Crunch Time

The current instability and infectious loss of confidence in financial systems has implications for us all. Awareness of the need for integrated and effective risk management processes within all organisations has been growing fast over the past decade yet, clearly, we still have some way to go.

The International Monetary Fund points to a failure of banks’ risk management systems to appreciate the increased complexity and viability of new financial instruments. Ben Bernanke, chairman of the Federal Reserve blames generally poor risk management practices among large financial institutions. Work at Nottingham University Business School suggests that sophisticated risk management systems used by banks (e.g. the use of Value at Risk models) to address their own market risks do nothing to address, and may actually make worse, the systemic risks across wider financial markets. Northern Rock’s recovery plan recognises a need to strengthen its risk and control environment.

So, from a risk management point of view, what can we learn? The lessons mainly relate to how we deal with issues of change, complexity and above all, competence.

In the UK, the Financial Services Skills Council (FSSC) is already taking a bottom-up approach to raising competence in risk management at all levels within financial organisations by the development of a set of National Occupational Standards for Risk Management in Financial Services. National occupational standards provide a clear description of what an individual needs to do, know and understand in order to carry out a particular job role or function. As such, they aim to cover the key activities undertaken within risk management in financial services under all the circumstances which the job holder is likely to encounter. The standards then link into qualification structures such as those offered by professional bodies like IRM. Once the standards are in place then they can be used by the industry to help with recruitment, training and appraisal.

However the risk management standards we get from FSSC will only be as good and as usable as the input that the risk management industry makes to the process. FSSC is currently seeking input from all those responsible for developing and operating risk management systems in the financial sector in order to ensure that the standards are practical and workable and reflect the best of current practice. Input will be required at different points during 2008, in establishing the standards framework and then commenting on work in progress.

Carolyn Williams

Development Manager

The Institute of Risk Management

April 2008

This article first appeared in CIR Magazine