TD Bank 2011 Annual Report Download - page 77

TD BANK GROUP ANNUAL REPORT 2011 MANAGEMENT’S DISCUSSION AND ANALYSIS 75
Outsourcing Management
Outsourcing is any arrangement where an external supplier performs
a business activity, function or process on our behalf. The benefits of
outsourcing business activities include access to leading technology,
specialized expertise, economies of scale and operational efficiencies.
While these arrangements bring benefits to our businesses and custom-
ers, we also need to manage and minimize any risks related to the activity.
We do this through an enterprise-level outsourcing risk management
program that guides outsourcing activities and ensures the level of risk
management and senior management oversight is appropriate to the
size and importance of the outsourcing arrangement.
Project Management
We have established a disciplined project management program of
processes and supervisory mechanisms to ensure projects are success-
fully implemented in a planned and systematic manner and are moni-
tored by senior management. Our Enterprise Program Management
Office maintains project management standards that are continually
benchmarked against leading industry practices.
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 exceed-
ing the insurance claims expected in product pricing. Insurance risk
is further divided into underwriting risk and claims risk. Underwriting
risk is defined as the risk of financial loss resulting from inappropriate
product design and the 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 trans-
fer 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 direc-
tors, as well as independent appointed actuaries who provide addi-
tional 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, nota-
bly the exposure to natural catastrophes in the property and casualty
insurance business. We also manage risk through effective underwrit-
ing and claim adjudication practices, ongoing monitoring of experi-
ence, 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 transac-
tions. 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
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.
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 Corporate
Compliance Department and Regulatory & Government Affairs
Department assist them by providing advice and oversight.
The Corporate Compliance Department and Regulatory & Government
Affairs Department identifies and monitors significant 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 works closely with the busi-
ness units and corporate functions to identify areas of potential regula-
tory 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
every business decision and action on TD’s behalf must be assessed in
light of what is right, legal and fair. All directors, officers and employ-
ees 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 Corporate Compliance and Regulatory &
Government 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 Corporate Compliance Department 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 an 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.