The need to transform risk management operations within UK financial services (FS) was already pressing pre-pandemic. Institutions were grappling with numerous emerging types of risk, such as the increasing threat of cyber risk and technology resilience, the implications of Brexit, decarbonisation and crypto, alongside more traditional challenges around market, credit, conduct rules, regulatory changes and heightened regulatory scrutiny.
In the last few years, UK risk teams have had to deal with an incredibly complex and fast-changing environment. The pandemic and subsequent change to working arrangements, high inflation and the volatile geo-political environment post-Brexit are all areas where financial institutions (FIs) are looking to chief risk officers (CROs) to come to the fore. CEOs need their risk function to be a strategic enabler, giving insight and perspective to help meet firm’s strategic objectives whilst managing an acceptable risk profile, and designing and implementing a strong control framework.
The shift to a strategic enabler of business
The traditional view of the risk management process was focussed on historical rather than future challenges and took a siloed approach to risk. Today’s risk functions are increasingly being seen as key strategic enablers to sustainably grow the business, providing insight on how organisational objectives can be met rather than just opining on what can and cannot be done. This evolution makes the role of a risk manager increasingly demanding and complex, not least as the risk landscape grows ever more complex with overlapping and correlated risks.
The recent EY and the Institute of International Finance (IIF) survey¹ of banking CROs found they face an extraordinary volume and variety of risks – traditional and emerging, external and internal – nearly all of which seem to be increasing in urgency. To be prepared for risk transformation, we see three key areas that are fundamental to success:
A strategic transformation mindset.
Leadership that puts humans at the centre of transformation.
Having the right tools for a high-performance risk function – talent, technology and resilience by design.
Risk management teams will need to help build the capability to think and work across traditional risk silos. This needs a change in culture as much as a need for new skills along with the capabilities, tooling to support risk managers in decision-making.
A risk function with a strategic transformation approach
Demonstrating how risk adds strategic value requires a shift in approach around the role and scope of risk, which is often viewed only from a control and efficiency prism. Risk leaders need to have a strategic transformation mindset and value-driven approach to realise tangible benefits for the business. This involves looking at all transformation and change initiatives in the pipeline in their entirety rather than in isolation. It also means evaluating their alignment to the firm’s strategic objectives to determine their strategic value. This holistic approach has some key advantages:
Set up for success: By using a portfolio view of current and upcoming transformation, institutions can help ensure they have built sufficient capacity and capability for success. A firm’s resource capacity and technical infrastructure planning done at this strategic level will be notably more impactful. For example, it can free up experienced risk managers to own/lead key transformation initiatives that are interconnected in outcomes.
Timing it right: Mobilising using a portfolio view with clear outcomes and prerequisites should help firms get the timing right when looking to manage a high number of transformation projects. Mobilising too early may result in transformation stalling, whereas moving too late is likely to lead to excessive pressure to meet deadlines, resulting in lower value “tactical” fixes. We have seen this impact across FIs over the last few years, as they juggled several simultaneous risk priorities (i.e., Brexit, regulatory remediations, operational resilience, conduct and culture).
Communicate - take the firm on the journey: A strategic detailed view allows senior leadership to regularly communicate the purpose, value, progress, and successes of transformation initiatives, keeping employees motivated and engaged.
That shift in approach must be backed up by effective performance in transformations. EY teams conducted cross-sector research with Oxford University to understand the human-centric drivers of success in transformation. They found 67%² of senior leaders have experienced at least one underperforming transformation in the past five years. The research also found organisations that put humans at the centre of their transformation journeys are 2.6 times more likely to be successful than those that do not (73% change of success versus only 28%).
A risk function with the tools and skills to transform.
The third element to success is a risk function that is equipped for success:
Talent: Risk teams need expertise across an ever-increasing scope – including sustainability, technology (including cloud, machine learning and artificial intelligence (AI)), hybrid working, culture and new regulatory expectations such as the Financial Conduct Authority’s (FCA) Consumer Duty. Data analytics, data science and climate change skills are particularly in-demand. In the UK, the demand for technical skills is around 20% short of supply³. In fact, around one in eight UK FS roles is a tech role – double the proportion compared to the rest of the UK economy.
Banks have adopted a range of approaches to manage their talent and skills gaps, from reviewing reward and compensation, to offering flexible work arrangements. Equity, transparency, and inclusion are critical to retention programmes and intervention frameworks that help retain key risk talent. Leaders need to be creative about engaging with risk employees at all levels and listening to which approaches will be most impactful to their experience. This remains a key challenge, illustrated by a respondent to the 12th annual EY/IIF global bank risk management survey, who said: “Our function has often valued narrow, professional, and deep technical skills. The kinds of people who can balance broad complexity are few and far between”.
