|Risk comes in many forms in the banking sector and managing exposure to that risk is a key focus for the regulators when they look at the risk functions within banks. Today I’m joined by Lisa and John from our regulatory consulting compliance team to discuss more broadly how that impacts the banks. John, first, how are banks focusing on risk management generally at the moment?
|Thanks Alan. So the concept of harm is an area that regulators are more focused on in recent times. So what that means in practice is looking through products and thinking about which ones could carry a higher inherent risk of malpractice or harm occurring. So that means thinking about products or features that could be more risky, thinking about which ones could be more complex or difficult for customers to understand. Where there might be products that generate higher profits for firms, then thinking about, could there be conflict of interest or could there be potential issues with remuneration or commission? And finally also considering vulnerable customers and the resilience of customers to particular product groups. So bringing this all together, what it really means is thinking about having the right systems, processes and monitoring practices in place to ensure that harm is properly mitigated against and also understood and then also really thinking about where issues might exist and where they crystallise, ensuring that firms deal with them promptly and quickly.
|And Lisa, what part can technology play in the evolution of risk management within the banking sector?
The risk management functions are looking at the evolution of technology to see how banks can manage and monitor risks more effectively and efficiently and, in particular, looking at data analytics and the ability to slice and dice this information in an easy, reliable fashion. Now, one of the added benefits that we see from technological changes is the cost benefit which will apply to many functions, but including the risk function, and for the risk function in particular, with increased enhanced technology, this will mean that many risk functions will have the ability to manage and mitigate both emerging and evolving risks such as cybersecurity risks in an easier fashion.Now, cybersecurity risks remains at the top of the Board’s agenda and also remains at the top of the CRO’s agenda at all times. We will be talking about cybersecurity risks in a future video. Now, banks will have their risk management documentation, their frameworks, their risk appetite statements, their heat maps and all of these documents will help. However, quantifying such emerging and evolving risks such as cybersecurity risk or conduct risk or reputational risk remains quite tricky for many firms and with enhanced technological changes, this will mean enhanced data analytics which can be provided to board members and senior management teams to allow them to have greater visibility over the information and the risk profile of the banker at all times and this is an improvement that not only firms welcome, but regulars welcome in particular, and for the risk function in particular, it will mean that monitoring emerging risks in a fast-paced environment whilst allowing the business to keep up to pace with the customer’s expectation in terms of how the firm manages these risks are also important in line with the customer’s journey.
|John, how are you expecting banks to deal with this in practice?
|There’s a lot of things to consider. I mean, a key hallmark for effective risk management overall is the culture that pervades in firms so a compliance led framework of rules monitoring and dealing with regulations can of course lead to fair customer outcomes but what firms really need to think about is, ‘should they take a course of action’ as well as ‘can they’ so in practice what that really means, Alain, is a firm thinking about how it leads from the front around doing the right thing and as regulators globally get more intrusive and more attentive around accountability regimes, that only means that their assessments of culture are going to be more and more important going forward and I guess, overall, whilst a regulator can always take a different view, a firm that’s demonstrated thinking through how it might deal with issues, thinking through how it might respond to them and how that may or may not be fair to customers, is more likely to be judged in a positive light.
Welcome to Banking horizons. With insights and commentary from across our global banks group, the series will explore some of the hot topics that we see as being front of mind for our bank clients.
The second episode sees Alan Bainbridge, partner and global head of banks, John Coley, head of regulatory compliance consulting, EMEA, and Lisa Lee Lewis, head of advisory, regulatory compliance consulting, discuss the evolution of risk functions within banks, the challenges and opportunities this presents, and how this is being dealt with this in practice.