Legal risk is not just about anti-money laundering and bribery. The correct legal risk management procedures and processes need to be implemented to protect your firm.
What is legal risk?
Legal risk can be described as an action or issue that has caused a business or individual reputational damage or a financial loss. A legal risk is often caused by a failure to take the correct legal measures to protect themselves or a company. Legal risk is also a result of a lack of understanding of how laws and regulations apply to businesses.
The importance of legal risk management
Insufficient legal risk management can have fatal effects on businesses, which is why it should be a top priority for any legal firm. The purpose of risk management is to reduce or eliminate the impact of a particular action or event.
To prevent facing financial and reputational losses, risks must be identified and mitigated against at an early stage.
Types of legal risks
Customer data security
Because of the large amounts of sensitive information law firms handle, there has been a rise in cyber attacks during the pandemic, putting customer’s data at risk. Cybercriminals are finding new ways to hack through security software and trick people into providing personal or business details.
It’s important to keep your law firm secure and compliant to avoid customer data security risks.
A contractual risk occurs when there has been a failure to fulfil contractual liabilities.
Contract risk can happen at any point, and mitigating clauses need to be put in place to protect the company. Failing to meet contract terms can result in fines and reputational loss.
A compliance risk can arise because of a non-compliance with policies or best practices. Examples include failing to conduct due diligence on new customers and failing to report suspicious transactions or activity. Compliance checks should be regularly conducted to avoid penalties.
Operational risk refers to risks that business owners face during the day-to-day running of a company such as HR issues or management problems. To reduce operational risk, contingency plans should be put in place to cover every possible scenario.
All businesses are subject to financial risk, including credit risk, liquidity risk, equity risk and market risk.
Having a strategy in place will help your company cope with adverse effects such as a pandemic.
Reduce legal risk with these steps
- Identify risks: The first step is to document and define what legal risks could affect your law firm. Ownership of risks should be included, and the document should be shared internally to ensure all employees are appropriately trained in each area.
- Assess the risks: Next, an assessment of the level of risk exposure to your organisation should take place to determine which risks are the highest.
- Control the risks with a plan: Control measures and mitigation plans such as policies, tools and technologies should be agreed and implemented.
- Monitor and report on the risks: It’s important to regularly assess the effectiveness of the controls you have in place, so they remain robust and secure.
Penalties for non-managed risks
Companies that are not compliant with legal risks may face severe consequences.
The most common penalty for not managing legal risk is fines, which range in value depending on the severity of the breach. Some actions result in criminal consequences such as significant financial penalties or even expensive court cases or jail.
Protect your legal firm
Effective legal risk management will protect your legal firm from risks. Our vast experience in the legal sector means we are familiar with the different legal risks facing those in the legal sector. Let us help you manage your legal risks with our trusted protection services.