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STNDF Santander UK

Filed: 4 Mar 21, 2:57pm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                         to                         
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report                         to                         
Commission file number 001-14928 
Santander UK plc
(Exact name of Registrant as specified in its charter)

England
(Jurisdiction of incorporation or organization)
2 Triton Square, Regent’s Place, London NW1 3AN, England
(Address of principal executive offices)
Julian Curtis
2 Triton Square, Regent’s Place, London NW1 3AN, England
Tel: +44 (0) 20 7756 4272
E-mail: julian.curtis@santander.co.uk
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each classTrading
Symbol(s)
Name of each exchange
on which registered
2.500% Notes due January 5, 2021, issued by Santander UK plcSAN/21BNew York Stock Exchange
3.400% Notes due June 1, 2021, issued by Santander UK plcSAN/21CNew York Stock Exchange
Floating Rate Notes due June 1, 2021, issued by Santander UK plcSAN/21DNew York Stock Exchange
3.750% Notes due 2021 due November 15, 2021, issued by Santander UK plcSAN/21FNew York Stock Exchange
Floating Rate Notes due November 15, 2021, issued by Santander UK plcSAN/21GNew York Stock Exchange
2.100% Notes due January 13, 2023, issued by Santander UK plcSAN/23BNew York Stock Exchange
4.000% Notes due March 13, 2024, issued by Abbey National Treasury Services plc *SAN/24New York Stock Exchange
2.875% Notes due June 18, 2024, issued by Santander UK plcSAN/24DNew York Stock Exchange
    


*From June 1, 2016 Santander UK plc became the issuer in respect of the outstanding notes issued by Abbey National Treasury Services plc under its US SEC registered debt shelf. All notes transferred to Santander UK plc by Abbey National Treasury Services plc under its US SEC registered debt shelf and all notes issued by Santander UK plc in the future under its US SEC registered debt shelf will be the sole liability of Santander UK plc and are not guaranteed by any other entity.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
7.95% Term Subordinated Securities due October 26, 2029
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Ordinary shares of nominal value of £0.10 each*31,051,768,866 
10 3/8% Non-cumulative Preference Shares of nominal value of £1 each200,000,000 
8 5/8% Non-cumulative Preference Shares of nominal value of £1 each125,000,000 
*All of the issued and outstanding ordinary shares of Santander UK plc are held by Santander UK Group Holdings plc.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes      No  
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-accelerated filerEmerging growth company
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.   
The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAPInternational Financial Reporting Standards as issued by the International Accounting Standards BoardOther
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17      Item 18  
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
    
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2020 Annual Report Santander UK plc Part of the Banco Santander group

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1Santander UK plc Santander UK plc Annual Report 2020 Important information for readers None of the websites referred to in this Annual Report on Form 20-F for the year ended 31 December 2020 (the Form 20-F), including where a link is provided, nor any of the information contained on such websites, is incorporated by reference in the Form 20-F. Santander UK plc and its subsidiaries (collectively Santander UK or the Santander UK group) operate primarily in the UK, and are part of the Banco Santander group (comprising Banco Santander SA and its subsidiaries). Santander UK plc is regulated by the UK Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and certain other companies within the Santander UK group are regulated by the FCA and the PRA. This Annual Report contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward- looking statements. See Forward-looking statements on page 253. Santander UK Group Holdings plc is the immediate parent company of Santander UK plc. The two companies operate on the basis of a unified business strategy, albeit the principal business activities of the Santander UK Group Holdings plc group are carried on by Santander UK plc and its subsidiaries. The Santander UK Group Holdings plc Corporate Governance and Risk Frameworks have been adopted by the Company and its subsidiaries to ensure consistency of application. Contents Strategic report 2 Financial review 17 Governance 26 Board of Directors 27 Corporate governance report 30 Directors’ remuneration report 53 Directors’ report 61 Risk review 67 Financial statements 163 Auditor’s report 164 Primary financial statements 172 Notes to the financial statements 182 Shareholder information 251

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Santander UK plc2 Annual Report 2020 | Strategic report Strategic report About this report The Strategic Report outlines the key elements of the Annual Report and provides context for the related financial statements. The report highlights key financial and non-financial metrics which help to explain the business’s performance over the past year. It also highlights the external environmental factors affecting the business along with Santander UK’s position in the UK banking market. At all times we try to treat our stakeholders fairly and meet our environmental responsibilities. Sustainability and our strategic direction are inseparable, and we continue to embed sustainability across our business. We have included information to demonstrate this within our Strategic Report and further information is also available in our ESG Supplement. By order of the Board. William Vereker Chair, 2 March 2021 Santander UK at a glance We provide high quality, seamless service across our branch, digital and telephony channels 14 million active UK customers c22,000 Full time equivalent employees 564 Branches 3rd largest retail mortgage provider(1) Top 5 Largest current account provider(2) 5th Largest commercial lender(1) We offer innovative products and services to help people and businesses prosper Santander UK is a large customer-focused bank and possesses the scale and breadth of proposition to challenge the big four UK banks. We serve our customers through digital channels, alongside a network of branches. We play an important role in the UK economy and in the communities in which we operate. We help people purchase their home and save for the future, and support business growth. We employ 21,900 people and we paid £159m of corporation tax and £74m through the UK Bank Levy in 2020. Our innovative international proposition facilitates access to a range of markets and offers invaluable expertise and insight. We operate through three customer business segments, supported by central functions Retail Banking Offers a wide range of products and financial services to individuals and small businesses through a network of branches and ATMs, as well as through telephony, digital and intermediary channels. It includes business banking customers, small businesses with an annual turnover up to £2m, and Santander Consumer Finance, predominantly a vehicle finance business. Corporate & Commercial Banking Offers a wide range of financial services and solutions to more complex businesses across multiple sectors, typically with annual turnovers of between £2m and £500m. Our service is provided by relationship managers and product specialists who cover clients’ UK and overseas needs. Corporate & Investment Banking(3) Offers specially tailored solutions and value-added services to corporate clients with an annual turnover of over £500m. We provide products to manage currency fluctuations and protect against interest rate risk and also arrange capital markets finance and specialist trade finance solutions. Corporate Centre Mainly includes Treasury, which is responsible for capital, funding, liquidity, pensions and balance sheet management. It also includes our Jersey and Isle of Man businesses as well as our non-core corporate and legacy portfolios. (1) Santander UK industry analysis of latest available bank and building society reports. Mortgage provider: UK mortgage stock, Retail Banking divisions. Commercial lender: UK commercial lending stock, Corporate and/or Commercial Banking divisions (excludes investment banking). (2) CACI’s CSDB, Current Account Stock, Volume, November 2020. (3) Subject to court approval, we are proposing to transfer substantially all of the CIB business to the London Branch of Banco Santander, S.A. in H221 by way of a banking business transfer scheme under Part VII of the Financial Services and Markets Act 2000.

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3Santander UK plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information Strategy and key performance indicators The directors of the Company’s immediate parent, Santander UK Group Holdings plc, manage the operations of the Santander UK Group Holdings plc group (which includes the Santander UK group) on a business division basis. Key performance indicators are not set, monitored or managed at the Santander UK group level. As a result, the Company’s Directors believe that analysis using key performance indicators for the Company is not necessary or appropriate for an understanding of the development, performance or position of the Company. The development performance and position of the business of the Santander UK group, mainly at a consolidated level, is set out in the Financial Review. The key performance indicators of the Santander UK Group Holdings plc group can be found in its 2020 Annual Report, which does not form part of this report 2020 results Our 2020 results have been materially impacted by the Covid-19 crisis. Profit before tax of £605m was 40% lower than in 2019. The decline in profit before tax was primarily due to higher credit impairment losses which were up £425m to £645m, including £448m related to Covid-19 impacts. Business model Our purpose is to help people and businesses prosper. Our resources People Bringing the skills, expertise and drive to deliver enhanced customer loyalty and experience Infrastructure Branch and online presence, operating centres and innovative technology Banco Santander family Technology, shared management experience and brand benefits as part of well-diversified global bank Financial Strong capital, liquidity and a prudent approach to risk Our competitive advantage Leading scale challenger bank in the UK Scale in our core banking businesses combined with an innovative mindset Resilient balance sheet and prudent approach Demonstrated by the lowest CET1 drawdown in the 2019 BoE stress tests International expertise for UK companies 20 trade corridors to help UK companies expand into overseas markets What we do We provide financial products and services Mortgages, consumer auto finance, unsecured loans, credit cards, banking and savings accounts, investment and insurance products for individuals and growth-focused support and services for companies. How we do it – Build strong customer relationships – Offer a differentiated proposition – Take a prudent approach to risk – Do things The Santander Way Our culture is built on doing things The Santander Way Simple Our products are easy to understand and we offer a service which is convenient, no matter when or how our customers want to engage with us.

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Santander UK plc4 Annual Report 2020 | Strategic report Personal We treat our customers as valued individuals, with a professional service they can trust. We support our colleagues to achieve their ambitions. Fair We are open, honest and treat others as we would like to be treated. We earn our investors a sustainable return and do our part to support our communities. Creating value for our stakeholders Customers Delivering customer loyalty and outstanding customer experience People Providing a thriving workplace for engaged, motivated and diverse individuals and teams Shareholders Aiming to improve efficiency and returns through simplification and digitalisation Communities Supporting our communities in which we operate with our sustainability strategy Market overview: five major forces continue to shape the UK banking market Changing customer behaviour What we have seen The change in customer behaviour accelerated in 2020 as the move away from traditional in-branch banking towards online services stepped up as a result of the Covid-19 pandemic. As essential services, bank branches remained largely open throughout the lockdowns but, despite this, more customers used remote channels such as digital and telephone banking services. Digital banks have gained some traction in 2020 attracting more than their market share of current account switchers in the UK. Younger customers in particular put a greater emphasis on better digital tools, convenience, and a simpler purchasing process, characteristics often associated with digital-only banks. Our response and looking ahead During 2020, customer engagement through contact centres and digital channels increased sharply, with digital financial transactions up 18% over the year. Branch counter transactions reduced by 18% and branch ATM transactions reduced by 55%. In response, we adapted our operating model to meet the changing needs of our customers and to increase remote banking capacity. During the lockdown period we trained branch staff to be redeployed to online chat and telephone services. We also moved many services online, such as the ability for our customers to request a payment holiday on a mortgage. Strong market competition What we have seen While the UK banking sector remains very competitive, customer rates have fallen in both lending and deposits in 2020. Mortgage rates increased in the second half of 2020 as demand recovered strongly following the Covid-19 lockdown and the temporary reduced rates of stamp duty for house purchases. However, although new business margins have improved they still tend to be below back book levels, and competition could increase as demand eases in 2021. In recent years, some retail banks have exited mortgages or ceased new mortgage lending. In particular, several non-banks who diversified into financial services in recent years announced plans to divest and have put their books up for sale. Our response and looking ahead In line with the market, we increased mortgage lending rates as we managed our risk appetite and new lending flow. We also repriced our 1I2I3 Current Account and change in benefits in light of the lower rate environment and competitor actions. Strategic report continued

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5Santander UK plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information We expect our net mortgage lending to be in line with market growth, as we focus on quality customer service, retention and our comprehensive proposition for first-time buyers. Rapid technological change What we have seen Technology continues to evolve rapidly across all areas of the financial services sector as people demand to be able to do more digitally. Over recent years the banking sector has evolved to offer more and more services that were once only possible to do in a branch, online or through apps. Over recent years, new challenger banks entered the UK banking sector, disrupting the market with innovative propositions and competitive pricing to grow their business. This has helped to further influence customers’ expectations of digital banking interactions in particular. While the Covid-19 crisis highlighted the need for banks to offer essential services remotely, it has also reinforced that a high street presence has a part to play. Our response and looking ahead We have continued to invest heavily in improving our digital platforms to ensure our customers have a reliable, innovative and full banking service. By focusing on the customer experience, we have been able to reduce duplication from back office processes and streamline customer outcomes. During lockdown, having branches available for small teams to work from has been a real benefit. They have provided flexibility and technology has enabled them to support both their contact centre colleagues as well as our customers. Demanding regulatory agenda What we have seen Despite the initial pause at the onset of Covid-19 pandemic, the regulatory policy and change agenda became intense heading into year- end. This was driven by the regulators continued guidance on Covid-19 financial support measures, preparation for Brexit, innovation and technological developments, and beginning of the design process for the post-Brexit regulatory landscape. Covid-19 guidance implementation at short notice put a considerable strain on technology and operations as well as programme management resources. Alongside this, there was a significant increase in the volume and frequency of supervisory information and data requests. Significant business line, Risk, Finance, Compliance, and Regulatory Affairs resources were dedicated through the year to deliver these. Our response and looking ahead The Government is undertaking a series of reviews of the Financial Services sector, looking at the future regulatory framework in the UK, the regulatory regime for overseas firms coming into the UK, the UK Funds regime, Ringfencing, and the UK Listings rules among others. We are proactively engaging with the regulators, government, and industry trade associations on these and other significant policy initiatives, including a 2021 focus on Operational Resilience and Climate Risk Stress Testing, on-shored CRR II, and possibly the Basel 3.1 package of capital framework reforms. Uncertain economic environment What we have seen The UK economy, along with other global economies, experienced a significant downturn in 2020. As the Covid-19 pandemic unfolded, a number of regional and national lockdowns were announced to control the virus and reduce pressure on the NHS. During lockdown, non- essential businesses, schools and workplaces were closed and economic activity and consumer spending fell dramatically as a consequence. Alongside the uncertainty caused by the Covid-19 crisis there was focus on preparation for the end of the Brexit transition period. In response, the UK government implemented a range of support programmes to protect jobs and help businesses survive and eventually support economic recovery. The Bank of England reduced the bank rate twice in March 2020, from 0.75% to 0.25% and then down to 0.10%, the lowest interest rate the UK has ever seen. Our response and looking ahead At Santander UK, we implemented a number of support measures, including offering payment holidays for business and retail customers, along with participating in various government lending schemes for businesses.

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Santander UK plc6 Annual Report 2020 | Strategic report Securing a Brexit deal has provided some welcome certainty and the chance to consider the opportunities inside the EU under the new arrangements, and new markets which we can support through our overseas links to the Banco Santander group. Strategic review Our refined strategic priorities are aligned to Banco Santander’s One Europe strategy, with a focus on customer loyalty and experience, simplification, improved efficiency and sustainable growth, while aiming to be the best bank for all our stakeholders. Our strategic priorities 1. Deliver growth through customer loyalty and outstanding customer experience 2. Simplify and digitise the business for improved efficiency and returns 3. Engage, motivate and develop a talented and diverse team Be a responsible and sustainable business Focusing on five pillars for a thriving workplace : sustainable economic growth and financial inclusion; climate change; inclusive digitalisation; and ethics and fighting financial crime. Meeting all our regulatory requirements and expectations. Risk management overview Meeting operational challenges The Covid-19 pandemic has resulted in a number of significant challenges, which were met during the course of 2020. We transitioned effectively to a sustained working from home environment, underpinned by robust remote access technology, and continuous communications and support measures for all of our colleagues. At the same time, the risk team’s resources were mobilised to implement new processes and procedures to facilitate the delivery of Covid-19 government support measures for our retail, business and corporate customers, whilst maintaining operational resilience. Interactions and communications with our customers were also increased in order to better understand their individual needs. Credit and operational risk impacts During the year, we managed the evolution of both our credit and operational risk profiles across all of our businesses and loan portfolios. We initiated targeted retail customer out-reach to assess requirements for ongoing support and re-rated substantial segments of our corporate credit portfolios, also supplemented by proactive client engagement. Financial Support activities have been re-engineered to ensure our customers obtain the best individual outcomes. We continue to focus on increased fraud and cyber risks seen across the financial services sector to ensure we maintain a robust operational environment. We have prioritised monitoring and oversight of these and other key operational risks with enhanced reporting and input to IT strategy, data management and business transformation. Strategic risk management actions Our teams supported the analysis of net credit loss modelling through ongoing reviews of inputs to our IFRS9 models, which determine the level and timing of the provision of credit losses in our financial accounts. Regular risk assessments of our business plans were undertaken throughout the year, under a range of economic stress scenarios. This enabled us to view our medium to longer term financial forecasts and the setting of our risk appetite to support the business plan. We also identified management actions that will assist us in mitigating cost and revenue pressures, including the phased delivery of our cost transformation programme. Top risks Covid-19 first and second order risks During 2020 our top risks have been re-focused to incorporate two new top risks; the credit and operational (first order risks) and cost and revenue (second order risks) impacts of Covid-19. Financial crime Financial crime activities can have significant impact on our customers. Criminals are increasingly using the financial system to launder the profits of illegal activity such as human trafficking and terrorism. We continued to make significant investment in ongoing enhancement to our financial crime control framework, and to key controls including anti-bribery and corruption measures, customer risk assessment, screening and transaction monitoring. Our Money Laundering Reporting Officer continues to reinforce the importance to Senior Management of focusing on; continuous enhancements to data quality, key risk indicators and treatment strategies to sustainably control risk; ensuring proportionate capacity and investment across due diligence processes for higher risk customer segments; and promoting the embedding of an anti-financial crime culture framework. Covid-19 has also provided an opportunity for fraudsters to take advantage of vulnerable customers through a range of fraud attacks and scams. We have increased our fraud messaging and scam education to assist our customers. We have also continued to build on existing controls and develop new control environments to address fraud attacks. Strategic report continued

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7Santander UK plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information Brexit Whilst our contingency plans were based on a worst-case ‘no deal’ scenario, the risks associated with Brexit remain substantially the same, as the Trade and Cooperation Agreement deal does not cover financial services in any significant detail, as expected. Our plans are described more fully in the separate case study later in this section. Conduct and Regulatory We are operating in an environment where conduct and regulatory risks are elevated, reflecting the challenges posed by Covid-19 and the continuing need for customer support following the extension of support and forbearance measures in relation to mortgage repayments and government lending schemes for SMEs. Regulatory engagement continues to be high as a result of these issues, as well as with respect to other key developments such as Brexit, Negative Rates and Libor Transition. Robust processes have been put in place to provide assurance that risks are being managed and actions monitored across the various government sponsored schemes, and also other conduct related issues, in order to ensure fair customer outcomes. Managing a complex change agenda We continue to face a challenging change agenda into 2021 with respect to our operating model and also supporting a range of initiatives required to deliver our business strategy. These include increased agile transformation across the organisation; significant IT infrastructure projects; bedding down of new centres of excellence; and implementation of regulatory projects. This places more importance on our management of change, which is underpinned by our established risk project prioritisation processes and change oversight governance. Building and maintaining capital strength Regulatory uncertainty on the implementation and interpretation of capital rules continues and impacts on both our capital management and capital position. We continuously review our capital position on a forward-looking basis, which remains subject to the Bank of England’s stress testing regime. The 2020 CET1 capital ratio of 15.2% (2019: 14.3%) and UK leverage ratio of 5.1% (2019: 4.7%) were both significantly above regulatory requirements, despite higher Covid-19 related credit impairment losses. This includes the impact of a 2020 ordinary share dividend. Pension There was substantial volatility in the funding position and IAS 19 accounting position during 2020, particularly in the first half year. AA UK corporate credit spread volatility has been a major driver of the accounting position which impacts capital, along with equity and interest rate markets, with the Bank of England cutting the bank rate to 10bps and increasing quantitative easing. The de-risking actions we have taken during the past two years, including executing various hedging strategies and strategic asset reallocation have reduced exposure to pro-cyclical assets and improved the fund’s resilience. Cyber attacks In 2020, threats from the external cyber environment continued to increase, placing even more importance on our internal controls. We monitor a range of cyber risks and have taken mitigating actions including; deployment of a cyber threat intelligence platform; increased intelligence through industry co-operation; and actions to increase staff awareness. Implementation of our Cyber Security Plans is proving effective, with no significant disruption experienced to date. Third party risk management The complexity and criticality of services provided by third-parties is a key operational risk that has been recognised by us, our peers, and the regulators. We have established a robust Third Party Supplier Risk Framework, which ensures that those with whom we intend to conduct business, meet our risk and control standards throughout the life of our relationship with them. Ring-fencing implementation Ring-fencing has resulted in significant change to our structure, people and operations and we have retained it as a top risk to ensure continued focus on the ongoing embedding of ring-fencing culture throughout our governance and operations. Emerging risks in 2020 Six new emerging risks have been introduced to our risk radar during 2020. These are reviewed and discussed regularly at both ERCC and BRC. Negative rates Central Banks wish to retain as wide a range of policy tool options in order to mitigate economic and financial market risks. In early 2021 we were involved in roundtable discussions with the PRA, along with our industry peers, to provide feedback on the issues facing the banking sector in the event of a negative rate environment. Although we do not have material structural balance sheet exposure to negative rates, we have revisited our plans for readiness including systems capabilities (both tactical and strategic), legal and documentation issues, and how negative rates may impact our customers as well as implications for margin management. We will continue to develop and enhance our strategy during 2021, through a coordinated bank-wide approach led by our CFO.

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Santander UK plc8 Annual Report 2020 | Strategic report Extended government involvement in the banking industry There is the potential for adverse impacts on financial performance and investor perceptions of the banking industry, that could arise inadvertently as a result of the governments ongoing responses to Covid-19 (e.g. implementation risks related to government backed loan schemes, and IFRS9 loan loss guidance). However, to a certain extent, these risks have been balanced by other government actions such as the furlough scheme and the Term Funding Scheme for SMEs (TFSME), which have delayed peak unemployment and reduced funding costs respectively. These issues are considered as part of our forward financial business planning and by our Capital Committee and Assets and Liability Committee (ALCO) regularly. We are further evaluating the potential impacts of this risk, as government lending schemes unwind and the credit impacts of the crisis crystalise further. Extended period of economic contraction Negative multiplier effects from the economic shock caused by Covid-19 could materialise such as delayed spending and investment, and a larger surge in business failures and unemployment than anticipated. Coupled with deflation and lower or negative rates, this would prove even more challenging for banks’ profitability. We regularly undertake stress tests on our future business plans, under a range of economic scenarios. High inflation The injection of significant government and central bank stimulus, could over the medium to longer-term result in the emergence of higher inflation that detrimentally impacts the UK economy. Similar to other economic risks our regular analysis of stress scenarios that we run across our business plans ensures that we fully understand the potential impacts and any mitigating actions that we might need to take. Disruption of macro-economic factors Changes to GDP, unemployment, and house prices from longer term structural shifts in income and wealth could have a material impact on the inputs to our economic scenario analysis. As part of this analysis we review changes in key underlying drivers which aids our forward business planning and risk appetite setting. Other environmental and social issues Extreme weather, natural disasters, biodiversity loss, human made environmental disasters, health impacted by pollution, water crisis, other infectious diseases, and social unrest, are other risks we are taking into consideration. Whilst, we have an ongoing focus on maintaining and enhancing our operational resilience, these risks have the potential to have unpredictable impacts on global businesses and economies, including us, and our suppliers, similar to the wide ranging impacts of Covid-19. These risks were highlighted and discussed at the World Economic Forum in January 2020. Task Force on Climate-related Financial Disclosures We are implementing the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and taking action to meet the expectations set by the PRA, BoE and FCA. This requires wide-ranging collaboration both within the bank and externally to develop the tools and methodologies needed. As such, we have adopted a unified approach across the Santander UK group and the following disclosures are made on a Santander UK Group Holdings basis. 1. Governance The Chief Risk Officer (CRO) is responsible for climate-related financial risks with oversight from the Board Risk Committee (BRC) and the Responsible Banking Committee (RBC). A climate change working group is managing our TCFD implementation and reports climate risks to the CRO and progress updates to the Executive Risk Control Committee and BRC. A separate working group has been set up to lead our preparation for the Bank of England 2021 Biennial Exploratory Scenario climate stress test and a steering committee provides management oversight. We actively contribute to Banco Santander’s newly-established sustainable finance working groups, which draw on global expertise to identify new business opportunities in renewable energy, green buildings, clean mobility and sustainable agriculture . To support the Board, management, and business we delivered a range of training across the bank: – Board-level climate change workshop covering climate science and regulations, and TCFD recommendations – Online climate change training, available to all staff – Sector-specific climate change training for Corporate and Commercial Banking. In addition, we are preparing a Climate Dashboard to highlight portfolio-relevant risks and opportunities using internal portfolio level data, and external market and policy data. 2. Strategy We are committed to the objectives of the Paris Agreement and our ambition is to help the UK transition to a low-carbon economy and tackle climate change. We are a leader in financing renewable energy projects and in 2020 we were the number one lender to the renewable energy sector by deal number, and number two by value (source: Inframation League Tables 2020). Strategic report continued

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9Santander UK plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information We also aim to deliver carbon reductions across our wider lending portfolio. We have tightened our policies on lending to carbon intensive sectors and do not fund new coal-fired power plants worldwide, or oil and gas drilling projects north of the Arctic Circle. Banco Santander is a member of the UN Collective Commitment on Climate Action, which requires banks to set sector-specific targets for the most material sectors in their portfolios. In the UK, we have assessed our most material portfolio, mortgages, against the physical and transition risks of different climate scenarios. Following a review by the Board and ExCo, we have also repositioned climate change to be a standalone pillar within our broader sustainability agenda and increased our level of ambition. More information is available in our ESG Supplement. In preparation for the Bank of England BES climate stress test, we are reviewing our financial exposure to climate-related risks. We have developed and are stress testing a Target Operating Model, including scenario modelling, process map and data flows. We will include stress testing results in our ICAAP in Q1 2021 ahead of the BES in Q2 2021. 3. Risk management Climate change is integrated into Santander UK’s risk framework. We have introduced minimum standards requiring each business area and risk type to consider the risks posed by climate change. The risk framework outlines the CRO’s responsibility to “embed the approach to managing the financial and strategic risks associated with climate change.” The Board has also approved a qualitative statement within the bank’s risk appetite statement relating to climate change. We will develop a quantitative expression for climate change risk in 2021. The key inputs for setting this limit(s) will be our climate change strategy and the outputs of the 2021 BES. We contributed to the Banco Santander risk taxonomy in 2020 using the outputs of our 2019 Climate Portfolio Screen. A UK-relevant taxonomy that is aligned with the Banco Santander taxonomy will be completed in Q1 2021. Banco Santander provides guidance and tools to analyse potential credit risk impacts relating to climate change, including identifying, assessing, managing and reporting climate-related risks. This guide is for Corporate and Investment Banking and Corporate and Commercial Banking, and is supported by the following documents: – Banco Santander climate briefing paper and climate finance risk and opportunity briefings for oil & gas, power, mining and metals, and steel – Santander Corporate and Investment Banking environment, social and climate change assessment procedure sector questionnaires and Q&A documents In 2020, we updated policies in line with our PRA plan commitments. The Environmental Operations Policy Statement now includes reference to the bank’s risk framework, which requires that climate change risks are considered. We also adopted the general sustainability policy from Banco Santander, which now incorporates the previously separate climate change policy. All UK processes and policies have been updated to reflect this, for example, integrating our commitment to a low-carbon transition into our Supplier Code of Conduct. 4. Targets and metrics Banco Santander has increased the number of climate-related performance metrics it discloses. These include market position for number of deals, total financing of most relevant climate financial services, and emissions avoided by financing renewables. Details can be found in the Banco Santander Climate Finance Report. Below we provide metrics for Santander UK Group Holding plc portfolio exposure by sector, and green finance. The table outlines the largest exposures to both physical and transition climate risks for sectors on our balance sheet. The percentage represents the sector contribution to total assets Details of our operational carbon emissions can be found on page 37 or page 10 of our ESG Supplement 2020. Sector Amount £bn Exposure percentage Total assets 299.1 Mortgages 169.8 57% Real Estate 10.7 4% Consumer Finance 8.0 3% Electricity & Gas 0.6 0.2% In 2020, Banco Santander was the top lender in the UK renewable energy sector by number of transactions (2nd by deal amount), exclusive of energy from waste assets.1 As part of this, Santander UK originated £1,268m of debt financing to renewable energy projects in 2020. This includes financing originated in Santander UK by our Corporate & Commercial Banking and Corporate & Investment Banking teams. (1) Inframation League Tables 2020

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Santander UK plc10 Annual Report 2020 | Strategic report Strategic report continued Stakeholder and Sustainability Review We strive to create value for all our stakeholders, engaging others to help us deliver our commitment to be a more responsible bank. Our Sustainability strategy became even more relevant during Covid-19, as the pandemic reinforced the need to build more sustainable and resilient systems. This section is designed to be read together with our Environmental, Social and Governance Supplement. Customers We want to help people and businesses prosper and aim to do so by being Simple, Personal and Fair in everything we do. Support measures During the Covid-19 pandemic, we offered unprecedented support to our customers, while ensuring the safety of our colleagues. We provided a full package of support measures for business and retail customers, including over 373,000 payment holidays, and £4.6bn of lending to our business and corporate customers through government schemes including Bounce Back Loans (BBLs), and Coronavirus Business Interruption Loan Scheme (CBILS). We paid particular attention to supporting our more vulnerable customers, providing flexibility with support options, and the rapid adaptation of our systems and processes to respond to the crisis. Inclusive digitalisation During the pandemic, we continued to offer a full banking service to our customers in branch, over the phone and online. We provided the opportunity for customers to self-serve where possible, and prioritised services for those unable to do so. We launched a Financial Support phone line and online hub to help customers dealing with financial difficulties. We introduced Chat, a new digital channel providing 24/7 service via a chatbot and access to colleagues via Live Chat. Since April 2020, we have seen over 3.7 million conversations through Chat, with volumes growing from 1,000 per day to over 25,000. To ensure capacity, we trained 4,000 colleagues to speak through live chat and introduced a continuous optimisation model for chatbot. We tested more decisions with customers than ever before, checking close to 500 customer journeys across digital channels, communications and online experiences. To help customers access information most relevant to them, we launched a dedicated home page and support sections for all Covid-19 tools and assistance. This was across Personal and Business, Mortgages, Current Accounts, Loans, Credit Cards & Investments. Between March and October 2020, over 1.3 million customers visited one of these support pages. Protecting customers from fraud Santander UK anticipated significant impacts on the fraud landscape due to the Covid-19 pandemic, through changes in social behaviour and criminal activity. In preparation, we adapted our controls and 2020 awareness campaigns, which covered remote access fraud, investment scams, safe account scams, financial fraud, and Covid-19-linked scams. We adapted our in-branch Scam Awareness sessions to virtual events for customers, colleagues and communities, open for all to attend. Following a June 2020 trial with 543 attendees, we implemented their feedback to develop ‘phase two’ – totalling 73 events with 1,783 attendees and an 89% satisfaction score. Cyber security As a result of Covid-19 and the UK lockdown we have seen an increase in customers adapting to a more digital banking experience, and in parallel, we have ensured they can place full trust in our online and mobile services. Our global, multi-layered and agile resilience framework has allowed us to respond quickly and securely to ensure the protection of our customers and their data at a time where the industry has faced extraordinary change. Awareness is at the core of our cyber defence; we see the protection of our customers and their data as the responsibility of every employee. We focus on educating our colleagues by hosting training sessions to enhance their cyber capabilities and ultimately bolster the bank’s security. We also continue to invest in emerging cyber security talent; the first cohort of our Digital Apprentices graduated in 2020 with key skills to secure the bank’s next generation of cyber experts. ‘Survive and Revive’ for SMEs In 2020, Santander Breakthrough re-aligned its support to SMEs with a focus on digital delivery. Designed to provide beyond-banking support to businesses from start-up to growth, we launched Survive and Revive, a bank-wide proposition delivering a suite of resources to help SMEs manage the crisis. Survive and Revive evolved during the year to respond to the changing economic environment and will continue into 2021. The first phase included our new resource hub, providing access to webinars, overseas opportunities, a part-funded e-commerce package, thought leadership and insights. This included a Sustainability module developed together with B Lab UK, the charity behind the B Corporation movement. Through a five-part webinar, it introduces SMEs to emerging trends in Sustainability and provide guidance for business leaders to make their companies more sustainable. Over 50 webinars and 140 pages of content were delivered, reaching over 16,000 site visitors.

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11Santander UK plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information The second phase of Survive and Revive focused on helping businesses trade as restrictions across the country changed. We secured digital advertising space online and in our branches for 50 SMEs and helped those wanting better digital engagement through social media and PR toolkits. Our freelancers campaign provided £250k to fund 250 SMEs projects delivered by freelancers across the country. We are signatories of the Investing in Women Code, and in 2020 continued a remote Women Business Leaders’ Mentoring Programme for 180 participants. We improved access to support and funding to under-represented entrepreneurs, focused on women of colour as part of Santander UK’s Black Inclusion Plan. In 2020 we supported over 880 businesses through international and sector trade activity, adapting our model to deliver 69 digital activities since March 2020 to a total 867 attendees. In 2020, we added 143 members to the Trade Club Alliance and supported 36 companies who faced Covid-19 challenges with supplier matchmaking, as well as referring 59 companies to the government for a PPE matchmaking scheme. Supporting our vulnerable customers With the backdrop of the Covid-19 pandemic, we responded to the needs of our most vulnerable customers, from ‘access to cash’ solutions to providing mechanisms for help from a trusted third party. One key initiative is our Supported Banking proposition, providing a flexible level of support from the customer’s chosen third party. In addition to a Power of Attorney, we now provide a Third Party Access facility and Carer’s Card option, for customers who need support but not a full Power of Attorney. Compared to other ‘workarounds’ where people were giving their own debit card to their carer to do their shopping, the Carer’s Card and Third Party mandate are safe and legal alternatives. For people who needed cash, but who couldn’t leave their homes, we enabled secure access via the Post Office network, meaning a customer could place an order for a limited amount of cash and allow a trusted third party to collect it. With our focus also on building capability across our colleagues, we introduced a dedicated online Vulnerability Hub. Colleagues visited the hub over 6,000 times in 2020, raising awareness and understanding about challenges faced by some customers and how this can impact their banking. The vulnerability hub is complimented with specific training sessions for all colleagues (including specialist teams), to continually broaden knowledge and develop our ability to recognise and support our vulnerable customers. During 2020 our bereavement service saw a number of improvements. We now offer an online chat facility to support customers and their representatives who may have questions about the bereavement process. We have also simplified the information required from customer representatives and we continue to be part of the Death Notification Service allowing a customer’s representatives to notify different organisations of a death through a centralised service. To support our colleagues, and to raise awareness and improve levels of confidence in this area, we have developed a series of tailored training videos on the bereavement process and how to support customers impacted by a bereavement. Supporting mental health Working with the mental health charity Mind, we provided colleagues with targeted, practical tools and guidance so that they can more confidently manage difficult conversations with customers, and manage any impact these conversations can have on their own wellbeing. Through in-depth workshops reaching over 100 colleagues, this training helps to ensure our customers – who may be dealing with financial or non-financial related stress, anxiety and other mental health issues – are aware and have access to avenues of mental health support. These initiatives are being complemented by the provision of additional tools, e-learning guidance and support for all colleagues on mental health through our internal wellbeing hub. Shareholders We aim to deliver a long-term, sustainable return for our shareholder while helping people and businesses prosper. In 2019, we began a multi-year transformation programme to reshape the bank to support our customers better. By focusing on simplification, digitisation and customer experience, we aim to improve returns in the medium-term. Investor engagement Our UK Investor Relations team actively engages with institutional investors across the globe, working alongside our funding and capital teams for new issuances and building and maintaining relationships with fixed income investors and analysts. The UK Investor Relations team provides a two-way link between investors and senior management, focusing on both external messaging and communication whilst providing feedback from investors to the Board.

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Santander UK plc12 Annual Report 2020 | Strategic report People Supporting our colleagues to deliver for our customers is our priority. Culture We are on a journey to embed our culture. Making all that we do Simple, Personal and Fair, underpinned by our nine behaviours, is critical to our effort to build a more responsible bank. We want to create a thriving workplace that promotes inclusion and diversity, prioritises wellbeing and develops the skills of our people. Our goal to be a high-performing and responsible business is reflected in the 2020 Global Pulse Survey with 88% of colleagues feeling “We act responsibly and make a positive contribution to society” up 3pts vs 2019. Our announcement that we will form part of the One Europe business model, alongside our ongoing transformation programme, will further develop our culture driving collaboration between our teams to better serve our customers in a Simple, Personal, Fair way. It presents an exciting opportunity and the Global Pulse Survey showed that our people have positive attitudes to change - 86% feel managers lead effectively through change and 85% believe their teams support our transformation. In 2020, we were again recognised as a Top Employer in UK and Europe by the Top Employers Institute alongside being accredited as a Great Place to Work. In 2021, our cultural priorities will continue to focus on being an inclusive and responsible organisation alongside continuously improving our culture to become more Simple, Personal, Fair in order to enable our colleagues to deliver great customer outcomes. Ways of working during the pandemic With the backdrop of the pandemic, we responded to the rapidly changing needs of our customers at pace and with efficiency, leveraging technology to enable over 15,000 colleagues to work remotely. Our response to Covid-19 has been well received with 88% of colleagues in agreement that “Santander is taking the appropriate steps to ensure employees stay safe and healthy at this stage of the pandemic” in the Global Pulse survey. Our top priority is to support the wellbeing and safety of our colleagues. We made a commitment that whatever a colleague’s personal situation, we will continue to pay contracted hours as normal, including throughout any periods of self-isolation. This applies to colleagues who are both permanent and on fixed term contracts. Our commitment continues to provide colleagues who have primary caring responsibilities with paid leave. We did not furlough any colleagues. We introduced a new always-on pulse survey called ‘Your Say’ to enable colleagues to provide regular feedback, share ideas and seek support. The survey focused on wellbeing, communication and our response to Covid-19. To help maintain social connections, we launched a ‘Stay in Touch, Keep Calm & Connect’ website to enable colleagues to remain connected through activities including stories and quizzes. We introduced a new module to our mandatory training suite to help people work from home effectively. Topics include preparing yourself, setting up your environment and managing your time, as well as how best to stay connected. Our survey on working from home continues to show positive feedback in terms of how we have managed this process. 91% of colleagues stated they are as or more productive working from home, an increase of 7 points from when the survey was first run earlier in the year. Inclusion and belonging Our commitment is to be a truly inclusive organisation reflective of our customer and communities. In 2020, we set out our next three year inclusion and belonging strategy “everyday inclusion” that prioritises the themes of respect, balance, leadership, advocacy, allyship, transparency and accountability. A member of our Executive Committee sponsors each diversity strand of gender, LGBT+, ethnicity, disability, families and carers, social mobility, and mental wellbeing. We hold a quarterly Everyday Inclusion Forum to provide guidance and direction to our strategy attended by our Executive Committee Sponsors, our Chief HR Officer and our Employee Led Network Leads. Our eight employee-led diversity networks collectively have over 11,000 members. They consider intersectionality, providing a safe space for colleagues to share their lived experiences, and receive targeted communications within a digital community space that is a vital source of support during the pandemic. We made enhancements to our people polices, including increasing our maternity, adoption and shared parental leave, offering a new paid sabbatical and developing ground breaking work to support menopause. Over the summer, we held a number of colleague listening events in response to the Black Lives Matter movement, looking at the ways to support colleagues to accelerate the pace of change. In September, we put in place a Black Inclusion plan, alongside an analysis of our own data. Three areas of focus were identified: Leadership, Allyship and Networks with supporting measures and targets to shape our activity to build Black Inclusion and amplify Black Voices. Additional actions include no longer using the term BAME, publishing our ethnicity workforce data and voluntarily publishing our ethnicity pay gap and action plan in December. We again featured in The Times Top 50 for Women List, commended for being in the top ten per cent of organisations that featured regularly during the ten years the list has been published. In the Social Mobility Employer Index, we were the highest placed Retail Bank (26th). The Social Strategic report continued

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13Santander UK plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information Mobility Employers’ Index, created by the Social Mobility Foundation (SMF), ranks UK employers on the actions they are taking to ensure they are open to accessing, developing and progressing talent from all backgrounds. Our Global Pulse survey results show that 87% of colleagues believe that Santander UK has created an environment where people of diverse backgrounds can succeed, 9 points above the external benchmark.(1) Skills development Investing in our people allows us to be fit for the future with skilled and engaged colleagues who can truly thrive. In 2020, our people undertook 61,398 training days and we invested £7.9m, equipping them with the skills they need for now and in the future, including digital skills. Our Digital Learning Platform, MIO, saw 328,950 hits throughout 2020. The platform is focused on both development and providing support through internal communities and networks. MIO provides a variety of training styles, from 2-3 minute bursts to themed box set content. In 2021, we will launch a number of colleague upskill academies through the new global academy offer via Dojo (Banco Santander skills platform). This will include academies on Cloud and Agile, Digital Fluency, Global Engineering, Leadership and Global Financial Crime Academy. Employee engagement We foster an open dialogue between employees and our senior leaders. Colleagues joined virtual “In Conversation” events this year with the Santander UK plc Employee Designated Director on topics of simplification, wellbeing and inclusion. Our CEO and members of the Executive Committee participated in quarterly virtual events, with all colleagues invited to participate in the conversation and submit their questions in the live forum. The topics included sharing Santander UK’s financial results, recognition and celebrating success and providing insight into the future strategy. The Global Pulse Survey results improved in 24 of the 26 questions where we had a historical trend from the Global Engagement Survey (GES) 2019. Our Engagement Index score increased from 2019 by 7 points to 77%, and is 7 points above the external benchmark. Pride in being part of Santander increased by 7 points to 82% and is 5 points above the external benchmark. Drivers of increased engagement with the most positive trends compared with 2019 were questions around wellbeing, communication, innovative working practices and collaboration. Areas of improvement included continuing our simplification to improve colleague enablement and addressing ineffective ways of working. Working in partnership During 2020, we continued to work in partnership with our recognised trade unions Advance and Communication Workers Union (CWU) on our approach to support colleagues through the pandemic. We have also continued consultation with representatives on changes associated with transformation. Fair pay Our Reward Framework is reviewed annually against the external marketplace. We are proud to have been an accredited Real Living Wage employer since 2015. Salary reviews, and changes to reward policies, are assessed for any adverse impacts on a particular group. Salary ranges and Pay Progression arrangements are visible to all colleagues. We embrace transparent reporting, evidenced by our detailed Diversity Pay Report which includes voluntarily publishing our ethnicity pay gap, and the voluntary disclosure of our CEO pay ratio in our Remuneration Implementation Report. (1) Financial sector benchmarks taken from the survey provider Mercer Sirota. The financial services sector norms are based on more than one million employees answering 114 surveys over the last five years. Communities We support and invest in communities across the UK to foster sustainable economic growth. Becoming the UK’s best dementia-friendly bank In 2020, we entered the second year of our partnership with Alzheimer’ Society by focusing on how to better support customers with dementia. This included developing an online Dementia Guide, and launching a bespoke e-learning module, ‘Dementia Friends,’ encouraging our colleagues to improve their awareness of, and commit to a social action to support people affected by the disease. At the end of 2020, 54% of our workforce were Dementia Friends and 129 contact centre and branch staff completed a Dementia Ambassador training course, aimed at empowering colleagues to share information and promote internal dementia-friendly initiatives in their areas. We also launched the Dementia Steering Group, made up of carers and people living with dementia to ensure our products and services, (such as the ATM journey), are dementia friendly. Despite the challenges of Covid-19, we raised over £655,000 for Alzheimer’s Society in 2020, equating to over £1.4m since the partnership began in 2019.

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Santander UK plc14 Annual Report 2020 | Strategic report Santander Foundation Older people and those affected by dementia were disproportionately impacted by Covid-19. In response, the Santander Foundation postponed the launch of its new grants programme until 2021 to concentrate on supporting Alzheimer’s Society and Age UK. Each charity received a £1.5m donation enabling their contact centres and online services to increase capacity and continue providing support for those in need. The Foundation did however, further continue its support of charities though the Matched Donations programme, approving 577 employee requests totalling £509,319. Financial inclusion Confidence with numbers is a key skill that underpins financial inclusion and in 2019 we established a three-year partnership with National Numeracy aimed at helping children and parents build confidence with numbers, using the magic of football and our sponsorship of the Champions League. To support the partnership during school closures, we enlisted Twinkl (the world’s largest online education hub), the F2 Freestylers (the world’s biggest football influencers), and Rio Ferdinand, former England and Manchester United Captain to create a series of free online football-themed maths challenges. The content received over 119,000 unique downloads. Confidence in money matters is another key skill which our partnership with Young Enterprise (YE) addresses through in-school activity. Due to school closures, YE adapted their programmes, and took My Money Week (MMW) and the Fiver challenge online. For MMW, a free resource hub was created for teachers, parents and carers to share with children, and the Fiver ‘at Home’ challenge encouraged students to develop a product or service over four weeks using £5 start-up money. Even with schools closed, over 110,000 young people took part in activities. Digital inclusion Wanting to improve digital skills for older people, we partnered with Age UK to launch GoDigital in 2020. Through digital awareness events 21,716 people were reached and a further 462 people received one-to-one support. In addition to supporting older people, we worked with We Are Digital to create content aimed at keeping 11-17 year-olds safe online. Through this programme, 1,513 young people were trained on topics such as captology, fraud and scams and sextortion. Santander Universities In response to Covid-19, Santander UK contributed £5.1m to university initiatives, which included a £300k donation to Oxford, UCL and Imperial College to support Covid-19 research and vaccine development. The contribution also went towards the production of PPE for the NHS and IT equipment for students. We also supported more than 10,200 students and graduates in 2020. 490 start-ups and SMEs benefitted from the Santander Universities Internship Scheme, totalling 558 internships and founderships, with 45% of the internships going on to employment with the SME. Ethics & Environment We are committed to upholding the highest ethical standards. Responsible lending As part of the Banco Santander group, we comply with the Equator Principles, factoring social, ethical and environmental impacts into our risk analysis and decision making process for financial transactions. These principles address climate change, prevention of pollution and toxic waste emissions, biodiversity, indigenous peoples and human rights. Our policy on Aerospace and Defence, Energy, Mining & Metals and Soft Commodities and our Sensitive Social and Ethical Sectors policy continue to define our approach towards creating long-term value while managing reputational, social and environmental risks. We have in place a number of prohibitions restrictions on a range of activities. Prohibited activities now include the provision of products or services for new Coal Fired Power Plant (CFPP) projects and taking on new clients with existing CFPPs. Restricted activities include transactions specific to CFPPs for existing clients which do not significantly improve environmental impacts, such as a significant reduction of CO2. Environmental and Social Risk Champions and the Reputational Risk Forum reviews and approves all restricted activities to ensure that they fall within our risk appetite. This forum reviews, monitors and escalates key decisions around financial and non-financial reputational risks to the Board. Renewable financing In 2020, Santander was the top UK lender in the renewable energy sector by number of transactions (2nd by deal amount), exclusive of energy from waste assets . As part of this, Santander UK originated £1.27bn of debt financing to renewable energy projects. We provide advisory and financing solutions for renewable and alternative energy clients across a range of technologies and renewable energy support schemes, including onshore and offshore wind and solar projects. In 2020 we funded renewable energy in new markets and continued to expand our service offering by developing innovative new funding structures for the sector. We advised on two onshore wind portfolio financings across the UK and Ireland, which will allow clients to secure long-term financing and assure their future growth in this sector. We also lent to an offshore wind project in a new Asian market for that technology. Strategic report continued

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15Santander UK plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information In Corporate and Commercial Banking, we continue to support traditional mid-market renewable generation technologies, with tailored project finance solutions and flexible portfolio level facilities. In addition, we delivered funding solutions for a diverse range of projects and technologies, including batteries, energy efficiency and subsidy-free renewables. In 2020 we launched an innovative “Environmental and Social Growth Funding” solution, aiming to unlock high quality projects which deliver clear sustainability benefits. Ethical supply chain We want to do business with companies who share our values. Our standard supplier contracts include specific requirements to respect human rights and ethical labour practice based on the principles of the UN Global Compact. In 2020 we improved our Third-Party Risk Management framework, processes and policies. The Third Party Supplier Control Questionnaire was reviewed and updated in Q2 2020 with support from EY, aligning to market best practice and including a review of the supplier’s approach to ensure compliance with human rights standards and support of the Real Living Wage. Covid-19 disrupted our planned on-site assessments, and we adapted to deliver remote assessments to suppliers. We launched our Third Party Code of Conduct in 2019, which we ask all suppliers to accept on our platform. We updated this in 2020 to include reference to climate change, inviting suppliers to join our commitment to a low carbon economy. We also improved our Procurement controls in review with a consultancy. Anti-Financial Crime, Anti-Bribery and Corruption Our Anti Financial Crime (AFC) strategy is set around the three principles of ‘Deter, Detect and Disrupt’. In 2020 we continued to promote our AFC Culture and Strategy, including through senior leadership briefings and colleague events or communications. We continue to develop external partnerships including through participation on the Economic Crime Action Plan. We’re a proactive member of the Joint Money Laundering Intelligence Taskforce and supported work to reform the Suspicious Activity Reporting regime. In addition, our partnership with the NGO “Stop the Traffik” strengthens how we tackle human trafficking and modern slavery. In 2020, AFC Strategy held a virtual three-day conference with over 400 colleagues in attendance and external speakers from the National Economic Crime Committee and Stop the Traffik.

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Santander UK plc16 Annual Report 2020 | Strategic report Covid-19 has had an immediate and significant impact on the financial position of the Company as well as its stakeholders. The Board has actively engaged with stakeholders to ensure that our efforts to help people and businesses prosper notwithstanding the pandemic, are effective and impactful. The pandemic has also reaffirmed the importance of our on-going transformation programme with its focus on Technology, Procurement, Digital Capability and Omni-channel service provision. The Board has remained focused on providing oversight of the programme’s delivery and balanced this with the interests of stakeholders in light of the current trading environment. Covid-19 has had a significant impact on our employees with the majority moving to remote working. The Chief HR officer regularly reported to the Board on the results of frequent employee wellbeing surveys and initiatives to support employees through these challenging times. The Company’s two recognised unions Advance and CWU have been actively consulted and engaged on a wide range of proposals this year, including the response to the pandemic and relating to change across the business at both national and local levels to ensure that members are effectively represented. The Non-Executive Director designated to represent the views of the workforce (“Designated NED”) regularly engaged with employees from a range of business areas and job roles through quarterly virtual “In Conversation” events and employee networks on topics of leadership, simplification, response to Covid-19, wellbeing and inclusion and inputted the feedback to Board during related discussions. Themes from the events were also fed directly into the Board Responsible Banking Committee through the People and Culture Updates. The Designated NED was actively involved in engagement with employees in response to the Black Lives Matter movement, finding ways to support colleagues and accelerate the pace of change. As a Board, we paid close attention to our relationships with our customers, across Retail, Corporate and Commercial and Corporate Investment Banking businesses. At the outset of the lockdown, the Board held several ad hoc meetings to understand how continuity of service and additional support would be provided to individual customers and businesses both large and small. Extensive customer testing helped improve customer journeys and the development of a more holistic “Net Promoter Score” tracking programme provided the Board with insight to inform discussions on prioritisation and strategic developments. The Board worked closely with executive directors, Government, regulatory bodies and industry to make funds available to limit the impact of Covid-19 and also manage the impact of their implementation on capital, liquidity, colleagues and customers. The Board took a particular interest in our vulnerable customers but also vulnerable members of the communities in which we operate. The Board also actively progressed the Company’s sustainability strategy, holding longer “deep dive” sessions on both Climate Change and Sustainability more broadly. As a Board, we adopted locally the Banco Santander Responsible Banking policies on Sustainability, Human Rights and Culture. Even in these challenging circumstances, the Board sought to ensure the maintenance of high standards of business conduct, ensuring continued focus on Anti-Financial Crime, Anti-Money Laundering and Anti-Bribery & Corruption initiatives. The Company has a single shareholder that is Santander UK Group Holdings plc. The Board ensures that the interests of the shareholder are balanced against those of other stakeholders where interests may not be aligned. Stakeholder Voice in the Boardroom
Strategic reportFinancial reviewGovernanceRisk reviewFinancial statementsShareholder information
Financial review
Contents
Critical factors affecting results18
The preparation of the Consolidated Financial Statements requires management to make judgements and accounting estimates that affect the reported amount of assets and liabilities at the date of the Consolidated Financial Statements and the reported amount of income and expenses during the reporting period. Management evaluates its judgements and accounting estimates, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, on an ongoing basis. Actual results may differ from these accounting estimates under different assumptions or conditions.
Estimates and judgements that are considered important to the portrayal of our financial condition including, where applicable, quantification of the effects of reasonably possible ranges of such estimates are set out in ‘Critical Judgements and Accounting Estimates’ in Note 1 to the Consolidated Financial Statements.

Santander UK plc    17    

Annual Report 2020 | Financial review
Income statement review
SUMMARISED CONSOLIDATED INCOME STATEMENT
20202019
£m£m
Net interest income3,443 3,292 
Non-interest income(1)
532 881 
Total operating income3,975 4,173 
Operating expenses before credit impairment losses, provisions and charges(2,452)(2,499)
Credit impairment losses(645)(221)
Provisions for other liabilities and charges(273)(441)
Total operating credit impairment losses, provisions and charges(918)(662)
Profit before tax605 1,012 
Tax on profit(134)(279)
Profit after tax471 733 
Attributable to:
Equity holders of the parent452 714 
Non- controlling interests19 19 
Profit after tax471 733 
(1)Comprises 'Net fee and commission income' and 'Other operating income'.
A more detailed Consolidated Income Statement is contained in the Consolidated Financial Statements.
2020 compared to 2019
Profit before tax was down 40% to £605m due to the factors outlined below. By income statement line item, the movements were:
Net interest income was up 5%, with repricing actions on the 1I2I3 Current Account and other deposits offsetting base rate cuts and back book mortgage margin pressure, including £1.8bn net attrition on SVR and Follow on Rate products (2019: £3.9bn).
Non-interest income was down 40%, with significantly lower banking and transaction fees in our retail business largely due to the implementation of regulatory changes to overdrafts.
Operating expenses before credit impairment losses, provisions and charges were down 2%, with efficiency savings, and lower variable pay accrual.
Credit impairment losses were up £424m to £645m. This includes £448m arising from changes to economic scenarios and weights, the staging reclassification of certain loans, payment holidays and other Covid-19 management judgement overlays. Portfolio performance remains resilient with low write-offs and deterioration seen only on a few single name corporate cases.
Provisions for other liabilities and charges were down 38% to £273m, largely due to the absence of an additional PPI charge, lower transformation restructuring charges and a release of other conduct provisions related to the sale of interest rate derivatives (IRD). This was partially offset by a previously reported regulatory and other provision in our Retail Banking business.
Tax on profit decreased £145m to £134m The 2020 Effective Tax rate (ETR) of 22.1% is lower (2019: 27.6% ) primarily as a result of 2019 non-allowable conduct charges which were not repeated in 2020, partially offset by adverse movements in deferred tax.

Please refer to the Financial review section of our Annual Report on Form 20-F for the year ended 31 December 2019, filed with the US Securities and Exchange Commission on 24 March 2020, for a comparative discussion of 2019 financial results compared to 2018.
18 Santander UK plc    

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PROFIT BEFORE TAX BY SEGMENT
The segmental information in this Annual Report reflects the reporting structure in place at the reporting date in accordance with the segmental information in Note 2 to the Consolidated Financial Statements.
Retail
Banking(2)
Corporate & Commercial
Banking(2)
Corporate & Investment
Banking(2)
Corporate
Centre(2)
Total
2020£m£m£m£m£m
Net interest income/(expense)3,100 364 55 (76)3,443 
Non-interest income(1)
375 93 68 (4)532 
Total operating income/(expense)3,475 457 123 (80)3,975 
Operating expenses before credit impairment losses, provisions and charges(1,913)(316)(114)(109)(2,452)
Credit impairment losses(308)(294)(7)(36)(645)
Provisions for other liabilities and (charges)/releases(173)(12)(10)(78)(273)
Total operating credit impairment losses, provisions and charges(481)(306)(17)(114)(918)
Profit/(loss) before tax1,081 (165)(8)(303)605 
2019
Net interest income/(expense)2,827 422 62 (19)3,292 
Non-interest income(1)
691 109 70 11 881 
Total operating income/(expense)3,518 531 132 (8)4,173 
Operating expenses before credit impairment losses, provisions and charges(1,980)(324)(130)(65)(2,499)
Credit impairment (losses)/releases(156)(45)(22)(221)
Provisions for other liabilities and charges(290)(22)(16)(113)(441)
Total operating credit impairment losses, provisions and charges(446)(67)(38)(111)(662)
Profit/(loss) before tax1,092 140 (36)(184)1,012 
(1)Comprises 'Net fee and commission income' and 'Other operating income'.
(2) The segmental basis of presentation has changed following a management review of our structure and segmental income statements and customer balances for 2019 have been restated accordingly. See Note 2 to the Consolidated Financial Statements.

2020 compared to 2019
For Retail Banking, profit before tax decreased 1%, with an increase in credit impairment charges largely due to Covid-19, partially offset by an increase in net interest income largely due to 1I2I3 Current Account and other deposit repricing. Non-interest income was impacted by reduced banking and transaction fees as a result of regulatory changes to overdrafts.
For Corporate & Commercial Banking, loss before tax of £165m, with an increase in credit impairment charges largely due to Covid-19, as well as a small number of single name exposures. Income was impacted by the base rate reductions and lower fees due to lower business activity levels which have been adversely affected by Covid-19.
For Corporate & Investment Banking, loss before tax of £8m, with lower credit impairment charges and lower operating expenses, driven by transformation programme efficiencies. As part of our drive for continuous improvement in customer experience and following a review of the way we operate the CIB business in the UK, we intend to conduct substantially all of this business from SLB beginning later this year. To undertake this change, and subject to court approval, we are proposing to transfer substantially all of the CIB business to SLB in H221 by way of a banking business transfer scheme under Part VII of the Financial Services and Markets Act 2000.
For Corporate Centre, loss before tax increased to £303m with net interest income impacted by the effect of the reduction in the base rate on our liquidity asset buffer. Furthermore, operating expenses increased with centrally held transformation programme costs and credit impairment losses. Credit impairment losses were higher driven by a provision for unexpected large single name exposures at risk of defaulting as a result of the Covid-19 crisis. Our structural hedge position has remained stable at c£97bn, with an average duration of c2.5 years. Our structural hedge contribution is reallocated to our other business segments in line with our transfer pricing policy.
Santander UK plc    19    

Annual Report 2020 | Financial review
Balance sheet review
SUMMARISED CONSOLIDATED BALANCE SHEET
20202019
£m£m
Assets
Cash and balances at central banks41,250 21,180 
Financial assets at fair value through profit or loss3,614 3,702 
Financial assets at amortised cost231,194 239,834 
Financial assets at fair value through other comprehensive income8,950 9,747 
Interest in other entities172 117 
Property, plant and equipment1,734 1,967 
Retirement benefit assets495 669 
Tax, intangibles and other assets4,923 4,486 
Total assets292,332 281,702 
Liabilities
Financial liabilities at fair value through profit or loss3,018 3,161 
Financial liabilities at amortised cost270,063 259,179 
Retirement benefit obligations403 280 
Tax, other liabilities and provisions2,912 3,065 
Total liabilities276,396 265,685 
Equity
Total shareholders’ equity15,774 15,857 
Non-controlling interests162 160 
Total equity15,936 16,017 
Total liabilities and equity292,332 281,702 
A more detailed Consolidated Balance Sheet is contained in the Consolidated Financial Statements.
2020 compared to 2019
Assets
Cash and balances at central banks
Cash and balances at central banks increased by 95% to £41,250m at 31 December 2020 (2019: £21,180m). This was mainly driven by cash inflows from higher customer deposits, lower non-bounce back lending, the drawdown of TFSME funding and normal liquidity management, partially offset by increased mortgage and bounce back lending. In addition, the Santander UK group received £3.2bn for the transfer of mortgages assets to Santander Financial Services plc.
Financial assets at fair value through profit or loss:
Financial assets at fair value through profit or loss decreased by 2% to £3,614m at 31 December 2020 (2019: £3,702m), mainly due to:
A £0.4bn increase in derivatives held for hedging with an increase in interest rate contracts and a decrease in exchange rate contracts.
A decrease in derivatives held for trading of £0.3bn, linked to transactions with corporate customers that are not held in hedging relationships.
A decrease in SRT balances of £0.2bn.
Financial assets at amortised cost:
Financial assets at amortised cost decreased by 4% to £231,194m at 31 December 2020 (2019: £239,834m), largely driven by the disposal of £5.5bn of UK Government gilts, a £4.0bn decrease in reverse repurchase agreements and, a decrease in time deposits and third party cash collateral of £0.6bn, as part of normal liquidity management. This was partially offset by an increase in customer loans of £5.1bn, with £4.4bn increase in mortgages due to pent up demand from the lockdown period and the temporary reduced rates of stamp duty. In addition, consumer (auto) finance increased by £0.3bn, and unsecured retail lending decreased by £0.7bn due to lower consumer spending during lockdown. Corporate loans increased £1.1bn, driven by our participation in the government lending schemes (£4.6bn), partially offset by lower investment appetite resulting borrowing requirements. In addition, there was a decrease due to the transfer of £3.2bn of mortgages assets to Santander Financial Services plc.
Financial assets at fair value through other comprehensive income
Financial assets at fair value through other comprehensive income decreased by 8% to £8,950m at 31 December 2020 (2019: £9,747m) mainly due to the disposal of UK Government bonds and the maturity of bank issued securities, partially offset by an increase in non-UK government securities due to normal liquidity management.
Property, plant and equipment
Property, plant and equipment decreased by 12% to £1,734m at 31 December 2020 (2019: £1,967m) reflecting freehold and leasehold property sales and lower contract hire sales.
Retirement benefit assets
Retirement benefit assets decreased by 26% to £495m at 31 December 2020 (2019: £669m), due to a decrease in the overall accounting surplus of the Santander (UK) Group Pension Scheme (the Scheme) resulting from a decrease in the discount rate in the period. This was partially offset by a rise in overall asset values.
Tax, intangibles and other assets
Tax, intangibles and other assets increased by 10% to £4,923m at 31 December 2020 (2019: £4,486m), mainly due to changes in interest rates impacting the macro hedge of interest rate risk included in other assets.

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Liabilities
Financial liabilities at amortised cost
Financial liabilities at amortised cost increased by 4% to £270,063m at 31 December 2020 (2019: £259,179m). This was mainly due to an increase of £13.9bn in customer deposits, of which £7.6bn was corporate and business banking customers building up their cash reserves and £6.7bn related to retail customers increasing current account balances through reduced spending. Deposits from banks increased £6.6bn reflecting funding received through TFSME and additional amounts deposited as collateral. This was partially offset by a £2.4bn decrease in non-trading repurchase agreements as part of normal liquidity management and a £6.5bn decrease in subordinated liabilities following the repurchase of certain subordinated liabilities as part of ongoing liability management.
Retirement benefit obligations
Retirement benefit obligations increased by 44% to £403m at 31 December 2020 (2019: £280m), due to a decrease in the overall accounting surplus of the Scheme. This was principally due to a decrease in the discount rate in the period due to falling corporate bond yields which increased the value of liabilities in the Scheme. This was partially offset by a rise in overall asset values.
Equity
Total shareholders’ equity
Total shareholders’ equity decreased by 1% to £15,774m at 31 December 2020 (2019: £15,857m). This was principally due to an increase in the cash flow hedging reserve and profit after tax for the period, partially offset by dividends paid and a decrease in the defined benefit pension asset.
Santander UK plc    21    

Annual Report 2020 | Financial review
CUSTOMER BALANCES
Consolidated
20202019
£bn£bn
Customer loans207.0 205.0 
Other assets85.3 76.7 
Total assets292.3 281.7 
Customer deposits185.7 171.7 
Total wholesale funding63.1 65.2 
Other liabilities27.5 28.7 
Total liabilities276.3 265.6 
Shareholders' equity15.8 15.9 
Non-controlling interest0.2 0.2 
Total liabilities and equity292.3 281.7 

Further analyses of credit risk on customer loans, and on our funding strategy, are included in the Credit risk and Liquidity risk sections of the Risk review.
2020 compared to 2019
Customer loans increased £5.1bn, with a £4.4bn increase in mortgages due to pent-up demand from the lockdown period and the temporary reduced rates of stamp duty. In addition, consumer (auto) finance increased by £0.3bn and unsecured retail lending decreased by £0.7bn due to lower consumer spending during lockdown. Corporate loans increased £1.1bn, driven by our participation in the government lending schemes (£4.6bn), partially offset by lower investment appetite reducing borrowing requirements.
Customer deposits increased £14bn, of which £7.6bn was corporate and business banking customers building up their cash reserves and £6.7bn related to retail customers increasing current account balances through reduced spending.

Retail Banking
20202019
£bn£bn
Mortgages166.7 165.4 
Business banking3.9 0.2 
Consumer (auto) finance8.0 7.7 
Other unsecured lending4.8 5.5 
Customer loans183.4 178.8 
Current accounts75.6 68.7 
Savings57.4 57.2 
Business banking accounts13.4 10.5 
Other retail products5.8 6.3 
Customer deposits152.2 142.7 

Corporate & Commercial Banking
20202019
£bn£bn
Non-Commercial Real Estate trading businesses12.9 13.3 
Commercial Real Estate4.7 5.1 
Customer loans17.6 18.4 
Customer deposits25.0 20.5 

Corporate & Investment Banking
20202019
£bn£bn
Customer loans2.8 4.0 
Customer deposits6.5 6.1 

Corporate Centre
20202019
£bn£bn
Social Housing3.0 3.6 
Non-core0.2 0.2 
Customer loans3.2 3.8 
Customer deposits2.0 2.4 

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Cash flows
SUMMARISED CONSOLIDATED CASH FLOW STATEMENT
20202019
£m£m
Net cash flows from operating activities19,236 3,077 
Net cash flows from investing activities6,636 2,890 
Net cash flows from financing activities(8,152)(4,126)
Change in cash and cash equivalents17,720 1,841 
A more detailed Consolidated Cash Flow Statement is contained in the Consolidated Financial Statements.
The major activities and transactions that affected cash flows in 2020 and 2019 were as follows:
In 2020, the net cash inflows from operating activities of £19,236m resulted from net cash inflows generated from profits in the year and higher customer deposits, offset by additional retail and corporate lending. The net cash inflows from investing activities of £6,636m mainly reflected the net disposal of certain asset backed securities as part of normal liquid asset portfolio management. The net cash outflows from financing activities mainly reflected net cash outflows relating to debt securities in issue. These resulted in cash and cash equivalents increasing by £17,720m in the year.
In 2019, the net cash inflows from operating activities of £3,077m resulted from net cash inflows generated from profits in the year and higher customer deposits, offset by additional retail lending. The net cash inflows from investing activities of £2,890m mainly reflected the net disposal of certain asset backed securities as part of normal liquid asset portfolio management. The net cash outflows from financing activities mainly reflected net cash outflows relating to debt securities in issue. These resulted in cash and cash equivalents increasing by £1,841m in the year.

Capital and funding
20202019
£bn£bn
Capital
CET1 capital11.1 10.4 
Total qualifying regulatory capital15.2 15.8 
CET1 capital ratio15.4 %14.3 %
Total capital ratio21.2 %21.7 %
Risk-weighted assets71.9 72.6 
Funding
Total wholesale funding and AT165.3 67.4 
- of which with a residual maturity of less than one year21.1 22.5 

Liquidity
20202019
£bn£bn
Santander UK Domestic Liquidity Sub Group (RFB DoLSub)
Liquidity Coverage Ratio (LCR)150 %142 %
LCR eligible liquidity pool51.542.0

Further analysis of capital, funding and liquidity is included in the Capital risk and Liquidity risk sections of the Risk review.
2020 compared to 2019
CET1 capital increased to£11.1bn with capital accretion through retained profits, the impact of the change in treatment of software assets outlined in the EBA technical standard on the prudential treatment of software assets and a lower deduction from the excess of regulatory expected loss amounts over credit provisions. These increases were partially offset by adverse market driven movements in the defined benefit pension schemes.
CET1 capital ratio increased 110 basis points to 15.4% with a 4.6p.p. buffer to Maximum Distributable Amount (MDA) restrictions.
Amendments to Capital Requirements Regulation (CRR), which were published in the Official Journal on 26 June 2020, contributed 17 basis points to the CET1 ratio, through the implementation of the RWA reduction factors for certain Small and Medium-sized Enterprise (SME) and infrastructure exposures.
The Pillar 2A capital requirement was 4.94%, the majority of which remained with an RWA percentage-based element.
Following the PRA's announcement regarding the resumption of dividend payments, an interim dividend of £103m for 2020 was paid in Dec 20.
We issued £5.4bn of wholesale funding, including £1.4bn MREL eligible senior unsecured downstreamed from Santander UK Group Holdings plc and £4bn of core funding, consisting of covered bonds and senior unsecured, issued from Santander UK plc.
We have £6.3bn outstanding under the TFS and £11.7bn outstanding under the TFSME.
In October 2020, Santander UK plc transferred £3.2bn of mortgage assets to SFS.
Santander UK plc    23    

Annual Report 2020 | Financial review
Selected financial data
The financial information set forth below for the years ended 31 December 2020, 2019 and 2018 and at 31 December 2020 and 2019 has been derived from the audited Consolidated Financial Statements of Santander UK plc (the Company) and its subsidiaries (together, the Santander UK group) prepared in accordance with IFRS included elsewhere in this Annual Report. The information should be read in connection with, and is qualified in its entirety by reference to, the Santander UK group’s Consolidated Financial Statements and the Notes thereto.
BALANCE SHEETS
2020(1,2)2019(3,4,5)201820172016
£m£m£m£m£m
Assets
Cash and balances at central banks41,250 21,180 19,747 32,771 17,107 
Financial assets at fair value through profit or loss3,614 3,702 10,876 52,593 57,646 
Financial assets at amortised cost231,194 239,834 232,444 205,417 204,086 
Financial assets at fair value through other comprehensive income8,950 9,747 13,302 
Financial investments17,611 17,466 
Interests in other entities172 117 88 73 61 
Intangible assets1,646 1,766 1,808 1,742 1,685 
Property, plant and equipment1,734 1,967 1,832 1,598 1,491 
Current tax assets264 200 153 — — 
Retirement benefit assets495 669 842 449 398 
Other assets3,013 2,520 2,280 2,511 2,571 
Total assets292,332 281,702 283,372 314,765 302,511 
Liabilities
Financial liabilities at fair value through profit or loss3,018 3,161 7,655 51,037 41,103 
Financial liabilities at amortised cost270,063 259,179 256,514 243,858 241,590 
Other liabilities2,337 2,344 2,448 2,730 3,221 
Provisions464 572 509 558 700 
Current tax liabilities — — 54 
Deferred tax liabilities111 149 223 88 128 
Retirement benefit obligations403 280 114 286 262 
Total liabilities276,396 265,685 267,463 298,560 287,058 
Equity
Total shareholders’ equity15,774 15,857 15,758 16,053 15,303 
Non-controlling interests162 160 151 152 150 
Total equity15,936 16,017 15,909 16,205 15,453 
Total liabilities and equity292,332 281,702 283,372 314,765 302,511 
(1)In 2020, the Santander UK group adopted 'Interest Rate Benchmark Reform – Phase 2 - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16’.
(2)In October 2020, Santander UK plc sold £3.2bn of mortgages to Santander Financial Services plc.
(3)On 1 January 2019, the Santander UK group adopted IFRS 16 (2016-2018: IAS 17).
(4)On 1 January 2018, the Santander UK group adopted IFRS 9 (2016 and 2017: IAS 39).
(5)In 2018, the Santander UK group completed the implementation of its ring-fencing plans.


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INCOME STATEMENTS
2020(1,2)2019(3,4,5)2018(4,5)20172016
£m£m£m£m£m
Net interest income3,443 3,292 3,603 3,803 3,582 
Net fee and commission income385 686 749 807 770 
Other operating income147 195 182 302 443 
Total operating income3,975 4,173 4,534 4,912 4,795 
Operating expenses before credit impairment losses, provisions and charges(2,452)(2,499)(2,579)(2,499)(2,414)
Credit impairment losses(645)(221)(153)(203)(67)
Provisions for other liabilities and charges(273)(441)(257)(393)(397)
Total operating credit impairment losses, provisions and charges(918)(662)(410)(596)(464)
Profit before tax605 1,012 1,545 1,817 1,917 
Tax on profit(134)(279)(399)(515)(598)
Profit after tax471 733 1,146 1,302 1,319 
(1)In 2020, the Santander UK group adopted 'Interest Rate Benchmark Reform – Phase 2 - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16’.
(2)In October 2020, Santander UK plc sold £3.2bn of mortgages to Santander Financial Services plc.
(3)On 1 January 2019, the Santander UK group adopted IFRS 16 (2016-2018: IAS 17).
(4)On 1 January 2018, the Santander UK group adopted IFRS 9 (2016 and 2017: IAS 39).
(5)In 2018, the Santander UK group completed the implementation of its ring-fencing plans.


Santander UK plc    25    

Annual Report 2020 | Governance

Governance
Our governanceContents
The UK Corporate Governance Code 2018 (the Code) sets out the framework for premium listed companies in the UK. The Code is the corporate governance code applied by the Company, with appropriate amendments as a fully owned subsidiary, and the standard against which we measure ourselves.

This Governance section (including the Chair’s report on Corporate Governance, the Committee Chair Reports and the Remuneration Policy and Remuneration Implementation reports) detail how the Company has applied and complied with the principles and provisions of the Code.

Any principles and provisions of the Code that are not precisely followed are detailed in the Directors’ Report.
Governance26
Board of Directors27
Corporate Governance report30
Chair's report on corporate governance30
Board Nomination Committee Chair's report34
Board Risk Committee Chair's report36
Board Audit Committee Chair's report42
Board Responsible Banking Committee Chair's report48
How our governance supports the delivery of our strategyDirectors' Remuneration report50
All Directors are collectively responsible for the success of the Company. The Non-Executive Directors exercise objective judgement in respect of Board decisions, and scrutinise and challenge management. They also have various responsibilities concerning the integrity of financial information, internal controls and risk management.

The Board is responsible for setting our strategy and policies, overseeing risk and corporate governance, and monitoring progress towards meeting our objectives and annual plans. It is accountable to our shareholder for the proper conduct of the business and our long-term success, and seeks to represent the interests of all stakeholders.
Board Remuneration Committee Chair's report50
Remuneration policy report53
Remuneration implementation report56
Board and committee membership and attendance60
Directors' report61
26    Santander UK plc

Strategic reportFinancial reviewGovernanceRisk reviewFinancial statementsShareholder information

Board of Directors
1 William Vereker
Chair
Appointed 1 November 2020 (Chair) Previously Independent Non-Executive Director from 1 October 2020
Skills and experience
William is an experienced and well-respected Banker, previously having served as Global Head of Investment Banking for UBS (2013 – 2018), and prior to that holding a number of leadership roles at Nomura, Lehman Brothers and Morgan Stanley. From 2018 to 2019 he served as the Prime Minister’s Business Envoy. He was a Vice Chairman at JP Morgan until October 2020.
Other principal appointments
Chair of Santander UK Group Holdings plc*.

Board Committee memberships
Board Nomination Committee
2 Garrett Curran
Independent Non-Executive Director
Appointed 7 May 2019
Skills and experience
Garrett has spent over 20 years in investment banking in a variety of positions, predominantly in global markets, capital markets and investment banking in London and New York. Most recently, he was CEO of Credit Suisse in the UK and the bank’s Chief Client Officer in EMEA. Since leaving Credit Suisse in 2016, Garrett has been an active advisor and investor specialising in financial services, technology and real estate. He brings extensive financial services experience, and knowledge of the UK regulatory environment and risk management.
Other principal appointments
Board Member of EQCapital SLU, Board Member of Les Trois Rocs SA, Senior Adviser to Cambridge Machines Pte Ltd,

Board Committee memberships
Board Audit Committee
Board Responsible Banking Committee
Board Risk Committee

3 Annemarie Durbin
Independent Non-Executive Director
Employee Designated Director
Senior Ring-Fencing Director
Appointed 13 January 2016
Skills and experience
Annemarie has 30 years’ international retail, commercial, corporate and institutional banking experience culminating in membership of Standard Chartered’s Group Executive Committee where she was Group Company Secretary. She was a member of the Listing Authority Advisory Panel from 2015, and Chair between 2016 and 2018.
Annemarie is an executive coach and mentor.
Other principal appointments
Chair of Cater Allen Limited*. Non-Executive Director and Chair of the Remuneration Committee of WH Smith PLC. Chair of Merryck & Co. Limited, a global mentoring group. Non-Executive Director and Chair of Remuneration Committee of Persimmon Plc.
Board Committee memberships
Board Nomination Committee
Board Remuneration Committee
Board Responsible Banking Committee
Board Risk Committee
Board Audit Committee

4 Ed Giera
Independent Non-Executive Director
Appointed 19 August 2015
Skills and experience
Ed is currently Principal of EJ Giera LLC, providing corporate finance advisory and fiduciary services, and the Manager of Boscobel Place Capital LLC, a private investment partnership focused on the global financial services sector. Formerly, his executive career was with JP Morgan Securities, the investment banking affiliate of JP Morgan Chase & Co.
Ed also previously served as a Non-Executive Director at Pension Corporation Group Limited, ICBC Standard Bank plc, the Renshaw Bay Structured Finance Opportunity Fund, NovaTech LLC and the Life and Longevity Markets Association.
Other principal appointments
Independent Non-Executive Director of Santander UK Group Holdings plc*. Non-Executive Director of the Renshaw Bay Real Estate Finance Fund.
Board Committee memberships
Board Audit Committee
Board Nomination Committee
Board Responsible Banking Committee
Board Risk Committee
Board Remuneration Committee
5 Chris Jones
Independent Non-Executive Director
Whistleblower’s Champion
Appointed 30 March 2015
Skills and experience
Chris was a partner at PwC from 1989 to 2014 and was a Senior Audit Partner specialising in the audit of banks and other financial services companies. He also led PwC’s EMEA Financial Services practice. He is a past president of the Association of Corporate Treasurers and a former Chairman of the Advisory Board of the Association of Corporate Treasurers.
Other principal appointments
Independent Non-Executive Director of Santander UK Group Holdings plc*. Independent Non-Executive Director of Legal & General Investment Management (Holdings) Limited. Audit and Risk Committee member of the Wellcome Trust. Non-Executive Director of Redburn (Europe) Limited. Board member of the Audit Committee Chairs’ Independent Forum.
Board Committee memberships
Board Audit Committee
Board Remuneration Committee
Board Responsible Banking Committee
Board Risk Committee
Whistleblower Champion




































* Part of the Banco Santander group.
Santander UK plc    27

Annual Report 2020 | Governance
Board of Directors continued
6 Mark Lewis
Independent Non-Executive Director
Appointed 16 December 2020
Skills and experience
Mark brings a track record of digital transformation and growth across multiple consumer businesses and sectors. Most recently he was CEO of Moneysupermarket Group plc, operating regulated marketplaces across financial services, travel and home services and helping UK households save over £7bn from their bills.
Prior to this, Mark sat on the John Lewis management Board as Retail Director, responsible for sales and operations across 48 UK department stores and online channels serving 37 countries. He previously served as Managing Director of eBay UK and CEO of Collect+.
Board Committee memberships
Board Remuneration Committee
Board Responsible Banking Committee
Board Risk Committee

7 Genevieve Shore
Independent Non-Executive Director
Appointed 18 May 2015
Skills and experience
Genevieve brings digital, technology and commercial expertise to Santander UK from a career in the media, publishing and technology sectors, most recently as Chief Product and Marketing Officer of Pearson plc, and previously as Director of Digital Strategy and CIO. Genevieve has also advised and invested in Education Technology start-ups. She was a member of the Advisory Board of Lego Education. She also works with female executives as a coach and mentor.
Genevieve has also served as a Non- Executive Director of Moneysupermarket. com Group plc, Next Fifteen Communications Group plc, Arup Group Limited and STV Group plc.
















* Part of the Banco Santander group.

Other principal appointments
Independent Non-Executive Director of the Rugby Football Union.
Board Committee memberships
Board Audit Committee
Board Remuneration Committee
Board Responsible Banking Committee
Board Risk Committee
8 Ana Botín
Banco Santander Nominated
Non-Executive Director
Appointed 1 December 2010, Non-Executive Director from 29 September 2014
Skills and experience
Ana joined the Banco Santander group in 1988 and was appointed Executive Chair of Banco Santander SA in September 2014. Ana has been a member of Banco Santander SA’s Board and Executive Committee since 1989 and previously served as CEO of Santander UK plc between 2010 and 2014. Ana directed Banco Santander’s Latin American expansion in the 1990s.
Other principal appointments
Non-Executive Director of Santander UK Group Holdings plc*. Executive Chair of Banco Santander SA* and Director. Non-Executive Director of The Coca-Cola Company. Vice-Chair of the Empresa y Crecimiento Foundation. Vice-Chair of the World Business Council for Sustainable Development. Member of the MIT’s CEO Advisory Board. Appointed to the IMF external advisory Board in March 2020.

9 Bruce Carnegie-Brown
Banco Santander Nominated
Non-Executive Director
Appointed 16 September 2019
Skills and experience
Bruce is a Vice Chairman and Lead Independent Director of Banco Santander SA* and Chairman of Lloyd’s of London.
Bruce has served as Non-Executive Chairman of Moneysupermarket.com Group plc and a Non-Executive Director of JLT Group plc. He was also Non-Executive Chairman of Aon UK Ltd, and was Senior Independent Director at Close Brothers Group plc and Catlin Group Ltd. As an executive, he was co-founder and managing partner of the listed private equity division of 3i Group plc, President and CEO of Marsh Europe and a managing director of JP Morgan.
He was previously a Non-Executive Director of Santander UK plc* between 2012 and 2017, and a Non-Executive Director of Santander UK Group Holdings plc* between 2014 and 2017.
Other principal appointments
Non-Executive Director of Santander UK Group Holdings plc* since September 2019. Vice Chairman and Lead Independent Director of Banco Santander SA*. Chairman of Lloyd’s of London and Chair of Cuvva Limited.
Board Committee memberships
Board Nomination Committee
10 Dirk Marzluf
Banco Santander Nominated
Non-Executive Director
Appointed 7 May 2019
Skills and experience
Dirk joined Banco Santander as Group Head of Technology and Operations in September 2018. He joined Banco Santander from AXA Group, where he served as Group Chief Information Officer, leading the insurance group’s technology and information security transformation, and overseeing its overall project portfolio and acting as co-sponsor of its digital strategy. His global technology leadership roles include previous work at Accenture, Daimler Chrysler and Winterthur Group.
As Banco Santander Group Head of Technology and Operations, Dirk leads the information technology and operations function and its strategic development.
Other principal appointments
Chairman of Santander Global Operations SA* and Santander Global Technology SL.*
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11 Nathan Bostock
Executive Director
Chief Executive Officer
Appointed 19 August 2014
Skills and experience
Nathan joined Santander UK from RBS, where he was an Executive Director and Group Finance Director. He joined RBS in 2009 as Head of Restructuring and Risk, and Group Chief Risk Officer. He previously spent eight years with Abbey National plc (now Santander UK plc*) and served on the Board as an Executive Director from 2005. During his time with Abbey National plc, he held other senior positions including Chief Financial Officer.
He was also at RBS from 1991 to 2001 in a number of senior positions and spent seven years before that with Chase Manhattan Bank, having previously qualified as a Chartered Accountant at Coopers & Lybrand (now PwC).
Other principal appointments
Chief Executive Officer of Santander UK Group Holdings plc*. Member of the Financial Services Trade Investment Board.
12 Susan Allen
Executive Director
CEO, Retail and Business Banking
Appointed 1 January 2019
Skills and experience
Susan has substantial experience in the banking sector following a career spanning over 25 years. She joined Santander UK in 2015 as MD, Retail Banking before being appointed as Chief Transformation Officer the same year. In March 2017 she was appointed as Head of Retail Distribution and is currently CEO of Retail and Business Banking. Prior to joining Santander UK, she held a number of senior roles at RBS including CEO: Customer Solutions Group Corporate Banking and MD: UK Retail.
Other principal appointments
Director of Cater Allen Limited*. Director of UK Finance Limited.


13 Madhukar (Duke) Dayal
Executive Director
Chief Financial Officer
Appointed 16 September 2019
Skills and experience
Duke has extensive financial services experience in a wide range of areas. Before joining Santander UK*, he worked for Santander US* in Boston as CFO of Santander Holdings* (April 2016 – July 2019) and President and CEO of Santander Bank NA* (September 2017 – July 2019).
Prior to joining Santander, Duke was with BNP Paribas for six years, where he served as Chief Financial Officer for BNP Paribas USA Holdings, BancWest and Bank of the West. Before that he helped lead a private equity start-up for JP Morgan Chase & Co, Brysam Global Partners. Prior to that, he spent eight years with Citi.
Duke also served as a member of the Executive Committee on the Board of Trustees for the Institute of International Banking in New York as a Board member of the Federal Home Loan Bank of Pittsburgh and is on the Board of Governors for Nottingham Trent University.
Other principal appointments
Chief Financial Officer of Santander UK Group Holdings plc*.


14 Tony Prestedge
Executive Director
Deputy Chief Executive Officer
Appointed as Deputy CEO on 1 September 2020 and as an Executive Director on 18 December 2020
Skills and experience
Tony has extensive experience of the financial services and banking sector and joined Santander UK from Nationwide Building Society, where he was Deputy Chief Executive and Executive Director with responsibilities that included strategy and sustainability, digital transformation, venturing and innovation and the leadership of all customer facing channels, including the branch network, contact centres, mobile and internet banking, mortgages, investment and intermediary distribution and product operations (2018-2020). He held a number of senior positions since joining, including Chief Relationships and Distribution Officer (2016-2018), Chief Operating Officer (2010-2016), Group Development Director (2007-2010) and Group Operations Director, Portman Building Society (2003-2007).
Prior to Nationwide, Tony held a number of senior executive roles at Barclays plc, including Managing Director, Home Finance (2000-2003) and a member of the Executive Committees for both Group Retail and Business Banking and Woolwich plc and Retail Support, Transformation and Operations Director (1999-2000).



























* Part of the Banco Santander group.

Santander UK plc    29

Annual Report 2020 | Governance

Chair’s report on corporate governance
My report describes the roles, responsibilities and activities of the Board and its Committees.

The Board has been focused on supporting management during a challenging year to achieve Simple, Personal and Fair outcomes for customers.
William Vereker
Chair
2 March 2021
Board activities
Read more on p33
Committee membership
and attendance
Read more on p60



Our governance
Maintaining high standards of corporate governance is an essential element underpinning the long-term sustainable success of the Company.
In addition to the UK Corporate Governance Code 2018 (the Code) (the standard against which we measure ourselves), our governance practices and rules are set out in a number of our key documents, principally:
The UK Group Framework, which defines clearly our responsibilities and relationship with Banco Santander SA, our ultimate shareholder, taking account of our fiduciary and regulatory responsibilities. This gives us the autonomy to discharge our responsibilities in the UK in line with best practice as an independent board while giving Banco Santander SA the oversight it needs. Clarity of roles and responsibilities is key to ensuring proper accountability for decisions and outcomes; and
The Corporate Governance Framework, which is designed to assist the Board of Directors in discharging their responsibilities and ensuring an appropriate scheme of delegation throughout the Santander UK group.
The Board’s schedule and activities are planned to make sure that Directors have regard to the matters necessary to promote the success of the Company, including the broader implications of their decisions for all the Company’s stakeholders including its shareholder.
Ring-fencing embedding
Following the changes implemented at the end of 2019, Santander UK plc, as the ring-fenced bank, has continued to operate within the ring-fencing governance rules. As the substantive business of the Santander UK Group Holdings plc group is currently conducted by Santander UK plc, our ring-fenced bank, under our current business model, the PRA has granted certain ring-fencing governance rule modifications, subject to various safeguards.

This allows for certain overlaps of the Board and senior management of Santander UK Group Holdings plc and Santander UK plc, recognising our ownership structure and chosen ring-fencing business model.
The key ring-fencing safeguards include:
the requirement to have at least three ring-fenced bank Independent Non-Executive Directors (INED), of whom none are employees or directors of any other member of the ring-fenced body's group other than a ring-fenced affiliate (referred to as Double INEDs (DINEDs)); and one of whom is designated senior ringfencing director (SRD) responsible for making sure that processes to identify and manage any conflicts of interest between the ring-fenced bank group and other members of the Santander UK Group Holdings plc group are operating effectively.
the DINEDs and SRD have certain veto rights designed to protect the interests of the ring-fenced bank.
the requirement for an approved person who is part of the RFB risk management function and who is not a director of, employed by or has any responsibilities for any other member of the ring-fenced bank's group other than a ring-fenced affiliate (RFB Risk Officer). The RFB Risk Officer has certain specific responsibilities in relation to identifying conflict matters.
the Board and Committees of the two companies continue to be run substantially simultaneously to ensure efficiency and effectiveness whilst guaranteeing the independence and autonomy of our ring-fenced bank are appropriately protected. However, under PRA rule modifications, the ring-fenced bank Board and Board Committees must hold separate meetings twice a year to consider matters specific to the ring-fenced bank. The separate Board and Board Committee meetings of the ring-fenced bank took place in July and December 2020.

At 31 December 2020, the four DINEDs of the ring-fenced bank were Garrett Curran, Annemarie Durbin, Mark Lewis and Genevieve Shore. In addition, Annemarie Durbin acts as the SRD of Santander UK plc. Copies of the role profiles of board members, including the SRD, are available at www.aboutsantander.co.uk.
30    Santander UK plc

Strategic reportFinancial reviewGovernanceRisk reviewFinancial statementsShareholder information
Santander UK Group Holdings plc Board Key
William Vereker
(Chair and Chair of NomCo)
Ed Giera
(Chair of BRC and BRBC)
Chris Jones
(Chair of BAC and RemCo)

san-20201231_g19.jpg
Ana Botín
(Group Executive
Chair)
Bruce
Carnegie-Brown
(Group NED)
Nathan Bostock
(CEO)
Duke Dayal
(CFO)

Santander UK plc Board
William Vereker
(Chair and Chair of NomCo)
Ed Giera
(Chair of BRC)
Chris Jones
(Chair of BAC)
Garrett Curran
(Chair of BRBC)
Annemarie Durbin
(SRD and Chair of RemCo)

Mark LewisGenevieve Shore
Ana Botín
(Group Executive
Chair)
Bruce
Carnegie-Brown
(Group NED)
Dirk Marzluf
(Group Head of Technology & Operations)
Nathan Bostock
(CEO)
Tony Prestedge
(Deputy CEO)
Susan Allen
(CEO, Retail & Business Banking)
Duke Dayal
(CFO)

In addition, the Board Committees of the ring-fenced bank must comprise at least one DINED member (or two DINED members for the Board Audit Committee and the Board Risk Committee). The Company continues to benefit from the knowledge, skills and experience of the DINEDs, where appropriate, in the simultaneous Board and Committee meetings of both companies.
Board membership
As at 31 December 2020, the Board of Santander UK Group Holdings plc consisted of 3 Independent Non-Executive Directors (INEDs) including the Chair, 2 Group appointed Non-Executive Directors (GNEDs) and 2 Executive Directors (EDs). The Santander UK plc Board, as at 31 December 2020, consisted of 7 INEDs, including the Chair, 4 EDs and 3 GNEDs. The Board composition of Santander UK Group Holdings plc and Santander UK plc is detailed above. Under the UK Group Framework, in light of the fact that Santander UK Group Holdings plc is fully owned by Banco Santander and that the Chair is independent of the shareholder, the Chair is counted as an INED. This does not comply with Code provisions.

Through the Board Nomination Committee, we make sure we have the right composition of individuals on the Board, giving an appropriate balance of knowledge, skills, experience and perspectives. Our aim of ensuring orderly succession for Board positions is supported by continuous and proactive processes. We take into account our strategic priorities and the main trends and factors affecting the sustainability and success of the business. We oversee and regularly review the development of a diverse pipeline for succession
Changes to Board membership are set out in the Directors' report. These appointments maintain valuable skills and experience of financial services, digital, strategy, development and execution and transformation. On behalf of the Board, I would like to thank Gerry Byrne, Shriti Vadera and Scott Wheway who stepped down during 2020 for their invaluable service to the Board and the Company.
All aspects of diversity form part of our Board succession planning process, which is explained in the Board Nomination Committee Chair’s report. In 2016 we set an aspirational target of having 33% women on the Board by 2020. As anticipated in last year’s report, the level we achieved at that time (36%) reduced in 2020 as a result of Shriti Vadera stepping down from the Board and the addition of an extra NED and ED, and we ended the year at 29%.


Director inductions and training
The Company Secretary supports the Chair in designing individual inductions for NEDs, which include site visits and cover topics like strategy, key risks and current issues including the legal and regulatory landscape. The delivery of our tailored NED induction programe for our new appointments continued through 2020, appropriately adapted in light of the pandemic to include a number of virtual site visits and interactions.
William Vereker,Tony Prestedge and Mark Lewis benefited from tailored induction programmes phased over a period of 12 months, which includes meeting with senior management and site visits (where appropriate and in a Covid-19 safe way).
Throughout 2020, we continued to deliver workshops for all NEDs to further develop their knowledge and understanding of key business issues including major change projects and operational resilience, climate change, sustainability and financial crime.
As well as workshops, the NEDs received briefings on the governance requirements of ring-fenced banks.

Santander UK plc    31

Annual Report 2020 | Governance
Chair’s report on corporate governance continued
san-20201231_g20.jpg*Board and Committee meetings held concurrently with Santander UK Group Holdings plc
Views of the workforce at the Board
In 2019, in response to the Code requirement for boards to engage with employees to make sure the views of the workforce were represented, Annemarie Durbin was appointed as the designated NED to represent the views of the workforce.
During 2020, as well as extensive reporting on people issues to the Board (including the impacts of the pandemic on colleagues), Annemarie Durbin participated in focus groups, management forums and development workshops. She also had regular meetings with the Head of Culture, Inclusion and Experience to discuss matters like the employee voice and engagement survey results.
Board Committees
The Board delegates certain responsibilities to Board Committees to help discharge its duties, as detailed in each of the individual Committee Chair's reports. The Committees play an essential role in supporting the Board, giving focused oversight of key areas and aspects of the business. The role and responsibilities of the Board and Board Committees are set out in formal Terms of Reference. These are reviewed at least annually as part of the review of the Corporate Governance Framework.
Except for the Board Nomination Committee which has one GNED, all Committees are composed of INEDs only.
Additionally, the Board Committees of Santander UK plc met twice during the year, independently from Santander UK Group Holdings plc.

Further details of the roles and responsibilities of the Board Committees are detailed in the Chair's reports of each of the Board Committees.
Board activities
The Chair, with the CEO and Company Secretary, supported by the Directors and senior management, make sure that the Board has an appropriate schedule, which is focused on the opportunities and risks to the future success of the business, business performance and risk mitigation, and make sure that the Company’s culture is aligned with its purpose, values and strategy.
The Board regularly monitors progress against the strategic priorities and performance targets of the business.
During 2020, unlike previous years, the Board did not hold a separate Board Strategy day as the Board sought to adapt its processes due to the pandemic.
From March 2020, Board meetings were held virtually and the Board received deep dives on a number of particular areas of focus as well as undertaking a review of the overall strategy, including developing thoughts about what the new organisational operating model would look like in a post Covid-19 world.
During the course of the year, separate sessions were also held with the INEDs.

The Board has remained focused on the execution of strategy and responding to the challenges the business faced due to Covid-19, working closely with the government on the implementation of their support programmes.
To ensure the most effective use of the time at Board meetings, in addition to the delegation of certain responsibilities to the Board Committees, the Chair holds informal discussions with Board members. Complemented with external speaker workshops the Board consider important topics in depth and engage with key stakeholders. The Board ensures regular contact with management and colleagues through a number of means. These include inviting relevant business and function heads to present to the Board or its Committees on latest developments; permitting observers as part of individual senior managers’ development plans; scheduling regular meetings for Committee Chairs to meet with relevant senior managers; site visits by one or more NEDs, and topical or technical workshops. Senior leaders are also available to the NEDs throughout the year.
Further details of the Board activities in 2020 are set out on the following page.
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Summary of Board activities in 2020
The Board endeavoured to consider the views of all impacted stakeholders, whilst acting in the best interests of the Company and its members as a whole. The Board’s activities in 2020 included the following themes:
ThemeAction taken by the Board and outcomes
Strategy and transformation
In respect of transformation, received regular updates on the progress in driving the transformation agenda.
Received regular updates on the competitive landscape, the UK economy and banking sector including changes resulting from regulatory change requirements or in response to Covid-19.
As part of consideration of the overall strategy, considered the UK economic outlook, including financial impacts of Covid-19, and possible future operating models, together with an in depth review of Financial Crime.
Regularly considered Financial Crime, including approval of risk appetite and oversight of programmes to accelerate controls enhancement and regulatory engagement.
Considered M&A market opportunities and reviewed organic and inorganic growth opportunities.
Regularly reviewed progress in delivering the strategic priorities of Santander UK including the future Retail business model and technological journey and associated investments required.
Received regular updates from Banco Santander on the OneEurope initiative, including the benefits to Santander UK as a consequence of synergies with our ultimate parent, Banco Santander SA.

Business and
customer
Reviewed, challenged and remained apprised of the performance of the business divisions and functions, strategic business opportunities, developments with customer experience and the Company's transformation programme.
Reviewed and approved the response to implementing the High Cost of Credit Review and changes to current accounts.
Reviewed, challenged and approved the 3-year business plan (2021-2023) and the annual Budget, including cost efficiencies and associated risk assessments.
Conducted strategic reviews of our current account and mortgage propositions to ensure they remained competitive.

Covid-19
Received regular reports on Covid-19 throughout the pandemic.
Provided support to Management in its deliberations and challenged preparedness for business dislocation.
Received regular reports on the well being of staff during the pandemic across a range of metrics.
Reviewed, challenged and remained apprised of the support being given to customers under the various Government initiatives as well as changes to overdrafts and the assistance being provided to vulnerable customers.

Regulation,
Balance Sheet
and Capital
Reviewed, challenged and approved the ICAAP; ILAAP; adequacy and effectiveness of stress-testing and capital management; AT1 Payments and ordinary dividend payments in accordance with guidance from the PRA.
Reviewed the results of the BoE Financial Policy Committee Financial Stability Report, considering future changes to the UK bank capital framework.
Received regular updates on capital planning.
Considered asset and liability management activities and was apprised of regulatory developments.
Agreed key assumptions and capabilities.
Approved the Annual Report and other year-end related matters.
Received and discussed regular reports on ring-fencing implementation compliance including the consideration of conflict matters and the appointment of a ring-fenced bank officer.
Approved the Surplus Capital Allocation Framework and Dividend Policy.
Risk and
control
Received regular enterprise wide risk updates from the CRO, together with updates on specific risks, such as pensions, cyber security, financial crime, climate change and Brexit.
Approved/adopted changes to the Risk Framework as part of the annual review, including the introduction of a new minimum standard to ensure each business area and risk type considers risks posed by climate change.
People and
Culture
Received updates on issues including talent management and succession planning, gender pay, and diversity and inclusion.
Received updates on culture, considering our long-term strategic direction and cultural priorities following employee feedback and assessment findings from the Banking Standards Board.
Considered Succession Planning across all key control and support functions.
Governance
Received regular updates on the Chair's succession, subsequently approving the appointment of the new Chair.
Approved the appointment of a new NED, Senior Independent Director, ED and the Company Secretary.
Reviewed, challenged and approved Santander UK’s Annual Report.
Received regular verbal updates of Board Committee activity from their respective Committee Chairs.
Approved a revised version of the Group Subsidiary Governance Model for subsidiaries, as well as changes to certain Group Corporate Frameworks.
Approved a number of policies including a new Board level Conflicts of Interest Policy and a Group Policy for the Suitability, Selection and Succession of Board members, on the recommendation of the Board Nomination Committee.
Approved certain policies in respect of ring-fencing compliance including a Permitted Exceptions Policy and an Arms Length Policy, on the recommendation of the Board Risk Committee.
Approved any changes to directors' conflicts of interest, on the recommendation of the Board Nomination Committee.

Santander UK plc    33

Annual Report 2020 | Governance
Board Nomination Committee Chair’s report
The Committee has focused on overseeing board changes and continuing to strengthen the senior management succession pipeline

During the course of 2020, we strengthened the senior management team and will continue to do so throughout 2021, striving to achieve greater diversity.
William Vereker
Chair
2 March 2021
Committee membership
and attendance
Read more on p60


On behalf of the Committee, I am pleased to present my first Board Nomination Committee report. I would like to thank Shriti Vadera and the Committee members for their support as part of my transition to the Chairmanship of the Company and the Committee. During 2020, the Committee has undergone a number of changes in its membership as set out later in this report.
Role and responsibility
The primary responsibilities of the Committee include to:
Review the Board’s structure, size and composition, including skills, knowledge, experience and diversity;
Consider succession planning for Directors and Senior Executives;
Identify and nominate candidates to fill Board vacancies as they arise;
Assess its performance and oversee the performance evaluation process for the Board and its Committees;
Consider the annual reappointment of NEDs having regard to their performance and ability to contribute to the Board;
Oversee the induction of new directors and ongoing training needs for the Board and individual directors; and
Oversee the adequacy of the governance arrangements in place.
Overview of the year
During 2020, the focus of the Committee’s work was to:
Oversee Board changes and continue to strengthen the senior management succession pipeline;
Lead the process for new director appointments to the Board;
Review the collective skills, knowledge and experience of the Board, taking into account independence and diversity to inform succession plans;
Review Board Committee membership and overseeing changes;
Consider arrangements relating to Directors including Directors' interests, time commitment, terms of employment and that they remain appropriate; and
Oversee governance arrangements on ring-fencing rule safeguards.


In addition, the Committee considered a number of governance policies and corporate frameworks that support our internal governance systems.
Summary of 2020 outcomes
Succession planning
The Committee leads the process for identification, nomination and recommendation of candidates for appointments to the Board and senior management. It also makes sure plans are in place for orderly succession to both the Board and senior management positions. In doing so, it follows a rigorous and transparent process designed to make sure the appointments are based on merit and objective criteria and they promote diversity in its broadest sense to complement and strengthen the overall Board and its Committees’ skills, knowledge and experience.
As part of the Board appointments process, the Committee takes account of legal and regulatory requirements. The Board retains responsibility for and approves final decisions on these matters.
In 2020, the Committee spent significant time overseeing new Board appointments. Under the lead of the SID, the Committee undertook a search supported by Spencer Stuart for Shriti Vadera's replacement, resulting in its recommendation to the Board to appoint me as an independent Chair to the Board.
The Committee also led the process for appointing Mark Lewis, a new DINED, and Tony Prestedge as Executive Director and Deputy CEO,supported by Russell Reynolds and Spencer Stuart, respectively. Russell Reynolds and Spencer Stuart do not have any connection with Santander UK.
During the year, the Committee also reviewed changes to executive management talent, including a thorough assessment of the skill sets needed in light of the strategic direction of the business, together with development planning for identified talent, to ensure a diverse leadership pipeline and strong leadership team. As part of this process, Tony Prestedge joined Santander UK plc as Deputy CEO, and Christine Palmer joined as Chief Risk Officer. Both are members of the Executive Committee.

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Strategic reportFinancial reviewGovernanceRisk reviewFinancial statementsShareholder information
To support orderly succession planning for Board and senior management positions, the Committee assesses the challenges and opportunities facing the Company and evaluates the skills and expertise that will be needed in the future alongside internal capabilities, including Board evaluation feedback. Increasing diversity in all respects in the boardroom and executive pipeline is a key factor we consider. Board appointments and succession planning in 2020 were consistent with this approach, tailored as appropriate in each case.
Central to the succession planning process is the Board skills and diversity matrix which is used to track the Board's strengths and identify any gaps in its desired collective skills profile.
The skills and diversity matrix was updated during 2020 to take into consideration the future strategic direction of the Company and to make sure that consideration is given to diversity in its broadest sense.The revised skills and diversity matrix was considered in the appointment of Mark Lewis and will be used for all future appointments.
Other areas of 2020 focus
Diversity, inclusion and engagement with stakeholders
In 2016, we set an aspirational target of having 33% women on the Board by 2020. As anticipated in last year’s report, the level we achieved at that time (36%) reduced in 2020 due to Shriti Vadera stepping down from the Board and the addition of an extra NED and ED, and we ended 2020 at 29%. Our Senior Manager female population (Executive Committee) is 29%. At 31 December 2020, 23% of Executive Committee’s members were female. We are a signatory to the Women in Finance Charter, setting a target of 50% (+\-10%) by 2021 for our wider senior manager female population of which this forms a part.
We will also continue to make sure that gender and all aspects of diversity remain front of mind in our succession planning. We have signed the Business in The Community ‘Race at Work’ Charter and made good progress, achieving four of our five actions with good progress on the final one. In February 2019, the Board confirmed our ambition to increase senior manager representation of Asian, Black, other Minority Ethnic and White ethnic group employees to 14% (+/-2%) across mid to senior manager roles by 2025.
The Board Diversity and Inclusion Policy is available at www.aboutsantander.co.uk.

Annual review of director interests, fees and conflicts of interest
In 2020, the Committee continued to review time commitment and Directors’ interests and to ensure any conflicts are managed appropriately and in compliance with CRD IV and ring-fencing requirements. The Company’s Articles of Association contain provisions that allow the Board to consider and, if it sees fit, to authorise situational conflicts. The Board confirms that such powers have operated effectively and that a formal system for Directors to declare their interests and for the non-conflicted Directors to authorise situational conflicts continues to be in place. Any authorisations given are recorded by the Company Secretary.
The CEO and I reviewed the level of fees paid to INEDs for Board and Board Committee chairmanship and membership, as well as certain roles including the SID, SRD and designated NED to represent the views of the workforce. In doing so, we considered whether NED fees were at an appropriate level, having regard to factors including the associated time commitments for INEDs and benchmarking against peers. In light of this, increases to the SID fee, and the introduction of a fee for the role of SRD and designated NED to represent the views of the workforce were approved. Further details are set out in the Remuneration Implementation Report.
Priorities for 2021
Over the next year we will continue to work on talent and succession planning, in particular on executive and senior management succession, ensuring we have a strong pipeline for senior management positions, as well as focusing on NEDs’ continuing development. We will place particular focus on the integration and orderly transition of new Board and senior management members, ensuring that Board and senior management dynamics remain appropriate.
We will also undertake an external evaluation of the Board and Board Committees’ effectiveness.
Governance
Committee membership
With effect from 1 January 2020, we welcomed Genevieve Shore (Double INED) as a member of the Committee. On 28 April 2020, Bruce Carnegie-Brown replaced Ana Botin as the GNED on the Committee. Subsequently, on 30 September 2020, Scott Wheway ceased to be a member of the Committee, following his decision to step down from the Board and Genevieve Shore also stepped down as a member of the Committee in October 2020. I joined the Committee on 1 October 2020 and became Chair of the Committee
on 1 November 2020, following Shriti Vadera's departure, and Annemarie Durbin and Ed Giera became members on 16 October 2020. I would like to thank Ana Botin, Genevieve Shore, Shriti Vadera and Scott Wheway for their service on behalf of the Committee and welcome Bruce Carnegie-Brown, Annemarie Durbin and Ed Giera to the Committee.
I believe that the Committee retains an appropriate balance of skills and expertise to carry out its role effectively.
Details of other Board Committee chairmanship and membership changes are detailed in each of the respective Committee reports.
Effectiveness of the Committee
The Committee’s performance was assessed as part of the Board’s evaluation process in the year. Results were shared with the Committee Chair and then considered by the Committee. The review highlighted that the Committee continues to perform effectively, and the areas identified for enhancement have already been completed.
Board Effectiveness
In April 2020, an internal review of Board Effectiveness was facilitated by Lintstock, focused on the Board's performance in 2019 as well as capturing matters pertaining to 2020. Individual Directors’ assessments were also conducted. The review concluded that the Board and its Committees continue to perform effectively. The Committee reviewed with the Board the areas for greater focus identified by the effectiveness review and recommended actions (including 2020 related actions) which are now underway. Those areas included: executive and board succession planning, transformation, dynamics between Board and executive, financial crime and customer focus. With my arrival in November 2020, the SID will undertake his twice-yearly assessment of my performance in 2021.
Following a number of Board membership changes in the year as described earlier, the Committee determined that an external evaluation of the operation of the Board and Board Committees will be conducted at the end of 2021. Whilst this is later than the normal cycle, it is designed to allow new Board members to transition and for new Board processes to be established, giving more meaningful observations for the ongoing operational effectiveness of the Board.
Terms of Reference
The Terms of Reference are regularly reviewed by the Committee to make sure they continue to be appropriate. The Committee's Terms of Reference are available at www.aboutsantander.co.uk.
Santander UK plc    35

Annual Report 2020 | Governance
Board Risk Committee Chair’s report
The Committee supports the Board in
ensuring that the business operates within
agreed Risk Appetite while reviewing the
capability to identify and manage new and
emerging risks.

We counselled management on the need for a dynamic assessment of credit risk following industry or market responses to emerging risks, including Covid-19 and climate change.
Ed Giera
Board Risk Committee Chair
2 March 2021
Committee membership
and attendance
Read more on p60

Role and Responsibilities
Advise the Board on the enterprise wide risk profile, Risk Appetite and strategy.
Review the enterprise wide risk profile through business updates from the First Line of Defence and regular reports and updates on each key risk type from the Second Line of Defence.
Provide advice, oversight and challenge to embed and maintain a supportive risk culture.
Review the Risk Framework and recommend it to the Board for approval.
Review and approve the key risk type and risk activity frameworks identified in the Risk Framework.
Review the capability to identify and manage new risks and risk types.
Oversee and challenge the day-to-day risk management actions and oversight arrangements and adherence to risk frameworks and policies.
Overview of the year
2020 was an unprecedented year for the Committee mainly due to the risks facing our business from Covid-19. The Committee considered a wide range of current and emerging risks to our customers and our business including:
Covid-19 impact on our people and operating model
Operational risks, resilience of systems to fraud, and third party risks
Capital and liquidity
Conduct and Prudential risks
Credit, both retail and commercial
Santander Services including data integrity and security, cyber risks and risk infrastructure
Initial development of climate change risk appetite
Brexit.


We reviewed the top risks at each meeting and also received regular updates on key emerging risks, principally driven by the Covid-19 pandemic, such as stress testing in response to the economic recovery, rapid technology change, changing customer behaviour, climate change risk, LIBOR transition, market risk, pension risk and business risk reviews.
The Board Risk Committee maintains a holistic view of Enterprise-Wide risks and, to help achieve this, there is appropriate cross-membership between this Committee and both the Board Responsible Banking Committee and the Board Audit Committee.
Whilst the Board Responsible Banking Committee has oversight of financial crime risk, the Board Risk Committee retains ultimate oversight of risk appetite with respect to conduct, regulatory, reputational and financial crime risks.
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Summary of 2020 outcomes
The Committee addressed our key responsibilities relating to Risk Appetite and the Risk Framework, our oversight of capital and liquidity stress testing, and raised challenges relating to areas of focus and risk categories. Many of the risk categories had been significantly impacted by Covid-19. For more on our responsibilities relating to risk management and internal controls see the section 'Other areas of focus' that follows.
Significant areas of focus
Area of focusAction taken by the Board Risk CommitteeOutcome
Risk Appetite
Considered a number of changes proposed to the Board’s Risk Appetite Statement as part of the Annual Risk Appetite Review.
Challenged management on the risk appetite for Crown Dependencies, specifically concentrations for buy-to-let and interest only, were appropriate and proportionate for the size of the geography.
Reviewed management progress on the development of climate change risk appetite.
Discussed the economic downturn and the impact on risk limits.
Challenged management on the controls in place to identify and mitigate concentration risk in deposit gathering units by geography and business line.
Monitored management progress on addressing financial crime risk exposure relative to risk appetite.
Requested the development of a set of measures to improve the Committee's oversight and monitoring of and the concentration of deliverables to support prioritisation and input to change risk.

Following challenge, recommended management’s proposed changes to Risk Appetite to the Board for approval.
Noted and were satisfied with the proposal to reduce the risk appetite limit for annual operational risk losses.
Continued to assess management’s progress relative to Risk Appetite in the context of the Financial Crime Transformation Programme and Controls Acceleration Programme to enhance the Financial Crime control framework.
For more, see ‘Risk Appetite’ in the ‘Risk
governance’ section of the Risk review.
Risk Framework
Reviewed and adopted management changes to the Risk Framework to include the broadening of the scope of climate change risk and the inclusion of the Ring-Fenced Bank Risk Officer role.
Received an update on the annual certification process and assessed the extent to which the Risk Framework had been effectively implemented and embedded across the business.
Received management’s proposal for changes to the suite of Risk Type and Risk Activity Frameworks and their delineation between Santander UK Group Holdings plc and Santander UK plc.
Received management’s proposal to amalgamate the Banking Market and Market Risk Frameworks into a single framework, the Structural and Market Risk Type Framework.
Noted the enhanced responsibilities to be included in the Chief Financial Officer. role profile, and discussed the measures intended to increase capital efficiency and recycling.
Received the Risk function’s confirmation that the Risk Framework had embedded the ring-fencing changes.
Noted there was transparency and ownership of areas for improved compliance.
Recommended the proposed changes to the Board for approval.
For more, see ‘Risk Framework’ in the
‘Risk governance’ section of the Risk review.
Stress testing
Monitored the 2020 Bank of England Concurrent Stress Test exercise and received updates throughout the process.
Noted the development plans in place to improve existing and to develop new models.
Noted that risks associated with Santander UK’s suite of stress testing models had generally improved across the last year.
Recommended the governance, process, controls and stress test results to the Board for approval and onward submission to the PRA.
Committee members were provided with greater insight to adaptations to model plans, particularly for Internal Ratings Based and IFRS 9 and response to Covid-19.
Supported management in determining the approach to climate change risk stress testing.
For more, see ‘Stress testing’ in the ‘Risk governance’ section of the Risk review.

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Annual Report 2020 | Governance
Board Risk Committee Chair’s report continued
Area of focusAction taken by the Board Risk CommitteeOutcome
Santander
Services (Technology & Operations)
Challenged management to decide on how best to report on enhancements needed to improve connectivity between Santander Services and business units, specifically in relation to skills and resourcing needs.
Requested that reporting enables the Committee to have appropriate oversight on cultural change.
Received update on actions being taken by management to enhance the approach to, and capability of, Third Party Risk Management including the establishment of a centre of excellence and exploring opportunities to consolidate and streamline the certification of external suppliers, particularly those that provide services across the business.
Continued discussions with management on Data Management risk and the progress being made to identify and manage key risks such as data quality and data lineage.
 Received updates on cyber risk and the strategy and risk management relating to cloud usage.
Continued discussions with management about the execution risks, and benefits, associated with a migration away from existing technology and risk infrastructure. Emphasised the need for Board-level involvement as well as alignment with Banco Santander group in the associated debate and decisions impacting data management and key systems architecture.
Received substantive updates on Bank-wide Risk Infrastructure Management and the ongoing monitoring of IT obsolescence and data.
Assessed the impact of Covid-19 on key Bank-wide Risk Infrastructure Management projects.
Received updates on third party supplier risks and supported management’s efforts to ensure successful embedding and awareness of third party risk management across the workforce.
Received regular updates from the Chief Operating Officer.
Noted the progress made by management to improve risk management capability within Santander Services and the improved clarity of management’s reporting to the Committee more generally.
Noted the three-year Cyber Transformation Programme and associated investment had contributed to enhancing Cyber security, including augmenting fraud detection capability across the business.
Supported the implementation of a data governance model.
Took comfort from the process by management to distribute ownership and accountability for data integrity and observed that data structure and legacy systems architecture were key areas of focus to improve data quality.
Noted the progress on the Cyber investment plan and the Bank-wide Risk Infrastructure Management programme and the overall execution risk status.

Brexit
Received regular updates on management’s contingency plans.
Continued to monitor the risks and potential impact to Santander UK of alternative scenarios following the transition period.
Noted management actions to enhance infrastructure, improve data and respond dynamically to reflect local regulations in overseas jurisdictions.
Reviewed and supported the decision on retaining passive servicing of EEA customer accounts.
Requested management to consider how business customers would be supported with the changes to supplier payments.
Considered the risk of greater regulatory misalignment between the UK and the EU both in the near-term and in the longer-term.
Emphasised the need for coordination with Banco Santander on any actions taken impacting customers and our employees working in the UK as EU nationals, in particular.
We continue to monitor political developments, and to review and challenge management’s contingency plans and post transition control framework for Brexit.
For more, see the ‘Operational risk’ section of the Risk review.
Ring-fencing
Received frequent updates on the ring-fencing programme both as part of the Enterprise Wide Risk Management Reports and separately. These updates focused on the programme’s top risks and mitigating actions, including operational, legal, execution and regulatory risks related to completion of the programme.
Received the annual Ring-Fenced Body Permitted Exceptions and Arm’s Length policies and associated reports from Internal Audit. We noted the governance and waterfall of attestation processes and management’s increasing awareness of ring-fencing related compliance obligations.
In the course of monitoring progress on the execution of the ring-fencing programme, we agreed to the appointment of a Ring-Fenced Bank Risk Officer role, subject to regulatory approval.
Recommended the Ring-Fenced Body Permitted Exceptions Policy and the Arm’s Length Policy to the Board for approval.
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Oversight and advice to the Board on Santander UK’s current risk exposure and future risk strategy
In 2020, we reviewed Santander UK’s exposure to the risks outlined below and analysed emerging themes, including regulatory, macroeconomic and global risks, which could affect Santander UK’s ability to achieve its strategic goals.
RiskAction taken by the Board Risk CommitteeOutcome
Credit risk
Received regular credit risk updates across Retail Banking, Corporate & Commercial Banking and Corporate Investment Banking businesses.
Examined the impact of Covid-19 on the credit and collateral quality of affected customers, including sector deep dives of our businesses.
Received updates on the retail mortgage book, including interest-only and buy-to-let mortgages.
Monitored concentration risks, reviewed growth strategies and challenged management in relation to the Consumer Finance business.
Discussed how the Covid-19 crisis was expected to accelerate structural shifts in certain industry sectors and the potential impact from a credit risk perspective, in particular the Retail and Real Estate sectors.
Reviewed the impact of Payment Holidays on credit risk and the suppression of collection activities on non-performing loan stock.
Considered the process and support for customers on Payment Holidays.
In relation to the construction and associated support sectors, we noted the progress made by management to implement risk management, including control enhancements, adjustments to limits and exposures, corporate credit monitoring and approval processes, and operational procedures for delivering supply chain financing and receivables purchase products.
Counselled management on the need for a dynamic assessment of credit risks following Covid-19 and industry or market responses to emerging risks, including climate change.
For more, see the ‘Credit risk’ section of the Risk review.
Strategic risk
Considered strategic risk as part of risk reports on M&A opportunities, Data, Change and Operational Risk.
Discussed the value to the Company of being part of Santander Group.
Discussed the Company’s agility to be able to adapt quickly to changes in the market, including the acceleration of digital technologies.
Encouraged Management to continuously re-evaluate the strategy in order to be responsive to the changing competitive environment.
For more, see the ‘Strategic risk’ section of the Risk review.
Pension risk
Received regular updates on pension risk.
Discussed the volatility in both the funding position and the IAS 19 accounting position.
Noted that market uncertainty had increased volatility of credit spreads, however, the asset de-risking and hedging programme completed by management had mitigated the impacts on pension risk metrics.
Supported the enhancements of the governance arrangements with the trustees.
Encouraged management to continue working with the Trustees on a framework that would enable timely and efficient execution of asset allocation and risk management decisions.
For more, see the ‘Pension risk’ section of the Risk review.
Liquidity risk
Reviewed the Internal Liquidity Adequacy Assessment Process (ILAAP) and noted material enhancements to the previous process made by management.
Questioned management about material liquidity stress test assumptions, and the flexibility and timeliness of our liquidity reporting.
Received half yearly updates on asset and liability management activities and confirmed the liquid asset buffer portfolio remained within risk appetite, and appropriately hedged against duration risks and LIBOR decommissioning risks, respectively.
Agreed to recommend the 2020 ILAAP to the Board for approval following review and challenge.
For more, see the ‘Liquidity risk’ section of the Risk review.
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Annual Report 2020 | Governance
Board Risk Committee Chair’s report continued

RiskAction taken by the Board Risk CommitteeOutcome
Capital risk
Considered, from a capital risk perspective, dividends payable on the ordinary dividends proposed to be paid by Santander UK Group Holdings plc and Santander UK plc for the year-end.
Reviewed and approved the changes proposed to the Surplus Capital Allocation Framework which allowed for the identification of surplus capital.
Reviewed the Internal Capital Adequacy Assessment Process (ICAAP) and noted material enhancements to the previous process made by management.
Received updates on a new internal rating based (IRB) regulatory capital model for the mortgage book.
Recommended the payment of dividends to the Board for approval, subject to final determinations on capital distributions by the regulator.
 Comments and challenges received from Committee members were considered by management and incorporated into the final draft ICAAP.
Agreed to recommend the ICAAP to the Board for approval following review and challenge.
For more, see the ‘Capital risk’ section
of the Risk review.
Operational risk
Noted the emerging risk associated with Covid-19 and considered the actions being taken by management with respect to business continuity, credit sanction policy, supply chain as well as sector and single name exposures.
Discussed the operational risk & resilience challenge to the business, particularly those relating to our working from home model.
Received Operational Risk updates within Enterprise-wide Risk Management as well as Operational Resiliency, Data Centre Resilience and Change Risk.
Received regular updates on management’s strategies for mitigating cyber risk and third party risk.
Reviewed steps being taken to manage the additional operational risks caused by the Covid-19 pandemic.
Discussed the current residual risks for the extended Working From Home operating model adopted as a result of Covid-19 pandemic.
Reviewed the increase in operational risk incidents and the impacts on our own customers, as well as any lessons that could be learned.
Noted the enhancements to programme management disciplines around change and considered third party risk and dependence on key suppliers.
Highlighted the elevated risk presented by the confluence of regulatory change requirements, change risk more generally and organisational capacity and capability programme.
Considered and noted good progress on the LIBOR transition.

Monitored the impacts on operational risk and key controls associated with management’s execution of the high volume of significant transformation and remediation programmes.
Acknowledged management had enhanced operational resilience and implemented effective crisis management protocols.
Assessed and challenged the progress being made by management in the management of operational risk incidents.
Considered an update on the regular monitoring of capital adequacy models.
Received an update on the regulatory review of key mortgage and corporate IRB models.
Considered the implications of differing regulatory perspectives on through-the-cycle capital requirements of the Bank of England and the ECB, respectively.

For more, see the ‘Managing LIBOR transition’ case study in the ‘Market risk’ section of the Risk review.
Model risk
Considered an update on the regular monitoring of capital adequacy models.
Received an update on the regulatory review of key mortgage and corporate IRB models.
Considered the implications of differing regulatory perspectives on through-the-cycle capital requirements of the Bank of England and the ECB, respectively.
Reviewed management's short, medium, and long term approaches to model data time series and model recalibration in the wake of Covid-19 impacts.
The Committee will continue to monitor progress in respect of regulatory initiatives for IRB models, and request evidence of appropriate model types, assumptions, data integrity, and calibration.
For more, see the ‘Model risk’ section
of the Risk review.

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Other areas of focus
Effectiveness of risk management system and internal controls
The Committee considered, as part of the Operational Risk Profile & Analysis update, the results of the 2019 year end Risk and Control Self Assessment (RCSA). This highlighted the risk and exposure issues reported through the RCSA processes.
Based on our assessments of the risk and exposure issues reported, we considered the continued increase in critical and high risks, however, we were satisfied that overall critical and high risks were well managed via risk mitigation and reassessment processes, respectively. The remaining high risks related mainly to third party provider IT disruption and making sure third party providers are contracted to meet ring-fencing requirements.
Whilst the self-assessment acknowledged a number of control weaknesses, in particular for Financial Crime, we were satisfied that appropriate actions were planned and being progressed by management to address these. Management had undertaken significant work through the Financial Crime Transformation Programme (the FCTP) and the establishment of a Controls Acceleration Programme (CAP) to enhance the financial crime control network. To mitigate risk, steps were being taken to assess the impact of integrating CAP changes into business as usual activity.
The volume of change expected to be implemented in such a concentrated period of time presented a meaningful challenge for the Financial Crime function, however, and this necessitated a review of the resources needed. We continue to monitor the exposure, including with respect to overall risk appetite.
The Committee received reports on management’s strategic plan for investment prioritisation. The Committee continues to review management’s reports on the execution of the overall bank-wide risk infrastructure investment programme and the effectiveness of controls and improvements driven by the programme over the investment period.


Change Programme
The Committee maintained its oversight of the changing scale, scope and critical nature of the various change initiatives undertaken by Santander UK to meet regulatory and other requirements that continued to pose significant risk in 2020. The impact of Covid-19 had necessitated some reprioritisation of change initiatives, in agreement with regulators, to ensure continuity of service support to customers.
Reports from the Chief Operating Officer’s and Operational Risk identified similar themes with respect to root cause issues underpinning the execution of change programmes.
The Committee sought assurance around the aggregate risk of, as well as the capacity for delivering, the change programme.
The Committee had expressed concern at management’s capacity to effectively resource and execute the number of strategic transformation programmes in progress concurrently with the execution of regulatory change requirements including Covid-19 Government initiatives.
The Committee noted the plans to improve management information to execute the implementation of complex and often time critical and interdependent deliverables.
Priorities for 2021
In 2021, we will monitor the ongoing impact of Covid-19 on the credit risk profile, capital and liquidity adequacy and conduct risk, with respect to the Government sponsored recovery loan programs.
Data, cyber, third party, operational resilience and other IT-related operational risks will continue to be a priority, including the adoption of cloud services.
We expect to review continuing developments related to Brexit and the changes to the UK’s political, economic, and regulatory relationships with the EU.
We will also review and consider Santander UK’s risk framework and risk appetite for financial crime and climate-related financial and strategy risks.


Governance
Committee membership
There were two changes to the membership of the Committee in the year: Mark Lewis became a member in December and Scott Wheway left the Committee on his retirement from the Board in September. Scott had been a member of the Committee since January 2014. I would like to take this opportunity to thank Scott, on behalf of the Committee, for his contributions to our discussions. I would also like to welcome Mark. The Committee also welcomed the appointment of a new Chief Risk Officer.
The Terms of Reference require the majority of the members to be Independent Non-Executive Directors. This criterion was met throughout the year.
Effectiveness of the Committee
I believe that the Committee has an appropriate mix of skills to enable it to operate effectively and to offer appropriate challenge and support to management.
In December 2020, we reviewed the Committee’s responsibilities as set out in the Terms of Reference and confirmed that including the impacts from Covid-19, the Committee had discharged its responsibilities in full in 2020.
The Committee's performance was assessed as part of the Board's evaluation process during the year. The results were considered by the Committee, with some actions agreed as a mechanism for continuous improvement and to keep areas for development in focus.
We continued to receive regular reports on enterprise wide risk and to call risk owners to our meetings to account for their progress. We have benefited from the perspectives of each of the three lines of defence to gain assurance and confirm progress in respect of material initiatives intended to mitigate key risk exposures.
These actions are examples of how we have looked to inform our debate and decision making in the year and contribute to our effectiveness as a Committee
Terms of Reference
The Terms of Reference are regularly reviewed by the Committee to ensure they continue to be appropriate. The Committee’s Terms of Reference are available at www.aboutsantander.co.uk.
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Annual Report 2020 | Governance
Board Audit Committee Chair’s report
Our responsibilities include oversight of the integrity of financial reporting and controls, the effectiveness of our internal audit function, the relationship with the external auditors and the adequacy of our whistleblowing arrangements

In 2020, the principal challenge for the Committee comprised the assessment of the appropriateness of significant management judgements, disclosures and financial reporting arising from Covid-19, within an environment that has seen an unprecedented shift to remote working and the associated incremental risks this entails.
Chris Jones
Board Audit Committee Chair
2 March 2021
Committee membership and attendance
Read more on p60




Role and responsibility
The Committee provides oversight of the:
integrity of the financial statements of the Company and any formal announcements relating to its financial performance, including significant financial reporting judgements.
effectiveness of internal financial controls.
relationship with the external auditors including their independence and objectivity, audit scope and effectiveness of the audit process in respect of the statutory audit of the annual financial statements.
effectiveness of the internal audit function.
whistleblowing arrangements.
Overview of the year
In 2020, the main activities of the Committee included:
Financial reporting:
Assessing the appropriateness of key management judgements and estimates and related reporting each quarter.
Monitoring our Expected Credit Loss provisioning under IFRS 9, particularly as a result of the impact of Covid-19 and Brexit on the macroeconomic scenarios and their weightings; reviewing the staging of impaired loans; assessing the impact of payment holidays, including related PRA guidance; considering any post model adjustments, particularly those designed to adjust model results in response to the unusual economic environment due to Covid-19; focusing on disclosure enhancements and reviewing plans for further tactical and strategic IFRS 9 model development.
Monitoring the provisions for and disclosure of PPI-related matters considering a number of factors, including the run-off of claims post the PPI deadline expiry and the potential for future Plevin/RND legal claims.
Considering our conduct risk exposures, including any associated provisioning and contingent liability disclosures, and challenging management's estimates.
Reviewing the actuarial assumptions of the pension scheme accounting valuation, with particular focus on discount rates impacted by stressed markets and the risk of impairment to private equity, real estate and infrastructure assets.
Considering the assessment of goodwill due to reduced profitability in the Covid-19 impacted economic environment.

Other key areas:
Providing oversight on the adequacy and effectiveness of internal controls over financial reporting including: overseeing the enhancement of the SOx independent testing framework; reviewing the adequacy of data lineage; and assessing potential risks arising from the Covid-19 related remote working of staff.
Overseeing the performance of the Internal Audit function, including their consideration of the potentially enhanced risks arising from remote working as well as overseeing the succession of the incumbent Chief Internal Auditor.
Continuing oversight of interaction with our External Auditors including rotation of the partner team, selection of a new lead engagement partner for 2021, their increasing use of IT and monitoring their ability to audit remotely.
Overseeing Santander UK's whistleblowing arrangements including the effectiveness of a largely new team.
Reviewing management's progress in implementing the incoming Resolvability Assessment Framework.
Reviewing the UK taxation strategy.
We also addressed other responsibilities delegated to the Committee by the Board.

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Summary of 2020 outcomes
Significant financial reporting issues and judgements
The use of assumptions or estimates and the application of management judgement is an essential part of financial reporting. In 2020, we focused on the following significant reporting matters in relation to financial accounting and disclosures:
Financial reporting issue or judgementAction taken by the Board Audit CommitteeOutcome
Credit provisions
Determining the appropriateness of credit provisions is highly judgemental requiring management to make a number of assumptions. This has been impacted further during the year as a result of the Covid-19 pandemic.
Covid-19 impact
Noted that applying management judgements on IFRS 9 ECL provisioning was highly difficult given the unusual and unique circumstances as a consequence of Covid-19.
Noted the importance of being as alert to over provisioning as to under provisioning.
Reviewed the fully updated macroeconomic scenarios and weights on a quarterly basis which captured a wide range of potential outcomes for the UK economy since the outbreak of Covid-19.
Noted that there was model risk around the underlying economic modelling in respect of the IFRS 9 ECL provisioning models in the context of the very significant required judgements.
Considered management's compliance with both regulatory guidance in relation to the treatment of payment holidays and accounting guidance published during 2020.

Agreed additional disclosures to provide clarity on management judgements.
Satisfied ourselves that the robustness of the process used to arrive at the management judgements as well as with the management judgements themselves.
Endorsed the quarterly updates to the macroeconomic scenarios and weights.
Agreed to continue monitoring the IFRS 9 ECL models for the reasonableness of the outputs in future periods.
Agreed management’s approach on applying additional Post Model Adjustments (PMAs) to supplement the IFRS 9 ECL models due to Covid-19.
See the ‘Credit risk’ section in the Risk review.
See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.
Retail credit provisions
Reviewed detailed reports from management throughout the year analysing the proposed provisions by key product.
Considered management’s proposals to apply a PMA to the mortgage model to transfer a proportion of Stage 1 loans into Stage 2 where our discussions with retail customers on a Covid-19 payment holiday established they may be in longer-term financial difficulties.
Considered management’s proposals to apply a PMA to mitigate the risk of the mortgage model underestimating ECL.

Agreed with management’s judgement on the level of retail credit provisions, concluding that provisions remain robust and assumptions were appropriate.
Agreed with management’s proposals to apply PMAs to the mortgage model.
We will continue to monitor retail credit provisions.
See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.
See Note 13 to the Consolidated Financial Statements.
Corporate credit provisions
Reviewed detailed reports from management throughout the year to satisfy ourselves that any Significant Increase in Credit Risk triggers had been correctly identified.
Considered management’s proposals to apply a PMA to transfer loans for some corporate and SME sectors and clients who have been severely impacted because of Covid-19 from Stage 1 into Stage 2 or from Stage 2 into Stage 3.
Considered management’s proposals to apply a PMA to mitigate against the risk of a single name exposure with an ECL requirement of greater than £10m defaulting, which has not been covered by the existing model estimate or the corporate and SME PMA above.

Agreed with management’s judgement on the level of corporate credit provisions, concluding that provisions remain robust and assumptions were appropriate.
Agreed with management’s proposals to apply PMAs to the corporate model.
Acknowledged management’s approach of performing a significant amount of internal sector and counterparty assessments on the corporate portfolio.
We will continue to monitor corporate credit provisions.
See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.
See Note 13 to the Consolidated Financial Statements.



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Annual Report 2020 | Governance
Board Audit Committee Chair’s report continued
Financial reporting issue or judgementAction taken by the Board Audit CommitteeOutcome
Conduct and regulatory provisions
The provision for conduct and regulatory remediation activities continued to be highly judgemental and requires significant assumptions including Plevin in scope rates.
Continued to scrutinise the level and adequacy of conduct provisions and challenged the reasonableness of management’s assumptions throughout the year.
In respect of non-PPI matters, the Committee:
Reviewed management’s judgements and estimates in respect of the level of provision.
Considered disclosures on the Cologne CPO and German FTO ongoing investigation into our historical involvement in German dividend arbitrage trades.
Considered potential risks arising from anti-money laundering and financial crime systems and controls and our regulator's focus on this area and concurred with management's proposed disclosures.
In respect of PPI, mainly Plevin, the Committee:
Monitored the discussion and progress made with a third party over the liability under an indemnity.
Reviewed management’s judgements and estimates in respect of the level of provision for potential future Plevin/RND legal claims.



Agreed with management’s judgement on the level of conduct provisions and disclosures, including PPI, mainly Plevin, and other products.
Endorsed management's recommendation that no additional charges should be made for PPI BAU matters in 2020.
Endorsed the proposed year-end disclosures relating to German dividend arbitrage trades and anti-money laundering and financial crime systems and controls matters.

See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.
See Note 29 to the Consolidated Financial Statements.
Pension obligations
Significant judgement is required on the key assumptions underlying defined benefit pension obligation calculations. Outcomes remain inherently uncertain.
Reviewed detailed reports throughout the year on key assumptions underlying the defined benefit pension obligation calculations. We recognised that, although some assumptions are based on observable data, others continue to require significant judgement.
Noted actuaries continue to review our best estimate of pension liabilities under IAS 19.
Reviewed the approach and outcome of illiquid assets valuation.
Reviewed the proposed update to the long-term improvement mortality assumption to reflect the Continuous Mortality Investigation (CMI) 2019 projections model.
Reviewed the change proposed to the Consumer Price Index (CPI) inflation assumption.
Reviewed the regulatory capital impact of the change.
Monitored the continued appropriateness of the methodology and reviewed the inflation, discount and mortality rates applied at the year-end.
Agreed with management’s conclusion on illiquid assets revaluation.
Agreed with management’s approach to the assumptions applied, including changes made on long-term improvement mortality assumption and CPI inflation assumption in 2020.
Endorsed the proposed quantitative and qualitative year-end disclosures in respect of pension obligations.

See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.
See ‘Pension risk management’ in the Risk Review.
See Note 30 to the Consolidated Financial Statements.
Other areas
Reviewed the outcome of the management’s going concern assessment in light of Covid-19.
Reviewed the outcome of management’s assessment of any potential impairment of goodwill and investment in subsidiaries, and noted the decrease in 'headroom' arising from reduced expected future profitability in the current Covid-19 impacted economic environment.
Received regular reports on any material litigation cases and their progress, as part of our consideration of provisions and contingent liabilities and monitored the appropriateness and transparency of disclosures.
Agreed with management that the going concern basis of accounting remained appropriate at 31 December 2020.
Agreed with management no impairment to either goodwill or the carrying value of investment in subsidiaries should be recognised in 2020 and also considered the required increased sophistication of the assessment process and disclosures as a result of the lower headroom.
Endorsed management’s recommended accounting and disclosure in relation to litigation.

See Notes 29 and 31 to the Consolidated Financial Statements.

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The Committee’s focus continues to be on areas of significant judgement which pose the greatest risk of a material financial statement misstatement.
In addition to the areas set out in the preceding table, the Committee also considers other higher risk items. For 2020, these included the identification and assessment of risks of material misstatement due to fraud or error and the controls over calculation of risk-weighted assets. The Committee commissioned an external review of regulatory reporting, including consideration of the main controls over the completeness and accuracy of the main COREP returns and the appropriateness of key interpretations and judgements, with a focus on capital and risk-weighted assets. The Committee also reviewed the processes and governance in respect of the preparation of additional capital and risk management disclosures. The Committee monitored the increased risk arising from widespread and sustained remote working of staff due to Covid-19. We also received regular reports on any material litigation cases and their progress, as part of our consideration of provisions and contingent liabilities.
External Auditor
We continued to develop and oversee the interaction with PwC following their appointment in 2016. The independence of PwC was considered and monitored throughout the year. The Committee satisfied itself that PwC had met the independence requirements.
Jon Holloway will complete his fifth year as lead audit engagement partner and will rotate off the PwC audit engagement team in March 2021. Accordingly, during 2020, the Committee oversaw the process to select his replacement, Laura Needham. As part of our broader oversight of the PwC partner team, the Committee also considered the rotation of Hamish Anderson, a Key Audit Partner, during 2020 after four years and his replacement by Heather Varley.
Oversight of the relationship with our External Auditors
As part of our review of our relationship with PwC, our activities included:
Consideration of their work and opinion relating to management judgements.
Discussion of the impact of Covid-19 and remote working on their audit work and interaction with management.
Consideration of the summary of misstatements not corrected by management. The Committee was satisfied that they were not quantitatively or qualitatively material,
either individually or in the aggregate at each quarter.
Discussion on the level of disclosure in the Annual Report and Half Yearly Financial Report to satisfy ourselves that it is appropriate.
Discussion of developments in financial reporting including changes to statute, accounting standards and best practice.
Review of PwC’s reports on findings and recommendations on internal control and financial reporting matters identified during their audit and their view of management’s progress in resolving them.
Received a briefing on PwC's increasing use of technology in their audit work.
Interactions, including meetings in private session during each Committee meeting, and at other times throughout the year.
Noted the latest results of the FRC’s quality inspection, and enquired into the results of any internal and external audit quality reviews of Santander UK.
Considered Santander UK specific independence issues, as well as the PwC firmwide transparency report.
Considered the FRC’s Audit Quality Inspection Report published in July 2020 and audit quality indicators as part of our annual assessment of PwC’s performance.
Based on the above inputs, which were captured in a formalised assessment, the Committee satisfied itself as to the rigour and quality of PwC’s audit process.
Non-audit fees
We have a robust policy on non-audit services provided by our External Auditors, which was updated in 2020 in the context of the Revised Ethical Standard issued by the FRC in December 2019.
Non-audit services were under continuous review throughout 2020 to determine that they were permitted by reference to their nature, assessing potential threats and safeguards to auditor independence as well as the overall ratio of audit to non-audit fees.
All assignments require advance approval, either by the Chair (or in his absence his alternate), under delegated authority for amounts under £250,000 plus VAT or, if larger, by the full Committee. This process is in addition to the requirement for all non-audit fees to be approved by the Banco Santander Audit Committee.
The fees for non-audit work performed by PwC in the year, which are disclosed in Note 7 to the Consolidated Financial Statements, mainly comprised audit-related assurance services relating to the
support of various debt issuance programmes. We ensured that these met the external and internal tests for maintaining their independence, including evidence of their professional scepticism. During 2020, Santander UK paid a fee of £1.4m to PwC in relation to incremental work undertaken in support of their audit of Banco Santander SA.
In 2020, PwC’s non-audit related fees were 34% of their total audit fees, well within the internal cap of 70% approved by the Committee.
Fees for non-audit work performed by PwC in the year, other than those in relation to audit-related assurance services, were 4.3% of the average of the fees approved for Deloitte, EY and KPMG.
Internal controls
The Board Risk Committee has overall responsibility for the effectiveness of the internal control systems. However, due to the nature of internal control matters, there is a degree of overlap in responsibilities with those of this Committee, particularly regarding financial reporting controls.
Section 404 of the Sarbanes-Oxley Act requires management to report on the design and effectiveness of its internal controls over financial reporting (ICFR) framework. During 2020, the framework was further enhanced.
We considered the financial control environment in the year. Finance and our External and Internal Auditors provided regular reports to the Committee on ICFR, including key systems, and provided feedback on remediation and overall improvements required to ensure that the relevant controls were appropriately designed and operating effectively. Management also provided presentations to the Committee concerning their actions in response to External and Internal Audit recommendations. This included access management, end user computing, controls over IFRS 9 and the Client Assets control environment.
Disclosure in the Annual Report
We received reports from the Disclosure Committee in respect of each quarterly financial report, a senior executive committee chaired by the CFO. Its remit is to advise the Committee on the completeness and accuracy of disclosures in Santander UK’s external reporting. This, together with other reports received in the year, and a review of best practice and the approach of our peers, enabled us to conclude that we were satisfied with the disclosures in this Annual Report.
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Annual Report 2020 | Governance
Board Audit Committee Chair’s report continued
Management also engaged the Board and Committee early on concerning the approach to the report which enabled us to provide input into the overall tone and messaging in a timely manner.
Fair, balanced and understandable
The Disclosure Committee also reports on whether the Annual Report is fair, balanced, and understandable and whether it provides the information necessary for readers to assess Santander UK’s position and performance, business model and strategy. In this context, the Disclosure Committee considered and advised us whether:
Key messages remained consistent throughout the document, relating both to financial performance and progress against strategic priorities.
All key judgements, significant risks and issues are reported and explained clearly and adequately.
There is a clear framework to the document with good signposting and a complete picture of performance and events.
In addition to the above review process, the Committee’s assessment of fair, balanced and understandable is underpinned by the understanding it gains through the reporting made to it throughout the year of management judgements, internal control matters, Internal Audit activities and the reports of the External Auditors.
The Committee’s assessment also considers the robustness and outcomes of the assurance, review and verification processes conducted by management and considers whether the key risks reflected those that were of a concern to the Committee and were consistent with those reported by management.
Following our assessment we concluded that the 2020 Annual Report is fair, balanced and understandable.

Financial Reporting Council (FRC) Annual Review of Corporate Reporting 2020/21
In November 2020, the FRC issued a report which sets out its perspective on key developments for 2020/21 annual reports. As part of our oversight of this area, we received and reviewed a report from management on its work in respect of the areas of interest to the FRC. We are satisfied that management addressed the areas identified by the FRC in the preparation of this Annual Report to the extent appropriate to our ownership structure, including the impact of Covid-19 and Brexit on the operation of the Company.
Going Concern
We satisfied ourselves that it is appropriate to use the going concern basis of accounting in preparing the financial statements, supported by a detailed analysis provided to the Committee by senior finance management.
As part of the assessment, we considered whether there are sufficient financial resources, including liquidity and capital, available to continue the operations of Santander UK. We considered Santander UK’s resilience in the face of potential stress and prominent events including Covid-19. In making our assessment, we considered all information of which we were aware about the future, which was at least, but not limited to, 12 months from the date that the balance sheet was signed.

Internal Audit
The Internal Audit plan, based on a comprehensive risk assessment, was presented in draft and then final form for challenge and approval by the Committee. The plan has been updated at regular intervals throughout the year in response to changes in the business and the regulatory environment and at the request of the Committee.
All unsatisfactorily rated audit reports issued were subject to additional scrutiny by the Committee with the relevant business areas being required to present their action plans to the Committee. Some audit reports rated needs improvement or satisfactory were also considered by the Committee on a sample basis.
We chose to invite management to present on progress with the implementation of Internal Audit’s recommendations, issues encountered, key milestones and key dependencies.
We received regular reports on audit recommendations from our Chief Internal Auditor (the Head of Internal Audit), quarterly Internal Audit reports and monitored findings as part of our oversight. We considered the total number of recommendations, the rationale for any of them becoming overdue, and broader root cause analyses. The Committee also requested that the Chief Internal Auditor highlight recommendations becoming due and any that were past due.
We noted a strong engagement between Internal Audit and the business in 2020. The Committee was also pleased to note that in January 2020, Internal Audit was the winner of the Chartered Institute of Internal Auditors Audit & Risk Awards 2019 in the category of 'Outstanding Team - Financial Services Sector'.

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The Committee monitored the impact of Covid-19 and the widespread remote working of staff including Internal Audit staff on execution of the Internal Audit plan.
We also oversaw the objective setting and performance evaluation of the Chief Internal Auditor. The Chief Internal Auditor, having completed his term of assignment, is due to return to Banco Santander in early 2021. The Committee oversaw the selection process for a new Chief Internal Auditor and satisfied itself as to his qualifications, experience and suitability for the role.
Internal Audit External Quality Assessment
In early 2020, the Committee reviewed the implementation of the remaining improvement opportunities identified in the External Quality Assessment of the Internal Audit function that was conducted in 2018. This review is conducted every five years and evaluates the Internal Audit function in respect of its conformance with the standards of the Chartered Institute of Internal Auditors (CIIA), as well as its performance and effectiveness in comparison to industry peers and good practice. The outcome of the review had been favourable with the function being compliant with the CIIA’s Guidance on Effective Internal Audit in Financial Services – Second Edition and also benchmarked well against peers.
Whistleblowing
Santander UK recognises the importance of a culture where colleagues feel able to speak up. In 2020, management continued to embed within Santander UK the whistleblowing framework and arrangements under our oversight. This included recruiting a number of staff resulting in a largely new whistleblowing team.
We further consolidated operating procedures and delivered targeted training to managers within the Retail Division notwithstanding that further training was impacted by Covid-19. Nevertheless, there has been significant senior management engagement as well as staff whistleblowing communications.
The Committee is responsible for reviewing and monitoring the effectiveness of Santander UK’s whistleblowing procedures. It received and considered bi-annual reports on Santander UK’s whistleblowing arrangements. The reporting included oversight and progress of concerns, outcomes, identifiable trends, observable risks, the regulatory environment, changes to proposed
legislation and activities to promote and enhance the arrangements to support the culture of speaking up. The Committee also reviewed the annual Whistleblowing Report prepared for the Board to consider.
In 2020, Internal Audit performed an audit of the key controls in the Whistleblowing function and rated them as satisfactory.
The Committee is satisfied that Santander UK has complied with the FCA and PRA regulations on whistleblowing in the year.
I continued to act as the Whistleblowers’ Champion to oversee the integrity, independence, and effectiveness of the whistleblowing arrangements. I remained focused on procedures and governance to prevent victimisation of those employees raising a whistleblowing concern. I meet regularly with management and I have been involved in overseeing the implementation of suggested enhancements to continuously improve the arrangements.
Other areas of 2020 focus
In 2019, the Bank of England published its Resolvability Assessment Framework (RAF). This sets out how the Bank of England assesses UK financial firms' resolvability and introduces a public disclosure regime. The Bank of England expects UK firms to be resolvable by 1 January 2022 and firms must submit a self-assessment of their resolvability to the Prudential Regulation Authority on a two-yearly cycle from October 2021.
During 2020, the Committee oversaw management's progress in strengthening resolution capabilities, including with respect to valuations in resolution, and in meeting the requirements of the RAF. As in previous years the Committee also oversaw the development and updating of the recovery plan.
Priorities for 2021
Areas of focus for the Committee for 2021 will include:
Monitoring the ongoing impact of Covid-19 on the macroeconomic scenarios and their weights which flow through to the management judgements and estimates supporting the IFRS 9 ECL provisioning.
Reviewing our enhanced disclosures in response to recommendations of the PRA's Taskforce on Disclosure about ECL.
Overseeing Management's proposed development of the IFRS 9 model.
Monitoring the financial impact and disclosure consequences of historical conduct and litigation related issues including Plevin/RND.
Monitoring the adequacy and effectiveness of internal controls over financial reporting including those in
relation to IFRS 9, effective interest rate and goodwill/impairment carrying values.
Monitoring the potential impact of remote working by staff on financial reporting risk, the execution of the 2021 Internal Audit plan and external audit activities.
Monitoring Management's progress implementing the Resolvability Assessment Framework.
Monitoring the rotation of the PwC lead audit engagement partner.
Monitoring the rotation of the Chief Internal Auditor.
Governance
Committee membership
We welcomed Annemarie Durbin, who joined the Committee in November 2020. Annemarie brings extensive international retail, commercial, corporate and institutional banking experience.
At 31 December 2020, all members of the Committee were Independent Non-Executive Directors. The Committee also met the necessary requirements of independence throughout the year, in accordance with the requirements of Rule 10A-3 under the US Securities Exchange Act 1934.
Effectiveness of the Committee
In respect of the Revised Statutory Audit Directive, the Board satisfied itself that at least one member of the Committee had competence in accounting and auditing, and the members of the Committee as a whole had competence in the banking sector, in which we are operating.
The Board has determined that I have the necessary qualifications and skills to qualify as a Board Audit Committee financial expert as defined in Item 16A of Form 20-F and by reference to the NYSE listing standards.
In my capacity as Committee Chair, I meet with key members of the management team and the External Auditors in advance of each Committee meeting. I ensure that the Committee meets with management, the Internal Auditors and the External Auditors in private sessions. I also attend meetings with the PRA, the FCA and the FRC.
Terms of Reference
The Terms of Reference are regularly reviewed by the Committee to make sure they continue to be appropriate. The Committee’s Terms of Reference are available at www.aboutsantander.co.uk..

Santander UK plc    47

Annual Report 2020 | Governance
Board Responsible Banking Committee Chair’s report
The Committee supports the Board with
oversight of financial crime, reputation, conduct, sustainability, culture, diversity and inclusion, customer outcomes and employee wellbeing

We continued to challenge management on delivering appropriate financial crime controls, managing regulatory change, and supporting employees and customers during the pandemic.
Garrett Curran
Responsible Banking Committee Chair
2 March 2021
Committee membership and attendance
Read more on p60



Role and responsibility
The purpose of the Committee is to strengthen focus on financial crime, culture, conduct, sustainability and customer outcomes. It monitors, challenges and supports actions taken by management to ensure that the business is run in a responsible way, in the interests of all of our stakeholders including customers, our people and communities in order to promote Santander UK’s long-term success.
The Committee supports the Board with shaping Santander UK’s culture, reputation and customer propositions through oversight of matters related to conduct, compliance, culture, diversity and inclusion, employee wellbeing, sustainability, climate change, reputation, brand and financial crime.
The oversight of financial crime includes anti-money laundering, sanctions, terrorist financing, anti-bribery and corruption and two key transformation programmes that are critical to controls and systems.
The Committee Chairs collaborate to prevent any gaps in coverage and to ensure that any areas of overlap are addressed in the appropriate forum. Committee Chairs are members of other Board Committees to ensure breadth of visibility and open channels of communication.
Overview of the year
In 2020, the impact of the pandemic was prevalent in Committee discussions, which ranged from changes to the way that colleagues worked in head office sites, branches and contact centres including provision of additional training and support; wellbeing considerations and support; homeworking support; consideration of feedback from employee surveys; and support for customers and businesses, including as a result of Government support schemes and by use of digital enhancements.


Summary of 2020 outcomes
Customers and Customer Outcomes
A strong focus at Board level for much of 2020 was support for customers and colleagues during the pandemic. The Committee also focused on:
Vulnerable customers
Fair customer treatment and outcomes
Fraud prevention and detection
Open Banking implementation and
Resourcing.
Reputational risk
The Committee ensured that adequate and effective control processes were in place to identify and manage reputational risks.
It received reports on existing and possible reputational, brand and franchise risks, including media and public policy issues and climate change. The reports also included key decisions or key risk events that give rise to reputational risk issues.
Financial crime
The Committee:
Received regular updates on Financial Crime from business accountable executives and the Money Laundering Reporting Officer, including his annual report, and approved the proposed strategic recommendations
Discussed the importance of culture in the context of Financial Crime
Monitored and challenged management on the progress of Santander UK in improving its systems and controls to combat financial crime and meet regulatory expectations, including regular updates on controls acceleration and financial crime transformation; and
Reviewed potential financial crime risks and any actions required in response, including in respect of international sanctions compliance.

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Conduct and Compliance
The Committee:
Ensured that adequate and effective control processes and policies were in place to manage and measure Conduct and Compliance risk
Considered key emerging Conduct and Compliance risk issues, lessons learned and anticipated risks via horizon scanning and investigations
Received first and second line reporting against Conduct and Compliance risk metrics and reports on conduct-related regulatory interaction matters
Considered the FCA Firm-Wide Evaluation and response plans
Considered the Compliance Programme, including resourcing in the Compliance Monitoring Plan
Considered any actions in response to regulatory developments, including individual and market developments, on conduct and compliance risk matters and
Themes arising from customer complaints, whistleblowing, satisfaction metrics and FOS referrals.
People and Culture
During the pandemic, the Committee focused on the wellbeing of employees, due to the impact of necessary and ongoing home working. It also considered colleagues who were based in branches and the challenges inherent in each of the new circumstances that had been a response to the pandemic. In addition the Committee:
Received updates on culture, considered thematic culture and conduct trends, including management-identified cultural drivers, changes in policy and working practices
Monitored the culture strategy and management efforts to embed and maintain the desired culture throughout the business in line with the Company’s purpose, the simple, personal and fair values and the Santander behaviours

san-20201231_g21.jpg



Received updates on the approach to employee wellbeing, diversity and inclusion, including actions to increase black representation and progress against gender and minority ethnic inclusion targets.
Reviewed key themes arising from employee surveys, employee focus groups led by management and the Santander UK plc Designated Director, and people metrics to evaluate the impact on conduct and culture, including the external Banking Standards Board Assessment and the internal Global Pulse Engagement Survey results and
Received updates on the operation of the engagement with the workforce mechanisms undertaken by the Santander UK plc Designated Director. The themes raised during engagement sessions and employee focus groups fed into People and Culture Updates. For more, see the Stakeholder Voice in the Boardroom.
Brand and Sustainability
The Committee:
Considered brand and marketing and provided challenge on the brand proposition, the weight of factors within NPS and sought greater insight into the impact from changes made to the 1I2I3 proposition and also on brand affinity
Considered reputation and how reputational risk impacted its brand and market positioning
Received two separate Workshops on Sustainability and Climate Change
Monitored embedding of Sustainability into our business strategy, helping the bank deliver value to all stakeholders, protect its reputation and brand.
It also oversees alignment to international frameworks, such as the Sustainable Development Goals and the UN Principles for Responsible Banking. For more on our Sustainability strategy, Governance and metrics, please see our Environmental, Social and Governance (ESG) Supplement.
Priorities for 2021
In 2021, the Committee will continue to take a holistic approach to gain greater understanding and oversight of all of the key areas that contribute to the experiences of our customers, our people and wider stakeholders.
Key priorities will be:
Oversight of progress on Financial Crime objectives, the successful embedding of the Controls Acceleration Programme and meeting regulatory expectations
Oversight of programmes of regulatory change, to understand customer impact so that the highest standards of conduct and fair outcomes are delivered
Oversight of Sustainability strategy, including initiatives to achieve our priorities and development of the UK Climate Change Programme strategy
Oversight of conduct
Oversight of culture
Oversight of diversity and inclusion, with focus on actions to close the pay gaps, including increasing senior representation
Oversight of employee wellbeing
Monitoring reputational risk, the continued enhancement of Fraud prevention; complaints and treatment of vulnerable customers; and
Progress and plans to drive improvements to NPS and brand affinity.
Governance
Committee membership
All Committee members, including the Chair, are Independent Non-Executive Directors. The members of the Committee in 2020 were Scott Wheway (Chair until 17 March 2020 and a member until 30 September 2020), Garrett Curran (Chair from 17 March 2020), Ed Giera, Annemarie Durbin, Genevieve Shore, Mark Lewis (who joined the Committee on 16 December) and Chris Jones (who joined the Committee on 1 November 2020). Details of members, including their skills and experience, are shown in the Board of Directors section. The Committee is satisfied that its composition and operation comply with ring-fencing rules.
In addition to the Committee members, in 2020, regular attendees at Committee meetings included the Board Chair, CEO, Chief Legal and Regulatory Officer, Chief Risk Officer, CEO, Retail and Business Banking, Chief HR Officer, Director of Corporate Communications and the Director of Conduct and Compliance. In 2020, the Committee met eight times in response to changes due to Covid-19.
Effectiveness of the Committee
The Committee's performance was assessed as part of the Board's evaluation process during the year. The results were considered by the Committee, with some actions agreed as a mechanism for continuous improvement and to keep areas for development in focus. The Committee continues to operate effectively, discharging its responsibilities against its Terms of Reference and the Board takes assurance from the Committee on particular decision matters.
Terms of Reference
The Terms of Reference are regularly reviewed by the Committee to make sure they continue to be appropriate. The Committee’s Terms of Reference are available at www.aboutsantander.co.uk.
Santander UK plc    49

Annual Report 2020 | Governance
Board Remuneration Committee Chair’s report
Our performance management, reward and benefits approach supports our business strategy, rewards strong performance and reinforces our culture and values within the approved risk management framework

We aim to deliver remuneration aligned to sustainable performance outcomes for the long term benefit of our organisation.
Annemarie Durbin
Board Remuneration Committee Chair
2 March 2021
Committee membership and attendance
Read more on p60


On behalf of the Committee, I am pleased to present the Directors' Remuneration Report for 2020.
Role and responsibilities
The Committee is responsible for the application and implementation of remuneration policies and frameworks across the Santander UK group. It is responsible for remuneration arrangements of employing entities within the Santander UK plc (the Ring-Fenced Bank or RFB) perimeter.
The Committee works in consultation with Santander UK Group Holdings plc to ensure alignment of remuneration practices, policies, and procedures.
In light of our ring-fencing obligations, we proactively manage potential remuneration conflict matters which may arise between the Company, Santander UK Group Holdings plc and Banco Santander SA.
Overview of the year
Business Performance in 2020 and Impact on Remuneration
2020 has been a year of unprecedented disruption to the global economic and social environment. In response to the extraordinary impact of Covid-19 on the business, economy and wider society, the Committee supported a number of direct actions:
A comprehensive package of measures was introduced to support colleagues, including a commitment to paying our colleagues their contracted hours throughout the pandemic.
As a token of our gratitude, we rewarded front line colleagues with a one-off £500 bonus, for their continued support to customers during the year. The Bank has not made use of the the Government furlough scheme.

During 2020, the Santander Foundation made donations to the Alzheimer’s Society and Age UK to support those most affected by the pandemic. The total amount contributed to the fund by Santander UK in 2020 was £3m, which includes cost savings partially achieved through a reduction in the CEO's total pay for the year
A number of Independent Non-Executive Directors voluntarily donated a proportion of their 2020 fees to the Santander Foundation.
Our 2020 results have been materially impacted by the pandemic, reflecting the uncertainty in the wider economy. Profit before tax and Net interest income were both reduced year-on-year.
Operating expenses were reduced year-on-year as efficiency improvements continued under the ambitious multi-year transformation programme, launched in 2019. This aims to reshape the bank to better support our customers by focusing on simplification, digitalisation and customer experience.
We have been able to report a net profit for each quarter of 2020, due to decisive management action taken throughout of the pandemic. In addition, the balance sheet remains resilient through strong capital and liquidity, and this leaves us well placed in a highly uncertain environment. We are also in a position to make a dividend payment to our shareholder.
The Committee used its discretion to review the formulaic bonus pool outcome, and agreed that the available pool should be allocated more heavily towards more less senior colleagues.
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The Committee made the decision not to award the CEO a bonus for the year, and instead the value of bonus he would have received has been used to fund a corporate donation to the Santander Foundation. In keeping with our responsible approach in the current environment, the other Executive Directors received a reduced bonus reflecting the challenging conditions this year and our financial results, paid wholly in shares to align to the long-term interests of our shareholders.
The Committee considered outcomes against the remuneration policy to make sure that the policy was operating as intended, to achieve pay for performance alignment.
Summary of 2020 outcomes
Variable pay
We continue to evaluate the structure and metrics of our variable reward schemes to ensure continued alignment between metrics and strategic priorities, that internal performance targets are stretching and robust and that our framework reflects the evolving views of our various stakeholders.
For 2020, variable pay was based on a balanced scorecard of metrics across Customer, Shareholders, People and Sustainability. Although new to the scorecard, sustainability metrics were previously considered as part of risk adjustment determinations and bonus pool outcomes. To drive our goals further in this area, sustainability has also become a priority within individual performance objectives for executive and senior management.
The Committee introduced an underpin to the awards for Executive Directors to make sure that no awards would be made in the event of a loss. Details of the metrics used in each quadrant are set out in the Directors’ Remuneration Report.
The Committee is satisfied that 2020 variable pay outcomes for all colleagues are appropriately aligned to Santander UK’s business performance, which is fair, consistent, and aligned to our stakeholder interests.
Risk Adjustments
Our risk adjustment procedures, which are applicable to all colleagues, are robust and well embedded within our remuneration policy. We use a range of risk adjustment mechanisms including in-year individual adjustments to performance rating/reward outcomes; individual adjustment following accountability reviews; and collective adjustments at a bonus pool level. Metrics are under continuous review, to adapt to the changes in Santander UK’s operating environment, ensuring that they remain comprehensive and relevant.
Board Changes
The Committee considered the remuneration for Tony Prestedge, who was appointed as Deputy Chief Executive on 1 September 2020. Tony became an Executive Director, joining the Board on 18 December 2020. The Committee also considered the remuneration package for William Vereker who was appointed as Board Chair on 1 November 2020. Further details are set out later in this report.
Reward for senior colleagues
As the business continues to evolve, the Committee spent time during the year on reviewing reward for our senior colleagues. This included re-evaluating remuneration principles to make sure that we attract, retain and motivate the talented individuals capable of delivering the Company’s ambitious strategy. We considered and challenged, as appropriate, remuneration being offered to new appointments at senior levels.
We also updated our performance management framework for these colleagues to highlight the importance of risk management across the business.

Other focus areas for 2020
Wider workforce and the Employee Value Proposition
The Committee’s role and remit extends beyond the Executive Directors to include other senior roles (including Material Risk Takers) within the organisation together with oversight of the implementation of remuneration policies across Santander UK.
We have also intensified our prioritisation of the safety and wellbeing of our colleagues, ensuring they are well supported.
As a Committee, we seek to make sure that executive remuneration decisions are informed by, and consistent with, the approach taken for employees more broadly. The Committee undertakes an annual review of the remuneration policies and practices for the wider workforce, and receives updates throughout the year on other key matters.
As in 2019, we have voluntarily disclosed our CEO pay ratio. The ratio relative to median employee pay has reduced significantly in comparison to last year reflecting the reduction in the CEO's overall pay for the year. More information can be found in the Directors' Remuneration Report.
During the year, the Committee contributed to the Board's evolution of the Santander UK Employee Value Proposition, making sure that remuneration promotes positive behaviours and stimulates a culture where our employees can thrive.
We are encouraged by the high participation levels in our all employee share plans. Sharesave was again oversubscribed for 2020, demonstrating loyalty of our colleagues through their investment and willingness to become shareholders of the organisation.
See section on Stakeholder Voice In the Boardroom for details on how we ensure that employees' views and interests are considered at Board level.
Santander UK plc    51


Annual Report 2020 | Governance
Board Remuneration Committee Chair’s report continued
Diversity Pay Reporting
We remain committed to our Inclusion and Diversity agenda, which remains a key consideration in Committee deliberations on executive pay and recruitment of senior positions. We recognise that a diverse workforce is core to driving our strategic priorities on corporate culture, ensuring that our organisation is representative of the Communities it serves.
We have improved our pay gap reporting this year by voluntarily disclosing our ethnicity pay gap in addition to gender. This allows us to better understand our position with a view to bridging the pay gap in both areas. We want to encourage an environment where more colleagues voluntarily disclose their ethnicity over time, to allow us to continue to improve our understanding of our performance and pay gaps in this area.
For more information refer to our 2020 Pay Gap report available on our website.
Transformation Incentive
Throughout 2020 the Committee considered the design of and participation in a new long-term plan to incentivise the delivery of our transformation agenda - the Transformation Incentive plan. This plan is designed to recognise and reward the achievement of key internal financial targets and an enhanced customer experience, whilst maintaining appropriate controls around conduct and risk management, over the course of the Company's transformation period. Further details will be set out in next year's report.


Priorities for 2021
In 2021, we will continue to:
monitor our incentive structures and measures, to maintain alignment to our strategic aims, culture and behaviours, balancing the needs of our people, customers, communities and shareholders and supporting our business transformation.
review and update our remuneration policies and procedures to implement the changes needed in the context of CRD V.
focus on the pay policies and practices for the wider workforce and to make sure that they are considered when determining senior executive reward.
monitor external developments in executive remuneration best practices in the industry and broader market taking into account the regulatory landscape and corporate governance.
Committee Membership
The members of the Committee during 2020 were Annemarie Durbin (Chair) Chris Jones, Scott Wheway (until 30 September 2020), Genevieve Shore, Mark Lewis (from 16 December 2020) and Ed Giera (from 1 November 2020).
The Committee met15 (including ad hoc meetings) times in 2020, reflecting its responsiveness to the changing environment brought by Covid-19.
The Committee is satisfied that its composition and operation comply with ring-fencing obligations.
Effectiveness of the Committee
The Committee’s performance was assessed as part of the Board’s evaluation process during the year. We considered the results and agreed key areas of development for 2020. The plan focuses on allocating more time to remuneration strategy, longer term trends and challenges.
The Committee continues to operate effectively in discharging its responsibilities, and the Board takes assurance from the quality of the Committee’s work. The Committee considered the performance of its remuneration consultants, Deloitte LLP, and is satisfied that their advice and conduct remain independent, and objective.
Terms of Reference
The Committee’s Terms of Reference are regularly reviewed to make sure they remain appropriate. The Terms of Reference are available at www.aboutsantander.co.uk.
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Remuneration policy report
Basis of preparation
This report has been prepared on behalf of the Board by the Board Remuneration Committee. We comply with the statutory reporting obligations for large private companies. Furthermore, we follow the UK Corporate Governance Code 2018 (the Code) wherever applicable in order to practice best standards of corporate governance, and other listed disclosure requirements to the extent considered appropriate.

Accordingly, several voluntary disclosures relating to remuneration are presented in this report.

Forward-looking remuneration policy for Executive Directors
Our forward-looking remuneration policy, which applies to Main Board Executive Directors (Executive Directors), is outlined below. Remuneration is structured in two main elements: fixed and variable pay. Fixed pay is set at market competitive levels appropriate for the role, so that inappropriate risk taking is not encouraged. Variable pay rewards the delivery of internal financial targets, key strategic priorities and individual performance.

Executive Directors' remuneration structure
Fixed payPrinciple and descriptionPolicy
Base salary
To attract and retain Executive Directors of sufficient calibre and with the skills to deliver our strategy, taking into account the demands and complexity of the role.
Base salaries are normally reviewed annually. In reviewing base salaries the Committee considers a number of factors, including:
The skills required and responsibilities of the role alongside the market value of those attributes;
The requirement for base salaries to be set at a level to avoid inappropriate risk taking;
Base salary increases across the colleague population; and
Prevailing market and economic conditions.
Pension arrangements
To provide a discrete element of the package to contribute towards retirement.
All Executive Directors receive a cash allowance in lieu of pension.
Pension for new Board appointments will be in line with the average level of pension provision available to the broader workforce, currently 9% of salary.
Our approach to current Executive Director pension allowances is set out in the Policy Report.
Other benefits
To offer a competitive package and to support employee wellbeing.
Including but not limited to: private medical insurance for Executive Directors and their dependants, life assurance, health screening, relocation allowances and expatriate allowances where relevant.
Access to Santander UK’s all-employee share schemes on the same terms as all UK employees.

Variable payPrinciple and descriptionPolicy
Variable pay plans
The Variable Pay Plan aims to motivate Executive Directors to achieve and exceed annual internal targets within Santander UK’s Risk Appetite and in alignment with our business strategy and values.
Multi-year deferral, further performance testing and delivery in Banco Santander SA shares aligns Executive Directors’ interests to the long-term interests of Santander UK.
Part of the award is deferred according to the requirements of the PRA Remuneration Code.
The long-term Transformation Incentive plan recognises the collective achievement of key financial and non-financial internal targets associated with the bank's ongoing transformation.
Bonus awards under the Variable Pay Plan are discretionary and determined by reference to performance against a scorecard of financial and non-financial goals, as well as individual performance.
40% of any bonus awarded is paid upfront after the performance year ends (year one), and delivered at least half in shares.
60% of the bonus awarded is deferred and delivered in equal tranches over years three to seven, with each tranche delivered at least half in shares.
For Executive Directors, the first three of five deferred award tranches are subject to further performance testing, which may reduce the level of payout, but not increase it.
The Transformation Incentive is based on performance assessed over a three year period with further deferral into cash and share based awards in line with regulatory requirements.
Share based awards are subject to a minimum twelve-month retention period following vesting.
Malus and clawback provisions apply to variable pay for up to ten years following the grant of an award.
The structure of variable pay awards means Executive Directors acquire a meaningful shareholding in Banco Santander SA which may extend for a significant period post-employment. A formal post-employment shareholding requirement is therefore not in place.
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Annual Report 2020 | Governance
Remuneration policy report continued
Our remuneration policy continues to meet regulatory requirements. Santander UK applies a 2:1 variable to fixed pay cap in line with approvals granted to Banco Santander SA by its shareholders. For control function staff, a lower ratio of 1:1 is applied, apart from in exceptional circumstances
Executive remuneration policies
and principles
Our core values of Simple, Personal and Fair drive our remuneration policy. We focus on delivering a reward framework that is simple to understand, tailored to individual roles and competitive yet fair.
The key drivers of our Remuneration Policy
Alignment to culture
To design policies aligned to the long-term success of the business which support the delivery of our strategy and reinforce our values.
To base variable pay on a balanced scorecard of quantitative and qualitative metrics which reflect our strategic priorities across Customers, Shareholders, People and Sustainability. This ensures that our day-to-day activities align with Santander UK’s over-arching strategy and our aim of being the best bank.
Simplicity
To ensure our approach to remuneration is transparent and easily understood.
To operate simple and clear structures for all Santander UK colleagues.
Risk
To apply a consistent approach to reward for all our employees which upholds our prudent approach to Risk Appetite set as part of a Santander UK-wide framework. Risk adjustment occurs at an individual and bonus pool level.
To provide a package that is balanced between fixed and variable pay, and short-term and long-term horizons, which aligns to our strategy whilst promoting prudent risk management.
To ensure remuneration is compliant with applicable regulations and legislation.
Fairness
To take into account an assessment of the Executive Directors' performance against objectives set at the start of the year covering a range of financial, non-financial, quantitative and qualitative criteria.





To set robust and stretching internal targets and reward exceptional performance.
To attract, retain and motivate employees of the highest calibre by providing total remuneration which reflects individual and Company performance, is competitive, reflects the responsibilities of the role and drives the organisation’s growth.
To consider wider employee pay when determining pay of our Executives.
Clarity
The Committee reviews remuneration reporting on an annual basis against principles of best practice and developments in corporate governance, including the Code. Our reporting is designed to be transparent to promote effective stakeholder engagement, whilst reflective of our subsidiary structure.
Predictability
The Committee annually reviews the variable pay opportunity for individuals and the basis of the pool calculation. Due to commercial sensitivity, these are not disclosed as per the requirements of the Code. Directors’ remuneration is within the variable pay cap as approved by Banco Santander SA shareholders and set out above on this page.
Executive Director pension alignment
In 2018, following developments in corporate governance and best practice, the Committee took the decision to reduce pension allowances for new Executive Directors to 9% of salary, in line with the wider workforce average. This pension level applied on the appointment to the Board of Susan Allen, Head of Retail and Business Banking, on 1 January 2019, Duke Dayal, Chief Financial Officer, on 16 September 2019, and Tony Prestedge, Deputy Chief Executive Officer, on 18 December 2020.
In 2019, the Committee decided to extend this approach to existing Executive Directors, namely the Chief Executive Officer. This reduction has been phased with the Chief Executive Officer's allowance reducing from 35% to 22% of salary effective 1 January 2020, and to 9% of salary from 1 January 2021. Subsequently, with effect from January 2021 the Chief Executive Officer's pension provision is aligned with the current workforce average.
On recruitment
When appointing a new Executive Director, base salary is set at a market competitive level appropriate for the role, taking into consideration a range of factors including role scope and responsibilities, internal and external peer groups, the individual’s previous remuneration, relevant experience, and affordability.
Unless determined otherwise, any new Executive Director will receive a pension allowance in line with the wider workforce average, currently 9% of salary. Benefits available will typically be aligned to the wider employee population.
Other elements of remuneration will be established in line with the Remuneration Policy, as set out in the Executive Directors’ remuneration structure table in this report.
Relocation support and international mobility benefits may also be given. Where provided, relocation assistance will normally be a capped amount for a limited time. For an overseas appointment, the Committee will have discretion to offer benefits and pension provisions which reflect their home country market practice and align to relevant legislation.
Buy-out awards
Compensation may be provided to Executive Directors recruited externally for the forfeiture of any award on leaving their previous employer. The Committee retains discretion to make such compensation as deemed appropriate to secure the relevant Executive Director’s employment and will ensure any such payments align with both the long-term interests of Santander UK and the prevailing regulatory framework.
Such payments will be in line with the awards foregone as a result of leaving the previous employer taking into account value, form of awards, vesting dates and the extent to which performance conditions applied to the original awards.
Service agreements
Terms and conditions of employment are set out in individual service agreements which include a notice period of six months from both the Executive Director and the Company.
The agreements may be terminated immediately with payment of fixed pay in lieu of notice. In the event of termination for gross misconduct, neither notice nor payment in lieu of notice is required, and any deferred awards are forfeited.
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Termination payments
The impact on remuneration of an Executive Director leaving the Company under various scenarios reflects the service agreements, the relevant scheme rules, regulatory requirements and the Committee’s policy in this area.
Outstanding variable pay awards will generally lapse on termination, other than where an individual is considered a ‘good leaver’, in which case the awards will normally subsist until normal payment dates. The Committee determines whether an Executive Director is a good leaver under certain circumstances including but not limited to: injury, ill-health, disability, redundancy, retirement, death, or any other reason at the Committee’s discretion.
There is a framework in place which is intended to guide the Committee to determine the discretionary circumstances when good leaver status is appropriate. Other than a payment in the event of redundancy, there are generally no other payments upon termination of employment for Executive Directors.
In the event of a change in control, awards will be treated in line with the relevant scheme rules, taking into account the applicable regulatory requirements.
Risk and Performance adjustment
We continue to ensure that the regulatory requirements of the Remuneration Code on risk and performance adjustment are met for our colleagues. All variable remuneration is subject to adjustment for current and future risks through our Additional Risk Adjustment Standard which is linked to our Board approved Risk Appetite.

The Standard provides both a formula-based assessment against Santander UK’s Risk Appetite and an additional qualitative risk event assessment overlay that can reduce the bonus pool or individual awards to nil at the Committee’s discretion. Given commercial sensitivity, the Committee does not provide annual detail on the application of discretion as required by the Code.
Our Individual Remuneration Adjustment Standard provides a framework for the process, governance and standards relevant for decisions in relation to individual performance adjustments following an incident, including the application of malus and clawback.
Performance adjustments may include, but are not limited to:
Reducing a bonus for the current year;
Reducing the amount of any unvested deferred variable remuneration;
Requiring a bonus which has been awarded (but not yet paid) to be forfeited; and
Requiring repayment on demand (on a net basis) of any cash and share awards received at any time for a period of up to ten years following the date of award.
The Committee has full discretion to prevent vesting of all or part of an amount of deferred remuneration and/or to freeze an award during an ongoing investigation in a number of circumstances, including:
Colleague misbehaviour or material error;
Material downturn in the performance of Santander UK or a relevant business unit’s performance;
Santander UK or a relevant business unit suffering a material failure of risk management;
Significant changes in Santander UK’s economic or regulatory capital base and the qualitative assessment of risk; and
Material restatement of the Santander UK’s financial statements (except when required due to modification of the accounting rules).

When determining variable pay awards for individuals performing roles across Santander UK plc and Santander UK Group Holdings plc, the Santander UK Group Holdings plc Board Remuneration Committee will apply any necessary discretion based on factors related to UK Group entities outside of Santander UK plc. This discretion is subject to validation by the Santander UK plc Board Remuneration Committee.
The Committee seeks input from the Chair of the Board Risk Committee, Chief Risk Officer, Chief Legal and Regulatory Officer, Chair of the Board Audit Committee, Chief HR Officer, Chair of the Board and Chief Internal Auditor when determining whether any performance or risk adjustments are required.
Policy for all employees
Our performance, reward and benefits approach across the Company supports and drives our business strategy, rewards strong performance and reinforces our values within the approved risk management framework. The general principles of the Remuneration Policy broadly apply across all colleagues where appropriate, and are designed to facilitate recruitment, motivation and retention whilst driving performance.
The composition of remuneration packages for the Executive Directors is aligned with the broader colleague population, comprising salary, pensions and benefits and eligibility for discretionary variable pay dependent on role and responsibility. From 1 January 2021, the level of pension allowance for all current Executive Directors is aligned with the current average employer contribution for the wider workforce.
The Committee annually approves the operation of all of our variable reward schemes for our customer-facing colleagues to ensure that all plans reward appropriate behaviour and do not incentivise unnecessary risk taking.
Santander UK plc    55

Annual Report 2020 | Governance
Remuneration implementation report
Introduction
This section of the report outlines how our Remuneration Policy was implemented for 2020.
Variable Pay Plan
To incentivise and reward Executive Directors for achieving superior and sustained performance, our Directors participate in an annual variable incentive plan. A balance of financial and non-financial performance metrics are selected annually by the Committee and are aligned with our strategy as measured over the financial year. Multi-year deferral, further performance testing and delivery in Banco Santander SA shares ensures that Executive Directors’ interests are aligned to the long-term interests of the business. Both upfront and deferred awards are made at least half in shares. The deferred element is delivered over seven years, with the first three deferred tranches of awards subject to further performance testing against long-term metrics which can reduce but not increase the overall level of awards. Awards delivered in shares are subject to an additional one-year retention period from the point of delivery.
The structure of the plan is illustrated below. The 2020 Variable Pay Plan pool was determined based on a range of metrics using a balanced scorecard approach as follows:
Quantitative assessment
A quantitative assessment is undertaken against a balanced scorecard of financial and non-financial metrics that are key to Santander UK’s 2020 strategy. Performance metrics are reviewed annually to ensure continued alignment with strategy, and for 2020 were:
Customers (Net Promoter Score and number of loyal customers)
Shareholders
Risk (Cost of credit & Stage 3 ratios)
Capital (Contribution to Banco Santander group capital)
Profitability (Net profit & RoTE)
Sustainability (Financial empowerment, Dementia Friendly Bank and emissions reduction)
People (Employee Engagement).
A profit underpin was introduced for 2020 applicable to Executive Directors which requires Profit after Tax to remain positive in order to pay any award.
Qualitative assessment
A qualitative assessment adds context to the quantitative assessment and ensures a balanced view of performance is taken.
Banco Santander Group Multiplier
The Committee has the discretion to adjust the pool upwards or downwards to reflect overall Banco Santander performance if appropriate.
Exceptional Adjustment
Intended to cover unexpected factors or additional internal targets not covered by the quantitative or qualitative assessments. This may also include adjustments not covered in the qualitative assessments, including major risk events. No exceptional metrics were applied to the 2020 variable awards for Executive Directors


UK-focused risk adjustment
Linked to Santander UK’s Risk Appetite, this provides both a formula-based assessment against Risk Appetite and an additional qualitative risk event assessment overlay (including consideration of other risk appetite limit breaches e.g. reputational risk and Financial Crime risk). This can result in a downward risk adjustment of up to 100% of the bonus pool or individual awards at the discretion of the Committee.
The Committee reviews and approves remuneration governance and frameworks on an annual basis to ensure continued compliance with the relevant regulatory rules, including for ring-fencing.
Individual assessment
The allocation of the pool is based on an individual's performance, taking into account a range of factors including behaviours, conduct and risk.
Deferred long-term awards
The payment of the first three deferred tranches of the 2020 awards (36% of the total award), payable in 2024, 2025 and 2026, is conditional on the achievement of long-term objectives measured over the three-year period 2021 to 2023. The performance measures for 2020 awards are EPS, relative TSR and compliance with the fully-loaded CET1 capital ratio. Following performance assessment, the level of awards will be adjusted accordingly. The measures can reduce but not increase the overall value of the deferred awards. The payment of the final two deferred tranches (24% of the total award), payable in 2027 and 2028 is subject to continued employment only and ex-post risk adjustment.

san-20201231_g22.jpg
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2020 Business Performance and Impact
on Remuneration
In spite of the impact on the broader economy from the Covid-19 pandemic, we have been able to report a net profit for each quarter of 2020. Our balance sheet remains strong and resilient, and progress has been made to reduce expenses through the transformation programme. Our people have responded rapidly and positively to the challenges posed by the pandemic, to support our customers and meet their changing needs. It is in this context that the Committee made remuneration decisions in respect of the 2020 performance period. Bonus awards were significantly reduced from previous years, and included an exercise of discretion by the Committee to reduce the formulaic bonus pool outcome in recognition of the external environment.
The Committee made the decision not to award the CEO a bonus for the year, and instead the value of bonus he might otherwise have received has been used to fund a corporate donation to the Santander Foundation. The CEO fully supported this decision. In keeping with our responsible approach in the current environment, the other Executive Directors received a reduced bonus reflecting the challenging conditions this year and our financial results. This was paid wholly in shares to align to the long-term interests of our shareholders.

As noted in the Chair's statement, a comprehensive package of measures was introduced to support colleagues at the start of the pandemic. These included a series of wellbeing interventions and a commitment to pay all colleagues their contracted hours, alongside confirmation that the Government's Coronavirus Job Retention Scheme would not be used. In recognition of the contribution made by customer facing colleagues who continued to directly engage with customers throughout the pandemic, a one-off £500 award was made. In considering year-end outcomes, the Committee agreed that the allocation of the bonus pool should be weighted towards less senior colleagues.
The Committee confirms that the remuneration policy operated as intended, demonstrating pay for performance alignment.
Context for decision making
The Committee ensures that broader remuneration policies and practices for employees across the Santander UK group are taken into account when setting policy for Executive Director remuneration. The Committee reviews remuneration trends across the Santander UK group including the relationship between Executive remuneration and that of other Santander UK group employees, as well as remuneration in the wider UK market when making decisions on Executive pay.
The Committee oversees broader workforce remuneration policies and practices, the implementation of remuneration and related employment policies across Santander UK and the salary and variable pay awards for all MRTs. It also approves the design of any material performance-related pay plans. As part of the monitoring of pay, the following is considered:
Santander UK’s engagement with its recognised trade unions on pay and benefits matters for all colleagues;
Annual pay reviews for the general employee population;
Santander UK group-wide pension and other benefit provisions;
The design of and overall spend on variable incentive arrangements; and
An assessment of conduct across the business.
The Committee is focused on ensuring that colleagues are not unduly stretched or inappropriately incentivised. This is monitored using existing employee engagement indicators via the Global Engagement Survey, and The Santander Way survey which provides an indication of our progress in performance against the nine Santander behaviours.
The Committee always considers the broader stakeholder environment when setting policy or reaching decisions on executive pay.
Executive Directors’ remuneration (audited)
Total remuneration of each Executive Director for the years ended 31 December 2020 and 2019.
Nathan Bostock (2,4,5)
Susan Allen (2,6)
Duke Dayal (1,2)
Tony Prestedge (2,7)
20202019202020192020201920202019
£000£000£000£000£000£000£000£000
Salary and fees1,6801,68080080092226836
Taxable benefits445623487489
Pension370588727283243
Total fixed pay2,0942,3248748751,49278239
Bonus (paid and deferred) (3)
1,99066885972634464
Total variable pay1,99066885972634464
Total remuneration2,0944,3141,5421,7342,2181,125103
(1)Duke Dayal was appointed as an Executive Director on 16 September 2019 and his remuneration is shown from this date, with 2019 full year Santander UK Group Holdings plc equivalent total remuneration of £2.957m.
(2)Taxable benefits for the Executive Directors comprise a range of benefits including private health care, life and critical illness cover, health insurance and car allowance. Included in the 2020 benefits figure for Duke Dayal is a relocation allowance of £500,000.
(3)The bonus value shown is the total Variable Pay Plan award made in respect of 2020, which will be delivered wholly in shares. As set out in this report, a portion of the award (36% of the value shown) is subject to further performance testing which may reduce, but not increase, the value delivered.
(4)As set out in the Remuneration Policy report, the pension contribution received by Nathan Bostock was reduced from 35% to 22% of salary from 1 January 2020, and to 9% of salary from 1 January 2021.
(5)The CEO bonus outcome takes into account the external environment and the Committee's commitment to a reduction in the CEO's overall remuneration for the year.
(6)Susan Allen was appointed as an Executive Director on 1 January 2019 and stepped down on 31 December 2019 from the Board of Santander UK Group Holdings plc.
(7)Tony Prestedge was appointed as an Executive Director on 16 December 2020 and his remuneration is shown from this date. The remuneration figure does not include a buy-out of deferred performance related payments in respect of his previous employment, of which £242,605 was delivered in 2020.
(8)The values shown for Duke Dayal represent an allocation of 97% (2019: 97%) of his remuneration for his time spent as a Director of the Company in the year, as he spent 97% of his time on Company business. The remaining 3% (£68,000) has been allocated to Santander Financial Services plc. This results in total remuneration of £2.286m.

Relative importance of spend on pay
20202019Change
£m£m%
Profit before tax6051,012(40)
Total employee costs1,1661,263(8)
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Annual Report 2020 | Governance
Remuneration policy report continued

Stakeholder views
During 2020, Santander UK continued to engage with key stakeholders on remuneration related matters including its main regulators the PRA and FCA.
In addition to her role as RFB Committee Chair, Annemarie Durbin performs the designated Non-Executive Director role, with responsibility to further enhance the employee voice in the boardroom on matters associated with organisational culture.
Employee opinion surveys are undertaken annually on employee engagement, and discussion takes place with union representatives during the annual pay review cycle and on relevant employee reward matters on a more frequent basis. The Committee receives updates on these discussions during the year. More frequent colleague pulse surveys were conducted in 2020, alongside other virtual listening forums, for a more frequent gauge of employee sentiment throughout the pandemic.

CEO pay ratio
Santander UK is committed to delivering fair pay which attracts, retains and motivates colleagues of the highest calibre across all grades. In line with this commitment, the Committee has oversight of compensation across the organisation, including pay ratios, and considers this when determining reward outcomes. For the second year we are voluntarily disclosing the ratio of the CEO’s total remuneration to that of UK colleagues.

The CEO's pay mix is weighted more highly towards variable pay to incentivise the achievement of stretching internal targets and long-term value creation which can lead to greater variability in total remuneration each year. In contrast, the typical pay mix of our colleagues places more emphasis on fixed pay, to ensure a minimum level of earnings which offers greater security and reflects our commitment to colleague wellbeing.
This difference in pay mix plays a key role in the movement of the ratio which is in part driven by the variable nature of our CEO's remuneration. However, in reviewing the ratio the Committee is keen to ensure that changes in the ratio are influenced by the differences in remuneration structure rather than an increase in pay disparity. In assessing the pay ratio, the Committee is confident that the Company's policy on remuneration is fair. A summary of our approach to Fair Pay is included in the People section of our Sustainability report.
The ratio this year has reduced from 129:1 to 64:1. This is largely due to the fact the CEO has not received a bonus. The first phase of the reduction in CEO pension contribution to employee average (from 35% in 2019 to 22% in 2020) has also contributed to the reduction in the ratio.






Advice and support provided to the
Committee
As permitted by its Terms of Reference, the Committee has engaged the advice and support of Deloitte LLP (Deloitte) as independent remuneration consultants at the expense of the Company. Total fees (excluding VAT) for advice and support provided to the Committee during 2020 were £143,600 (2019: £157,500). Deloitte is a founding member of the Remuneration Consultants Group and voluntarily operates under the Code of Conduct in relation to executive remuneration consulting in the UK.
The Committee is satisfied that the Deloitte engagement partner and team that provides remuneration advice to the Committee do not have connections with Santander UK that may impair their independence, following review in 2020.
In 2020, Deloitte also provided unrelated tax, financial and advisory, risk, assurance and consulting services to Santander UK.
By Committee invitation, the Chair, Chief Executive Officer and designated representatives from business functions attend meetings to advise on HR, Risk, Legal and Regulatory matters as appropriate, to support the Committee's work. Attendees included the Chief HR Officer, Performance & Reward Director, Chief Legal and Regulatory Officer, Chief Risk Officer and Company Secretary. No individual participates in discussions regarding their own remuneration.






CEO pay ratio
Methodology (1)
25th percentileMedian75th percentile
2020 CEO pay ratioOption A88:164:137:1
2019 CEO pay ratio (4)
Option A178:1129:176:1
CEO remuneration (3)
25th percentile (2)
Median (2)
75th percentile (2)
2020 CEO pay ratio££££
Total salary ££1,680,000£20,009£26,347£43,228
Total remuneration ££2,094,000£23,903£32,785£56,190
(1)Employee pay is calculated based on the 'Option A' methodology. We have chosen Option A as it gives the most reliable and accurate result by calculating a comparable single figure for each employee.
(2)Employee pay data is based on full time equivalent pay for Santander UK plc employees. This excludes a small number of employees in the rest of the Santander UK group. Including those employees results in a ratio consistent with the above. For each employee, total remuneration is calculated based on fixed pay accrued during the financial year, and variable pay is either based on actual bonuses in respect of the 2020 year (where these are available) or modelled target bonuses where actuals are not yet available.
(3)The CEO's total remuneration is aligned to that disclosed in the Executive Directors' remuneration table on the previous page.
(4)The 2019 ratios are re-stated above. These were originally calculated based on fixed pay accrued within the 2019 year, in addition to bonuses paid in 2019 in respect of the 2018 year. The 2019 ratios have now been recalculated using 2019 fixed pay and bonuses paid in 2020 in respect of 2019 for all employees, to ensure closer alignment with the reporting requirements. This results in a reduction in the 2019 median pay ratio from 132:1 to 129:1.

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Chair and Non-Executive Director
remuneration
The Chair’s fee is reviewed and approved by the Committee. The fees paid to Non-Executive Directors are reviewed and approved by the Chief Executive Officer and the Chair. Fees are reviewed annually taking into account the market rate and time commitment for the role. The Chair is paid an all-inclusive base fee. Non-Executive Directors are paid a base fee, with a supplement for serving on or chairing a Board Committee. Group Non-Executive Directors do not receive fees in respect of their Santander UK duties.



William Vereker was appointed Chair on 1 November 2020, previously Non-Executive Director from 1 October 2020. For the period served from 1 October 2020 to 31 October 2020, he received the base board member fee of £95,000 pro-rated for time served. From appointment as Chair, in line with his predecessor, he will be paid an annual fee of £675,000. In addition, William is eligible to receive private medical insurance.
All Non-Executive Directors and the Chair serve under letters of appointment and either party can terminate on three months’ written notice, except in the case of the Chair where twelve months’ written notice is required..

Neither the Chair nor the Non-Executive Directors have the right to compensation on the early termination of their appointment beyond payments in lieu of notice at the option of Santander UK. In addition, neither the Chair nor the Non-Executive Directors are eligible for pension scheme membership or other incentive arrangements.
In 2020, some of the Non-Executive Directors voluntarily elected to donate a portion of their fees to the Santander UK Foundation Covid relief fund. The fees shown below do not reflect those contributions.
Chair and Board Committee member fees
1 January 20201 January 2019
£000£000
Chair (inclusive of membership fee)675650
Board member9590
Additional responsibilities
Senior Independent Director3530
Chair of Board Risk Committee6560
Chair of Board Audit Committee6060
Chair of Board Responsible Banking Committee6060
Chair of Board Remuneration Committee6060
Membership of Board Risk Committee3025
Membership of Board Audit Committee2525
Membership of Board Responsible Banking Committee2525
Membership of Board Remuneration Committee2525
1.Fee increase last effective 1 May 2019. Note a review of fees took place in late 2020. As a result, a fee (£7,500 per annum) will be paid from 1 January 2021 for the roles of Senior Ringfencing Director and for the role of designated NED representing the views of the workforce. In addition, the fee for Senior Independent Director will increase to £45,000.
2020 Fees2019 Fees2020 Expenses2019 Expenses2020 Benefits2019 Benefits2020 Total2019 Total
Non-Executive Directors£000£000£000£000£000£000£000£000
Chair
William Vereker (1,2)
1201121
Shriti Vadera (1,2)
5636674722610689
Independent Non-Executive Directors
Garrett Curran (6)
20311412204116
Annemarie Durbin (11,12)
229222229222
Ed Giera21420730214237
Chris Jones214207214207
Genevieve Shore (11)
20019733203200
Scott Wheway (3)
16524028167248
Mark Lewis (8)
88
Banco Santander nominated Non-Executive Directors (5)
Ana Botin
Bruce Carnegie-Brown (4)
Dirk Marzluf (7)
Gerry Byrne (10,11)
(1)Shriti Vadera stepped down on 31 October 2020. William Vereker joined on 1 October 2020 and was appointed Board Chair on 1 November 2020.
(2)2019 full year fees for the Board Chair reflect the increase on 1 May 2019 from £650,000 to £675,000. Shriti Vadera was entitled to taxable benefits as follows: private medical cover of £548 (2019: £626) and transportation of £15,582 (2019: £20,752). In addition, she received a payment of £31,154 in respect of holiday pay. William Vereker received private medical cover of £411.
(3)Scott Wheway stepped down on 30 September 2020. Fees received are in respect of services to this date.
(4)Bruce Carnegie-Brown was appointed on 16 September 2019.
(5)None of the Banco Santander nominated Non-Executive Directors received any fees or expenses.
(6)Garrett Curran was appointed on 7 May 2019 and stepped down on 31 December 2019 from the Board of Santander UK Group Holdings plc. Fees received are in respect of services from this date.
(7)Dirk Marzluf was appointed on 7 May 2019 and stepped down on 31 December 2019 from the Board of Santander UK Group Holdings plc.
(8)Mark Lewis was appointed on 16 December 2020. Fees received are in respect of services from that date.
(9)Directors' expenses are disclosed above in relation to the period in which they were accrued.
(10)Gerry Byrne stepped down on 31 August 2020.
(11)Gerry Byrne, Annemarie Durbin and Genevieve Shore stepped down on 31 December 2019 from the Board of Santander UK Group Holdings plc.
(12)Annemarie Durbin's fees include £15,000 in relation to her services as Chair of Cater Allen Ltd.
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Annual Report 2020 | Governance
Board and Committee membership and attendance


BoardNomination CommitteeRisk
Committee
Audit
Committee
Responsible Banking CommitteeRemuneration Committee
Scheduled meetings attendedAd hoc meetings attendedScheduled meetings attendedAd hoc meetings attendedScheduled meetings attendedAd hoc meetings attendedScheduled meetings attendedAd hoc meetings attendedScheduled meetings attendedAd hoc meetings attendedScheduled meetings attendedAd hoc meetings attended
Chair
William Vereker (1)
1/12/22/23/3--------
Shriti Vadera (2)
8/84/47/73/3--------
Independent Non-Executive DirectorsGarrett Curran9/95/6--9/91/110/101/16/63/3--
Annemarie Durbin7/96/62/22/28/91/11/11/16/62/38/87/7
Ed Giera9/96/62/22/29/91/110/101/16/63/32/21/1
Chris Jones9/96/6--9/91/110/101/10/10/08/87/7
Mark Lewis (3)
0/01/1--0/00/0--0/00/00/01/1
Genevieve Shore9/95/66/63/39/91/110/101/16/63/38/87/7
Scott Wheway (4)
6/74/46/62/27/70/0--5/52/26/65/5
Banco Santander nominated Non-Executive DirectorsAna Botin7/92/60/20/1--------
Bruce Carnegie-Brown7/94/65/63/4--------
Dirk Marzluf8/96/6----------
Gerry Byrne (5)
5/64/4----------
Executive DirectorsNathan Bostock9/96/6----------
Susan Allen8/96/6----------
Duke Dayal9/96/6----------
Tony Prestedge (6)
0/01/1----------

1William Vereker joined 1 October 2020; appointed Board Chair on 1 November 2020
2Shriti Vadera resigned on 31 October 2020
3Mark Lewis joined 16 December 2020
4Scott Wheway resigned on 30 September 2020
5Gerry Byrne resigned on 31 August 2020
6Tony Prestedge joined 18 December 2020
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Directors' report
Introduction
The Directors submit their report together with the financial statements for the year ended 31 December 2020. The information in the Directors’ Report is unaudited, except where marked.
History and corporate structure
Santander UK plc is a subsidiary of Banco Santander SA, a Spanish retail and commercial bank with a meaningful market share in ten core countries in Europe and the Americas.
Santander UK was formed from the acquisition of two former building societies, Abbey National and Alliance & Leicester together with the branch network of Bradford & Bingley, and has operated under a single brand since 2010. The ordinary shares of the Company are not traded.
In 2018, certain subsidiaries and portfolios were transferred as part of the implementation of the ring-fence arrangements required under the Financial Services (Banking Reform) Act 2013. Following these transfers, Santander UK plc and its subsidiaries comprise of only entities whose business is permitted under the Act as a ring-fenced bank
Result and dividends
The audited consolidated profit after tax for the year was £471m (2019: £733m). The Directors do not recommend the payment of a final dividend for 2020 (2019: £nil). One interim dividend was declared on the Company’s ordinary shares in issue in the year. This dividend of £129m was declared on 10 December 2020 and was paid in 2020.
Details of Santander UK’s activities and business performance in 2020, together with an indication of future outlook, are set out in the Strategic report and the Financial review.
Events after the balance sheet date
There have been no material post balance sheet events, except as set out in Note 42.




Directors
The names and biographical details of the current Directors are shown in the Board of Directors section. Details of their emoluments and interests in shares are set out in the Directors’ Remuneration implementation report. Changes to the composition of the Board can be found in the Board of Directors section with more details in the Chair’s report on Corporate Governance, and the relevant Committee Chairs’ reports.
Appointment and retirement of Directors
All Directors are appointed and retired in accordance with the Company’s Articles of Association, the UK Companies Act 2006 and the UK Group Framework. The following appointments took place in 2020: William Vereker was appointed as a Director on 1 October 2020 and appointed as Chair on 1 November 2020. The following resignations took place in 2020: Shriti Vadera (Chair & Director), Scott Wheway (SID & INED) and Gerry Byrne (GNED). Further details are set out in the governance section.
A resolution was passed at the 2019 Annual General Meeting which requires Directors to retire every year, with those wishing to serve again submitting themselves for election or re-election.
Directors’ indemnities
Directors’ and Officers’ liability insurance cover was in place throughout 2020, in addition to deeds of indemnity which were also in place to provide cover to the Directors for liabilities to the maximum extent permitted by law. These remain in force for the duration of the Directors’ period of office from the date of appointment until such time as any limitation periods for bringing claims against the Directors have expired. The Directors of the Company, including former Directors who resigned in the year, benefit from these deeds of indemnity.
They constitute as qualifying third party indemnity provisions for the purposes of the Companies Act 2006. Deeds for existing Directors are available for inspection at the Company’s registered office.
The Company has also granted an indemnity which constitutes ‘qualifying third party indemnity provisions’ to the Directors of its subsidiary and affiliated companies, including former Directors who resigned in the year and since the year-end. Qualifying pension scheme indemnities were also granted to the Trustees of the Santander UK group’s pension schemes.

Employees
We continue to ensure that Santander UK’s remuneration policies are consistent with its strategic objectives and are designed with its long-term success in mind. In doing so, we aim to attract and retain the most talented and committed people.
Communication
Santander UK aims to involve and inform employees on matters that affect them. The intranet is a focal point for communications and the ‘AskHR’ website connects employees to all the information they need about working for Santander UK. We also use face-to-face communication, such as team meetings and roadshows for updates.
Santander UK considers employees’ opinions and asks for their views on a range of issues through regular Santander UK-wide surveys.
Employee Designated Non-Executive Director
Annemarie Durbin is the Santander UK Employee Designated non-executive Director representing the views of employees.
Consultation
Santander UK has a successful history of working in partnership with its recognised trade unions, Advance and the Communication Workers Union (CWU), who collectively negotiate on behalf of our UK workforce (approximately 99.5% of colleagues). Both trade unions are affiliated to the Trades Union Congress. We consult Advance and the CWU on significant proposals including those relating to change across the business at both national and local levels.
Employee share ownership
Santander UK continues to operate two all-employee, HMRC-approved share schemes: a Save-As-You-Earn (Sharesave) Scheme and a Share Incentive Plan (SIP), the latter of which allows employees to purchase Banco Santander SA shares from gross salary. Eligible senior management participated in a Banco Santander long-term incentive plan. A further description of the plans and the related costs and obligations can be found in the Notes.










Disability
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Annual Report 2020 | Governance
Directors' report continued
Santander UK is committed to equality of employment, access and quality of service for disabled people and complies with the UK Equality Act 2010 throughout its business operations. Santander UK has processes in place to help train, develop, retain and promote employees with disabilities. We are a Disability Confident Employer achieving the Leader level. We are committed to giving full and fair consideration to employment applications by disabled people, having regard to their particular aptitudes and abilities, and for continuing the employment of employees who have become disabled by arranging appropriate training and making reasonable adjustment in the workplace.
Streamlined Energy and Carbon Reporting (SECR)
In 2020 we used 123,152,495 kWh of energy, with associated GHG emissions of 6,452 tCO2e (market-based emissions). This equates to 0.31 tCO2e per employee, and compares to 139,467,401 kWh and 8,693 tCO2e from 2019.
While Covid-19 had a significant impact on our figures for 2020, we have a programme of initiatives to improve energy efficiency and reduce our impact on the environment. These are outlined in our Strategic Report. We calculate our emissions using the UK government Department for Environment, Food and Rural Affairs (DEFRA) conversion factors. For full data and methodology, please see our ESG Supplement.
Political contributions
In 2020 and 2019, no contributions were made by the Company for political purposes and no political expenditure was incurred.

Share capital
Details about the structure of the Company’s capital can be found in Note 32.
For details of employee share schemes and how rights are exercisable, see Note 37.
The powers of the Directors in relation to share capital are set out in the Company’s Articles of Association as determined by the Companies Act 2006.
Subsidiaries and branches
The Santander UK group consists of a parent company, Santander UK plc, incorporated in England and Wales, and a number of directly and indirectly held subsidiaries and associates. The Company directly or indirectly holds 100% of the issued ordinary share capital of its principal subsidiaries. All companies operate principally in their country of incorporation or registration.
For more information, see Note 19.
Financial instruments
The financial risk management objectives and policies of Santander UK and the policy for hedging, along with details of Santander UK's exposure to credit risk, market risk and liquidity risk are outlined in the Risk review.
Research and development
Santander UK has a comprehensive product approval process and policy. New products, campaigns and business initiatives are reviewed by Santander UK’s Proposition Approval Forum.
Supervision and regulation
The Company is authorised by the PRA and regulated by the FCA and the PRA. .Some of its subsidiaries and associates are also authorised by the PRA or the FCA, and regulated by the FCA or both the FCA and the PRA.
While Santander UK operates primarily in the UK, it is also subject to the laws and regulations of the other jurisdictions in which it operates, such as the rules of the SEC for its activities in the US.
Internal controls
Risk management and internal controls
The Board and its Committees are responsible for reviewing and ensuring the effectiveness of management’s system of risk management and internal controls.
We have carried out a robust assessment of the principal and emerging risks facing Santander UK including those that would threaten its business model, future performance, solvency or liquidity. Details of our principal risks, our procedures to identify emerging risks, and an explanation of how these are being managed or mitigated are set out in the Risk review. A summary of our Top and Emerging Risks is also set out in the Strategic report. For more details, see the Strategic report and the Risk review.
Management’s report on internal control over financial reporting
Internal control over financial reporting is a component of an overall system of internal control. Santander UK’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting, and the preparation and fair presentation of financial statements for external purposes in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and endorsed by the EU. Santander UK’s internal control over financial reporting includes:
Policies and procedures that relate to the maintenance of records that fairly and accurately reflect transactions and dispositions of assets
Controls providing reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS, and that receipts and expenditures are being made only as authorised by management
Controls providing reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or because the degree of compliance with policies or procedures may deteriorate.
Management is responsible for establishing and maintaining adequate internal control over the financial reporting of Santander UK. Management assessed the effectiveness of Santander UK’s internal control over financial reporting at 31 December 2020 based on the criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) in May 2013.
As a registrant under the US Securities Exchange Act of 1934, Santander UK plc’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting in order to ensure the accuracy and reliability of Santander UK plc’s Financial Statements and the Form 20-F submitted to the US Securities and Exchange Commission.
In line with COSO and SEC requirements, those controls recognised as Sarbanes-Oxley applicable are subject to annual testing and certification by management including an attestation by the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) that the controls are operating effectively and that the internal control over financial reporting can be relied on.
Any Sarbanes-Oxley control weaknesses identified are captured, assessed and included within the year end assessment of the reliability of the Internal Control environment. These weaknesses are
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reported on an ongoing basis to the Audit Committee to ensure continuous improvements to the control environment are achieved.
Based on this assessment, management concluded, at 31 December 2020, that Santander UK’s internal control over financial reporting was effective.
Disclosure controls and procedures over financial reporting
Santander UK’s management has evaluated, with the participation of its CEO and CFO, the effectiveness of its disclosure controls at 31 December 2020. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error, and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based upon this evaluation, the CEO and the CFO have concluded that, at 31 December 2020, Santander UK’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by Santander UK in the reports that it files and submits under the US Securities Exchange Act of 1934 is recorded, processed, summarised and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to Santander UK’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure.
Changes in internal control over financial reporting
There were no changes to our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Statements of Compliance
The UK Corporate Governance Code 2018
Santander UK voluntarily complies with the Code wherever applicable in order to achieve best standards of corporate governance.
The Code applied to the financial year ended 31 December 2020. The Board confirms that, it applied the principles and complied with those provisions of the Code throughout the year, except as detailed as follows:
Provision 11 and 17: The Company does not comply with the requirement for at least half the Board, excluding the Chair, to be Non-Executive Directors whom the Board considers to be independent. This is because our shareholder requires at least half the Board, including the Chair, to be independent (for details, see Board membership in the Chair’s Report on Corporate Governance). We have assessed the implications and believe that the approach we follow is appropriate for our size and ownership structure. Furthermore, no one person or group of individuals dominates the Board’s decision-making.
Provision 36: The Remuneration Committee has not developed a policy for post-employment shareholding requirements. The structure of variable pay for executive directors ensures that individuals acquire a meaningful shareholding in Banco Santander SA which is held over a period for up to eight years and which may extend for a significant period post employment. The Remuneration Committee does not intend to introduce a formal post employment shareholding policy for executive directors at this time, but will continue to keep this under review. For further details, see the Remuneration Policy Report;
Provision 38: With effect from January 2021, alongside the other Executive Directors, the Chief Executive Officer's pension provision is aligned with the current workforce average. For further details, see the Remuneration Implementation Report;


Provisions 40 and 41: When determining remuneration policy, the Remuneration Committee considers the factors of clarity, simplicity, risk, predictability, proportionality, and alignment to culture, and in particular how our remuneration policy and practices align to Santander UK’s core values of Simple, Personal and Fair. Regular engagement takes place with our shareholder to ensure alignment with remuneration constructs across the wider Banco Santander group whilst ensuring that all regulatory requirements and expectations are met and the outcome of these discussions drives our bonus pool construct. Details of the structure of our remuneration arrangements and key considerations of the Committee in the year are included in the Remuneration Committee Chair's Report. Due to commercial sensitivity, whilst we have chosen to provide details of our pay arrangements beyond the requirements for an entity with our ownership structure, we have chosen not to provide all of the disclosures required by this part of the Code. The details not provided relate to individual award opportunities and certain descriptions of the Committee’s work. For further details, see the Remuneration Policy Report.
The Code is publicly available on the Financial Reporting Council website at www.frc.org.uk.
UK Finance Code for Financial Reporting Disclosure
Santander UK’s financial statements for the year ended 31 December 2020 have been prepared in compliance with the principles of the UK Finance Code for Financial Reporting Disclosure.
Engagement with stakeholders and employees
Santander UK recognises the importance of fostering relationships with their principal stakeholders and how this is key to the long term success of our business. They understand the importance to act fairly and responsibly between members of the company.


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Directors' report continued
Going concern
The going concern of Santander UK is reliant on preserving a sufficient level of capital and adequately funding the balance sheet. In making their going concern assessment in connection with preparing the financial statements, the Directors considered a wide range of information similar to that considered as part of the their assessment of longer-term viability including Santander UK’s long-term business and strategic plans, forecasts and projections, estimated capital, funding and liquidity requirements, contingent liabilities and the reasonably possible changes in trading performance arising from potential economic, market and product developments.
During 2020, Government and Central Bank responses to Covid-19, including lending and financial stability measures and significant restrictions on people's movement, resulted in significant operational and financial impacts for Santander UK and its customers. The Directors' assessment therefore specifically considered the impacts of Covid-19, including for the following areas:
Economic scenarios and weights: These underpin our ECL impairment allowances and are discussed in detail in the Credit risk section of the Risk review. The Directors reviewed the economic scenarios, revised as a result of Covid-19, to ensure that they captured the wide range of potential outcomes for the UK economy. These include a re-emergence of the virus and further lockdown measures being imposed, a slower economic recovery, and lag effects caused by higher and longer unemployment rates.
Liquidity: Although the key aim of the UK Government’s financial support measures introduced during 2020 (including the TFS and TFSME) was to limit damage to the wider economy from Covid-19, they had the side-effect of reducing any potential liquidity risks arising due to Covid-19. Although Covid-19 did not trigger a liquidity stress, its immediate negative impacts on liquidity, such as the drawing of committed credit and liquidity facilities, were largely offset by deposits from those same drawings as corporates reduced their spending. Similarly, the impact of the initial effective shutdown of the mortgage market and payment holidays granted to customers was offset by better than expected retail deposit balances as customers reduced their spending.

Capital: Santander UK remains strongly capitalised and Covid-19 did not trigger a capital stress. As part of the Bank of England Interim Financial Stability Report (May 2020), the PRA developed a desktop stress scenario, which had less of an impact over the first two years of the scenario on the core banking system than their 2019 Stress Test, where our CET1 drawdown was the lowest across UK banks and we exceeded CET1 capital ratio and Tier 1 Leverage ratio hurdle rates across the projection horizon. We paid an ordinary share dividend in December in accordance with the PRA’s approach to shareholder distributions for 2020.
Customers: Santander UK has supported many thousands of individuals and businesses affected by Covid-19 with a range of measures, including payment holidays on mortgages, personal loans and credit cards as well as taking an active part in UK Government’s loan schemes to help businesses. We are working with those customers who are experiencing difficulties to understand their individual situations and help them resume payments.
Operations: All our operations continue to operate effectively with a significant majority of employees working from home and the majority of branches remaining open and returning to more normal hours. The current operating model could be sustained indefinitely with additional resilience being continuously implemented and is not affecting our ability to operate all our services, or raising concerns about our Business Continuity Planning, and
Key suppliers: Suppliers are being closely monitored in line with our Third Party Risk Management Framework. No significant service issues were reported across our cohort of critical suppliers, and no material issues were reported across our broader (non-critical) supply chain. Isolated supplier impacts are being separately managed.
Having assessed the principal risks and uncertainties, the Directors are satisfied that the Santander UK group has adequate resources to continue operations for a period of at least twelve months from that date of this report and therefore consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements.




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Ethical Code of Conduct
Santander UK is committed to maintaining high ethical standards – adhering to laws and regulations, conducting business in a responsible way, and treating all stakeholders with honesty and integrity. These principles are further reflected in Santander UK’s Ethical Code of Conduct, which sets out the standard expected of all employees. Under their terms and conditions of employment, employees are required to act at all times with the highest standards of business conduct in order to protect Santander UK’s reputation and ensure a Company culture which is free from any risk of corruption, compromise or conflicts of interest.


Employees are also required to comply with all Company policies, which require employees to:
Abide by all relevant laws and regulations
Act with integrity in all their business actions on behalf of Santander UK
Not use their authority or office for personal gain
Conduct business relationships in a transparent manner
Reject all improper practices or dealings to which they may be exposed.
The SEC requires companies to disclose whether they have a code of ethics that applies to the Chief Executive Officer and senior financial officers which promotes honest and ethical conduct, full, fair, accurate, timely and understandable disclosures, compliance with applicable governmental laws, rules and regulations, prompt internal reporting of violations, and accountability for adherence to such a code of ethics.

The Santander UK group meets these requirements through its Ethical Code of Conduct, the Anti-Bribery and Corruption Policy, the Whistleblowing Policy, the FCA’s Principles for Businesses, and the FCA’s Statements of Principle and Code of Practice for Approved Persons, with which the CEO and senior financial officers must comply.
These include requirements to manage conflicts of interest appropriately and to disclose any information the FCA may want to know about. Copies of these documents are available to anyone, free of charge, on application to Santander UK plc, 2 Triton Square, Regent’s Place, London NW1 3AN.

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Disclosure of information to Auditors
Each of the Directors at the date of approval of this report confirms that:
So far as the Director is aware, there is no relevant audit information of which Santander UK’s auditor is unaware
The Director has taken all steps that they ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that Santander UK’s auditor is aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the UK Companies Act 2006.
Auditor
PricewaterhouseCoopers LLP have expressed their willingness to continue in the office of auditor and a resolution to reappoint them will be proposed at the Company’s forthcoming Annual General Meeting.

By Order of the Board




Simon Mitchley
Company Secretary
2 March 2021
2 Triton Square,
Regent’s Place,
London NW1 3AN
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Risk review
Contents
The Risk review consists of unaudited financial information unless otherwise stated. The audited financial information is an integral part of our Consolidated Financial Statements.

We aim to continually enhance our disclosures and their usefulness to readers in the light of developing market practice and areas of focus. As a result, our disclosures go beyond the minimum required by accounting standards and other regulatory requirements.

We support the recommendations and guidance made by the Taskforce on Disclosures about ECL (DECL Taskforce) and have adopted its recommendations where it is practical to do so. The DECL Taskforce was formed in 2017 by the FCA, FRC and PRA with a remit to help encourage high-quality ECL-related disclosures following adoption of IFRS 9.
Risk governance68
Introduction68
Risk Framework68
Risk Appetite72
Stress Testing73
How risk is distributed across our business73
Credit risk74
Santander UK group level74
Retail Banking102
Other business segments117
Market risk130
Banking market risk130
Trading market risk134
Liquidity risk135
Capital risk144
Pension risk147
Conduct and regulatory risk150
Operational risk153
Other key risks158
Financial crime risk158
Legal risk160
Strategic and business risk160
Reputational risk161
Model risk162

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Annual Report 2020 | Risk review
Risk governance

INTRODUCTION
Santander UK Group Holdings plc is the immediate parent company of Santander UK plc. The two companies operate on the basis of a unified business strategy with some overlap in membership, albeit the principal business activities of the Santander UK Group Holdings plc group are carried out by Santander UK plc and its subsidiaries. The Santander UK Group Holdings plc Risk Frameworks have been adopted by the Company and its subsidiaries to ensure consistent application.

As a financial services provider, managing risk is a core part of our day-to-day activities. To be able to manage our business effectively, it is critical that we understand and control risk in everything we do. We aim to use a prudent approach and advanced risk management techniques to help us deliver robust financial performance, withstand stresses, such as the impacts of the Covid-19 pandemic, and build sustainable value for our stakeholders. We aim to keep a predictable medium-low risk profile, consistent with our business model. This is key to achieving our strategic objectives.
In 2020, the Covid-19 pandemic had a material impact on our business and financial performance, and our risk profile. The main impacts were felt in credit risk and operational risk, although other risks such as conduct and reputational risk were also affected. In response, we managed the evolution of our credit and operational risk profiles across the business. Challenges remain, such as the significant increase in cyber and fraud risk seen across the industry. We have prioritised monitoring and oversight of these and other key operational risks with enhanced reporting and input to IT strategy, data management and business transformation. Detailed discussions of the impact of Covid-19 on specific risk types are set out in the relevant sections of this Risk review and summarised in the 'Risk management overview' in the Strategic report.
RISK FRAMEWORK
How we define risk )
Risk is any uncertainty about us being able to achieve our business objectives. It can be split into a set of key risk types, each of which could affect our results and our financial resources. Enterprise wide risk is the aggregate view of all the key risk types described below:
Key risk typesDescription
CreditThe risk of financial loss due to the default or credit quality deterioration of a customer or counterparty to which we have provided credit, or for which we have assumed a financial obligation.
Market
Banking market risk – the risk of loss of income or economic value due to changes to interest rates in the banking book or to changes in other market risk factors (e.g. credit spread and inflation risk), where such changes would affect our net worth through a change to revenues, assets, liabilities and off-balance sheet exposures in the banking book.
Trading market risk – the risk of changes in market factors that affect the value of positions in the trading book.
LiquidityThe risk that we do not have sufficient liquid financial resources available to meet our obligations as they fall due, or we can only secure such resources at excessive cost.
CapitalThe risk that we do not have an adequate amount or quality of capital to meet our internal business objectives, regulatory requirements and market expectations.
PensionThe risk caused by our statutory contractual or other liabilities with respect to a pension scheme (whether set up for our employees or those of a related company or otherwise). It also refers to the risk that we will need to make payments or other contributions with respect to a pension scheme due to a moral obligation or for some other reason.
Conduct and regulatory
Conduct risk – the risk that our decisions and behaviours lead to a detriment or poor outcome for our customers. It also refers to the risk that we fail to maintain high standards of market behaviour and integrity.
Regulatory risk – the risk of financial or reputational loss, or imposition or conditions on regulatory permission, as a result of failing to comply with applicable codes, regulator’s rules, guidance and regulatory expectations.
Operational risk
The risk of loss due to inadequate or failed internal processes, people and systems, or external events. We give a particular focus to the following risks which we mitigate through our management of operational risk:
Cyber – We rely extensively on the use of technology across our business. It is critically important that we give our customers a secure environment in which to deal with us, especially when the threat from cyber criminals is so prevalent and more sophisticated than ever. Failure to protect the data assets of Santander UK and its customers against theft, damage or destruction from cyber-attacks could result in damage to our reputation and direct financial losses.
Change and transformation – A key part of our business strategy is to develop and deliver new banking channels and products. We are also implementing a large number of regulatory and legal changes, impacting all areas of our business.
People – People risk include all risks related to employees and third parties working for us, covering resource management, health & safety and employee relations.

Other key risk types
Financial crime risk – the risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, bribery and corruption. Failure to meet our legal and regulatory obligations could result in criminal or civil penalties against Santander UK or individuals, as well as affecting our customers and the communities we serve.
Legal risk – the risk of an impact arising from legal deficiencies in contracts; failure to protect assets; failure to manage legal disputes appropriately; failure to assess or implement the requirements of a change of law; or failure to comply with law or regulation or to discharge duties or responsibilities created by law or regulation.
Strategic and business risk – the risk of significant loss or underperformance against planned objectives; damage arising from strategic decisions or their poor implementation that impact the long-term interests of our key stakeholders or from an inability to adapt to external developments.
Reputational risk – the risk of damage to the way our reputation and brand are perceived by the public, clients, government, colleagues, investors or any other interested party.
Model risk – the risk that the predictions of our models may be inaccurate, causing us to make sub-optimal decisions, or that a model may be used inappropriately.
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Risk governance
Top and emerging risks
Several of our key risk types also have top risks associated with them. We regularly review the top risks that could impact our business, customers and shareholders, and they are monitored monthly at the ERCC and BRC. The top risks we actively monitored over 2020 are set out in the relevant section of this Risk review and summarised in the ‘Top risks’ section of the 'Risk management overview' in the Strategic report. Our top risks included the first and second order risks arising from Covid-19, Brexit, capital strength, financial crime, conduct and operational risks.
We also regularly review emerging risks that could impact our business, customers and shareholders, including regular review and discussion at the ERCC and BRC. The identification of emerging risks is co-ordinated by the Risk Division. A key part of the process is continual scanning of the external environment, focusing on emerging risk drivers such as regulation, markets, technology, competition, customers, geo-politics, environment (including climate change), and social and economic changes. Emerging risks actively monitored over 2020 are set out in the relevant section of this Risk review and summarised in the ‘Emerging risks’ section of the 'Risk management overview' in the Strategic report.
We introduced six new emerging risks to our risk radar in 2020, several of which reflected the impact of the Covid-19 pandemic. They consisted of negative rates, extended government involvement in the banking industry, an extended period of economic contraction, high inflation, disruption of macro-economic factors, and other environmental and social issues. We also continued to monitor previously identified emerging risks including changing customer behaviour, rapid technological change, LIBOR transition and climate change.
Key elements
Our Risk Framework sets out how we manage and control risk. In 2020, we updated it with a new standard to consider the impact for risks related to climate change and also added additional controls to deal with potential conflicts of interest which might affect Santander UK.
As a group, Banco Santander supports the recommendations of the TCFD, which were published with the aim of improving disclosure of climate financial risks and opportunities. We also welcome the UK developments of the PRA and FCA to improve management and disclosure of climate change related risks. In October 2019, we submitted an initial implementation plan to the PRA to address the expectations set out Supervisory Statement 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’. Alongside this plan, responsibility for climate related financial risks was added to the Statement of Responsibility of the CRO as SMF holder. Delivering on our plan will be a multi-year programme. We are targeting the end of 2022 to achieve full adoption, aligned to the implementation path as set out in the TCFD recommendations.
How we approach risk – our culture and principles
The complexity and importance of the financial services industry demands a strong risk culture. We have extensive systems, controls and safeguards in place to manage and control the risks we face, but it is also crucial that everyone takes personal responsibility for managing risk. Our risk culture plays a key role in our aim to be the best bank for our customers, shareholders, people and communities by acting responsibly. It is vital that everyone in our business understands this. To achieve this, our people have a strong, shared understanding of what risk is, and what their role is in helping to control it. We express this in our Risk Culture Statement:
Risk Culture Statement
Santander UK will only take risks that it understands and will always remain prudent in identifying, assessing, managing and reporting all risks. We proactively encourage our people to take personal responsibility for doing the right thing and to challenge without fear. We ensure decisions and actions take account of the best interests of all our stakeholders and are in line with The Santander Way.
The Board reviews and approves our Risk Culture Statement every year. Senior executives are responsible for promoting our risk culture from the top. They drive cultural change and increased accountability across the business. We reinforce our Risk Culture Statement and embed our risk culture in all our business units through our Risk Framework, Risk Certifications and other initiatives. This includes highlighting that:
It is everyone’s personal responsibility to play their part in managing risk
We must Identify, Assess, Manage and Report risk quickly and accurately
We make risk part of how we assess our people’s performance and how we recruit, develop and reward them
Our internal control system is essential to ensure we manage and control risk in line with our principles, standards, Risk Appetite and policies.
We use Risk Certifications to confirm how we manage and control risks in line with our Risk Framework and within our Risk Appetite. As an example, every year, each member of our Executive Committee confirms that they have managed risk effectively in line with the Risk Framework in the part of the business for which they are responsible. Their certification lists any exceptions and the agreed actions to be taken to correct them. This is a tangible sign of the personal responsibility that is such a key part of our risk culture.

Our risk culture programme – I AM Risk
The Covid-19 pandemic has created additional risks in our business. At the same time, we continue with significant transformation programme activities, while dealing with a highly competitive financial services sector and a challenging political and regulatory environment. At times of change, it is important that we make the decisions that help us achieve our goals while supporting and protecting our colleagues and customers. I AM Risk continues to play a key part in our aim to be the best bank for our people, customers, shareholders and communities. Our I AM Risk approach aims to make sure our people:
Identify risks and opportunities
Assess their probability and impact
Manage the risks and suggest alternatives
Report, challenge, review, learn and ‘speak up’.
san-20201231_g23.jpg
I AM Risk is how we make risk management part of everyone’s life as a Santander UK employee from how we recruit them and manage their performance to how we develop and reward them. It is also how we encourage people to take personal responsibility for risk to speak up and to come up with ideas. We use I AM Risk in our risk certifications, policies, frameworks and governance, and risk-related communications. We also include it in reward arrangements and in mandatory training. To support general awareness, our learning websites includes e-learning videos and factsheets.
As part of I AM Risk, we include mandatory risk objectives for all our people in our performance management processes – from our Executive Committee to branch staff. The Executive Committee leads our culture initiatives under the CEO’s sponsorship. In our most recent employment engagement survey, 94% of employees recognised their personal responsibility for the risks they face in their day-to-day work. This demonstrates how we have embedded risk management in our culture.
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I AM Risk in Action - Our Covid-19 Response
Our I AM Risk ethos was demonstrated through our response to the Covid-19 pandemic when we were faced with the rapid deployment of colleagues to remote working. This required a comprehensive review of the increased risks of remote working by all areas of the business. In addition, we devised additional mandatory training material at pace, in order to support our colleagues in their new working environments and to help them protect our customers. As the pandemic progressed and our colleagues were returning or continuing to work in our branches and offices, we created training to support them and to help them comply with the relevant government guidelines.
I AM Risk Week 2020
In November 2020, we once again joined colleagues from across the Banco Santander group to celebrate our risk culture, with an emphasis on our Speak Up behaviour. During this time, we encouraged our colleagues to use our I AM Risk resources to:
Use our new and dynamic Speaking Up Channels Guide on the intranet to help find the right channels to raise any concerns
Recognise a colleague for good risk behaviour
Share a story of how an individual or team have taken personal accountability for risk.
Our risk governance structure
We are committed to the highest standards of corporate governance in every part of our business, including risk management. For details of our governance, including the Board and its Committees, see the ‘Governance’ section of this Annual Report. The Board delegates certain responsibilities to Board Level Committees as needed and where appropriate. Our risk governance structure strengthens our ability to identify, assess, manage and report risks, as follows:
Committees: A number of Board and Executive committees are responsible for specific parts of our Risk Framework
Key senior management roles: A number of senior roles have specific responsibilities for risk management
Risk organisational structure: We have the ‘three lines of defence’ model built into the way we run our business.

Committees
The Board Level Committee responsibilities for risk are:
Board Level CommitteeMain risk responsibilities
The Board
Has overall responsibility for business execution and for managing risk
Reviews and approves the Risk Framework and Risk Appetite.
Board Risk Committee (BRC)
Assesses the Risk Framework and recommends it to the Board for approval
Advises the Board on our overall Risk Appetite, tolerance and strategy
Oversees our exposure to risk and our strategy and advises the Board on both
Reviews the effectiveness of our risk management systems and internal controls.
Board Responsible Banking Committee
Responsible for culture and operational risk from conduct, compliance, competition, financial crime & legal matters
Reviews reports from the CLRO on the adequacy and effectiveness of the compliance function
Ensures that adequate and effective control processes are in place to identify and manage reputational risks
Oversees our Corporate Social Responsibility programme and how it impacts on employees, communities, the environment including sustainability and climate change, reputation, brand and market positioning.
Board Audit Committee
Monitors and reviews the financial statements integrity, and any formal announcements on financial performance
Reviews the adequacy and effectiveness of the internal financial controls and whistleblowing arrangements
Monitors and reviews the effectiveness of the internal audit function.
Oversees the independence and performance of our auditors.
Board Remuneration Committee
Oversees implementation of remuneration policies, ensuring they promote sound and effective risk management.

The Executive Level Committee responsibilities for risk are:
Executive Level CommitteeMain risk responsibilities
Executive Committee
Reviews business plans in line with our Risk Framework and Risk Appetite before they are sent to the Board to approve.
Receives updates on key risk issues managed by CEO-level committees and monitors the actions taken.
Senior Management Committee
Focuses on the responsibilities of the Executive Committee Senior Management Function holders and how they are discharged
Reviews updates on key risk issues, customer, reputational and conduct matters.
Executive Risk Control Committee (ERCC)
Reviews Risk Appetite proposals before they are sent to the Board Risk Committee and the Board to approve
Ensures that we comply with our Risk Framework, Risk Appetite and risk policies
Reviews and monitors our risk exposures and approves any corrective steps we need to take.
Asset and Liability Committee (ALCO)
Reviews liquidity risk appetite (LRA) proposals
Ensures we measure and control structural balance sheet risks, including capital, funding and liquidity, in line with the policies, strategies and plans set by the Board
Reviews and monitors key asset and liability management activities to ensure we keep our exposures within our Risk Appetite.
Pensions Committee
Reviews pension risk appetite proposals
Approves actuarial valuations and reviews the impact they may have on our contributions, capital and funding
Consults with the pension scheme trustees on the scheme’s investment strategy.
Capital Committee
Puts in place reporting systems and risk control processes to make sure capital risks are managed within our Risk Framework
Reviews capital adequacy and capital plans, including the ICAAP, before they are sent to the Board to approve.
Incident Accountability Committee
Considers, calibrates, challenges and agrees any appropriate individual remuneration adjustments
Presents recommendations to the Board Remuneration Committee.
Credit Approval Committee
Approves corporate and wholesale credit transactions which exceed levels delegated to lower level forums or individuals.
Investment Approval Committee
Approves equity type investment transactions which exceed levels delegated to lower level approval forums or individuals.
Financial Crime Committee
Ensures due reporting, consideration, oversight and informed decision making regarding compliance by the Company and its subsidiaries with financial crime laws and regulations, and best industry practice aligned to the Company’s stated risk appetite.
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Key senior management roles
Senior roles with specific responsibilities for risk management are:
RoleMain risk responsibilities
Chief Executive OfficerThe Board delegates responsibility for our business activities and managing risk on a day-to-day basis to the CEO. The CEO proposes our strategy and business plan, puts them into practice and manages the risks involved. The CEO must also ensure we have a suitable system of controls to manage risks and report to the Board on it.
Chief Risk Officer (CRO)As Risk Division leader, oversees and challenges risk activities, and ensures lending decisions are made within our Risk Appetite. Accountable for control and oversight of credit, market, liquidity, capital, pension, strategic & business, operational and model risk.
Chief Legal and Regulatory Officer (CLRO)Accountable for the control and oversight of legal, conduct and regulatory, reputational and financial crime risk, and is responsible for reporting on these risks to the CRO, to provide the CRO with a holistic enterprise wide view of all risks.
Chief Financial OfficerResponsible for developing strategy, leadership and management of the CFO Division. In supporting our corporate goals within our risk appetite, the CFO is responsible for managing interest rate, liquidity, pension and capital risks. The CFO aims to maximise the return on Regulatory and Economic Capital, ensuring transactions create value with the right risk-based profile.
Chief Internal Auditor (CIA)Designs and uses an audit system that identifies key risks and evaluates controls. The CIA also develops an audit plan to assess existing risks that involve producing audit, assurance and monitoring reports.
Money Laundering Reporting Officer (MLRO)Responsible to the CLRO for control and oversight of financial crime risk but has regulatory responsibility to report on this risk type to Executive and Board Committees and the FCA.
Risk organisational structure
We use the ‘three lines of defence’ model to manage risk. This model is widely used in the banking industry and has a clear set of principles to put in place a cohesive operating model across an organisation. It does this by separating risk management, risk control and risk assurance. The diagram below shows the reporting lines to the Board with respect to risk:
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Line 1: Business Units and Business Support Units identify, assess and manage the risks which originate and exist in their area, within our Risk Appetite.
Line 2: Risk Control Units are independent monitoring and control functions. They are under the executive responsibility of the CEO, but responsible to the CRO for overseeing the first line of defence. They make sure Business Units and Business Support Units manage risks effectively and within our Risk Appetite. The Risk Control Units are: Financial Crime; Conduct & Compliance, responsible for controlling reputational and conduct & regulatory risks; Legal; and Risk, responsible for controlling credit, market, liquidity, capital, pension, strategic and business, operational and model risks.
Line 3: Internal Audit is an independent corporate function. It gives assurance on the design and effectiveness of our risk management and control processes.
Internal control system
Our Risk Framework is an overarching view of our internal control system that helps us manage risk across the business. It sets out at a high level the principles, standards, roles and responsibilities, and governance for internal control. Our Risk Framework covers the categories below:
CategoryDescription
Risk FrameworksSet out how we should manage and control risk across the business (overall framework), our key risk types (risk type frameworks) and our key risk activities (risk activity frameworks).
Risk Management ResponsibilitiesSet out the Line 1 risk management responsibilities for Business Units and Business Support Units.
Strategic Commercial PlansPlans produced by business areas, at least annually, which describe the forecasted objectives, volumes and risk profile of new and existing business, within the limits defined in our Risk Appetite.
Risk AppetiteSee our Risk Appetite section that follows.
Delegated Authorities/MandatesDefine who can do what under the authority delegated to the CEO by the Board.
Risk CertificationsBusiness Units, Business Support Units or Risk Control Units set out how they have managed and/or controlled risks in line with our risk frameworks and within our Risk Appetite. They are completed at least once a year and explain action to be taken. This helps ensure people can be held personally accountable.
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RISK APPETITE
How we control the risks we are prepared to take
When our Board sets our strategic objectives, it is important that we are clear about the risks we are prepared to take to achieve them. We express this through our Risk Appetite Statement, which defines the amount and kind of risk we are willing to take. Our Risk Appetite and strategy are closely linked, and our strategy must be achievable within the limits set out in our Risk Appetite.
The principles of our Risk Appetite
Our Risk Appetite Statement lists ten principles that we use to set our Risk Appetite.
We always aim to have enough financial resources to continue to do business in adverse but plausible stressed economic and business conditions, as well as to survive a very severe stress that would deplete our capital reserves
We should be able to predict how our income and losses might vary – that is, how volatile they are. That applies to all our risks and lines of business
Our earnings and dividend payments should be stable, and in line with the return we aim to achieve
We are an autonomous business, so we always aim to have strong capital and liquidity resources
The way we fund our business should be based on diverse funding sources and duration. This helps us avoid relying too much on wholesale markets
We set controls on large concentrations of risk, like single customers or specific industries
There are some key risks we take, but for which we do not actively seek any reward, like operational, conduct and regulatory, financial crime, legal and reputational risk. We take a risk-averse approach to these risks
We comply with all regulations – and aim to exceed the standards they set
Our pay and bonus schemes should support these principles and our risk culture
We always aim to earn the trust of our people, customers, shareholders and communities.
How we describe the limits in our Risk Appetite
Our Risk Appetite sets out detailed limits for different types of risk, using metrics and qualitative statements.
Metrics
We use metrics to set limits on losses, capital, liquidity and concentration. We set:
Limits for losses for our most important risks, including credit, market, operational and conduct risk
Capital limits, reflecting both the capital that regulators expect us to hold (regulatory capital) and our own internal measure economic capital (EC)
Liquidity limits according to a range of plausible stress scenarios for our business
Concentration limits, to determine the maximum concentration level that we are willing to accept.
These limits apply in normal business conditions, but also when we might be experiencing a far more difficult economic environment. A good example of this might be when the UK economy is performing much worse than we expected, such as in 2020 due to the Covid-19 pandemic. We refer to conditions like this as being under stress. See more on EC and stress scenarios on the next page.
Qualitative statements
For some types of risk we also use qualitative statements that describe in words the appetite we want to set. For example, in operational risk, we use them to describe our risk-averse appetite for cyber risk. We also use them to prohibit or restrict exposure to certain sectors, types of customer and activities.
How we set our Risk Appetite, and stay within it
We control our Risk Appetite through our Risk Appetite Framework. Our Board approves and oversees our Risk Appetite Statement every year. This ensures it is consistent with our strategy and reflects changes in the markets and economic environment in which we operate, such as due to the Covid-19 pandemic. Our ERCC is responsible for ensuring that our risk profile (the level of risk we are prepared to accept) is consistent with our Risk Appetite Statement. To do this they monitor our performance against our Risk Appetite, business plans and budgets each month.
We also use stress testing to review how our business plan performs against our Risk Appetite Statement. This shows us if we would stay within our Risk Appetite under stress conditions. It also helps us to identify any adverse trends or inconsistencies.
We embed our Risk Appetite by setting more detailed risk limits for each business unit and key portfolio. These are set in a way so that if we stay within each detailed limit, we will stay within our overall Risk Appetite. When we use qualitative statements to describe our appetite for a risk, we link them to lower-level key risk indicators, so that we can monitor and report our performance against them.

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Risk governance
STRESS TESTING
Stress testing helps us understand how different events and economic conditions could affect our business plan, earnings and risk profile. This helps us plan and manage our business.
Scenarios for stress testing
To see how we might cope with difficult conditions, we regularly develop challenging scenarios that we might face. We consult a broad range of internal stakeholders, including Board members, when we design and choose our most important scenarios. The scenarios cover a wide range of outcomes, risk factors, time horizons and market conditions. They are designed to test:
The impact of shocks affecting the economy as a whole or the markets we operate in
Key potential vulnerabilities of our business model, and the processes and systems which support it
Potential impacts on specific risk types.
We describe each scenario using a narrative setting out how events might unfold, as well as a market and/or economic context. For example, the key economic factors we reflect in our ICAAP scenarios include house prices, interest rates, unemployment levels and the size of the UK economy. One of the scenarios used in 2020 considered a further level of stress to the UK economy driven by a resurgence of the coronavirus cases in Q4 2020. This scenario is characterised by a double dip in GDP growth and unemployment reaching near 12%. We use a comprehensive suite of stress scenarios to explore sensitivities to market risk, including those based on historical market events.
How we use stress testing
We use stress testing to estimate the effect of these scenarios on our business and financial performance, including:
Our business plan, and its assessment against our Risk Appetite
Our capital strength, through our ICAAP
Our liquidity position, through our ILAAP
Impacts on other risk types.
We use a wide range of models, approaches and assumptions. These help us interpret the links between factors in markets and the economy, and our financial performance. For example, one model looks at how changes to key macroeconomic variables like unemployment rates might affect the number of customers who might fall into arrears on their mortgage.
Our stress testing models are subject to a formal review, independent validation and approval process. We highlight the key weaknesses and related model assumptions in the approval process for each stress test. In some cases, we overlay expert judgement onto the results of our models. Where this is material to the outcome of the stress test, the approving governance committee reviews it. We take a multi-layered approach to stress testing to capture risks at various levels. This ranges from sensitivity analysis of a single factor to a portfolio, to wider exercises that cover all risks across our entire business. We use stress test outputs to design plans that aim to mitigate damaging effects.
We also conduct reverse stress tests. These are tests in which we identify and assess scenarios that are most likely to cause our business model to fail.
Board oversight of stress testing
The ERCC approves the design of the scenarios in our ICAAP and ILAAP. The Board Risk Committee approves the stress testing framework. The Board reviews stress test outputs as part of the approval processes for the ICAAP, ILAAP, Recovery and Resolution, our Risk Appetite and regulatory stress tests.
Regulatory stress tests
We take part in a number of external stress testing exercises. These can include stress tests of the UK banking system conducted by the PRA. We also contribute to stress tests of Banco Santander SA conducted by the European Banking Authority (EBA).
For more on capital and liquidity stress testing, see the ‘Capital risk’ and ‘Liquidity risk’ sections.
HOW RISK IS DISTRIBUTED ACROSS OUR BUSINESS
Economic capital
As well as assessing how much regulatory capital we need to hold, we use an internal EC model to measure our risk. We use EC to get a consistent measure across different risk types. EC also takes account of how concentrated our portfolios are, and how much diversification there is between our various businesses and risk types. As a consequence, we can use EC for a range of risk management activities. For example, we can use it to help us compare requirements in our ICAAP or to get a risk-adjusted comparison of income from different activities.
Regulatory capital – risk-weighted assets
We hold regulatory capital against our credit, market and operational risks. In 2020, the largest category continued to be credit risk in Retail Banking, which accounted for more than half of our risk-weighted assets. This reflects our business strategy and balance sheet.
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Credit risk
Overview
Credit risk is the risk of financial loss due to the default or credit quality deterioration of a customer or counterparty to which we provided credit, or for which we have assumed a financial obligation.
Santander UK group level
We start by discussing credit risk at a Santander UK group level. We set out how our exposures arise, our types of customer and how we manage them, and our approach to credit risk across the credit risk lifecycle. We discuss our ECL approach and the key inputs to our ECL model. We also summarise various Covid-19 support measures provided to our customers and their impact on ECL. We then analyse our key metrics, credit performance and forbearance, and highlight how Covid-19 affected them where relevant.
Business segments
Then we cover Retail Banking separately from our other business segments – Corporate & Commercial Banking, Corporate & Investment Banking and Corporate Centre – in more detail.
Key metrics
Stage 3 ratio increased to 1.45% (2019: 1.15%).
Loss allowances increased to £1,377m (2019: £863m).
Average LTV of 64% (2019: 65%) on new mortgage lending.

Credit risk – Santander UK group level
SANTANDER UK GROUP LEVEL – CREDIT RISK MANAGEMENT
Exposures (audited)
Exposures to credit risk arise in our business segments from:
Retail BankingCorporate & Commercial BankingCorporate & Investment BankingCorporate Centre
Residential mortgages, business banking, consumer (auto) finance and other unsecured lending (credit cards, personal loans and overdrafts).
We provide these to individuals and small businesses.
Loans, bank accounts, treasury services, invoice discounting, cash transmission, trade finance and asset finance.
We provide these to SMEs and mid corporates, Commercial Real Estate and Social Housing associations.
Loans, bank accounts, treasury services, treasury markets activities, trade finance, receivables discounting and cash transmission.
We provide these to large corporates and financial institutions.
Asset and liability management of our balance sheet, as well as our non-core and Legacy Portfolios being run down.
Exposures include sovereign and other international organisation assets that we hold for liquidity.

The segmental basis of presentation in this Annual Report has been changed, and the prior periods restated, to report some customer assets in Corporate & Commercial Banking rather than in Business Banking (in Retail Banking), some non-core corporate mortgages in Corporate & Commercial Banking rather than in Corporate Centre, and a number of smaller business lines in Corporate Centre rather than in Corporate & Investment Banking. See Note 2 for more information.

Our types of customers and how we manage them
We manage credit risk across all our business segments in line with the credit risk lifecycle that we show in the next section. We tailor the way we manage risk to the type of customer. We classify our customers as standardised or non-standardised:
StandardisedNon-standardised
Mainly individuals and small businesses. Their transactions are for relatively small amounts of money and share similar credit characteristics.
Mainly medium and large corporate customers. Their transactions are for larger values and have more diverse credit characteristics.
We manage risk using automated decision-making tools. These are backed by teams of expert analysts.
We manage risk through expert analysis with support from internal risk assessment models.

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For many of our business customers, the impact of the Covid-19 pandemic has been extreme with, in some cases, revenue streams disappearing overnight and cash flows becoming very challenged. Many businesses that had been performing well were suddenly faced with considerable unforeseen challenges. Given the scale of these issues and their impact on the wider economy, it is understandable that the UK Government wanted to provide financial help and recognised that one of the most efficient ways to do so quickly was through the banking sector.

The result was the rapid development, introduction and implementation of the government-backed loan schemes, BBLS, CBILS and CLBILS. We mobilised quickly to implement these schemes in a way that allowed our customers to get much needed support quickly. In a matter of months, we granted such loans to circa 150,000 customers totalling £4.6bn, consisting of £4.0bn BBLS, £0.4bn CBILS and £0.2bn CLBILS. These loans ensured that our customers had liquidity to allow them to survive, and adapt their business models to the new environment. Almost all of our government-backed loans have been to existing customers, with an incredible 111,000 BBLS loans made to existing customers who had never borrowed from us before. Almost all of the remainder of the BBLS loans have been made to existing borrowers.

The rapid support provided to so many of our business customers has strengthened and deepened many of our customer relationships.
Covid-19 loan schemes

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Credit risk
Our approach to credit risk
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We manage our portfolios across the credit risk lifecycle (above), from drawing up our risk strategy, plans, budgets and limits to making sure the actual risk profile of our exposures stays in line with our business plans and within our Risk Appetite. We further tailor the way we manage risk across the lifecycle to the type of product. We say more on this in the Credit risk – Retail Banking and the Credit risk – Other business segments sections.
1. Risk strategy and planning (audited)
All relevant areas of the business work together to create our business plans. We aim to balance our strategy, goals, and financial and technical resources with our Risk Appetite. To do this, we focus on economic and market conditions and forecasts, regulations, conduct matters, profitability, returns and market share. The result is an agreed set of targets and limits that help us direct our business.
2. Assessment and origination (audited)
Managing credit risk begins with lending responsibly. That means only lending to customers who can afford to pay us back, even if things get tighter for them, and are committed to paying us back. We perform a thorough risk assessment to make sure customers can meet their obligations before we approve a credit application. These decisions are made with authority from the Board and consider:
The credit quality of the customer
The underlying risk and how we can mitigate it, such as through netting or collateral, or participation in Government-sponsored programs, such as the coronavirus support loan schemes introduced in 2020
Our risk policy, limits and appetite
Whether we can balance the amount of risk we face with the returns we expect, and
Assessment of customer affordability.
We lend responsibly by having a number of prohibitions and restrictions on a range of activities. For details, see the 'Other business segments - credit risk management' section.
3. Monitoring (audited)
We measure and monitor changes in our credit risk profile on a regular and systematic basis against our budgets, limits and benchmarks. We monitor credit performance by portfolio, segment, customer or transaction. If our portfolios do not perform as we expect, we investigate to understand the reasons. Then we take action to mitigate it as far as possible and bring performance back on track. We monitor and review our risk profile through formal governance forums and committees across our business. These agree and track any steps we need to take to manage our portfolios, to make sure the impact is prompt and effective. This structure is a vital feedback tool to coordinate issues, trends and developments across each part of the credit risk lifecycle.
Credit concentrations
A core part of our monitoring and management is a focus on credit concentrations, such as the proportion of our lending that goes to specific borrowers, groups or industries. We set concentration limits in line with our Risk Appetite and review them on a regular basis. We track how concentrated our portfolios are using a range of criteria, these include geographies, economic sectors, products and groups of customers.
Geographical concentrations
We set exposure limits to countries and geographies, with reference to the country limits set by Banco Santander. These are determined according to how the country is classified (whether it is a developed OECD country or not), its credit rating, its gross domestic product, and the products and services we or Banco Santander want to offer in that country. For more geographical information, see ‘Country risk exposures’.
Industry concentrations
We also set exposure limits by industry sector. We set these limits based on the industry outlook, our strategic aims and desired level of concentration, and relevant limits set by Banco Santander. We analyse committed exposures in the ‘Credit risk review’.
4. Arrears management (audited)
Sometimes our customers face financial difficulty and may fall into payment arrears or breach the conditions of their credit facility. If this happens, we work with them to get their account back on track. We aim to support our customers and keep our relationship with them. To do this, we:
Find affordable and sustainable ways of repaying to fit their circumstances
Monitor their finances and use models to predict how they will cope. This helps us put in place the right strategy to manage their debt
Work with them to get their account back on track as soon as possible in a way that works for them and us
Monitor agreements we make to manage their debt, so we know they are working.
For more, see the Forbearance section on the next page.
5. Debt recovery (audited)
Sometimes, even when we have taken all reasonable and responsible steps we can to manage arrears, they are not effective. If this happens, we have to end our agreement with the customer and try to recover the whole debt, or as much of it as we can.
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Loan modifications (audited)
We sometimes change the terms of a loan when a customer gets into financial difficulty (this is known as forbearance), or for other commercial reasons.
Forbearance
When a customer gets into financial difficulties, we can change the terms of their loan, either temporarily or permanently. We do this to help customers through temporary periods of difficulty so they can get back on to sustainable terms and fully pay off the loan over its lifetime, with support if needed. We try to do this before the customer defaults. Whatever we offer, we assess it to make sure the customer can afford the repayments. Forbearance improves our customer relationships and our credit risk profile. We review our approach regularly to make sure it is still effective. In a few cases, we can help a customer in this way more than once. This can happen if the plan to repay their debt doesn’t work and we have to draw up another one. When this happens more than once in a year, or more than three times in five years, we call it multiple forbearance. We only use foreclosure or repossession as a last resort.
When we agree to forbearance, we consider that the account has suffered a Significant Increase in Credit Risk (SICR), as we explain later on. We review our loss allowance for it and report the account as forborne. For retail accounts, if an account is in Stage 1 (a 12-month ECL) when we agree forbearance, we transfer it to Stage 2 (a lifetime ECL). For all accounts, if an account is already in Stage 2 when we agree forbearance, we keep it in Stage 2 unless the forbearance arrangement involves an account that is deemed unlikely to pay (defined through a number of events listed in our Classification Policy), the forgiveness of fees and interest or debt, or is being granted multiple forbearances which would put the case into Stage 3 (a lifetime ECL). If an account is already in Stage 3 when we agree forbearance, we keep it in Stage 3. We monitor the performance of all forborne loans. A loan moves from a lifetime ECL to a 12-month ECL once the criteria to exit forbearance have been met, as set out below.
Exit from forbearance or cure
For an account in Stage 3 to exit forbearance, all the following conditions must be met:
The account has been classed as Stage 3 for at least one year since the end of the latest forbearance strategy
The account is not deemed unlikely to pay
The account is no longer in arrears, and the customer has no other material debts with us which are more than 90 days in arrears.
If all the conditions are met, the account is re-classed as Stage 2 forbearance until the Stage 2 forbearance exit conditions set out below are also met.
For an account in Stage 2 to exit forbearance, all the following conditions must be met:
The account has been classed as Stage 2 for at least two years since the end of the latest forbearance strategy
The account has been performing, i.e. the customer is no longer in financial difficulty
Meaningful capital and interest repayments have been made for at least 50% of the two year period
The account is no longer in arrears, and the customer has no other material debts with us which are more than 30 days in arrears.
Other modifications
When a customer is not showing any signs of financial difficulties, we can also change the terms of their loan. We do this to assist them to manage their financial liabilities. In addition, since March 2020, we have provided mortgage customers with payment holiday terms in line with UK Government and FCA guidance. Similar payment holidays have also been granted in respect of consumer (auto) finance, personal loans, credit cards, businesses and corporates. For more on this, see 'Covid-19 Support measures'.
Loans for customers who were provided with payment holidays were considered to have the contract terms modified. The granting of a payment holiday on its own was not considered to be a Significant Increase in Credit Risk (SICR) event, nor was it considered a default under regulatory definitions. Neither were they considered to have been granted forbearance. For customers who have needed further financial support after the payment holiday period, we help them by offering assistance in line with our policies.

Risk measurement and control
We measure and control credit risk at all stages across the credit risk lifecycle. We have a range of tools, processes and approaches, but we rely mainly on:
Credit control: as a core part of risk management we generate, extract and store accurate, comprehensive and timely data to track credit limits. We use internal data and data from third parties like credit bureaux.
Models: we use models widely to measure credit risk and capital needs. They range from statistical and expert models to benchmarks.
Review: we use formal and informal forums to approve, validate, review and challenge our risk management. We do this to help predict if our credit risk will worsen.

Key metrics (audited)
We use a number of key metrics to measure and control credit risk, as follows:
MetricDescription
Expected Credit Loss (ECL)ECL tells us what credit risk is likely to cost us either over the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a SICR since origination. We explain how we calculate ECL below.
Stages 1, 2 and 3We assess each facility’s credit risk profile to determine which stage to allocate them to, and we monitor where there is a SICR and transfers between the Stages including monitoring of coverage ratios for each stage. We explain how we allocate a facility to Stage 1, 2 or 3 below.
Stage 3 ratioThe Stage 3 ratio is total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures. The Stage 3 ratio is the main indicator of credit quality performance.
Expected Loss (EL)EL is based on the regulatory capital rules of CRD IV and gives us another view of credit risk. It is the product of the probability of default, exposure at default and loss given default. We calculate each factor in accordance with CRD IV and include direct and indirect costs. We base them on our risk models and our assessment of each customer’s credit quality. There are differences between regulatory EL and IFRS 9 ECL, which we set out below. The rest of our Risk review, impairments, losses and loss allowances refer to calculations in accordance with IFRS, unless we specifically say they relate to CRD IV. For our IFRS accounting policy on impairment, see Note 1 to the Consolidated Financial Statements.
We also assess risks from other perspectives, such as geography, business area, product and process to identify areas we need to focus on. We also use stress testing to establish vulnerabilities to economic deterioration. Our business segments tailor their approach to credit risk to their own customers, as we explain later on.
Key differences between regulatory EL and IFRS 9 ECL models
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Credit risk
There are differences between the regulatory EL and the IFRS 9 ECL approaches. Although our IFRS 9 models use the existing Basel advanced IRB risk components, we need to make several adjustments to ensure the outcome is in line with the IFRS 9 requirements, i.e. the financial reporting standard we use, as follows.
Basel advanced IRB ELIFRS 9 ECL
Rating philosophyMix of point-in-time, through-the-cycle or hybridPoint-in-time, forward-looking. Considers a range of economic scenarios
Parameters calibrationContains regulatory floors and downturn calibrationUnbiased estimate, based on conditions known at the balance sheet date
Calculation timingConsiders aggregation of possible default events in the next 12 monthsConsiders monthly calculation of parameters, for all possible future default dates. First 12 months are used for Stage 1, full lifetime for Stages 2 and 3
Probability of Default (PD)PD in the next 12 monthsIncludes forward-looking economic data and removes conservatism. PD in next 12 months for Stage 1, lifetime for Stages 2 and 3
Loss Given Default (LGD)Lifetime LGD for defaults in the next 12 monthsModelled without regulatory floors and exclusion of indirect costs
Exposure at Default (EAD)Exposure at the point of default if the customer defaults in the next 12 monthsFloored at amount owed, except on some revolving facilities. Recognises ability for exposure to reduce from the balance sheet date to default date
SICRDoes not include SICR conceptIncludes SICR concept
Discounting appliedAt the weighted average cost of capital to the default dateAt the effective interest rate (EIR) to the balance sheet date

Recognising ECL (audited)
The ECL approach estimates the credit losses arising from defaults in the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a SICR since the origination date. The ECL approach takes into account forward-looking data, including a range of possible outcomes, which should be unbiased and probability-weighted in order to reflect the risk of a loss being incurred even when it is considered unlikely.

Multiple economic scenarios and probability weights (audited)
For all our portfolios, except CIB, we use five forward-looking economic scenarios. For 2020, they consist of a central base case, one upside scenario and three downside scenarios. We use five scenarios to reflect a wide range of possible outcomes for the UK economy.
(i) For all our portfolios, except CIB
Our forecasting approach
We derive our scenarios in part by using a set of parameters in GDP fan charts published by the Office for Budget Responsibility (OBR). To avoid major changes to the scenarios due to changes in the OBR fan charts, we place more weight on the long-run outlook of the fan charts rather than relying solely on each individual release as this can create large swings in the scenarios which may not be appropriate. We use the OBR fan charts to calculate our GDP paths for each scenario. For 2020 this applied to the Upside 1, Downside 1 and Downside 2 scenarios. These fan charts reflect the probability distribution of a deviation from the OBR’s central forecast to illustrate the uncertainty regarding the outcome of a variable, in this case GDP.
We use the 0.6 fan chart path for our Upside 1 scenario and the 0.3 path for Downside 1. For Downside 2 we use a blend of the Downside 1 scenario and the base case rather than the 2008/09 recession, which is used under BAU. This is because the fall in GDP in the base case is markedly higher than the one seen in 2008/09, due to the lockdown restrictions imposed due to Covid-19. This means that in the longer run the GDP levels in our Downside 1 and 2 scenarios converge. To ensure that Downside 2 is kept consistent with any changes to the OBR fan charts, we calculate the Downside 2 GDP by taking the percentage difference between Downside 2 and Downside 1 GDP in the original forecast and applying this difference to the new Downside 1.
Once we have established the GDP paths for each scenario, we run them through the Oxford Global Economic Model (OGEM) to derive the other macroeconomic variables, such as unemployment and house prices. These variables are the product of the GDP growth paths we have forecast and the output of the OGEM for these growth paths. We then impose a Bank Rate profile for each scenario using expert judgement. We determine the Bank of England Bank Rate (Bank Rate) by using the base case Bank Rate profile and adjusting this for each of the four other scenarios. To do this, we firstly consider what each of the scenarios is trying to achieve.
For the upside scenario, which has a higher growth path and rising productivity growth, we allow for a managed tightening of the monetary stance, so we assume small increases in Bank Rate. In contrast, for Downside 2 the scenario shows monetary policy forced into a reactive stance to contain CPI inflation at a time of weakening output growth, so we assume the Bank of England would raise rates in this scenario to bring inflation back to its target rate. The rising Bank Rate profiles are based on forward guidance from the Bank of England, where increases are assumed to be gradual and incremental. For the Downside 1 scenario, this is aligned to the base case forecast as inflation is similar to that of the base case, and for Downside 3, this shows a negative interest rate profile which the Bank of England follows to try and boost growth with inflation remaining low. In this way, our scenarios reflect a range of possible outcomes that the Bank of England may follow for different growth paths.
Our use of five scenarios is designed to reflect different possible outcomes to the base case forecast highlighting the upside and downside risks associated with the central scenario. The downside risks for the UK economy include further waves of Covid-19 leading to restrictions on economic activity, a further and sharper downturn in global growth, a continuation of the very low productivity growth seen in the UK, and a move to a more protectionist agenda for trade. The upside risks are more muted at present and include the smooth implementation of a new free trade agreement with the EU with limited trade frictions caused by customs checks and a recovery in global growth, coupled with a move to more open trade.
We update the baseline in our economic scenarios at least twice a year in line with our annual budgeting and three-year planning processes, or sooner if there is a material change in current or expected economic conditions (as was the case in Q4 2020 when a second national lockdown was imposed). We refresh all our economic scenarios each quarter to reflect the latest data and OBR fan charts if these have changed, which are then reviewed and approved by the Credit Risk Provisions Forum (CRPF). The CRPF also assesses the probability weights at least once a quarter.
We do not use consensus forecasts as inputs to our models, but we do compare the outputs of our models against consensus views for the base case, to make sure that we understand any significant differences and address them where needed. At the end of 2020, there were no significant differences between our base case forecasts and the consensus views.
In 2020, we were also able to do further peer benchmarking analysis of the economic scenarios using the data the PRA provided, which for Q4 2020 included the mean weighted analysis for a selection of economic variables, including GDP, unemployment rate and HPI. This meant that we could compare our weighted scenarios against the average of our peers to understand what differences there may be. The conclusion of this analysis demonstrated that our economic scenarios were in line with our peers.
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Annual Report 2020 | Risk review
Key changes to our forecasting approach in 2020
In 2020, although the number of alternative scenarios remained the same, we removed the best upside scenario and replaced it with a further downside scenario that reflects the key risks associated with Covid-19. This scenario was developed internally by the Economic Analysis team with the Enterprise Risk team, rather than using a different path from the OBR fan charts, in order to reflect the specific circumstances of Covid-19 and further lockdowns which are unprecedented in the economic history of the UK. In addition there was a slight change to the Downside 1 Bank Rate profile, which in 2019 had Bank Rate rising. In the 2020 scenarios it was decided that in an environment which has seen Bank Rate remain at record lows, there should a be a downside scenario which reflects this status quo i.e. Bank Rate held flat at 10 bps.

Base case
Two key assumptions underpin the base case. Firstly it assumed a trade agreement was negotiated with the EU and that further discussions would take place post 2020 on aspects not covered. However despite the agreement, disruption would still occur in Q1 2021 as firms factor in the additional requirements they need to meet in order to trade. It further assumed that the second national lockdown was followed by the UK entering tier restrictions again and that this system would continue through Q1 2021 and into Q2 2021. However, it did not assume that there would be a third lockdown in Q1 2021. It is normal practice to review the scenarios and associated weights every quarter to ensure they appropriately reflect the current economic circumstances and we will continue to follow that approach particularly as the advice the UK Government issues is subject to change in this fluid environment. In order to factor in this further lockdown the Q4 2020 weights were updated with 5% removed from both Upside 1 and the base case and put onto Downside 2 and Downside 3. The reason for moving weight to both Downside 2 and Downside 3 is that Downside 3 incorporates a double dip recession, which is now considered more likely given the second lockdown in November 2020 and now a third in January 2021, although it is noted that this is still a very severe scenario and not a replacement for a base case. In terms of Downside 2, the longer restrictions remain in place, the greater the risk of longer-term effects which are reflected in this scenario.
Base case key macroeconomic assumptions
House price growth: As we move into 2021, with the end of the stamp duty holiday in March 2021, the rise in unemployment, and negative real wage growth, there is likely to be a reduced demand and so lower house prices. As such we expect to see some negative growth towards the end of 2021 but, with the supply side still weak, this will be limited. We are projecting a fall of 2% by the end of 2021.
GDP: The outlook assumes that the recovery is curtailed by the return of the virus and the second national lockdown which leaves Q4 2020 growth in negative territory with GDP expected to contract by 11.5% in 2020. For 2021, it assumes the gradual easing of restrictions towards the end of Q2 2021 will support a modest rebound in growth.
Unemployment rate: Unemployment is expected to peak in Q2 2021 at just under 8% as the UK Government’s job support schemes come to an end. With support ending for firms and limited savings left to keep trading, rising insolvency rates trigger a further increase in unemployment. As consumers and businesses become more confident about efforts to contain the coronavirus in the second half of 2021, unemployment falls back gradually. However, given the need for the economy to restructure, unemployment remains at elevated levels compared to recent figures over the remaining forecast period.
Bank Rate: For the Bank Rate forecast, the base case assumes a flat profile of 10bps with a rise to 25bps at the beginning of 2024. This was based on the view that we have a limited trade agreement by the end of 2020, with inflation expected to remain near target over the five year forecast period. The Monetary Policy Committee will wait to understand how the economy responds to the new economic environment before changing the Bank Rate.

In the medium-term, the projections assume that current demographic and productivity trends will continue, causing a reduction in the UK’s growth potential. This is reflected in an average growth expectation of 1.6% pa, the OBR’s latest estimate of the UK’s long run average growth rate. CPI inflation is forecast to be below the 2% target rate in the initial forecast period but returning to target by the end. Nominal earnings growth will fall in 2020 before starting to recover in 2021. This will then support household spending power as we move into 2022. However, the effect of limited business investment on growth will continue as firms look to repay debt that they have taken on due to the lockdown.
In summary, the base case assumes that activity starts to recover as the restrictions are lifted, but that progress will be tempered by the uncertainty around the UK’s new trading relationship with the EU.
Key changes to our base case in 2020
The key changes to our base case assumptions in 2020 were: (i) lower GDP projections in 2020 and 2021 to reflect the impact of the ongoing restrictions on economic activity due to Covid-19; (ii) the unemployment rate, whilst lower than expected given the government furlough scheme, peaks in Q2 2021 and only slowly recovers as firms adapt to the new economic environment; (iii) there is negative house price growth for 2021 as the stamp duty holiday ends and unemployment rises; and (iv) the Bank Rate profile is held flat at 0.10% until Q1 2024, when there is a rise to 0.25% and remains flat over the rest of the forecast period.
Other scenarios
Based on this revised base case, we have reviewed our suite of scenarios to ensure that they capture the wide range of potential outcomes for the UK economy. These include (i) a significant rise in Covid-19 cases and further lockdown measures being imposed; (ii) a slower recovery that is more akin to the ‘U’ shape of past recessions; (iii) higher inflation; (iv) the long-term effects caused by higher and longer unemployment rates or higher and longer unemployment rate persisting, increasing the natural rate of unemployment; (v) a vaccine or treatments being developed at a quicker pace; and (vi) the global economy bouncing back more swiftly than expected.
In order to reflect these potential outcomes, we decided to continue to use the base case and four additional scenarios, which management considers to provide a range wide enough to reflect all of the above potential outcomes. However, as the risks remain skewed to the downside, to reflect these outcomes sufficiently, we concluded that only one upside scenario would be needed to reflect the upside risks to the base case. As with the base case, the scenarios are forecast over a five-year period and then mean revert over the next three years to the OBR's latest estimate of the UK's long run average growth rate.
The four scenarios are as follows:
One upside scenario
All our Q4 2020 scenarios reflect a sharp recession in 2020, although a modest upside scenario remains appropriate based on vaccines being distributed quickly and effectively to the population, with a faster global recovery and the UK quickly concluding trade agreements with a number of countries after leaving the EU, along with minimum effective tariffs. It is also based on productivity growth recovering. HPI for Upside 1 is less positive than for the base case and is based on the HPI equations built into the OGEM and the particular GDP profile used, whereas our base case reflects our planning view which allows for flexibility to align what is currently seen in the market to the outlook of the economic variable forecast.
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Three downside scenarios
Downside 1 assumes further local/regional lockdowns as we move through 2021 than in the base case as a means of controlling increases in infection rates, which in turn impact economic growth as the vaccine(s) is not as effective in reducing the virus outbreak as hoped. The scenario also reflects a fall in demand for housing leading to significant downward price corrections over the next five years with a peak to trough of negative 10%. It assumes trade agreements with other countries being negotiated over the forecast period, but fewer than in the base case.
Downside 2 reflects a severe downturn with a longer recovery needed (U shape) capturing even more conservatism and lack of confidence in terms of spending by consumers with the higher levels of unemployment. For businesses it reflects a slower return to profitability and more insolvencies as the rollout of the vaccine progresses at a slower pace than needed to keep infection rates under control. It retains a rising bank rate profile to ensure there is a scenario which encapsulates rising inflation. However, the rise in interest rates results in a large increase in debt-service costs to households and a rapid undermining of demand in the housing market. House values fall sharply and the combination of rising interest rates and unemployment with falling house prices results in a rising profile of credit impairment losses.
Downside 3 features a double dip in economic activity (W shape) lasting three quarters, with higher unemployment and a sharper fall in house prices compared to the four other scenarios. The fall in GDP of c.11.5% between H2 2020 and H1 2021 is roughly half the fall of c22% in H1 2020, as this assumes that businesses have contingency plans to be able to stay open whilst practising social distancing. The peak in the unemployment rate is similar to that seen in the early 1980s recession peaking at 11.9% in 2021 and remaining in double digits until early 2022, before falling back very gradually. The long term effects of high unemployment result in a permanent hit to potential output, as persistent and elevated uncertainty leads to more job losses and corporate bankruptcies. Sharp falls in house prices (c30%) combined with persistently higher unemployment has particularly adverse consequences for credit impairment charges.
Key changes to our alternative scenarios in 2020
In terms of key changes to our alternative scenarios in 2020, these relate to changes to the base case, historic data for each variable, OBR fan charts and the OGEM. We also updated the way the GDP path is defined in Downside 2 as discussed above. Otherwise we did not make any methodological changes to the scenarios. The combination of these different inputs will mean differences across the variables for each of the alternative scenarios when we update them each quarter. As such it is not possible to pin-point a specific reason for each change as we do not run the inputs in isolation. However, we compare the variables between each quarter and review any large changes to ensure they are not erroneous.
The table sets out the house price growth and unemployment rate for 2020 and 2021, and GDP and Bank Rate for 2020-2022 for each of the five scenarios.
Upside 1Base caseDownside 1Downside 2Downside 3
%%%%%
House price growth(1)
20203.70  3.50  3.70  3.70  3.50  
2021(4.60) (2.00) (5.40) (11.30) (19.70) 
GDP(2)
2020(10.50) (11.50) (10.50) (11.10) (11.50) 
20214.80  4.50  4.00  (0.80) (8.00) 
20224.90  6.10  3.60  3.20  3.10  
Unemployment rate20206.30  6.80  6.30  6.30  6.80  
20216.10  7.50  6.50  8.50  11.40  
Bank of England bank rate20200.10  0.10  0.10  0.10  0.10  
20210.25  0.10  0.10  0.75  (0.50) 
20220.75  0.10  0.10  1.75  0.00  
(1)Q4 annual growth rate.
(2)GDP is shown as an annual average and all other data points are at 31 December in the year indicated.

Our macroeconomic assumptions and their evolution throughout the forecast period
Our macroeconomic assumptions and their evolution throughout the forecast period for 2020 and 2019 were:
Upside 1Base caseDownside 1Downside 2Downside 3
2020 % % % % %
House price growth5-year average increase/decrease0.49  1.38  (2.01) (4.54) (4.44) 
Peak/(trough) at (1)
2.45  7.11  (9.65) (20.72) (20.32) 
GDP5-year average increase/decrease0.75  0.39  (0.38) (0.98) (2.82) 
Cumulative growth/(fall) to peak/(trough) (2)
3.82  1.96  (1.88) (4.80) (13.33) 
Unemployment rate5-year end period4.14  5.50  5.84  6.52  7.40  
Peak/(trough) at (1)
6.28  7.90  6.51  8.78  11.90  
Bank of England bank rate5-year end period1.75  0.25  0.25  2.75  0.00  
Peak/(trough) at (1)
1.75  0.25  0.25  3.00  (0.50) 
Upside 2Upside 1Base CaseDownside 1Downside 2
2019%%%%%
House price growth5-year average increase/decrease4.90 3.70 1.60 (1.20)(9.30)
Peak/(trough) at (1)
8.10 5.80 2.00 (2.80)(13.50)
GDP5-year average increase/decrease2.40 2.00 1.60 0.70 0.20 
Cumulative growth/(fall) to peak/(trough) (2)
1.50 1.00 0.70 (1.10)(5.60)
Unemployment rate5-year end period1.90 2.70 4.00 5.60 7.40 
Peak/(trough) at (1)
1.88 2.73 4.10 5.64 7.84 
Bank of England bank rate5-year end period2.00 2.00 0.75 2.00 2.25 
Peak/(trough) at (1)
2.00 2.00 0.75 2.00 3.00 
(1)For GDP and house price growth it is the peak to trough change over the 5 year period; for the unemployment rate it is the peak; and for Bank Rate it is the peak or trough.
(2)This is the cumulative growth for the 5 year period.
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Annual Report 2020 | Risk review
The historical and forecast growth rates for the GDP assumptions we use for scenario modelling
The evolutions of the historical and forecast growth rates for the GDP assumptions we used for scenario modelling at 31 December 2020 and 31 December 2019 were:
GDP assumptions applied at 31 December 2020
san-20201231_g27.jpg
GDP assumptions applied at 31 December 2019
san-20201231_g28.jpg
Our forecasting period for GDP is five years and then we revert to the average trend growth over three years based on the OBR’s long-run GDP forecast.
For GDP assumptions applied at 31 December 2020, in the Downside 2 and Downside 3 scenarios the economy reaches a cyclical low in Q1 2021 and Q2 2021 respectively, after which GDP increases. In all scenarios, we assume that GDP will have reverted to the OBR’s long-run forecast rate after Q4 2028. The reversion to mean for all macroeconomic variables is expected to take three years after the initial five-year forecast period.

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Scenario weights
Given the change in scenarios for Q4 2020, we undertook a full review of the probability weights applied to the scenarios. The setting of probability weights needs to consider both the probability of the forecast economic scenarios occurring whilst ensuring that the scenarios capture the non-linear distribution of losses across a reasonable range. To support the initial assessment of how likely a scenario is to occur, we would typically undertake a Monte Carlo analysis which would ascertain the likelihood of a five-year average GDP forecast growth rate occurring based on the long run historically observed average. Creating a standard distribution bell curve around this long run average allows us to estimate the probability of a given GDP scenario occurring and therefore assign a probability weight to that scenario. However, a key challenge with this approach in a stressed environment is that the extreme GDP forecasts for the downside scenarios all fall in the last percentile which results in all of the new downside scenarios attracting very low probability weights.
Given this issue, we performed a similar analysis on a more limited time period relating to the global financial crisis in 2007-2012, as this reflected better the current UK outlook. In this case, the base case 5 year compound annual growth rate (CAGR) sat in the middle of the distribution, which is what is expected to occur. It also showed a ranking in terms of the weights to apply to the additional downside scenarios, and was able to show that the Downside 2 scenario should have a higher weight than Downside 3.
However, we also need to consider the UK economic and political environment when applying weights. The scenarios were developed in Q4 2020 and within this period there was considerable change, particularly relating to where UK regions sat within the tiers. For example, London moved through 4 different stages within a two week period. With the circumstances changing again in January 2021, although the Monte Carlo analysis would suggest keeping the weights from Q3 2020 and provides a useful starting point, it was clear that the move to a third lockdown in Q1 2021 would result in greater downside risks than would have been reflected by using the Q3 2020 weights. Therefore the weights were updated to reflect these further changes to the balance of risks moving forward. For the Q4 2020 weights, 5% was removed from both Upside 1 and the base case and put onto Downside 2 and Downside 3. The reason for moving weight to both Downside 2 and Downside 3 is that Downside 3 incorporates a double dip recession, which is now considered more likely given the second lockdown in November 2020 and now a third in January 2021, although it is noted that this is still a very severe scenario and not a replacement for a base case. In terms of Downside 2, the longer restrictions remain in place, the greater the risk of longer-term effects which are reflected in this scenario.

The scenario weights we applied for 2020 and 2019 were:
Upside 1Base caseDownside 1Downside 2Downside 3
Scenario weights % % % % %
20205 45 15 25 10 
Upside 2Upside 1Base CaseDownside 1Downside 2
Scenario weights%%%%%
201910 40 30 15 

ii) For our CIB portfolios

Our forecasting approach
The scenario we applied for CIB is an overlay calculation which is used for the overlay in provisions estimation, due to Covid-19. This is the same methodology as adopted since Q2 2020. The Long Run scenario is based on a long run view (rather than point in time) and is prepared in the context of a long-term stable outlook where the structural deterioration is materialized to quantify the overlay to account for the macroeconomic worsening. This is to avoid excessive volatility and considered appropriate due to the size of the portfolio. No weights are applied.
Key changes to our forecasting approach in 2020
The approach taken in 2020 is different to that of 2019. In 2019 the approach was to forecast global growth rates for three different scenarios (Base case, Upside and Downside) and apply weights to those. These were then used across Banco Santander to ensure consistent treatment of these large and/or international counterparties across the Banco Santander group.
Scenario weights
The scenario weights we applied to the scenarios for our CIB portfolio for 2020 and 2019 were:
UpsideBase caseDownside
Scenario weights % % %
2020N/AN/AN/A
201930 40 30 
As noted above, no scenario weights were applied to our CIB portfolio for 2020 as it is a single scenario based on a long-run view, rather than a point in time.

Our macroeconomic assumptions and their evolution throughout the forecast period
Our macroeconomic assumptions and their evolution throughout the forecast period for our CIB portfolio for 2020 and 2019 were:
GDP assumption %
2020
Long Run global growth scenario (1)
1.3 
UpsideBase caseDownside
GDP assumption%%%
20195 year average increase/decrease3.7  3.5  3.0  
Cumulative growth/(fall) to peak/(trough)(2)
0.3  0.5  (1.2) 
(1)The Long Run scenario is the average annual global growth rate over the 5 year period 2020 to 2024.
(2)The Cumulative growth/(fall) refers to the cumulative change from the last historical data point for GDP growth to the peak (for Upside scenarios) or to the trough (for Downside scenarios).
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Annual Report 2020 | Risk review
Sensitivity of ECL allowance
At 31 December 2020, the probability-weighted ECL allowance totalled £1,377m (2019: £863m), of which £1,344m (2019: £813m) related to exposures in Retail Banking, Corporate & Commercial Banking and Corporate Centre, and £33m (2019: £50m) related to exposures in Corporate & Investment Banking. The ECL allowance is sensitive to the methods, assumptions and estimates underlying its calculation. For example, management could have applied different probability weights to the economic scenarios and, depending on the weights chosen, this could have a material effect on the ECL allowance. In addition, the ECL allowance for residential mortgages, in particular, is significantly affected by the HPI assumptions which determine the valuation of collateral used in the calculations.
Had management used different assumptions on probability weights and HPI, a larger or smaller ECL charge would have resulted that could have had a material impact on the Santander UK group’s reported ECL allowance and profit before tax. Sensitivities to these assumptions are set out below.

Scenario weights
The amounts shown in the tables below illustrate the ECL allowances that would have arisen had management applied a 100% weighting to each economic scenario. The allowances were calculated using a stage allocation appropriate to each economic scenario presented and differs from the probability-weighted stage allocation used to determine the ECL allowance shown above. For exposures subject to individual assessment, the distribution of ECL which could reasonably be expected has also been considered, assuming no change in the number of cases subject to individual assessment, and within the context of a potential best to worst case outcome.
As described above, our CIB segment uses a single forward-looking economic scenario for 2020 (2019: three scenarios). However, the three scenarios are still used within the model, with a PMA held to increase provisions up to the level required in the single scenario. In order to present a consolidated view in a single table and show variation from the forward-looking component, the three scenarios are presented in the table with the overlay value added to each scenario. As all other segments use five scenarios (2019: five scenarios), interpolation is also required. Data from the CIB Upside scenario is presented in the Upside 1 Column, the Downside scenario is in the Downside 3 column, the Base Case is in the Base Case column and values in Downside 1 and Downside 2 are interpolated from the Base Case and Downside scenarios. At 31 December 2019, the data for CIB in the table below presents the CIB Upside scenario in the Upside 2 column, the CIB Downside scenario in the Downside 2 column, and interpolated data for CIB in the Upside 1 and Downside 1 columns.
WeightedUpside 1Base caseDownside 1Downside 2Downside 3
2020£m£m£m£m£m£m
Exposure322,745 322,745 322,745 322,745 322,745 322,745 
Retail Banking210,251 210,251 210,251 210,251 210,251 210,251 
of which mortgages
180,006 180,006 180,006 180,006 180,006 180,006 
CCB24,503 24,503 24,503 24,503 24,503 24,503 
CIB11,646 11,646 11,646 11,646 11,646 11,646 
Corporate Centre76,345 76,345 76,345 76,345 76,345 76,345 
ECL1,377 1,129 1,222 1,300 1,613 1,802 
Retail Banking706 610 587 660 850 863 
of which mortgages
280 212 207 253 389 415 
CCB603 485 575 567 671 824 
CIB33 5 26 40 53 66 
Corporate Centre35 29 34 33 39 49 
%%%%%%
Proportion of assets in Stage 25.3 4.6 4.7 4.6 6.6 6.8 
Retail Banking5.4 4.6 4.6 4.7 7.2 7.0 
of which mortgages
5.7 4.8 4.9 4.9 7.7 7.5 
CCB22.4 20.1 20.8 20.2 24.5 28.6 
CIB1.7 1.7 1.7 1.7 1.7 1.7 
Corporate Centre0 0 0 0 0 0 
WeightedUpside 2Upside 1Base CaseDownside 1Downside 2
2019£m£m£m£m£m£m
Exposure310,155 310,155 310,155 310,155 310,155 310,155 
Retail Banking204,780 204,780 204,780 204,780 204,780 204,780 
of which mortgages
178,788 178,788 178,788 178,788 178,788 178,788 
CCB24,118 24,118 24,118 24,118 24,118 24,118 
CIB13,384 13,384 13,384 13,384 13,384 13,384 
Corporate Centre67,873 67,873 67,873 67,873 67,873 67,873 
ECL863 640 680 726 855 1,542 
Retail Banking549 425 433 448 525 1,084 
of which mortgages
218 122 127 137 196 660 
CCB262 195 212 229 275 398 
CIB50 19 34 48 53 58 
Corporate Centre
%%%%%%
Proportion of assets in Stage 23.82.82.82.83.26.8
Retail Banking4.53.23.33.33.78.3
of which mortgages
4.63.13.13.13.68.7
CCB8.77.47.47.48.516.3
CIB1.51.51.51.51.51.5
Corporate Centre0.10.10.10.10.10.3

Changes to Stage 3 instruments are part of the sensitivity analysis but excluded from the disclosure because their values do not move due to changes in macroeconomic assumptions, i.e. they are either in or not in default at the reporting date.
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We have incorporated our post model adjustments into the sensitivity analysis.
HPI
Given the relative size of our residential mortgage portfolio, management considers that changes in HPI assumptions underpinning the calculation of the ECL allowance for residential mortgages of £280m at 31 December 2020 (2019: £218m) would have the most significant impact on the ECL allowance. The table below shows the impact on profit before tax of applying an immediate and permanent house price increase / decrease to our unweighted base case economic scenario, and assumes no changes to the staging allocation of exposures. In 2019, we applied 40% weighting to the base case economic scenario, therefore a change in the basis of preparation in 2020. 2019 numbers have been restated.
Increase/decrease in house prices
+20%+10%-10%-20%
Increase/(decrease) in profit before tax£m£m£m£m
202063 38 (66)(183)
201941 25 (39)(105)

2020 compared to 2019
In response to the Covid-19 pandemic the economic forecasts were downgraded, with the Base Case becoming significantly worse, and the Upside 2 scenario being replaced with a specific Covid-19 'W' shaped severe downside, increasing ECLs and Stage 2 balances across the scenarios. Further increases have come from management actions taken outside the scenarios, which moved the most impacted cases to Stage 2, further increasing losses. ECLs in the Covid- 19 'W' scenario are tempered by low Base Rate, keeping repayments low and allowing mortgage customers to more easily refinance.
In 2020, Stage 2 exposures increased as although arrears balances have reduced, management took actions in response to the Covid-19 pandemic, namely downgrading the economic scenarios and weights which increased PDs across the business causing more accounts to breach the SICR triggers to enter Stage 2, moving riskier balances of £0.8bn to which payment holidays were offered to from Stage 1 to Stage 2 and moving £3.1bn corporate loans most impacted by Covid-19 from Stage 1 to Stage 2. The increase in ECL balances reflected these actions.

Significant Increase in Credit Risk (SICR) (audited)
Loans which have suffered a SICR since origination are subject to a lifetime ECL assessment which extends to a maximum of the contractual term of the loan, or the behavioural term for a revolving facility. Loans which have not experienced a SICR are subject to 12 month ECL. We assess the credit risk profile of each facility to determine which of three stages to allocate them to:
Stage 1: when there has been no SICR since initial recognition. We apply a loss allowance equal to a 12 month ECL i.e. the proportion of lifetime expected losses that relate to that default event expected in the next 12 months
Stage 2: when there has been a SICR since initial recognition, but no credit impairment has materialised. We apply a loss allowance equal to the lifetime ECL i.e. lifetime expected loss resulting from all possible defaults throughout the residual life of a facility
Stage 3: when the exposure is considered credit impaired. We apply a loss allowance equal to the lifetime ECL. Objective evidence of credit impairment is required. For more, see the section ‘Definition of default (Credit impaired)’ that follows.

We use a range of quantitative, qualitative and backstop criteria to identify exposures that have experienced a SICR. The Credit Risk Provisions Forum (CRPF) reviews and approves our SICR thresholds periodically. The Board Audit Committee reviews and challenges the appropriateness of them each year, or more often if we change them.
Quantitative criteria
We use quantitative criteria to identify where an exposure has increased in credit risk. The criteria we apply are based on whether any increase in the lifetime PD since the recognition date exceeds a set threshold both in relative and absolute terms. We base the value anticipated from the initial recognition on a similar set of assumptions and data to the ones we used at the reporting date, adjusted to reflect the account surviving to that date. The comparison uses either an annualised lifetime PD, where the lifetime PD is divided by the forecast period, or the absolute change in lifetime PD since initial recognition. For each portfolio, the quantitative criteria we used for 2020 were:
Retail Banking (1)
Consumer (auto) finance(2)
Other unsecuredCorporate & Commercial BankingCorporate & Investment Banking
MortgagesPersonal loansCredit cardsOverdrafts
30bps300bps30bps340bps260bps30bpsInternal rating method
(1)In Business banking, for larger customers we apply the same criteria that we use for Corporate & Commercial Banking.
(2)Consumer (auto) finance use the comparison of lifetime PDs to determine Stage allocation, unlike other products which first turn the lifetime PD into an average yearly PD (annualised) and then do the comparison.
The criteria above are absolute (rather than relative) increases in lifetime PD since initial recognition. These are all absolute values.
We also applied a relative threshold of 100% (doubling the PD) across all portfolios except CIB.
In 2020, there were no changes to the way that we measure SICR. The granting of a payment holiday on its own was not considered to be a SICR event.
Qualitative criteria
We also use qualitative criteria to identify where an exposure has increased in credit risk, independent of any changes in PD. For each portfolio, the criteria we used for 2020 and 2019 were:
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Annual Report 2020 | Risk review
Retail Banking(1)
MortgagesConsumer (auto) financeOther unsecuredCorporate & Commercial BankingCorporate & Investment Banking
Personal loansCredit cardsOverdrafts
- In forbearance
- Default in last 24m

- >30 Days past due (DPD) in last 12m

- Bankrupt

- £100+ arrears
- In forbearance
- Deceased or Insolvent
- Court ‘Return of goods’ order or Police watchlist
- Agreement terminated
- Payment holiday
- Cash Collection
- In Collections
- Default in last 12m






- £50+ arrears
- In forbearance
- Default in last 12m

- In Collections




- £100+ arrears
- Fees suspended
- Default in last 12m

- Debit dormant >35 days



- Any excess in month
- In forbearance
- Default in last 12m

- Watchlist: proactive management

- Default at proxy origination



- Watchlist: proactive management
(1)    In Business Banking, for larger customers we apply the same criteria that we use for Corporate & Commercial Banking.
In addition, due to Covid-19 we introduced temporary Post Model Adjustments (PMAs) to Stage allocation based on collective assessments of portfolios in Retail Banking and client level in corporate lending (Corporate & Commercial Banking and Corporate & Investment Banking segments) based on sector and client credit quality. See the section 'Post Model Adjustments (PMAs)' below for more on this.
Backstop criteria
As a backstop, we classify all exposures more than 30 or 90 DPD in at least Stage 2 or in Stage 3, respectively. This means that we do not rebut the backstop presumptions in IFRS 9 (i.e. credit risk has significantly increased if contractual payments are more than 30 DPD) relating to either a SICR or default.
Improvement in credit risk or cure
In some cases, instruments with a lifetime ECL (in Stage 2 or 3) may be transferred back to 12 month ECL (Stage 1). Financial assets in Stage 3 can only be transferred to Stage 2 or Stage 1 when they are no longer considered to be credit impaired, as defined below. Financial assets in Stage 2 can only be transferred to Stage 1 when they are no longer considered to have experienced a SICR. Where we identified a SICR using quantitative criteria, the instruments automatically transfer back to Stage 1 when the original PD-based transfer criteria are no longer met. Where we identified a SICR using qualitative criteria, the issues that led to the transfer must be cured before the instruments can be reclassified to Stage 1. For a loan in forbearance to cure, it must meet the exit conditions set out in the earlier section ‘Forbearance’.
Definition of default (Credit impaired) (audited)
We define a financial instrument as in default (i.e. credit impaired) for purposes of calculating ECL if it is more than three months past due, or if we have data to make us doubt the customer can keep up with their payments i.e. they are unlikely to pay. The data we have on customers varies across our business segments. It typically includes where:
Retail Banking
They have been reported bankrupt or insolvent. This excludes accounts which are up to date and are not defaulted.
Their loan term has ended, but they still owe us money more than three months later
They have had forbearance while in default, but have not caught up with the payments they had missed before that, or they have had multiple forbearance
We have suspended their fees and interest because they are in financial difficulties
We have repossessed the property.
Other business segments: Corporate & Commercial Banking, Corporate & Investment Banking and Corporate Centre
They have had a winding up notice issued, or something happens that is likely to trigger insolvency – such as another lender calls in a loan
Something happens that makes them less likely to be able to pay us – such as they lose an important client or contract
They have regularly missed or delayed payments, even though they have not gone over the three-month limit for default
Their loan is unlikely to be refinanced or repaid in full on maturity
Their loan has an excessive LTV that is unlikely to be resolved, such as by a change in planning policy, pay-downs, or increase in market value.
Where we use the advanced internal ratings-based basis for a portfolio in our capital calculations, we use the same default definitions for ECL purposes. The CRPF reviews and approves the definition of default at least annually. The Board Audit Committee reviews and challenges the appropriateness of the definition each year, or more often if we change it.
During 2020, we offered customers the option to take a payment holiday for up to 6 months where the customer had self certified they had been financially impacted by Covid-19. The granting of a payment holiday on its own was not considered to a Significant Increase in Credit Risk, nor was it considered to be a default under regulatory definitions. Customers requiring further longer term financial support after the 6 month period, such as term extension or interest-only conversion, would be treated in accordance with our normal SICR and default definitions.
Measuring ECL (audited)
For accounts not in default at the reporting date, we estimate a monthly ECL for each exposure and for each month over the forecast period. The lifetime ECL is the sum of the monthly ECLs over the forecast period, while the 12-month ECL is limited to the first 12 months. We calculate each monthly ECL as the discounted value for the relevant forecast month of the product of the following factors:
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FactorDescription
Survival rate (SR)The probability that the exposure has not closed or defaulted since the reporting date.
PDThe likelihood of a borrower defaulting in the following month, assuming it has not closed or defaulted since the reporting date. For each month in the forecast period, we estimate the monthly PD from a range of factors. These include the current risk grade for the exposure, which becomes less relevant further into the forecast period, as well as the expected evolution of the account risk with maturity and factors for changing economics. We support this with historical data analysis.
EADThe amount we expect to be owed if a default event was to occur. We determine EAD for each month of the forecast period by the expected payment profile, which varies by product type. For amortising products, we base it on the borrower’s contractual repayments over the forecast period. We adjust this for any expected overpayments on Stage 1 accounts that the borrower may make and for any arrears we expect if the account was to default. For revolving products, or amortising products with an off-balance sheet element, we determine EAD using the balance at default and the contractual exposure limit. We vary these assumptions by product type and base them on analysis of recent default data.
LGDOur expected loss if a default event were to occur. We express it as a percentage and calculate it based on factors that we have observed to affect the likelihood and/or value of any subsequent write-offs, which vary according to whether the product is secured or unsecured. If the product is secured, we take into account collateral values as well as the historical discounts to market/book values due to forced sales type.
We use the original effective interest rate as the discount rate. For accounts in default, we use the EAD as the reporting date balance. We also calculate an LGD to reflect the default status of the account, considering the current DPD and loan to value. PD and SR are not required for accounts in default.
Forecast period
We base the forecast period for amortising facilities on the remaining contract term. For revolving facilities, we use an analytical approach based on the behavioural, rather than contractual, characteristics of the facility type. In some cases, we shorten the period to simplify the calculation. If we do this, we apply a post model adjustment to reflect our view of the full lifetime ECL.
Forward-looking information
Our assessments of a SICR and the calculation of ECL both incorporate forward-looking data. We perform historical analysis and identify the key economic variables that impact credit risk and ECL for each portfolio. These can include the house price growth, GDP, unemployment rate and Bank of England bank rate. Where applicable, we incorporate these economic variables and their associated impacts into our models.
Economic forecasts have the most impact on the measurement of ECL for residential mortgages and, to a lesser extent, corporate loans. This is due to the long behavioural lives and large sizes of these portfolios. Economic forecasts have less impact on the measurement of ECL for our other portfolios. This is due to the shorter behavioural lives and smaller sizes of these portfolios.
Grouping of instruments for losses measured on a collective basis
We measure ECL at the individual financial instrument level. However, where we have used internal capital or similar models as the basis for our ECL models, this typically results in a large number of relatively small homogenous groups. We typically group instruments where they share risk characteristics using one or more statistical models and assess them for impairment collectively.
We use this approach for:
all our Retail Banking portfolios (as described in Retail Banking – credit risk management)
SME customers in Corporate & Commercial Banking
Legacy Portfolios in run-off in Corporate Centre.
We calculate separate collective provisions for instruments in Stages 1, 2 and 3 where the instrument is not individually assessed.
As described above, for our CIB portfolios (whether we assess them for impairment individually or collectively) we used one forward-looking economic scenario for forecasting in 2020 (2019: three scenarios). For all our other portfolios (whether we assess them for impairment individually or collectively) we use five forward-looking economic scenarios.

Management judgement applied in calculating ECL (audited)
IFRS 9 recognises that expert management judgement is an essential part of calculating ECL. Specifically, where the historical data that we use in our models does not reflect current or future expected conditions, or the data we have does not cover a sufficient period or is not robust enough. We consider the significant management judgements in calculating ECL to be:
Definition of default: We define a financial instrument as in default (i.e. credit impaired) for purposes of calculating ECL if it is more than three months past due, or if we have data to make us doubt they can keep up with their payments. The data we have on customers varies across our business segments..
Forward-looking multiple economic scenarios: We use five scenarios, consisting of a central base case, one upside scenario and three downside scenarios except for our CIB portfolio, where we used one scenario in 2020 (2019: three scenarios). This symmetry meets the ‘unbiased’ requirement and we consider these scenarios sufficient to account for any non-linear relationships.
Probability weights: In determining the initial scenario probability weights, we assign the highest probability to the base case, whilst the outer scenarios typically attract lower probabilities than the more moderate ones.
SICR thresholds: We use a combination of quantitative (both absolute and relative), qualitative and backstop criteria to identify exposures that we consider have shown a SICR since initial recognition.
Post Model Adjustments: These relate to adjustments which we need to account for identified model limitations – such as those that have arisen due to challenges in obtaining historical data. We expect these to gradually be incorporated into the underlying models as we build up more comparative data over future reporting periods.
Internal credit risk rating for corporate borrowers: We assign each corporate borrower an internal credit rating based on our internal rating scale. To do this, we look at the customer’s financial history and trends in the economy including reflecting the impacts of the Covid-19 pandemic – backed up by the expert judgement of a risk analyst. We review our internal ratings on a dynamic basis and at least once a year. The internal risk rating is used to determine the Probability of Default for a client.
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Individually assessed corporate Stage 3 exposures: We assess the ECL requirement for large single name corporate exposures on an individual basis when they meet our definition of default and are transferred into Stage 3. This assessment takes into consideration the latest specific information about the counterparty to determine a probability weighted ECL based on a best, worst and mid case outcome.

Probability weights
We made significant adjustments to our economic assumptions and scenario weightings during 2020 to reflect the emerging impact of the Covid-19 pandemic. Our five economic scenarios have been updated for Q4 2020 and weighted further to the downside, to reflect the expected longer path to recovery for the UK. The 2020 impact was an ECL charge of £164m. Had management applied Q3 2020 weights to the scenarios (Upside 1: 10%; Base case: 50%; Downside 1: 15%; Downside 2 :20%; Downside 3: 5%), the ECL would decrease by £34m to £130m.

Individually assessed corporate Stage 3 exposures
Management judgements are applied in assessing ECL provisions on individually assessed corporate loans. For those loans that were in default (i.e. Stage 3), the ECL was £157m at 31 December 2020. Had management assumed the best or worst outcome in terms of loss estimates, the ECL could have been within a range of £78m to £220m.

Post Model Adjustments (PMAs)
We use a range of methods to identify whether we need a PMA. These include regular review of model monitoring tools, period-to-period movement and trend analysis, comparison against forecasts, and input from expert teams who monitor and manage key portfolio risks. We only recognise a PMA if the ECL is over £1m. We keep PMAs in place until we no longer need them. This will typically be when they are built into our core credit model or the conditions that impacted the historical data no longer exist.
The Risk Provisions & Forecasting team calculates PMAs to ensure they are incremental to the core credit model and to ensure the calculation is performed in a consistent and controlled manner. We apply standard end-user computing controls to material and long-standing PMAs i.e. those expected to be in place for more than six months. Our Independent Validations Team may also review significant PMAs at their discretion. The CRPF approves all new PMAs. It delegates authority to approve temporary PMAs not expected to last beyond a quarter-end to the CFO. The Consolidated Reporting team reviews all new PMAs to ensure they comply with IFRS 9. We record all PMAs on a central log maintained by the Consolidated Reporting team which documents the justification, IFRS 9 compliance assessment, expected life, recalibration frequency, calculation methodology and value of each PMA. The CRPF reviews and approves the log each quarter.
The CRPF reviews and approves changes in all key management judgements at least each quarter. The Board Audit Committee reviews and challenges the appropriateness of changes in all key management judgements at least each quarter. The creation of new PMAs is a joint responsibility between the Risk Provisions & Forecasting team, as model owners who may identify issues with the historical data, and the Consolidated Reporting team who may identify changes in portfolio or credit quality performance.

The most significant PMAs that we applied at 31 December 2020 and 31 December 2019 were:
20202019
PMAs£m£m
Interest-only maturity default risk(1)
49 51 
Buy-to-Let24 21 
Long-term indeterminate arrears(1)
29 19 
12+ months in arrears(1)
30 23 
Corporate Covid-19 affected segments193 
Payment Holidays27 
Corporate single large exposure35 
(1)In model adjustment

Interest-only maturity default risk: When an interest-only mortgage reaches contractual maturity and the capital payment becomes due, there is a risk that the customer won’t be able to repay the full capital balance. Our model estimates the likelihood of a customer missing a monthly payment, rather than the capital repayment. We hold an incremental provision to address the risk of default on capital repayments on maturity ultimately leading to write-off. We calculate it using a Judgement Model which uses historically observed experience and expert judgement to determine the proportion of customers who won’t be able to repay. Over time, as we continue to enhance our model, we expect the need for this PMA will diminish. This PMA increased our ECL by £49m. Had management applied different judgements to the expected proportion of customers who will not be able to repay at maturity, the PMA could have been within a range of £24m to £56m.
Buy-to-Let (BTL): Historical data shows that the risk of default on a BTL mortgage is higher than on a residential mortgage, particularly in a downturn. However, our IFRS 9 models have been calibrated over a period of favourable and relatively benign economic conditions during which our BTL mortgage portfolio has continued to grow with limited loss events. To avoid underestimating ECL in an economic downturn, we adjust the loss allowance for our BTL accounts to increase the ECL. We use market data from the last economic crisis to estimate the adjustment. Over time, as our historical data grows and covers a wider range of economic conditions, we expect the need for this PMA will diminish. This PMA increased our ECL by £24m.
Long-term indeterminate arrears: To mitigate the risk of model underestimation, we fully provide for accounts in arrears which have neither repaid (cured) or been written-off after a period of 2 years for unsecured portfolios or 5 years for secured portfolios. For our secured portfolios, we use expected security valuations at the point of repossession to estimate the adjustment. At 31 December 2020 and 31 December 2019 , we only needed to make an adjustment for mortgages. As a result of regulatory suspension of repossession in response to the Covid-19 pandemic, management has assumed up to a 2 year delay in repossessions when calculating the ECL uplift for this PMA. This is to make sure LTVs are appropriately stressed by the economic scenarios. Over the medium term, as we continue to address long term arrears in the portfolio, we expect the need for this PMA will diminish. This PMA increased our ECL by £29m. Had management assumed no delay in repossessions or a 3 year delay, the PMA could have been within a range of £18m to £31m.
12+ months in arrears: To mitigate the risk of underestimating ECL, mortgage accounts which are more than 12 months past due are fully provided for after deducting a historically observed self-cure rate. As a result of regulatory suspension of repossession in response to the Covid-19 pandemic, management has assumed up to a 2 year delay in repossessions when calculating the ECL uplift for this PMA. This is to make sure LTVs are appropriately stressed by the economic scenarios. Over the medium term, as we continue to address long term arrears in the portfolio, we expect the need for this PMA will diminish. This PMA increased our ECL by £30m. Had management assumed no delay in repossessions or a 3 year delay, the PMA could have been within a range of £19m to £35m.
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Corporate Covid-19 affected segments: In 2020, following internal sector and counterparty assessments, we transferred loans for some corporate and SME sectors and clients who have been severely impacted because of Covid-19 from Stage 1 into Stage 2. This includes exposures in a sector where trading has been highly impacted by Covid-19 including Hotels, Hospitality, Retail, Leisure and Care Homes sectors, and where the client has been assessed as most likely to require financial support based on their current financial circumstances. In addition, we have transferred some Stage 2 corporate and SME loans to Stage 3 based on a similar analysis of sector and client credit quality taking into consideration any concessions given to clients since the start of the pandemic as an indicator of those loans most likely to meet our default definition. We use our models to calculate the incremental ECL required from transferring loans between stages and apply stress factors to the client PD ratings based on our historical experience. Over the medium term, as our actual data on the performance of these customers grows, we expect the need for this PMA will diminish. This PMA increased our ECL by £193m, of which £70m relates to £3.1bn of exposures transferred from Stage 1 to Stage 2 and £123m relates to £0.4bn of Stage 2 exposures transferred to Stage 3. Had management assumed the lowest observed PD stress factors to all Stage 1 to Stage 2 transferred loans or transferred none of the Stage 2 exposures in highly impacted sectors to Stage 3, the PMA would reduce to £35m. Had management assumed the highest observed PD stress factor to all Stage 1 to Stage 2 transferred loans and transferred all £0.7bn high risk Stage 2 exposures in highly impacted sectors to Stage 3, the PMA would increase to £311m.
Payment holidays: In 2020, we transferred a proportion of Stage 1 loans into Stage 2 where our discussions with retail customers on a Covid-19 payment holiday established they are in longer-term financial difficulties. This was done on a collective basis through a customer contact exercise and customer data profiling. Based on this assessment, we calculate the incremental ECL required by using the average Stage 2 coverage ratio of similar Stage 2 loans. Over the medium term, as our actual data on the performance of these customers grows, we expect the need for this PMA will diminish. This PMA increased our ECL by £27m. Had management assumed a higher or lower new to arrears flow rates, the PMA could have been within a range of £11m to £65m.
Corporate single large exposure: In 2020, to mitigate against the risk of a single large corporate exposure with an ECL requirement of greater than £10m defaulting, which has not been covered by the existing model estimate or the corporate and SME PMA above, we applied a PMA for the risk of a company which unexpectedly defaults. This PMA has been calculated based on incurring three average historically observed single name large losses across our Corporate & Commercial and Corporate & Investment Banking business segments. We will continue to assess this risk over the medium term based on actual experience and we will refine the estimate based on changes in our portfolio credit quality and loan size mix. This PMA increased our ECL by £35m assuming three average losses are incurred or would reduce to £23m assuming only two average losses were incurred.
Governance around ECL impairment allowances (audited)
Our Risk Methodology team developed our ECL impairment models (except for the external models we use, such as OGEM which we described earlier in ‘Our forecasting approach’), and our Independent Validations Team independently reviews all material models. As model owners, our Risk Provisioning & Forecasting team run the models to calculate our ECL impairment allowances each month. The models are sensitive to changes in credit conditions and reflect various management judgements that give rise to measurement uncertainty in our reportable ECL as set out above. The following committees and forums review the provision drivers and ensure that the management judgements we apply remain appropriate:
Model Risk Control Forum (MRCF) reviews and approves new models and required model changes. It also reviews the use of OGEM as a reliable model on which to base our other forecast macroeconomic variables. It is used across all stress testing and planning so it is subject to model risk criteria. MRCF will delegate responsibility of approvals to Model Risk Management Forum (MRMF) for changes of low risk materiality or less complex changes.
ALCO reviews and approves the base case used in the economic scenarios we use to calculate forward-looking scenarios.
CRPF reviews and approves the economic scenarios and probability weights we use to calculate forward-looking scenarios. It also reviews management judgements and approves ECL impairment allowances.
Board Audit Committee reviews and challenges the appropriateness of the estimates and judgements made by management.
For more on the governance around specific elements of the ECL impairment allowances, including the frequency of, and thresholds for, reviews, including by these committees and forums, see the detailed sections above.
How we assess the performance of our ECL estimation process
We assess the reasonableness of our ECL provisions and the results of our Staging analysis using a range of methods. These include:
Benchmarking: