Survey also reveals elevated role and remit of risk function
Increased regulatory interest has overtaken reputation as the biggest risk concern for asset management chief risk officers, according to a survey.
The results of the survey showed more emphasis on regulatory scrutiny plus a desire by firms to optimise the amount of capital they must set aside. The desire to optimise capital was the third biggest risk concern, claimed the Ernst & Young survey.
Anthony Kirby, director in the Ernst & Young regulatory and risk management practice, comments: “To a large extent, the G20, the central banks and the prudential regulators are all acting in a concerted manner to manage liquidity risk and avoid pro-cyclicality at all costs. However, the current evidence is that the FSA in particular is placing more focus on risk appetite and linking the risk framework to strategic decision making. This includes requiring managers to provide a sufficiently detailed explanation of (and justification for) the methodology adopted and the conclusions reached.”
Twenty nine heads of risk and CROs from several asset managers in the UK and continental Europe were queried in the survey.
Elevating the CRO
The greater worth of the CRO has been recognized by the industry this year. Unlike the 2009 survey, there were no instances where a CRO was not involved in any stage of the product development process. The survey also highlighted the fact that more CROs are reporting to chief executive officers than last year with an equal number reporting to either the group CRO or COO.
Kirby commented: “The role and remit of the risk function has elevated from a ‘risk monitoring’ function reactive to events, towards more of a strategic enabler of the business. The CRO now looks at a multitude of new risks, such as investment, fiduciary and client mandate risks, in addition to more traditional risks such as liquidity, valuation, counterparty and operational. It is clear from our survey this year that businesses are better valuing the role of the CRO. CROs must persist in driving risk management through the business and continue with essential reporting to the board,” he adds.
Improving management information
“If there was a silver lining for the industry in light of the financial crisis, it was that managers recognized the need for good quality operational risk data in order to meet stress testing requirements – such as stress testing to destruction scenarios,” said E&Y.
“Most firms need between five to seven years of historic data featuring both incidents and near misses to carry out meaningful analysis”, Kirby commented. “They must record all the data from errors in their firm’s favour as well as bad news data to ensure they have the most complete picture possible to hand for assessing future scenarios.”
Kirby concluded: “CROs are not always afforded the luxury of being able to sit back and study the bigger picture of the business. However, for the newly-elevated risk management function to maintain its seat at the table, CROs must be armed with the relevant management information and historic data for back-testing.”