Basel II classified legal risk as a subset of operational risk in 2003. This design is based on a business perspective and recognizes that there are threats in the business environment. The idea is that companies don`t operate in silos and tend to be subject to legal obligations when they take advantage of opportunities and engage with other companies. [1] For the purposes of this training, there is a legal risk if the event or consequences are of a legal nature. To put it in ISO 31000 terms, there is a change of circumstances that is legal, or the effect of a change of circumstances is legal. Legal risk is the risk of financial or reputational loss that can result from a lack of awareness or misunderstanding, ambiguity or reckless indifference to how laws and regulations are applied to your business, its relationships, processes, products and services. [9] This does not mean that only lawyers can perform a legal risk analysis or that lawyers are sufficient for the legal risk analysis. One of the most powerful and intangible benefits of this legal risk management course is that it can bridge the gap between lawyers and their peers across the organization. These risks certainly overlap. Does an infringement claim represent a contractual risk or a litigation risk? They also overlap with other types of risks, which are often outside the lawyer`s jurisdiction. Is the risk that a loan agreement will be unenforceable against a borrower a contractual risk or a credit risk? There are four types of legal risks.

Legal risks arise from contracts, regulations, litigation and structural changes in the market. Contracts create business relationships that funnel money into an organization in the form of revenue and out of an organization in the form of expenses. Contracts may relate to assets and liabilities. Contract risk quietly and chronically threatens the health of the organization. What do we mean by legal risk? Why do legal risks warrant their own categorization and analysis? The types of legal risks vary by industry. An indicative list: Organizations invest significant amounts of money to prevent litigation. It is useful to weigh the costs of risk management against the possible outcomes. Legal risk is the risk of losses resulting from an unintentional or negligent breach of a professional (legal) duty to certain customers (including loyalty and suitability requirements) or from the nature or design of a product. Legal risk is the risk of loss to an institution primarily caused by: (a) an erroneous transaction; or (b) a claim (including a defense of a claim or counterclaim) is asserted or any other event occurs that gives rise to liability to the Institution or any other loss (for example, as a result of termination of a contract), or; (c) the lack of appropriate measures to protect the assets (e.g. intellectual property) of the institution; or (d) changes in law. [6] Employee conduct, intellectual property, business practices and more result in lawsuits.

The risk of litigation receives the lion`s share of media and board attention. Litigation is not necessarily the most damaging legal risk. We can subject both situations to a legal risk analysis. Legal risk was defined as part of operational risk by Basel II in 2003. It involves the risk of financial or reputational loss arising from any type of legal problem. This could include a lack of awareness or understanding of how laws and regulations apply to a business. But companies can take steps to reduce this risk. For example, a company may require all employees to complete health and safety training to reduce the legal risk associated with claims.

For better or worse, government regulations infect every sector of the economy. These regulations set standards of care, requirements, require reports and presentations. With each regulation, the risk of fines, penalties or injunctions increases to promote compliance. Regulatory risks are inevitable and potentially embarrassing. Airline deregulation, antitrust complaints and competitors` pricing practices are examples of structural legal risks. Regulatory risks come in many colours, making it difficult to identify regulatory risks. Some regulations are cross-sectoral, such as taxation and labour and employment. Some regulations are specific to a jurisdiction: national, regional or local. Regulations may address specific practices such as clinical trials, consumer product protection or financial disclosures. Regulatory risks may be significant or unclear. What regulations apply to your organization? To use a tired sentence: « It depends. » One of the main reasons why legal risk is associated with operational risk is fraud, as it is recognized as the most important category of business interruption events and is also considered a legal issue.

[2] However, this does not mean that the legal risk is limited to this conceptualization. For example, there are certain types of legal risks defined by European Union (EU) law.