LEGAL RISK MANAGEMENT IN FINANCIAL AND BANKING SERVICES

In the context of globalisation and the continuous development of financial markets, the financial and banking services industry has become increasingly complex, accompanied by inherent legal risks that organisations must address. Legal risk management has become crucial for financial institutions and banks as it is an essential factor in protecting assets, reputation, and organisational stability. This article aims to provide foundational knowledge on legal risk management in financial and banking services.

1. What is legal risk in financial and banking services?

Legal risk in financial and banking services refers to the risks or dangers associated with non-compliance with legal regulations, rules, and management regulations of the financial industry. This includes violations of financial transaction regulations, compliance with financial safety measures, or failing to follow necessary legal processes and standards. These risks can lead to severe consequences such as financial losses, loss of reputation, and even legal actions from regulatory authorities.

Specifically, legal risks in financial and banking services can arise for the following reasons:

• Violation of legal regulations: Including laws and regulations issued by state regulatory agencies that financial organisations must comply with. Non-compliance can lead to financial penalties, loss of reputation, or other punitive measures from regulatory bodies.
• Breach of contract: Financial institutions often engage in a range of complex financial transactions, including but not limited to securities trading, currency exchange, and providing derivative financial products. In this process, legal risks in financial and banking services can arise from not fulfilling contract terms with customers, partners, or related parties, or from ambiguity in transaction terms and conditions.

Misinterpretation or incorrect application of terms, and failure to comply with terms can lead to legal disputes, financial losses from compensation claims, and severe consequences for the financial institution’s reputation.

• Legal disputes: Including lawsuits or disputes between financial institutions and customers, partners, or other third parties. This legal risk does not necessarily arise from the financial institution’s wrongdoing but can originate from various sources such as customers, business partners, or regulatory agencies.
• Internal management: Ineffectiveness or looseness in the internal management system of the financial organisation can be a loophole for unethical or unprofessional behaviour by employees within the organis This can include fraud, corruption, or abuse of power.

2. Strategies for legal risk management in financial and banking services

For legal risk management in financial and banking services, financial institutions need to apply detailed and effective solutions. Below are ways to significantly mitigate legal risk:

Establishing an internal compliance system

Financial institutions and banks need to establish independent compliance departments separate from business units to monitor and ensure compliance with legal regulations. Additionally, training employees in compliance departments on legal regulations and compliance processes is crucial. Training employees not only helps them understand the rules and regulations but also provides them with the tools and knowledge needed to identify and address legal risks effectively.

Providing regular and practical training programs is an important part of ensuring that the internal compliance system achieves the necessary effectiveness. These training programs should not only focus on conveying knowledge about new legal regulations and preventive measures but also delve into how to handle specific risk situations.

Training programs may include instruction on the latest legal regulations in the finance and banking sectors, specific procedures and guidelines for legal risk management, as well as communication and negotiation skills to enable employees to handle risk situations professionally.

Conducting periodic internal audits and compliance reviews is essential to detect and correct legal violations. This requires a commitment from leadership to ground-level employees, ensuring that everyone in the organisation is aware of and implements preventive and responsive measures to risks.

Contract risk management

Before signing, financial institutions and banks need to thoroughly review contract terms. This not only ensures the legality and reasonableness of the contract but also helps to early identify terms that may cause adverse or legal risk to the organisation. Legal experts should be involved in this process to ensure that all legal aspects are fully considered. Additionally, ensuring that contract terms are clear, transparent, and free of contradictions or ambiguities is important to avoid misunderstandings and future disputes.

After signing a contract, ensuring compliance with the agreed terms is crucial. Organisations need to establish strict and effective control measures to monitor contract performance. These measures can include clearly assigning responsibilities to relevant departments, tracking progress, and regularly reporting on contract implementation status. Additionally, periodic inspection and evaluation processes are necessary to ensure that contract terms are properly adhered to and to promptly identify and rectify any errors.

Litigation risk management

Despite thorough preparation and stringent control measures, financial institutions sometimes cannot avoid disputes during contract performance. Therefore, establishing effective dispute resolution procedures in the dispute resolution clause of the contract is necessary to minimise the negative impacts of disputes. Financial institutions need to collaborate with law firms or professional lawyers from the contract drafting stage to receive specific legal advice. Organisations should also prepare thoroughly for litigation by building a strong case and collecting robust evidence to protect their rights. At the same time, out-of-court dispute resolution through negotiation, mediation, or arbitration should be prioritised to save costs and time.

Ethical risk management

Financial institutions need to build and maintain a strong ethical culture, encouraging employees to act rightly and honestly. Therefore, establishing clear ethical regulations and rules, disseminating and training to ensure employees understand and comply is particularly important. Besides, establishing monitoring measures and strictly handling ethical violations should be emphasised for effective legal risk management in financial and banking services in terms of ethics.

Investing in technology to support legal risk management

Modern technology can help financial institutions and banks with more effective legal risk management. Legal risk management systems and compliance software can automate control, monitoring, and reporting processes, helping to minimise risks and improve operational efficiency. Essentially, applying technology not only enhances the legal risk management capability of financial institutions and banks but also opens up new opportunities to implement preventive measures and timely solutions to potential legal issues.

• Compliance management systems: These systems assist financial institutions and banks in tracking and ensuring adherence to regulations. Key features of such systems include monitoring and updating legal regulations, managing compliance documentation, and conducting regular compliance checks and evaluations to identify and rectify legal violations.
• Risk management systems: These systems should be established to comprehensively detect and assess risks, enabling financial institutions and banks to effectively evaluate and conduct legal risks management in financial and banking services. Key features of these systems include assessing the legal risks of business activities, financial transactions, and business partners; monitoring and managing control measures to ensure effectiveness; and providing risk reports and analyses to help the organisation understand and conduct legal risk management.

In summary, legal risk management is a crucial and necessary element for financial institutions and banks. Implementing effective strategies and measures of legal risk management in financial and banking services helps protect the organisation’s assets and reputation, ensure compliance with legal regulations, and cooperate with regulatory agencies. Additionally, utilising modern technology and raising awareness about legal compliance are also important factors helping financial institutions and banks with more effective and sustainable legal risk management.

The above is an overview of legal risk management in financial and banking services. If you have difficulties in finding a Law Firm to advise and support in the relevant legal field, please contact us. Phuoc & Partners is a professional consulting firm established in Vietnam and currently has nearly 100 members working in three offices in Ho Chi Minh City, Hanoi and Danang. Phuoc & Partners is also rated as one of the leading consulting firms specialising in business law in Vietnam that has leading practice areas in the legal market such as Labour and Employment, Taxation, Merger and acquisition, Litigation. We are confident in providing Clients with optimal and effective service.