Relevance of Operational Risk to the
FCA
Jill Savager
Manager, Operational Risk, Financial Conduct Authority
IOR Scottish Chapter Annual Conference
Glasgow Caledonian University – 1st November 2013
1
What we will cover
– FCA overview
– Relevance of operational risk to the FCA
– How our focus on operational risk is
different from the FSA
2
FCA Objectives
Strategic objective:
– To ensure that the relevant markets function well
Operational objectives:
– To secure an appropriate degree of protection for consumers
– To protect and enhance the integrity of the UK financial system
– To promote effective competition in the interests of consumers
In comparison, the objectives of the PRA are:
– To promote the safety and soundness of banks, building societies, credit unions,
insurers and major investment firms.
– For insurers, to contribute to the securing of an appropriate degree of protection
for policyholders.
3
FCA Scope
Supervise conduct of c.25,000
financial services firms
Regulate prudential standards
for c.23,000 of these firms
Co-operation and co-ordination
with PRA through Memorandum
of Understanding (MoU)
4
FCA Supervision Approach
To ensure firms have the
interests of their customers and
the integrity of the market at
the heart of how they run their
business.
Approach
based on
key
principles
Aim of Supervision
Executed through
coherent operating
model
•
•
•
•
•
•
•
•
•
•
Forward looking and more pre-emptive
Focused on judgement not process
Consumer focused
Focused on big issues and causes of problems
Robust when things go wrong
More focused on business models and culture
Orientated towards firms doing the right thing
Greater emphasis on individual accountability
Externally focused, engaged, transparent and listening
Joined-up approach
Principles
Enabling
delivery of
real
outcomes
5
• Making life easier for consumers
across their life cycles
• Embedding major interventions
• Preparing for the worst
• Looking further up the value chain
• Ensuring redress when thing so wrong
Delivering real outcomes
Definition of Operational Risk
Basel definition:
“The risk of loss resulting from inadequate or failed
internal processes, people and systems or from external
events”
The interpretation of ‘loss’ can be extended beyond financial
loss to include other aspects such as:
– Loss to customers
– Loss of integrity of the UK financial system
6
The example of mis-selling
Prudential-related
Impacts
Financial Loss
Redress
Damage to Physical
Assets
Revenue
Foregone
Operational Risk
IT systems failure
Reputational
Damage
Fraud
Mis-selling
Etc.
Consumer
Detriment
Conduct-related
Impacts
Consumers
Market Integrity
Competition
7
Regulatory
Fine
Firm
Failure
What are our expectations?
Robust and effective operational risk
management framework
Second line of defence providing robust challenge
FCA has not created new risks
– Change in impact and likelihood?
– New ways of managing risks?
– Assessing wider range of operational risk
impacts?
Not just ‘a compliance exercise’
8
‘Typical ‘ Operational Risk Framework Elements
OR Governance & Culture
Risk Identification & Assessment
Risk & Control Self-Assessments (RCSAs)
Inherent Risks
Controls
Residual Risks
Internal & External Incident Capture
Scenario Analysis
OR Systems & Documentation
9
OR Monitoring, Escalation &
Reporting
(definition, categorisation and terminology)
OR Appetite / Thresholds
OR Measurement &
Quantification
OR Taxonomy
(Policies, committees, allocation of responsibilities, challenge, performance appraisal, reward, etc)
Possible enhancements to your OR
framework
– Add customers and UK financial system integrity impacts
to risk assessment methodology for RCSAs
– Number of customers affected, measure of customer detriment
etc.
– Size of market affected, volume and value of transactions,
significance to operation of UK financial system
– Assess effectiveness of controls in managing risks for the
customer
– Include conduct impacts when capturing details of
crystallised operational risk loss events
– Enhance MI to give management a conduct perspective
on risks the firm is exposed to
10
Questions
11