TD Bank 2010 Annual Report Download - page 73

TD BANK GROUP ANNUAL REPORT 2010 MANAGEMENT’S DISCUSSION AND ANALYSIS 71
WHO MANAGES REGULATORY AND LEGAL RISK
Business units and corporate areas are responsible for managing
day-to-day regulatory and legal risk, while the Legal, Compliance
and Regulatory Affairs Departments assist them by providing advice
and oversight.
The Compliance and Regulatory Affairs Departments identify and
monitor regulatory risk across our organization, and the Compliance
Department is responsible for ensuring that key day-to-day business
controls comply with applicable legislation.
Internal and external Legal counsel also work closely with the
business units and corporate functions to identify areas of potential
regulatory and legal risk, and actively manage them to reduce
TD’s exposure.
HOW WE MANAGE REGULATORY AND LEGAL RISK
Our Code of Conduct and Ethics helps set the “tone at the top” for
a culture of integrity within our organization. The Code stipulates that
concern for what is right, including compliance with the law, should
be the first consideration in all business decisions and actions. All
directors, officers and employees are required to attest annually that
they understand the Code and have complied with its provisions.
Business units and corporate areas manage day-to-day regulatory
and legal risk primarily by implementing appropriate policies, proce-
dures and controls. The Legal, Compliance and Regulatory Affairs
Departments, in certain circumstances, assist them by:
• Communicating and advising on regulatory and legal requirements
and emerging compliance risks to each business unit as required.
• Implementing or assisting with policies, procedures and training.
• Independently monitoring and testing for adherence to certain
regulatory and legal requirements, as well as the effectiveness of
associated key internal controls.
• Tracking, escalating and reporting significant issues and findings
to senior management and the Board.
• Liaising with regulators, as appropriate, regarding new or revised
legislation, or regulatory guidance or regulatory examinations.
Additionally, the Legislative Compliance Management Program (LCM),
run by the Compliance Department, carries out enterprise-wide
management of legislative and regulatory risk. LCM assesses legislative
requirements and associated key controls across the organization,
using a risk-based approach. Where any gaps are identified, action
plans are implemented and are tracked to completion. The Chief
Compliance Officer provides an annual LCM report to the Audit
Committee of the Board stating the results of the annual process and
setting out his opinion on the strength of the LCM framework and
regulatory risk management at TD.
Finally, while it is not possible to completely eliminate legal risk, the
Legal Department also works closely with business units and other
corporate areas to draft and negotiate legal agreements to manage
those risks, to provide advice on the performance of legal obligations
under agreements and applicable legislation, and to manage litigation
to which TD or its subsidiaries are a party.
Reputational Risk
Reputational risk is the potential that negative stakeholder impressions,
whether true or not, regarding an institution’s business practices,
actions or inactions, will or may cause a decline in the institution’s
value, brand, liquidity or customer base.
A company’s reputation is a valuable business asset in its own right,
essential to optimizing shareholder value and, as such, is constantly
at risk. Reputational risk cannot be managed in isolation from other
forms of risk. All risks can have an impact on reputation, which in turn
can impact the brand, earnings and capital. Credit, market, operational,
insurance, liquidity and regulatory and legal risks must all be managed
effectively to safeguard TD’s reputation.
Financial Crime
Safeguarding our customers, employees, assets, information and
preventing and detecting fraud and other forms of financial crime are
very important to us. To do this, we maintain extensive security
systems, protocols and practices to detect and prevent financial crime.
This includes regular employee training to ensure compliance with
crime prevention policies and practices.
Insurance Risk
Insurance risk is the risk of loss due to actual insurance claims exceeding
the insurance claims expected in product pricing. Furthermore, under-
writing risk is defined as the risk of financial loss resulting from the
inappropriate product design, selection and pricing of risks to be insured.
Claims risk is defined as the risk of loss due to unforeseen increases in
the size and frequency of claims and time-to-payment expenses.
Insurance by nature involves the distribution of products that transfer
individual risks to the issuer with the expectation of a return built into
the insurance premiums earned. We are exposed to insurance risk in
our property and casualty insurance business, and in our life and
health insurance and reinsurance businesses.
WHO MANAGES INSURANCE RISK
Senior management within the insurance business units has primary
responsibility for managing insurance risk with oversight by the Chief
Risk Officer for Insurance who reports into Risk Management. The
Audit Committee of the Board acts as the Audit and Conduct Review
Committee for the Canadian Insurance company subsidiaries. The
Insurance company subsidiaries also have their own boards of directors,
as well as independently appointed actuaries who provide additional
risk management oversight.
HOW WE MANAGE INSURANCE RISK
We maintain a number of policies and practices to manage insurance
risk. Sound product design is an essential element. The vast majority of
risks insured are short-term in nature, that is, they do not involve long-
term pricing guarantees. Geographic diversification and product-line
diversification are important elements as well. Reinsurance protection
is purchased to further reduce exposure to fluctuations in claims, notably
the exposure to natural catastrophes in the property and casualty
insurance business. We also manage risk through effective underwriting
and claim adjudication practices, ongoing monitoring of experience,
and stress-testing scenario analysis.
Regulatory and Legal Risk
Regulatory and Legal risk is the risk of non-compliance with laws,
rules, regulations, obligatory practices or standards, contractual agree-
ments, or other legal requirements, including the effectiveness of
preventing and handling litigation.
Financial services is one of the most closely regulated industries,
and the management of a financial services business such as ours is
expected to meet high standards in all business dealings and transactions.
As a result, we are exposed to regulatory and legal risk in virtually all
of our activities. Failure to meet regulatory and legal requirements not
only poses a risk of censure or penalty, and may lead to litigation, but
also puts our reputation at risk. Financial penalties, unfavourable judi-
cial or regulatory judgments and other costs associated with legal
proceedings may also adversely affect the earnings of TD.
Regulatory and legal risk differs from other banking risks, such as
credit risk or market risk, in that it is typically not a risk actively or
deliberately assumed by management in expectation of a return. It
occurs as part of the normal course of operating our businesses.