What Does Risk Transformation Mean For Financial Services?

Risk transformation is a crucial skill for financial institutions, encompassing the ability to navigate market shifts, withstand challenges, and continuously adapt to new disruptions.

As the financial services industry evolves, the skills and competencies required for effective risk management are expanding.

New initiatives around sustainability, equity, and resilience demand tools and methodologies beyond traditional risk mitigation techniques.

Many of these challenges go beyond quantifiable approaches to assess capital and balance sheet threats and are operational in nature.

This requires institutions to consider how they deliver services to remain compliant, relevant, and competitive.

Failing to respond to these pressures can expose institutions to financial losses, regulatory censure, reputational damage, and service disruptions.

Secondary effects can be less immediate but equally damaging in the long term, such as reduced sales or accelerated disruption by other market participants due to lost trust.

Here, we examine the changing nature of risk and how financial institutions can leverage new processes and tools to reduce their exposure.

The Risk Shift

While financial institutions are experienced in managing risk, the nature of the threats facing the industry has shifted over the last two decades.

Whereas institutions were mainly concerned with financial risks—those reflected in their balance sheets and risk-taking activity—many have shifted their focus to non-financial risk (NFR).

NFR is diverse, making it inherently difficult to prepare for.

Threats can include changes in consumer or business expectations, regulatory shifts, external attacks such as fraud or cybercrime, or events such as geopolitical incidents or global pandemics.

Financial risk necessitates a focus on decisions or investments being made and analysing the probability of their success or failure.

Each decision can be assessed, rated, and placed in the wider context of the institution’s overall financial position. NFR is different.

Risk transformation for NFR requires proactive action based on what might happen to minimise losses or exposure from external forces.

This includes focusing on the ‘how’ of an institution's operations: how they work with clients, manage and store data, position their services in a changing market, and future-proof their operations.

What Are The Risks Facing Financial Institutions?

Non-financial risks for financial institutions are similar to those facing other industries. However, given the core nature of the industry, these businesses can experience increased pressure from consumers and regulators regarding compliance.

Key challenges include:

• Regulatory risk from changing legislation focused on protecting consumers and economies from emerging issues, such as climate change, ESG, and data compliance.
• Digital risk from cybercrime, including extortion, theft, and fraud, as well as technological failures and data breaches.
• Business model risk in light of the shift to digital banking services and challenges from challenger institutions.

The key issue for many large institutions is that existing systems are set up to quantify, contextualise, and mitigate historic risks—those that have been seen before.

Given the rapid development of new technology and policy in areas such as sustainability, cloud data management, and digital banking, these systems lack the agility to adapt proactively to new threats.

A key example is client communication and record-keeping. Many institutions still rely largely on paper to manage engagement with customers, with 72% of customers still receiving printed documents even if they use a banking app or online banking service. This is despite widespread commitments by financial institutions to hit green targets.

Working with physical documentation also hampers the speed of service that clients expect in a digital-first economy and lacks the robust security and visibility of online data management.

How Can Financial Institutions Transform Effectively?

To keep pace with market changes, financial institutions need systems and approaches that can evolve with their market context to remain relevant. This requires investing in tools and creating structures to leverage these across organisations.

Change-Ready Software

With public policy and consumer sentiment subject to rapid development, financial organisations need to prioritise systems that can adapt quickly and be implemented with minimal cost and lead time.

These must also be secure and integrated across organisations to minimise disruption, including:

• Cloud data storage and management
• API-first systems and connectivity
• Automation to manage data flows between interfaces and platforms
• Training for teams and customers to engage with new technology quickly and efficiently
• Systems such as Mailock that are easily deployed and integrated with any infrastructure, allowing systems to evolve in line with new platforms.

Structural Resilience

Viewing change as a continuous challenge, institutions need to be able to roll out changes rapidly without being stuck in silos and red tape.

By creating cross-functional teams across core capabilities including operations, customer support, legal, finance, and other functions, organisations can create holistic change plans that connect value delivery across relevant departments and avoid blockers.

Proactive Planning

The fastest way to react to market changes is to focus on change at the earliest opportunity.

By creating frameworks around common goals, terminology, and values within the business, organisations can identify preventative actions and proactive investments to prepare the business for future challenges.

Initiatives can have both short and long-term impacts, aligning immediate needs with long-term compliance and efficiency.

For example, by moving to an end-to-end client and broker communication solution that can manage internal and external stakeholder communication and transfer data securely between parties without paper, businesses can increase speed and efficiency while also targeting long-term sustainability goals.

Mailock is a tailor-made secure email solution for financial services businesses, allowing providers, advisers, and customers to communicate securely using a single system:

• Stakeholders can send sensitive documents and forms to customers over an encrypted channel, directly to their inbox.
• All customer replies are fully encrypted, including sensitive documents, which are protected on delivery and return.
• Move from inefficient paper-based systems to secure, centralised, paperless digital communications.
• Mailock integrates with Unipass identity, which is used by 8 out of 10 financial advisers in the UK.

Risk Transformation for Long-Term Resilience

With financial and consumer markets likely to remain dynamic and disrupted for some time to come, the ability to effectively manage, mitigate, and adapt to changing risk parameters will be a key determiner of success in the market.

Financial organisations can position themselves for future success by investing in solutions that provide long-term value for stakeholders across the value-delivery journey, improving retention, compliance, and efficiency.

Mailock is a secure email solution with risk-prevention hardwired and has been specifically designed for the financial industry.

By leaving paper communications behind, institutions can implement end-to-end secure communication channels for internal and external stakeholders to move data, documents, and gather information securely. Mailock digitises key workflows, helping businesses to:

• Improve internal and external communications efficiency
• Maintain secure audit trails for sensitive interactions
• Comply with security and environmental regulations
• Drive cross-functional alignment around key processes

References:

Cost Savings for UK Financial Services, NS Business Hub, 2021

The evolution of non-financial risk, KPMG, 2024

Risk transformations: The heart, the art, and the science, McKinsey, 2022

Reviewed By:

Sabrina McClune, 05.06.24

Sam Kendall, 05.06.24