Tesco plc Annual Report and Financial Statements 2012

OVERVIEW
Principal risks
Credit risk – external
environment
The downside risks to the UK
economy remain high, including
fragile consumer confidence,
a squeezing of real incomes,
increasing unemployment and
some consumers increasing
borrowing and switching to
variable rate mortgages
On the wider economic front
subdued UK growth, continued
fiscal austerity and the continuing
eurozone debt crisis is impacting
confidence and may impact the
ability to sustain debt servicing
and repayment in the event of
an economic shock
Legal and regulatory
compliance risk
Legal and regulatory
compliance risk is the risk of
consequences arising as a result
of non-compliance with the laws
and regulations affecting the
Bank’s governance, prudential
arrangements, business activities,
risk management and its
conduct with customers
Conduct risk
There remains significant
regulatory focus in relation
to ‘Conduct risk’ or ‘Treating
Customers Fairly’. Specifically
there has been continued
industry-wide focus on provision
of redress in relation to past
sales of Payment Protection
Insurance (‘PPI’)
Insurance risk
The Bank defines insurance risk
as the risk we accept through our
insurance products in return for
a premium. These risks may
or may not occur as expected
and the amount and timing of
these risks are uncertain and
determined by events outside
of our control
The Bank is exposed to
insurance risks through its
historic distribution arrangement
with RBS, which is expected
to terminate in quarter four of
2012, and through its ownership
of 49.9% of Tesco Underwriting
Limited (‘TU’)
STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS
Board of Directors Principal risks and uncertainties General information Corporate governance
Directors’ remuneration report
Change from
2010/11 Key controls and mitigating factors
�� The Bank’s credit risk appetite is based on lending responsibly to manage the
credit risk profile of its portfolio within agreed parameters
�� Credit portfolios continue to be closely monitored with changes made to
acquisition and limit management strategies to mitigate, as far as possible,
downside economic risks
�� The Bank has minimal direct exposure to non-UK sovereigns and proactively
monitors and manages the non-retail portfolios to reduce exposure to specific
names or geographies
�� The Bank’s aim is to meet all legal and regulatory requirements by maintaining
an effective control framework
�� A dedicated risk team is responsible for the identification of regulatory risks,
the management and oversight of policies and processes and the provision of
assurance in relation to regulatory risk and compliance
�� The Bank’s Treating Customers Fairly Board and the Bank’s Board reviews
and challenges delivery of fair outcomes for customers
�� A programme to proactively remediate disadvantaged PPI customers has
commenced
�� The Bank’s aim is to actively manage insurance risk exposure with particular
focus on those risks that impact profit volatility
�� Regular, independent reviews of reserves are undertaken with reporting to the
Bank’s RMC, Audit Committee, BRC and Board
�� The Bank uses reinsurance to limit exposure above pre-determined limits
�� Risk appetite and a suite of risk policies are in place to manage risk in TU
�� The Bank’s Insurance Risk function provides independent oversight of TU
which is appropriate to the Bank’s role as key shareholder
Tesco PLC Annual Report and Financial Statements 2012 45