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12 | Risk management
ties with the goal of achieving sustained bene-
fit within each activity and across the portfo-
lio of all activities. Effective risk management requires
Focus
T
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he focus of good risk management is to: a reporting and review structure, as
Identify Risk
Risk identification should be approached in a
methodical way to ensure that all significant well as having a company board that
activities within the organisation have been
identified and all the risks flowing from these
a
circle6
ctivities are defined. is engaged in the process to ensure
Assess and Analysis Risk
Once risks have been identified, they must
then be assessed as to their potential severity that risks are effectively identified
of loss (impact) and to the probability of
occurrence (probability). The fundamental
difficulty in risk assessment is applying a con- This became especially apparent in the early ‘break away from the pack’ and express an
sistent assessment approach and metrics that part of the summer after a speech to the independent view.”
allows the organisation to “speak the same Securities and Investment Institute (SII), dur-
languag
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e” when assessing risk. ing which Hector Sants, chief executive of the Science
Measure Risk FSA, said that the current economic crisis had In any situation there is no perfect science for
The need to speak a common understood lan- revealed some management decisions that had risk. If there was a perfect way of assessing
guage is essential when measuring risk; it is a a degree of incompetence and at times a "cav- risk then everyone would be using it but there
complex matter that needs to be made simple. alier approach" regarding risk management. are a number of ways in which to help miti-
Risk measurement can be quantitative, semi- Addressing the SII, Sants outlined the gate unnecessary risk or at least illustrate con-
quantitative or qualitative in terms of the changes being made in the regulator’s trols. In accordance with FSA rules all firms
probability of occurrence and the possible approach to judging the competence of firms’ must satisfy themselves that their systems and
consequence. Whichever approach is taken, senior management as well as their probity. controls are adequate and indeed appropriate
whichever metric is used, whatever language is He said the economic crisis had demonstrated to their business activities.
developed, it needs to consistent and under- that “albeit with the benefit of hindsight, there A good compliance tool to help firms with
circle6
stood so it can be monitored. are some management decisions that have risk management should include holistic
Manage Risk revealed a degree of incompetence, and at assessments of its systems and controls and
The risks with potentially the most significant times a rather cavalier approach regarding risk thus identify areas where compliance risks
impact must have a risk action plan developed management. The necessary challenge was could crystallise. It should be designed to be
for them. The risk action plan should outline missing from governance structures, in partic- scalable and used within business divisions to
the key actions taken to both manage the risk ular boards, and there may well be questions enable them to report their progress centrally.
on an ongoing basis and also the key actions that can reasonably be asked about the open- This is a cost effective way for firms to validate
to be taken should the risk materialise. If the ness and thus, arguably, the integrity of firms their exposure to risk covering FSA require-
controls to manage the risk further mitigate dealings with regulators, shareholders and ments on systems and controls in areas such
the impact of the risk this should be taken their customers.” as:
into account in scoring the impact of the risk. But he added, “The structure of governance circle6
The management of risk can involve either in financial companies does not need radical circle6
Senior Management Arrangements
Risk Management Systems and Controls
Avoidance (eliminate), Reduction (mitigate), overhaul. The attitudes and competence of the
Transfer (outsource or insure) and Retention individuals who conduct that governance circle6
(Prudential and Operational Risk)
(accept and budget), or a mixture of all of does. In particular we need to create gover- circle6
Liquidity Risk
them. nance that fosters challenge without creating circle6
Credit Risk
Effective risk management requires a conflict. The effectiveness of governance is the circle6
Market Risk
reporting and review structure, as well as hav- key issue and addressing this challenge is the circle6
Insurance Risk
ing a company board that is engaged in the responsibility of all of us, not just regulators circle6
Group Risk
Solvency II
process to ensure that risks are effectively and boards.” He did stress however, that; “this Using a good system will enable firms to
identified and assessed so that appropriate by no means weakens our fundamental view gather information together with supporting
controls and responses are in place. It is essen- that firms’ senior management carry primary evidence in order to facilitate a high level gap
tial that the senior management team ensure responsibility for their actions and their analysis on the systems and controls within
this is a pro-active process that helps the busi- resulting consequences”. the firm. The assessment and the conclusions
ness to manage the risks involved in all busi- The FSA is not seeking to establish non- reached can feed in to the firm’s overall risk
ness activities to maximise opportunities and executive directors as a competing governance management framework.
minimise adverse effects. mechanism against the executive. It is about It is vital that firms are in a position to
making both much more effective. The FSA demonstrate they have completely reviewed
FSA protection therefore, continues to support the ‘unitary their risk framework, asked the key questions
As a compliance specialist we are constantly board’ model but, as Sants said “it must be of itself and implemented a robust repository
urging intermediary firms to place the imple- recognised that such a structure runs the risk facility. In view of recent comments this is
mentation of risk management reviews at the of encouraging the herd instinct both in the obviously a topic close to the heart of the FSA
top of their agenda to ward off potential FSA sense of encouraging ‘follow the leader’ behav- and one that intermediary firms can certainly
action. iour and in the sense of the reluctance to ill-afford to ignore.
November 2009 Mortgage Introducer www.mortgageintroducer.com
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