Unit 4 - Risk Management

Unit 4 - Risk Management

1. Types of risks that can be encountered

   • DPA
   • Systemic
   • outsourcing
     • real risk lack of talent
   • Interest/exchange rate
   • Reputational
   • 3rd party
   • Market
   • Regulatory
   • Conflicts of interest
   • Unknown risks
     • Future stuff
   • Fraud/criminals
   • Credit/counterparty
     • Access to credit
   • Liquidity
   • operational/ fiduciary/ business continuity & disaster recovery
   • legal(litigation)
   • insurance
   • Technology/ cyber
   • Economic (recovery)
   • Compliance

2. The focus of good risk management is the identification and management of risk. It is the responsibility of all to ID risks and not just the risk dept. Integrated into culture of firm with effective policy and risk programme led by Senior Management with backing from the Board

   • Effective Risk Management - how it underpins the achievement of firm's objectives
     • Contributing to BETTER USE of capital and resources
       • Therefore optimizing operational efficiency
     • PROTECT & ENHANCE - firm's assets and reputation
     • FRAMEWORK - enables activity to take place in a consistent and controlled manner
     • by implementing system that promotes understanding of business activity , opportunity and threats
       • IMPROVED - decision making, planning, prioritisation
     • REMEMBER - risks can and do change over time, so need to be monitored
   • Business units are responsible for the day to day risk management, and should promote risk awareness in operations, projects and management meetings. To be effective a Risk Plan needs to be embedded
   • RISK MANAGEMENT FUNCTION
     • Sets policy and strategy for risk management
     • Designs and reviews PROCESSES for risk management
     • Establishes internal risk policy and structures for business units
     • MI production for Board and key stakeholders
     • Development of risk response processes , contingency , continuity, incident reaction
     • Promotes risk Mgmt at strategic and Ops level
     • EDUCATION & TRAINING in order to build a risk awareness culture

3. Risk Mgmt is the process by whereby firms methodically address the risks attached to their past, present and future activities

   • RISK can be defined as the combination of the probability that an event will occur and the nature of the severity of its consequences. (Probility x Impact = Risk)
     • FSA identified a range of risks faced by Financial Services
       • FCA & PRA Handbooks require regulated firms to establish systems & controls to mitigate these risks
         • SYSC 7.1 Adequate risk management
         • PRIN 3 - Management systems and controls
   • Risk Mgmt is a subdivision of general mgmt, it is relatively young discipline still developing
   • Like Compliance, risk Mgmt must be integrated within a firm and not simply left to the risk dept. This means a culture that ensures risks are managed by all in their individual roles. Including an effective policy and risk programe led by Senior mgmt with full backing from the Board
   • Mar12 HBOS plc publically censured by regulator for failing to comply with PRIN3 and Final Notice made specific reference to failings with risk mgmt...'culture focused on revenue rather than on risk adjusted returns,This was reflected in targets which incentivised the following behaviours.... Regarding risk mgmt as a constraint on the business rather than integral to it'.