When you’re tasked with protecting your firm and your customers’ assets, you must be able to not only assess risk in a multitude of ways but respond accordingly.
Imagine you’re a medieval knight, and the queen has dubbed you her royal risk manager, charged with protecting and defending the castle. One day, you hear word of a threat, and rush to suit up in your armor like you have countless times before. You mount your trusty steed and gallantly advance to meet the foe you are certain you can defeat. After all, you know what you’re doing. Except, no one is at the castle gates. While you were focused on protecting against the risk you were expecting, you failed to see that the threat was something else entirely …
As a current-day risk or compliance professional, you don’t want to be the knight in this story. Sure, the “shiny armor” you’ve used for years may be useful to respond to some challenges, but you’ve got to be able to anticipate and adapt to the next risk, too.
So, how do you get there?
1. Establish a unified view of risk across your firm.
A unified view of risk across your firm’s front- and middle-office functions will provide a solid foundation for alignment around risk and a shared understanding for deciding how and when to adjust your approach.
By establishing a risk culture with a common language and clear lines of communication across the business, it is possible to create a risk management strategy that will lead to more innovative and intuitive investment strategies. This unified view of risk can also help the front and middle office collaborate to access new opportunities in today’s competitive markets. When everyone is aligned on risk, you have a greater ability to anticipate and adapt as needed to protect your firm and your clients.
2. Take a proactive approach to the integration of risk and regulation.
Between Basel IV, MiFID II and MAD II, IFRS, Solvency II and more, financial services firms of all types, from trading to banking to insurance, are under significant pressure to adapt to new rules, new reporting demands, and new consequences for non-compliance. At the same time, regulators are prompting firms to re-examine how risk can and should be managed in order to minimize market disruption and protect assets and clients while remaining competitive and profitable.
Elaborating on the critical intersection of risk and regulation, a recent Chartis Research report states: “Regulatory reporting, approval and emergency responses take precedence over all other risk IT projects and programs, and there is much re-classification of what is ‘mandatory’ and what is ‘discretionary’ … [and firms must] ensure there is a flexible infrastructure for the fresh complexities” of new market structures and regulatory demands.
Essentially, being able to respond flexibly to the changing regulatory environment has become the crux of the risk manager’s job. And with a flexible risk strategy that also connects the dots across functions, you can anticipate new regulatory demands and adapt.
3. Ensure you have the right tools for the job.
Our medieval knight would be halfway there if he had a sophisticated castle-protection strategy that considered risk from multiple angles. But what happens if the risk shifts and comes from the air rather than on foot like you expected? What if it’s a flood? What if it’s a disease? What if it’s a fire-breathing dragon? Do you have the tools to quickly adjust your approach and respond with confidence?
The same concept is true for risk managers. Having a unified view of risk across your firm and understanding the critical intersection of risk and regulation set the foundation. You can then discover patterns and correlations that may have been overlooked. Having a flexible set of tools, solutions and systems at hand enables you to then adapt and shift to meet new demands and challenges as they arise.
Chartis reports that as large banks are seeking to minimize complexity, they are radically reducing the number of duplicated systems they use. For example, one large bank went from more than 40 market risk management systems seven years ago to 10 systems and now to two or three. As the number of systems shrinks, each remaining – or new – risk system needs to be able to do more, which can enable flexibility. Even the way risk and compliance managers utilize their risk and compliance solutions and data needs to be enabled for flexibility. In a recent survey of insurance risk professionals, respondents shared that they are looking for tablet-based access, HTML5 dashboards, and mobile displays from their risk systems.
But to achieve your goal of a flexible, comprehensive and unified risk management strategy, you need comprehensive, accessible technology solutions.
Many organizations have already begun moving toward an enterprise-wide approach to unify their firms’ view of risk and prioritize the interconnectedness of risk and regulation. However, there is still demand for more innovative tools and solutions that will enable firms to take full advantage of this advanced approach to risk management.
But, whatever happened to the knight in our story? Was he able to adapt and respond to a new risk, or was he defeated for lack of flexibility or a deficient toolset? Drop us a note if you think you know what happened … The ending is up to you.