APS ASSET MANAGEMENT FRAMEWORK This document constitutes the Asset Management Framework applicable to The Royal Bank of Scotland plc’s (“RBS”) participation in the UK Asset Protection Scheme (“APS”), as referred to in the terms and conditions of the APS set out in the document entitled “UK Asset Protection Scheme Terms and Conditions” which is in agreed form (the “Conditions”). This document is a Scheme Document. This Asset Management Framework and all Information contained in it constitutes Participant Confidential Information for the purposes of Condition 42 (Confidential Information and Restricted Asset Information). Capitalised terms used but not defined in this document have the meanings given to them in the Scheme Documents or the RBS glossary of terms (set out at Appendix 3), as applicable. This Asset Management Framework will be reviewed by the SOC, in consultation with the Commissioners of Her Majesty’s Treasury (the “Treasury” or “HMT”), no less frequently than semi-annually during 2010 and annually thereafter, to determine any modifications to this Asset Management Framework that the SOC or HMT reasonably considers to be necessary or appropriate for the purpose of ensuring that this Asset Management Framework complies with the Scheme Documents and addresses areas where the operation of this Asset Management Framework (including the effect of any thresholds) has turned out to be deficient or has had unintended or inappropriate consequences. In considering any proposed modification, the SOC will ensure that the same is consistent with Condition 10 and the other requirements of the Conditions. If any modifications are determined to be required such modifications must be approved and communicated and approved as below. No part of this Asset Management Framework may be modified or disapplied, nor any proposed modification implemented or adopted, without the prior written approval of the Scheme Head, the responsible APS Compliance Officer, Representatives of Group Legal and Group Regulatory Risk, the SOC and the Treasury in writing. 2 INTRODUCTION AND CONTENTS The Conditions regulate the conduct of personnel with respect to all aspects of the Management and Administration of the Protected Assets and certain Related Party Assets (see below). These requirements cover, amongst other things: (i) all amendments to Covered Assets (including increased lending commitments and Rollovers); (ii) disposals of Covered Assets; and (iii) specific types of conduct which constitute Prohibited Conduct unless approved in accordance with the Conduct Approvals Hierarchy set out in this document. The overarching requirement in the Conditions is that all Protected Assets should be Managed and Administered in accordance with the Asset Management Objective, namely “to maximise the expected net present value of the Protected Assets, including by minimising losses and potential losses and maximising recoveries and potential recoveries”. Net present value is to be assessed on a risk-adjusted basis using a discount rate corresponding to the Treasury’s cost of funds being derived from the new loan fixed rates and premature prepayment fixed rates for maturity loans of the Public Works Loan Board published on the website of the Debt Management Office of Her Majesty’s Government, or (at HMT’s option) a similar government rate from time to time. However, the Asset Management Objective need not be complied with where RBS (or the other relevant member of its group) is Managing and Administering the relevant Protected Assets in accordance with specific requirements applied to Blind Pool Assets. The obligation to manage a Protected Asset in accordance with the Asset Management Objective is also qualified, in the relevant circumstances, by Conditions 10.12, 10.14 and 10.21. Given that the above requirements may give rise to a Conflict, the Conditions also require development of, and compliance with, a Conflicts Management Policy. This is supplemented by a requirement that certain Related Party Assets which will or are likely to give rise to a Conflict, (or, broadly, which are treated as Related Party Assets pursuant to RBS’s Credit Aggregation Policy) must also be Managed and Administered to ensure that the Asset Management Objective is satisfied with respect to the Protected Assets, although this requirement does not apply where RBS (or the other relevant members of its group) is Managing and Administering the relevant Related Party Assets in accordance with the requirements applied to Blind Pool Assets. The obligation to Manage and Administer a Related Party Asset to ensure that the Asset Management Objective is satisfied with respect to Protected Assets is also qualified, in the relevant circumstances, by Conditions 10.12, 10.14 and 10.21. It is acknowledged that some Covered Assets may be Managed and Administered by entities outside the RBS Group pursuant to the requirements of Condition 11. The contents of this document set out how RBS proposes to ensure compliance with the Conditions referred to above through adopting the following procedures: 1. The identification of all Protected Assets or Related Party Assets as Blind Pool Assets; 2. A governance framework; 3. Approval procedures and hierarchy for various decisions regarding the Protected Assets and the Related Party Assets (including the Conduct Approvals Hierarchy required under Condition 12.3) (any such approvals hierarchy referred to in this document being the “APS Approval Hierarchy”); and 4. Monitoring and Administration in respect of the Protected Assets and Related Party Assets, including the Blind Pool Assets. In addition, this document has four appendices: • Appendix 1: Commercial strategies • Appendix 2: Conflicts Management Policy • Appendix 3: RBS Glossary • Appendix 4: Management and Administration Process Maps The terms of this document are qualified by the terms of the Transitional Exceptions Document which sets out certain matters which the Treasury must take into consideration in exercising its 3 rights in connection with a breach of certain Conditions relating to the Management and Administration of the Protected Assets during the transitional period specified in the Transitional Exceptions Document. 4 1. "Blind" and "Sighted" Assets In order to apply a strict control environment to the Protected Assets and Related Party Assets that complies with the Conditions, RBS will identify which are to be Managed and Administered as Blind Pool Assets in accordance with Condition 10.18. • "Blind" pools of Protected Assets and Related Party Assets ("Blind Pool Assets") will be Managed and Administered, subject to the following paragraphs, by RBS personnel that do not know (and are not authorised to access any Information which will enable them to determine) which assets and exposures are Protected Assets or Related Party Assets. • "Sighted" pools of Protected Assets and Related Party Assets will be Managed and Administered by RBS personnel that do know (and/or are authorised to access any Information which will enable them to determine) which assets and exposures are Protected Assets or Related Party Assets. Blind Pool Assets RBS need not ensure that the Management and Administration of any Blind Pool Asset is undertaken in accordance with the Asset Management Objective and in accordance with the requirements specified in Condition 12 in respect of Prohibited Conduct as specified under Condition 12.2(A). All other Conditions relevant to the Management and Administration of Protected Assets and Related Party Assets (including the Asset Management Conditions) will continue to apply to Blind Pool Assets. In accordance with Condition 10.18, a Protected Asset or Related Party Asset is deemed to be Managed and Administered as a Blind Pool Asset if it satisfies the requirements of Condition 10.18 and it is a: • Retail Protected Asset or Related Party Asset which falls within the “Consumer Finance” or “Residential Mortgage” Covered Asset Classes as specified in the Conditions; • SME Protected Asset or Related Party Asset which falls within the “Consumer Finance” Covered Asset Class as specified in the Conditions; • Protected Asset or Related Party Asset which falls within the “Loans” or “Lease Finance” Covered Asset Classes, which has been Managed and Administered by RBS’ Lombard Division at all times since 31 December 2008 and which has a Covered Amount (as specified in the Initial Data) equal to or less than *** (or its equivalent); and • GBM Related Party Asset on the public-side (which, in compliance with applicable regulatory rules, is Managed and Administered in accordance with the Conflicts Management Policy behind “Chinese walls” independently of the Management and Administration with respect to any Covered Assets) In order that RBS is not required to ensure that the Management and Administration of Blind Pool Assets is undertaken in accordance with the Asset Management Objective and in accordance with the requirements of Condition 12 in respect of Prohibited Conduct specified under Condition 12.2(A), RBS will enforce strict controls to maintain the “blindness” of these “Blind” pools. Personnel Managing and Administering Protected Assets and Related Party Assets in these pools will not be authorised to access such Information (including on the relevant systems) that identifies whether any assets are Protected Assets or Related Party Assets. A very restricted population of senior managers and Risk and Finance personnel will have access to this Information; these personnel will be trained in APS compliance issues and *** Indicates omitted information. 5 will only be allowed to influence the Management and Administration of a Blind Pool Asset to the extent they do so in accordance with the Asset Management Conditions (including the Asset Management Objective and the provisions of the Conditions covering Prohibited Conduct). "Sighted" individuals in respect of a Blind Pool Asset will be limited to individuals with reporting and monitoring responsibilities across the portfolios of assets and exposures, but without any capacity to influence any single asset or exposure’s decision-making process. APS Compliance Teams centrally will be sighted only at the level necessary to ensure compliance with the applicable Asset Management Conditions and will participate in any decisions regarding portfolios of Blind Pool Assets rather than single Blind Pool Assets (e.g. outsourcing, securitisations and disposals). As examples, this may apply when Credit Scoring principles are changed (e.g. in relation to the asset continuity rules in Retail) or where there is a decision to sell a business or portfolio of Blind Pool Assets or to securitise the relevant assets and exposures. RBS will also monitor the Asset Actions relating to Blind Pool Assets to ensure that the Management and Administration of Blind Pool Assets is undertaken by the application of policies, practices and procedures which are being consistently applied to a particular type or class of asset or exposure regardless of whether or not the asset or exposure is a Covered Asset or a Related Party Asset, to ensure that there are no trends that imply any systemic different treatment and in such a way as to ensure that there is no prejudice to, discrimination against, or disproportionate and adverse effect upon Protected Assets when compared with other assets and exposures which are not covered under the APS (including Related Party Assets). RBS will review data to ensure systemic differences (other than those required by the APS itself) between Blind Pool Assets and assets and exposures not covered by the APS do not occur. The reviews will, amongst other things, test the cycle of transfers to Collections and Recoveries Units to ensure there are no accelerated transfers being arranged and when the assets and exposures are in Collections and Recoveries processes, that they are treated in the same way as RBS’s other assets and exposures in that distressed situation. RBS will: a) review all credit scoring and committee decisions to ensure equal treatment is in place and maintained, and b) attend, when required in regards the level of decision, meetings and risk committees, in order to maintain visibility and therefore adherence to the Conditions. If and to the extent that “Sighted” personnel, such as certain senior managers of RBS divisions that contain Blind Pool Assets are involved in making any credit decisions in relation to individual Blind Pool Assets, such "Sighted" personnel must treat those Blind Pool Assets as if they were "Sighted" pool Protected Assets and Related Party Assets. "Sighted" pool All requirements of the Conditions will apply to Protected Assets and Related Party Assets in the "Sighted" pool with no exceptions but subject always to Conditions 10.12, 10.14 and 10.21. RBS must therefore ensure that the Management and Administration of any Protected Assets or Related Party Assets which are in a "Sighted" pool is undertaken in accordance with the Asset Management Objective, as well as in accordance with all other requirements of the Conditions (including the provisions of the Conditions covering Prohibited Conduct). "Sighted" pool assets and exposures comprise all Covered Assets and Related Party Assets that do not fall within a "Blind" pool as described above. 6 2. GOVERNANCE FRAMEWORK General principle RBS must ensure compliance with all applicable requirements of the Conditions, including the Asset Management Conditions. Subject to this, RBS will apply two general principles to the implementation of the APS: (1) that the governance of the APS is as close to business-as-usual as possible; and (2) that the procedures surrounding such governance build on the existing processes and in-house knowledge/experience of Risk personnel. These general principles help to secure: • quick adoption of the APS by all relevant individuals; and • benefits from the robustness and control environments created by existing processes. Where consistent with the requirements of the Conditions, RBS has applied these principles throughout its governance framework, including reporting and Asset Action approvals. APS governance RBS participation in the APS will operate in accordance with a governance hierarchy headed by the SOC as follows: • The SOC (as set out in the SOC Terms of Reference) includes representation from each of the following: HMT (non-voting), the RBS Board (including at all times at least one non- executive director of RBS Group PLC), Risk, Finance and the Scheme Head. As the ultimate owner of this Asset Management Framework within RBS, the SOC has the power to approve or veto certain actions with respect to Protected Assets and Related Party Assets to ensure compliance with the Asset Management Framework and the requirements of the Conditions (subject to a HMT power to approve or veto certain conduct with respect to Covered Assets which would be Prohibited Conduct if undertaken without first obtaining the requisite approval specified in the “Approval Procedures and APS Approval Hierarchy” defined below). The SOC also has overall responsibility for ensuring that the strategy in respect of the Protected Assets as a portfolio, and the strategy with respect to each Protected Asset, complies with the requirements of the Conditions and will therefore exercise, directly or indirectly, its control both at an individual asset level and with respect to portfolios of assets. • The Scheme Head manages and administers RBS’s participation in the APS, including day-to-day oversight of compliance with the Conditions (including the Asset Management Conditions). The Scheme Head ensures that the relevant information on and from the Asset Management Framework is disseminated to all RBS personnel that need to know such information in order to ensure RBS’s compliance with the Scheme Documents. • The Scheme Executive Team (“SET”) members all report directly to the Scheme Head. The SET comprises four individuals; two separate heads of APS Compliance (each for different business types), a member responsible for Regulatory Advisory and the Head of APS Finance & Management. The SET members are responsible for liaising with relevant personnel to ensure that those personnel comply with the Asset Management Conditions. The only SET members who are APS Approvers are the Scheme Head and the two Heads of APS Compliance. − The two Heads of APS Compliance cover GBM (and related Non-Core) assets and the Corporate and Retail assets (and related Non-Core assets) respectively. These Heads of APS Compliance will be APS Approvers and have the relevant authority and are responsible for advice in respect of APS approvals and the monitoring of Asset Actions and trends. Heads of APS Compliance are also liaison officers in relation to HMT for any specific request in relation to their portfolios and are responsible for ensuring RBS’s activities comply with the Conditions. 7 − The Regulatory Advisory member of the SET provides specialised accounting policy and regulatory capital advice in respect of RBS’s participation in the APS. This includes advice on the treatment of back-to-back arrangements and the calculation of Losses and Recoveries. − The Head of Finance & Management is responsible for a number of aspects of RBS’s participation in the APS, including financial control, external disclosure of all APS financial and risk metrics, provision of internal management information to support the SET and the SOC in performing their obligations, managing the SOC agenda, the Transitional Exceptions Document (and related issues) and delivery and maintaining training to RBS staff related to APS. To support this governance structure, RBS has put in place the following: • APS Delegated Authority: The SOC will have the right to delegate the power to approve or veto certain actions with respect to Protected Assets and Related Party Assets to ensure compliance with the Asset Management Framework and the requirements of the Conditions to APS Approvers subject to the APS Approval Hierarchy. In particular, the SOC will exercise its right to delegate power to approve or veto actions so as to ensure that all Asset Actions are considered at the appropriate level of the APS Approval Hierarchy. • APS Approval Hierarchy: The APS Approval Hierarchy and procedures are closely modelled upon RBS’s existing Credit Approval Framework in order to build upon the existing tight control environment surrounding this process within RBS. • Training: RBS will train all “Sighted” personnel to ensure that the Conditions (including the Asset Management Conditions) and APS policies and procedures are closely adhered to. This will include more sophisticated detailed training for those personnel empowered to take decisions in respect of Protected Assets and Related Party Assets, and specialist reporting training for those personnel connected to the calculation of the inputs to the Quarterly Statements. • Documented guidance: RBS will produce materials for “Sighted” personnel to support their APS activities. This will include an overview of their APS responsibilities, the core principles (as outlined in “Key considerations for an APS Approver” below) that should be applied when reviewing Asset Actions in order to ensure compliance with the Conditions (including the Asset Management Conditions), details of who to contact in the event of any specialised questions and information on which APS Approvers have the power to take particular decisions. • Audit trail: RBS will implement a detailed audit trail for APS decisions and reporting in order to comply with the Conditions. This will build on RBS’s existing extensive internal audit procedures, including the audit procedures to support other regulations (such as Sarbanes-Oxley) and the external audit of financial statements. In addition, RBS will establish an Assurance Team to support the SET and provide internal audit of APS- specific policies and procedures within RBS for the purposes of ensuring compliance with the Conditions (as detailed in the Assurance Plan). Upon request by the Treasury, RBS will provide to the Treasury the current version from time to time of its Credit Approval Framework. Reporting Reporting on the Protected Assets and Related Party Assets will be undertaken in compliance with the requirements of the Conditions and will be executed by existing Finance and Risk functions throughout RBS. The SOC will oversee the reporting on Protected Assets and Related Party Assets on the basis of the following 6 main categories: 8 • Executive Summary of Key Measures • Financial Performance • Risk Metrics • Governance/Compliance • Control Environment • Expenses Personnel with responsibility for and in close connection with APS reporting will receive appropriate training. By building on existing systems and processes in a way which ensures that the systems and processes are consistent with the requirements of the Conditions, RBS intends to reinforce the APS control environment. For example, this will ensure that APS financial information is signed off by divisional CFOs in the same way as it currently is for other divisional disclosures. APS Finance & Management is a central team responsible for the statutory reporting required by the APS, the Quarterly Statements and other such information provided to HMT. This team ensures that there is a full audit trail for all information supplied by the divisions. Reporting on the Protected Assets and Related Party Assets will vary depending on whether those assets and exposures are Blind Pool Assets or in the “Sighted” pool. The Blind Pool Assets will be reviewed after the event and comparisons made with other parts of RBS’s Group which do not benefit from protection under the APS, in order to confirm that Blind Pool Assets are not prejudiced, discriminated against or disproportionately adversely affected in comparison to other assets. The activities of the Collections and Recoveries functions will receive particular attention. “Sighted” pool reporting will include checks to ensure that APS compliance is in place and is working effectively in the operating divisions, as well as reviewing information on trend and volume analysis with a view to ensuring that this Asset Management Framework and the requirements of the APS are being correctly applied. Certain details of the development of the Finance and Risk APS reporting structure and systems are set out in the Transitional Exceptions Document. Asset Action approvals The governance surrounding Asset Action approvals is set out in the next section. Business Strategies and the SOC The SOC shall review, approve and reassess the business strategy and governance arrangements of the Group and will do so having regard to business conditions, Applicable Law and Good Industry Practice. For these purposes, a portfolio review (essentially an analysis of sectoral exposures) covering both commercial and risk parameters will be prepared for each class of asset identified by the Group from time to time and this will be presented to the SOC on a regular basis, no less than annually. 9 3. APPROVAL PROCEDURES AND APS APPROVAL HIERARCHY General Protected Assets and Related Party Assets are subject to all of the requirements of the Conditions (subject to (a) Conditions 10.12, 10.14 and 10.21 and (b) the exception for Blind Pool Assets with respect to the (i) Asset Management Objective and (ii) the requirements of Condition 12 in respect of Prohibited Conduct specified under Condition 12.2(A) as described above). In particular, the requirements of Condition 12 covering Conduct Requiring Approval which if not duly approved in accordance with this Asset Management Framework and the Conditions would constitute Prohibited Conduct will apply to Covered Assets and Related Party Assets in the “Sighted” pool and (except in relation to Prohibited Conduct specified under Condition 12.2(A)) will also apply to Blind Pool Assets. In addition, if and to the extent that “Sighted” personnel, such as certain senior managers of RBS divisions that contain Blind Pool Assets are involved in making any credit decisions in relation to individual Blind Pool Assets, such “Sighted” personnel must also treat those Blind Pool Assets as if they were in the “Sighted” pool. In accordance with RBS’s general principle that the implementation of the governance of the APS should be as close to business-as-usual (“BAU”) as possible (to the extent that is compatible with the Conditions, including the Asset Management Conditions), the conduct procedures and APS Approval Hierarchy are built into RBS’s existing Credit Approval Framework approved by the RBS Board. Risk as an independent custodian of the business has the ability to provide the necessary internal checks and monitoring systems required to ensure APS compliance. In addition, the dedicated APS Compliance team will be required to provide Secondary Approval for certain categories of Asset Actions to enhance the control environment around those activities. The Approvals Procedure and the APS Approvals Hierarchy is based on a series of core principles that will make the process sound, consistent with business as usual and efficient: • Independence of Risk from Business – The Risk Framework in RBS, recently established, is built around a sound risk governance, and separation of roles between Risk and Business. Risk has control on final decision making. Overriding of risk decisions by the business units is forbidden by the current process. The same concept will apply to APS Approvals. • Risk decisions are escalated according to a series of rules to a higher level of authority, providing for higher and more senior overview where required by materiality of exposure or event. • Risk Managers in the divisions are responsible for a first assessment of Risk and Asset Actions (see below). • In addition a number of categories of approvals will require a Secondary Approval/Check by the APS Compliance Team or, where applicable, the SOC and HMT RBS will develop as soon as possible process and administration maps covering the detailed operation of the approvals processes referred to in this Asset Management Framework. RBS will provide in a timely fashion copies of such process and administration maps (once completed) to HMT upon request. Asset Actions In this Asset Management Framework, “Approval” means any decision in respect of any action concerning a Protected Asset or Related Party Asset in order to comply with the Conditions, including in order to retain cover under the APS (any such action, an “Asset Action”). Approvals include *** decisions in respect of these Protected Assets and Related Party Assets and other related conduct, including: *** Indicates omitted information. 10 *** • Prohibited Conduct referred to in Condition 12.2; *** This includes, but is not limited to, actions taken to comply with the Asset Management Objective, the Asset Management Conditions, the provisions of the Conditions covering Prohibited Conduct and the Conflicts Management Policy. Each proposed Asset Action will be subject to the Approvals Procedure, which will require assessment of the action against key requirements of the Conditions, including amongst others, the Conditions relating to Rollovers, Restructurings and additional lending (including Extended Protection Assets). Each APS Approver will be able to communicate with the dedicated APS Compliance teams (discussed below) for guidance on the impact of proposed Asset Actions which constitute Rollovers and Restructurings or which may require additional lending under Condition 10.13 and/or consultation with HMT under Condition 10.15. If and to the extent any additional lending is made and constitutes an Extended Protection Asset, depending on the terms of the cover for that Extended Protection Asset pursuant to Conditions 6.36 to 6.42 of the Conditions, RBS will consider whether further procedures and arrangements need to be implemented for the Management and Administration of that Extended Protection Asset and will communicate any such procedures and arrangements to HMT at such time. Asset Continuity Requirements - "reasonable criteria" In determining whether an Asset Action is compliant with the Conditions, one of the key criteria that needs to be satisfied is the Asset Continuity Requirements in Condition 4 of the APS. In certain cases, an APS Approver will use “reasonable criteria” in making a decision in respect of compliance with the Asset Continuity Requirements. The basis of the “reasonable criteria” test and some details of its application is set out below. • Condition 4.5(D)(iii)(b): For assets and exposures other than in the “Residential Mortgages” and “Consumer Finance” Covered Asset Classes, “reasonable criteria” consistently applied must be used in deciding whether or not a proposed Asset Action increases the expected loss on an asset where the obligors change but, broadly, the new obligor is in the same group as the old obligor or the new obligor (or any parent undertaking) is a successor of the old obligor (or any parent undertaking). “Reasonable criteria” for decision making in this context may comprise but not be limited to: (i) assessment of the related credit rating that the RBS Group has assigned to the new obligor using its internal Master Grading Scale; (ii) assessment of the LGD (loss given default, which is a regulatory based measure for expected loss) for the new obligor which is linked to the Master Grading Scale and available on internal systems. Moreover, the relevant APS Approver will be required to consider these issues having regard to past experience with the proposed new obligor and any assessment available to the APS Approver outlining the medium term prospects for that obligor. • Condition 4.5(D)(iii)(c): For “Residential Mortgages” and “Consumer Finance” assets and exposures, “reasonable criteria” (consistently applied) must be used in determining whether or not a new obligor has a "close connection" with an old obligor, where “close connection” is defined in Condition 4.8. For those assets which are Blind Pool Assets, normal business as usual processes which constitute “reasonable criteria” in this context apply. These may include, but are not limited to, the following criteria: *** Indicates omitted information. 11 (i) when a proposed new obligor becomes a client of the RBS group for the first time the standard "Know your customer" and Money Laundering checks are run (which, amongst other things, highlight full legal name and address details which must be supported by Government issued identity documents and utility bills); (ii) when a proposed obligor is to become an obligor of an asset or exposure then (in addition to information required under item (i) above as relevant) the obligor is required to complete an application form which, as well as all usual identity and contact information, will require confirmation of that obligor's relationship status, which information is then subject to separate credit checks which among other things can confirm consistency of information; and (iii) in particular, where there is an obligor change of name (for example on marriage) a copy of the marriage certificate and evidence of residency at the relevant address ( e.g. utility bills) is required. Key considerations for an APS Approver APS Approvers are persons responsible for ensuring that all Asset Actions on Protected Assets and Related Party Assets comply with the Conditions. This requires them to review all such Asset Actions in the light of the Conditions and attribute them to one of the following: 1. A proposed Asset Action that is not of the type regulated by the Conditions and may therefore proceed in accordance with RBS’s ordinary business practices; or 2. A proposed Asset Action is of the type regulated by the Conditions and is compliant with the Conditions, and may therefore proceed; or 3. A proposed Asset Action is of the type regulated by the Conditions but is not compliant with the Conditions, and may therefore not proceed in the form originally proposed. In addition to these requirements, RBS also requires its personnel to ensure that the Management and Administration of (1) the portfolio of Covered Assets as a whole, (2) the portfolio of Covered Assets within each Covered Asset Class and (3) each Covered Asset is, subject to the exceptions stated in the Conditions, executed in light of the following core principles (in accordance with the following hierarchy): • In accordance with Applicable Law • Other than in respect of Blind Pool Assets and Related Party Assets, in accordance with the Asset Management Objective • In such a way as to ensure that there is no prejudice to, discrimination against, or disproportionate adverse effect on Covered Assets when compared with the Management and Administration of non-APS assets (including Related Party Assets) • In accordance with any provisions of the Accession Agreement relating to the Management and Administration of the Covered Assets (including this Asset Management Framework and the Conflicts Management Policy). • In a manner which will facilitate compliance with the Monitoring and Reporting Conditions and the Governance and Oversight Conditions • At all times and in all respects in accordance with the ordinary course business and banking policies, practices and procedures of RBS or other relevant member of its Group (including the policies, practices and procedures which RBS or other relevant member of its Group would apply in the ordinary course of business when Managing and Administering any asset, exposure, liability or risk which is equivalent or similar to the 12 relevant Covered Asset), to the extent consistent with (1) the business and banking policies, practices and procedures of a reasonable and prudent banking organisation and (2) Good Industry Practice. Any APS Approval will be recorded and subject to audit by the APS Compliance team, the APS Assurance Team and Group Internal Audit. APS Approval Hierarchy RBS will build upon the existing Credit Approval Framework to establish the APS Approval Hierarchy. The RBS Credit Approval Framework delegates Credit approval authority to individuals across RBS according to their seniority, experience and expertise. There will be a separation of roles between Risk and Business. Risk has control on final decision making. Overriding of Risk decisions by the business units is forbidden by the current process. The same concept will apply to APS Approvals. In addition a number of categories of approvals will require a Secondary Approval/Check by the APS Compliance Team or, where applicable, HMT. The delegation grids used in the Credit Approval Framework and included in this Asset Management Framework identify rankings for decision-making authority. The delegation grids are updated from time to time. The Participant will consult with HMT regarding any future updates to the delegation grids. The most junior ranking for decision-making authority is a Credit Officer ***, rising to Credit Officer ***; above these are a Senior Credit Officer *** rising to a Senior Credit Officer ***, above which is the Group Chief Credit Officer or his or her delegates. The Executive Committee Group, a committee of the RBS Board, is the most senior credit decision-making body in RBS. APS Approval authorities for larger exposures are exercised by those individuals that RBS has identified as Group Chief Credit Officers and Senior Credit Officers. This ensures an appropriate level of seniority, experience and expertise is applied to larger exposures. However, for certain categories of Asset Actions, a mandatory Secondary Approval by the APS Compliance team will be required, as detailed below. For smaller exposures APS Approval authority would be exercised by Credit Officers *** and *** based on their Risk Delegated Authorities. These individuals hold APS Approval authority as a consequence of their credit officer ranking. All APS Approvals in excess of the authorisations limits of those with Group Chief Credit Officer or an equivalent status will be for the consideration of the SOC. APS Approvers have the power to approve, veto or require an Asset Action in order to ensure that RBS complies with the Conditions. For the avoidance of doubt, this includes the power to manage conflicts and approve Conduct Requiring Approval which, without such approval, would constitute Prohibited Conduct. In certain circumstances, HMT will also have the power to approve or veto an Asset Action which would otherwise be Prohibited Conduct. SET Heads (i.e. the Scheme Head and the two Heads of APS Compliance) will have been allocated APS Approval capacity in line with a Senior Credit Officer 1 authority and they are able to delegate certain APS Approval capacity to their team members subject to evidencing appropriate experience and seniority of those individuals. Approval procedure 1. All RBS’s proposed Asset Actions relating to Protected Assets and Related Party Assets other than Blind Pool Assets will be subject to an initial check to review whether the *** Indicates omitted information. 13 proposed Asset Action affects a Protected Asset or Related Party Asset. An automated process will be developed to facilitate the undertaking of these initial checks but until the implementation of this automated process the initial checks will be undertaken manually. This will be done by Credit Risk for credit-related proposed Asset Actions, and by Regulatory Risk for non-credit-related proposed Asset Actions or proposed Asset Actions related to new transactions that go through Regulatory Risk checks. 2. If a Protected Asset or Related Party Asset is affected, the proposed Asset Action will be referred to an APS Approver for clearance. If there is a later change to the proposed Asset Action, then, for continuity, the same APS approver may need to revisit his/her decision and confirm the approval. The same principles of materiality will apply for later changes to the proposed Asset Action. This clearance is not approval to undertake the proposed Asset Action, but is clearance to proceed with the client mandate and transaction structuring. 3. If a proposed Asset Action affecting a Protected Asset or Related Party Asset is cleared to proceed, the business will prepare all materials necessary to support RBS’s approval procedures for the proposed Asset Action. 4. The business will then submit the proposed Asset Action for approval. − In the event of a non-credit-related proposed Asset Action this will require the usual business and associated sign-offs, plus APS Approval from an appropriately authorised APS Approver, which will be determined by the appropriate Risk manager responsible for the overall connection. − In the event of a credit-related proposed Asset Action, this will require credit approval from a credit officer in accordance with the Credit Approval Framework, and APS Approval from an appropriately authorised APS Approver. The credit officer and APS Approver may be the same person. In all cases APS Approvers can only approve proposed Asset Actions according to the appropriate limits set out in the Approval Grids and only for the categories of Asset Action that they have specific authority to approve. In the event that an APS Approver does not have the appropriate authority s/he is obliged to escalate the proposal to an APS Approver with the required authority. It may not be practicable to calculate the Asset Management Objective solely on the basis of a formula (i.e. to determine the net present value (“NPV”) of the Protected Asset) in the context of each proposed Asset Action. For example, where an Asset Action does not result in an immediate liquidation of the positions, exposures or underlying collateral or assets in respect of a Protected Asset, a conclusion regarding the impact of that Asset Action on the NPV of the Protected Asset is likely to involve not just a formulaic approach, but will require a degree of subjective judgement, on the part of the relevant APS Approver. The relevant APS Approver should act reasonably in undertaking this process and in a manner consistent with the APS. As such, in exercising his or her subjective judgement the relevant APS Approver will endeavour to ensure that the Asset Action is consistent with the Asset Management Objective, taking account of objective measures, metrics and criteria where available and reaching a decision based on an appropriate assessment of the risks associated with the proposed Asset Action (including its impact on credit metrics). Approval Grids – Prohibited Conduct A Conduct Requiring Approval framework will be created to establish the limits for all APS Approvers’ approval authority in relation to Prohibited Conduct which will be based on the Approval Grids below. The approval authorities under the Conduct Requiring Approval 14 framework will contain a right for HMT/APA to approve or refuse Conduct Requiring Approval in respect of the following circumstances (the “HMT Approval Matters”): 1. If the Conduct Requiring Approval is conduct described in (a) Condition 12.2(A) relating to the release of Security, guarantee, indemnity or collateral in respect of a Covered Asset, or (b) Condition 12.2(B) relating to a return of value on equity in respect of a Covered Asset, or (c) Condition 12.2(C) relating to the sale, transfer or other disposal of a Triggered Asset and: − As at 31 2008 December the Covered Amount in respect of the applicable Covered Asset or the Triggered Asset (as the case may be) which is the subject of the Conduct Requiring Approval exceeded ***; or − As at the date of the relevant proposed Conduct Requiring Approval, the Outstanding Amount of the Covered Asset or Triggered Asset (as the case may be) which is the subject of the Conduct Requiring Approval exceeds or exceeded ***. 2. If the Conduct Requiring Approval is any conduct described in Condition 12.2(D) relating to any amendment, replacement or termination of any Closely Related Hedge, subject to the applicable provisions of Conditions 12.2 and 12.4. 3. For the purposes of paragraph 1 above, the *** threshold may be exceeded by: − a single transaction; or − a number of separate transactions which, when taken together, form part of the same transaction; or − a series of independent but related transactions to or with a person or persons connected to or with that person which, when taken together, form part of the same transaction. Any Conduct Requiring Approval which is not a HMT Approval Matter may be approved or refused by the relevant APS Approver in accordance with the APS Approvals Hierarchy. The approval authority of the relevant APS Approver in relation to Conduct Requiring Approval will be based on the Approval Grids and methodology for Credit Approvals and Other Conduct Approvals (as set out below) Any Conduct Requiring Approval which is a HMT Approval Matter must be notified by the relevant APS Approver to APS Central Compliance: • If APS Central Compliance determines that the relevant Conduct Requiring Approval should not be undertaken APS Central Compliance may refuse the Conduct Requiring Approval and such conduct shall not be undertaken. • If APS Central Compliance determines that approval of the relevant Conduct Requiring Approval should be undertaken, and therefore approved by HMT/APA, then APS Central Compliance will notify HMT/APA of its recommendation and seek HMT/APA’s consent to the Conduct Requiring Approval. Subject to the provisions of Condition 39, if the SOC notifies HMT/APA of the Conduct Requiring Approval which is an HMT Approval Matter and seeks HMT/APA’s consent for such Conduct Requiring Approval, HMT/APA shall provide to the SOC its approval or refusal of the Conduct Requiring Approval within 5 Business Days of notification by the SOC. If HMT/APA does not provide to the SOC its approval or refusal of any Conduct Requiring Approval escalated to HMT/APA within 5 Business Days, then subject to the provisions in Condition 39, HMT/APA will be deemed to have approved the relevant Conduct Requiring Approval. *** Indicates omitted information. 15 Approval Grids – Other Conduct The Credit Approval Framework establishes the limits for all credit officers’ approval authority, according to RBS’s total counterparty exposure to the connection (determined in accordance with RBS’s credit aggregation procedures) and the internal credit rating applied to the proposed action. • Because the decision-making limits in the Credit Approval Framework apply to RBS’s total exposures to the entire connection, this effectively provides a tool for a combined assessment of the Protected Assets and Related Party Assets. • The internal credit rating is the master grading scale (“MGS”) ***. Aligning the APS Approval Hierarchy with the Credit Approval Framework is one aspect of how RBS complies with the requirement in the Conditions to ensure that the level of scrutiny increases concurrently with the likelihood of Losses. The Credit Approval Framework has a number of standard grids which apply relevant limits. The most relevant grids in an Approvals context are those relating to Direct Risk (see below), though those relating to Settlement Risk (see below) have operational relevance: *** Where: • The distinction is made *** so that RBS can apply lower limits *** to reflect the greater general *** risk entailed with ***. • “Direct Risk” means actions where RBS extends funds to a counterparty (such as a loan) • “Settlement Risk” means actions where RBS depends upon a counterparty for the settlement of a transaction ***. The Credit Approval Framework applies limits based on RBS’s total exposure to an entire connection. For example, this means that an additional £*** loan to a connection with a total exposure of £*** will require a more senior approval than a £*** loan to a connection with a total exposure of £*** (assuming the same MGS rating). Set out below are the two most commonly applicable grids and the limits they apply to APS Approvals in RBS. *** Indicates omitted information. 16 Approval Grids for *** Approval Grids for *** *** Indicates omitted information. 17 Work-out RBS has a dedicated work-out team, the Global Restructuring Group (“GRG”) which handles almost all corporate work-out activity. *** The Credit Approval Framework for the GRG sets out a different type of grid for decision-making that also includes some consideration of the type of transaction proposed. The APS Approval Hierarchy will apply in GRG as set out below. The Credit Approval Framework for GRG sets out a different approach to deal with troubled and non-performing assets: *** Watch List The Credit Approval Framework also addresses the requirement in the Conditions to enhance the level of scrutiny for those Covered Assets and Related Party Assets that have an increased likelihood of Losses. RBS uses a Watch List to monitor the most troubled assets. According to their status, assets are ranked from *** (being the least troubled) to *** (being the most troubled). Watch List clients are subject to heightened monitoring as RBS employs a proactive approach to managing the possible deterioration of the creditworthiness of its counterparties. *** RBS’s divisions establish early warning indicator processes, which include ongoing monitoring that is capable of detecting changes in customer behaviour or credit risk quality using appropriate internal and external information sources to determine whether any particular customers or assets or exposures should be on a Watch List. These include but are not limited to • Internal Sources – account performance information that indicates performance is not in line with expectations e.g. late payments, excesses, failure to meet terms and conditions of approval, *** • External Sources – *** Secondary Approvals In addition to the APS Approvers, there are dedicated APS Compliance teams reporting to the two Heads of APS Compliance that are members of the SET. The role of the APS Compliance Officers in these teams is to: • Monitor Asset Actions (after the event) in all “Blind” and “Sighted” portfolios • Advise APS Approvers in respect of whether proposed Asset Actions comply with the applicable Conditions Provide mandatory Secondary Approvals for certain proposed Asset Actions (in addition to the APS Approver) in respect to both “Sighted” and “Blind” portfolios. Mandatory Secondary Approvals exist to enhance RBS’s control environment in respect of the following events: *** In addition to the above Mandatory Secondary Approvals, APS Approvers may (but are not obliged to) refer any other Asset Action for a Secondary Approval. RBS will provide information regarding the materiality thresholds referred to above to HMT upon request. *** Indicates omitted information. 18 4. MONITORING AND ASSURANCE Monitoring RBS will monitor the Asset Actions after the event in both the “Sighted” and “Blind” pools. This will be carried out by the dedicated APS Compliance teams reporting to the SET. “Sighted” Assets and “Blind” Pool Assets will require different techniques to assess overall compliance (including compliance with the Conditions) and confirmation of effectiveness. • “Sighted” pool monitoring will involve sample checks of the Credit Approval Framework system to ensure individual credit cases are correctly marked (via electronic tags), that the correct processes were followed, and that the APS decisions were robust, evidenced, recorded and escalated as necessary and that Approvals were subsequently made at the correct level in accordance with the APS Approval Hierarchy. • “Blind” Pool Assets require an approach that ensures that they are treated in an identical manner to non-APS assets (including Related Party Assets) so as to ensure that there is no prejudice to, discrimination against, or disproportionate adverse effect on Protected Assets. This monitoring will focus on the volumes and types of actions (as well as their integrity). In addition, the APS Compliance team will conduct portfolio analysis to compare the Covered Assets against the wider performance of RBS. The APS Compliance team will also review RBS’s existing Credit Quality Assurance reports in respect of Covered Assets and Related Party Assets. This is an audit process that ensures credit exposures are correctly Managed and Administered within RBS. Reporting to the SOC will be provided in accordance with this Asset Management Framework in compliance with the Conditions. This reporting will cover in particular: (1) compliance with all aspects of the APS Approval Hierarchy, (2) monitoring of Blind Pool Asset actions to ensure that the Management and Administration of the Blind Pool Assets within such pools is being undertaken in compliance with the Conditions (including ensuring that there is no prejudice to, discrimination against, or disproportionate adverse effect on Protected Assets when compared with assets and exposures which are not in the APS) and (3) the heightened monitoring applicable to Protected Assets and Related Party Assets on the Watch List. Performance measures Key performance measures (“KPIs”) will be set at overall Bank and business levels. Operating procedures Operating procedures KPIs will include (but not be limited to) for example: • Volume of Blind Pool Asset and other Covered Asset Asset Actions transactions (and amount) • Volume of Asset Actions declined/rejected and an analysis of the underlying rationale • Volume of cases and amount of Covered Assets withdrawn from the APS, including Disposals Portfolio quality Portfolio quality KPIs will include (but not be limited to) for example: • Total Covered Assets against provision coverage • Total Covered Assets against provision charge per business 19 • Granular migration analysis of the MGS of the portfolio • Watch List data and migration trends • Portfolio movements per industry sector or asset class • Comparison of total Covered Assets against total RBS credit portfolios • Comparison of derivatives portfolio quality • Transfers to work-out teams (such as GRG) for Covered Assets and Related Party Assets APS compliance APS compliance KPIs will include (but not be limited to) for example: • Assessment of the businesses’ certification process • Testing findings of sample statistics and reports of APS Compliance monitoring teams • Tracking of non-compliance activity by APS Compliance monitoring teams Where appropriate existing Group Internal Audit or Risk classifications will be used to assess and grade the materiality of the findings and will be aligned to the Assurance Plan. Assurance Plan As set out in the Assurance Plan, RBS will also establish an APS Assurance Team to supplement the second line of defence. The Assurance Team will be responsible for maintaining and reporting on the execution of the Assurance Plan. The “first line of defence” (as set out in the Assurance Plan) is those persons who are responsible for the Management and Administration of the Covered Assets and the Related Party Assets and such persons will perform testing to certify to APS Compliance their level of compliance with APS requirements. The “second line of defence” (as set out in the Assurance Plan) is the Risk function and the APS Compliance team who will perform additional testing, checking and challenge the level of compliance with the Conditions. The “third line of defence” is RBS’s Group Internal Audit who will perform independent testing over RBS’s compliance with the Conditions. Third party audit providers may be used to address shortfalls in knowledge, skills and resource levels. Any use of third parties will need to be endorsed by the SOC. 20 APPENDIX 1: COMMERCIAL STRATEGIES The commercial strategies that RBS deploys will vary ***. RBS will use its expertise to assess the most appropriate actions to achieve compliance with the Asset Management Objective, Asset Management Conditions and the rest of the Conditions. Set out here is the range of commercial strategies that will be used in respect of Covered Assets. Due to the significant variation of circumstances for each asset, the commercial strategies pursued will vary by asset/client and over time. *** *** Indicates omitted information. 21 APPENDIX 2: APS CONFLICTS MANAGEMENT POLICY This Asset Management Framework and the Approvals under it shall be applied in conjunction and in accordance with the Conflicts Management Policy. RBS shall ensure that the Management and Administration processes under the Asset Management Framework are developed to avoid any Conflicts in accordance with the Conflicts Management Policy. In particular RBS shall ensure that: • Conflicts arising from potential new transactions, in particular surrounding Compliance, are to be minimised in accordance with the Conflicts Management Policy; • Conflicts concerning the Asset Management Objective will be subject to specific Approval and oversight by APS Approvers. Further details are contained in the Conflicts Management Policy. 22 APPENDIX 3: RBS GLOSSARY *** “CFO” means chief financial officer; “Corporate Asset” means an asset originated in or Managed and Administered within the Corporate Banking division of RBS; “Credit” means the credit function within Risk; “Credit Approval Framework” means the credit approval framework implemented by RBS on 31 May 2009; “Debt to Equity” means a debt for equity swap effected during a work out process under which debt is cancelled, reduced or waived (or otherwise compromised) in exchange for equity; “Executive Committee Group” means a committee of the RBS Board, being the most senior credit decision making body with RBS; “Finance” means the Finance function of RBS; “GBM” means the Global Banking & Markets division of RBS; “Global Restructuring Group” means the dedicated work out team within Restructuring & Risk, which deals with distressed and defaulted counterparties within RBS; “Group CCO” means the Chief Credit Officer of RBS; “Group Internal Audit” means the internal audit function of RBS; “GRG Restructuring” means the postponement, deferral or rescheduling of payments by RBS in respect of monies owed to it by one or more Obligors effected during a work out process; “Master Grading Scale” or “MGS” is the internal credit rating scale of RBS, ***; “MI” means high level management information prepared for the purposes of presentation to senior management; “Non-Core” means the Non-Core division within Restructuring & Risk; “RBS Board” means the board of directors of The Royal Bank of Scotland Group plc; “RBS Facility And Security Documentation Policy” means the facility and security documentation policy applicable with RBS, as the same may be amended from time to time; “Regulatory Risk” means the Group Regulatory and Operational risk function within Restructuring & Risk; “Restructuring & Risk” means the Restructuring & Risk division of RBS; “Retail asset” means an asset originated in or Managed and Administered within the Retail division of RBS; “Risk” means the Group Risk function within Restructuring & Risk; *** Indicates omitted information. 23 “Sarbanes-Oxley” means the United States Sarbanes-Oxley Act of 2002; “Senior Credit Officer” has the meaning ascribed thereto in the Credit Approval Framework; “Single Name Concentration Limit” means the maximum credit concentration limit for any single customer or client of RBS; “SME” means small and medium enterprise; and “Watch List” means an internal list maintained within RBS for the purposes of monitoring the most troubled assets within RBS’s portfolio, where assets are allocated a ranking according to their status, ranging from ***. *** Indicates omitted information.
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