TD Bank 2006 Annual Report Download - page 70

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis
66
penalty, and may lead to litigation, but also puts the reputation
of the Bank as a whole at risk. Financial penalties, judicial or
regulatory judgments and other costs associated with legal
proceedings may also adversely affect the earnings of the Bank.
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.
WHO MANAGES REGULATORY AND LEGAL RISK
Proactive management of regulatory risk is carried out primarily
through an enterprise-wide regulatory risk management
framework called the “Legislative Compliance Management
Framework” (LCM). The Compliance department is responsible
for the LCM. Under the LCM, business unit management is
responsible for managing day-to-day regulatory risk. They are
required to demonstrate compliance with all regulatory require-
ments, and they receive advice and assistance from the corporate
oversight functions, including Legal, Compliance and Audit.
Internal and external counsel also work closely with the busi-
ness units in daily operations to identify areas of potential legal
risk, to draft and negotiate legal agreements to manage those
risks, to provide advice on the performance of legal obligations
under agreements, and to manage litigation to which the Bank
and its subsidiaries are a party.
HOW WE MANAGE REGULATORY AND LEGAL RISK
Business units manage day-to-day regulatory and legal risk
primarily by setting the appropriate tone at the top with respect
to compliance, establishing and maintaining appropriate policies
and procedures, and monitoring for compliance. The corporate
oversight functions also promote a compliance culture within
the Bank by:
•Communicating regulatory requirements and emerging compli-
ance risks to each business unit.
•Ensuring that business units have appropriate policies and pro-
cedures in place and that staff are trained to meet regulatory
requirements, as well as the effectiveness of internal controls.
•Independently monitoring and testing the business units for
adherence to the policies, procedures and requirements, as
well as the effectiveness of internal controls.
•Tracking, escalating and reporting significant issues and
findings to senior management and the Board.
Compliance with regulatory requirements is also documented
through a formal business unit management certification
process. In addition to ongoing monitoring and review processes,
Canadian business units annually review regulatory requirements
relating to the unit’s governing legislation and update their risk
assessments and the controls that they have in place to mitigate
those risks. The higher the risk, the morerigorous the control
process must be to minimize the risk of non-compliance. Their
assessments are also reviewed by the Compliance department to
evaluate the effectiveness of the business unit controls. Once the
annual review process is completed, senior management of the
business unit certify in writing whether they are in compliance
with applicable regulatory requirements, or whether any gaps
or weaknesses exist – in which case an action plan must be
established and implemented to remedy the gap or weakness.
While it is not possible to completely eliminate legal risk, the
legal function strives to ensure that the business units under-
stand the potential risks, and actively seek to manage them
in order to reduce the Bank’s exposure. In addition, legal risk
associated with the handling of litigation is managed by:
•Use of appropriate experts and external counsel.
•Regular review of matters by the Legal department with the
business involved and others as needed.
•With respect to the effect of litigation on the Bank’s financial
condition and related reporting, quarterly review of matters by
the Legal department and General Counsel with the Finance
department and other areas of management, the shareholders’
auditors and, if material, the Audit Committee.
Reputational Risk
Reputational risk is the potential that negative publicity, whether
true or not regarding an institution’s business practices, actions
or inactions, will or may cause a decline in the institution’s value,
liquidity or customer base.
Acompany’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 isola-
tion from other forms of risks, since all risks can have an impact
on reputation, which in turn can impact the brand, earnings and
capital. Credit, market, operational, insurance, liquidity, regulato-
ry and legal risks must all be managed effectively in order to
safeguardthe Bank’s reputation.
As business practices evolve to address new operating environ-
ments with respect to reputational risk, we, like others in our
industry,have strengthened our focus in this area. We have an
enterprise-wide reputational risk management policy, approved
by the Risk Committee of the Board, which establishes a frame-
work under which each business unit identifies reputational
issues, which are then considered at the appropriate committees
including the Reputational Risk Committee. In our wholesale
business, we also have defined and documented a process to
approve structured transactions. The process involves committees
with representation from the businesses and control functions,
and includes consideration of all aspects of a new Structured
Product, including reputational risk.
WHO MANAGES REPUTATIONAL RISK
Ultimate responsibility for the Bank’s reputation lies with the
Senior Executive Team and the executive committees that exam-
ine reputational risk as part of their ongoing mandate. However,
every employee and representative of the Bank has a responsibili-
ty to contribute in a positive way to the Bank’s reputation. This
means ensuring that ethical practices are followed at all times,
that interactions with our stakeholders arepositive and that the
Bank complies with applicable policies, legislation and regula-
tions. Reputational risk is most effectively managed when every
individual works continuously to protect and enhance the Bank’s
reputation.
Basel II
Basel II is a new framework developed in 2004 by the Basel
Committee on Banking Supervision. The goal of the framework
is to improve the consistency of capital requirements internation-
ally, make regulatory capital more risk sensitive, and promote
improved risk management practices for internationally active
banking organizations. The Bank has dedicated qualified
resources on this project to meet the requirements of Basel II.