OREANDA-NEWS. On March 19, 2007 The findings of a new study by PricewaterhouseCoopers, in cooperation with the Economist Intelligence Unit, entitled ‘Creating value: Effective risk management in financial services’, revealed that risk managers do not seem very confident that their considerable investment almost a quarter of respondents increased their annual spending on risk management by more than 25% year-on-year for the past three years and efforts in risk management are very effective in adding value to the business, reported the press-centre of  PricewaterhouseCoopers. Only 50% of the risk managers in the survey sample believed the function contributed substantially more value than it did three years ago. The verdict from executives in other functions is worse, with only 23% saying there had been a substantial improvement. Overall, fewer than one in ten survey respondents believed that risk management is very effective at enabling managers to make better business decisions.

 
As the regulatory tide slowly begins to ebb, the time is right for executives inside and outside the risk function to re-evaluate the contribution that risk management makes to the business. The profile of risk managers has never been higher, yet in many ways the discipline of risk management is still neglected. According to our survey, the current limitations of risk management become very clear: Focus on regulators. The regulators have driven the risk management agenda in recent years and those questioned for this report think their organisations’ risk managers are most effective at ensuring regulatory compliance: 64% think they perform here successfully, while only 14% of respondents indicated compliance as one of risk management’s most important functions. Objectives of identifying new and emerging risks, measuring and monitoring risk and communicating key risks to the executive team were indicated as the most important by 43%, 42% and 41% of respondents respectively, and risk managers are not as successful in achieving these objectives as in meeting regulatory requirements. In other words, respondents tend to define successful risk management in regulatory terms.

Disconnect between risks and capabilities.There are wide gaps between the risks that organisations find most pressing and those that they manage most effectively. It is noteworthy that, when asked how well their organisations manage certain risks, respondents show a higher degree of confidence about their ability to deal with the traditional (and usually quantifiable) risks associated with banking and financial services, such as credit and market risk (69% and 67% of respondents respectively think they manage these risks effectively or very effectively). Confidence levels drop when it comes to less traditional and tangible sources of risk, such as operational risk (44% respondents think they manage effectively), business risk (40%) and people risk (23%), which are also perceived to be among the most threatening.

Disengagement from the business and low integration with other functions.The involvement of risk managers in strategic business activities is patchy and, when compared with findings from earlier briefings in this series, has not increased. A mere 47% of respondents say that there is a structured assessment of risk around strategy development, compared with 50% in the 2004 report, and only 40% say that risk management is formally involved in budgeting and financial reporting, compared with 54% in 2004. Other areas where involvement of risk managers is not sufficient are mergers and acquisition activity (32% think they are involved), forming alliances and partnerships (24%), setting prices (37%) and HR policies (17%). The institution as a whole would benefit if risk managers were involved more widely in these crucial strategic decisions and if there were common tools to assess the risks the company faces across its full range of operations.

Chris Barrett, Partner, PricewaterhouseCoopers Moscow, said: “At first glance it could be perceived that the Western regulatory environment does not affect companies operating in Russia. In reality, the situation is the opposite. The Russian banking sector, for example, has already been influenced by Basel II, and the introduction later this year of the European Union’s Markets in Financial Instruments Directive (MiFID) (despite the low level of awareness in Russia) will affect many Russian banks, especially investment banks, asset managers and private banks - all those institutions operating within or with EU capital markets. Among others it will require significant organisational changes, including in the risk management function. Despite the progress made with risk management function and techniques over the past couple of years, the Russian financial sector still has a long way to go. The short history of a risk management function, imperfect procedures, the lack of reliable data and a shortage of experienced professionals are all real challenges to the industry”.