Dramatic growth in the regulatory environment, revolutionary change in technology and various shocks to the economy have seen the risk function move from a discretionary to mandatory cost for many organisations. More people and funds have been proverbially ‘thrown’ at risk – but the tide is shifting, explains Daniel Knoll, Partner, Advisory, KPMG.
“The pressure on risk functions to justify cost will continue to increase as organisations think deeply about affordability and the return on investment (ROI) across all business units,” he says.
Risk is also staring down the path of a technology automation overhaul of its core activities, as well as emerging industry disruptors (particularly tech-savvy start-ups who are bringing real-time risk assessment into financial transactions) and unprecedented security threats such as cyber-attack.
Amid these pressures, the risk function of the future needs to step up the value it adds to its organisation, demonstrating its power to confidently steer businesses into the unknown.
A financially based ROI analysis of the value of the risk function can be quite straightforward to measure and rectify, says Michael Cunningham, Partner, Advisory, KPMG.
“If you are not pricing risk correctly, the market will come back and tell you, as your fault rates will go up and your reputation will go down,” Cunningham says. “If you are overpricing risk, you are turning people down for mortgages who will get them elsewhere. So the market for risk works efficiently.”
However, the potential for risk to be a true value add to an organisation goes far beyond pragmatic numbers. Cunningham says risk can share deeper insight into the relationships between actions, decisions, outcomes, returns and the probabilities associated with them.
“Whether that is a default ratio on a loan book, or stock price movements, or an infrastructure investment, risk can frame those problems to help businesses better allocate capital and generate returns for shareholders.”
It is all about harnessing insights and bringing new solutions to the attention of leadership.
“Risk can add value by working with the business to drive financial innovations,” Cunningham says.
In the years since the global financial crisis (GFC) risk activity has largely focused on compliance, regulation and reputational matters. As a result, Knoll says risk has gained the image in some organisations of being a constraint, rather than enabler, of opportunity.
“The risk function has historically been very good at steering an organisation away from higher risk industries or segments. Businesses are looking to their risk functions to partner with them to tell them where they can grow and lend.”
He says if risk make this shift, their ability to draw on data and insight to shine light on solutions will bring a competitive edge.
“The risk functions that are most valuable are those that act as true business partners – they are a support for the business, as opposed to being seen as a restraint,” he says.
Mark Burgess, Director, Advisory at KPMG says if the risk function of the future harnesses the full potential of technology to offer comprehensive data and insights, they will be sought for “more than just a signature”. He says risk’s role as the second line of defence (sandwiched between Audit and the staff of the business) will move to a more “strategic advisor position that is more analytical”.
“The business should go to the risk function when they want something strategic, and when they want to inform decisions – not just for a piece of data that risk hand over,” he says.
While technology can empower risk to analyse information with greater efficiency and impact, Knoll says the benefit comes with a threat to traditional activities in the function. Already there is a shift away from the risk function having a personal role in approving certain transactions, such as un-secured lending, thanks to digital end-to-end transaction capabilities.
“There is a big move towards real time risk assessment, so the risks associated with things like payments that typically happen in batch form, are now made in real time. The way risk touches real time transactions is going to change quite dramatically,” Knoll says.
However, rather than see the threats to the nature of risk jobs, Burgess says risk must embrace the opportunity.
“Automation can allow risk to focus on more strategic items and allow them to think about what is on the horizon rather than what is in front of them. If they are able to achieve that, they will really start to add genuine value and insights,” he says.
Knoll adds that risk is in a position to be on the front foot of technology that could advance an organisation, or be on the lookout for disruption.
“I have been astounded by some of the analytics capabilities that come through disruptive players and the strength of technology enabled models around lending. There is quite a risk to the business model as it stands, if the traditional players don’t increase their diversity of analytical thinking, particularly in the way of advanced credit,” he says.
As risk prepares to add more value in a future full of challenge and change, the best demonstration of success will be in how the broader business engages the function. Burgess says the ideal outcome will be when: “…the business seeks out risk for their thoughts on how the environment will change and how the organisation can cope with changes. It could be the economy, disasters or events that other institutions are experiencing, and they ask, ‘do you think that will happen to us?’.”
Ultimately, ‘value add’ for risk should not be about offering ‘more for less’, nor should it retreat in the face of automation. Rather risk should have a bigger voice than ever.
“The risk function of the future is not about creating capacity with more people, it is about adding value,” Burgess says.
Functional consolidation and technology transformation are key for risk functions, as is a focus on the customer and business. Find out more in our article Risk function of the future – urgent change starts now.