TD Bank 2014 Annual Report Download - page 71

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS 69
Evolution of Fraud and Criminal Behaviour
The Bank is routinely exposed to various types of fraud. The sophistica-
tion, complexity and materiality of these crimes is evolving quickly.
In deciding whether to extend credit or enter into other transactions
with customers or counterparties, the Bank may rely on information
furnished by or on behalf of such other parties including financial
statements and financial information. The Bank may also rely on the
representations of customers and counterparties as to the accuracy
and completeness of such information. In addition to the risk of mate-
rial loss that could result in the event of a financial crime, client and
market confidence in the Bank could be potentially impacted. TD has
invested in a coordinated approach to strengthen the Bank’s fraud
defenses and build upon existing practices in Canada and the U.S.
The Bank continues to introduce new capabilities and defenses that
will help achieve an enhanced position to combat more complex fraud.
Third Party Service Providers
The Bank recognizes the value of using third parties to support its
business, as they provide access to leading processes and solutions,
specialized expertise, innovation, economies of scale and operational
efficiencies. However, they also create a reliance upon the continuity,
reliability and security of these relationships and their associated
processes, people and facilities. As the financial services industry and
its supply chains become more complex, the need for robust, sophisti-
cated controls and ongoing oversight also grows. Just as the Bank’s
own services, information technology, facilities and processes could
be subject to failures or disruptions as a result of human error, natural
disasters, utility disruptions, and criminal or terrorist acts (such as
cyber-attacks) each of its suppliers may be exposed to similar risks
which could in turn impact the Bank’s operations. Such adverse effects
could limit TD’s ability to deliver products and services to customers,
and/or damage the Bank’s reputation. Consequently, the Bank has
established expertise and resources dedicated to third party supplier
risk management, and policies and procedures governing third party
relationships from the point of selection through the life cycle of both
the relationship and the good or service. The Bank develops and tests
robust business continuity management plans which contemplate
customer, employee, and operational implications, including technol-
ogy and other infrastructure contingencies.
Introduction of New and Changes to Current Laws and Regulations
The introduction of new, and changes to current laws and regulations,
changes in interpretation of existing laws and regulations, judicial deci-
sions, as well as the fiscal, economic and monetary policies of various
regulatory agencies in Canada and the U.S. and other countries inter-
nationally, and changes in their interpretation or implementation, could
adversely affect TD’s operations and profitability. Such adverse effects
may include incurring additional costs and resources to address initial
and ongoing compliance; limiting the types or nature of products and
services the Bank can provide and fees it can charge; unfavourably
impacting the pricing and delivery of products and services the Bank
provides; and increasing the ability of new and existing competitors to
compete with their pricing, products and services (including, in jurisdic-
tions outside Canada, the favouring of certain domestic institutions).
In particular, the most recent financial crisis resulted in, and could
further result in, unprecedented and considerable change to laws
and regulations applicable to financial institutions and the financial
industry. In addition to the adverse impacts described above, the
Bank’s failure to comply with applicable laws and regulations could
result in sanctions and financial penalties that could adversely impact
its earnings and its operations and damage its reputation.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank), a United States federal law, was signed into law
on July 21, 2010. It requires significant structural reform to the
U.S. financial services industry and ultimately affects every financial
institution operating in the U.S., including the Bank. Due to certain
extraterritorial aspects, it also impacts the Bank’s operations outside
the U.S., including in Canada. Many parts of the law are now
in effect and others are now in the implementation stage, while
regulations on other portions of the law remain to be finalized.
Certain of the rules that impact the Bank include:
• The “Volcker Rule” − In December 2013, the U.S. Federal Reserve
and other U.S. federal regulatory agencies issued final regulations
implementing the Volcker Rule provision of Dodd-Frank, which
restricts banking entities from engaging in proprietary trading and
from sponsoring or investing in certain hedge funds and private
equity funds. Under the final Volcker Rule regulations, banking
entities are required to conform their covered trading activities,
investments and sponsorship activities to the Volcker Rule by
July 21, 2015, absent an applicable exemption or further extension
to the conformance period by the Federal Reserve − The Bank has
established conformance plans, where relevant, but we are still in
the process of evaluating the full impact of the Volcker Rule on our
current activities. The Volcker Rule has and will likely continue to
increase our operational and compliance costs, and may also restrict
certain of our trading and fund investment or sponsorship activities.
• Debit Interchange − On July 31, 2013, the U.S. District Court for the
District of Columbia issued a ruling regarding the Federal Reserve’s
rules implementing a limit on debit interchange fees. The district
court’s ruling effectively required the Federal Reserve to lower the
cap on debit interchange fees by requiring the Federal Reserve to
recalculate the cap without considering certain costs to issuers.
Subsequently, the Appellate court overturned the District Court’s
decision. That Appellate court decision is now under appeal by the
merchant plaintiffs. If the Federal Reserve, upon final resolution of
the dispute, implements a lower cap on debit interchange fees, there
may be adverse impact on our debit card interchange fee revenue.
• Capital planning and Stress testing − Pursuant to the Federal
Reserve’s Comprehensive Capital Analysis and Review (CCAR)
process, we must submit our capital plan and stress test results to
the Federal Reserve on an annual and semi-annual basis respectively,
beginning in 2016. In addition, TD Bank, N.A. and TD Bank USA
are required to conduct stress testing pursuant to the requirements
of the Office of the Comptroller of the Currency (OCC), which also
defines the stress test scenarios. Any issues arising from stress test-
ing may negatively impact the Bank’s market position, businesses,
operations and reputation and lead to increased costs.
• Intermediate Holding Company − On February 18, 2014, the
U.S. Federal Reserve adopted a final rule that imposes “enhanced
prudential standards” on the operations of foreign banking organi-
zations (FBO) with consolidated assets of $10 billion or more in the
U.S., such standards including, for example, enhanced capital and
liquidity standards, stress testing requirements, and risk manage-
ment standards. In addition, FBOs with consolidated U.S. assets of
$50 billion or more, such as the Bank, must place all of their U.S.
operations (excluding branch and agency operations) under a top-
tier U.S. intermediate holding company (IHC), with 90 percent of
assets being transferred to the IHC by July 1, 2016, and the remain-
ing by July 1, 2017. It is anticipated that the foregoing actions will
likely require TD to incur operational and compliance costs and may
impact its businesses, operations and results in the U.S. and overall.