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Effective management of non-financial and compliance risk: a strategic approach

3 December 2024
Rudi Sneyers Risk Management & Compliance Practice Leader Connect on Linkedin
Lance Wauters Project Consultant - Financial Institutions Connect on Linkedin

Managing non-financial and compliance risks has grown increasingly complex for financial institutions. As supervisory expectations evolve and risks like ESG concerns, cybersecurity threats, and geopolitical volatility intensify, institutions must adapt their frameworks to address these challenges effectively. Below, we outline key considerations and actionable insights to enhance governance, oversight, and risk management processes.

Supervisory expectations and governance standards

The European Banking Authority (EBA) emphasizes the integration of risk and compliance functions in approving new products and adapting existing processes. These functions require sufficient authority, resources, and oversight to address risks emerging from digitalization, ESG, IT outsourcing, and cyber resilience. Supervisory Authorities have highlighted persistent gaps in governance, often stemming from insufficient involvement of management bodies in steering the Risk Appetite Framework (RAF).

Key Actions:
  • Involve senior management in defining and validating comprehensive risk metrics and thresholds aligned with the institution's business model.
  • Ensure a balance between quantitative and qualitative elements within the RAF.
  • Adopt dashboards and visual tools to provide real-time insights into risk metrics for immediate action.

Enhancing the risk appetite framework (RAF)

The RAF remains a cornerstone of effective non-financial risk management, though its application often lacks scope and explicitness. Financial institutions must refine their RAFs to encompass compliance and non-financial risks comprehensively.

Recommendations for an effective RAF process:
  1. Comprehensive alignment: Align RAF components with corporate values, strategy, and operational capabilities.
  2. Cross-functional collaboration: Establish partnerships between business units, shared services, and control functions to leverage expertise effectively.
  3. Proactive threshold setting: Use risk indicators that provide early warning signals and measure both leading and current risk trends.

Institutions should also integrate the RAF into a dynamic reporting that matters, making it accessible and actionable for board members and key stakeholders.

We believe that supervisory and other stakeholders’ expectations are getting increasingly aligned on the need for a ‘Fit for Purpose’ Risk Appetite Framework. The Board of Directors must take a leading role in the process by challenging and validating the risk cartography and define the corresponding metrics and thresholds. The latter must reflect proportionality in terms of the business model, size and complexity of the financial institution.

Lance Wauters, Project Consultant Financial Institutions

Risk and control self-assessment (RCSA)

RCSA is a foundational tool for embedding a proactive risk-aware culture. It enables institutions to identify, assess, and mitigate risks through a structured, bottom-up approach.

Steps to implement an effective RCSA:
  1. Establish risk registers: Document potential risks for processes, assign ownership, and assess using a probability-impact matrix.
  2. Empower first-line risk owners: Business and operational units should actively manage identified risks, while the second line of control provides oversight and challenges the outcomes.
  3. Promote documentation and methodologies: Clearly define processes for quantifiable and non-quantifiable impacts, including reputational and operational risks.

By integrating RCSA into everyday operations, institutions can bridge the gap between regulatory compliance and effective business management.

We believe that RCSA frameworks should not be designed as a standalone framework to ensure regulatory compliance but rather as a business management tool with risk management capabilities. At the end of the day, the RSCA must ensure that activities are managed within the defined Risk Appetite.

Rudi Sneyers, Risk Management & Compliance Practice Leader

Emerging risks and opportunities

Technological evolution, ESG mandates, and geopolitical dynamics are reshaping the risk landscape. Traditional risk management approaches are often inadequate for addressing high-velocity risks such as HR disruptions, greenwashing, and AI-related challenges.

Strategies for managing emerging risks:
  • Develop structured processes for identifying and prioritizing emerging risks.
  • Conduct "what-if" analyses and stress tests to model the impact of unpredictable scenarios.
  • Engage external experts for specialized risk assessments, such as cybersecurity and ESG compliance.

Embedding these practices into governance processes ensures that financial institutions remain agile and proactive in addressing evolving threats.

Leveraging governance, risk, and compliance (GRC) tools

Efficient GRC tools streamline governance and compliance processes by automating workflows, centralizing risk documentation, and enabling real-time reporting. However, low internal control maturity often impedes their effective implementation.

The use of an Information System can create significant efficiency gains leaving more time for core Risk management & Compliance activities and reporting that matters.

Key Benefits of GRC tools:
  1. Enhanced collaboration: Facilitate structured communication between business units and control functions.
  2. Data-driven insights: Utilize advanced analytics and dynamic dashboards for better decision-making.
  3. Efficiency gains: Automate repetitive tasks, allowing teams to focus on core risk management activities.

Successful implementation requires clear communication about the tool’s value, ensuring team engagement and a unified approach to risk management.

How TriFinance can help

TriFinance offers comprehensive solutions for enhancing non-financial risk management frameworks, including:

  • Framework (re)design: Aligning risk management processes with supervisory expectations.
  • Risk ownership training: Empowering business units to take ownership of their risk profiles.
  • RAF (re)definition: Developing robust Risk Appetite Statements and key risk indicators.
  • GRC implementation support: Guiding institutions through the implementation itself but not only. We can help clients in the definition of the needs, the implementation of controls and the change management processes to maximize GRC tool potential.

TriFinance ensures that financial institutions not only meet regulatory standards but also embed risk management into their strategic operations, fostering resilience and agility in an evolving risk landscape.

By adopting a proactive, structured approach to non-financial and compliance risk management, institutions can navigate challenges effectively, meeting supervisory demands while driving sustainable growth.

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