The recent financial upheaval has intensified the concern and attention of companies on financial risk management, emphasizing the need for a strong risk framework to efficiently recognize, evaluate, and manage risks. Companies are focusing more on their risk and reward ratio. Risk management is a field in which a business can distinguish itself from the competition; and is hence, a matter of strategic value.
Successful risk management in financial services these days begins with Governance Risk Compliance (GRC)—but it must not end there. As more companies adopt digital transformation, enterprise risk expands in complexity and scope, and the need to handle it in a nimbler and more receptive manner becomes urgent. GRC in its initial manifestation, a toolkit for overseeing compliance risk, continues to be critical for that particular challenge but is less effective with today’s changing meanings of risk and risk management. The solution is not to leave behind GRC, but to enable it to evolve into a method that fits in with today’s multidimensional challenges through Integrated Risk Management (IRM).
GRC emerged as a way of enhancing internal controls and corporate governance to tackle regulatory compliance constraints. Today, the need has developed from controlling compliance risk to managing overall risk. The scope of risk has also evolved, with digital risk moving to the fore. Policies that propel success today, such as market expansion or technology adoption, are generating new prospects while creating more risks. Here are a few emerging trends shaping risk management in financial services companies:
The main reason we need IRM is because of the interconnectedness of risks. Today risks are more complex and their interconnectedness is still unknown. But with the help of IRM, we are able to look at them collectively giving us some insights into their behavior. In addition, risks are evolving and new risks are emerging. Having an integrated approach might give us early warnings to these emerging risks and related trends.
The globalization era, rise in digital processes, and the trend toward third-party reliance are compelling firms to evolve from a siloed risk management approach to Integrated Risk Management that require additional tech to support such complex processes.
Other external pressures on the financial services come from insurers and bank regulators who want to assure customers and policyholders and the whole financial system and shield them from unnecessary risks, even as the industry is liberalized. The internal pressures arise from risks and business conditions unique to this sector, particularly those that appear from operating in a competitive environment.
The advantages of a unified integrated risk management program are company-wide, and a strong business case can deliver the needs of existing market drivers. Without a unified, reliable, and repeatable set of metrics, it is difficult to achieve the true objective of lining up risk appetite with risk tolerance. Recognizing enterprise values and goals, and mapping them to the company’s existing state, is the first move in defining the case for executing cohesive risk management. Based on these ideas and a vision of the future, a business will get to know how to align resources towards these objectives.
As a result of applying all-inclusive, enterprise-wide IRM programs, companies can control risk with comprehensive risk visibility and make risk-aware decisions, grow opportunities within the business's risk tolerance; and improve value through a shared language for risk that can integrate the company more successfully.
Technology can help manage risk by enabling complete visibility through a central repository for risk and control information. Decentralized responsibility provides extensive ownership for the company's risks and a stringent repeatable process highlights how risk management is a process and not a project that must be applied holistically.
Executing a corporate risk management structure involves risk management to be embedded across the entire business. The approach at the top must define the purpose and appetite for risk of the business, as per the corporate operations and strategy, and put it on paper in the form of a risk policy. A combined operational risk structure offers clear direction on impact tolerance, methodologies, processes, and policies for routine risk management.
Several firms today still depend on ad-hoc methods to manage risks. In today’s age, it is more important to steer your firm towards an integrated approach to managing risk. Local and global disruptions, constantly changing regulations, cyber risks, third parties, all these contribute to the risk and how you successfully deploy an integrated view of the risks and how you put that real-time information to full use at the appropriate time will decide how your operations are impacted.
There are four key pillars that need to be looked at while building a successful IRM plan: Strategy, Processes, Technology, and People. Each pillar relies on the other to build a solid foundation. When coming up with a strategy, you must have people on board. Inculcate a culture within your firm that encourages empowerment and awareness among individuals, executives, and teams. Good reporting and communication are imperative in the success of any IRM strategy, and this is nurtured by having straightforward and effective processes in place. In a risk aware culture, staff and executives at all levels can be empowered to have a role in developing a strong risk management and mitigation strategy by using modern technologies. It is important for firms to leverage these technologies to enhance collaboration and build robust workflows for IRM strategies. Having a single and integrated platform available to the whole firm means that you can identify and address risks more quickly and easily internally and from third and fourth-party vendors.
Practically speaking, there are no major differences between ERM and IRM. Both terms refer to an initiative that encompasses all aspects such as finance, human resources, cybersecurity, audit, compliance, privacy, natural disasters, and more. However, ERM comrpises strategic, high-level risk management that includes several functions and involves the board and the executives.
IRM entails the hands-on work that makes ERM possible, such as technical controls crucial to robust cybersecurity such as network monitoring, perimeter protection, and security monitoring.
System management is located somewhere in the middle that includes risk management procedures and policies, which is placed in the ERM camp. Certifications and accreditations, which is compliance, fall on the ERM side while others that are more technically-oriented are classified under IRM.
Both IRM and ERM offer a thorough model of risk management, IT and operational risk, and are related integrally and you cannot have one without the other. IRM feeds ERM, and ERM guides IRM.
As opinions on risk management expand to include both a vertically integrated view through business and IT, and a horizontally integrated view across risk areas, companies will find it easier to adapt their risk management policies to tackle the complexity and scope of risk today. When compliance was the key driver of risk management, and when it was largely the area of IT, there was no need for a unified approach to risk management. But today, the integration exemplified by the original GRC vision is no longer sufficient.