Risk Expert Outlines Vision for Financial Services Regulation
“Locked Down” Controls May be Less Flexible, but Essential
Dublin – CCH SWORD (formerly Ci3) has issued a white paper outlining steps the financial services industry needs to take to ensure the risk inherent in their businesses is managed effectively. CCH SWORD is a leading developer and supplier of operational risk control solutions to the global financial services sector and a part of CCH, a Wolters Kluwer business.
“Countless financial institutions have told us for years that the industry is too fluid, too competitive or too complex for good quality, current information on risks and controls to be provided to senior management,” said Richard Pike, CCH SWORD director. “The outcome of this thinking has had negative impact on economies, businesses and individual citizens worldwide.”
Pike notes that a number of other industries are complex, competitive and fluid, yet have established and enforced stable core products and processes, including pharmaceuticals, aircraft manufacturing and nuclear power generation organizations.
“Within these industries, every company must be able to prove to regulators that each and every core process and product has gone through rigorous reviews and each control is of the highest quality,” said Pike. “Financial institutions are as vitally important as these industries, and we need to ensure they are regulated as such.”
As an example, under a more stringent framework, Pike points out that any proposed adjustable rate mortgage product would be forced to go through a rigorous review process where all impacted stakeholders, including clients, back-office staff, risk staff, senior management and regulators, would be consulted and lengthy testing cycles completed.
Additionally, financial institutions must be more disciplined in understanding their risk models and ensuring that all of the processes upon which risk models rely are “locked down” and subject to very rigid change control procedures. For example, a chemical engineer would not change an input to a process without fully understanding the ramifications and effects that may occur many years into the future.
Returning to the adjustable rate mortgage example, Pike notes that many credit risk systems capture all the actual mortgages issued, however, the process of recording borrowers details (upon which the probability of default was calculated) has been shown to be faulty and not subject to the correct controls.
While the locking down or stabilization of these processes and controls may lead to a less flexible customer experience or limited choices, Pike is quick to point out the alternative.
“The current economic downturn is showing people that ‘easy credit’ is not necessarily good for their long-term financial well-being,” he said. “Regulation of the financial industry in such a way as to lock down the processes and products that drive risk and then to enforce high quality scenario analysis will make financial institutions a more reliable leader in the global economy. And that is to the benefit of us all.”
About the Author
Richard Pike has more than 15 years experience in risk management and treasury IT. He has analysed, designed and managed the development of core treasury and risk management systems for large international financial institutions. He is a regular speaker and writer on risk management issues.
About CCH SWORD
CCH SWORD, based in Dublin, Ireland, is a part of CCH, a Wolters Kluwer business. It serves over 3,000 users in Europe, North America and Asia Pacific, with enterprise risk management (ERM) software, governance, risk and compliance software and IT consulting services to provide corporations with a comprehensive view of operational risk in conjunction with audit activities. Established in 1995, CCH SWORD became part of CCH, a Wolters Kluwer business in 2008 and was renamed from Ci3 to CCH SWORD.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading products are The ProSystem fx® Office, CorpSystem®, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.
Wolters Kluwer is a leading global information services and publishing company. The company provides products and services globally for professionals in the health, tax, accounting, corporate, financial services, legal, and regulatory sectors. Wolters Kluwer has annual revenues (2007) of €3.4 billion, maintains operations in over 33 countries across Europe, North America, and Asia Pacific and employs approximately 19,500 people worldwide. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Visit www.wolterskluwer.com for information about our market positions, customers, brands, and organization.
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