What is legal risk?
This is the potential loss that a company or individual could face as the result of a legal issue. It could be a claim made against them, a change in the law or failure to take the proper legal measures to protect themselves.
Key takeaways
Legal risk is the potential financial or reputational loss that a company or individual could face from legal issues such as claims, law changes, or failure to take proper legal measures.
The Basel II accord in 2003 defined legal risk as part of operational risk, including losses from lack of awareness or misunderstanding of how laws and regulations apply to businesses.
Legal risks for businesses include violating employment law, tax law, and other regulations, with consequences ranging from compensation claims to arrest and prosecution.
Companies can take proactive measures to reduce legal risk, such as requiring employees to undergo health and safety training to minimize exposure to compensation claims.
Where have you heard about legal risk?
If you're an investor or in business, you've probably heard about how you should always abide by employment law, tax law, and other regulations. One of the most obvious legal risks of not doing so is the risk of arrest and prosecution.
What you need to know about legal risk...
Legal risk was defined as part of operational risk by the Basel II accord in 2003. It includes the risk of financial or reputational loss resulting from any type of legal issue. This could include a lack of awareness or misunderstanding of the way laws and regulations apply to a business. But companies can take action to reduce this risk. So for example, a corporation may require all its employees to undergo health and safety training in order to reduce its legal risk from compensation claims.