NEW YORK, March 13, 2007 (PRIME NEWSWIRE) -- Executives in the financial services industry say that risk management has yet to deliver the full value they expect, according to a survey by PricewaterhouseCoopers and Economist Intelligence Unit. The findings indicate that risk management remains defined largely by regulation and not as a strategic discipline embedded throughout and across the business. With focus on regulatory reform such as Basel II and Sarbanes-Oxley waning, businesses could be left exposed.
The findings of the new study, titled 'Creating Value: Effective Risk Management in Financial Services,' reveal that the risk management function, despite considerable investment, is often disengaged from the rest of the business. More than half of survey respondents said there was no structured assessment of risk in some of the most critical business processes within their organizations, and risk managers often are not involved in key business activities such as alliances and M&A, pricing, recruitment and compensation policies. Two-thirds of the 400 respondents (66 percent) believe that their organizations need to view risk management as a more strategic function in order to add greater value to their business.
Nearly a quarter of respondents increased their annual spending on risk management by more than 25 percent year over year for the past three years. However, only half of the risk managers in the survey sample believed the function contributed substantially more value than it did three years ago. Even fewer executives in non-risk functions -- 23 percent -- said there had been a substantial improvement.
"Even when directors of financial institutions insist on risk managers having their say, too little attention is paid to embedding risk managers in the individual businesses," says Shyam Venkat, a partner with PricewaterhouseCoopers. "This often makes it harder to get to grips with the intricacies of the business; it also slows down the speed with which risk officers can respond."
Among the survey findings:
-- Regulators have driven the risk management agenda in recent years.
As a result, successful risk management is largely defined in
regulatory terms.
-- Overall, fewer than one in ten survey respondents (7 percent)
believed that risk management is "very effective" at enabling
managers to make better business decisions.
-- Nearly half of respondents (47 percent) believe that effective
risk management burnishes their reputation with customers, while
42 percent feel that it enhances their reputation among analysts
and 32 percent think it improves their reputation among
shareholders.
-- There are wide gaps between the risks that organizations find most
pressing and those that they manage most effectively. Although
respondents report high levels of effectiveness around classic
sources of uncertainty, such as credit risk and market risk,
confidence levels drop when it comes to less traditional sources
of risk, such as business risk, reputational risk and people risk.
-- The involvement of risk managers in specific business activities is
patchy. Only 46 percent of respondents say that there is a
structured assessment of risk around strategy development, and
just 40 percent say that risk management is formally involved in
budgeting and financial reporting.
-- Companies would benefit in increased fashion if risk managers were
involved more widely in crucial strategic decisions and if there
were common tools to assess the risks the company faces across its
full range of operations.
"The priority is integration. For too long, organizations have had a silo mentality towards risk management," says Paul Horgan, a partner with PricewaterhouseCoopers. "Too few firms have taken steps to integrate their approaches to governance, compliance and risk management, resulting in inefficiency and duplication. In rectifying this, it is important that they look for ways to create value as well as seeking to reduce unnecessary duplication and costs."
The survey results did contain promising news for risk managers. While survey respondents expect regulation to be the main driver of change for the risk function in the short term, more respondents expect risk management to play an increasingly important, strategic role over the next three years.
For risk management to contribute greater value, management needs to be engaged and committed. A central risk management function is essential but a few major financial institutions have also added a positive value to the business by embedding risk managers and their processes into individual functions.
Another area where greater value can be derived is in strengthening the integration between risk and other functions, especially with the finance function. Risk management has helped many companies to reduce the number of surprises to their earnings.
PricewaterhouseCoopers financial services group, in association with Economist Intelligence Unit, has published a number of major studies to address key strategic issues facing the financial services industry. Copies of previous reports on economic capital, offshoring, growth, improving performance, governance, rebuilding public trust, International Financial Reporting Standards, compliance, restructuring and wealth management can be found at www.pwc.com/financialservices
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