Striking a balance on operational risk

The culture within the financial services industry has, unsurprisingly, become much more risk aware since the 2008 crisis. Multiple regulations have come to the fore in attempts to boost oversight and transparency. Under such conditions, how can fund administrators balance managing operational risk against achieving operational efficiencies, whilst at the same time maintaining the benefit of economies of scale? Neil Richards, Product Manager GTAS at Bravura Solutions explains:

Just a few years ago fund management companies were focused on streamlining transaction processes to boost efficiencies. As part of this process some organisations outsourced back-office operations to third party administrators (TPA’s) whilst others off-shored certain functions to lower cost regions. The outsourcing market for transfer agency is mature, with the major TPA’s having sufficient scale to provide efficiencies and control. Following a tsunami of regulation over the last few years, , transfer agency participants are now just becoming able to lift their heads above the parapet on the regulation side of things, as the majority of the preparations for major initiatives such as RDR and FATCA come to fruition.  This in turn provides some much needed breathing space for organisations to focus on the benefits of reducing operational risk and realising potential cost savings.

Balancing act

One of the biggest moves in the transfer agency space most recently is towards an increased number of control points within end-to-end processes, resulting in several people monitoring aspects of each transaction. These changes are designed to reduce operational, financial and reputational risk. However, administrators must balance due care with wrapping too many people around a transaction. By applying over-rigorous controls, organisations run the risk of causing a drag on the back-office, impeding their ability to bring new products to market and, ironically, introducing additional risks. It is about achieving a balance between making the processes work smoothly and having adequate controls in place.

This is the same across SMEs and larger companies. They are all working towards the same goals in this respect. Everyone has different views on how to solve a problem but generically the gut reaction is to throw extra people at it to make sure it doesn’t happen again. This too often becomes a permanent solution in organisations and two years later no one knows why the process is as it is. It has just become the norm. A much better approach sees organisations removing the root cause, putting streamlined solutions in place to fix the problem and thereby preventing it from happening again, larger companies may be more inclined to put people on it for longer – they can afford to – but conversely they should also be able to fix the root of the problem more easily than a smaller, less well resourced organisation.

Mixing it up

Let’s liken it to an analogy of a restaurant. The head chef might make a dish and check that it has been seasoned correctly. Then the sous-chef might look and the waiter too. You end up in a situation where despite being flavoured correctly, the meal is cold before it makes it out of the kitchen because of the time-consuming, people-heavy review process. As in the kitchen, operational risk needs to have a balance between achieving the goal and not impacting the overall operation.

Any solution to balancing the management of risk against operational efficiencies is likely to be a subtle blend that:

  • Identifies potential risks;
  • Reduces those risks by reviewing processes in a controlled manner, and enhancing them where required to maintain efficiency;
  • Finally, accepts risk where the cost of trying to prevent it is greater than any cost, be it operational, financial, or reputational, should it arise.

New technology

Technology has an important part to play as it can introduce additional checks within existing functionality and automate (either partially or fully) those processes susceptible to risk. It can also provide new processes and tools to manage the growing dependency on automated real-time business processes.

A practical example of this approach is the use of D2C platforms. These allow investors to manage their own accounts thereby reducing the risk of processing errors within the back-office. At the same time the administrator maintains efficiency as the automation required reduces the day-to-day servicing cost in servicing clients. The investor also benefits with an improved service whereby they can access and manage their accounts at their convenience on a 24/7 basis

Automation can undoubtedly enabled significant improvement in productivity. The key to mitigating operational risk, is striking the right balance between automation and protection.

About the author

Neil Richards

GTAS Product Manager

Neil Richards is a Product Manager at Bravura Solutions based across our Tonbridge, London and Warsaw offices. With extensive knowledge of the funds industry spanning 20 years, Neil is a specialist in transfer agency and automated solutions. His responsibilities include managing the GTAS transfer agency product and monitoring the raft of new regulatory initiatives.