Legal risk
Competent authorities should consider the following when assessing the relevance and significance of the institution’s exposures to legal risk:
mis-selling of products or services;
conflicts of interest in conducting business;
manipulation of benchmark interest rates, foreign exchange rates or any other financial instruments or indices;
barriers to switching financial products during their lifetime and/or to switching financial service providers;
automatic renewals of products or exit penalties; and/or
customer complaints processing;
violation of national and international rules and regulations (tax rules, internal fraud or internal theft, anti-money laundering rules, anti-terrorism rules and economic sanctions);
ESG-related, in particular environment-related and greenwashing-related, litigation exposures.
Competent authorities should consider whether the institution may occur any expenses, fines, penalties or punitive damages from legal proceedings and the number and content of complaints. The outcomes of the Title 4 assessment should be also leveraged, along with scrutinising the incentive policies, to obtain high-level insights into sources of potential misconduct. In this context, competent authorities should also consider whether the institution has in place adequate and effective systems and processes to implement and comply with restrictive measures (e.g. sanctions), including assessing institution’s compliance with the EBA Guidelines on internal policies, procedures and controls(42).
However, the competent authority should apply a forward-looking approach, also considering the possible impact of regulatory developments and the activity of relevant authorities in respect of consumer protection and the supply of financial services in general.