The best ingredients to meet the needs of a healthy risk appetite framework

The best ingredients to meet the needs of a healthy risk appetite framework

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By Campbell Davidson, Head of Operational Risk Framework, RBS.

Campbell will be a leader at the New Generation Operational Risk: Europe – Post-Event Masterclass (London, 15 March): Sourcing the Best Ingredients to Meet the Needs of a Healthy Risk Appetite Framework.

Campbell, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I’ve been responsible for the design and delivery of risk and control frameworks in the Finance industry for the last 20 years. Alongside this, changing the mind-sets and behaviors has been every bit as important as building class leading tools and processes. Today, working for RBS, I am responsible for all elements of the operational risk framework and how these are embedded across the organisation. Our goal for 2018 is to develop a single framework and approach and apply this across all types of risk (financial and non-financial).

At the New Generation Operational Risk Europe Summit, you will be helping provide an overview of the best ingredients to meet the needs if a healthy risk appetite framework. Can you give a taster as to what risk professionals will gain from your insights?

In true Jamie Oliver style, I’ll simplify to 5 ingredients.

Get Business ownership – 1st Line of Defence should set the risk limits to drive accountability for management.
Set Aggregate and granular measures – Overall appetite for risk based on outcomes (e.g. Customer, Financial, Reputational Impact) is vital for Board visibility and understanding but each risk should have a transparent limit to drive management decisions.
Tell the board what they need to know, not everything that you know – KRI’s can quickly run to 100’s if not 1,000s of measures – this breeds uncertainty, so important to focus only on measures that drive intervention. Limit to a manageable number.
Align appetite and measurement – Once you set a limit, you need to measure risks and events against this. The classification matrix & associated thresholds should therefore align to appetite measures & limits.
Simple Reporting – Present the appetite breaches etc, in as simple a format as possible. The best reports show inherent risk, controls & residual risk alongside the target state defined by appetite. The reporting on management actions should then speak directly to the gaps that need closed to return to appetite.

Can you give a brief overview of the importance of communicating the risk Appetite Framework at a Board Level?

Setting Risk appetite is only useful where it truly represents the amount of risk the company is willing to take. In the absence of Board owning, approving and reviewing the approach and conclusions, the business will either build too much or not enough control. Both outcomes are important to avoid, given the economic and risk environment we now operate in.

Without giving too much away, how should financial professionals be establishing appropriate governance structures for risk appetite framework oversight?

Simplicity and accountability are key. Be clear on the roles and responsibilities for each individual and committee that manages or oversees risk appetite. Wherever possible, do not present a silo’d view by risk class. Financial and non-Financial risk should be presented together.

What, in your opinion does the future hold for operational risk professionals, and how can they keep up with the increasing change?

As the world becomes ever faster paced through automation, Operational Risk will continue to grow. That said, the historically silo’d management of financial and non-financial risk will need to be consolidated and simplified to better influence and inform management in real time. We will all need to become Risk Professionals, not Operational Risk professionals.

We asked Campbell some informal questions…

If you did not pursue your current career path, what do you believe your alternative career path would have been?

I always wanted my own business, wheeling & dealing. Perhaps a used car salesman…with conduct high on the agenda.

What is your favourite thing to do to wind down after a long week?

As long as it involves my wife & kids, I’m quite happy to leave the decisions on activity to someone else. Simply unplug my brain & enjoy being with my family.

What came first, the chicken or the egg?

I guess Darwin would say, 2 non-chickens laid a chicken egg so that came first. They would probably be 99.999% chickens though, so it depends on how pure you like your chicken.