Legal Risk Guidance Note for Banks

Summary

This is a guidance note issued by the Guernsey Financial Services Commission for banks operating in Guernsey, addressing legal risk as a subset of operational risk. It is non-exhaustive and does not create binding rules, but sets out areas where the Commission expects banks to have considered and documented their approach to legal risk, drawing on a suggested definition of legal risk from the International Bar Association (attached to the note).

• Mis-selling and cross-border risk: Firms should take care over pre-contractual discussions, record-keeping, agent/principal roles, and cross-border legal complexity, especially in group structures spanning multiple jurisdictions.
• Documentation issues: Firms should understand when standardised versus bespoke documentation is used, ensure documentation authorship is identifiable, review governing law choices, keep legal opinions current and applicable, and verify counterparty authority and required filings.
• Independence and organisation: Legal risk should be assessed independently by the Guernsey entity even where advice is sourced from elsewhere in a group, with clear allocation of responsibility and periodic board reporting.
• Group credit risk relationships: Firms should scrutinise the legal basis of upstream payments or asset transfers to parent or group companies, review insolvency implications, and ensure client money protections (such as segregation) are properly in place.

The note concludes by summarising these four risk areas and notes that other legal risks specific to individual firms may also be relevant; each firm should identify and manage the issues pertinent to its own business and take its own legal advice as appropriate.

Key obligations

• Banks are expected to identify and consider legal risk issues relevant to their own business and take their own legal advice as appropriate
• Banks should adopt or consciously decide upon (and document) a clear definition of legal risk used throughout the business
• Banks should ensure legal advice and training on relevant legal risks are available to Guernsey management and personnel
• Firms should have documented policies and procedures for managing legal risk, with periodic reporting to the board or executive committee
• Firms should ensure Guernsey entities independently assess legal risks even when relying on group-sourced advice
• Firms should periodically review the legal basis and insolvency implications of upstream payments or transfers to parent or group companies
• Firms should verify that client money is properly segregated or otherwise protected under applicable statutory trust arrangements

Applies to

banks