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Rothschild & Co | Annual Report 2017
4.2 Operational risk
The Group has defined operational risk as the risk of loss resulting from
inadequate or failed internal processes, people, and systems or from
external events.
4.2.1 Governance and organisation
of operational risk
The Group has an established operational risk framework with the
key objectives of mitigating operational risks by means of policies,
processes, systems and procedures; communicating the Group’s risk
appetite; protecting the Group’s assets; defining roles, responsibilities
and accountabilities across the Group; and establishing a consistent
approach for identifying, monitoring, measuring and reporting operational
risk throughout the Group.
The Group Operational Risk policy, pursuant to the Group Risk Framework
for the Group, is reviewed annually and formalises the operational
risk framework and is designed to ensure compliance with regulatory
requirements in relation to operational risk. Oversight of operational risk
matters is undertaken by the Group Executive Committee, the Managing
Partner and the Risk Committee of Rothschild & Co Supervisory Board.
Each of the key operating entities have established processes and
appointed staff to identify and assess the operational risks that they
are exposed to, in the context of their own market conditions, and
have appropriate controls or risk mitigation processes in place. The
management’s assessment of operational risk is supported by the
risk assessments which are undertaken at least annually.
All incidents with a loss amount greater than €30k are reported in the
quarterly Legal, Compliance & Risk report which is presented to the Group
Executive Committee, the Risk Committee and the Audit Committee of
Rothschild & Co Supervisory Board.
4.2.2 Compliance risk
Regular and targeted compliance training ensures that the Group
employees are clear on their regulatory responsibilities and understand
the regulatory environment in which they conduct business.
Group Compliance identifies employee training needs based upon a number
of factors, including regular monitoring of permanent controls, compliance
reviews, regulatory developments, annual compliance risk assessments,
breaches of compliance policy, practice or procedure, and other factors.
Group Compliance works in conjunction with the Learning and Development
(L&D) team in Group HR to identify and implement compliance training
requirements across the Group. In addition, bespoke training is organised
at the business line and legal entity level.
Ad hoc
training is given to ensure
prompt dissemination to staff of business-related market and best practice,
legal, compliance, and regulatory developments.
Protection of the Rothschild brand is of fundamental importance to
the Group. The Rothschild name and its reputation are the Group’s key
asset and a number of controls are in place to ensure the culture of
professionalism and protection of the firm’s reputation is maintained.
Measures relating to guarding of reputational risk are set out in Group
policies and each of the businesses’ Compliance manuals. These include
high-level principles to guide behaviour and extensive procedures relating
to new client take on/acceptance for all business divisions.
On a monthly basis, each Compliance function in all the major business
lines is required to complete a report of Compliance management
information. This information comprises quantitative data reporting and
qualitative assessments made by local Compliance officers. This gives a
Group-wide picture of compliance risk and also allows Compliance to collect
the requested information by business line or topic.
4.2.3 Money laundering and terrorist financing
risk
The Group Legal, Compliance and Risk functions oversee and coordinate
the prevention of money laundering and terrorist financing for all Group
entities. The Group Head of Legal & Compliance oversees the Group’s
AML risk framework and strategy and reports to the Managing Partner.
He is assisted by subject matter experts in the Group Financial Crime Team
and with execution of operational processes by Legal, Compliance and Risk
staff on a global basis.
A Group Financial Crime Committee (chaired by the Group Head of Financial
Crime) examines the design and effectiveness of the Group’s financial crime
policies, procedures and monitoring programmes as well as developing a
strategic approach to money laundering prevention for the Group. The
Committee convenes on a quarterly basis and its members include all
Regional Heads of Financial Crime.
The Group Financial Crime team reviews all Group Financial Crime related
policies on an annual basis.
4.3 Market Risk
Market risk arises as a result of the Group’s activities in interest rate,
currency, equity and debt markets and comprises interest rate, foreign
exchange, equity and debt position risk. Exposure to market risk on trading
activities is small in relation to capital, as trading activity is focused on
servicing client requirements rather than on proprietary risk-taking. Foreign
exchange and interest rate derivative contracts are predominantly used for
hedging purposes. Trading activities in the Group are confined to “vanilla”
products – the Group does not trade in complex derivatives or other
exotic instruments.
Each of the Group’s regulated banking entities is required to manage
market risk on a stand-alone basis in accordance with its individual risk
appetite and limits approved by the Group ALCO.
The Group measures interest rate risk in the banking book by measuring
its effect on the fair value of interest-bearing assets and liabilities (and of
interest rate derivatives). This is done by showing the impact of a uniform
200 basis point shock upwards or downwards over one year. These are
calculated at the entity level.
Exposure to interest rate risk in the banking book is small in relation to
capital and there have been no material changes to the profile of interest
rate risk in the banking book in the last 12 months, as reported in the
internal report to the ACPR.
Internal control, risk management and accounting procedures