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Integrated Risk Management in Financial Services Companies

The recent financial upheaval has intensified the concern and attention of companies on financial risk management, emphasizing the need for a strong risk framework to efficiently recognize, evaluate, and manage risks. Companies are focusing more on their risk and reward ratio. Risk management is a field in which a business can distinguish itself from the competition; and is hence, a matter of strategic value.

Successful risk management in financial services these days begins with Governance Risk Compliance (GRC)—but it must not end there. As more companies adopt digital transformation, enterprise risk expands in complexity and scope, and the need to handle it in a nimbler and more receptive manner becomes urgent. GRC in its initial manifestation, a toolkit for overseeing compliance risk, continues to be critical for that particular challenge but is less effective with today’s changing meanings of risk and risk management. The solution is not to leave behind GRC, but to enable it to evolve into a method that fits in with today’s multidimensional challenges through Integrated Risk Management (IRM).

Recognizing Constantly Evolving Risk in Financial Services Organizations

GRC emerged as a way of enhancing internal controls and corporate governance to tackle regulatory compliance constraints. Today, the need has developed from controlling compliance risk to managing overall risk. The scope of risk has also evolved, with digital risk moving to the fore. Policies that propel success today, such as market expansion or technology adoption, are generating new prospects while creating more risks. Here are a few emerging trends shaping risk management in financial services companies:

  • Vendor and Third-Party Relationships: To move deftly to take advantage of business opportunities, financial service firms are counting on external partners, such as service providers, contractors, consultants, and vendors. This approach poses a threat since firms do not have direct influence over the risk a third party produces but are still responsible for controlling the risk in third-party dealings.
  • Digital Transformation: Digital transformation generates new openings to prosper and compete, but it also raises digital risk. Digital business involves fast-moving ventures backed by processes that involve a host of different applications, broadening the stakes for the organization and the points of risk. The key to optimizing opportunities includes controlling risks in essential domains.
  • Compliance and Oversight: Compliance risk has become a part of the other risks, mentioned above. Considering the growing intricacies of business and IT, compliance has become more complex, heightening the risk associated with it.
    Accomplishing regulatory compliance is something that financial institutions of all sizes need to focus on daily. Fulfilling these standards is no minor task but there is no other choice as the cost of non-compliance is very high. It could be in the form of heavy fines or being named and shamed - no firm wants to be called out. As such, financial services firms must understand the regulatory challenges they confront and take steps to address them.
    Some of the most well known regulations that these institutions need to adhere to include the Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), Prudential Regulation Authority (PRA), Federal Reserve System, Federal Financial Institutions Examination Council( FFIEC), Foreign Corrupt Practices Act (FCPA), Basel accord , and more.
  • Rapidly changing geopolitical situation: Today, financial institutions are continually exposed to a wide range of global landscapes many of which are propelled by the geopolitical,economic, sociopolitical, environmental, and technological realms in which they function. Such contrasting landscapes expose firms to a collection of rapidly changing risks that must be handled properly to alleviate the threats to a financial services organization's performance.
  • Changing customer demand: The banking environment is witnessing a shift in irreversible ways, yielding to a normal. With customers having freedom to choose certain banking services, the “lifetime value” that customers offer to the banking relationships is going down and transforming how customers interact with banks. Such customer preferences can shorten deposit durations and affect rate sensitivity and bank liquidity.
  • Customer retention and loyalty:Competition for financial service clients has never been fiercer. While brand loyalty may not be dead, it is definitely on life support. What matters to most customers in this year is greater personalization, more automated services, and easier access to services. Institutions that can deliver all three will capture their share of the market. Key to not losing the battle is recognizing that customers are less concerned with brand familiarity than getting the services they want. Providing customers those services is key to client retention.
    The issue of acknowledging customer loyalty properly is relevant amid today’s environment of digital disruption and customer dissatisfaction in financial services. Banks today have the opportunity to take a new approach to acknowledging and rewarding the loyalty of customers. There is a chance to control the material risks to reputation and profitability from consumer dissatisfaction.

Need for Integrated Risk Management

The main reason we need IRM is because of the interconnectedness of risks. Today risks are more complex and their interconnectedness is still unknown. But with the help of IRM, we are able to look at them collectively giving us some insights into their behavior. In addition, risks are evolving and new risks are emerging. Having an integrated approach might give us early warnings to these emerging risks and related trends.

The globalization era, rise in digital processes, and the trend toward third-party reliance are compelling firms to evolve from a siloed approach to Integrated Risk Management that require additional tech to support such complex processes.

Other external pressures on the financial services come from insurers and bank regulators who want to assure customers and policyholders and the whole financial system and shield them from unnecessary risks, even as the industry is liberalized. The internal pressures arise from risks and business conditions unique to this sector, particularly those that appear from operating in a competitive environment.


Moving Towards Integrated Risk Management

The advantages of a unified integrated risk management program are company-wide, and a strong business case can deliver the needs of existing market drivers. Without a unified, reliable, and repeatable set of metrics, it is difficult to achieve the true objective of lining up risk appetite with risk tolerance. Recognizing enterprise values and goals, and mapping them to the company’s existing state, is the first move in defining the case for executing cohesive risk management. Based on these ideas and a vision of the future, a business will get to know how to align resources towards these objectives.

As a result of applying all-inclusive, enterprise-wide IRM programs, companies can control risk with comprehensive risk visibility and make risk-aware decisions, grow opportunities within the business's risk tolerance; and improve value through a shared language for risk that can integrate the company more successfully.

Technology can help manage risk by enabling complete visibility through a central repository for risk and control information. Decentralized responsibility provides extensive ownership for the company's risks and a stringent repeatable process highlights how risk management is a process and not a project that must be applied holistically.

Key Success Factors in Applying IRM Technology

Executing a corporate risk management structure involves risk management to be embedded across the entire business. The approach at the top must define the purpose and appetite for risk of the business, as per the corporate operations and strategy, and put it on paper in the form of a risk policy. A combined operational risk structure offers clear direction on impact tolerance, methodologies, processes, and policies for routine risk management.

Several firms today still depend on ad-hoc methods to manage risks. In today’s age, it is more important to steer your firm towards an integrated approach to managing risk. Local and global disruptions, constantly changing regulations, cyber risks, third parties, all these contribute to the risk and how you successfully deploy an integrated view of the risks and how you put that real-time information to full use at the appropriate time will decide how your operations are impacted.

There are four key pillars that need to be looked at while building a successful IRM plan: Strategy, Processes, Technology, and People. Each pillar relies on the other to build a solid foundation. When coming up with a strategy, you must have people on board. Inculcate a culture within your firm that encourages empowerment and awareness among individuals, executives, and teams. Good reporting and communication are imperative in the success of any IRM strategy, and this is nurtured by having straightforward and effective processes in place. In a risk aware culture, staff and executives at all levels can be empowered to have a role in developing a strong risk management and mitigation strategy by using modern technologies. It is important for firms to leverage these technologies to enhance collaboration and build robust workflows for IRM strategies. Having a single and integrated platform available to the whole firm means that you can identify and address risks more quickly and easily internally and from third and fourth-party vendors.


What are the Key Differences Between ERM and IRM?

Practically speaking, there are no major differences between ERM and IRM. Both terms refer to an initiative that encompasses all aspects such as finance, human resources, cybersecurity, audit, compliance, privacy, natural disasters, and more. However, ERM comrpises strategic, high-level risk management that includes several functions and involves the board and the executives.

IRM entails the hands-on work that makes ERM possible, such as technical controls crucial to robust cybersecurity such as network monitoring, perimeter protection, and security monitoring.

System management is located somewhere in the middle that includes risk management procedures and policies, which is placed in the ERM camp. Certifications and accreditations, which is compliance, fall on the ERM side while others that are more technically-oriented are classified under IRM.

Both IRM and ERM offer a thorough model of risk management, IT and operational risk, and are related integrally and you cannot have one without the other. IRM feeds ERM, and ERM guides IRM.

As opinions on risk management expand to include both a vertically integrated view through business and IT, and a horizontally integrated view across risk areas, companies will find it easier to adapt their risk management policies to tackle the complexity and scope of risk today. When compliance was the key driver of risk management, and when it was largely the area of IT, there was no need for a unified approach to risk management. But today, the integration exemplified by the original GRC vision is no longer sufficient.


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