Operational Risk in the New Way of Working

As the world comes to terms with the fact that it will be living with COVID-19 for some time to come, there are increasing questions around what this means for the future of the workplace. Will people return to the office or cling on to home working, are we going to see local ‘hub’ offices springing up outside of major capitals, will the relative isolation of the past few months see people keener than ever to spend time together for collaborative work?

But what about the financial services industry specifically? It is true that certain functions in a bank or buyside firm are not necessarily more challenging to transition to a home-based model than those of any other multi-national corporation. However, when it comes to parts of the business where processes and information flows are complex, the pace is fast, and errors have the potential to be catastrophic, such as derivatives trading, it quickly becomes apparent that the transition to ‘the new normal’ will not be straightforward. A major consideration for banks and their peers is the level of operational risk generated as working models undergo a seismic change. The industry may have adapted quickly in the initial crisis phase, but what does the future look like?

IT and technology risk have been at the top of the operational risk agenda for several years now and the shift in working models and practices is unlikely to do anything to change that. One of the reasons this is so pertinent for financial institutions is that many have large amounts of legacy tech which is already at breaking point, particularly in back office operations supporting trading desks. Add in the additional complexity of staff working offsite or the company scrambling to set up alternative locations or hubs to accommodate social distancing or shorter commutes for staff, and it’s easy to see how a system stretched beyond its capabilities could suddenly snap.

Furthermore, many firms relying on legacy tech have resorted to manual workarounds to tackle problems which are simply beyond the scope of their existing solutions. These are a danger spot anyway, but the possibility for breakdown or human error increases exponentially when you factor in the complexity of adjusting to new working practices or locations or simply dealing with a high level of change and uncertainty, as it seems we will all be doing for some time to come. A key component of managing operational risk in the new world then is eliminating or at least minimizing these manual processes, particularly in complex areas such as trading where the fast pace both increases the chance of errors and makes them potentially highly damaging.

From a regulatory perspective, operational risk has always been challenging to model and quantify due to a paucity of data, and the ‘black swan’ nature of a global pandemic is likely to exacerbate this. Consequently, the industry can perhaps expect to see regulators focusing more on the management and mitigation of operational risk. Many regulators have been increasing their focus in the area anyway, with Singapore’s MAS, the U.S.’s OCC, and the FCA in the UK all issuing new guidelines or updates in the field over the past few years, addressing risks in areas including technology, cyber security, and working with third parties and vendors.

The challenge that operations, technology, and op risk teams face is convincing the relevant stakeholders that the time to act is now – not when a major disaster has already occurred. Whilst some of the high profile technology failure incidents the industry has seen over the past few years may help to focus the mind, it is inevitable that over the next few months, teams will be expected to ‘do more with less’ and major transformation projects will be scrutinised.

This is where focusing not only on the risk mitigation elements of legacy transformation, but also the operational efficiency benefits, can help. Building a business case is always easier when there are quantifiable savings to be made or efficiencies to be gained. This approach allows operational risk managers to turn red indicators to green whilst operations and technology teams are able to work with systems purpose built to support a modern trading business, therefore consuming less of their time and resources in maintenance and management. By working together, these functions can create an operational environment which meets their needs and is appropriate for the new working world we find ourselves in – however it may look.

To understand how we can help you minimise operational risk through eliminating manual processes and ensuring the integrity of your data, please contact us here.

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