Leading the digitalisation of operational risk management

The risk land­scape has trans­formed over the last decade, with oper­a­tional risk leap­ing in sig­nif­i­cance. There have been almost $400 bil­lion in fines and $150 bil­lion in loss­es since 2012, and the Asso­ci­a­tion for Finan­cial Mar­kets in Europe cal­cu­lates annu­al reg­u­la­to­ry costs at around $26 bil­lion.

Pre-finan­cial crash, banks did­n’t have to hold any cap­i­tal against oper­a­tional risk, only mar­ket and cred­it risk. Now, the top 30 banks hold more than $400 bil­lion of cap­i­tal against oper­a­tional risk and it’s the sec­ond high­est cap­i­tal item at J.P.Morgan, with reg­u­la­tors poten­tial­ly per­ceiv­ing its oper­a­tions as riski­er than its trad­ing activ­i­ties.

Despite the sever­i­ty of fines and loss­es, banks have been slow to adopt a sim­i­lar lev­el of dig­i­tal­i­sa­tion and data-dri­ven intel­li­gence to oper­a­tional risk than has been applied in oth­er
risk areas.

For mar­ket risk, banks have Bloomberg, Reuters and exchanges that con­nect par­tic­i­pants in real time. For cred­it risk, cred­it rat­ings agen­cies, includ­ing the big three, Fitch, S&P and Moody’s, have been lead­ing stan­dard­i­s­a­tion and a net­work of com­pa­ra­bil­i­ty across firms. In both areas, tech­nol­o­gy helps achieve a sin­gle ver­sion of truth. Yet when it comes to oper­a­tional risk, it’s still pre­dom­i­nant­ly peo­ple and process. Fitch Group, how­ev­er, are a major investor in Acin.

Acin is chang­ing all this with a ground-break­ing approach to dig­i­tal­is­ing oper­a­tional risk man­age­ment. The company’s indus­try-wide net­work com­bines tech­nol­o­gy and data stan­dard­i­s­a­tion to enable insti­tu­tions to con­sis­tent­ly mea­sure, man­age and mit­i­gate oper­a­tional risk in a way they haven’t been able to in the past.

Organ­i­sa­tions can clear­ly visu­alise their data, bench­mark per­for­mance and demon­strate com­pli­ance to reg­u­la­tors, allow­ing them to reduce costs, return focus to their core busi­ness and ulti­mate­ly make bank­ing safer. This comes at a time when coro­n­avirus has forced banks to rethink their oper­at­ing envi­ron­ments.

“The foun­da­tion of Acin, when we launched three years ago, was real­ly that there’s a bet­ter way to approach oper­a­tional risk. This is even more appar­ent since the pan­dem­ic has fur­ther exposed the flaws in any process­es that are too reliant on peo­ple and prox­im­i­ty,” says Paul Ford, founder and chief exec­u­tive of Acin.

“Our tech­nol­o­gy helps organ­i­sa­tions become bet­ter at what they do, as well as the indus­try to become bet­ter and safer on a sys­temic basis. When a new bank joins us, we see they can be miss­ing 20 or 30 per cent of the key risks and con­trols. Despite their best efforts, people’s judg­ments are impor­tant, but it’s no sub­sti­tute for the pow­er of data and tech­nol­o­gy.”

The peo­ple-dri­ven approach to oper­a­tional risk man­age­ment was born in the wake of the glob­al finan­cial cri­sis. Though oper­a­tional risk always exist­ed, it nev­er gar­nered the same atten­tion as its direct rev­enue-gen­er­at­ing coun­ter­parts in mar­ket risk and cred­it risk. The post-finan­cial cri­sis reg­u­la­to­ry envi­ron­ment, heav­i­ly influ­enced by a hos­tile polit­i­cal land­scape, changed all of that, bring­ing oper­a­tional risk man­age­ment firm­ly to the fore.

Inves­ti­ga­tions, inquiries and rogue-trad­ing inci­dents became fre­quent between 2008 and 2010, as the pres­sure from reg­u­la­tors to resolve oper­a­tional risk issues mount­ed.

“Banks did what they always do when they don’t quite know how to solve a prob­lem yet, but there’s a tsuna­mi of exist­ing reg­u­la­tions being applied and new ones being added, they hired some real­ly smart peo­ple and brought in a bunch of con­sul­tants,” says Ford, who along with oth­er mem­bers of Acin’s lead­er­ship team comes from a bank­ing back­ground, so he has lived through oper­a­tional risk chal­lenges in this sec­tor him­self.

“While those peo­ple were fig­ur­ing it all out and deal­ing with the issues, banks could go back to their board and the reg­u­la­tors and say, ‘Look how many peo­ple we’ve hired and con­sul­tants we’ve brought in to sort this out; we’re tak­ing it seri­ous­ly’. It was a very peo­ple-cen­tric approach to oper­a­tional risk and that’s broad­ly remained the case.

“Annu­al­ly or quar­ter­ly, teams of expe­ri­enced peo­ple sit down and look at a par­tic­u­lar top­ic, dis­cussing the risks they’ve iden­ti­fied, the con­trols in place to man­age or mit­i­gate them, whether any­thing has changed and how they grade each con­trol in its effec­tive­ness.”

While rely­ing entire­ly on the judg­ment, skills and expe­ri­ence of indi­vid­u­als can ren­der good results; tak­ing a man­u­al, arti­san approach means mis­takes are bound to hap­pen and fre­quent­ly do. Intel­li­gence is lim­it­ed to the expe­ri­ence of the peo­ple sat around the table and the costs of that can be astound­ing. Glob­al bank fines for 2020 hit €11.61 bil­lion in Octo­ber, on top of aver­age annu­al risk and con­trol oper­at­ing costs of more than $100
mil­lion each.

Acin’s vision is to utilise tech­nol­o­gy that brings oper­a­tional risk up to a scal­able, more effi­cient and effec­tive oper­at­ing mod­el. Acin is cre­at­ing the stan­dards, pro­to­cols and data attrib­ut­es for both iden­ti­fy­ing and con­trol­ling risk, and then using the dig­i­tal­i­sa­tion to form a net­work across the indus­try that is inter­op­er­a­ble and inter­con­nect­ed around these pro­to­cols. Instead of just one organ­i­sa­tion look­ing at their oper­a­tional risk in a silo, data is aggre­gat­ed across all the banks in the net­work, on an anonymised basis, so shar­ing vital risk intel­li­gence.

“We’re going to see oper­a­tional risk grow to be on a par with mar­ket and cred­it risk in the ways they are man­aged and run like a data sci­ence,” Ford con­cludes. “Acin is set­ting the stan­dards and lead­ing the indus­try in this new capa­bil­i­ty, form­ing that net­work across banks so they can be stronger togeth­er.

“But this isn’t all about gold plat­ing. A lot of the things we do allow peo­ple to remove con­trols and take noise out of the sys­tem. We want to see the indus­try become safer and more effec­tive at man­ag­ing risk, but also more effi­cient. Firms are always going to take risk, but they need to take it in a quan­ti­ta­tive way, just like they do with cred­it risk in lend­ing mon­ey and mar­ket risk in trad­ing mon­ey.”

For more infor­ma­tion please vis­it acin.com

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