What is Reputation Risk?
Reputation Risk is the risk arising from the potential that negative stakeholder opinion or negative publicity regarding business practices, whether true or not, will adversely impact current or projected financial conditions and resilience, cause a decline in the customer base, or result in costly litigation. Stakeholders include employees, customers, communities, shareholders, regulators, elected officials, advocacy groups, and media organizations.
According to the Basel iii framework, in supervising an individual bank which is part of a corporate group, it is essential that supervisors consider the bank and its risk profile from a number of perspectives:
- on a solo basis (but with both a micro and macro focus as discussed above);
- on a consolidated basis (in the sense of supervising the bank as a unit together with the other entities within the “banking group”), and
- on a group-wide basis (taking into account the potential risks to the bank posed by other group entities outside of the banking group).
Group entities (whether within or outside the banking group) may be a source of strength but they may also be a source of weakness capable of adversely affecting the financial condition, reputation and overall safety and soundness of the bank.
The Core Principles include a specific Core Principle on the consolidated supervision of banking groups, but they also note the importance of parent companies and other non-banking group entities in any assessment of the risks run by a bank or banking group.
This supervisory “risk perimeter” extends beyond accounting consolidation concepts. In the discharge of their functions, supervisors must observe a broad canvas of risk, whether arising from within an individual bank, from its associated entities or from the prevailing macro financial environment.
Learning from the Annual Reports
Reputation Risk, important parts from the 2021 Annual Report, Barclays Bank UK PLC
Reputation risk is the risk that an action, transaction, investment, event, decision or business relationship will reduce trust in the Barclays Bank UK Group’s integrity and/or competence.
Any material lapse in standards of integrity, compliance, customer service or operating efficiency may represent a potential reputation risk.
Stakeholder expectations constantly evolve, and so reputation risk is dynamic and varies between geographical regions, groups and individuals.
A risk arising in one business area can have an adverse effect upon the Barclays Bank UK Group’s overall reputation and any one transaction, investment or event (in the perception of key stakeholders) can reduce trust in the Barclays Bank UK Group’s integrity and competence.
The Barclays Bank UK Group’s association with sensitive topics and sectors has been, and in some instances continues to be, an area of concern for stakeholders, including:
(i) the financing of, and investments in, businesses which operate in sectors that are sensitive because of their relative carbon intensity or local environmental impact;
(ii) potential association with human rights violations (including combating modern slavery) in the Barclays Bank UK Group’s operations or supply chain and by clients and customers; and
(iii) the financing of businesses which manufacture and export military and riot control goods and services.
Reputation risk could also arise from negative public opinion about the actual, or perceived, manner in which the Barclays Bank UK Group (including its employees, clients and other associations) conducts its business activities, or the Barclays Bank UK Group’s financial performance, as well as actual or perceived practices in banking and the financial services industry generally.
Modern technologies, in particular online social media channels and other broadcast tools that facilitate communication with large audiences in short time frames and with minimal costs, may significantly enhance and accelerate the distribution and effect of damaging information and allegations.
Negative public opinion may adversely affect the Barclays Bank UK Group’s ability to retain and attract customers, in particular, corporate and retail depositors, and to retain and motivate staff, and could have a material adverse effect on the Barclays Bank UK Group’s business, results of operations, financial condition and prospects.
In addition to the above, reputation risk has the potential to arise from operational issues or conduct matters which cause detriment to customers, clients, market integrity, effective competition or the Barclays Bank UK Group.
Reputation risk management
A reduction of trust in the Barclays Bank UK Group’s integrity and competence may reduce the attractiveness of the Barclays Bank UK Group to stakeholders and could lead to negative publicity, loss of revenue, regulatory or legislative action, loss of existing and potential client business, reduced workforce morale and difficulties in recruiting talent. Ultimately it may destroy shareholder value.
Organisation, roles and responsibilities
The Barclays PLC Board is responsible for reviewing and monitoring the effectiveness of the Barclays Bank UK Group’s management of reputation risk.
The Barclays Bank UK Group Chief Compliance Officer is responsible for overseeing the management of Reputation Risk for Barclays Bank UK Group and the Head of Public Policy and Corporate Responsibility is responsible for developing a reputation risk policy and associated standards, including tolerances against which data is monitored, reported on and escalated, as required. The Reputation Risk Management Framework sets out what is required to manage reputation risk across the Barclays Bank UK Group.
The primary responsibility for identifying and managing reputation risk and adherence to the control requirements sits with the business and support functions where the risk arises.
The Barclays Bank UK Group is required to operate within established reputation risk appetite, and its component businesses prepare reports for its respective Risk and Board Risk Committees highlighting their most significant current and potential reputation risks and issues and how they are being managed. These reports are a key internal source of information for the quarterly reputation risk reports which are prepared for the Barclays UK Risk Committee and the Barclays Bank UK PLC Board.
Reputation Risk, important parts from the 2021 Annual Report, Scotiabank
Reputational risk is the risk that negative publicity regarding Scotiabank’s conduct, business practices or associations, whether true or not, will adversely affect its revenues, operations or customer base, or require costly litigation or other defensive measures. Negative publicity about an institution’s business practices may involve any aspect of its operations, but usually relates to questions of business ethics and integrity, or quality of products and services. Such negative publicity has an impact on the Bank’s brand and reputation.
Negative publicity and related reputational risk frequently arise as a by-product of some other kind of risk management control failure such as compliance and operational risks. In some cases, reputational risk can arise through no direct fault of an institution, but indirectly as a ripple-effect of an association or problems arising within the industry or external environment.
Reputational risk is managed and controlled throughout the Bank by the Scotiabank Code of Conduct (Code), governance practices and risk management programs, policies, procedures and training.
Many relevant checks and balances are outlined in greater detail under other risk management sections, particularly Operational Risk, where reference is made to the Bank’s well-established compliance program. All directors, officers and employees have a responsibility to conduct their activities in accordance with the Code, and in a manner that minimizes reputational risk and safeguards the Bank’s reputation.
While all employees, officers and directors are expected to protect the reputation of Scotiabank by complying with the Code, the activities of the Legal, Global Tax, Corporate Secretary, Global Communications, AML Risk, Global Compliance and Global Risk Management departments, and the Reputational Risk Committee, are particularly oriented to the management of reputational risk.
In providing credit, advice, or products to customers, or entering into associations, the Bank considers whether the transaction, relationship or association might give rise to reputational risk. The Bank has a Reputational Risk Policy, as well as policy and procedures for managing reputational and legal risk related to structured finance transactions.
Global Risk Management plays a significant role in the identification and management of reputational risk related to credit underwriting.
In addition, the Reputational Risk Committee is available to support Global Risk Management, as well as other risk management committees and business units, with their assessment of reputational risk associated with transactions, business initiatives, new products and services and sales practice issues.
The Reputational Risk Committee considers a broad array of factors when assessing transactions, so that the Bank meets, and will be seen to meet, high ethical standards. These factors include the extent, and outcome, of legal and regulatory due diligence pertinent to the transaction; the economic intent of the transaction; the effect of the transaction on the transparency of a customer’s financial reporting; the need for customer or public disclosure; conflicts of interest; fairness issues; and public perception. The Reputational Risk Committee also holds quarterly meetings to review activities in the quarter, review metrics and discuss any emerging trends or themes.
The Reputational Risk Committee may impose conditions on customer transactions, including customer disclosure requirements to promote transparency in financial reporting, so that transactions meet Bank standards. In the event the Committee recommends not proceeding with a transaction and the sponsor of the transaction wishes to proceed, the transaction is referred to the Risk Policy Committee.
You may also visit:
The Role of the Risk Officer: https://www.risk-officer.com/Role_Of_Risk_Officer.html
Credit Risk: https://www.risk-officer.com/Credit_Risk.htm
Market Risk: https://www.risk-officer.com/Market_Risk.htm
Operational Risk: https://www.risk-officer.com/Operational_Risk.htm
Systemic Risk: https://www.risk-officer.com/Systemic_Risk.htm
Political Risk: https://www.risk-officer.com/Political_Risk.htm
Strategic Risk: https://www.risk-officer.com/Strategic_Risk.htm
Conduct Risk: https://www.risk-officer.com/Conduct_Risk.htm
Reputation Risk: https://www.risk-officer.com/Reputation_Risk.htm
Liquidity Risk: https://www.risk-officer.com/Liquidity_Risk.htm
Cyber Risk: https://www.risk-officer.com/Cyber_Risk.htm
Climate Risk: https://www.risk-officer.com/Climate_Risk.htm
Emerging Risk: https://www.risk-officer.com/Emerging_Risk.htm
In the Reading Room (RR) of the association you can find our weekly newsletter - "Top risk and compliance management news stories and world events, that (for better or for worse) shaped the week's agenda, and what is next". Our Reading Room