With regulators introducing significant reforms to the finance sector—whether it’s the upcoming Basel IV framework or the pending Sustainable Financial Disclosure regulation—financial institutions are exposed to significantly more business risks, which they must manage effectively to avoid any legal repercussions.
Here, they must adopt more advanced and sophisticated approaches to risk management to ensure compliance with the evolving regulations.
Once deemed a siloed function that detracted value, events such as the 2008 economic crash and the fallout from the COVID-19 pandemic have prompted organisations to re-examine their view of risk management.
Today, many leaders across the world consider risk management to be a vital tool in their arsenal to navigate troubling events in the future, and the function will only continue to evolve for years to come.
In this post, we discuss the best approaches to risk management to meet the needs of the modern regulatory environment.
Expanding the role of risk management in business
While finance firms have institutionalised risk management by imparting a quantitative label for easy assessment, there is still room for substantial improvement.
Most financial institutions have established risk management as a separate department within the business, relatively isolated from critical functions, which could lead to severe compliance violations down the line.
Therefore, you should consider expanding risk management into a more value-driven function that aids in achieving business objectives and optimises outcomes. This would allow you to pursue growth objectives without compromising financial compliance.
Making this change would require you to adjust the corporate hierarchy, meaning you need buy-in from senior leaders. There would also need to be a strategic change in how regulatory management practices are implemented, including creating models and metrics used in the analysis.
Incorporating frameworks for deeper analysis
While current risk management practices provide detailed insight into credit, market, compliance, and operational risk, most of the data remain isolated, which makes it impossible to ask substantial, nuanced questions about the current state of operations.
To ensure that you are improving risk management in business, consider breaking down these isolated compliance risk management processes and adopting a more holistic approach to compliance risk.
This approach would allow you to assess and compare different operations within your business for a deeper, more accurate take on current compliance processes.
Transforming your risk management framework is also critical for accomplishing this goal.
For example, a risk appetite framework captures your organisation’s overall approach to establishing a risk appetite, which helps you understand risk exposure and make more informed decisions regarding resource allocation and operational management.
Risk appetite is a better take on compliance management because it identifies potential risks by assessing stresses within business organisations, allowing you to mitigate them before they lead to a compliance violation.
Eliminate redundant risk management processes
Financial firms suffer from compliance debt where multiple layers of compliance programs bog down operations with additional red tape and complexity instead of offering an easy path to enjoy a return on investment.
Therefore, you should prune unnecessary programmes, remediation efforts, and control structures that do not contribute to your organisation’s ability to meet business objectives.
The policy of eradicating unnecessary workflows should also extend to data, reducing the volume and type of data.
Moreover, the sheer volume of compliance regulations and overlapping controls and risks creates a convoluted compliance program that is impossible to sustain. Working around this problem would require you to eliminate duplicate sets of controls to reduce assessment fatigue for business units.
Financial organisations should consolidate risk functions to improve compliance methods and get a better grasp of operations. This would allow organisations to identify if they are operating within appropriate risk and tolerance levels.
Meeting compliance demands of the future with the best approaches to risk management in business
As financial regulators hold financial firms accountable for customer data security, climate change amendments, and even cybersecurity defences, they need to rethink their compliance risk management practices.
This would require firms to switch to a more holistic approach to risk management in business, which is a massive challenge to overcome without using RegTech tools from market leaders like FinregE.
Our RegTech solutions turn financial regulation into a more efficient scalable process to help businesses adopt the best risk management practices to secure data, minimise compliance penalties, and convert financial regulation into an instrument for growth.