By Rich Cooper, Director of Global Accounts, Fusion Risk Management
Regulators Will Hold Firms Responsible; Good News is Technology Is Here to Help
Everyone knows there are inherent risks in markets. Investors know and accept the risk that their investments may lose value. For the financial services companies that facilitate and stand behind the trades of ordinary investors, there are risks largely unseen by the public that must be reckoned with on a constant basis.
Financial Service (FS) providers (banks, brokers, asset managers, etc.) must work with a variety of vendors and third parties to be competitive in attracting investors as well as keeping their clients’ business. They range from back-office and IT outsourcing vendors to third-party trade-clearing, settlement and money-transfer providers. The economic services provided by the finance industry encompass a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises. Many of these relationships are intricate and multi-layered with risks imbedded in every layer. A vendor or third party providing direct services to you as an FS provider may also have several relationships with others that could put your direct relationship at risk.
Just this month (December 2019), the Bank of England (the Bank), Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) published proposed new expectations to strengthen operational resilience in the financial services sector. This is major next step in evaluating “operational resilience” in the Financial Sector (in the UK defined as UK banks, building societies and investment firms (banks); and the Society of Lloyd’s and its managing agents (insurers) collectively called “Firms” and also Financial Market Infrastructure collectively called “FMI’s”). It likely will become policy in the UK in 2021, The European Union and Singapore by 2022 and possibly the U.S. soon as well.
The Federal Financial Institutions Examination Council (FFIEC) in the US came out with new guidance as well this month. The guidance notes: “Business Continuity Management (BCM) is the process for management to oversee and implement resilience, continuity, and response capabilities to safeguard employees, customers, and products and services. Disruptions such as cyber events, natural disasters, or man-made events can interrupt an entity’s operations and can have a broader impact on the financial sector. Resilience incorporates proactive measures to mitigate disruptive events and evaluate an entity’s recovery capabilities. An entity’s BCM program should align with its strategic goals and objectives. Management should consider an entity’s role within and impact on the overall financial services sector when it develops a BCM program.”
Two areas that present the most significant risk management and compliance challenges to FS providers are:
- Financial Market Infrastructures (FMI). These are critically important institutions responsible for providing clearing, settlement and recording of monetary and other financial transactions. A payment system is a set of instruments, procedures and rules for the transfer of funds between or among participants. An example is the SWIFT network for global banking and payments. In the US, the Federal Reserve Board supervises most market infrastructures.
- Outsourced Technology Services. FS providers that rely on third parties to provide operational services need those vendors to have sufficient resources and recovery capabilities in the event of a disruption. The FFIEC, which has a handbookfor business continuity management (BCM) planning, warns that: “Financial institutions should recognize that using such providers does not relieve the financial institution of its responsibility to ensure that outsourced activities are conducted in a safe and sound manner.”
The primary concern of regulators is the “systemic risk” that individual vendors and third parties present to the overall health of the financial/economic eco-system. Recall the snowball effects that the failures of several large broker-dealers and investment banks had in precipitating the great financial crisis of 2008. Regulators are also concerned that the FMIs, if not properly managed, can result in significant violations of consumer laws and regulations and expose an institution to supervisory enforcement action, as well as financial, legal and reputational risks.
This is the most important point to remember – as an FS provider, you OWN THE RISKS.
So, what can you do to mitigate your risks? As best practice, you should:
- Mark all of your vendor and third-party relationships from end-to-end. As an example, in payments and settlements, you vitally need to understand who your third parties are, where they are and what risks they may present. You need to plan on how you can mitigate those risks to the greatest extent possible.
- Make sure everyone in your organization who is responsible for these risks is informed – including C-suites and boards. The FFIEC handbook emphasizes that “the responsibility for properly overseeing outsourced relationships lies with the financial institution’s board of directors and senior management.”
- FS providers should do a deep dive into their current systems, their limitations and their liabilities. Many firms still have legacy systems with risks assessments built into spreadsheets or printed documents. State-of-the-art BCM systems allow for information inputs from across the organization with advanced technologies employed in risk assessments.
- Some firms keep their databases in silos (i.e.: equity trading department; mutual fund department) where one silo can be unaware of the risks of the other, putting the entire firm in jeopardy. A holistic system that covers the enterprise and allows prompt reporting to the board level is not a luxury. It is a must for today’s FS providers.
- Your system must be stress-tested constantly and vigilantly. Game-playing scenarios are helpful in identifying “what if’s?” as well as planning work-arounds for potential disruptions.
- Identifying “acceptable risks” is important as well. A one-hour outage may not be desirable, but it may be acceptable and not have any regulatory ramifications for your firm. But a 72-hour outage would be vastly different, as access to cash reserves and insurance may be limited or non-existent and your legal liabilities could be piling up.
If you think this is complex, you are right. Operational disruptions to the products and services that firms and FMIs provide have the potential to cause harm to consumers and market participants, threaten the viability of firms and FMIs and cause instability in the financial system. There are new regulations on the way to mitigate this risk to the economy and managing 3rd (and fourth) parties is a key area of discussion.
The infrastructure of financial institutions and FS providers is much like a tapestry whose resilience depends on the strength of the weave. But don’t be deterred by the complexity. The good news: there are technology-empowered platforms that can help you manage your vendor and third-party risks.
An effective outsourced business continuity management program will provide the framework to successfully manage your vendor and third-party risks now. It will employ up-to-date technology; will break down silos, and will identify, measure, monitor and mitigate the risks that otherwise may keep you up at night.
MOBEY FORUM: BANKS’ BIG OPPORTUNITY IN DIGITAL ID WON’T LAST FOREVER
New report offers strategic insights for banks following in-depth review of seven prominent digital ID schemes across Europe and North America
Despite banks playing a fundamental enabling role in the development of national digital ID schemes to date, their uniquely strong position in the field is under increasing threat from web giants and other globally networked firms. This is the view expressed by Mobey Forum’s Digital ID Expert Group in a new research report launched today.
The report, entitled How to Make Digital Identity a Success: Insights and Learnings from Seven Digital ID Schemes, is the product of an in-depth, collaborative study conducted in 2019 with seven digital ID schemes across Europe and North America. The report presents a comparative overview of the different models being applied around the world and provides insights, and comments for banks and financial institutions on their evolution, together with a range of other factors such as their varying models and management, technical underpinnings and services they provide to users.
“As our collective reliance on technology continues to grow so too does our need to establish robust, secure and user-friendly ways of verifying our individual identities, digitally,” comments Jukka Yliuntinen, co-chair of the Digital ID Expert Group, Mobey Forum. “Banks have mastered the ability to operate at scale in highly regulated environments, under conditions that require rigorous and stringent security and identity verification procedures. This has enabled them to play a key role in the evolution of national digital ID schemes and also makes them prime candidates to be future guardians of digital identities, supporting services that stretch far beyond banking and generating new revenues as a result. This advantageous position could change quickly, however, as other powerful networked stakeholders move into the space. Banks must be aware that the window of opportunity to adopt these critical roles may be closing, perhaps faster than they think.”
Launched in a new interactive, all-digital format, the How to Make Digital Identity a Success report gives banks and other stakeholders a chance to refer to a detailed comparison of Alastria, e-Estonia, Itsme, NemID, BankID, Verimi and Verified.Me.
“Like in so many other industries, Google, Amazon, Facebook, Apple, Alibaba/Alipay and other hugely powerful digital players have serious potential to upend the global market for digital ID,” adds Elina Mattila, Executive Director, Mobey Forum. “That said, the success of a digital ID scheme is rooted in trust and collaboration – between users, governments and regulators, telcos, banks and other key service providers. While they can move quickly and at scale, the ‘GAFAs’ are unlikely to be afforded bank-beating collaborative relationships with all of these stakeholders any time soon.”
“This collaborative model is here to stay,” adds Mattila. “It’s only through close collaboration that banks can both address the challenges and seize the opportunities presented by digital identity.”
The report also charts the opportunities and challenges posed by cross-border integration of digital ID schemes and examines the role that regulation can play to assist. It contends that, as digital ID schemes continue to mature, the issue of cross-border interoperability will gather momentum and, while regulation can provide the framework for interoperability, much work remains before the schemes can be harmonised to enable a seamless flow of digital identity usage over the borders.
HALO TRUST USES ADAPTIVE INSIGHTS FOR STRATEGIC BUSINESS PLANNING
Cloud-based financial planning helps HALO Trust deliver greater benefit to communities affected by war
Adaptive Insights, a Workday company, today announced The HALO Trust, the world’s largest humanitarian landmine clearance organisation, employing more than 8,700 employees across 25 countries, uses Adaptive Insights Business Planning Cloud to support the charity’s continued growth with a modern business planning process. The HALO Trust joins more than 750 non-profit customers that trust Adaptive Insights for business planning, benefiting a variety of communities and causes worldwide.
The organisation relied on the development of financial plans utilising complex spreadsheets, which were difficult to integrate into the global planning process and inefficient when producing multiple scenarios for effective option appraisal.
“Being able to holistically manage real-time changes is critical to our success. With a single, powerful system in the cloud, we’ve eliminated the headache of working with siloed spreadsheets and have significantly reduced the time taken to produce high-quality financial models,” says Mick Darby, finance director at The HALO Trust.
For more than 30 years, The HALO Trust has kept people safe and helped communities to rebuild by clearing landmines, destroying weapons, managing stockpiles, and educating communities how to stay safe until the dangerous debris of war can be removed for good. By moving HALO’s planning and analysis process entirely to the cloud, the finance team provides the guidance necessary to support the rapid growth of the organisation, which has doubled in just the last three years. Providing globally distributed team members with an easier, faster, and standardised approach ensures that the charity’s budgets and forecasts reflect current local conditions and currencies, all rolled up into a single platform.
“We’re proud to provide organisations like HALO with more time to focus on the important humanitarian work they do by simplifying and modernising their business planning process,” said Robert Douglas, Europe planning director at Adaptive Insights. “By streamlining budgeting and forecasting, we’re helping to make every pound and every volunteer hour count, which in turn helps HALO maximise the impact on its mission to save and protect lives.”
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