29 Jun Deloitte outlines strategy imperatives for the future of risk management
The risk advisory arm of leading international business consultant firm, Deloitte, has published a new report: The Future of Risk in Financial Services. The report posits that risk management in financial services is in the midst of an evolution, right on the brink of a new era, and outlines six key imperatives for managing risk in this new environment.
Deloitte, a leading international provider of audit, consulting, financial advisory, risk management, and tax services, recently published a new report through its risk advisory division, The future of risk in financial services. Created through a collaborative effort with contributions by financial practitioners from more than a dozen different Deloitte member firms around the globe, this June 2017 report describes a future risk management landscape that has taken a dramatic departure from the current risk capabilities that today’s industry stakeholders are most likely versed in.
According to Deloitte, risk management is about to enter a new era. Unsurprisingly, this transformation is expected to come with considerable challenges for financial institutions. With this in mind, the paper outlines six key imperatives for managing risk in financial services in the future. It goes on to delineate several focus areas for accelerating organisational change within financial institutions, offering a highly persuasive endorsement. For your convenience, the aforementioned imperatives and levers for driving change as advocated by Deloitte have been briefly summarised below. Readers that would like to gain deeper insight into this topic should refer to the original report by Deloitte.
Imperatives for managing risk in the future
1 | Increase focus on strategic risk
With greater uncertainty over the direction of regulation, the future of trade agreements and alliances, and the potential for fintech start-ups to disrupt traditional financial businesses, strategic risk will demand increased attention from senior executives, supported by an improved ability to identify strategic risks and analyse the potential impact of said risks on the organisation. In addition to helping the institution to better manage strategic risk, these improved capabilities also provide valuable insights that can play an instrumental role in helping an institution achieve its strategic objectives.
2 | Rethink the three lines of defence and risk alignment
Institutions should consider restructuring and eliminating overlapping responsibilities across the three lines of defense. Specifically, organisations should ensure that each business unit takes full ownership of the risks present in its area, thus allowing the risk management function to focus fully on its risk control role through improved oversight.
3 | Do more with less
With limited revenue growth and compressed margins, institutions will increasingly be compelled to reduce the costs of managing risk while simultaneously increasing effectiveness to meet regulatory requirements and handle shifting stakeholder expectations. In addition to traditional process reengineering, RegTech solutions can be leveraged to bring substantial improvements in efficiency. Deeper and more sustainable cost efficiency and improved return-on-investment performance can similarly be realised by taking advantage of new capabilities, for instance, by applying business decision modelling to analyse the cost of change, cost mutualisation, and cloud-based offerings such as the platform as a service.
4 | Establish a formal conduct & culture programme
Recent instances of inappropriate behavior by employees at financial institutions have led to an increased focus by senior management as well as by regulatory authorities on the importance of instilling a risk-aware culture and encouraging ethical behavior by employees. Efforts in this area will need to be enhanced to give testimony to a more programmatic and sustainable approach for the management of risk.
5 | Enhance risk management capabilities
Institutions will be obliged to integrate their siloed responses to the countless new regulatory measures that have been implemented in recent years, or which will soon be implemented. Likewise, financial institutions must learn to leverage beneficial RegTech solutions in order to increase their agility in responding quickly to new developments, while also providing the analytics necessary to support more effective risk management.
6 | Strategically manage capital & liquidity
Capital and liquidity requirements have risen significantly, in large part as a result of the myriad new regulatory mandates that have been implemented in recent years. In the current low-revenue environment, institutions will need to carefully consider the impact of business strategy on capital and liquidity if they wish to improve returns on equity through optimized usage of these scarce resources.
Strategies that stimulate change
A brief section preceding the conclusion outlines four so-called ‘levers’ that Deloitte has characterised as critical drivers to change. For achieving this accelerated rate of change however, the report stresses that these levers should not be dealt with in isolation, but rather, carefully coordinated in a collaborative effort.
Consider, for example, the following instance: an organisation’s established business strategy will generally have important implications for the potential for conduct-related risk, whereas the responsibilities assigned to each business unit will determine the types of risk management skills that are required. Thus, a successful risk management approach should harmonise the process of addressing each lever, while also carefully considering the interaction between these. Keeping these factors in mind, the four levers for driving change as outlined by Deloitte are as follows:
• | Integrate risk management into strategy
• | Focus on people
• | Enhance the three lines of defense
• | Leverage emergent technologies
Interested in learning more?
– To read or download [PDF] the complete Deloitte report – ‘The future of risk in financial services’ – click here.
– To see the insights and findings from the recent ‘Global Risk Management Survey, 10th edition’ by Deloitte, click here.