Legal risk management in financial markets – second part

| 2014 – Number 1
| February 2014 | 4050 Views | with No Comments

Before the Christmas’s Holidays InvesTO Law talked about legal risk management in financial markets; it was one of the topic discussed during the afternoon section of InvesTO Day, that was held at Torino Incontra last September, 26th.

For any investor, and for experts too, the most common definition of legal ricks is “ but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements”.

Although it cannot be calculated based on mathematical models, the legal risk can certainly be estimated and prevented.

For these purposes it is necessary to indentify subjects with in-depth and diversified legal specific competences but, above all, with independent judgment.

What is then the role of the legal advisor assisting a bank, another financial broker (or a private customer or a company for their investments) to allow customers to accurately estimate and minimize legal risks, giving them an added value compared to a “traditional lawyer” who mainly deals with litigation or assists single transactions?

First of all, the lawyer (or better a multidisciplinary team of lawyers) has to identify the most suitable method of legal risk assessment, as per the company’s characteristics, to be adopted.

His work will have to simplify an efficient legal risk management, allowing the costumer (quoting the Basel Committee on Banking Supervision established in the Bank for International Settlements) to implement “control systems that are able to contribute effectively to the management of legal aspects of operational risk”.

In this framework, the Basel Committee on Banking Supervision issued some principles for the sound management of operational (and therefore legal) risks. In particular:

(i)             the definition of an adequate operation management and supervision system in accordance with the provisions and procedures set out by the board of directors.

(ii)      an efficient system of internal reporting and contingency plans implementation; and

(iii)      the promotion of a well-established culture of legal risk and internal controls, which should result in:

(a)        an appropriate involvement of the legal function in the daily operations of the company and an appropriate definition of external lawyer interventions;

(b)       an adequate update especially on legal  aspects and compliance with new regulations and  jurisprudential standards that may cause legal risk; and

(c)        a training course for all company personnel in order to ensure the most appropriate behavior in case of legal risk (for example the “unexpected” inspection by the Tax Administration Authorities).

The need of every investors (banks and financial brokers first) to evaluate their own legal risk and to implement suitable management and prevention system, also with the help of external professionals, it is part of a large risk “self-assessment” and the work of social authorities which represent the most significant innovation in financial market regulations.

The most important example of the “risk prevention is better than treat them” trend is the self-assessment process established by the “Supervisory arrangements on bank corporate organization and governance”, consulted by Banca d’Italia last December 16th for the acknowledgment in Italy of the sa-called “CRD IV” (Capital Requirements Directive IV).

But we will talk about this in the next issue of Investo  Magazine.

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