And Not Forgetting Risk

So far, these blog posts have tended to concentrate on regulatory compliance matters. This is partly because of my own background, but also because there’s always so much to write about. After all, with so many regulators and focus from both the UK and Europe, there’s always plenty going on. And there are, as a result, plenty of areas where financial services professionals need to keep their personal development up to date.

But it’s easy to forget that there are other control functions within firms where the requirement for people to acquire new skills and knowledge is just as important; and one of those is the risk function.

To a certain extent, the problem with the term “Risk Function” is that unlike compliance, which tends to deal mainly with regulatory matters, the management of risk usually has a much wider remit and touches on all aspects of the business. In fact, in many organisations, the compliance function will sit within the reporting structure of the risk function, and the head of compliance may well report to either a chief risk officer, or a senior manager with a wider governance remit.

The management of risk within many firms, particularly those in the insurance and fund management sectors, is usually a complicated and involved process. It reflects the many different types of risks that these firms have to identify, monitor, manage and mitigate on an ongoing basis. The process requires the involvement of many people within different functional areas. After all, they are the people best placed to say where they think the risks are in respect of their particular areas.

But it’s the people in the heart of the risk function who need to have their fingers on the pulse when it comes to emerging developments. And there’s a lot to keep them occupied here at the moment.

A big year for insurers

Solvency II has been a topic in a few of these blog posts in the past, but this is the year when everything really kicks off. Although the official start date is 1 January 2016, now is the time when all the preparations need to be finalised.

In many firms, the risk function will likely be heavily involved in many aspects of Solvency II developments, but particularly with regard to Pillar 2 and the development of the Own Risk and Solvency Assessment, for which firms will currently be going through the process of producing dry runs; for their own benefit and for that of the regulators.

This is arguably the most important time for risk teams to make sure that they have the necessary skills, knowledge and understanding to ensure that Solvency II implementation is fully supported. 

Not forgetting fund managers

Many investment management firms are now captured by the requirements of the EU Capital Requirements Directive IV and the associated Regulation, which in the UK, has been implemented by the FCA, with the introduction of its “IFPRU” handbook.

Amongst other things, the new legislation requires improvements to the quality of capital held by fund managers, together with new requirements for capital buffers, and enhanced liquidity requirements.

All of these will lead to increased focus from the risk function; in particular around how regulatory capital limits fit against the firm’s risk appetites. Also, firms may need to revisit their liquidity policies, firstly to make sure they’re in line with the new requirements, but also, to ensure that they remain fit for purpose against the specific demands of their businesses, as well as additional emerging risks.

Which brings me on to…

The issue of changes in the industry generally, and how the risk function needs to respond to these in order to ensure that their firms avoid breaching their risk thresholds and limits.

A good example would be the pension changes that will take place in the UK from the early part of April.

There is an expectation of increased demand for pension funds to be encashed as many pension policyholders will be able to draw on their entire pension funds as lump sums. This activity could be particularly acute when the new rules first take effect.

For insurers and pension funds, there are threats to operational risk tolerances, especially in ensuring that customers receive their funds in a timely and compliant manner, without significant backlogs arising.

From a strategy perspective, there is the risk that such a run on business would have on income and profitability projections, and strategic goals.

Then there are the financial risks. Liquidity risk is an obvious one. There needs to be enough cash to be able to pay customers when they ask for their funds. Areas where liquidity may be compromised, such as property funds, need to be examined, and relevant contingency measures taken.

And from a capital management perspective, there is the issue of whether this scenario has been properly stress tested, and whether capital buffers are sufficient.

From a fund manager perspective, the issue here is going to be potentially greater net outflows from funds, with the implications this has for future performance potential. Stress testing is also important here. For smaller funds, such outflows could potentially result in funds becoming too small to be economically viable. 

The challenge

The risk functions in firms are often looked to as the source of expertise, management, and challenge to the risk management policies employed. It’s therefore vital that these functions contain people whose professional development is kept up to date. In fact, it could be argued that the need is equal to that for their opposite numbers in compliance. The weight of change is just as great; it just comes from different sources.

And as for compliance personnel, the number of external training opportunities is increasing, covering not just specific topics such as Solvency II, but the wider discipline of risk management in financial services as well.

Keep Industry Events Online as your first port of call for such opportunities, and make the most of what’s available.


Martyn Oughton 

By Martyn Oughton a Professional Member of the International Compliance Association (ICA).  Martyn now writes a regular blog for Industry Events Online focusing on the importance of training in all aspects of compliance. Read Martyn's other publications at Martyn's Writers Residence website.

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