The Office of the Superintendent of Financial Institutions Canada says that financial institutions could be doing more to manage reputational risk.

The regulator has published a report on reputation risk practices in the Canadian financial industry, based on a review it carried out last year which focused on reputation risk management in the areas of structured financial transactions, trading in mutual and segregated funds, and due diligence into the funding of brokered mortgages and financial reinsurance. It says the results indicate that, “although financial institutions have taken significant steps to manage reputation risk, more could be done”.

Reputation risk often arises due to inadequate management of other risks (insurance, market, credit and operational), OSFI says. And it warns that reputation risk can arise in virtually any area of a firm’s operations even when transactions technically comply with legal, accounting and regulatory requirements.

OSFI notes in some cases that insufficient consideration may be given to reputation risk, either within specific areas (e.g., business activities, products, locations, etc.) or on an enterprise-wide basis. “All institutions must recognize that their reputation is a strategically important asset and should endeavour to strengthen their reputation risk management practices,” it says.

During its reviews, OSFI found that firms employ differing strategies to address reputation risk. In some cases, distinct reputation risk management and control frameworks are employed, while other firms manage reputation risk as part of their overall management of financial and other risks such as regulatory, legal, fiduciary and operational risks.

It is not publishing a formal guideline for firms, but the report is intended to communicate basic principles associated with reputation risk management, highlight observations from its work in this area and indicate issues OSFI may focus on during supervisory reviews. It also notes that it will pay more attention to reputational risk management in its supervisory reviews. “Recent corporate scandals have resulted in regulatory bodies and the public placing more focus on business practices, ethics and integrity. This is a key issue for an industry that relies on the confidence of consumers, creditors and the general marketplace,” it says.

“Dealing with reputation risk is challenging, but it is an area OSFI considers vital to ensuring that Canadian financial institutions continue to be managed in a safe and sound fashion,” it notes.