1.

Membership

2.

Quorum

3.

Frequency of Meetings

4.

Responsibilities

5.

Reporting

In discharging its responsibilities, the Committee will also have due regard to the directors' duties codified in the Companies Act 2006.

Constitution

1.

The Group Board has established a sub-committee of the Board to be known as the Group Audit Committee to report to the Board and to support the Board’s Corporate Governance responsibilities.

Membership

2.

The Group Audit Committee shall comprise no less than three independent non-executive directors of the Board with at least one having recent and relevant financial experience. A quorum shall be two members.

3.

The Chairman of the Committee shall be appointed by the Board from amongst the independent members.

4.

The Secretary of the Committee shall be the Head of Group Internal Audit.

Attendance at Meetings

5.

The Group Chief Executive, and other Executive Directors, Director of Group Risk, Director of Accounting & Taxation, Group Secretary, Head of Group Internal Audit, Head of Group Compliance and a representative of the External Auditors shall normally be invited to attend meetings. Other Group Board members are also invited to all meetings. All such attendees shall have the right to speak but not vote at meetings.

Conduct of Meetings

6.

Group Board Standing Orders shall apply to the conduct of meetings, as appropriate.

7

The Committee shall hold separate discussions at least once a year with the External Auditors and with the Internal Auditors without executives present.

Evaluation

8.

The Committee shall undertake a formal and rigorous annual evaluation of its own performance for review by the Group Board.

Frequency of Meetings

9.

Meetings shall be held not less than four times a year. The External Auditors may request a meeting if they consider that one is necessary. Additionally, the Head of Group Internal Audit has the right of access to the Chairman of the Committee, who may convene a special meeting of the Group Audit Committee, if in his/her judgement an issue arises that cannot wait until the next regularly scheduled meeting.

Authority

10.

The Committee approves on behalf of the Group Board arrangements in respect of Internal Audit and Compliance and monitors the operation of the internal control framework.

11.

The Committee is authorised by the Group Board to investigate any activity within its terms of reference. It is authorised to seek any information it requires from any employee and all employees are directed to co-operate with any request made by the Committee. The Committee will advise the Group Chief Executive if it has exercised this authority to seek information (other than routine information) from any employee, setting out the information required and the circumstances underlying the request.

12.

The Committee is authorised by the Group Board, if considered necessary, to secure the attendance of outsiders with relevant experience and expertise provided that the Committee shall notify the Group Chief Executive before any fees for such attendance are agreed.

Duties

13.

The duties of the Committee shall be as set out in the annexed schedule to these Terms of Reference.

14.

The Committee’s duties and activities during the year shall be disclosed in the annual financial statements.

15.

The Chairman of the Committee shall attend the AGM and shall answer questions, through the Chairman of the Board, on the Audit Committee’s responsibilities and activities.

Communications

16.

The Secretary of the Committee will normally circulate the agenda and papers for meetings at least five days before the meeting.

17.

Draft minutes of the Committee, approved by the Chairman of the Committee, shall be submitted to the Group Board.

18.

The Chairman will provide a report on the activities of the Committee to be considered by the Group Board following each meeting of the Committee.

19.

The Committee’s Terms of Reference will be made available on the Company’s website. They will be reviewed and, where necessary, updated annually.

1 Internal Control

To undertake the following, making recommendations to the Group Board as appropriate:

1.1

Regular reviews of the operation of internal controls within the Group, considering:

1.1.1

Reports on the effectiveness of systems of control across all significant areas of the Group.

1.1.2

Reports on control issues (including breaches of key controls) of major significance to the Group.

1.2

An annual assessment of

1.2.1

The scope and quality of the system of internal control and the work of Internal Audit and other assurance providers.

1.2.2

The effectiveness of the Company’s public reporting processes.

1.3

A review of recommendations to this Committee from the Group Risk Committee on internal controls and note the annual assessment of the effectiveness of internal control (including the Group Internal Control Policy process) and the review of major control issues carried out by the Group Risk Committee in accordance with paragraph 2.1 of its Terms of Reference.

2 Internal Audit and Compliance

To consider and approve on behalf of the Group Board:

2.1

The annual plans of both the Group Internal Audit function and the Group Compliance function and their respective Terms of Reference.

2.2

Ongoing reports from the Head of Internal Audit and the Head of Group Compliance, covering at least the following matters:

2.2.1

Progress against the annual Internal Audit plan and the annual Compliance plan;

2.2.2

Departmental matters relating to the structure and organisation of the Internal Audit and Compliance departments;

2.2.3

Management ’s responsiveness to Internal Audit and Compliance findings and recommendations.

2.3

The resources allocated to the Group’s Internal Audit and Compliance functions, the qualifications of the staff and the training provided.

2.4

The appointment or removal from post of the Head of Group Internal Audit and the Head of Group Compliance (on the recommendation of the Group Chief Executive).

2.5

Changes affecting the status and reporting relationship of the Head of Internal Audit and the Head of Group Compliance, ensuring that the independence and objectivity of the functions is maintained.

To consider, making recommendations to the Group Board as appropriate;

2.6

In the event of the resignation of either the Head of Group Internal Audit or the Head of Group Compliance after receiving a report from the Group Chief Executive on the underlying circumstances.

2.7

The outcome of the appraisals of both the Head of Group Internal Audit and the Head of Group Compliance, to be reported by the Group Secretary.

3 External Audit

To consider and make recommendations to the Group Board as appropriate in respect of the following:

3.1

Appointment, re-appointment and removal of the External Auditors as well as any questions of resignation or dismissal.

3.2

The effectiveness of the audit process including an annual assessment of the qualification, expertise and resources of the External Auditors and a report on the External Auditors own internal quality control procedures.

3.3

The audit fee, having considered whether:

3.4

The engagement letter ensuring that it has been updated to reflect changes in circumstances arising since the previous year.

3.5

The External Auditors’ audit reports.

3.6

Reports from the External Auditors on any matters they wish to bring to the Committee’s attention and on any matters specifically requested by the Committee.

3.7

Policy and practice for ensuring the provision of non audit services by the External Auditors does not impair independence or objectivity.

3.8

An annual report from the External Auditors on their policies and processes for maintaining independence and monitoring compliance with UK ethical guidance including the rotation of audit partners and staff.

3.9

Management’s responsiveness to External Audit findings and recommendations.

3.10

A policy for the employment of former employees of the external auditor taking account of the relevant ethical guidelines governing the accounting profession.

4 Financial Statements

To consider and recommend to the Group Board for approval:

4.1

The Financial Statements and Directors’ Report of the Group, together with related information including the Financial Review and Business reviews, the Management representations, Summary Financial Statement, Stock Exchange Preliminary Results Announcement and the Corporate Governance Statement.

4.2

The accounting policies and practices of the Group, focusing particularly on;

4.2 1

Significant accounting policies and any changes to them

4.2.2

Loan loss provisions and other major judgmental areas

4.2.3

Departures from accounting standards

4.2.4

Methods used to account for significant or unusual transactions where the accounting treatment is open to different approaches

4.2.5

The clarity, completeness and context of disclosures in the financial statements

4.3

Other statements containing financial information for which Board approval is required, whenever practicable without being inconsistent with any requirement for prompt reporting under the listing rules.

5 Other Matters

5.1

To consider, approve, or make recommendations in respect of any other matters at the request of the Group Board.

5.2

To review arrangements by which staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters, and to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.

Constitution

1.

The Group Board has established a sub-committee of the Board to be known as the Group Risk Committee to report to the Board. The Group Risk Committee supports the Board’s Corporate Governance responsibilities in relation to risk management.

Membership

2.

The Group Risk Committee shall comprise no less than two independent non-Executive Directors with at least one having banking risk management experience, the Group Chief Executive and the Director of Group Risk. A quorum shall be two members, one of whom should be a non-executive director.

3.

The Chairman of the Committee shall be appointed by the Board from amongst the independent members.

4.

The Secretary of the Committee shall be a senior manager in Group Risk.

Attendance at Meetings

5.

The Group Finance Director, Managing Director Commercial Banking, Managing Director Retail Banking, Director of Credit & Risk Commercial Bank, Director of Credit & Risk Retail Bank, Director of Lending, Group Secretary, the Heads of Group Internal Audit and Group Compliance and the Group Money Laundering Reporting Officer shall normally be invited to attend meetings. Other Group Board members are also invited to all meetings. All such attendees shall have the right to speak but not vote at meetings.

Conduct of Meetings

6.

Group Board Standing Orders shall apply to the conduct of meetings, as appropriate.

7.

Meetings of the Group Risk Committee will be split into two sections with separate agendas covering:

1)

Credit, market, liquidity and funding risks.

2)

Business, operational, and pension fund risks and also capital adequacy issues.

8.

The non-executive director members of the Committee shall hold separate discussions at least once a year with the Director of Group Risk without executives present.

Evaluation

9.

The Committee shall undertake a formal and rigorous annual evaluation of its own performance for review by the Group Board.

Frequency of Meetings

10.

Meetings shall be held not less than four times a year. Additionally special meetings may be convened if an issue arises that cannot wait until the next regularly scheduled meeting.

Authority

11.

The Committee approves on behalf of the Group Board the Group’s risk management framework, other risk management policies and arrangements and internal control policies.

12.

The Committee is authorised by the Group Board to investigate any activity within its terms of reference. It is authorised to seek any information it requires from any employee and all employees are directed to co-operate with any request made by the Committee. The Committee will advise the Group Chief Executive if it has exercised this authority to seek information (other than routine information) from any employee, setting out the information required and the circumstances underlying the request.

13.

The Committee is authorised by the Group Board, if considered necessary, to secure the attendance of outsiders with relevant experience and expertise provided that the Committee shall notify the Group Chief Executive before any fees for such attendance are agreed.

Duties

14.

The duties of the Committee shall be as set out in the annexed schedule to these Terms of Reference.

15.

The Committee’s duties and activities during the year shall be disclosed in the annual financial statements.

16.

The Chairman of the Committee shall attend the AGM and shall answer questions, through the Chairman of the Board, on the Group Risk Committee’s responsibilities and activities.

Communications

17.

The Secretary of the Committee will normally circulate the agenda and papers for meetings at least five days before the meeting.

18.

Draft minutes of the Committee, approved by the Chairman of the Committee, shall be submitted to the Group Board.

19.

The Chairman will provide a report on the activities of the Committee to be considered by the Group Board following each meeting of the Committee.

20.

The Committee’s Terms of Reference will be made available on the Company’s website. They will be reviewed and, where necessary, updated annually.

1. Risk Management Framework

1.1

On behalf of the Group Board to consider and challenge the effectiveness of the Group’s Risk Management Framework including the Group Risk Function.

1.2

To consider and approve on behalf of the Group Board the Group’s Risk Management Framework and its key risk management policies.

1.3

To approve the Group’s statement of overall risk appetite.

1.4

To approve on an annual basis, the Group Risk Directorate terms of reference and its annual plan.

1.5

To review reports from Group Risk in respect of the status of key current and emerging risks and internal controls relating to those risks.

2. Internal Control

To undertake the following, making recommendations to the Group Board and/or the Group Audit Committee as appropriate:

2.1

Regular review of reports from Group Risk, and where appropriate Group Internal Audit, on risk and internal controls, considering:

2.1.1

The effectiveness of systems of internal control across the Group, including the Group Internal Control Policy (GICP) process.

2.1.2

Reports on major control issues and their impact on the Group’s risk profile.

2.2

An annual assessment of all significant risk issues considering:

2.2.1

Changes since the last annual assessment and the Company’s response.

2.2.2.

The scope and quality of management’s ongoing monitoring of risks and the system of internal control (including GICP).

2.2.3

The incidence of significant control failings in relation to all significant risks and their impact.

3. Business, Operational and Pension Fund Risks

On behalf of the Group Board to:

3.1

Determine the Group’s business, operational and pension fund risk appetite.

3.2

Consider and approve relevant risk policy statements.

3.3

Monitor compliance with risk policies.

3.4

Review the key activities of the Group Operational Risk Committee.

3.5

Consider and approve the Annual Report from the Money Laundering Reporting Officer.

3.6

Consider and note the Group’s corporate insurance arrangements.

4. Credit Risk

On behalf of the Group Board to:

4.1

Determine the Group’s credit risk appetite - including that appropriate to individual subsidiaries and/or divisions.

4.2

C onsider the impact of external economic and market influences and consider their impact on credit quality.

4.3

Ensure that credit risk is appropriately defined and measured throughout the Group.

4.4

Consider and approve all credit policy statements (including policies relating to large exposures) ensuring that:

they reflect the Group’s risk appetite;

credit risk is appropriately defined, measured and controlled throughout the Group;

they include suitable methodologies for establishing lending limits.

4.5

Consider and approve all asset quality plans and investment guidelines.

4.6

Monitor compliance with key credit risk policies and targets / triggers contained therein and approve action proposed and taken in the event of said key triggers / targets being breached.

4.7

Monitor trends that indicate the on-going quality of the Group’s asset portfolios, including review of actual loss charges.

4.8

Approve the use of credit rating models, as recommended by the Model Validation Committee, giving due consideration to the methodologies used and the validity of their output.

4.9

Consider and approve major product initiatives which involve new credit risks.

4.10

To review the key activities of the Wholesale Banking Credit Sanctioning Committee and the Model Validation Committee.

5. Market, Liquidity and Funding Risks

On behalf of the Group Board to:

5.1

Approve the Group’s appetite for market, liquidity and funding risks as recommended by the Group Asset & Liabilities Committee - including those appropriate to individual subsidiaries and/or divisions.

5.2

Review external economic and market influences and consider their impact on the Group’s exposure to market, liquidity and funding risks.

5.3

Consider and approve all policy statements including those applicable to Liquidity and Funding, Market Risk, Trading and Treasury Delegations ensuring that:

they reflect the Group’s risk appetite;

risks are appropriately defined and measured throughout the Group;

they include controls that protect the Group from excessive risk;

they include suitable limits.

5.4

Monitor compliance with key market and liquidity risk policies and targets / triggers contained therein and approve action proposed and taken in the event of said key triggers / targets being breached.

5.5

Monitor trends that indicate the on-going extent of the interest rate risk to which the Group is exposed.

5.6

To review the key activities of the Group Asset & Liabilities Committee.

6 Capital Adequacy

On behalf of the Group Board to:

6.1

Approve the use of the Group’s economic capital models in relation to credit, market, operational, pension fund and other risks for the purposes of assessing capital adequacy and measuring the risk adjusted performance of business units and activities.

6.2

Conduct regular reviews of economic capital reports, deciding on the most appropriate allocation of the Group’s economic capital resources and deciding on the consequences for the Group’s capital adequacy.

6.3

Approve the use of the Group’s stress testing policy and methodology.

6.4

Regularly review stress testing results deciding on the consequences for the Group’s capital adequacy.

6.5

Review the Group’s capital plan in the light of the assessment of Group Capital adequacy.

6.6

Regularly review the economic capital requirements and risk-adjusted performance of business units and activities.

6.7

Review the economic capital requirements and risk-adjusted performance of acquisition and divestment opportunities and decide on the consequences for the Group’s capital adequacy.

7 Other Matters

7.1

To approve the statement in the Annual Report on the management of risk.

7.2

To consider, approve, or make recommendations in respect of any other matters at the request of the Group Board.