IBRC annual report for 2011 - Irish Bank Resolution Corporation ...

Principal risks and uncertainties continuedValuation riskTo establish the fair value of financial instruments, the Grouprelies on quoted market prices or, where the market for afinancial instrument is not sufficiently active, internal valuationmodels that utilise observable market data. In certaincircumstances, observable market data for individual financialinstruments or classes of financial instruments may not beavailable. The absence of quoted prices in active marketsincreases reliance on valuation techniques and requires theGroup to make assumptions, judgements and estimates toestablish fair value. In common with other financialinstitutions, these internal valuation models are complex, andthe assumptions, judgements and estimates the Group isrequired to make often relate to matters that are inherentlyuncertain. These judgements and estimates are updated toreflect changing facts, trends and market conditions and anyresulting change in the fair values of the financial instrumentscould have an adverse effect on the Group’s earnings andfinancial position.Fitness and probity regimeThe Central Bank of Ireland published its Regulations andStandards of Fitness and Probity, issued under Part 3 of theCentral Bank Reform Act 2010 (‘the 2010 Act’), on1 September 2011.These statutory standards came into effecton 1 December 2011.Litigation and legal compliance riskThe Group’s business is subject to the risk of litigation bycounterparties, customers, employees, pre-nationalisationshareholders or other third parties through private actions,class actions, regulatory actions, criminal proceedings or otherlitigation or actions. The outcome of any such litigation,proceedings or actions is difficult to assess or quantify. Thecost of defending such litigation, proceedings or actions maybe significant. As a result, such litigation, proceedings oractions may adversely affect the Group’s business, financialcondition, results, operations or reputation.In the period since December 2008, various regulatory bodiesin Ireland have initiated investigations (including in some cases,criminal investigations) into certain aspects of the Bank’sbusiness, including certain loan and other transactionsinvolving former Directors and certain third parties. Theseinvestigations are ongoing and it is not possible at this stage togive any indication as to whether these investigations willresult in civil, administrative or criminal proceedings against theBank or any of its current or former Directors or officers.Due to the complexity of the restructuring of the Bank,including integration of the former INBS into the Group, thereis a potential for unforeseen legal risks to arise.The 2010 Act provides for a fitness and probity regime for thereview of individuals performing ‘controlled functions’ and‘pre-approval controlled functions’, including directors andchief executive officers, in regulated financial service providersother than credit unions. Where the review causes the Head ofFinancial Regulation of the Central Bank of Ireland to form theopinion that there is reason to suspect the person’s fitness andprobity to perform the relevant function, an investigation maybe conducted which may result in a prohibition notice beingissued preventing the person from carrying out the function.The Group could suffer reputational damage or adversefinancial performance if any issues were to arise under thefitness and probity regime.22