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7. Consumer issues, reputational
concerns and IT related
operational risks
Detrimental business practices of EU banks
continue to affect consumer confidence in
banks and have an increasingly adverse im-
pact on institutions involved. Related risks
remain elevated while further risks related to
banks’ business practices have materialised,
and the number and types of alleged detri-
mental practices continue to grow. Some
banks are coping with further rising materi-
alised and potential redress costs, and con-
duct concerns therefore remain high on the
supervisory agenda. In addition, there are
growing concerns over the increasing per-
sistence, intensity and sophistication of infor-
mation technology-related operational risks.
7.1 Consumer issues and
reputational concerns
Inappropriate conduct such as mis-selling
of banking and other products to consum-
ers, failures with regard to rate benchmark
setting processes, and alleged manipulation
of markets for credit default swaps has al-
ready been mentioned in previous reports.
However, the scope of alleged inappropriate
practices is widening, and the magnitude of
previously identified detrimental practices,
for example related to foreign exchange trad-
ing business, is increasing. Additional types
of alleged inappropriate conduct are coming
to the fore, for example inappropriate hiring
of relatives of family members of well-con-
nected business and public partners.
Increased concerns on widening scope
and magnitude of in-appropriate
The RAQ provides indications of an ongoing
aggravation of reputational risks. Around
43 % of respondents identified a further in-
crease in the reputation/legal risk for the
banking sector in general and a negative
trend in banks’ public perceptions — an in-
crease compared to the December 2013 RAQ
(33 % of respondents), and an indication of a
need to keep conduct risks high on the su-
pervisory agenda. The RAQ also provides an
indication of rising redress costs. A growing
number of respondents have paid out in the
form of compensation, redress, litigation and
similar payments aggregate amounts of over
EUR 1 billion, both in the reporting year and
also since the financial year 2007/08. Around
21 % of respondents have paid out such
amounts since 2007/08. Such rising conduct
costs in some cases substantially affect prof-
itability of institutions concerned.
It is also noteworthy that in the previous RAQ,
some respondents did not need to render
some compensation, redress, litigation and
similar payments in the ongoing financial
year: all respondents to this RAQ now need to
render such payments. On the one hand 49 %
of respondents provided related payments of
less than EUR 10 million, on the other hand
around 11 % of respondents needed to provide
substantial amounts of over EUR 1 billion.
Previous risk reports have indicated that
conduct risks are not sufficiently provisioned
for and that there is room for improvement
in disclosure on details of redress costs.
However, this RAQ indicates some modest
improvement in provisioning of conduct risk.
Since the last RAQ, the share of respondents
indicating that they set aside and disclose
contingent liabilities for potential compen-
sation, redress, litigation and similar pay-
ments has increased (28 % of respondents
compared to 18 %). However, at the same
time, the level of disclosure appears to have
deteriorated and only 10 % of respondents
indicate that they provide specific pillar 3
disclosure (13 % in the previous RAQ). Also,
only 38 % of respondents now provide esti-
mates on specific contingent liabilities (47 %
in the previous RAQ), in spite of stipulations
in International Accounting Standards (IAS)
that contingent liabilities with no impact on
the income statement should be set aside if
reliable estimates of actual and potential re-
dress costs cannot be made and therefore
provisions cannot be recognised (Figure 53).