Search 
Mallesons Stephen Jaques
Who does this affect?

All banks with branches or invested enterprises in China; lease financing companies, auto finance and trust companies.

What do you need to do?

Review the requirements of the CBRC to ensure that your reputational risk management systems comply with the new requirements.

Authors
Minny Siu  (蕭乃瑩)
Partner

Nicolas Groffman  (郭愷)
Senior Associate
Minny Siu  (蕭乃瑩)
Partner
T +852 3443 1111
John Shi  (史衛)
Partner
T +86 10 5927 2168

Hong Kong
Richard Mazzochi  (馬紹基)

Beijing
David Olsson  (沈文)

Shanghai
Martyn Huckerby  (贺墨亭)

Banks’ reputational risk can no longer be handled just by marketing departments - 7 October 2009

The China Banking Regulatory Commission (CBRC) has recently released a Guidance on Commercial Banks’ Management of Reputational Risks - changing the way financial institutions manage reputational risks. The new guidelines are aimed at having commercial banks take ownership of addressing and managing such risks.

The Guidance applies to foreign invested banks, branches of foreign banks, financial asset management corporations, trust companies, finance companies, financial leasing companies, auto financing companies, money brokerage companies and other banking financial institutions.

The CBRC is aware that negative economic consequences arise not just for the banks themselves, but also for the economy at large, and requires commercial banks to take responsibility for addressing risks. “Reputational risk” is widely defined as any negative comments with respect to any operation, management and other activities of a commercial bank, or arising from other external events. The bank itself does not have to be at fault: the issue that is addressed here is public perception, even when it is misguided.

Previous perception in the market that the management of reputational risks is merely a branch of corporate advertising or marketing requires to be reconsidered by the senior management of onshore banks. Analysis and judgment of public opinion, real-time attention to public opinion, and timely clarification of false information or incomplete information is considered too important to be left to marketing professionals and is required to be dealt with by risk specialists and senior management of a bank.

Directors of a bank will bear the ultimate responsibility for the bank’s reputational risk management (RRM) and their key obligations are summarised in the chart below:

Responsibility

Specific duties prescribed in the Guidance:

Directors shall:

  • formulate RRM policies applicable to the entire bank
  • establish the bank’s RRM system
  • monitor the situation and effectiveness of the bank’s RRM, and
  • assume the ultimate responsibility for RRM.

1. To review and approve the responsibility and reporting path of senior management in respect of RRM, to ensure the adoption of measures to continuously and effectively monitor and report the reputation risk of the bank, and to timely respond to any reputation risk events.

2. To authorise a special department or team within the bank to deal with the bank’s RRM.

3. To designate the responsibilities of the various departments within the bank with respect to RRM.

4. To ensure that the bank formulates training programs on RRM for its staff.

5. To nurture RRM culture within the entire bank and foster employees’ awareness of reputation risk.

At the entity level, each commercial bank is required to set up anti-risk systems, and to ensure on-going compliance with its RRM. These are summarised in the chart below.

Responsibility

Specific duties prescribed in the Guidance:

Establish and formulate RRM mechanisms applicable to the entire bank.

1. Investigation and regular analysis of reputational risks and occurrence factors.

2. Classify and grade management of reputational risks, as well as clarification of management authority, responsibilities and reporting paths.

3. Emergency response to reputational risks, scenario analysis of various types of reputational risk that may occur, formulation of prediction scheme, and conducting exercises.

4. Complaints handling, monitoring customer relationships, notification, solving customers’ problems, ensuring the legitimate rights of customers

5. Specialized management of information disclosure and media observation, timely and accurate press releases, listening to public opinion, and providing assistance for ordinary news reports.

6. Analysis of public opinion and timely clarification of false information or incomplete information.

7. Rewards and punishments for internal RRM.

8. Management of reputational risks, recording and storage of RRM-related data.

9. Evaluation subsequent to RRM, and timely assessment of the effectiveness of the measures in response to reputational risk events.

Respond to a “material reputational event”* in a timely manner and keep the regulators properly informed.

1. To promptly implement contingency plans and draw up countermeasures subsequent to the occurrence of a material reputational event or actions and events that may trigger from a material reputational event.

2. To designate senior management personnel to establish a special team, and clarify the authorities in charge and responsibilities.

3. To make press releases in a timely, transparent and effective way.

4. To closely follow and analyze public opinion in a real-time manner and adjust the counter-measures in a dynamic manner.

5. To report to the CBRC or its local offices within 12 hours subsequent to the occurrence of a material reputational event.

6. To report to other relevant departments in a timely manner.

7. To submit the disposal and assessment reports promptly to the CBRC or its local offices.

* In the Guidance, a “material reputational event” means any reputational event that will cause or trigger substantial loss to a bank, a material fluctuation in market volatility, systematic risk or an adverse effect on the social and economic order and stability.

Disclaimer

The views set out in this publication are based on our experience as international counsel representing clients in their business activities in China. As is the case for all international law firms licensed in China, we are authorised to provide information concerning the effect of the Chinese legal environment. However we are not admitted to practice Chinese law and so are unable to issue opinions on matters of Chinese law.

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.