Panel session: Best practices for operational risk management

Transcription

1 Panel sessin: Best practices fr peratinal risk management Dr. Simn Ashby, Chairman, Institute f Operatinal Risk Vassilis Duvalis, Financial Risks & Prducts, Prudential Specialists, FCA Dr. Paul Hamalainen, Prudential Plicy, Strategy and Cmpetitin, FCA Brian Thrnhill, Operatinal Risk, Prudential Specialists, FCA 1

2 Panel bjectives T prvide an verview f the FCA s current engagement apprach fr the review and assessment f firms apprach t Operatinal Risk (OR) management T identify and cmment n key areas f challenge t the develpment and embedding f effective OR management practices by FCA sl-regulated firms T explre regulatry and practitiner views f acceptable standards f practice fr the versight and management f peratinal risk by FCA sl-regulated firms 2

3 FCA peratinal risk apprach Operatinal risk firm reviews: Aim t minimise risks t cnsumers and the integrity f the financial markets arising frm inadequate firm risk management arrangements Practive assessment f ur mst significant sl-regulated firms thrugh ur SREP / ICAAP review prcess. We als supprt (risk management related) supervisry deep dives f significant dual-regulated firms Fcused n firm s embedding f effective risk management practices, including the rle f senir management and frntline business heads (e.g. t demnstrate effective wnership and management f risk) 3

4 FCA peratinal risk apprach Operatinal Risk external stakehlder engagement: On-ging interactin with relevant industry expert grups, skilled persns, the PRA and ther relevant regulatry bdies t discuss key OR issues and trends Encurage industry-led initiatives t address cmmn cncerns and imprve standards f practice in risk management 4

5 Current regulatry develpments We cntinue t be engaged in a number f EU/internatinal plicy initiatives fr the treatment f peratinal risk, alngside ur clleagues frm the PRA and the Bank. EBA/ESMA Investment Firm Review: Review is nw underway t assess the apprpriateness f the CRD IV prudential regime fr investment firms Basel Pillar 1 Apprach: Current prpsal t replace the Basic Indicatr and Standardised Appraches with a Revised Standardised Apprach (RSA) Internatinal: A number f regulatry rganisatins (e.g. Basel, the FSB) are cnsidering cnduct issues and the ptential interactin with the prudential framewrk 5

6 Gvernance and culture Sund gvernance and culture are essential fr the delivery f effective risk management. This includes: Apprpriate design, embedding and perfrmance appraisal f key rles and respnsibilities acrss the Bard, executive, (1st line) business, (2nd line) risk functin and (3rd line) audit / assurance functin Practive Bard and senir management versight and cnsideratin f all key risks - including peratinal risks and nt limited t (reactive) issue management Demnstrable culture and tne frm the tp that embeds effective (risk management) challenge in all key decisin-making prcesses, and supprts the timely identificatin, escalatin and management f material risks Decisin-making supprted by management infrmatin that is relevant, cmplete and timely, and that facilitates effective identificatin f key risks, issues and trends 6

7 Operatinal risk measurement Capital measurement a risk management tl Firms need t demnstrate that their capital measurement apprach is adequately integrated and aligned t an effective risk management framewrk OR capital assessments ften need t incrprate bth qualitative and quantitative elements. Qualitative elements are susceptible t bias while quantitative measures may create a false sense f accuracy. Be aware f the limitatins and supplement with cnservatism where apprpriate Internal challenge, Validatin and Use Test Apprpriate level f dcumentatin t permit effective independent validatin f the statistical quality, calibratin and use test f the mdel 7

8 Diversificatin benefits As part f the Pillar 2 capital assessment prcess can firms recgnise diversificatin benefits t reduce their capital requirements: (i) fr their peratinal risk expsures; and/r (ii) between peratinal risk and ther risk types, e.g. credit r market risk? We are aware that firms claim fr the presence f diversificatin benefits fr their peratinal risk prfile, but ur ability t recgnise these fr the purpses f regulatry capital requirements is very limited by the EBA s SREP guidelines. The Pillar 1 capital requirements represent an abslute minimum, s reductin by a firm f its Pillar 2 capital thrugh diversificatin is nt recgnised in Pillar 1 The EBA SREP guidelines d nt allw firms t recgnise inter-risk diversificatin (i.e. acrss different risk types) Firms must present satisfactry and cmpelling empirical evidence f diversificatin benefits between peratinal risk expsures where this is claimed under their ICAAP 8

9 Insurance as a capital mitigant Can firms that d nt meet the qualitative and quantitative standards fr an apprved Advanced Measurement Apprach (AMA) use insurance as a mitigant fr peratinal risk when determining their Pillar 2 capital requirements? Fr Pillar 1 regulatry capital purpses insurance is nt recgnised as an peratinal risk mitigant utside f its rle in calculating Pillar 1 capital requirements fr institutins with an apprved AMA, i.e. we cannt recgnise insurance as a mitigant fr Pillar 1 capital requirements fr nn-ama firms Fr firms that have an apprved AMA mdel, the maximum pssible Pillar 1 reductin frm insurance and all ther risk transfer mechanisms taken tgether is 20%. (Subject t meeting apprpriate insurance recgnitin criteria and standards) If a nn-ama firm can demnstrate the efficacy f insurance as a mitigant fr peratinal risk then it culd be included in the ICAAP 9