Reputational Risk

Reputational risk is one of the most challenging issues banks and other financial institutions have to manage. According the World Economic Forum in 2012, 25% of a company’s value is now linked to its reputation. This heavily reflects the fact that the aftermath of the 2008 financial crisis had shown the true repercussions of shattered reputations, having had prestigious institutions gain notoriety overnight. In its annual global risk survey, EY together with the Institute of International Finance have repeatedly placed Reputational Risk as one of the top concerns for CROs and the board of directors. But why is this risk so important to manage?
The Most Valuable and Fragile Asset
Reputation is crucial for Financial Institutions to gain public and consumer trust. Reputational risks are threats to the good name of the business and are often underestimated and well hidden.
Therefore, it is important to know potential threats and the potential impact that can occur. Threats can be found in anywhere from employment activities, product structure, and failures in governance. Negative consequences can lead to repercussions such as the loss of both current and future clients and partners, greater distrust among the general public, loss of revenue, fall in share price, and negative publicity that can spread very fast through the media. The main reason that Reputational risk is so important is that the actual risk itself is difficult to quantify. Revenue can of course be lost through regulatory measures depending on the breaches of the company, however the greatest loss comes from the decrease in clientele which is not immediately detectable and takes years to address.
Distrust towards the banking industry is still present today, more than 12 years after the financial crisis, and people in the UK are still weary of financial advice, having gone through the Payment Protection Insurance scandals of 2014.
So what can be done to prevent?
Dodging the Bullet Before it Hits
The focus should be the Integrity and Transparency of your business. Setting high standards and having clear business procedures and policies, with proper KYC and CDD processes, should be the main priority, defining clearly the risk appetite of the bank in terms of financial crime and more holistically on business ethics.
Taking complaints seriously. In today’s society social media and online reviews can alter the client’s perception of your company. Customer feedback should be addressed promptly and adequately, following up on all regulated complaint handling procedures for companies who fall under the MIFID II remit. Taking care of both the company’s and the customer’s data by having a strong GDPR framework is key in avoiding expensive data breaches.
Avoid Becoming the Target
You don’t know when, you don’t know how much, but if you ignore the reputational risk, you will be hit. To avoid risks, it is imperative that one considers a series of preventive and proper measures for reputational risk mitigation. This would include a 360-degree view of the potential threats that could damage your reputation or your business.
