The operational risk & control market is experiencing significant change.
As firms hit peak headcount, they must now achieve more with less, necessitating the integration of advanced technology, and a fundamental change of approach to running and changing the bank.
Following recent interactions with clients and at industry conferences, there are 8 key areas which I believe are crucial to successfully navigating these changes:
1. A Focus on Strategic and Future Models
A forward-looking approach is essential.
Firms need to consider the technological architecture and infrastructure required for future operations. The traditional, people-dependent models are becoming unsustainable at scale.
2. Navigating the Culture Shift: Industrialisation vs. Artisan approach
As the industry shifts from an ‘artisan’ people-centric approach to a more tech-industrialised AI driven model, Banks must establish strong foundations and standards now.
To manage this transformation successfully, a focus on data accuracy and integrity are critical – trying to remediate these at a later date will be considerably more challenging. This can be achieved by reducing dependence on individual expertise through capturing and comparing institutional knowledge.
There is a noticeable fear of change and cultural resistance within organisations.
When navigating such a challenge, risk owners must be proactive in risk acceptance, supported by risk managers who clarify the implications of these decisions.
3. Balancing Talent: Running the Bank (RTB) and Changing the Bank (CTB)
Identifying and hiring the right talent for tomorrow’s operational model is imperative.
A prevalent concern across the industry is whether firms possess the right talent to simultaneously manage “Run the Bank” (RTB) and “Change the Bank” (CTB) initiatives. The skillsets required for these two functions are distinct, and most firms do not believe they have the necessary talent mix. RTB focuses on maintaining current operations, while CTB is about transformation and innovation. This divergence in required skills required prompting firms to reconsider their talent strategies and explore ways to bridge this gap.
Human Resources functions must play a pivotal role in this transition, partnering to ensure the organisation is equipped for future challenges.
4. Regulatory Censure and Transformation
Regulatory censure and subsequent remediation have driven many transformation programs which have differed from those required to revamp operating models.
Current systems and processes are often deemed unfit for purpose, but the existing remediation programs can be leveraged and refined to align with future needs. There is an urgent call to action: firms must seize the opportunity to retune these programs now rather than delaying.
5. Regulation and Demonstrating Risk Control
Regulators are increasingly demanding accountability throughout organisations. There is a growing emphasis on ensuring risk control mechanisms flow seamlessly top-down; from the boardroom through to the end-to-end business practices.
Firms must demonstrate how laws and regulations are identified, implemented, and evidenced. This requirement is pushing firms to adopt more robust frameworks for risk management and regulatory compliance.
6. Addressing Technology Debt and Cloud Integration
Technology debt and the move towards cloud solutions are significant drivers of change. Firms are grappling with legacy systems that hinder agility and competitiveness. The integration of cloud technologies and a focus on data-driven decision-making are essential for maintaining operational efficiency and supporting new products and services in evolving markets.
7. Leveraging both Artificial Intelligence and Human Intelligence
Artificial Intelligence (AI) is reshaping the operational risk landscape, but its integration remains uneven. While client-facing and revenue-generating functions are receiving AI resources and attention, first-line control functions are often overlooked. This needs to be rebalanced. In addition, as AI tools are deployed, it is crucial to keep the human in the loop to ensure control and oversight guardrails are maintained.
8. Harnessing Collective Intelligence
Firms need to know how they measure up in terms of control and compliance and must be able to provide evidence of this to both boards and regulators. Benchmarking and peer comparison and calibration helps ensure that risk management practices are not only robust but also aligned with industry standards. Basel III Pillar 2 capital calculations reinforce this shift.
Conclusion
Operational risk management is not typically seen as a competitive advantage, but failing to modernise and adapt can significantly impact your business and become a disadvantage.
It is critical that firms embrace change, leverage technology and rethink their talent strategies to remain competitive. The ability to support new products and services with agility is critical.
Firms that can effectively perceive problems, absorb feedback, determine the right course of action and implement at speed will outpace those that cannot.
As the industry stands at a crossroads where strategic foresight and decisive action will determine future success, the time to act is now.