Risk management is an area ripe with concerns, trends, and regulatory developments for compliance professionals; especially those in the financial industry.
In turn, all organisations in this field face several types of risks including operational risks, competition-related risks, financial risks, cybersecurity and compliance risks as part of their routine operations.
Today, managing these is crucial in helping organisations avoid a series of costly fallouts including hefty penalties, reputational damage, stakeholder alienation and lost data. In this regard, compliance risk mitigation tends to be one of the biggest priorities because, without it, financial institutions are vulnerable to other types of risks as well.
In the current environment, this reality is compelling organisations to implement a robust risk management process to prevent and manage their risks. Here are a few steps you can follow when creating this kind of framework.
Contextualise your risk management plan
Every organisation is unique in its own way and will have different goals, objectives, and requirements. Moreover, depending on its internal and external environment, it will need to comply with various industry regulations as well.
Financial institutions, for example, have to comply with know-your-customer regulations and anti-money laundering regulations. This means that when building a custom risk management system, each institution needs to consider the regulatory context in which it operates to create a system that works.
Beyond just staying on top of existing regulations, you also need to commit to tracking emerging trends and developments, which is where tools and processes that support regulatory horizon scanning prove useful.
Create an effective governance plan
A risk management system should be implemented across all departments of an organisation to be effective. Boards of directors and employees need to ensure that risk mitigation frameworks are being implemented and followed given that they are, ultimately, responsible for the financial and material impacts of any risks.
By creating a governance plan, it’s easier for financial institutions to monitor the effectiveness of their risk management protocols continuously. A governance plan will also help you disclose and report risks, and their potential impact, to all stakeholders.
Identify your risks
A robust risk identification process will help you identify internal risks and external risks across human behaviour and biases, your digital infrastructure, threats to goodwill, regulatory obligations, competitors, and consumers.
Beyond identifying these, this kind of assessment can also help you identify gaps across your existing risk controls, highlighting which areas need to be improved to reduce your exposure to these threats.
In this process, make sure risk identification is being carried out continuously across each of your departments to be effective. A one-and-done compliance assessment is more likely to lull you into a false sense of security given that financial institutions are vulnerable to risks that change over time.
Analyse and evaluate your risks
Risk analysis and evaluation involve comparing your level of exposure across identified risks with the pre-established tolerance levels, internal control measures, and potential impacts to your organisation.
The evaluation process should include your areas of practice, the experience of your firm, management and internal control procedures, the composition of the external environment and anticipated expansion, among others.
Analysing risks this way will help you establish risk levels, which allow you to prioritise the most urgent remedial actions and follow through on them.
Manage your risks
After identifying risk levels, what follows should be taking the necessary measures to manage and treat potential risks, which involve creating action plans to accept, transfer, reduce or prevent risks.
As a rule of thumb, high-level threats need to be addressed immediately with short-term action plans, as these have the potential to cause the most damage.
Monitor and review your precautionary measures
A fail-safe risk management process involves monitoring and reviewing the effectiveness of your action plans regularly.
With time, risk levels fluctuate, new threats surface, and certain action plans become irrelevant due to changes in your regulatory environment.
The monitoring process ensures that new risks are addressed and any obsolete action plans are eliminated, saving you plenty of time and other organisational resources.
Commit to effective reporting
As a final step, your risk management plan should include comprehensive reporting, which involves documenting identified risks, action plans and any material or financial implications of these.
A failure in your reporting procedures may lead to misinterpretation and misinformation among employees and stakeholders—thorough and detailed documentation can also prevent hefty sanctions from regulatory authorities.
Create a fail-safe risk management process and stay ahead of compliance risks
All organisations are exposed to different types of risks on a near-constant basis.
By establishing an effective risk management system, which includes the processes highlighted in this post, it’s easier to avoid falling behind on regulatory compliance and the penalties associated with this.