In January 2010 the GFSC identified operational risk was attracting significant attention due to the emergence of a series of major losses by banks – and due to the increasing need to provide better customer service in a competitive banking environment.
They have issued a guidance note (BELOW) – and they say :-
Accordingly, operational risk has been the subject of widespread discussion, including the application of enhanced risk management approaches. However, legal risk – as a subset of operational risk – continues to be an area where discussions about its definition and application are still on-going. This Guidance Note is a contribution to that debate, with particular reference to the legal risks that face banks in Guernsey.
In Guernsey, legal risk is of some importance for banks given that
(a) lending is collateralised in many instances and
(b) banks draw significant income from fees and commissions where credit and market risk is limited but where operational risk – including legal risk – can be high.
Accordingly, the Commission is issuing this Note to help ensure that banks address some of the key legal risks in the jurisdiction.
The Guernsey banking community is made up of several different sorts of banks, and some of the legal risks outlined below may not align with the particular business model of some banks.
The list is not as exhaustive. It does not, for example, deal with issues of tax law or anti-money laundering requirements.
Each firm, therefore, should identify and consider the issues (both as to substantive risks and the management of them) that are relevant to its own business and take its legal advice, as appropriate.
The Commission defines legal risk, in this context, by adopting the definition of the International Bar Association which is attached to this Note
The Commission does not require firms to use the same definition but suggests that they would find it helpful – if only for the purpose of effective allocation of responsibility – to have some clearly accepted definition used throughout their business and appropriately documented as such. If no definition is agreed, the Commission would, at least, expect this to be the result of a conscious, reasoned decision taken at an appropriate level.
Specific legal risk issues to which the Commission wishes to draw attention as set out IN THE ATTACHED DOCUMENT (Below).
The GFSC also say the Note was written with the assistance of Mr Roger McCormick, a Visiting Professor and Senior Research Fellow at London School of Economics and Political Science and the author of “Legal Risk in the Financial Markets” (Oxford University Press 2006).
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