Risk management is evolving in the financial services industry. Traditionally, risk was managed by the risk management and compliance functions, but responsibilities are now moving to the front-line.
A Risk in Review study from PwC reveals that a number of leading companies are shifting risk management to the front-line. It strengthens the organization’s risk culture and accountability, and reinforces the defense lineup.
In the banking world, risk is first introduced in the transaction (e.g., when a customer applies for a credit card online). These risks may result in better outcomes and less damage on the front-line than if the same risk is caught later, at your second or third lines of defense. So ideally, banks should aim to identify at least 50% of potential transactional risk and fraud concerns here, at the first line of defense.
According to the International Money Laundering Information Bureau, money laundering is the third largest industry after oil and currency, and accounts for billions of dollars in dirty money globally. Know your customer (KYC) procedures and controls are an essential precaution against these types of shady activities. And the keys to a successful KYC program are, again, your front-line staff.
So the question becomes: are you valuing your front-line staff to do their job?
“By using risk and control self-assessments, you can capture a continuous risk assessment from staff who interact closely with risks and controls every day.”
Front-line staff are best positioned to manage risk
Your front-line staff are in the trenches on a daily basis, so they’re in the best position to assess and address transactions from customers as they take place.
Shifting the focus to the front-lines helps empower employees by giving them increased responsibility and ownership (with support from the second and third lines of defense as required).
Staff can also gather essential risk data. By using risk and control self-assessments (RCSAs), you can capture a continuous risk assessment from staff who interact closely with risks and controls every day.
Benefits of front-line risk management
There are three key advantages of managing risk through your front-line.
- Better accountability and decision making from the ground up.
Using RCSAs equips staff with the risk intelligence to make better decisions. Since many procedures and controls are designed with transactional risk and KYC requirements in mind, data and insights from the point of sale are valuable. Operational staff are, by far, in the best position to gauge when things seem a bit off, and are also better positioned to amend possible control weaknesses quicker and earlier. The added responsibility and empowerment almost demands staff to exercise professional judgment. An RSCA approach also empowers the front-line with a feedback mechanism to provide additional insight to management for more real-world informed decision making.
- More agility.
The use of RCSAs can be a valuable tool for banks to maintain systematic controls, while at the same time being more agile and responsive to customer needs. Today’s banking product landscape has evolved dramatically as a result of new regulations and red tape. The internet makes customers more information-savvy and aware. This means they expect even more from face-to-face banking interactions. Shifting ownership through RCSAs helps make sure that future customer interactions can be modified more quickly when the risk landscape evolves, or when customer preferences change.
- Improved customer service.
Insights on customer behavior and strategic knowledge can be gained from RCSAs. Having these insights translates into better service and happier customers. The data can help you improve procedures during customer interactions and arm the front-line with the necessary tools to enrich the customer journey. Empowered staff who own RCSAs will ultimately help translate that into a healthier brand by delivering better customer service outcomes.
Risk control self-assessments and HighBond
RCSAs can significantly help your first line of defense become more empowered and risk-aware. Where transaction risk is introduced, RCSAs help to ensure there is enough information to understand the risk and appropriately address it. The first line understands the risks and fixes the issues, while the second line then provides validation.
Technology can help you automate and streamline the self-assessment process, while at the same time freeing up your organization’s second and third lines of defense. This fortifies your first line of defense by properly equipping your front-line staff.
HighBond makes it possible for financial institutions to develop and implement effective RCSAs as part of their overall risk management strategy.
KRI basics for financial institutions
- The different kinds of indicators, what they measure, their purpose, and audience
- How KRIs fit into a greater risk management program
- How to select your own KRIs, including a worksheet
- How to ensure your KRI program is scalable and sustainable.