Biggest barriers to digitising risk management

Following the 2008 crisis, the financial regulatory framework has increased year on year. The logical step would be to digitise risk management, yet despite an array of compelling reasons to digitise, such as customer expectations, competitive pressures and evolving risks, as well as a clear interest from management, barriers remain

1. Lack of vision

Until recently most digitisation at financial institutions has focused on customer interfaces, not the risk function. Most of the biggest banks have now embraced digital risk transformation, but it is not clear to everyone that the best approach to digital transformation is to encompass the whole business.

To be truly transformational, risk leaders need to avoid looking at the adoption of technology in isolation

Mark D. Ward, Deloitte

However, unless a robust control framework is in place with a strong culture led from the top, no amount of automating or digitising will improve business processes, structures or outlook. Digital transformation must progress in tandem with the transformation and development of the whole business operation.

Mark D. Ward, lead partner, future of risk and compliance, at Deloitte, says: “To be truly transformational, risk leaders need to avoid looking at the adoption of technology in isolation. They need to set a clear vision that changes how their business works, and drives a new operating model and ways of working.

“It can be easy to get excited about the opportunities of new technology, but It will only progress as fast as the business will allow it, so it’s essential to bring these other functions on the journey too.”

2. Budget constraints

Since the financial crash, central banks in industrialised countries have maintained tight control over monetary policy. Although predications persist that policy will loosen, a low interest rate environment remains. Margins have been squeezed over a long period. Although investment in risk management has grown commensurately with the evolving risk outlook, budgets are tight.

According to Accenture, 87 per cent respondents in its 2019 Compliance Risk Study expect investment in compliance to increase in the next two years, though seven in ten say they face quantitative cost-​reduction targets.

“The shifting nature of risk and risk management, and the drive to modernise and automate, is being played out against the backdrop of major industry challenges that all banks are facing,” says Richard Price, sales director, financial services industry, UK and Ireland, at TIBCO Software.

“These range from squeezed margins to the need to sustain and, where possible, improve performance in the face of a changing competitive landscape to the more down-​to-​earth imperative of increasing the wallet share each client spends with them.”

3. People and culture

Historically, the risk function has been dominated by technical experts in activities such as credit underwriting and compliance. The function requires people well versed in digital, analytics and broader business skills. The risk function is slowly attracting a different calibre of specialist, but the pipeline of talent for people with the necessary skills is not yet flowing.

The culture of an organisation seems to be another barrier

Andrew Frost, Lawson Conner

“The adoption of digital tools must be carefully managed, with the right combination of human instinct and experience acting as a safety net to ensure the pursuit of efficiency doesn’t expose the business to other threats,” says Claire Nightingale, global head of FINEX (financial, executive and professional risk) financial institutions claims advocacy, at Willis Towers Watson

The organisational change resulting in the whole business being accountable for risk and compliance has only just begun, so not every institution has fully embedded this culture of responsibility within the business.

“The culture of an organisation seems to be another barrier; getting everyone within the hierarchy to buy into the idea of updating antiquated risk management systems and processes is a problem,” says Andrew Frost, executive director at compliance and regulatory experts Lawson Conner.

4. Legacy systems and low-​quality data

Faced with the agility of fintech challenger companies designed on the most up-​to-​date technologies and run by entrepreneurs whose skillset seamlessly marries both digital and finance, kick-​starting change at huge global institutions can often be a slow and frustrating process.

Added to the size and weight of an organisation come myriad legacy systems that no longer “talk” to each other. IT systems are often patchworks, resulting in poor data quality. Legacy IT systems and a lack of easily accessible high-​quality data are, therefore, among the greatest obstacles to digitising risk.

“One of the largest barriers is that many banks are still relying on ageing legacy systems and so digitising risk management and incorporating an effective framework into existing software seems like an onerous task,” says Lawson Conner’s Mr Frost.