Does the definition of operational risk include compliance risk? This is the potential loss that a business or individual could suffer due to a legal issue. This may include a claim against them, a change in the law, or a failure to take appropriate legal steps to protect themselves. Legal risks are mitigated by rigorous internal controls and supported by the company`s employee-integrated risk culture One of the main reasons why legal risks are associated with operational risk is fraud, as it is recognized as the most important category of business interruption events and is also considered a legal issue. [2] However, this does not mean that the legal risk is limited to this conceptualization. For example, there are certain types of legal risks defined by European Union (EU) law. In 2005, the European Central Bank stated that it would develop its own legal definition of risk in order to “facilitate appropriate risk assessment and management and ensure a consistent approach among EU credit institutions”. [3] Types of legal risks vary by industry. An indicative list: According to the CRR`s definition of operational risk, legal risk is included in operational risk. The definition of legal risk has been transposed into our national legislation by incorporating the legal risk provisions into the Basel II Accord (“legal risks include, but are not limited to, fines or punitive damages resulting from private oversight and settlements”), which is generally consistent with the definition that will be included in RTS`s draft EBA on WADA assessment methodologies. The definition of legal risk overlaps to some extent with the definition of compliance risk in the EBA Internal Governance Guidelines (L 44) (“current or anticipated return and capital risk arising from violations or non-compliance with laws, rules, regulations, agreements, prescribed practices or ethical standards”). Legal risk is the risk of financial or reputational loss that can result from a lack of awareness or misunderstanding, ambiguity or reckless indifference to how laws and regulations are applied to your business, its relationships, processes, products and services. [9] If you`re an investor or a business, you`ve probably heard that you should always comply with employment laws, tax laws, and other regulations. One of the most obvious legal risks of not doing so is the risk of arrest and prosecution.
Legal risk was defined as part of operational risk by Basel II in 2003. It involves the risk of financial or reputational loss arising from any type of legal problem. This could include a lack of awareness or understanding of how laws and regulations apply to a business. But companies can take steps to reduce this risk. For example, a company may require all employees to complete health and safety training to reduce the legal risk associated with claims. Basel II classified legal risk as a subset of operational risk in 2003. This design is based on a business perspective and recognizes that there are threats in the business environment. The idea is that companies don`t operate in silos and tend to be subject to legal obligations when they take advantage of opportunities and engage with other companies. [1] Legal risk management is not a precise and subjective science to the situation of the institution and is mainly caused by the absence of an appropriate communication channel, undefined institutional objectives (such as the absence of policies and regulations), the unresolved flow of information between different employees and departments, and the absence of delegation of authority to define risk mitigation tasks. [7] Advancing legitimate risk does not require the Commission to take many actions for each organization.
This process does not preclude all administrative prosecutions or penalties, but it can reduce legitimate risks and improve the organization`s responses. [4] Legal risk is the risk of loss resulting from an unintentional or negligent breach of a professional (legal) duty to certain customers (including loyalty and suitability requirements) or from the nature or design of a product. For the purpose of calculating own funds requirements for operational risk and for the purposes of sound operational risk management, risks arising from non-compliance with an institution`s legal or regulatory obligations or requirements shall be included in the definition of operational risk set out in point (52) of Article 4(1) of Regulation (EU) No 575/2013 (CRR). Legal risks may result in fines and administrative penalties, the need for monetary damages, reputational deterioration, deterioration of the bank`s market position, restriction of development opportunities, reduction of development opportunities or legal enforcement of agreements. Failure to comply with legal or statutory responsibilities or requirements is one of many categories of operational risk. It is caused by a conscious or unconscious failure to implement the requirements of laws, rules, regulations, agreements, prescribed practices or ethical standards. This may result in an administrative penalty or a fine. From an operational risk perspective, a bank`s business practices are governed by its board of directors and senior management and should operate in a safe and sound manner, with integrity and in accordance with applicable laws and regulations. Legal risk is the risk of loss to an institution primarily caused by: (a) an erroneous transaction; or (b) a claim (including a defense of a claim or counterclaim) is asserted or any other event occurs that gives rise to liability to the Institution or any other loss (for example, as a result of termination of a contract), or; (c) the lack of appropriate measures to protect the assets (e.g. intellectual property) of the institution; or (d) changes in law. [6] Costs and income foregone caused by legal uncertainty multiplied by the possibility of the individual event or the legal environment as a whole. [10] One of the most obvious legal risks in the conduct of business, which is not mentioned in the definitions above, is the risk of arrest and prosecution.
This is a recognized risk category in global regulatory frameworks (Basel II/III standards), commonly referred to as customers, products and business practices. Danger is inherent in any business, and good risk management is a fundamental part of maintaining a successful business. The leadership of an organization has varying degrees of control over hazards. Some hazards can simply be overlooked; Various hazards go far beyond the ability to control organizational management. All an organization can manage is anticipate potential threats, monitor the potential impact on the organization`s business, and be prepared to respond to adverse events. [5] Classification depends on the underlying domain governed by the rule. Thus, if it is the absence of formal rules and/or non-compliance with regulations for customers, products or business practices, the event could, for example, be classified as “customers, products and business processes”. Other cases could lead to classification as “execution, delivery and process management” if they concern non-compliance with internal anti-money laundering regulations and rules. under “Internal fraud” if it is due to the absence of formal rules and/or non-compliance with the rules relating to personal transactions; or “Employment Practices and Workplace Safety” if this is due to inappropriate variable compensation policies. Update 2021-03-26: These questions and answers have been reviewed in light of the amendments to Regulation (EU) No 575/2013 (CRR) and remain relevant. There is no standard definition, but there are at least two sets of primary/secondary definitions in circulation.