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Reputational risk refers to the threat to a financial institution’s profitability or sustainability triggered by an unfavorable public perception of the organization. For example, if a financial institution has a wealthy client who is a pedophile, the public might question the financial institution’s positive image, integrity and goodwill. Another example could be that if a financial institution engages in activities that could harm the environment, it could change the perception of its customers as well as its employees. In that line, Volkswagen had to spend up to $14.7 billion to settle allegations of emissions test fraud and customer deception on 2.0-liter diesel vehicles against the Federal Trade Commission. United States. Consequently, this cheating scandal considerably damaged Volkswagen’s reputation, causing a significant drop in sales as well as a loss of employee confidence in the group.
The consequences of such stigmatization by the public could be devastating for a financial institution. With the advent of social media, reputational damage can go viral in the click of a button and the effects can last forever. The rhetoric online can be brutal, with consumers quick to condemn companies. Additionally, investors may become more skeptical and fearful of facing public anger. As for the employees, being in direct contact with the customers, they can even find themselves in a state of anguish in the middle of vehement polemics on their employer. Reputational risk can even lead to increased criminal or regulatory risks and potentially cause further damage to a financial institution.
At the macro level, the devastating effects faced by a financial institution can cast blame and shame on the reputation of an entire country. This could potentially lead to skepticism about the effectiveness of regulator oversight and could even impact the country’s good reputation, leading to collateral damage as potential or existing investors may seek to invest their funds in other other jurisdictions. If this were to happen to an international financial center, it could be a major cause for concern with devastating consequences for a country’s economic pillar as a whole, as it would mean far less gross domestic product.
With regard to operators in the Non-Banking Financial Services sector in Mauritius, the legal and regulatory framework already takes into account damage to reputation through the following:
Since reputational risk can come from both internal and external sources for a financial institution, it should be emphasized that like a well-equipped fisherman, the regulatory framework was designed like a fishing net. , with a long and wide range, to capture as many negative events and as widely as possible. Among the regulator’s amenities, terms such as “reputation” and “character” have been used in guidelines signaling that no stone should be left unturned when assessing the suitability and propriety of a person. This denotes the utmost importance that the regulator attaches to the preservation of the good reputation of Mauritius.
In light of the above paragraphs, it has been observed that reputational risk poses a massive threat to financial institutions and therefore there is a need to strike the right balance between “worth it” management and ‘worthy‘ customer relations. As Abraham Lincoln rightly said, “Character is like a tree and reputation like its shadow. The shadow is what we think of it; the tree is the real thing.” Assessing reputational risk therefore means going beyond an assessment of money laundering and terrorist financing (“ML/FT”) risks. Therefore, non-ML/FT elements should also be part of the assessment of adverse information framework in place, it does not seem easy to escape the regulator’s fishing net.Thus, reputation risk must be a substantial component that should be considered by all financial institutions because this could have dire consequences in terms of public perception of the financial institution and the country of operation, thus aecting the sustainability and profitability of the financial institution as well as the good reputation of the country .The need for continuous vigilance through an effective KYC program is therefore essential, as is compliance with reporting obligations vis-à-vis the regulator.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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