Page 40 - EBA 2013.2869 Risk Assesment Report final proof4

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E U R O P E A N B A N K I N G A U T H O R I T Y
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built in order to meet increased reputational
and/or legal risk.
Supervisors should therefore assess if pru-
dential risks stemming from banks’ business
practices are adequately reflected in an in-
stitution’s Internal Capital Adequacy Assess-
ment Process (ICAAP), given their institu-
tion-specific and potential wider prudential
implications. Likewise, supervisors should
ensure that risks stemming from potentially
detrimental business practices of banks are
adequately reflected in their supervisory re-
view and evaluation process (SREP). While an
appropriate quantification of institution-spe-
cific reputational risks might be difficult to
attain, further approaches of taking into ac-
count reputational risks should be explored.
In order to get a more accurate picture of
legal and reputational risk, auditors and su-
pervisors should challenge situations where
non-provisioning for related risks is poorly
substantiated and where contingency re-
serves for legal or reputational risks are
lacking.
Further, a more general reassessment of the
relationship between banks and their custom-
ers should be considered: when asked about
most important risks for retail consumers,
76 % of the RAQ respondents specified lack of
knowledge, 47 % mentioned the deepening of
the euro crisis, and 44 % thought mis-selling
to be the most important risk for consum-
ers. Thus a lack of knowledge is considered
being the predominant reason for materiali-
sation of risks for consumers. With respect
to existing markets in financial instruments
directive (MiFID) provisions aimed to protect
customers from buying products they do not
understand, the conclusion could be drawn
that the relationship between banks and re-
tail customers needs further improvement.
In particular, further needs for educational
efforts for both banks and the public sector
can be identified, as well as the need for sim-
pler and more transparent products offered
to retail customers. In addition, other condi-
tions such as comprehensive disclosure and
products, conflict-of-interest-free advice,
measures against mis-selling, alternative
dispute resolution and a pro-active supervi-
sion of business conduct are key to improve
the functioning of the retail financial markets
for consumers.