2020 Annual ReportSantander UK plcPart of the Banco Santander group

Annual Report 2020 Strategic reportThis page intentionally blank

Santander UK plcAnnual Report 2020ContentsStrategic report 2Financial review 17Governance 26Board of Directors 27Corporate governance report 30Directors’ remuneration report 53Directors’ report 61Risk review 67Financial statements 163Auditor’s report 164Primary financial statements 173Notes to the financial statements 182Shareholder information 251Important information for readersSantander UK plc and its subsidiaries (collectively Santander UK or the Santander UKgroup) operate primarily in the UK, and are part of the Banco Santander group (comprisingBanco Santander SA and its subsidiaries). Santander UK plc is regulated by the UKPrudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and certainother 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 anduncertainties. Actual results may differ materially from those contained in such forwardlooking 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 principalbusiness activities of the Santander UK Group Holdings plc group are carried on bySantander UK plc and its subsidiaries.The Santander UK Group Holdings plc Corporate Governance and Risk Frameworks havebeen adopted by the Company and its subsidiaries to ensure consistency of application.Santander UK plc1

Annual Report 2020 Strategic reportStrategic reportAbout this reportThe Strategic Report outlines the key elements of the Annual Report and provides context for the related financial statements. It is also designedto help members of the company assess how the Directors have performed their duty under section 172 of the Companies Act 2006. The reporthighlights key financial and non-financial metrics which help to explain the business’s performance over the past year. It also highlights theexternal 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 areinseparable, and we continue to embed sustainability across our business. We have included information to demonstrate this within ourStrategic Report and further information is also available in our ESG Supplement.By order of the Board.William VerekerChair, 2 March 2021Santander UK at a glanceWe provide high quality, seamless service across our branch, digital and telephony channels14 millionactive UK customers3rdlargest retail mortgage provider(1)c22,000564Top 55thFull time equivalent employeesLargest current account provider(2)BranchesLargest commercial lender(1)We offer innovative products and services to help people and businesses prosperSantander 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 forthe future, and support business growth. We employ 21,900 people and we paid 159m of corporation tax and 74m through the UK Bank Levyin 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 functionsRetail BankingOffers a wide range of products and financial services to individuals and small businesses through a network of branches and ATMs, as well asthrough 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 BankingOffers a wide range of financial services and solutions to more complex businesses across multiple sectors, typically with annual turnovers ofbetween 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 provideproducts to manage currency fluctuations and protect against interest rate risk and also arrange capital markets finance and specialist tradefinance solutions.Corporate CentreMainly includes Treasury, which is responsible for capital, funding, liquidity, pensions and balance sheet management. It also includesour 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 businesstransfer scheme under Part VII of the Financial Services and Markets Act 2000.2Santander UK plc

Strategic ReportGovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationStrategy and key performance indicatorsThe directors of the Company’s immediate parent, Santander UK Group Holdings plc, manage the operations of the Santander UK GroupHoldings plc group (which includes the Santander UK group) on a business division basis. Key performance indicators are not set, monitored ormanaged at the Santander UK group level. As a result, the Company’s Directors believe that analysis using key performance indicators for theCompany is not necessary or appropriate for an understanding of the development, performance or position of the Company. The developmentperformance 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 partof this report2020 resultsOur 2020 results have been materially impacted by the Covid-19 crisis. Profit before tax of 605m was 40% lower than in 2019. The declinein profit before tax was primarily due to higher credit impairment losses which were up 425m to 645m, including 448m related toCovid-19 impacts.Business modelOur purpose is to help people and businesses prosper.Our resourcesPeopleBringing the skills, expertise and drive to deliver enhanced customer loyalty and experienceInfrastructureBranch and online presence, operating centres and innovative technologyBanco Santander familyTechnology, shared management experience and brand benefits as part of well-diversified global bankFinancialStrong capital, liquidity and a prudent approach to riskOur competitive advantageLeading scale challenger bank in the UKScale in our core banking businesses combined with an innovative mindsetResilient balance sheet and prudent approachDemonstrated by the lowest CET1 drawdown in the 2019 BoE stress testsInternational expertise for UK companies20 trade corridors to help UK companies expand into overseas marketsWhat we doWe provide financial products and servicesMortgages, consumer auto finance, unsecured loans, credit cards, banking and savings accounts, investment and insurance products forindividuals 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 WayOur culture is built on doing things The Santander WaySimpleOur 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.Santander UK plc3

Annual Report 2020 Strategic reportStrategic report continuedPersonalWe treat our customers as valued individuals, with a professional service they can trust. We support our colleagues to achieve their ambitions.FairWe 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 supportour communities.Creating value for our stakeholdersCustomersDelivering customer loyalty and outstanding customer experiencePeopleProviding a thriving workplace for engaged, motivated and diverse individuals and teamsShareholdersAiming to improve efficiency and returns through simplification and digitalisationCommunitiesSupporting our communities in which we operate with our sustainability strategyMarket overview: five major forces continue to shape the UK banking marketChanging customer behaviourWhat we have seenThe change in customer behaviour accelerated in 2020 as the move away from traditional in-branch banking towards online services steppedup 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 channelssuch 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, characteristicsoften associated with digital-only banks.Our response and looking aheadDuring 2020, customer engagement through contact centres and digital channels increased sharply, with digital financial transactions up18% over the year. Branch counter transactions reduced by 18% and branch ATM transactions reduced by 55%. In response, we adapted ouroperating 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 servicesonline, such as the ability for our customers to request a payment holiday on a mortgage.Strong market competitionWhat we have seenWhile the UK banking sector remains very competitive, customer rates have fallen in both lending and deposits in 2020. Mortgage ratesincreased in the second half of 2020 as demand recovered strongly following the Covid-19 lockdown and the temporary reduced rates ofstamp duty for house purchases. However, although new business margins have improved they still tend to be below back book levels, andcompetition 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 intofinancial services in recent years announced plans to divest and have put their books up for sale.Our response and looking aheadIn line with the market, we increased mortgage lending rates as we managed our risk appetite and new lending flow. We also repriced our 1I2I3Current Account and change in benefits in light of the lower rate environment and competitor actions.4Santander UK plc

Strategic ReportGovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationWe expect our net mortgage lending to be in line with market growth, as we focus on quality customer service, retention and ourcomprehensive proposition for first-time buyers.Rapid technological changeWhat we have seenTechnology 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 orthrough apps.Over recent years, new challenger banks entered the UK banking sector, disrupting the market with innovative propositions and competitivepricing 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 presencehas a part to play.Our response and looking aheadWe have continued to invest heavily in improving our digital platforms to ensure our customers have a reliable, innovative and full bankingservice. By focusing on the customer experience, we have been able to reduce duplication from back office processes and streamlinecustomer outcomes.During lockdown, having branches available for small teams to work from has been a real benefit. They have provided flexibility and technologyhas enabled them to support both their contact centre colleagues as well as our customers.Demanding regulatory agendaWhat we have seenDespite the initial pause at the onset of Covid-19 pandemic, the regulatory policy and change agenda became intense heading into yearend. This was driven by the regulators continued guidance on Covid-19 financial support measures, preparation for Brexit, innovation andtechnological 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 managementresources. 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 aheadThe 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 capitalframework reforms.Uncertain economic environmentWhat we have seenThe UK economy, along with other global economies, experienced a significant downturn in 2020. As the Covid-19 pandemic unfolded, anumber of regional and national lockdowns were announced to control the virus and reduce pressure on the NHS. During lockdown, nonessential 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 eventuallysupport 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 theUK has ever seen.Our response and looking aheadAt 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.Santander UK plc5

Annual Report 2020 Strategic reportStrategic report continuedSecuring a Brexit deal has provided some welcome certainty and the chance to consider the opportunities inside the EU under the newarrangements, and new markets which we can support through our overseas links to the Banco Santander group.Strategic reviewOur 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 priorities1. Deliver growth through customer loyalty and outstanding customer experience2. Simplify and digitise the business for improved efficiency and returns3. Engage, motivate and develop a talented and diverse teamBe a responsible and sustainable businessFocusing 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 overviewMeeting operational challengesThe 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 continuouscommunications and support measures for all of our colleagues. At the same time, the risk team’s resources were mobilised to implement newprocesses 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 betterunderstand their individual needs.Credit and operational risk impactsDuring 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 corporatecredit portfolios, also supplemented by proactive client engagement. Financial Support activities have been re-engineered to ensure ourcustomers obtain the best individual outcomes. We continue to focus on increased fraud and cyber risks seen across the financial services sectorto ensure we maintain a robust operational environment. We have prioritised monitoring and oversight of these and other key operational riskswith enhanced reporting and input to IT strategy, data management and business transformation.Strategic risk management actionsOur teams supported the analysis of net credit loss modelling through ongoing reviews of inputs to our IFRS9 models, which determine thelevel and timing of the provision of credit losses in our financial accounts. Regular risk assessments of our business plans were undertakenthroughout the year, under a range of economic stress scenarios. This enabled us to view our medium to longer term financial forecasts andthe setting of our risk appetite to support the business plan. We also identified management actions that will assist us in mitigating cost andrevenue pressures, including the phased delivery of our cost transformation programme.Top risksCovid-19 first and second order risksDuring 2020 our top risks have been re-focused to incorporate two new top risks; the credit and operational (first order risks) and cost andrevenue (second order risks) impacts of Covid-19.Financial crimeFinancial crime activities can have significant impact on our customers. Criminals are increasingly using the financial system to launder theprofits of illegal activity such as human trafficking and terrorism. We continued to make significant investment in ongoing enhancement to ourfinancial crime control framework, and to key controls including anti-bribery and corruption measures, customer risk assessment, screening andtransaction monitoring.Our Money Laundering Reporting Officer continues to reinforce the importance to Senior Management of focusing on; continuousenhancements to data quality, key risk indicators and treatment strategies to sustainably control risk; ensuring proportionate capacity andinvestment across due diligence processes for higher risk customer segments; and promoting the embedding of an anti-financial crime cultureframework. Covid-19 has also provided an opportunity for fraudsters to take advantage of vulnerable customers through a range of fraudattacks and scams. We have increased our fraud messaging and scam education to assist our customers. We have also continued to build onexisting controls and develop new control environments to address fraud attacks.6Santander UK plc

Strategic ReportGovernanceRisk reviewFinancial reviewFinancial statementsShareholder informationBrexitWhilst our contingency plans were based on a worst-case ‘no deal’ scenario, the risks associated with Brexit remain substantially the same, asthe Trade and Cooperation Agreement deal does not cover financial services in any significant detail, as expected. Our plans are described morefully in the separate case study later in this section.Conduct and RegulatoryWe are operating in an environment where conduct and regulatory risks are elevated, reflecting the challenges posed by Covid-19 and thecontinuing need for customer support following the extension of support and forbearance measures in relation to mortgage repayments andgovernment lending schemes for SMEs. Regulatory engagement continues to be high as a result of these issues, as well as with respect to otherkey developments such as Brexit, Negative Rates and Libor Transition. Robust processes have been put in place to provide assurance that risksare being managed and actions monitored across the various government sponsored schemes, and also other conduct related issues, in orderto ensure fair customer outcomes.Managing a complex change agendaWe continue to face a challenging change agenda into 2021 with respect to our operating model and also supporting a range of initiativesrequired to deliver our business strategy. These include increased agile transformation across the organisation; significant IT infrastructureprojects; bedding down of new centres of excellence; and implementation of regulatory projects. This places more importance on ourmanagement of change, which is underpinned by our established risk project prioritisation processes and change oversight governance.Building and maintaining capital strengthRegulatory uncertainty on the implementation and interpretation of capital rules continues and impacts on both our capital management andcapital position. We continuously review our capital position on a forward-looking basis, which remains subject to the Bank of England’s stresstesting 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 aboveregulatory requirements, despite higher Covid-19 related credit impairment losses. This includes the impact of a 2020 ordinary share dividend.PensionThere was substantial volatility in the funding position and IAS 19 accounting position during 2020, particularly in the first half year. AA UKcorporate credit spread volatility has been a major driver of the accounting position which impacts capital, along with equity and interest ratemarkets, with the Bank of England cutting the bank rate to 10bps and increasing quantitative easing. The de-risking actions we have takenduring the past two years, including executing various hedging strategies and strategic asset reallocation have reduced exposure to pro-cyclicalassets and improved the fund’s resilience.Cyber attacksIn 2020, threats from the external cyber environment continued to increase, placing even more importance on our internal controls. We monitora range of cyber risks and have taken mitigating actions including; deployment of a cyber threat intelligence platform; increased intelligencethrough industry co-operation; and actions to increase staff awareness. Implementation of our Cyber Security Plans is proving effective, with nosignificant disruption experienced to date.Third party risk managementThe complexity and criticality of services provided by third-parties is a key operational risk that has been recognised by us, our peers, and theregulators. We have established a robust Third Party Supplier Risk Framework, which ensures that those with whom we intend to conductbusiness, meet our risk and control standards throughout the life of our relationship with them.Ring-fencing implementationRing-fencing has resulted in significant change to our structure, people and operations and we have retained it as a top risk to ensure continuedfocus on the ongoing embedding of ring-fencing culture throughout our governance and operations.Emerging risks in 2020Six new emerging risks have been introduced to our risk radar during 2020. These are reviewed and discussed regularly at both ERCC and BRC.Negative ratesCentral Banks wish to retain as wide a range of policy tool options in order to mitigate economic and financial market risks. In early 2021 wewere involved in roundtable discussions with the PRA, along with our industry peers, to provide feedback on the issues facing the banking sectorin the event of a negative rate environment. Although we do not have material structural balance sheet exposure to negative rates, we haverevisited our plans for readiness including systems capabilities (both tactical and strategic), legal and documentation issues, and how negativerates may impact our customers as well as implications for margin management. We will continue to develop and enhance our strategy during2021, through a coordinated bank-wide approach led by our CFO.Santander UK plc7

Annual Report 2020 Strategic reportStrategic report continuedExtended government involvement in the banking industryThere is the potential for adverse impacts on financial performance and investor perceptions of the banking industry, that could ariseinadvertently as a result of the governments ongoing responses to Covid-19 (e.g. implementation risks related to government backed loanschemes, and IFRS9 loan loss guidance). However, to a certain extent, these risks have been balanced by other government actions such asthe furlough scheme and the Term Funding Scheme for SMEs (TFSME), which have delayed peak unemployment and reduced funding costsrespectively. These issues are considered as part of our forward financial business planning and by our Capital Committee and Assets andLiability Committee (ALCO) regularly. We are further evaluating the potential impacts of this risk, as government lending schemes unwind andthe credit impacts of the crisis crystalise further.Extended period of economic contractionNegative multiplier effects from the economic shock caused by Covid-19 could materialise such as delayed spending and investment, and alarger surge in business failures and unemployment than anticipated. Coupled with deflation and lower or negative rates, this would prove evenmore challenging for banks’ profitability. We regularly undertake stress tests on our future business plans, under a range of economic scenarios.High inflationThe injection of significant government and central bank stimulus, could over the medium to longer-term result in the emergence of higherinflation that detrimentally impacts the UK economy. Similar to other economic risks our regular analysis of stress scenarios that we run acrossour business plans ensures that we fully understand the potential impacts and any mitigating actions that we might need to take.Disruption of macro-economic factorsChanges to GDP, unemployment, and house prices from longer term structural shifts in income and wealth could have a material impact on theinputs to our economic scenario analysis. As part of this analysis we review changes in key underlying drivers which aids our forward businessplanning and risk appetite setting.Other environmental and social issuesExtreme weather, natural disasters, biodiversity loss, human made environmental disasters, health impacted by pollution, water crisis, otherinfectious diseases, and social unrest, are other risks we are taking into consideration. Whilst, we have an ongoing focus on maintaining andenhancing 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 WorldEconomic Forum in January 2020.Task Force on Climate-related Financial DisclosuresWe are implementing the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and taking action to meet theexpectations set by the PRA, BoE and FCA. This requires wide-ranging collaboration both within the bank and externally to develop the tools andmethodologies needed. As such, we have adopted a unified approach across the Santander UK group and the following disclosures are made ona Santander UK Group Holdings basis.1. GovernanceThe Chief Risk Officer (CRO) is responsible for climate-related financial risks with oversight from the Board Risk Committee (BRC) and theResponsible Banking Committee (RBC). A climate change working group is managing our TCFD implementation and reports climate risks to theCRO and progress updates to the Executive Risk Control Committee and BRC. A separate working group has been set up to lead our preparationfor 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 identifynew 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 train

(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) C