TD Bank 2009 Annual Report Download - page 83

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS 79
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 agreements,
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 judicial
or regulatory judgments and other costs associated with legal proceed-
ings 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
Business units and corporate areas are responsible for managing
day-to-day regulatory and legal risk, while the Legal and Compliance
Departments assist them by providing advice and oversight.
The Compliance Department identifies and monitors regulatory risk
across our organization, and 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 the Bank’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, procedures
and controls. The Legal and Compliance Departments 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 legal 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 the Bank.
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 the Bank 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 institut
ion’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 the Bank’s reputation.
Our enterprise-wide Reputational Risk Management Policy is
approved by the Risk Committee of the Board. This policy sets out the
framework under which each business unit is required to implement
a reputational risk policy and procedures. These include designating
a business-level committee to review reputational risk issues and to
identify issues to be brought to the Reputational Risk Committee. We
also have defined and documented processes to approve new products
and new business, particularly structured transactions in our wholesale
business. These processes involve committees with representation from
the businesses and control functions, and include consideration of all
aspects of a new product, including reputational risk.
WHO MANAGES REPUTATIONAL RISK
Ultimate responsibility for the Bank’s reputation lies with the SET and
the executive committees that examine reputational risk as part of
their regular mandate. The Reputational Risk Committee is the execu-
tive committee with enterprise-wide responsibility for making decisions
on reputational risks. The Committee’s purpose is to ensure that new
and existing business activities, transactions, products or sales practices
that are referred to it are reviewed at a sufficiently broad and senior
level so that the associated reputational risk issues are fully considered.
Nonetheless, every employee and representative of our organization
has a responsibility to contribute in a positive way to our reputation.
This means ensuring ethical practices are followed at all times, interac-
tions with our stakeholders are positive, and we comply with applicable
policies, legislation and regulations. Reputational risk is most effectively
managed when every individual works continuously to protect and
enhance our reputation.
Environmental Risk
Environmental risk is the possibility of loss of financial, operational or
reputational value resulting from the impact of environmental issues
or concerns within the scope of short-term and long-term cycles.
Management of environmental risk is an enterprise-wide priority.
Key environmental risks include: 1) direct risks associated with the
ownership and operation of our business, which includes management
and operation of company-owned or managed real-estate, fleet,
business operations and associated services; 2) indirect risks associated
with the environmental performance of clients to whom the Bank
provides financing or in which the Bank invests, and; 3) identification
and management of emerging environmental issues that may be
material to the Bank.