HSBC 2011 Annual Report Download - page 104

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Top and emerging risks
102
business we can carry out, with the risk of
decreased profitability as a result. Due to the
stage of development and implementation of
these various regulations, it is not possible to
estimate the effect, if any, on our operations.
• We are closely engaged with the governments
and regulators in the countries in which we
operate to help ensure that the new requirements
are properly thought through and understood so
that they can be implemented in an effective
manner. We are also ensuring that our capital
and liquidity plans take into account the
potential effects of the changes. Capital
allocation and liquidity management disciplines
have been expanded to incorporate future
increased capital and liquidity requirements and
drive appropriate risk management and
mitigating actions.
Regulatory investigations and requirements
relating to conduct of business and financial
crime negatively affecting our results and
brand
Financial service providers are at risk of regulatory
sanctions or fines related to conduct of business and
financial crime. The incidence of regulatory
proceedings and other adversarial proceedings
against financial service firms is increasing.
Potential impact on HSBC
• We are subject to a number of regulatory actions
and investigations. See Note 44 on the Financial
Statements. It is inherently difficult to predict
the outcome of the regulatory proceedings
involving our businesses. An unfavourable
outcome could have a material adverse effect on
our results and brand.
• In response to this risk, we are progressing a
number of initiatives which seek to address the
issues identified and enhance our governance
and oversight.
Dispute risk
The current economic environment has increased our
exposure to actual and potential litigation against the
Group. Further details are discussed in Note 44 on
the Financial Statements.
Potential impact on HSBC
Dispute risk gives rise to potential financial loss
and significant reputational damage which could
adversely affect customer and investor confidence.
Risks related to our business operations,
governance and internal control systems
• Challenges to achieving our strategy in
a downturn
• Internet crime and fraud
• Social media risk
• Level of change creating operational
complexity and heightened operational
risk
• Information security risk
Challenges to achieving our strategy in a
downturn
The external environment remains challenging
and the structural changes which the financial
sector is going through are creating obstacles to
the achievement of strategic objectives. This,
combined with the prolonged global macroeconomic
slowdown, could affect the achievement of our
strategic targets for the Group as a whole and our
global businesses.
Potential impact on HSBC
• The downturn may put pressure on our ability to
earn returns on equity in excess of our cost of
equity while operating within the overall
parameters of our risk appetite.
• Through our strategic initiatives, which have
heightened the focus on capital allocation and
cost efficiency, we are actively seeking to
manage and mitigate this risk.
Internet crime and fraud
We are exposed to potentially fraudulent and
criminal activities, in particular from a growing
threat from internet crime which could result in the
loss of customer data and sensitive information.
The threat of external fraud may increase during
adverse economic conditions, especially in retail
and commercial banking.
We also face breakdowns in processes or
procedures and systems failure or unavailability
and are subject to the risk of disruption to our
business arising from events that are wholly or
partially beyond our control, such as internet
crime and acts of terrorism.