Risk Assessment – Page 4 – Compliance Guru

Every year about this time, I’m asked to look ahead to the upcoming year and prognosticate on regulatory compliance trends. I intend to do just that in a future post, but today I wanted to do something very few other prognosticators do…look back at last years’ predictions and see which ones hit and which missed (and why).

Here was the list of 2010 trends as I saw them early last year:

Risk Assessments –New standards and expectations
Documentation–Who, What, How and Why
Disaster Recovery –Compliant and Recoverable
Vendor Management –Trust but Verify

Overall I scored 2 hits and 2 misses, although to be fair the misses are more along the line of “not yet hits”. Here is how 2010 actually shaped up:

Risk Assessments – miss. This prediction was taken from the Winter 2009 FDIC Supervisory Insights Newsletter article entitled “Customer Information Risk Assessments: Moving Toward Enterprise-wide Assessments of Business Risk”. It described how examiners should start to evaluate risk on an enterprise-wide basis instead of simply focusing on information security risks. I predicted that examiners would start to adjust their examination procedures for the new criteria in 2010, but it hasn’t manifested itself in examination work papers yet. However, some of the enterprise-wide risk criteria has made its way into various risk assessment best practices. Criteria such as strategic risk, operational/transactional risk, reputation risk and legal/regulatory risk are now part of the vernacular for disaster recovery, retail payment systems and new technology risk assessments. We’ll call this a miss…for now.
Documentation – hit. The vast majority of audit and examination findings I’ve seen this year we’re not related to missing or insufficient policies or procedures, they were due to the institutions inability to document (prove) that they were following their own procedures. Expect this trend to continue in 2011.
Disaster Recovery – hit. Both auditors and examiners are finding fault with DR plans that do not strictly conform to the FFIEC guidance. Specifically, they must contain a business impact analysis, risk assessment, risk management and testing sections, and in that order. A non-compliant plan that may even be able to demonstrate (through testing) recoverability will still be written up. (More here.)
Vendor Management – miss. With the increasing reliance of financial institutions on third-party vendors, I predicted that 2010 would be the year that the examiners started scrutinizing vendor management programs more closely. It hasn’t happened…yet. It may be because of the continued overwhelming emphasis on asset quality during the safety and soundness examination, but I’m leaving this on the list for 2011. Asset quality will undoubtedly still dominate in 2011, but there are indications that the pendulum is starting to swing back around. (More on that later.)

My next post will be my predictions for 2011. I’m also collecting survey responses from auditors and examiners on where they think the areas of focus will be, and I’ll report that in early 2011 as well.

All the best for a Happy and Compliant New Year!!

As a financial institution, it sometimes seems that everything you do requires a risk assessment. Information security, disaster recovery, ID theft, remote deposit capture, outsourcing, in fact the term “risk assessment” appears 215 times in the FFIEC IT Examination Handbooks. But a risk assessment is only one step of a five step risk management process…and it’s not even the first step.

I think the regulators unnecessarily confuse the issue by conflating “risk assessment” with “risk management”. Sure it’s important to assess risk, but unless you’ve correctly identified the assets to be protected, you’re assessment will be off target. And once you’ve correctly identified the assets, and assessed the risk to those assets, you must design a system of controls to avoid, reduce and transfer the risk down to an acceptable level. And then, because the environment in which the risks and controls exist is not static, you’re still not done managing. You must constantly repeat the process.

The process is further complicated by the fact that there is no one standard for documenting risk management. Although it would be so much easier for both the institution and the regulator if there were a standard checklist or matrix. Easier for the institution to implement, and much easier for the regulator to follow. (In fact, in my opinion a standardized risk management process would have been a mutually beneficial outcome from Dodd-Frank…it would benefit institutions, regulators, and the public.)

So, lacking a universal standard for risk management, how do you proceed? Again, the FFIEC handbooks provide guidance here. I mentioned earlier how often the term “risk assessment” appeared in the handbooks, but the term “risk management” appears even more often…303 times total. The essential elements of an effective risk management program are:

Identify the assets to be protected. What are you protecting (i.e. customer information, critical business processes, etc.), and why (privacy, security, etc.)?
Identify the threats to those assets. What could happen to the assets identified in step 1? Rank the threats by both impact and probability. (This is the traditional risk assessment step.)
Apply controls in a layered, overlapping way until the risks are reduced to an acceptable level.
Test the adequacy and effectiveness of the controls.
Monitor the program and periodically repeat the process.

Remember, exactly how this is documented is up to the institution. Most choose to utilize a matrix, others use a narrative, but regardless of how it’s done the process should include all 5 of these elements.

So next time you hear an auditor or regulator ask for a risk assessment, what they are really asking for is one step in your overall risk management program. Deliver it to them as part of the program and you’ll never come up short.

Tag: Risk Assessment

Looking back – 2010 compliance hits & misses

5 Key Elements of Risk Management