Since emerging as a formal discipline in response to demands for greater assurance and standardisation in financial organisations’ risk control environments, operational risk management (ORM) has undergone a significant evolution over the past two decades, expanding its scope to meet the dynamic challenges of the modern business landscape.
Traditionally considered a means to mitigate losses from internal processes, ORM today incorporates proactive strategies for identifying, assessing and responding to emerging risks. With globalisation, geopolitical developments, changing business models, evolving customer expectations, next-generation risks only grow in complexity, as do regulatory obligations. To be prepared for what may lie ahead Chief Risk Officers (CROs) must integrate ORM with strategic planning and align risk mitigation efforts with overall business objectives.
This evolution reflects a shift from a reactive stance to a more proactive and joined-up approach, positioning operational risk management as a strategic enabler for organisational resilience within an ever-competitive business landscape.
What is operational resilience and why is it the desired outcome?
The Financial Conduct Authority (FCA), responsible for regulating financial services (FS) firms and financial markets in the UK, defines operational resilience as ‘the ability of firms, financial market infrastructures and the financial sector as a whole to prevent, adapt and respond to, recover and learn from operational disruption.’*
Building operational resilience is important for financial services organisations due to the complex and interconnected nature of their operations, coupled with the potential for widespread economic impact in the event of disruptions. Failure within these institutions can have far-reaching consequences.
Operational resilience involves the ability to identify, protect, detect, respond to, and recover from operational disruptions, including cyber threats, natural disasters, and other unforeseen events.
For FS organisations, maintaining operational resilience is vital to safeguarding customer trust, ensuring continuous service delivery, and meeting regulatory requirements all of which ultimately contribute to the overall stability and confidence in the financial system. As the FCA puts it, ‘operational disruptions and the unavailability of important business services have the potential to cause wide-reaching harm to consumers and/or risk to market integrity, threaten the viability of firms and cause instability in the financial system.’
The regulatory standpoint
The regulatory perspective on operational risk management and resilience has become increasingly stringent, driven by the recognition that effective risk management is essential for the stability of financial institutions and the broader financial system. Regulatory bodies worldwide have established guidelines and frameworks to ensure that financial institutions prioritise operational risk management and build resilience into their operations.
Financial institutions are expected to continually adapt and enhance their operational risk management frameworks in response to evolving regulatory expectations, ensuring a resilient and well-governed financial system.
Make ORM the strongest link
To be and remain sustainable, reliable and trusted - meeting the needs of customers, regulators, and shareholders - organisations need to develop strong ORM programs. In this dynamic era, that means beyond ORM practitioners, CROs must be resilience architects!
Key strategies for resilience include:
Holistic risk assessment
Thorough and ongoing assessment of operational risks across the organisation, considering internal and external factors, emerging risks, and dependencies between different risk categories, will provide you with the ‘full picture’ for decision-making.
Scenario analysis and stress testing
By implementing scenario analysis and stress testing to simulate various adverse conditions, you will be able to identify vulnerabilities and ensure preparedness for a wide range of potential disruptions.
Dynamic risk monitoring
Establishing real-time monitoring mechanisms for key risk indicators allows for early detection of emerging risks, enabling timely intervention and mitigation strategies.
Crisis management and response plans
Developing robust crisis management and response plans that clearly outline roles, responsibilities, and communication strategies will provide structure. These plans should be regularly tested and updated to ensure they remain effective in evolving conditions.
Risk culture building
Fostering a strong risk culture enterprise-wide will ensure that employees at all levels understand the importance of risk management and are actively engaged in identifying and mitigating risks within their areas of responsibility.
Integration with business strategy
Aligning ORM with overall business strategy will integrate risk considerations into decision-making processes. This will ensure that risk management is a fundamental part of strategic planning and execution.
Collaboration and information sharing
Establishing clear channels for sharing best practices and lessons learned from incidents (informed by reliable data) will enhance collective resilience.
Leverage technology to withstand shocks and ensure business continuity
See how Decision Focus can revolutionise your operational resilience strategy with a powerful GRC software solution designed to address key ORM challenges, enhance preparedness and support your GRC journey. Get in touch for your own personalised demo.