons who will transfer into Banco Santander (including SLB) as a consequence of the Ring-Fencing Plan, including the Scheme. My conclusions are supported by analysis summarised below: I reviewed Banco Santander s annual report, ICAAP and ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan. The Ring-Fencing Plan will result in a significant amount of SGCB business (both assets and liabilities) being transferred to SLB or directly into Banco Santander during However, this will not impact the viability and sustainability of these entities as the assets and liabilities associated with the transfer of business will not have a significant impact on Banco Santander s balance sheet or P&L. I reviewed SLB s P20 and the Ring-Fencing Plan. SLB is forecast to remain profitable across the P20 and the business moving directly into Banco Santander (including SLB) will also contribute to the parent bank s profits. Overall, these movements will not have an adverse effect on Banco Santander s viability and sustainability as the incomes and costs associated with the transfer of business will not have a significant impact on Banco Santander s P&L. Groups of persons transferred to SLB or Banco Santander will become connected to an entity with a different balance sheet and P&L composition and credit rating. Banco Santander is expected to remain profitable, viable and sustainable over the forecast period and meet its minimum regulatory capital, leverage and liquidity requirements. The size of the business being transferred into Banco Santander will not have a significant impact on the overall financial position of Banco Santander when compared to the size of its current balance sheet, P&L and RWAs (as at 31 December 2016). EY 92

97 Finance Business Model Viability, Capital and Liquidity Capital Adequacy Table 33: Changes with no adverse effects Capital requirements, ratios and resources Capital requirements, ratios and resources Description of the change A corresponding amount of capital resources and RWAs will be transferred to Banco Santander (alongside the business that is being transferred to Banco Santander or SLB) from Santander UK and ANTS under the Ring-Fencing Plan, including the Scheme. Why is the change not adverse? I reviewed Banco Santander s ICAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan to assess the changes to SLB and Banco Santander s capital in the year of transfer. I assessed the impact of the amount of capital resources and RWAs transferring from Santander UK and ANTS. Banco Santander s CET1 capital resources are forecast to decrease but total capital resources will increase across the planning period. Banco Santander is expected to maintain sufficient capital resources to meet minimum regulatory requirements. On a consolidated basis, given that the quantum of RWAs moving into Banco Santander is small, as a percentage of its total RWAs, and that a corresponding amount of capital resources will be transferred, I do not expect there to be anything other than minor changes to the capital ratios of Banco Santander as a result of the Ring-Fencing Plan, including the Scheme. My conclusion I am satisfied that based on the ICAAP, Banco Santander is forecast to meet its minimum regulatory capital requirements over the forecast period. I have therefore concluded that the changes are not adverse for groups of persons who will remain in Banco Santander (including SLB) or for those groups of persons who will transfer into Banco Santander (including SLB) as a consequence of the Ring-Fencing Plan, including the Scheme. EY 93

98 Finance Business Model Viability, Capital and Liquidity Table 34: Changes with no adverse effects Leverage ratios Leverage ratios Description of the change Leverage ratios are expected to increase over the forecast period. Why is the change not adverse? I reviewed Banco Santander s ICAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan to assess the changes to the change in capital for Banco Santander (including SLB) in the year of transfer. Banco Santander s minimum regulatory requirements are expected to be met. My conclusion I am satisfied that, based on ICAAP, Banco Santander is forecast to meet its minimum regulatory requirements over the forecast period. I have therefore concluded that the changes are not adverse for groups of persons who will remain in Banco Santander (including SLB) or for those groups of persons who transfer into Banco Santander (including SLB) as a consequence of the Ring-Fencing Plan, including the Scheme. Table 35: Changes with no adverse effects Overall risk profile Overall risk profile Description of the change Groups of persons being transferred into Banco Santander will become connected to an entity that has a different overall risk profile, including different capital resources, requirements and ratios to the Santander UK Group. Why is the change not adverse? I reviewed Banco Santander s ICAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan to assess the changes to SLB and Banco Santander s risk profile in the year of transfer. Banco Santander is expected to remain adequately capitalised and meet the minimum regulatory requirements. My conclusion Banco Santander forecasts in its consolidated ICAAP that it will remain adequately capitalised and meet the minimum regulatory capital requirements. I have therefore concluded that the changes are not adverse for groups of persons who will remain in Banco Santander (including SLB) or for those groups of persons who will transfer into Banco Santander (including SLB) as a consequence of the Ring-Fencing Plan, including the Scheme. EY 94

99 Finance Business Model Viability, Capital and Liquidity My conclusions are supported by analysis summarised below: I reviewed Banco Santander s ICAAP, SLB P20 and the Ring-Fencing Plan. I have assessed that Banco Santander is forecast to meet its minimum regulatory capital requirements over the planning period to Capital and leverage ratios are projected to increase over the forecast period. Santander UK has estimated the amount of RWAs to be transferred into Banco Santander (including SLB) by 2018 under the Ring-Fencing Plan, including the Scheme. A corresponding amount of capital resources will also be transferred by December On a consolidated Banco Santander basis there will be no change to capital ratios. The changes as a consequence of the Ring-Fencing Plan, including the Scheme, will not impact the capital position of Banco Santander. Groups of persons transferred into Banco Santander (including SLB) will become connected to an entity that has a different overall risk profile, including different capital resources, requirements and ratios to Santander UK and/or ANTS. However, Banco Santander forecasts in its consolidated ICAAP that it will remain adequately capitalised and meet the minimum regulatory capital requirements. EY 95

100 Finance Business Model Viability, Capital and Liquidity Liquidity and Funding Table 36: Changes with no adverse effects Liquidity and funding profile Liquidity and funding profile Description of the change Santander UK and ANTS s corporate liabilities will be transferred to Banco Santander (including SLB). Why is the change not adverse? I reviewed Banco Santander s ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan. The movements in key Banco Santander balance sheet lines, including SLB, due to ring-fencing are estimated under the P20 are as follows: SGCB business will be transferred to SLB, including prohibited loans to UK financial institutions, trading assets, customer deposits and trading liabilities. The current P20 forecast is that this will increase SLB liabilities by December 2018, specifically securities financing and fixed income market-making derivatives; Some SGCB business will also transfer directly into Banco Santander which will increase trading liabilities by December 2018; and Banco Santander s 2017 ILAAP does not factor the changes to its balance sheets as the result of the Ring-Fencing Plan, including the Scheme. However, I have assessed that its consolidated liquidity position will not be affected materially, given that the balance sheet movements will be within the Banco Santander consolidation and do not involve any transfers outside the Banco Santander Group. Further, I do not expect the funding and liquidity profile of Banco Santander to be different, by any material amount, as a consequence of the transfer of business under the Ring-Fencing Plan, including the Scheme. My conclusion I have considered the impact and am satisfied that, based on the ILAAP, there will be no adverse effects as a consequence of the Ring-Fencing Plan, including the Scheme, as there will not be a significant impact on Banco Santander s liquidity and funding profile. I have therefore concluded that the changes are not adverse for groups of persons who will remain in Banco Santander (including SLB) or for those groups of persons who will transfer into Banco Santander (including SLB) as a consequence of the Ring-Fencing Plan, including the Scheme. EY 96

101 Finance Business Model Viability, Capital and Liquidity Table 37: Changes with no adverse effects LCR and NSFR ratios LCR and NSFR ratios Description of the change The transfer of business under the Ring-Fencing Plan, including the Scheme, will result in changes to the assets and liabilities of Banco Santander. Therefore, there will be an impact on its LCR and NSFR ratios. Why is the change not adverse? I reviewed Banco Santander s ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan. Banco Santander has a plan in place to meet its regulatory LCR and NSFR requirements over the forecast period, and both ratios are expected to remain above the minimum regulatory requirements and appetite. My conclusion I have considered the impact on LCR and NSFR ratios, and I am satisfied that there are no adverse effects as a consequence of the Ring-Fencing Plan, including the Scheme, given that the transfers will not significantly impact the capacity for Banco Santander to meet its minimum regulatory requirements. I have therefore concluded that the changes are not adverse for groups of persons who will remain in Banco Santander (including SLB) or for those groups of persons who will transfer into Banco Santander (including SLB) as a consequence of the Ring-Fencing Plan, including the Scheme. EY 97

102 Finance Business Model Viability, Capital and Liquidity Table 38: Changes with no adverse effects Transfer pricing Transfer pricing Description of the change Banco Santander holds a one notch lower credit rating than Santander UK. Groups of persons transferring to SLB or Banco Santander will become connected to an entity with a different liquidity and funding profile to Santander UK and ANTS and, therefore, may be impacted by different transfer pricing outcomes. Why is the change not adverse? I reviewed Banco Santander s ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan. Banco Santander maintains a corporate funds transfer pricing system framework, which is broadly comparable to the corresponding framework for Santander UK. This involves Funds Transfer Pricing (FTP) for each entity within the Banco Santander Group. This supports pricing for transactions with customers, profitability assessment of new transactions and products, hedging of business units from interest rate and liquidity risks, and the measurement of net interest incomes for business units. The FTP is the sum of the applicable base rate, liquidity spread and adjustments for each customer deal or product. The primary determining factor is the entity s credit ratings, which for Banco Santander is below the current credit ratings of Santander UK HoldCo, Santander UK and ANTS. This will result in different funds transfer pricing outcomes, even though the underlying methodologies are similar. Banco Santander s impact assessments identify that there will be a pricing impact on derivative and non-derivative products due to the different credit ratings between Banco Santander, Santander UK and ANTS. The Banco Santander Group have considered the pricing impact of the 5 year and 10 year senior debt used to fund the non-derivatives portfolio, and compared the pricing differences between Santander UK and Banco Santander. The derivatives products associated with the transferred portfolio will be valued in line with Banco Santander s current pricing methodology. Banco Santander s Strategy and Financial Management team have confirmed that the pricing impact on existing derivative and non-derivative portfolio customers has been assessed by them as a marginal change to cost of funds. As a mitigation, Banco Santander senior management have stated and documented that any differences in pricing of existing derivatives and nonderivatives products, transferring under the Scheme, will be absorbed internally and therefore there will be no effect on customers. My conclusion I have concluded that the changes are not adverse for groups of groups of persons who will remain in Banco Santander (including SLB) or for those groups of persons who will transfer into Banco Santander (including SLB) as a consequence of the Ring-Fencing Plan, including the Scheme. This is as a result of Banco Santander absorbing any pricing impacts on existing derivative and non-derivative portfolio customers from the transferred business. EY 98

103 Finance Business Model Viability, Capital and Liquidity My conclusions are supported by analysis summarised below: I reviewed Banco Santander s ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan. The funding and liquidity profile of Banco Santander is not expected to be significantly different as a consequence of the transfers of business under the Ring-Fencing Plan, including the Scheme. While Banco Santander s 2017 ILAAP does not factor the changes to its balance sheets as the result of the Ring-Fencing Plan, including the Scheme, it has a plan in place to meet its LCR requirements and appetite over the forecast period. The composition of the funding in Banco Santander is expected to remain diversified, and the NSFR is forecast to remain above the regulatory minimum requirement and risk appetite. Groups of persons transferred to SLB under the Scheme will become connected to an entity with a different liquidity and funding profile and, therefore, different transfer pricing inputs. Banco Santander (and therefore SLB) holds a lower credit rating than Santander UK which may have an effect on funds transfer pricing, even though the underlying methodologies are similar. Banco Santander s impact assessments identify that there will be a pricing impact on derivative and nonderivative products due to the different credit ratings between Banco Santander, Santander UK and ANTS. Banco Santander s Strategy and Financial Management team have confirmed that the pricing impact on derivative and non-derivative portfolio customers has been assessed by them as not significant. Banco Santander s own impact assessments identify that there will be an effect due to the different credit ratings between Banco Santander and Santander UK and ANTS. While this difference will manifest in the pricing outcomes for derivative and non-derivative portfolios, Banco Santander have confirmed in writing that any differences will be absorbed internally. EY 99

104 Guarantees and Contingent Liabilities 11. Guarantees and Contingent Liabilities Introduction This section of my Report addresses the guarantees and contingent liabilities of Santander UK and ANTS. Guarantees provided between entities ensure that one entity would meet the obligations of the other, if the other were to be unable to meet their own obligations. This provides additional comfort and security for groups of persons with an exposure to an entity. Contingent liabilities are liabilities that depend on an uncertain future event occurring but are still accounted for by the entity, for example redress or compensation payments that may not arise. Capital is held to enable the entity to meet the liability should it arise. The best publicised example of this is PPI mis-selling, where certain banks have had to set aside capital to meet customer claims. The guarantees and contingent liabilities of Santander UK and ANTS are summarised below: Table 39: Santander UK and ANTS contingent liabilities Name Description Provider CAL deed poll guarantees Santander UK has guaranteed the obligations and liabilities of CAL which expired on 30 June 2017, but which continue to apply to liabilities incurred on or prior to the expiry date. Santander UK As these guarantees will not be transferred or changed under the Scheme, and expire prior to the final legal effective date, they are not considered in this Report. Obligations of ANTS to Holmes, Fosse and Langton securitisation programmes Santander UK has issued guarantees of ANTS swap obligations under the Holmes, Fosse and Langton programmes. As at the date of this Report, there are no further Holmes or Langton programme ANTS swap obligations requiring transfer. Santander UK As these guarantees will not be transferred or changed under the Scheme, and expire prior to the final legal effective date, they are not considered in this Report. Litigation and financial redress Obligations to meet existing and potential future claims arising from litigation and financial redress. Santander UK and ANTS Guarantees and contingent liabilities Santander UK and ANTS have guaranteed all of the other s unsubordinated obligations and liabilities under a series of deed poll guarantees. These are known as cross-guarantees. Santander UK and ANTS EY 100

105 Guarantees and Contingent Liabilities Approach to assessing Guarantees and Contingent Liabilities Assessment areas I have assessed whether there will be changes to the beneficiaries of guarantees and contingent liabilities issued by Santander UK and ANTS. This assessment has considered whether any groups of persons will be adversely affected by the Scheme, as a result of any changes. The existing guarantees and contingent liabilities have been included or excluded from my assessment as follows: Table 40: Guarantees and Contingent Liabilities assessment areas Assessment area Description Litigation and financial redress Under the terms of the Scheme, the debts, liabilities and obligations associated with the business transferring from Santander UK and ANTS to Banco Santander, will be transferred to Banco Santander. All those associated with the business transfers from ANTS to Santander UK will be transferred to Santander UK. Liabilities/issues with transferring business will generally transfer to the recipient of the business, save for certain elements which I have set out in section I have considered whether there are any changes to the ability of Santander UK, ANTS and Banco Santander to meet any existing or future claims. Removal of crossguarantees between Santander UK and ANTS The cross-guarantees issued between Santander UK and ANTS will be unwound under the Scheme on 31 December Each entity will be released and discharged from all present and future obligations and liabilities covered under these guarantees, including any obligations and liabilities which have accrued prior to the 31 December Effect on claimants moving to another jurisdiction There are some customers with transactions and/or positions that are moving from ANTS to Banco Santander (including SLB) and who will therefore have a counterparty or entity incorporated underspanish law rather than English law. This may result in an effect on claimants, arising from the change in jurisdiction of the entity which is subject to litigation or claim for redress. EY 101

106 Guarantees and Contingent Liabilities My conclusions are supported by the information and analysis summarised below: Information and documentation reviewed, supported by meetings with the finance and legal leadership teams for the Ring-Fencing Programme; The Ring-Fencing Plan; Scheme document; Business Transfer and Implementation Agreement relating to the implementation of ring-fencing in the UK dated 16 October 2017 (BTIA); Programme implementation plans including senior programme governance material; Santander UK audited annual accounts as at 31 December 2016 and half year accounts as at 30 June 2017; Santander UK Group s draft annual operating plan, called the P20, covering the period 2017 to 2020 drafted as at 30 June This was approved by the Santander UK Board on 24 July The starting point of the P20 is the 31 December 2016 actuals. The P20 comprises of a detailed breakdown of the balance sheet and P&L line items and their underlying assumptions, which I have used and relied upon as the basis for my assessment given the authorised content and following a review of the assumptions used in the plan; My capital assessment was carried out based on a review of the consolidated 31 December 2016 Santander UK HoldCo ICAAP document, base case P20 capital data and the June 2017 Bank of England stress test results; A review of Santander UK Group s planning assumptions for liquidity and funding, which are based on the September 2016 ILAAP for Santander UK HoldCo and the March 2017 ILAAP update specifically for Santander UK (the RFB). The ILAAP documents have been reviewed in conjunction with Santander UK s draft P20; Banco Santander ICAAP at 31 December 2016, ILAAP as at 2017 and SLB P20; Santander UK deed poll guarantee executed on 11 May 2017; and ANTS deed poll guarantee executed on 11 May Litigation and financial redress under the terms of the Scheme and the BTIA relating to the implementation of ring-fencing in the UK, the debts, liabilities and obligations associated with the business transferring from Santander UK and ANTS to Banco Santander (including SLB) and with the business transferring from ANTS to Santander UK, will transfer as set out below: a. Business transferring from ANTS to Santander UK all liabilities associated with this business will transfer to Santander UK (including employee and conduct matters) other than tax liabilities. b. Business transferring from ANTS to SLB all liabilities associated with this business will transfer to Banco Santander (including SLB) excluding employee matters, conduct matters and tax liabilities. Employee and conduct liabilities associated with such business will transfer to Santander UK. c. Business transferring from Santander UK to SLB all liabilities associated with this business will transfer to Banco Santander (including SLB) excluding employee matters, conduct matters and tax liabilities. Removal of cross-guarantees between Santander UK and ANTS these guarantees and contingent liabilities will be unwound under the Scheme on 31 December Each entity will be released and discharged from all present and future obligations and liabilities. There will be some prohibited asset facilities remaining on the ANTS balance sheet, and any claims relating to this business will no longer be covered under the cross-guarantees. The impact of the removal of the cross-guarantees on the customers and counterparties remaining in ANTS is considered in section EY 102

107 Guarantees and Contingent Liabilities Changes to guarantees and contingent liabilities Findings and conclusions Having completed my assessment of guarantees and contingent liabilities, I have concluded that groups of persons who remain contracted or connected to, or are transferred to Santander UK (the RFB) and/or Banco Santander (including SLB) as a consequence of the Scheme, will not be adversely affected. Note: for those groups of persons who will remain connected to ANTS after 1 January 2019, please refer to section 26.1 for an assessment of the impact of the removal of the cross-guarantees between Santander UK and ANTS. Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have adverse effects on groups of persons covered by this Scheme Report. Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will not result in an adverse effect on any group of persons covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that all group of persons will be affected, but not adversely affected, as a consequence of the Ring-Fencing Plan, including the Scheme. EY 103

108 Guarantees and Contingent Liabilities Table 41: Changes with no adverse effects Litigation and financial redress Litigation and financial redress Description of the change Under the terms of the Ring-Fencing Plan, including the Scheme, the debts, liabilities and obligations associated with the business transferring from Santander UK and ANTS to Banco Santander, will be transferred to Banco Santander. All those associated with the business transfers from ANTS to Santander UK will be transferred to Santander UK. Liabilities/issues with transferring business will generally transfer to the recipient of the business, save for certain elements which I have set out in section above. Why is the change not adverse? I have reviewed the Scheme document and the BTIA (dated 16 October 2017) to confirm that liabilities associated with transferring business will be transferred to the recipient of the business. I have reviewed the P20 data provided by the Santander UK Group which was compiled into analytical tools to assess the viability of Santander UK (the RFB) and its ability to meet ongoing liabilities as they fall due. I reviewed Banco Santander s ICAAP and ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan to assess the changes to SLB and Banco s P&L and balance sheet in the year of transfer to assess the viability of Banco Santander and its ability to meet ongoing liabilities as they fall due. As a result of these reviews, I have assessed that Santander UK and Banco Santander are both able to meet any existing or future claims resulting from the transfer of business under the Ring-Fencing Plan, including the Scheme. Note: This excludes customers and counterparties remaining in ANTS in run-off who are covered under section 26.1 of this report. For further information in relation to my financial assessments for Santander UK (the RFB) and Banco Santander (including SLB), which sets out in more detail the business viability of both entities to meet their obligations and liabilities, please refer to sections 10.3 and 10.4 respectively. My conclusion I have concluded that, given Santander UK (the RFB) and Banco Santander (including SLB) have the ongoing ability to meet any existing or potential claims that might transfer with the associated business under the Scheme, there are no adverse effects to groups of persons connected with these entities. This conclusion is applicable to all those groups of persons who are transferring under the Scheme into Santander UK and/or Banco Santander (including SLB) and to all those groups of persons who are currently connected to Santander UK or Banco Santander (including SLB). EY 104

109 Guarantees and Contingent Liabilities Table 42: Changes with no adverse effects Removal of cross-guarantees between Santander UK and ANTS Removal of cross-guarantees between Santander UK and ANTS Description of the change Santander UK and ANTS have guaranteed all of the other s unsubordinated obligations and liabilities under a series of deed poll guarantees (the crossguarantees). These guarantees issued between Santander UK and ANTS will be unwound under the Scheme as at 31 December 2018 and cease to exist prior to the implementation date under the legislation. Why is the change not adverse? I have reviewed the Scheme document and the deed poll guarantees, and these guarantees between Santander UK and ANTS will be unwound under the Scheme and will cease to apply to any present and future obligations and liabilities of Santander UK or ANTS. Under the terms of the Ring-Fencing Plan, including the Scheme, the debts, liabilities and obligations associated with the business transferring from Santander UK and ANTS to Banco Santander and SLB will be transferred to Banco Santander. Further, all those associated with the business transfers from ANTS to Santander UK will be transferred to Santander UK. I have reviewed the P20 data provided by the Santander UK Group which was compiled into analytical tools to assess the viability of Santander UK (the RFB) and its ability to meet ongoing liabilities as they fall due. I have reviewed Banco Santander s ICAAP and ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan to assess the changes to SLB and Banco s P&L and balance sheet in the year of transfer to assess the viability of Banco Santander and its ability to meet ongoing liabilities as they fall due. As a result of the cross-guarantees being unwound, I have assessed the following: Banco Santander is a viable entity and as such, able to meet its future liabilities as they fall due, including any new liabilities as a result of business transferring under the Ring-Fencing Plan, including the Scheme; and Santander UK (the RFB) is a viable entity and as such, able to meet its liabilities as they fall due, including any new liabilities as a result of business transferring under the Ring-Fencing Plan, including the Scheme. Note: this excludes customers and counterparties remaining in ANTS in runoff who are covered under section 26.1 of this report. My conclusion I have concluded that, given the un-winding of the cross-guarantees between Santander UK and ANTS under the Scheme will not introduce any additional risk to Santander UK (the RFB) and Banco Santander s ability to meet existing or potential liabilities that might transfer with the associated business under the Scheme, there will be no adverse effects to groups of persons connected with these entities. As I have concluded in section 10.3 and 10.4 respectively, both Santander UK and Banco Santander (including SLB) will in the future and as a consequence of the Ring-Fencing Plan, including the Scheme, continue to be well capitalised, viable able to meet existing or potential liabilities as they are able to do today. This conclusion is applicable to all those groups of persons who are transferring under the Scheme into Santander UK and/or Banco Santander (including SLB) and to all those groups of persons who are currently connected to Santander UK or Banco Santander (including SLB). EY 105

110 Guarantees and Contingent Liabilities Table 43: Changes with no adverse effects Effect on claimants moving to another jurisdiction Effect on claimants moving to another jurisdiction Description of the change Under the terms of the Ring-Fencing Plan, including the Scheme, the debts, liabilities and obligations associated with the business transferring from Santander UK and ANTS to Banco Santander (including SLB), will be transferred to Banco Santander. Liabilities/issues with transferring business will generally transfer to the recipient of the business, save for certain elements which I have set out in section above. As the contractual counterparty of the underlying contract will change from Santander UK or ANTS to Banco Santander, as a consequence of the Scheme, counterparties who enforce against breaches of contract, under their contractual rights, will have a claim against a Spanish incorporated entity in the place of an English incorporated entity. Why is the change not adverse? I have reviewed the Scheme document and the BTIA (dated 16 October 2017) to confirm that liabilities associated with transferring business will be transferred to the recipient of the business. I have considered the effect of the change in jurisdiction for Santander UK and ANTS business being transferred to Banco Santander (including SLB). Civil judgements made by the High Court are enforceable within the EU either through the use of a European Enforcement Order or if that is not available through the (recast) Brussels I Regulation. Accordingly, creditors who will be transferred from Santander UK or ANTS to Banco Santander should not find themselves in a worse position, were they to take enforcement action under the terms of their contract. Note: this excludes customers and counterparties remaining in ANTS in run-off who are covered under section 26.1 of this report. I reviewed Banco Santander s ICAAP and ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan to assess the changes to SLB and Banco s P&L and balance sheet in the year of transfer to assess the viability of Banco Santander and its ability to meet ongoing liabilities as they fall due. As a result of these reviews, I have assessed that Banco Santander will be able to meet any existing or future claims resulting from the transfer of business under the Ring-Fencing Plan, including the Scheme. For further information in relation to my financial assessment for Banco Santander (including SLB), which sets out in more detail the business viability of the entity to meet it s obligations and liabilities, please refer to section My conclusion As a result of the above, I have therefore concluded that there will be no adverse effects to groups of persons being transferred from Santander UK or ANTS to Banco Santander. EY 106

111 Governance 12. Governance Introduction This section assesses changes to the governance arrangements in place to manage and control the Santander UK Group and SLB resulting from the implementation of the Ring-Fencing Plan. It explains whether changes being made under the Ring-Fencing Plan, including the necessary changes because of the transfers of business under the Ring-Fencing Plan, including the Scheme, will affect any groups of persons covered by this Scheme Report. It also includes the conclusions, following my assessments. Governance is the system by which a bank is directed and controlled. Effective director and senior manager oversight is crucial to ensuring a safe and well managed bank. Governance of Santander UK is through the Santander UK Board, committees and control functions. It is a key factor in ensuring appropriate customer protection and the safeguarding of risks for the UK business. This includes adherence to applicable UK regulations and specific policies and procedures. In completing my assessment, I have restricted my review to considering the changes to the future governance arrangements within the Santander UK Group and SLB against those currently in place. My assessment is not a review of whether the Santander UK Group and SLB are in compliance with UK or Spanish regulatory requirements against any specific set of rules or standards relating to corporate governance. Approach to assessing governance Assessment areas I have assessed the changes in governance against a set of governance principles which have been developed based on the UK Corporate Governance Code (April 2016) (the Code). The Code is based on the underlying principles of accountability, transparency, probity and focus on the sustainable success of the entity over a longer term. The Code applies to all companies with a premium listing of equity shares on a UK stock exchange regardless of whether they are incorporated in the UK or elsewhere. Whilst Santander UK is a non-premium listed company, it seeks to follow the Code voluntarily. Additionally, I have considered the requirements of ring-fencing legislation in relation to the governance arrangements. EY 107

112 Governance Table 44: Governance assessment areas Assessment area Description Leadership structures Board responsibilities, including a clear division of responsibilities between the running of the Board and the executive responsibilities for running the business. The Chairman s responsibilities, including the leadership of the board and ensuring its effectiveness. The role of the Non-Executive Directors (NEDs), including independent challenge and critique of the entities strategy and performance. Effectiveness The Board having an appropriate balance of skills, experience, independence and knowledge. A robust and transparent procedure for the appointment of all new directors. The directors allocating sufficient time to the company in order to discharge their responsibilities effectively. A structured induction process is performed when a director joins the Board and ongoing training being regularly completed. Management Information being supplied to the Board in a timely fashion, in a format that allows them to discharge their duties. An annual evaluation of the Board and Board committees being undertaken, with directors submitted for re-election at regular intervals, subject to appropriate skills and satisfactory performance. Accountability The Board presenting a fair, balanced and understandable assessment of the entity s position and prospects. The Board determining the nature and extent of the risks the entity is willing to take in order to achieve its strategic objectives, including the maintenance of a risk management framework and associated control systems. Remuneration Remuneration being designed to promote the long-term success of the entity. The performance related elements of remuneration should be transparent, stretching and applied rigorously. Existence of formal policies for executive remuneration, together with structured procedures for determining and setting the compensation for individual directors. Relations with shareholders An active dialogue with shareholders, based on mutual understanding of objectives with collective responsibility across the Board as a whole. Ring-fencing considerations for governance Compliance with the objectives and requirements of the ring-fencing legislation, which includes the independence of decision making by the Board and management of the ring-fenced bank. These requirements are specific to the RFB and from a governance perspective will result in an effective Board for the RFB that is independent from the wider group, recognising the commonality of interests resulting from the group's 100% ownership of the ring fenced bank. EY 108

113 Governance My conclusions are supported by the information and analysis summarised below: Information and documentation reviewed, supported by meetings with the company secretariat leadership teams for the Ring-Fencing Programme: The Ring-Fencing Plan; Annual Reports for Banco Santander, Santander UK and ANTS, which provide an overview of governance for each of the entities; Corporate Governance Framework for the UK and proposed changes to SLB structure, outlining the key interaction points between the Banco Santander Group and the Santander UK Group and which allocates accountabilities; Management Responsibility Maps and Statements of Responsibilities for the current and proposed structures; Terms of Reference for key committees in the current structure including the UK Country Committee; and Key policies relating to remuneration, conflict of interest and training and development. I have reviewed the Ring-Fencing Plan relating to Santander UK (the RFB) and a range of additional governance documentation and plans to understand the level of changes proposed to be made, or not made, under the Scheme. I have then carried our specific tests in the assessment areas and met several times with Company Secretariat leadership as follows: Leadership structures and Effectiveness I have confirmed that the structure proposed in the Ring- Fencing Plan is consistent with the way that the business is currently structured and led. I have reviewed the Management Responsibilities Map and Terms of Reference to validate the Ring-Fencing Plan. I have reviewed the key governance changes made in relation to SLB and the enhancements offered by the new SLB Executive Committee and UK Country Committee. Additionally, I have reviewed the role profiles for the SLB Branch Manager, UK SGCB business owner and UK Country Head. Accountability I have confirmed that the structure referred in the Ring-Fencing Plan is consistent with the current accountabilities in the business. Additionally I have reviewed the Management Responsibilities Map and Terms of Reference. Remuneration I have confirmed that the remuneration policy will be the same going forward as today. Additionally I have reviewed the Management Responsibilities Map and Terms of Reference for the Remuneration Committee. I have reviewed the Remuneration Committee reports in the Annual Report for Banco Santander and the Terms of Reference for the Remuneration Committee to assess the consistency in approach proposed for SLB as currently applies to Santander UK. Relations with shareholders I have confirmed through discussion with the Santander UK Group leadership that the relationship between Santander UK (the RFB) and Banco Santander would remain as today. Ring-fencing considerations for governance I have met with senior Santander UK management and leadership to discuss the position with ANTS, and the need to run off positions in ANTS that cannot be transferred by 1 January I have also reviewed the waiver applications to the PRA (in consultation with the FCA) with respect to the Santander UK Board composition and membership taking into account ANTS remaining a Santander UK HoldCo subsidiary. EY 109

114 Governance Changes to the governance of Santander UK (the RFB) Findings and conclusions Following completion of my governance assessment, I have concluded that groups of persons who remain connected to, or will be transferred into Santander UK (the RFB) as part of the Scheme, will not be adversely affected as there is no deterioration to the governance of Santander UK (the RFB) after the implementation of the Ring-Fencing Plan, including the Scheme. Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have an effect, adverse or otherwise, on groups of persons covered by this Scheme Report. No change The following summarises the areas where I have assessed there will be no change to groups of persons as a consequence of the Ring-Fencing Plan, including the Scheme. Table 45: No change Assessment area Conclusion Leadership structures No change is anticipated to the structure of the Board of Directors or committees of Santander UK resulting from ring-fencing. There will be no change to the current leadership structure resulting from ring-fencing and therefore no effect on groups of persons connected with the entity. Effectiveness No change is anticipated to the structure of the Board of Directors or committees of Santander UK resulting from ring-fencing. There will be no change to the current structure resulting from ringfencing and therefore no change to the effectiveness of governance on groups of persons connected with the entity. Accountability No change is anticipated to the structure of the Board of Directors or committees of Santander UK resulting from ring-fencing. There will be no change to the current structure resulting from ringfencing and therefore no effect on the accountability of the governance structure on groups of persons connected with the entity. Remuneration No change is anticipated for the executive remuneration as a result of ring-fencing. There will be no change to the current remuneration practice resulting from ring-fencing and therefore no effect on groups of persons connected with the entity. Relations with shareholders No change is anticipated for the relationship with the holding company. Banco Santander remains responsible for the relationship with shareholders and this results in no change. There will be no change to the current structure resulting from ringfencing and therefore no effect on the relationship with shareholders as it relates to groups of persons connected with the entity. EY 110

115 Governance Assessment area Conclusion Ring-fencing considerations for governance Santander UK has applied to the PRA (in consultation with the FCA) for waiver(s). These are required, given Santander UK and Santander UK HoldCo will continue to maintain a common Board structure and membership. Positions will also be held in ANTS, which will be maintained in run-off (see section 26.1). CAL will require similar waivers for their governance as it is a ringfenced body within the RFB Sub-Group. An Executive Director will serve both Santander UK and ANTS for which a separate waiver has been applied for given the size and nature of business remaining in ANTS. Additionally, the Santander UK and ANTS Head of Internal Audit will be the same individual. ANTS will become a run-off entity. Its portfolio of prohibited transactions represents a very small amount of assets when compared to Santander UK (the RFB). The likelihood and materiality of any potential impact of a conflict of interest arising between ANTS and Santander UK is likely to be small. This risk is mitigated by the Conflicts of Interest Policy which I reviewed and deem appropriate. The Conflict of Interest Policy which applies to the Santander UK Group, Santander UK and ANTS includes a framework to manage any potential conflicts of management between these three entities, these entities and the group, as well as clients. The maintenance of existing governance arrangements, requiring individuals to hold executive roles in Santander UK and ANTS going forward are appropriate and necessary given the need to maintain ANTS in run-off. I have reviewed the waiver applications, and concluded that there will be no changes being made to existing governance arrangements and therefore no effects on groups of persons, on the assumption the PRA approves the waiver application as applied for, with respect to ANTS in run-off. EY 111

116 Governance Changes to the governance of SLB Findings and conclusions Following completion of my governance assessment, I have concluded that groups of persons who remain contracted or connected to, or will be transferred into SLB as part of the Scheme, will not be adversely affected as there will be no deterioration to the governance of SLB after the implementation of the Ring-Fencing Plan, including the Scheme. The proposed changes to the governance of SLB are necessary and the current arrangements are being enhanced appropriately for the increased levels of business activity that will be undertaken in SLB after implementation of the Ring-Fencing Plan. When those changes are combined with the current governance of Banco Santander, SLB will offer comparable levels of control and oversight as currently exist in the Santander UK Group. Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have adverse effects on groups of persons covered by this Scheme Report. Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will not result in an adverse effect on any group of persons covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that all group of persons will be affected, but not adversely affected, as a consequence of the Ring-Fencing Plan, including the Scheme. EY 112

117 Governance Table 46: Changes with no adverse effects Changes to leadership structures Changes to leadership structures Description of the change A new SLB Executive Committee structure has been established to support the SLB Branch Manager in discharging his duties. A UK Country Committee is being established, which will be chaired by the UK Country Head, who is the current Santander UK Chief Executive Officer (CEO). The purpose of this committee is to oversee all business carried out in the UK, the integrity of Santander UK (the RFB) and review governance, risk and control arrangements of Santander s activities in the UK in line with Group standards. Why is the change not adverse? In assessing the effect of the change, I have reviewed the key governance changes being made to SLB and the enhancements to the existing structures through a new SLB Executive Committee and UK Country Committee. These have been provided to me in governance documentation. Additionally I reviewed the role profiles for the SLB Branch Manager, UK SGCB business owner and UK Country Head provided to me. The Santander UK Group has put in place a UK Country Committee whose key responsibility is to review governance, risk and control arrangements in the UK. The committee is chaired by the UK CEO of Santander UK HoldCo and Santander UK (the RFB). On top of the standard risk MI reported at the committee, the Country Head will receive all audit and compliance reports relating to UK activity. Membership to this committee will include Heads of the Santander entities operating within the UK which ensures a holistic view of UK activity is provided at this committee. The changes proposed, and currently being implemented, combined with the existing Banco Santander structures will result in a leadership structure that is comparable to that which currently exists in Santander UK. With the proposed enhancements of the SLB Executive Committee and UK Country Committee, the proposed leadership model is appropriate given the size and nature of the proposed business to be undertaken by SLB. My conclusion The leadership structures that are being put in place are aimed at, and in my opinion will, enhance management levels in the enlarged SLB. I have therefore concluded that given these enhancements, there will be no adverse effects as a result of the enhancements being implemented as a consequence of the Ring-Fencing Plan, including the Scheme, on groups of persons who will remain connected to SLB and those who will transfer into SLB from Santander UK or ANTS. EY 113

118 Governance Table 47: Changes with no adverse effects Changes to effectiveness Changes to effectiveness Description of the change The SLB Executive Committee replaces the previous Management Committee and is supported by five standing committees who have access to the Banco Santander Governance bodies. The membership of the UK Country Committee will be determined by the UK Country Head. At a minimum, it will include Heads of Santander entities operating in the UK and those responsible for the key control functions. Why is the change not adverse? In assessing the effect of the change, I have reviewed the key governance changes being made to SLB and the enhancements to the existing structures through a new SLB Executive Committee and UK Country Committee. These have been provided to me in governance documentation. Additionally I reviewed the role profiles for the SLB Branch Manager, UK SGCB business owner and UK Country Head provided to me. In his role as UK Country Head, the Santander UK CEO will have oversight of UK based activity, without affecting the established roles of the Banco Santander Board and Board Committees as he will review the governance, risk and control arrangements of the business only and will not take decisions on the risk appetite of Banco Santander or SLB. There is a clear division of responsibility between the roles of the Branch Manager and the Head of UK SGCB. The Branch Manager is responsible for the governance, risk and control management of SLB. The Head of UK SGCB is responsible for key business targets for customers, products and channels. The conflicts of interest policy deals with conflicts arising between two Banco Santander group entities as well as an employee and a Banco Santander group entity, which will be relied upon to resolve any potential conflict of interest arising from the UK SGCB business owner. The changes proposed will result in a set of management committees and structures that will offer a similar level of effectiveness as exists today in Santander UK. With the proposed enhancement to the SLB committee structure and the membership of UK Country Committee, the proposed changes to management committees is appropriate given the size and nature of the proposed business to be undertaken by SLB. My conclusion The leadership structures that are being put in place are aimed at, and in my opinion will, enhance management effectiveness in the enlarged SLB. I have therefore concluded that given these enhancements, there will not be adverse effects as a result of the enhancements being implemented as a consequence of the Ring-Fencing Plan, including the Scheme, on groups of persons who will remain connected to SLB and those who will transfer into SLB from Santander UK or ANTS. EY 114

119 Governance Table 48: Changes with no adverse effects Changes to accountability Changes to accountability Description of the change A SLB Branch Manager has been appointed who is accountable for the control and infrastructure functions in SLB and reports to the Banco Santander Group Financial Controller. A UK SGCB business owner has been appointed who reports directly to the Global Head of SGCB and the Santander UK Head of Corporate Banking. The individual is employed by Santander UK (the RFB) and responsible for all SGCB business across both Santander UK (the RFB) and SLB. Why is the change not adverse? In assessing the effect of the change, I have reviewed the key governance changes being made to SLB and the enhancements to the existing structures through a new SLB Executive Committee and UK Country Committee. These have been provided to me in governance documentation. Additionally I reviewed the role profiles for the SLB Branch Manager, UK SGCB business owner and UK Country Head provided to me. The Santander UK CEO, as the UK Country Head, will maintain oversight of the overall UK based activity. The changes made will result in accountability being allocated to the SLB Branch manager and UK SGCB business owner. This will provide the same level of oversight on control and risk management that currently exists in Santander UK. There is a clear division of responsibility between the roles of the Branch Manager and the Head of UK SGCB. The Branch Manager is responsible for the governance, risk and control management of SLB. The Head of UK SGCB is responsible for key business targets for customers, products and channels. The conflicts of interest policy deals with conflicts arising between two Banco Santander group entities as well as an employee and a Banco Santander group entity which will be relied upon to resolve any potential conflict of interest arising from the UK SGCB business owner. With the appointment of the Branch Manager, the UK SGCB business owner and the Santander UK CEO as the UK Country Head, the management accountability in SLB is, in my opinion, of the right level and clear in all key areas of accountability for the size and nature of the proposed business to be undertaken by SLB. My conclusion I am satisfied that the proposed dual reporting lines being put in place for SLB, one into the UK Country Head and one into the UK SGCB business owner does not create an unacceptable conflict or a lack of clear accountability. Discussions with senior management, including the Corporate Banking CEO and UK SGCB business owner, have satisfied me that this is not a change to the way that reporting and accountability currently works, and is consistent with the overall Banco Santander model implemented in other countries. The leadership structures that are being put in place are intended to, and in my opinion will, enhance management in the enlarged SLB, including clear accountability statements and role descriptions. I have therefore concluded that there will be no adverse effects as a result of the enhancements being implemented as a consequence of the Ring-Fencing Plan, including the Scheme, on groups of persons who will remain connected to SLB and those who will transfer into SLB from Santander UK or ANTS. EY 115

120 Governance Table 49: Changes with no adverse effects Changes to remuneration procedure Changes to remuneration procedure Description of the change Existing policies around remuneration that are implemented in the UK will continue to be in place and adhered to in the new structure. This will impact the UK SGCB business owner, who remains an employee of Santander UK (the RFB). A different remuneration committee will be in charge of executive remuneration for the Branch Manager being the Banco Santander Remuneration Committee. This Committee would normally be involved in ratifying pay; as a result the same level of scrutiny in remuneration is expected as exists today. Why is the change not adverse? I have reviewed the Remuneration Committee reports in the Annual Report for Banco Santander and the Terms of Reference for the Remuneration Committee to assess whether a consistent approach will exist regarding remuneration in SLB with that in place in Santander UK. With the ultimate accountability of the Remuneration Committee remaining in place and the consistent policies being applied, the proposed changes to the remuneration procedures will remain transparent and promote the long-term success of the entity. My conclusion I am satisfied that the fundamentals of the remuneration policy and the way it is governed will not change in the future as a consequence of the Scheme, or the changes that will affect the overall governance structures in Santander UK, ANTS and SLB as described above. I have therefore concluded that there will be no adverse effects as a result of the enhancements being implemented as a consequence of the Ring-Fencing Plan, including the Scheme, on groups of persons who will remain connected to SLB and those who will transfer into SLB from Santander UK or ANTS. EY 116

121 Governance No change The following summarises the areas assessed where I identified no change. Table 50: No change Assessment area Conclusion Relations with shareholders SLB will maintain its relationship with Banco Santander as the UK branch operation of Banco Santander. On this basis, I conclude that there will be no adverse effects of the Scheme in relation to SLB s relations with shareholders. Banco Santander will remain responsible for the relationship with shareholders and this results in no change for those groups of persons remaining with SLB. There will be no adverse effects resulting from the relations with shareholders. For those groups of persons who will transfer into SLB from Santander UK or ANTS, the ultimate shareholders remain the same. There will be no adverse effects resulting from relations with shareholders. EY 117

122 Risk Management 13. Risk Management Introduction This section assesses changes to the risk management arrangements in place to manage and control risk in the Santander UK Group and SLB resulting from the implementation of the Ring-Fencing Plan. It explains whether changes being made under the Ring-Fencing Plan, including the necessary changes because of the transfers of business under the Ring-Fencing Plan, including the Scheme, will affect any groups of persons covered by this Scheme Report and includes the conclusions following my assessment. The risk appetite of a business sets out how much risk it is prepared to take in order to meet its strategic objectives. Risk management, in all its different parts, is a key component of the bank s governance structure and is in place to protect the bank (and its customers and other groups of persons) from being exposed to unmanaged risk and ultimately loss. In completing my assessment, I have restricted my assessment to considering the changes to the future risk management arrangements within the Santander UK Group and SLB against those currently in place, and not a review of compliance with UK or Spanish regulatory requirements on risk management. Approach to assessing Risk Management Assessment areas I have assessed changes to risk management with reference to the current Santander UK Group risk management governance when determining if groups of persons, whether remaining or transferred to Santander UK (the RFB) or transferred to SLB under the Scheme, will be adversely affected as a result those changes. The risk management governance has been assessed against the areas summarised in the table below: EY 118

123 Risk Management Table 51: Risk Management assessment areas Assessment area Description Risk management framework Robust and clear committee structures providing oversight via stand-alone committees for risk. Aggregation and consolidation of risk types, including financial, nonfinancial and horizon risks. Utilisation of the three lines of defence model, with clear roles and responsibilities, splitting out accountability for: Identifying, assessing and managing risks (First line of defence); Risk oversight and compliance functions (Second line of defence); and Independent assurance (Third line of defence). Risk appetite and limits Risk appetite framework being utilised to set the appetite, which is approved on an annual basis. The risk appetite setting out limits for different types of risk, using metrics and qualitative statements. Risk limits being in place for financial and non-financial risks. Risk culture The risk culture promoting individual responsibility for risk across the organisation and the tone being set from the Board and Executive. The principles are consistent including responsibility, resilience, challenge, simplicity and customer focus. Roles and responsibilities Board of Directors being responsible for risk and control management, including setting risk appetite. Having clear divisions of responsibilities across the Board and Executive Risk Committees. My conclusions are supported by the information and analysis summarised below: Information and documentation reviewed, supported by meetings with the company secretariat leadership teams for the Ring-Fencing Programme: The Ring-Fencing Plan; Annual Reports for Banco Santander, Santander UK and ANTS which provide an overview of risk management for each of the entities; Risk management frameworks across the divisions within the UK and applicable frameworks for SLB set by Banco Santander; Risk appetite frameworks and statement; and Current and Target Operating Models (TOMs) for the applicable risk management and control functions, including the first line of defence, Compliance, Legal and Internal Audit. Risk management framework I have reviewed the Ring-Fencing Plan relating to the RFB and confirmed in writing with Santander UK risk management leadership that these frameworks referred in the Ring-Fencing Plan would remain unchanged in the RFB. Additionally, I have reviewed the applicable risk management frameworks for the RFB, to confirm their appropriateness. EY 119

124 Risk Management I have reviewed the risk management frameworks developed for SLB as part of a TOM for SLB risk management. It is aligned to Banco Santander, which sets the framework for the entire Banco Santander Group. Risk management operating and services model I have reviewed the Risk TOM for SLB to assess how services will be leveraged from the RFB, given the expertise and resource available in the RFB. I have assessed the proposed services model to validate that services, that will be provided directly from SLB and Banco Santander, will be carried out under appropriate levels of control and management accountability from SLB, as well as ensuring that the overall risk management framework applied in SLB will be of a comparable standard to that currently in Santander UK. Risk management implementation plan As part of the overall SLB implementation plan, I have reviewed the plan for implementing the Risk TOM, including full mobilisation of the risk management framework. Risk appetite and limits I have discussed risk appetite, limit setting and management with Santander UK risk management and leadership and understand that while entity specific risk limits are likely to change, at a consolidated level across all UK entities and Santander group, in particular SLB, the overall risk appetite for an asset class or name will not change as a result of ring-fencing, and therefore there will be no adverse effect on groups of persons connected with Santander UK or SLB. I have reviewed the applicable risk appetite frameworks for Santander UK (the RFB), to confirm their appropriateness. I have reviewed the Ring-Fencing Plan relating to SLB, which confirms that the Banco Santander risk appetite will apply to SLB, with specific risk limits put in place. If the limit in SLB is reached, the Banco Santander Group will look to utilise the Banco Santander Group limit if applicable in line with the current business practice. Risk culture I have reviewed the annual report for Santander UK relating to risk culture and confirmed with Risk that the risk culture program I AM Risk would remain in the Santander UK Group. The I AM RISK ensures personal responsibility for risk management across the Santander UK Group. I have reviewed the Annual Report for Banco Santander and compared the principles of the risk culture program RiskPro used in Banco Santander and SLB to I AM Risk used in Santander UK. These principles are consistent and the I AM Risk program required ratification from Banco Santander to ensure consistency. Roles and responsibilities I have reviewed the Ring-Fencing Plan relating to the RFB and confirmed with Santander UK risk management that the roles and responsibilities would remain consistent in the RFB, excluding any business as usual changes that may occur. Additionally I reviewed the Management Responsibility Maps for the RFB and Terms of Reference for key committees relating to Risk Management including Board Risk and Audit Committees. I reviewed the Risk TOMs for SLB and the key governance changes made in relation to the new SLB Executive Committee and UK Country Committee. Additionally, I have reviewed the role profiles for the SLB Branch Manager, UK SGCB business owner and UK Country Head. EY 120

125 Risk Management Changes to Risk Management in Santander UK (the RFB) Findings and conclusions Following completion of the risk management assessment, I have concluded that groups of persons who will remain connected to, or will be transferred to Santander UK (the RFB) as part of the Scheme, will not be adversely affected as there will be no deterioration to the risk management of Santander UK following the implementation of the Scheme. Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have an effect, adverse or otherwise, on groups of persons covered by this Scheme Report. EY 121

126 Risk Management No change The RFB will maintain the current structures, policies, procedures related to risk management that are applicable for Santander UK at present. Therefore, there will be no change to group of persons who remain connected to, or are transferred to Santander UK, as a result of the Scheme. The following summarises the areas where I have assessed there will be no change to groups of persons as a consequence of the Ring-Fencing Plan, including the Scheme. Table 52: No change Assessment area Conclusion Risk management framework No changes will be made to the risk management framework for Santander UK as a consequence of the Ring-Fencing Plan, including the Scheme. There will be no change to the current risk management framework as a result of ring-fencing and therefore no effect on groups of persons connected with the entity. Risk appetite and limits In assessing the effect of the changes, I have discussed the risk appetite, current and proposed, and the setting and management of risk limits with Santander UK and Banco Santander risk management leadership. I have reviewed the applicable risk appetite frameworks for Santander UK to confirm their applicability going forward, after the implementation of the Scheme. No changes will be made to the risk appetite or the risk appetite framework for Santander UK as a result of the Ring-Fencing Plan, including the Scheme. Risk limits applied across Santander UK (for example customer or counterparty exposures or credit limits) may be affected by the transfer of business from Santander UK to SLB as a consequence of the Ring- Fencing Plan, including the Scheme. This will result in a reduction in the balance sheet size and ability to maintain the previous concentration limit or single exposure risk. This is addressed as Santander UK (the RFB) will continue to utilise and operate within the Banco Santander Group s limits, where applicable and in-line with current business practice, utilising the Banco Santander Group s balance sheet and higher limits. This is consistent with the existing risk management and limits framework in place today. I am therefore satisfied that there will be no changes to the way that the Banco Santander Group s limit management and overall risk appetite will operate and therefore no effect on groups of persons accessing products and services and engaging with Santander UK. Risk culture No changes will be made to the risk culture for Santander UK as a result of the Scheme. The principles set out in Santander UK s risk management model (I AM Risk) will remain unchanged. There are no changes planned to the current risk culture as a result of ring-fencing and therefore will be no effect on groups of persons connected with the entity. Roles and responsibilities No changes will be made to roles and responsibilities in Santander UK as a consequence of the Ring-Fencing Plan, including the Scheme. EY 122

127 Risk Management Changes to Risk Management in SLB Findings and conclusions Following completion of my risk management assessment, I have concluded that groups of persons who remain contracted or connected to, or are transferred to, SLB will not be adversely affected as there will be no deterioration to the risk management of SLB after the implementation of the Scheme. The proposed changes to the way risk is managed in SLB are necessary and the current arrangements are being enhanced appropriately for the increased levels of business activity in SLB after its implementation of the Ring-Fencing Plan, including the Scheme. When those changes are combined with the current risk management structures in place in Banco Santander, SLB will offer comparable levels of protection, control and oversight as currently exist in the Santander UK Group. Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have adverse effects on groups of persons covered by this Scheme Report. EY 123

128 Risk Management Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will not result in an adverse effect on any group of persons covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that all group of persons will be affected, but not adversely affected, as a consequence of the Ring-Fencing Plan, including the Scheme, or as a consequence of the Scheme. I have concluded, therefore, that the changes are no more than reasonably necessary to achieve the Scheme s purposes. Table 53: Changes with no adverse effects Changes to risk management framework Changes to risk management framework Description of the change The existing risk management teams across the three lines of defence will be enhanced to enable them to appropriately support the anticipated increase in business activity as a result of The Scheme. These proposed changes are outlined in the TOM documentation which was developed, and includes identifying additional resource requirements in SLB and describing which services will be provided from other parts of the Santander UK Group (including Santander UK (the RFB)). In the instances where SLB will rely on services from Santander UK (the RFB), these will be provided in such a way as to comply with the ring-fencing regulations. New procedural documentation will be drawn up for SLB across the three lines of defence model where support is provided to SLB by Santander UK (the RFB). The leveraged services provided by Santander UK (the RFB) will be monitored via key performance indicators (KPIs) documented in formal SLAs between the Santander UK (the RFB) and SLB to ensure an appropriate level of service is maintained. Why is the change not adverse? I have reviewed the risk management frameworks developed for SLB as part of the TOMs designed for SLB risk management. It is aligned to Banco Santander, which sets the framework for the entire Banco Santander Group, ensuring a consistent approach to managing risk within SLB. I have held interviews with the teams responsible for developing the individual TOMs to further understand the services provided from both Santander UK (the RFB) and Banco Santander (including SLB) and the rationale when making those decisions. The changes to the risk management framework currently in place in SLB will provide the necessary and complete risk management capability to support the transferring business. It will provide a comparable risk management capability as compared to that that operates today in Santander UK. With the introduction of new procedural documentation and formal SLAs for leveraged services from Santander UK, I am satisfied that the risk management framework will be appropriate given the size and nature of the proposed business to be undertaken by SLB. My conclusion The changes being implemented in SLB to enhance existing risk management capabilities are proposed to be in place, full implementation and operational in H1 2018, as documented in implementation plans for SLB. On the assumption that implementation is completed as defined and to plan, I have concluded that there will be no adverse effects on groups of persons who remain connected to SLB or for those who will be transferring into SLB as a consequence of the Ring-Fencing Plan, including the Scheme. EY 124

129 Risk Management Table 54: Changes with no adverse effects Changes to roles and responsibilities Changes to roles and responsibilities Description of the change SLB has created an Executive Committee which includes an Executive Risk Approval Committee (second line of defence), Executive Risk and Control Committee (second line of defence) and Compliance Committee (second line of defence). These committees report into the Executive and Board Committees for Banco Santander, as well as having a reporting line to the newly created UK Country Committee. The SLB Chief Audit Executive (CAE) will report directly to the Santander Group CAE and inform the SLB Branch Manager and UK Country Committee on any relevant internal audit aspects. The UK Country Committee reviews the governance, risk and control arrangements of Santander s activities in the UK, including Santander UK (the RFB) and SLB. Please refer to section 12 for further information on the UK Country Committee. Why is the change not adverse? I have reviewed the proposed Risk TOM for SLB and the key governance changes made in relation to the new SLB Executive Committee and UK Country Committee. Additionally, I have reviewed the role profiles for the SLB Branch Manager, who is responsible for risk management. The changes proposed will result in a set of management committees and structures that will provide at least the same level of control, transparency and effective decision making as currently exists in Santander UK. With the enhancements made to the branch reporting to Banco Santander risk committees and the creation of the UK Country Committee, the proposed risk management structures and governance are appropriate given the size and nature of the proposed business to be booked in SLB. My conclusion I have concluded that there will be no adverse effects on groups of persons who remain connected to SLB or for those who will be transferring into SLB as a consequence of the Ring-Fencing Plan, including the Scheme. EY 125

130 Risk Management No change The following summarises the areas where I have assessed there will be no change to groups of persons as a consequence of the Ring-Fencing Plan, including the Scheme. Table 55: No change Assessment area Conclusion Risk appetite and limits No changes will be made to the risk appetite or the risk appetite framework for SLB as a result of the Ring-Fencing Plan, including the Scheme. Risk limits applied across SLB (for example customer or counterparty exposures or credit limits) will be affected by the transfer of the significant additional business volumes from Santander UK and ANTS to SLB as a consequence of the Ring-Fencing Plan, including the Scheme. This is addressed as SLB will continue to utilise and operate within the Banco Santander Group s limits, where applicable and in-line with current business practice, utilising the Banco Santander Group s balance sheet and higher limits. This is consistent with the existing risk management and limits framework in place today. I am satisfied that there will be no changes to the way that the Banco Santander Group will manage their risk limits and set their overall risk appetite. Therefore, there will be no changes to groups of persons accessing products and services and engaging with SLB. Risk culture Banco Santander (including SLB) will continue to utilise their risk culture programme (Risk Pro) to promote their risk culture. The principles behind this culture program and Santander UK s (I AM Risk) are consistent, focusing on individual responsibility. EY 126

131 Operations, Infrastructure and Shared Services 14. Operations, Infrastructure and Shared Services Introduction This section assesses changes being made to enable Santander UK, ANTS and SLB to support their future operational requirements, given the transfer of business and products as a consequence of the Scheme. An operating model underpins a bank s ability to provide its product and services (e.g. processing payments, online banking and complaints handling) and interact with counterparties, in order to achieve its strategic goals. Any deterioration to the performance of the operating model could result in the bank not meeting the expectations of its customers and counterparties. Components of an operating model consist of people, infrastructure, services plus processes and controls. There are a number of changes in the way that operations teams, processes, IT systems and infrastructure work and are set up across Santander UK (the RFB), Banco Santander and SLB. These are to enable the various operations teams to support the transferring business with the right tools, systems and controls. These can broadly be summarised as follows: Enhancements to the Corporate and Commercial Banking operating model, to support the permitted transactions and products that are transferring from ANTS to Santander UK; Enhancements to the CFO and Treasury operating model, to manage the liquidity and risk management needs of Santander UK (the RFB) within the Treasury function; Significant enhancements are being completed to current operations, systems and the internal supplier service model within SLB. Once set-up this will enable it to process and support the new customers and products transferred under the Scheme; and Banco Santander operations in Madrid, as the centre of the global operations and IT infrastructure for the Banco Santander Group, is setting-up the configuration and alignment of systems and processes, to support specific requirements of certain UK products that it will in the future be processing through SLB. Figure 11: Ring-Fenced Bank and Banco Santander (including SLB) areas of focus Source: The Ring-Fencing Plan EY 127

132 Operations, Infrastructure and Shared Services Approach to assessing Operations, Infrastructure and Shared Services Assessment areas In assessing the effect of the Scheme on such a large and complex operational and technical environment, I have focused my work on the changes to those areas that are more likely to have an effect on groups of persons (and the performance of those areas) rather than an analysis of every detailed change (e.g. between systems used in the UK and Spain that perform the same function, or between teams of people organised differently but who perform the same tasks). In completing my assessment, I have grouped detailed tests into the following four key areas against which I am reporting my findings in this Scheme Report: Table 56: Operations, Infrastructure and Shared Services assessment areas Assessment area Description Overall operational and technical (IT) structures and data To understand whether all required services and products will be made available through the infrastructure of Santander UK, SLB and/or in Banco Santander in Spain. Changes to important or critical processes The ability for customers to access products and services e.g. directly through a digital platform, via a call centre, through a RD, or through a Corporate Centre. Any changes to the quality and availability of services and products to customers, for example availability of online banking and levels of system outage, or the target response times to customer queries. Performance of the new operations and IT structures Comparing the performance indicators used across operations and technology to assess performance and manage operational risk of failures and losses of products, services, systems, suppliers, critical processes and core infrastructure (the physical hardware). Supplier arrangement(s) Any changes to the existing service model, including the use of centralised processing and technology teams run in-house and the use of any major suppliers who provide critical services that could affect customers. EY 128

133 Operations, Infrastructure and Shared Services My conclusions are supported by the information and analysis summarised below: Information and documentation reviewed, supported by extensive meetings and workshops with senior IT and operations management in Santander UK, SLB and Banco Santander together with implementation leadership for the Ring-Fencing Programme in each business area: Details of proposed IT architecture for Santander UK (the RFB) and SLB; TOMs for divisions within Santander UK (the RFB) and the RFB Sub-Group where there will be change (including SGCB and the CFO Division highlighting the future state functions); Target state operating models for SLB (including several divisional TOMs for front, middle and back office operations as well as details of critical compliance processes); TOM for specific areas changing as a consequence of the Scheme: Santander UK Link Desk (a new multi-product low risk desk is being set-up by Santander UK under the title of a Link Desk. This will offer corporate customers access to permitted products, which include plain vanilla interest rate derivatives, currency swaps and European foreign exchange (FX) options) including: proposed technology architectures, front-to-back operating models, booking perimeters, clearing and settlement arrangements and internal accounting treatments; Santander UK short-term markets (STM) desk and supporting changes, including: technology architectures, front to back operating models, clearing and settlement arrangements and internal accounting treatments and the associated operational support required in the middle and back office; and Santander UK Treasury middle office (MO) TOMs and resourcing plans; Santander UK Treasury MI and controls function TOMs and resource plans; Documented details of the payment arrangements Santander UK is making to enable isolation of ANTS from Santander UK (the RFB) from a payments perspective; Proposed KPIs and SLAs between Santander UK, ANTS, SLB and Banco Santander as part of the Service Model performance management, highlighting if there are any changes from the current KPIs and service levels; As-is and to-be Servicing Models for Santander UK, ANTS and Banco Santander (including the SSCs); The Design Integrity Document, produced by the Ring-Fencing Programme, to outline the full extent of changes required as a result of the ring-fencing legislation; and Implementation plans for changes to Santander UK (the RFB), SLB and Banco Santander. There are a number of areas where it has been stated that there will be no change to the current operating model or technical architectures that support business functions e.g. in Retail and Business Banking. To validate the accuracy of these statements, I have reviewed the following: The Ring-Fencing Plan, to ensure no changes are documented or proposed; The Design Integrity Document, produced by the Ring-Fencing Programme, to outline the full extent of changes required as a result of the ring-fencing legislation; Implementation plans, where implementation activity to deliver changes is set out; Future product catalogue to ensure that no changes are documented or proposed; and Technical and functional architectures to ensure there are no changes to the way products and services operate or perform. EY 129

134 Operations, Infrastructure and Shared Services I reviewed related areas of change to gain confidence that these were not contrary to the requirements on technology and operations caused by the business transfers under the Scheme. These included the changes to SSCs being made under a Business As Usual (BAU) project, changes to payments infrastructure being made for CAL customers (to remove the dependence on Royal Bank of Scotland plc (RBS) for clearing) and changes being made to isolate Crown Dependencies business (see Part 5 for more detail). Additional assessments carried out on SLB operations, technology and shares services plans: The transfers of business from Santander UK and ANTS to SLB under the Scheme will require significant enhancements to the SLB operating model and the operations which will leverage the Banco Santander business. I have assessed the technology infrastructure being put in place for these changes and the associated supporting operations assistance required from Banco Santander. Banco Santander has provided detailed TOMs for SLB and the supporting functions, including technology architectures, individual TOMs for each functional area, clearing and settlements arrangements and the set of KPIs which will be used to manage the business. These have provided the basis for detailed discussion with senior project staff and a number of senior staff from within SLB and Banco Santander. From this documentation provided I have been able to make assessments for the areas outlined in the Table 56 above. Technology enablement The technology infrastructure in SLB that will be required to support the transferring business is not the same as that currently in use in SLB within ANTS and Santander UK. Instead, it will be based on the infrastructure of Banco Santander. I have reviewed the proposed technology infrastructure, based on architectures provided by Banco Santander, to establish whether the new technology will be able to support the transferring business and the degree of change required to achieve this. The majority of the systems proposed are different instances of the same systems that are already in use in Santander UK and ANTS, hence only configuration changes are required. Hence, in these areas, I have concluded that the infrastructure will be able to support the transferring business. There are a second group of systems where functionality is provided by technology not in use in Santander UK and ANTS, but where, with limited change, the systems will be able to support the transferring business. In these areas I have concluded that the infrastructure will be able to support the transferring business. Performance of the new operations I have reviewed any changes between current and proposed KPIs and MI which will be used to manage the performance of the enhanced SLB operation and IT infrastructure. These provide the information by which management assess the effectiveness of the business and enable control over key customer interactions (such as effectiveness of settlement processes). I have been provided with the KPIs used in SGCB s Active Business Management (ABM) dashboards and also the same material for SLB, as well as more detailed metrics for operations and MO. Through reviewing the material above I have established that the same KPIs will be used for the transferring business as at present and hence the performance of the new operations will be managed to the same standards as at present. EY 130

135 Operations, Infrastructure and Shared Services Summary of findings and conclusions Primarily, in relation to the provision of products and services to retail and the majority of corporate and commercial customers, I have concluded that there will be no changes being made in Santander UK to operations, technology or the service model as a consequence of the Scheme. As a result of the transfers of business from ANTS and Santander UK to SLB, there are a significant number of changes to SLB s current operational and IT operating models, where currently there is limited operational capability and IT systems. Table 57 below summarises my findings: Table 57: Changes to Operations, Infrastructure and Shared Services as a consequence of the Scheme Business division Description Overall operational and technical (IT) structures and data Changes to important or critical processes Performance of the new operations and IT structures Supplier arrangement(s) Retail and Business Banking Retail and Small Business Banking. No change for customers as a result of the Scheme. Corporate and Commercial Banking For the majority of customers of corporate and commercial there will be no change as a result of the Scheme. For customers whose products and services were previously provided by ANTS there will be change. CFO & Treasury In order to comply with ringfencing legislation, it is necessary to separate the OLM function within the Short-Term Markets team and provide it with operational readiness to transact as Santander UK rather than ANTS (reporting to the CFO). This will affect counterparties whose transactions with ANTS will now be with Santander UK. SLB As a consequence of the transfer of business to SLB under the Scheme, the Banco Santander Group is enhancing the Spanish instance of Global IT Architecture and processes and controls to enable SLB to support the business transferred. Note: the work I have undertaken and confirmation provided by senior Banco Santander Group stakeholders confirmed that there are no changes to supplier arrangements as a consequence of the Scheme. However, as a consequence of the changes being made to comply with the ring-fencing legislation, there are a number of supplier contractual arrangements which will need to change to reflect the correct legal entity post-implementation of the Scheme. These are being managed though a separate project, more detail can be found in Part 5. EY 131

136 Operations, Infrastructure and Shared Services Changes to Operations, Infrastructure and Shared Services covering Santander UK (the RFB) Retail and Business Banking Findings and conclusions The operating model of Santander UK (the RFB) is almost entirely set up to support the Retail and Business Banking and Corporate and Commercial divisions of Santander UK (the RFB). Hence there is no change required to the majority of the operations and technology of Santander UK (the RFB). There are however some specific changes that need to be made to enable Santander UK (the RFB) to continue to provide the products and services required to meet its customer needs as well as its regulatory obligations, specifically around products and services moving from ANTS to Santander UK. These are detailed below in my findings and conclusions. Changes with adverse effects I have identified no changes that as a consequence of the Scheme will have an effect, adverse or otherwise, on groups of persons covered by this Scheme Report. EY 132

137 Operations, Infrastructure and Shared Services No change The following summarises the areas where I have assessed there will be no change to groups of persons as a consequence of the Scheme. Table 58: No change Assessment area Conclusion Overall operational and technical (IT) structures and data No changes identified. As a consequence of the Scheme there is no requirement for the Santander UK Group to change the existing Operating Model for Retail and Business Banking. Changes to important or critical processes No changes identified. Following the review of the Ring-Fencing Programme s implementation plans and associated documentation, I am able to conclude that there will be no change as a consequence of the Scheme and hence, no effect on Retail and Business Banking customers. Performance of the new operations and IT structures No changes identified. Following the review of the Ring-Fencing Programme s implementation plans and associated documentation, I am able to conclude that there will be no change as a consequence of the Scheme and hence, no effect on Retail and Business Banking customers. Supplier arrangement(s) No changes identified. Following the review of the Ring-Fencing Programme s implementation plans and associated documentation, I am able to conclude that there will be no change as a consequence of the Scheme and hence, no effect on Retail and Business Banking customers. EY 133

138 Operations, Infrastructure and Shared Services Changes to Operations, Infrastructure and Shared Services covering Santander UK (the RFB) Corporate and Commercial Banking Findings and conclusions Through the SCCB and SGCB divisions, the Banco Santander Group provides wholesale banking products and services to its corporate and commercial banking customers from both Santander UK and ANTS. ANTS is currently the booking entity for the majority of the wholesale banking and markets business of SGCB and elements of the corporate banking business of SCCB. It also issues short-term debt securities as part of the treasury and liquidity management activities of the CFO division and holds the liquid assets as part of the liquid asset buffer (LAB). As part of the Ring-Fencing Plan, Santander UK will retain almost all permitted wholesale business within the RFB. Hence, business will be transferred from ANTS to Santander UK (the RFB) as part of the Scheme. Prohibited business in Santander UK and ANTS will be transferred to SLB. To support the business transfers, a number of changes to the operating model of the Corporate and Commercial banking are required. The key changes as a result of this are set out below. Changes with adverse effects I have identified no changes that as a consequence of the Scheme will have adverse effects on groups of persons covered by this Scheme Report. Changes with no adverse effects I have identified changes as a consequence of the Scheme that will not result in an adverse effect on any group of persons covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that some groups of persons will be affected, but not adversely affected, as a consequence of the Scheme. EY 134

139 Operations, Infrastructure and Shared Services Table 59: Changes with no adverse effects Overall operational and technical (IT) structures and data Establishment of a Link Desk to support Rates, FX, Retail Structured Products and XVA (risk management) Description of the change To support business currently undertaken in ANTS, Santander UK (the RFB) will offer permitted client derivatives (plain vanilla interest rate derivatives, currency swaps, European FX options within the market risk constraints set out in the EAPO) to corporate customers through the establishment of a permitted derivatives desk in Santander UK (the RFB), that will include an X-Value Adjustment (XVA) desk. A new multi-product low risk desk is being set up, under the title of a Link Desk which will be responsible for operating these services from Santander UK (the RFB), with market risk back-to-back transferred to Banco Santander. The Link Desk will encompass the following desks Rates (excluding Market Making), FX, Structured Notes Programme (SNP) activity only, and XVA. As a consequence, the Link Desk will be operating under a Derivatives cap which will restrict the level of open business i.e. no market marking activity will be carried out. At the time of writing the Link Desk is operational for new business and related activities are on track to be set-up in line with the implementation plans (see section 5.6 for further detail of my assessment of key milestones and implementation risk). Why is the change not adverse? For the business transferring from ANTS to Santander UK, a new multi-product low risk desk has been set up, under the title of a Link Desk. I have assessed the technology infrastructure being put in place to enable the new Link Desk to operate and the associated operational support required in the middle and back office. To do this I have reviewed the TOM for the new desk including: proposed technology architectures, front to back operating models, booking perimeters, clearing and settlement arrangements and internal accounting treatments. The TOM provided the basis for detailed discussion with senior project staff and the Head of Wholesale Technology & Operations Banking Reform. The creation of the Link Desk is an internal change for Santander UK to distinguish permitted and prohibited business. Following completion of my review I found that there is no requirement for new systems to be implemented to support the new Link Desk, within the Santander UK IT architecture. The technology being used to support the Link Desk is the same as that currently used in ANTS, requiring only configuration changes to enable booking to the correct entities. Hence, I am able to conclude that the technology provided will enable the same products and services to be offered to customers as at present. The new Link Desk will also require enhancements to operations functions within Corporate and Commercial Banking. Santander UK has set out the required changes which will be implemented in advance of any transfers. My conclusion Having reviewed the most recent programme status reports and understood the delivery timeline, I am satisfied that at the time of writing this report these changes are on track to be implemented in time for the Link Desk to be operational by the first legal effective date of the Scheme. I am satisfied that the work done to differentiate permitted products offerings for wholesale banking via the creation of the Link Desk is required and an effective solution to enable Santander UK (the RFB) to provide access to and maintain quality and performance of services. I have concluded that the introduction of the Link Desk will not affect customers or counterparties in any way, on the basis that it is implemented as planned and within the deadlines set out by the Ring-Fencing Programme. EY 135

140 Operations, Infrastructure and Shared Services Table 60: Changes with no adverse effects Changes to important or critical processes Third party membership and payments Description of the change For cash payments, Santander UK will need to change the legal ownership of Business/Bank Identifier Codes (BICs) from ANTS to Santander UK. This will ensure there will be no change in Payment Instructions/Standard Settlement Instructions (SSIs) for existing Santander UK customers. ANTS will use its own BIC. ANTS customers that are transferring to Santander UK under the Scheme will need to update their SSIs due to the changes in the account numbers. Why is the change not adverse? The Ring-Fencing Programme has provided documented detail of the payment arrangements it is making to enable isolation of ANTS from the RFB from a payments perspective. This includes the detail of changes for customers transferring from ANTS to Santander UK. Based on this information and detailed discussion with senior Ring-Fencing Programme management I have been able to make the following assessments: Santander UK will ensure it has relationships with relevant cash agents, interbank payment systems and clearing houses to enable continuity of services; For cash payments, Santander UK will be changing the legal ownership of the BIC from ANTS to Santander UK which ensures there is no change in Payment Instructions/SSIs for the existing Santander UK customers. This has been agreed with SWIFT and is an administrative change, rather than requiring changes to contracts. SWIFT have agreed in principle that Santander UK can proceed with the change as proposed; For transferring customers the ANTS BIC will remain unchanged. However account numbers will change, meaning a change to the SSIs for these customers will be required; and This change is unavoidable given the transfer of business and is not an unusual nor onerous change for corporate customers who, in my experience, are typically adept at making administrative changes on their own systems and documentation as part of BAU from time-to-time and would not consider this to be an onerous change or overhead. My conclusion I am satisfied that the approach to change BIC ownership was reasonable considering it results in no disruption for existing Santander UK clients and only affects transferring customers from ANTS, where the change required is administrative in nature and would not be considered as an overhead or to be onerous. It is a change required as a consequence of the Scheme that will affect a number of customers and require some action. However, I have concluded that the level of change is such that it does not cause an adverse effect. EY 136

141 Operations, Infrastructure and Shared Services No change The following summarises the areas where I have assessed there will be no change to groups of persons as a consequence of the Scheme. Table 61: No change Assessment area Conclusion Performance of the new operations and IT structures There will be no changes in the performance of critical services and operations as a consequence of the Scheme. Supplier arrangement(s) There will be no changes in supplier arrangements as a consequence of the Scheme. EY 137

142 Operations, Infrastructure and Shared Services Changes to Operations, Infrastructure and Shared Services covering Santander UK (the RFB) CFO Division and Treasury Findings and conclusions Currently, the OLM function is organised as part of the STM desk of the SGCB division within ANTS. This group provides liquidity management services to Santander UK. The OLM group operates under a SLA with a reporting line to the Santander UK CFO, with accountability residing with the CFO division in Santander UK. The Ring-Fencing Programme will transfer the OLM desk from ANTS into a new function within the CFO Division in Santander UK (the RFB). This will align the ownership, control and execution of the RFB Sub- Group s requirements under the direct control of the Santander UK CFO Division. Changes with adverse effects I have identified no changes as a consequence of the Scheme that will have adverse effects on groups of persons covered by this Scheme Report. Changes with no adverse effects I have identified changes as a consequence of the Scheme that will not result in an adverse effect on any group of persons covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that some groups of persons will be affected, but not adversely affected, as a consequence of the Scheme. EY 138

143 Operations, Infrastructure and Shared Services Table 62: Changes with no adverse effects - Overall operational and technical (IT) structures and data Transfer of the OLM function from ANTS to Santander UK Description of the change The OLM management function of STM will no longer operate under a SLA between ANTS and Santander UK, but will have a direct reporting line to the CFO of Santander UK (the RFB). The OLM desk will be the key interface for front office operations of the RFB Sub-Group with the Bank of England. The Santander UK Group will create an OLM desk framework in Santander UK (the RFB), integrating STM in the CFO division, and ensuring: A front to back integrated OLM model will be implemented in Santander UK (the RFB), including the facilitation of payments, through posting and management of collateral into payment systems and repo transactions as part of LAB management; and Third Party Memberships will be enabled to support continuity of business activities (clearing, settlement and custody), in particular considering the majority of memberships are in name of ANTS and those will be set up in name of Santander UK (the RFB). The technology and infrastructure services that will be used to support the OLM is the same as that used for current CFO Division and Treasury functions. A system configuration change is required to enable booking of trades to Santander UK (the RFB) instead of ANTS. However, the IT systems already have the capability to support the change and no additional software is required. These systems will interact with clearing and settlement systems in the same way as at present and will be supported by the same middle and back office systems as at present. Why is the change not adverse? The transfer of the OLM function under the direct control of the CFO requires changes to the operating model and technology of the CFO Division and Treasury function. I have assessed the technology infrastructure being put in place for this and the associated operational support required in the middle and back office. The Ring-Fencing Programme has provided a TOM for the new STM desk and supporting changes, including: technology architectures, front-to-back operating models, clearing and settlement arrangements and internal accounting treatments. The TOM provided the basis for detailed discussion with senior project staff and the Head of Technology and Operations (T&O) Treasury. The change is predominately to enable Santander UK (the RFB) to be selfsufficient in performing all Treasury related functions (critical functions). The ring-fencing legislation requires this to be within Santander UK (the RFB) and therefore this transfer is required. A front to back integrated OLM model will be implemented in Santander UK (the RFB), including the facilitation of payments, through posting and management of collateral into payment systems and repo transactions as part of LAB management. The technology infrastructure that is required to support the new desk is the same as that already in use within SGCB. The only changes required are those to support booking of trades into a different legal entity and alignment of books within Santander UK (the RFB). The technology infrastructure will be able to support the business being transacted under the changed legal entity. There are no fundamental changes in the way the OLM desk will function when compared to today. Existing support teams in Santander UK will continue to support the function as they do today. My conclusion Following my review of the proposed transfer of the OLM function, I am satisfied that the move will not adversely affect counterparties in any way. EY 139

144 Operations, Infrastructure and Shared Services Table 63: Changes with no adverse effects Overall operational and technical (IT) structures and data and changes to important or critical processes Expanded role of the Middle Office within the CFO Division Description of the change Santander UK will be expanding the Treasury middle office (MO) function to support all CFO Division front office desks, delivering complete MO support in Treasury, particularly considering full servicing of STM and OLM but also shortterm funding (STF) and ALM (Asset and Liability Management). Why is the change not adverse? There are revised operating models, processes and resourcing plans in place to address this requirement. I have reviewed these and have concluded that these will provide the necessary MO support in Treasury, particularly considering full servicing of STM and OLM but also STF and ALM. I am satisfied that Santander UK has taken the decision to expand the MO to enable it to maintain the existing service levels for counterparties. This is currently planned to be in place by Q and following a review of the implementation plan, review of project status report and discussion with the project manager, I am satisfied that the changes are on track to be implemented to plan. My conclusion I have concluded that, on the basis set out above, I have identified no adverse effect on customers and counterparties as a consequence of this change. Table 64: Changes with no adverse effects Overall operational and technical (IT) structures and data Enhanced Management Information and Controls Description of the change Santander UK will be expanding the Treasury MI and Controls function to support all CFO Division front office desks. Why is the change not adverse? The addition of the STM desk requires enhancements to the MI and Controls function within CFO and Treasury. There are revised operating models and resourcing plans in place to address this requirement, which I have reviewed, and I have concluded that these will provide the necessary support for the business transferred. I am satisfied that Santander UK has taken the decision to expand the control functions and supporting MI to enable it to maintain the existing levels of control and governance over the function. Skills will be transferred and enhancements made to reporting by Q1 2018, and I see no risk to that deadline being met. My conclusion I have concluded that, on the basis set out above, I have identified no adverse effect on customers and counterparties as a consequence of this change. EY 140

145 Operations, Infrastructure and Shared Services No change The following summarises the areas where I have assessed there will be no change to groups of persons as a consequence of the Scheme. Table 65: No change Assessment area Conclusion Performance of the new operations and IT structures There will be no changes in the performance of critical services and operations as a consequence of the Scheme. Supplier arrangement(s) There will be no changes in supplier arrangements as a consequence of the Scheme. EY 141

146 Operations, Infrastructure and Shared Services Changes to Operations, Infrastructure and Shared Services covering SLB Findings and conclusions In order to support the business transferring to SLB under the Scheme, the Banco Santander Group is enhancing the operational and IT infrastructure, processes and controls in SLB. SLB will largely leverage existing operational processes and global IT infrastructure already in place within Banco Santander and Santander UK, in order to retain the existing level of customer support and experience for transferring customers, thereby limiting the effect of the transfers to a minimum. To achieve this, there is a significant programme of work underway to configure and enhance systems, processes and operational capability to enable SLB to provide the products and services to at least the same level of performance that relevant customers and counterparties receive today from Santander UK and ANTS. I have reviewed (through detailed workshops with Santander UK, ANTS and Banco Santander and SLB functional leads across all functions) detailed TOMs, process gap analysis, organisation design and implementation plans, to validate that the appropriate systems and controls have been designed and are being implemented to enable a fully capable SLB to meet the requirements of the business transferring to SLB under the Scheme. Further details are provided in Changes with adverse effects I have identified no changes as a consequence of the Scheme that will have adverse effects on groups of persons covered by this Scheme Report. Changes with no adverse effects I have identified changes as a consequence of the Scheme that do not result in an adverse effect on any group of persons covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that some groups of persons will be affected, but not adversely affected, as a consequence of the Scheme. Table 66: Changes with no adverse effects Changes to important or critical processes Security Settlement and Payment Instructions Data Description of the change For cash payments and securities settlement, there will be change of payment and settlement instructions. ANTS and Santander UK customers that are migrating to SLB will need to update their SSIs to reflect this change. Why is the change not adverse? I am satisfied that Santander UK could not have avoided the change of SSIs for most of the migrating customers which is inherent with change of the legal entity. I have concluded that this is not a significant change and Santander UK has indicated that they will be including the new SSIs in their customer communication plans to the affected customers. My conclusion On the basis that the affected customers are advised of the new SSIs in the timely manner, I am satisfied that this change will not have an adverse effect on customers. EY 142

147 Operations, Infrastructure and Shared Services Table 67: Changes with no adverse effects Overall operational and technical (IT) structures and data Overall operational and technical (IT) structures and data Description of the change SLB will offer prohibited derivatives, prohibited lending products and permitted derivatives above the ring-fencing caps. It will also provide Gilt-Edged Market Maker (GEMM) and gilts products, prohibited STM products, Rates market making and Financial Institution Group (FIG) coverage. In order to support the above products and business activities, there will be a transfer of front office functions, the dedicated support services (including MO and control functions), as well as establishment of leveraged functions. Furthermore, SLB will continue to utilise the shared operational support services from SBGM (which is already providing operational support to Banco Santander (including the current SLB)). As part of enabling SLB, the programme will need to ensure: Front to back integrated booking model for prohibited products and services in SLB; Enablement of market platforms (incl. risk infrastructure) in Banco Santander and SLB; Apply for/transfer the relevant memberships required for new activities; and Accounting and operational configuration (including regulatory reporting). Why is the change not adverse? I am satisfied that the work undertaken to enable SLB was necessary for the implementation of the Scheme and to separate prohibited products and clients from Santander UK (the RFB). Based on my review of SLB enablement plans and several discussions with the Banco Santander implementation leader, I have concluded that Banco Santander has comprehensive plans in place to enable SLB for the movement of prohibited products and clients under the Scheme. Following a review of the implementation plan, review of project status report and discussion with the project manager, I am satisfied that the changes are on track to be implemented to plan including enablement work which was completed to the planned target of 2 January 2018, such that new business for transferring products can be booked in SLB from that date. In my review of several divisional TOMs for SLB, it has been highlighted where existing operational processes from Santander UK and Banco Santander are being leveraged to reduce execution risk and make best use of existing expertise and processes. See for further details of documents reviewed and tested as part of reaching my conclusions. My conclusion I have concluded that on the basis set out above, I have identified no adverse effect on customers and counterparties as a consequence of this change. EY 143

148 Operations, Infrastructure and Shared Services Table 68: Changes with no adverse effects Overall operational and technical (IT) structures and data Technology Enablement Data Description of the change SLB will utilise the technology infrastructure currently in use within Banco Santander. For the front office, these are different instances of the systems currently used within SGCB in ANTS and Santander UK the exceptions being related to Flame and Loan IQ (discussed below). Consequently the changes required to enable SLB are minimal. At present some customers are able to access valuations online using an application called Flame. This functionality is not currently available in the Banco Santander front-office infrastructure, but is planned to be implemented in SLB to provide continuity of service, once relevant customers are migrated to the SLB instance of Flame. A number of loans to SCCB customers will transfer to SLB, specifically onto the Loan IQ and Trade Innovation systems. This may affect up to 10 customers. The loans are currently supported on the ALFA system, and whilst this is a different system than the target, analysis has been undertaken to confirm that for the transferring loans the target systems can support servicing of these loans. The systems supporting Middle and Back Office functions will similarly use the Banco Santander infrastructure. In this area there are differences in the applications in use between Santander UK and Banco Santander. However changes are being made such that the systems are able to support the products and services being transferred. Why is the change not adverse? I am satisfied that the work underway to enable SLB branch was necessary for the implementation of the Scheme and to separate prohibited products and clients from Santander UK (the RFB). Whilst the bulk of the changes required are configuration changes, there are some coding changes required (particularly to enable multi-entity reporting in some back office systems). However, these have been designed to support the as-is products and services provided to customers. Hence, if implemented in-line with plans, this will not lead to an adverse effect. I have reviewed SLB enablement plans and I have concluded that these plans are comprehensive and that at the time of writing the enablement work is on track. See above for further details of documents reviewed and tested as part of reaching my conclusions. My conclusion I have concluded that, on the basis set out above, there will be no adverse effect on customers and counterparties as a consequence of this change. EY 144

149 Operations, Infrastructure and Shared Services No change The following summarises the areas where I have assessed there will be no change to groups of persons as a consequence of the Scheme. Table 69: No change Assessment area Conclusion Performance of the new operations and IT structures No changes identified. The revised SLB operation will have a comprehensive set of KPIs specific to SLB and covering all of the principal areas of operation. I have reviewed these KPIs to establish whether there is a risk of changes to the performance of services which will affect groups of persons. Based on my discussions with Banco Santander, and the documentation I have been provided with, it is evident that Banco Santander is intending to retain the existing level of KPIs. In the event of any deviations from current KPI benchmarks, Santander will perform the root cause analysis to understand and remediate any issues. Banco Santander has confirmed that they will maintain the same KPIs and service levels, as those used in Santander UK today, as key management controls. I have therefore concluded that customers or counterparties will not be adversely affected, given that there will be no changes in the performance of critical services and operations. Supplier arrangement(s) No changes identified. As a consequence of the Scheme, there are no changes in the supplier arrangements or services model. Note: see Part 5 for details of changes to supplier arrangements being made outside of the Scheme. EY 145

150 Recovery and Resolution, Operational Continuity and Creditor Hierarchy 15. Recovery and Resolution, Operational Continuity and Creditor Hierarchy Introduction The proposed transfer of business between entities under the Ring-Fencing Plan, including the Scheme, may affect the areas of recovery and resolution planning, operational continuity arrangements and the creditor hierarchy of the relevant entities involved. These are areas that I have considered when answering the Statutory Question. The PRA Statement of Policy (March 2016, paragraph 5.8) is explicit in this regard: In making this judgement, the skilled person may consider whether the transfer results in a material deterioration in: the quality of the operational continuity arrangements of the entities to which those persons are exposed or connected and the ability of the entities to continue to provide core services to those persons the ability of the group to be resolved and the strength of resolution planning in place the robustness of recovery planning and the position of persons other than the transferor in the creditor hierarchy This section assesses how the Ring-Fencing Plan, including the Scheme, may affect the areas of recovery and resolution planning, the quality of operational continuity arrangements and the creditor hierarchy of relevant Santander entities. In order to assist, the following diagram summarises how a bank operates under normal circumstances (top left Target operating range) and how, in the event of a stress event, it may migrate down a slope towards insolvency (bottom right Resolution). Figure 12: Role of recovery and resolution planning Upper end of operating range Current Capital/ liquidity ratios Lower end of operating range Crisis threshold (capital or liquidity) Failure threshold Capital and liquidity ratios Target operating range Reverse stress testing indicates environmental backdrop CCAR/ICAAP/Recovery planning requirements Stress testing Analyze potential impact of stress scenarios and risk mitigation options Stress buffer Gap to crisis Identify point of non-viability Further stress testing Identify potential crisis/failure scenarios; demonstrate strength of capital/liquidity position Recovery zone Resolution Risk appetite calibration The amount of risk that the firm is willing to accept given target capital/liquidity positioning Risk capacity analysis The maximum amount of risk that can be borne given current capital/liquidity levels Recovery plan Plan for potential recovery actions to address severe stresses Resolution plan Support resolution planning by the RA so as to facilitate effective resolution action and post-resolution restructuring Time Risk appetite inputs Recovery and Resolution plan (RRP) During stress situations, recovery plans provide options for a bank to return to financial strength, whereas resolution plans provide information to support the strategy for dealing with a bank failure. Without sufficient planning, a bank could fail when stressed, interrupting the product/service offerings and meaning that creditors may not receive the payments that are due to them. The ability of a bank to ensure continuity of critical shared services that are necessary to maintain a bank s critical functions in resolution is referred to as operational continuity. The creditor hierarchy refers to the order in which different classes of creditors receive funds during insolvency proceedings. If a creditor s position in the hierarchy falls, it will be more uncertain whether they will receive the payments that are due to them from the bank, should the bank become insolvent. EY 146

151 Recovery and Resolution, Operational Continuity and Creditor Hierarchy Approach to assessing recovery and resolution, operational continuity and creditor hierarchy In assessing the effect of the Ring-Fencing Plan, including the Scheme, on recovery and resolution planning, operational continuity and the creditor hierarchy, I have considered the following assessment areas which would highlight adverse effects on groups of persons as a consequence of changes made. Table 70: Recovery and resolution, operational continuity and creditor hierarchy assessment areas Assessment area Description Overall robustness of recovery planning Since the financial crisis, each of the EU and UK banks has been required to develop a recovery plan, which explains the actions it would take under a number of stress situations, in order to return to a position of financial strength. As regards to the Santander UK Group and the Banco Santander Group, assessments have been undertaken considering: Changes to recovery planning in the Santander UK Group and the Banco Santander Group (including governance arrangements, how these processes are operationalised and owned); and Any effects of the Ring-Fencing Plan, including the Scheme, on recovery options, indicators and scenarios and capacity. Ability to be resolved and the strength of resolution planning Resolution packs provide information required to support the preferred plan for dealing with a bank that is failing or is likely to fail. As regards to the Santander UK Group and the Banco Santander Group, assessments have been undertaken considering: Changes to resolution planning in the Santander UK Group and the Banco Santander Group (including governance arrangements, how these processes are operationalised and owned); Changes to the ability of the Santander UK Group and the Banco Santander Group to make regulatory submissions in good time, detail supporting the preferred resolution strategy and that regulatory feedback is acted upon; and Any potential impediments to resolvability as a consequence of the Ring-Fencing Plan, including the Scheme, covering the legal entity structure, preservation of critical economic functions, resilience of critical service suppliers and levels of LAC. Quality of the operational continuity arrangements Operational continuity refers to the means of ensuring continuity of critical shared services that are necessary to maintain a firm's critical functions in resolution. It is a key aspect of resolution planning for individual firms. As regards to the Santander UK Group and the Banco Santander Group, assessments have been undertaken considering: Changes to operational continuity plans ensuring continuity of services and facilities; and Current service model, number of critical economic functions that exist with linkage to legal entity and underlying supplier (either internal or external), supported by contracts or SLAs or intra-group agreements (IGAs). Position of groups of persons other than the transferor in the creditor hierarchy A creditor hierarchy is an analysis of where creditors would rank in the event of an insolvency/resolution. As regards to the Santander UK Group and the Banco Santander Group, assessments have been undertaken considering: Changes from the current ranking of creditors in the hierarchy and how that ranking might change as consequence of the Ring-Fencing Plan, including the Scheme: As part of the assessment, I prepared a memorandum for creditors to outline how the creditor s classification would operate for respective creditors. Further details regarding insolvency ranking is detailed in Appendix 3. EY 147

152 Recovery and Resolution, Operational Continuity and Creditor Hierarchy My conclusions are supported by the information and analysis summarised below: Information and documentation reviewed, supported by extensive meetings and workshops with senior UK Company Secretariat team, UK Recovery and Resolution Office teams, Banco Santander Office of Recovery and Resolution teams, Operational Continuity project teams and Legal and Financial teams detailing the creditor hierarchy analysis, including the: The Ring-Fencing Plan; The Design Integrity Document; Santander UK Group June 2017 Recovery plan (RCP), which was submitted to UK and European Regulators; Santander UK Group June 2017 Resolution pack (RSP), which was submitted to UK and European Regulators; Operational continuity plans; Creditor hierarchy analysis; and Supporting project papers and source documentation. There is one Recovery and Resolution Plan (RRP) for the Santander UK Group and this forms part of an appendix of the RRP of Banco Santander (including SLB). Santander UK confirmed that following the implementation of the Ring-Fencing Plan, including the Scheme, this structure and arrangement will not change. Post-implementation RRPs have not been produced and will be produced after the financial year ended 31 December 2017, in line with the existing annual reporting cycle. Overall robustness of recovery planning I have reviewed the June 2017 RCP clarifying any developments to the governance arrangements and crisis management framework, and assessed the available options, early warning indicators, scenarios and capacity in given scenarios. I found that none of these will change as a result of the Scheme and will not be impacted by the Ring-Fencing Plan. The recoverability of Santander UK (the RFB), and by extension the wider RFB Sub-Group and ANTS, following implementation of the Scheme, will be comparable to that of the Santander UK Group currently. I have reviewed the Banco Santander Group governance arrangements and crisis management framework, and discussed available options, early warning indicators, scenarios and capacity in given scenarios which did not change as a result of the Scheme and will not be impacted by the Ring-Fencing Plan. The recoverability of SLB as a branch of Banco Santander will be comparable to that of its current status. In addition, those groups of persons transferring into SLB under the Scheme, will ultimately become a part of the Banco Santander balance sheet and so have standing comparable to that of Santander UK i.e. recourse directly to its parent entity, Banco Santander (being the ultimate parent of the Banco Santander Group). Ability to be resolved and the strength of resolution planning I have reviewed the June 2017 RSP, ensured that the proposed legal entity structure supports the preferred resolution strategy, confirmed levels of loss absorbing capital and that the continuity of critical economic functions (CEFs) in the event of resolution are aligned. I have checked Santander UK s modelling of resilience of critical service suppliers and SSCs. The resolvability of the RFB Sub-Group and ANTS will be comparable to that of the Santander UK Group currently. I have reviewed resolution documentation and discussed with Santander UK and Banco Santander management how the legal entity structure will support the preferred resolution strategy, the levels of loss absorbing capital, that the continuity of CEFs in the event of resolution are aligned, the resilience of critical services suppliers and SSCs has been reflected in resolution terms and that the Ring-Fencing Plan including the Scheme, does not create any barriers to resolution. The resolvability of Banco Santander (including SLB) will be unchanged and retain its current resolution strategy for the existing Santander UK Group. This will be independent of the RFB Sub-Group, as is the case currently. EY 148

153 Recovery and Resolution, Operational Continuity and Creditor Hierarchy Quality of the operational continuity arrangements I have reviewed the workstream plan for contracting and operational continuity, which forms part of the Ring-Fencing Plan. I have assessed the proposed service model structure, including SSCs, and viewed the assessment of criticality and operational and financial resilience data. I have reviewed information relating to existing contractual relationships across the group which has been made available, including SLAs and IGAs, third party suppliers and those deemed critical in nature. The quality of operational continuity arrangements for the RFB Sub-Group will be unaffected throughout implementation of the Ring-Fencing Plan, including the Scheme. I was able to confirm the applicable service model structure, including SSCs. The quality of operational continuity arrangements for Banco Santander (including SLB) are on a similar programme to that of Santander UK and will be an equivalent standard, based upon explicit Financial Stability Board (FSB) expectations for global systemically important banks (G- SIBs), including Banco Santander. The current arrangements will remain unchanged at a minimum, with ongoing enhancements planned in 2018 as part of Single Resolution Board (SRB) work priorities. Position of groups of persons other than the transferor in the creditor hierarchy An overview of the approach taken by the Santander UK Group was provided along with analysis underpinning a creditor hierarchy assessment. I have tested this information and calculated asset coverage across each class of creditor. Overall, the standing of Santander UK (the RFB) creditors following implementation of the Ring-Fencing Plan, including the Scheme, will be in a comparable position to that of their current standing as creditors in the Santander UK Group. I prepared a memorandum on the applicable laws that determine the application of assets in priority across creditors for both the United Kingdom and Spain (a summary of this has been provided in Appendix 3). An overview of the approach taken by Santander UK and Banco Santander was provided along with analysis underpinning a creditor hierarchy assessment. I have tested this information and calculated asset coverage across each class of creditor. Overall the standing of Banco Santander creditors following implementation of the Ring-Fencing Plan, including the Scheme, will be in a comparable position to that of their current standing as creditors in Banco Santander or of the Santander UK Group. EY 149

154 Recovery and Resolution, Operational Continuity and Creditor Hierarchy Changes to recovery and resolution, operational continuity and creditor hierarchy for Santander UK (the RFB) Findings and conclusions Having completed my assessment, I have concluded that groups of persons who will remain contracted or connected to, or are transferred to, Santander UK (the RFB) as a consequence of the Ring-Fencing Plan, including the Scheme, will not be adversely affected. Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have adverse effects on groups of persons covered by this Scheme Report. Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will not result in an adverse effect on any group of persons covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that all groups of persons will be affected, but not adversely affected, as a consequence of the Ring-Fencing Plan, including the Scheme. EY 150

155 Recovery and Resolution, Operational Continuity and Creditor Hierarchy Table 71: Changes with no adverse effects Position of groups of persons other than the transferor in the creditor hierarchy Position of groups of persons other than the transferor in the creditor hierarchy Description of the change Santander UK (the RFB) will have a different composition of assets and liabilities, which makeup its balance sheet, following the transfer of business. This is driven by the transfer of permitted business to Santander UK from ANTS and the transfer of prohibited business (and a small amount of permitted business) from Santander UK to Banco Santander or SLB. Overall, there will be a decrease in total assets and liabilities. For the purposes of the hierarchy, this reduction in assets and liabilities will not have a significant difference in the level of assets available to those creditors of Santander UK (the RFB). Why is the change not adverse? I have reviewed the creditor hierarchy analysis of Santander UK (the RFB) to ensure it reflected the correct starting balance sheet position for the relevant legal entities, as at 30 June The analysis was then reviewed to identify those permitted assets and liabilities transferring from ANTS to Santander UK and those prohibited assets and liabilities transferring from Santander UK to Banco Santander or SLB. A summary for each of these transitions was built to detail the destination for the respective business and enabled a post-scheme balance sheet for Santander UK (the RFB) to be constructed. I have assessed the ranking of those creditors and calculated the level of asset cover for each respective class of creditor, before and after the transfer of business. The output of my analysis is that existing creditors of Santander UK and creditors who will transfer to Santander UK (the RFB) under the Scheme, are unlikely to be adversely affected because: The ranking of creditors will remain the same for Santander UK (the RFB); and The level of assets available for each class of creditor will remain at least the same, or improved, for each class of creditor. My conclusion Following my analysis, I am satisfied that the resultant changes will not have an adverse effect on groups of persons covered by this Scheme Report. I have formed this conclusion having analysed the creditor hierarchy analysis, supporting documentation and completed a calculation of the levels of asset cover for a given class of creditor. Groups of persons will continue to rank as the same class of creditor were insolvency/resolution to occur. This would mean that any payment would be received in the same ranking. The resulting level of available assets means that asset cover will be at least comparable for every class of creditor. A large majority of Santander UK (the RFB) customers are retail clients with Financial Services Compensation Scheme (FSCS) deposit protection and they will continue to be protected. As such, in this circumstance there will be no change. EY 151

156 Recovery and Resolution, Operational Continuity and Creditor Hierarchy No change The following summarises the areas where I have assessed there will be no change to groups of persons as a consequence of the Ring-Fencing Plan, including the Scheme. Table 72: No change Assessment area Conclusion Overall robustness of recovery planning I have considered the implications of the Ring-Fencing Plan, including the Scheme, on the existing RCP and supporting arrangements. I have assessed that there will be no changes required or proposed to recovery planning or the recovery plan. There will be no change to the current RCP or recovery planning arrangements as a result of the Ring-Fencing Plan, including the Scheme, and therefore no effect on groups of persons connected with Santander UK. Ability to be resolved and the strength of resolution planning I have considered the implications of the Ring-Fencing Plan, including the Scheme, on the existing RSP and supporting arrangements. I have assessed that there will be no changes required or planned to the ability of Santander UK to be resolved, or to affect existing resolution planning arrangements. There will be no change to the current RSP or resolution planning arrangements as a result of the Ring-Fencing Plan, including the Scheme and therefore no adverse effect on groups of persons connected with Santander UK. Quality of the operational continuity arrangements There will be no change in the quality of the current operational continuity arrangements as a consequence of the Scheme. Note: Santander UK is implementing a wide ranging programme covering operational continuity and contracting which is due to be delivered in Q This is a result of Santander UK working toward a regulatory compliance date of 1 January 2019 for operational continuity PRA rules. These changes are a part of Banking Reform and will not be affected by the Ring-Fencing Plan, including the Scheme. EY 152

157 Recovery and Resolution, Operational Continuity and Creditor Hierarchy Changes to recovery and resolution, operational continuity and creditor hierarchy for Banco Santander (including SLB) Findings and conclusions Having completed my assessment, I have concluded that groups of persons who will be transferred to Banco Santander including SLB, as a consequence of the Ring-Fencing Plan, including the Scheme, will not be adversely affected. There will be no deterioration to the arrangements of Banco Santander (including SLB) following implementation of the Ring-Fencing Plan, including the Scheme, and those arrangements will be at least comparable to those of Santander UK and ANTS at present. Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have adverse effects on groups of persons covered by this Scheme Report. Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will not result in an adverse effect on any group of persons covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that all groups of persons will be affected, but not adversely affected, as a consequence of the Ring-Fencing Plan, including the Scheme. EY 153

158 Recovery and Resolution, Operational Continuity and Creditor Hierarchy Table 73: Changes with no adverse effects Position of groups of persons other than the transferor in the creditor hierarchy Position of groups of persons other than the transferor in the creditor hierarchy Description of the change Banco Santander (the RFB) will have a different composition of assets and liabilities, which makeup its balance sheet, following implementation of the Ring- Fencing Plan, including the Scheme. This is driven by the transfer of prohibited business, and a small amount of permitted business, from Santander UK and ANTS to Banco Santander and SLB. Overall, there will be an increase in the both the level of assets available and liabilities in Banco Santander. Why is the change not adverse? I have reviewed the Banco Santander creditor hierarchy analysis to ensure it reflected the correct starting balance sheet position as at 30 June The analysis was then examined to verify the detail of those prohibited assets and liabilities and excluded activities transferring from ANTS to Banco Santander or SLB, and those prohibited assets and liabilities, excluded activities and a small amount of permitted business transferring from Santander UK to Banco Santander or SLB. A summary for each of these transitions was built to outline the destination for the respective business and enable construction of a post-scheme balance sheet for Banco Santander. I was then able to assess the comparable ranking of creditors (other than the transferor) and calculate the level of asset cover for each respective class of creditor, both before and after the transfer of business. Given these changes, those existing creditors of Banco Santander and those creditors who will transfer under the Ring-Fencing Plan, including the Scheme, to Banco Santander and SLB, are not likely to be adversely affected because: The rank of creditors remains at least equivalent for those in Banco Santander; and Given that the resolution authorities have stated that the likely path in resolution for G-SIBs, such as Banco Santander, would be bail-in, I have considered that any bail-in action would not include ordinary creditors, in order to achieve the five resolution objectives. I also considered if as a result of the Scheme those creditors of Banco Santander were any closer to being bailed-in and, having calculated the likely levels of loss absorbing capital, concluded that the creditors will not face an increased risk of being bailed-in. The level of liabilities required to be bailed-in prior to affecting ordinary unsecured creditors remains consistent. My conclusion Following my analysis, I am satisfied that the resultant changes will not have an adverse effect on groups of persons covered by this Scheme Report. I have formed this conclusion having analysed the creditor hierarchy analysis, supporting documentation and completed a calculation of the levels of asset cover for a given class of creditor. Groups of persons continue to rank as an equivalent class of creditor were insolvency to occur, meaning that any payment would still be received in a comparable ranking. Groups of persons continue to rank as an equivalent class of resolution ranking, meaning that if the bail-in tool were to be implemented, these creditors would not be closer to suffering losses as a result of the transfer and Scheme. EY 154

159 Recovery and Resolution, Operational Continuity and Creditor Hierarchy No change The following summarises the areas assessed where I identified no change. Table 74: No change Assessment area Conclusion Overall robustness of recovery planning I have assessed the implications of the Ring-Fencing Plan, including the Scheme on the existing RCP, through review of documentation and exchanges with the team responsible for maintaining the Banco Santander Group RRP in Madrid. As a result, I have concluded that there are no changes required or proposed to recovery planning or the recovery plan. There will be no change to the current RCP or recovery planning arrangements as a result of the Scheme and therefore no adverse effect on groups of persons who are or will be connected with Banco Santander (including SLB). Banco Santander has equivalent planning arrangements in place, as these are prescribed to each jurisdiction from a parent company level (e.g. Banco Santander) and are comparable to those currently experienced in the Santander UK Group. Ability to be resolved and the strength of resolution planning I have assessed the implications of the Ring-Fencing Plan, including the Scheme, on the existing RSP, through review of documentation and exchanges with the team responsible for maintaining the Banco Santander Group RRP in Madrid, and as a result concluded that there are no changes required or planned to existing resolution planning arrangements or the RSP. The current resolution pack covers Banco Santander (including SLB). SLB is currently not classified as a material branch and postimplementation of the Scheme it will remain a non-material branch and thus no change is anticipated. There will be no change to the current RSP or resolution planning arrangements as a result of the Ring-Fencing Plan, including the Scheme, and therefore no adverse effect on groups of persons connected with Banco Santander (including SLB). Quality of the operational continuity arrangements There will be no change in the current operational continuity arrangements as a consequence of the Ring-Fencing Plan, including the Scheme. Note: for Banco Santander (including SLB) there is an equivalent standard, based on the FSB s expectations for G-SIBs and forms part of the requirements for SRB. Banco Santander (including SLB), being a G-SIB, has commenced a programme of work following SRB and FSB priorities and requirements respectively. Initial work has begun on SSC arrangements e.g. the inclusion of clauses in relevant supplier contracts ensuring a minimum of 36 months of continuity of services. EY 155

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161 Part 3 Findings and conclusions: Groups of customers EY 157

162 Introduction to findings and conclusions: groups of customers 16. Introduction to findings and conclusions: groups of customers Introduction This section of my report presents my findings and conclusions for all customers of the Santander UK Group and SLB. I have grouped my findings according to the following customer types: Section 17 Santander UK Group Retail Banking Customers; Section 18 Santander UK Group SME Customers (including ANTS SME Customers); Section 19 Santander UK Corporate Customers (non-sme) holding permitted products only; Section 20 ANTS Corporate Customers (non-sme) holding permitted products only; Section 21 Santander UK Corporate Customers (non-sme) holding permitted and prohibited products; Section 22 ANTS Corporate Customers (non-sme) holding permitted and prohibited products; Section 23 Santander UK and ANTS Specified Corporates; Section 24 Santander UK and/or ANTS Relevant Financial Institutions; Section 25 ANTS Exempt Financial Institutions; and Section 26 Other Customers (ANTS and SLB). For guidance on definitions of permitted products and prohibited products referenced in this section please refer to Appendix 6. For all customers, other than the small number of ANTS customers that ANTS does not expect to transfer, please see figure 13 which sets out the different types of customers with contractual relationships with the Santander UK Group and the associated Santander brands that they deal with. Customers who are a Specified Corporate in Santander UK or ANTS will be contacted by their RD or Santander banker by the date of the Directions Hearing (5 February 2018) to make them aware that they are a Specified Corporate. Refer to section 23 for more details. For customers who will remain with ANTS, they will have been contacted directly by their RD or Santander banker and should already be aware of their products and transactions that will be remaining in run-off in ANTS. Refer to section 26.1 for more details. EY 158

163 Introduction to findings and conclusions: groups of customers Types of customers or products moved under the transfers Figure 13 sets out, by types of customer, whether, under the terms of the Scheme, the customer or some of their products will be moving under one of the following transfers: Customers holding permitted products only from ANTS to Santander UK; Customers holding prohibited products from ANTS to SLB; and Customers holding prohibited products from Santander UK to SLB. Note: in addition, 66 Santander UK and ANTS Specified Corporate Customers ( Specified Corporates ) will have their permitted derivatives transferred to SLB. See section 23 for further details. EY 159

164 Introduction to findings and conclusions: groups of customers Figure 13: Retail and corporate customer types, and associated Santander brands EY 160

165 Introduction to findings and conclusions: groups of customers EY 161

166 Introduction to findings and conclusions: groups of customers Navigating Part 3 In addition, I have included figures 14(a)-(c) below, which set out a flowchart to help identify which of the sections each customer type should read to establish whether, and how, they may be affected by the changes as a consequence of the Scheme. There are separate flowcharts to read for customers of Santander UK and customers of ANTS. Therefore, if you are a customer of both Santander UK and ANTS, you should read both of the flowcharts and refer to each relevant section in this Scheme Report. Figure 14a: Navigation to specific sections of Part 3 EY 162

167 Introduction to findings and conclusions: groups of customers Figure 14b: Navigation to specific sections of Part 3 EY 163

168 Introduction to findings and conclusions: groups of customers Figure 14c: Navigation to specific sections of Part 3 EY 164

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170 Introduction to findings and conclusions: groups of customers Approach to assessing the effect of the Scheme on customers of the Santander UK Group Assessment areas In assessing the effect of the Scheme on customers, I have considered the following assessment areas (outlined in Table 75 below) where potential changes could affect customers. This includes those who are transferring to another entity and those who will remain connected to their existing entity. My assessment has had regard to the actions proposed by the Santander UK Group and the Banco Santander Group to mitigate any adverse effect on customers and whether alternative approaches have or should be considered. Where relevant these are referenced as part of my assessment. Table 75: Areas of change considered for assessments specific to the retail and corporate banking customers Assessment areas Description Contractual Rights Changes to any terms and conditions, including: the ability to transfer deposits or investments or switch to other providers, termination rights, events of default or change of control provisions and effects on customers who may be restricted to dealing with UK banks. Coverage and Channels (e.g. online banking, branch network, call centres, dedicated relationship managers) The means by which customers access products and services e.g. directly through a digital platform, via a call centre, via a branch, or through a relationship manager. Credit Availability (e.g. access to loans, credit cards) The circumstances for, and access customers have to, credit facilities e.g. loans, mortgages, credit cards, trade finance and trading credit limits. Product Availability and Access (full access to products and services as available currently) The provision of current products and services and whether some will be discontinued or provided through a different channel, platform or legal entity. Regulatory Protection The provision of protections afforded to different customer types by virtue of a bank s status as a regulated financial institution in the UK and Spain, including access to the UK FSCS or equivalent. Finance Business Model Viability, Capital and Liquidity Assessment of the ongoing financial viability of Santander UK, ANTS and Banco Santander (including SLB), whether the entity will have sufficient capital and liquid assets to meet its obligations to its creditors (including customers) and whether it will continue to generate and/or maintain an appropriate level of funding to support its products and services. Governance Ongoing management and control of Santander UK and SLB, to ensure a safe and well managed bank and protect the rest of the Santander UK Group. This includes adherence to applicable UK regulations and specific policies and procedures. EY 166

171 Introduction to findings and conclusions: groups of customers Assessment areas Description Risk Management How much risk the business is prepared to take to meet its strategic objectives, is a key component of the bank s governance structure. Risk management should protect the bank, its customers, the rest of the Santander UK Group and other relevant groups of persons from exposure to unmanaged risk and loss. Operations, Infrastructure and Shared Services The operation, robustness and performance of operations teams, processes, systems and infrastructure to the same standards as customers currently receive from the bank. Recovery and Resolution, Operational Continuity and Creditor Hierarchy The ability of the RFB and RFB Sub-Group to recover from a crisis or stress through its recovery and resolution planning and the effect on creditors (e.g. customers of the bank) in the event of a failure. My conclusions are supported by the information and analysis summarised below: Information and documentation has been reviewed, and supported by meetings with senior business management and executives, including the Heads of Retail Banking and Corporate Banking, as well as senior legal and Ring-Fencing Programme leadership. The Ring-Fencing Plan; Scheme design documents including presentations to regulators and senior business management; Product Availability Matrix, detailing the current and planned future availability of products across Banco Santander Group entities prior to, and following transfer under the Scheme to validate ongoing access to prohibited products through SLB and permitted products through the RFB via the referral model; Revisions to the referral model currently in place to facilitate and control access to products across the Banco Santander Group and ensure customers will not lose access to products that they currently have access to; Specific product documentation and designs to assess the effect of the Scheme in areas such as valuations and credit limit management where customers may be affected, including those who will have split contractual relationships for the first time in Santander UK (the RFB) and SLB after the implementation of the Scheme; Operating Models detailing the planned changes to operations, technology and customer interaction channels across Banco Santander Group entities impacted by the Scheme to identify and assess a number of operational changes that will affect customers, including: delegated reporting services, trade reporting, arrangements for credit assessments, post trade support, and access to online trading platforms and reporting systems; Relationship director model in place for all types of corporate customers; Migration strategy and plans by customer type to understand the detail and approach to customer migration across all three business transfers under the Scheme; Communications plans and approach for customer engagement and management, including internal briefings and training for RDs or Santander bankers to ensure that customers are being treated fairly in relation to the proposed transfer(s) and that an explanation of the transfer(s) is provided to all affected customers; Legal analysis and due diligence prepared by the Ring-Fencing Programme to assess the changes required to customer documentation (including International Swaps and Derivations Association agreements (ISDAs) and Credit Support Annexes (CSAs)) affected by the Scheme; EY 167

172 Introduction to findings and conclusions: groups of customers The Ring-Fencing Programme s impact analysis documents, detailing the Santander UK Group s own analysis of the effects of the Scheme on customers and other persons (including know-yourcustomer (KYC) gap and impact analysis); The Design Integrity Document, to outline the full extent of changes required as a result of the ringfencing legislation; Implementation plans for changes to Santander UK (the RFB), SLB and Banco Santander; Santander UK audited annual accounts as at 31 December 2016 and half year accounts as at 30 June 2017; Santander UK Group s draft annual operating plan, called the P20, covering the period 2017 to 2020 drafted as at 30 June This was approved by the Santander UK Board on 24 July The starting point of the P20 is the 31 December 2016 actuals. The P20 comprises of a detailed breakdown of the balance sheet and P&L line items and their underlying assumptions which I have used and relied upon as the basis for my assessment, given the authorised content and following a review of the assumptions used in the plan; My capital assessment was carried out based on a review of the consolidated 31 December 2016 Santander UK HoldCo ICAAP document, base case P20 capital data and the June 2017 Bank of England stress test results; A review of Santander UK Group s planning assumptions for liquidity and funding, which are based on the September 2016 ILAAP for Santander UK HoldCo and the March 2017 ILAAP update specifically for Santander UK (the RFB). The ILAAP documents are have been reviewed in conjunction with Santander UK s draft P20; Banco Santander ICAAP at 31 December 2016, ILAAP as at 2017 and SLB P20; Moody s, S&P and Fitch Ratings Credit Rating assessment of Santander UK HoldCo and Santander UK s credit rating, having taken into account the impact of the Ring-Fencing Plan, including the Scheme; BTIA; Santander UK Group June 2017 RCP; Santander UK Group June 2017 RSP; Operational continuity plans; Creditor hierarchy analysis; The Ring-Fencing Programme s derivatives valuation analysis (including valuation services provided); The Ring-Fencing Programme s tax impact analysis; and ANTS in run-off documentation, including Santander UK Group Board papers and analysis of retained customers/counterparties in ANTS after 1 January Analysis of documents provided were supported by interviews and workshops with a large range of business stakeholders and representatives to enhance my understanding of key elements of the Ring- Fencing Plan, including the Scheme, and anticipated consequential effects on customers. As part of that, I have obtained attestation from the Head of Retail Banking confirming that no changes are being made to the Santander UK Group retail banking customers as a consequence of the Scheme. EY 168

173 Findings and conclusions: Santander UK Group Retail Banking Customers 17. Findings and conclusions: Santander UK Group Retail Banking Customers Introduction This section addresses changes arising as a consequence of the Scheme which may affect the retail banking customer group, and the conclusions of my assessment. No retail banking customers will be transferring under the Scheme all UK retail customers will remain in Santander UK (the RFB) and CAL. The retail banking customer group consists of individual customers only and not companies, corporations or other financial institutions. These individuals have retail banking products and services including current accounts, mortgages, unsecured personal loans, saving and investment products with the Santander UK Group. They are sub-divided into three groups: Personal, Select and HNWIs. Changes to Retail Banking Customers as a consequence of the Scheme Findings and conclusions Having completed my assessments, I am satisfied that there are no changes that affect retail banking customers taking place as a consequence of the Scheme and therefore no effects on retail banking customers. Additionally, I am satisfied that no changes are taking place that will affect retail banking customers of the Santander UK Group (the RFB Sub-Group) (e.g. the customers of Cahoot, Cater Allen or Santander Personal Finance) as a consequence of business transferring away from Santander UK and ANTS. There will be no changes as a consequence of the Scheme to customers existing relationship with Santander UK (the RFB) and the wider RFB Sub-Group, including access to, and the key features of, products and services through existing brands, channels and locations. Changes with adverse effects I have identified no changes as a consequence of the Scheme that will have adverse effects on retail banking customers covered by this section of Scheme Report. EY 169

174 Findings and conclusions: Santander UK Group Retail Banking Customers Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, that do not result in an adverse effect on retail banking customers. The following details these changes and the rationale for why I have concluded that retail banking customers will be affected, but not adversely affected. Table 76: Changes with no adverse effects summary of findings from Part 2 Assessment area Assessment findings Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Santander UK from the transfer of business, as a result of the Ring-Fencing Plan, including the Scheme. Santander UK (the RFB) is expected to remain viable and sustainable and meet its minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes do not result in an adverse effect on retail banking customers remaining within Santander UK. For further details of my findings, and how I have reached them through my work, please refer to section 10. Creditor Hierarchy (as part of Recovery and Resolution) The ranking of retail customers is unchanged and they continue to benefit from the deposit guarantee scheme in the UK. The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of the RFB Sub-Group. However, I have concluded that these changes do not result in an adverse effect on retail banking customers. For further details of my findings, and how I have reached them through my work, please refer to section 15. EY 170

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176 Findings and conclusions: Santander UK Group Retail Banking Customers No change Table 77 summarises the areas where I have assessed there will be no change to retail banking customers as a consequence of the Scheme. Table 77: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives and loans There will be no change to existing policies, rights or processes. Customers ability to transfer products as a result of the Scheme Rights of set-off/netting Coverage and Channels Relationship management There will be no change to existing policies or processes. Sales process E-commerce platforms and services Online banking Branch availability Telephony services Sort codes Bank Identification Numbers (BINs) BICs Credit Availability Credit assessments There will be no change to existing policies or processes. Credit partner support Product and Services Availability Product and Services Availability There will be no change to existing policies or processes. Regulatory Protection FSCS protection Pursuit of complaints, legal and other proceedings There will be no change to existing policies, rights or processes. Client money EY 172

177 Findings and conclusions: Santander UK Group Retail Banking Customers Assessment area Conclusion Governance Governance There will be no change to the governance of Santander UK (the RFB) and the RFB Sub-Group or the performance of risk management as a key control in the RFB that will adversely affect retail banking customers. Risk Management Risk Management For further details of my findings, please refer to section 12 and 13. Operations, Infrastructure and Shared Services Operations, Infrastructure and Shared Services There will be no change to the operations that will function or the technology that will support the business of the RFB Sub-Group as a consequence of the Scheme. As such, there is no adverse effect on retail banking customers. For further details of my findings, please refer to section 14. Recovery & Resolution Planning and Operational Continuity Recovery & Resolution Planning and Operational Continuity Retail banking customers will remain part of the Santander UK Group RRP and operational continuity arrangements. There will be no change to the recovery, resolution and operational continuity arrangements as a consequence of the Scheme. I have concluded that there will not be an adverse effect on retail banking customers. For further details of my findings, please refer to section 15 for Santander UK as the RFB. EY 173

178 Findings and conclusions: Santander UK Group SME Customers 18. Findings and conclusions: Santander UK Group SME Customers Santander UK Group (excluding ANTS) SME Customers Introduction This section addresses changes arising as a consequence of the Scheme which affect SME customers who only hold permitted products in Santander UK Group, excluding SME customers of ANTS. SMEs include small business (annual turnover of less than 250,000) and mid-size business (annual turnover between 250,000 and 6.5mn). These customers form part of the Santander Business brand. Santander UK, as the RFB, will provide access to all mandated and permitted products. There is no requirement for SME customers of Santander UK and the Santander UK Group, excluding SME customers of ANTS, to transfer to a different legal entity under the Scheme. Changes to Santander UK Group (excluding ANTS) SME Customers as a consequence of the Scheme Findings and conclusions The Ring-Fencing Programme has identified 511,105 SME customers of Santander UK and the Santander UK Group, excluding SME customers of ANTS, who will continue to access RFB mandated and permitted products and services through Santander UK (the RFB) or other RFB Sub-Group members. There is no impact in the way in which customers bank with or access financial services as a consequence of the Scheme. Under the design of the Ring-Fencing Plan, SME customers connected to Santander UK (the RFB) will not be able to use the referral model to access prohibited products or services from SLB. This formalises a Santander UK Group business practice that is currently in place, given that appropriateness tests would have prevented SME customers from accessing these products other than in exceptional circumstances Changes with adverse effects I have identified no changes as a consequence of the Scheme that will have adverse effects on Santander UK Group excluding SME customers of ANTS. Some products involving an indirect exposure to Relevant Financial Institutions (RFI) which are currently provided to SME customers will be withdrawn, outside of the Scheme, to comply with ring-fencing requirements, and have not therefore been considered by this report. For further details please refer to Part 5. EY 174

179 Findings and conclusions: Santander UK Group SME Customers Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, that do not result in an adverse effect on Santander UK Group excluding SME customers of ANTS. Table 78 below details these changes and the rationale for why I have concluded that Santander UK Group SME customers will be affected, but not adversely affected. Table 78: Changes with no adverse effects summary of findings from Part 2 Assessment area Assessment findings Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Santander UK from the transfer of business, as a result of the Ring- Fencing Plan, including the Scheme. Santander UK is expected to remain viable and sustainable and meet its minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes do not result in an adverse effect on SME customers remaining within Santander UK. For further details of my findings, and how I have reached them through my work, please refer to section 10. Creditor Hierarchy (as part of Recovery and Resolution) The ranking of SME customers will not be changed and they will continue to benefit from the deposit guarantee scheme in the UK. The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of the RFB Sub-Group. However, I have concluded that these changes do not result in an adverse effect on SME customers. For further details of my findings, and how I have reached them through my work, please refer to section 15. EY 175

180 Findings and conclusions: Santander UK Group SME Customers No change Table 79 summarises the areas where I have assessed there will be no change to Santander UK Group, excluding SME customers of ANTS, as a consequence of the Scheme. Table 79: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives and loans There will be no change to existing policies, rights or processes. Customer ability to transfer products as a result of the Scheme Use of collateral Use of customers assets as security Rating triggers Rights of set-off/netting Customer documentation change There will no change of contractual rights within existing Legal Documentation including ISDA Master Agreements and relevant CSAs where applicable. Consequential administrative changes will be applied such as removing the cross-guarantee between ANTS and Santander UK. Coverage and Channels Relationship management There will be no change to existing policies or processes. Sales process Post trade support Clearing arrangements Delegated reporting/trade reporting e-commerce channels and platforms Online banking Branch availability Telephony services Sort codes BINs BICs Credit Availability Credit assessments There will be no change to existing policies or processes. Credit partner support EY 176

181 Findings and conclusions: Santander UK Group SME Customers Product and Services Availability Product and Services Availability There will be no change to existing policies or processes other than those described in section Regulatory Protection FSCS protection Pursuit of complaints, legal and other proceedings There will be no change to the existing policies, rights or processes. Client money Governance Governance There will be no change to the governance of the RFB or the performance of risk management as a key control in the RFB and RFB Sub-Group, which will adversely affect SME customers. Risk Management Risk Management For further details of my findings, please refer to sections 12 and 13. Operations, Infrastructure and Shared Services Operations, Infrastructure and Shared Services There will be no changes to the operations that will function or the technology that will support the business as a consequence of the Scheme. As such, there is no adverse effect on SME customers. For further details of my findings, please refer to section 14. Recovery & Resolution Planning and Operational Continuity Recovery & Resolution Planning and Operational Continuity SME customers will remain part of the Santander UK Group RRP and operational continuity arrangements. There will be no change to the recovery, resolution and operational continuity arrangements as a consequence of the Scheme. I have concluded that there will not be an adverse effect on SME customers. For further details of my findings, please refer to section 15 for Santander UK as the RFB. EY 177

182 Findings and conclusions: Santander UK Group SME Customers ANTS SME Customers Introduction This section addresses changes arising as a consequence of the Scheme which affect SME customers who only hold permitted products in ANTS. SMEs include small business (annual turnover of less than 250,000) and mid-size business (annual turnover between 250,000 and 6.5mn). These customers form part of the Santander Business brand. There are no proposals to remove or restrict the availability of products or services to which these customers currently have access, or the way in which these customers access products and services through a single RD. There are 2 SME customers in ANTS who will have their permitted products (loans and vanilla FX Forwards) migrated to Santander UK (the RFB) through novation and are therefore outside of the scope of the Scheme. Changes to ANTS SME Customers as a consequence of the Scheme Findings and conclusions The Ring-Fencing Programme has identified 1 SME customer of ANTS that will have its permitted transactions booked in ANTS transferred to Santander UK (the RFB) under the Scheme. This customer will become a customer of Santander UK (the RFB) and will continue to access RFB mandated and permitted products and services through Santander UK (the RFB) or other RFB Sub-Group members. There is no impact in the way in which this customer will bank with or access financial services as a consequence of the Scheme. Under the design of the Ring-Fencing Plan, SME customers connected to Santander UK (the RFB) will not be able to use the referral model to access prohibited products or services from SLB. This formalises a Santander UK Group business practice that is currently in place, given that appropriateness tests would have prevented SME customers from accessing these products other than in exceptional circumstances. Santander UK and ANTS currently leverage shared systems and processes and Santander UK (the RFB) will be able to provide a consistent level and standard of service as today, including retention of the customer RD model. The infrastructure, control mechanisms and oversight of this business will remain unchanged, and I am satisfied that Santander UK has a robust migration strategy and plan to execute this change. My review has identified no changes that will have an adverse effect on this SME customer following the transfer of permitted products from ANTS to Santander UK (the RFB) Changes with adverse effects I have identified no changes as a consequence of the Scheme that will have an adverse effect on the 1 transferring ANTS SME customer. Some products involving an indirect exposure to Relevant Financial Institutions (RFI) which are currently provided to SME customers will be withdrawn, outside of the Scheme, to comply with ring-fencing requirements, and have not therefore been considered by this report. For further details please refer to Part 5. EY 178

183 Findings and conclusions: Santander UK Group SME Customers Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, that do not result in an adverse effect on the transferring ANTS SME customer. Table 80 below details these changes and the rationale for why I have concluded that the ANTS SME customer will be affected, but not adversely affected. Table 80: Changes with no adverse effects summary of findings from Part 2 Assessment area Assessment findings Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Santander UK from the transfer of business, as a result of the Ring- Fencing Plan, including the Scheme. Santander UK is expected to remain viable and sustainable and meet its minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes do not result in an adverse effect on SME customers remaining within Santander UK. For further details of my findings, and how I have reached them through my work, please refer to section 10. Creditor Hierarchy (as part of Recovery and Resolution) The ranking of SME customers will not be changed and they will continue to benefit from the deposit guarantee scheme in the UK. The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of the RFB Sub-Group. However, I have concluded that these changes do not result in an adverse effect on SME customers. For further details of my findings, and how I have reached them through my work, please refer to section 15. EY 179

184 Findings and conclusions: Santander UK Group SME Customers Table 81: Changes with no adverse effect Changes to customer documentation Changes to customer documentation Description of the change Customers that have permitted derivatives migrating from ANTS to Santander UK (the RFB) under the Scheme will have some changes to their existing International Swaps and Derivatives Association ISDA Master Agreements and any associated CSAs implemented through the Scheme, as applicable to their specific contracts. There will also be amendments to the Master Agreements as a consequence of Santander UK (the RFB) becoming the new counterparty to the Master Agreement. However, those will be administrative in nature and do not affect customers rights or obligations under the agreement. The consequential changes include removal of cross-guarantee, removal of Santander UK as Credit Support Provider, removal of cross-affiliate set-off rights for the customer and Santander UK and notice details, etc. Why is the change not adverse? I have reviewed the legal due diligence and the Scheme document together with holding extensive discussions with the Santander UK and ANTS legal teams and programme leadership delivering the Scheme. As a result I am satisfied that the changes that will be made to replicate the Master Services Agreements (MSAs) and the CSAs under the Scheme will preserve the existing terms, with the consequential changes to the Master Agreements, with the customers as described above. Whilst changes to customer documentation are required as a result in changing the legal entity from ANTS to Santander UK (the RFB), the overall effect of the agreement remains largely unchanged. There are some minor changes required, such as the removal of necessary clauses including the cross-guarantee between ANTS and Santander UK, removal of Santander UK as the Credit Support Provider, removal of cross affiliate set-off rights for the customer and Santander UK and updating notice details as referred to separately above. The Scheme will suspend any events of default and termination events within current documents to the extent that they would otherwise be triggered by the Scheme to ensure continuation of coverage. My conclusion Whilst there will be consequential changes to ISDA Master Agreements for those customers whose derivatives will be transferring to Santander UK (the RFB), I have concluded that the changes proposed will not have an adverse effect on customers. Customers rights and obligations will be maintained under the proposed changes and wherever possible, existing terms of ISDA Master Agreements and CSAs (if applicable) will be preserved. EY 180

185 Findings and conclusions: Santander UK Group SME Customers Table 82: Changes with no adverse effect Changes to standard settlement instructions (SSIs) Changes to standard settlements instructions (SSIs) Description of the change Customers will be required to change SSIs for permitted derivatives, permitted loans and permitted transactions transferred from ANTS to Santander UK (the RFB). Changes will also be made to static and reference data in Santander UK (the RFB) systems but this will have no effect on customers. These changes are as a direct result of products being transferred within IT systems and the requirement for settlement payments to be made to a different legal entity. Why is the change not adverse? I have reviewed programme plans and the migration strategy. Customers will be required to amend their SSIs upon transfer of their positions to Santander UK (the RFB) in order to continue payments under their products. All customers will be contacted individually and be informed of the changes. All customers will have standard operational procedures to handle changes to settlement instructions as part of BAU processes. In addition, Santander UK (the RFB) will operate a follow-on service for any payments that are inadvertently paid using the incorrect settlement instructions, to correct errors at Santander UK (the RFB) s cost, not the customer s cost. My conclusion Having considered the nature of the change, in my view the changes that need to be made will not be onerous for affected customers. Furthermore, the risk of error and loss is mitigated by Santander UK s actions to correct errors. Therefore, I have concluded that this change will have no adverse effect on customers. EY 181

186 Findings and conclusions: Santander UK Group SME Customers No change Table 83 summarises the areas where I have assessed there will be no change to Santander UK Group SME customers as a consequence of the Scheme. Table 83: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives and loans There will be no change to existing policies, rights or processes. Customer ability to transfer products as a result of the Scheme Use of collateral Use of customers assets as security Rating triggers Rights of set-off/netting Coverage and Channels Relationship management There will be no change to existing policies or processes. Sales process Post trade support Clearing arrangements Delegated reporting/trade reporting e-commerce channels and platforms Online banking Branch availability Telephony services Sort codes BINs BICs Credit Availability Credit assessments There will be no change to existing policies or processes. Credit partner support EY 182

187 Findings and conclusions: Santander UK Group SME Customers Product and Services Availability Product and Services Availability There will be no change to existing policies or processes other than those described in section Regulatory Protection FSCS protection Pursuit of complaints, legal and other proceedings There will be no change to the existing policies, rights or processes. Client money Governance Governance There will be no change to the governance of the RFB or the performance of risk management as a key control in the RFB and RFB Sub-Group, which will adversely affect SME customers. Risk Management Risk Management For further details of my findings, please refer to sections 12 and 13. Operations, Infrastructure and Shared Services Operations, Infrastructure and Shared Services There will be no changes to the operations that will function or the technology that will support the business as a consequence of the Scheme. As such, there is no adverse effect on SME customers. For further details of my findings, please refer to section 14. Recovery & Resolution Planning and Operational Continuity Recovery & Resolution Planning and Operational Continuity SME customers will remain part of the Santander UK Group RRP and operational continuity arrangements. There will be no change to the recovery, resolution and operational continuity arrangements as a consequence of the Scheme. I have concluded that there will not be an adverse effect on SME customers. For further details of my findings, please refer to section 15 for Santander UK as the RFB. EY 183

188 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted products only 19. Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted products only Introduction This section addresses corporate customers who only hold mandated and permitted products in Santander UK. Santander UK (the RFB) will provide access to all mandated and permitted products. As such, there will be no need for existing Santander UK corporate customers holding only mandated and/or permitted products to transfer to a different legal entity under the Scheme. Changes to Santander UK Corporate Customers (non-sme) holding permitted products only as a consequence of the Scheme Findings and conclusions The Ring-Fencing Programme has identified 21,120 corporate customers (either under the SCCB or SGCB businesses) holding only permitted products who will remain within Santander UK and continue to access Santander UK and Santander UK Group mandated and permitted products and services through Santander UK (the RFB). There will be no change to the way in which customers access products or services, as a consequence of the Scheme. All products provided via the existing referral model through SGCB and made available to SCCB customers (and vice versa) will continue to be available to customers, after the final legal effective date of the Scheme. Changes with adverse effects I have identified no changes as a consequence of the Scheme that will have adverse effects on Santander UK corporate customers holding permitted products only. EY 184

189 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted products only Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, that do not result in an adverse effect on Santander UK corporate customers holding permitted products only. The following table details these changes and the rationale for why I have concluded that Santander UK corporate customers holding permitted products only will be affected, but not adversely affected. Table 84: Changes with no adverse effects summary of findings from Part 2 Assessment area Assessment findings Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Santander UK from the transfer of business, as a result of the Ring-Fencing Plan, including the Scheme. Santander UK is expected to remain viable and sustainable and meets its minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes do not result in an adverse effect on Santander UK corporate customers remaining within Santander UK. For further details of my findings, and how I have reached them through my work, please refer to section 10. Creditor Hierarchy (as part of Recovery and Resolution) The ranking of Santander UK corporate customers holding permitted products only will be unchanged and they will continue to rank in the same class. The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of the RFB Sub-Group. However, I have concluded that these changes do not result in an adverse effect on Santander UK corporate customers holding permitted products only. For further details of my findings, and how I have reached them through my work, please refer to section 15. EY 185

190 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted products only No change The following table summarises the areas where I have assessed there will be no change to Santander UK corporate customers (non-sme) holding permitted products only, as a consequence of the Scheme. Table 85: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives and loans There will be no change to existing policies, rights or processes or documentation as a result of the Scheme. Customer ability to transfer products as a result of the Scheme Rights of set-off/netting Use of collateral Use of customers assets as security Rating Triggers Customer documentation There will be no change of contractual rights within existing Legal Documentation, including ISDA Master Agreements and relevant CSAs where applicable. Consequential administrative changes will be applied such as removing the cross-guarantee between ANTS and Santander UK. Coverage and Channels Relationship management and split relationship SSIs Customers will continue to have a single RD as their point of contact into the Santander UK Group or SLB, which is a continuation of their existing relationship. Sales process Post trade support There will be no changes to SSIs as these customers will remain within Santander UK. Clearing arrangements Delegated reporting/trade reporting There will be no changes to the policies, processes or availability of these assessment areas. e-commerce channels and platforms Online banking Branch availability Telephony services Sort codes BINs BICs EY 186

191 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted products only Credit Availability Credit assessments Credit partner support There will be no changes to the policies, processes or availability in these assessment areas. Product and Services Availability CVA Access and availability of the current products and services offered to customers will remain the same. Further, levels of service and performance will remain consistent with quality standards, irrespective of the legal entity from which they will be supplied. No CVA change as customers will remain within Santander UK. Regulatory Protection FSCS protection There will be no change to existing policies, rights or processes. Pursuit of complaints, legal and other proceedings Client money Governance Governance There will be no change to the governance of Santander UK (the RFB) or the performance of risk management as a key control in Santander UK (the RFB) that will adversely affect this group of customers. Risk Management Risk Management For further details of my findings, please refer to sections 12 and 13. Operations, Infrastructure and Shared Services Operations, Infrastructure and Shared Services There will be no changes to the operations that will function or the technology that will support the business as a consequence of the Scheme. As such, there will be no adverse effect on this group of customers. For further details of my findings, please refer to section 14. EY 187

192 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted products only Recovery & Resolution Planning and Operational Continuity Recovery & Resolution Planning and Operational Continuity Santander UK corporate customers holding permitted products will remain part of the Santander UK Group RRP and operational continuity arrangements. There will be no changes to the recovery, resolution and operational continuity arrangements as a consequence of the Scheme. I have concluded that there will not be an adverse effect on Santander UK corporate customers holding permitted products only. For further details of my findings, please refer to section 15 for Santander UK as the RFB. EY 188

193 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted products only 20. Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted products only Introduction This section addresses corporate customers who only hold mandated and permitted products in ANTS. These customers and their transactions booked in ANTS will be transferring to Santander UK (the RFB) under the Scheme. These customers will become customers of Santander UK (the RFB) and will be able to access all mandated and permitted products through this legal entity. There are no proposals to remove or restrict the availability of products or services to which these customers currently have access, or the way in which these customers access these products and services through a single RD. All products currently provided through SGCB and made available to SCCB customers (and vice versa) will continue to be available after the Scheme is effective. Where this involves a customer seeking a prohibited product no longer available from Santander UK (the RFB), this will be actioned through the referral model which allows customers to access products provided from a different legal entity in the Banco Santander Group through the entity which the primary relationship is held. In line with the existing process, the product specialist will provide the product to a customer through the referral model and will conduct a suitability assessment, which may result in a product not being deemed suitable for certain customers. Changes to ANTS Corporate Customers (non-sme) holding permitted products only as a consequence of the Scheme Findings and conclusions A total of 454 corporate customers of ANTS have been identified by the Ring-Fencing Programme to be transferred to Santander UK (the RFB) under the Scheme. Santander UK and ANTS currently leverage shared systems and processes and Santander UK (the RFB) will be able to provide a consistent level and standard of service as today, including retention of the customer RD model. The infrastructure, control mechanisms and oversight of this business will remain unchanged, and I am satisfied that Santander UK has a robust migration strategy and plan to execute this change. My review has identified a change that may have an adverse effect on the rights of set-off, applicable to certain customers as a result of customers loans and deposits being consolidated within Santander UK, following the transfer of permitted products (i.e. loans) from ANTS. However, I have concluded that the effects are no more than reasonably necessary to achieve the Scheme s purposes. Details of this change and the effect are set out in Table 86. Changes with adverse effects I have identified changes as a consequence of the Scheme that will have adverse effects on 47 ANTS Corporate Customers (non-sme) holding permitted products only. These adverse effects are, in my opinion, not mitigated. The following details these changes I have identified and the rationale for why I have concluded that these ANTS corporate customers who hold permitted products only will be adversely affected, with no mitigations or alternatives available, but that the effects are no more than reasonably necessary to achieve the Scheme s purposes. EY 189

194 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted products only Table 86: Changes with adverse effects that are not mitigated Changes to rights of set-off Changes to rights of set-off Description of the change Set-off is where a creditor (ANTS or Santander UK) can claim against a debtor (in this scenario, a customer) and reduce or settle any amounts outstanding in the event of a default by the customer, as a result of holding one or more active accounts with the customer. For those customers with existing deposits with Santander UK, and as a consequence of the transfer of a customer s permitted unsecured loan from ANTS to Santander UK under the Scheme, a customer may have existing deposits held by Santander UK set-off against loan repayments outstanding to Santander UK. This will only happen in the event that the customer defaults on the loan, and to the extent any security is insufficient. Santander UK (the RFB) will obtain the ability to set-off where previously they would not have because, as a consequence of the Scheme, a customer s permitted unsecured loans and deposits will be both held in Santander UK (the RFB), where before they were split between Santander UK and ANTS. This will affect 47 ANTS corporate customers. These 47 ANTS corporate customers that currently hold permitted unsecured loans will have those products transferred from ANTS to Santander UK (the RFB) under the Scheme. These customers will retain the right to off-set any Early Termination Amount (ETA) owed on any of their permitted derivatives against their permitted unsecured loan, in the event of a Santander UK default, given that both permitted derivatives and unsecured loans will transfer from ANTS to Santander UK (the RFB). Why is this adverse? There is likely to be an adverse effect for customers where permitted unsecured loans are migrated to Santander UK, caused by the contractual rights that Santander UK (the RFB) will have in future. However, this change with an adverse effect will only materialise if the customer has already agreed to give Santander UK set-off rights in existing product agreements and the customer default on the permitted unsecured loan. Mitigations or alternatives available An alternative approach, to maintain ANTS as a separate banking entity outside of the RFB Sub-Group, was considered. However, there were a number of issues (including the ability of ANTS to remain viable and maintain a separate credit rating) which resulted in this option being discounted. This is covered in more detail in section 5.1.1, which includes my conclusions on the overall structural alternatives considered. A further alternative approach, to transfer all loans from ANTS to SLB, would require SLB to implement new infrastructure and organisational changes to originate and manage a loan portfolio in SLB, with the sole objective of obviating the risk that customers who may be adversely affected by set-off rights that will only materialise should the customer default on the unsecured loan. I consider that this alternative would be disproportionate to the risk that the adverse effect poses to customers, also in the light of the circumstances where it would materialise. Is this sufficiently mitigated? I have assessed that the adverse effect is not mitigated by actions that are or could be taken by the Santander UK Group. EY 190

195 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted products only Changes to rights of set-off My conclusion The level of communication proposed by the Ring-Fencing Programme to the affected customers will provide clarity on the new contractual rights and enable customers to consider alternative arrangements (including alternative banking arrangements) to maintain the separation of unsecured loans from deposits, if they consider the change unacceptable to them. Whilst communications cannot mitigate the adverse effect, they will ensure that customers are aware of the potential effect, in this case adverse effects, of the changes. I have concluded that no viable alternatives or mitigations are available that would reduce the adverse effect, given the design of the Ring-Fencing Plan, including the Scheme. Therefore, I have concluded that although this group of customers is likely to be adversely affected by the change proposed by the Scheme, the effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 191

196 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted products only Changes with no adverse effects I have identified changes as a consequence of the Scheme that do not result in an adverse effect on ANTS corporate customers who hold permitted products only. The following table details these changes and the rationale for why I have concluded that ANTS corporate customers will be affected, but not adversely affected. Table 87: Changes with no adverse effects Changes to customer documentation Changes to customer documentation Description of the change Customers that have permitted derivatives migrating from ANTS to Santander UK (the RFB) under the Scheme will have some changes to their existing International Swaps and Derivatives Association ISDA Master Agreements and any associated CSAs implemented through the Scheme, as applicable to their specific contracts. There will also be amendments to the Master Agreements as a consequence of Santander UK (the RFB) becoming the new counterparty to the Master Agreement. However, those will be administrative in nature and do not affect customers rights or obligations under the agreement. The consequential changes include removal of cross-guarantee, removal of Santander UK as Credit Support Provider, removal of cross-affiliate set-off rights for the customer and Santander UK and notice details, etc. Why is the change not adverse? I have reviewed the legal due diligence and the Scheme document together with holding extensive discussions with the Santander UK and ANTS legal teams and programme leadership delivering the Scheme. As a result I am satisfied that the changes that will be made to replicate the Master Services Agreements (MSAs) and the CSAs under the Scheme will preserve the existing terms, with the consequential changes to the Master Agreements, with the customers as described above. Whilst changes to customer documentation are required as a result in changing the legal entity from ANTS to Santander UK (the RFB), the overall effect of the agreement remains largely unchanged. There are some minor changes required, such as the removal of necessary clauses including the cross-guarantee between ANTS and Santander UK, removal of Santander UK as the Credit Support Provider, removal of cross affiliate set-off rights for the customer and Santander UK and updating notice details as referred to separately above. The Scheme will suspend any events of default and termination events within current documents to the extent that they would otherwise be triggered by the Scheme to ensure continuation of coverage. My conclusion Whilst there will be consequential changes to ISDA Master Agreements for those customers whose derivatives will be transferring to Santander UK (the RFB), I have concluded that the changes proposed will not have an adverse effect on customers. Customers rights and obligations will be maintained under the proposed changes and wherever possible, existing terms of ISDA Master Agreements and CSAs (if applicable) will be preserved. EY 192

197 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted products only Table 88: Changes with no adverse effects summary of findings from Part 2 Assessment area Assessment findings Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Santander UK from the transfer of business, as a result of the Ring-Fencing Plan, including the Scheme. Santander UK is expected to remain viable and sustainable and meet its minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes will not result in an adverse effect on ANTS corporate customers transferring to Santander UK. For further details of my findings, and how I have reached them through my work, please refer to section 10. Creditor Hierarchy (as part of Recovery and Resolution) The ranking of ANTS corporate customers holding permitted products only will be unchanged and they will continue to rank in the same class, albeit in Santander UK as the RFB. The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of the RFB Sub-Group. However, I have concluded that these changes will not result in an adverse effect on ANTS corporate customers holding permitted products only. For further details of my findings, and how I have reached them through my work, please refer to section 15. EY 193

198 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted products only No change The following table summarises the areas where I have assessed there will be no change to ANTS corporate customers (non-sme) who hold permitted products as a consequence of the Scheme. Table 89: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives and loans Withholding Tax (WHT) Derivatives no WHT as derivatives fall within other income category for WHT purposes. WHT Loans no WHT change or effect for loans transferred from ANTS to Santander UK under the Scheme, as Santander UK and ANTS are both subject to the same UK tax regime as UK banks. No capital gain/loss tax implication from the transfer of derivatives under the Scheme. Customer ability to transfer products as a result of the Scheme The Scheme will not impose or remove any restrictions on any contractual right that a customer has to transfer a product. Netting sets under ISDA The Scheme will not impose any change to the ISDA netting sets applicable to these customer s permitted derivatives as the customer s entire permitted derivatives portfolio will move from ANTS to Santander UK under the existing ISDA. Use of collateral The Scheme will not impose any change to the use of collateral or any requirement to lodge additional collateral as the customer s entire permitted derivatives will move from ANTS to Santander UK (the RFB) under the existing ISDA and CSA. Use of customers assets as security The Scheme will not impose any change to the use of customer security as all of the permitted products will move from ANTS to Santander UK (the RFB) under the terms of the same security arrangements. Rating triggers The Scheme will not impose any change to the rating triggers included in ANTS customer documentation as transactions will migrate from ANTS to Santander UK (the RFB) and there is no credit rating downgrade. EY 194

199 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted products only Coverage and Channels Relationship management and split relationship Customers will continue to have a single RD as their point of contact into the bank. This is a continuation of their existing relationship. Sales process SSIs Post trade support Clearing arrangements Delegated reporting/trade reporting There will be no changes to the policies, processes or availability in these assessment areas. For customers transferring from ANTS to Santander UK (the RFB) there will be no change to BIC codes as the ANTGB2L BIC code will also move from ANTS to Santander UK (the RFB). e-commerce channels and platforms Online banking Branch availability Telephony services Sort codes BINs BICs Credit Availability Credit assessments Credit partner support There will be no changes to the policies, processes or availability in these assessment areas. Product and Services Availability Product and Services Availability Access and availability of the current set of products and services that is offered to customers will remain the same. However, they might be provided from different entities via the referral model, depending on whether the products are permitted or prohibited. Furthermore, levels of service and performance will remain consistent with quality standards, irrespective of the legal entity from which they are supplied. Derivative valuation service No change of derivative valuation service as ANTS customers holding permitted products will move to Santander UK. No change of discount curve and valuation position. CVA No CVA change as ANTS customers holding permitted products will move to Santander UK (the RFB). Further, no change of credit rating or CVA effect. EY 195

200 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted products only Regulatory Protection FSCS protection The Scheme will not transfer deposits. Customers will not lose FSCS protection as a consequence of the Scheme. Deposits held for corporate customers in ANTS will either be novated to Santander UK or mature ahead of the Scheme becoming effective. Pursuit of complaints, legal and other proceedings All customers transferring from ANTS to Santander UK under the Scheme will retain the right to pursue any outstanding complaints, legal or other proceedings against the transferee. Client money No transferring customers have client money protection. Governance Governance There will be no changes to the governance of the RFB or the performance of risk management as a key control in the RFB that will adversely affect this group of customers. Risk Management Risk Management For further details of my findings, please refer to sections 12 and 13. Operations, Infrastructure and Shared Services Operations, Infrastructure and Shared Services There will be no changes to the operations that will function or the technology that will support the business as a consequence of the Scheme. As such, there is no adverse effect on this group of customers. For further details of my findings, please refer to section 14. Recovery & Resolution Planning and Operational Continuity Recovery & Resolution Planning and Operational Continuity ANTS corporate customers holding permitted products will remain part of the Santander UK Group RRP and operational continuity arrangements. There will be no changes to the recovery, resolution and operational continuity arrangements as a consequence of the Scheme. I have concluded that there is not an adverse effect on ANTS corporate customers holding permitted products. For further details of my findings, please refer to section 15 for Santander UK as the RFB. EY 196

201 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products 21. Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Introduction Under the Ring-Fencing Plan, all prohibited transactions and products, other than those remaining in ANTS Run-Off, will be transferred out of Santander UK or its subsidiaries, which will become the RFB Sub-Group. As explained in section 5.1, the Santander UK Group has previously considered and discounted alternative options to retain prohibited business within ANTS as an entity outside of the RFB Sub-Group. However, following a full assessment including long-term business viability and sustainability tests, it was decided that this was not a viable solution and that the preferred model, as being implemented by the Ring-Fencing Plan, including the Scheme, is to transfer prohibited business to SLB given its relative financial strength as the London branch of Banco Santander. For further details of the decision process leading to the current design, and my assessment of the process, please refer to section 5.1. Therefore, for Santander UK corporate customers holding prohibited products there will be changes that the Ring-Fencing Programme is making that will have an effect on their banking relationship and where business will be booked and held in the future. Customers defined as Specified Customers are considered in section 23, rather than in this section. Affected customers A total population of 38 corporate customers have been identified by the Ring-Fencing Programme with prohibited products only or prohibited and permitted products that will be transferred from Santander UK to SLB under the Scheme, subject to approval of the Scheme. Certain permitted products will be retained within Santander UK (the RFB) and will continue to be provided to corporate customers from Santander UK (the RFB). These products fall within the ringfencing rules of permitted products and the Santander UK Group has concluded that under the Ring- Fencing Plan they will be provided by Santander UK (the RFB). Examples of these products include: loans, deposits, permitted derivatives, permitted trade finance, invoice finance, supply chain finance and payment services. Prohibited products currently held in Santander UK will be transferred to SLB under the Scheme. Whether prohibited products are available through SLB or permitted products through Santander UK (the RFB), there are no proposals to remove or restrict the availability of products or services to which customers currently have access to, or the way in which customers access these products and services through a single relationship manager. All products currently provided through SGCB and made available to SCCB customers (and vice versa) will continue to be available after the Scheme through the existing referral model. This enables customers to access products provided from different legal entities in the Banco Santander Group other than the one they hold their primary relationship with. EY 197

202 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Changes to Santander UK Corporate Customers (non-sme) holding permitted and prohibited products as a consequence of the Scheme Findings and conclusions My review has identified changes arising as a result of corporate customers prohibited business being transferred from Santander UK to SLB. There are changes to, amongst other things: customer documentation, netting arrangements, some operational functions (such as post trade support and trade reporting) and access to prohibited products (which in future will be through SLB via the referral model). All customers will experience a continuity of relationship management and access to their existing RD. I have identified three changes that will have adverse effects on these customers as a result of the migration of prohibited derivatives to SLB. They relate to the change of CVA on derivative valuations resulting from the wider credit default swap (CDS) spread for Banco Santander (including SLB), and changes to netting sets for customers permitted and prohibited derivatives given that prohibited derivatives will be in SLB and permitted derivatives will be in Santander UK (the RFB). In the event of default by Santander UK or SLB, these customers will be unable to net ETAs, where there is a default event, between the two types of derivatives. Notwithstanding that mitigation cannot be provided in all circumstances, I have concluded that the changes with adverse effects are no more than reasonably necessary to achieve the Scheme s purposes and that no better alternatives are available to reduce the adverse effects on customers. The details of the changes and the effects are set out in Table 90 below. Changes with adverse effects I have identified changes as a consequence of the Scheme that will have adverse effects on Santander UK corporate customers holding permitted products. These adverse effects are, in my opinion, not mitigated. The following details these changes I have identified and the rationale for why I have concluded that these Santander UK corporate customers who hold permitted products will be adversely affected, with no mitigations or alternatives made available, but that the effects are no more than reasonably necessary to achieve the Scheme s purposes. EY 198

203 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Table 90: Changes with adverse effects that are not mitigated Changes to netting sets Changes to netting sets Description of the change 14 corporate customers that currently hold permitted and prohibited derivatives with Santander UK will have their prohibited derivatives transferred to SLB under the Scheme. Permitted derivatives will remain in Santander UK (the RFB). This will cause the netting sets contained within the Santander UK CSA relating to the customer s permitted and prohibited derivatives to be broken. Why is this adverse? In the event of a bank default, the customer will not be able to net any ETA owed under the prohibited derivative against any permitted derivatives that remain held in Santander UK (the RFB). Mitigations or alternatives available Given the requirement to move the prohibited products out of the RFB Sub-Group, and given that ANTS has been proved to not be an alternative as a viable banking entity outside of the RFB Sub-Group, the other alternative approach considered is for Santander UK to transfer affected customer s permitted derivatives to SLB, which would preserve existing netting sets. However this approach would cause other issues for the customer which would not necessarily be to the customer s interests. For example, the lower credit rating of SLB might result in higher CVA charge if the customers are transferred to SLB, along with consequential onboarding and systems changes that would be required. Also, if the customers have other products (e.g. loans) moving permitted products could have other consequences and may, for example, affect hedging arrangements involving the permitted derivatives. This alternative would result in the migration of the entire Santander UK derivatives portfolio to SLB, with all the consequential implications that would have for capital, infrastructure and controls. This would require a fundamental change in the Ring- Fencing Plan, and is therefore not an alternative that I have considered. Is this sufficiently mitigated/were alternatives feasible? I have assessed that the adverse effect will not be mitigated by actions that are or could be taken by the Santander UK Group. My conclusion The level of communication proposed by the Ring-Fencing Programme to the affected customers will provide clarity on the new contractual rights and enable customers to consider alternative arrangements (including alternative banks to maintain the separation of unsecured loans from deposits) if they consider the effect sufficiently adverse to them. Whilst communications cannot mitigate the adverse effect, they will ensure that customers are aware of the potential effect, in this case adverse effects, of the changes. I have concluded that no viable alternatives or mitigations are available that will reduce the adverse effect, given the design of the Ring-Fencing Plan, including the Scheme. The proposed design to retain the permitted derivatives in Santander UK (the RFB) is considered the most appropriate solution as it provides a continuity of service and avoids other potential effects. Therefore, I have concluded that although this group of customers is likely to be adversely affected by the change proposed by the Scheme, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 199

204 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Table 91: Changes with adverse effects that are not mitigated Changes to rights of set-off Changes to rights of set-off Description of the change Set-off is where a creditor (SLB or Santander UK) can claim against a debtor (in this scenario, a customer) and reduce or settle any amounts outstanding in the event of a default by the customer, as a result of holding one or more active accounts with the customer. 3 Santander UK corporate customers who currently hold permitted and prohibited derivatives will have their prohibited derivatives transferred from Santander UK to SLB under the Scheme. Permitted unsecured loans will be retained within Santander UK (the RFB). Following the transfer of the prohibited derivatives to SLB, customers (in their capacity as debtors) will no longer be able to set-off any ETA owed by SLB against the unsecured loan products that will remain in Santander UK (the RFB). Santander UK s contractual set-off rights (in its capacity as debtor) between the customers deposits and permitted unsecured loans will remain unchanged. Why is this adverse? In the event of a default by SLB, there is likely to be an adverse effect for customers whose prohibited products have been migrated to SLB. This may be caused by the loss of contractual rights to off-set any ETA owed to the customer under the prohibited derivatives against the unsecured loan that remains in Santander UK. Mitigations or alternatives available An alternative option would be to transfer all permitted products, including all loans, from Santander UK to SLB. This would require SLB to implement new infrastructure and organisational changes to originate and manage a loan portfolio in SLB. This would have the sole objective of obviating the risk that customers may be adversely affected by set-off rights, that will only materialise should SLB default. I consider this alternative to be disproportionate to the risk that the adverse effect poses to customers, in the light of the circumstances where it would materialise. Is this sufficiently mitigated/were alternatives feasible? I have assessed that the adverse effect is not mitigated by actions that are or could be taken by the Santander UK Group. My conclusion The level of communication proposed by the Ring-Fencing Programme to the affected customers will provide clarity on the new contractual rights and enable customers to consider alternative arrangements (including alternative banking arrangements) to maintain the separation of unsecured loans from deposits if they consider the change unacceptable to them. Whilst communications cannot mitigate the adverse effect, they will ensure that customers are aware of the potential effect, in this case adverse effects, of the changes. I have concluded that no viable alternatives or mitigations are available that would reduce the adverse effect, given the design of the Ring-Fencing Plan, including the Scheme. Therefore, I have concluded that although this group of customers is likely to be adversely affected by the change proposed by the Scheme, the effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme, particularly given that the adverse effect will only impact on customers should SLB default. EY 200

205 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Table 92: Changes with adverse effects that are not mitigated Credit Valuation Adjustment (CVA) Credit Valuation Adjustment (CVA) Description of the change There may be a change to CVA for 38 Santander UK corporate customers whose prohibited derivatives will be transferred to SLB. This is due to the lower credit rating of Banco Santander (and therefore SLB), compared to the credit rating of Santander UK and ANTS, resulting in a wider credit spread being applied to their CVA calculations. Customers CVA calculations are complex with a number of variables within the calculation and there is no standard method used across all customers. It is an activity carried out by the customer to their own valuation design, with credit rating spread being but one variable used. Why is this adverse? The exact impact on CVA for individual customers is not possible to assess because the valuation models used by customers for CVA calculation are specific to them and unknown to Santander UK, or to me. However the Ring-Fencing Programme has carried out its own Debt Valuation Adjustment (DVA) and using that as a proxy for CVA, there may be changes in CVA for some customers whose derivatives will be transferred to SLB, as a consequence of the wider CDS credit spread. Some may be positive, others negative and this will depend on the valuation method used and the timing of the calculation, which is impacted by market rates at the time of the calculation. There is no defined methodology to calculate CVA. The Ring-Fencing Programme has used proxy CDS spread (an average of LBG, HSBC and Banco Santander) used in DVA to estimate the CVA effect. Although this calculation cannot provide precise estimates of CVA, this analysis has evidenced to me that the CVA effect may be either positive or negative, and dependent upon the constituents of the customer s portfolio, market data at the time of transfer and customers accounting policies. Potential changes to CVA affected customers may require customers to apply additional economic regulatory capital to cover their positions incurring additional costs of capital. It should be noted that equally they may require less capital and therefore less cost. Those customers who do not trade under the terms of a CSA will not have the benefit of the netting and collateral arrangement which help to mitigate the adverse CVA effect. Mitigations or alternatives available Given the winding down of the cross-guarantee, and without the creation of a new A-rated banking entity in the UK or the withdrawal or termination of certain products, there is no reasonable alternative to the consequential impact of the rating change from ANTS to SLB on CVA calculations. Beyond that, and given inherent uncertainty of the actual effect of the change, positive and negative, on a customers position, the Ring-Fencing Programme is not proposing to offer compensation as a mitigation for additional capital costs that may not materialise and cannot at this point be quantified. Is this sufficiently mitigated? I have assessed that the adverse effect is not mitigated by actions that are or could be taken by the Santander UK Group. EY 201

206 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Credit Valuation Adjustment (CVA) My conclusion I have concluded that it would be unreasonable for Santander UK to commit to providing some form of compensation to customers, when the effect (adverse or positive) will only become clear on transfer when each customer runs their own CVA calculation, which will be influenced by market data at the time of transfer and may result in a positive or negative effect on CVA. Whilst communications cannot mitigate an adverse effect, it can ensure that customers are aware of the potential effect of a change, and I am satisfied that the communications approach being adopted by Santander UK will raise the possible effect and enable a dialogue with customers regarding how to mitigate any actual adverse effects on customers, including compensation, when CVA calculations are run by customers on transfer. I have concluded that no appropriate alternatives are available that would reduce the adverse effect and that the Santander UK Group is being transparent and open with affected customers, through their communications approach involving direct engagement through their RDs. Therefore, I have concluded that although this group of customers may be adversely affected by the change proposed by the Scheme, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 202

207 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Changes with no adverse effects I have identified changes as a consequence of the Scheme that will not result in an adverse effect on Santander UK corporate customers holding permitted products. The following details these changes and the rationale for why I have concluded that Santander UK corporate customers will be affected, but not adversely affected. Table 93: Changes with no adverse effects Access to Prohibited Products in the future Access to Prohibited Products in the future Description of the change Following the implementation of the Scheme, Santander UK corporate customers will only be able to access prohibited products through SLB via the referral model. Customers will be referred to the specialist product area within SLB for product structuring, pricing and ultimately booking and contracting. Whilst continuing to remain a customer of Santander UK, the counterparty for a trade will be SLB and so these customers will receive a SLB confirmation/contract. Why is the change not adverse? I have carried out assessments of the product matrix, referral model and relationship management models adopted by the Santander UK Group and any changes being made, including the extension of the existing processes and policies to recognise the transfer of prohibited products to SLB. Products will continue to be available either directly from Santander UK (the RFB) for permitted products or through SLB for prohibited products via the referral model. In both cases, customers will continue to access products through their existing RD, who will not change. The RD is the single point of contact responsible for enabling smooth access to the Banco Santander Group, by liaising with product specialists in the other entity, through the referral model. In practice, for many customers this is not a change to the way they currently engage with multiple entities across the Banco Santander Group. There are no financial incentives, including introducer s fees, for RDs or other Santander bankers as part of the referral model which might influence the products provided to customers and the entity from which they are provided. My conclusion I have assessed this change and have concluded that there is no adverse effect on customers. Customers will continue to have access to the same products and services and continue to have a single RD who will continue to act as a single point of contact and manage and coordinate access to all products and services provided by the Banco Santander Group (for their customers). I am further satisfied that there are no financial incentitives built into the referral model that might influence which products are offered from which entities by RDs or other Santander bankers and therefore no risk that unsuitable, prohibited or simply the wrong products are provided to customers through the referral processes. EY 203

208 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Table 94: Changes with no adverse effects Use of customer assets as security Use of customer assets as security Description of the change There will be a change to the basis on which security is provided by customers to Santander UK with regard to prohibited derivatives, secured loans or other transactions when they are transferred under the Scheme from Santander UK to SLB. For the majority of these customers, there are security trustees/agents currently in place. The security arrangement will transfer, along with the product, existing bilateral arrangements. These will be amended under the Scheme to enable SLB to share in security as a beneficiary under a security trust arrangement. There will be no effect, including no cost, on the customers as a result of the changes. However where customers do not have a security trustee arrangement (usually where security has been taken on a bilateral basis across all the customer s assets), Banco Santander will need to be named as a beneficiary, under a new security trust arrangement. There will be 38 customers subject to this change. Why is the change not adverse? SLB is proposing to meet the costs associated with amending security trustee arrangements to add Banco Santander as a named trust beneficiary to the contracts. In addition, Banco Santander will not request additional security from customers. Instead, existing security will be allotted to the secured loans, derivatives and other transactions across relevant legal entities without the need for customers to do anything. My conclusion I have considered the plans proposed for the handling of customer security when customers prohibited products, including prohibited derivatives, are transferred to SLB and I have concluded that there will be a change but no adverse effect. EY 204

209 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Table 95: Changes with no adverse effects Post trade support Post trade support Description of the change Post trade support (e.g. settlement, reconciliation, and confirmation for the derivatives transactions) will be provided from the Banco Santander Operations Centre in Madrid for prohibited transactions and products transferred under the Scheme. Currently, it is provided by Santander UK operations. There will be 38 customers subject to this change. Why is the change not adverse? I have carried out a full review of the proposed operating model and service model for SLB currently being implemented. Please refer to section 14 on Operations, Infrastructure and Shared Services for further information on work carried out. Based on my review, I am satisfied that all current service levels and performance levels will remain the same as today at a minimum, and management control and governance levels will be at least the same level as a consequence of the changes. The quality, level and performance of post trade support to be provided by the Banco Santander Operations Centre is expected to be unchanged and therefore there is no need to consider mitigating actions or alternative approaches. My conclusion I have assessed this change and have concluded that it will not result in an adverse effect on the quality, level and performance of service provided to customers. Table 96: Changes with no adverse effects Changes to standard settlement instructions (SSIs) Changes to standard settlements instructions (SSIs) Description of the change Customers will be required to change SSIs for derivatives, and other transactions and arrangements transferred from Santander UK to SLB. Changes will also be made to support systems and static/reference data in SLB systems but this will have no effect on customers. These changes are as a direct result of derivatives, and other transactions being transferred and the requirement for settlement payments to be made to a different legal entity. Why is the change not adverse? Customers will be required to amend their SSIs upon transfer of their positions to SLB in order to continue payments under their derivatives contracts and other transactions and arrangements. Corporate customers will typically have well practiced operational procedures to address changes to settlement instructions, which happen from time to time in the course of usual business activity. All affected customers will be contacted individually and advised of the changes through the communications plans in place. In addition, Santander UK will operate a follow-up service for any payments that will be inadvertently paid using the incorrect settlement instructions. My conclusion Having considered the nature of the change and the level of communication proposed to pre-warn customers of the changes, I have concluded that there is a change, but that this change will have no adverse effect on customers. EY 205

210 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Table 97: Changes with no adverse effects SLB on-boarding SLB on-boarding Description of the change 38 Santander UK corporate customers holding prohibited products transferring to SLB under the Scheme will need to be on-boarded to SLB, to the extent that they are not existing customers of Banco Santander. The Ring-Fencing Programme has conducted a KYC gap and impact analysis to compare the differences in anti-money laundering (AML) and KYC policies between Santander UK and SLB, and has identified any additional identification requirements that may be applied to the transferring customers. The gap and impact analysis has identified the differences between Santander UK and SLB in relation to the policies and standards applied (e.g. classification of Politically Exposed Persons (PEPs) and use of electronic identification evidence), the risk assessment methodologies used (e.g. a higher country risk interpretation for some jurisdictions), KYC checklists and identity verification evidence requirements. These changes may require some customers to provide additional information to enable them to be onboarded to SLB. Why is the change not adverse? Santander UK (the RFB) and SLB proposed to harmonise and align the AML Policy, Standards and Procedures Framework for Santander UK and SLB, to mitigate the effect on the transfering customers. These include: 1. Align SLB AML Policy Framework with Santander UK (the RFB). 2. Develop a common global risk rating methodology, align underlying reference data and country risk across Santander UK and SLB. 3. Develop a single set of common KYC checklists and identification and verification (ID&V) evidence per client type across Santander UK (the RFB) and SLB. SLB will be undertaking on-boarding on behalf of affected customers and aims to leverage existing due diligence information in Santander UK. Customers may need to provide additional information, pending the results of the policy alignment and harmonisation plan. SLB will seek to ensure a smooth on-boarding plan is in place and that all the customers migrating to SLB will meet the KYC requirements of SLB to enable all business to be transferred as necessary under the Scheme. My conclusion I have considered the policy harmonisation plan proposed by Santander UK (the RFB) and SLB and have concluded that all customers will be communicated and on-boarded to SLB to enable the transfer of business under the Scheme. I have concluded that there will be a change but no adverse effect on the customers who will be on-boarded to SLB under the Scheme, because the effort to complete on-boarding will not be significant to customers and will be reduced as much as possible by the processes and activities proposed by SLB. EY 206

211 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Table 98: Changes with no adverse effects Changes to customer documentation Changes to customer documentation Description of the change Corporate customers that have prohibited derivative products migrating from Santander UK to SLB will have their ISDA Master Agreements and associated CSAs replicated by Banco Santander, to the extent that they do not already have an ISDA Master Agreement with Banco Santander. The Ring-Fencing Programme is pursuing three options in terms of required customer documentation changes for customers positions transferring to SLB (contracting with Banco Santander) with all changes effected under the terms of the Scheme: Customer has a Banco Santander ISDA Master Agreement derivatives, and if applicable, CSAs, will be transferred to that existing master agreement with appropriate amendments. Customer does not have a Banco Santander ISDA Master Agreement and entire portfolio of derivatives is transferred to Banco Santander the existing ISDA Master Agreement and if applicable CSA will be transferred along with appropriate amendments. Customer does not have a Banco Santander ISDA Master Agreement and portfolio of derivatives will be split between Santander UK (permitted) and SLB (prohibited) the existing Master Agreement and if applicable, CSA, will be replicated in a Banco Santander ISDA Master Agreement for prohibited derivatives subject to the appropriate amendments. 38 corporate customers will be affected by the change outlined in the third option as set out above. This approach will also be applied to other forms of Master Agreement (e.g. Global Master Repurchase Agreements (GMRAs) and Global Master Securities Lending Agreements (GMSLAs)). There will be some consequential changes to ISDAs for customers transferring from Santander UK to SLB (e.g. changes to cross default threshold, tax representations, rating triggers and set-off provisions relating to Santander UK, as well as removing references to Santander UK regulatory requirements and authorisations). Why is the change not adverse? I have reviewed the legal due diligence performed and the Scheme document, together with holding extensive discussions about the findings of the due diligence with the Ring-Fencing Programme legal workstream. An objective of the Ring- Fencing Programme, is ensuring that derivative products can be transferred from Santander UK to SLB under the Scheme on equivalent terms. The proposed approach to achieve this is by transferring positions under the existing ISDA Master Agreement and associated CSAs or by replicating the ISDA Master Agreement with Banco Santander under the Scheme. The proposed amendments to the Master Agreements as a consequence of Banco Santander becoming the counterparty to the Master Agreement are consequential or administrative in nature and will not affect customers rights or obligations under the agreement. Existing collateral terms will be retained through replicated or equivalent CSAs. The Scheme will suspend any events of default and termination events within current documents to the extent that they would otherwise be triggered by the Scheme to ensure continuation of coverage. My conclusion I have assessed this change and I have concluded that there will be no adverse effect on a customer s rights and obligations under ISDAs and CSAs for prohibited derivatives transferred to SLB. EY 207

212 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Table 99: Changes with no adverse effects summary of findings from Part 2 Assessment area Assessment findings Finance Business Model Viability, Capital and Liquidity I have assessed the potential impact of the transfers to Banco Santander on its financials based on the quantum of business being transferred as a percentage of the current Banco Santander financial position as at December The business being transferred into Banco Santander will not have significant impact on the overall financial position of Banco Santander when compared to the size of its current balance sheet, P&L and RWAs (as at 31 December 2016). SLB and Banco Santander will remain viable and sustainable and meet minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes will not result in an adverse effect on Santander UK corporate customers being transferred into SLB. For further details of my findings, and how I have reached them through my work, please refer to section 10. Governance There will be changes to the governance of SLB and the performance of risk management as a key control for customers whose products are issued through SLB. However, I have concluded that these changes will not adversely affect this group of customers. Risk Management For further details of my findings, and how I have reached them through my work, please refer to sections 12 and 13. Operations, Infrastructure and Shared Services There will be changes to the operations that will function and/or the technology that will support the business transferred to SLB. However, I have concluded that these changes will not adversely affect this group of customers. For further details of my findings, and how I have reached them through my work, please refer to section 14. Recovery & Resolution Planning and Operational Continuity Santander UK corporate customers holding prohibited products will become subject to the Banco Santander (including SLB) RRP and operational continuity arrangements. These arrangements are set for the entire Banco Santander Group by Banco Santander as the ulimate parent. As a result, recovery, resolution and operational continuity arrangments in Banco Santander are consistent and no change is expected for the existing arrangements for Banco Santander with Santander UK, as a result of the Scheme. I have concluded that this change will not result in an adverse effect on Santander UK corporate customers holding prohibited products. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 208

213 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Assessment area Assessment findings Creditor Hierarchy (as part of Recovery and Resolution) Santander UK corporate customers holding prohibited products will continue to rank in a comparable class in Banco Santander (Including SLB). The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of both Santander UK as the RFB and Banco Santander (including SLB). However, I have concluded that these changes will not result in an adverse effect on Santander UK corporate customers holding prohibited products. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 209

214 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products No change The following summarises the areas where I have assessed there will be no change to Santander UK corporate customers (non-sme) as a consequence of the Scheme. Table 100: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives and loans WHT Derivatives no WHT as derivatives fall within other income category for WHT purposes. No capital gain/loss tax implication from the transfer of derivatives under the Scheme. There will be tax implication for some US non-derivatives products (e.g. covered bonds) where transfer of derivatives is deemed as a disposal for the US Tax purpose, but the Ring-Fencing Plan proposes to transfer these products outside of the Scheme. Customer ability to transfer products as a result of the Scheme The Scheme will not impose or remove any restrictions on any contractual right that a customer has to transfer a product. Use of collateral Existing collateral held with Santander UK will transfer along with the ISDA and relevant CSAs when the prohibited derivatives portfolio of Santander UK corporate customers is transferred to SLB. Current CSAs for derivatives that are transferring under the Scheme will be replicated in SLB. Permitted derivatives will be retained in Santander UK (the RFB) and collateral in relation to these products will continue under the terms of the existing CSA. Total amount of collateral received or posted by customers will not change. Rating triggers Santander UK will not provide derivatives to UK corporate customers containing rating trigger terms. Credit Availability Credit assessment Credit partner support There is expected to be no change to a customers ability to access credit for products across different legal entities, or any extension of the time taken to achieve credit approval. Although credit assessments for some products may need to be obtained through two legal entities (Santander UK and SLB), the credit policies, assessment and approval process is consistent across both legal entities and will be managed by the customers home entity credit team and RD. There will be no change to the level of credit partner support. EY 210

215 Findings and conclusions: Santander UK Corporate Customers (non-sme) holding permitted and prohibited products Coverage and Channels Relationship management and split relationship Customers will continue to have a single RD as their point of contact into the bank, which is a continuation of their existing relationship. There will be no change or split relationships, as customers will access products from both Santander UK and SLB through their existing RD. Sales process Clearing arrangements There are no changes to the policies, processes or availability of these assessment areas. Online banking e-commerce channels and platforms Branch availability Telephony services Sort codes BINs BICs Product and Services Availability Product and Services Availability Access and availability of the current set of products and services will remain the same. Further, levels of service and performance will remain consistent with quality standards, irrespective of the legal entity from which they are supplied. Regulatory Protection FSCS protection The Scheme will not transfer deposits to SLB. Customers will not lose FSCS protection as a consequence of the Scheme. Pursuit of complaints, legal and other proceedings All customers transferring under the Scheme will retain the right to pursue any outstanding complaints, legal or other proceedings against the transferee. Client money No transferring customers have client money protection. EY 211

216 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products 22. Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Introduction Under the Scheme, ANTS customers will have their prohibited products transferred to SLB. Their overall relationship will be managed and permitted products provided out of Santander UK (the RFB), with access to prohibited products via a referral model. As explained in section 5.1, the Santander UK Group has previously considered and discounted alternative options to retain prohibited business within ANTS as an entity outside of the RFB Sub-Group. However, following a full assessment including long-term business viability and sustainability tests, it was decided that this was not a viable solution and that the Chosen Model, as being implemented under the Ring-Fencing Plan, including the Scheme, is to transfer prohibited business to SLB, given its financial strength as the London branch of Banco Santander. For further details of the decision process leading to the current design, and my assessment of the process, please refer to section 5.1. Therefore, for ANTS corporate customers holding prohibited products, there are changes that the Ring- Fencing Programme is making that will have an impact on their banking relationships and where permitted and prohibited products will be booked and held in the future. Affected customers A total population of 472 corporate customers (excluding transferring Specified Corporate Customers), has been identified by ANTS. For 454 customers, their overall relationship and permitted products will be transferred under the Scheme to Santander UK (the RFB) and for 18 customers their prohibited products will be transferred to SLB under the Scheme. There are no proposals to remove or restrict the availability of products or services to which customers currently have access, or the way in which customers access these products and services (through a single RD). All products provided through the SGCB business and made available to SCCB business customers (and vice versa) will continue after the final legal effective date. This will continue to be actioned through the referral model, which which allow customers to access products provided from a different legal entity in the Banco Santander Group other than that which they hold their primary relationship with. The product specialist providing the product to a customer through the referral model will conduct a suitability assessment, as they do today. This is the same process that currently operates within the Santander UK Group and is a feature of product selection rather than availability. EY 212

217 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Changes to ANTS Corporate Customers (non-sme) holding permitted and prohibited products as a consequence of the Scheme Findings and conclusions I have identified a number of changes that will have adverse effects on these customers as a result of the migration of prohibited derivatives to SLB under the Scheme. They are in three specific areas: 1. The adverse effect of a lower credit rating for Banco Santander (including SLB) on CVA on derivative valuations; 2. Changes to netting sets for 10 customers permitted and prohibited derivatives given that customer positions will be split in the future between SLB for prohibited derivatives and Santander UK (the RFB) for permitted derivatives. Customers will be unable to net ETAs, if there is a default from either Santander UK (the RFB) or SLB, between the two types of derivatives; and 3. Changes to rights of set-off for 4 customers whose permitted unsecured loans will be transferred to Santander UK (the RFB) where they also hold deposits, resulting in Santander UK (the RFB) being able to exercise rights of set-off between permitted customers unsecured loans and deposits. Notwithstanding that mitigation cannot be provided in all circumstances, I have concluded that the changes with adverse effects are no more than reasonably necessary to achieve the Scheme s purposes and that no better alternatives are available to reduce the adverse effects on customers. The details of the changes and the effects are set out below. Changes with adverse effects I have identified changes as a consequence of the Scheme that will have adverse effects on ANTS corporate customers holding permitted and prohibited products. These adverse effects are, in my opinion, not mitigated. The following details these changes I have identified and the rationale for why I have concluded that these ANTS corporate customers who hold permitted and prohibited products will be adversely affected with no mitigations or alternatives made available, but that the effects are no more than reasonably necessary to achieve the Scheme s purposes. EY 213

218 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Table 101: Changes with adverse effects that are not mitigated Changes to rights of set-off Changes to rights of set-off Description of the change 4 ANTS corporate customers who currently hold permitted and prohibited products will have their prohibited derivatives transferred from ANTS to SLB under the Scheme. Permitted derivatives, permitted unsecured loans and other transactions will be transferred under the Scheme, from ANTS to Santander UK (the RFB). Set-off is where a debtor (ANTS or Santander UK) can claim against a creditor (in this scenario, a customer) and reduce or settle any amounts outstanding in the event of a default by the customer, as a result of holding one or more active accounts with the customer. As a consequence of the transfer of an ANTS corporate customer s prohibited derivatives to SLB, in the event of SLB default, those customers will no longer be able to set-off any ETA arising from prohibited derivatives owed by SLB against the permitted unsecured loans that have been transferred to Santander UK (the RFB). Previously, with unsecured loans and derivatives both held in ANTS, they would have set-off rights between the derivative ETA owed by ANTS and the unsecured loans. Customers will retain the right of set-off between ETA arising from permitted derivatives and outstanding permitted unsecured loan payments in the event of Santander UK (the RFB) default. As a consequence of the transfer of an ANTS corporate customer s permitted derivatives and loans (including unsecured loans) to Santander UK (the RFB), that entity will obtain the ability to set-off outstanding unsecured loan amounts against the customer s deposit, if they have one, where previously this was not possible. This is because as a consequence of the Scheme, the customers unsecured loans and deposits will be both held in Santander UK (the RFB), whereas before they were split between Santander UK and ANTS. Why is this adverse? There is likely to be an adverse effect where customers permitted unsecured loans are transferred to Santander UK (the RFB), as Santander UK (the RFB) will be contractually entitled to apply its right of set-off between the customer s permitted unsecured loan and their deposit held in Santander UK (the RFB). However, this adverse effect will only materialise should the customer default on the unsecured loan. There may also be an adverse effect where customer s prohibited derivatives are transferred to SLB, as the customer will no longer be able to off-set any ETA owed to the customer under the prohibited derivative against outstanding unsecured loan payments that will be transferred to Santander UK. However, this adverse effect will only materialise should SLB default. Mitigations or alternatives available An alternative approach to maintain ANTS as a separate banking entity outside of the RFB Sub-Group was considered. However, there were a number of issues (including the ability of ANTS to remain viable and maintain a separate credit rating) which resulted in this option being discounted. This is covered in more detail on section 5.1.1, which includes my conclusions. A further alternative approach to transfer all loans from ANTS to SLB would require SLB to implement new infrastructure and organisational changes to originate and manage a loan portfolio in SLB. The sole objective would be obviating the risk that customers may be adversely affected by set-off rights that will only materialise should the customer default on the unsecured loan. I consider that this alternative would be disproportionate to the risk that the adverse effect will pose to customers, also recognising the circumstances where it would materialise. EY 214

219 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Changes to rights of set-off Is this sufficiently mitigated/were alternatives feasible? I have assessed that the adverse effect is not mitigated by actions that are or could be taken by the Santander UK Group. My conclusion The level of communication proposed by the Ring-Fencing Programme to the affected customers will provide clarity on the new contractual rights and enable customers to consider alternative arrangements (including alternative banking arrangements), to maintain the separation of unsecured loans from deposits if they consider the change unacceptable to them. Whilst communications cannot mitigate the adverse effect, they will ensure that customers are aware of the potential effect, in this case adverse effects, of the changes. I have concluded that no viable alternatives or mitigations are available that would reduce the adverse effect, given the design of the Ring-Fencing Plan, including the Scheme. Therefore, I have concluded that although this group of customers is likely to be adversely affected by the change proposed by the Scheme, the effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme, particularly given that the adverse effect will only impact on customers should they default an unsecured loan. EY 215

220 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Table 102: Changes with adverse effects that are not mitigated Changes to netting sets Changes to netting sets Description of the change 10 ANTS corporate customers that currently hold (permitted and prohibited) derivatives will have their prohibited derivatives transferred to SLB under the Scheme. Their positions in permitted derivatives will also be transferred under the Scheme, from ANTS to Santander UK (the RFB). This will cause the netting sets, contained within the ANTS CSAs, relating to the customer s permitted and prohibited derivatives to be broken. Why is this adverse? In the event of bank default, the customer will not be able to net any ETA owed from SLB under the prohibited derivative against any ETA under the permitted derivatives that move to Santander UK (the RFB). This may result in the customer having to pay, to SLB for prohibited derivatives or to Santander UK for permitted derivatives, any amounts owed to the respective entities separately to receiving any amounts due to it as a result of early termination. If timing issues are taken into account, this could be adverse for the customer. Mitigations or alternatives available Given the requirement to move the prohibited products, and given that ANTS has been proved to not be an alternative as a viable banking entity outside of the RFB Sub-Group, the other alternative approach considered is for ANTS to transfer customers permitted derivatives to SLB, which would preserve existing netting sets. However, this would cause other issues for the customer which will not necessarily be to the customer s interests. For example, the lower credit rating of SLB might result in a higher CVA charge if the customers are transferred to SLB, along with consequential on-boarding and systems changes that would be required. Also, if the customer has other products (e.g. loans) moving permitted derivatives could have other consequences, and could, for example, affect hedging relating to their permitted derivatives. This alternative would effectively result in the migration of the entire ANTS derivatives portfolio to SLB. The consequential implications that this would have for capital, infrastructure and controls would require a fundamental change in the Ring-Fencing Plan, and so is not an alternative that I have considered. Is this sufficiently mitigated/were alternatives feasible? I have assessed that the adverse effect is not mitigated by actions that are or could be taken by the Santander UK Group. EY 216

221 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Changes to netting sets My conclusion The level of communication proposed by the Ring-Fencing Programme to the affected customers will provide clarity on the new contractual rights and enable customers to consider alternative arrangements (including alternative banks) to maintain the separation of unsecured loans from deposits, if they consider the effect sufficiently adverse to them. Whilst communications cannot mitigate the adverse effect, they will ensure that customers are aware of the potential effect, in this case adverse effects, of the changes. I have concluded that no viable alternatives or mitigations are available that would reduce the adverse effect, given the design of the Ring-Fencing Plan, including the Scheme. The proposed design to transfer prohibited derivatives to SLB and permitted derivatives to Santander UK is the most appropriate solution. Therefore, I have concluded that although this group of customers is likely to be adversely affected by the change proposed by the Scheme, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 217

222 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Table 103: Changes with adverse effects that are not mitigated Credit Valuation Adjustment (CVA) Credit Valuation Adjustment (CVA) Description of the change There may be a change to CVA for 18 ANTS corporate customers whose prohibited derivatives are transferred to SLB. This is as a result of the lower credit rating of Banco Santander (and therefore SLB), compared to that of Santander and ANTS, which results in a wider credit spread being applied to their CVA calculation. Customers CVA calculations are complex, with a number of variables within the calculation and no standard method used across all customers. It is an activity carried out by the customer in accordance with their own valuation design, with credit spread being but one variable used. Why is this adverse? The exact effect on CVA for individual customers is not possible to assess because the valuation models used by customers for CVA calculation are specific to them and unknown to Santander UK, or to me. However the Ring-Fencing Programme has carried out its own DVA and, using that as a proxy for CVA, there may be changes in CVA for some customers whose derivatives will be transferred to SLB as a consequence of the wider CDS credit spread. Some may be positive, others negative and this will depend on the valuation method used and the timing of the calculation, which is impacted by market rates at the time of the calculation. There is no defined methodology to calculate CVA. The Ring-Fencing Programme has used proxy CDS spread (an average of LBG, HSBC and Banco Santander) in DVA, to estimate the CVA effect. Although this calculation cannot provide precise estimates of CVA, this analysis has evidenced to me that the CVA impact may be either positive or negative and dependent upon the constituents of the customer s portfolio, the market data at the time of transfer and customers accounting policy. Potential changes to CVA affected customers may require customers to apply additional economic regulatory capital to cover their positions, incurring additional costs of capital. It should be noted that equally they may require less capital and therefore less cost. Those customers who do not trade under the terms of a CSA will not have the benefit of the netting and collateral arrangement which help mitigate the adverse CVA effect. Mitigations or alternatives available Given the winding down of the cross-guarantee, and without the creation of a new A-rated banking entity in the UK or withdrawal or termination of certain products, there is no reasonable alternative to the consequential effect of the rating change from ANTS to SLB on CVA calculations. Beyond that, and given inherent uncertainty of the actual positive and negative effect of the change on a customer s position, Santander UK is not proposing to offer compensation as a mitigation for additional capital costs that may not materialise and cannot at this point be quantified. Is this sufficiently mitigated? I have assessed that the adverse effect is not mitigated by actions that are or could be taken by the Santander UK Group. EY 218

223 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Credit Valuation Adjustment (CVA) My conclusion I have concluded that it would be unreasonable for Santander UK to commit to providing some form of compensation to customers, when the effect (adverse or positive) will only become clear on transfer when each customer runs their own CVA calculation, which will be influenced by market data at the time of transfer and may result in a positive or negative effect on CVA. Whilst communications cannot mitigate an adverse effect, it can ensure that customers are aware of the potential effect of a change, and I am satisfied that the communications approach being adopted by Santander UK will raise the possible effect and enable a dialogue with customers regarding how to mitigate any actual adverse effects on customers, including compensation, when CVA calculations are run by customers on transfer. I have concluded that no appropriate alternatives are available that would reduce the adverse effect and that the Santander UK Group is being transparent and open with affected customers, through their communications approach involving direct engagement through their RDs. Therefore, I have concluded that although this group of customers may be adversely affected by the change proposed by the Scheme, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 219

224 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Changes with no adverse effects I have identified changes as a consequence of the Scheme that do not result in an adverse effect on ANTS corporate customers holding permitted and prohibited products. The following details these changes and the rationale for why I have concluded that ANTS corporate customers will be affected, but not adversely affected. Table 104: Change with no adverse effects Derivative valuation service provided by ANTS to certain customers Derivative valuation service provided by ANTS to certain customers Description of the change The Ring-Fencing Programme has identified 4 ANTS corporate customers holding uncollateralised prohibited derivatives, currently using the derivative valuation service provided by ANTS to value their derivative portfolios. There will be a change and effect on their valuation service when their derivatives portfolios are moved from ANTS to SLB under the Scheme, due to the different discount curve used by ANTS and SLB. For ANTS corporate customers holding collateralised prohibited derivatives with CSAs, Banco Santander propose to replicate existing CSAs in SLB, in order to preserve the valuation parameters (including discount curve). Why is the change not adverse? Although the affected customers will see a change in the valuation of their uncollateralised derivative portfolios given the different discount curve used in SLB, the Ring-Fencing Programme s analysis has shown that the 4 ANTS corporate customers will experience a positive impact on their derivative portfolios. I have reviewed this analysis and am satisfied with the outputs. My conclusion Having considered the analysis undertaken by the Ring-Fencing Programme of the effect on customers portfolio valuations, I have concluded that the changes caused by the difference in valuation parameters used by ANTS and SLB will have no adverse effect on the ANTS corporate customers holding uncollateralised prohibited derivatives. EY 220

225 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Table 105: Changes with no adverse effects Access to Prohibited Products in the future Access to Prohibited Products in the future Description of the change Santander UK (the RFB) corporate customers, including those transferred from ANTS under the Scheme, will only be able to access prohibited products through SLB via the referral model. Customers will be referred to the specialist product area within SLB for product structuring, pricing and ultimately booking and contracting. Whilst continuing to remain a customer of Santander UK Group, the counterparty for a trade will be SLB/Banco Santander and these customers will receive a SLB confirmation/contract. Why is the change not adverse? I have carried out assessments of the future product matrix, referral model and relationship management models adopted by the Santander UK Group and any changes being made, including the extension of the existing processes and policies to recognise the transfer of prohibited products to SLB. Products will continue to be available either directly from Santander UK (the RFB) for permitted products or through SLB for prohibited products via the referral model. In both cases, customers will continue to access products through their existing RDs, who will not change and are responsible for enabling the smooth access to the Banco Santander Group for the customer. The RD acts as a single point of contact, by liaising with product specialists in other entity through the referral model. For many customers, this will not be a change to the way that they currently engage with multiple entities across the Banco Santander Group. My conclusion I have assessed this change and have concluded that there is no adverse effect on customers. Customers will continue to have access to the same products and services. They will also continue to have a single RD, who will continue act as a single point of contact and manage and coordinate access to all products and services provided by the Banco Santander Group for their customers. EY 221

226 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Table 106: Changes with no adverse effects Changes to customer documentation Changes to customer documentation Description of the change Up to 18 corporate customers that have prohibited derivative products migrating from ANTS to SLB will have their ISDAs and associated CSAs replicated by Banco Santander (the RFB), to the extent that they do not already have an ISDA with Banco Santander. The Ring-Fencing Programme is pursuing three options in terms of required customer documentation changes for customers positions transferring to SLB (contracting with Banco Santander) with all changes effected under the terms of the Scheme: Customer has a Banco Santander ISDA Master Agreement derivatives, and if applicable, CSAs, will be transferred to that existing Master Agreement with appropriate amendments. Customer does not have a Banco Santander ISDA Master Agreement and entire portfolio of derivatives is transferred to Banco Santander existing ISDA Master Agreement, and if applicable, CSAs, will be transferred along with appropriate amendments. Customer does not have a Banco Santander ISDA Master Agreement and portfolio of derivatives will be split between Santander UK (permitted) and SLB (prohibited) existing Master Agreements, and if applicable, CSAs, will be replicated in a Banco Santander ISDA Master Agreement for prohibited derivatives subject to the appropriate amendments. This approach will also be applied to other forms of Master Agreement (e.g. GMRAs and GMSLAs). There will be some consequential changes to ISDAs for customers transferring from ANTS to SLB, e.g. changes to cross default threshold, tax representations, rating triggers and set-off provisions relating to Santander UK, as well as removing references to Santander UK regulatory requirements and authorisations. Why is the change not adverse? I have reviewed the legal due diligence performed and the Scheme document, together with holding extensive discussions about the due diligence findings with the Ring-Fencing Programme legal workstream. An objective of the Ring-Fencing Programme, is ensuring that derivative products can be transferred from ANTS to SLB under the Scheme on equivalent terms. The proposed approach to achieve this is by transferring positions under the existing ISDA Master Agreement and associated CSAs or by replicating the ISDA Master Agreement with Banco Santander under the Scheme. The proposed amendments to the Master Agreements as a consequence of Banco Santander becoming the counterparty to the Master Agreement are administrative in nature and do not affect customers rights or obligations under the agreement. Existing collateral arrangements will be retained through replicated or equivalent CSAs. The Scheme will suspend any events of default and termination events within current documents to the extent that they would otherwise be triggered by the Scheme to ensure continuation of coverage. My conclusion I have assessed this as a change and I have concluded that there will be no adverse effect on a customer s rights and obligations under ISDAs and CSAs for prohibited derivatives transferred to SLB. EY 222

227 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Table 107: Changes with no adverse effects Use of customer assets as security Use of customer assets as security Description of the change There will be a change to the basis on which security is provided by customers to ANTS with regard to permitted derivatives, secured loans or other transactions when the permitted derivatives will be transferred under the Scheme from ANTS to SLB. For the majority of these customers, there are security trustees/agents currently in place. The security arrangement will transfer along with the product. Existing bilateral arrangements will be amended under the Scheme, to enable SLB to share in security as a beneficiary under a security trust arrangement. There will be no change, including no cost, to the customers as a result of the changes. In some limited circumstances, where customers do not have a security trustee arrangement (usually where security has been taken on a bilateral basis across all the customer s assets), the Banco Santander Group will assist in establishing arrangements and ensuring that Banco Santander is named as a beneficiary. Why is the change not adverse? SLB is proposing to meet the costs associated with amending security trustee arrangements, e.g. adding Banco Santander as a named trust beneficiary. SLB will not request additional security from customers. Instead, existing security will be allotted to the secured loans, derivatives and other transactions across the different legal entities. My conclusion I have considered the plans proposed for the handling of customer security when customers prohibited products will be transferred to SLB. I have concluded that there is a change, but no adverse effect, as consequence of the Scheme. Table 108: Changes with no adverse effects Post trade support Post trade support Description of the change Post trade support (e.g. settlement, reconciliation, and confirmation for the derivatives transactions) will be provided from the Madrid Operations Centre (which may not be a change for a customer if this customer already contracts with Banco Santander for some products). Why is the change not adverse? All current service levels and performance levels will remain the same as today at a minimum. Management control and governance levels will be at least the same level as a consequence of the changes. Note: please refer to section 14 on Operations, Infrastructure and Shared Services for further information. The quality, level and performance of post trade support to be provided by the Madrid Operations Centre is expected to be unchanged. Therefore, there is no need to consider mitigating actions or alternative approaches. My conclusion I have assessed this change and have concluded that it will not result in an adverse effect on the quality, level and performance of service provided to customers. EY 223

228 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Table 109: Changes with no adverse effects Delegated Reporting/Trade Reporting/Mandatory Reporting Delegated Reporting/Trade Reporting/Mandatory Reporting Description of the change Customers access to delegated reporting/trade reporting/mandatory trading services will change as a result of transferring under the Scheme. Delegated Reporting and Trade Reporting (European Market Infrastructure Regulation (EMIR) & Dodd Frank Act (D-FA) requirement) 9 customers who currently use ANTS for the delegated reporting service will be able to use a replicated delegated reporting service contract with SLB. Customers who need to trade report the change of counterparty on the day after the contract transfer (via novation or the Scheme) will need to report a new UTI (Unique Transaction ID) for EMIR reporting. The number of impacted trades will equal the number of migrated clients with reportable trades that will be transferred. Mandatory Trading (D-FA requirement) There is a mandatory trading requirement set by D-FA for ANTS customers who are US persons or guaranteed affiliates or conduits of US persons to trade certain derivatives through a Swap Execution Facility (SEF), via ANTS SEF membership. SLB will continue to support ANTS customers SEF access via a Banco Santander membership. Why is the change not adverse? Replicated delegated reporting service agreements will be provided by SLB, which will replicate the service provided by ANTS and/or Santander UK. SLB will provide access to a SEF through Banco Santander SEF membership for customers with D-FA trading requirements. Therefore, there is no need to consider mitigating actions or alternative approaches. My conclusion I have assessed these changes and concluded that there is no adverse effect. A comparable level of service will be provided following the transfer under the Scheme. EY 224

229 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Table 110: Changes with no adverse effects Changes to standard settlement instructions (SSIs) Changes to standard settlements instructions (SSIs) Description of the change 18 customers will be required to change SSIs for prohibited derivatives, and other transactions and arrangements transferred from ANTS to SLB. Changes will also be made to supporting systems and static/reference data in SLB systems, but this will have no effect on customers. These changes are as a direct result of prohibited products being transferred and the requirement for settlement payments to be made to a different legal entity. Why is the change not adverse? Customers will be required to amend their SSIs upon transfer of their positions to SLB in order to continue payments under their derivatives contracts and other products and arrangements. All customers will be contacted individually and advised of the changes. All customers will have standard operational procedures to handle changes to settlement instructions as part of BAU processes. In addition, Santander UK and SLB will operate a follow-on service for any payments that are inadvertently paid using the incorrect settlement instructions. My conclusion Having considered the nature of the change, I have concluded that there will be changes but no adverse effect on customers. EY 225

230 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Table 111: Changes with no adverse effects SLB on-boarding SLB on-boarding Description of the change Up to 18 ANTS corporate customers, holding prohibited products transferring to SLB under the Scheme, will need to be on-boarded to SLB, to the extent that they are not existing customers of Banco Santander (including SLB). The Ring-Fencing Programme has conducted a KYC gap and impact analysis to compare the differences in AML and KYC policies between ANTS and SLB and has identified any additional identification requirements that may be applied to the transferring customers. The gap and impact analysis has identified the differences between ANTS and SLB in relation to the policies and standards applied (e.g. classification of PEPs and use of electronic identification evidence), the risk assessment methodologies used (e.g. a higher country risk interpretation for some jurisdictions) and KYC checklists and identity verification evidence. These changes may require some customers to provide additional information to enable them to be onboarded to SLB. Why is the change not adverse? Santander UK (the RFB) and SLB proposed to harmonise and align the AML Policy, Standards and Procedures Framework to mitigate the effect on the transfering customers. These include: 1. Align SLB AML Policy Framework with Santander UK (the RFB); 2. Develop a common global risk rating methodology, align underlying reference data and country risk across Santander UK (the RFB) and SLB; and 3. Develop a single set of common KYC checklists and ID&V evidence per client type across Santander UK (the RFB) and SLB. SLB will be undertaking on-boarding on behalf of the affected customers and aims to leverage existing due diligence information in ANTS. Customers may need to provide additional information, pending the results of the policy alignment and harmonisation plan. SLB aims to ensure a smooth on-boarding plan is in place and that all the customers migrating to SLB will meet the KYC requirements of SLB, to enable all business to be transferred as necessary under the Scheme. My conclusion I have considered the policy harmonisation plan proposed by Santander UK (the RFB) and SLB and have validated that all customers will be communicated and onboarded to SLB to enable the transfer of business under the Scheme. I have concluded that there will be a change but no adverse effect on the customers who will be on-boarded to SLB under the Scheme. The effort to complete onboarding will not be significant for customers and will be reduced as much as possible by the processes and activities proposed by SLB. EY 226

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232 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Table 112: Changes with no adverse effects summary of findings from Part 2 Assessment area Assessment findings Finance Business Model Viability, Capital and Liquidity I have assessed the potential impact of the transfers to Banco Santander on its financials, based on the quantum of business being transferred as a percentage of the current Banco Santander financial position as at December The business being transferred into Banco Santander will not have significant impact on the overall financial position of Banco Santander when compared to the size of its current balance sheet, P&L and RWAs (as at 31 December 2016). SLB and Banco Santander will remain viable and sustainable and meet minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes will not result in an adverse effect on ANTS corporate customers with prohibited products being transferred into SLB. For further details of my findings, and how I have reached them through my work, please refer to section 10. Governance There will be changes to the governance of SLB and the performance of risk management as a key control for customers whose products are issued through SLB. However, I have concluded that these changes will not adversely affect this group of customers. Risk Management For further details of my findings, and how I have reached them through my work, please refer to sections 12 and 13. Operations, Infrastructure and Shared Services There are changes to the operations that will function and/or the technology that will support the business transferred to SLB. However, I have concluded that these changes will not adversely affect this group of customers. For further details of my findings, and how I have reached them through my work, please refer to section 14. Recovery & Resolution Planning and Operational Continuity ANTS corporate customers holding prohibited products will become part of the Banco Santander (including SLB) RRP and operational continuity arrangements. These arrangements are set for the entire Banco Santander Group by Banco Santander as the ultimate parent. As a result, recovery, resolution and operational continuity arrangements in Banco Santander are consistent and no change is expected to the existing arrangements for Banco Santander as a result of the Scheme. I have concluded that this change will not result in an adverse effect on ANTS corporate customers holding prohibited products. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 228

233 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Assessment area Assessment findings Creditor Hierarchy (as part of recovery and resolution) ANTS corporate customers holding prohibited products will continue to rank in a comparable class in Banco Santander (including SLB). The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of both Santander UK (the RFB) and Banco Santander (including SLB). However, I have concluded that these changes will not result in adverse effects on ANTS corporate customers holding prohibited products. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 229

234 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products No change The following summarises the areas where I have assessed there will be no change to ANTS corporate customers (non-sme) holding permitted and prohibited products as a consequence of the Scheme. Table 113: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives and loans WHT Derivatives no WHT as derivatives fall within other income category for WHT purposes. No capital gain/loss tax implications from the transfer of derivatives under the Scheme. There will be tax implications for some US non-derivatives products (e.g. covered bonds) where derivatives transfer is deemed as a disposal for US Tax purposes, but the Ring-Fencing Plan aims to transfer these products outside of the Scheme. Customer ability to transfer products as a result of the Scheme The Scheme will not impose or remove any restrictions on any contractual right that a customer has to transfer a product. Rating triggers ANTS does not provide derivatives to UK corporate customers containing rating trigger terms. Use of collateral Existing collateral held with ANTS will transfer along with the Master Agreements and relevant CSAs (no change of existing terms) when prohibited derivatives will be transferred to SLB and permitted derivatives will be transferred to Santander UK (the RFB). Current CSAs for derivatives that are transferring under the Scheme will be replicated in SLB and Santander UK No change to the total amount of collateral posted by customer. Coverage and Channels Relationship management and split relationship Customers will continue to have a single RD as their point of contact into the bank. This will be a continuation of their existing relationship. There will be no change/split relationship as customers will access products from both Santander UK and SLB/Banco Santander through their existing RDs. Credit assessment and credit partner support There is expected to be no effect on a customers ability to access credit for products across different legal entities or any extension of the time taken to achieve credit approval. Although credit assessments for some products may need to be obtained through two legal entities (Santander UK and SLB), the credit policies, assessment and approval process is consistent across both legal entities and will be managed by the customer s home entity credit team and RD. EY 230

235 Findings and conclusions: ANTS Corporate Customers (non-sme) holding permitted and prohibited products Assessment area Conclusion There will be no change in the skill-set(s) of Credit Analysts as the Credit Analysts currently working in Santander UK will transfer to SLB in support of migrating customers. Sales process Clearing arrangements There will be no changes to the policies, processes or availability of these assessment areas. Online banking e-commerce channels and platforms Branch availability Telephony services Sort codes BINs BICs Product and Services Availability Product and Services Availability Access and availability of the current set of products and services offered to customers will remain the same. Further, levels of service and performance will remain consistent with quality standards, irrespective of the legal entity from which they are supplied. Regulatory Protection FSCS protection The Scheme will not transfer deposits to SLB. Customers will not lose FSCS protection as a consequence of the Scheme. Deposits held for corporate customers in ANTS will either be novated to Santander UK or mature ahead of the Scheme becoming effective. Pursuit of complaints, legal and other proceedings All customers transferring under the Scheme will retain the right to pursue any outstanding complaints, legal or other proceedings against the transferee. Client money No transferring customers have client money protection. EY 231

236 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers 23. Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Introduction In order to meet the requirements of Article 12 of EAPO for Santander UK (the RFB), Santander UK and ANTS will transfer some permitted derivatives to SLB under the Scheme in order to provide headroom against the threshold set by the EAPO. To minimise the impact, those customers with the largest and most complex permitted derivatives and who already hold prohibited products with Banco Santander will be transferred to SLB. Other permitted products will remain in Santander UK (the RFB) for applicable Santander UK customers or transfer to Santander UK (the RFB) for applicable ANTS customers. Affected customers 66 ANTS and Santander UK corporate customers with the largest and most complex derivative portfolios from SGCB Corporate and Institutional Banking (CIB) have been identified to have their permitted derivatives and prohibited products transferred to SLB under the Scheme. These customers have been chosen based on the customers having the largest and most complex derivative positions and prohibited products already booked with Banco Santander. Therefore, the changes as a consequence of transferring under the Scheme, will have the least effect on the customers compared to the way in which they engage with the Banco Santander Group today. There are no proposals to remove or restrict the availability of products or services to which customers currently have access; or the way in which customers access these products and services, through a single RD. All products provided through the SGCB business and made available to SCCB business customers (and vice versa) will continue after the final legal effective date. This will continue to be actioned through the referral model, which allows customers to access products provided from a different legal entity in the Banco Santander Group other than that with which they hold their primary relationship. The product specialist providing the product to a customer through the referral model will conduct a suitability assessment as they do today. EY 232

237 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Changes to Santander UK and ANTS Specified Corporate Customers as a consequence of the Scheme Findings and conclusions I have identified changes that will have adverse effects on these customers as a result of the migration of prohibited derivatives to SLB. The changes relate to the effect of CVA on derivative valuations resulting from the lower credit spread SLB, the basis on which derivatives will be valued under the ANTS valuation service caused by the different discount curves used by SLB, and customers rights of set-off between permitted and prohibited products held with SLB and permitted products held with Santander UK (the RFB). Given the circumstances of the changes, it is not possible for SLB to offer mitigation to the adverse effect that these changes create. In addition, I have identified a change affecting ratings triggers included in customer documentation, as a result of a lower credit rating for SLB than for Santander UK Group (including ANTS). This change may result in the customer being required to take action as a result of the rating downgrade. However, the Ring-Fencing Programme proposes to take mitigating actions to avoid the customer having to take any actions. Notwithstanding that mitigation cannot be provided in all circumstances, I have concluded that the changes with adverse effects are no more than reasonably necessary to achieve the Scheme s purposes and that no better alternatives are available to reduce the adverse effects on customers. Changes with adverse effects I have identified changes as a consequence of the Scheme that will have adverse effects on Santander UK and ANTS specified corporate customers. These adverse effects are, in my opinion, not mitigated. The following details these changes I have identified and the rationale for why I have concluded that these Santander UK and ANTS specified corporate customers will be adversely affected with no mitigations or alternatives made available, but that the effects are no more than reasonably necessary to achieve the Scheme s purposes. Table 114: Changes with adverse effects that are not mitigated Changes to rights of set-off for ANTS specified corporate customers Changes to rights of set-off for ANTS specified corporate customers Description of the change 23 ANTS specified corporate customers who currently hold permitted and prohibited derivatives will have their permitted and prohibited derivatives transferred from ANTS to SLB under the Scheme. Permitted loans will be transferred under the Scheme, from ANTS to Santander UK (the RFB). Set-off is where a debtor (ANTS or Santander UK) can claim against a creditor (in this scenario, a customer) and reduce or settle any amounts outstanding in the event of a default by the customer, as a result of holding one or more active accounts with the customer. As a consequence of the transfer of an ANTS corporate customer s prohibited derivatives to SLB, in the event of SLB default, customers will no longer be able to set-off any ETA arising from prohibited derivatives owed by SLB against the unsecured loans that have been transferred to Santander UK (the RFB). Previously, with loans and prohibited derivatives both held in ANTS they would have set-off rights between ETA owed by ANTS and unsecured loans. EY 233

238 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Changes to rights of set-off for ANTS specified corporate customers Why is this adverse? There is likely to be a change with adverse effect where customers permitted and prohibited derivatives are transferred to SLB, as the customer will no longer be able to off-set any ETA owed to the customer against outstanding unsecured loan payments that will be transferred to Santander UK (the RFB). However, this adverse effect will only materialise should SLB default. Mitigations or alternatives available An alternative approach to maintain ANTS as a separate banking entity outside of the RFB Sub-Group was considered. However, there were a number of issues (including the ability of ANTS to remain viable and maintain a separate credit rating) which resulted in this option being discounted. This is covered in more detail in section 5.1.1, which includes my conclusions. A further alternative approach to transfer all loans from ANTS to SLB, would require SLB to implement new infrastructure and organisational changes to originate and manage a loan portfolio in SLB. The sole objective would be obviating the risk that customers may be adversely affected by set-off rights, that will only materialise should SLB default. I consider that this alternative would be disproportionate to the risk that the adverse effect poses to customers, also recognising the circumstances where it would materialise. A further alternative approach, to retain some or all of these customers permitted derivatives in Santander UK (the RFB), would result in issues for Santander UK (the RFB) s ability to meet the EAPO Market Risk Regulatory limits requirements. Therefore, this alternative approach has been considered but discounted by both the Ring-Fencing Programme and me. Is this sufficiently mitigated/is the alternative feasible? I have assessed that the adverse effect is not mitigated by actions that are or could be taken by the Santander UK Group. My conclusion The level of communication proposed by the Ring-Fencing Programme to the affected customers will provide clarity on the new contractual rights and enable customers to consider alternative arrangements (including alternative banking arrangements), to maintain the separation of unsecured loans from deposits, if they consider the change unacceptable to them. Whilst communications cannot mitigate the adverse effect, they will ensure that customers are aware of the potential effect, in this case adverse effects, of the changes. I have concluded that no viable alternatives or mitigations will be available that would reduce the adverse effect, given the design of the Ring-Fencing Plan, including the Scheme. Therefore, I have concluded that although this group of customers is likely to be adversely affected by the change proposed by the Scheme, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme, particularly given that the adverse effect would only affect customers should SLB default. EY 234

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240 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Table 115: Changes with adverse effects that are not mitigated Changes to rights of set-off for Santander UK specified corporate customers Changes to rights of set-off for Santander UK specified corporate customers Description of the change 3 Santander UK specified corporate customers who currently hold permitted and prohibited products will have their permitted derivatives and prohibited products transferred from Santander UK to SLB under the Scheme. Loans will be retained within Santander UK (the RFB). Set-off is where a debtor (Santander UK) can claim against a creditor (in this scenario, a customer) and reduce or settle any amounts outstanding in the event of a default by the customer, as a result of holding one or more active accounts with the customer. As a consequence of the transfer of Santander UK specified corporate customer s permitted and prohibited derivatives to SLB, in the event of SLB default, customers will no longer be able to set-off any ETA owed by SLB against the unsecured loans retained in Santander UK (the RFB). Previously, with loans and derivatives both held in Santander UK, they would have had set-off rights between ETA owed by ANTS and unsecured loans. Santander UK s contractual set-off rights between the customers deposits and unsecured loans will remain unchanged. Why is this adverse? There is likely to be an adverse effect where customers permitted and prohibited derivatives are transferred to SLB as the customer will no longer be able to off-set any ETA owed to the customer against outstanding unsecured loan payments that will be retained in Santander UK (the RFB). However, this adverse effect will only materialise should SLB default. Mitigations or alternatives available An alternative approach to maintain ANTS as a separate banking entity outside of the RFB Sub-Group was considered. However, there were a number of issues, including the ability of ANTS to remain viable and maintain a separate credit rating, which resulted in this option being discounted. This is covered in more detail on section 5.1.1, which includes my conclusions. A further alternative approach to transfer all loans from Santander UK to SLB would require SLB to implement new infrastructure and organisational changes to originate and manage a loan portfolio in SLB. The sole objective of this would be obviating the risk that customers may be adversely affected by set-off rights, that would only materialise should SLB default. I consider that this alternative would be disproportionate to the risk that the adverse effect poses to customers, also recognising the circumstances where it would materialise. A further alternative approach, to retain some or all of these customers permitted derivatives in Santander UK (the RFB), would result in issues for Santander UK (the RFB) s ability to meet the EAPO Market Risk Regulatory limits requirements. Therefore, this alternative approach has been considered but discounted by both the Ring-Fencing Programme and me. Is this sufficiently mitigated/is the alternative feasible? I have assessed that the adverse effect is not mitigated by actions that are or could be taken by the Santander UK Group. EY 236

241 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Changes to rights of set-off for Santander UK specified corporate customers My conclusion The level of communication proposed by the Ring-Fencing Programme to the affected customers will provide clarity on the new contractual rights and enable customers to consider alternative arrangements (including alternative banking arrangements) to maintain the separation of unsecured loans from deposits if they consider the change unacceptable to them. Whilst communications cannot mitigate the adverse effect, they will ensure that customers are aware of the potential effect, in this case adverse effects, of the changes. I have concluded that no viable alternatives or mitigations are available that would reduce the adverse effect, given the design of the Ring-Fencing Plan, including the Scheme. Therefore, I have concluded that although this group of customers is likely to be adversely affected by the change proposed by the Scheme, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme, particularly given that the adverse effect would only affect customers should SLB default. EY 237

242 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Table 116: Changes with adverse effects that are not mitigated Derivative valuation service provided by ANTS to certain customers Derivative valuation service provided by ANTS to certain customers Description of the change There are 14 ANTS specified corporate customers holding uncollateralised prohibited derivatives currently using the derivative valuation service provided by ANTS to value their derivative portfolios. There will be a change on their valuation service when their derivatives portfolios are moved from ANTS to SLB under the Scheme, because SLB uses the Banco Santander derivative valuation service. This has a different discount curve in the valuation model, compared to that used by ANTS. The current Banco Santander service allows for a single discount curve for all customers of that service, and to change it to that used within the ANTS service would affect all existing customers of the Banco Santander s derivative valuation service, causing all of the existing customers to be potentially adversely affected. Changing the service to accommodate a different discount curve, or allow for multiple discount curves within the service, to enable consistency of service for the transferring customers would result in significant IT development and operational change. The total notional amounts of the derivative positions held by the 14 ANTS specified corporate customers are 989mn, $434mn and 3.48bn (latest number subject to change). The average positive and negative changes in values, as calculated by ANTS, is less than 1% of the notional amounts. For ANTS corporate customers holding collateralised prohibited derivatives with CSAs, SLB proposes to replicate existing CSAs in SLB to preserve the valuation parameters (including discount curve). Why is this adverse? The change in the valuation of their derivative portfolios in the valuation service for the 14 affected ANTS specified corporate customers, may result in either a positive or negative effect on customers derivatives portfolios, depending on the constituent components of the customer s portfolio. If the valuation falls as a result of the change it may impact other positions that the customer has, depending on what purpose the derivative was used to support. Mitigations or alternatives available Given the transfers of ANTS RFIs to SLB under the Scheme, and the different discount curve used by Banco Santander in its derivative valuation service from that used in ANTS currently for the 14 ANTS customers, the change and adverse effect are not possible to avoid or mitigate. Given the inherent uncertainty of the actual effects of the change (positive and negative) on the affected customers positions, Banco Santander is not proposing to consider major system developments in an attempt to maintain the existing service for the 14 transferring customers. The cost and timescale to complete such a development was considered disproportionate to the number of customers transferring to the Banco Santander service. Is this sufficiently mitigated? I have assessed that the adverse effect is not mitigated by actions that are being taken by the Santander UK Group. EY 238

243 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Derivative valuation service provided by ANTS to certain customers My conclusion I have concluded that the direct communications approach being taken by the Santander UK Group with the affected customers will identify and address any issues or effects that the customers believe will be caused by the change in the credit rating (including to their derivative valuation service, and terminating the service if it is no longer required by the customer). Whilst communications cannot mitigate the adverse effect, they will ensure that customers are aware of the potential effect of the changes. Given it will be unclear whether the potentially affected 14 customers will be negatively affected until the valuations are run after the transfer, I am satisfied that the decision not to develop the Banco Santander derivative valuation service to accommodate an additional discount curve for the transferring customers is disporportiate in cost and likely to take too long to be a viable alternative. I have therefore concluded that no appropriate alternatives are available that would reduce the adverse effect. Therefore, I have concluded that although this group of customers is likely to be adversely affected by the change proposed by the Scheme, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 239

244 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Table 117: Changes with adverse effects that are not mitigated Credit Valuation Adjustment (CVA) Credit Valuation Adjustment (CVA) Description of the change There may be a change to CVA for 57 specified Santander UK and ANTS corporate customers whose prohibited derivatives are transferred to SLB. This is as a result of the lower credit rating of Banco Santander (and therefore SLB), compared to the credit rating of Santander and ANTS, resulting in a wider credit spread being applied to their CVA calculations. Customers CVA calculations are complex with a number of variables within the calculation and there is no standard method used across all clients. It is an activity carried out by the customer to their own valuation design, with credit spread being but one variable used. Why is this adverse? The exact effect on CVA for individual customers is not possible to assess because the valuation models used by customers for CVA calculations are specific to them and unknown to Santander UK, or to me. However, the Ring-Fencing Programme has carried out its own DVA calculations and is using that as a proxy for CVA. There may be changes in CVA for some customers whose derivatives are transferred to SLB as a consequence of the wider credit spread. Some may be positive, others negative, and this will depend on the valuation method used and the timing of the calculation, which is impacted by market rates at the time of the calculation. There is no defined methodology to calculate CVA. The Ring-Fencing Programme has used proxy CDS spread (an average of LBG, HSBC and Banco Santander) in DVA to estimate the CVA effect. Although this calculation cannot provide precise estimates of CVA, it has evidenced to me through that analysis that the CVA impact may be either positive or negative. This will depend upon the constituents of the customer s portfolio, the market data at the time of transfer and customers accounting policy. Potential changes to CVA affected customers may require customers to apply additional economic regulatory capital to cover their positions, incurring additional costs of capital. It should be noted that equally they may require less capital and therefore less cost. Those customers who do not trade under the terms of a CSA will not have the benefit of the netting and collateral arrangement which help to mitigate the adverse CVA effect. Mitigations or alternatives available Santander UK is required to move the prohibited products outside of the RFB Sub- Group as a consequence of the ring-fencing legislation. Given the winding down of the cross-guarantee, and without the creation of a new A-rated banking entity in the UK or the withdrawal or termination of certain products, there is no reasonable alternative to the consequential impact of the rating change from ANTS to SLB on CVA calculations. Beyond that, and given inherent uncertainty of the actual effect of the change, positive and negative, on a customer s position, Santander UK is not proposing to offer compensation as a mitigation for additional capital costs that may not materialise and cannot at this point be quantified. Is this sufficiently mitigated? I have assessed that the adverse effect is not mitigated by actions that are or could be taken by the Santander UK Group. EY 240

245 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Credit Valuation Adjustment (CVA) My conclusion I have concluded that it would be unreasonable for Santander UK to commit to providing some form of compensation to customers, when the effect (adverse or positive) will only become clear on transfer when each customer runs their own CVA calculation, which will be influenced by market data at the time of transfer and may result in a positive or negative effect on CVA. Whilst communications cannot mitigate an adverse effect, it can ensure that customers are aware of the potential effect of a change, and I am satisfied that the communications approach being adopted by Santander UK will raise the possible effect and enable a dialogue with customers regarding how to mitigate any actual adverse effects on customers, including compensation, when CVA calculations are run by customers on transfer. I have concluded that no appropriate alternatives are available that would reduce the adverse effect, and that the Santander UK Group is being transparent and open with affected customers through their communications approach (involving direct engagement through their RDs). Therefore, I have concluded that although this group of customers may be adversely affected by the change proposed by the Scheme, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 241

246 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Changes with no adverse effects I have identified changes as a consequence of the Scheme that will not result in an adverse effect on Santander UK and ANTS specified corporate customers covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that Santander UK and ANTS specified corporate customers will be affected, but not adversely affected. Table 118: Changes with no adverse effects Access to Permitted Derivatives and Permitted Products in the future Access to Permitted Derivatives and Permitted Products in the future Description of the change Santander UK and ANTS specified corporate customers will access permitted derivatives and prohibited products through SLB via the referral model. Relationship management of the customers and the single point of contact to the Banco Santander Group for these customers will be through Santander UK (the RFB) and their RD. Their RD will be the same person as currently, unless otherwise agreed with the customer through the communications plan. Why is the change not adverse? I have reviewed the details of the referral model, changes proposed to reflect the changes under the Ring-Fencing Plan, the organisation design and communications plans specific to this group of customers. As a consequence of my assessment I am satisfied that products will continue to be available either directly from Santander UK (the RFB) or from SLB via the referral model. In all cases, affected customers will continue to access products from SLB through their existing RDs, who will not change, unless otherwise agreed. The referral model has been designed to ensure that, where necessary, customers can gain access to products in a different Banco Santander Group entity, including SLB. The referral will be managed through a customer s existing RD, who will liaise with the product specialist in the other entity. The requirements on customers and the process as a whole will be no different to current arrangements. My conclusion Having assessed this change, I have concluded that there will be no adverse effect on the products or services provided as affected customers will continue to have access to the same products and services. Further, there is no impact on the conduct-related regulatory protections that affected customers will receive. EY 242

247 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Table 119: Changes with no adverse effects Changes to customer documentation Changes to customer documentation Description of the change Specified Corporate Customers that have products transferred to SLB under the Scheme will have some changes to their existing ISDA Master Agreements and associated CSAs implemented through the Scheme, as applicable to their specific contracts. There will also be amendments to the Master Agreements as a consequence of Banco Santander becoming the new counterparty to the Master Agreement. However, these are administrative in nature and do not affect customers rights or obligations under the agreement. These consequential changes include removal of the cross-guarantee, removal of Santander UK as Credit Support Provider, notice details, tax representation, cross-default threshold and set-off provisions etc. Why is the change not adverse? I have reviewed the legal due diligence and the Scheme document, together with holding extensive discussions with the Santander UK and ANTS legal teams and the Ring-Fencing Programme leadership delivering the Scheme. As a result, I am satisfied that the changes that will be made to replicate the CSAs under the Scheme will preserve the existing terms, alongside the consequential changes to the Master Agreements with the customers as described above. Whilst changes to customer documentation are required as a result of changing the legal entity to SLB, the overall effect on the agreement remains unchanged, with the exception of removal of necessary clauses covering the cross-guarantee between ANTS and Santander UK, removal of Santander UK as the Credit Support Provider and notice details as referred to separately above. My conclusion Whilst there will be minor changes to ISDA Master Agreements for those customers whose derivatives will be transferring to SLB, I have concluded that the changes proposed will not have an adverse effect on customers. Customers rights and obligations will be maintained under the proposed changes and wherever possible, existing terms of ISDA Master Agreements will be preserved. EY 243

248 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Table 120: Changes with no adverse effects Use of customer assets as security Use of customer assets as security Description of the change There will be a change to the basis on which security is provided by customers to Santander UK and ANTS, with regard to permitted and prohibited derivatives, secured loans or other transactions when the prohibited products are transferred under the Scheme from Santander UK to SLB. For the majority of these customers, there are security trustees/agents currently in place. The security arrangement will transfer along with the product and existing bilateral arrangements will be amended under the Scheme, to enable SLB to share in security as a beneficiary under a security trust arrangement. There will be no effect, including no cost, on the customers as a result of the changes. However, where customers do not have a security trustee arrangement (usually where security has been taken on a bilateral basis across all the customers assets) Banco Santander will need to be named as a beneficiary. Why is the change not adverse? Banco Santander is proposing to meet the costs associated with amending security trustee arrangements, to add Banco Santander as a named trust beneficiary to contracts. In addition, Banco Santander will not request additional security from customers. Instead existing security will be allotted to the secured loans, derivatives and other transactions across relevant legal entities without the need for customers to do anything. My conclusion I have considered the plans proposed for the handling of customer security when customers prohibited products and permitted derivatives are transferred to SLB and I have concluded that there is no adverse effect as Banco Santander will undertake appropriate action. Table 121: Changes with no adverse effects Post trade support Post trade support Description of the change Post trade support (e.g. settlement, reconciliation, and confirmation for the derivatives transactions) will be provided from the Banco Santander Operations Centre in Madrid for prohibited transactions and products transferred under the Scheme. Currently it is provided by Santander UK operations. Why is the change not adverse? I have carried out a full review of the proposed operating model and service model for SLB currently being implemented. Please refer to section 14 on Operations, Infrastructure and Shared Services for further information on work carried out. Based on my review, I am satisfied that all current service levels and performance levels will remain the same as today. Management control and governance levels will be at least at the same level as today, as a consequence of the changes. The quality, level and performance of post trade support to be provided by the Banco Santander Operations Centre is expected to be unchanged. Therefore, there is no need to consider mitigating actions or alternative approaches. My conclusion I have assessed this change and have concluded that it will not result in an adverse effect on the quality, level and performance of service provided to customers. EY 244

249 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Table 122: Changes with no adverse effects Delegated Reporting/Trade Reporting/Mandatory Reporting Delegated Reporting/Trade Reporting/Mandatory Reporting Description of the change Customers access to delegated reporting/trade reporting/mandatory trading services will change as a result of transferring under the Scheme. Delegated Reporting and Trade Reporting (EMIR & D-FA requirement) Corporate customers who currently use Santander UK/ANTS for the delegated reporting service will be able to use a replicated delegated reporting service contract with SLB. Corporate customers who need to trade report the change of counterparty on the day after the contract transfer (via novation or the Scheme) will need to report a new UTI (Unique Transaction ID) for EMIR reporting. The number of impacted trades will equal the number of migrated clients with reportable trades. Mandatory Trading (D-FA requirement) There is a mandatory trading requirement set by D-FA for ANTS customers who are US persons or guaranteed affiliates or conduits of US persons, to trade certain US trades to a SEF via ANTS SEF membership. SLB will continue to support ANTS customers SEF access via a Banco Santander membership. Why is the change not adverse? Replicated delegated reporting service agreements will be provided by SLB, which will replicate the service provided by ANTS and/or Santander UK. SLB will provide access to a Swap Execution Facility through Banco Santander SEF membership for customers with DF trading requirements. Therefore, there is no need to consider mitigating actions or alternative approaches. My conclusion I have assessed these changes and concluded that there will be no adverse effect. A comparable level of service will be provided following the transfer under the Scheme. EY 245

250 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Table 123: Changes with no adverse effects Changes to standard settlement instructions (SSIs) Changes to standard settlements instructions (SSIs) Description of the change Customers will be required to change SSIs for derivatives, other transactions and arrangements transferred from Santander UK and ANTS to SLB. Changes will also be made to supporting systems and static/reference data in SLB systems but this will have no effect on customers. These changes are as a direct result of derivatives, loans and trade finance loan positions being transferred and the requirement for settlement payments to be made to a different legal entity. Why is the change not adverse? Customers will be required to amend their SSIs upon the transfer of their positions to SLB, in order to continue payments under their derivatives contracts and other products and arrangements. Corporate customers will typically have established operational procedures to address changes to settlement instructions, which happen from time to time in the course of usual business activity. All affected customers will be contacted individually and advised of the changes through the communications plans in place. In addition, Santander will operate a follow-on service for any payments that are inadvertently paid using the incorrect settlement instructions. My conclusion Having considered the nature of the change and the level of communication proposed to pre-warn customers of the changes, I have concluded that this will have no adverse effect on customers. EY 246

251 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Table 124: Changes with no adverse effects SLB on-boarding SLB on-boarding Description of the change Santander UK and ANTS corporate customers, holding prohibited products transferring to SLB under the Scheme, will need to be on-boarded to SLB, to the extent that they are not existing customers of Banco Santander. The Ring-Fencing Programme has conducted a KYC gap and impact analysis to compare the differences in AML and KYC policies between Santander UK/ANTS and SLB and has identified any additional identification requirements that may be applied to the transferring customers. The gap and impact analysis has identified the differences between Santander UK/ANTS and SLB in relation to the policies and standards applied (e.g. classification of PEPs and use of electronic identification evidence), the risk assessment methodologies used (e.g. a higher country risk interpretation for some jurisdictions), KYC checklists and identity verification evidence. These changes may require some customers to provide additional information to enable them to be onboarded to SLB. Why is the change not adverse? Santander UK (the RFB) and SLB proposed to harmonise and align the AML Policy, Standards and Procedures Framework for Santander UK and SLB, in order to mitigate the effect on the transfering customers. These include: 1. Align SLB AML Policy Framework with Santander UK (the RFB); 2. Develop a common global risk rating methodology, align underlying reference data and country risk across Santander UK (the RFB) and SLB; and 3. Develop a single set of common KYC checklists and ID&V evidence per client type across Santander UK (the RFB) and SLB. SLB will be undertaking on-boarding on behalf of the affected customers and aims to leverage existing due diligence information in Santander UK and ANTS. Customers may need to provide additional information pending the results of the policy alignment and harmonisation plan. SLB will seek to ensure a smooth on-boarding plan is in place and that all the customers migrating to SLB will meet the KYC requirements of SLB, to enable all business to be transferred as necessary under the Scheme. My conclusion I have considered the policy harmonisation plan proposed by Santander UK and SLB and have validated that all customers will be communicated and on-boarded to SLB to enable the transfer of business under the Scheme. I have concluded that there is a change, but there will not be an adverse effect on the customers who will be on-boarded to SLB under the Scheme. The effort to complete on-boarding will not be significant to customers and will be reduced as much as possible by the processes and activities proposed by SLB. EY 247

252 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Table 125: Changes with no adverse effects summary of findings from Part 2 Assessment area Assessment findings Finance Business Model Viability, Capital and Liquidity I have assessed the potential effect of the transfers to Banco Santander on its financials, based on the quantum of business being transferred as a percentage of the current Banco Santander financial position as at December The business being transferred into Banco Santander will not have significant impact on the overall financial position of Banco Santander when compared to the size of its current balance sheet, P&L and RWAs (as at 31 December 2016). SLB and Banco Santander will remain viable and sustainable and meet minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes will not result in an adverse effect on Specified Corporate Customers being transferred into SLB. For further details of my findings, and how I have reached them through my work, please refer to section 10. Governance There will be changes to the governance of SLB and the performance of risk management as a key control for customers whose products are issued through SLB. However, I have concluded that these changes will not adversely affect this group of customers. Risk Management For further details of my findings, and how I have reached them through my work, please refer to sections 12 and 13. Operations, Infrastructure and Shared Services There are changes to the operations that will function and/or the technology that will support the business transferred to SLB. However, I have concluded that these changes will not adversely affect this group of customers. For further details of my findings, and how I have reached them through my work, please refer to section 14. Recovery & Resolution Planning and Operational Continuity Santander UK and ANTS Specified Corporate Customers will become part of the Banco Santander (including SLB) RRP and operational continuity arrangements. These arrangements are set for the entire Banco Santander Group by Banco Santander as the ultimate parent. As a result, recovery, resolution and operational continuity arrangements in Banco Santander are consistent and no change is expected to the existing arrangements for Banco Santander as a result of the Scheme. I have concluded that this change will not result in an adverse effect on Santander UK and ANTS Specified Corporate Customers. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 248

253 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Assessment area Assessment findings Creditor Hierarchy (as part of recovery and resolution) Specified Corporate Customers with permitted and prohibited products will continue to rank in a comparable class in Banco Santander (including SLB). The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of Santander UK (the RFB), ANTS and Banco Santander (including SLB). However, I have concluded that these changes will not result in an adverse effect on the Specified Corporate Customers with permitted and prohibited products. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 249

254 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers No change The following summarises the areas where I have assessed there will be no change to Santander UK and ANTS specified corporate customers as a consequence of the Scheme. Table 126: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives and loans WHT Derivatives no WHT as derivatives fall within other income category for WHT purposes. Note: no capital gain/loss tax implication from the transfer of derivatives under the scheme. There will be tax implications for some US non-derivatives products (e.g. covered bonds) where derivatives transfer is deemed as a disposal for the US Tax purpose. These will be transferred outside of the Scheme and as a result have not been considered in this Scheme Report. Changes to netting sets The Scheme will not introduce any changes to ISDA netting sets as the customers entire derivatives portfolio will transfer from Santander UK and ANTS to SLB. Customer ability to transfer products as a result of the Scheme The Scheme will not impose or remove any restrictions on any contractual right that a customer has to transfer a product. Rating triggers Santander UK and ANTS do not provide derivatives to UK corporate customers containing rating trigger terms. Use of collateral Existing collateral held with Santander UK and ANTS will transfer along with the ISDA and relevant CSAs (no change of existing terms) when the whole derivatives portfolio is transferred. Current ISDAs and CSAs for derivatives that are transferring under the Scheme will be replicated in SLB. No change to the total amount of collateral posted by the customer. Coverage and Channels Relationship management and split relationship Customers will continue to have a single RD as their point of contact into the bank. This is a continuation of their existing relationship. There will be no change/split relationship as customers will access products from both Santander UK and SLB/Banco Santander through their existing RDs. EY 250

255 Findings and conclusions: Santander UK and ANTS Specified Corporate Customers Assessment area Conclusion Credit assessment and credit partner support There is expected to be no effect on a customers ability to access credit for products across different legal entities or any extension of the time taken to achieve credit approval. Although credit assessments for some products may need to be obtained through two legal entities (Santander UK and SLB), the credit policies, assessment and approval process is consistent across both legal entities and will be managed by the customer s home entity credit team and RD. There will be no change in the skill-set(s) of Credit Analysts as most of the Credit Analysts currently working in Santander UK will transfer to SLB in support of migrating customers. Sales process Clearing arrangements There are no changes to the policies, processes or availability of these assessment areas. Online banking e-commerce channels and platforms Branch availability Telephony services Sort codes BINs BICs Product and Services Availability Product and Services Availability Access and availability of the current set of products and services offered to customers will remain the same. Furthermore, levels of service and performance will remain consistent with quality standards, irrespective of the legal entity from which they are supplied. Regulatory Protection FSCS protection The Scheme will not transfer deposits to SLB. Customers will not lose FSCS protection as a consequence of the Scheme. Deposits held for corporate customers in ANTS will either be novated to Santander UK or mature ahead of the Scheme becoming effective. Pursuit of complaints, legal and other proceedings All customers transferring under the Scheme will retain the right to pursue any outstanding complaints, legal or other proceedings against the transferee. Client money No transferring customers have client money protection. EY 251

256 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions 24. Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Introduction Under the Scheme, any prohibited exposures to RFIs will be transferred out of the Santander UK Group, which will become the RFB Sub-Group, and move to SLB. RFIs include Financial Institution customers such as banks and investment firms, insurance companies, funds and fund managers, and structured finance vehicles (SFVs). These customers may have certain permitted products with Santander UK Treasury function such as deposits, Sterling cash management deposits, payment services and products used for hedging, liquidity and risk management transactions. These customers will continue to be serviced from Santander UK (the RFB). As explained in section 5.1, the Santander UK Group has previously considered and discounted alternative options to retain prohibited business within ANTS as an entity outside of the RFB Sub-Group. However, following a full assessment (including long-term business viability and sustainability tests) it was decided that this was not a viable solution and that the preferred model, as being implemented by the Ring-Fencing Plan, including the Scheme, is to transfer prohibited business to SLB, given its relative financial strength as the London branch of Banco Santander. For further details of the decision process leading to the current design, and my assessment of the process, please refer to section 5.1. Affected customers A total population of 248 RFIs has been identified by the Ring-Fencing Programme to have their relationships and prohibited products transferred from Santander UK and ANTS to SLB under the Scheme. The transfers are expected to take place over a six week period commencing after 9 July These are broken down as follows: RFIs relationships and prohibited products will transfer from ANTS to SLB under the Scheme; and RFIs relationships and prohibited products will transfer from Santander UK to SLB under the Scheme. Therefore, for RFIs of either Santander UK or ANTS, there are some changes that the Ring-Fencing Programme is making that will have an impact on the banking relationship with those entities. For those RFIs which are part of a financial institution group the relationship will move to SLB, whereas for non-fig RFIs the relationship will be held within the Santander UK Group. EY 252

257 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Changes to Santander UK and ANTS Relevant Financial Institutions as a consequence of the Scheme Findings and conclusions I have identified changes that will have an adverse effect on some of these customers as a result of the migration of their derivatives and loans to SLB. They relate to the impact of Capital Valuation Adjustment (KVA) on derivative valuations resulting from the lower credit rating and wider CDS credit spread for Banco Santander (including SLB), plus changes to the basis on which their derivatives will be valued under Banco Santander s valuation service (caused by the different discount curves used by SLB). Given the circumstances of the changes it is not possible for the Santander UK Group to mitigate the adverse effect that these changes create. In addition, I have identified a change affecting ratings triggers included in customer documentation, as a result of a lower credit rating for Banco Santander than for ANTS. This change may result in the customer being required to take action as a result of the rating downgrade, however the Santander UK Group propose to take mitigating actions to avoid the customer having to take any action. Notwithstanding that mitigations cannot be provided in all circumstances, I have concluded that the effects are no more than reasonably necessary to achieve the Scheme s purposes. The details of the changes and the effects are set out in the tables below. Changes with adverse effects I have identified changes as a consequence of the Scheme that will have adverse effects on ANTS RFI customers (who may receive derivative valuation services). These adverse effects are, in my opinion, not mitigated. The following details these changes I have identified and the rationale for why I have concluded that these ANTS RFI customers will be adversely affected, with no mitigations or alternatives made available, but that the effects are no more than reasonably necessary to achieve the Scheme s purposes. Table 127: Changes with adverse effects that are not mitigated Derivative valuation service provided by ANTS to certain customers Derivative valuation service provided by ANTS to certain customers Description of the change Within the total population of RFIs, there are 9 ANTS customers holding uncollateralised prohibited derivatives, currently using the derivative valuation service provided by ANTS. There will be a change on their valuation service when their derivatives portfolios are moved from ANTS to SLB under the Scheme, because SLB uses the Banco Santander derivative valuation service which has a different discount curve in the valuation model, compared to that used by ANTS. The current Banco Santander service allows for a single discount curve for all customers of that service, and to change it to that used within the ANTS service would affect all existing customers of the Banco Santander s derivative valuation service, causing all of the existing customers to be potentially adversely affected. Changing the service to accommodate a different discount curve, or allow for multiple discount curves within the service, to enable consistency of service for the transferring customers would result in significant IT development and operational change. EY 253

258 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Derivative valuation service provided by ANTS to certain customers The average positive and negative change in value as calculated by ANTS is less than 1% of the notional amounts. For ANTS RFI customers holding collateralised prohibited products with CSAs, Banco Santander proposes to replicate existing CSAs in SLB to preserve the valuation parameters (including discount curve). Why is this adverse? The change in the valuation of their derivative portfolios in the valuation service for the 9 affected ANTS RFI customers may result in either a positive or negative effect on customers derivatives portfolios, depending on the constituent components of the customer s portfolio. If the valuation falls, as a result of the change, it may impact other positions that the customer has, depending on what purpose the derivative was written to support. Mitigations or alternatives available Given the transfers of ANTS RFIs to SLB under the Scheme, and the different discount curve used by Banco Santander in its derivative valuation service compared to that used in ANTS (currently for the 9 ANTS RFI customers), the change and adverse effect are not possible to avoid or mitigate. Given the inherent uncertainty of the actual effects of the change (positive and negative) on the affected customers positions, Banco Santander is not proposing to consider major system developments in an attempt to maintain the existing service for the 9 transferring customers. The cost and timescale to complete such a development was considered disproportionate to the number of customers transferring to the Banco Santander service Is this sufficiently mitigated? I have assessed that the adverse effect is not mitigated by actions that are being taken by the Santander UK Group. My conclusion I have concluded that the direct communications approach being taken by the Santander UK Group with the affected customers will identify and address any issues or effects that the customers believe will be caused by the change in the credit rating (including to their derivative valuation service, and terminating the service if it is no longer required by the customer). Whilst communications cannot mitigate an adverse effect, it can ensure that customers are aware of the potential effect of a change, and I am satisfied that the communications approach being adopted by Santander UK will raise the possible effect and enable a dialogue with customers regarding how to mitigate any actual adverse effects on customers. I have concluded that no appropriate alternatives are available that would reduce the adverse effect. Therefore, I have concluded that although this group of customers is likely to be adversely affected by the change proposed by the Scheme, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 254

259 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions This page is intentionally left blank. EY 255

260 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Table 128: Changes with adverse effects that are not mitigated Capital Valuation Adjustment (KVA) Capital Valuation Adjustment (KVA) Description of the change There may be a change to Capital Valuation Adjustment (KVA) for 161 Santander UK and ANTS regulated RFI customers whose transactions will be transferred to SLB. This is as a result of the lower credit rating of Banco Santander (and therefore SLB) being applied to the KVA calculation, compared to the credit rating of Santander UK and ANTS. KVA calculations are complex, with a number of variables within the calculation and there is no standard method used across all clients. It is an activity carried out by the customer according to their own valuation design, with credit rating being but one variable used. However, the Ring-Fencing Programme is not aware of any circumstances where customers use KVAs in their valuation methodologies. This is therefore only an effect on RFI customers should it become apparent through the communications process with these customers that they do use it and what the effect will therefore be. Why would this be adverse? The exact effect on KVA for individual customers is not possible to assess because the valuation models used by customers for KVA calculations are specific to them and unknown to Santander UK, ANTS or to me. There are no universally recognised methodologies that can be used for KVA. However, the Ring-Fencing Programme has carried out its own KVA calculations in an attempt to model possible consequences of the credit rating change, which has highlighted potential changes in KVA for some customers. The actual effect of the change on individual customer KVAs, which will only materialise at the point of legal transfer, will be dependent on a number of factors, including the valuation method used and the timing of the calculation. This will be based on market rates at the time of the calculation. The potential changes to KVA may result in customers needing to apply additional regulatory capital to cover their positions, hereby incurring additional costs of capital. Equally, it should be noted that they may require less capital and therefore face a reduced cost, depending on the KVA calculation at the point of legal transfer. Mitigations or alternatives available Any effect on KVA may be mitigated where products of RFI customers are transferred out of Santander UK and ANTS, under the Scheme, and as a result become subject to clearing through Central Clearing Counterparties (CCP), because they will qualify under the D-FA Clearing and Margining Rules. Therefore, the transfer will reduce counterparty credit risk and regulatory capital requirement, resulting in reduced regulatory capital being required. Given the winding down of the cross-guarantees, and without the creation of a new A-rated banking entity in the UK or withdrawal or termination of certain products, there is no reasonable alternative to the consequential impact of the rating change from ANTS to SLB on KVA calculations. Given that exposures to RFIs have to be held outside of the RFB Sub-Group in the future, there are no alternative structures or legal entities within the Banco Santander Group that would offer the same credit rating as Santander UK and ANTS therefore the effect on the KVAs are not possible to avoid. Beyond that, and given inherent uncertainty of the actual effect of the change (positive and negative) on a customer s position, Santander UK is not proposing to offer alternatives or mitigations to customers to cover, for example, any additional capital costs. EY 256

261 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Capital Valuation Adjustment (KVA) Is this sufficiently mitigated? It is possible that there will be mitigations available for some or all of the adverse effects by transferring the positions out of ANTS to SLB, for clearing through the CCP. My conclusion I have reviewed and considered the communications approach being taken by the Santander UK Group with the affected customers, which will identify and address any issues or effects that the customers believe will be caused by the change in the credit rating (including to their KVA calculations). This goes some way towards providing transparency to the customer and shows a willingness to engage, but does not directly serve as a mitigation to the underlying effect on KVA. Whilst communications cannot mitigate the adverse effect, they will ensure that customers are aware of the potential effect, in this case adverse effects, of the changes. I have concluded that no appropriate alternatives are available that would reduce the adverse effect. Therefore, I have concluded that although this group of customers may be adversely affected by the change proposed by the Scheme, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 257

262 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Change with adverse effect that is mitigated I have identified a change, as a consequence of the Scheme, that will have an adverse effect on Santander UK and ANTS RFI customers. This adverse effect is, in my opinion, mitigated. The following details this changes and the rationale for why I have concluded that Santander UK and ANTS RFI customers will be adversely affected, but there will be mitigating actions or alternatives offered. I have concluded, therefore, that the effect is no more than reasonably necessary to achieve the Scheme s purposes. Table 129: Change with adverse effect that is mitigated Ratings Triggers Ratings Triggers Description of change There may be an effect on rating triggers in the ANTS documentation, due to the lower credit rating of Banco Santander (and therefore SLB). In many cases customer documentation deals with the actions that must be taken if the contracting entity (SLB as a consequence of the transfer under the Scheme) ceases to have the required credit rating. The purpose of the triggers is to protect the issuer and the holders against a rating downgrade of the swaps, as a result of a rating downgrade of a bank (as swap provider). Why is this adverse? For swaps being transferred from ANTS to SLB under the Scheme, there will be an affect on 8 ANTS RFI customers as a result of a lower rating for Banco Santander (including SLB), than currently for ANTS. This may result in the customer being required to take action, as a result of the rating downgrade, including potentially requiring the RFI customer to hold additional capital or in extremis having to terminate the agreement. Mitigations or alternatives available To avoid customers having to take action, SLB will provide additional collateral to mitigate the effect, as required by the existing contract. The Scheme will also be used to override any events of default or termination events should they occur as a result of the lower rating of SLB. Is this sufficiently mitigated The posting of additional collateral as required, to avoid customers having to take action, proposed by the Ring-Fencing Programme, is a sufficient mitigation for the adverse effect. My conclusion I have concluded that the change to rating triggers is likely to result in an adverse effect on customers. However, the actions proposed by the Ring-Fencing Programme will mitigate the adverse effects on the affected customers. EY 258

263 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Changes with no adverse effects I have identified changes as a consequence of the Scheme that do not result in an adverse effect on Santander UK and ANTS RFI customers. The following details these changes and the rationale for why I have concluded that Santander UK and ANTS RFI customers will be affected, but not adversely affected. Table 130: Changes with no adverse effects Use of customer assets as security Use of customer assets as security Description of the change There will be a change to the basis on which security is provided by customers to Santander UK and ANTS with regard to derivatives, secured loans or other transactions when they are transferred under the Scheme from Santander UK or ANTS to SLB. For the majority of these customers, there are security trustees/agents currently in place. The security arrangement will transfer along with the product and existing bilateral arrangements will be amended under the Scheme to enable Banco Santander (including SLB) to share in security as a beneficiary under a security trust arrangement. There will be no effect, including no cost, on the customers as a result of the changes. However, where customers do not have a security trustee arrangement (usually where security has been taken on a bilateral basis across all the customer s assets), Banco Santander will need to be named as a beneficiary. Why is the change not adverse? Banco Santander is proposing to meet the costs associated with amending security trustee arrangements, to add Banco Santander as a named trust beneficiary to contracts. In addition, the Banco Santander Group will not request additional security from customers. Instead, existing security will be allotted to the secured loans, derivatives and other transactions across relevant legal entities without the need for customers to do anything. My conclusion I have considered the plans proposed for the handling of customer security when customers prohibited products, including prohibited derivatives, are transferred to SLB and I have concluded that there is no adverse effect. EY 259

264 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Table 131: Changes with no adverse effects Post trade support Post trade support Description of the change Post trade support (e.g. settlement, reconciliation, and confirmation for the derivatives transactions) will be provided from the Banco Santander Operations Centre in Madrid for prohibited products transferred under the Scheme. Currently, post trade support is provided by Santander UK operations. Why is the change not adverse? I have carried out a full review of the proposed operating model and service model for SLB currently being implemented. Please refer to section 14 on Operations, Infrastructure and Shared Services for further information on work carried out. Based on my review, I am satisfied that all current service levels and performance levels will remain the same as today. Management control and governance levels will be at least the same level, as a consequence of the changes. The quality, level and performance of post trade support to be provided by the Banco Santander Operations Centre is expected to be unchanged. Therefore, there is no need to consider mitigating actions or alternative approaches. My conclusion I have assessed the future SLB post trade support and have concluded that the change will not result in an adverse effect on the quality, level and performance of service provided to customers. EY 260

265 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Table 132: Changes with no adverse effects Access to Permitted Products in the future Access to Permitted Products in the future Description of the change Following the transfer of Santander UK and ANTS RFIs to SLB under the Scheme, these customers will access permitted products through Santander UK (the RFB) via the referral model, for example, deposits and Sterling payment services. For those RFIs where the relationship will be held by SLB, relationship management of the customer and the single point of contact to the Banco Santander Group for these customers will be through Santander UK and their RD. Their RD will be the same person as currently, unless otherwise agreed with the customer through the communications plan. Why is the change not adverse? I have reviewed the detail of the referral model, changes proposed to reflect the Ring-Fencing Plan, the organisation design and communications plans specific to this group of customers. As a consequence of my assessment, I am satisfied that products will continue to be available either directly from SLB or through the referral model to the wider Banco Santander Group, including Santander UK (the RFB) In all cases, affected customers will continue to access products through their existing RD. The RD will not change, unless otherwise agreed. The referral model has been designed to ensure that, where necessary, customers can gain access to products in a different Banco Santander Group entity, including Santander UK (the RFB). The referral will be managed through a customer s existing RD, who will liaise with the product specialist in the other entity. The requirements on customers and the process as a whole will be no different to current arrangements. My conclusion I have concluded that there is no adverse effect on the products or services provided, as affected customers will continue to have access to the same products and services. Further, there is no impact on the conduct-related regulatory protections that affected customers will receive. EY 261

266 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Table 133: Changes with no adverse effects Changes to standard settlement instructions (SSIs) Changes to standard settlements instructions (SSIs) Description of the change Customers will be required to change SSIs for derivatives, other transactions and arrangements transferred from Santander UK and ANTS to SLB. Changes will also be made to supporting systems and static/reference data in SLB systems, but this will have no effect on customers. These changes are as a direct result of derivatives being transferred, and the requirement for settlement payments to be made to a different legal entity. Why is the change not adverse? Customers will be required to amend their SSIs upon transfer of their positions to SLB, in order to continue payments under their derivatives contracts and other products and arrangements. RFI customers will typically have established operational procedures to address changes to settlement instructions, which happen from time to time, in the course of usual business activity. All affected customers will be contacted individually and advised of the changes through the communications plans in place. In addition, SLB will operate a followon service for any payments that are inadvertently paid using the incorrect settlement instructions. My conclusion Having considered the nature of the change and the level of communication proposed to pre-warn customers of the changes, I have concluded that this change will have no adverse effect on customers. Table 134: Changes with no adverse effects OTC Derivative Clearing for Non-EU Counterparties OTC Derivative Clearing for Non-EU Counterparties Description of the change The transfer of positions under the Scheme may trigger the loss of grandfathering provisions that preserve the exemption for clearing under the D-FA for Over-The- Counter (OTC) derivatives. This may not be the case in relation to OTC derivatives that are subject to equivalent requirements in other jurisdictions. The resulting effect on both Banco Santander Group and their customers is a requirement to comply with mandatory clearing for all in-scope derivatives. The derivatives with 5 US affiliated swap dealers that are subject to mandatory clearing under the D-FA will transfer through the Scheme and may therefore be affected by the clearing requirement rules. Why is the change not adverse? SLB have confirmed that it will cover and/or remediate any associated clearing costs incurred by these customers. My conclusion I have assessed the change in arrangements and I have concluded that that this change will have no adverse effect for customers who are required to clear OTC derivatives. EY 262

267 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Table 135: Changes with no adverse effects Changes to customer documentation Changes to customer documentation Description of the change RFI customers that have prohibited derivatives migrating from Santander UK and ANTS to SLB, will have their ISDAs and associated CSAs replicated by Banco Santander as the contracting party, to the extent that they do not already have an ISDA with Banco Santander. The Ring-Fencing Programme is pursuing two options in terms of required customer documentation changes for customers positions transferring to SLB, with all changes effected under the terms of the Scheme: Customer has a Banco Santander ISDA Master Agreement derivatives, and if applicable, CSAs, will be transferred to that existing Master Agreement with appropriate amendments. There will be up to 248 customers affected by this change. Customer does not have a Banco Santander ISDA Master Agreement and entire portfolio of derivatives is transferred to Banco Santander existing ISDA Master Agreement, and if applicable, CSA, will be transferred along with appropriate amendments. There will be up to 248 customers affected by this change. This approach will also be applied to other forms of Master Agreement (e.g. GMRAs and GMSLAs). There will be some consequential changes to ISDAs for customers transferring from Santander UK and ANTS to SLB (e.g. changes to cross default threshold, tax representations, rating triggers and set-off provisions relating to Santander UK as well as removing references to Santander UK regulatory requirements and authorisations). Why is the change not adverse? I have reviewed the legal due diligence performed and the Scheme document, together with holding extensive discussions about the findings of the due diligence with the Ring-Fencing Programme legal workstream. An objective of the Ring- Fencing Programme, is ensuring that derivative products can be transferred from Santander UK to SLB under the Scheme on equivalent terms. The proposed approach to achieve this is by transferring positions under the existing ISDA Master Agreement and associated CSAs, or by replicating the ISDA Master Agreement with Banco Santander under the Scheme. The proposed amendments to the Master Agreements, as a consequence of Banco Santander becoming the counterparty to the Master Agreement, are consequential or administrative in nature, so do not affect customers rights or obligations under the agreement. Existing netting, collateral and security arrangements will be retained through replicated or equivalent CSAs. The Scheme will suspend any events of default and termination events within existing documents to the extent that they would otherwise be triggered by the Scheme, to ensure continuation of coverage. My conclusion I have concluded that this change will not cause an adverse effect on a customer s rights and obligations under ISDAs and CSAs for prohibited derivatives transferred to SLB. EY 263

268 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Table 136: Changes with no adverse effects SLB on-boarding SLB on-boarding Description of the change Santander UK and ANTS RFI customers holding prohibited products transferring to SLB under the Scheme will need to be on-boarded to SLB, to the extent that they are not existing customers of Banco Santander. The Ring-Fencing Programme has conducted a KYC gap and impact analysis to compare the differences in AML and KYC policies between Santander UK, ANTS and SLB and identified any additional identification requirements that may be applied to the transferring customers. The gap and impact analysis has identified the differences between Santander UK, ANTS and SLB in relation to the policies and standards applied (e.g. classification of PEPs and use of electronic identification evidence), the risk assessment methodologies used (e.g. a higher country risk interpretation for some jurisdictions), KYC checklists and identity verification evidence. These changes may require some customers to provide additional information to enable them to be onboarded to SLB. Why is the change not adverse? Santander UK (the RFB) and SLB proposed to harmonise and align the AML Policy, Standards and Procedures Framework for Santander UK, ANTS and SLB to mitigate the effect on the transfering customers. These include: 1. Align SLB AML Policy Framework with Santander UK (the RFB); 2. Develop a common global risk rating methodology, align underlying reference data and country risk across Santander UK (the RFB) and SLB; and 3. Develop a single set of common KYC checklists and ID&V evidence per client type across Santander UK (the RFB) and SLB. SLB will be undertaking on-boarding on behalf of the affected customers and aims to leverage existing due diligence information in Santander UK. Customers may need to provide additional information, pending the results of the policy alignment and harmonisation plan. SLB will seek to ensure a smooth on-boarding plan is in place and that all the customers migrating to SLB will meet the KYC requirements of SLB, to enable all business to be transferred as necessary under the Scheme. My conclusion I have considered the policy harmonisation plan proposed by Santander UK and SLB and have validated that all customers will be communicated and on-boarded to SLB, to enable the transfer of business under the Scheme. I have concluded that there is a change but no adverse effect on the customers who will be on-boarded to SLB under the Scheme. The effort to complete onboarding will not be significant to customers and will be reduced as much as possible by the processes and activities proposed by SLB. EY 264

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270 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Table 137: Changes with no adverse effects summary of findings from Part 2 Assessment area Assessment findings Finance Business Model Viability, Capital and Liquidity I have assessed the potential impact of the transfers to Banco Santander on its financials, based on the quantum of business being transferred as a percentage of the current Banco Santander financial position as at December The business being transferred into Banco Santander will not have significant impact on the overall financial position of Banco Santander when compared to the size of its current balance sheet, P&L and RWAs (as at 31 December 2016). SLB and Banco Santander will remain viable and sustainable and meet minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes will not result in an adverse effect on ANTS and Santander UK RFIs being transferred into SLB. For further details of my findings, and how I have reached them through my work, please refer to section 10. Governance There are changes to the governance of SLB and the performance of risk management as a key control for customers whose products are issued through SLB. However, I have concluded that these changes will not adversely affect this group of customers. Risk Management For further details of my findings, and how I have reached them through my work, please refer to sections 12 and 13. Operations, Infrastructure and Shared Services There are changes to the operations that will function and/or the technology that will support the business transferred to SLB. However, I have concluded that these changes will not adversely affect this group of customers. For further details of my findings, and how I have reached them through my work, please refer to section 14. Recovery & Resolution Planning and Operational Continuity Santander UK and ANTS RFI customers will become part of the Banco Santander (including SLB) RRP and operational continuity arrangements. These arrangements are set for the entire Banco Santander Group by Banco Santander as the ultimate parent. As a result, recovery, resolution and operational continuity arrangements in Banco Santander are consistent and no change is expected to the existing arrangements for Banco Santander as a result of the Scheme. I have concluded that this change will not result in an adverse effect on Santander UK and ANTS RFI customers. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 266

271 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Assessment area Assessment findings Creditor Hierarchy (as part of recovery and resolution) RFI customers will rank in a comparable class in Banco Santander (including SLB). The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of Santander UK (the RFB), ANTS and Banco Santander (including SLB). However, I have concluded that these changes will not result in an adverse effect on RFI customers. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 267

272 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions No change The following summarises the areas where I have assessed there will be no change to Santander UK and ANTS RFI customers as a consequence of the Scheme. Table 138: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives WHT Derivatives no WHT as derivatives fall within other income category for WHT purposes. No capital gain/loss tax implication from the transfer of derivatives under the Scheme. Customer ability to transfer products as a result of the Scheme The Scheme will not impose or remove any restrictions on any contractual right that a customer has to transfer a product. Rights of ISDA netting set No change of the ISDA netting set because the whole derivatives portfolio will move from ANTS and Santander UK to SLB. Rights of set-off No change to the set off rights relating to loans, deposits and derivatives. Use of collateral Existing collateral held with Santander UK and ANTS will transfer along with the Master Agreements and relevant CSAs (no change of existing terms) when the whole derivative portfolio is transferred to SLB. Current CSAs for derivatives that are transferring under the Scheme will be replicated in SLB. Coverage and Channels Classification of RFI Status The methodology and process for the classification of customers as a RFI has been reviewed and no anomalies have been detected. Relationship management and split relationship Customers will continue to have a single RD as their point of contact into the bank. This is a continuation of their existing relationship. There will be no change/split relationship as customers will access products from both Santander UK and SLB/Banco Santander through their existing RD. EY 268

273 Findings and conclusions: Santander UK and ANTS Relevant Financial Institutions Assessment area Conclusion Credit assessment and credit partner support There is expected to be no effect on a customers ability to access credit for products across different legal entities or any extension of the time taken to achieve credit approval. The credit policies, assessment and approval process is consistent across Santander UK and SLB and will be managed by the customer s home entity credit team and RD. There will be no change in the skill-set(s) of Credit Analysts as most of the Credit Analysts currently working in Santander UK will transfer to SLB in support of migrating customers. Sales process Clearing arrangements There are no changes to the policies, processes or availability of these assessment areas. Online banking e-commerce channels and platforms Branch availability Telephony services Sort codes BINs BICs Product and Services Availability Product and Services Availability With the exception of products identified above for certain RFIs, access and availability of the current set of products and services that is offered to customers will remain the same. Furthermore, levels of service and performance will remain consistent with quality standards, irrespective of the legal entity from which they are supplied. Regulatory Protection FSCS protection The Scheme will not transfer deposits to SLB. Customers will not lose FSCS protection as a consequence of the Scheme. Deposits held for corporate customers in ANTS will either be novated/assigned to Santander UK or mature ahead of the Scheme becoming effective. Pursuit of complaints, legal and other proceedings All customers transferring under the Scheme will retain the right to pursue any outstanding complaints, legal or other proceedings against the transferee. Client money No transferring customers have client money protection. EY 269

274 Findings and conclusions: ANTS Exempt Financial Institutions 25. Findings and conclusions: ANTS Exempt Financial Institutions Introduction The Ring-Fencing Plan sets out the transfer of all market transactions between ANTS and Exempt Financial Institutions (EFIs) from ANTS to SLB as a result of a strategic and operational review (notwithstanding that EFIs are financial institutions that are not classified as Relevant Financial Institutions under the EAPO and the RFB is not prohibited from having exposures to them under the ring-fencing legislation.) EFIs include other UK ring-fenced banks, building societies, credit unions, recognised clearing houses and central counterparties and other international banking institutions (e.g. the European Investment Bank). Market transactions are derivative and repo transactions not carried out in connection with Santander UK s Treasury function. Any banking business (for example desposits and sterling payment services) with EFIs in ANTS will be transferred to Santander UK under the Scheme. Affected customers Market transactions relating to 31 EFIs has been identified by the Ring-Fencing Programme, to be transferred from ANTS to SLB under the Scheme. There are no EFIs transferring from Santander UK to SLB under the Scheme. 8 EFIs currently transacting with ANTS will either be transferred outside of the Scheme via the relevant clearing system or their transactions will mature or be terminated before the commencement of the Scheme. Those EFIs that are credit unions, other ring-fenced banks, recognised clearing houses and CCPs, and market infrastructure providers, will continue to conduct banking business activities with Santander UK (the RFB). For ANTS EFIs, there are some changes that the Ring-Fencing Programme are making that will have an impact on banking relationships with those entities. Notwithstanding that the market transactions with these customers will be transferred to SLB and will be outside of the RFB Sub-Group, certain permitted products which can be retained within the RFB will continue to be provided from Santander UK. This is because these products are permitted under the ring-fencing rules and the Ring-Fencing Plan sets out that they are best provided from Santander UK (the RFB) for operational and business reasons. Examples of these products include banking business such as deposits, Sterling payment services, hedging and liquidity and risk management transactions that these customers may undertake with Santander UK s Treasury function. EY 270

275 Findings and conclusions: ANTS Exempt Financial Institutions Changes to ANTS Exempt Financial Institutions as a consequence of the Scheme Findings and conclusions I have identified changes that will have adverse effects on some of these customers as a result of the migration of their derivatives and repo transactions to SLB. One relates to the effect of Capital Valuation Adjustment (KVA) on derivative valuations resulting from the lower credit rating of SLB. Given the circumstances of the changes it is not possible for Santander to offer mitigations to the adverse effect that these changes create. A further change affects ratings triggers included in customer documentation, as a result of a lower credit rating and wider credit spread for Banco Santander (including SLB) than for ANTS. This change may have resulted in the customer being required to take action as a result of the rating downgrade. However, mitigating actions are proposed to avoid the customer having to take any action. Notwithstanding that mitigations cannot be provided in all circumstances, I have concluded that the effects are no more than reasonably necessary to achieve the Scheme s purposes. The details of the changes and the effects are set out in Table 139 below. Changes with adverse effects I have identified changes as a consequence of the Scheme that will have an adverse effect on ANTS EFI customers. This adverse effect is, in my opinion, not mitigated. The following details this change I have identified and the rationale for why I have concluded that the ANTS EFI customers will be adversely affected, with no mitigations or alternatives made available, but that the effects are no more than reasonably necessary to achieve the Scheme s purposes. Table 139: Changes with adverse effects that are not mitigated Capital Valuation Adjustment (KVA) Capital Valuation Adjustment (KVA) Description of the change There may be a change to Capital Valuation Adjustment (KVA) for 22 ANTS regulated EFI customers whose transactions will be transferred to SLB. This is as a result of the lower credit rating of Banco Santander (and therefore SLB) being applied to the KVA calculations, compared to the credit rating of ANTS being applied. KVA calculations are complex, with a number of variables within the calculation and there is no standard method used across all customers. It is an activity carried out by the customer in accordance to their own valuation design, with credit rating being but one variable used. Why is this adverse? The exact effect on KVA for individual customers is not possible to assess because the valuation models used by customers for their KVA calculations are specific to them, and unknown to Santander UK, ANTS, or to me. There are no universally recognised methodologies that can be used for KVA. However, the Ring-Fencing Programme has carried out its own KVA calculations in an attempt to model possible consequences of the credit rating change, which has highlighted potential changes in KVA for some customers. The impact assessment has identified positive and negative effects. The actual effect of the change on individual customer KVAs, which will only materialise at the point of legal transfer, will be dependent on a number of factors, including the valuation method used and the timing of the calculation. This will be based on market rates at the time of the calculation. EY 271

276 Findings and conclusions: ANTS Exempt Financial Institutions Capital Valuation Adjustment (KVA) The potential changes to KVA are the result of customers needing to apply additional regulatory capital to cover their positions, incurring additional costs of capital. It should be noted that equally they may require less capital and therefore face a reduced cost, depending on the KVA calculation at the point of legal transfer. Mitigations or alternatives available Any effect on KVA calculations may be mitigated where products of EFI customers are transferred out of ANTS, under the Scheme, and as a result become subject to clearing through CCPs, because they will qualify under the D-FA Clearing and Margining Rules. Therefore, the transfer will reduce counterparty credit risk and regulatory capital requirement, resulting in reduced regulatory capital required. Given the unwinding of the cross-guarantees without the creation of a new A-rated banking entity in the UK, or withdrawal or termination of certain products, or the transfer of these products to Santander UK, there is no reasonable alternative to the consequential impact of the rating change from ANTS to SLB on KVA calculations. An alternative approach may have been to transfer all market transactions with EFIs from ANTS to Santander UK (the RFB). However, the EFIs concerned are likely to have existing relationships with Banco Santander and therefore, the consolidation of their products and relationship management in SLB will provide a more holistic approach for those customers. Beyond that, and given inherent uncertainty of the actual effect of the change (positive and negative) on a customer s position, Santander UK is not proposing to offer alternatives or mitigations to customers to cover, for example, any additional capital costs. Is this sufficiently mitigated? It is possible that there will be mitigations available for some or all of the adverse effects by transferring the positions out of ANTS to SLB, for clearing through the CCP. My conclusion I have reviewed and considered the communications approach being taken by the Ring-Fencing Programme with the affected customers, which will identify and address any issues or effects that the customers believe will be caused by the change in the credit rating (including to their KVA calculations). This goes some way towards providing transparency to the customer and shows a willingness to engage, but does not directly serve as a mitigation to the underlying effect on KVA. Whilst communications cannot mitigate the adverse effect, they will ensure that customers are aware of the potential effect, in this case adverse effects, of the changes. I have concluded that no appropriate alternatives are available that would reduce the adverse effect. Therefore, I have concluded that although this group of customers may be adversely affected by the change proposed by the Scheme, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 272

277 Findings and conclusions: ANTS Exempt Financial Institutions Changes with no adverse effects I have identified changes as a consequence of the Scheme that will not result in an adverse effect on ANTS EFI customers. The following details these changes and the rationale for why I have concluded that ANTS EFI customers will not be adversely affected. Table 140: Changes with no adverse effects Credit Valuation Adjustment (CVA) Credit Valuation Adjustment (CVA) Description of the change There may be a change to CVA for 22 ANTS EFI customers whose prohibited derivatives will be transferred to SLB. This is as a result of the lower credit rating of Banco Santander (and therefore SLB), compared to the credit rating of ANTS, resulting in a wider credit spread being applied to the CVA calculations. Customers CVA calculations are complex, with a number of variables within the calculation and there is no standard method used across all clients. It is an activity carried out by the customer in accordance with their own valuation design, with credit spread being but one variable used. There will be no CVA effect if trades are collateralised with CSAs because netting and collateral arrangements will help mitigate the CVA effect. A total of 21 ANTS EFI customers have CSAs in place. Why is the change not adverse? The exact effect on CVA for individual customers is not possible to assess, because the valuation models used by customers for CVA calculations are specific to them and unknown to Santander UK, or to me. However, the Ring-Fencing Programme has carried out its own DVA, and using that as a proxy for CVA, there may be changes in CVA for some customers whose derivatives are transferred to SLB, as a consequence of the lower credit rating. Some may be positive, others negative and this will depend on the valuation method used and the timing of the calculation. This is impacted by market rates at the time of the calculation. There is no defined methodology to calculate CVA. The Ring-Fencing Programme has used proxy CDS spread (an average of LBG, HSBC and Banco Santander) in DVA to estimate the CVA effect. Although this calculation cannot provide precise estimates of CVA, this analysis has evidenced to me that the CVA effect may be either positive or negative. This is dependent upon the constituents of the customer s portfolio, market data at the time of transfer and the customer s accounting policy. The Ring-Fencing Programme is undertaking a communications strategy with all affected customers. Initial feedback from customers is that any CVA effect is not substantial for EFIs. To the extent that EFIs conduct CVA valuations, I understand that they already value CVA against Banco Santander CDS spread. CVA is likely to be worse if EFI customers remain within ANTS, as ANTS will have no credit rating following the withdrawal of the cross-guarantee of Santander UK. The reasons for not transferring EFIs from ANTS to Santander UK (the RFB) is set out in Table 139. My conclusion I have concluded that CVA change and effect will not be adverse for ANTS EFI customers, as most of the trades are collateralised with CSAs and, to the extent that EFIs conduct CVA valuations, already value CVA against Banco Santander CDS spread. EY 273

278 Findings and conclusions: ANTS Exempt Financial Institutions Table 141: Changes with no adverse effects Use of customer assets as security Use of customer assets as security Description of the change There will be a change to the basis on which security is provided by customers to ANTS with regard to derivatives, secured loans or other transactions, when they are transferred under the Scheme. For the majority of these customers, there are security trustees/agents currently in place. The security arrangement will transfer along with the product, and existing bilateral arrangements will be amended under the Scheme to enable SLB to share in security as a beneficiary under a security trust arrangement. There will be no effect, including no cost, on the customers as a result of the changes. However, where customers do not have a security trustee arrangement (usually where security has been taken on a bilateral basis across all the customer s assets), Banco Santander will need to be named as a beneficiary. Why is the change not adverse? The Banco Santander Group is proposing to meet the costs associated with amending security trustee arrangements, to add Banco Santander as a named beneficiary to security trust arrangements. In addition, the Banco Santander Group will not request additional security from customers. Instead, existing security will be allotted to the secured loans, derivatives and other transactions across relevant legal entities, without the need for customers to do anything. My conclusion I have considered the plans proposed for the handling of customer security when these customers products are transferred to SLB and I have concluded that there will be no adverse effect. EY 274

279 Findings and conclusions: ANTS Exempt Financial Institutions Table 142: Changes with no adverse effects Access to Permitted Products in the future Access to Permitted Products in the future Description of the change Following the transfer of market transactions with EFIs to SLB, these customers will access permitted banking business products (i.e. other than market transactions) through Santander UK (the RFB), namely deposits and Sterling payment services. This will be achieved under the Referral Model, where affected customers will be referred to the specialist product area within Santander UK. Whilst continuing to remain a customer of SLB, stated products will be accessed through Santander UK (the RFB). Why is the change not adverse? Products will continue to be available either directly from SLB or through Santander UK (the RFB) via the referral model. In both cases, affected customers will continue to access products through their existing RDs, who will not change unless otherwise agreed. The referral model has been designed to ensure that, where necessary, customers can gain access to products in a different Banco Santander Group entity, in this case Santander UK (the RFB). The referral will be managed through a customer s existing RD, who will liaise with the product specialist in the other entity. The requirements on customers and the process as a whole will be no different to current arrangements. My conclusion Having assessed this change, I have concluded that there is no adverse effect on the products or services provided, as affected customers will continue to have access to the same products and services. Further, there is no impact on the conduct-related regulatory protections that affected customers will receive. EY 275

280 Findings and conclusions: ANTS Exempt Financial Institutions Table 143: Changes with no adverse effects Changes to customer documentation Changes to customer documentation Description of the change EFI customers that have derivatives migrating from ANTS to SLB will have new ISDA Master Agreements and associated CSAs with Banco Santander, as the contracting party, to the extent that they do not already have an ISDA Master Agreement with Banco Santander. The Ring-Fencing Programme is pursuing two options in terms of required customer documentation changes for customers positions transferring to Banco Santander (including SLB), with all changes effected under the terms of the Scheme: a. Customer has a Banco Santander ISDA Master Agreement derivatives and, if applicable, CSA will be transferred to that existing Master Agreement with appropriate amendments. There will be up to 14 customers affected by this change. b. Customer does not have a Banco Santander ISDA Master Agreement and entire portfolio of derivatives is transferred to Banco Santander existing ISDA Master Agreement and, if applicable CSA, will be transferred along with appropriate amendments. There will be up to 14 customers affected by this change. This approach will also be applied to other forms of Master Agreement (e.g. GMRAs and GMSLAs). There will be some consequential changes to ISDAs for customers transferring from ANTS to SLB (e.g. removal of cross-guarantees and tax representations relating to ANTS as well as removing references to ANTS regulatory requirements and authorisations). Why is the change not adverse? I have reviewed the legal due diligence performed and the Scheme document together with holding extensive discussions about the findings of the due diligence with the Ring-Fencing Programme legal workstream. An objective of the Ring- Fencing Programme, is ensuring that derivative products can be transferred from ANTS to SLB under the Scheme on equivalent terms. The proposed approach to achieve this is by transferring positions under the existing ISDA Master Agreement and associated CSAs, or by replicating the existing ISDA Master Agreement with Banco Santander, under the Scheme. The proposed amendments to the Master Agreements, as a consequence of Banco Santander becoming the counterparty to the Master Agreement, are administrative in nature and will not affect customers rights or obligations under the agreement. Existing netting, collateral and security arrangements will be retained through replicated or equivalent CSAs. The Scheme will suspend any events of default and termination events within current documents, to the extent that they would otherwise be triggered by the Scheme, to ensure that they continue in force. My conclusion I have concluded that this change will not result in an adverse effect on a customer s rights and obligations under ISDAs and CSAs for derivatives transferred to SLB. EY 276

281 Findings and conclusions: ANTS Exempt Financial Institutions Table 144: Changes with no adverse effects Post trade support Post trade support Description of the change Post trade support (e.g. settlement, reconciliation, and confirmation for the derivatives transactions) will be provided from the Banco Santander Operations Centre in Madrid for products transferred under the Scheme. Currently, post trade support is provided by Santander UK operations. Why is the change not adverse? I have carried out a full review of the proposed operating model and service model for SLB currently being implemented. Please refer to section 14 on Operations, Infrastructure and Shared Services for further information on work carried out. Based on my review, I am satisfied that all current service levels and performance levels will remain the same as today, and management control and governance levels will be at least the same level as a consequence of the changes. The quality, level and performance of post trade support to be provided by the Banco Santander Operations Centre is expected to be unchanged and therefore there is no need to consider mitigating actions or alternative approaches. My conclusion I have assessed the proposed SLB post trade support and have concluded that the changes will not result in an adverse effect on the quality, level and performance of service provided to customers. Table 145: Changes with no adverse effects Changes to standard settlement instructions (SSIs) Changes to standard settlements instructions (SSIs) Description of the change ANTS EFI customers will be required to change SSIs for derivatives and other transactions and arrangements transferred from ANTS to SLB. Changes will also be made to supporting systems and static/reference data in SLB systems, but these will have no effect on customers. These changes are as a direct result of derivatives being transferred and the requirement for settlement payments to be made to a different legal entity. Why is the change not adverse? ANTS EFI customers will be required to amend their SSIs upon transfer of their positions to SLB in order to continue payments under their derivatives contracts and other products and arrangements. EFI customers will typically have established operational procedures to address changes to settlement instructions, which happen from time to time, in the course of usual business activity. All affected customers will be contacted individually and advised of the changes through the communications plans in place. In addition, Santander UK and SLB will operate a follow-on service for any payments that are inadvertently paid using the incorrect settlement instructions. My conclusion Having considered the nature of the change and the level of communication proposed to pre-warn customers of the changes, I have concluded that this will have no adverse effect on customers. EY 277

282 Findings and conclusions: ANTS Exempt Financial Institutions Table 146: Changes with no adverse effects SLB on-boarding SLB on-boarding Description of the change ANTS EFI customers holding products transferring to SLB under the Scheme, will need to be on-boarded to SLB, to the extent that they are not existing customers of Banco Santander. The Ring-Fencing Programme has conducted a KYC gap and impact analysis to compare the differences in AML and KYC policies between Santander UK/ANTS and SLB and identified any additional identification requirements that may be applied to the transferring customers. The gap and impact analysis has identified the differences between Santander UK/ANTS and SLB in relation to the policies and standards applied (e.g. classification of PEPs and use of electronic identification evidence), the risk assessment methodologies used (e.g. a higher country risk interpretation for some jurisdictions), KYC checklists and identity verification evidence. These changes may require some customers to provide additional information to enable them to be onboarded to SLB. Why is the change not adverse? Santander UK (the RFB) and SLB propose to harmonise and align the AML Policy, Standards and Procedures Framework for Santander UK, ANTS and SLB to mitigate the effect on the transferring customers. These include: 1. Align SLB AML Policy Framework with Santander UK (the RFB); 2. Develop a common global risk rating methodology, align underlying reference data and country risk across Santander UK (the RFB) and SLB; and 3. Develop a single set of common KYC checklists and ID&V evidence per client type across Santander UK (the RFB) and SLB. SLB will be undertaking on-boarding on behalf of the affected customers and aims to leverage existing due diligence information in Santander UK and ANTS. Customers may need to provide additional information, pending the results of the policy alignment and harmonisation plan. SLB will seek to ensure a smooth on-boarding plan is in place and that all customers migrating to SLB will meet the KYC requirements of SLB, to enable all business to be transferred as necessary under the Scheme. My conclusion I have considered the policy harmonisation plan proposed by Santander UK/ANTS and SLB and have validated that all customers will be communicated and on-boarded to SLB to enable the transfer of business under the Scheme. I have concluded that there is a change but no adverse effect on the customers who will be on-boarded to SLB under the Scheme, as the effort to complete onboarding will not be significant to customers and will be reduced as much as possible by the processes and activities proposed by SLB. EY 278

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284 Findings and conclusions: ANTS Exempt Financial Institutions Table 147: Changes with no adverse effects summary of findings from Part 2 Assessment area Assessment findings Finance Business Model Viability, Capital and Liquidity I have assessed the potential effect of the transfers to Banco Santander on its financials, based on the quantum of business being transferred as a percentage of the current Banco Santander financial position as at December The business being transferred into Banco Santander will not have significant impact on the overall financial position of Banco Santander when compared to the size of its current balance sheet, P&L and RWAs (as at 31 December 2016). SLB and Banco Santander will remain viable and sustainable and meet minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes will not result in an adverse effect on ANTS EFIs being transferred into SLB. For further details of my findings, and how I have reached them through my work, please refer to section 10. Governance There will be changes to the governance of SLB and the performance of risk management as a key control for customers whose products are issued through SLB. However, I have concluded that these changes will not adversely affect this group of customers. Risk Management For further details of my findings, and how I have reached them through my work, please refer to sections 12 and 13. Operations, Infrastructure and Shared Services There are changes to the operations and/or the technology that will support the business transferred to SLB. However, I have concluded that these changes will not adversely affect this group of customers. For further details of my findings, and how I have reached them through my work, please refer to section 14. Recovery & Resolution Planning and Operational Continuity ANTS EFI customers will become part of the Banco Santander (including SLB) RRP and operational continuity arrangements. These arrangements are set for the entire Banco Santander Group by Banco Santander as the ultimate parent. As a result, recovery, resolution and operational continuity arrangements in Banco Santander are consistent and no change is expected to the existing arrangements for Banco Santander as a result of the Scheme. I have concluded that this change does not result in an adverse effect on ANTS EFI customers. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 280

285 Findings and conclusions: ANTS Exempt Financial Institutions Assessment area Assessment findings Creditor Hierarchy (as part of recovery and resolution) EFIs will rank in a comparable class in Banco Santander (including SLB). The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of Santander UK (the RFB), ANTS and Banco Santander (including SLB). However, I have concluded that these changes will not result in an adverse effect on the EFI customers. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 281

286 Findings and conclusions: ANTS Exempt Financial Institutions No change The following summarises the areas where I have assessed there will be no change to ANTS EFI customers as a consequence of the Scheme. Table 148: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives and loans WHT Derivatives no WHT as derivatives fall within other income category for WHT purposes. No capital gain/loss tax implication from the transfer of derivatives under the Scheme. Customer ability to transfer products as a result of the Scheme The Scheme will not impose or remove any restrictions on any contractual right that a customer has to transfer a product. Rights of ISDA netting set No change of the ISDA netting set because the whole derivatives portfolio will move from ANTS to SLB. Rights of set-off No change to the set off rights relating to loans, deposits and derivatives. Use of collateral Existing collateral held with ANTS will transfer along with the Master Agreements and relevant CSAs (no change of existing terms) when the whole derivative portfolio is transferred to SLB. Current CSAs for derivatives that are transferring under the Scheme will be replicated in SLB. No change of total amount of collateral posted by customer. Coverage and Channels Classification of RFI Status The methodology and process for the classification of customers as an EFI has been reviewed and no anomalies have been detected. Relationship management and split relationship Customers will continue to have a single RD as their point of contact into the bank. This is a continuation of their existing relationship. There will be no change/split relationship as customers will access products from both Santander UK (the RFB) and SLB/Banco Santander through their existing RD. Credit assessment and credit partner support There is expected to be no effect on a customers ability to access credit for products across different legal entities, or any extension of the time taken to achieve credit approval. EY 282

287 Findings and conclusions: ANTS Exempt Financial Institutions Assessment area Conclusion The credit policies, assessment and approval process, is consistent across both ANTS and SLB and will be managed by the customer s home entity credit team and RD. There will be no change in the skill-set(s) of Credit Analysts as most of the Credit Analysts currently working in Santander UK will transfer to SLB in support of migrating customers. Sales process Clearing arrangements There are no changes to the policies, processes or availability of these assessment areas. Online banking e-commerce channels and platforms Branch availability Telephony services Sort codes BINs BICs Product and Services Availability Product and Services Availability Access and availability of the current set of products and services offered to customers will remain the same. Further, levels of service and performance will remain consistent with quality standards, irrespective of the legal entity from which they are supplied. Regulatory Protection FSCS protection The Scheme will not transfer deposits to SLB. Customers will not lose FSCS protection as a consequence of the Scheme. Deposits held for EFI customers in ANTS will either be novated/assigned to Santander UK or mature ahead of the Scheme becoming effective. Note: only applicable to EFIs with current eligibility for FSCS protection e.g. building societies. Pursuit of complaints, legal and other proceedings All customers transferring under the Scheme will retain the right to pursue any outstanding complaints, legal or other proceedings against the transferee. Client money No transferring customers have client money protection. EY 283

288 Findings and conclusions: Other customer groups 26. Findings and conclusions: Other customer groups Customers with transactions or positions remaining in ANTS Introduction ANTS currently holds assets and liabilities comprising, amongst other things: trading books, social housing assets, liquid assets, Santander UK SCCB and SGCB loan portfolio assets. It also provides ALM services. Under the existing cross-guarantee, Santander UK and ANTS guarantee each other s liabilities in the event one entity is unable to meet them, providing support to creditors of both entities. Under the Scheme, the cross-guarantees between ANTS and Santander UK will be unwound with effect from 31 December The loss of the cross-guarantees and the associated Santander UK credit rating will significantly restrict the ability of ANTS to raise funding and capital from sources other than the Banco Santander Group. Historically, ANTS had a significant source of external funding. Furthermore, coinciding with the removal of the cross-guarantee, ANTS will withdraw from the Defined Liquidity Group (DLG) Facility Agreement. As part of the Ring-Fencing Programme, ANTS has been significantly reducing the assets, liabilities and business it holds or transacts. This has involved the following: The transfer of business, contracts and relationships currently held by ANTS to either Santander UK (the RFB), Banco Santander or SLB by novation and assignment; The run-off of positions not required by either Santander UK (the RFB) or Banco Santander such as repo transactions, short term trading assets and liabilities, short-term loans, certain deposits, short term debt securities and other liabilities; The sale of certain facilities to Santander UK (the RFB), such as LAB-eligible debt and equity securities, such as repos; and The associated incomes of the business being transferred, run-off and sold, no longer being available to Santander UK (the RFB), including recourse to creditors, bondholders and AT1 holders. There are some short term market products which will expire before 31 December 2018 that will remain in ANTS following the Scheme. These are being allowed to run-off and will not be updated as they will remain beneficiaries of the cross-guarantee between ANTS and Santander UK. Under the Ring-Fencing Plan, the Santander UK Group will not be able to completely empty ANTS of assets and liabilities, and hence, achieve a zero balance sheet prior to the deadline for compliance with the ring-fencing legislation on 1 January Accordingly, ANTS will continue to hold certain business beyond this date. The Santander UK Group will continue to operate ANTS following the Scheme, but it will hold certain transactions and positions in run-off. ANTS will not book or provide any new products or services to any customers, existing or new. ANTS will be a directly owned subsidiary of, and controlled by, Santander UK HoldCo and will sit outside of the RFB Sub-Group. It will require ongoing credit support from Santander UK HoldCo. ANTS will need to continue to demonstrate that it maintains adequate financial and non-financial resources, that it is viable, and that it can meet its minimum regulatory capital and liquidity requirements. Other regulatory obligations under MiFID/MiFID 2 and EMIR will continue to apply as long as ANTS seeks to maintain its status as a financial counterparty and carry out MiFID activities. EY 284

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290 Findings and conclusions: Other customer groups Basis of assessment for ANTS I have performed my assessment, and reached my conclusions, on the basis set-out below. The Santander UK Board Risk Committee was advised in September 2017 that a worst case scenario for the ANTS balance sheet would be c. 900mn on 1 January This is comprised of two asset facilities, both to Financial Institutions (FIs). In both cases, the FIs have been made aware of the intent to retain their facilities with ANTS and the intent to manage these facilities in run-off until their maturity. These facilities are set-out below: A secured annuity transaction which continues to be funded directly by a corresponding repo of collateral received. This transaction will mature in 2059; and A Total Return Swap (TRS) with a residual funding requirement which will be met by a combination of additional intra-group term funding from Santander UK HoldCo and share capital held by Santander UK HoldCo. This transaction will mature in In addition, there are a total of 18 instruments that have been issued by ANTS, on behalf of 6 SGCB customers, to beneficiaries of guarantees, letters of credit (LOC) or performance bonds. These instruments are off-balance sheet contingent liabilities, foreign law contracts, which cannot be transferred under the Scheme and expire after 1 January Accordingly, they will be retained by ANTS. Approach to assessing changes to customers and counterparties with transactions and positions being run-off in ANTS as a consequence of the Ring-Fencing Plan, including the Scheme Assessment areas In assessing the effect of the Scheme, I have considered the following assessment areas which would highlight adverse effects on those customers who will remain in ANTS. Table 149: Customers and counterparties of ANTS assessment areas Assessment areas Description Financial analysis Business Model Viability The impact on ANTS as a result of the Ring-Fencing Plan, including the transfer of certain facilities to Santander UK, run-down of positions, the transfer of residual business to Banco Santander (including SLB) and Santander UK, and potential remaining products and transactions in ANTS. Financial analysis Capital Adequacy The impact of minimum regulatory capital requirements for ANTS. Credit rating Assessment of the consequences of ANTS no longer having a credit rating. Removal of crossguarantee with Santander UK Assessment of the consequences of un-winding the cross-guarantees under the Scheme between Santander UK and ANTS, with effect from 31 December Governance Validate that governance arrangements in ANTS are appropriate. This includes any changes to the Board and management committees. EY 286

291 Findings and conclusions: Other customer groups Assessment areas Description Risk Management Validate that any changes made to the risk management processes and controls currently in place are appropriate. Product Types and Customer Services Assessment of the impact on collateral held against related positions in ANTS, the methodology for valuation, any impact on netting and on the relationship management model providing a single point of contact for the affected customers. Operations, Infrastructure and Shared Services Whether the operations and technology infrastructure required to support ANTS will be sufficient and robust to support the customers and counterparties who remain in ANTS. Key considerations include no loss of service and whether critical services (in particular payment and settlement services) will remain enabled. Recovery and resolution planning Assessing whether ANTS remains supported by the wider Santander UK Group recovery and resolution plan. Operational continuity Ongoing operational continuity of ANTS, to ensure plans are in place to maintain critical services, ensure that ANTS customers and counterparties can access money in their accounts and can generally keep the lights on. Creditor Hierarchy Understand changes from the current creditor hierarchy and how that position might affect persons remaining in ANTS after implementation of the Ring- Fencing Plan, including the Scheme. The impact on ANTS, as a result of the Ring-Fencing Plan, including the transfer of certain facilities to Santander UK (the RFB), run-down of positions, the transfer of residual business to Banco Santander or SLB and Santander UK (the RFB), and potential remaining products and transactions in ANTS. EY 287

292 Findings and conclusions: Other customer groups My conclusions are supported by the information and analysis summarised below In reaching my conclusions with regard to customers and counterparties who will remain in ANTS, in run-off, after 1 January 2019, I have reviewed the following key documents and information sources (amongst others) and undertaken my assessments: Scheme design documents including presentations to regulators and senior business management; Programme implementation plans including senior programme governance material; Santander UK Group plan for ANTS; BTIA; Santander UK deed poll guarantee executed on 11 May 2017; ANTS deed poll guarantee executed on 11 May 2017; Governance structures of ANTS; Management Responsibility Maps and Terms of Reference for the key committees; Operating Models detailing the planned changes to operations, technology and customer interaction channels across the Santander UK Group entities; Prospectus documents of debt instruments; ANTS audited accounts as at 31 December 2016; ANTS half year accounts as at 30 June 2017; ANTS forecast balance sheet position as at 1 January 2019; ANTS forecast P&L position from 1 January 2019; Detailed list of positions of counterparties (including maturity dates of positions between June 2018 and 31 December 2018), as at 30 June 2017; List of counterparties remaining in ANTS beyond 1 January 2019; and Creditor hierarchy analysis. Under the Santander UK Group plan for ANTS, approved by the Santander UK Board and which I have reviewed: There will be a significant reduction in RWAs which will reduce the capital required to be held by ANTS. This facilitates the distribution of equity to Banco Santander who will need to increase capital held as a result of receiving the RWAs from the business being transferred from Santander UK under the Ring-Fencing Plan, including the Scheme. The remaining share capital is sufficient to meet regulatory requirements; ANTS will fund its remaining facilities through a combination of equity, intra-group term funding and a repo of collateral received; As a result of the reduction in the balance sheet assets and liabilities, I have concluded that this will result in a reduced liquidity requirement for ANTS; and ANTS will not seek a replacement for the cross-guarantee with Santander UK, which will be unwound by the Scheme, as the secured annuity transaction is already collateralised and a charge/security for the TRS has been introduced as a substitute for the cross-guarantee. The financial analysis undertaken in this section and any conclusions derived from it are based on ANTS financials as at 30 June 2017, in conjunction with Board Risk Committee considerations during July and September 2017 at which point a revised balance sheet was developed and provided to show the projected starting position for ANTS in run-off as at 1 January This has enabled me to assess and conclude the following: There will be remaining assets and liabilities in ANTS, which would be prohibited under the ringfencing legislation; and Any persons remaining in ANTS will be connected to an entity that has a different capital risk profile (when compared to ANTS prior to implementing the Ring-Fencing Plan, including the Scheme). EY 288

293 Findings and conclusions: Other customer groups However, the ANTS balance sheet and capital requirements papers show that the entity will remain adequately capitalised and that minimum regulatory capital requirements will be met in relation to remaining RWAs. Having obtained the workstream plan for contracting and operational continuity (which forms part of the Ring-Fencing Plan), I have assessed the proposed service model structure, including SSCs, and reviewed the assessment of criticality and operational and financial resilience data. Information relating to existing contractual relationships across the Santander UK Group has been made available, including SLAs and IGAs, third party supplier contracts and those relationships deemed critical in nature. A set of draft IGAs and SLAs for ANTS have been provided showing commercial, atarms-length services provided by Santander UK (the RFB). An overview of the approach taken by Santander UK was provided along with analysis underpinning a creditor hierarchy assessment. I have assessed this information and calculated asset coverage across each class of creditor. I have reviewed the June 2017 RCP, clarified any developments to the governance arrangements and crisis management framework, and assessed the available options, early warning indicators, scenarios and capacity in given scenarios. I have reviewed the June 2017 RSP, ensured that the proposed legal entity structure supports the preferred resolution strategy, confirmed that levels of loss absorbing capital are on a trajectory to ensure sufficient levels are in place for regulatory requirements and confirmed that the continuity of critical economic functions in the event of resolution are aligned. I checked whether the resilience of critical services suppliers and shared service companies had been modelled. I have analysed high level designs for the payment services required to support ANTS. Based on my assessment of these plans and discussion with senior programme staff, I have been able to assess the change to the SSIs for the remaining customers. EY 289

294 Findings and conclusions: Other customer groups Changes to customers and counterparties of ANTS Changes with adverse effects The following details these changes and the rationale for why I have concluded that an ANTS customer (TRS customer) will be adversely affected but that there are or will be mitigating actions or alternatives offered. I have concluded, therefore, that the changes are no more than reasonably necessary to achieve the Scheme s purposes. Table 150: Changes with adverse effects that are mitigated Removal of the cross-guarantees and the loss of ANTS credit rating for the TRS customer Removal of the cross-guarantees and the loss of ANTS credit rating for the TRS customer Description of the change Santander UK and ANTS have guaranteed all of the other s unsubordinated obligations and liabilities under the cross-guarantees. A global investment bank has entered into a transaction with ANTS, where ANTS is financing a portfolio of securities for the bank and holds the securities on behalf of the bank paying interest and principal received. As a consequence of the Ring-Fencing Plan, including the Scheme, these crossguarantees will be unwound under the Scheme as at 31 December 2018 and cease to exist prior to the implementation date. In addition, ANTS will lose its credit rating as a result of the cross-guarantees being unwound. Why is this adverse? I have reviewed the Scheme document and the deed poll guarantees, and these guarantees between Santander UK and ANTS will be unwound under the Scheme and will cease to apply to any present and future obligations and liabilities of Santander UK (the RFB) or ANTS. As a result of this, with effect from 1 January 2019 Santander UK (the RFB) will not settle any liabilities of ANTS in the event that ANTS cannot meet them. Mitigations or alternatives available The final maturity of the transaction is December Through bilateral discussion, the transaction will be reduced in size, although it will still exist at 1 January 2019 and as a consequence, be part of the small portfolio of positions in the ANTS entity. Through bilateral discussions between the customer and ANTS, it has been agreed that the Santander UK cross-guarantee which will be unwound under the Scheme on 31 December 2018, will be replaced with a customer charge/security in favour of the customer over a portfolio of collateral held by ANTS. Is this sufficiently mitigated? As the customer, who can be regarded as a sophisticated and knowledgeable investor, has entered into bilateral discussions with ANTS, and has reached an agreement to accept the replacement collateral portfolio, I am satisfied that the adverse effect has been sufficiently mitigated. Further, ANTS holds third party bonds which make-up the collateral. As a result, the customer is not directly exposed to ANTS. My conclusion I have considered the impact of the removal of the cross-guarantees and the loss of ANTS credit rating on the global investment bank and have concluded that this customer will be adversely affected by the change. However, the adverse effect has been mitigated through bilateral agreement between ANTS and the customer. EY 290

295 Findings and conclusions: Other customer groups Changes with no adverse effects I have identified changes as a consequence of the Scheme that will not result in an adverse effect on those ANTS customers who will remain with ANTS. The following details these changes and the rationale for why I have concluded that Santander UK and ANTS EFI customers will be affected, but not adversely affected. Table 151: Changes with no adverse effects Removal of the cross-guarantees and the loss of ANTS credit rating for the beneficiaries of guarantees, LOC or performance bonds Removal of the cross-guarantees and the loss of ANTS credit rating for the beneficiaries of guarantees, LOC or performance bonds Description of the change Santander UK and ANTS have guaranteed all of the other s unsubordinated obligations and liabilities under the cross-guarantees. There are 18 instruments (which have an aggregate principal amount of 35.2mn as at 21 August 2017) that have been issued by ANTS, on behalf of 6 SGCB customers, to beneficiaries of guarantees, letters of credit or performance bonds. These instruments will remain in ANTS after 1 January 2019, if it has not been possible to transfer them with the consent of the beneficiary by that date. As a consequence of the Ring-Fencing Plan, including the Scheme, these crossguarantees will be unwound under the Scheme as at 31 December 2018 and cease to exist from that date. In addition, ANTS will lose its credit rating as a result of the cross-guarantees being unwound. As a result of this, with effect from 1 January 2019 Santander UK (the RFB) will not settle any liabilities of ANTS in the event that ANTS cannot meet them. Why is the change not adverse? Whilst ANTS has a contingent liability to the beneficiaries of the instruments, it has a matching indemnity claim against the customer, in the event the customer defaults. The customer indemnity is typically governed by English law. In the event that ANTS is unable to transfer the underlying contract for the instruments (governed by foreign law) through novation or assignment ahead of the final legal effective date, the Ring-Fencing Programme will transfer the customer indemnity to Santander UK (the RFB) (if the customer is not an RFI) or SLB (if the customer is an RFI). The transfer of the customer indemnity will take place on the basis that Santander UK (the RFB) or Banco Santander (including SLB) will indemnify ANTS for any claims on the related instruments as set-out under the BTIA. I have reviewed the P20 data provided by Santander UK which was compiled into analytical tools to assess the viability of Santander UK (the RFB) and its ability to meet ongoing liabilities as they fall due. I reviewed the Banco Santander s ICAAP and ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan to assess the changes to SLB and Banco s P&L and balance sheet in the year of transfer to assess the viability of Banco Santander and its ability to meet ongoing liabilities as they fall due. Santander UK (the RFB) and Banco Santander (including SLB) are viable and sustainable entities and will be able to meet their obligations to the beneficiaries of guarantees, LOC or performance bonds which may crystallise under the indemnity provided to ANTS. My conclusion I have considered the impact of the removal of the cross-guarantees and the loss of ANTS credit rating on the beneficiaries of the 18 instruments remaining in ANTS and have identified no effect on the ability of Santander UK (the RFB) or Banco Santander (including SLB) to meet any potential claims to the beneficiaries of guarantees, LOC or performance bonds following the removal of the crossguarantees I have therefore concluded that this group of persons will not be adversely affected by the changes being made under the Scheme. EY 291

296 Findings and conclusions: Other customer groups Table 152: Changes with no adverse effects Removal of the cross-guarantees and the loss of ANTS credit rating for the secured annuity transaction customer Removal of the cross-guarantees and the loss of ANTS credit rating for the secured annuity transaction customer Description of the change ANTS sold a portfolio of mortgages to a major insurance company and in return receives a fixed schedule of quarterly GBP payments over the period to 31 December The payment obligations are guaranteed and secured through a title transfer of collateral (a combination of gilts and bonds transferred to ANTS and a fixed charge over other gilts held in a custodian account with another bank). Collateral is valued at 100% of present value of the loan on a daily basis with appropriate haircuts depending on the collateral quality. ANTS is in discussion with the customer to look at options to transfer or sell the transaction to a third party bank. However this is not certain and the current planning assumption is that the transaction will remain with ANTS beyond 1 January 2019 and as a consequence, be part of the small portfolio of positions in ANTS. Why is the change not adverse? The customer is not adversely affected as a consequence of removal of the crossguarantees or loss of credit rating because they have received the loan from ANTS and is not exposed to any greater extent as a consequence of the loss of credit rating. My conclusion I have considered the impact of the removal of the cross-guarantees and the loss of credit rating on the insurance company that has a loan from ANTS and have concluded that this customer will not be adversely affected by the change. Table 153: Changes with no adverse effects ANTS regulatory capital position ANTS regulatory capital position Description of the change Under the ANTS programme, ANTS RWAs will be significantly reduced. This will reduce the capital requirements and change the regulatory capital position of ANTS. Why is the change not adverse? Having reviewed the proposed balance sheet for ANTS, the Santander UK Group is expected to maintain sufficient capital resources in ANTS to meet its minimum regulatory requirements. The large exposure requirement (i.e. ANTS exposure to its single largest customer) has been identified as the constraint on capital requirements, as noted in the Santander UK Business Risk Committee papers, September My conclusion I have considered the impact of the significantly reduced ANTS balance sheet on its capital position and have concluded that this would not result in an adverse effect on customers remaining in ANTS. ANTS is projected to maintain sufficient capital resources to meet its minimum regulatory requirements. EY 292

297 Findings and conclusions: Other customer groups Table 154: Changes with no adverse effects Risk management Risk management Description of the change A new TOM has been designed in line with the anticipated decrease in business activity to manage risk in the remaining positions within ANTS. Why is the change not adverse? I have reviewed the proposed risk management operating model for ANTS and have been able to validate that ANTS will continue to use risk management systems and procedures from Santander UK (the RFB), which is in line with current business practice and which are appropriate for the remaining business held in ANTS. My conclusion I am satisfied that the chosen approach will result in appropriate risk management of ANTS and not result in an adverse effect to the groups of persons who remain connected to ANTS after 1 January Table 155: Changes with no adverse effects Payment services Payment services Description of the change The majority of business currently managed in ANTS is transferring to Santander UK (the RFB), and accordingly, the Ring-Fencing Programme will transfer the BIC associated with payments from ANTS to Santander UK (the RFB). As a consequence, customers remaining in ANTS will need to use a new BIC. In this case, it will be an existing code which ANTS already owns. ANTS payments will be managed by Santander UK (the RFB), and accordingly, the existing funding model will need to ensure no exposures are created on behalf of Santander UK (the RFB). Why is the change not adverse? Given the volume of business moving to Santander UK (the RFB) from ANTS, transferring the existing BIC ownership to Santander UK (the RFB) will minimise the overall effect on transferring customers. The change to a new BIC code for the 2 remaining customers is a small administrative change, and I do not consider it to cause any significant level of work or operational risk. There has been and will continue to be significant levels of contact between the 2 customers and their RDs through the implementation of the Ring-Fencing Plan, including the Scheme. This will include communication of the change to the BIC and the proactive validation through the RDs that the change has been made on time and is working. This level of communication and engagement will help mitigate any operational risk of error and consequential loss as a consequence of the BIC change. My conclusion I have considered this change and I have concluded that there is no adverse effect on customers remaining in ANTS. This is an internal change to the Santander UK Group s infrastructure and SWIFT have agreed in principle that Santander UK can proceed with the change as proposed. The level of communication taking place between the 2 affected customers and their respective RDs will minimise operational risk when implementing the change. EY 293

298 Findings and conclusions: Other customer groups Table 156: Changes with no adverse effects Position for groups of persons other than the transferor in the creditor hierarchy Position for groups of persons other than the transferor in the creditor hierarchy Description of the change ANTS will have a significantly reduced balance sheet following the transfer of permitted business from ANTS to Santander UK (the RFB) and the transfer of prohibited business from ANTS to Banco Santander and SLB. Overall, the significant reduction in the level of assets and liabilities remaining in ANTS means these are equally matched. Why is the change not adverse? The classification of creditors was prepared to outline how the creditor s ranking would operate for respective creditors. Further details with regard to insolvency ranking can be found in Appendix 3. I have reviewed the creditor hierarchy analysis to ensure it reflected the correct starting balance sheet position for the relevant legal entities, as at 30 June I assessed those permissible assets and liabilities transferring from ANTS to Santander UK (the RFB) and those prohibited assets and liabilities transferring from ANTS to Banco Santander and SLB. A summary for each of these transitions was built to detail the destination for the respective business and enabled a post-scheme balance sheet for the ANTS to be constructed and recognising the business maturing before 31 December At this stage, I was able to assess the ranking of those residual creditors and calculate the level of asset cover for each respective class of creditor, before and after the transfer of business. Given these changes, those existing creditors of ANTS are not likely to be adversely affected. The rank of creditors remains the same for ANTS. The level of assets available for each creditor remains at least the same. These changes to the balance of ANTS are as a result of the Ring-Fencing Programme placing ANTS into run-off. ANTS retains a sufficient level of assets to cover the residual positions and the changes mean that creditors are not likely to be adversely affected. The removal of the cross-guarantees has been considered in detail in Tables 151 and 152 above. My conclusion Following my analysis, I am satisfied that the resultant changes will not result in an adverse effect. I have formed this conclusion, having analysed the creditor hierarchy analysis, supporting documentation and calculating of the levels of asset cover for a given class of creditor. Groups of persons remaining in ANTS continue to rank as the same class of creditor, had insolvency occurred, and this means that any payment will be received in the same ranking. EY 294

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300 Findings and conclusions: Other customer groups No change The following summarises the areas where I assessed there will be no change to those ANTS customers who will remain with ANTS in run-off. Table 157: No change Assessment area Conclusion Overall robustness of recovery planning Overall robustness of recovery planning I assessed the implications of the Ring-Fencing Plan, including the Scheme on the existing RCP and supporting arrangements. Following my assessment, I confirm there will be no changes required or planned to recovery planning or the recovery plan as a result of implementation of the Scheme. There will be no change to the current RCP or recovery planning arrangements as a result of the Scheme and therefore no effect on groups of persons connected with ANTS. Ability to be resolved and the strength of resolution planning Ability to be resolved and the strength of resolution planning I assessed the implications of the Ring-Fencing Plan, including the Scheme on the existing RSP and supporting arrangements. Following my assessment, I confirm there will be no changes required or planned to the ability of the Santander UK Group to be resolved or to affect existing resolution planning arrangements. There will be no change to the current RSP or resolution planning arrangements as a result of the Scheme and therefore no adverse effect on groups of persons connected with ANTS. Operational continuity Operational continuity I assessed the implications of the Ring-Fencing Plan, including the Scheme on the quality of operational continuity arrangements for ANTS. Following my assessment, I confirm that there will be no changes to the quality of arrangements. ANTS will continue to be serviced by the current service model and have access to Santander UK (the RFB), to the extent required through a series of IGAs and SLAs. Note: the Santander UK Group is implementing a wide ranging programme covering the operational continuity and contracting which is due to be delivered in Q and is as a result of work progressing toward a regulatory compliance date of 1 January 2019 for operational continuity PRA Rules. These changes are a part of the wider ring-fencing legislation and are not adversely affected by implementation of the Ring-Fencing Plan, including the Scheme. EY 296

301 Findings and conclusions: Other customer groups Assessment area Conclusion Governance Governance I have assessed the governance structures and confirmed with the Company Secretary that these will remain unchanged. I have reviewed the Management Responsibility Maps and Terms of Reference for the key committees to confirm Company Secretary s representation. There will be no change to the current Governance structures and practices as a consequence of the Scheme and therefore, no adverse effect on groups of persons connected with ANTS. Contractual position of customers remaining in ANTS Contractual position of customers remaining in ANTS There will be no change to the contractual arrangements for customers and counterparties who will remain in ANTS, notwithstanding the loss of ANTS credit rating. There will be no change to the management of, and operational processes for the customers and counterparties who remain in ANTS. Product Support Servicing and Relationship Management Product Support Servicing and Relationship Management There will be no change to the relationship management arrangements for the customers and counterparties who remain in ANTS. The ongoing access to products and services for the two remaining customers of ANTS will be subject to the transfer arrangements under the Scheme. Overall operational and technical (IT) structures and data Overall operational and technical (IT) structures and data There will be no change to the operations technology infrastructure required to support the business remaining in ANTS as a result of the Ring- Fencing Plan, including the Scheme. Therefore, there will be no adverse effect on groups of persons connected with ANTS. EY 297

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303 Findings and conclusions: Other customer groups SLB existing customers Introduction This section addresses changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will affect 497 existing customers of SLB. These customer relationships are typically managed by SGCB. These customers may hold both permitted and prohibited products and they will continue to access those products in line with current arrangements, subject to the implementation of the referral model. This enables these customers to access permitted products or services via Santander UK (the RFB), to the extent that they will not be provided by SLB. No existing customers of SLB will be transferring under the Ring-Fencing Plan, including the Scheme. To the extent that they are also customers of ANTS or Santander UK, any changes as a consequence of the Scheme that will affect them in that capacity, have been addressed in other sections of this Scheme Report. Changes to existing SLB customers as a consequence of the Scheme Findings and conclusions Existing customers of SLB who will continue to access their existing products and services through SLB. There will be changes to the way in which these customers bank or access financial services as a consequence of the Ring-Fencing Plan, including the Scheme Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have adverse effects on existing customers of SLB. EY 299

304 Findings and conclusions: Other customer groups Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, that do not result in an adverse effect on existing customers of SLB. The following details these changes and the rationale for why I have concluded that existing customers of SLB will be affected, but not adversely affected. Table 158: Changes with no adverse effects summary of findings from Part 2 Assessment area Assessment findings Finance Business Model Viability, Capital and Liquidity I have assessed the potential effect of the transfers under the Ring-Fencing Plan, including the Scheme, on Banco Santander s financial position. My assessment has been based on the size of business being transferred as a percentage of the current Banco Santander financial position as at 31 December The business being transferred into SLB will not cause a significant change to the overall financial position of Banco Santander when compared to the size of its current balance sheet, P&L and RWAs as at 31 December Banco Santander, and SLB as its London Branch, will remain viable and sustainable and meet minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes will not result in an adverse effect on existing customers of SLB. For further details of my findings, and how I have reached them through my work, please refer to section 10. Governance Risk Management There will be changes to the governance of SLB and the performance of risk management as a key control for customers whose products are issued through SLB. I have concluded that these changes will be enhancements to the existing governance and risk management structures and process in SLB and will, therefore, not adversely affect existing customers of SLB. For further details of my findings, and how I have reached them through my work, please refer to sections 12 and 13. Operations, Infrastructure and Shared Services There will be changes to the operations teams, business processes and the technology that will support the business and products in SLB. These changes are necessary to support the increased volume and new products and business that will be transferred into SLB from Santander UK and ANTS as a consequence of the Ring-Fencing Plan. These changes will not affect the current operations and technology environment that support existing business and products. I have therefore concluded that whilst there will be significant change to the overall operating model of SLB, these changes will not adversely affect existing customers of SLB. For further details of my findings, and how I have reached them through my work, please refer to section 14. EY 300

305 Findings and conclusions: Other customer groups Assessment area Assessment findings Creditor Hierarchy (as part of recovery and resolution) The existing customers of SLB will rank in a comparable class in Banco Santander. The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of Banco Santander (including SLB). However, I have concluded that these changes will not result in an adverse effect on this group of customers. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander (including SLB). EY 301

306 Findings and conclusions: Other customer groups No change The following summarises the areas where I have assessed that there will be no change to existing customers of SLB as a consequence of the Scheme. Table 159: No change Assessment area Conclusion Contractual Rights Tax treatment Use of collateral There will be no change to existing policies, rights or processes. Use of customers assets as security Rating triggers Rights of set-off/netting Customer documentation change Customer documentation change There will be no change of contractual rights within existing legal documentation including ISDA master agreements and relevant CSAs if applicable. Coverage and Channels Relationship management There will be no change to existing policies or processes. Sales process Post trade support Clearing arrangements Delegated reporting/trade reporting e-commerce channels and platforms Online banking Telephony services Sort codes BINs BICs Credit Availability Credit assessments There will be no change to existing policies or processes. Credit partner support EY 302

307 Findings and conclusions: Other customer groups Assessment area Conclusion Product and Services Availability Product and Services Availability There will be no change to existing policies or processes, with permitted products being accessed from Santander UK (the RFB) via the referral model. Regulatory Protection Regulatory Protection Pursuit of complaints, legal and other proceedings There will be no change to existing policies, rights or processes. Client money Recovery & Resolution Planning and Operational Continuity Recovery & Resolution Planning and Operational Continuity No changes are expected to recovery, resolution and operational continuity arrangements for Banco Santander, including SLB, as a result of the Ring-Fencing Plan, including the Scheme. Therefore, there will be no adverse effect on this group of customers. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 303

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309 Part 4 Findings and conclusions: All other groups of persons EY 305

310 Findings and conclusions: Employees 27. Findings and conclusions: Employees Introduction In reaching my conclusions, I have assessed the effects of the proposed changes on different groups of employees, who are employed in the Santander UK Group (including Santander UK) and SLB. My assessment separates branch employees from call centre and corporate office staff, and then highlights where the effect of the changes as a consequence of the Ring-Fencing Plan, including the Scheme, will occur, both in terms of numbers and locations. This assessment is not intended to provide details of how employees and locations may be affected as a consequence of normal business activities during the implementation period of the Ring-Fencing Plan, including the Scheme. Details of the total numbers of employees in the UK, the businesses and teams they are employed in and their locations are included in section 4. Please note that ANTS is not an employing entity and accordingly, is not considered in this section. Isolating changes relating to employees as a consequence of the Scheme (e.g. as a result of business transferring under the Scheme rather than by novation or assignment under the Ring-Fencing Plan), was not practical. Therefore, my assessment in this section has considered all changes to employees as a consequence of the Ring-Fencing Plan, including the Scheme. Approach to assessing changes to Employees as a consequence of the Ring-Fencing Plan, including the Scheme Assessment areas The following sets out the assessment areas covered by my work: Table 160: Employees assessment areas Assessment area Description Assessment areas in this section specific to Employees Location of employment Changes to the locations in which employees conduct/carry out their roles. Core terms and conditions of employment Changes made to the core terms and conditions of employment, including the employing entity and base employment terms e.g. pay, notice periods, holiday entitlement, rights and obligations. Employment benefits Changes to employment benefits e.g. the provision of childcare, healthcare, savings plans, bonus schemes, transport season ticket loans and employee pension contributions. Employment representation Continuity of employment representation (union and any other). Rationale for the transfer of employment To confirm whether the rationale for transfer of employment is relevant and justified to the terms of the Ring-Fencing Plan, including the Scheme. EY 306

311 Findings and conclusions: Employees Assessment area Description Support throughout the transfer For those employees who will be transferred, to understand whether they will have had sufficient support throughout the transfer e.g. relocation costs. Consultation throughout the process Consultation throughout the process, including with union representatives. Finance Business Model Viability, Capital and Liquidity Assessment of the ongoing financial viability of the Santander UK Group/the RFB Sub-Group and SLB, whether they will have sufficient capital and liquid assets to meet their obligations to creditors. Governance, including operational management Ongoing management and control of the Santander UK Group/the RFB Sub- Group and SLB to ensure a safe and well managed bank. This is to ensure that staff are not put at unnecessary risk or stress through weakened leadership or unclear responsibilities. Recovery and Resolution, Operational Continuity and Creditor Hierarchy Ability of an entity to recover from a crisis or stress through its recovery and resolution planning and the effect on creditors (e.g. suppliers of the bank) in the event of a failure. An assessment of the position in the creditor hierarchy in both Santander UK and Banco Santander (as applicable). My conclusions are supported by the information and analysis summarised below: In reaching my conclusions I have reviewed the following key documents and information and conducted the following analysis and assessments: Information and documentation reviewed, which has been supported through meetings with the organisation design leadership team of the Ring-Fencing Programme: Organisation design documentation covering employees and pensions (including presentations to senior Santander leadership outlining the effect of the Ring-Fencing Plan, including the Scheme) and the Ring-Fencing Programme s own assessment of employees affected; Consultation papers with union representatives; and Papers submitted to regulators and the pension trustee. The design of the future organisation, size of the teams required to support the increased scale of work in SLB as a consequence of the transfers under the Ring-Fencing Plan, including the Scheme, and the identification of skilled employees most suited to staff the roles, was completed by a dedicated team within the Ring-Fencing Programme. All material requested, that evidenced the Ring-Fencing Programme s work covering the robustness and fairness of the design and decision making, was made available to me. The design was based on clear principles to ensure continuity and quality of service to transferring customers and counterparties, together with explicit statements about maintaining and ensuring consistent terms and conditions of employment for transferring employees. This was clearly documented through governance forum packs/minutes and signed off at Steering Committee(s), which I have reviewed. EY 307

312 Findings and conclusions: Employees Consultation with the union representatives, Advance, took place through Santander UK s standard employee consultation process. The consultation papers and presentations to union representatives were made available to me. The consultation papers were comprehensive and demonstrated full intent to meet the objectives outlined in the point above. Additional comfort regarding the transfer of employee rights is provided through the use of the TUPE process (see of section 27.5). As part of the union consultation process, it has been confirmed to me in writing that Advance will continue to be recognised and be the representative employee body for the transferring employees. This will be recognised formally as part of the TUPE transfer process. Communications with affected employees, as part of the consultation process, appear to have been open and transparent. I have had an opportunity to review communications delivered to date as part of the employee communications plan. A number of roles currently in Santander UK are being transferred to Banco Santander in Madrid as a consequence of the business transfers under the Ring-Fencing Plan. These have been identified as a sub-set of roles that are no longer required, as a consequence of work being performed most efficiently in Madrid as opposed to London. I have seen evidence that there was an attempt to match these transferring roles to Spanish nationals currently working in the UK, in an effort to limit placing any employees at risk. The 8 employees who have been placed at risk are being supported by Santander UK Group s documented consultation process. I have received management assurance that every effort is being taken to find alternative roles, where the employee is looking for one and/or to provide appropriate redundancy. Given the sensitivity of this process, I concluded that it would not be appropriate to see any papers associated with individual consultations, and the conclusions of the consultation process will become known and available to me for my review at the end of November 2017, at which point I will update my findings. I have reviewed the Ring-Fencing Plan and implementation plans to ensure no changes are planned for implementation that contradict with my assessment. I have reviewed the Design Integrity Document, which outlines the full extent of changes required as a result of the ring-fencing legislation, and cross-referenced my findings to the Ring-Fencing Plan to ensure that there is no contradiction between the documents. EY 308

313 Findings and conclusions: Employees Changes to Retail and Small Business Banking employees The Santander UK Group currently has a branch network of c.850 branches and employs over 12,900 permanent staff in the branches and a number of dedicated contact centres serving retail and small business customers in major locations across the UK (details of their locations are provided in section 4.5). Findings and conclusions Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have adverse effects on Retail and Small Business Banking employees Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, that do not result in an adverse effect on any group of persons. The following details these changes and the rationale for why I have concluded that Retail and Small Business Banking employees will be affected, but not adversely affected. I have concluded, therefore, that the changes are no more than reasonably necessary to achieve the Scheme s purposes. Table 161: Changes with no adverse effects summary of findings from Part 2 Assessment area Conclusion Finance Business Model Viability, Capital and Liquidity There will be changes to the forecast financial position of Santander UK and SLB that will impact the viability and sustainability of the entities (who are relevant employers). I have concluded that these changes will not result in an adverse effect on Retail and Small Business Banking employees. For further details of my findings, and how I have reached them through my work, please refer to section 10. Creditor Hierarchy The amount of asset cover available will change for Retail and Small Business Banking employees as a result of the change in balance sheet makeup. However, in my opinion, the cover remains sufficient to meet employee liabilities in an insolvency event. Therefore, I have concluded that the changes will not result in an adverse effect on Retail and Small Business Banking employees. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Santander UK (the RFB). EY 309

314 Findings and conclusions: Employees No change There will be no changes to Retail and Small Business Banking employees as a consequence of the Ring- Fencing Plan, including the Scheme. Following the completion of my review, I am satisfied that there will be no change to employment levels and the roles of employees within the branch network or contact centres of the Santander UK Group, as a consequence of the Ring-Fencing Plan, including the Scheme. I am further satisfied that there will be no location changes (e.g. branch closures across the network) as a consequence of the Ring-Fencing Plan, including the Scheme. The following summarises the areas where there will be no change to Retail and Small Business Banking employees as a consequence of the Ring-Fencing Plan, including the Scheme. Table 162: No change Employee group Description Change to location of employment Changes to core terms and conditions Changes to employment benefits Employment representation Risk of Redundancy Governance, including operational management Retail and Small Business Banking employees There are approximately 12,900 employees across the UK. There will be no change as a consequence of the Ring-Fencing Plan, including the Scheme. EY 310

315 Findings and conclusions: Employees Changes to non-branch employees Non-branch employees of the Santander UK Group are located across c.70 locations separate from the branch network and call centres covered previously. The 8,875 employees in this category work across a range of functions as illustrated below. Findings and conclusions Following my assessment, I have concluded that the majority of employees of the Santander UK Group will not be affected as a consequence of the changes being made by the Ring-Fencing Plan, including the Scheme. However, specific groups of employees will experience changes as follows: Out of a total in-scope population of 501 employees, 213 will transfer between Santander UK and SLB. These employees will be affected due to the transfers of business under the Ring-Fencing Plan, including the Scheme. These employees will see no change to their role, terms and conditions of employment or location of employment, as a consequence of changes to their employing entity. 1 employee has been made redundant, having been placed at risk of redundancy and going through the Santander UK consultation process, which concluded on 30 November During the consultation process, Santander UK offered the employee a role that matched the employee s skillset, however it was in Madrid and the employee turned down the role. Subsequently, no other suitable roles were identified and at 30 November 2017 the employee was made redundant. The terms and conditions of redundancy were the standard redundancy terms used by Santander UK. A further 7 employees were initially identified as being at risk of redundancy, with their roles no longer existing as a consequence of the transfers under the Ring-Fencing Plan, including the Scheme. Of those: 2 employees were formally placed at risk and went through the consultation process. Through this process, Santander UK was able to identify new roles within the Santander UK Group, which the employees accepted and to which they have now moved. 5 employees requested redundancy and did not go through the consultation process. Santander UK agreed to their request and they have now left the business. The legal team in SLB, totalling 6 employees, will transfer from SLB to join the legal team in Santander UK. Full legal support will be provided to SLB from this single legal team, which will be more efficient. I have concluded that the rationale for the transfers of employees has been based on a set of sound principles to ensure the continuity and quality of service to transferring customers and counterparties. There are explicit objectives to maintain and ensure consistent terms and conditions of employment for transferring employees. This has included full consultation with employees and their union representatives, Advance, which has been open and transparent. Any effects on employees are being minimised by the Santander UK Group. Figure 15 below summarises the number of employees affected. EY 311

316 Findings and conclusions: Employees Figure 15: Future organisation design for Santander UK and SLB, after the implementation of the Ring-Fencing Plan, including the Scheme Source: Santander Ring-Fencing Programme Team EY 312

317 Findings and conclusions: Employees This page is intentionally left blank. EY 313

318 Findings and conclusions: Employees Change with adverse effects I have identified changes which, as a consequence of the Ring-Fencing Plan, including the Scheme, will have adverse effects on some non-branch employees. These adverse effects are, in my opinion, mitigated or there are alternatives available. The following details these changes and the rationale for why I have concluded that some non-branch employees will be adversely affected, but there are mitigating actions or alternatives offered. I have concluded, therefore, that the changes are no more than reasonably necessary to achieve the Scheme s purposes. Table 163: Changes with adverse effects that are mitigated Risk of redundancy for 3 employees Risk of redundancy for 3 employees Description of the change 3 employees within the SGCB division were formally placed at risk of redundancy, as a consequence of the transfer of some business to Banco Santander, with their roles needing to be transferred to Madrid as a result. The formal Santander UK consultation process was followed for these employees, with the aim of Santander UK helping to identify new roles within the Banco Santander Group that would be suitable. This consultation process ended on 30 November Of the 3 employees at risk, 2 have identified and accepted new roles elsewhere within the Banco Santander Group. However, it was not possible to find a suitable role that was acceptable to 1 employee. Following the conclusion of the consultation process, that employee was made redundant, with the terms and conditions applied being the standard Santander UK redundancy package offered to all employees in these circumstances. Why is this adverse? Redundancy as a result of a loss of a role, or as a consequence of a role change as a result of a redundancy process, inherently carries an adverse effect on the employee or employees involved. The actual effect of the loss of role, and how adverse the effect will be, is dependent on a number of factors. These include the outcome of each employee s consultation process, the options offered together with their personal circumstances and how easy it will be to find an alternative role in another organisation. EY 314

319 Findings and conclusions: Employees Risk of redundancy for 3 employees Mitigations or alternatives available The employees affected have been through Santander UK s standard at risk of redundancy process, to look for suitable roles elsewhere in the Banco Santander Group, over a defined period of time. This is a well-established mechanism to provide employees with the best possible opportunity to find alternative roles should their current position be removed, which can happen for any number of reasons. In this case, the consultation period to identify new roles ended on 30 November 2017, at which point 2 employees had accepted new roles on the same terms and conditions elsewhere in the Santander UK Group. The other employee has failed to identify a role that was acceptable to them through the consultation process, having turned down a role that was offered because it was based in Madrid. As a consequence, and following completion of the consultation process on 30 November 2017, this employee has been made redundant under the standard Santander UK redundancy terms and conditions. Is this sufficiently mitigated? I have discussed the consultation process with the HR leader for the process and concluded that Santander UK is making every effort to support the at-risk employees in identifying alternative roles within the overall Santander UK Group. For the 2 employees who have found alternative roles, the effect of the changes on them have been sufficiently mitigated. For the employee who has been made redundant, I am satisfied that the redundancy package that will be offered by Santander UK will compensate the employee and will provide a good level of financial and non-financial support (e.g. job placement support) to help them identify new roles in other organisations. My conclusion I have concluded that there is likely to be an adverse effect on the person who has been made redundant. The effect of the redundancy on this person will depending on a number of factors, including redundancy terms, and not least how the person feels about the redundancy and their ability to find a suitable replacement role. Whilst I am satisfied that Santander UK is doing everything that can reasonably be expected of them to support employees in identifying new roles, and the redundancy package that is likely to be offered is reasonable and will enable affected employees to find new employment in other organisations, it is not possible to fully mitigate the effect of being made redundant on an individual. However, I have concluded that the change is a necessary consequence of the Scheme and the adverse effect is not greater than reasonably necessary to meet the Scheme s purposes. EY 315

320 Findings and conclusions: Employees Change with no adverse effect I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, that do not result in an adverse effect on non-branch employees. The following details these changes and the rationale for why I have concluded that non-branch employees will be affected, but not adversely affected. Table 164: Changes with no adverse effects Risk of redundancy for 5 employees Risk of redundancy for 5 employees Description of the change 5 employees within the SGCB division were identified as being at risk of redundancy as a consequence of the transfer of some business to Banco Santander and their roles needing to be supported out of Madrid as a result. When told about the risk, these employees indicated a preference to take redundancy rather than seek alternative roles within Santander UK through the consultation process which Santander UK accepted. They did not, as a consequence, go through the formal consultation process. Rather they accepted the standard redundancy terms offered to them and have subsequently left the Santander UK Group. Why is this change not adverse? The employees expressed a preference to leave the Santander UK Group through redundancy which was accepted. My conclusion I am satisfied that the consultation process, including full disclosure and involvement of the Union representatives, has been carried out properly and it is the choice of the 5 employees to seek redundancy. Therefore I have concluded that there is no adverse effect on these employees as a consequence of the Ring-Fencing Plan, including the Scheme. EY 316

321 Findings and conclusions: Employees Table 165: Changes with no adverse effects Transfer of 213 employees from Santander UK to Banco Santander and SLB Transfer of 213 employees from Santander UK to Banco Santander and SLB Description of the change Out of a total population of 501 employees, 213 employees in the SGCB division providing services to the group of large corporate customers will be transferred to SLB. As a consequence of the transfers of business, through both novation and the Scheme, the associated employees will transfer from Santander UK to SLB and continue to support their customers and provide continuity of service and product knowledge, hereby avoiding disruption. Why is the change not adverse? I have reviewed a number of documents, including employee notifications and Union representative papers, which explain the transfers of employees and the terms of the transfers. I am satisfied that Santander UK will ensure that all existing terms and conditions, benefits and rights are being either met or replicated as a consequence of the transfer. These are guaranteed through the TUPE transfer process, described in section 27.5 below. Further, I have discussed the intention of the transfers with Santander UK s management team and have seen documented objectives that state the maintenance of existing terms and conditions, or where changes are made, that these are to be improvements to existing terms and conditions. I am satisfied that there are clear objectives and this represents management s intentions. Note: see section 28 on pension scheme members for a related effect on a group of employees. My conclusion I have assessed the employee transfers to Banco Santander and SLB and I am satisfied that there will be no adverse effects on either the transferring or remaining employees. EY 317

322 Findings and conclusions: Employees Table 166: Changes with no adverse effects Transfer of 6 employees from SLB to Santander UK Transfer of 6 employees from SLB to Santander UK Description of the change A team of 6 employees within the legal function of SLB will be transferred to Santander UK. This will consolidate legal services into a single team, which can provide legal services across the Santander UK Group and SLB. This allows SLB to access a full range of legal services, given its expanded client base and subsequent additional requirements. This is a beneficial solution from both a customer and business perspective, as it provides more extensive legal expertise than can currently be offered through the existing team of 6 in SLB. Why is the change not adverse? I have reviewed a number of documents, including employee notifications and Union representative papers which explain the transfers of employees and the terms of the transfers. I am satisfied that Santander UK will ensure that all existing terms and conditions, benefits and rights are being either met or replicated as a consequence of the employee transfers. These are guaranteed through the TUPE transfer process, described in section 27.5 below. I have reviewed documents covering roles and responsibility mapping and have discussed with the project leadership whether there are any overlaps in roles as a consequence of the transfers into Santander UK. I am satisfied that the transferring in employees will not be at risk as a consequence of the transfers, and that employees in Santander UK will not be at risk of overlaps or possible inefficiencies as a consequence of the 6 transferring in. Further, I have discussed the intention of the transfers with Santander UK s management team and have seen documented objectives that state that maintenance of existing terms and conditions, or where changes are made, that these are to be improvements to existing terms and conditions. I am satisfied that there are clear objectives and this represents management s intentions. In this case, this includes a recognition that transferring the 6 employees into a larger team with wider responsibilities should offer the transferring employees greater opportunities for learning and development. My conclusion I have assessed the employee transfers to Santander UK and I am satisfied that there will be no adverse effects on the transferring employees. I have also considered the effect on the existing team in Santander UK and there will be no adverse effects as a consequence of receiving the 6 employees from SLB. EY 318

323 Findings and conclusions: Employees Table 167: Changes with no adverse effects summary of findings from Part 2 Assessment area Conclusion Finance Business Model Viability, Capital and Liquidity There will be changes to the forecast financial position of the Santander UK Group/the RFB Sub-Group and SLB that affects the viability and sustainability of the entities (who will act as employers). I have concluded that these changes will not result in an adverse effect on non-branch employees. For further details of my findings, and how I have reached them through my work, please refer to section 10. Governance The will be changes to the management and leadership team responsible for the enlarged SLB entity. Transferring employees will be transferred into SLB with an enhanced organisation design, which will include enhanced governance structures required to support the increased business size and scope. For further details of my findings, and how I have reached them through my work, please refer to section 12. Creditor Hierarchy The amount of asset cover will change for non-branch employees as a result of the change in balance sheet makeup. However, in my opinion the cover remains sufficient were an insolvency to occur. I have therefore concluded that the changes do not result in an adverse effect on non-branch employees. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Santander UK (the RFB). EY 319

324 Findings and conclusions: Employees No change There will be no changes to those non-branch employees in Santander UK which are not part of the 501 in-scope employee group, as a consequence of the Ring-Fencing Plan, including the Scheme. Further there will be no changes that will affect employees of SLB as consequence of the Ring-Fencing Plan, including the Scheme, other than the 6 legal team employees in-scope and transferring to Santander UK as described above. Following the completion of my review, I am satisfied that there will be no change to employment levels and roles to the majority of the employees within the non-branch network or contact centres of the Santander UK Group as a consequence of the Ring-Fencing Plan, including the Scheme. I am further satisfied that there will be no location changes for the majority of non-branch employees as a consequence of the Ring-Fencing Plan, including the Scheme. The following table summarises the areas where there will be no change to non-branch employees as a consequence of the Ring-Fencing Plan, including the Scheme. Table 168: No change Employee group Description Change to location of employment Changes to core terms and conditions Changes to employment benefits Employment representation Risk of Redundancy Nonbranch employees (including head office, technology and operational centres and all corporate banking employees) All remaining Santander UK non-branch employees outside of the 501 in-scope employee group. All remaining SLB employees outside of the 6 legal team members transferring to Santander UK (the RFB). EY 320

325 Findings and conclusions: Employees Approach and timeline for implementing the changes. All employee transfers in the UK will be carried out under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (as amended), originally enacted in 1981, and known as TUPE. The purpose of TUPE is to protect employees if the business in which they are employed is transferred, and protects existing employment terms and conditions through automatic transfer to the new employing entity. The effect is to move employees and any liabilities associated with them, from the existing employer, to the proposed employer, by operation of law. The Ring-Fencing Plan has stated that the objective of the employee transfer process is to ensure that employment terms and conditions of all employees involved, are at least of the same standard and level as today, and that the consequence of transferring people into new teams will not result in differences between Santander UK and Banco Santander (including SLB) as employing entities. As part of consultation with the employees union, it was noted that the intention is to provide continuity of employment and that there should be no changes to employment terms, benefits and rights. However, there will be changes to pension arrangements for a number of employees. These changes are covered in detail in section 28. Figure 16 below summarises the timeline and transfer steps being executed by the Ring-Fencing Programme. Figure 16: Timeline for employee transfer under TUPE Source: Santander Ring-Fencing Programme Team 29 June 2017 Announcement to all impacted colleagues. Comments and views invited via trade union representatives. Q June 2017 Formal meeting with trade union representatives to outline rationale and proposals, share employee data (and other information for the purposes of regulation 13 (2) or TUPE) and overall time scales. 16 August 2017 Earliest notice is served. Dates will depend on individual migration and work transitioning. Q July 2017 Follow up discussions to respond to any outstanding employee comments and views. Decisions concerning activity moving to Madrid to be finalised. Next steps agreed. September/October 2017 Transfers to Madrid take place Q August 2017 Meeting held with employees who are at risk of redundancy as a result of roles moving to Madrid. Confirmation of internal transfers. Mid 2018 Mid 2018 Further union consultation meeting to be held following Court Process and in advance of legal effective dates. EY 321

326 Findings and conclusions: Pension scheme members 28. Findings and conclusions: Pension scheme members Introduction This section addresses whether there are any changes to the current pension schemes in the UK as a consequence of the Ring-Fencing Plan, including the Scheme. These are as follows: One defined benefit pension scheme, Santander UK Group Pension Scheme (SUKGPS); and Three defined contribution schemes. I recommend that members of a Santander pension scheme in the UK refer to their pension scheme documentation as a reference when reading this section. Isolating changes relating to pension scheme members as a consequence of the Scheme, for example as a result of business transferring under the Scheme, rather than by novation or assignment under the Ring-Fencing Plan, was not practical. Therefore my assessment in this section has considered all changes to pension scheme members as a consequence of the Ring-Fencing Plan, including the Scheme. Approach to assessing changes to pension scheme members as a consequence of the Ring-Fencing Plan, including the Scheme Assessment areas The following sets out the assessment areas covered by my work: Table 169: Pension scheme members assessment areas Assessment area Description Assessment areas in this section specific to the Pension scheme members Defined contribution schemes Any changes to the terms of any current defined contribution pension scheme(s) (i.e. levels of employer funding) and as a result, changes to the existing terms for active members of the defined contribution pension schemes. Defined benefit schemes Changes to the SUKGPS and any effect on current, participating or retired members of SUKGPS. Finance Business Model Viability, Capital and Liquidity Assessment of the ongoing financial viability of Santander UK (the RFB), whether it will have sufficient capital and liquid assets to meet its obligations to its creditors (including the SUKGPS and employer contributions to defined contribution schemes) and whether it will continue to generate and/or maintain an appropriate level of funding to support its products and services. Creditor Hierarchy Impact of the Ring-Fencing Plan, including the Scheme, on the position of creditors (e.g. pension scheme members) and the level of asset coverage available in Santander UK (the RFB). EY 322

327 Findings and conclusions: Pension scheme members My conclusions are supported by the information and analysis summarised below: In reaching my conclusions I have reviewed the following key documents and information and carried out the following analysis and assessments: Information and documentation reviewed, supported by meetings with the organisation design leadership team for the Ring-Fencing Programme: The Ring-Fencing Plan; The Design Integrity Document; Programme implementation plans including senior programme governance material; Organisation design documentation covering employees and pensions, including presentations to the Ring-Fencing Programme s senior leadership outlining the impact of the Ring-Fencing Plan including the Scheme, alongside the Ring-Fencing Programme s own assessment of employees affected; Correspondence and formal communication with the Pensions Regulator and the PRA; Santander UK audited annual accounts as at 31 December 2016 and half year accounts as at 30 June 2017; Santander UK Group s draft annual operating plan, called the P20, covering the period 2017 to 2020 drafted as at 30 June This was approved by the Santander UK Board on 24 July The starting point of the P20 is the 31 December 2016 actuals. The P20 comprises of a detailed breakdown of the balance sheet and P&L line items and their underlying assumptions which I have used and relied upon as the basis for my assessment given the authorised content and following a review of the assumptions used in the plan; My capital assessment was carried out based on a review of the consolidated 31 December 2016 Santander UK HoldCo ICAAP document, base case P20 capital data and the June 2017 Bank of England stress test results; and A review of Santander UK Group s planning assumptions for liquidity and funding, which are based on the September 2016 ILAAP for Santander UK HoldCo and the March 2017 ILAAP update specifically for Santander UK (the RFB). The ILAAP documents have been reviewed in conjunction with Santander UK s draft P20. As a result of the above analysis on the P20, Santander UK s financial ability to support the SUKGPS, now and in the future, by reference to its ongoing earnings capability and consideration of its evolving capital strength relative to the pension obligations it holds (covenant strength) pre-and post-implementation of the ring-fencing of Santander UK; SUKGPS scheme trustee s view of the restructuring proposals; and Remedial options for the members of SUKGPS who are having their benefits deferred. I have reviewed the Ring-Fencing Plan and implementation plans to ensure no changes are planned for implementation that contradict my assessment. I have reviewed the Design Integrity Report, produced by Santander UK to outline the full extent of changes required as a result of the ringfencing legislation, and cross-referenced my findings to the Ring-Fencing Plan to ensure that there is no contradiction between the documents. I have analysed the Santander UK Group annual operating plan (P20), which includes financial projections for the RFB. I have concluded, based on P20, that the RFB is expected to meet all of its ongoing obligations, including employer contributions over the forecast period. Please refer to Part 2 of my report where I have provided an overview of the comprehensive financial analysis I have undertaken on Santander UK pre- and post-implementation of ring-fencing. I have analysed the outcome of financial modelling and summary analysis, to validate that the financial outcome for all deferred members receiving a 20% additional contribution for three years is greater than that they would have received as entitlements under the SUKGPS (should they have remained active members). EY 323

328 Findings and conclusions: Pension scheme members I am satisfied that consultation with the union representatives was undertaken with a documented process for remedial options available to employees. I have assessed the employer s covenant strength prior to and after the implementation of ringfencing for Santander UK (the RFB), primarily through the analysis of the profit & loss account and balance sheet of Santander UK pre and post ring-fencing. I am satisfied that there is no substantial impact on the ability of Santander UK to meet its financial obligations, including the ability to meet ongoing obligations to the SUKGPS over the forecast period. I have reviewed correspondence issued by Santander UK, to both the PRA and Pensions Regulator, defining plans to comply with the ring-fencing legislation. This is clear and provides the assessment of the SUKGPS Trustee. Changes to Santander defined contribution pension schemes in the UK There are currently three defined contribution schemes in the UK, the main pension scheme being Santander Retirement Plan which is the only pension scheme open to new members. Table 170: Defined contribution schemes in the UK Source: Santander Ring-Fencing Programme Team Pension Scheme name Membership Status Santander Retirement Plan* 20,000 active full members. 3,900 SUKGPS members with a defined contribution top-up. 5,000 deferred members. This pension scheme is open to new members. * Santander Retirement Plan has been replaced by a new defined contribution pension scheme, LifeSight master trust, on 1 December 2017 and then wound-up. This change is a BAU change outside of the Ring-Fencing Programme/Plan. Alliance & Leicester Defined Contribution Scheme 45 active members. 6,157 deferred members. This pension scheme is closed to new members. Woodchester Investments Group Pension Scheme No active members. 330 deferred members. This pension scheme is closed to new members. EY 324

329 Findings and conclusions: Pension scheme members Findings and conclusions Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have adverse effects on members of the Santander defined contribution pension schemes in the UK Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, that will not result in an adverse effect on members of the Santander defined contribution pension schemes in the UK. The following details these changes and the rationale for why I have concluded that members of the Santander defined contribution pension schemes in the UK will be affected, but not adversely affected. Table 171: Changes with no adverse effects summary of findings from Part 2 Assessment area Conclusion Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Santander UK from the transfer of business, as a result of the Ring-Fencing Plan, including the Scheme. Santander UK is expected to remain viable and sustainable and meet its minimum regulatory capital and liquidity requirements over the forecast period and will be able to meet its pension obligations. I have concluded that these changes will not not result in an adverse effect on pension scheme members. For further details of my findings, and how I have reached them through my work, please refer to section 10. Creditor Hierarchy The ranking of defined contribution pension schemes in the UK hierarchy will not change and continues to benefit from its current ranking. The amount of asset cover will change for the defined contribution pension schemes as a result of the change in balance sheet makeup for Santander UK (the RFB). Having assessed and tested the creditor hierarchy analysis to detail each class of creditor, it was possible to establish ranking and levels of asset cover, both pre- and post-implementation of the Scheme. The ranking remains unchanged and in my opinion the level of cover remained sufficient were insolvency to occur. I have concluded that the changes will not result in an adverse effect on defined contribution pension schemes. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Santander UK (the RFB). EY 325

330 Findings and conclusions: Pension scheme members No change Having assessed information provided by the Ring-Fencing Programme, there will be no other changes, nowithstanding than those covered above, to existing members of the Santander defined contribution pension schemes in the UK. EY 326

331 Findings and conclusions: Pension scheme members Changes to Santander defined benefit pension scheme in the UK (SUKGPS) The SUKGPS is the result of a merger of seven legacy pension schemes of Abbey National plc and Alliance & Leicester plc which took place in Most of the seven schemes were closed to new members in the 1990s, with the final scheme, the Abbey National Group scheme, closed to new members in The SUKGPS was closed to new members in As at 31 December 2016, there were 61,502 members of the SUKGPS. The SUKGPS is not open to new members. The sponsoring employer of the SUKGPS is Santander UK. There are currently four other participating employers, set out below: SCUK which will remain a subsidiary of Santander UK in the RFB Sub-Group; GEOBAN UK and ISBAN UK, whose ownership is changing from Banco Santander to Santander UK under a separate project (please refer to Part 5), both of which will be in the RFB Sub-Group; and PRODUBAN S.L. (i.e. one of the SSCs), which is wholly owned by Banco Santander and is not in the RFB Sub-Group. Note: PRODUBAN S.L. is proposed to continue as a participating employer of the SUKGPS until no later than 31 December 2025, after which time it must cease to participate in order to comply with ring-fencing legislation. Table 172 sets out the current SUKGPS membership by category and employees. Table 172: Membership of SUKGPS Source: The Ring-Fencing Plan Entity Active Deferred Pensioners Total Santander UK 2,825 33,152 23,047 59,024 SCUK GEOBAN UK ,677 ISABAN S.L PRODUBAN S.L Total 3,987 34,062 23,453 61,502 EY 327

332 Findings and conclusions: Pension scheme members Findings and conclusions Changes with adverse effects I have identified changes which, as a consequence of the Ring-Fencing Plan, including the Scheme, will have adverse effects on some members of the Santander defined benefit pension scheme in the UK. These adverse effects are, in my opinion, mitigated or there are alternatives available. The following details these changes and the rationale for why I have concluded that some members of the Santander defined benefit pension scheme in the UK will be adversely affected but there are mitigating actions or alternatives offered. I have concluded, therefore, that the changes are no more than reasonably necessary to achieve the Scheme s purposes. Table 173: Changes with adverse effects that are mitigated Deferred contributions of 11 active members of SUKGPS Deferred contributions of 11 active members of SUKGPS Description of the change There are 11 active members of the SUKGPS, whose employment will be transferring under TUPE to Banco Santander (including SLB). As a result of this transfer, this group of employees (deferred members) are no longer employed by a sponsoring and/or participating member of the SUKGPS. Why is this adverse? By becoming deferred members of the SUKGPS, this group of employees will no longer have the benefit of ongoing entitlements/contribution by a sponsoring and/or participating member of the SUKGPS. Mitigations or alternatives available The deferred members will have their defined benefit entitlements replaced with membership and participation in a defined contribution scheme. In addition, deferred members will receive additional contributions of 20% of their salary to their defined contribution scheme for a period of three years. Is this sufficiently mitigated? I have reviewed the outcome of financial modelling undertaken (with underlying assumptions) by the Ring-Fencing Programme, which forecasts contributions to the SUKGPS for these deferred members (should they have remained active members of the SUKGPS through to their forecast retirement age). In recognition of the loss of their defined benefit entitlement, Santander UK have proposed to compensate these employees, in consultation with their union representatives. These deferred members will be transferred to a defined contribution scheme, with an additional employer contribution of 20% for a period of three years. The work done by the Ring-Fencing Programme has concluded that this proposal will result in a forecast net positive financial outcome for all of those deferred members, when compared to their continued receipt of entitlements/contributions to the SUKGPS through to their forecast retirement age. On the basis of my review of their analysis, and following discussions with EY pensions specialists, I am satisfied that the proposed contribution will provide a reasonable mitigation to the adverse effect for the 11 deferred members, when compared to their continued receipt of entitlements to the SUKGPS through to their estimated retirement age (should these employees have remained active members of the SUKGPS). My conclusion I have assessed the change is a necessary consequence of the Scheme and have concluded that it has been mitigated in a satisfactory way. I am satisfied that Santander UK is following the right process and offering affected active members a comprehensive and financially better alternative. EY 328

333 Findings and conclusions: Pension scheme members Change with no adverse effect I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme, that do not result in an adverse effect on members of the Santander defined benefit pension schemes in the UK. The following details these changes and the rationale for why I have concluded that members of the Santander defined benefit pension schemes in the UK will be affected, but not adversely affected. Table 174: Changes with no adverse effects summary of findings from Part 2 Assessment area Conclusion Finance Business Model Viability, Capital and Liquidity There will be changes to the forecast financial position of Santander UK (as the RFB), across my analysis of Business Model Viability and Sustainability, Capital Adequacy, and Liquidity and Funding. I have concluded that these changes will not result in an adverse effect on defined benefit scheme members. For further details of my findings, and how I have reached them through my work, please refer to section 10. Creditor Hierarchy The ranking of the defined benefit pension scheme in the UK hierarchy will not change and it will continue to benefit from its current ranking. The amount of asset cover will change for the defined benefit pension scheme as a result of the change in balance sheet makeup for Santander UK (the RFB). Having assessed and tested the creditor hierarchy analysis to detail each class of creditor, it was possible to establish ranking and levels of asset cover both pre- and postimplementation of the Scheme. The ranking remains unchanged and in my opinion the level of cover remained sufficient were insolvency to occur. Accordingly, I have concluded that the changes do not result in an adverse effect on the defined benefit pension scheme. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Santander UK (the RFB). EY 329

334 Findings and conclusions: Pension scheme members No change Having assessed information provided by the Ring-Fencing Programme, notwithstanding the above adverse effect on the 11 deferred members of the SUKGPS which is being sufficiently mitigated as described above, there are no changes to all other current active, deferred or retired members of the SUKGPS. EY 330

335 Findings and conclusions: Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) 29. Findings and conclusions: Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) Introduction This section of my report considers landlords and suppliers (including suppliers of payments and clearing infrastructure) of Santander UK and ANTS. These groups of persons have contractual relationships with Santander UK and ANTS and are responsible for the provision of premises, goods, services and access to payments and clearing infrastructure to support Santander UK s and ANTS business activities. I have considered the following groups of persons as set-out below: Landlords; Suppliers who will solely service the business remaining in the Santander UK Group; Suppliers who will solely service the business transferring to SLB; and Suppliers who will service both the business remaining in the Santander UK Group and the business transferring to SLB. Note: there are no direct supplier or landlord relationships with SLB. All suppliers and landlord services and provided to SLB through the service model from other entities, including Santander UK. As a consequence of the changes being made to comply with the ring-fencing legislation, there are 20 supplier contractual arrangements which will need to be transferred. These are being made through novation of contracts in discussion with affected suppliers, which is being managed though a separate project. For further information on the changes planned, please refer to Part 5 of this Scheme Report. EY 331

336 Findings and conclusions: Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) Approach to assessing changes to Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) Assessment areas In assessing the changes as a consequence of the Scheme on Landlords and Suppliers, who have contractual relationships with either Santander UK and/or ANTS, I have considered a number of assessment areas which are summarised in Table 175 below. Table 175: Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) assessment areas Assessment area Description Assessment areas in this section specific to Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) Terms and Conditions Assessment of any terms and conditions changes proposed to be made under the Scheme including: commercial terms, rights, payment terms, termination, preferred supplier status (if applicable) and guarantees (if applicable). Landlord and Supplier Service Model, Management and Governance Assessment of the effect of changes to the service model to determine whether these are likely to directly affect landlords and suppliers e.g. changing the location, delivery or nature of the service provided by the supplier. Assessment of the management of suppliers under the proposed service model, to include: assessment of any changes in the processes, controls, governance and risk management of the landlords or suppliers. Payments and Clearing Infrastructure (direct and indirect) Assessment of any changes (if applicable) to the payment and clearing infrastructure, including: services from agent banks, clearing houses and exchanges. Finance Business Model Viability, Capital and Liquidity Assessment of the ongoing financial viability of the RFB, whether it will have sufficient capital and liquid assets to meet its obligations to its creditors (including suppliers) and whether it will continue to generate and/or maintain an appropriate level of funding to support its products and services. Recovery and Resolution, Operational Continuity and Creditor Hierarchy Ability of Santander UK (the RFB) to recover from a crisis or stress through its recovery and resolution planning and the effect on creditors (e.g. suppliers of a bank) in the event of a failure. Assessment of the position in the creditor hierarchy in both Santander UK and Banco Santander (as applicable). EY 332

337 Findings and conclusions: Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) My conclusions are supported by the information and analysis summarised below: Information and documentation reviewed has been supported by meetings with the operations leadership team for the Ring-Fencing Programme: The Ring-Fencing Plan; The Design Integrity Document; Programme implementation plans (including senior programme governance material); Lists of third-party contracts for the relevant entities; The approach for review of these contracts; The governance arrangements surrounding these contracts; Timescales to support the work necessary to address required contractual changes; Santander UK audited annual accounts as at 31 December 2016 and half year accounts as at 30 June 2017; Santander UK Group s draft annual operating plan, called the P20, covering the period 2017 to 2020 drafted as at 30 June This was approved by the Santander UK Board on 24 July The starting point of the P20 is the 31 December 2016 actuals. The P20 comprises of a detailed breakdown of the balance sheet and P&L line items and their underlying assumptions which I have used and relied upon as the basis for my assessment given the authorised content and following a review of the assumptions used in the plan; My capital assessment was carried out based on a review of the consolidated 31 December 2016 Santander UK HoldCo ICAAP, base case P20 capital data and the June 2017 Bank of England stress test results; A review of Santander UK Group s planning assumptions for liquidity and funding, which are based on the September 2016 ILAAP for Santander UK HoldCo and the March 2017 ILAAP update specifically for Santander UK (the RFB). The ILAAP documents are have been reviewed in conjunction with Santander UK s draft P20; Santander UK Group June 2017 RCP; Santander UK Group June 2017 RSP; Operational continuity plans; and Creditor hierarchy analysis. EY 333

338 Findings and conclusions: Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) Changes to Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) Findings and conclusions Changes with adverse effects I have identified no changes, as a consequence of the Scheme, that will have adverse effects on landlords and suppliers covered by this section of the Scheme Report Changes with no adverse effects I have identified changes, as a consequence of the Scheme, that will not result in adverse effects on any group of persons covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that landlords and suppliers will be affected, but not adversely affected. I have concluded, therefore, that the changes are no more than reasonably necessary to achieve the Scheme s purposes. Table 176: Changes with no adverse effects summary of findings from Part 2 Assessment area Conclusion Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Santander UK from the transfer of business, as a result of the Ring-Fencing Plan, including the Scheme. Santander UK is expected to remain viable and sustainable and meet its minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes will not result in an adverse effect on landlords and suppliers remaining within or are transferring into Santander UK. I have concluded that these changes do not result in an adverse effect on landlords and suppliers. For further details of my findings, and how I have reached them through my work, please refer to section 10. Recovery and Resolution, Operational Continuity and Creditor Hierarchy The ranking of landlords and suppliers in the hierarchy will not change and they will continue to benefit from their current ranking. The amount of asset cover will change for landlords and suppliers as a result of the change in balance sheet makeup for Santander UK (the RFB). Having assessed and tested the creditor hierarchy analysis to detail each class of creditor, it was possible to establish ranking and levels of asset cover both pre- and post-implementation of the Scheme. The ranking remains unchanged and in my opinion the level of cover remained sufficient were insolvency to occur. I have concluded that the changes will not result in an adverse effect on landlords and suppliers. Recovery, resolution and operational continuity arrangements for the Santander UK Group and Banco Santander Group will remain unchanged. For further details of my findings, and how I have reached them through my work, please refer to section 15.4 for Santander UK (the RFB), section 15.5 for Banco Santander and section 26.1 for ANTS. EY 334

339 Findings and conclusions: Landlords and Suppliers (including direct and indirect payments and clearing infrastructure) No change The following summarises the areas where there will be no change to landlords and suppliers as a consequence of the Scheme. Table 177: No change Assessment area Conclusion Terms and Conditions I have reviewed lists of critical and other suppliers plus Santander UK s process for assessing the change required to supplier contracts to meet the requirements of the ring-fencing legislation. In discussions with Santander UK management, I have understood that the Ring-Fencing Plan does not include an intention or plan to include any changes to landlord and supplier contracts under the Scheme (see Part 5 for other changes). No change planned to the terms and conditions of any landlords, suppliers, payments or market infrastructure suppliers under the Scheme. Landlords and Supplier Service Model, Management and Governance I have reviewed the proposed service model as it applies to all entities in the UK, including Santander UK, ANTS and SLB to identify whether there will be any changes from the current model which would affect landlords and suppliers. There are no change planned to the service model, management or governance over any landlords, suppliers, payments or market infrastructure suppliers as a consequence of plans under the Scheme. Payments and Clearing Infrastructure (direct and indirect) In my review of the critical processes, particularly, with regards to the payment and clearing infrastructure (which involves services from agent banks, clearing houses and exchanges) I have not identified any changes to any payments infrastructure (direct or indirect) or any market or clearing infrastructure as a consequence of plans the Scheme. EY 335

340 Findings and conclusions: Bondholders and debtholders 30. Findings and conclusions: Bondholders and debtholders Introduction This section is concerned with the following groups of persons: Bondholders of Santander UK; Debtholders of Santander UK; and Debtholders of ANTS. Isolating changes to bondholders and debtholders as a consequence of the Scheme, rather than the wider Ring-Fencing Plan, was not practical given the change being made. Therefore my assessment in this section has considered all changes to bondholders and debtholders of Santander UK and debtholders of ANTS as a consequence of the Ring-Fencing Plan, including the Scheme. Bondholders of Santander UK Santander UK has currently issued instruments that will not expire until after 1 January These bondholders are currently holders of Santander UK instruments, will remain within Santander UK and will not be transferred under the Scheme. Table 178: Santander UK Bondholders Persons Description Covered bondholders Investors holding notes issued under Santander UK s covered bond programme. The covered bond programme is secured on Abbey Covered Bonds LLP s interest in a portfolio of residential mortgages. Abbey Covered Bonds LLP guarantees the issuer s (i.e. Santander UK s) obligations. Debtholders of Santander UK Santander UK has currently issued instruments that will not expire until after 1 January These debtholders are currently holders of Santander UK instruments, will remain within Santander UK and will not be transferred under the Scheme. Table 179: Santander UK Debtholders Persons Description Global Structured Solutions Programme (GSSP) Private placements of structured notes, certificates and warrants. This is a new programme set up in August 2017 to replace the ANTS programme being wound-down (see below). Structured Note and Certificate Programme (POP) Public offers of structured notes. This is a new programme set up in August 2017 to replace the ANTS programme being wound-down (see below). EIB Loan Facilities 4 loan facilities extended originally to ANTS by the European Investment Bank (EIB) to fund education facilities, renewable energy projects and SMEs in the UK. These are being transferred via novation to Santander UKby H EY 336

341 Findings and conclusions: Bondholders and debtholders Persons Description US$30bn EMTN programme Investors holding notes issued under Santander UK s US$30bn EMTN programme. US Shelf Programme Investors holding notes issued under Santander UK s US shelf programme. Standalone Bond Issues Investors holding bonds from Santander UK s standalone bond issues. Short-term unsecured debtholders Investors holding securities issued under Santander UK s: i. Sterling Certificate of Deposit programme; ii. US$10bn Euro Commercial Paper Programme (Euro CP); iii. French Certificate of Deposit programme; iv. Non-Sterling Certificate of Deposit programme; and v. US Corporate Commercial Paper programme (US CP). Together these are referred to as the Santander Short-Term Debt Programmes. This group previously comprised of investors holding securities under ANTS equivalent short-term debt programmes, which will be wound down in ANTS in advance of the Scheme by H New programmes have been commenced in Santander UK in July and August AT 1 securities Investors holding the following securities issued by Santander UK HoldCo: i. 500mn Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities (issued 10 April 2017); ii. 750mn Perpetual Capital Securities (issued on 10 June 2015); iii. 500mn Perpetual Capital Securities (issued on 2 December 2014); and iv. 300mn Perpetual Capital Securities (issued on 24 June 2014) (together, the AT1 Securities ). Subordinated debt securities Investors holding the following securities issued by Santander UK: i. 325mn Sterling Preference Shares (issued on 23 October 1995 ( 100mn), 13 February 1996 ( 100mn) and 9 June 1997 ( 125mn)); ii. 175mn Fixed/Floating Rate Tier One Preferred Income Capital Securities (issued 9 August 2002); iii. The Undated Subordinated Liabilities comprising: (i) % Exchangeable subordinated capital securities (issued 23 October 1995); (ii) 7.375% 20 Year Stepup perpetual callable subordinated notes (issued 28 September 2000); and (iii) 7.125% 30 Year Step-up perpetual callable subordinated notes (issued 28 September 2000); and iv. The Dated Subordinated Liabilities comprising: (i) % Subordinated guaranteed bond 2023 (issued 4 February 1993); (ii) 11.50% Subordinated guaranteed bond 2017 (issued 30 December 1991); (iii) 7.95% Subordinated notes 2029 (issued 26 October 1999); (iv) 6.50% Subordinated notes 2030 (issued 21 October 1999); (v) 8.963% Subordinated notes 2030 (issued 7 February 2000); (vi) 5.875% Subordinated notes 2031 (issued 14 August 2001); (vii) 9.625% Subordinated notes 2023 (issued 30 April 2008); (viii) 5% Subordinated notes 2023 (issued 7 November 2013); (ix) 4.75% Subordinated notes 2025 (issued 15 September 2015); and (x) 5.625% Subordinated notes 2045 (issued 15 September 2015), together, the Subordinated Debt Securities. EY 337

342 Findings and conclusions: Bondholders and debtholders Debtholders of ANTS ANTS has issued instruments in a number of categories that will either mature or be transferred to Santander UK by 1 January The Ring-Fencing Programme has plans to complete the transfer of all instruments by novation or assignment by H The terms and conditions of the programmes allow for the substitution of Santander UK as the issuer without consent of the holder, with notices to holders advising of the change sent out in October Since there will be no instruments to transfer to Santander UK under the Scheme, as all will have either matured before 1 January 2019 or transferred to Santander UK by novation or assignment, I have concluded that there are no ANTS debtholders that should be considered for the purpose of answering the Statutory Question in this Scheme Report. Table 180: ANTS Debtholders (as at date of this Report) Persons Description Global Structured Solutions Programme (GSSP) Private placements of structured notes, certificates and warrants. Note: programme wound-down, all outstanding instruments were transferred to Santander UK programme by 31 December Structured Note and Certificate Programme (POP) Public offers of structured notes. Note: programme wound-down, all outstanding instruments were transferred to Santander UK programme by 31 December Warrants Programme (WP) Legacy warrants programme. Note: programme being wound-down. Most instruments in the programme will mature by end H1 2018, with the last maturing in July ECP Programme Main commercial paper programme used by ANTS, outside the US. Note: programme is now closed. All instruments in the programme will mature by end H French Certificate of Deposit Programme STEP market compliant Certificate of Deposit programme. Note: programme is now closed. All instruments in the programme will mature by end H London Certificate of Deposit Programme Certificate of Deposit programme used by ANTS for the UK market. Note: programme is now closed. All instruments in the programme will mature by end H EIB loan facilities 4 loan facilities extended to ANTS by the European Investment Bank to fund education facilities, renewable energy projects and SMEs in the UK. Note: the Ring-Fencing Programme intends to novate the EIB loan facilities to Santander UK by H EY 338

343 Findings and conclusions: Bondholders and debtholders Approach to assessing changes to Santander UK bondholders and debtholders as a consequence of the Ring-Fencing Plan, including the Scheme Assessment areas In assessing the effect of the Ring-Fencing Plan, including the Scheme, on the bondholders and debtholders of Santander UK, I have considered a number of areas as a consequences of the Ring- Fencing Plan, including the Scheme, and potential changes affecting these groups of persons. My findings and conclusions are grouped below in the following assessment areas: Table 181: Bondholders and debtholders assessment areas Assessment area Description of potential change Interest and dividend cover Impact of the Ring-Fencing Plan, including the Scheme on the interest and dividend cover. Removal of existing cross-guarantees Impact of the removal of the existing cross-guarantees from 1 January 2019 on bondholders and debtholders. This includes the removal of the upstream guarantee from ANTS to Santander UK and the downstream guarantee from Santander UK to ANTS. Credit rating of Santander UK (the RFB) Impact of a change in the credit rating of Santander UK (the RFB) on the counterparties. Terms and conditions of the instruments Impact of the Ring-Fencing Plan, including the Scheme on the terms and conditions of the instruments held by the bondholders and debtholders. Finance Business Model Viability, Capital and Liquidity Assessment of the ongoing financial viability of Santander UK (the RFB), whether it will have sufficient capital and liquid assets to meet its obligations to creditors (including suppliers) and whether it will continue to generate and/or maintain an appropriate level of funding to support its products and services. Creditor Hierarchy Impact of the Ring-Fencing Plan, including the Scheme, on the position of the bondholders and debtholders and the level of asset coverage. Recovery, Resolution, and Operational Continuity Ability of Santander UK (the RFB) to recover from a crisis or stress through its recovery and resolution planning and the effect on creditors (e.g. bondholders and debtholders) in the event of a failure. EY 339

344 Findings and conclusions: Bondholders and debtholders My conclusions are supported by the information and analysis summarised below: Information and documentation reviewed, supported by meetings with the finance and legal leadership teams for the Ring-Fencing Programme: The Ring-Fencing Plan; Detailed list of debt and bondholders for Santander UK and ANTS, including: issuer, type, issue date, maturity date and value; Documented plans supported by the Ring-Fencing Programme s senior management team s confirmation for the transfer of ANTS debtholders to Santander UK, including planned dates for communication and completion; Notifications to issuers to advise of the assignment of ANTS instruments to Santander UK; Prospectus documents of debt instruments; Santander UK audited annual accounts as at 31 December 2016 and half year accounts as at 30 June 2017; Santander UK Group s draft annual operating plan, called the P20, covering the period 2017 to 2020 drafted as at 30 June This was approved by the Santander UK Board on 24 July The starting point of the P20 is the 31 December 2016 actuals. The P20 comprises of a detailed breakdown of the balance sheet and P&L line items and their underlying assumptions which I have used and relied upon as the basis for my assessment given the authorised content and following a review of the assumptions used in the plan; My capital assessment was carried out based on a review of the consolidated 31 December 2016 Santander UK HoldCo ICAAP document, base case P20 capital data and the June 2017 Bank of England stress test results; A review of Santander UK Group s planning assumptions for liquidity and funding, which are based on the September 2016 ILAAP for Santander UK HoldCo and the March 2017 ILAAP update specifically for Santander UK (the RFB). The ILAAP documents are have been reviewed in conjunction with Santander UK s draft P20; BTIA; Santander UK deed poll guarantee executed on 11 May 2017; ANTS deed poll guarantee executed on 11 May 2017; Moody s, S&P and Fitch Ratings Credit Rating assessment of Santander UK HoldCo and Santander UK s credit rating, having taken into account the impact of the Ring-Fencing Plan, including the Scheme; Santander UK Group June 2017 RCP; Santander UK Group June 2017 RSP; Operational continuity plans; and Creditor hierarchy analysis. Interest and dividend cover I reviewed the P20 and calculated the AT1 dividend cover. Prohibited and some permitted business and all of the Crown Dependency assets and liabilities will be transferred from Santander UK into the wider Banco Santander Group. The associated income and profit from the transferred business will also be transferred out of Santander UK; Removal of existing cross-guarantees I reviewed the February 2017 Ring-Fencing Plan which states that the implementation of the Ring-Fencing Plan, including the Scheme, will result in the removal of cross-guarantees, as required by the legislation. This includes the removal of the upstream guarantee from ANTS to Santander UK and the downstream guarantee from Santander UK to ANTS. Santander UK will continue to remain viable and sustainable without them and this will not impact the credit rating of Santander UK; EY 340

345 Findings and conclusions: Bondholders and debtholders Credit rating of Santander UK (the RFB) Moody s, S&P and Fitch Ratings have confirmed that their proposed credit ratings for Santander UK is expected to remain unchanged as a result of ringfencing; and Terms and conditions of the instruments I reviewed the impact assessment provided by Santander UK which states that all existing Santander UK bondholders and debtholders will remain with Santander UK. The terms and conditions of these issuances will not change as a result of the Ring- Fencing Plan, including the Scheme. All existing ANTS debtholders will be transferred to Santander UK prior to, and outside, the Scheme. Therefore, the analysis of any comments regarding Santander UK bondholders and debtholders applies to existing/current ANTS debtholders. EY 341

346 Findings and conclusions: Bondholders and debtholders Changes to Santander UK bondholders and debtholders Findings and conclusions Changes with adverse effects I have identified no changes as a consequence of the Scheme that will have adverse effects on Santander UK bondholders and debtholders covered by this Scheme Report Changes with no adverse effects of Santander UK I have identified changes as a consequence of the Scheme that do not result in an adverse effect on Santander UK bondholders and debtholders. The following details these changes and the rationale for why I have concluded that Santander UK bondholders and debtholders will be affected, but not adversely affected, as a consequence of the Scheme. Table 182: Changes with no adverse effects Removal of existing cross-guarantees between Santander UK and ANTS Removal of existing cross-guarantees between Santander UK and ANTS Description of the change Santander UK and ANTS have guaranteed all of the other s unsubordinated obligations and liabilities under a series of deed poll guarantees (the crossguarantees). These guarantees issued between Santander UK and ANTS will be unwound under the Scheme as at 31 December 2018, and cease to exist prior to the implementation date under the legislation. Why is the change not adverse? I have reviewed the Scheme document and the deed poll guarantees, and these guarantees between Santander UK and ANTS will be unwound under the Scheme. Accordingly, they cease to apply to any present and future obligations and liabilities of Santander UK or ANTS. Under the terms of the Ring-Fencing Plan, including the Scheme, the debts, liabilities and obligations associated with the business transferring from Santander UK and ANTS to Banco Santander, will be transferred to Banco Santander. Further, all those associated with the business transfers from ANTS to Santander UK will be transferred to Santander UK. I have reviewed the P20 data provided by the Santander UK Group which was compiled into analytical tools, to assess the viability of Santander UK (the RFB) and its ability to meet ongoing liabilities as they fall due. Santander UK (the RFB) is a viable and sustainable entity and will be able to meet its obligations to the Santander UK bondholders and debtholders and ANTS debtholders that are transferring into Santander UK. My conclusion As a result of the Scheme, there will be no impact on the ability of Santander UK (the RFB) to meet any existing or potential claims following the removal of the cross-guarantees between Santander UK and ANTS. Therefore, I conclude there are no adverse effects resulting from the removal of the cross-guarantees. EY 342

347 Findings and conclusions: Bondholders and debtholders Table 183: Changes with no adverse effects Interest and dividend cover Interest and dividend cover Description of the change The prohibited and some permitted business will be transferred from Santander UK to Banco Santander (including SLB) with the associated incomes and profit from the transferred business which moves out of Santander UK (the RFB). Further, all of Crown Dependency assets and liabilities will be transferred from Santander UK to the wider Banco Santander Group. The share of Santander UK (the RFB) income, Profit Before Tax (PBT) and Profit After Tax (PAT) available for the payment of interest and dividend coupons to bondholders and debtholders is expected to decrease in the year of transfer. Therefore, the interest and dividend cover will also decrease in the year of transfer. The biggest impact of this will be on the AT1 holders, as they are paid from PAT and are below all other creditors except shareholders, in the creditor hierarchy. Why is the change not adverse? I calculated the AT1 dividend cover of Santander UK based on the P20. I researched the price of similar rated instruments issued by other UK and EU banks and calculated the dividend cover of those instruments using information available to the public, to identify the correlation between the change in AT1 dividend cover and the pricing of these instruments. My analysis has indicated that there is no correlation between these. Based on the analysis I have completed on the dividend cover and pricing of AT1 instruments with a similar credit rating issued by other UK banks, I have concluded that the price of these instruments will not be impacted by the change in the dividend cover in the year of transfer. I have reviewed the P20 data provided by the Santander UK Group, which was compiled into analytical tools, to calculate the changes to the following performance metrics. Although there is a decrease in PAT in the year of transfer as a result of the transfer of business and the associated profits, and an increase in AT1 cost due to the additional AT1 issuance in 2017, the dividend cover of Santander UK is sufficient to meet the AT1 dividend payments. My conclusion I have assessed this change as having no adverse effect on the bondholders and debtholders of Santander UK based on the analysis I have completed, given that the change in dividend cover will not impact the pricing of AT1 instruments and Santander UK will maintain a dividend cover sufficient to meet its AT1 dividend payments. EY 343

348 Findings and conclusions: Bondholders and debtholders Table 184: Changes with no adverse effects summary of findings from Part 2 Assessment area Conclusion Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Santander UK from the transfer of business, as a result of the Ring-Fencing Plan, including the Scheme. Santander UK is expected to remain viable and sustainable and meet its minimum regulatory capital and liquidity requirements over the forecast period. Santander UK will have sufficient financial resources to meet its obligations to bondholders and debtholders. I have concluded that these changes will not result in an adverse effect on Bondholders and Debtholders of Santander UK. For further details of my findings, and how I have reached them through my work, please refer to section 10. Creditor Hierarchy The ranking of bondholders and debtholders in the hierarchy will not change and they will continue to benefit from their current UK ranking. The amount of asset cover will change for bondholders and debtholders as a result of the change in balance sheet makeup for Santander UK (the RFB). Having assessed and tested the creditor hierarchy analysis to detail each class of creditor, it was possible to establish ranking and levels of asset cover both pre- and post-implementation of the Scheme. The ranking remains unchanged and in my opinion the level of cover remained sufficient were insolvency to occur. I have concluded that the changes will not result in an adverse effect on bondholders and debtholders. For further details of my findings, and how I have reached them through my work, please refer to section 15.4 for Santander UK (the RFB). EY 344

349 Findings and conclusions: Bondholders and debtholders No change The following summarises the areas where I have assessed there will be no change to Santander UK bondholders and debtholders as a consequence of the Scheme. Table 185: No change Assessment area Conclusion Credit rating of Santander UK (the RFB) Moody s, S&P and Fitch Ratings have confirmed that their proposed credit ratings for Santander UK is expected to remain unchanged as a result of ring-fencing. Santander UK terms and conditions of the instruments All existing Santander UK bondholders and debtholders will remain with Santander UK. The terms and conditions of these issuances will not change as a result of the Ring-Fencing Plan, including the Scheme. Recovery, Resolution, and Operational Continuity All existing Santander UK bondholders and debtholders remain with Santander UK (the RFB). The recovery plan and resolution pack and operational continuity arrangements will not change as a result of the Ring-Fencing Plan, including the Scheme. EY 345

350 Findings and conclusions: Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS 31. Findings and conclusions: Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS Introduction Isolating changes to the beneficiaries of guarantees, letters of credit or performance bonds as a consequence of the Scheme, rather than the wider Ring-Fencing Plan was not practical given the changes being made. Therefore, my assessment in this section has considered all changes to the beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and/or ANTS as a consequence of the Ring-Fencing Plan, including the Scheme. This section is concerned with the following groups of persons, set out below. Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK This group of persons are contingent liabilities and as such, potential creditors of Santander UK by virtue of their direct contractual relationship with customers of Santander UK. As a result of the Ring- Fencing Plan (including the Scheme), this group of persons will either (depending on what happens to the direct customer with whom they have a relationship): Remain creditors of Santander UK; or Transfer to Banco Santander (including SLB). Beneficiaries of guarantees, letters of credit or performance bonds of ANTS This group of persons are contingent liabilities and as such, potential creditors of ANTS by virtue of their direct contractual relationship with customers of ANTS. As a result of the Ring-Fencing Plan (including the Scheme), this group of persons will (depending on what happens to the direct customer with whom they have a relationship): Remain creditors of ANTS. This section excludes beneficiaries of guarantees, letters of credit or performance bonds of ANTS who will remain in ANTS after 31 December This group of persons are covered in section 26.1 of this report; Transfer to Santander UK; or Transfer to Banco Santander (including SLB). EY 346

351 Findings and conclusions: Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS Approach to assessing changes to beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS as a consequence of the Ring-Fencing Plan, including the Scheme Assessment areas In assessing the effect of the Ring-Fencing Plan, including the Scheme, I have considered a number of areas as a consequences of the Ring-Fencing Plan, including the Scheme, and potential changes affecting these groups of persons. My findings and conclusions are grouped below in the following assessment areas: Table 186: Beneficiaries of guarantees, letters of credit or performance bonds assessment areas Assessment area Description of potential change Finance Business Model Viability, Capital and Liquidity Assessment of the ongoing financial viability of Santander UK (the RFB), whether it will have sufficient capital and liquid assets to meet its obligations to creditors (including suppliers) and whether it will continue to generate and/or maintain an appropriate level of funding to support its products and services. Assessment of the ongoing financial viability of Banco Santander, whether it will have sufficient capital and liquid assets to meet its obligations to creditors (including suppliers) and whether it will continue to generate and/or maintain an appropriate level of funding to support its products and services. Credit rating of Santander UK (the RFB) and Banco Santander Impact of a change in the credit rating of Santander UK (the RFB) or Banco Santander on the beneficiaries of guarantees, letters of credit or performance bonds. Removal of crossguarantees between Santander UK and ANTS Impact of the removal of the existing cross-guarantees from 1 January 2019 on beneficiaries of guarantees, letters of credit or performance bonds of Santander UK (the RFB). This includes the removal of the upstream guarantee from ANTS to Santander UK and the downstream guarantee from Santander UK to ANTS. Creditor Hierarchy Impact of the Ring-Fencing Plan, including the Scheme, on the position of creditors (e.g. beneficiaries of guarantees, letters of credit or performance bonds) and the level of asset coverage available in Santander UK (the RFB) or Banco Santander. EY 347

352 Findings and conclusions: Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS My conclusions are supported by the information and analysis summarised below: Information and documentation reviewed, supported by meetings with the finance and legal leadership teams for the Ring-Fencing Programme: The Ring-Fencing Plan; The Design Integrity Document; Programme implementation plans including senior programme governance material; Santander UK audited annual accounts as at 31 December 2016 and half year accounts as at 30 June 2017; Santander UK Group s draft annual operating plan, called the P20, covering the period 2017 to 2020 drafted as at 30 June This was approved by the Santander UK Board on 24 July The starting point of the P20 is the 31 December 2016 actuals. The P20 comprises of a detailed breakdown of the balance sheet and P&L line items and their underlying assumptions which I have used and relied upon as the basis for my assessment given the authorised content and following a review of the assumptions used in the plan; My capital assessment was carried out based on a review of the consolidated 31 December 2016 Santander UK HoldCo ICAAP document, base case P20 capital data and the June 2017 Bank of England stress test results; A review of Santander UK Group s planning assumptions for liquidity and funding, which are based on the September 2016 ILAAP for Santander UK HoldCo and the March 2017 ILAAP update specifically for Santander UK (the RFB). The ILAAP documents are have been reviewed in conjunction with Santander UK s draft P20; Banco Santander ICAAP at 31 December 2016, ILAAP as at 2017 and SLB P20; Moody s, S&P and Fitch Ratings Credit Rating Credit Rating assessment of Santander UK HoldCo and Santander UK s credit rating, having taken into account the impact of the Ring- Fencing Plan, including the Scheme; BTIA; Santander UK deed poll guarantee executed on 11 May 2017; ANTS deed poll guarantee executed on 11 May 2017; and Creditor hierarchy analysis. Having assessed the P20 Santander UK Group annual operating plan, whilst there will be changes to the P&L, balance sheet composition, capital and liquidity profile of Santander UK (the RFB), the entity will remain viable and sustainable and able to meet obligations that fall due; My assessment of the Banco Santander ICAAP and ILAAP has confirmed that whilst there will be changes to the P&L, balance sheet composition, capital and liquidity profile of Banco Santander, the entity will remain viable and sustainable and able to meet obligations that fall due; My review of analysis undertaken by Moody s, S&P and Fitch Ratings has confirmed that the proposed credit ratings (depending on the rating agency) for Santander UK (the RFB) is expected to remain unchanged as a result of ring-fencing; I reviewed the Ring-Fencing Plan and the Scheme document which states that the implementation of the Ring-Fencing Plan, including the Scheme, will result in the cross-guarantees being unwound on 31 December This includes the removal of the upstream guarantee from ANTS to Santander UK and the downstream guarantee from Santander UK to ANTS. Santander UK will continue to remain viable and sustainable without them and this will not impact the credit rating of Santander UK; and I have reviewed the creditor hierarchy analysis and assessed the ranking of creditors and independently calculated asset coverage across each class of creditor. Overall, Santander UK (the RFB) and Banco Santander creditors following implementation of the Ring-Fencing Plan, including the Scheme will be in a comparable position to that of their current standing as creditors of each respective entity. EY 348

353 Findings and conclusions: Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS Changes to beneficiaries of guarantees, letters of credit or performance bonds connected with Santander UK Findings and conclusions Changes with adverse effects I have identified no changes as a consequence of the Scheme that will have adverse effects on beneficiaries of guarantees, letters of credit or performance bonds connected with Santander UK covered by this Scheme Report Changes with no adverse effects I have identified changes as a consequence of the Scheme that will not result in an adverse effect on beneficiaries of guarantees, letters of credit or performance bonds connected with Santander UK. The following details these changes and the rationale for why I have concluded that beneficiaries of guarantees, letters of credit or performance bonds connected with Santander UK will be affected, but not adversely affected, as a consequence of the Scheme. Table 187: Changes with no adverse effects Removal of cross-guarantees between Santander UK and ANTS Removal of cross-guarantees between Santander UK and ANTS Description of the change Santander UK and ANTS have guaranteed all of the other s unsubordinated obligations and liabilities under a series of deed poll guarantees (the crossguarantees). These guarantees issued between Santander UK and ANTS will be unwound under the Scheme as at 31 December 2018 and cease to exist prior to the implementation date. Why is the change not adverse? I have reviewed the Scheme document and the deed poll guarantees, and these guarantees between Santander UK and ANTS will be unwound under the Scheme and will cease to apply to any present and future obligations and liabilities of Santander UK or ANTS. Under the terms of the Ring-Fencing Plan, including the Scheme, the debts, liabilities and obligations associated with the business transferring from ANTS to Santander UK, will be transferred to Santander UK. I have reviewed the P20 data provided by Santander UK which was compiled into analytical tools to assess the viability of Santander UK (the RFB) and its ability to meet ongoing liabilities as they fall due. Santander UK (the RFB) is a viable and sustainable entity and will be able to meet its obligations to existing Santander UK beneficiaries of guarantees, letters of credit or performance bonds and ANTS beneficiaries of guarantees, letter of credit or performance bonds that are transferring into Santander UK (the RFB). My conclusion As a result of the Scheme, there will be no impact on the ability of Santander UK (the RFB) to meet any existing or potential claims following the un-winding of the cross-guarantees between Santander UK and ANTS. Therefore, I conclude there are no adverse effects resulting from the un-winding of the cross-guarantees. EY 349

354 Findings and conclusions: Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS Table 188: Changes with no adverse effects summary of findings from Part 2 Assessment area Conclusion Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Santander UK from the transfer of business, as a result of the Ring-Fencing Plan, including the Scheme. Santander UK (the RFB) is expected to remain viable and sustainable and meet its minimum regulatory capital and liquidity requirements over the forecast period. Santander UK (the RFB) will have sufficient financial resources to meet its obligations to beneficiaries of guarantees, letters of credit or performance bonds. I have concluded that these changes do not result in an adverse effect on the beneficiaries of guarantees, letters of credit or performance bonds of Santander UK. For further details of my findings, and how I have reached them through my work, please refer to section 10. Creditor Hierarchy The ranking of the beneficiaries of guarantees, letters of credit or performance bonds in the creditor hierarchy does not change and they will continue to benefit from their current UK ranking. The amount of asset cover will change for the beneficiaries of guarantees, letter of credit or performance bonds as a result of the change in balance sheet makeup for Santander UK (the RFB). Having assessed and tested the creditor hierarchy analysis to detail each class of creditor, it was possible to establish ranking and levels of asset cover both pre- and post-implementation of the Scheme. Ranking remained unchanged and in my opinion the level of cover remained sufficient were insolvency to occur and I have concluded that the changes do not result in an adverse effect on the beneficiaries of guarantees, letters of credit or performance bonds. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Santander UK (the RFB). EY 350

355 Findings and conclusions: Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS No change The following summarises the areas where I have assessed there will be no change to beneficiaries of guarantees, letters of credit or performance bonds connected with Santander UK as a consequence of the Scheme. Table 189: No change Assessment area Conclusion Credit rating of Santander UK Moody s, S&P and Fitch Ratings have confirmed that they anticipate no change to the Santander UK credit rating as a result of the Ring-Fencing Plan. EY 351

356 Findings and conclusions: Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS Changes to beneficiaries of guarantees, letters of credit or performance bonds connected with Banco Santander Findings and conclusions Changes with adverse effects I have identified no changes as a consequence of the Scheme that will have adverse effects on beneficiaries of guarantees, letters of credit or performance bonds connected with Banco Santander covered by this Scheme Report Changes with no adverse effects I have identified changes as a consequence of the Scheme that do not result in an adverse effect on beneficiaries of guarantees, letters of credit or performance bonds connected with Banco Santander. The following details these changes and the rationale for why I have concluded that beneficiaries of guarantees, letters of credit or performance bonds connected with Banco Santander will be affected, but not adversely affected, as a consequence of the Scheme. Table 190: Changes with no adverse effects Removal of cross-guarantees between Santander UK and ANTS Removal of cross-guarantees between Santander UK and ANTS Description of the change Santander UK and ANTS have guaranteed all of the other s unsubordinated obligations and liabilities under a series of deed poll guarantees (the crossguarantees). These guarantees issued between Santander UK and ANTS will be unwound under the Scheme as at 31 December 2018 and cease to exist prior to the implementation date under the legislation. Why is the change not adverse? I have reviewed the Scheme document and the deed poll guarantees, and these guarantees between Santander UK and ANTS will be unwound under the Scheme and will cease to apply to any present and future obligations and liabilities of Santander UK or ANTS. Under the terms of the Scheme, the debts, liabilities and obligations associated with the business transferring from Santander UK and ANTS to Banco Santander, will be transferred to Banco Santander. I reviewed the Banco Santander s ICAAP and ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan to assess the changes to SLB and Banco s P&L and balance sheet in the year of transfer to assess the viability of Banco Santander and its ability to meet ongoing liabilities as they fall due. My conclusion As a result of the Scheme, there is no impact on the ability of Banco Santander to meet any existing or potential claims following the removal of the cross-guarantees between Santander UK and ANTS. Therefore, I conclude there are no adverse effects resulting from the removal of the cross-guarantees for beneficiaries of guarantees, letters of credit or performance bonds who are connected with Banco Santander. EY 352

357 Findings and conclusions: Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS Table 191: Changes with no adverse effects Credit rating of Banco Santander Credit rating of Banco Santander Description of the change Santander UK and ANTS currently have a stronger credit rating than Banco Santander. For beneficiaries of guarantees, letters of credit or performance bonds who will be transferring from Santander UK or ANTS to Banco Santander, the entity acting as guarantor will have a lower credit rating. Why is the change not adverse? I reviewed the Banco Santander s ICAAP and ILAAP as at 31 December 2016, SLB P20 and the Ring-Fencing Plan to assess the changes to SLB and Banco s P&L and balance sheet in the year of transfer to assess the viability of Banco Santander and its ability to meet ongoing liabilities as they fall due. My conclusion As a result of the Scheme, there is no impact on the ability of Banco Santander to meet any existing or potential claims following the transfer of beneficiaries of guarantees, letters of credit or performance bonds from Santander UK and ANTS. Therefore, I conclude there are no adverse effects as a result of beneficiaries of guarantees, letters of credit or performance bonds who will be connected to Banco Santander. EY 353

358 Findings and conclusions: Beneficiaries of guarantees, letters of credit or performance bonds of Santander UK and ANTS Table 192: Changes with no adverse effects summary of findings from Part 2 Assessment area Conclusion Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Banco Santander from the transfer of business, as a result of the Ring-Fencing Plan, including the Scheme. Banco Santander is expected to remain viable and sustainable. Further, Banco Santander will have sufficient financial resources to meet its obligations to the beneficiaries of guarantees, letters of credit or performance bonds. I have concluded that these changes do not result in an adverse effect on the beneficiaries of guarantees, letters of credit or performance bonds of Banco Santander. For further details of my findings, and how I have reached them through my work, please refer to section 10. Creditor Hierarchy The ranking of beneficiaries of guarantees, letter of credit or performance bonds will change, but continue to rank in a comparable class in Banco Santander (including SLB). The amount of asset cover will change for the beneficiaries of guarantees, letter of credit or performance bonds as a result of the change in balance sheet makeup for Banco Santander following the implementation of the Scheme. Having assessed and tested the creditor hierarchy analysis to detail each class of creditor, it was possible to establish ranking and levels of asset cover both pre and post implementation of the Scheme. Ranking will remain comparable and in my opinion the level of cover will remain sufficient were insolvency to occur. I have concluded that the changes will not result in an adverse effect on the beneficiaries of guarantees, letter of credit or performance bonds. For further details of my findings, and how I have reached them through my work, please refer to section 15 for Banco Santander. EY 354

359 Findings and conclusions: Market counterparties 32. Findings and conclusions: Market counterparties Introduction This section relates to market counterparties (the counterparties ) of ANTS and Santander UK, who currently contract with the Santander UK Group CFO Division Treasury function. These counterparties are Financial Institutions and include CCPs and Payment Systems. They are counterparties to transactions with Santander UK and ANTS through the Santander UK Group CFO Treasury function in the following instrument types: derivatives, repurchase agreements, reverse repurchase agreements and securities finance. These Financial Institutions may also have a customer relationship with either Santander UK or ANTS in relation to the transactions and services that they conduct or undertake for themselves or on behalf of their own customers. There will be changes as a result of the transfers under the Scheme, that will affect these Financial Institutions as customers of Santander UK or ANTS, which are addressed in sections 24 and 25 of this report. As Counterparties, they will continue to transact with the Santander UK Group Treasury function. However, some of the exposures that they have with ANTS will transfer to SLB, whilst others will transfer to Santander UK under the Ring-Fencing Plan, including the Scheme, depending on whether the transaction qualifies for the RFB hedging/liquidity/default risk exemptions under the EAPO (the EAPO exemption ). Affected counterparties The following are within the scope of this Scheme Report which total 34 market counterparties: There are 16 market counterparties that will have transactions transferred from ANTS to Santander UK (the RFB) under the Scheme. Counterparty transactions with Santander UK and ANTS that do not fall within the EAPO exemption and will not be transferred by novation or assignment in advance of the Scheme, will be transferred from Santander UK and/or ANTS to SLB under the Scheme. Counterparty transactions with Santander UK that fall within the EAPO exemption because they are hedging transactions conducted by Santander UK in support of debt issuance by Santander UK, will stay in Santander UK (the RFB). The following are outside the scope of this Scheme Report, as the transfer mechanisms being used, are part of the wider Ring-Fencing Plan. ANTS transactions that fall within the EAPO exemption will either be transferred to Santander UK through novation or assignment as part of the wider Ring-Fencing Plan, or run-down in ANTS prior to the implementation date. These are principally repurchase agreements, reverse repurchase agreements and central bank facilities and short-term liabilities. These transactions will therefore not be considered by this Scheme Report. Swap contracts with US and US affiliated swap dealers, that mature before 30 September 2018, will be allowed to run-off in ANTS. As with the above, these transactions will therefore not be considered by this Scheme Report. Cleared transactions with the London Clearing House (LCH), will be transferred by the LCH to Banco Santander and/or SLB under the Ring-Fencing Programme, prior to the implementation of the Scheme. EY 355

360 Findings and conclusions: Market counterparties Approach to assessing changes to market counterparties as a consequence of the Scheme Assessment areas In assessing the effect of the Scheme on relevant counterparties of ANTS and Santander UK, I have considered the key assessment areas highlighted in Table 193. These counterparties include those market counterparties with transactions that are transferring under the Scheme and those who will remain connected to Santander UK (the RFB). My assessment has considered the actions proposed by the Ring-Fencing Programme to mitigate any adverse effect on counterparties and whether alternative approaches have or should have been considered. Where relevant these are referenced as part of my assessment. I have assumed that market counterparties that are planned to novate or transfer through the LCH under the Ring-Fencing Plan will be successfully transferred using those transfer methods. My findings and conclusions are grouped below in the following assessment areas: Table 193: Market counterparties assessment areas Assessment area Description of potential change Contractual Rights Changes to any terms and conditions, including ability to transfer deposits or investments or switch to other providers, termination rights, events of default or change of control provisions and effects on counterparties who may be restricted to dealing with UK banks. Finance Business Model Viability, Capital and Liquidity Assessment of the ongoing financial viability of Santander UK (the RFB), whether it will have sufficient capital and liquid assets to meet its obligations to creditors (including suppliers) and whether it will continue to generate and/or maintain an appropriate level of funding to support its products and services. Assessment of the ongoing financial viability of Banco Santander, whether it will have sufficient capital and liquid assets to meet its obligations to creditors (including suppliers) and whether it will continue to generate and/or maintain an appropriate level of funding to support its products and services. Credit rating of Santander UK (the RFB) and Banco Santander Impact of a change in the credit rating of Santander UK (the RFB) or Banco Santander on the counterparties. Governance Ongoing management and control of Santander UK and SLB, to ensure a safe and well managed bank. This includes adherence to applicable UK regulations and specific policies and procedures. Risk Management How much risk the business is prepared to take to meet its strategic objectives, is a key component of the bank s governance structure. Risk management should protect the bank, its customers and other relevant persons from exposure to unmanaged risk and loss. Operations, Infrastructure and Shared Services The operation, robustness and performance of operations teams, processes, systems and infrastructure to the same standards as market counterparties currently receive from Santander UK and/or ANTS. Creditor Hierarchy Impact of the Ring-Fencing Plan, including the Scheme, on the position of creditors (e.g. market counterparties) and the level of asset coverage available in Santander UK (the RFB) or Banco Santander (including SLB). EY 356

361 Findings and conclusions: Market counterparties My conclusions are supported by the information and analysis summarised below: In reaching my conclusions with regard to market counterparties, I have used the following information sources (amongst others) provided by the Ring-Fencing Programme: The Ring-Fencing Plan and Scheme design documents including presentations to regulators and senior management; Operating Models detailing the planned changes to operations, technology and customer interaction channels across Banco Santander Group entities impacted by the Scheme; Output of a legal analysis undertaken by the Ring-Fencing Programme s legal workstream to identify changes to counterparty documentation; Migration strategy and plans by customer type to understand the detail and approach to customer migration across all three business transfers under the Scheme; Santander UK audited annual accounts as at 31 December 2016 and half year accounts as at 30 June 2017; Santander UK Group s draft annual operating plan, called the P20, covering the period 2017 to 2020 drafted as at 30 June This was approved by the Santander UK Board on 24 July The starting point of the P20 is the 31 December 2016 actuals. The P20 comprises of a detailed breakdown of the balance sheet and P&L line items and their underlying assumptions, which I have used and relied upon as the basis for my assessment given the authorised content and following a review of the assumptions used in the plan. My capital assessment was carried out based on a review of the consolidated 31 December 2016 Santander UK HoldCo ICAAP document, base case P20 capital data and the June 2017 Bank of England stress test results; A review of Santander UK Group s planning assumptions for liquidity and funding, which are based on the September 2016 ILAAP for Santander UK HoldCo and the March 2017 ILAAP update specifically for Santander UK (the RFB). The ILAAP documents are have been reviewed in conjunction with Santander UK s draft P20; Banco Santander ICAAP at 31 December 2016, ILAAP as at 2017 and SLB P20; Moody s, S&P and Fitch Ratings have confirmed that they anticipate no change to the Santander UK HoldCo and Santander UK credit rating as a result of the Ring-Fencing Plan, including the Scheme; and Creditor hierarchy analysis. I have reviewed the Ring-Fencing Programme s migration strategy and plan which highlighted the number of derivatives positions and other arrangements with counterparties that will be transferred under the Scheme. I have assessed a legal analysis, prepared by the Ring-Fencing Programme s legal workstream, of the necessary changes to counterparties documentation (ISDAs and CSAs) to effect the transfers from ANTS to Santander UK (the RFB) and SLB. I evaluated the P20 Santander UK Group annual operating plan. Whilst there will be changes to the P&L, balance sheet composition, capital and liquidity profile of Santander UK (the RFB), the entity will remain viable and sustainable and able to meet obligations that fall due. My assessment of the Banco Santander ICAAP and ILAAP has confirmed that whilst there will be changes to the P&L, balance sheet composition, capital and liquidity profile of Banco Santander (the RFB), the entity will remain viable and sustainable and able to meet obligations that fall due. My review of analysis undertaken by Moody s, S&P and Fitch Ratings has confirmed that the proposed credit ratings (depending on the rating agency) for Santander UK (the RFB) is expected to remain unchanged as a result of ring-fencing. I have reviewed the creditor hierarchy analysis and assessed the ranking of creditors and independently calculated asset coverage across each class of creditor. Overall, Santander UK (the RFB) and Banco Santander creditors will be in a comparable position to that of their current standing as creditors of each respective entity, following implementation of the Ring-Fencing Plan, including the Scheme. EY 357

362 Findings and conclusions: Market counterparties Findings and conclusions for market counterparties remaining in Santander UK or transferring from ANTS to Santander UK (the RFB) Findings and conclusions I have identified a change relating to the impact of netting sets within the ISDA CSA that may have an adverse effect on some of these market counterparties as a result of the transfer of their transactions from ANTS to Santander UK (the RFB). Notwithstanding that mitigation cannot be provided in all circumstances, I have concluded that the effects will be no more than reasonably necessary to achieve the Scheme s purposes. The details of the changes and the effects that I have identified, are set out in the tables below. Changes with adverse effects I have identified changes as a consequence of the Scheme that will have adverse effects on market counterparties remaining in Santander UK or transferring from ANTS to Santander UK (the RFB). These adverse effects are, in my opinion, not mitigated. The following details these changes I have identified and the rationale for why I have concluded that these market counterparties will be adversely affected, with no mitigations or alternatives available, but that the effects are no more than reasonably necessary to achieve the Scheme s purposes. Table 194: Changes with adverse effects that are not mitigated Changes to netting sets Changes to netting sets Description of the change A number of market counterparties will have open transactions in permitted and prohibited derivatives with Santander UK and ANTS. Those ANTS derivative transactions that fall within the EAPO exemption will be transferred to Santander UK (the RFB) from ANTS under the Scheme. The ANTS prohibited derivatives transactions that do not fall within the EAPO exemption will be transferred to SLB under the Scheme (to the extent that they are not novated or otherwise transferred). The effect of derivative permitted transactions transferring from ANTS to Santander UK (the RFB), where there are also ANTS prohibited transactions transferring or transacted with SLB, is that the netting sets contained within the ANTS ISDA will be broken. This will affect 14 market counterparties. Why is this adverse? For counterparties where the transfers under the Scheme cause there to be transactions with both Santander UK (the RFB) and SLB, the market counterparty will be unable to net any ETA owed or due under the prohibited derivatives held in SLB against any ETA owed or due under the permitted derivatives that remain held in, or transferred to, Santander UK (the RFB). This adverse effect will only happen in the event of a default by either Santander UK (the RFB) or SLB. The result may be timing differences in payment and receipt of ETA and, in extremis, the counterparty may be required to make payments for owed ETA to either Santander UK (the RFB) or SLB with no certainty of receiving ETA due from the other. EY 358

363 Findings and conclusions: Market counterparties Changes to netting sets Mitigations or alternatives available An alternative approach considered is for ANTS to transfer permitted derivatives with market counterparties to SLB, which would preserve existing netting sets. However this would cause effects on the market counterparties which would not be to their benefit e.g. a lower credit rating and wider credit spread of Banco Santander (including SLB) might result in higher KVA. Retaining the permitted derivatives in Santander UK is necessary as the transactions are related to hedging, liquidity, and default risk management activities undertaken by Santander UK. Counterparties are used to dealing with counterparty risk and the volume and value of transactions that they choose to book with either Santander UK (the RFB) or SLB in light of the changes to netting sets will be entirely at their discretion in the future. Is this sufficiently mitigated/is the alternative feasible? I have assessed that the adverse effect will not be mitigated by actions that are or could be taken by the Santander UK Group. My conclusion I have concluded that no reasonable alternatives are available that would reasonably reduce the adverse effect, given the design of the Ring-Fencing Plan. The actions that Santander UK is taking, through open communications with counterparties through the Santander UK CFO Treasury function, provide a good level of transparency in explaining the changes and effects. The level of communication proposed by the Ring-Fencing Programme to the affected counterparties will provide clarity on the changes. However communications cannot mitigate the adverse effect, but they will make the market counterparties aware of the potential effect of the changes. As noted above, market counterparties, as professional market participants, are used to dealing with counterparty risk and changes to their counterparties that affect their risk management. Notwithstanding their own options, I have concluded that these counterparties are likely to be adversely affected by the change proposed by the Scheme. However, the effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme, particularly given that the adverse effect will only impact on counterparties should either Santander UK (the RFB) or SLB default. EY 359

364 Findings and conclusions: Market counterparties Changes with no adverse effects I have identified changes as a consequence of the Scheme that will not result in an adverse effect on counterparties remaining in Santander UK or transferring from ANTS to Santander UK covered by this Scheme Report. The following details these changes and the rationale for why I have concluded that these counterparties will be affected, but not adversely affected, as a consequence of the Scheme. Table 195: Changes with no adverse effects summary of findings from Part 2 Assessment area Conclusion Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Santander UK, due to the transfers of business, as a result of the Ring-Fencing Plan, including the Scheme. Santander UK (the RFB) is expected to remain viable and sustainable and meet its minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes will not result in an adverse effect on Santander UK counterparties remaining in Santander UK (the RFB) and ANTS counterparties transferring to Santander UK. For further details of my findings, including my work undertaken in reaching my conclusions, please refer to section 10. Creditor Hierarchy The ranking of ANTS counterparties is unchanged and they continue to rank in the same class, albeit in Santander UK (the RFB). The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of the RFB Sub-Group. However, I have concluded that these changes will not result in an adverse effect on ANTS counterparties. Furthermore, as counterparties remaining in Santander UK (the RFB) will be part of the same class of creditor as the ANTS counterparties, the change in asset cover also applies to them, but will not result in an adverse effect. For further details of my findings, including my work undertaken in reaching my conclusions, please refer to section 15. EY 360

365 Findings and conclusions: Market counterparties No change The following summarises the areas where I have assessed there will be no change to counterparties remaining in Santander UK or transferring from ANTS to Santander UK as a consequence of the Scheme. Table 196: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives WHT Derivatives no WHT as derivatives fall within other income category for WHT purposes. No capital gain/loss tax implication from the transfer of derivatives under the Scheme. Pursuit of complaints, legal and other proceedings All counterparties transferring from ANTS to Santander UK under the Scheme will retain the right to pursue any outstanding complaints, legal or other proceedings against the transferee. Governance There will be no changes to the governance of Santander UK (the RFB) or the performance of risk management as a key control in Santander UK (the RFB) that will adversely affect this group of counterparties. Risk Management For further details of my findings, please refer to section 12 and 13. Operations, Infrastructure and Shared Services There will be no changes to the operations that will function or the technology that will support the business as a consequence of the Scheme. For customers transferring from ANTS to Santander UK (the RFB) there will be no change to BIC codes as the ANTGB2L BIC code will also move from ANTS to Santander UK (the RFB). As such, there will be no adverse effect on this group of counterparties. For further details of my findings, please refer to section 14. Recovery & Resolution Planning and Operational Continuity ANTS and Santander UK counterparties will remain part of the Santander UK Group RRP and operational continuity arrangements. There will be no changes to the recovery, resolution and operational continuity arrangements as a consequence of the Scheme. I have concluded that there will not be an adverse effect on ANTS and Santander UK counterparties. For further details of my findings, please refer to section 15 for Santander UK (the RFB). EY 361

366 Findings and conclusions: Market counterparties Findings and conclusions for market counterparties transferring from ANTS to SLB Findings and conclusions I have identified a number of changes that will have an adverse effect on counterparties as a result of the migration of prohibited derivatives from ANTS to SLB under the Scheme. They are in two specific areas: The effect of a lower credit rating for SLB on the KVA on derivative valuations; and Changes to netting sets for counterparties permitted and prohibited derivatives, given that positions will be split in the future between SLB for prohibited transactions and Santander UK (the RFB) for permitted transactions. Counterparties will be unable to net ETAs, where there is a default event, between the two types of derivative. Given the circumstances of the changes it is not possible to mitigate the adverse effects that these changes will create. Notwithstanding that mitigations cannot be provided in all circumstances, I have concluded that the effects are no more than reasonably necessary to achieve the Scheme s purposes, and that there are no better alternatives available to reduce the effects on the counterparties. The details of the changes and the effects are set out below. EY 362

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368 Findings and conclusions: Market counterparties Changes with adverse effects I have identified changes as a consequence of the Scheme that will have adverse effects on ANTS market counterparties transferring to SLB. These adverse effects are, in my opinion, not mitigated. The following details these changes I have identified and the rationale for why I have concluded that these ANTS market counterparties will be adversely affected with no mitigations or alternatives available, but that the effects are no more than reasonably necessary to achieve the Scheme s purposes. Table 197: Changes with adverse effects that are not mitigated Changes to netting sets Changes to netting sets Description of the change There are market counterparties who have open transactions in permitted and prohibited derivatives with Santander UK and ANTS. To the extent that they are not novated or otherwise transferred, those ANTS derivative transactions that fall outside of the EAPO exemption will be transferred to SLB from ANTS under the Scheme. The ANTS permitted derivatives transactions that fall within the EAPO exemption will be transferred to Santander UK (the RFB) under the Scheme. The effect of derivative permitted transactions transferring from ANTS to SLB, where there are also ANTS prohibited transactions transferring or transacted with Santander UK (the RFB), is that the netting sets contained within the ANTS ISDA will be broken. This will affect 27 market counterparties. Why is this adverse? For counterparties where the transfers under the Scheme cause there to be transactions with both Santander UK (the RFB) and SLB, the counterparty will be unable to net any ETA owed or due under the prohibited derivatives held in SLB against any ETA owed or due under the permitted derivatives that remain held in, or transferred to, Santander UK (the RFB). This adverse effect will only happen in the event of a default by either Santander UK (the RFB) or SLB. The result may be timing differences in payment and receipt of ETA and, in extremis, the counterparty may be required to make payments for owed ETA to either Santander UK (the RFB) or SLB with no certainty of receiving ETA due from the other. Mitigations or alternatives available An alternative approach considered is for ANTS to transfer permitted derivatives with counterparties to SLB which would preserve existing netting sets. However, this would cause effects on the counterparties which would not be to their benefit e.g. a lower credit rating and wider credit spread of Banco Santander (including SLB) may result in a higher KVA. Counterparties are used to dealing with counterparty risk. The volume and value of transactions that they choose to book with either Santander UK (the RFB) or SLB, in light of the changes to netting sets, will be entirely at their discretion in the future. Is this sufficiently mitigated? I have assessed that the adverse effect is not mitigated by actions that are or could be taken by the Santander UK Group. EY 364

369 Findings and conclusions: Market counterparties Changes to netting sets My conclusion As noted above, counterparties, as professional market participants, are used to dealing with counterparty risk and changes to their counterparties that affect their risk management. It will only be through discussion that it will be clear how they view the change, in terms of adverse effects, or otherwise. The level of communication proposed by the Ring-Fencing Programme to the affected counterparties will provide clarity on the changes. Communications cannot mitigate the adverse effect, but they will make the market counterparties aware of the potential effects of the changes. I have concluded that no viable alternatives or mitigations are available that would reduce the adverse effect. I have concluded that these counterparties are likely to be adversely affected by the change proposed by the Scheme. However, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme, particularly given that the adverse effect will only impact on counterparties should either Santander UK (the RFB) or SLB default. EY 365

370 Findings and conclusions: Market counterparties Table 198: Changes with adverse effects that are not mitigated Capital Valuation Adjustment (KVA) Capital Valuation Adjustment (KVA) Description of the change There may be a change to KVA calculations for market counterparties whose transactions will be transferred to SLB from ANTS under the Scheme. This is as a result of the lower credit rating of Banco Santander (and therefore SLB) compared to the credit rating of Santander UK and ANTS being applied to KVA. KVA calculation is complex with a number of variables within the calculation and there is no standard method used. It is an activity performed by the counterparty to their own valuation design, with credit rating being but one variable used. Why is this adverse? As a result of the transfer to SLB, the lower credit rating of Banco Santander may adversely affect the counterparties KVA calculation, and may as a consequence, require them to hold more regulatory capital against the transaction. The exact effect on KVA for individual counterparties is difficult to assess, given that the models used by counterparties for KVA calculations are unknown to both the Santander UK Group and me. The effect on individual counterparties will depend on how they use credit ratings as part of their KVA calculations to calculate RWAs. The Ring-Fencing Programme s own KVA analysis shows the impact on counterparties could be positive or negative. The positive/negative KVA impact also depends on the market data at the time of transfer. Mitigations or alternatives available Given the winding-down of the cross-guarantees, and without the creation of a new A-rated banking entity in the UK or withdrawal or termination of certain products, there is no reasonable alternative to the consequential effect of the rating change from ANTS to Banco Santander on KVA calculations. The Santander UK Group is required to move exposures to prohibited derivatives to an entity outside of the RFB Sub-Group as a result of the ring-fencing legislation. There is no available alternative to the consequential effect on KVA for counterparties whose positions are moved. Is this sufficiently mitigated? I have assessed that the adverse effect is not mitigated by actions that are or could be taken by the Santander UK Group. My conclusion Counterparties are used to dealing with counterparty risk, including the consequences of changes in credit ratings and credit spreads. The volume and value of transactions that they choose to book with either Santander UK (the RFB) or SLB, in light of the changes to credit ratings and credit spreads, will be entirely at their discretion in the future. I have reviewed and considered the communications approach being taken by the Santander UK Group with the affected counterparties. This approach will identify and address any issues or effects that the counterparties believe will be caused by the change in the credit rating, including changes to their KVA calculations. Whilst communications cannot mitigate the adverse effect, they will ensure that customers are aware of the potential effect (in this case adverse effects) of the changes. Therefore, I have concluded that these counterparties may be adversely affected by the change under the Scheme. However, the adverse effect is not greater than reasonably necessary in order to achieve the statutory purposes of the Scheme. EY 366

371 Findings and conclusions: Market counterparties Changes with no adverse effects I have identified changes as a consequence of the Scheme that will not result in an adverse effect on ANTS market counterparties being transferred to SLB. The following details these changes and the rationale for why I have concluded that these ANTS market counterparties will be affected, but not adversely affected, as a consequence of the Scheme. Table 199: Changes with no adverse effects Changes to standard settlement instructions (SSI) Changes to standard settlements instructions (SSIs) Description of the change 4 counterparties will be required to change SSIs for prohibited derivatives and other transactions and arrangements transferred from ANTS to SLB. Changes will be made to supporting systems and static/reference data in SLB and Santander UK CFO Treasury systems, but this will have no effect on counterparties. These changes are as a direct result of derivatives being transferred and the requirement for settlement payments to be made to a different legal entity. Why is the change not adverse? Counterparties will be required to amend their SSIs upon transfer of their positions to Santander UK (the RFB) and SLB in order to continue payments under their derivatives contracts and other products and arrangements. Counterparties will typically have established operational procedures to address changes to settlement instructions, which happen from time to time in the course of usual business activity. All counterparties will be contacted individually through the Santander UK CFO Treasury function and advised of the changes through the communications plans in place. In addition, the Santander UK CFO Treasury function and SLB will operate a follow-on service for any payments that are inadvertently paid using the incorrect settlement instructions. My conclusion Having considered the nature of the change and the level of communication proposed to pre-warn market counterparties of the changes, I have concluded that this change will have no adverse effect on market counterparties who currently transact with either Santander UK or ANTS. EY 367

372 Findings and conclusions: Market counterparties Table 200: Changes with no adverse effects Changes to market counterparty documentation Changes to market counterparty documentation Description of the change 4 market counterparties are affected by having derivative transactions transferred from ANTS to SLB and will require their ISDA Master Agreements and associated CSAs to be replicated by Banco Santander, as contracting party, as they do not already have an ISDA Master Agreement with Banco Santander. Why is the change not adverse? I have reviewed the legal due diligence performed and the Scheme document, together with holding extensive discussions about the findings of the due diligence with the Ring-Fencing Programme legal team. An objective of the Ring-Fencing Programme, is the intention to transfer derivative products from ANTS to SLB, under the Scheme, on equivalent terms. To acheive this, the proposed approach is transferring positions under the existing ISDA Master Agreement and associated CSAs or by replicating the ISDA Master Agreement with Banco Santander under the Scheme. The proposed amendments to the Master Agreements, as a consequence of Banco Santander becoming the counterparty to the Master Agreement, will be administrative in nature and will not affect counterparties rights or obligations under the agreement. Existing netting, collateral and security arrangements will be retained through replicated or equivalent CSAs. The Scheme will suspend any events of default and termination events to the extent that they would otherwise be triggered by the Scheme to ensure continuation of coverage. My conclusion I have assessed this as a change and I have concluded that there will be no adverse effect on the market counterparties rights and obligations under ISDAs and CSAs for derivative transactions transferred to SLB. EY 368

373 Findings and conclusions: Market counterparties Table 201: Changes with no adverse effects summary of findings from Part 2 Assessment area Conclusion Finance Business Model Viability, Capital and Liquidity I have assessed the potential impact of the transfers to Banco Santander (including SLB) on its financials based on the quantum of business being transferred as a percentage of the current Banco Santander financial position as at December The business being transferred into Banco Santander will not have significant impact on the overall financial position of Banco Santander when compared to the size of its current balance sheet, P&L and RWAs (as at 31 December 2016). SLB and Banco Santander will remain viable and sustainable and meet its minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes will not result in an adverse effect on ANTS market counterparties being transferred into SLB. For further details of my findings, including my work undertaken in reaching my conclusions, please refer to section 10. Creditor Hierarchy The ranking of the counterparties will continue to rank in a comparable class in Banco Santander (including SLB). The amount of asset cover will change as a result of the transfers of business and resultant change in the balance sheet makeup of Santander UK (the RFB), ANTS and Banco Santander (including SLB). However, I have concluded that these changes will not result in an adverse effect on the counterparties. For further details of my findings, including my work undertaken in reaching my conclusions, please refer to section 15 for Banco Santander (including SLB). Governance There will be changes to the governance of SLB and the performance of risk management as a key control relating to counterparties exposures with SLB. However, I have concluded that these changes will not adversely affect this group of counterparties. Risk Management For further details of my findings, including my work undertaken in reaching my conclusions, please refer to section 12 and 13. Operations, Infrastructure and Shared Services There will be changes to the operations that will function and/or the technology that will support the business transferred to SLB. However, I have concluded that these changes will not adversely affect counterparties. For further details of my findings, including my work undertaken in reaching my conclusions,please refer to section 14. Recovery & Resolution Planning and Operational Continuity ANTS counterparties will become part of the Banco Santander (including SLB) RRP and operational continuity arrangements. These arrangements are set for the entire Banco Santander Group by Banco Santander as the ultimate parent. As a result, recovery, resolution and operational continuity arrangements in Banco Santander are consistent and no change is expected to the existing arrangements for Banco Santander as a result of the Scheme. I have concluded that this change will not result in an adverse effect on Santander UK (the RFB) and ANTS counterparties. For further details of my findings, including my work undertaken in reaching my conclusions,please refer to section 15.5 for Banco Santander (including SLB). EY 369

374 Findings and conclusions: Market counterparties No change The following summarises the areas where I have assessed there will be no change to ANTS market counterparties transferring to SLB under the Scheme. Table 202: No change Assessment area Conclusion Contractual Rights Tax treatment of transferring derivatives WHT Derivatives no WHT as derivatives fall within other income category for WHT purposes. No capital gain/loss tax implication from the transfer of derivatives under the Scheme. Rights of set-off No change to the set off rights relating to loans, deposits and derivatives. Use of Collateral Counterparties existing collateral held with ANTS will transfer along with the ISDAs and relevant CSAs (no change of existing terms) when the prohibited derivative portfolio is transferred to SLB. Current CSAs for derivative transactions that are transferring under the Scheme will be replicated in SLB. Pursuit of complaints, legal and other proceedings All counterparties transferring under the Scheme will retain the right to pursue any outstanding complaints, legal or other proceedings against the transferee. EY 370

375 Findings and conclusions: Shareholders 33. Findings and conclusions: Shareholders Introduction This section is concerned with shareholders, which is made up of the following three groups at the date of this Scheme Report: ANTS: 100% owned by Santander UK; Santander UK: 100% owned by Santander UK Holdco; Santander UK HoldCo: 78% owned by Banco Santander; 22% by Santusa Holding S.L.; and Santusa Holding S.L: 100% owned by Banco Santander. Under the Ring-Fencing Plan, including the Scheme, the ownership structure of Santander UK, Santander UK HoldCo and Santusa Holdings S.L. will remain the same. ANTS is currently wholly owned by Santander UK but will be transferred as part of the Ring-Fencing Plan to Santander UK HoldCo, to sit outside of the RFB Sub-Group until it can be closed. Isolating changes to shareholders as a consequence of the Scheme, rather than the wider Ring-Fencing Plan was not practical, given the changes being made to the legal entity structures and subsequent impact on shareholders. Therefore my assessment in this section has considered all changes to shareholders as a consequence of the overall Ring-Fencing Plan, including the Scheme. Approach to assessing changes that will affect Shareholders as a consequence of the Ring-Fencing Plan, including the Scheme Assessment areas My assessment has been focused on identifying whether there is an adverse effect on the shareholders of ANTS, Santander UK, Santander UK HoldCo and Santusa Holdings S.L. as a result of the Ring-Fencing Plan, including the Scheme. To do this, I have focused on the financial viability and sustainability of Santander UK (the RFB) and whether it will have sufficient capital, liquidity and funding resources to meet minimum regulatory requirements, and to meet Santander UK s shareholder (i.e. its ultimate parent, Banco Santander) commitments to pay dividends. My conclusions are supported by the information and analysis summarised below: Information and documentation reviewed, supported by meetings with the finance leadership team for the Ring-Fencing Programme: The Ring-Fencing Plan and Santander UK audited annual accounts as at 31 December 2016 and half year accounts as at 30 June 2017; Santander UK Group s draft annual operating plan, called the P20, covering the period 2017 to 2020 drafted as at 30 June This was approved by the Santander UK Board on 24 July The starting point of the P20 is the 31 December 2016 actuals. The P20 comprises of a detailed breakdown of the balance sheet and P&L line items and their underlying assumptions, which I have used and relied upon as the basis for my assessment given the authorised content and following a review of the assumptions used in the plan; My capital assessment was carried out based on a review of the consolidated 31 December 2016 Santander UK HoldCo ICAAP document, base case P20 capital data and the June 2017 Bank of England stress test results; EY 371

376 Findings and conclusions: Shareholders A review of Santander UK Group s planning assumptions for liquidity and funding, which are based on the September 2016 ILAAP for Santander UK HoldCo and the March 2017 ILAAP update specifically for Santander UK (the RFB). The ILAAP has been reviewed in conjunction with Santander UK s draft P20; ANTS September 2017 Board Risk Committee Paper; and The Ring-Fencing Programme s own impact assessment on shareholders. Santander UK dividend I have reviewed the P20 and assessed that the shareholders of Santander UK will be affected by the change due to the impact of lower income and profit after tax available for distribution in the year of transfer. Santander UK will continue to pay the stated 50% dividends to shareholders, all of whom are ultimately 100% owned by Banco Santander (post AT1 distributions). Going forwards, as a consequence of the reduced PAT, this payment will probably be lower than today. However, Banco Santander will still receive income from the transferred business, which will offset any reduction in profit; and ANTS dividend I have reviewed the ANTS September 2017 Board Risk Committee Paper. ANTS will be in run-off, with the exception of two trades, all business will either be transferred into Santander UK and/or SLB. Santander UK as the shareholder of ANTS will be affected by this change as it will no longer receive dividend payment from ANTS. Some SGCB business, assets, liabilities and corresponding incomes will be transferred into Santander UK. Santander UK will receive the incomes from the transferred business, providing some level of offset from not receiving a dividend from ANTS going forward. EY 372

377 Findings and conclusions: Shareholders Changes to Shareholders as a consequence of the Ring-Fencing Plan, including the Scheme Findings and conclusions Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have adverse effects on the group of shareholders covered by this Scheme Report Changes with no adverse effects I have identified changes as a consequence of the Ring-Fencing Plan, including the Scheme. However, these will not have an adverse effect on shareholders. The following details these changes and the rationale for why I have concluded that shareholders will be affected, but not adversely affected, as a consequence of the Ring-Fencing Plan, including the Scheme. Table 203: Changes with no adverse effects Santander UK dividend Santander UK dividend Description of the change As a result of the Ring-Fencing Plan, including the Scheme, a proportion of SGCB business and associated income will be transferred from Santander UK and ANTS into Banco Santander (including SLB). Further, all of Crown Dependency assets and liabilities will be transferred from Santander UK to newly authorised branches or new or existing subsidiaries of the wider Banco Santander Group. The publicly stated dividend pay-out commitment to external shareholders of 50% is in line with the Group Policy. However the share of PAT available prior shareholder distributions for Santander UK (the RFB), is expected to decrease in the year of transfer due to lower incomes from the SGCB business resulting from the transfer of business to Banco Santander (including SLB). The Shareholder of Santander UK will be affected by the change due to the impact of lower income and PAT available for distribution in the year of transfer. Why is the change not adverse? I have reviewed the P20 data provided by the Santander UK Group which was compiled into analytical tools to validate the PAT for Santander UK (the RFB). Santander UK will continue to pay the stated 50% dividends to shareholders, all of whom are ultimately 100% owned by Banco Santander (post-at1 distributions). Whilst this quantum of the dividend payment and those dividend payments going forward is likely to be lower than the current dividend amounts, as a consequence of the reduced PAT, Banco Santander will still receive incomes from the transferred business, which will offset any reduction in PAT. Santander UK HoldCo consented to the changes as part of the BTIA. My conclusion I have assessed this change as having no adverse effect on the shareholders of Santander UK for the reasons provided above. EY 373

378 Findings and conclusions: Shareholders Table 204: Changes with no adverse effects ANTS dividend ANTS dividend Description of the change As a result of the implementation of the Ring-Fencing Plan, the business of ANTS will be composed of a limited number of assets and liabilities in run-off. Under the worst case scenario, with the exception of two trades, all business will either be transferred into Santander UK and/or Banco Santander (including SLB). Santander UK, as the shareholder of ANTS, will be affected by this change as it is unlikely that it will continue to receive dividend payments from ANTS. Why is the change not adverse? I have assessed the allocation of SGCB business, assets, liabilities and corresponding incomes that will be transferred into Santander UK and/or Banco Santander (including SLB). By way of mitigation for no longer receiving a dividend, Santander UK will receive the incomes from the transferred business, providing some level of offset from not receiving a dividend payment from ANTS going forward. Whilst this quantum of the dividend payment and those dividend payments going forward is likely to be lower than the current dividend amounts, as a consequence of the transfer of SGCB business to Banco Santander, Banco Santander as the ultimate parent will still receive incomes from the transferred business, which will offset any reduction in dividends. Both Santander UK HoldCo and Santander UK have given their consent to these changes as part of the BTIA. My conclusion I have assessed this change as having no adverse effect on the shareholder of ANTS for the reasons provided above. Table 205: Changes with no adverse effects summary of findings from Part 2 Assessment area Conclusion Finance Business Model Viability, Capital and Liquidity There will be changes to the balance sheet, P&L, capital and liquidity position of Santander UK from the transfer of business, as a result of the Ring-Fencing Plan, including the Scheme. Santander UK is expected to remain viable and sustainable and meet its minimum regulatory capital and liquidity requirements over the forecast period. I have concluded that these changes will not result in an adverse effect on the shareholders of Santander UK. For further details of my findings, and how I have reached them through my work, please refer to section EY 374

379 Findings and conclusions: Government and other fiscal persons 34. Findings and conclusions: Government and other fiscal persons Introduction This section of my Report assesses the effect of the Scheme on government and other fiscal persons. This group of persons is made up of the following: Governments: in the UK and Spain; Tax authorities: HMRC in the UK and Agencia Tributaria in Spain; Bank Levy: payable in the UK; and FSCS Levy: payable in the UK. Under the Ring-Fencing Plan, including the Scheme, c. 28.7bn in assets and c. 31.5bn in liabilities will be transferred from Santander UK and ANTS to Banco Santander (including SLB) by the end of Whilst the effect of these transfers will not impact on the viability and sustainability of any of these entities, as has been shown in my financial analysis, there will be a corresponding movement of revenue and profit from the Santander UK Group to Banco Santander and SLB. Approach to assessing changes that will affect Government and other fiscal persons as a consequence of the Scheme Assessment areas My assessment has considered the likely adverse effect of these transfers on tax revenues in the UK and Spain as a consequence of the Ring-Fencing Plan, including the Scheme. It is theoretical given I have not completed a full assessment of the overall tax position of the Banco Santander Group in the UK or Spain. My conclusions are supported by the information and analysis summarised below: Information and documentation reviewed, supported by meetings with the finance leadership team for the Ring-Fencing Programme: The Ring-Fencing Plan; Santander UK audited annual accounts as at 31 December 2016 and half year accounts as at 30 June 2017; Santander UK Group s draft annual operating plan, called the P20, covering the period 2017 to 2020 drafted as at 30 June This was approved by the Santander UK Board on 24 July The starting point of the P20 is the 31 December 2016 actuals. The P20 comprises of a detailed breakdown of the balance sheet and P&L line items and their underlying assumptions, which I have used and relied upon as the basis for my assessment given the authorised content and following a review of the assumptions used in the plan. Balance sheet I reviewed the RFB Balance Sheet projections provided in the P20 and the supporting Board papers to assess the changes to the balance sheet. P&L I reviewed the RFB P&L projections provided in the P20 and the supporting Board paper to assess the changes to P&L. I have assessed that the total income will be lower in the year of transfer as a result of the transfer of SGCB and Crown Dependencies business out of the RFB. EY 375

380 Findings and conclusions: Government and other fiscal persons Corporate tax I have reviewed the assets transferring under the Scheme and validated that the UK Branch of Banco Santander (SLB) is and will remain a UK tax payer. I have further validated that all profit related activities will remain in the UK and therefore have assumed that the transferring assets should remain within the scope of UK corporate tax calculations. My assessment has been carried out at a principles or rules level rather than detailed tax calculation level. Given the size of the transfer under the Scheme, the amount of work required and the difficulty in isolating the effect of the Scheme on other influences on tax calculations, I did not consider it reasonable to carry out a detailed assessment and calculation of the likely effect on UK corporate tax as a consequence of the Scheme. Bank Levy I have reviewed the assets transferring under the Scheme and validated that SLB is and will remain a UK tax payer. I have further validated that all profit related activities will remain in the UK and therefore have assumed that the transferring assets should remain within the scope of the Bank Levy calculations. My assessment has been carried out at a principles or rules level rather than detailed tax calculation level. Given the size of the transfer under the Scheme, I did not consider it reasonable to carry out a detailed assessment and calculation of the likely effect on the Bank Levy payable due to the changes introduced as a consequence of the Scheme, in order to take into account any differences in calculation methodology used for a UK branch versus a UK company. EY 376

381 Findings and conclusions: Government and other fiscal persons Findings and conclusions Changes with adverse effects I have identified no changes as a consequence of the Ring-Fencing Plan, including the Scheme, which will have an effect, adverse or otherwise, on government or other fiscal persons covered by this Scheme Report. No change The following summarises the areas where I have assessed there will be no change to government or other fiscal persons as a consequence of the Ring-Fencing Plan, including the Scheme. Table 206: No change Assessment area Conclusion Corporate tax payable Whilst SLB, as part of Banco Santander, is not a tax resident in the UK, it currently pays UK tax on profits attributable to its business and this arrangement is not expected to change. Based on the P20 and analysis of the data, I have been able to validate that based on assumptions made and the transfers under the Ring-Fencing Plan, including the Scheme, Santander UK (the RFB) will remain profitable over the forecast period with a comparable level of profitability over the period. Given all key relationship and business activity with the transferring customers and counterparties will remain in the UK branch, the assets will remain within the scope of UK corporate tax following completion of the transfer under the Scheme and should therefore not affect the amount of UK corporate tax payable. Further, there should be no effect on Spanish corporate tax payable as a consequence of the Scheme. Bank Levy in the UK Under the Scheme, the assets transferring are a UK company to the UK Branch of a Spanish company within the same UK tax group. Given all key relationship and business activity with the transferring customers and counterparties will remain in the UK branch, the assets will remain within the scope of the UK Bank Levy following completion of the transfer under the Scheme and should therefore not affect the Bank Levy payable. FSCS Levy in the UK No changes anticipated to the FSCS levy amount given no transfer of applicable deposits out of the Santander UK Group. EY 377

382 Findings and conclusions: Government and other fiscal persons This page is intentionally left blank. EY 378

383 Part 5 Other changes identified and not considered in the report EY 379

384 Other changes identified and not considered in this Scheme Report 35. Other changes identified and not considered in this Scheme Report Introduction During the course of my work, I have identified changes that are taking place in parallel, but are not as a consequence of the Scheme. These changes are outlined below, for information, to enable a reader to consider whether these changes affect them. Note: this is not an exhaustive list of all changes being made by the Santander UK Group, through the Ring-Fencing Programme, to comply with the ring-fencing legislation. The Crown Dependency Schemes I have not considered the effects of the Jersey Scheme and the Isle of Man Scheme (together the Crown Dependency Schemes) on the groups of persons in this Scheme Report. These Schemes are being carried out by Santander UK to move its current local branch business in Jersey and the Isle of Man to newly authorised branches within the wider Banco Santander Group in Jersey and the Isle of Man. The Crown Dependency Schemes will be the subject of separate court processes (in the Royal Court of Jersey and Isle of Man Court respectively) and any affected persons will receive separate communications and information relating to those Schemes under these processes. For the avoidance of doubt, I have considered the impact of the Crown Dependency Schemes upon the Santander UK Group structure when considering any adverse effects as a consequence of the Scheme. I am informed that the Crown Dependency Schemes are intended to become effective by the end of 2018 and that accordingly the Crown Dependency customers will become customers of relevant local branches or new or existing subsidiaries of the wider Banco Santander Group prior to 1 January IBAN change for Cater Allen Limited customers Currently, the Royal Bank of Scotland plc (RBS) is the sponsoring bank of CAL for the processing of payments through the UK inter-bank payments systems. These are used to make and receive payments of monies between banks. As a consequence of the ring-fencing legislation, this will no longer be permitted and CAL s inter-bank payments access must be transferred to a member of the RFB Sub-Group. As part of the Ring-Fencing Programme, CAL s inter-bank payments system is being transferred to Santander UK and there is a project, currently designing and implementing the overall technology solution for implementation in early 2018, to enable this to happen. The first phase, relating to Faster Payments, is already live. Whilst there is no intention to change sort codes or account numbers, CAL will need to have a new IBAN (International Bank Account Number). An IBAN number is a standardised number, separate to the sort code and account number, used to identify bank accounts when international payments are made or received. 117,000 CAL customers will be affected by the change in IBAN codes. This change has not been not been considered under this Scheme Report as it is part of the Ring- Fencing Plan but not related to the Scheme. EY 380

385 Other changes identified and not considered in this Scheme Report Change in ownership of SSCs The Banco Santander Group makes extensive use of SSCs today, with services both delivered from within Santander UK and by Banco Santander Group owned SSCs. These cover services such as Operations (including support for customer services) as well as technology change and operational delivery as set-out in the figure below. Figure 17: Overview of the SSCs and their services Source: The Ring-Fencing Plan Banco Santander and the Santander UK Group have recently carried out a project, with Santander UK s objective being to achieve a Technology and Operations organisation which is closer to customer and businesses, whilst facilitating agility, fast execution, and cost efficiency by leveraging the advantages of being a Group 17. A key objective was to enable the Country CEO to have direct responsibility and accountability for local IT and Operations including the SSCs. There are a number of changes to the legal entity structure of the SSCs, including the transfer of ownership of UK SSCs to the Santander UK Group and the transfer of some employees between entities in the UK via TUPE. As an additional benefit of the work, the revised shared service structure enables the Santander UK Group to meet the ring-fencing legislation requirement that the RFB should have direct management control over critical services, including those supplied by SSCs. 17 Santander UK IT&O Model proposal (December 2016) EY 381

386 Other changes identified and not considered in this Scheme Report Figure 18: Overview of the proposed Service Model Source: The Ring-Fencing Plan These changes, including the transfer of ownership of UK SSCs and UK based employees, have not been considered under this Scheme Report, as this is a separate strategic project not related to the Scheme or ring-fencing. Operational continuity Banco Santander Group is currently working, both in Spain and in the UK, to document its existing and proposed operational continuity arrangements. Supervision and planning in this area in Spain and the UK, are set-out through the SRB and operational continuity PRA rules respectively. The focus for Banco Santander Group has been, following the establishment of operational continuity projects/teams, to understand which critical services it provides, what contractual arrangements/slas are in place, what terms and conditions are in place and taking steps to build an operational asset register. Compliance with these requirements is taking place outside of the Scheme, and the broader ringfencing legislation. As such, I have not considered the work being undertaken by the Banco Santander Group to meet operational continuity requirements under this Scheme Report. Further details of operational continuity and why it is important can be found in section 15. EY 382

387 Other changes identified and not considered in this Scheme Report Changes to UK defined benefit pension scheme Santander UK Group Pension Scheme (SUKGPS) Currently, SUKGPS has a participating member of the pension scheme, PRODUBAN S.L. which is currently (and will continue to be) owned by Banco Santander. The ring-fencing legislation requires that the RFB cannot be, nor become liable for, pension liabilities of any entity outside the RFB Sub-Group after As a result of this requirement, Santander UK Group are taking steps to restructure their business and the SUKGPS. PRODUBAN S.L. will not be part of the RFB Sub-Group and as a result, must cease to participate in the SUKGPS by no later than 31 December As part of the process, a guarantee, under which Santander UK guarantees the liabilities of PRODUBAN S.L. in relation to its participation of the SUKGPS, will need to be terminated. It is proposed that PRODUBAN S.L. s liabilities in the SUKGPS will be apportioned through flexible apportionment arrangements, as and when required. This will be subject to the receipt of consent from the SUKGPS Trustee. There are 8 employees who are active members of the SUKGPS who will continue to be employed by PRODUBAN S.L. These employees will remain active members of the SUKGPS following the implementation of the Scheme. They continue to accrue pension benefits in the SUKGPS for so long as they remain employed by PRODUBAN S.L. and the SUKGPS remains open to future accrual for PRODUBAN S.L. until no later than 31 December These changes, including the transfer of employees and those 8 employees detailed above, have not been considered under this Scheme Report. Withdrawal of products for certain RFIs Santander UK Group is required to transfer exposures to RFIs outside of the RFB as a result of the ring-fencing legislation. My assessment of the changes that are required as a result of this requirement, including the transfer of all RFI prohibited business to SLB, is set out in section 24. As part of addressing the requirements of the ring-fencing legislation, Santander UK Group has identified 23 customers (1 FIG, 11 SCCB Funds and Trusts, 5 SBB Asset Managers, 6 SCUK Asset Managers) holding 28 prohibited RFI exposure products in the Santander UK non-wholesale systems, that it will not transfer to other entities in the Banco Santander Group because it does not consider it to be viable to do so. The products concerned are credit cards, overdrafts, loans, car loans and trade finance. Santander UK will consult and liaise with each customer affected by these changes and will seek bilateral agreement to either terminate the arrangement, or offer an alternative product. As at the date of this Report, 10 customers have agreed to terminate their products or allow their products to lapse before the Scheme effective date. All of these changes will be implemented outside of the Scheme and so have not been considered under this Scheme Report. Novation and assignment of prohibited business from legal entities that are not transferors under the Scheme Some legal entities (e.g. Santander Lending Limited) within the Santander UK Group are currently conducting prohibited activities. Under the Santander UK Group's Ring-Fencing Plan, these legal entities will remain in the RFB Sub-Group. To comply with the ring-fencing legislation, and as part of the broader Ring-Fencing Plan, these entities will transfer their prohibited business through novation and assignment to SLB, prior to 1 January These transfers of business will be implemented outside of the Scheme, and so have not been considered under this Scheme Report. EY 383

388 Other changes identified and not considered in this Scheme Report Intra-group lenders There are currently intra-group loans between Santander UK and ANTS, and other entities within the Banco Santander Group, as set-out in the financial statements as at 30 June The status of these positions prior to 1 January 2019 will be: Santander UK Intercompany balance with Santander UK HoldCo will remain after 31 December 2018; Loans from Santander UK to Santander UK Group members will be settled in full by 30 September 2018; Loans from Santander UK to Banco Santander will be settled in full by 30 September 2018; Loans from Santander UK to ANTS will be settled in full before the 30 September 2018; and Deposits from ANTS will be settled in full by 30 September ANTS Deposits from Santander UK Group members to ANTS will be settled in full by 30 September 2018; Deposits from Banco Santander to ANTS will be settled in full by 30 September 2018; Loans to Banco Santander Group members will be settled in full by 30 September 2018; Loans to Santander UK Group members will be settled in full by 30 September 2018; Loans and advances to Santander UK Group members will be transferred to Banco Santander by 30 September 2018; and Loans and advances to Banco Santander Group members will be settled in full by 30 September All of these changes will be implemented outside of the Scheme and have not been considered under this Scheme Report. Consolidation of non-core subsidiaries under Santander UK HoldCo It is proposed that current ANTS subsidiaries and other non-core or dormant entities of the Santander UK Group are re-organised under a subsidiary of ANTS, SEIL, and that SEIL is transferred by ANTS to become a direct subsidiary of Santander UK HoldCo. In addition, some transactions will also be transferred to SEIL for the same reason. It is expected that the total RWAs of the transfers will be less than 50mn. It is expected that all transfers will be completed by the end of March 2018 and be carried out by transfer mechanisms other than under the Scheme. EY 384

389 Part 6 Skilled Person duty to the High Court EY 385

390 Skilled Person duty to the High Court 36. Skilled Person duty to the High Court I confirm that I am aware of the requirements of Part 35 of the Civil Procedure Rules and the relevant Practice Direction, and the protocol for Instruction of Experts to give Evidence in Civil Claims. In reporting on the Scheme as the Skilled Person, I recognise that I owe a duty to the High Court to assist on matters within my expertise. This duty overrides any obligation to Santander UK or the PRA and FCA. I confirm that I have complied with this duty. EY 386

391 Part 7 Appendices EY 387

392 Appendix 1 Glossary and definitions 37. Appendix 1 Glossary and definitions 1 January 2019 The implementation date for ring-fencing. ABM AIFs ALM AML ANTS AQUANIMA (UK Branch) AT1 capital Banco Santander Banco Santander Board Banco Santander Group Banco Santander Group member Bank Levy Banking reform BAU BdE BIC BIN BIS Active Business Management. Alternative Investment Funds. Asset and Liability Management. Anti-money laundering. Abbey National Treasury Services plc. The objective is to empty Abbey National Treasury Services plc of business. However, it is expected that a small portfolio of business will remain in ANTS following the Scheme. This is referred to as ANTS in run-off (where applicable). No new business will be carried out in ANTS, aside from transactions required for risk management purposes. UK branch of Iberica de Compras Corporativas, S.L. (a subsidiary of Banco Santander registered in Spain). Provides procurement services to the Santander UK Group, to other Santander entities operating in the UK and to external customers. Additional Tier 1 Capital. Banco Santander S.A. The board of directors of Banco Santander. Banco Santander and its subsidiaries. Banco Santander or a subsidiary of Banco Santander. A tax imposed on banks in addition to normal corporate taxes, designed to limit employee bonuses, maintain financial discipline and deter overly risky banking practices. Domestic and international changes to banking regulation to improve the conduct standard, resilience and resolvability of banks (e.g. Banking Reform Act 2013). Business As Usual. Banco de España, the national central bank of Spain. Bank Identifier Code is a unique identifier used by banks which contains a 4-character bank code, a 2-character country code, a 2-character location code and an optional 3- character branch code. Bank Identification Number is used to identify an issuing bank and helps to match transactions to a bank. It contains the initial four to six numbers that appear on a debit or credit card. Bank for International Settlements. BRA Financial Services (Banking Reform Act) BRRD BTIA Business Banking CAE CAL CAL guarantee CCAR CCP CDS CEF CEO Bank Recovery and Resolution Directive. Business Transfer and Implementation Agreement. Existing SME customers of Santander UK with turnover < 0.25mn. Chief Audit Executive. Cater Allen Limited. The deed poll guarantees of Santander UK of the obligations and liabilities of CAL. Comprehensive Capital Analysis and Review. Central clearing counterparty. Credit Default Swap. Critical Economic Function. Chief Executive Officer. CET1 Common Equity Tier 1. EY 388

393 Appendix 1 Glossary and definitions CFO Chosen Model CIB Client money CNMV COMP Contingent Liabilities Covenant strength CPI CRD IV Credit Partner Cross-guarantees Crown Dependencies CRR CSA CVA D-FA Delegated Reporting DGS Spain Directions Hearing DLG DVA EAPO EBRD ECB Chief Financial Officer. The model under which Santander UK retains its retail and corporate banking business in the UK ring-fence (to the extent permitted), with Santander Global Corporate Banking business spread between Santander UK and Banco Santander (including SLB) as approved by the Santander UK Board on 22 December This is also known as the wide RFB model. Corporate and Institutional Banking. Monies held by a firm for and on behalf of a client, in accordance with FCA client money rules. Comisión Nacional del Mercado de Valores the agency in charge of supervising and inspecting the Spanish Stock Markets and the activities of all participants in those markets. Compensation Sourcebook, as part of the FCA Handbook. Liabilities that depend on an uncertain future event occurring, for example redress or compensation payments that may or may not arise. Santander UK s (as a participating scheme member) financial ability to support the pension scheme now and in the future, by reference to its ongoing earnings capability and consideration of its evolving capital strength relative to the pension obligations it holds. Consumer Price Index. Capital Requirements Directive IV. Currently, the Santander UK Credit Partner model covers all Santander UK customers whose exposure is greater than 2.5mn on a secured basis or 1mn on an unsecured basis. The Credit Partner model combines risk management functions with customerfacing responsibilities including informing customers on the financial viability of their credit applications and helping prepare all necessary documentation. The deed poll guarantees of Santander UK and ANTS under which each bank has guaranteed the obligations and liabilities of the other bank. The branches of Santander UK in Jersey and the Isle of Man. Capital Requirements Regulation. Credit Support Annex a legal document which regulates credit support (collateral) for derivative transactions. Credit Valuation Adjustment. The Basel Committee on Banking Supervision defines this as an adjustment to the fair value (or price) of derivative instruments to account for counterparty credit risk (CCR). The calculation of this price takes into account both counterparty credit spreads and the market risk factors that drive derivatives values. Dodd-Frank Wall Street Reform and Consumer Protection Act. Under regulations such as EMIR, any counterparty to a trade may delegate reporting to their counterparty or to a third party service provider. Firms may take on the reporting responsibilities of multiple clients. The Fondo de Garantía de Depósitos de Entídades de Crédito (DGS Spain) Spain s statutory compensation fund of last resort for customers of financial services firms authorised by the BdE and ECB. A hearing to allow a Judge to examine and consider a bank s RFTS application and decide on how it should proceed. This can include setting a deadline for notification to affected persons and confirming the date of the Sanction Hearing. The Directions Hearing for this Scheme will be held on 5 February Defined Liquidity Group. Debt Valuation Adjustment. This is the other side of CVA and captures the benefit that a bank would derive in the event of its own default. It is applicable to uncollateralised derivatives liabilities. The Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order European Bank for Reconstruction and Development. European Central Bank. EY 389

394 Appendix 1 Glossary and definitions EEA Effective Date(s) EFI EIB EMEIA EMIR ESCB ETA Excluded activity EY EY ITEM Club FCA FCA FG 16/1 FI FIG FOS FPC FSB FSCS FSCS Levy European Economic Area. The date or dates on which the RFTS becomes effective, as sanctioned by the High Court, and Santander UK and/or ANTS, transfer relevant transferring business. The final date of transfer of relevant business, as referred to the final effective date means 13 August An Exempt Financial Institution is a financial institution that is not classified as a Relevant Financial Institution (RFI) under the EAPO. European Investment Bank. Europe, Middle East, India and Africa. European Market Infrastructure Regulation. European System of Central Banks. Early Termination Amount. The regulated activity of dealing in investments as a principal, which ring-fenced bodies are not permitted to perform (in accordance with FSMA section 142D) except in circumstances specified by the Treasury. Ernst & Young LLP. EY sponsors the ITEM Club, which is a non-governmental forecasting group using HMT's model of the UK economy to produce detailed economic analyses and forecasts. Financial Conduct Authority. Guidance on the FCA s approach to the implementation of ring-fencing and ring-fencing transfer schemes. Financial Institution. Financial Institution Group. Financial Ombudsman Service. Financial Policy Committee, as part of the Bank of England. Financial Stability Board. Financial Services Compensation Scheme, as the UK s statutory fund of last resort that can pay compensation to customers when a financial services firm is unable/unlikely to be able to pay claims against it. A proportional contribution made by each firm authorised by the PRA and FCA, used to finance FSCS compensation payments. FSMA Financial Services and Markets Act FSMA Section 166 FTP FX G-SIBs G20 GCB GDP GEMM GEOBAN S.A. GEOBAN UK GESBAN S.L. GESBAN UK A skilled person review to obtain an independent view of a firm s activities, as one of the supervisory activities defined by FSMA. Funds Transfer Pricing Foreign Exchange. Global Systemically Important Banks. Group of 20, as the central forum for international cooperation on financial and economic issues 18. Global Corporate Banking. Gross Domestic Product. Gilt-Edged Market Maker. Geoban, S.A. (Registered in Spain). Geoban UK Limited. Gesban Servicios Administrativos Globales, S.L. Gesban UK Limited. 18 About the G20 EY 390

395 Appendix 1 Glossary and definitions Global SSC GMRA GMSLA Grandfathering GSSP High Court HMT HNWIs HQLA HR Hurdle rate IBAN ICAAP ICAEW ICB ICE ID&V IGA ILAAP IMF IoM IoM FSA IoM Scheme IPO IR ISBAN S.L. ISBAN UK ISDA / ISDA Master Agreement IT January 2016 submission Jersey Scheme JFSC JSTs KPI A shared service centre who provides shared services and facilities to Banco Santander Group members globally e.g. SBGM. Global Master Repurchase Agreement the model legal agreement published by the International Capital Market Association (ICMA) which has been designed for parties transacting repurchase agreements. Global Master Securities Lending Agreement. A provision to allow activities that commenced before an amendment to a rule to continue, despite the amendment to the rule meaning that the activity is forbidden. Global Structured Solutions Programme. UK High Court of Justice in England and Wales. Her Majesty s Treasury. High net worth individuals. High Quality Liquid Assets. Human Resources. The required rate of return. International Bank Account Number. This is a standardised number, separate to the sort code and account number, used to identify bank accounts when international payments are made. Internal Capital Adequacy Assessment Process. Institute of Chartered Accountants in England and Wales. Independent Commission on Banking. Intercontinental Exchange. Identification and Verification. Activities taken by Financial Institutions as part of the KYC process to check the identity of their customers and verify the authenticity of their identities. Intra-group agreements. Internal Liquidity Adequacy Assessment Process. International Monetary Fund. Isle of Man. Financial Services Authority in the Isle of Man. Bank business transfer scheme under the Financial Services Act 2008 that will transfer the business of the Isle of Man branch of Santander UK to Banco Santander. Initial Public Offering. Interest Rate. Ingenieria de Software Bancario S.L. (a subsidiary of Banco Santander registered in Spain). Isban UK Limited. International Swaps and Derivatives Association a trade organisation for participants in the over-the-counter derivatives market. The term ISDA can also be used to refer to the ISDA Master Agreement an agreement that sets out the standard terms to be applied to over-the-counter derivatives transactions between two parties. Information Technology. Santander UK Group s Ring-Fencing Plan submitted to the PRA on 29 January Bank business transfer scheme under the Banking Business (Jersey) Law 1991 that will transfer the business of the Jersey branch of Santander UK to Banco Santander. Jersey Financial Services Commission. Joint Supervisory Teams. Key Performance Indicator. EY 391

396 Appendix 1 Glossary and definitions KVA KYC LAB LBG LCH LCR LOC Local SSC Loyal retail customers LRA LTD Margin MI MiFID MiFID2 MO MPE MREL MRG MRL MSA MTF MTM MTN NCBs NDF NED NIM Novation NRFB Capital Valuation Adjustment is the cost of additional regulatory capital banks are required to manage large unexpected credit, market or operational risk losses. Know Your Customer the process of identifying and verifying the identity of clients. Liquid Asset Buffer. Lloyds Banking Group London Clearing House. Liquidity Coverage Ratio. Please note that Article 412(1) of Regulation (EU) No 575/2013 imposes a liquidity coverage requirement for credit institutions to hold liquid assets to cover liquidity outflows, less the liquidity inflows, under stressed conditions 19. Letter of credit. An SSC that provides shared services and facilities to Banco Santander Group members in a particular country only e.g. Geoban UK Limited. Santander UK defines these as primary banking current account customers (who have a minimum credit turnover of at least 500 per month and at least two direct debits on the account) who hold an additional product 20. Liquidity Risk Appetite. Loan to Deposit Ratio. The difference between the selling price and cost of a product, expressed as a percentage of the selling price. Management Information. Markets in Financial Instruments Directive, which came into effect on 1 November The second Markets in Financial Instruments Directive, which is due to come into effect on 1 January Middle Office. Multiple point of entry (in the context of bank resolution). Minimum Requirement for own Funds and Eligible Liabilities. Modelo de Relación Global large corporate customers, typically with turnover in excess of 1bn, which interact with the Banco Santander Group in more than one jurisdiction. Modelo de Relación Local large corporate customers, typically with turnover in excess of 50mn, which interact with the Banco Santander Group primarily in one jurisdiction (in this case the UK). Master services agreement between at least two legal entities. Medium term funding. Mark to Market a measure of the fair value of accounts that can change over time, such as assets and liabilities. MTM aims to provide a realistic appraisal of an institution's or company's current financial situation. Medium Term (5-10 years) Note. National Central Banks. Non-deliverable forward. Non-Executive Director. Net Interest Margin. Replacing one counterparty in a contract with another, requiring the consent of all parties involved. The novation replaces the original contract. Non Ring-Fenced Bank. 19 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June Santander UK Group Holdings plc Annual Report 2016 EY 392

397 Appendix 1 Glossary and definitions NSFR OLM OTC P&L Net Stable Funding Ratio. The net stable funding is equal to the ratio of an institution's available stable funding to the institution's required stable funding over a one year period. Institutions shall maintain a net stable funding ratio of at least 100% 21. Operational liquidity management. Over-The-Counter; trading between parties that is not via an exchange. Profit & Loss P19 or P19 plan Current medium-term financial plan for the three financial years to P20 or P20 plan Part 4A permission Part VII Scheme/Part VII Transfer Passporting PAT PBT PCAR PEP Permitted business Permitted products Personal customers Persons PPI PRA PRODUBAN (UK Branch) PRODUBAN S.L. Prohibited business Prohibited products PS10/16 PS21/16 PSA PSR The draft annual operating plan, 2017 to 2020, as at 30 June The starting date for the plan is the 31 December 2016 actuals. In relation to FSMA, permission to carry on regulated activities. For banks, this would include accepting deposits and serving as a credit institution, but not as a credit union, friendly society or a building society. A business transfer scheme to move a portfolio of insurance or banking business between legal entities via a court sanctioned process, as defined under Part VII of FSMA. Subject to its fulfilment of conditions under the relevant single market directive, a firm authorised in an EEA state is entitled to carry on permitted activities in any other EEA state by either exercising the right of establishment (of a branch and/or agents) or providing cross-border services 22. Profit After Tax. Profit Before Tax. Prudential Capital Assessment Review. Politically Exposed Person. Defined by the Financial Action Task Force (FATF) as an individual who is, or has been, entrusted with a prominent public function. Due to their position and influence, it is recognised that many PEPs are in positions could potentially be abused for the purpose of committing money laundering offences and related offences (including corruption and bribery). All assets, transactions or arrangements held by a Santander UK Group entity from time to time which does not constitute Prohibited Business. Products which may be provided under the ring-fencing legislation, by either the RFB or SLB. Please refer to Appendix 6 for further information. A customer within the RFB Personal segment, which comprises the majority of Santander UK s Retail customers. A group with homogenous features that enables the skilled person to classify and consider them as one group. Payment Protection Insurance. Prudential Regulation Authority. UK branch of Produban Servicios Informaticos Generales, S.L. Produban Servicios Informaticos Generales, S.L. (a subsidiary of Banco Santander registered in Spain). All assets, transactions and arrangements held by ANTS or Santander UK or to which ANTS and/or Santander UK is a party from time to time prior to the effective date(s) which would constitute, involve or give rise to (i) an excluded activity for the purposes of section 142D of FSMA and the EAPO and/or (ii) an exposure to an RFI, that would be prohibited under the EAPO once Part 9B of FSMA is brought fully into force. Products which cannot be provided under the ring-fencing legislation, by the RFB. Please refer to Appendix 6 for further information. The PRA s policy statement 10/16 on the implementation of ring-fencing: the PRA s approach to ring-fencing transfer schemes. The PRA s policy statement 21/16 on ensuring operational continuity in resolution. PSA Finance UK Limited, a joint venture between SCUK and Banque PSA Finance S.A. Payment Systems Regulator. 21 Regulation of the European Parliament and of the Council amending Regulation (EU) No 575/ Bank of England Prudential Regulation Authority Authorisations Passporting EY 393

398 Appendix 1 Glossary and definitions RA RBS RCP RD Real economy Referral Model Regulated activity Repo RFB RFB Mandated RFB Permitted RFB Prohibited RFB Sub-Group RFI RFTS Ring-fenced bank Ring-fencing legislation Resolution Authority. Royal Bank of Scotland plc. Recovery plan. Relationship director the relationship manager of Santander UK Group s Retail, Corporate and Financial Institution customers. An area of the economy involved in the production of goods and services. The cross-entity straddling Referral Model which operates, and will continue to operate, between Santander UK and Banco Santander, including SLB, by which customers of Santander UK will be able to access the product offering of Banco Santander, SLB and vice versa. An activity that cannot be carried out, unless a person is exempt or authorised. These activities are set out in FSMA (and its subsequent amendments). A repurchase agreement is a form of short-term borrowing for dealers in government securities (such as gilts). Securities are sold to investors and then repurchased within a short timeframe, such as a day. Ring-Fenced Bank. Products and services that can only be provided from the RFB, e.g. deposit solutions for retail/sme customers. Products and services that may be provided from the RFB or from outside the RFB, e.g. trade finance for corporate customers. Products and services that cannot be provided from the RFB, e.g. lending to RFIs. Santander UK and its subsidiaries (including CAL) following implementation of the Ring- Fencing Plan as a ring-fenced group. A Relevant Financial Institution, as defined under the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order Those financial institutions that are not RFIs, are Exempt Financial Institutions (EFIs). The BRA introduced an additional form of a transfer scheme, ring-fencing transfer schemes, under Part Vll of the FSMA. An RFTS gives effect to any transfers of business needed by banking groups to achieve ring-fencing purposes. Generic term for a bank that meets the requirements of a ring-fenced bank as defined by the ring-fencing legislation. Relevant sections of legislation enacted (together or separately): 1. Financial Services (Banking Reform) Act Financial Services and Markets Act Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order The Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions)(Amendment) Order CRD lv in relation to the additional buffer RFBs will be subject to, composed of CET1 capital. Ring-Fencing Plan Santander UK Group s Ring-Fencing Plan as submitted to the PRA and FCA on 28 February Ring-Fencing Programme/Banking Reform Programme Risk Pro RPI RRP RSP RWAs The programme under which the Santander UK Group will implement its Ring-Fencing Plan. A Banco Santander risk culture programme. Retail Price Index. Recovery and Resolution Plan. Resolution plan. Risk weighted assets. EY 394

399 Appendix 1 Glossary and definitions RWP S&P SAF Sanction Hearing Santander UK Santander UK (the RFB) Santander UK Board Santander UK Group Santander UK HoldCo SBGM S.A. SCCB SCCB Segment A SCCB Segment B Scheme Scheme Report SCUK SEF SEIL Select customers SFV SGCB SGCB UK SIM SLA SLB SME SNP SRB SRR A credit rating which could stay at its present level but has a heightened probability of being upgraded. Standard & Poor s, a credit rating agency. Santander Asset Finance plc. The final court hearing, at which the High Court is asked to approve the RFTS. For this Scheme, the Sanction Hearing will be held on 11 June 2018 (and 12 June 2018 if required). Santander UK plc. Santander UK plc, as a ring-fenced body. The board of directors of Santander UK plc. Santander UK Group Holdings plc and its subsidiaries. Santander UK Group Holdings plc. Santander Back Office Global Mayorista S.A. (a subsidiary of Banco Santander registered in Spain). The Santander Corporate and Commercial Banking division of the Santander UK Group. Existing SME customers served by SCCB, whose turnover is in the 0.25mn- 2.5mn range. Existing SME customers served by SCCB, whose turnover is in the 2.5mn- 25mn range. The Santander UK and ANTS ring-fencing transfer scheme under which: 1. The ANTS permitted business is transferred to Santander UK (defined as ANTS Permitted Business in the Scheme); 2. The ANTS prohibited and certain permitted business is transferred to SLB (defined as ANTS Prohibited Business in the Scheme); 3. The Santander UK prohibited and certain permitted business is transferred to SLB (defined as Santander UK Prohibited Business in the Scheme); Further, the term Scheme where relevant, in this Scheme Report, will also include: *The cross-guarantees are unwound and all liabilities under them released; and * Certain changes are made to existing contractual documentation of Santander UK and ANTS. The skilled person s report, as required under section 109 of FSMA, being this document. Santander Consumer (UK) plc. Swap Execution Facility a regulated facility, trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants. Santander Equity Investments Limited. A customer within the RFB Select segment, which caters for more affluent customers (those with more than 100,000 of current account turnover and/or deposits of more than 75,000). Structured Finance Vehicle. The Santander Global Corporate Banking division of Banco Santander Group. The Santander Global Corporate Banking division of the Santander UK Group. Santander ISA Managers Limited. Service Level Agreement. Banco Santander, S.A. London Branch. Small and medium sized enterprises. Structured Notes Programme. Single Resolution Board. UK Special Resolution Regime is a process for failing banks. Its key purpose is to enable an orderly resolution of a failing UK bank to be completed. EY 395

400 Appendix 1 Glossary and definitions SS9/16 SSCs SSIs SSM Statutory Question STF STM Subordinated Debt SUKGPS Summary Report SWIFT SYSC T&O T/O The PRA s supervisory statement 9/16 on ensuring operational continuity in resolution. Shared Service Companies are the Banco Santander Group companies and branches that provide shared services and facilities to Banco Santander Group members. Standard Settlement Instructions. Single Supervisory Mechanism. In respect of an RFTS: a. Whether persons other than the transferor concerned are likely to be adversely affected by the scheme; and b. If so whether the adverse effect is likely to be greater than is reasonably necessary in order to achieve whichever of the purposes mentioned in section 106B(3) is relevant. Section 106B(3) of FSMA states the purposes as: a. Enabling a UK authorised person to carry on core activities as a ring-fenced body in compliance with the ring-fencing provisions; b. Enabling the transferee to carry on core activities as a ring-fenced body in compliance with the ring-fencing provisions; c. Making provision in connection with the implementation of proposals that would involve a body corporate whose group includes the body corporate to whose business the scheme relates becoming a ring-fenced body while one or more other members of its group are not ring-fenced bodies. d. Making provision in connection with the implementation of proposals that would involve a body corporate whose group includes the transferee becoming a ringfenced body while one or more other members of the transferee s group are not ring-fenced bodies. Short-term funding. Short-term markets. A debt that ranks after all other debts, if a company faces liquidation. Santander UK Group Pension Scheme, as a defined benefit pension scheme. A Summary of the Scheme Report that will be made available subsequent to the Directions Hearing. Society for Worldwide Interbank Financial Telecommunication a secure financial messaging service, used by financial institutions across the globe. Senior Management Arrangements, Systems and Controls, as a module of the FCA Handbook. Technology & Operations. Turnover. The Code UK Corporate Governance Code (April 2016). T1/Tier 1 Capital T2 TLAC TOM Trade Reporting TRS TUPE UCITS CET1 and AT1. Tier 2 Capital. Total loss-absorbing capacity. Target Operating Model a high level representation of how an organisation can be best organised to more efficiently and effectively deliver and execute on the organisation's strategy. The act of sending trade information to a regulated party in order to comply with a set of rules. Dodd-Frank, EMIR and Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) all have a trade reporting element to them, as do the other rules that derives from the G Pittsburgh Agreement. Total Return Swap. Transfer of Undertakings (Protection of Employment) Regulations 2006 as amended by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations These regulations protect the terms and conditions of UK employees when a business (or part of a business) changes owner or when service providers change. Undertakings for Collective Investments in Transferable Securities. EY 396

401 Appendix 1 Glossary and definitions UK SSC Unsecured Debt USD VDR Volcker Rule WHT XVA An SSC who provides shared services and facilities to Banco Santander Group members in the UK only e.g. Geoban UK Limited. A loan that is not supported by any underlying assets. US Dollar. Virtual Data Room. Section 619 of the Dodd-Frank Act. Withholding Tax. Under UK domestic law, WHT is the duty of a company to withhold tax in relation to the payment of interest. Please note that there is no duty to withhold tax for dividends and payments under derivatives contracts. X-Value Adjustment is one of the possible valuation adjustments (denoted by X) used by derivative trading desks. EY 397

402 Appendix 2 Hyperlinks to regulatory and professional guidance 38. Appendix 2 Hyperlinks to regulatory and professional guidance Table 207: Regulatory/professional guidance and corresponding website addresses Document name The Financial Services (Banking Reform) Act 2013 The Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014 The Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 The ICB Report The Financial Services and Markets Act 2000 The FCA handbook PS10/16 FCA 16/1 Civil Procedure Rules (CPR35) Civil Practice Direction 35 (PD35) The guidance for the Instruction to Experts in Civil Claims 2014 set out by the Civil Justice Council on complying with CPR35 and PD35 Board of Actuarial Standards: Technical Actuarial Standard D: Data. Significant Considerations (November 2009) International Standard on Assurance Engagements 3000 (January 2005) The International Standard on Auditing 320 (December 2009) Jersey (Banking Business (Jersey) Law 1991) The Isle of Man (Financial Services Act 2008) Website address _en.pdf pdf CFC59A029575E dd8e735c37/TAS-D-Data-Significant-considerations-Nov-09.pdf pdf /FinancialServicesAct2008_2.pdf EY 398

403 Appendix 2 Hyperlinks to regulatory and professional guidance Document name SYSC 8 Outsourcing requirements FSMA Section 166 PS21/16 SS9/16 CRR Article 113(6) Freedom of Information Act 2000 Financial Services Act 2012 The EU Bank Recovery and Resolution Directive (BRRD) Capital Requirements Directive (CRD IV) Capital Requirements Directive (2013/36/EU) (CRD) Capital Requirements Regulation (575/2013) (CRR) The UK Corporate Governance Code Financial Reporting Council (April 2016) ICAEW Technical Release TECH 15/14FSF Guidance for skilled persons reviews (Under Finance Services and Markets Act 2000 as amended by the Financial Services Act 2012, Section 166 and Section 166A) Website address EE4C1CD05E8976DE ad76a322873c/uk-corporate-governance-code-april-2016.pdf EY 399

404 Appendix 3 Legislative and regulatory background 39. Appendix 3 Legislative and regulatory background Amendments to the FSMA The BRA inserted a number of additions to the FSMA. The BRA required the PRA to extend its remit to cover ring-fencing and ring-fenced bodies, and to ensure one of its primary objectives is to protect the continuity of the provision of core services and activities 23. The FCA was also given a new contingent continuity objective under BRA. The contingent continuity objective is to ensure that in the event the FCA becomes responsible for regulating a core activity, it would also have the additional objective to protect the continuity of core services associated with that activity. Finally, in order to protect the continuity of the banking industry, the BRA gave Her Majesty s Treasury (HMT) more power to prohibit actions of ring-fenced banks in particular situations, specifically considering a ring-fenced bank s exposure to risk or failure. 24 Regulatory background Overview of the UK Financial Services Regulatory System Since 2013, UK banks have been authorised by the PRA and supervised and regulated by both the PRA and FCA. Santander UK is authorised in the UK by the PRA and regulated by the PRA and FCA. SLB is also subject to regulatory oversight from the FCA. The following summarises the roles and responsibilities of the regulators in the UK in supervising the Santander UK Group. Prudential Regulation Authority The PRA acts as the UK prudential regulator and supervisor of banks, building societies, credit unions, insurers and major investment firms. Santander UK, ANTS and CAL are authorised by the PRA, and regulated by both the PRA and the FCA. Although the PRA does not have direct prudential supervisory powers over SLB (this is the responsibility of the ECB), it is concerned with its potential to impact UK financial stability. The PRA works with the ECB in prudential supervision to ensure that the resolution strategy for the whole firm takes account of the branch s potential impact on UK financial stability 25. It also has recourse to precautionary action where there is any threat to the collective interests of depositors, investors, and clients in the UK. In regard to the banks it supervises, the PRA s statutory objectives are to: Promote the safety and soundness of the firms it regulates; and Facilitate effective competition in the market. 23 FCA Guidance consultation 15/5 24 Financial Services (Banking Reform) Bill Explanatory Notes Supervisory Statements SS10/14 EY 400

405 Appendix 3 Legislative and regulatory background Financial Conduct Authority As noted above, the FCA is also involved in the regulation of Santander UK, ANTS and CAL with a focus on conduct regulation. SLB is part of an established bank in the EEA, giving Banco Santander Passporting rights into the UK. However, SLB is subject to certain of the FCA s Handbook provisions, including the Conduct of Business rules and is supervised by the FCA on this basis. In practice, this means that the FCA is able to impose enforcement action upon Banco Santander for failure to comply with these rules 26. The FCA has an overarching strategic objective to ensure markets function well. This objective is underpinned by the following operational objectives to: Protect consumers securing an appropriate degree of protection for consumers; Protect financial markets the orderly operation of the financial markets as one part of the integrity of the financial system; and Promote competition promoting effective competition in the interests of the consumer. Payment Services Regulator (PSR) The PSR is a subsidiary of the FCA but, as an independent economic regulator, is responsible for regulating: The eight HMT designated payment systems: BACS, CHAPS, Faster Payments Scheme, LINK, Cheque and Credit, Northern Ireland Cheque Clearing, MasterCard and Visa; The participants in those payment systems (such as banks, building societies and other payment service providers); and The infrastructure providers for payment systems. Financial Ombudsman Service (FOS) The FOS is an independent and impartial association providing dispute resolution services for financial services in the UK, set up under FSMA. It is partly funded by levies on firms which conduct the activities covered by its dispute resolution service, in a manner that is proportionate to the amount of such activities each firm conducts in the market. The scope of FOS jurisdictions depends on the type of particular activity to which the complaint relates (e.g. regulated activity, payment services, secured and unsecured lending, ancillary banking services), the place where the activity to which a complaint relates was carried on (e.g. UK for most products, but includes EEA for collective portfolio management and alternative investment fund managers), whether the complaint is eligible (e.g. a consumer, micro-enterprise, charity, trustee), and whether the complaint was referred to the FOS in time Supervisory Statements SS10/14 27 FCA Handbook DISP EY 401

406 Appendix 3 Legislative and regulatory background Financial Services Compensation Scheme (FSCS) The FSCS is the UK s statutory compensation fund of last resort for customers of financial services firms authorised by the PRA and FCA. Under FSMA, both the PRA and the FCA are responsible for ensuring that the scheme manager of the FSCS is capable of exercising its functions, and for making rules in relation to compensation under the FSCS. The PRA sets out its applicable rules in relation to the FSCS in the Depositor Protection and Policyholder Protection sections of the PRA Rulebook, with the FCA setting out its rules in the Redress section of the FCA Handbook. The FSCS ensures that should a financial services firm become unable, or be likely to become unable to satisfy claims against them, the FSCS will compensate such customer claims of financial loss, subject to certain compensation limits. As recommended by the ICB and enacted by the BRA, from 1 January 2019, deposits which are eligible for compensation under the FSCS are to be given preference in the insolvency hierarchy if a bank enters insolvency. As set out in the FCA s COMP Handbook, firms 28, large companies, large partnerships, collective investment schemes and alternative investment funds are not covered by the FSCS). Note: COMP 4.2 of the FCA Handbook gives exceptions to this (such as sole trader firms, credit unions and trustees of a stakeholder pension schemes, amongst others). Regulatory Background Overview of the European Financial Market Authorities The following summarises the roles and responsibilities of the regulators in Europe in supervising Banco Santander and SLB. European Central Bank The ECB acts as the central bank of the 19 EU countries which have adopted the euro and sets the monetary policy of the Union. The ECB, together with the national central banks (NCBs), constitute the European System of Central Banks (ESCB) for all European Union (EU) Member States. Since 2014 significant banks in Europe have also fallen under the direct supervisory remit of the ECB in line with the provisions of the Regulation on SSM (see for further details). Banco Santander in Spain qualifies as a supervised entity due to its size and therefore falls under the direct regulatory supervision of the ECB. SLB is authorised and regulated in line with Banco Santander by virtue of being part of the same legal entity. Banco de España (BdE) The BdE is the national central bank of Spain and, as a national competent authority (NCA), shares its domestic supervisory responsibility for Spain with the ECB. Its activity is regulated by the Law of Autonomy of the BdE in Spain. It is responsible for promoting the smooth functioning and stability of the financial system and its functions include: Supervising solvency and compliance with the specific rules of credit institutions, other entities and financial markets, for which it has been assigned supervisory responsibility; Providing treasury services and acting as financial agent for government debt; and Supervising retail conduct risk. 28 FCA Handbook COMP 4.2 EY 402

407 Appendix 3 Legislative and regulatory background Comisión Nacional del Mercado de Valores The Comisión Nacional del Mercado de Valores (CNMV) is the agency in charge of supervising and inspecting the Spanish Stock Markets and the activities of all participants in those markets. It was created by the Securities Market Law, which instituted in-depth reforms of this segment of the Spanish financial system. The purpose of the CNMV is to ensure the transparency of the Spanish market and the correct formation of prices in them, and to protect investors. The CNMV is also responsible for supervising wholesale conduct risk. The SSM and ECB The ECB directly supervises 129 significant banks in participating countries. These banks represent 82% of banking assets in the Euro area 29. Banco Santander is one of these banks. The SSM is the system of banking supervision in Europe. It is a system headed by the ECB, involving the participating national supervisory authorities. Its main aims are to: Ensure the safety and soundness of the European banking system; Increase financial integration and stability; and Ensure consistent supervision. As an independent EU institution, the ECB oversees banking supervision from a European perspective by: Establishing a common approach to day-to-day supervision; Taking harmonised supervisory actions and corrective measures; and Ensuring the consistent application of regulations and supervisory policies. Joint Supervisory Teams (JSTs) JSTs comprise staff of the ECB and relevant national supervisors. Their role is to ensure that European wide banking supervision is carried out effectively and consistently for those Banks considered to be significant. JSTs carry out the day to day supervision of significant entities on behalf of the ECB. Banco Santander and its operations are considered significant and, as a result, ongoing supervision is carried out by a dedicated JST. The JST meets quarterly and is ultimately responsible for implementing the supervisory tasks and activities included in the Supervisory Examination Programme for Banco Santander, as well as carrying out the thematic and geographic supervisory objectives. Fondo de Garantía de Depósitos de Entídades de Crédito (DGS Spain) The DGS Spain is Spain s statutory compensation fund of last resort for customers of financial services firms authorised by the BdE and ECB. This provides similar protection to that of the UK s FSCS, and was established to provide compensation in the event that financial services firms becomes unable, or are likely to become unable, to satisfy claims against them. The DGS Spain will compensate such customer claims where they are related to regulated activity. The objective of DGS Spain is to guarantee deposits and securities held by credit institutions, up to the limit of 100,000. DGS Spain was established in its current form by virtue of Royal Decree Law 16/2011, on 14 October It has its own legal form and full capacity to fulfil its functions and is headquartered in Madrid. 29 European Central Bank Banking Supervision Supervisory statistics EY 403

408 Appendix 3 Legislative and regulatory background Additional applicable regulations and rules Banking Recovery and Resolution Directive (BRRD) Alongside the introduction of the Financial Services Act 2012 and the BRA, directives and legislation have been introduced to enhance the financial strength of RFIs and ensure they can be resolved in the event of a future failure. The BRRD, introduced across the EU from 1 January 2015, aims to manage bank failure through crisis planning. Banks are required to produce recovery and resolution plans and authorities have the ability to intervene in the operation of a bank. This is in order to avoid the impact of another financial crisis on public finances, as witnessed in The EBA has developed further requirements for recovery and resolution plans. To protect financial stability of the UK banking industry, the UK s Special Resolution Regime (SRR) works with the PRA and FCA and the Bank of England to provide tools to implement the BRRD. Basel III Basel III was endorsed in 2010 by the G20 (Group of 20) and aims to reform banking prudential regulation with measures developed by the Basel Committee on Banking Supervision. These measures aim to strengthen the regulation, supervision and risk management of the banking sector by: Improving the banking sector s ability to absorb shocks arising from financial and economic stress; Improving risk management and governance; and Strengthening banks transparency and disclosures. Capital Requirements Directive IV (CRD IV) The role of the CRD IV is to transpose Basel III global standards on bank capital into EU and national law, including bank bonus caps, liquidity reporting requirements, design of the countercyclical buffer and reporting of tax paid. CRD IV is made up of the Capital Requirements Directive (2013/36/EU) (CRD) which must be implemented through national law; and the Capital Requirements Regulation (CRR), which is directly applicable to firms across the EU. Within the framework of CRD IV, the PRA has substantial discretion as to how to manage banks capital requirements. The PRA is in the process of fully implementing revised capital standards, which are due to be in force by The core elements of the capital framework include: Agreed international standards based on Basel III to reduce the probability of banks failing; Additional capital buffers to enable banks to absorb losses without sharp cuts in lending when an economy is under stress; and New additional capacity to ensure that banks can avoid losses if they fail, facilitating the orderly resolution of banks, minimising the impact on the economy and avoiding the use of public funds. Capital adequacy is expressed as a ratio of capital to a bank s assets. Two main measures are used: risk weighted and leveraged exposures. The risk weighted measure assigns weights to a bank s assets to reflect their relative risk of incurring loss. The leverage measure captures the total value of a bank s assets, regardless of their riskiness. The PRA s 2019 capital adequacy framework is made up of a variety of different capital types and other elements. EY 404

409 Appendix 3 Legislative and regulatory background Types of Capital CET1 the highest quality of capital which can absorb any losses. Only perpetual capital instruments count as CET1 and any dividend payments on these instruments must be discretionary. Tier 1 capital CET1 along with AT1 capital makes up the sum of capital instruments that a bank can use to cover losses while remaining a going concern. AT1 includes perpetual subordinated debt instruments that have conversion or write down features. Tier 2 capital can absorb losses once a bank is a gone concern, but may not be able to avoid losses while the bank is a going concern. Tier 2 instruments do not need to be permanent and may have nondiscretionary coupons. Total Loss Absorbing Capacity (TLAC) is a global standard, effective from 1 January It requires G- SIBs to issue sufficient amounts of long-term debt in a form that means the banks can absorb losses, should they be put into resolution. In the EU this requirement has been implemented through MREL and each bank has been set its own MREL requirement by its regulator. Capital requirements of Santander HoldCo The following details the capital requirements of Santander HoldCo used in the assessment, which apply equally to the RFB Sub-Group given that there is no other subsidiary or material assets or liabilities in the HoldCo consolidation: The Pillar 1 and Pillar 2A capital requirements are driven by risks the entity is exposed to. The Countercyclical Capital Buffer and Capital Conservation Buffer requirements are driven by CRD IV capital requirements. The Systemic Risk Buffer is an additional requirement for RFBs. The Pillar 1 minimum capital requirement is 8%, of which 4.5% must be CET 1, 6 % Tier 1 and 8% Total Capital. Pillar 1 capital requirements are driven by credit risk, market risk and operational risk. Pillar 2A capital requirements are driven by additional risks not considered under Pillar 1 e.g. credit concentration risk, interest rate risk in the banking book (IRRBB) and pension risk. Pillar 2A requirements must be met by at least 56% of CET 1 but not exceed 44% of AT1 or 25% of Tier 2. Pillar 2B capital requirements are driven by the firm s own assessment of its firm-specific and marketwide stress testing. Individual Capital Guidance this is an additional capital requirement set by the PRA as a percentage of Pillar 1 RWA plus one or more static add-ons for additional Pillar 2A risks. It is set in light of both the calculations in the ICAAP Process document and the PRAs own Pillar 2A methodologies. Capital Conservation Buffer a buffer of 2.5% of CET 1 capital to be built up outside of a stressed period and can be used to absorb losses during times of stress so that the firm can avoid breaching minimum regulatory capital requirements. Countercyclical Capital Buffer a buffer of CET 1 capital varied over the financial cycle to match resilience against risk. This is to ensure that the banking system is able to withstand stress without restricting essential services such as the supply of credit to the real economy. The Financial Policy Committee of the Bank of England (FPC) sets this figure, and it is expected to be set up to 2.5%. Under business as usual this is expected to be set at a rate of 1%. Systemic Risk Buffer a buffer of 0-3% of CET 1 Capital set for ring-fenced banks to reduce their probability of failure or distress. The initial rates will be set by the PRA in early 2019 and will apply three months after being set. Thereafter the rates will be set and announced annually and will apply the second calendar year after they are set. PRA Buffer an additional firm specific buffer set by the PRA to cover risks not covered elsewhere and losses that may arise under a stressed scenario. Internal Management Buffer this represents the risk appetite of the bank above the minimum regulatory capital requirements, which is approved by Board to ensure that the bank has sufficient capital resources to absorb additional losses based on the outcomes of the stress testing scenarios. EY 405

410 Appendix 3 Legislative and regulatory background PRA 2019 Capital Framework Core (Tier 1 and CET1) Pillar 1 (core) requirement that banks must hold Tier 1 capital to the value of 6% of their RWAs and CET1 to the value of 4.5% of their RWAs. The CET1 capital is the highest quality capital and absorbs losses in the widest range of circumstances. Buffers (CET1) Capital conservation buffer a buffer of 2.5% CET1 capital that can be used to absorb losses whilst avoiding breaching minimum requirements. Countercyclical capital buffer a buffer of CET1 capital varied over the financial cycle to match resilience against risk. The FPC of the Bank of England sets this figure, and it is not expected to be greater than 2%. Global systemic importance buffer a buffer set for globally systemic banks to reduce their probability of failure or distress linked with the impact that it could have for the global economy. It is set between 0 and 2.5% of CET1 capital. Systemic risk buffer a buffer of 0-3% of CET1 Capital set for ring-fenced banks to reduce their probability of failure or distress. It is set by the PRA. Additional supervisory requirements Pillar 2A an adjustment to Tier 1 minimum requirements set by the PRA to reflect additional risk such as trading book and pension scheme deficits. PRA Buffer an additional firm specific buffer set by the PRA to ensure that banks more at risk of loss have additional capital buffers Going concerns and total loss absorbing capacity total loss absorbing capacity encompasses systemwide equity requirements and other loss absorbing capacity circa 23% of RWAs. Leverage ratio The FPC also sets a leverage ratio for banks. As a baseline standard, this framework is for major banks and building societies to satisfy a minimum Tier 1 leverage ratio of 3%. An additional buffer is added to be equivalent to 35% of systemic and countercyclical buffers, resulting in a Tier 1 leverage ratio requirement of circa 4.2%. EY 406

411 Appendix 3 Legislative and regulatory background Creditor hierarchy The creditor hierarchy refers to the order in which different classes of creditors receive funds during insolvency proceedings. If a creditor s position in the hierarchy falls, the uncertainty increases as to whether they will receive the payments that are due to them from the bank, should the bank become insolvent. Creditor hierarchy position on insolvency UK legislation The creditor hierarchy position that would apply on an insolvency is set out in the Insolvency Act 1986 (IA 1986) and incorporates recent amendments made as a result of BRA, the Banks and Building Societies (Depositor Preference and Priorities) Order 2014 (the 2014 Order ) and The Deposit Guarantee Scheme Regulations 2015 (the 2015 Scheme Regulations ). This creditor hierarchy, as depicted in Table 208, took effect from 1 January 2015 and I am currently unaware of any proposed changes to this. As far as I am aware, there is nothing in the legislation that alters or amends this position for a UK entity. Table 208: Creditor hierarchy for a UK entity Ranking Creditor hierarchy 30 Comments 1 Fixed charge holders (i.e. security in the form of mortgage, fixed charge, pledge lien) This includes capital market transactions (e.g. covered bonds) and trading book creditors (e.g. collateralised positions) 2 Liquidators fees and expenses 3 Preferential creditors (ordinary): i. Employees with labour-related claims ii. Eligible depositors up to the FSCS protected limit (the equivalent of 100,000; currently 85,000) 4 Preferential creditors (secondary): i. Eligible Depositors for amounts in excess of the FSCS protected limit (the equivalent of 100,000; currently 85,000) Applies to all protected (eligible) depositors including individuals, micro, small, medium and large sized enterprise up to the FSCS protected limit and FSCS taking the place of all protected (eligible) depositors in the event they have been paid by the FSCS Applies to all eligible protected depositors excluding large sized enterprise 5 Floating charge holders 6 Unsecured senior creditors This includes all ineligible depositors (including large sized enterprises for amounts in excess of the FSCS protected limit) 7 Subordinated creditors 8 Interest incurred post-insolvency 9 Shareholders (preference shares) 10 Shareholders (ordinary shares) 30 Note: All creditors within each category rank equally amongst themselves. EY 407

412 Appendix 3 Legislative and regulatory background Creditor hierarchy position on insolvency Spanish legislation The European regulation 2014/59/UE BRRD, banking recovery and resolution directive has been directly transposed into Spanish Law (Royal Decree 11/2015 of June 2018). The creditor hierarchy to apply in a resolution scenario for a Spanish entity is the same that is included in the BRRD. However, a potential creditor will need to ensure that the principle of No Creditor Worse Off in Liquidation (NCWOL) applies as the insolvency ranking is unique from country to country. Any application of bail-in or non-viability conversion shall be in accordance with the hierarchy of claims in normal insolvency proceedings. Another consideration is the different treatment applied to subsidiaries and branches, when the preferred group strategy is multiple point of entry, as is the case for the Banco Santander Group. If a Banco Santander subsidiary, for example Santander UK, is failing or likely to fail, then the UK Resolution Authority (the Bank of England) will conduct that procedure under UK Law. In the case of branches (e.g. SLB) the main entity (Banco Santander) will be responsible for its financial health and UK resolution would not apply directly to it; resolution would always apply to SLB through Banco Santander in Spain and the Spanish Resolution Authority (the Fund for Orderly Bank Restructuring). Taking these factors into consideration, figure 19 provides a summary of the UK and Spanish creditor hierarchy and insolvency ranking. Figure 19: Comparison between UK and Spanish creditor hierarchy and insolvency ranking (left Spain, and right UK) Ranking Creditor Hierarchy (Spain) Ranking Creditor Hierarchy (UK) 11 Claims against the insolvency estate 1 Fixed charge holders (i.e., security in the form of mortgage, fixed charge, pledge line) 10 Claims with special privilege 2 Liquidator fees and expenses 9 Other claims with general privilege 3 Preferential creditors (ordinary): i. Employees with labour-related claims ii. Eligible depositors up to the FSCS protected limit (the equivalent of 100,000; currently 85,000) 8 Covered deposits 4 Preferential creditors (secondary): i. Eligible Depositors for amounts in excess of the FSCS protected limit (the equivalent of 100,000; currently 85,000) 7 Preferred deposits exceeding coverage 5 Floating charge holders 6 Ordinary claims 6 Unsecured senior creditors 5 Other subordinated debt 7 Subordinated creditors 4 T2 8 Interest incurred post-insolvency 3 AT1 9 Shareholders (preference shares) 2 Specific Subordinated Claims 10 Shareholders (ordinary shares) 1 CET1 EY 408

413 Appendix 4 Comparison of UK and Spanish regulations 40. Appendix 4 Comparison of UK and Spanish regulations Introduction Customers of Banco Santander Group may be subject to changes in the level of conduct related regulatory protection arising from the transfer of relationships and business under the Scheme. A key element of the Scheme requires the transfer of prohibited, and some permitted, products and business from ANTS and Santander UK to Banco Santander (including SLB). The levels of protection afforded to customers, under the applicable regulatory frameworks of the transferor jurisdiction (UK) and the transferee jurisdiction (Spain), have been reviewed to identify any areas of significant divergence. Whilst there may be incidental differences in the application of the EU regulatory framework across the UK and Spain, the regulatory requirements relevant to the direct protection of the customers of both the transferor jurisdiction and transferee jurisdiction are broadly consistent and will remain so following the transfers of business under the Scheme. Approach In undertaking the comparison, the high-level thematic requirements under the regulatory framework of the UK have been reviewed, and the equivalent protection(s) available to customers under the regulatory framework of Spain have been identified. This included the following key themes: Regulatory Principles for Businesses and Individuals; Conduct of Business Rules including sales and marketing, advertising, product description, advice, trade execution, confirmations and settlement, complaints and redress; Depositor and Financial Services Compensation Schemes; Client money and client asset protection; and Market conduct rules. Summary The main country of business of the transferors, Santander UK and ANTS, is the UK, while the transferee, Banco Santander, is domiciled in Spain. The London branch of Banco Santander, to which transfers will be made under the Scheme, operates in the UK and is subject to FCA conduct regulation. Whilst the application of the regulatory framework within each constituent member country may and does indeed differ, the regimes fall under a broad regulatory framework at the EU level. This is derived from supranational Directives and Regulations, which rely on a system of mutual recognition and equivalency across the 28 EU member states. Across a number of regulatory areas critical to ensuring customer protection, there are broad similarities between the regulatory frameworks applicable to a UK transferor and a Spanish transferee. For example: Regulation governing the conduct of business is largely driven at a supranational level by for example, the Markets in Financial Instruments Directive (MiFID) for UK conduct of business rules (COBS) and the Market Abuse Directive for UK market conduct requirements. The conduct of business rules in the UK apply equally to UK firms and incoming EEA Branches (i.e. SLB). Therefore, customers transferring from Santander UK or ANTS to SLB will experience no change in the level of regulatory protection they are currently afforded in this regard; With regard to customers transferring from Santander UK or ANTS to Banco Santander (including SLB) the UK and Spanish domestic regulators have both adopted the EU Directives and whilst certain differences do exist, domestic regulations apply broadly equivalent levels of regulatory protection; and Depositor protection is governed by the Deposit Guarantee Scheme across the EU. Under the UK s FSCS, customers are afforded deposit protection up to a limit of 85,000. Under the Spanish regulatory framework, customers are afforded deposit protection up to a limit of 100,000. EY 409

414 Appendix 5 Interpretation of credit ratings 41. Appendix 5 Interpretation of credit ratings A credit rating is an expression of the likelihood that a debtor will be able to repay their debt and, by implication, the risk that said debtor will default. Ratings agencies issue both short-term and long-term ratings. A short-term rating refers to the debtor s predicted ability to repay their debts within 12 months of the rating being issued, while long-term ratings look at the period beyond 12 months. Long-term ratings therefore need to take into account wider, longterm economic issues which may affect the debtor s ability to pay beyond the immediate future. A ratings Outlook can be applied to both long and short-term ratings to indicate the direction that a rating is likely to move over a one-to-two year period. Outlooks take into account financial and political trends that, should they continue, are expected to have an effect on the rating. If a rating is judged to have a higher than usual probability of change, it may be placed on Watch. For example, a rating which is assigned Rating Watch Positive (RWP) could stay at its present level but has a heightened probability of being upgraded. Table 209 outlines the long-term rating credit ratings provided by Moody s, Standard & Poor's and Fitch Ratings, matching them by rating description. Table 209: Credit rating agency long-term credit rating mapping Source: BCBS 31 and Global Credit Rating Co 32 Moody s S&P Fitch Rating description Aaa AAA AAA Investment grade: highest credit quality. Aa1 AA+ AA+ Investment grade: very high credit quality. Aa2 AA AA Aa3 AA- AA- A1 A+ A+ Investment grade: high credit quality. A2 A A A3 A- A- Baa1 BBB+ BBB+ Investment grade: adequate protection factors and considered Baa2 BBB BBB sufficient for prudent investment. However, there is considerable variability in risk during economic cycles. Baa3 BBB- BBB- Ba1 BB+ BB+ Below investment grade: some capacity for timely repayment exists. Ba2 BB BB Ba3 BB- BB- B1 B+ B+ Below investment grade: possessing risk that obligations will B2 B B not be met when due. B3 B- B- Caa1 CCC+ CCC+ Well below investment grade: considerable uncertainty exists as to timely payment of principal or interest. Caa2 CCC CCC Caa3 CCC- CCC- Ca CC CC C C C 31 Bank for International Settlements Long-term Rating Scales Comparison 32 Global Credit Rating Co. Rating Scales & Definitions EY 410

415 Appendix 6 Banco Santander Group permitted and prohibited products and services 42. Appendix 6 Banco Santander Group permitted and prohibited products and services Table 210 outlines the types of permitted products or permitted business that can be provided by Santander UK (the RFB) and the prohibited products or business that cannot. It is important to note that depending on customer type, permitted products may not always be offered by Santander UK (the RFB), but may be offered by another entity with Banco Santander Group. For example, corporate customers may have access to simple derivatives, from both Santander UK (the RFB) and from other entities. In addition, some prohibited transactions are permitted if they are used by the RFB for hedging, default risk management and liquidity management purposes and as indicated some permitted products cannot be accessed from RFB by RFIs or where a prohibited exposure to an RFI will be created. Table 210: Banco Santander Group Permitted and Prohibited products Source: Santander 2017 Product Matrix (Retail, Corporate) RFB Permitted Deposits Sterling Current Accounts and overdrafts Currency Accounts and overdrafts Deposit Accounts Cash management and payments Money Transmission Services Payments Services including international payments Cash Management Lending Commercial Mortgages Revolving Credit Facilities Lending and Asset Finance (leasing and equipment finance, confirming, invoice financing, receivables financing) Permitted Project Finance (incl. infrastructure, acquired, leveraged) Trade Finance (bonds and guarantees, trade bills and promissory notes, other permitted trade finance) Syndicated Loans RFB Prohibited Complex Derivatives Structured and leveraged FX products (FX Vanilla Options with maturity >3 years, NDFs, Time Options) European Swaptions with maturity >5 years, other Swaptions, Gilt Lock Inflation Swaps (RPI/CPI) and Options Equity Derivatives (Equity Single Stock Options, Equity TRS) Structured Interest Rate Swap, Cross Currency Swap, Asset swaps Futures Debt Capital Markets Prohibited Project Finance (acquisitions) Loan Underwriting Asset & Capital Structuring (Long Life/Lending) (Equity like/seed Equity) Structured Trade Finance (Documentary Trade, Export Finance) Stock borrowing/lending Repurchase Agreements Securitisation (securitised lending, buy-to-let warehousing) Bilateral Loans Simple Derivatives Vanilla FX (Spot, Forwards, Swaps) Vanilla Interest Rate Swaps European Swaptions with maturity <5 years EY 411

416 Appendix 7 The Skilled Person 43. Appendix 7 The Skilled Person Skilled Person CV John Cole I am appointed as Skilled Person on the Scheme. My experience, knowledge and expertise over many years make me ideally placed for this critical role. I am personally independent of the Banco Santander Group. CV and qualifications I joined EY having taken a degree in chemistry from the University of Bristol. I am a Fellow of the Institute of Chartered Accountants in England & Wales and a Member of the Chartered Institute for Securities & Investment. I was admitted to the partnership in 1988 and since then have been involved in a number of high profile and/or sensitive engagements. I am on the list of EY s skilled persons for s166 appointments. Some of my recent experience is given below: Part VII involvement through capital optimisation of a number of disparate closed life funds. Recent banking experience includes: Business plan review on a building society on behalf of the Shareholder Executive and HMT; Assisting an Icelandic bank in preparing a business plan for restructuring; Business plan review of a major UK retail bank on behalf of the Shareholder Executive and HMT; Working with the administrators of an Icelandic bank on the optimal resolution to preserve the value of existing assets; Due diligence review of loan books for two Irish retail banks; Leading the EY due diligence team supporting a potential acquirer of Irish owned UK retail bank; A partner on the team working for the Central Bank of Ireland on the Prudential Capital Assessment Review (PCAR) work; Joint lead on the 2013 PCAR work for the Central Bank of Ireland; Joint lead on S166 reviews for the PRA in connection with UK retail banks; Leading the central team coordinating EY s response to the ECB s Comprehensive Assessment in 2014; and From 2008 until 2015 I was an elected partner representative on both EY s Global Europe, Middle East, India and Africa (EMEIA) Boards where latterly I chaired the Audit and Finance Committees. EY 412