Managing business risks to stay competitive
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The financial services market is facing continuous disruption, and the ability to adapt to new challenges has become crucial for businesses. Improvements to the regulatory framework are under way to strike the right balance between public and business interests, but the distribution of power among the market players and the rules of the game are no longer what they were a few years ago.
The increasing regulatory burden
We see consolidation going on in the traditional banking and insurance sectors as the number of financial service providers in the less regulated and unregulated sectors continues to grow. Although the business goals and growth drivers of those players vary, their future operations depend on how they will manage their compliance risks. According to PwC’s latest CEO survey, 86% of banking and capital market players globally are concerned about the increasing regulatory burden.
Businesses may be facing numerous risks, for example:
a breach of competition law – an agreement between rivals to align their commission fees or customer terms;
a money laundering offence where the origin of customer funds or the reputation of business partners is not checked adequately;
a business partner investigation failing to comply with tax legislation;
unlawful use of customer data without receiving appropriate consent;
a company provides a new unlicensed financial service.
Risk management: the top priority and the biggest challenge
Any such breach may result in the company’s business being suspended or significantly undermined by a fine of millions, and so managing these risks should be high on the agenda of its shareholders and directors alike. Yet in practice we still see infringements in companies of any size. These violations mostly go unreported to the CEO, the main reason being inadequate risk management procedures and a lack of understanding of the legal framework.
Our experience suggests the following common weaknesses in legal risk management:
inadequate resources or inaccessible expertise on specific legal risks;
lack of separation between the legal function and the risk management function;
inadequate CEO involvement in risk management;
failure to use information technology for mitigating human risks;
unsystematic risk audits;
inappropriate actions in crisis management.
Investing in risk management offers key benefits over the long run in terms of stable future revenue streams, growth in company value, board responsibility, corporate reputation, and engaging strategic partners. While these benefits are qualitative and there is no single approach to assessing their impact, they do have a direct influence on the financial value of the company in the event of acquisition.
A company investing in risk management is often driven by two factors: the need to stay competitive or to improve its reputation in the industry. For the latter, liaising with national regulatory bodies is crucial, as evidenced by the ongoing dialogue between financial sector companies and the government.
Efficient risk management is a challenge that companies face in any industry globally. Addressing this challenge requires not only industry experts but also people with experience in risk auditing, business advisory, and information technology. Improving the regulatory framework is an ongoing process and a company’s failure to modify its approach to risk management is a risk in itself.