The implementation of the divestment and behavioural Commitments leading up to the Amended Restructuring Decision is described in detail in recitals 12 to 22 of the Amended Restructuring Decision.

The implementation of the Commitments included in the Amended Restructuring Decision is outlined in recitals 15 and 16 of the Opening Decision. RBS completed these divestments ahead of the committed deadlines with the exception of the commitment related to the divestment of the Rainbow business.

The largest disbursements from the Capability and Innovation Fund would be targeted at entities with strong existing BCA capability. The three largest awards will be made available to entities with such capability, enhancing their ability to compete with RBS in the provision of banking services and financial products to SMEs. The eligibility criteria of the different pools are described in more detail in recitals 28 to 31.

1. (a)

   which has a BCA offering;

2. (b)

   which is authorised by the UK Prudential Regulation Authority to take deposits;

3. (c)

   whose ultimate parent entity is or is itself at the time of the application, an entity domiciled in the United Kingdom, European Union, the European Economic Area or Switzerland and is a deposit-taking entity or financial holding company;

4. (d)

   which has gross assets in the United Kingdom of less than GBP 350 billion shown in its latest published consolidated accounts (or interim balance sheet);

5. (e)

   whose income in the United Kingdom relates primarily to the provision of deposit-taking, lending or payment services to individuals and businesses in the United Kingdom; and

6. (f)

   which has expressed an intention to expand its business offering to SMEs through the development of new products, expansion into new geographical markets in the United Kingdom or new business segments and/or investing in its customer service levels.

The eligibility criteria for Pool B: The same eligibility criteria as set out in recital 28 in respect of Pool A would apply, except that the entity need not currently have a BCA offering (although it must have at least publicly stated its intention to launch one).

1. (a)

   whose ultimate parent entity is or is itself, at the time of the application, domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland;

2. (b)

   which derives (or if such entity is part of a group, such group derives) the majority of its revenue from the provision of financial services to individuals and businesses; and

3. (c)

   which offers, or has expressed an intention to expand its business offering to include, lending or payment services to SMEs in the United Kingdom or international payments services to SMEs.

1. (a)

   whose ultimate parent entity is or is itself, at the time of the application, domiciled in the United Kingdom, the European Union, the European Economic Area or Switzerland;

2. (b)

   which either provides or develops financial products or services predominantly to or for SMEs in the United Kingdom or provides products or services to the SMEs in the United Kingdom; and

3. (c)

   which has raised capital of at least GBP 1 million in the three years prior to the date of submission of its business case to the Body.

The Body would manage and control the Capability and Innovation Fund. The Body is designed to be independent of both RBS and the UK authorities, and will have the necessary powers to fulfil its task of administering, or arranging for the administration of, the applications to the Capability and Innovation Fund, and for monitoring the use that is made of the funds. There will be four groups of safeguards as to the deployment of funds by the recipient entities which would operate through the lifecycle of the fund: (i) safeguards before disbursement, (ii) ongoing reporting and monitoring by the Body, (iii) the Body's right of audit and (iv) the Body's right to claw back funds.

1. (a)

   a brief account of the developments in the entity's SME business over the preceding year;

2. (b)

   an overview and quantification of investments made in the relevant business in the last three months and how such developments relate to its business case;

3. (c)

   details of the entity's SME business volumes, including customer numbers, BCA numbers, lending and deposit balances;

4. (d)

   confirmation that drawings on the SME Capability Fund have been used for the Permitted Purposes; and

5. (e)

   other items agreed between the Body and the recipient entity.

1. (a)

   an entity shall use a grant for purposes which have a demonstrable link to (i) improving customer outcomes for SMEs; and/or (ii) expanding the entity's business capacity, product offering and/or target markets in order to improve its offering to SMEs (the ‘Overarching Principles’).

2. (b)

   a grant may be used by an entity to cover its capital expenditure or operating expenses in relation to the following purposes (‘Permitted Purposes’):

   1. (1)

      the development of systems and/or infrastructure required to expand either (i) in the case of a Pool A entity or Pool B entity, its SME banking business or (ii) in the case of a Pool C entity, its SME lending business and/or SME payments business (‘Relevant Business(es)’)

   2. (2)

      the recruitment and payment of employees in order to expand and/or operate its Relevant Business(es);

   3. (3)

      the marketing of products related to its Relevant Business(es);

   4. (4)

      the acquisition or leasing of premises required to expand its Relevant Business(es); or

   5. (5)

      any other purpose which is (in the opinion of the Body) consistent with the Overarching Principles.

3. (c)

   A grant may not be used by an entity for any of the following prohibited purposes:

   1. (1)

      to subsidise temporary price cuts for banking products and/or services;

   2. (2)

      to repay any existing liability;

   3. (3)

      to provide financing directly to customers;

   4. (4)

      to finance capital expenditure and/or operating expenses which the company had planned prior to the date of the application and: (a) that the company would make regardless of whether or not any amount from the Capability and Innovation Fund is received; or (b) that had been included in the company's business plan prior to the date of the application;

   5. (5)

      to return capital by any means to existing shareholders of the company; or

   6. (6)

      for a purpose which is inconsistent with the Overarching Principles and/or its Business Case.

1. (a)
   the entity shall use a grant to develop improve, operate, expand and/or commercialise (or support the development, improvement, operation, expansion and/or commercialisation of) its Fintech30 product or service and the grant may be used by an entity to cover its capital expenditure and operating expenses in relation to the following purposes (‘Permitted Purposes’):
   1. (1)

      the development of systems and/or infrastructure required to develop, improve, operate, expand and/or commercialise the Fintech product or service;

   2. (2)

      the recruitment and payment of employees in order to develop improve, operate, expand and/or commercialise the Fintech product or service;

   3. (3)

      the marketing of the Fintech product or service; or

   4. (4)

      any other purpose which (in the opinion of the Body) furthers the development, improvement, operation, expansion and/or commercialisation of the Fintech Product or Service.

2. (b)

   a grant may not be used by an entity for the following prohibited purposes:

   1. (1)

      to repay any existing liability;

   2. (2)

      to provide financing directly to customers;

   3. (3)

      to return capital by any means to existing shareholders of the company; or

   4. (4)

      for a purpose which is inconsistent with its Business Case.

The funding for Pools A, B and C entities would be phased so that any entities that do not win an application for Pool A would be eligible to apply for funding from Pool B, and any entities that do not win an application for Pool B would be eligible to apply for funding from Pool C. The Pool D funding process will run concurrently with the phased funding process for Pools A, B and C.

The application period for Pool A funds will end within 2 months after the Body first starts marketing the fund, whilst the Pool B application period will end within 5 months after this date and the Pool C period will end within 8 months after this date. The Pool D application period will run concurrently with the application periods for Pool A-C funds, and will end up to 6 months after the Body first starts marketing the fund.

The fund is intended to terminate after the end of the Incentivised Switching Scheme (although may be extended under predetermined criteria depending on the amount of undistributed funds remaining). The rights and obligations of the Body as regards reporting would however continue for three months after the termination of the last agreement between the Body and any recipient participating in the Capability and Innovation Fund.

1. (a)

   they have, or have publicly stated an intention to launch, a business current account offering;

2. (b)

   they meet the criteria set out in recital 28 paragraphs (b) to (f) for a Pool A entity; and

3. (c)
   they participate in the UK Current Account Switching Service (‘CASS’)33.

1. (a)

   pay up to GBP 225 million in dowries (i.e. a monetary incentive) to Eligible Entities in relation to any customers that agree to transfer their BCAs (‘BCA dowries’);

2. (b)

   pay up to an additional GBP 50 million for loan related dowries (‘loan dowries’) for those customers who move a loan-product alongside their BCA;

3. (c)

   ear-mark an additional GBP 75 million of its costs which would also be available to help facilitate switching (compensation for break fees related to the transfer of loan balances or other third party costs such as legal fees).

Loan dowries will enable Eligible Entities to reduce the rates of interest charged on loans to customers, making their offers more competitive while maintaining adequate returns on capital. Where a customer switches its primary BCA and a loan product from RBS, the Body will pay to the recipient entity an additional dowry of 2,5 % of the drawn loan balance transferred.

RBS would target its customers within the W&G perimeter (which contains roughly 200 000 SME banking customers) who would be provided with information on the benefits of switching and potential alternative Challenger Entities that they may wish to consider.

RBS would start communicating the Incentivised Switching Scheme to customers around three months after launch of the package, and dowries would be available as early as Q2 2018 (around three months from when RBS starts communicating to its customers). The process of distributing dowries for the Incentivised Switching Scheme would be repeated quarterly for as long as dowries are available. Dowries would cease when a maximum of GBP 225 million has been paid in respect of BCA dowries or, in the event that this has not occurred earlier, 18 months after RBS's communication of the Incentivised Switching Scheme (subject to an extension of up to 12 months, see recital 51(d)).

1. (a)

   make changes to the amount of dowries paid to ensure they are as effective as possible;

2. (b)

   approve the communication materials to be sent by RBS to its SME customers in relation to the Incentivised Switching Scheme;

3. (c)

   require RBS to increase the frequency of such communications;

4. (d)
   extend the period for which dowries are available by up to 12 months if fewer than […] Eligible Customers35 have switched (or commenced the switching process) within […] months of the Incentivised Switching Scheme commencement date (the ‘Extended Incentivised Switching Date’); and
5. (e)

   require RBS to extend the customer base to which it sends such communications beyond the W&G perimeter if a given volume of switchers is not achieved in a given timeframe. If the perimeter is extended, the scheme will target switching offers at SMEs representing around […] of UK BCA market share. The perimeter will be extended where:

   1. (1)
      […]36;
   2. (2)

      […]

   3. (3)

      […]

In order to ensure that RBS has the appropriate incentives to implement the Incentivised Switching Scheme effectively, in the event that fewer than […] customers have switched and there is an underspend in the dowries by the end of the […] month period (or, in the event the Body decides to extend the relevant period, the date when the extended period ends), RBS would be required to transfer a pre-defined additional multiple (the ‘Multiplier’) of this underspend to the Body, subject to a cap of GBP 50 million.

1. (a)

   as the success of the Incentivised Switching Scheme will be dependent on the ability of Eligible Entities to build attractive propositions for RBS's SME customers, the Body would have the power to reduce the Multiplier to the extent that it was reasonably satisfied that any underspend was a result of factors beyond the control of RBS;

2. (b)

   with the consent of the Body, RBS may be allowed to restructure the dowries after a period of time in order to improve the efficacy of the scheme and reduce the probability of it incurring a penalty; and

3. (c)

   if (i) the Body has extended the perimeter by the incentivised switching termination date; (ii) there are fewer than […] switched customers; and (iii) the Body considers that RBS did not actively communicate incentivised switching to customers in the wider pool, the Body may increase the Multiplier to such percentage as it considers appropriate, subject to a cap of GBP 50 million.

[…]

Where the sum of the underspend and Multiplier (together with any amounts clawed back and any amounts not distributed out of the Capability and Innovation Fund) amounts to less than GBP 5 million, the Body will distribute the funds to charities.

RBS will agree to non-solicitation arrangements under the Incentivised Switching Scheme, which will prohibit RBS and members of its group from (i) taking certain actions which may have an adverse effect on the Incentivised Switching Scheme; and (ii) soliciting, inducing or encouraging Eligible Customers (or customers who have switched to an Incentivised Switching Eligible Entity) to remain a customer of the group in respect of any BCA or relevant loan product, or to transfer any BCA or relevant loan product from Incentivised Switching Eligible Entities to any member of the group within certain prescribed time periods.

In order to support the success of the Incentivised Switching Scheme, RBS will offer to entities participating in the Incentivised Switching Scheme the option of entering into an Inter-Bank Agency Deed allowing customers they attract under the Incentivised Switching Scheme the option of continuing to use cash and cheque handling services in RBS branches (the ‘Branch Access Scheme’). This branch access will be available for Eligible Customers for a minimum of three years from the launch of the Incentivised Switching Scheme on reasonable and non-discriminatory commercial terms, at the expense of the entity concerned.

The majority of comments received indicate that the Initial Alternative Package has a number of features that could enhance competition in the UK SME markets. Some indicate that the alternative package would have a faster impact on competition with less execution risk and has the capacity to strengthen not just one Challenger Entity (as with the divestment of the Rainbow business).

1. (a)

   the overall size of the Initial Alternative Package is insufficient to drive structural change in the UK SME market, which has high barriers to switching;

2. (b)

   a transfer of business current accounts equivalent to a market share of 2 % of the SME market is not equivalent to the divestment of the Rainbow business (representing roughly a 5 % SME market share in terms of the number of SME customers);

3. (c)

   a transfer of BCAs does not address a transfer of assets; and

4. (d)

   the Body and its decisions will be central to the success (or otherwise) of the Alternative Measures. It will be difficult to ensure the Body has the requisite degree of impartiality.

The UK authorities consider that the alternative package is at least equivalent to a divestment of the Rainbow business in terms of its impact on limiting potential distortions of competition, and can be implemented with more certainty and more quickly than a divestment.

The UK authorities consider that the alternative package as a whole is designed to build the capacity in the market to drive higher ongoing levels of market-wide switching in the SME and mid-corporate banking markets. As the largest player, the burden of this will fall most heavily on RBS. Although less easily quantifiable than the benefits of the Incentivised Switching Scheme, the Capability and Innovation Fund will strengthen multiple banks' SME banking offerings, bringing more choice to the market, creating a diversity of business models and driving switching. It will also accelerate the development of new businesses and new technologies that would weaken SMEs' dependence on their banks.

1. (a)

   Reduce RBS's market share: The implementation of the Incentivised Switching Scheme and the provision of funds to develop SME banking capability will strengthen smaller competitors and allow them to exert a greater competitive constraint on RBS;

2. (b)

   Reduce the commercial gain from having received the aid: The alternative package has a significant upfront cost with an additional ongoing impact through reduced turnover from a reduction in SME customers through the Incentivised Switching Scheme;

3. (c)

   Transfer of SME customers: Unlike a divestment, which would involve the forced transfer of SME customers who have not chosen to move bank, the Incentivised Switching Scheme encourages customers to make their own decision to switch. Empowered customers should be more likely to engage with their new bank, and switch again in the future if they can obtain a better deal with another bank; and

4. (d)

   Access to branches to cater for SME customers: The Branch Access Scheme supports the switching of customers away from RBS to Challenger Entities under the Incentivised Switching Scheme, as these customers will not need to change their day to day cash handling arrangements.

1. (a)
   RBS has lost [5-10] % of market share in the corporate segment since Q4 2010, moving from a [30-35] % to a [20-25] % share. It is no longer the largest bank for serving mid-corporate customers in the UK. This reduction in market share also substantially exceeds the reduction in market share envisaged by the divestment of the Rainbow business40.
2. (b)

   The Capability & Innovation Fund includes a number of very significant grants to help banks with an established SME banking franchise enhance and extend their existing business banking propositions for large SMEs and mid-corporates. The UK authorities anticipate that many of these developments will enhance certain banks' ability to serve mid-corporate customers and will increase the total number of banks able to consequently develop and offer propositions for mid-corporates.

3. (c)

   The Incentivised Switching Scheme is targeted to deliver a movement of large SME customers from RBS to other banks. For recipient banks the increased number of large SME customers will incentivise the development of services for larger firms including mid-corporates. In addition, over time, some of the large SME customers can be expected to grow to being mid-corporate firms, which will further incentivise the development of relevant offerings.

4. (d)
   The CMA41 found that SMEs with turnover above GBP 2 million were generally able to negotiate pricing and service terms with their banks. For this to be an effective means of generating competition it is critical that these customers have viable alternative providers. By enabling additional banks to build mid-corporate capabilities competition will be materially enhanced.
5. (e)
   Due to the complexity of handling mid-corporate customers, the proposals RBS had received when attempting to sell the Rainbow business42 in the past envisaged […].

1. (a)

   Geographic scope: The alternative package would impact competition throughout the UK, without any geographic limitation

2. (b)

   Broad market impact: The alternative package would help to bring about a systemic and long lasting change on the market by assisting a number of Challenger Entities to compete with the incumbent banks more effectively. More specifically:

   1. (i)

      The Capability and Innovation Fund will assist entities to develop their capacity to service SMEs and mid-corporates, whilst also increasing their liquidity and financial standing. It will also encourage the development of new technologies to be used by Challenger Entities;

   2. (ii)

      The Incentivised Switching Scheme will help the Incentivised Switching Eligible Entities to become established, by growing their customer-bases;

   3. (iii)

      The Branch Access Scheme will enable Eligible Entities to physically service newly acquired SME customers under the Incentivised Switching Scheme e.g. by providing cash and cheque handling services.

3. (c)

   Addresses market issues identified by the UK Competition and Markets Authority (‘CMA’): The alternative package also addresses some key market issues identified by the CMA in its recent review of the UK SME banking market. These issues include:

   1. (i)

      Low levels of customer engagement with their banking services, weak responses to variations in price and quality and a lack of trigger points to prompt switching;

   2. (ii)

      A lack of incentives for banks to invest in attracting customers to switch;

   3. (iii)

      High customer acquisition costs for new entry and expansion by Challenger Entities;

   4. (iv)

      The lack of product and technical innovation in SME banking

   5. (v)

      Concerns from Challenger Entities about the cost of building and running a branch network.

4. (d)

   Timing and certainty of execution: The alternative package can be implemented in a more timely and certain manner. It would avoid the risks and uncertainties of a capital transaction, as experienced in previous attempts to sell the Rainbow business.

5. (e)

   Removing barriers to the UK Authorities' exit from RBS: The UK Authorities has publicly expressed its intention to progress with the sale of its stake in RBS and thereby return RBS to private ownership. The prevailing difficulties and delays to the divestment of the Rainbow business, which is the only one of the divestment Commitments remaining to be satisfied, have led to uncertainties which have affected the attractiveness of RBS as an investment proposition. The alternative package would remove these uncertainties.

1. (a)
   RBS's market share decreased from [25-30] % in Q4 2010 to [20-25] % in Q4 201643, representing a decrease of [3-7] % for the period. The 5 % decrease expected from the divestment of the Rainbow business is therefore exceeded when the market share loss expected from the Incentivised Switching Scheme alone is aggregated with the observed organic RBS market share loss since 2010.
2. (b)

   The UK Authorities have made a number of changes to the proposed package to address the key points made by interested parties. The UK authorities consider that the updated alternative package addresses the third party concerns, will be equivalent to the divestment of the Rainbow business (in terms of its impact both on RBS and the market as a whole) and will be effective in boosting competition in SME banking in the UK.

3. (c)
   Regarding the comment on the need to ensure the independence of the Body, the UK authorities note that the Body will be bound by the Framework and State aid Deed44 which specify the functions and duties of the Body, and which determine the obligations and restrictions of the Body. Furthermore, an individual shall not be permitted to take up office as a director of the Body if that individual concurrently holds any office (other than any non-executive office which is not as the chair or equivalent position) or a senior management position in any public sector body or is a director or senior manager of the RBS Group or is a related party (or an associate of a related party) of RBS.

A number of comments from interested parties mentioned that the size of the SME Capability Fund should be increased, as this would lead to a greater impact on competition in the SME banking market.

Other comments from interested parties mentioned that fragmenting funds between a large number of banks, such that none can make meaningful investment, will have no material effect on competition or concentration. Rather than there being equal disbursements within the respective pools, the size of the disbursements should vary to take into account the applicant's actual needs and investment plans.

A number of parties also submitted that the SME Capability Fund should be opened up further to those institutions without existing strong BCA capability and that non-banks (e.g. building societies) should be able to benefit from the Capability Fund.

The UK authorities consider that it is reasonable to expect that the SME Capability Fund, especially when combined with the Incentivised Switching Scheme, will increase the market shares of Challenger Entities, and therefore result in a corresponding decrease in RBS's market share.

The UK authorities consider that the Capability Fund will increase the Challenger Entities' market shares as it will materially improve the economics of banks entering the SME (and, if they so wish, mid-corporate) banking market and/or further developing existing capabilities. By way of illustrating the underlying concept, a GBP 3 million grant from the fund might make a borderline GBP 10 million project economic, by increasing the return on investment on a project from a return below the cost of capital to a viable and sustainable level.

1. (a)

   the size of the SME Capability Fund that the Challenger Entities have access to will be increased. The largest disbursements of the Capability and Innovation Fund will be targeted at those Challenger Entities with strong existing BCA capability. This is likely to lead to the largest impact on competition in the SME banking market and in the shortest time period, since these banks have already spent time and money developing their BCA products and the associated distribution infrastructure.

2. (b)

   the SME Capability Fund will be combined with the Innovation Fund. The distinction in pool 1 and 2 will be removed. The flexibility will be increased to improve opportunities for banks without strong existing BCA capability and for non-banks to access sizeable disbursements from the Capability and Innovation Fund.

Some interested parties questioned whether enough customers would be sufficiently incentivised by the proposed size of the dowries to overcome the efforts involved in switching. Customers have historically proven to be inert and there should be a clear, seamless process for customers to switch. To facilitate switching RBS should also share information on their customers with the Challenger Entities (incl. credit track record). Some interested parties also indicated the need to provide historical track records of customers for creditworthiness assessment.

A number of comments indicated that the size of the dowries should be increased to enable switching (and linked to the complexity and size of the customer), which would require the overall size of the Incentivised Switching Scheme to be significantly increased.

Some comments indicated that the duration of the Incentivised Switching Scheme should be sufficient to ensure time is not a significant constraint. Furthermore, an automatic extension of the customer perimeter (if the desired level of switching is not reached) was put forward.

Several comments suggested that the alternative package should also focus on transferring loans next to transferring BCAs, as the focus on BCAs ignores the need for greater competition in the SME lending market. The package would be too focussed on BCA providers. The SME lending market is viewed as significantly more profitable than BCAs and competition distortion needs to be remedied in the SME lending market as well. The comments also outline that currently Challenger Entities are disadvantaged, as the largest 4 banks are allowed to use an Advanced Internal Ratings Based model rather than standardised capital model: this allows the four banks to offer better pricing for loans than the Challenger Entities.

Some comments suggested that RBS should be forced to divest customers (including forced sales of BCAs and/or loans), rather than giving customers the opportunity to switch banks. Other comments suggest that RBS should commit to transfer a minimum number of net BCAs and have a penalty for non-performance.

A number of comments also suggest that the Incentivised Switching Scheme should only start after they have been able to implement the investments enabled through the SME Capability Fund.

1. (a)

   the current size of fund has capacity to result in more than a 2 % reduction in RBS's current market share. The targeted two percentage point reduction was specifically structured in order to incentivise a greater number of large SME customers to switch. There is nothing to stop RBS customers from continuing to switch to Challenger Entities (without dowries being given) and therefore continuing to reduce RBS's market share further. Indeed, they are much more likely to do so after being exposed to Challenger Entity marketing;

2. (b)

   the Incentivised Switching Scheme involves incentives to switch that are themselves likely to be much greater than those currently in the market. Further, these are expected to be paid in addition to those incentives already available;

3. (c)

   Challenger Entities will compete hard for customers and create sufficiently attractive offers to entice customers to switch. There is clearly demand in the market for these customers;

4. (d)

   switching to a Challenger Entity in the UK has been made easier for many customers following the introduction of CASS in 2013. BCA customers already use CASS to switch away from RBS to Challenger Entities;

5. (e)
   RBS intends to mitigate/counter any resistance by customers from switching by committing to measures identified by the CMA45 as competitive, including informing eligible customers about CASS and assisting customers with on-boarding data requests;
6. (f)

   RBS would be required to engage with a defined pool of its customers (including through the provision of marketing materials) on behalf of Challenger Entities on the benefits of switching; and

7. (g)

   the Incentivised Switching Scheme has various built-in safety mechanisms to ensure that sufficient switching occurs. For example: The Body overseeing the scheme would have the ability (i) to require RBS to increase the frequency of the communications or (ii) to extend the period for which dowries are available by up to 12 months or (iii) to restructure the dowry formula, after a period of time, in order to improve the efficacy of the scheme and (iv) if there is an underspend in the dowries, RBS would have to transfer the Multiplier as outlined in recitals 52 and 53.

1. (a)
   incentives have historically induced customer switching as reflected also in the CMA Retail Banking Investigation Final Report and the RBS-commissioned Charterhouse research46‘[…]’47;
2. (b)

   the switching process is likely to be smooth for customers with most customers taking advantage of the Incentivised Switching Scheme to make their transfer through CASS. However, sharing customer financial records or other information on customers will likely be restricted by data protection legislation;

3. (c)

   customers in the W&G perimeter are not less likely to switch. RBS states that the switching and customer attrition rates of those customers within the W&G perimeter are broadly in line with RBS's ‘core’ customers and that W&G customers have been expected to leave the RBS group since 2010;

4. (d)

   protection and anti-avoidance mechanisms are in place to ensure customer switching. The Body has the power to impose a financial penalty on RBS if the BCA dowries have not been used up within the term of the scheme's operation (i.e. the Multiplier). Furthermore, the Body will be able to make changes to the amount of the dowries paid to ensure they are as effective as possible, force RBS to increase its frequency of marketing of the scheme. Furthermore, the perimeter and the length of the scheme will be increased if certain switching levels are not reached.

1. (a)
   customers would transfer their other banking products (e.g. loans) in addition to their BCAs. The CMA have found that ‘the vast majority of SMEs seeking finance go to their BCA bank…over 90 % of SMEs in UK went to their main bank for overdrafts, loans and credit cards’48; and
2. (b)
   empowering customers to make their own decision to switch is preferable to forced divestments, since empowered customers should be more likely to engage with their new bank and switch again in the future if they can obtain a better deal with another bank. This approach also has support in the CMA's Retail Banking Investigation Final Report, which states that ‘divestment might induce some additional customer engagement on a temporary transitional basis, particularly among customers who saw themselves as having been transferred against their will to a ‘new’ bank, but this is clearly not a desirable way of inducing greater sustained customer engagement’49. Instead, the CMA found that non-structural remedies ‘directly targeting the underlying causes of the AEC — i.e. by improving customer engagement and facilitating switching — are much more likely to be effective in addressing the competition issues we had identified…’50. The Incentivised Switching Scheme will build up SME customer awareness of a large number of Challenger Entity brands through the targeted marketing, encouraging the customer to engage with the Challenger Entity options and brands before deciding which one to choose.

1. (a)

   the total size of the scheme will increase from GBP 175 million to GBP 350 million of which GBP 225 million will be available for BCA dowries. GBP 50 million will be available for loan-related dowries to accommodate the comment that the scheme should also focus on transferring loans next to transferring BCAs. GBP 75 million would also still be available to help facilitate switching (compensation for break fees related to the transfer of loan balances or other third party costs such as legal fees);

2. (b)

   with the increase in size, the Incentivised Switching Scheme will also target a transfer of 3 % market share instead of the initial 2 %; and

3. (c)

   RBS would start communicating the Incentivised Switching Scheme to customers around three months after launch of the package and after the first awards of the capability fund are granted.

A number of interested parties questioned the benefits that the Branch Access Scheme would have on competition in the SME banking market and that the administration and funding of the scheme would be burdensome on the customers and Challenger Entities involved, and may be an unfruitful distraction for the Body.

A small number of interested parties were supportive of the Branch Access Scheme, and believed that they would take advantage of it.

1. (a)

   the Branch Access Scheme will only be open to those customers that have switched under the Incentivised Switching Scheme (and where the relevant bank participating in the Incentivised Switching Scheme has entered into an Inter-Bank Agency Deed with RBS).

2. (b)

   banks will no longer have access to branches for free, but branch access will be provided for their eligible customers on reasonable and non-discriminatory commercial terms. Banks will be able to use money from the Capability and Innovation Fund and/or dowries received under the Incentivised Switching Scheme to cover this cost. The money saved has been reallocated to other aspects of the alternative package.

Some interested parties were critical of the proposed Innovation Fund, considering it to be unnecessary and, given its long term nature, believing that it would not have a meaningful impact on competition and will have no effect on RBS's position in the UK SME market. They argued that funding from the Innovation Fund would be better diverted to other elements of the package.

A few comments about the Innovation Fund were positive and this would help to speed up innovation in the SME banking sector. Some also argued that banks and building societies should also be able to access the benefits of this funding.

In response to comments received, the Innovation Fund will be merged with the SME Capability Fund to create a Capability and Innovation Fund. This is intended to address concerns about having two distinct funds by allowing more flexibility in who may apply and how the funds are allocated, whilst maintaining the benefits of funding for innovations relevant to SMEs.

Given that the updated alternative package does not involve State resources with respect to RBS, there is no need to assess the other cumulative conditions for a measure to qualify as State aid. Hence, the alternative package does not involve new aid to RBS.

The Commission observes that there is no direct link between the State aid granted to RBS in 2008 and 2009 and the updated alternative package described in Section 2.3. Indeed, in the procedure leading to the Restructuring Decision, the UK authorities committed to divest the Rainbow business and the approval of the aid was based on that commitment. The alternative package has been proposed eight years after the granting of the last capital aid to RBS. Therefore, it can be excluded that the alternative package is directly linked or funded by the 2008 and 2009 aid to RBS.

It should however be noted that, as indicated in recital 15, the State still owns 71,2 % of RBS's shares. This suggests that the financial burden of the alternative package is indirectly but largely borne by the State, as the majority shareholder of RBS. In addition, the UK authorities have been closely involved in the design of the alternative package which could suggest that the design of the package is imputable to the State. Moreover, the alternative package could give a selective advantage to the undertakings that are entitled to benefit from it. The measure is also designed in such a way as to channel its effects towards the Challenger Entities.

In view of the elements discussed in Section 5.1.1, the Commission concludes that the updated alternative package does not qualify as new State aid to RBS.

As analysed in Section 5.1.2, to the extent the alternative package qualifies as State aid to the banks which benefit from it, such aid is considered compatible on the basis of Article 107(3)(b) TFEU as necessary part of the Commitments on the basis of which the initial aid measures in favour of RBS are considered compatible in the present case. The compatibility of the existing aid to RBS in view of the replacement of the divestment commitment by the alternative package is analysed in Section 5.2 of the present Decision.

The Commission has to assess whether the modifications to the Amended Commitments call into question the conclusion reached in the Amended Restructuring Decision as to RBS's ability to restore its viability without requiring further State aid.

According to the estimation provided by the UK authorities (see Table 3), the cost of the alternative package is not higher than the costs of continuing with the divestment of the Rainbow business. The Commission therefore considers that switching to the alternative package would not significantly affect RBS's viability.

The Commission preliminarily concludes that the amendments proposed by the UK authorities do not endanger the viability of RBS.

The Core Tier 1 capital ratios have improved further since 2013 and the core operating profit has continued to be positive as described in recital 11 of the Opening Decision.

The Commission therefore considers that the proposed amendments do not call into question the conclusion reached in the Amended Restructuring Decision as to RBS's ability to restore its viability.

The notified changes therefore do not affect the assessment of burden sharing made in the Restructuring Decision and the Amended Restructuring Decision.

The purpose of the alternative package as described in Section 3.3 is to address distortion of competition in the same way as the divestment commitment of the Rainbow business it is replacing.

The Commission therefore has to assess whether the updated alternative package is equivalent to the divestment commitment it will replace.