A survey, conducted by Marsh and the independent research group Ipsos, has concluded that almost all European financial institutions have reviewed their approach to risk since the onset of the global financial crisis, “but less than half have increased their spending on risk management.
“While 87 percent felt that senior management now perceives risk management as more important, only 47 percent said that budgets for risk management expenditure were growing. In addition, only 20 percent expressed high levels of confidence in their existing risk management processes. Of the seven industry sectors surveyed by Marsh, 64 percent of European financial institutions felt that their industry has been worst affected by the recession.”
Carrick Lambert, Industry Practice Leader for the Financial Institutions Practice in Europe, the Middle East and Africa at Marsh, commented: “The global financial crisis revealed a breakdown of certain risk management controls in financial institutions. The results of our research demonstrate just how little confidence European financial institutions have in their current risk management procedures.
“Despite over four-fifths of respondents stating that their organizations are now reviewing their approach to risk, it is disappointing to note that ‘new thinking’ is not being backed up by financial investment in over half of the organizations surveyed. More money needs to be invested in risk management as business practices are fundamentally overhauled, which is crucial in terms of strengthening the overall risk management function and restoring stakeholder confidence.”
Marsh’s paper, New Risk Management Insights for Financial Institutions, is the first in a series of industry sector reports to be published over the coming weeks. It offers a comprehensive analysis of the current role of risk management in the financial crisis, examining the attitudes of risk professionals “towards risk management in the current economic downturn, risk priorities, risk strategy and management and risk solutions.”
Among the key challenges facing financial institutions, 68 percent of respondents expressed concern about the level of risk associated with their customers. Among the steps being taken to manage this risk are rigorous credit checks (33 percent), better communication (31 percent), stricter payment terms and conditions (25 percent).
Other key operational risks identified for the next 18 months include:
— Business continuity (58 percent)
— Mergers and acquisitions (39 percent)
— Management liability (52 percent)
— Outsourcing (37 percent)
— Legal risk (52 percent)
— Environmental risk (20 percent)
— Fraud (44 percent)
Charles Beresford-Davies, Head of Marsh’s UK Financial Institutions Practice, added: “While most respondents were concerned about business continuity issues over the next 18 months, management liability and legal risks were also seen as priorities. In a downturn, legal action against directors and officers increases as people try to hold someone accountable for the chain of company failures, financial underperformance and lost jobs.
“In addition, nearly 45 percent of respondents rated fraud a significant concern over the next 18 months, both in relation to the global financial crisis and the fact that such activity is historically shown to increase during any period of economic downturn.
“This correlates with the recent experience of many of our own clients who are showing increased incidence of claims in areas such as mortgage fraud, breach of mandate allegations, mis-selling, Madoff-type events, shareholder disquiet and regulatory investigations. With all this evidence, it is our strong recommendation that all financial institutions review and update their risk management infrastructure.”